Closed Book Exam 1

Which of the following political contributions made by a municipal finance professional will NOT violate the provisions of the MSRB Rule G-37? $100 to a candidate for whom you may vote $100 to a candidate for whom you may not vote $500 to a candidate for whom you may vote $500 to a candidate for whom you may not vote

$100 to a candidate for whom you may vote Municipal finance professionals (MFPs) are allowed to make political contributions of up to $250 per person to candidates for whom they are permitted to vote. Any contribution made to a candidate for whom they are not entitled to vote would be a violation. For example, if you are an MFP and a resident of New Jersey, you may not contribute to an election campaign for the governor of New York.

A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of:

$5,300 The customer paid $300 for the call option plus $5,000 when he exercised the option at the $50 strike price. The customer's cost basis is, therefore, $5,300. The strike price plus the premium equals the cost basis for a buyer of a call who is exercising the option.

A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a: $500 profit $500 loss $1,000 profit $1,000 loss

$500 loss The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).

XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of the outstanding common stock is:

$90,000,000 Outstanding shares are issued shares minus treasury stock (shares repurchased by the company). There are 4,500,000 shares outstanding with a market value of $20.00 per share. Therefore, the market capitalization is $90,000,000.

hen opening a new account, what is the order in which the following actions should take place? Obtain approval from the ROP Obtain essential facts from the customer Obtain a signed options agreement Enter the initial order

1. Obtain essential facts from the customer 2. Obtain approval from the ROP 3. Enter the initial order 4. Obtain a signed options agreement When opening an account, the first step is to obtain the essential facts regarding the investor's investment objectives and financial means. The account is then approved by the manager and the initial order can be entered. The member firm has 15 days to obtain the signed options agreement.

Use the following quote to answer this question. ABC 25.13 + .25 B 25 A 25.25 Excluding any markups, what price will a customer pay to purchase the security?

25.25 When purchasing stock, a customer will pay the ask (offer) price. A customer selling stock will receive the bid price.

Ashton purchased 100 shares of XYZ common stock in January 2003, at a price of $25 per share. XYZ pays a quarterly dividend of $.25 per share. Today, XYZ closed at $30 per share. What is the dividend yield of XYZ common stock?

3.33% The dividend yield for a stock is equal to the annualized dividend divided by the current market price. Since dividends are paid quarterly, the annual dividend is $1 per share ($.25 x 4). The annualized dividend of $1 divided by the current market price of $30 per share results in a dividend yield of 3.33%.

A 28-year-old single investor has funds saved at a bank. He contacts an RR and wants to begin allocating funds to a retirement account. Which of the following choices is the most appropriate asset allocation? 80% stocks, 20% bonds 60% stocks, 40% bonds 50% stocks, 50% bonds 30% stocks, 70% bonds

80% stocks, 20% bonds Long-term, risk-tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Over long periods, stocks usually keep pace or offer higher returns as measured against inflation. Inflationary risk is also referred to as purchasing-power risk. Since the investor is many years from retirement, a large percentage of his portfolio should be allocated to stocks.

Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend? A GTC order to sell 100 XYZ at $50 stop A GTC order to sell 100 XYZ at $50 stop-limit A GTC order to buy 100 XYZ at $50 stop A GTC order to buy 100 XYZ at $50 stop-limit

A GTC order to sell 100 XYZ at $50 stop Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked Do Not Reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC sell stop and sell stop-limit orders are entered below the market and are reduced on the ex-dividend date.

When the proceeds of a refunding issue are deposited into an account that will be used to pay the interest and principal on the issue being refunded to its maturity date, the outstanding bond is said to be: Noncallable A Treasury arbitrage bond Escrowed to the call date Escrowed to maturity

A Treasury arbitrage bond When the proceeds of a refunding issue are deposited in an escrow account used to pay the interest and principal on the issue being refunded to its final maturity date, the outstanding bond is said to be escrowed to maturity. The process is referred to as advance refunding. The new issue of bonds would be referred to as the refunding issue. The outstanding bond would be referred to as being prerefunded.

Which TWO of the following types of municipal securities does NOT require voter approval? A general obligation bond backed by income taxes A special tax bond A bond backed by ad valorem taxes A certificate of participation

A certificate of participation A general obligation bond would require voter approval since it is backed by the full faith and credit of the issuing municipality. A bond backed by ad valorem or real estate taxes is a type of general obligation bond. A special tax bond is financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter approval. A certificate of participation (COP) is a revenue bond backed by a lease payment that does not require voter approval.

Which of the following statements is TRUE concerning periodic payment variable annuities? A client's number of annuity units never changes A client's number of accumulation units never changes Annuity contracts never have a beneficiary The monthly payout is fixed by the inflation index

A client's number of annuity units never changes During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.

When opening a new customer account to trade options, which of the following documents is not needed? A new account agreement An options account agreement A hypothecation agreement The approval for options trading

A hypothecation agreement A customer needs all of the items listed except a hypothecation agreement. This is needed to open a margin account and gives the brokerage firm the right to pledge customer securities to a bank as collateral for a loan.

In order to sell variable annuities to clients, a person must hold which of the following? A life insurance license only A securities registration only A life insurance license and securities registration No licenses or registrations

A life insurance license and securities registration Variable annuities are considered both insurance products and securities. As a result, an individual must be properly registered (Series 6 or 7) and hold a life insurance license.

Which of the following funds is the least suitable for investors mainly seeking income? A mortgage-backed securities fund A municipal bond fund A balanced fund A sector fund

A sector fund A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.

XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates are not attractive from its viewpoint, the company knows that interest rates could drop suddenly. The company would like to be ready to sell the bonds quickly. It would also like the bonds to be as liquid as possible in order to attract investors. Which of the following choices is most appropriate for its needs? A private placement under Regulation D An intrastate offering under Rule 147 A traditional registration statement A shelf registration under Rule 415

A shelf registration under Rule 415 While the sales described in choices (a), (b), and (d) will usually be faster than a full registration, both Regulation D and Rule 147 place various restrictions on resales, reducing the liquidity of the issue. A shelf registration under Rule 415 will satisfy all of XYZ Corporation's needs.

A municipal securities principal must review and approve municipal transactions made with: Individuals Trust departments Commercial bank portfolios Casualty insurance companies

All of the above MSRB rules require a municipal securities principal to approve all transactions in municipal securities.

An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option? European style, next business day settlement European style, two business days' settlement American style, next business day settlement American style, two business days' settlement

American style, two business days' settlement Long-term anticipation securities (LEAPS) may be exercised on any day prior to expiration (American style). Exercise settlement is in the underlying stock, in two business days.

Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules? An employee of a municipal securities firm may open a new account with another municipal securities firm without the employer being notified An employee of a municipal securities firm may open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer A bond attorney may open a new account without restriction An officer of a municipal issuer may open a new account without restriction

An employee of a municipal securities firm may open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer A bond attorney may open a new account without restriction An officer of a municipal issuer may open a new account without restriction

Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer? An exchange-traded fund (ETF) An equipment leasing direct participation program (DPP) A private activity municipal revenue bond The PAC tranche of a collateralized mortgage obligation

An equipment leasing direct participation program (DPP) A registered representative may not purchase a direct participation program in a discretionary account without prior written approval by the customer.

The term fast market is characterized by which TWO of the following descriptions? An imbalance of orders A very low number of trades Highly volatile prices The quotes of market makers being updated very quickly

An imbalance of orders Highly volatile prices The term fast market is characterized by very heavy trading, fast moving prices, and high volatility. There also may be an imbalance in the number or shares clients are willing to buy or sell. For example, there are 500,000 shares to buy and only 100,000 shares to sell. Quotes may take a long time to update since prices and trades are moving so quickly. A client's order may take a longer time to execute, and if a market order is entered by a client, the price received may be significantly higher or lower then the quoted price.

Which of the following money-market securities assists in financing importing and exporting operations? Bankers' acceptances Treasury bills Eurodollar CDs Revenue anticipation notes

Bankers' acceptances Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt) which facilitates the trading of foreign securities in U.S. markets. A Eurodollar certificate of deposit pays interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and is not used to finance importing and exporting operations. A revenue anticipation note is a short-term municipal security issued in anticipation of receiving revenues from the federal or state government.

Which of the following securities is an example of a collateralized time draft? Commercial paper American Depositary Receipts Bankers' acceptances Eurodollars

Bankers' acceptances A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank.

Decisions of the Hearing Panel regarding complaints: Are final if the complaints are between members Are final if the complaints are between member firms and their employees Can be appealed to the National Adjudicatory Council Can be appealed to a Federal District Cour

Can be appealed to the National Adjudicatory Council Decisions of a Hearing Panel regarding complaints can be appealed to the National Adjudicatory Council. Arbitration decisions are final.

All would be considered an advantage of a Health Savings Account, EXCEPT: Tax-deductible contributions Tax-deferred growth Designed to offset out-of-pocket medical expenses Can be used to fund college tuition expenses

Can be used to fund college tuition expenses An HSA is not designed to pay for college expenses. They are programs that are generally associated with a high deductible/low premium medical plan. The employer or employees can make tax-deductible contributions into the account, which grow on a tax-deferred basis. If used to offset medical expenses, the monies are received tax-free.

Regulation T applies to: Cash accounts Margin accounts Commodity accounts Municipal bond margin accounts

Cash accounts Margin accounts Regulation T of the Federal Reserve Board applies to cash accounts and margin accounts. Regulation T does not apply to commodity accounts or municipal bond margin accounts. For municipal bond accounts, industry rules require a margin deposit of 7% of the market value of the bond. Margin requirements for commodity accounts are set by the individual commodity exchanges.

To apply for a securities registration, a previously unregistered individual must: Complete Form U5 Complete Form U4 File the necessary form with FINRA File the necessary form with the SEC

Complete Form U4 File the necessary form with FINRA To apply for a securities registration, a person must file Form U4 with FINRA.

You discover that one of your clients is on the OFAC list. You must: Contact federal law enforcement authorities immediately Call the client to see if a mistake has been made Investigate the matter further to see if there is evidence of suspicious activity Notify FINRA

Contact federal law enforcement authorities immediately You must contact the federal law enforcement authorities immediately if you discover that a client is on the list of suspicious persons and entities maintained by the Office of Foreign Assets Control (OFAC). You must also freeze the account and block further transactions.

A municipal securities principal must approve: Memos in response to customer complaints The opening of accounts Advertisements to be used for a seminar Correspondence to customers

Correspondence to customers MSRB rules require a municipal securities principal to approve all the choices given. In addition, the principal must approve all transactions and must frequently review all discretionary accounts.

The Securities Exchange Act of 1934: Created the SEC Provided for the regulation of credit Provided for the regulation of exchanges Provided for the regulation of new issues

Created the SEC Provided for the regulation of credit Provided for the regulation of exchanges The Securities Exchange Act of 1934 created the SEC and provided for the regulation of credit and exchanges. The Securities Act of 1933 provided for the regulation of new issues.

The marketability of a municipal bond would NOT be affected by the: Rating Block size Maturity date Dated date

Dated date The dated date of a municipal bond is the date that interest begins to accrue and will not affect its marketability. The marketability of a municipal bond will be affected by the rating it received by either Moody's or Standard and Poor's. The marketability of a municipal bond will also be affected by the block size. A block is considered to be a large quantity of municipal bonds (minimum of $100,000 par value). The maturity of the bond will also affect the marketability of the bond. The closer the bond is to maturity, the more liquid it becomes.

A municipal securities broker's broker will complete transactions for a: Retail customer Dealer bank Municipality Municipal broker-dealer

Dealer bank Municipal broker-dealer A broker's broker works only for other professionals in the industry, executing trades for dealer banks or other broker-dealers, but not for retail customers or municipalities. The purpose of a broker's broker is to provide anonymity to market participants.

An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT: Runway maintenance expenses Debt service expenses Hangar expenses Salaries of airport personnel

Debt service expenses Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.

Mr. Jones has a margin account in which there is activity each month. The firm sends Mr. Jones an account statement: Each month when there is activity during the month At the end of calendar quarter Each week when there is activity during the week After each trade is executed

Each month when there is activity during the month Brokerage firms send customer statements monthly for accounts with activity during that month. For inactive accounts, statements must be sent at least quarterly.

Before a broker-dealer may offer a portfolio margin program to its clients, the firm must obtain approval from: The options exchange FINRA The SEC The OCC

FINRA Prior to establishing a portfolio margin program for its clients, a broker-dealer is required to obtain approval from FINRA. With a portfolio margin program, a broker-dealer is able to offer larger loans to its clients; however, this will also create greater risk of the firm going bankrupt. The reason for requiring approval is that FINRA wants the opportunity to analyze whether the broker-dealer is capable of handling the potential risks that portfolio margin accounts create.

The payout on a variable annuity is based on a: Fixed number of accumulation units with a fluctuating value per unit Fixed number of annuity units with a fluctuating value per unit Fixed value per unit with a fluctuating number of annuity units Fixed number of annuity units with a fixed value per unit

Fixed number of annuity units with a fluctuating value per unit When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing the units.

Which of the following choices helps the U.S. balance of payments? U.S. corporations building plants abroad Lending money to foreigners at high interest rates U.S. investment in foreign securities Foreign investment in the U.S.

Foreign investment in the U.S. Foreign investments in the U.S. will direct money into the country, helping the U.S. balance of payments.

Which of the following choices is NOT taxable to the owner of mutual fund shares? Dividends that were reinvested at net asset value Fund shares that appreciated which are exchanged for other shares in the same family of funds Fund shares held by the investor, which have appreciated but have not yet been sold A capital gains distribution that was reinvested at net asset value

Fund shares held by the investor, which have appreciated but have not yet been sold Owning fund shares that have appreciated in value does not incur taxes. The appreciation becomes taxable as a capital gain when the shares are sold for the profit. An exchange within a family of funds is considered a sale and subsequent purchase, and will be a taxable event if the sale resulted in a gain. Dividends and capital gain distributions are taxable events whether or not they are reinvested.

An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers: Maturity diversification Coupon diversification Geographical diversification Type diversification

Geographical diversification The portfolio offers the investor geographical diversification because the issues are from different municipalities throughout the country.

Which of the following securities are guaranteed by the federal government? Fannie Mae securities Ginnie Mae securities Freddie Mac securities Federal Home Loan Bank securities

Ginnie Mae securities Of the choices given, only Ginnie Mae securities or the Government National Mortgage Association securities (GNMAs) are fully guaranteed as to principal and interest by the federal government.

A high net worth investor seeking safety of principal would MOST likely invest in which of the following securities? High-grade general obligation bonds High-yield corporate bonds Low-grade general obligation bonds High-yield revenue bonds

High-grade general obligation bonds Safety of principal refers to a customer being able to preserve or retain the initial amount of, the investment over its life. Many bonds offer investors this feature. The higher the rating, the greater the likelihood the investor will achieve safety of principal. High-grade generally refers to an investment-grade or highly rated bond. A general obligation bond would also offer a high net worth investor tax-exempt income. High-yield refers to non-investment- grade or junk bonds that would expose the investor to the risk of not achieving safety of principal.

Deflation will generally cause existing bond prices to: Remain the same Increase Decrease by a high percentage Decrease by a low percentage

Increase Deflation is an economic situation in which the prices of goods and services are declining. It is an unusual occurrence which results in the consumer price index (CPI) decreasing and the economy contracting. In order to stimulate the economy the FRB often lowers interest rates, which causes existing bond prices to rise. Long-term zero coupon bonds tend to perform best during periods of deflation.

If an investor was primarily interested in safety of principal, which of the following securities would you LEAST likely recommend? State GO bond GNMA security Railroad equipment trust bond Industrial development revenue bond

Industrial development revenue bond Industrial development revenue bonds are secured by a lease agreement with a corporation and are only as secure as the corporation. State GOs are generally of high quality and a GNMA is secured by the U.S. government. The holder of an equipment trust bond has a lien on the equipment that secures the issue.

MSRB rules state that subject or nominal quotes may be given for: Revenue bonds only General obligation bonds only Informational purposes Municipal notes only

Informational purposes MSRB rules state that a dealer who does not wish to buy or sell securities based on a quote given, must identify the quote as a subject or nominal quote. Such quotes can be given for informational purposes only.

A portfolio's mix of investments and two potential investors are described below: 20% Investment-grade corporate bonds 30% Blue-chip common stock 20% Variable annuity 20% Equity mutual funds 10% Money-market funds Investor A: A 35-year-old single individual who earns a good salary, makes the maximum contribution to his employer's 401(k), and is willing to assume a moderate degree of risk. Investor B: A 40-year-old married female who, along with her spouse, works and earns a good salary. She chooses not to contribute to her employer's 401(k) and is willing to assume a moderate degree of risk. The total portfolio is MOST suitable for: Neither Investor A nor Investor B Both Investor A and Investor B Investor A only Investor B only

Investor A only In this question, the fact that this portfolio includes an investment in variable annuities is the determining factor for which investor is the most suitable. Generally, an annuity should only be considered after a person contributes the maximum amount to the qualified plan that is sponsored by his employer. The reason for this is that it provides for deductible contributions, tax-deferred growth, and the potential for a company match. Investor A has contributed the maximum amount to his employer's 401(k) plan and could use the variable annuity as an additional retirement vehicle. Since Investor B is not contributing to her employer's pension plan, she should probably not include a variable annuity in her portfolio.

Relative to a sales tax, which TWO of the following statements are TRUE? It is a progressive tax It is a regressive tax It affects low income individuals the most It affects all individuals equally

It is a regressive tax It affects low income individuals the most A regressive tax applies the same tax rate regardless of a person's income. This has an adverse effect on a low-income person since the tax represents a higher percentage of income.

Which TWO of the following statements are TRUE concerning a company that becomes delisted from the NYSE or Nasdaq? It may be quoted on the OTC Bulletin Board It may only be quoted in the OTC Pink market Firm quotes would no longer be available Firm quotes may still be available

It may only be quoted in the OTC Pink market A company that fails to meet the maintenance requirements of securities listed on the NYSE or Nasdaq will become delisted. When this occurs, the company may be quoted (but not listed) on the OTC Bulletin Board or in the OTC Pink Market (also called the Pink Sheets). Quotes on the OTCBB or the electronic Pink Sheets generally are firm quotes. Firm quotes obligate the offering dealer to buy or sell the amount quoted.

An investor is a limited partner in a direct participation program that the IRS has determined to be abusive. This investor: Will lose his entire investment May be subject to pay back taxes as well as penalties and interest Will escape all adverse tax consequences due to his limited status Will be forbidden by the IRS to invest in any other limited partnerships

May be subject to pay back taxes as well as penalties and interest If the IRS deems a direct participation program abusive, deductions previously claimed may be disallowed causing investors to pay back taxes as well as interest and penalties on the back taxes. A DPP may be considered abusive if it is based on a false assumption or if it overstated property values for the purpose of generating large deductions.

A CMO would be suitable for an investor seeking: Monthly tax-free income, assuming he does need the principal returned at maturity Quarterly income, assuming he does not need the principal returned at maturity Monthly income, assuming he needs the entire principal returned at maturity Monthly income, assuming he does not need the entire principal returned at maturity

Monthly income, assuming he does not need the entire principal returned at maturity CMOs pay monthly income made up of interest, which is taxable, and principal, which is a tax-free return of capital. Due to the structure of a CMO, a fluctuating amount of principal is returned monthly, not at maturity, which makes CMOs different from most other fixed-income securities.

Which TWO of the following choices are methods of underwriting municipal securities? Standby Negotiated Competitive Fill-or-kill

Negotiated Competitive A municipal issuer will choose an underwriter either through a negotiated offering or competitive bidding process. A standby underwriting is associated with a rights offering of common stock. Fill-or-kill is a type of order placed to buy or sell a security in the secondary market. It is not a type of underwriting.

A registered representative has limited discretion over a customer's account. The registered representative may: Remove money freely from the account Place orders before the order has been approved by a principal Not enter buy stop orders Have all confirmations of transactions sent only to himself

Place orders before the order has been approved by a principal Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be approved promptly afterward.

In a new issue of municipal bonds, the syndicate manager will fill orders in which of the following priorities? Group net, net designated, member, presale Group net, net designated, presale, member Presale, member, group net, net designated Presale, group net, net designated, member

Presale, group net, net designated, member When allocating a new issue of municipal bonds, the normal priority of orders is the following: 1. Presale 2. Group net 3. Net designated 4. Member

In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the: After-tax yield Discount rate Real interest rate LIBOR

Real interest rate The real interest rate is the yield of a security reduced by the inflation rate. While it represents earnings remaining once inflation is taken into account, the real interest rate does not factor in the tax consequences. The discount rate is the rate of interest that the Federal Reserve charges member banks for loans. LIBOR (the London Interbank Offered Rate) is the rate of interest that banks in London charge each other for short-term loans.

If an investor purchased an ETF call option and decides to exercise the option, he would: Receive shares of the ETF Deliver shares of the ETF Receive the cash difference between the strike price on the option and the closing value of the ETF Deliver the cash difference between the strike price on the option and the closing value of the ETF

Receive shares of the ETF An ETF option is similar to an equity option since the buyer, after exercising an ETF call option, receives shares of the underlying ETF. On the other hand, if an index call option (not an ETF call option) is exercised, the buyer of the index call would receive the cash difference between the option's strike price and the index's closing value (or the index's opening value if it uses AM settlement).

Taxable income normally includes: The interest on municipal bonds issued in the state in which the taxpayer lives The taxpayer's annual 401(k) contributions Reinvested dividends paid on a mutual fund investment Any unrealized capital appreciation on stocks that the taxpayer owns

Reinvested dividends paid on a mutual fund investment Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.

Income that is derived from which of the following sources may NOT be used to fund an IRA contribution? Money earned from a part-time job A bonus Rental income received from a summer rental Taxable alimony

Rental income received from a summer rental Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.

Which of the following objectives is the least suitable reason for investing in a mutual fund? Diversification Professional management Short-term trading Liquidity

Short-term trading Investors in mutual funds usually seek all of the objectives listed except short-term trading.

A customer may contribute money to an IRA based on which of the following sources? Dividends received from preferred stock Taxable alimony Interest received from a convertible bond Payments received from a variable annuity

Taxable alimony Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.

Recently, the federal funds rate has been rising. This may indicate all of the following situations, EXCEPT: Rates for short-term loans have been increasing The Federal Reserve may be engaging in matched sales to absorb reserves from the banking system Banks will find it more expensive to obtain overnight loans to satisfy a minor deficit in their reserve accounts The Federal Reserve is easing credit

The Federal Reserve is easing credit The federal funds rate is the rate that one bank charges another bank for overnight borrowing. This borrowing is done when a bank is in need of reserves. If the fed funds rate is steadily rising, it indicates that the Federal Reserve is tightening credit. Therefore, banks may find difficulty in obtaining overnight loans to meet reserve requirements.

Which of the following indexes or averages is made up of the largest number of stocks? The Dow Jones Composite Index The S&P 500 Index The NYSE Index The Wilshire Associates Equity Index

The Wilshire Associates Equity Index The Wilshire Associates Equity Index shows the market value in dollars of roughly 7,000 NYSE, NYSE MKT (formerly NYSE Amex), and Nasdaq stocks. It contains the most stocks of the choices listed.

What information would NOT need to be disclosed by a broker-dealer in a research report? The broker-dealer received compensation for assisting the company in an acquisition The analyst provided a target price for the company The analyst is a director of the company The analyst had owned shares in the company one year before writing the report

The analyst had owned shares in the company one year before writing the report A broker-dealer is required to make certain disclosures in its research reports. Any investment banking compensation paid during the last 12 months, the anticipated price target, and the fact that the analyst is a director of the company are all required disclosures. In addition, any ownership in the company held by the analyst or a member of the analyst's immediate family at the time the report is issued must be disclosed. The fact that the analyst formerly owned shares that were sold does not need to be disclosed.

A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? The annual interest payments are found on the balance sheet The annual interest payments are found on the income statement The interest payment is deducted from net income The interest payment is deducted from EBIT

The annual interest payments are found on the income statement The interest payment is deducted from EBIT The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.

A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed? ABC Corp is an investment banking client of the broker-dealer The broker-dealer has a 1% or greater beneficial ownership in ABC common stock The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds The broker-dealer makes a market in ABC common stock

The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.

Which of the following is NOT considered a don't know (DK) trade? There is a disagreement on the price of the trade There is a mismatch on the size of the trade There is no record of the trade at one of the firms The buyer is suspicious of insider trading

The buyer is suspicious of insider trading Don't know (DK) trades occur when the contrabrokers disagree or have conflicting details of a trade. While insider trading is illegal, suspicion of insider trading would not cause a DK notice to be sent.

A client has a brokerage account with a broker-dealer in New York City. She decides to move to Montana to retire. She still intends to maintain the account with the broker-dealer, which is registered only in New York. Which of the following statements is TRUE? This is permitted provided the client maintains a P.O. Box in New York This is permitted since the account was opened in New York prior to the client's move to Montana The client can maintain the brokerage account if the firm registers as an investment adviser in Montana The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana

The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana A broker-dealer must be registered in each state in which it conducts business. In addition, the securities and the registered representative must be registered in all states in which the issue is sold. Registration as an investment adviser is not the same as registration as a broker-dealer.

When considering the credit strength of a municipal issuer, which TWO of the following choices are the MOST important? The condition of the local economy The current financial status of the U.S. economy Money supply figures The general capability of the fiscal officers of the municipality

The condition of the local economy The general capability of the fiscal officers of the municipality The state of the local economy is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt, and this must be understood in the analysis. The current financial status of the U.S. economy is not as important as the local economy in determining the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board, are irrelevant with regard to the credit strength of a municipality.

In a direct participation program, the point at which revenues begin to exceed deductions is known as: The cash-on-cash return The maximum cash flow The crossover point Phantom income

The crossover point The crossover point is reached when the project's revenues exceed expenses and net income is produced.

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? User charges Rental and lease payments The federal funds rate Concessions and fees

The federal funds rate Current interest rates are factors that will affect all bond issuers and would be least useful when analyzing a specific issuer of revenue bonds. The other choices are all sources of revenue to be used to pay the interest and principal on a municipal revenue bond.

A customer will be taking a six-month trip to a foreign country and will not have access to her mail. If the customer provides written instructions and includes a valid reason: The firm is not permitted to hold a customer's mail under any conditions The firm may hold the customer's mail for the six-month period provided a power of attorney is signed in advance by the customer The firm may hold the customer's mail for only three months The firm may hold the customer's mail for the six-month period

The firm may hold the customer's mail for the six-month period A broker-dealer may hold mail for a customer who will not be receiving mail at his usual address provided the firm receives written instructions from the customer that include the time-period during which the mail is to be held. If the period exceeds three consecutive months, the customer's instructions must also include a valid reason for the request

If a registered representative opens an account for an investor, the registered representative would need to know all of the following information, EXCEPT: The investor's tax identification number If the investor is a U.S. citizen The investor's investment objectives The investor's educational background

The investor's educational background A registered representative does not need to know the customer's educational background to open an account. A reasonable attempt should be made to obtain all the other information when opening an account for a customer.

All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT: They are based on the S&P 500 Index The levels are calculated on a monthly basis A trading halt on one exchange applies to all exchanges A 7% decline will halt trading for 15 minutes

The levels are calculated on a monthly basis Marketwide trading halts are based on the S&P 500 Index and are calculated daily (not monthly). A trading halt on one exchange applies to all exchanges that trade the same security. A Level 1 Market Decline (7%) and a Level 2 Market Decline (13%) will halt trading for 15 minutes. For a Level 3 Market Decline (20%), trading will be halted for the remainder of the day.

Which TWO of the following statements are TRUE regarding municipal fund security performance-based advertisements? The minimum sales load should be stated in the ad The maximum sales load must be stated in the ad Sales charges may not be reflected in performance data Sales charges must be reflected in performance data

The maximum sales load must be stated in the ad Sales charges must be reflected in performance data A 529 College Savings Plan is a type of municipal fund security. If performance based advertising is used, the maximum sales charge must be disclosed and must be reflected in the performance data within the advertisement.

According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased? The name of the beneficiary for the customer's account Whether the customer is subject to IRS backup withholding rules A written acknowledgment that the customer has received the fund's prospectus The name of the RR responsible for the account and the manager who approved the account

The name of the RR responsible for the account and the manager who approved the account Under industry rules, the following items MUST be obtained when opening an account. 1. The customer's name and residence 2. Whether the customer is of legal age 3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account 4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity The name of the beneficiary is not required when opening an account

Which of the following choices may write calls covered by XYZ stock? The president of XYZ Corporation The trustee of XYZ Corporation's pension fund XYZ Corporation ABC Corporation

The president of XYZ Corporation The trustee of XYZ Corporation's pension fund ABC Corporation Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock.

An individual considering the purchase of an equity-indexed annuity should understand that: The return over long periods of time will equal the underlying index These products tend to outperform the stock market over long periods of time These products do not have sales charges or surrender fees like mutual funds and should only be purchased by seniors who want a death benefit and life payout The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum

The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum Equity indexed annuities (EIAs) are a hybrid product that combines the elements of fixed and variable annuities. They provide a guaranteed minimum rate of return, but their performance is linked to a securities stock market index. Participation in the return found in the index is usually less than 100% and the calculation excludes dividends, which are normally based solely on appreciation. These products typically have surrender charges, fees based upon the riders selected, generally making these unsuitable for senior citizens or those needing access to their money.

An investor purchases an EPG Jan 40 put at 5 and writes an EPG Jan 50 put at 13. The investor would profit in all of the following situations, EXCEPT: The spread narrows Both options expire The Jan 50 put is closed out at 10 and the Jan 40 put is closed out at 4 The spread widens

The spread widens This is an example of a credit spread (more premium received for the option sold than paid for the option purchased). In a credit spread, the investor will profit if the spread (difference in premium) narrows.

When analyzing a general obligation bond, which of the following factors is NOT a positive indicator of the bond's quality? Voter registrations have increased over the last 18 months The department of motor vehicles reports that out-of-state drivers have been registering their cars in your state at an increasing rate The state increased the toll for the use of the turnpike A multiplex cinema, do-it-yourself store, and book-selling chain have all announced new franchises in your community

The state increased the toll for the use of the turnpike An increasing population trend and a mixture of diverse businesses (both new and established) are positive demographic indicators that reinforce the quality of general obligation issues. User fees are generally associated with revenue bond issuers.

A client owns 3,000 shares of stock in a company headquartered outside the U.S. The client receives a cash dividend and tax is withheld by the country where the company is located. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client? The dividend received is treated as a return of capital The taxes paid may be used as a credit The dividend paid is exempt from taxes The taxes paid may be used as a deduction

The taxes paid may be used as a credit The taxes paid may be used as a deduction U.S. citizens and corporations owning foreign stock may receive dividends from which foreign taxes have been withheld. The investor still owes U.S. income tax on the net dividend. The amount of the foreign tax, however, may be claimed by the investor as a deduction against income or may be applied as a credit against U.S. income tax.

An RR sees that a CMO is yielding 5.95% while the comparable Treasury is yielding 5.10%. This means that: The CMO is rated below investment-grade The yield pick-up on the CMO is 85 basis points The annual cash flow from the CMO is $85 greater than the Treasury The yield curve is inverted

The yield pick-up on the CMO is 85 basis points If the yield on a CMO is 85 basis points higher (5.95 - 5.10) than a comparably maturing Treasury security, the CMO provides a yield pick-up or higher yield of 85 basis points.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? They offer investors the same amount of liquidity as exchange-traded REITs They are not required to distribute the same percentage of taxable income as exchange-traded REITs They are not required to make periodic disclosures that are required of exchange-traded REITs They are not suitable for the same investors as exchange-traded REITs

They are not suitable for the same investors as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

A registered representative is sending an email to all her customers in anticipation of a new product being offered by the firm. If her customers consist of a large group of individual investors with assets from $100,000 to $100,000,000, which of the following statements is TRUE? This would be defined as a correspondence This would be defined as an institutional communication This would be defined as both a retail and an institutional communication This would be defined only as a retail communication

This would be defined only as a retail communication FINRA's Communications with the Public Rule defines different types of communication. Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). An institutional investor under this rule is any bank, S&L, insurance company, registered investment adviser or investment company (mutual fund), any person with total assets of at least $50 million, government entity, employee benefit plan, any member firm or registered person of the firm, and any person acting solely for any institutional investor. Since the email is being sent to both retail and institutional investors, it is defined as a retail communication. If the communication is made available only to customers with total assets of at least $50 million, then it would be defined as an institutional communication.

If an investor had cash and securities in his account, why would the investor write call options against the securities? To hedge his position To engage in an arbitrage To increase the overall rate of return of the portfolio To postpone paying taxes

To increase the overall rate of return of the portfolio

For a new municipal issue, which of the following choices is the responsibility of the underwriting syndicate? To file the official statement with the SEC To submit the final official statement to FINRA To hire the bond counsel that provides the legal opinion To submit the official statement to the MSRB's EMMA system

To submit the official statement to the MSRB's EMMA system Municipal securities are exempt from the registration and filing requirements of the SEC. However, the underwriting syndicate must submit the official statement to the MSRB's Electronic Municipal Market Access (EMMA) system and must also provide the official statement to customers. It is the responsibility of the issuer to hire the bond counsel.

Which of the following securities will probably have the greatest fluctuation in price when interest rates move up or down? Commercial paper Treasury bills Treasury notes Treasury bonds

Treasury bonds Treasury bonds have the longest maturity of the choices listed and will have the greatest fluctuation in price. Since they have the longest maturity, they will be exposed to the risks of the marketplace for the longest period.

When looking at a newspaper listing for foreign currency options, the spot prices for the underlying foreign currencies are quoted in: European terms U.S. terms 1/32 of a point 1/8 of a point

U.S. terms For foreign currency options, spot prices are quoted in U.S. terms (the cost in U.S. dollars to purchase one unit of the foreign currency). All of the spot prices are quoted in cents per unit except the Japanese yen (1/100th cent per unit).

When purchasing a straddle, an investor's maximum profit is: The premium The strike price minus the premium Limited to the narrowing of the spread Unlimited

Unlimited A long straddle consists of purchasing both a call and put with the same expiration and strike price. Since it involves purchasing a call, there is an unlimited profit potential.

A customer owns a total of 750 shares of a mutual fund and has invested $22,000 over the last three years. If the fund is currently valued at $31.20, what is the customer's cost basis using the average cost method?

$29.33 To calculate the cost basis using the average cost method, divide the sum of all investments by the total shares owned by the investor. The investor owns 750 shares and the total amount invested is $22,000. Therefore, the average cost is $29.33. The current value of the fund is not relevant.

A customer purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share.The buyer of these 10 straddles will need to deposit: $1,000 $2,000 $4,000 $10,000

$4,000 When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer has purchased 10 straddles and paid $400 per straddle for a total of $4,000 (10 straddles x $400 = $4,000).

Which of the following securities have the most interest-rate risk? 2X short-term bond leveraged ETFs 2X long-term bond leveraged ETFs Long-term bond leveraged ETFs Short-term bond leveraged ETFs

2X long-term bond leveraged ETFs An essential bond concept is that long-term bonds have a higher degree of interest-rate risk than short-term bonds. A leveraged ETF seeks to deliver a multiple of the performance of an index or other benchmark. Therefore, a 2X long-term bond leveraged ETF will have the highest degree of interest-rate risk of the answer choices.

An insider owning 500,000 shares of unregistered ABC stock has filed a Form 144 Notice of Offering. The weekly volume of trading for ABC on all exchanges was: June 30 61,000 June 23 62,000 June 16 64,000 June 9 65,000 June 2 40,000 ABC has 6,500,000 shares of stock outstanding. On July 3, the insider would like to sell a portion of his unregistered stock. What is the maximum amount of shares he may sell under Rule 144?

65,000 On July 3, the insider wants to sell unregistered ABC stock under Rule 144. The trading volume for the previous four weeks was: June 30 61,000 June 23 62,000 June 16 64,000 June 9 65,000 Total four-week volume = 252,000 The average volume is 63,000 shares (252,000 divided by four weeks equals 63,000). Rule 144 states that the insider may sell an amount equal to the average weekly volume of the previous four weeks, or 1% of the outstanding shares, whichever is greater. One percent of the 6,500,000 outstanding shares equals 65,000. Therefore, the investor may sell 65,000 shares of the security.

A customer in her late 40s, who is currently in the 15% tax bracket, has recently inherited $7,000,000. She informs you that she considers herself a conservative investor and wants your advice concerning investing the inheritance. Which of the following choices would be the BEST method of investing the funds? 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes 80% in equities, a 10% mixture of in-state and out-of-state municipal bonds, 10% in corporate bonds 30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 20% in corporate bonds, 20% in Treasury bonds, 10% in revenue anticipation notes, and 10% in tax-exempt money- market funds

30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 30% allocation in equities is reasonable (lower than 50%). However, since she is a conservative investor, this is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return for this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds in short-term municipal securities such as tax or revenue anticipation notes and tax-exempt money-market funds. Choice (a) has only a 20% allocation in equities and a 50% allocation of funds in tax anticipation notes, offering no growth potential. Having 100% of the funds in fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best method of investing the funds.

An investor is looking for a fund that, with little risk to her principal investment, will supplement her current wages. Which of the following funds best suits this investor? A growth fund An income fund A sector fund A no-load fund

An income fund A mutual fund investor most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.

A high net worth investor seeking safety of principal would MOST likely invest in: Corporate convertible bonds Non-investment-grade corporate bonds An investment-grade corporate bond fund A variable annuity

An investment-grade corporate bond fund Safety of principal refers to a customer being able to preserve or retain the initial amount of the investment over its life. Many bonds and bond funds offer investors this feature. The higher the rating, the greater the likelihood the investor will achieve safety of principal. An investment-grade corporate bond fund would offer more safety of principal than non-investment- grade and convertible corporate bonds. A variable annuity may fluctuate in value based on the subaccounts chosen by the investor.

An established customer has purchased penny stocks through a broker-dealer on five occasions. When making future recommendations to the customer regarding these securities, the broker-dealer must: Obtain a written statement from the customer for each trade Have the customer sign a suitability statement for each trade Have the trades preapproved by a principal Be sure that the recommendations take into account the customer's investment objectives

Be sure that the recommendations take into account the customer's investment objectives The account approval requirements for penny stocks under SEC Rule 15g-9 do not apply to existing customers who have maintained an account with a broker-dealer for more than one year or have previously engaged in three or more transactions involving penny stocks. All recommendations to a customer should take into account the customer's investment objectives.

Which of the following securities has prepayment risk? Mortgage bonds issued by a utility company Bonds issued by Freddie Mac Collateralized mortgage obligations Commercial paper

Collateralized mortgage obligations Many homeowners pay off their mortgages early. When interest rates fall, homeowners have an incentive to refinance and pay off their existing mortgages. These prepayments are passed through to the pools holding the old mortgages. The investors then need to reinvest this large amount of principal at a time when interest rates have declined. This is referred to as prepayment risk and it is associated with mortgage-backed securities such as CMOs. Although both Fannie Mae (FNMA) and Freddie Mac (FHLMC) issue mortgage-backed securities, in this question choice (b) covers the bonds of these issuers, which do not have prepayment risk.

A client invested $35,000 in a mutual fund and receives a lower sales charge by signing a letter of intent based on a purchase level of $50,000. If, one year later, she has not contributed additional funds, which of the following choices is the BEST course of action for the RR handling the account? Ask the client to sign a new letter of intent for $15,000 Allow the client a 90-day extension from the date of the original letter of intent Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed Contact the client and disclose that she is obligated to deposit $15,000

Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed A letter of intent (LOI) enables an investor to qualify for a reduced sales charge based on the breakpoint schedule of a mutual fund, without initially depositing the entire amount required. The LOI states the investor's intention to deposit the required money within 13 months of the inception of the letter. It may not be renewed for another 13 months. The letter of intent may be backdated for up to 90 days, but may not be extended for 90 days. Letters of intent are not binding on the investor. The investor is not obligated to contribute the additional $15,000. Investors who fail to make the additional investments are charged the amount that would equal the higher sales charge that applied to the original purchase. The fund insures that it will be able to recover the additional sales charge by withholding sufficient shares in escrow for this purpose.

Municipal securities Dealer A quotes a price for a block of bonds to Dealer B for one hour with a five-minute recall. This means: Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes Dealer B may call Dealer A within the one-hour period and demand a decision of Dealer A in five minutes Dealer B must take the bonds if he does not call Dealer A back within five minutes after the one-hour quote period has ended Dealer A may cancel its quote within the one-hour period by recalling Dealer B within the first five minute

Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes When municipal bonds are offered on a firm basis to Dealer B for one hour with a five-minute recall, the offering dealer, Dealer A, may not offer the bonds to anyone but Dealer B without giving Dealer B the first opportunity to take the bonds. Since the recall period is five minutes, if Dealer A recalls Dealer B, Dealer B then has five minutes to take the bonds or else Dealer A is free to sell the bonds to someone else.

When the proceeds of a refunding issue are deposited into an account that will be used to pay the interest and principal on the issue being refunded prior to its final maturity date, the outstanding bond is said to be: Escrowed to maturity Escrowed to call A Treasury arbitrage bond Noncallable

Escrowed to call When the proceeds of a refunding issue are deposited in an escrow account used to pay the interest and principal on the issue being refunded at a future call date (prior to maturity), the outstanding bond is said to be escrowed to call. The process is referred to as advance refunding. the new issue of bonds would be referred to as the refunding issue. The outstanding bond would be referred to as being prerefunded.

Dedicated Securities has been invited to join a syndicate selling a new offering of common stock. The head of the firm's syndicate department notices that the agreement among underwriters mentions a penalty bid. Which of the following choices is an example of a penalty bid? If Dedicated fails to sell its allotment, it will be liable for twice its normal commitment If Dedicated fails to solicit a certain number of indications of interest, it will be required to pay a fee to the syndicate manager If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated will forfeit the concession on those shares If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated could be penalized for failure to maintain the public offering price

If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated will forfeit the concession on those shares A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member when securities originally sold are repurchased by the syndicate in stabilizing transactions.

Regarding cash and margin accounts, which of the following statements is NOT TRUE? In a cash account, a customer is only required to deposit 50% of a purchase In a margin account, a customer is only required to deposit 50% of a purchase Under Regulation T, a customer must fully pay for her purchase in a cash account by no later than the fourth business day following the trade date Under Regulation T, a customer must pay for her portion of a purchase in a margin account by no later than the fourth business day following the trade date

In a cash account, a customer is only required to deposit 50% of a purchase The provisions of Regulation T apply to both cash and margin accounts. In both accounts the required customer deposit must be made by the fourth business day after the trade date. However, the required customer deposit amount is different based on whether the purchase is made in a cash or margin account. For any purchases that are made in a cash account, a customer must make full payment (no credit is extended by the B/D); on the other hand, for any purchases that are made in a margin account, a customer is only required to pay 50% (50% credit is extended by the B/D).

Which of the following statements is NOT TRUE regarding an equity-indexed annuity (EIA)? It offers a guaranteed minimum rate of return It provides a return that is based on the performance of a stock market index It is considered a security It provides tax-deferred growth

It is considered a security Equity-indexed annuities (EIAs) are a type of fixed annuity that provide a guaranteed minimum rate of return (unlike variable annuities), but may potentially provide a greater rate of return. An EIA's return is tied to the performance of a stock market index to which it is linked. As with standard annuities, they also provide tax-deferred growth. However, EIAs are not currently considered securities; instead, they are categorized as a life insurance product.

The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? It will have a negative impact on the security It will have a positive impact on the security It will have no impact on the security The issuer will be obligated to repay the investor his principal immediately

It will have a negative impact on the security Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.

Abigail is long 500 shares of GHI at $18 per share. In November, GHI is trading at $24 per share, but is expected to decrease in value over the next few months. Abigail wants to protect as much of her gain as possible and is willing to sacrifice upside potential to reduce her cost. Which of the following positions would you recommend to her to accomplish her goal? Purchase 5 GHI Jan 25 puts and sell 5 GHI Jan 30 calls Sell 5 GHI Jan 25 puts and sell 5 GHI Jan 25 calls Purchase 5 GHI Jan 25 puts and purchase 5 GHI Jan 30 calls Sell 5 GHI Jan 25 puts and purchase 5 GHI Jan 25 calls

Purchase 5 GHI Jan 25 puts and sell 5 GHI Jan 30 calls In order to protect some of the gain, Abigail will need to purchase 5 puts that expire in January. To reduce the cost of purchasing the 5 GHI Jan 25 puts, Abigail can sell 5 GHI Jan 30 calls to generate income from the premiums she receives and margin will not be required since Abigail owns 500 shares of GHI that could be called away should the short calls be exercised.

One of your clients anticipates a significant decline in XYZ stock. The client wants to establish a position to take advantage of a large decline, but not expose himself to significant risk. Which of the following actions best satisfies your client's needs? Short XYZ stock Purchase an XYZ put Purchase an XYZ straddle Establish an XYZ debit put spread

Purchase an XYZ put A long put will allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is at risk only for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium.

A corporation announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 7.25% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. Which of the following alternatives is MOST advantageous to an existing bondholder? Redeem the bonds Sell the bonds at the current market price Do nothing and hope for a takeover bid from another company Hold the bonds to maturity and continue to earn interest

Redeem the bonds When bonds are called for redemption, the bondholder can only redeem the bonds at the callable price or otherwise sell them in the market. The bondholder cannot continue to hold the bonds in anticipation of a better offer or until maturity.

A customer, who is going on vacation, enters a GTC order to buy a stock. The order is executed. The customer tells the registered representative that he wants the stock but will not return in time to pay for the security by the payment date. The customer states he will send in a check a few days late. The registered representative should: Cancel the trade Pay for the stock himself with a principal's approval Transfer the order to a margin account Request an extension

Request an extension The customer has indicated that he wants to purchase the stock but will not be able to pay for it in time because he will be on vacation. The order was a good-until-cancelled (GTC) order, so the customer did not know if and when the order would be executed. The reason for the late payment is due to the customer being on vacation. This is a valid reason, and the registered representative should request an extension.

An investor would purchase an inverse exchange-traded note if: She anticipates a decrease in the benchmark that is being tracked She anticipates an increase in the benchmark that is being tracked She is interested in obtaining a long-term capital gain She is interested in obtaining income on a regular basis

She anticipates a decrease in the benchmark that is being tracked Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. An inverse ETN would pay the opposite of the benchmark that is being tracked and would be suitable for a person interested in short-term trading. Most ETNs are traded on a national exchange (NYSE) and, therefore, an investor can quickly sell the security to earn a short-term gain.

Lucretia has a significant gain in Jaymont shares that she has held for 10 months. If she buys a put on Jaymont, which TWO of the following statements are TRUE? She still has upside potential in the stock She can achieve a long-term gain by holding the put and stock for three months She terminates the holding period She cannot suffer a loss on the investment

She still has upside potential in the stock If a stock is held short-term (one year or less) and a put is purchased, the holding period is terminated and will not resume until the put is sold or expires. When the holding period resumes, it will do so as if the stock was purchased on that day. If a long-term holding period were established on the stock, then the acquisition of the put will not affect the investor's holding period. If the stock and the put are purchased on the same day, that is termed a married put. In that case, the price of the put will be added to the price of the stock to arrive at a cost basis for the entire position. When the put expires, there will not be a taxable event, since the stock must be sold to trigger a capital gain or loss. The purchase of the put will create a hedge by allowing the investor to sell at the strike price, but this does not necessarily mean there will be no loss. There is still potential for the stock to rise and for Lucretia to achieve large gains.

An investor who sells 1 GE Dec 50 call and sells 1 GE Dec 40 put has: Created a vertical spread Created a horizontal spread Sold a straddle Sold a combination

Sold a combination Short straddles and short combinations are very similar positions. Both involve selling a call and a put on the same underlying stock. However, short combinations have a short call and short put with different expiration months and/or different strike prices. Short straddles have a call and a put with the same strike price and expiration month.

On February 10, an investor sold 100 shares of ABC short at $50/share. The investor covers the position on November 1 by purchasing 100 shares of ABC at $58/share, establishing an 8-point loss. If, on November 15, the investor shorts 100 shares of ABC at $56/share: The investor is short 100 shares of ABC against the box The wash sale rule has been violated The investor has a $200 short-term capital gain The investor has an $800 short-term capital loss

The wash sale rule has been violated Reinstating a position within 30 days of realizing a loss is a violation of the wash sale rule. The November 15 short sale creates a new short position in ABC only 15 days after establishing a loss on an original short position in ABC. Therefore, the loss may not be claimed at this time.

If an investor had cash and securities in his account, why would the investor write call options against the securities? To hedge his position To engage in an arbitrage To increase the overall rate of return of the portfolio To postpone paying taxes

To increase the overall rate of return of the portfolio The purpose of writing calls against securities owned is to increase the overall rate of return of the portfolio. The premium the purchaser of the call pays the writer will be added to whatever dividends the writer was receiving to increase the yield of the portfolio to the writer. If the stock declines in value, the writer will make the premium on the expiring call. However, the investor is still exposed to large downside risk in the stock. Therefore, generating income for the portfolio is a better choice than to hedge.

A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is:

$15,000 The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is $15,000.

An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:

3 Intrinsic value is defined as the in-the-money amount of the contract. A foreign currency put option is in-the-money when the spot price is less than the strike price. Since the spot price (157) is less than the strike price (160), the contract is in-the-money by 3 points.

A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. Each existing share receives one right. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would she need to buy 100 new shares of stock?

950 The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights. (10 rights x 100 shares = 1,000 rights.) The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 950 rights.

An investor is in the 35% tax bracket. Which of the following investments would afford him the BEST after-tax yield? A 3.50% general obligation bond A 4.10% Treasury bond A 5.25% investment-grade corporate bond A 5.75% non-investment-grade corporate bond

A 5.75% non-investment-grade corporate bond The 3.50% general obligation bond (municipal bond) is exempt from federal income taxes. The other investments are subject to federal income taxes and 35% of the income received would be taxable. The taxable equivalent yield of the 3.50% municipal bond is 5.38%. This is calculated by dividing the 3.50% municipal yield by the complement of the tax bracket which is 65%. The highest (best after-tax yield) would be found in the 5.75% non-investment-grade corporate bond.

A sell stop order most likely will be entered by a technical analyst or chartist: Below a support level for the stock Above a resistance level for the stock Below a previous low for the stock To take advantage of a rising market

Below a support level for the stock Sell stop orders are entered below the current market. The order will most likely be entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside. This is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.

An investor purchases a Canadian dollar September 80 call and writes a Canadian dollar September 82 call. This position is a: Bullish spread Bearish spread Long straddle Credit combination

Bullish spread A spread is the simultaneous sale and purchase of two options of the same class (same underlying interest and same type), on the same underlying security, with different strike prices and/or expiration months. The challenge to this question is that the premium for each option is not provided. To handle these types of questions, remember that call options gain intrinsic value as the movement of the underlying interest rises. For that reason, the 80 call will have a higher premium than the 82 call. Since the premium is larger on the option being purchased than the option being sold, this is a debit spread. Also, since buying calls is bullish, a call debit spread is a bullish strategy. Keep in mind, for call spreads, the lower strike price is always the dominant leg; however, for put spreads, the higher strike price is the dominant leg.

A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should: Buy 5 bonds Buy 100 shares of stock Sell 5 bonds short Sell 100 shares of stock short

Buy 5 bonds Sell 100 shares of stock short Since the bond is convertible into 20 shares of stock ($1,000 par divided by $50) and the bond is priced at 120, the parity for the stock is $60 per share ($1,200 bond price divided by 20 shares). An arbitrage situation exists because the stock is selling at a 5-point premium to parity (65 market price versus 60 parity price). An investor can profit from this situation by purchasing bonds at 120 and shorting the stock at 65. Each bond may be converted into 20 shares of stock at a cost of $60 per share. These shares may then be used to cover the short sale, establishing a 5-point profit (65 short sale price - 60 cost).

If a registered representative receives information that a client has recently received a large sum of money, the proper course of action is to: Encourage increased leverage in the account Suggest a sizable investment in tax-exempt investments Solicit the sale of taxable investments that the investor is holding Determine if the customer's investment objectives have changed

Determine if the customer's investment objectives have changed Registered representatives have a responsibility to update customer information periodically in case something has changed that would alter a customer's goals and objectives. Given that the customer has just experienced a financial windfall, the representative should check to see if the customer's investment objectives have changed before making any recommendations.

A registered representative should know all the essential facts about a customer's financial status, investment objectives, ability to assume risk, age, occupation, and other pertinent information: For the registered representative to determine if option trading is suitable for the customer For the brokerage firm to determine if it should approve the customer's account for option trading For the brokerage firm to determine if it should send an options risk disclosure document to the customer Before the registered representative answers questions the client has about options

For the registered representative to determine if option trading is suitable for the customer Option trading is not suitable for all investors because of the risks involved. The registered representative must obtain all the essential facts about the customer to determine if option trading meets the customer's investment objectives, financial background, and ability to assume the added risk. An option order (to buy or write the option) may not be accepted from a customer unless the customer's account has first been approved for option trading by the brokerage firm. Whether the account is approved or not depends on the essential facts about the customer. The answer therefore is (I) and (II) only. A customer must be sent a current option disclosure document at or prior to the time the account is approved for option transactions.

The federal tax exemption for interest earned on an industrial revenue bond is NOT available if the: Holder of the bond is a substantial user of the facility Issuer does not subscribe to equal opportunity employer standards Bonds are not approved by the MSRB Underwriter has a control relationship with the issuer

Holder of the bond is a substantial user of the facility If the holder of an industrial revenue bond is a substantial user of the facility, then the federal tax exemption on the interest earned does not apply.

If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would: Increase Decrease Remain the same Decrease temporarily but remain stable over a period

Increase If the tax-exempt status were eliminated, yields on newly issued municipal bonds would need to increase to compete with the higher yields of non-tax-exempt bonds.

Which TWO of the following statements are TRUE about a divided account? It is called a Western account It is called an Eastern account Each member is responsible for the unsold bonds based on the member's original participation Each member is liable only for its own participation in the syndicate

It is called a Western account Each member is liable only for its own participation in the syndicate In a divided account (Western account), the member is responsible for its own participation in the syndicate. If any bonds remain unsold, it is the responsibility of that member. In an undivided or Eastern account, any unsold bonds are the responsibility of the entire syndicate. Each member would then be liable for the same proportion as his original participation.

All of the following actions create a conflict of interest for a general partner, EXCEPT if the general partner: Accepting a payment not to compete with the program Holding partnership monies in his personal bank account Selling property that he owns to the partnership Lending money to the partnership at prevailing interest rates

Lending money to the partnership at prevailing interest rates A general partner is not permitted to compete with the limited partnership. Accepting a payment not to compete would be a conflict of interest. Selling property to the partnership is a definite violation of the conflict of interest provisions, as is commingling partnership funds. While partners are not allowed to borrow from the partnership, lending money to the partnership is permitted.

An investor has been following XYZ Corporation for several years and believes that the company is poised for some very profitable years. Since she wants to purchase a security that offers a consistent annual distribution and one that benefits from XYZ deciding to pay a significant cash dividend to its stockholders, she should consider purchasing: Cumulative preferred stock Participating preferred stock Collateral secured bond Common stock

Participating preferred stock Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than the stated amount based on the profits of the issuing company. In contrast, the benefit of cumulative preferred stock is that it allows the owner to add up all of the unpaid dividends to a future payment if the issuer intends to pay a cash dividend to its common shareholders. Cumulative preferred stock may be beneficial during a period of time where the company is unable to pay the full dividend since the holder is able to accrue the missing payments. A collateral secured bond is one that provides the holder with safety based on it being backed by a specific asset of the issuer; however, the issuer will pay no more than the bond's stated rate of interest. Common stock will pay cash dividends, but only if they are declared by the company's board of directors.

Which of the following securities would be LEAST suitable for an investor interested in preservation of capital? Long-term CDs Reverse convertible bonds A corporate bond fund A floating rate bond maturing in five years

Reverse convertible bonds Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

On Tuesday, the S&P 500 Index closed at 1,600. At 11:30 the next morning, the S&P 500 Index is at 1,488. All NMS stocks will: Stop trading for 15 minutes Stop trading for 30 minutes Stop trading for the remainder of the day Continue to trade

Stop trading for 15 minutes If the S&P 500 Index falls by 7% from the previous trading day's closing price, it is defined as a Level 1 Market Decline and triggers a 15-minute trading halt. In this question, the drop from the closing price of 1,600 to 1,488 the next day (112 points) is a 7% decline.

Which of the following choices makes a financial commitment in the distribution of a new issue of securities? The selling group The underwriting syndicate A customer who provides an indication of interest The exchange on which the security will be listed

The underwriting syndicate The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss. While the selling group also participates in the sale of the new issue, it does not run the risk of losses if the securities do not sell. Regarding choice (c), a customer who provides an indication of interest has no obligation of any kind.

An investor establishes a long margin account and buys 1,000 shares of TMP at $55. The value of the securities increases and SMA is created. All of the following actions affect SMA, EXCEPT: The value of the securities declines The value of the securities increases Cash is withdrawn from the account The buying power of the accounts used

The value of the securities declines The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. A decrease in the market value of the securities does not affect the SMA in a long account since, once created, SMA is reduced only when used. An increase in the market value of the securities can increase SMA, since equity increases. Withdrawing cash and buying of additional securities for the account will reduce the SMA since the SMA is used.

Which TWO of the following activities are normally functions of the investment banking department of a broker-dealer? Working with issuers to raise capital Selling securities to institutional investors Assisting companies with mergers and acquisitions Making a secondary market for new issues

Working with issuers to raise capital Assisting companies with mergers and acquisitions A corporation that wishes to raise capital will typically employ the services of an investment banker and engage in an underwriting process. Investment bankers provide financing for corporations by bringing an issue, whether debt or equity, to market for the issuer. The investment banking department will also assist companies with mergers and acquisitions. Investment bankers do not make a secondary market for new issues or sell securities to institutional investors.