Final 3
Which of the following information would be found in a municipal bond resolution? I Any restrictive covenants to which the issuer must adhere II Any call provisions providing for redemption prior to maturity as specified in the contract III The credit rating assigned to the issue by a nationally recognized ratings agency IV The compensation received by the underwriters for selling the issue to the public A I and II only B III and IV only C I, II, III D I, II, III, IV
Explanation The best answer is A. The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions. The credit rating is given by the ratings agencies (e.g., Moody's or Standard and Poor's); and is found in their publications. The underwriter's compensation is disclosed to investors in new negotiated municipal bond offerings in the Official Statement (the disclosure document, similar to a prospectus, for new municipal issues).
Active asset managers select investments based primarily upon: A inefficient market pricing of the investment B efficient market pricing of the investment C minimum time needed to achieve projected investment returns D minimum number of investments needed to achieve projected investment returns
The best answer is A. Active asset managers believe that by performing fundamental analysis, they can find undervalued companies - that is, companies that are not "efficiently priced". Passive asset managers believe that the market is basically efficient, and that one cannot consistently find "undervalued securities" - so why bother? Instead, just invest in an asset that mimics the index - that is, an index fund. This will do as well as the "market" with much lower expenses that those associated with "active" asset management.
A customer buys a listed stock option in a cash trade and exercises that same day. The Options Clearing Corporation will assign the exercise notice to a writer on: A that day B the next business day C the 2nd business day after exercise date D the 5th business day after exercise date
The best answer is A. An exercise notice may be placed by a customer immediately upon the purchase of a call or put contract. The Options Clearing Corporation will not assign the exercise notice until the purchase of the option settles - and this occurs the same day for a cash options trade. Once the assignment occurs, the stock must be delivered to the holder of the call; or the stock must be delivered to the writer of the put; 2 business days after assignment.
The President of PDQ Corporation donates restricted PDQ shares to the United Way after holding them for 3 years fully paid. United Way can sell the stock without restriction: A immediately B after holding the securities for 90 days C after holding the securities for 2 years D after holding the securities for 3 years
The best answer is A. As long as the 6-month holding period requirement has been met on the restricted shares (the officer held them 3 years) when they are donated, the charity can sell them immediately. There is no requirement that another 6-month holding period be met.
Banker's Acceptances are: I time drafts II demand deposits III used to finance imports and exports IV used to finance the issuance of ADRs A I and III B I and IV C II and III D II and IV
The best answer is A. Banker's Acceptances are time drafts on a bank used to finance imports and exports. BAs trade at a discount to their face amount until maturity, but the trading market is rather thin.
Regarding reporting of trades that take place in NYSE listed issues: I each trade must be reported within 10 seconds II each trade must be reported within 60 seconds III the executing member reports IV the initiating member reports A I and III B I and IV C II and III D II and IV
The best answer is A. Equity trade reporting rules are consistent for all markets - trades must be reported by the executing member within 10 seconds of execution during regular market hours.
A customer is long 1 ABC Jan 90 Put @ $5. The put is exercised when the market price of ABC is $80. The sales proceeds of the shares is: A strike price minus premium B strike price plus premium C market price minus premium D market price plus premium
The best answer is A. If a long put is exercised, the holder is selling the stock at the strike price ($90). Since $5 per share was paid in premiums, the holder's net sale proceeds is $85 per share for tax purposes. Note that this is the same as the breakeven on the position, which is the strike price minus the premium.
Which of the following actions must be taken if a municipality wishes to raise its debt limit? A Public referendum B Court order C Judicial edict D Tax assessment
The best answer is A. If a municipality wishes to raise its debt limit, the voters must approve via a public referendum. In effect, the voters are approving an increase in their taxes when they approve such a measure.
Under MSRB rules, which of the following are prohibited? I Guaranteeing a customer account against loss II Recommending the purchase of a put option to the customer as protection against loss III Agreeing to repurchase bonds from a customer personally at a preset price IV Recommending the use of a repurchase agreement to the customer as a means of protecting against loss A I and III B II and IV C I, II, III D All of the above
The best answer is A. It is prohibited to agree to repurchase bonds from a customer personally at a preset price since this is a guarantee against loss to the customer that is prohibited. Guaranteeing a customer's account against loss is prohibited. Recommending the use of put options or repurchase agreements to protect against loss are both valid strategies and are permitted under MSRB rules.
Which of the following statements are TRUE regarding lump sum distributions from qualified plans? I They may be rolled over into an IRA without dollar limit II They may be rolled over into an IRA subject a dollar limit of $35,000 III They remain tax deferred as long as the rollover is performed within 60 days IV They remain tax deferred as long as the rollover is performed within 90 days A I and III B I and IV C II and III D II and IV
The best answer is A. Lump sum distributions from qualified plans prior to the age of 59 1/2 can be "rolled over" into an IRA without dollar limit and remain tax deferred as long as the rollover is performed within 60 days of the distribution date.
If the actual interest rate earned in the separate account underlying a variable annuity contract is higher than the "AIR" the annuity payment: A will increase B will decrease C is unaffected D is capped to a maximum amount
The best answer is A. The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.
The Bond Buyer "20 Bond" index is composed of: I General Obligation Bonds II Special Tax Bonds III Revenue Bonds IV Industrial Revenue Bonds A I only B I and II only C III and IV only D I, II, III, IV
The best answer is A. The Bond Buyer 20 Bond Index consists of 20 General Obligation bonds with 20 years to maturity, all rated A or better. These are non self-supporting debt. In contrast, Choices II, III, and IV are all self-supporting debts.
Which statements are TRUE regarding Treasury STRIPS? I Interest is accreted annually II Interest is not accreted annually III Interest is subject to Federal income tax annually IV Interest is not subject to Federal income tax annually A I and III B I and IV C II and III D II and IV
The best answer is A. The accretion of the discount over the bond's life represents the interest earned. Even though no payments of interest are made annually, the discount must be accreted annually and is taxable as interest income earned.
The "Third Market" is trading of: A listed securities over-the-counter B listed securities on stock exchanges C unlisted securities over-the-counter D unlisted securities solely on regional stock exchanges
The best answer is A. The trading markets are: First Market: Trading of exchange listed securities on stock exchanges Second Market: Trading of unlisted securities over-the-counter Third Market: Trading of exchange listed securities over-the-counter Third Market Makers are OTC firms such as Jefferies and Co. and Weeden and Co. that stay open 24 hours a day and capture much of their trading volume in NYSE-listed issues when the NYSE is closed.
Accretion of a bond discount will: I increase the bond's cost basis II decrease the bond's cost basis III increase annual reported interest income IV decrease annual reported interest income A I and III B II and IV C II only D II and III
The best answer is A. When a bond discount is accreted, annually, the bond's cost basis is increased by the pro-rata amount of the discount and the accretion amount is shown as an increase of interest income received for tax purposes. Over the life of the bond, the entire discount will be accreted, increasing the cost basis to par at maturity. Thus, there will be no capital gain or loss at maturity; and the entire discount will have been taxed as interest income over the bond's life.
A customer has written 1 ABC Jan 50 Put @ $3. The contract is assigned. The tax consequence to the writer is a: A cost basis of $4,700 B sale proceeds of $4,700 C cost basis of $5,300 D sale proceeds of $5,300
The best answer is A. When a put option is exercised by the holder, the Options Clearing Corporation "assigns" the contract to any one of the individuals or firms that sold that option on a random basis. The writer of a put who was assigned must buy the stock at the strike price. The premium received is a reduction of the cost of buying the stock. The writer of the put must buy 100 shares at $50 ($5,000), but he or she received $300 in premiums for writing the contract, so the adjusted cost basis is $4,700 for 100 shares.
A customer in a low tax bracket has just inherited $10,000 and is looking for an investment that will provide current income and liquidity. The BEST recommendation is a: A Corporate Bond ETF B Variable Rate Bond C Municipal Bond Fund D Treasury STRIPS
The best answer is A. The Corporate Bond ETF is liquid because it is exchange traded, and it provides taxable income from its bond investments. Because the customer is in a low tax bracket, lower yielding tax-free municipal bond investments are not appropriate. Variable rate bonds would be good investment if it is expected that interest rates would rise (a point not addressed in this question), but direct bond investments are not that liquid, unless they are Treasury or Agency bonds. Treasury STRIPS are a liquid investment (a ready market exists at all times and they are easy to trade with low transaction costs), but they do not give current income. These are zero-coupon issues.
Which of the following bond issues would most likely have a mandatory sinking fund? I U.S. Government bond II General Obligation bond III Hospital Revenue bond IV Airport Revenue bond A I and II only B III and IV only C II, III, IV D I, II, III, IV
The best answer is B. A bond issue is likely to have a mandatory sinking fund provision if it is perceived to be somewhat risky causing potential purchasers to demand this additional safeguard. Treasury Bonds are backed by the full faith and credit of the U.S. Government, so these issues have no credit risk. State General Obligation bonds are backed by the unlimited taxing power of the State, and also are perceived to be of low risk. Hospital Revenue bonds and Airport Revenue bonds are backed solely by the facility's revenues and are considered to be somewhat risky. (If there is hospital overbuilding or patient stays are shortened, revenues can fall; if another airport is built nearby that takes away passengers, revenues can fall; etc.)
The term "publicly traded fund" is the common name for a(n): A open end management company B closed end management company C fixed unit investment trust D non-fixed unit investment trust
The best answer is B. A publicly traded fund has a 1 time stock issuance; closes its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "closed-end" fund - that is, closed to new investment.
Which statements are TRUE about the CBOE Order Support System? I The order is directed to the brokerage firm's communication post on the exchange floor II The order is directed to the trading post III Execution notices are sent directly from the trading post to the brokerage firm A I and III B II and III C I only D I, II, III
The best answer is B. All automated trading systems function in a similar fashion. Orders are routed directly to the trading post, eliminating the need for the order to be wired to the communication post on the exchange floor and then written by hand to be given to a floor broker. The execution report is sent directly to the originating firm; it does not go through the firm's communication post.
A company that has been growing rapidly announces that it is splitting its stock 3:2 and increasing its cash dividend by 10%. Prior to the announcement, the stock was trading at $60 and the dividend yield was 8%. What will be the next dividend paid per share? A $.80 B $.88 C $1.20 D $1.32
The best answer is B. Another question that is more annoying than difficult. When the stock was trading at $60, it was paying an annual cash dividend of 8% of $60 = $4.80 per share. After the 3:2 split, for every 2 shares held, there will now be 3 shares. This is the same as 1.5:1. The new share price will be $60 / 1.5 = $40. The new annual dividend amount per share before the increase will be $4.80 / 1.5 = $3.20. If this dividend is increased by 10%, the new annual rate will be $3.52, and the new quarterly dividend payment per share will be $3.52 / 4 = $.88.
Eurodollar bonds: I are issued in bearer form II are issued in fully registered form III pay interest which is subject to U.S. withholding taxes IV pay interest which is not subject to U.S. withholding taxes A I and III B I and IV C II and III D II and IV
The best answer is B. Eurodollar bonds are not offered in the U.S. and are issued in bearer form (remember that the U.S. has made it illegal to issue domestic bearer bonds!) These bonds are not subject to withholding taxes (once again, because they are not offered in the U.S.)
Which is considered to be a direct obligation of the U.S. Government? A Federal National Mortgage Association Pass Through Certificates B Government National Mortgage Association Pass Through Certificates C Federal National Mortgage Association Bonds D Federal Home Loan Bank Bonds
The best answer is B. GNMA certificates are backed by a pool of mortgages, the full faith and credit of GNMA, as well as the full faith and credit of the U.S. Government. GNMA is empowered to appropriate the funds necessary to pay interest and principal on its obligations from the U.S. Treasury. As such, this is considered a direct obligation of the U.S. Government. FNMA and FHLB are implicitly backed; there is no direct guarantee.
An investor who expects interest rates to drop would NOT invest in: I non-callable debt issues II puttable debt issues III callable debt issues IV debt issues with adjustable interest rates A I and II only B III and IV only C I, II, III D I, III, IV
The best answer is B. If interest rates decline, it is likely that issuers will call in outstanding bonds and refund the issues at the lower current interest rates. An investor who expects interest rates to drop should avoid callable issues (choice III) or issues with adjustable interest rates (since each year as interest rates drop, the rate on the bond is dropped). Non callable bonds are fine, as are bonds with put options. The put option will only be used if interest rates rise, decreasing the value of the bond. Then, the bondholder would exercise the option and "put" the bonds to the issuer at par.
A corporation has issued $100 par, 8% convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $104 while the common stock is trading at $71.50. The corporation calls the preferred stock at par. To realize the largest profit, a customer holding 100 shares of preferred stock should: A tender the preferred shares at the call price B sell the preferred shares at the current market price C sell short the common stock and convert the preferred for delivery to cover the short D continue to hold the preferred shares
The best answer is B. If the preferred shares are tendered at the call price, the owner receives $100 per share. Since par ($100) was paid for each share, there is no profit. If the preferred shares are sold at the current market price of $104, the owner has a profit of $4 per share. Since each preferred share is convertible into 1.4 common shares, the short sale (sale of borrowed shares) of 1.4 common shares will yield 1.4 x $71.50 = $100.10. The preferred can then be converted to common to cover the borrowed short position. This results in a $.10 profit per share. Thus, selling the preferred is the best choice. Continuing to hold the preferred does not make sense since dividend payments will cease. For this reason, buying additional preferred shares does not make sense either.
Which of the following statements are TRUE regarding a managed limited partnership offering? I The underwriter takes on financial liability in selling the issue II The underwriter takes no financial liability in selling the issue III The offering is effected on a best efforts basis IV The offering is effected on a firm commitment basis A I and III B I and IV C II and III D II and IV
The best answer is B. Managed direct participation program offerings are firm commitments by underwriters who buy the issue and then sell it to the public through a syndicate - the underwriter is said to be "managing" the sale of the offering. An unmanaged direct participation program is one which is sold to investors through wholesalers, acting as agents for the issuer. These offerings are sold on a best efforts basis. The wholesalers take no financial responsibility for the issue.
Credit can be extended on new issues: A immediately after the offering is complete B after 30 days have elapsed from the completion of the offering C after 60 days have elapsed from the completion of the offering D after 90 days have elapsed from the completion of the offering
The best answer is B. New issues are not eligible for margin until 30 days have elapsed from the completion of the offering.
Which of the following statements are TRUE regarding new issue government and new issue agency securities? I Agency securities are sold through a selling group II Agency securities are sold through auction III Direct U.S. government obligations are sold through a selling group IV Direct U.S. government obligations are sold through auction A I and III B I and IV C II and III D II and IV
The best answer is B. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. Out of the proceeds, a selling concession is paid to the selling group by the agency. Direct U.S. Government obligations are sold through auction.
Quotes published in the news media for mutual funds show: A Bid price at NAV; Ask price at NAV plus an average sales charge B Bid price at NAV; Ask price at NAV plus the maximum sales charge C Bid price at NAV less any redemption fee; Ask price at NAV plus an average sales charge D Bid price at NAV less any redemption fee; Ask price at NAV plus the maximum sales charge
The best answer is B. News media quotes for mutual fund shares show the Bid Price at Net Asset Value. The Ask Price is Net Asset Value plus the maximum sales charge imposed by that fund
REITs are NOT permitted to distribute which of the following to their shareholders? I Income II Dividends III Capital Gains IV Capital Losses A I and III B I and IV C II and III D II and IV
The best answer is B. REITs cannot distribute capital losses to shareholders - they can only distribute capital gains. REITs cannot distribute "income" as such. Any net income must be distributed to shareholders as a dividend.
Any changes in value of a variable annuity unit are directly related to changes in the: A Standard and Poor's 500 Average B Value of the securities funding the separate account C Consumer Price Index D Dow Jones Averages
The best answer is B. Since the separate account of investments funds a variable annuity, annuity unit values are directly influenced by changes in the values of the securities in the separate account.
ABC Corporation has declared a 3:2 stock split to shareholders of record on November 10th. The price of the stock will be reduced on ex date by: A 13% B 33% C 50% D 150%
The best answer is B. Since the stockholder has 1.5 times the number of shares after the split, the market price will be reduced on ex date by a factor of 1.5. Assume the market price of the stock is $60 before the split. After the split the new market price is $60 / 1.5 = $40. The new price is $20 less than the original $60 OR $20 / $60 = 33% reduction from the original price.
If a municipal securities firm is subject to a 2-year ban under MSRB Rule G-37, it would be permitted to: A act as a financial advisor to that municipality during the period of the ban B place a bid for a competitive offer of general obligation bonds being sold at auction by that issuer C negotiate with the issuer to be the underwriter on a revenue bond offering D do none of the above
The best answer is B. The 2-year ban applies to engaging in municipal securities business with that issuer. Municipal securities business includes acting as a financial advisor to that issuer or performing negotiated underwritings for that issuer. It does not include competitive bid underwritings because "favoritism" does not decide the outcome of the auction. Rather, the lowest interest rate bidder wins.
The anti-fraud provisions of the Securities Exchange Act of 1934 apply to which of the following? I Persons trading exempt securities in the secondary market II Persons trading non-exempt securities in the secondary market III Issuers selling exempt securities in the primary market IV Issuers selling non-exempt securities in the primary market A II only B I and II C III and IV D I, II, III, IV
The best answer is B. The anti-fraud provisions of the Securities Exchange Act of 1934 apply to the trading of both exempt and non-exempt securities. All investors are subject to the anti-fraud rules. The Securities Act of 1933 covers full and fair disclosure by issuers in the new issue (primary) market.
A customer sells short 100 shares of ABC at $54 and buys 1 ABC Jan 55 Call @ $6. ABC goes to $79 and the customer exercises the call to cover her short stock position. The customer has a: A $600 loss B $700 loss C $2,000 loss D $2,100 loss
The best answer is B. The customer shorts stock because she thinks the market for ABC will go down. However, she also wants to protect herself from unlimited loss potential if the market should rise, so she buys a call (which gives the right to buy stock at the strike price). In this case the market goes up sharply, and the customer exercise the call. The stock that was sold originally for $54 is purchased for $55 for a 1 point loss on the stock. Since $6 was paid in premiums, the total loss is 7 points or $700 for the 100 shares. Note that if the call was never purchased, the customer would have lost a greater amount.
All of the following statements are true regarding the sponsor of a mutual fund EXCEPT the sponsor: A establishes the fund B manages the fund C is also known as the fund underwriter D registers the fund with the Securities and Exchange Commission
The best answer is B. The sponsor of a mutual fund establishes the fund and registers the fund with the SEC before the security can be sold. The sponsor is also known as the fund underwriter. As part of the requirements of the Investment Company Act of 1940, the sponsor hires a custodian bank to safekeep the assets of the fund; hires an investment adviser to manage the fund; and signs up a selling group to sell the fund. Note that, therefore, the sponsor does not manage the fund.
A foreign currency trader has bought 1,000,000 Canadian Dollars in the spot market at 91. To hedge, the trader buys 100 PHLX Jul Canadian Dollar 92 Puts @ 1.50. The position will breakeven at which price? A .9050 B .9250 C .9350 D .9450
The best answer is B. The trader bought the Canadian Dollars at 91 and paid a premium of 1.50 for the put option, for a total cost of .9250. To breakeven, the Canadian Dollar must rise to this level.
An automobile manufacturer decides to distribute shares of its parts making subsidiary to existing shareholders as a separate operating company. This is a: A break up B spin off C fall out D leveraged buy out
The best answer is B. This company is "spinning off" a subsidiary to its shareholders as a separate stock company. Larger companies do this when they feel that the subsidiary will be better managed; and have better business opportunities; as a legally separate operating company. Do not confuse a "spin off" with a "break up." A "break up" is a government ordered splitting up of a company; usually as a result of the company engaging in monopolistic practices.
A customer buys 100 shares of ABC stock in a cash account at $49 and sells 1 ABC Jan 50 Call @ $5. The customer must deposit: A $500 B $4,400 C $4,500 D $5,000
The best answer is B. To buy the stock, the customer must deposit 100% of the purchase price of $4,900 in a cash account. There is no margin requirement on the short call because it is covered by the long stock position. Since $500 of premiums is credited to the account from selling the call, the customer must deposit $4,400 ($4,900 - $500).
To establish a short call position, an order ticket must be marked: A opening purchase B opening sale C closing purchase D closing sale
The best answer is B. To establish a short option position, the order ticket must be marked "opening sale." To liquidate this position, the order ticket is marked "closing purchase."
The "right of reclamation" in a municipal bond sale refers to the: A refusal by a municipal dealer to accept a delivery of bonds tendered to that firm by another municipal securities dealer B return of municipal securities that have been previously accepted on a delivery C procedure where a municipal dealer that bought securities, but has not yet received them, can close-out the trade D settlement method where payment is made on delivery, or, if the dealer does not have the monies, the delivery may be rejected
The best answer is B. When securities are delivered on settlement date, the buyer inspects the delivery to ensure that the proper securities are being delivered in "good form." If the buyer finds that the wrong securities are being delivered, or that there is a problem, such as the securities' not having a proper assignment; or a coupon bond missing coupons; then the buyer may reject the delivery. This is the right of rejection. If the buyer has failed to detect an irregularity upon settlement, and accepts a delivery that later proves to have a problem, the buyer may use the "right of reclamation" to correct the problem. The buyer completes a "reclamation form" detailing the error; attaches it to the securities with the problem; and returns both to the seller. Upon receipt of the securities with the reclamation form, the seller must correct the problem within stated time periods.
During a period when the yield curve is inverted: A short term bond prices are more volatile than long term bond prices B long term bond prices are more volatile than short term bond prices C short term and long term bond prices are equally volatile D no relationship exists between short term and long term bond price changes
The best answer is B. Whether the yield curve is ascending (normal), flat or inverted, long term bond prices always move faster than short term bond prices, as interest rates change. This is due to the compounding effect on the bond's price that occurs, which increases with longer maturities.
A 65-year old individual has just retired after working for the same employer for 20 years. He will collect an annual pension benefit of $50,000, but is not yet ready to stop working. He has lined up a part-time job that will pay $3,000 this coming year. How much can he contribute to a Traditional Individual Retirement Account for his first year in retirement? A 0 B $3,000 C $6,000 D $7,000
The best answer is B. Contributions to an IRA are only based on earned income - not on pension income. The maximum contribution in 2021 is 100% of earned income, capped at $6,000. In addition, he qualifies for a $1,000 additional catch-up contribution. But all of this is moot, because he only has $3,000 of earned income, so this is the maximum IRA contribution for this year.
Who does NOT have to be licensed in a broker-dealer? A Chief Executive Officer B Chairman of the Board of Directors C Chief Financial Officer D Chief Compliance Officer
The best answer is B. Only operating officers of broker-dealers must be registered - this would include the CEO, CFO and CCO. A member of the Board of Directors is not required to be licensed unless that person is also an operating officer. Also note that passive owners of broker-dealers who are also officers are not required to be licensed. And, of course, all traders, and salespersons must be registered and licensed.
The Securities Exchange Act of 1934 established "self regulatory organizations" (SROs) and empowered these organizations to do all of the following EXCEPT: A set guidelines for fair dealing with the public B establish commission rates to be charged to the public C take administrative action against broker-dealers that violate industry regulations D establish arbitration procedures to settle intra-industry disputes
The best answer is B. Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation; and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; it handles complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes. Fixed commission rates are prohibited under the Securities Exchange Act of 1934 - these are set by the member firms.
A customer has combined margin account that shows the following: Long: $20,000 of ABC stock Debit: $8,000 Short: $30,000 of XYZ stock Credit: $48,000 If no other activity occurs in the account, the account will show a current SMA balance of? A 0 B $5,000 C $8,000 D $10,000
The best answer is B. The customer has the following long position: Long Market Value Debit Equity SMA $20,000 $8,000 $12,000 $2,000 The customer could borrow 50% of the $20,000 LMV equals a potential debit of $10,000. Because the customer has borrowed only $8,000, the customer can borrow $2,000 more. This is the SMA in the long account. The customer established the following short position: Credits Short Market Value Equity SMA $48,000 $30,000 $18,000 $3,000 The required equity for the short account to be at 50% is 50% of $30,000 SMV = $15,000. This account has $18,000 of equity, so there is excess equity of $3,000 that can be borrowed. This is the SMA. The total SMA in the account is: $3,000 + $2,000 = $5,000.
A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. A customer buys 5M of the notes. How much will the customer pay, disregarding commissions and accrued interest? A $5,056.25 B $5,070.00 C $5,062.50 D $5,090.00
The best answer is C. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 101 and 8/32nds = 101.25% of $5,000 par = $5,062.50.
Which of the following cover a short ABC put? I Long ABC stock position II Short ABC stock position III Cash equal to the aggregate exercise price A I only B II only C II and III D I, II, III
The best answer is C. A long stock position is not considered "cover" for a short put since as the market goes down, the short put is exercised and there is increasing loss on the stock position. The O.C.C. accepts as "cover" a long put with the same strike price or higher (thus creating a long put spread), a bank guarantee letter (where the bank assumes responsibility for loss), or an escrow receipt for cash sufficient to pay for the stock should the put be exercised. A short stock position also covers a short put, since the credit from the sale of the stock is available to "pay" for the purchase of the stock should the short put be exercised.
Which of the following positions creates a Long Straddle? A Long 1 ABC Jan 50 Call; Long 1 ABC Jan 60 Call B Long 1 ABC Jan 50 Call; Short 1 ABC Jan 60 Call C Long 1 ABC Jan 50 Put; Long 1 ABC Jan 50 Call D Short 1 ABC Jan 50 Put; Short 1 ABC Jan 50 Call
The best answer is C. A long straddle is the purchase of a call and a put on the same underlying security, with the same strike price and expiration.
In riskless principal transaction, the dealer: I buys a security into inventory in advance of filling a customer order to buy that security II buys a security into inventory after receiving a customer order to buy that security III charges a mark-up to the customer IV does not charge a mark-up to the customer A I and III B I and IV C II and III D II and IV
The best answer is C. A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer.
Which of the following corporate bonds are secured? I Collateral trust certificate II Subordinated debenture III Second mortgage bond IV Equipment trust certificate A I and II only B III and IV only C I, III, IV D I, II, III, IV
The best answer is C. A secured bondholder has a lien on a specific asset of the company - such as equipment (an equipment trust certificate), real property (a mortgage bond) or securities given as collateral (a collateral trust certificate). A debenture is a promise to pay without any liens on corporate assets.
Which of the following characteristics of Fannie Mae and Ginnie Mae pass-through certificates are the same? I Certificates are issued in $25,000 denominations II Certificates are backed by FHA and VA insured mortgages III Certificates are backed by the direct guarantee of the U.S. Government IV Certificate holders receive monthly payments of combined interest and principal A I and III only B II and IV only C I, II, IV D I, II, III, IV
The best answer is C. Both Ginnie Mae and Fannie Mae pass-through certificates are issued in $25,000 denominations; are backed by VA and FHA insured mortgages; and pay monthly. However, only GNMA certificates have the direct guarantee of the U.S. Government. FNMA certificates are not directly backed by the U.S. Government.
Which of the following will decrease the debit balance in a customer's margin account? I Cash dividends received II Stock dividends received III Sale of securities IV Purchase of securities A I and II B III and IV C I and III D II and IV
The best answer is C. Cash dividends received are applied against a customer's debit balance and are simultaneously credited to SMA for 30 days. If the customer wishes to receive the dividend, he can take it out of the account, increasing the debit to its pre-dividend level. Stock dividends have no effect on SMA. The number of shares in the account increases, while the price per share falls. The aggregate market value stays the same, as does the debit. Sales of securities result in the proceeds being used to reduce the debit. Purchases of securities will increase the debit in a margin account.
A customer transferring an account may experience a delay for all of the following reasons EXCEPT the: A customer's signature does not match B positions listed do not match C assets are held in street name D assets are held in proprietary products
The best answer is C. Most brokerage firms will only hold customer securities in street name; if the customer wants the position registered in his or her name, then the brokerage firm typically requires that the position be physically shipped to the customer. No matter what, this has no impact on an account transfer. If the customer signature on the account transfer instruction does not match the record of the carrying firm, this would hold up transfer. If the positions listed on the account transfer instruction do not match the record of the carrying firm, this will hold up transfer as well. Finally if the assets are held in proprietary products of the carrying firm, these cannot be transferred - since they are only offered by the carrying firm. The customer would have to liquidate these positions and transfer the money proceeds of the liquidation; or the customer could choose to keep these positions at the carrying firm and not transfer them.
Short sale transactions are typical for which of the following? I Listed options II Common stock III Municipal bonds IV Treasury bonds A I and II only B III and IV only C I, II, IV D I, II, III, IV
The best answer is C. Municipal bonds are generally not sold short because the trading market in each maturity is very thin, making short covering difficult, if not impossible. Short selling (the sale of borrowed securities, with the purchase and replacement of the borrowed securities occurring later) is a strategy that allows the investor to profit in a falling market. Short selling can only be performed with actively traded securities (since ultimately the borrowed securities that were sold must be repurchased and replaced). Common stocks, listed options, and U.S. Government securities are all actively traded; and short selling of these securities is common.
Under MSRB rules, a registered representative can perform which of the following functions? I Trade municipal issues in the secondary market II Offer call and put options on municipal securities to customers III Approve municipal advertising that will be sent to customers IV Offer new municipal issues to retail customers A I and II only B III and IV only C I, II, and IV D I, II, III, IV
The best answer is C. Municipal representatives are permitted to trade municipal issues in the secondary market; offer call and put options on municipal issues; and sell new municipal issues to customers. Registered representatives are not permitted to approve municipal advertising. To do so, the individual must pass the principal's exam.
An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Home Loan Bank bonds with a 20 year maturity. The new issue of Federal Home Loan Bank Bonds will be sold: A through competitive bid at the weekly Treasury Auction B directly by the Federal Home Loan Bank to interested investors C through a selling group appointed by the Federal Home Loan Bank D through the "Dutch" auction method that awards the bonds to the lowest rate bidders at an "average" winning rate
The best answer is C. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. Direct U.S. Government obligations are sold through auction.
MUTUAL FUNDS Fund Net Asset Value Offering Price Change Capital $9.01 $9.59 - .02 Common $6.37 $6.64 - .04 Corporate $7.72 $8.44 + .03 A customer who placed an order to buy 200 shares of Capital Fund this day will pay: A $1,802 B $1,802 plus a commission C $1,918 D $1,918 plus a commission
The best answer is C. Open end mutual funds are purchased at the offering price, which is inclusive of any sales charges. This is a new issue prospectus offering, so no commissions are involved. The customer pays the offering price of $9.59 per share x 200 shares = $1,918.00.
Which of the following statements are TRUE about REITs? I To qualify under Subchapter M, at least 75% of Net Investment Income must be distributed to shareholders II To qualify under Subchapter M, at least 90% of Net Investment Income must be distributed to shareholders III To qualify under Subchapter M, at least 75% of the assets must be in real estate IV To qualify under Subchapter M, at least 90% of assets must be in real estate A I and III B I and IV C II and III D II and IV
The best answer is C. Real Estate Investment Trusts must distribute at least 90% of their Net Investment Income to shareholders; and invest at least 75% of their assets in real estate activities; to be regulated under Subchapter M.
Regulation T applies to transactions in which of the following securities? I Convertible corporate bonds II U.S. Government Bonds III American Depositary Receipts IV Warrants A I only B III and IV C I, III, IV D I, II, III
The best answer is C. Regulation T applies to transactions in non-exempt securities - these are the securities that are NOT exempt from the provisions of the Securities Act of 1933; and the Securities Exchange Act of 1934. U.S. Government bonds are exempt. Corporate bonds, American Depositary Receipts and warrants are non-exempt.
A customer buys 100 shares of ABC stock at $30 as an initial transaction in a margin account. The customer must deposit: A $750 B $1,500 C $2,000 D $3,000
The best answer is C. Regulation T initial margin to buy stock is 50% of $3,000 = $1,500. However, since this is a new account, it must meet the minimum initial margin of $2,000 needed to open an account. Therefore, $2,000 must be deposited.
Which of the following statements are TRUE regarding restricted shares? I They are normally acquired through Rule 144 transactions II They are normally acquired through Regulation D private placement transactions III They can be sold publicly under a Rule 144 exemption IV They can be sold publicly under a Rule 147 exemption A I and III B I and IV C II and III D II and IV
The best answer is C. Restricted shares are normally acquired through private placements. If there is a public market for the stock at a later date, to sell the restricted shares in the market, they must either be registered or sold under a Rule 144 exemption.
DUPA Corp. has a Price/Earnings multiple of 20 and a market price of $45. What was the corporation's Earnings Per Common Share? A $.225 B $.44 C $2.25 D $4.44
The best answer is C. The Earnings per Share can be found by taking the: Market Price/Multiple 45/20 = $2.25
The provisions of the Investment Company Act of 1940 include which of the following? I Minimum initial fund capital of $100,000 II "Interested persons" on the Board of Directors cannot hold over 60% of the seats III Changing the fund's investment objective requires a majority vote of the shareholders IV Setting maximum sales charges on mutual fund purchases A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is C. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000; that no more than 60% of the Board of Directors be "interested parties" - that is, they are affiliated with the sponsor, custodian, transfer agent, or firms in the selling group; and that the fund have a stated investment objective that can only be changed by majority vote of the shareholders. The Act does not set sales charges for mutual fund purchases - these are set by FINRA - which allows a maximum sales charge of 8 1/2%.
To determine if a stock appears to be overpriced, what would be examined? A The company's Earnings Per Share B The company's Dividend Payout Ratio C The company's Price to Earnings Ratio D The company's Debt to Equity Ratio
The best answer is C. The P/E ratio of a company is a valuation measure. Companies with high P/E ratios as compared to peer companies might be overvalued; while companies with low P/E ratios as compared to peer companies might be undervalued.
The Securities Exchange Act of 1934 regulates which of the following markets? I Primary Market II Second Market III Third Market IV Fourth Market A I only B II only C II, III, IV D I, II, III, IV
The best answer is C. The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities on an exchange), second market (over-the-counter trading of securities not listed on an exchange), third market (over-the-counter trading of securities listed on an exchange floor), and fourth market (direct trading of securities between institutions on ECNs and ATSs).
The Securities Act of 1933 is primarily concerned with registration of: A broker-dealers B exempt issues C non-exempt issues D self-regulatory organizations
The best answer is C. The Securities Act of 1933 requires that new issues that are not exempt from the Act be registered with the SEC. Thus, the 1933 Act is concerned with the primary (new issue) market. The Securities Exchange Act of 1934 consists of a variety of rules covering the trading (secondary) market. It requires the registration of broker-dealers and self-regulatory organizations (the exchanges).
The municipal bond counsel opines on all of the following EXCEPT: A validity B legality C feasibility D tax exempt status
The best answer is C. The bond counsel examines new municipal issues for legal or tax problems and renders an opinion on the validity, legality and tax exempt status of the issue. Bond counsels do not render economic opinions, which is the same as rendering an opinion on feasibility of an issue.
On the same day in a margin account, a customer buys 1 ABC Jan 45 Put @ $4 and sells 1 ABC Jan 60 Put @ $11 when the market price of ABC is $56. The customer must deposit: A $400 B $700 C $800 D $1,500
The best answer is C. The customer has created a short put spread resulting in a $700 credit. This position is profitable if the market should rise (bullish). The positions set up as: Sell 1 ABC Jan 60 Put @ $11 Buy 1 ABC Jan 45 Put @ $4 $7 Credit If the market should rise, both contracts expire "out the money" and the customer keeps the $700 credit (maximum potential gain). On the other hand, if the market drops, the short put is first to be exercised, requiring the customer to buy the stock at $60. If the market continues to fall, the long put allows the customer to sell the stock at $45, for a maximum loss on the stock of 15 points. Since 7 points were received in premiums, the maximum potential loss is $800. Margin rules require that the customer put up the $800, since this is his or her maximum loss exposure.
Which of the following information is required on a new account form? I Type of account - cash or margin II Type of securities that can be traded in the account III Country of citizenship of account holder IV Proof of domicile of account holder A I and II only B III and IV only C I and III only D I, II, III, IV
The best answer is C. The type of account (cash or margin) is needed when opening a new account, since a margin account requires the customer's signature on a separate "margin agreement." The country of citizenship of the account holder is needed because the PATRIOT Act requires that a copy of the customer's passport be obtained if the account is being opened for a non-U.S. citizen. In addition, the non-U.S. citizen must present a U.S. tax identification number. There is no requirement for Proof of Domicile - this documents the state (not the country) in which the customer legally resides.
All of the following procedures are required for discretionary accounts EXCEPT: A every order ticket initiated by the registered representative must be marked "discretionary" B every discretionary order ticket must be approved by the manager or principal C the customer must be contacted before each discretionary trade is executed D a written power of attorney must be obtained from the customer before discretionary trades are effected
The best answer is C. There is no requirement to contact a customer before executing each discretionary trade. The customer must give a written power of attorney; every order ticket that is discretionary must be marked as such; and the principal must approve all discretionary orders "promptly."
What option strategy is appropriate if one is bearish on the VIX index? A Long VIX calls B Short VIX calls C Long VIX puts D Short VIX puts
The best answer is C. This one is tricky! The VIX (Volatility Index options) is negatively correlated to the market. However, this question is not about what strategy to take if one is bearish on the market; it is about what strategy to take if one is bearish on the VIX (which would occur if stock prices are rising). To profit from the VIX going down, buy VIX puts!
A small business owner of a firm that has 25 employees wants to establish a retirement plan and make contributions for her employees. What type of plan can the employer establish? A Traditional IRA B Roth IRA C SEP IRA D 403(b)
The best answer is C. A SEP IRA is a "Simplified Employee Pension" plan that must be set up by the employer, with deductible contributions made by the employer. They are easier to set up and administrate than regular pension plans and allow for a very large annual contribution (25% of income statutory rate; 20% effective rate, capped at $58,000 in 2021). The employer sets the actual contribution percentage, which must be the same for all employees. A major advantage of SEP IRAs is that there is flexibility regarding the annual contribution to be made - the employer can change the contribution percentage each year. So this plan is a good option for a smaller business that has variable cash flow. A Traditional or Roth IRA can only be set up by the individual who is employed - it cannot be set up by the employer. A 403(b) plan can only be established by a not-for-profit entity. It cannot be set up by a for-profit company.
An ABLE account must be established before the beneficiary reaches the age of: A 18 B 21 C 26 D 30
The best answer is C. ABLE accounts were enacted by Congress in late 2014. ABLE stands for "Achieving a Better Life Experience Act." It allows each state to set up a "municipal fund security" regulated by the MSRB that permits an account to be established to pay for the ongoing expenses of a disabled person. One of the key features of an ABLE account is that accumulated savings do not affect that person's eligibility for other Federal benefits (it used to be the case that having too much in assets would disqualify that person from other Federal benefits such as Medicaid). Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses.
All of the following would be considered to be a "retail communication" EXCEPT a(n): A direct mailing sent to 30 existing retail clients B password-protected website maintained by a broker-dealer C institutional communication D internet bulletin board
The best answer is C. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" as long as the firm has appropriate supervisory procedures in place and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). A direct mailing to more than 25 existing or retail clients is a retail communication that is sales literature. A password protected website is a retail communication that is sales literature, since it is seen by a specific audience. An internet bulletin board is a retail communication that is advertising, since it is seen by the general public. Institutional communications are excluded from the "retail communications" definition, approval and filing rules because institutions are sophisticated investors who know what they are doing.
Under the provisions of Rule 606 of Regulation NMS, which of the following must be disclosed to customers by member firms upon request? I Which market received the customer order II Whether the order was directed or non-directed III The time of execution of the order IV The best market for the security at the time of execution A I and III B I and IV C I, II, III D I, II, III, IV
The best answer is C. Rule 606 of Regulation NMS covers reports that broker-dealers must prepare on their order-routing procedures. Upon customer request, a member firm must disclose: The markets to which the customer's orders were routed to during the past 6 months; Whether the orders were directed (that is, the customer specified the market where the order was to be filled) or non-directed (the member firm chose the market where the order was to be filled); and The time of execution of the orders. There is no requirement to disclose the best market available for that security at the time, since SEC rules require that execution must occur at the "best market."
An open order is on the member firm's internal order entry system to sell 400 XYZ at 40 Stop GTC. The company has declared a 25% stock dividend. On the morning of the ex date, the order on the book will be: A Sell 400 XYZ at 32 Stop GTC B Sell 400 XYZ at 40 Stop GTC C Sell 500 XYZ at 32 Stop GTC D Sell 500 XYZ at 40 Stop GTC
The best answer is C. To adjust the order for the 25% stock dividend, the number of shares is multiplied by a factor of 1.25 (since there are 25% extra shares) while the order price is divided by a factor of 1.25. 400 shares x 1.25 = 500 shares on the adjusted order (this is a round lot) $40 price / 1.25 = $32 adjusted order price.
Which of the following positions creates a "strangle" if the market price of ABC stock is $52 per share? I Buy 1 ABC Jan 55 Call II Buy 1 ABC Jan 50 Call III Buy 1 ABC Jan 55 Put IV Buy 1 ABC Jan 50 Put A I and II B III and IV C I and III D I and IV
The best answer is D. A "strangle" is a specific variation of a combination, where both contracts are "out the money." A long strangle is the purchase of an "out the money" call and an "out the money" put. Only Choice D fits this definition. Buy 1 ABC Jan 55 Call Buy 1 ABC Jan 50 Put This would be done when the market price is between $50 and $55. Both contracts are "out the money" and the premiums paid would be lower than if a long straddle was purchased. To profit, the price must move up sharply above $55 by at least the amount of premiums paid; or must move down sharply below $50 by at least the amount of premiums paid. This is a volatility strategy, similar to a long straddle.
Interest charges on customer debit balances are based on the: A Prime rate B Federal Funds rate C Treasury Bill rate D Broker Loan rate
The best answer is D. Brokers borrow from banks using customer securities as collateral at the Broker Loan rate, also termed the Call Loan rate. The interest charged to customers on loans made by brokers is based on this rate (e.g., the interest rate charged might be "Broker Loan Rate + 1/2%").
Which statements are TRUE about SIPC coverage for customer accounts at banks that solely handle exempt securities? I The bank must be registered as a broker-dealer under the Securities Exchange Act of 1934 II The bank does not need to be registered as a broker-dealer under the Securities Exchange Act of 1934 III The bank must be a member of the Securities Investor Protection Corporation IV The bank does not need to be a member of the Securities Investor Protection Corporation A I and III B I and IV C II and III D II and IV
The best answer is D. Dealers who solely handle exempt securities are not required to be SIPC members. Therefore, customer accounts at firms that deal solely in U.S. Government securities or municipal securities, are not covered by SIPC. If a bank dealer were to handle non-exempt securities, then it would have to register under the Securities Exchange Act of 1934 as a broker-dealer, and thus, would be obligated to be an SIPC member as well.
Distributions from an Individual Retirement Account must commence by: A April 1st of the year preceding that person reaching age 59 1/2 B April 1st of the year following that person reaching age 59 1/2 C April 1st of the year preceding that person reaching age 72 D April 1st of the year following that person reaching age 72
The best answer is D. Distributions from an Individual Retirement Account must commence by April 1st of the year following that person reaching age 72.
NASDAQ Level I shows: I Lowest Bid II Lowest Offer III Highest Bid IV Highest Offer A I and II B III and IV C I and IV D II and III
The best answer is D. NASDAQ Level I shows the "inside market" - the highest bid and lowest ask. These are the best prices at which to trade. (One wants to buy at the lowest price asked by dealers; one wants to sell at the highest price bid by dealers.) Another name for the inside market is the "NBBO" - National Best Bid and Offer.
Straight line amortization is mandatory for which of the following municipal bonds? I Primary market municipal bonds purchased at a discount II Primary market municipal bonds purchased at a premium III Secondary market municipal bonds purchased at a discount IV Secondary market municipal bonds purchased at a premium A II only B IV only C I and III D II and IV
The best answer is D. New issue and secondary market premium municipal bonds must be amortized on a straight line basis over the life of the bond. Each year, the amortization amount reduces non-taxable interest income received; and reduces the bond's cost basis. If the bond is held to maturity, the bond's cost basis has been adjusted to par and since it is redeemed at par, there is no tax deductible capital loss. Straight line amortization is required for both new issue premium and market premium municipal bonds. Discount bonds are subject to accretion rules, not amortization rules.
Which of the following statements are TRUE regarding REITs? I The REIT issues common shares representing a proportional interest in the investment company II The REIT issues shares of beneficial interest representing an undivided interest in a pool of real estate investments III REITs are similar to open end investment company shares IV REITs are similar to closed end investment company shares A I and III B I and IV C II and III D II and IV
The best answer is D. REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments. Other than this difference, the trust is run in a similar fashion to a corporation. REITs are registered securities under the Securities Act of 1933 and trade on an exchange or OTC. Thus, they are similar to closed-end investment companies under the Investment Company Act of 1940, except that investments are made in real estate and mortgages, instead of in securities.
All of the following are QIBs under Rule 144A EXCEPT a(n): A pension fund with at least $100 million of assets to invest B employee benefit fund with at least $100 million of assets to invest C institution with at least $100 million of assets to invest D individual with at least $100 million of assets to invest
The best answer is D. Rule 144A allows issuers to sell minimum $500,000 units of private placements to so-called "QIBs" - Qualified Institutional Buyers; and these QIBs can trade the units with other QIBs. Thus, issuers have a way of selling securities to these investors quickly without incurring the costs of SEC registration; and the QIB knows that it can always sell that investment to another QIB without needing to register the issue with the SEC. A Qualified Institutional Buyer must be an institutional investor (not an individual) with at least $100 million of discretionary funds available for investment. Included are investment companies, insurance companies, banks, trust funds, employee benefit plans, and employee retirement funds.
A municipal bond which funds an improvement that benefits only a small portion of the community is a: A general obligation bond B double barreled bond C moral obligation bond D special assessment bond
The best answer is D. Special assessment bonds are used to fund an improvement which benefits only a small portion of the community. For example: new street lights are installed in a specific area where only that area is assessed higher taxes to pay for the improvement.
In order to render an opinion on a new municipal bond issue, the bond counsel will examine: I Municipal statutes II State constitution and amendments III Tax code and interpretive regulations IV Judicial edicts A I and II only B III only C II, III, IV D I, II, III, IV
The best answer is D. The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he examines municipal statutes, state laws, judicial edicts, and tax regulations.
Which of the following are major tax benefits of real estate limited partnerships? I The real estate can be depreciated, even if its market value is increasing II Non-recourse financing is included in the basis III Interest on loans is fully deductible IV Long term capital gains may be achieved when the real estate is sold A I and II only B III and IV only C I, III and IV D I, II, III, IV
The best answer is D. The major tax benefits of real estate programs include all of the choices. Once property is ready for occupancy, it can be depreciated over a straight line basis over a 27 1/2 year life (for residential property). Each year, a depreciation deduction is allowed, even if the market value of the property is rising. Non-recourse mortgage financing is included in the basis (real estate is exempt from the "at risk" rule) and increases overall deductions available to the partner. Interest on the mortgage is fully deductible. Finally, when the property is sold, there is the possibility of having a long term capital gain.
A mutual fund has a net asset value per share of $9.45. The maximum offering price per share is: A $9.45 B $9.95 C $10.25 D $10.33
The best answer is D. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Ask Price = Bid (NAV)/100-Sales Charge Net Asset Value/ 100% - Sales Charge % = $9.45/ 100% - 8.5% = $9.45/ .915 = $10.33
On the same day in a margin account, a customer sells short 100 shares of ABC at $44 and buys 1 ABC Jan 45 Call @ $2.50. The customer's transactions on this day will generate a margin call of: A $1,950 B $2,000 C $2,200 D $2,450
The best answer is D. To short the stock requires 50% margin. 50% of $4,400 equals $2,200 to meet the Regulation T requirement. To buy the call requires the deposit of 100% of the premium or $250. Thus, the total Regulation T requirement is $2,450.
All of the following trade securities on the New York Stock Exchange EXCEPT: A Two dollar broker B Floor broker C Specialist (DMM) D Order Book Official (OBO)
The best answer is D. Two dollar brokers, Specialists, and Floor brokers execute transactions on the NYSE. The Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. The name comes from the fact that they used to charge $2 per trade. Order Book Officials, who solely handle the book of public orders, are only used on the Chicago Board Options Exchange.
Under NYSE rules, every "responsible broker or dealer" who communicates bids and offers on the exchange floor (also known as "addressing the crowd") must comply with all of the following rules EXCEPT: A any bid or offer for less than the normal trading unit has no standing in the trading crowd B the highest bid and the lowest offer have precedence in all cases C bids and offers must be publicly announced D bids and offers are set by floor officials during unusual situations
The best answer is D. Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). Bids and offers are always set by market participants; they are not set by floor officials (the regulators) under any circumstances.
Assuming that the Standard and Poor's 500 Index closes at 2,460, the U.S. listed equities markets will close its market for the balance of the day if the index declines below: A 2,338 B 2,288 C 2,140 D 1,968
The best answer is D. Under the "circuit breaker" rule on the U.S. equities markets, if theStandard and Poor's 500 Index falls by a cumulative 20% in a single day, the market will be shut for the balance of the day. If the Standard and Poor's 500 Index closes at 2,460, a 20% drop is 492 points. 2,460 - 492 = 1,968.
Which of the following persons MUST be registered under State "Blue Sky" Laws? I Brokers soliciting customers in that State II Dealers soliciting customers in that State III Salespersons soliciting customers in the State IV Investment advisers soliciting customers in that State A III only B I and II only C I, II, III D I, II, III, IV
The best answer is D. Under the Blue Sky laws of each state, any broker, dealer, or agent (registered representative) that solicits in that State must be registered. Agents must pass the Series 63 exam to comply with this requirement in most states. In addition, the laws require that any Investment Adviser in the State be registered as well. In many states, these persons must pass the Series 65 examination.
Distributions from Roth IRAs: A must commence by April 1st of the year prior to reaching the age of 72 without being penalized B must commence by April 1st of the year of reaching age 72 without being penalized C must commence by April 1st of the year after reaching age 72 without being penalized D can commence at any time after reaching age 59 1/2 without being penalized
The best answer is D. Unlike Traditional IRAs that require distributions to start on April 1st of the year after reaching age 72, there is no mandatory distribution age for Roth IRAs.
All of the following terms are associated with variable life insurance EXCEPT: A permanent B cash value C policy loan D flexible premium
The best answer is D. All variable products invest premiums into a separate account that purchases accumulation units of the separate account. The separate account itself holds shares of a designated mutual fund. Variable life is similar to whole life in that it is permanent insurance with a fixed annual premium. A "flexible" premium that can be adjusted up or down by the policyholder is only available in a "universal" life insurance policy (such as VULI - Variable Universal Life Insurance). Part of the fixed premium pays for insurance; the rest of the premium is invested in the separate account. Variable life builds cash value like a whole life policy that the customer can borrow out. The amount of cash value depends on the performance of the mutual fund held in the separate account. The amount of insurance purchased (the "death benefit") is a "target" that is met if the separate account grows at a predetermined rate (say 4% a year). While the "target" death benefit is a fixed dollar amount (say $1,000,000), if the separate account performs well, the policy can pay the fixed death benefit plus the excess cash value at death; and if the separate account goes down in value substantially (which can happen in a bear market), the insurance company can require additional premium payments to maintain the fixed coverage amount or can reduce the coverage amount. This is the "variable" part of a variable life policy!
What term would apply to Authorized Stock? A Issued B Outstanding C Voting D Par Value
The best answer is D. Authorized stock is the total number of shares that the company is "authorized" to sell. Issued stock is the number of shares that have actually been sold to the public out of the authorized total. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock - Repurchased Shares (such as shares repurchased for Treasury). The only stock that votes and that receives dividends is Outstanding shares. Par value is the term that applies to all stock, whether it is Authorized, Issued, Outstanding or Treasury.
A client believes that XYZZ stock has bottomed in price and is ready for a steep rebound. Which recommendation has the lowest profit potential? A Buy an XYZZ call option B Buy XYZZ rights C Buy XYZZ warrants D Buy XYZZ stock and sell an XYZZ call
The best answer is D. The purchase of a call gives unlimited potential gain in a rising market. Rights allow the owner to buy the stock at a fixed price, typically good for 30-60 days from issuance. These also have unlimited upside potential. Warrants allow the owner to buy the common stock at a fixed price, typically good for up to 5 years from issuance. They are attached to the sale of new bond and preferred stock offerings, to help make them more marketable. This would also give unlimited profit in a rising market. Of course, the purchase of XYZZ stock would give the customer a gain in a rising market, but if the customer also sold an XYZZ call, the stock would be called away in a rising market at the strike price, and the customer would not enjoy the upside gain. The customer's gain would be limited to the premium collected, net of any difference between the stock cost and the strike price of the call.
The designated Registered Options Principal (designated ROP) is responsible for the approval of options: I advertising II correspondence III sales literature IV accounts A I and III B I and IV C II and III D II and IV
Which of the following statements are TRUE regarding options advertising that is not accompanied by the ODD (Options Disclosure Document)? I It must be approved prior to use by the designated Registered Options Principal II It must be approved by the Branch Office Manager III The use of recommendations, or of past or projected performance, is permitted IV The use of recommendations, or of past or projected performance, is prohibited A I and III B I and IV C II and III D II and IV
