First Final

The computation of dollar prices and accrued interest on municipal bonds is normally on what pay period A) 30 / 360 B) 30 / 365 C) Actual / 360 D) Actual / 365

A

Which of the following are regressive taxes?I Sales taxesII Excise taxesIII Estate taxesIV Gift taxes A I and II B II and III C III and IV D I, II, III, IV

A

Which of the following considerations should a registered representative explain to a customer when recommending a 529 college savings plan? A) The potential deductibility of contributions from state taxes B) The potential deductibility of contributions from federal taxes C) The income eligibility restrictions to contribute to the account D) The rights of the account beneficiary to the assets at the age of majority

A

Direct participation programs (DPPs) provide A) Liquidity and transparency B) Exposure to non-correlated assets with steady returns C) Market-related correlations with higher average returns D) Investors with direct purchases of stock from public companies

B

No-load mutual funds may have lower expense ratios than load mutual funds for which of the following reasons? A) no-load funds do not charge 12b-1 fees B) No-Load funds are not permitted to charge a 12b-1 fee greater than 25 basis points C) Sales charges for load mutual funds increase their annual expense ratios D) Fund management fees for no-load funds are always lower than load funds

B

The primary purpose of a syndicate desk in the context of an equity offering is to: a) DETERMINE THE LIST OF SELLING SHAREHOLDERS b) build AN ORDER BOOK AND ALLOCATE TEH STOCK c) solicit INTEREST FROM INVESTORS IN TEH STOCK OFFERING d) chaperone COMPANY MANAGEMENT DURING THE ROAD SHOW

B

A well that is drilled on leases adjacent to proven reserves is known as a: A) step-out well B) wildcat well C) service well D) stripper well

The best answer is A. A "step-out" well steps out from an existing field to drill in an adjacent area. These are used in developmental oil programs.

Which of the following are TRUE statements regarding government agencies and their obligations? I Fannie Mae is a publicly traded company II Ginnie Mae obligations trade at higher yields than Fannie Mae obligations III Agency obligations have the direct backing of the U.S. Government IV Ginnie Mae securities are listed and trade

The best answer is A. Fannie Mae was "spun off" by the government as a public company listed on the NYSE (so was Freddie Mac). Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets. Ginnie Mae obligations trade at lower yields than Fannie Mae obligations since Ginnie Maes are directly backed by the U.S. Government whereas Fannie Maes are only implicitly backed. Ginnie Mae has not been "spun off" by the government as a private company and cannot be spun off because of the guarantee of the U.S. Government that its securities carry.

"The average daily rate charged by member banks for overnight loans of reserves" best describes the: A) Federal Funds Rate B) Broker Call Loan Rate C) Discount Rate D) Prime Rate

The best answer is A. Federal Funds are overnight loans of reserves from Fed member bank to member bank. Such loans are made at the Fed Funds Rate.

A middle-aged widowed customer has an investment objective of stable income and would also like to receive occasional "extra" income to help pay unexpected bills. What type of preferred stock would be the BEST recommendation? A) Participating preferred B) Convertible preferred C) Straight preferred D) Variable rate preferred

The best answer is A. Preferred stock that pays a fixed dividend rate is "straight" preferred. Participating preferred receives the fixed dividend rate, and also participates with common in any "extra" dividends paid by the company - so this meets the customer's investment objective. Convertible preferred has a fixed dividend rate that is lower than straight preferred, but in compensation for this, it can be converted into a predetermined number of common shares at the option of the holder. Thus, the holder can have capital gains if the market price of the common stock rises. Variable rate preferred has a dividend rate that is tied to a market rate of interest, and the dividend rate varies as that rate varies - so it does not meet the customer's objective of stable income.

A registered representative is a 5% participant in an investment club formed by members of the local Elks Club. The Elks Club investment club has opened a securities account at ABC Brokerage. The account wishes to buy an IPO being offered by an underwriter. Which statement is TRUE? A) The account can buy the issue without restriction B) The account can buy the issue if the branch manager approves C) The account can buy the issue if the registered representative agrees not to share in the profit on the position D) The account is prohibited from buying the new issue

The best answer is A. Registered representatives are prohibited from buying new issues from underwriters. This is true for any account in which registered representatives or other restricted persons have a greater than 10% participation as well. Thus, this account would NOT be prohibited from buying the IPO.

A customer buys a real estate limited partnership interest for $125,000 and signs a $20,000 recourse note. After the first year of operations, the investor's K-1 shows: Revenue$90,000Operating Expenses$40,000Debt Service - consisting of $15,000 principal repayment and $20,000 interest$35,000Management Fees$ 8,000Depreciation$22,000 The investor has net taxable gain or loss for this year of: A $0 . B $2,000 gain C $7,000 loss D $15,000 loss

The best answer is A. The income statement for this year will show: Revenue $90,000 Operating Expenses $40,000 Debt Service - Interest Expense Only $20,000 Management Fees $ 8,000 Depreciation $22,000 Net Income or Loss $ 0 Notice that principal repayments, which are not income statement items, are not included. These will be used to adjust the basis at year end, however, since a repayment of recourse debt reduces the basis.

Which type of account does NOT grow tax deferred? Correct answer A. You did not choose this answer. A UTMA Account B 529 Plan C Coverdell ESA D Health Savings Account

The best answer is A. There is no tax deduction for contributions to custodial accounts (either UGMA or UTMA accounts) and income is taxable each year. In contrast, while there is no tax deduction for contributions to 529 Plans or Coverdell ESAs, the earnings in these accounts grow tax-deferred and when a distribution is taken to pay for qualifying educational expenses, the distribution is tax-free. Health Savings Accounts (HSAs) allow an employee covered by a high-deductible corporate health insurance plan to make a deductible contribution to an HSA; earnings grow tax-deferred; and when distributions are taken to pay for qualifying health care expenses, they are tax-free.

At issuance, warrants have: A) time value B) intrinsic value C) both time value and intrinsic value D) neither time value nor intrinsic value

The best answer is A. Warrants are a "sweetener" attached by an issuer to a preferred stock or bond offering to make it more marketable. It gives the purchaser the long-term option to buy the common stock at a premium to the current market price. The life is typically 5 years. Assume that the stock price is currently $20 and the warrant allows the holder to buy the stock at $50 per share. The stock price must rise over 5 years to more than $50 for the holder to exercise. At issuance, the warrant is "out the money" by $30 - it has no intrinsic value (it only has intrinsic value if the market price of the stock rises above $50). The warrant trades in the market for its life, and its initial trading price is based on the "time value" of the warrant -essentially the value of the "bet" that the price will rise to more than $50 within 5 years.

A customer is short 1 ABC Jan 50 Put @ $7. The put is assigned when the market price of ABC is $45. The customer liquidates the stock position 3 weeks later at $49 per share. Upon assignment, the tax consequence is a: A) cost basis of $43 per share B) sale proceeds of $43 per share C) cost basis of $57 per share D) sale proceeds of $57 per share

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 ($50). Since $7 per share was received in premiums, the writer's cost of the stock is $43 per share for tax purposes. The writer sells the stock later in the market for $49 per share, for a $6 per share capital gain.

All of the following documents are unique to margin accounts EXCEPT the: A new account form B margin agreement C loan consent agreement D credit disclosure statement

The best answer is A. A new account form must be completed whether an account is set up as a cash or a margin account. The paperwork that is unique to opening margin accounts includes the margin agreement, which the customer must sign, pledging the securities in the account as collateral for the margin loan; the loan consent agreement, which is customarily signed, where the customer permits the securities in the account to be lent out for short sales by others; and the credit disclosure statement, which explains how the loan balance is computed and interest is charged.

A customer in the highest tax bracket has $500,000 to invest. The customer is subject to the AMT. The BEST recommendation would be an investment grade: A Municipal bond yielding 2.50% that is not subject to the AMT B Municipal bond yielding 2.70% that is subject to the AMT C Treasury bond yielding 3.50% D Corporate bond yielding 3.75%

The best answer is A. Because this customer is in the highest tax bracket, a tax-free municipal bond will give the highest "after-tax" return. Because this customer is subject to the AMT (Alternative Minimum Tax) he should avoid a municipal bond where the interest income is included in the AMT computation (non-essential use private purpose bond issues). The simplified math for this works out as: Choice A yield after federal tax is paid - 2.50% (none of yield is taxed) Choice B yield after federal tax is paid - 1.94% (28% AMT max. tax rate) Choice C yield after federal tax is paid - 2.21% (37% federal max. tax rate) Choice D yield after federal tax is paid - 2.36% (37% federal max. tax rate)

All of the following statements are true about commercial paper EXCEPT commercial paper: A is a funded debt of the issuer B matures on a pre-set date and at a pre-set price C is quoted on a yield basis D is an unsecured promissory note

The best answer is A. Corporate "funded debt" represents long term debt financing of a corporation with at least 5 years to maturity. Since commercial paper has a maximum maturity of 270 days, it is not a funded debt. Commercial paper is quoted on a yield basis; matures at a pre-set date and price; and is an unsecured promissory note of the issuer.

In a negotiated municipal underwriting, which of the following is disclosed to customers? A Spread B Names of the Underwriters C Participations of the Underwriters D Expenses of the Underwriters

The best answer is A. In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters, nor their participation amounts or expense allocations.

Which of the following persons trade for their own account on the floor of an options exchange? I Market Maker II Registered Options Trader III Order Book Official IV Floor Broker A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is A. On the Options Exchanges, floor brokers (who execute orders for retail member firms) and order book officials (who run the book of public limit orders) handle trades as agent only. They accept orders from the public for execution but do not trade for their own account. Market makers on the exchange floor make markets in option contracts, buying and selling for their own account. Registered options traders and competitive options traders are individuals that trade on the floor for themselves to add liquidity to the market. They can take positions and carry them.

During the 20-day cooling off period for an Initial Public Offering, officers of the company going public are: A allowed to make presentations in road shows B not allowed to answer questions posed by potential investors in road shows C only allowed to make presentations if a final prospectus is available D prohibited from making any kind of presentation about the issuer

The best answer is A. Part of the IPO marketing process is to schedule road shows during the 20-day cooling off period, attended by invited large institutional investors, portfolio managers and research analysts. These are informational only - not promotional. The officers of the company make presentations and the attendees get to have their questions answered. This process helps build investor interest in the offering. A final prospectus would not yet be available during the 20-day cooling off period.

Which of the following statements are TRUE regarding margin regulations? I In-house rules may be more stringent than FINRA rules II Exchange rules may be more stringent than Federal Reserve rules III In-house rules may be less stringent than FINRA rules IV Exchange rules may be less stringent than Federal Reserve Rules A I and II B III and IV C I and IV D II and III

The best answer is A. Regarding margin rules, FINRA rules may be more stringent than Federal Reserve rules, but cannot be less stringent. Firm rules can be more stringent than FINRA rules, but cannot be less stringent.

The "death benefit" associated with a variable annuity contract: I applies during the accumulation phase II applies during the annuity phase III prior to annuitization, the insurance company will pay to a beneficiary, at least the amount invested in the contract IV after annuitization, the insurance company will pay for the insured's burial expenses A I and III B I and IV C II and III D II and IV

The best answer is A. The "death benefit" of a variable annuity contract is not really much of one. If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more "death benefit."

Under the FINRA Code of Procedure, after the first level of hearings in any complaint proceeding with the Hearing Panel, this decision may: A be appealed to the National Adjudicatory Council B be appealed to the Securities and Exchange Commission C be appealed to Federal Court D not be appealed

The best answer is A. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held by a Hearing Panel. The Hearing Panel decision may be appealed to the FINRA National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court.

To find the NAV (Net Asset Value) of a mutual fund, which is deducted from the value of all assets owned by the fund? Correct answer A. You did not choose this answer. A Liabilities B Operating Expenses C Management Fees D Redemption Fees

The best answer is A. The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.

Trades of foreign currencies in the interbank market settle: I Spot II Cash III Forward IV Future A I and III B III and IV C I and IV D II and III

The best answer is A. Trades of foreign currencies either settle "spot" - with settlement taking place in 1 or 2 days (the more actively traded currencies settle next day; the less actively traded currencies settle 2 business days) or on a "forward" basis, with settlement taking place on an agreed upon date in the future. There is no "cash" settlement (same day settlement) for foreign currencies as there is for stocks; and there is no such thing as future settlement.

ABC Corp. has a convertible preferred issue with an "anti-dilutive" covenant. ABC declares a stock dividend. After the stock dividend is paid, which statements are TRUE? I The conversion price is decreased II The conversion price is unaffected III The conversion ratio is increased IV The conversion ratio is unaffected A I and III B I and IV C II and III D II and IV

The best answer is A. When a senior convertible security is issued with an "anti-dilutive" covenant, should the company issue additional common shares, the terms of conversion are adjusted. Additional common shares will be issued, and since there are more common shares now outstanding, each share will be worth proportionately less. To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible (the conversion ratio) is increased.

In a municipal bond contract, a "covenant of defeasance" would allow the issuer to: A) redeem the issue in part or full at predetermined date(s) and prices B) advance refund the issue under the terms specified in the bond contract C) omit interest or principal repayments if coverage ratios decline below specified limits D) reset interest rates periodically at predetermined dates based upon recognized interest rate indices

The best answer is B. A municipal "covenant of defeasance" allows the issuer to "advance refund" the bond issue under the terms specified in the bond contract. An issuer will take advantage of this covenant if interest rates have dropped and the issue is not currently callable. To advance refund the issue, the issuer buys enough U.S. Government securities to meet the debt service requirements on the issue and places then in escrow with a trustee. The maturity on the U.S. Governments matches the maturity (or first call date, in which case this process is called a "pre-refunding") of the outstanding bonds. The interest payments received from the U.S. Governments are used to meet the debt service requirements. When the U.S. Governments mature, the proceeds are used to retire the issuer's debt. By advance refunding, the issuer removes the existing debt as its own liability, freeing it to issue new debt at lower current interest rates. (Also note that the tax law changes that took effect at the beginning of 2018 banned municipalities from doing any more advance refundings or pre-refundings. However, all the bonds that have been advance refunded remain outstanding until they reach their maturity date, while those that have been pre-refunded remain outstanding until their first call date.)

A new issue corporate bond with dated date of June 1st is bought from the underwriter with settlement occurring on Monday, June 28th. How many days of accrued interest is owed to the underwriter? A) 26 B) 27 C) 28 D) 29

The best answer is B. Accrued interest on a new issue is calculated from the dated date up until, but not including settlement date. This new issue is bought from the underwriter. The customer pays the underwriter the price of the bond plus any accrued interest. This interest accrues from June 1st (the dated date) until, but not including the settlement date of the 28th. Thus, 27 days of accrued interest are due. (Note: Don't let the weekend date fool you! Accrued interest for corporates is calculated on an arbitrary 30 day month / 360 day year basis. The weekend has no effect on the computation.)

The purchaser of a variable annuity bears all of the following risks EXCEPT: A) investment risk B) mortality risk C) legislative risk D) interest rate risk

The best answer is B. Both mortality risk (the risk that the annuitant lives longer than expected) and expense risk (the risk that expenses of running the separate account are higher than expected) are borne by the issuer of a variable annuity contract. The customer assumes the investment risk, since the annuity payment varies with the performance of the securities funding the separate account. With any investment, customers assume legislative risk and interest rate risk. Legislative risk for a variable annuity contract would be Congress changing the tax law. Interest rate risk is inherent in any product that gives the holder a stream of payments - if market interest rates rise, the value of the stream of payments decreases.

When an investor disposes of an interest in a limited partnership, the taxable gain or loss is the difference between the sale proceeds and the: A) original cost basis B) adjusted cost basis C) stepped up cost basis D) original cost basis excluding sales charges and acquisition fees

The best answer is B. Every year, an investor's "basis" in a limited partnership is adjusted by the amount of partnership income and loss, and by additional contributions or distributions of cash and property. If the limited partner's interest is sold, the taxable gain is the difference between the adjusted basis and the sale proceeds.

Which of the following is defined as options "sales literature"? A) Member firm options website B) Standard option worksheet C) Options memorandums for internal use D) Letters of an "individual" nature sent to customers

The best answer is B. Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document. Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not "promotional" and they must state where an Options Disclosure Document can be obtained. A letter of an individual nature to a customer is defined as correspondence. Letters for internal use by a member firm do not come under any of these definitions, since they are not distributed to the public.

A customer buys 100 shares of preferred at $80 per share. The par value is $100. The dividend rate is 10%. The customer will receive how much in each dividend payment? A) $400 B) $500 C) $800 D) $1,000

The best answer is B. Preferred dividends are based on a stated percentage of par value. The stated rate is 10% of $100 par = $10 annual dividend per preferred share. Since there are 100 shares, the annual dividend is $1,000. Remember, though, that preferred dividends are paid twice a year, so each payment will be for $500.

Which statement is TRUE regarding Regulation A+? A Offerings are limited to a maximum of 35non-accreditedinvestors B Offerings are limited to a maximum size of $50,000,000 C A prospectus must be delivered to purchasers D The offering approved by the Securities and Exchange Commission

The best answer is B. Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 "tiers" to the rule. Tier 1 gives an exemption from registration to offerings of no more than $20 million in a 12 month period. Tier 2 (also called Regulation A+) requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million. While no prospectus is required, each buyer must be given disclosure in an Offering Circular. Anyone can purchase a Regulation A offering. Unlike the private placement exemption (Regulation D) that permits offerings to be made to a maximum of 35 non-accredited investors and an unlimited number of accredited investors, Regulation A does not set a limit on the number of non-accredited purchasers. Finally, note that nothing is "approved" by the SEC!

The Public Offering Price for a new issue is set at $25 per share. Which of the following are likely to be stabilizing bids? I $20.00 II $24.88 III $25.00 IV $30.00 A) I and II B) II and III C) III and IV D) I, II, III, IV

The best answer is B. Stabilizing bids are entered at or just below the public offering price, never above. If the public offering price is $25 per share, bids of $25 and $24.88 can be stabilizing bids. A bid of $20 is too low; a bid of $30 is too high.

A municipal dealer is reoffering 7% bonds which he bought at par. Which of the following quotes would be considered "fair and reasonable"? I 108 II 6.00 III 6.90 IV 100 1/2 A) I and II B) III and IV C) I and III D) II and IV

The best answer is B. The MSRB does not impose a fixed percentage mark-up that it considers to be "fair and reasonable." The dealer is supposed to use his judgment about the size of the trade; dollar amount involved; the difficulty of the trade; etc., to determine a fair and reasonable mark-up. In this example, the bond has a 7% coupon rate and was purchased by the dealer at par. If the bond is reoffered at 100 1/2, the dealer is taking a 1/2% mark-up. If the bond is reoffered at 108, the dealer is taking an 8% mark-up. If the bond is reoffered at 6.90%, the dealer is reducing the yield by .10 from the stated 7.00 yield. .10/7.00 = 1.4% reduction in yield, which approximates the percentage mark- up. If the bond is reoffered at 6.00%, the dealer is reducing the yield by 1.00 from the stated 7.00 yield. 1/7.00 = 14% reduction in yield, which approximates the percentage mark-up. Of the quotes given, it appears that 100 1/2 and 6.90 are reasonable; 108 and 6.00 appear to be most unreasonable.

ABC 10% $100 par preferred is trading at $120 in the market. The current yield is: A 5% B 8.33% C 10% D 12%

The best answer is B. The formula for current yield is: Annual Income / Market Price = CY $10 / $120 = 8.33%

An investor in a limited partnership generating passive losses can offset these against: I passive income generated from other limited partnership investments II income generated from direct investments in real estate III dividends received from blue chip corporations IV capital gains generated from the sale of securities A) I only B) I and II only C) III and IV only D) I, II, III, IV

The best answer is B. Under the Tax Code, passive losses can only be offset against passive income. They cannot be offset against portfolio income (interest, dividends, capital gains) or earned income. Passive income and loss is defined as that derived from real estate investments and limited partnership interests.

All of the following are true statements regarding convertible bond issues EXCEPT: A) at the time of issuance, the conversion price is set at a premium to the stock's current market price B) the yield on convertible issues is higher than the yield for similar non-convertible issues C) when the stock price is at a premium to the conversion price, bond price movements are usually caused by those of the stock D) when the stock price is at a discount to the conversion price, bond price movements are usually caused by interest rate changes

The best answer is B. When convertible bonds are issued, it is normal for the conversion price to be at a premium to the current market price. Thus, for the conversion feature to be worth something, the stock's price must move up in the market. Due to the value of the conversion feature (or rather, the potential value if the stock price goes up), convertible bonds are saleable at lower yields than bonds without the conversion feature. When the stock price is at a discount to the conversion price, the conversion feature is worthless. The bond is valued based on interest rate movements. On the other hand, when the stock price is at a premium to the conversion price, the conversion feature now has intrinsic value. For every dollar that the stock now moves, the bond will move as well, since the securities are "equivalent."

Which statement is TRUE about the tax deductibility of 529 Plan contributions? A Contributions are generally deductible at the federal level B Contributions are generally deductible at the state level C Contributions are generally deductible at the state level regardless of the state in which the plan was established D Contributions are generally not deductible at either the federal or state level

The best answer is B. 529 Plan contributions are not deductible at the federal level. However, most states that have income taxes allow a deduction for contributions made to a plan established by that state (and a handful of states allow a tax deduction for contributions made to any state's 529 Plan!). This is a tax benefit of making 529 Plan contributions.

A customer enters an order to buy 500 shares of ABC stock at $38.00. 200 shares are filled at $38.00; 200 shares are filled at $37.50; and 100 shares are not filled and that portion of the order is canceled. This order is a(n): A AON order B IOC order C FOK order D MAQ order

The best answer is B. An immediate or cancel order requires the trader to execute the order in part or in full in one attempt, with the unexecuted portion of the order (if any) canceled. No additional execution attempts are allowed. The customer must accept the partial fill of this order; with the remaining 100 shares that are unfilled canceled.FOK (Fill or Kill) and AON (All or None) orders require that the entire order be filled - partial fills are not permitted. The same is true for a MAQ (Minimum Acceptable Quantity) order.

A customer buys 1 ABC Jan 60 Call @ $5 and sells 1 ABC Jan 70 Call @ $1 when the market price of ABC is $62. The maximum potential gain is: A $400 B $600 C $1,000 D unlimited

The best answer is B. Bull call spreads (long call spreads are bullish strategies) are profitable if the market rises. If the market rises sharply, the customer will exercise the long call and buy the stock at $60. However, he will be exercised on the short call and must deliver the stock for $70, for a 10 point gain. Since 4 points were paid in net premiums, the net gain is 6 points or $600.

Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT to: A meet a temporary cash shortage due to unforeseen extraordinary expenses B refund an outstanding bond issue C provide construction period financing that will be permanently financed by a future bond sale D smooth out collections of funds that are normally subject to seasonal fluctuations

The best answer is B. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a bond anticipation note). Commercial paper cannot be used for long term financing such as a bond refunding.

Bond appraisals are used in the municipal secondary market because: I the market is thin II the market is active III trades are reported to a consolidated tape IV trades are not reported to a consolidated tape A I and III B I and IV C II and III D II and IV

The best answer is B. Municipal dealers are often asked for bond appraisals by customers who wish to sell bonds. Because there is no active trading market for municipal bonds, last trading price information is not available. To get an idea of the value of the bond, the dealer will get prices of similar bonds and then give an estimated price to the customer. This is a likely sale price - not a firm quote.

Which statements are TRUE about a registered representative that wishes to promote him- or herself on the Internet? I The representative can create a website with approval of the principal II The representative can create a website with approval of FINRA III The FINRA name must be used on the website IV The FINRA name, when used, must be hyperlinked to the FINRA website A I and III B I and IV C II and III D II and IV

The best answer is B. Regarding a website prepared by an associated person, FINRA states that this is permitted (though, odds are, your firm will not allow you to do it). Again, approval of FINRA is not required. Rather, approval of the firm is required. The FINRA name can be shown on a member firm or associated person's website, but is not required to be shown. If shown, it must be accompanied by a hyperlink to the FINRA website.

Reinvestment risk occurs in investment time horizons during which market interest rates are: A rising B falling C stable D volatile

The best answer is B. Reinvestment risk occurs when an investor is holding fixed income securities over a long time horizon during a time period when interest rates have been declining. As payments are received from these investments, they must be reinvested to maintain the overall rate of return on that portfolio - and if interest rates have been dropping, these payments are reinvested at lower and lower interest rates, lowering the overall rate of return on the portfolio.

Which statements are TRUE about the Specialist (DMM) on the NYSE? I The Specialist (DMM) has a negative obligation to stand aside from trading for his own account if retail customers are present to trade with each other II The Specialist (DMM) has a positive obligation to interposition itself between retail customers that are present to trade with each other III The Specialist (DMM) has a negative obligation to stand aside from trading with a customer if there are no other retail customers present to trade IV The Specialist (DMM) has a positive obligation to trade with a customer if there are no other retail customers present to trade A I and III B I and IV C II and III D II and IV

The best answer is B. The Specialist (now renamed the Designated Market Maker or DMM), as the assigned market maker in the stock, is obligated to make a continuous market in the stock. If there are customers that wish to sell and there are no other buyers for that stock, then the Specialist/DMM must "step-in" and buy that stock into its inventory account. If there are customers that wish to buy and there are no other sellers for a stock, then the specialist must "step-in" and sell that stock out of its inventory account. This is called the Specialist's "positive obligation" - that is, the obligation to be the buyer or seller of last resort. On the other hand, if there are buyers and sellers ready to trade at a given price, then the Specialist/DMM has a "negative obligation" not to interposition itself between these willing traders. Thus, if the market is active, then the Specialist/DMM should not be performing many trades for its own account. Note, however, that the specialist can still execute trades from its book as the market moves, since these are trades for the account of customers.

Regarding original issue corporate bonds, which statements are TRUE? I Corporate original issue discount bonds must be accreted II Corporate original issue discount bonds may be accreted III Corporate original issue premium bonds must be amortized IV Corporate original issue premium bonds may be amortized A I and III B I and IV C II and III D II and IV

The best answer is B. The discount on original issue discount corporate and government bonds must be accreted annually - with the accretion amount being taxable annual interest income. The premium on original issue premium corporate bonds may be amortized for tax purposes; this election is beneficial to the bondholder since the annual amortization amount reduces taxable annual interest income.

The market price of common stock will be influenced by which of the following? I The par value of the shares II Expectations for future earnings of the company III Expectations for future dividends to be paid by the company IV Book value of the company A I and IV B II and III C I, II, III D II and IV

The best answer is B. The market price of common stock is determined by investor expectations about the future of the company. Par value and book value have no bearing on the market price of the common.

REITs can invest in which of the following? I Limited partnerships II Government securities III Mortgages IV Real estate A IV only B II and IV C II, III and IV D I, II, III, IV

The best answer is C. REITs do not invest in limited partnerships, which are tax shelter vehicles. This makes sense because REITs cannot pass losses to their shareholders. They invest primarily in real estate and mortgages; excess funds can be invested in securities, such as U.S. Governments and the shares of other REITs (however, under the tax code, at least 75% of the REIT's assets must be invested in real estate or mortgages).

Which of the following statements are true regarding Construction Loan Notes ("CLNs")? I The use of CLNs allows the municipal issuer to reduce its interest cost when constructing a new facility II The maturity of CLNs is generally 2 - 3 years III Accrued interest on CLNs is computed on an actual day month / actual day year basis IV When the facility is completed, the permanent financing is added to the outstanding balance ("basis") of the CLNs A I only B II and III only C I, II, III D I, II, III, IV

The best answer is C. Construction Loan Notes (CLNs) are a type of short term municipal note used to finance the construction of buildings. Municipalities use CLNs because lenders are reluctant to finance a building until it is completed (for example, a bank will not give a mortgage on a house until there is a certificate of occupancy issued). Thus, during the construction period (which can take a number of years), short term financing is used. Once the building is completed, a long term bond issue is floated, and the proceeds are used to pay off the notes. (This long term financing is often called a "take out" loan, since it takes out the original short term financing). CLNs allow an issuer to reduce its interest cost, since the interest rate that must be paid on short term notes is lower than that for long term bond issues. CLNs typically have a maturity of 2 to 3 years, to coincide with the projected construction period of the building. Accrued interest on all municipal short term notes is computed in a manner similar to other money market instruments - an actual day month / actual day year basis. Please note that this is not true for long term municipal bonds, which accrue interest on a 30 day month / 360 day year. Finally, the last statement is false. When the long term financing is completed, the proceeds are used to retire the CLNs. The proceeds of the long term bond issue are not added to the original debt outstanding.

Which statements are TRUE about market discount corporate bonds? I The discount may be taxable as a capital gain at maturity II The discount may be accreted over the life of the bond and taxed annually as interest income III The discount need not be accreted over the bond's life and will be taxed as interest income earned when the bond matures or is sold A) I and II only B) I and III only C) II and III only D) None of the above

The best answer is C. Corporate bonds bought in the secondary market at a discount are termed "market discount bonds." There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond's life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).

Which of the following are included in the taxable income of a corporation? I Proceeds received from the issuance of common stock II Dividends received from domestic investments III Interest received from foreign investments IV Gain on the sale of a capital asset A) I and IV only B) II and III only C) II, III and IV D) I, II, III, IV

The best answer is C. Dividends received from any investments (domestic or foreign), and gains on any asset held for investment are taxable. Please note, however, that part of dividends received by corporate investors are subject to an exclusion from tax. Any interest income received (unless it is municipal interest income) is subject to Federal tax. The proceeds received by a corporation from issuing debt or stock are not taxable.

Which of the following statements are TRUE about Eurodollar bonds? I Interest received from the bonds is subject to U.S. taxation II Interest received from the bonds is not subject to U.S. taxation III The bonds are purchased only by foreigners IV The bonds are purchased only by U.S. citizens A I and III B I and IV C II and III D II and IV

The best answer is C. Eurodollar bonds are only issued outside the U.S. and are purchased by foreigners. The bonds are not registered for sale in the U.S. The bonds are not subject to withholding taxes and are issued in bearer form.

Which of the following agencies issuing mortgage backed pass through certificates is (are) restricted to purchasing conventional mortgages that are not VA or FHA insured? I Fannie Mae II Ginnie Mae III Freddie Mac A I only B II only C III only D I, II, III

The best answer is C. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. This agency was partially sold off to the public as a corporation that was listed on the NYSE. Fannie Mae (Federal National Mortgage Association) buys FHA and VA insured mortgages from financial institutions and packages them into pass through certificates. This agency was sold off to the public as a corporation that was listed on the NYSE. Both Fannie and Freddie are now bankrupt due to excessive purchases of bad "sub prime" mortgages and have been placed in government conservatorship. Their shares have been delisted from the NYSE and now trade OTC in the Pink OTC Markets. Ginnie Mae (Government National Mortgage Association) performs the same function as Fannie Mae except that its pass through certificates are guaranteed by the U.S. Government. It remains an agency of the government and cannot be "sold off" as a public company as long as the government continues to guarantee its securities.

If a put is purchased on stock that has been held short term, the stock's holding period: A is unaffected B is tolled C is wiped out D becomes long term

The best answer is C. If a customer buys stock and does not buy a put on the same day, then the put is not married to the stock. The worry of the IRS is that the customer might attempt to buy a put on stock that has appreciated in value to lock in a gain while the holding period is short-term, and then simply wait until the holding period is long term to sell the stock (either in the market or by exercising the put and be taxed at the lower 15% rate) without having been at risk. So if the put is purchased when the stock is held short-term, the IRS wipes out the holding period and it does not start counting again until the put expires (and it starts from day 1 at this point). Note that if the put is married to the stock on the same day, the stock's holding period counts normally; and if the stock was already held long term when the put was purchased, then the investor was not trying to stretch a short term capital gain to a long term capital gain without being at risk, and the holding period counts normally.

A customer is short 100 shares of DEF stock at $35 per share. The stock goes up to $50 and the customer covers the position. If, 30 days later, the customer decides to re-establish this short position when the market for DEF is $48, which statement is TRUE? A) The cost basis is $33 per share B) The cost basis is $48 per share C) The sale proceeds are $33 per share D) The sale proceeds are $63 per share

The best answer is C. In this transaction, the customer is attempting to take a loss and then reestablish the position. Under the "wash sale" rule, the loss deduction is disallowed if the position is reestablished within 30 days of the date the loss was generated. In this case the customer originally sold short the stock at $35. The stock was repurchased at $50, for a $15 loss per share ($1,500 loss on 100 shares). Then, the customer sold short another 100 shares 30 days later at $48 - exactly the 30 day limit set by the "wash sale" rule. Thus, the $1,500 loss is disallowed. (If the customer had waited for 31 days until reestablishing the short position, the rule would not apply!) The $15 per share loss will be deducted from the sale proceeds of $48, for a new sale proceeds of $33. In essence, this defers the taking of the loss until this short position is covered.

Which of the following tools are used by the Federal Reserve to control the money supply? I Setting reserve requirements II Setting the federal funds rate III Setting the discount rate IV Open market operations A I and II only B III and IV only C I, III and IV D I, II, III, IV

The best answer is C. Monetary policy tools of the Fed include setting reserve requirements, setting the discount rate, setting margin rates, and conducting open market operations. The federal funds rate is the charge for overnight loans of reserves from bank to bank. It responds to Fed actions, but is not set by the Fed. To memorize the 4 tools of the Fed, remember "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.

All of the following securities are redeemable EXCEPT: A) Common stock mutual funds B) Bond mutual funds C) Corporate debentures D) Series HH bonds

The best answer is C. Mutual funds - common stock and bond funds - are redeemable securities which do not trade. Savings bonds (Series EE and HH) sold by the U.S. Government are redeemable securities. There is no trading in these issues. To "cash out," they are redeemed with an agent for the Government - a bank or savings and loan. Corporate debentures are negotiable (tradeable) - they cannot be redeemed with the issuer. They trade OTC and on exchanges.

An annuitized account in a variable annuity is most similar to: A) a mutual fund B) a whole life insurance unit C) pension payments D) an individual retirement account

The best answer is C. Once a variable annuity separate account interest is "annuitized," the holder gets a fixed number of annuity units. Each month, the holder gets a payment equal to the fixed number of units x the unit value (which varies based upon the performance of the underlying investments). The payments continue for life. Thus, an annuitized account is most similar to pension payments.

Which statement is FALSE about Rule 147? A) Both the issuer and all purchasers must be state residents B) Resale is permitted to state residents only, for the 180 day period following the offering C) The rule exempts intrastate issues from State registration D) The rule exempts intrastate issues from Federal registration

The best answer is C. Rule 147 exempts "intrastate" issues from registration with the SEC. However, the issue is still subject to state (blue-sky) registration. To obtain the 147 exemption, both the issuer and the purchaser must be state residents. Resale is restricted to state residents for 6 months following the offering; thereafter, the issue can be sold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."

Which of the following actions taken by a fiduciary would be consistent with the obligations imposed by the "Prudent Man Rule"? I Purchasing new issues of low price speculative stocks II Writing naked calls to profit from an anticipated downward market move III Selling covered calls to generate extra income during a period of expected market stability IV Diversifying a debt portfolio with securities of varying maturities A) I and II only B) II and III only C) III and IV only D) I and IV only

The best answer is C. The "prudent man rule" is part of Uniform State Law, and it requires fiduciaries to make investments for accounts under their control as would a "prudent man." This makes sense, since fiduciaries are investing for the benefit of others, and the investments are supposed to provide a long term future benefit to these persons. Investing in unproven, speculative new issues would not be consistent with the "prudent man rule," nor would selling naked call options that expose the writer to unlimited loss potential. Diversifying a portfolio, and writing covered calls against stock positions for extra income are both proven, prudent investment strategies.

Which statement is TRUE regarding a 28-year old woman who inherits her grandfather's IRA? A) She may delay distributions until she reaches age 59 1/2 B) She may roll over the amount inherited into her own IRA C) She must take distributions that deplete the account over the next 10 years D) She must start taking distributions upon reaching age 59 1/2

The best answer is C. The best deal if one inherits an IRA is to inherit it from your spouse. In that case, the funds can stay in the IRA with no tax due until the spouse starts taking distributions - which must start by age 72. In this example, a granddaughter inherits the IRA. Her only option, other than giving away the IRA funds, is to transfer the IRA into a "Beneficiary Distribution Account." Distributions must occur to deplete the account over 10 years. And, of course, each annual distribution is taxable.

The Bid Form submitted to the issuer in a competitive bid municipal bond underwriting is best described as a(n): A) completed requisition for new bonds B) executed contract between issuer and bidder C) uncompleted contract to buy bonds D) tender offer for the bonds

The best answer is C. The bid form really is an uncompleted contract to buy the bonds. The bidder signs the form when the bid is submitted. If the bid is won, the issuer's representative signs the form accepting the bid at the stated terms and deposits the good faith check. This is the completed contract to buy the bonds.

Ford Motor Company has issued 8% convertible debentures, convertible at a 25:1 ratio. Currently the debenture is trading at 110. The stock is trading at 38. What is the conversion price of the stock? A) 25 B) 38 C) 40 D) 44

The best answer is C. The bond is convertible into common at a 25:1 ratio, based on the par value of the bond. The conversion price formula is: $1,000 / 25 = $40

On the same day a customer buys 100 shares of ABC stock at $30 and sells 1 ABC Jan 30 Call @ $3 and sells 1 ABC Jan 30 Put @ $2. The maximum potential loss is: A $500 B $2,500 C $5,500 D Unlimited

The best answer is C. The customer has created a long stock/short straddle position. This is shown below: Buy 100 Shares of ABC at $30Sell 1 ABC Jan 30 Call @$3Sell 1 ABC Jan 30 Put @$2$5 Credit The credit of $500 is the maximum potential gain occurring if both contracts expire "at the money." If the market rises above $30, the short call is exercised, while the short put expires "out the money." The stock that was purchased at $30 is delivered for $30 - there is no further gain or loss on this position. Thus, in a rising market, the maximum gain is $500. If the market falls below $30, the short put is exercised (requiring the customer to buy another 100 shares at $30), while the short call expires "out the money" As the market falls, the customer now owns 200 shares purchased at $30. Since $500 was collected in premiums, he can afford to lose 2.5 points per share and will still breakeven. Thus, the breakeven occurs at $30 - $2.50 = $27.50. If the market continues to drop to zero, the customer will lose the full value of the 200 shares purchased at $30, net of $500 collected in premiums, for a net loss of $5,500 ($27.50 per share).

A preliminary prospectus :I contains the public offering price of the issue II does not contain the public offering price of the issue III contains the financial statements of the issuer IV does not contain the financial statements of the issuer A) I and III B) I and IV C) II and III D) II and IV

The best answer is C. The preliminary prospectus contains the financial statements of the issuer. It does not contain the Public Offering Price - this is not set by the underwriters until just before the offering is made. Thus, it is found only in the Final Prospectus.

An inverted "saucer" formation is: I bullish II bearish III a reverse upward trend IV a reverse downward trend A I and III B I and IV C II and III D II and IV

The best answer is C. An "inverted saucer" formation is bearish since the market has topped out and is trending down. It is an uptrend that has reversed itself.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 2 shares of preferred stock and a warrant to buy one half additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have outstanding: A 100,000 preferred shares and 100,000 common shares B 200,000 preferred shares and 100,000 common shares C 200,000 preferred shares and 50,000 common shares D 50,000 preferred shares and 100,000 common shares

The best answer is C. Each unit consists of 2 preferred shares x 100,000 units equals 200,000 preferred shares issued and a warrant for 1/2 common share. If the warrants are exercised, 100,000 units x 1/2 common share = 50,000 common shares issued.

If the Federal Reserve is pursuing a "easy money" policy, which interest rate options strategies would be profitable? I Buy interest rate calls II Buy interest rate puts III Sell interest rate calls IV Sell interest rate puts A I and III B I and IV C II and III D II and IV

The best answer is C. If the Federal Reserve is pursuing an "easy money" policy, it is lowering market interest rates. Interest rate options track interest rate movements. The purchase of an interest rate put is profitable when interest rates fall, since if interest rates decline, the premium will increase. The sale of an interest rate call will also be profitable when interest rates fall. The call would expire "out the money" and the premium would be earned.

A customer holds a very large, diversified portfolio of high grade municipal bonds with varying maturities. This customer has minimized which of the following risks? I Default risk II Legislative risk III Marketability risk IV Interest rate risk A I only B III and IV only C I, III, IV D I, II, III, IV

The best answer is C. Legislative risk for holders of municipal issues is the risk that the Federal Government will tax the interest income on the bonds. This risk cannot be diversified away. All the other risks can be diversified away. Default risk is minimized with a diversified portfolio; interest rate risk is minimized by mixing maturities. Marketability risk is also reduced by diversification, since it is unlikely that all the issues in the portfolio would become unmarketable at one time.

Corporation "A" wishes to acquire the publicly held stock of Corporation "B," a company with a market capitalization of $300 million. Corporation "A" does not have the cash necessary to complete the purchase since it only has a free cash balance of $100 million. To finance the additional $200 million needed for the acquisition via a leveraged buy out: A the assets of Corporation "A" would be pledged as collateral for the purchase of Corporation "B" B the assets of Corporation "B" would be pledged as collateral for the purchase of Corporation "B" C Corporation "A" would borrow from a large financial institution D Corporation "B" would borrow from a large financial institution

The best answer is C. Leverage is the use of debt to finance a purchase. Corporation A needs an additional $200 million to buy the stock of Corporation B. To do so, it would borrow the money from a large bank. Note that the loan from the bank might be collateralized, or it might not, so Choices A and B could be correct answers, but Choice C is clearly the best of the choices offered.

When a selling group member sells securities in a corporate underwriting, which of the following is earned? Incorrect answer A. You chose this answer. A Takedown B Spread C Concession D Reallowance

The best answer is C. Selling group members help the syndicate find customers, acting as agent only. For this, the selling group member earns the selling concession.

At the market opening, a customer purchases 200 shares of an S&P 500 Inverse ETF (-1x) at $50 per share. At the end of that day, the S&P 500 Index declines by 10%. The next day, the index partially recovers and closes up 5%. What will be the market value of the 200 share position? A $9,450 B $9,500 C $10,450 D $10,500

The best answer is C. Since this ETF is "-1x," it is an inverse ETF that moves at the same rate (1x), but in the opposite direction (-), to the market. The customer starts with 200 shares at $50, or a $10,000 position. At the end of the first day, because the index falls by 10%, this position will rise by 10% to $11,000 value ($10,000 x 1.1). At the end of the second day, because the index goes up by 5%, the ETF value will decline by 5%. $11,000 x .95 = $10,450.

Specialists (DMMs) on the New York Stock Exchange can perform which of the following functions? I Act as a market maker II Act as a broker's broker III Handle odd lot transactions IV Act as an underwriter A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. Specialists (now renamed DMMs - Designated Market Makers) cannot deal with the public, so they cannot act as underwriters. They are wholesale members of the NYSE who deal only with other member firms. DMMs act as market makers and broker's brokers. DMMs also act as the odd lot dealers for trades of NYSE listed stocks that are less than a round lot.

Under the flow of funds for a net revenue pledge revenue bond, which of the following is paid first out of the collected revenues? Incorrect answer A. You did not choose this answer. A debt service B debt service reserve C operation and maintenance D operations and maintenance reserve

The best answer is C. The normal order for the "flow of funds" under a net revenue pledge is to apply revenues first to operation and maintenance; then to debt service; followed by debt service reserve; and last to the operation and maintenance reserve. If there are still funds left over after these payments are made, the excess goes into the surplus fund.

A $1,000 par Treasury Note is quoted at 101-3 - 101-5. The spread is: A 2 basis points B $.0625 per $1,000 C $.625 per $1,000 D $6.25 per $1,000

The best answer is C. The spread between the bid and ask is 2/32nds. Remember, government and agency securities are quoted in 32nds (with the exception of T-Bills, quoted on a yield basis). 2/32nds = .0625% of $1,000 par = $.625.

Client A's portfolio consists of the following: Equities:85%Fixed Income:10%Cash:5% The breakdown of these holdings is: Equities35%DEFF Total Market Index Fund30%2,100 shares of ABCD25%3,100 shares of XYZZ10%PDQQ International Small Cap Growth FundFixed Income:75%Investment Grade25%SpeculativeCash:100%Money Market Fund Client A is 55 years old, single with no children. He is beginning to think about retirement and wishes to modify his portfolio so that he can start receiving an assured income stream starting at age 65. Which recommendation would be the BEST choice to meet the customer's changed investment objective? A The ABCD and XYZZ stock holdings should be liquidated in full immediately, with the proceeds invested in 10 year income bonds of companies in special situations B The DEFF Total Market Index Fund holding should be liquidated in full immediately, with the proceeds invested in 10-30 year Treasury bonds C The customer should set minimum and maximum threshold prices at which the ABCD and XYZZ stock positions are to be liquidated; and if this occurs, the proceeds should be invested in 10-30 year maturity Treasuries D The customer should liquidate the ABCD and XYZZ stock holding to purchase 10, 15 and 20 years STRIPs that will mature in even installments

The best answer is C. This customer's portfolio is 85% invested in stocks and only 15% invested in bonds and cash. Since he is looking for income 10 years from now, more of the portfolio mix must be allocated to bond investments. Immediate liquidation of some of the stock investments might cause the customer to sell at a loss; or to miss out on potential stock gains that he or she anticipates. Setting minimum and maximum threshold prices to begin liquidating the stock investments, and reallocating the proceeds to safe income generating bond investments, is the best way to meet the customer's income objective.

If a registered representative wishes to distribute an options retail communication to her customers, which statement is FALSE? A The retail communication must be approved in advance of distribution by a Registered Options Principal B The retail communication must be approved 10 days in advance of use with the SRO if it is distributed to customers who have not received an Options Disclosure Document C The retail communication can be distributed to any customer who has already received an Options Disclosure Document without requiring prior filing with the SRO D The retail communication must be approved 10 days in advance of use with the SRO, regardless of whether it is distributed to customers who have already received, or who have not already received, an Options Disclosure Document

The best answer is D. A retail communication regarding options is defined as one distributed to more than 25 existing or prospective clients. When a client opens an options account, the customer must be given the latest Options Disclosure Document (the ODD) - which is basically an options primer, explaining how options and the OCC (Options Clearing Corporation) work. If the retail communication is distributed to customers who have already opened options accounts, then they have already received the ODD. These retail communications do not need to be pre-filed with the SRO (either the CBOE or FINRA) If the retail communication is distributed to customers who have not already opened options accounts, then they have not received the ODD. These customers are "new" to options, so the SRO is more concerned about what might be in these communications, therefore the SRO (FINRA or the CBOE) requires that the communication be filed 10 days in advance and get SRO approval before it can be used. Finally, no matter what, any options retail communication must be approved by a Registered Options Principal before it can be distributed.

Which of the following statements are TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering? I The indication is binding on the customer II The indication is not binding on the customer III The indication is binding on the underwriter IV The indication is not binding on the underwriter A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. An indication of interest is taken during the 20 day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These are not binding because the issue cannot be legally "offered or sold" until the effective date.

Which statements are TRUE regarding bids placed at the Treasury Auction? I Competitive bids are always filled II Non-competitive bids are always filled III Competitive bids are not always filled IV Non-competitive bids are not always filled A) I and II only B) III and IV only C) I and IV only D) II and III only

The best answer is D. At the weekly Treasury auction, non-competitive bids are always filled at the average winning yields of the competitive bids. Only the lowest interest rate competitive bids are filled; the higher rate competitive bids that exceed the amount of securities up for auction that week are rejected.

Issuance of which of the following municipal issues is NOT subject to statutory debt limits? I General obligation bond II Special tax bond III Industrial revenue bond IV Moral obligation bond A I only B I and II C III and IV D II, III, IV

The best answer is D. Debt limits keep a municipality from selling excessive amounts of general obligation bonds, which are backed by ad valorem taxing power. If the issuance was not limited, property taxes could skyrocket. Debt limits do not apply to self supporting debt such as revenue bonds. These are paid from the revenues generated by the "enterprise activity" and each project pays its own way (or it defaults). Special tax bonds are payable by a tax other than an ad valorem tax, such as an excise tax, sales tax or income tax. These require voter approval. Note that issuance is not restricted by a debt limit. Debt limits also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).

When analyzing a general obligation bond, all of the following ratios would be evaluated EXCEPT the: A collection ratio B debt per capita ratio C debt to value ratio D debt service coverage ratio

The best answer is D. General obligation bonds are backed by faith, credit, and taxing power of the issuer. To analyze these bonds, it is important to examine the issuer's collection ratio (taxes collected / taxes assessed) to ascertain if the issuer is truly collecting all the taxes necessary to service the debt. The ratio of debt per capita would also be used to evaluate the relative debt burden per resident of one municipality as compared to another. The ratio of debt to assessed value of property would also be examined, since most G.O. bonds are backed by ad-valorem (property) tax collections. The debt service coverage ratio (ratio of pledged revenues to debt service requirements) is used to evaluate a revenue bond issue - not G.O. bonds.

A customer has heard about the explosive growth in China and wants to make investments in Chinese companies. The customer should be informed about which risks? I Political risk II Exchange Rate risk III Marketability risk IV Default risk A) I and II only B) III and IV only C) I, II, III D) I, II, III, IV

The best answer is D. How about telling the customer about all of these risks! Political risk is the risk of investing internationally in countries that have weak political systems. Thus, the bondholder has very little in the way of legal protection. Another consideration is exchange rate risk. This is the risk that the foreign currency weakens against the U.S. dollar (which is the same as the U.S. dollar strengthening). When the "weakened" foreign currency is converted back into its value in U.S. dollars, it buys "fewer" U.S. dollars, so the value of the investment in terms of U.S. dollars, declines. In addition, any bond purchaser incurs some level of marketability risk and some level of default risk.

Listed REITs offer all of the following benefits to purchasers EXCEPT: A) diversification of investments B) ready marketability of shares C) capital gains potential D) preferential taxation of dividends received

The best answer is D. REITs offer diversification of investments similar to investment companies, except that the investments are being made in various types of real estate. REIT shares are listed and trade on an exchange (like a closed-end fund), so they are readily marketable. If real estate does well as an investment, the shares will appreciate, giving the investor a capital gain. Finally, REIT dividend taxation is truly "not that great." While dividends received from common stock investments, including mutual funds, qualify for the lower 15% or 20% tax rate, the tax law specifically denies this benefit to REIT dividend distributions. These are taxed at ordinary income tax rates of up to 37%.

All of the following information about corporate bonds would be found in the Standard and Poor's Bond Guide EXCEPT: A - Rating B - Yield C - Price D- Trading Volume

The best answer is D. Standard and Poor's Bond Guide is published on the web, and gives capsule summaries of every outstanding corporate issue, including recent price, rating, and yield. Trading volumes for corporate bonds come from TRACE (FINRA's Trade Reporting and Compliance Engine).

The legislation that requires a broker-dealer's research analysts to be completely separated from that firm's investment banking department is the: A) Securities Act of 1933 B) Securities Exchange Act of 1934 C) Trust Indenture Act of 1939 D) Sarbanes-Oxley Act of 2002

The best answer is D. The Sarbanes-Oxley Act of 2002 requires that research analysts at broker-dealers be completely separated from investment banking, so that the analysts are not "encouraged" or "intimidated" by the firm's investment bankers to write favorable reports to get future investment banking business.

All of the following are true about variable annuities EXCEPT: A) salespersons must register with both FINRA and the State Insurance Commission to sell variable annuities B) annuity payments may not be reduced due to increased expenses experienced by the insurance company C) variable annuities are considered to be securities regulated by the Investment Company Act of 1940 D) Investment risk is carried by the issuer of the annuity

The best answer is D. To sell variable annuities, both an insurance and a securities registration are required. The issuer gives an expense guarantee, limiting the amount of expenses that the issuer can charge against the contract. Variable annuities are considered to be securities because the purchaser bears the investment risk. Investment risk in a variable annuity is carried by the purchaser, not the issuer of the contract.

All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT: A) the number of outstanding shares is reduced B) the earnings per share is increased C) the market price of the stock will increase D) the number of authorized shares will be reduced

The best answer is D. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock's price in the market. The purchase of Treasury Stock has no effect on authorized shares. This is the legal amount of shares that the company is authorized to sell, established in the company's corporate charter.

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

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

As an initial transaction in a new margin account, a customer sells short 100 shares of ABC at $20 per share. After the customer deposits the appropriate margin, the credit balance in the account will be: A $1,000 B $2,000 C $3,000 D $4,000

The best answer is D. As an initial transaction in a new margin account, the customer sold 100 shares of ABC at 20. Regulation T requires 50% margin. 50% of $2,000 = $1,000 Regulation T requirement. However, since this is a new account, the FINRA minimum maintenance margin requirement of $2,000 must be met. Therefore, $2,000 must be deposited. This shows as a credit to the account. In addition, the short sale results in a credit of $2,000, for a combined credit of $4,000. This shows as: Credits - Short Market Value = Equity Sale $2,000 $2,000 0 Margin $2,000 ______ $2,000 Total $4,000 $2,000 $2,000

Equity options contracts for a given month expire: I on the 2nd Friday of the month II on the 3rd Friday of the month III at 4:00 PM Eastern Standard Time IV at 11:59 PM Eastern Standard Time A I and III B I and IV C II and III D II and IV

The best answer is D. Equity options contracts for a given month expire on third Friday of the month at 11:59 PM Eastern Standard Time. The trading cut-off is 4:00 PM ET on the same day.

Which of the following are characteristics of municipal primary market underwritings? I Order Period II Underwriting Agreement III Good Faith Deposit IV Concession and Takedown A I and II only B III and IV only C I, II, and IV D I, II, III, IV

The best answer is D. Municipal "primary market" underwritings are initial public offerings that are performed on either a competitive bid or negotiated basis. There is always an underwriting agreement between the issuer and the underwriters. In a competitive bid, the underwriting agreement is the signed and accepted "Proposal to Buy Bonds" on which the underwriters submitted the winning bid. In a negotiated underwriting, the underwriter and the issuer negotiate the terms of the formal underwriting agreement, which can be either a firm commitment or best efforts basis. In any underwriting, the issuer demands a good faith deposit from the underwriters at the time that the agreement is submitted to the issuer for signing. This "secures" the agreement, and assures the issuer that the underwriters are "bona-fide" and will complete the terms of the agreement. If not, the issuer keeps the good faith amount as liquidated damages.An "order period" is typically specified in a competitive bid underwriting. This is set by the manager, usually during a time period of about an hour just after the "bid" is won. During this time period, the manager will accept orders contingent upon winning the bid, but does not allocate the orders on a "first in-first out" basis. Instead, the orders are accumulated and then tallied up at the end of the "order period." The manager then fills the accumulated orders, either on a "discretionary basis" or he will start with the highest order prices obtained for each maturity and then continue to fill orders at successively lower prices until the maturity is either "sold out" or a minimum "floor" price is reached, below which no more orders will be filled during the "order period." After the "order period" is complete and the bid has been won, the manager accepts orders according to the established priority provisions. Typically, these are Pre-Sale orders; Group Net orders; Designated orders; and Member Orders at the Takedown. Any firms that place these orders will either earn the selling concession (as a selling group member); the additional takedown (as a syndicate member that has one of its bonds sold by a selling group member); or the total takedown - that is, the total of the selling concession and additional takedown when a bond is sold directly to the public by a syndicate member.

A customer has an account with a brokerage firm that is in receivership. The account holds $90,000 of securities and has a $50,000 debit. Which statement is TRUE regarding SIPC coverage? A The account is covered for $90,000 B The customer must deposit $50,000 to receive the $90,000 of securities C The account is covered for $50,000 D The account is covered for $40,000

The best answer is D. SIPC covers the equity in a customer's account, with coverage not to exceed $500,000 equity per account in securities. However, cash coverage is limited to $250,000. This account has $90,000 of securities and a $50,000 debit, so the equity is $40,000. The customer will receive $40,000 worth of securities in the liquidation.

In the same year, an investor has made the following trades: Jun. 1st:Dec. 1st:Dec. 9th: Buy 100 ABC at $50Buy 100 ABC at $35Sell 100 ABC at $40 The tax result of the transactions is: A $500capital gain B $750 capital loss C $1,000 capital loss D no capital gain or loss

The best answer is D. These transactions are subject to the "wash sale" rule. The customer bought 100 shares of ABC at $35, eight days before selling the stock at a loss on December 9th. When applying the wash sale rule, FIFO (first in; first out) accounting is always used - specific identification is not allowed - the first shares were bought at $50 and are now being sold at $40 for a 10 point loss. The wash sale rule states that if the stock is repurchased from 30 days prior to the sale until 30 days after the sale, any loss deduction is disallowed.

A customer inherits 3,000,000 shares of ABC stock, a company listed on the NYSE which has 10,000,000 shares outstanding. The customer is not a director or officer of the company. Which of the following statements is (are) TRUE? I The customer is defined as an "insider" under the Securities Exchange Act of 1934II The customer is prohibited from selling ABC stock short; however, the customer may short against the box at year end, as long as the position is covered within 20 days III If the customer trades ABC stock at a profit after having held the stock for less than 6 months, the gain is forfeited IV The customer must report trading activity to the SEC A I only B II and IV C I, II, IV D I, II, III, IV

The best answer is D. This person falls into the definition of an "insider" because he holds 10% or more (in this case he holds 30%) of the company's common stock. Insiders cannot sell their stock short (except to short against the box at year end to lock in a gain, in which case the position must be closed within 20 days); they must forfeit any short swing profits derived from trading their own company's shares; and trading activity must be reported within 2 business days of the trade to the SEC.