Prac Exam series 7 (number 6)

An investor sold 100 shares of MAS short when the stock was trading at 21. If MAS is now trading at 16, and the investor wants to protect her gain, which of the following orders should she place? A) Buy stop at $16.10 B) Sell limit at $16 C) Buy limit at $16 D) Sell stop at $16.25

A Explanation A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading. In this case with the stock trading at 16, a buy stop of 16.10 is the best

If municipal securities are offered on an inverted scale, this means A) the yields on short-term maturities are higher than the yields on long-term maturities. B) the yields on long-term bonds are higher than yields on short- term bonds. C) the coupon rates are higher than the yields. D) the coupon rates on short-term bonds are higher than coupon rates on long-term bonds.

A Explanation A normal scale of prices consists of lower yields on short-term maturities and higher yields on longer maturities. An inverted scale is the opposite.

A corporate offering of 200,000 additional shares to existing stockholders may be made through A) a rights offering. B) a secondary offering. C) a warrant. D) a tender offer.

A Explanation A rights offering is an offering of additional shares of stock to existing shareholders.

All of the following are oil and gas program sharing arrangements except A) all-or-none underwriting arrangement. B) reversionary working interest. C) functional allocation. D) disproportionate sharing.

A Explanation Functional allocation, disproportionate sharing, and reversionary working interest are all types of oil and gas sharing arrangements. All or none is a type of best efforts underwriting agreement.

If general interest rates increase, the interest income of an open-end bond fund will do which of the following? A) Increase B) Remain unchanged C) Decrease D) Cannot be determined from the information given

A Explanation What does a bond fund invest in? Bonds. One of the features of an open-end company (mutual fund) is the continuous issuance of new shares. The question states that interest rates are increasing. As that new money is received, the fund's manager will be able to invest in bonds offering that higher return. This will cause the income of the fund to increase. It is not part of the question, but the increase in interest rates will likely lead to the NAV of the fund decreasing (as interest rates go up, the price of the bonds in the fund's portfolio will go down).

If a short stock and long call attitude? BE MG ML

Attitude: Bearish BE: Market - Prem MG: Market - Prem ML: Strike - Market + Prem

If Long Stock and Short Call attitude? BE MG ML

Attitude: Bull/Neu (Covered Call) BE: Market - Prem MG: Strike - Market + Prem ML: Market - Prem

If short stock and short put attitude? BE MG ML

attitude: Bear/Neut BE: Market + premium MG: Market - Strike + Prem ML: Unlimited

When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period? A) None B) One year C) Six months D) Three months

A Explanation Because the securities were received in a public offering, they are registered securities (not restricted), and therefore, there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a six-month holding period in addition to volume limitations.

All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements except A) variable annuities. B) Keogh plans. C) IRAs. D) defined contribution plans.

A Explanation Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan.

For the purpose of reporting sales to the IRS, the method available to investors by the IRS that offers the most flexibility in anticipation of the investor's year-end tax needs is A) share identification. B) none of these. C) average cost basis. D) first in, first out.

A Explanation Share identification is the most flexible of the three methods. The investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs. For investors, the idea is to minimize tax liability, if possible, by limiting gains or maximizing loses in anticipation of what one's year-end tax liability might be.

The visible supply includes all of the following except A) municipal notes. B) industrial development bonds. C) revenue bonds. D) general obligation bonds.

A Explanation Short-term notes are not part of the visible supply, which measures the dollar amount of new issues scheduled over the coming month.

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC? A) 50% B) 65% C) 70% D) 100%

A Explanation The corporate dividend exclusion permits a corporation receiving dividends from another corporation to exclude 50% of those payments. Therefore, the corporation will only pay tax on the remaining 50%. This exclusion applies only to dividends, not interest.

An investor opens the following options position: Long 1 ABC Aug 50 call @ 5½; short 1 ABC Aug 55 call @ 3½. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is $200; breakeven is $52. B) Maximum gain is $200; maximum loss is $300; breakeven is $53. C) Maximum gain is $300; maximum loss is $200; breakeven is $53. D) Maximum gain is $200; maximum loss is $300; breakeven is $52.

A Explanation The first step is to identify the position. This is a debit call spread. It is a debit spread because the option purchased costs more than the one sold. The investor purchased the 50 call for a premium of 5½ and sold the 55 call for a premium of 3½. That difference (5½ minus 3½), a debit of $200, is the most the investor can lose. This is a bullish spread (the investor bought the low strike price and sold the high strike price). If the investor is correct and the stock rises, the short call will be exercised. That means the writer will have to sell the stock at $55 per share. However, the investor will exercise the 50 call and deliver the stock purchased for $5,000 and receive proceeds of $5,500. The $500 profit is reduced by the $200 it cost to put on the spread. That means a net gain of $300. The fastest way to do a question like this is to subtract the debit from the strike price difference (5 points here) and you have your maximum gain. In this case, it is $5 ‒ $2 = $3. Breakeven follows the call-up rule; add the net premium (the debit of $2) to the lower strike price ($50) to arrive at $52.

An investor opens the following options position: Buy 1 BOB Jan 60 call @4; Buy 1 BOB Jan 55 put @2½. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is unlimited; maximum loss = $650; breakeven points are $48.50 and $66.50. B) Maximum gain is unlimited; maximum loss is $1,800; breakeven points at $48.50 and $66.50. C) Maximum gain is unlimited; maximum loss = $650; breakeven points are $53.50 and $61.50. D) Maximum gain is $650; maximum loss is unlimited; breakeven points are $53.50 and $61.50.

A Explanation The first step is to identify the position. This is a long combination—a long put and a long call with different terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the combination (the two premiums totaling $650). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($60 + $6½ = $66.50) and subtract the premium from the strike of the put ($55 ‒ $6½ = $48.50).

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered? A) A straddle order B) A spread order C) Two limit orders D) Two stop orders

B Explanation A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less. (This is one order, not two.)

Which risk is generally lower when holding a municipal bond ETF instead of individual municipal bonds? A) Purchasing power risk B) Liquidity risk C) Inflation risk D) Interest rate risk

B Explanation In general, municipal bonds do not have the liquidity of many other securities. The bond ETF, being exchange-traded, does not usually have that issue. Both investments have the other risks (purchasing power and inflation risk are the same).

A company reported annual earnings of $2.40 per share and paid annual dividends of $0.60. If the dividends were distributed quarterly, what was the amount and payout rate? A) $0.15 at 6.25% B) $0.15 at 25% C) $0.60 at 25% D) $0.60 at 10%

B Explanation One-quarter of $0.60 is $0.15. $0.60 is 25% of $2.40.

A corporation's income statement reports net income of $10 million for the year. The company has one million shares of 4% $50 par value preferred stock and two million shares of common stock. If the corporation paid a quarterly dividend of $0.60 per share of common stock, A) the current return on the preferred stock was 4%. B) the dividend payout ratio was 60%. C) the retained earnings increased by $6.8 million. D) the earnings per share was $5 per share.

B Explanation The dividend payout ratio is the percentage of the net income (after preferred stock dividends) paid out to the common shareholders. The net income is $10 million. The preferred dividend is $2 per share ($50 par times 4% = $2). With one million shares, the total preferred dividend is $2 million (1 million shares at $2 per share). Because the preferred dividend must be paid before any earnings are available to common stockholders, we subtract that $2 million from the net income. That leaves $8 million in earnings available to common. There are 2 million shares receiving an annual dividend of $2.40 ($0.60 quarterly). That means $4.8 million of the $8 million available is paid, or a ratio of 60% ($4.8 million ÷ $8 million = 60%). Or, the earnings per share is $4.00 ($8 million divided by 2 million shares) and $2.40 in dividends paid out of $4.00 earnings made is 60%. The preferred stock is paying a dividend of 4% of the par value, but that does not tell us the current yield. To know the current yield, we must know the current market price of the stock and the question does not supply that value.

What is a possible benefit of purchasing shares of a closed-end investment company in the secondary market? A) Redemption takes place on the day of the sale. B) Dividends are paid in cash rather than additional shares. C) Shares are frequently trading at a discount to the NAV. D) Shares may be purchased and sold without any sales or redemption charge.

C Explanation Closed-end funds compute their NAV, just as do open-end funds. However, by trading in the secondary markets, prices of closed-end funds are determined by the supply and demand for their shares. This can result in a fund selling for less than the value of its assets. We say the fund is trading at a discount to the NAV and, just like anytime we can buy something at a discount, we might be getting a better deal. Of course, this can work the other way if the fund shares were purchased at a premium or NAV and now are sold at a discount. Although there are no sales loads or redemption fees, there are brokerage commissions to pay just like with the purchase of any security in the secondary markets. Most would agree that the ability to reinvest your dividends in additional shares is a bigger benefit than taking the cash. Those additional shares create a compounding effect over time. Closed-end funds do not redeem their shares. When an investor sells the shares, they settle the same T+2 as other securities.

Most business development companies (BDCs) are classified as A) an open-end investment company. B) a unit investment trust. C) a closed-end investment company. D) an exchange-traded fund.

C Explanation Most BDCs register as closed-end investment companies (CEF) and trade in similar fashion in the secondary markets. Federal law places some restrictions on the investment flexibility of a BDC that are not required of regular CEFs. A major difference between BDCs and the other investment companies is the active role played in the management of the businesses in the portfolio. That is what business development is about helping smaller businesses develop into larger ones.

Although investing in mutual funds has many advantages, there are some risks. One risk that is generally greater with a bond fund than a portfolio of individual bonds is A) default risk. B) purchasing power risk. C) interest rate risk. D) liquidity risk.

C Explanation One disadvantage a bond mutual fund has is that there is no maturity date. At maturity, a bond returns the principal, regardless of what current market interest rates are. That is why as the bond approaches maturity, the interest rate risk declines (bonds with a shorter duration have less interest rate risk). The bond fund itself does not have that advantage because the fund does not mature. The risk of default is probably less with a bond fund because of the greater diversification than most individual portfolios can attain. The redemption at NAV feature of the mutual fund offers a liquidity that may not be available with some inactively traded individual bonds. Purchasing power risk would likely be similar in both cases.

A fundamental analyst would be interested in all of the following except A) working capital. B) corporate regulatory filings. C) reversals. D) debt-to-equity ratios.

C Explanation Reversals interest technical analysts, who look at fluctuations in the market, not fundamental economic values.

The ABC Corporation has a long-standing policy of maintaining a dividend payout ratio of 45%. ABC's net income for the year is $12 million, and there are 8 million shares of common stock outstanding. After a 3:2 stock split, the annual dividend per share is A) $1.0125. B) $0.675. C) $0.45. D) $1.50.

C Explanation Take this systematically. A dividend payout ratio of 45% means ABC will distribute 45% of its net income to its common shareholders. Forty-five percent of $12 million is $5,400,000 in dividends. If there were 8 million shares before the split, there are now 12 million (8 times 3/2 = 24 divided by 2 = 12). Divide the amount available for common ($5.4 million) by the number of shares (12 million) to arrive at a dividend per share of $0.45. There is another way to compute this. With net income of $12 million and 8 million shares, the pre-split earnings per share is $1.50 ($12 million divided by 8 million = $1.50). The company pays out 45% of its net income as a dividend. That would be $0.675 ($1.50 times 45%). With the 3/2 split, the number of shares has increased by 150%, meaning that the new dividend will be 2/3 of the previous amount. That computes to the same $0.45 per share.

A 60-year-old customer who wishes an investment that can provide for retirement needs while adjusting for changes as aging takes place would probably find which of the following investments most suitable? A) An asset allocation fund B) An IRA C) A target date fund D) A long-term bond fund

C Explanation The benefit of a target date fund is that, as the specified date gets closer, the portfolio allocation automatically shifts into more conservative investments. It could be compared to an asset allocation fund on autopilot. An IRA is not an investment vehicle and at age 60 is probably not the best time to get started. The long-term bond fund is going to suffer from inflation risk, as well as interest rate risk.

A customer establishes the following positions: Buy 100 JMB at 28 Buy 1 JMB Dec 25 put at 2 What is the maximum potential loss? A) $3,000 B) $2,800 C) $500 D) $200

C Explanation The investor loses money on the long stock position when the market value falls. With the purchase of the put, the investor can sell the stock for no less than the strike price, but also loses the premium. In this example, the investor loses a maximum of $3 on the stock (28 − 25) plus the premium of $2, for a total loss of $500 on 100 shares.

A May and November Treasury bond is traded the regular way on Wednesday, June 8. The number of days of accrued interest is A) 44. B) 38. C) 45. D) 39.

D Explanation Accrued interest on government bonds is based on actual days in a year. Settlement occurs on the next business day. This bond pays interest in May and November, with the most recent payment on May 1. Interest has accrued on this bond for 31 days in May and 8 days in June, for a total of 39 days. The settlement date is Thursday, June 9.

Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will not affect NAV? A) The fund paying dividends to its shareholders B) The value of the fund portfolio's securities fluctuating C) The fund receiving cash dividends on the securities in its portfolio D) Fund shares being redeemed by the fund upon the request of shareholders

D Explanation Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. Although share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.

An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid $13.01 asked, what amount will the investor receive? A) $2,275.50 B) $2,602.00 C) $1,098.00 D) $2,410.00

D Explanation If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed. In this case, the investor would receive $2,410 ($12.05 × 200 shares).

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a large-cap growth fund. B) an intermediate-term government bond fund. C) a long-term government bond fund. D) an intermediate-term, high-grade corporate bond fund.

D Explanation In all these cases, liquidity should not be a problem because mutual funds have a seven-day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolios offer that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.

As a registered representative, you have a customer that is concerned about losing principal when investing in a mutual fund. Because the customer is risk averse, you recommend a principal-protected fund. Which of the following statements is not correct? A) There is a lockup period before shares may be redeemed. B) The principal is guaranteed, less any front-end load charges. C) The portfolio may contain both stocks and bonds. D) The portfolio is limited to bonds.

D Explanation Most principal-protected funds investments are in both stocks and bonds, not just bonds. The principal is guaranteed, typically by an insurance policy. In order for the investor to receive the guarantee, the money invested is subject to a lock-up period, usually 5-10 years. If any redemptions take place during the lockup period, the investor would lose the guarantee. That could result in a loss.

If an investor in the 27% federal marginal income tax bracket invests in municipal general obligation public purpose bonds nominally yielding 4.5%, what is the tax-equivalent yield? A) 5.72% B) 16.67% C) 3.29% D) 6.16%

D Explanation The formula for computing tax-equivalent yield is: nominal yield ÷ (1 − federal marginal income tax rate). Let's plug in the numbers: 0.045 ÷ (1 − 0.27) = 0.045 ÷ 0.73 = 6.16%. This tells the investor that they would have to receive 6.16% interest on a taxable bond to have the same after-tax return as earning 4.5% tax-free. You can check it out by working backwards. If an investor receives 6.16% taxable, they will have to pay 27% (in this person's bracket) in income tax. That is a tax of 1.66% (6.16 x 27% = 1.66). Subtract 1.66 in tax from 6.16 and the result is 4.50%.

A customer buys a municipal bond in the secondary market at 96 that has four years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are A) two points of capital gain and one point of ordinary income. B) three points of capital gain. C) three points of ordinary income. D) two points of ordinary income and one point of capital gain.

D Explanation When a municipal bond is purchased in the secondary market at a discount, the annual accretion is taxed as ordinary income. The annual accretion is one point per year (four points divided by four years to maturity). Therefore, when the bond is sold two years later, its cost basis is 98. If the bond is sold at 99, there is a long-term capital gain of one point per bond. Also, there is ordinary income taxation on the accretion of two points.

If Long Stock and Long Put attitude? BE MG ML

attitude: BULL BE: Market + Prem MG: Unlimited ML: Market - strike + prem

Which of the following is the computation for the coverage ratio for a municipal revenue bond issue? A) Net revenue divided by annual interest and principal expense B) Revenues collected divided by annual interest expense C) Annual interest and principal expense divided by revenues collected D) Revenues collected divided by annual principal expense

A Explanation Debt service coverage measures the amount of money available for debt service compared to the annual debt service requirements. Annual debt service includes both interest and principal expense.

When conducting a discussion with a client about the merits of investing in a direct participation program, all of the following could be tax advantages except accelerated depreciation. depletion allowances. recapture of depreciation. tangible drilling expenses. A) III and IV B) I and IV C) II and III D) I and II

A Explanation Depreciation is the deduction against income representing the cost recovery of certain fixed assets. When one of those assets is sold for more than the straight-line depreciated value, the excess is recaptured as ordinary income. Only intangible drilling expenses benefit the limited partner.

The practice of dollar cost averaging requires the investor to A) buy a security in a falling market and buy it in a rising market. B) buy a security in a falling market and sell it in a rising market. C) sell a security in a falling market and buy it in a rising market. D) sell a security in a falling market and sell it in a rising market.

A Explanation Dollar cost averaging requires the investor to invest a fixed amount of money on a regular basis, regardless of whether the stock market is rising or falling.

If a state agency has issued a moral obligation bond that runs into difficulty and requires the secondary backing to be implemented, what is necessary? A) Legislative approval B) Voter approval C) MSRB approval D) Administrative approval

A Explanation If a state agency that has issued a moral obligation bond requires that secondary backing, the agency must apply to the legislature for approval. If approved by the legislature, the funds will be made available. If not approved, the issue might go into default.

A couple with children ages 13 and 8 have $200,000 saved to put toward their children's college education. Which of the following would be most suitable for these investment dollars and objective? A) 80% zero coupon bonds, 20% T-notes B) 60% equities, 40% corporate bonds C) 10% zero coupon bonds, 90% corporate bonds D) 60% equities and equity funds, 30% T-bills, 10% corporate bonds

A Explanation Of the portfolio mixes presented, zero coupon bonds, which are purchased at a discount and mature at face value, are a suitable investment for future anticipated expenses such as college tuition. The T-notes, which are medium-term U.S. government securities, would additionally be a suitable investment where risk of principal loss wouldn't be a concern like it would be with equities.

The Nasdaq quotation system offers three different levels of service depending on the needs of the user. The information generally available to the retail investor is found on Level 1, and the quote represents A) the inside market. B) the outside market. C) the most recent trade. D) a firm quote.

A Explanation The Nasdaq Level 1 service shows the inside market. That quote is the highest bid and the lowest offer of all of the current market makers in the stock. Traders generally refer to that as the NBBO (national best bid and offer). Firm quotes are only available on Levels 2 and 3. Level 1 will display the most recent trade, but that is not a quote because it only shows one side, not a bid and ask.

A customer purchases a noncallable bond at a discount in the secondary market. All of the following must be on the customer's confirmation except A) the rating. B) the capacity in which the dealer acted. C) the yield to maturity. D) the CUSIP number.

A Explanation The rating is not a required disclosure. Committee on Uniform Securities Identification Procedures (CUSIP) numbers are used in all trade confirmations and correspondence regarding specific securities. Indicating whether the firm acted as a broker or dealer is always required and the yield to maturity would be shown. Why doesn't it say, "the lower of YTM or YTC?" Because a bond purchased at a discount will never have a lower YTC than its YTM.

In its notice of sale in The Bond Buyer, an issuer states that it will take into consideration the timing of interest payments when evaluating bids. The issuer will be using which of the following methods in its bid selection? A) True interest cost B) Real interest cost C) Low interest cost D) Net interest cost

A Explanation The true interest cost (TIC) method takes into consideration the time value of money. The issuer discounts future interest payments to arrive at a present value.

Which of the following is the largest component of a municipal underwriting spread? A) Total takedown B) Additional takedown C) Management fee D) Concession

A Explanation The underwriting spread is the entire amount. Total takedown is made up of the additional takedown and the concession, which makes it the largest component. The management fee is the smallest.

An investment company registered with the SEC under the Investment Company Act of 1940 that allows investors to sell their shares back to the company at net asset value on a quarterly basis is A) an interval fund. B) a unit investment trust. C) a closed-end fund. D) an open-end fund.

A Explanation The unique feature of interval funds is that at certain intervals, which may be anything from monthly to annually, investors are allowed to sell a portion of their shares back to the fund at net asset value (NAV). In the case of open-end funds and UITs, shareholders can redeem their holdings at NAV at all times, not just specified intervals. Aren't interval funds closed-end investment companies? Yes they are, but as covered many times in the course, when there are two choices that could be true statements, the correct answer is the one that more specifically answers the question. Use this logic: Are all interval funds closed-end funds? Yes. Are all closed-end funds, interval funds? No. That makes interval fund the best choice.

A customer of a member transfers his account to another member firm. Under SEC rules, the transferring member must maintain copies of the customer's account records for how many years following the transfer? A) Six years B) Three years C) Five years D) Two years

A Explanation Under SEC Rule 17a-r, customer account records must be maintained for six years following the closing of an account.

A registered representative was researching ABC, a technology stock. When looking at a graph of historical prices, the rep noticed that the variance in price movement has shrunk. This is an example of A) consolidation. B) odd-lot trading. C) narrowing. D) shrinking.

A Explanation When the difference between a stock's resistance and support level narrows, that is a condition called consolidation.

Municipal bonds are not normally sold short because A) the municipal bond market is illiquid. B) short sales are prohibited by Municipal Securities Rulemaking Board rules. C) the transaction is expensive to execute. D) short sales are prohibited by municipal statute.

A Explanation While there is no law or industry rule prohibiting short sale of municipal bonds, it is not a common practice. To short a security, it must be borrowed, and because most municipal securities are thinly traded, it is often difficult to locate the specific issue needed to cover the short position.

Which of the following balance sheet items is not a current liability? A) Mortgages B) Accounts payable C) Accrued taxes D) Long-term debt amount that is due within one year

A Short-term or current liabilities are those entries on a balance sheet that are due in one year or less. Accounts payable, accrued taxes, and that portion of long-term debt due within the year are all current liabilities. Mortgages are generally long-term liabilities, although that portion of a mortgage that is due within the year would be classified on the balance sheet as a current liability.

Which of the following statements describes an oil and gas blind pool offering? A) The income from producing wells is purchased at a discount from the present value of the projected future flows. B) Money is raised without a specific property being stated, and the general partner selects the investments. C) An unknown number of representatives participate in the sale of known partnership units. D) The oil exploration occurs in an area that is not adjacent to any known oil reserves.

B Explanation A blind pool offering, also known as a nonspecified program, involves an investment in a program without specific prospects or properties being identified.

ABC Corporation is planning an offering of $10 million of common stock. When would it be prohibited for the company to place a tombstone ad? A) After the effective date of the registration B) Before the registration statement is filed with the SEC C) On the effective date of the registration D) After the registration statement is filed with the SEC, but before the effective date

B Explanation A tombstone ad, listing the "bare bones" information about the offering cannot be published until the registration statement for the offering has been filed. That tombstone cannot include the effective date or the final offering price. On and after the effective date, the tombstone ad can include those two items.

The KAPCO Growth mutual fund's annual report shows receipt of $10,000,000 of interest income from corporate bonds, $15,000,000 in cash dividends, and $5,000,000 of operating expenses. According to the conduit theory, how much must the fund distribute to investors if it wishes to avoid paying any taxes? A) $10,000,000 B) $20,000,000 C) $18,000,000 D) $16,000,000

B Explanation According to Subchapter M of the Internal Revenue Code, the conduit theory requires that an investment company pay out a minimum of 90% of its net investment income (NII) to investors. In that case, the fund pays taxes on the remaining 10%. However, distributing 100% of the NII leaves no taxable income remaining. A fund's net investment income is the gross investment income minus the expenses. The NII for this fund is the interest ($10 million) plus the dividends ($15 million) minus the expenses ($5 million). That is $10 million + $15 million = $25 million minus $5 million = $20 million.

According to Municipal Securities Rulemaking Board (MSRB) rules, a municipal finance professional (MFP) is an associated person of a broker-dealer engaged in municipal securities representative activities other than retail sales. a registered representative engaged in the retail sale of municipal securities to individual investors. subject to the political contribution rules as outlined in MSRB Rule G-37. not subject to the political contribution rules as outlined in MSRB Rule G-37. A) II and IV B) I and III C) II and III D) I and IV

B Explanation As defined by the MSRB, an MFP is an associated person of a broker-dealer who is primarily engaged in municipal securities representative activities other than retail sales to individuals, who solicits municipal securities business for the broker-dealer, or who is in the supervisory chain above MFPs as described. MFPs are subject to the political contribution reporting rules as outlined in MSRB Rule G-37. Though there are exceptions for de minimis contributions, exceeding the allowable contribution limits may trigger restrictions on engaging in municipal securities business by the broker-dealer for two years.

All of the following will be included on a confirmation for noncallable municipal bonds purchased on a yield basis except A) yield to maturity. B) taxable equivalent yield. C) dollar price. D) par value.

B Explanation As investors' tax brackets vary, taxable equivalent yield is never required to be shown.

In the case of a real estate direct participation limited partnership program, nonrecourse financing will A) be added to a limited partner's sales proceeds at the time the partnership is dissolved. B) increase a limited partner's original cost basis. C) decrease a limited partner's original cost basis. D) have no effect on a limited partner's original cost basis.

B Explanation For real estate limited partnerships, nonrecourse loans are included in the limited partner's cost basis. In this way, the loans increase the partner's original cost basis by the amount of the partner's debt liability for the loan.

In general, FINRA rules prohibit member firms from improper use of customer funds. One example is intentionally holding up an account transfer. Another is holding on to funds that belong to the customer. One of the features of FINRA Rule 2165 dealing with senior exploitation is the ability of a member firm to place a temporary hold on disbursements from the account of a specified adult. This serves as a safe harbor for funds held in the manner described above. A member relying on this rule must A) report all temporary holds to FINRA within 15 days of the end of the month in which the hold took place. B) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule. C) segregate customer funds from those of the firm to avoid commingling of assets. D) place temporary holds on disbursements of funds or securities from the accounts of specified adults whenever there is suspected exploitation.

B Explanation In FINRA's eyes, this is all about making sure that associated persons of the firm are adequately (and frequently) trained. Although customer and firm assets must be segregated, that is not part of the senior exploitation rule. The rule permits, but does not require, that these holds be placed on disbursements from the affected accounts−it is voluntary. There is no reporting of this activity, but detailed reports must be made and retained, containing the relevant information leading to the decision to enforce the hold.

Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid? A) Six percent coupon with no premiums over par B) Six percent coupon with premiums over par C) Seven percent coupon with no premiums over par D) Eight percent coupon with premiums over par

B Explanation In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the six percent coupon on the bonds.

When a member firm sells municipal bonds to a customer out of its inventory, it must A) indicate compliance with the 5% markup policy. B) indicate the amount of markup on the customer's confirmation. C) disclose its cost basis in the bond. D) disclose the amount of commission on the customer's confirmation.

B Explanation In a principal transaction (out of its inventory), the markup must be disclosed on a confirmation, and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities. The firm does not disclose what it paid for the bond. That price could be higher or lower than the current market and is not relevant to computing the markup on inventoried securities.

The Nasdaq quotation system offers several different levels of service depending on the needs of the user. Which of those levels would be used by a FINRA member firm making a market in 15 different stocks? A) Level 1 B) Level 3 C) Level 2 D) Level 4

B Explanation Level 3 is used by market makers. It contains the quotes from all market makers (as does Level 2), but it allows for the entry of quotes. That is the unique feature of Level 3. Level 1 shows the inside market (best bid and best offer), and there is no Level 4.

If a company issues $10 million in par value convertible debentures, all of the following balance sheet items will be affected except A) assets. B) net worth. C) working capital. D) liabilities.

B Explanation Net worth is not affected by the issuance of long-term debt because it does not represent ownership. Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase. How does the working capital increase if the net worth does not? Because this company now has $10 million more in cash, and the liability is the debenture that is included in long-term debt, not current liabilities.

A customer must present a signed representation letter stating that he is not a restricted purchaser before buying a new issue of A) U.S. government bonds. B) common stock. C) municipal bonds. D) corporate bonds.

B Explanation New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Before buying an IPO, a customer must present a representation letter stating he is not a restricted person.

Regulation T governs the purchase of all of the following except A) corporate convertible bonds. B) U.S. government bonds. C) American depositary receipts. D) listed options.

B Explanation Regulation T applies only to nonexempt securities. Because governments and municipals are exempt, there is no federal regulation.

One of your customers invests $20,000 in an oil and gas limited partnership program. The Schedule K-1 she receives at year-end from the partnership indicates that operating revenues and operating expenses were exactly the same. In addition, her share of the year's depletion allowance is $6,000. During the year, she received a cash distribution of $8,000. What is her basis as of year-end? A) $12,000 B) $6,000 C) $8,000 D) $16,000

B Explanation She began with a basis of $20,000 (her original investment). During the year, she received a distribution of $8,000. That lowered her basis (the amount of money "at risk") to $12,000. In addition, the depletion represents a nonoperating expense that can be taken as a loss. That brings the basis down to $6,000.

A corporation must have stockholder approval to A) declare a 15% stock dividend. B) issue convertible bonds. C) repurchase 100,000 shares of stock for its Treasury. D) declare a cash dividend.

B Explanation Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholders' proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its Treasury, declaration of a stock dividend, and declaration of a cash dividend.

Market interest rates have risen steadily over the past several months. The market price of which two of the following shares would probably reflect the biggest impact of this change? Growth stock Money market mutual fund Preferred stock Public utility stock A) I and II B) III and IV C) II and III D) I and IV

B Explanation Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock, with its fixed dividend, and utility stocks, with their high degree of debt leverage, are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

An attractive investment for a customer with a very high risk tolerance might be a leveraged ETF. One your firm recommends is the QUID 3x leveraged ETF. You decide to track its performance for several days during a period of high market volatility. The starting date value is $50 per share. Day one ends with the specified index down 3%. Day two sees the index rise by 4%. One the third and final day, the index declines by 1%. The value of the QUID share is now A) $50.06 B) $49.43 C) $50.00 D) $49.94

B Explanation The 3x leverage will multiply the index movement by a factor of three. Should you receive a question like this, use the provided calculator as follows: $50 x 91% (3% drop x 3 = 9%) x 112% (4% up x 3 = 12%) x 97% (1% drop x 3 = 3%) and that rounds to $49.43.

All of the following statements about targeted amortization class (TACs) CMOs are correct except A) they have transferred prepayment risk to companion tranches. B) they are the most volatile of the tranches. C) in exchange for higher price risk, they generally offer a slightly higher interest rate. D) they have high extension risk.

B Explanation The Z-tranche, just like a zero-coupon bond, is the most volatile. TACs transfer the prepayment risk to companion tranches like PACs do, but they retain extension risk. This causes greater price risk in the market that is compensated for with a somewhat higher interest rate.

Which of the following investment vehicles has the highest credit risk? A) General obligation bonds B) Industrial revenue bonds C) New Housing Authority bonds D) Ginnie Mae pass-through certificates

B Explanation The industrial revenue bonds would have the highest risk because debt service is the responsibility of the corporation leasing the facility rather than the issuing municipality.

An investor wishes to invest $5,000 into the KAPCO Balanced Fund, an open-end investment company. How many shares will the investor receive if the next computed NAV per share after receipt of the order is $41.30 and the fund has a sales charge of 4%? A) 43.021 B) 116.225 C) 116.414 D) 121.065

B Explanation The investor will pay the POP (public offering price) of $43.02 per share. That price is computed by dividing the NAV of $41.30 by (100% ‒ 4%). Remember, the 4% sales charge is a percentage of the offering price, not the NAV. Dividing the $5,000 investment by the POP of $43.02 results in a purchase of 116.225 shares.

Which of the following statements regarding the flow of funds found within a municipal trust indenture are true? It describes the disbursement of funds for revenue bond issues. It describes the disbursement of funds for general obligation issues. It is found within the official statement. It is found within the bond contract. A) II and III B) I and IV C) I and III D) II and IV

B Explanation The term flow of funds relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts, as specified in the trust indenture found in the bond contract.

The underwriting agreement is signed by A) the managing underwriter and the syndicate members. B) the issuer and the managing underwriter. C) the selling group members and the syndicate members. D) the issuer and the SEC.

B Explanation The underwriting manager represents all underwriting members, and on behalf of the underwriting group, signs the underwriting agreement with the issuer. The agreement among underwriters is the document signed by the managing underwriter and all syndicate members. The selling group members have no formal agreement to be signed with the underwriters.

Several years ago, one of your customers bought an original issue discount (OID) municipal bond at $960. The bond has now matured. For federal income tax purposes, the discount is A) taxed each year as ordinary income. B) tax free. C) taxed as a long-term capital gain. D) taxed at maturity as ordinary income.

B Explanation When buying an OID municipal bond, the discount must be accreted each year and treated as interest income. Because interest income from a municipal bond is tax free at the federal level, the discount is not taxed if the bond is held to maturity. If the customer had purchased at a discount in the secondary market, the discount would have been accreted and taxed as ordinary income.

An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs A) no taxable result at this time. B) a capital gain. C) tax-free income. D) a capital loss.

B Explanation Yields fall as bond prices rise. Because the yield to maturity has dropped, the bond is trading at a higher price than when it was purchased. The consequence of the sale is a capital gain because the investor sold the bond that was purchased for par at a premium.

One of the terms used in the discussion of SEC Rule 144 is affiliate. Which of the following would be defined as an affiliate? A) The CEO's mother-in-law, whose only source of income is her Social Security and a small pension B) The brother-in-law of the spouse of the issuer's CEO, who lives in the same home as the CEO C) The sister of the CEO living in a neighboring town D) The CEO's contract bridge partner

B For purposes of Rule 144, an affiliate is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer. In addition, any relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person is considered an affiliate of the issuer. For test purposes, unless stated otherwise, spouses always live in the same home.

A legal opinion evaluates which of the following features of a municipal issue? Marketability Legality Tax-exempt status Economic feasibility A) I and III B) II and IV C) II and III D) I and IV

C Explanation A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality. The marketability of the new issue of bonds is dealt with by the syndicate. Economic feasibility relates to revenue bond issues and is performed by independent consultants.

All of the following statements regarding a limited partnership subscription agreement are true except A) the investor's registered representative must verify that the investor has provided accurate information. B) the investor's signature indicates that she has read the offering document. C) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs. D) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable.

C Explanation A limited partner's signature on the subscription agreement grants the general partner power of attorney to conduct the partnership's affairs. The subscription agreement for a limited partnership is deemed accepted when the general partner signs the subscription agreement.

The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which, $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Due to obsolescence, Acme sells the lathe for $6 million. The impact of this sale on the company's financials would be that A) long-term debt would increase. B) working capital would decrease. C) retained earnings would decrease. D) paid-in capital would decrease.

C Explanation Acme's net worth is currently $47 million. Net worth is total assets ($72 million minus total liabilities of $25 million equals $47 million. Or, add together the stock and surplus ($18 + $7 + $22 = $47 million). When the lathe is sold for $2 million less than its value on the books, total assets drop to $70 million, causing a $2 million decrease to net worth. Nothing has changed with the stock, so it is the retained earnings that, so to speak, take the hit. Working capital goes up because we have replaced a fixed asset with cash (the $6 million proceeds from the sale).

Which of the following describe an underwriter's financial liability if a syndicate is established as an Eastern account? Divided liability to purchase securities from the issuer Undivided liability to purchase securities from the issuer Divided responsibility for securities that remain unsold Undivided responsibility for securities that remain unsold A) I and IV B) II and III C) II and IV D) I and III

C Explanation An Eastern account has both undivided liability when purchasing the bonds from the issuer and undivided responsibility for bonds that remain unsold.

An underwriter in an Eastern syndicate has a 15% participation. The underwriting is for $20 million, and the underwriter has sold its $3 million allotment. The underwriting closes with $1 million remaining unsold. This underwriter's liability is A) $1,000,000. B) $0.00. C) $150,000. D) $15,000.

C Explanation An Eastern syndicate is an undivided account. That means that each member is responsible for its share of any unsold portion. This underwriter's commitment is 15%, so that percentage of the $1 million remaining is $150,000. If this were a Western syndicate (divided), the underwriter would have had no liability.

A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is A) $1,000. B) $0. C) $2,000. D) $4,000.

C Explanation Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SMA.

A buy stop order may be used for all of the following except A) to protect against loss in a short position. B) to acquire a long position as a stock breaks through resistance. C) to protect a profit in a long position. D) to protect a profit in a short position.

C Explanation Buying can only protect short positions, not long positions.

An order designated fill-or-kill (FOK) means that the order must be executed A) in its entirety but not immediately. B) immediately but not necessarily entirely. C) immediately and in its entirety. D) at the opening of trading.

C Explanation FOK orders must be executed immediately in their entirety or they are canceled.

For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as A) an all-or-none commitment. B) a standby underwriting commitment. C) a firm commitment. D) a best efforts underwriting commitment.

C Explanation For new municipal bond issues, underwriters must submit bids for the entire bond offering—a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities, and an all-or-none commitment is a type of best efforts commitment.

Achieving a Better Life Experience (ABLE) accounts are tax-advantaged savings accounts for individuals with disabilities and their families. The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age A) 18. B) 21. C) 26. D) 30.

C Explanation One need not be under the age of 26 to be eligible to establish an ABLE account. One could be over the age of 26, but as long as the onset of the disability occurred before age 26, the person is eligible to establish an ABLE account.

In a rising interest rate environment, which of the following risks associated with mortgage-backed securities such as a collateralized mortgage obligation (CMO) is of least consequence to a potential investor? A) Extension risk B) Credit risk C) Prepayment risk D) Interest rate risk

C Explanation Prepayment risk is the risk that mortgage holders will refinance or repay their mortgages early as a result of falling interest rates. Therefore, in a rising interest rate environment, it would be less of a concern for a CMO investor. Extension risk is the risk that mortgage payments will be missed or slower than anticipated in a faltering economic environment. Credit and interest rate risks are always of concern with CMOs.

All the following retail communications must be prefiled with FINRA except A) retail communications concerning investment companies with custom ratings. B) retail communications concerning options without previously providing an ODD. C) retail communications concerning public DPPs. D) retail communications concerning the member firm's opening for business last month.

C Explanation Retail communications concerning public DPPs do not need to be prefiled. Retail communications for all new member firms, concerning investment companies with custom ratings or options without previously providing an ODD must be prefiled with FINRA. New member firms, defined as being in their first year of business, must file retail communications with FINRA 10 business days in advance of use.

Which of the following statements regarding savings incentive match plans for employees (SIMPLEs) is not true? A) Employee contributions are pretax. B) SIMPLEs are retirement plans for small businesses with100 or fewer employees. C) Employers cannot make matching contributions for employees. D) Catch-up contributions for those age 50 and older are permitted.

C Explanation SIMPLEs are retirement plans for businesses with no more than 100 employees that have no other retirement plan in place. The employee makes pretax contributions into a SIMPLE up to an annual contribution limit, which can include catch-up contributions for those age 50 and older. The employer is permitted to make matching contributions for employees.

Due to the excellent skill of the investment management team, the XYZ Growth Fund has realized significant long-term capital gains in its portfolio. The fund may distribute these gains to its shareholders A) quarterly along with the dividend payment B) as often as semiannually C) no more than once every 12 months D) as often as biennially

C Explanation Section 19 of the Investment Company Act of 1940 states that "it shall be unlawful for any registered investment company to distribute long-term capital gains more often than once every twelve months." Dividends do not have any restriction on frequency.

A Treasury bond is quoted in The Wall Street Journal as follows: Bid 100:15 Asked 100:17 Bid Chg. -1 Yield 7.9 From this information, you know that the nominal yield is A) 7.89%. B) less than 7.90%. C) greater than 7.90%. D) 7.90%.

C Explanation The Bid and Asked prices show that the Treasury bond is being quoted at a premium (above par), with a yield to maturity of 7.9%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.

The Municipal Securities Rulemaking Board (MSRB) is authorized to adopt rules concerning all of the following except A) the form and content of price quotations. B) the sale of new issues to related portfolios. C) the information to be provided by municipal issuers. D) the regulation of municipal securities advertising.

C Explanation The MSRB does not regulate issuers. Rather, it regulates the underwriting of municipal securities and subsequent secondary market trading. Disclosure requirements for issuers are mandated by the SEC.

Regulation T requires payment from a customer in a margin account A) within three business days. B) before purchase. C) within four business days. D) business 10 days.

C Explanation The Regulation T payment date is the fourth business day from the trade date. Regular way settlement, according to FINRA rules, is two business days from the trade date, and Regulation T allows for two additional business days after settlement date—four business days total.

An investor has an established margin account with a current market value of $13,500 and a debit balance of $4,775, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $8,725 B) $4,775 C) $1,975 D) $13,500

C Explanation The Regulation T requirement is 50% of the current market value of $13,500 ($6,750). Equity is equal to the current market value of $13,500 minus the debit balance of $4,775 ($8,725). Excess equity is calculated by subtracting the Regulation T requirement of $6,750 from the equity of $8,725 ($1,975).

A company very concerned about liquidity would want A) high P/E ratio. B) low P/E ratio. C) high current ratio. D) low current ratio.

C Explanation The current ratio is a measure of liquidity. It is the current assets divided by the current liabilities. The higher the ratio, the more liquid the company. This has no bearing on whether high or low P/E ratios are desirable.

If an M&N 1 corporate bond issued at par with a 6% coupon is later purchased in August for 97 plus accrued interest of $16, how much taxable interest must the investor report for the year? A) $30 B) $60 C) $14 D) $16

C Explanation The purchaser of a bond pays the seller the interest that has accrued since the last interest payment date. A purchaser in August will pay the interest that has accrued since May 1. Then, on November 1, the investor will receive the entire six months of interest. We are told that the investor paid $16 in accrued interest. That is income to the seller. Then, when the November payment of $30 (6% coupon is $30 semiannually) is made, the investor must report the amount over the accrued interest paid out as income. In our question, that is $30 minus $16 = $14.

It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. Under SEC rules, if the terms of the offer are changed, the revised offer must remain open for at least A) 20 business days from the commencement and 20 business days from the date the terms are changed. B) 10 business days from the commencement and 20 business days from the date the terms are changed. C) 20 business days from the commencement and 10 business days from the date the terms are changed. D) 10 business days from the commencement and 10 business days from the date the terms are changed.

C Explanation The rule is that the offer must remain open for at least 20 business days from the time the tender offer begins, and if there should be a change to the terms of the offer, if must be held open for 10 business days from the change. This is more a principal level question and unlikely to be on your exam, but we want to be sure you are exposed to the information.

In a margin account, your customer's long market value is $22,000. The debit balance is $8,000. If the customer enters an order to purchase $12,000 of stock, the margin call will be A) $0.00. B) $6,000. C) $3,000. D) $4,000.

C Explanation We determine the excess equity in this account by comparing the equity in the account with the Reg. T requirement. With a LMV of $22,000, Reg. T requires 50% equity, or $11,000. This account has equity of $14,000 ($22,000 minus the $8,000 debit balance). That is how we note the excess equity is $3,000 ($14,000 minus $11,000). Unless stated otherwise, that $3,000 will be journaled to SMA. The margin required on a new $12,000 purchase is $6,000, so this customer would need to deposit an additional $3,000 on top of the SMA. Alternatively, after this purchase, the LMV will be $34,000. Regulation T would require 50% of that, or $17,000. The account already has $14,000 of equity, so only $3,000 additional would be required. Yet another way is that $3,000 of SMA has a buying power of $6,000 of stock. The remaining $6,000 from the $12,000 purchase would require a cash deposit of $3,000.

A customer's long margin account has a market value of $60,000, a debit balance of $35,000, and special memorandum account (SMA) of $5,000. To eliminate the restriction, the customer can deposit $5,000 in cash. borrow $5,000 from the account utilizing the SMA. deposit $5,000 in fully paid securities. sell $10,000 of securities in the account. A) I and II B) III and IV C) I and IV D) I and III

C Explanation When equity is between the initial (50% of long market value [LMV]) requirement and the maintenance requirement (25% of LMV), an account is described as restricted. This account has $25,000 of equity, which is $5,000 below the initial requirement. To bring the equity to 50% of the market value, the customer may deposit $5,000 in cash or sell $10,000 of securities. If $10,000 of securities are sold, LMV becomes $50,000, the debit falls to $25,000, and equity is at $25,000—exactly 50% of the LMV. However, if a customer is using securities to eliminate a restriction (either by selling or depositing fully paid securities), the customer must sell or deposit an amount equal to twice the restriction.

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer gifts the securities to his son. Which of the following statements are true? For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000. A) II and IV B) I and III C) II and III D) I and IV

C Explanation When making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.

You are analyzing a company's financial statements, including the balance sheet. You are specifically focusing on the company's liquidity, using the formula current assets minus current liabilities. What liquidity calculation are you using? A) Current ratio B) Acid-test ratio C) Working capital D) Quick asset ratio

C Explanation You are calculating working capital (current assets − current liabilities). There are three liquidity calculations using the balance sheet. They are as follows: Working capital = current assets − current liabilities Current ratio = current assets / current liabilities Quick asset ratio (acid-test ratio) = (current assets − inventory) / current liabilities

A married couple owns Class A shares of the KAPCO Balanced Fund as follows: The older of the pair has an individual account with a current value of $10,000. The other individual's account is valued at $20,000, and they have a JTWROS account valued at $12,000. KAPCO offers rights of accumulation and has breakpoints at $25,000 (4%), $50,000 (3%), and $100,000 (2%). How much will the sales charge be if they invest an additional $15,000 into the JTWROS account? A) $600 B) $530 C) $300 D) $450

D We combine all of the accounts under rights of accumulation. Let's chart them: Older:$10,000 Younger:$20,000 Joint: $12,000 Total value: $42,000 Add new purchase:$15,000 New account total:$57,000 Rights of accumulation means that we add a new purchase to the value of the existing accounts. If that total reaches or exceeds the breakpoint, the entire purchase is made with the lower sales charge. The question tells us that the next breakpoint is at $50,000. Once that dollar amount is reached (or exceeded), the sales charge on all new purchases is reduced from 4% to 3%. In this question, adding the $15,000 purchase to the existing $42,000 takes the customer's account well past the $50,000 breakpoint. That means the entire new purchase is charged 3%. Therefore, $15,000 times 3% equals $450 in sales charge.

A mutual fund that charges 12b-1 fees may use the money to cover all of the following except A) printing costs. B) promotion costs. C) sales fees. D) management fees.

D Explanation 12b-1 fees may not be used to pay for the portfolio manager's fees, only for sales promotions and fees and other activities relating to the distribution of the fund's shares.

The SEC has just declared the registration of XYZ Corporation's IPO effective for sale. If XYZ wanted to run a tombstone ad, it would not include A) the name of the lead underwriter. B) the public offering price. C) the type of security. D) the dated date.

D Explanation A tombstone ad for a stock offering, published on or after the effective date, will always include the effective date. It will not include the dated date. That is only relevant to bonds and represents the date from which interest begins to accrue. How did we know this was not a debt issue? An IPO can only be of stock. That is, a company can only "go public" once and that is with the issuance of stock.

Which of the following accounts would a collateralized mortgage obligation (CMO) Z-tranche be best suited for? A) A joint account with a nonworking spouse B) An IRA account for a middle aged client C) A custodial account set up under the Uniform Transfer to Minors Act D) A professionally managed hedge fund specializing in real estate portfolio securities

D Explanation A zero-tranche (Z-tranche) CMO is considered to be among the most volatile CMO tranches because they receive no payments until all preceding tranches of the CMO are retired. Generally, CMO tranches are not suitable for smaller or unsophisticated investors, which is why customers are required to sign a suitability statement before purchasing any CMO tranche. Of the answer choices given, the best suited account would be the one that is professionally managed and already specializing in real estate investments.

An investor sold a corporate bond with a 5% coupon at a net price of 101. The bond had accrued interest for 45 days. Which of the following statements regarding the confirmation of this trade is correct? A) The confirmation will indicate the current yield based on the price of the bond. B) The total amount received on the seller's confirmation will appear as $1,003.75. C) The total amount due on the purchaser's confirmation will appear as $1,035.00. D) The total amount due on the purchaser's confirmation will appear as $1,016.25.

D Explanation Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 5% coupon, the bond pays $25 every 6 months. One-quarter of that is $6.25, so the total proceeds to the seller (and cost to the purchaser) is the $1,010 plus the $6.25, or $1016.25. One of the details included on a bond confirmation is the yield to maturity based on the price of the bond, but not the current yield.

Under the Code of Arbitration Procedure, all monetary awards must be paid within how many days of the decision date? A) 60 B) 45 C) 15 D) 30

D Explanation All monetary awards in a Code of Arbitration Procedure decision must be paid within 30 days of the decision date. If payment is not made, the amount of the award begins to accrue interest as of the decision date.

Cutting Edge Securities is the managing underwriter for a new issue of 1 million shares of ABC common. While the underwriter has agreed to sell as much stock as possible in the market, ABC will cancel the offering if any portion of the stock remains unsold. This arrangement is known as what type of underwriting? A) Standby B) Mini-max C) Best efforts D) All or none

D Explanation All-or-none underwritings require the underwriter to either sell the entire issue of stock or cancel the offering completely.

Under one of the provisions allowing a company to qualify for an intrastate exemption under Rule 147, what percentage of an issuer's gross business revenues must be derived from sales within the company's home state? A) 90% B) 100% C) 70% D) 80%

D Explanation Any one of the three 80% test provisions can be met to qualify for a Rule 147 intrastate exemption. One of the provisions states that at least 80% of an issuer's gross revenue must be derived from the company's home state. In addition, there is a fourth test that may be used: a majority of the issuer's employees are based in the state.

In analyzing the ability of a company to meet scheduled interest payments A) net worth found on the firm's balance sheet. B) cash flow from financing activities. C) price-to-earnings (P/E) ratio. D) earnings before interest and taxes (EBIT) as calculated from the firm's income statement.

D Explanation EBIT, calculated from the firm's income statement, is a metric that measures the ability of a company to meet scheduled interest payments. Cash flow from financing activities reflects money raised by the company by issuing debt and equity securities. Net worth is useful for determining payback of principal but not semiannual interest.

A customer buys a real estate limited partnership interest by contributing $20,000 and signing a nonrecourse note for $50,000. The customer's beginning basis is A) $20,000. B) $30,000. C) $50,000. D) $70,000.

D Explanation Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership.

A new margin customer buys $12,000 CMV of ABC and sells short $10,000 CMV of XYZ. With Regulation T at 50%, what is the amount of his initial call? A) $1,000 B) $5,000 C) $6,000 D) $11,000

D Explanation In a mixed-margin account, the investor should figure the transactions as separate. The investor needs $6,000 for his purchase and $5,000 for his short sale.

A member of a $5 million Eastern account that has a $500,000 participation fails to sell $200,000 of bonds. At the close of the offering, if $1 million worth of bonds remains unsold, the member must take down A) $200,000. B) $300,000. C) $500,000. D) $100,000.

D Explanation In an undivided (Eastern) syndicate, each member is responsible for its portion of the offering regardless of how many bonds it has already placed. If the member was liable for 10% of the issue's original dollar value, it is committed to take down 10% of any bonds remaining unsold (10% of $1 million equals $100,000).

A municipal A & O bond is issued on October 1, 2010, with a 10-year stated maturity. If a trade in this bond settles on April 1, 2020, how many days' worth of accrued interest will be added to the price of the bond? A) 90 B) 1 C) 180 D) 0

D Explanation Interest on a municipal bond begins to accrue on the previous payment date and ends the day before settlement date. Always assume a bond pays interest on the first of the month unless told differently. In this case, interest is payable on April 1 and October 1 each year. Whenever a bond trade settles on a payment date, it trades flat (without accrued interest).

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement? A) 5 B) 15 C) 20 D) 10

D Explanation Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.

An investor purchases investment company shares paying an ask price that is a 5% premium to the company's net asset value (NAV). Two years later, the investor liquidates the position at a bid price that is 10% below the NAV. This investment was in A) a face amount certificate (FAC) B) a unit investment trust (UIT) C) an open-end investment company D) a closed-end investment company

D Explanation Pricing of closed-end investment company shares is based on supply and demand. That is because they trade in the secondary markets. Therefore, the investor's buying price and selling price could be a premium or discount to the net asset value per share (NAV). All the other investments here are redeemable at the NAV. As a consequence, the ask price would not be a discount to the NAV nor could the redemption price (the bid) be at a discount to the net asset value.

Regarding Regulation D (private placement) offerings, which of the following statements is true? A) The SEC does not require issuers to file. B) Purchasers need not be provided or have access to offering information normally provided by a prospectus. C) The amount of capital that can be raised through a private placement is limited. D) Registration with the SEC is not required.

D Explanation Regulation D offerings are exempt transactions, and therefore, no SEC registration is required. However, issuers must still file information with the SEC on Form D regarding the issue. This filing will contain all of the information a potential investor might want to know—similar to the information contained on a prospectus. There is no limit to the amount of capital that can be raised through a Regulation D private placement transaction.

In a new margin account, a customer sells short 1,000 shares of ABC at $15 per share and makes the required Regulation T deposit. If the stock drops to $12 per share, what is the equity in the account? A) $12,000 B) $18,000 C) $15,000 D) $10,500

D Explanation Remember, the equity in a short margin account is the credit balance minus the short market value (SMV). In this case, the credit balance is the total of the sale price plus the 50% Regulation T deposit. That is $15,000 plus $7,500, or $22,500. With the SMV down to $12,000, the equity becomes $22,500 minus $12,000, or $10,500. Alternatively, you can start with the initial equity of $7,500 (the 50% Regulation T deposit) and add the $3,000 gain from the drop in price of the short stock. You get the same $10,500 equity.

Under SEC rules, soft dollars may be used to pay for all of the following except A) research reports. B) computer software. C) seminar registration fees. D) computer hardware.

D Explanation Soft dollars is a term used to describe payments made by broker-dealers to investment advisers in return for research and other eligible services. The difference between soft dollars and hard dollars (cash) is that instead of paying a broker-dealer with cash, the fund will pay with brokerage business. Soft dollars may be used to pay for research, software, services for the benefit of clients, and seminar registration fees. Not permitted by the SEC are computer hardware, office equipment, and reimbursement of travel expenses to attend seminars.

A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest its total assets, such that A) no more than 5% of its assets in any one company. B) its portfolio consists of at least 15 different stock holdings C) it holds no more than 10% of the voting stock of any one company. D) at least 75% of its assets meet stated diversification requirements.

D Explanation The Investment Company Act of 1940 requires that a minimum of 75% of the assets of the diversified company meet stated requirements. Those requirements include the following: At least 75% of the fund's total assets must be invested in cash and securities that are not issued by the fund or any of its affiliates. Within that 75%, no more than 5% of the fund's total assets can be in a single stock. Within that 75%, no holding can represent more than 10% of the voting control of a single company. Please note that there are no restrictions on the nondiversified 25%. It can all be in a single stock. That means 30% of the fund's total assets can be in one company. Likewise, that 25% can be used to purchase a controlling interest in companies.

Which of the following responsibilities did the Municipal Securities Rulemaking Board (MSRB) receive through the Securities Acts Amendments of 1975? Regulation of municipal issuers Establishment of recordkeeping requirements for municipal broker-dealers Enforcement of any municipal regulations it adopts Creation of regulations for participants in the municipal securities secondary market A) II and III B) I and IV C) I and III D) II and IV

D Explanation The MSRB creates rules for municipal trading and issues interpretations of its rules. It does not regulate issuers or have any enforcement capability. For broker-dealers, MSRB rules are enforced by FINRA.

One of your customers purchased a municipal bond at a basis of 3.35%. Several weeks later, the bond's basis is now 3.21%. Which of the following statements is true? The bond's yield to maturity has fallen by 14 basis points The bond's price has fallen by 14 basis points Market interest rates have likely decreased The bond's rating has likely fallen A) II and IV B) II and III C) I and IV D) I and III

D Explanation The basis quote is the bond's yield to maturity. The difference between a basis of 3.35% and a basis of 3.21% is 14 basis points. What is it that causes a bond's yield to fall? It is the inverse relationship between interest rates and bond prices. The price has gone up because interest rates have fallen.

The call premium on a municipal bond trading above par is best described as the difference between A) the market price and the call price. B) the amortized premium and the annual interest. C) the market price and par. D) par and the call price.

D Explanation The call premium represents the difference between the call price and par. The farther away a call date, the lower the call premium.

Assume that a customer has an established margin account with no special memorandum account, and the account is restricted. With the Regulation T requirement at 50%, the purchase of $10,000 worth of stock would generate a Regulation T call of A) $25,000. B) $2,500. C) $20,000. D) $5,000.

D Explanation The customer must deposit the full margin requirement of the purchase (50% of $10,000), whether the account is restricted or not; therefore, the call would be for $5,000.

The dividend payout ratio of common stock is found by dividing the annual dividend per share by A) the capitalization per share. B) the book value. C) the market price. D) the earnings per share.

D Explanation The key to the question is ratio, which in this case is the relationship between dividends per share and their source of earnings per share.

A client enters a buy stop order for 100 shares of XYZ at 40. Trades then occur at 38, 39, 39.90, 40.05, 40.10, and 39.78. What is the likely price the client paid for the stock? A) $40.05 B) $39.00 C) $39.78 D) $40.10

D Explanation The order is triggered as soon as the price gets to 40 or higher. That would be the trade at 40.05. A typical use of a buy stop order is protecting a short stock position. Because the short stock position has unlimited potential loss, the short seller can gain protection by entering a buy stop order. That order is entered at a price above the current market (the short seller is hoping the price will fall), but if the price rises, the stop will be triggered. At that time, a market order is entered and the client pays the next price (which could be more or less than 40). In this case, the next price is 40.10 and that is the likely price per share paid by the client.

An underwriter should consider all of the following factors when determining the spread on a new issue except A) the amount bid on the issue. B) the type and size of the issue. C) the prevailing interest rates in the marketplace. D) the amount of the good faith check.

D Explanation The spread is the difference between the reoffering price and the amount bid on an issue in competitive bidding. Municipal Securities Rulemaking Board rules state that an underwriter is entitled to make a profit in an underwriting. Therefore, the underwriter can take into account factors such as market conditions, the type and size of the issue, the dollar volume of the transaction, and any extraordinary costs incurred by the syndicate. The amount of the good faith check deposited before bidding on the issue has no relevance to the bid or to the reoffering prices.

If you heard a portfolio manager bragging that the portfolio generated excess returns, it means that there was A) a positive beta. B) a return in excess of the risk-free rate. C) dividend payout greater than expected. D) a positive alpha.

D Explanation The term "excess returns" is used to describe when an investment has a positive alpha. It means that this manager's portfolio generated returns in excess of what would have been the expected rate of return. A positive alpha means that the manager is doing a good job. Beta measures the extent to which a portfolio is more or less volatile than a stated benchmark. It can be positive or negative, but does not reflect returns. In general terms, this portfolio would have a return in excess of the risk-free rate, but that is not nearly specific enough to answer the question.

EC Regulation SHO mandates a locate requirement for short sales that is applicable to corporate bonds. NYSE issues. Nasdaq securities. municipal bonds. A) II and IV B) I and III C) I and IV D) II and III

D Explanation This regulation mandates a locate requirement: before the short sale of any equity security, firms must locate the securities for borrowing to ensure that delivery will be made on settlement date.

If a member firm wishes to have a clearly erroneous trade reviewed, it must notify A) the Uniform Practice Committee. B) the contra party to the trade. C) the National Adjudicatory Council (NAC). D) Nasdaq Market Operations.

D Explanation To have a clearly erroneous trade reviewed, a member must notify Nasdaq Market Operations within 30 minutes of the trade. The NAC is where appeals of disciplinary hearings are made.

A risk associated with investing in most bonds is reinvestment risk. What type of bond can an investor buy that does not expose the investor to reinvestment risk of interest? A) Premium bonds B) Par bonds C) Discount bonds D) Zero-coupon bonds

D Explanation Zero-coupon bonds do not expose investors to reinvestment risk of interest. The risk is that as periodic income is received from an investment, such as bond interest, the investor cannot find another investment to reinvest into offering the same rate of return for the same level of risk. Because zero-coupon bonds do not pay periodic interest, (the return of the face value at maturity is the income), there is nothing to reinvest. The fact that a bond is selling at par, premium, or discount does not remove the reinvestment risk.

Find the working capital (millions) Current Assets = 16 + 110+ 70 Fixed Assets = 292 + 64 Current liabilities = 52 + 12 + 7 +0.5 Long-term liabilities = 61 + 73 A) $54,500,000 B) $212,000,000 C) $216,500,000 D) $124,500.000

Explanation To calculate the working capital, we subtract the current liabilities from the current assets. In this case, current assets total $196,000,000 and the sum of the current liabilities is $71,500,000. The difference between those two numbers is $124,500,000