Review Questions

Which of the following is available to purchasers of variable annuity contracts? A. The guarantee of a minimum growth rate in the separate account if a higher annual fee is paid for this rider B. The guarantee of payments for life if the purchaser chooses to take a lump sum distribution at retirement C. Tax deductibility of contributions made to the contract if distributions are not taken until age 59 1/2 or later D. Payments covering the lives of both a husband and wife if a Life Annuity option is chosen upon annuitization

The best answer is A. A "GMIB" - Guaranteed Minimum Income Benefit - is a rider that can be purchased in a variable annuity contract. It guarantees that the separate account will be annuitized based on a minimum annual growth rate (say 4% per year), regardless of how the investments in the separate account actually perform. This is a nice feature, but it comes at a cost of around 1% a year in additional fees. At retirement age (59 1/2 or later), distributions can be taken from the separate account without a 10% penalty tax (but tax on the build-up in the account must be paid). The customer can either take a lump sum distribution or can annuitize the separate account. With a lump sum distribution, the customer gets to deplete the account value and can do this in installments. The risk is that the customer depletes the entire account with many years left to live. This leaves the customer without an income stream in later life. If the customer annuitizes, he or she gets payments for life, but loses any value in the account if he or she dies early. A Life Annuity option only pays for 1 person's life, so if it were a Life Annuity on a husband, and he dies, the annuity stops and the surviving spouse gets no more payments. To cover both lives, a Joint and Last Survivor Annuity option must be chosen. Finally, annuity contributions are not tax deductible (these are non-qualified annuities). When distributions are taken after age 59 1/2, the portion of the distribution representing the tax-deferred build up in the separate account is taxable and the portion of any payment attributable to principal is a tax-free return of capital (since there was no deduction for the contribution amount).

Which of the following best describes a stock that pays out most of its earnings as dividends? A. Income stock B. Special situations stock C. Defensive stock D. Blue Chip stock

The best answer is A. Blue Chip stocks are large capitalization companies like General Electric that have a long track record (GE has been around for over 100 years) and P/E (Price/Earnings) multiples that are similar to the market as a whole. Their price movements tend to track the overall market. (For trivia freaks, the name "blue chip" comes from the most valuable poker chip.) In contrast, an income stock is one that pays a high dividend rate. These are often slow-growth companies that make up for their lack of growth in stock price by paying a higher dividend rate. Utilities are a "classic" income stock. A defensive stock is one whose price stays fairly stable, regardless of the price movements of the general market. Typical defensive stocks are food companies and health care companies. A special situations stock is a company that is the target of a merger or takeover or a company that is in bankruptcy and which stockholders hope will be able to turn itself around. These are companies in "special situations." If the turnaround or takeover is successful, the stock price could rise steeply.

All of the following statements are true about margin on securities EXCEPT: A. the FRB sets margins for exempt securities B. the FRB sets margins for non-exempt securities C. FINRA sets margins for exempt securities D. FINRA sets margins for non-exempt securities

The best answer is A. The Federal Reserve Board (FRB) only has the power to set margins for non-exempt issues. It has no power to set margins for exempt issues under the Securities Exchange Act of 1934. However, FINRA sets minimum margins for both exempt and non-exempt issues. For example, there is no Regulation T margin for corporate bond positions (a non-exempt security), but FINRA sets the minimum at the greater of 7% of face or 20% of market value. For example, there is no Regulation T margin for municipal bond positions (an exempt security), but FINRA sets the minimum at the greater of 7% of face or 15% of market value.

To open an account for a limited partnership, the required signatures are those of the: A. general partner(s) only B. limited partner(s) only C. both the general and limited partner(s) D. a majority of the general and limited partners

The best answer is A. A limited partnership consists of a least 1 limited partner and at least 1 general partner (there can be multiples of each). The limited partners are the passive investors. The general partner(s) manage the partnership and can contractually bind the partnership. Thus, the signature of the general partner(s) only is required to open an account for a limited partnership.

A tombstone announcement would show which of the following? I Gross proceeds of a new issue offering to the issuer II Net proceeds of the new issue offering to the issuer III Syndicate member names IV Syndicate member participations A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. A tombstone announcement shows the gross proceeds of a new issue offering. It does not show the net amount received by the issuer (that is, the gross proceeds reduced by the underwriter's spread). It does not show the syndicate member participations, though it does show syndicate member names. It does not indicate whether the syndicate account is Eastern or Western. These items are found in the syndicate agreement.

Which of the following investment portfolios is LEAST liquid? A. An aggressive growth fund B. A U.S. Government securities fund C. A money market fund D. An income fund

The best answer is A. Aggressive growth stocks are usually too small to be NYSE listed; they might be found on NASDAQ, which has lower listing standards than the NYSE; or on the OTCBB - the Over-the-Counter Bulletin Board - which has no listing standards. The OTCBB is a much less liquid market than NASDAQ; and NASDAQ's liquidity is not as good as the NYSE's. Thus, aggressive growth stocks would be the least liquid securities of the choices offered. Government securities and money market securities are actively traded and are extremely liquid. Income funds are composed of high yielding preferred stocks and bonds. These are more liquid than aggressive growth stocks, though not as liquid as NYSE listed issues.

Banker's Acceptances are: I Money Market Instruments II Capital Market Instruments III Exempt Securities IV Non-Exempt Securities A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Bankers Acceptances are a money market instrument used to finance imports and exports. They are an exempt security under the Securities Act of 1933 and can be sold without a prospectus.

Under ERISA provisions, a pension fund manager that wishes to write naked call options: A. can only do so if explicitly allowed in the plan document B. can do so if the plan document allows for options transactions C. can do so without restriction D. is prohibited under ERISA requirements

The best answer is A. ERISA does not specify securities strategies that are prohibited. It does state that all investments must meet both "fiduciary responsibility" tests and "prudent man" rule tests. Selling naked call options exposes the writer to unlimited risk, but is not explicitly prohibited. If the plan document specifically authorizes such a strategy, it would be permitted. However, the plan trustee bears unlimited liability, if this action is deemed to be imprudent.

"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.

In 2018, a self-employed individual has an adjusted gross income of $100,000 per year. This person has no other retirement plan and contributes $5,500 to an Individual Retirement Account. Which statement is TRUE? A. The contribution is fully tax deductible B. The contribution is partially tax deductible C. The contribution is not tax deductible D. The contribution is prohibited because income limitations are exceeded

The best answer is A. If a person is not covered by another retirement plan, contributions to an IRA are tax deductible, without any income limitation. If the person is covered by another plan, as that person's income rises, the tax deduction for the IRA contribution phases out.

Upon exercise of a Japanese Yen World Currency call option, the holder will: A. receive U.S. Dollars B. deliver U.S. Dollars C. receive Japanese Yen D. deliver Japanese Yen

The best answer is A. If there is an exercise of a foreign currency option, settlement is the same as for exercise of index options. If a PHLX World Currency option is exercised, the writer must pay the holder the "in the money" amount the next business day. There is no delivery of the foreign currency upon exercise.

Customer Name: Jack and Jill Customer Ages: 62 and 57 Marital Status: Married - 39 years Dependents: None Occupations: Jack - Manufacturing Manager - Dyno-Mite Corp. Jill - Marketing Consultant - Self Employed Household Income: $140,000 Joint Income ($100,000 for Jack and $40,000 for Jill) Net Worth: $1,100,000 (excluding residence) Own Home: Yes $420,000 Value, No Mortgage Investment Objective: Additional Income Risk Tolerance: Moderate Investment Time Horizon: 25 years Investment Experience: 30 years Current Portfolio Composition: Cash in Bank: $30,000 Growth Fund: $50,000 Variable Annuity: $50,000 Growth Stocks: $150,000 Retirement Accounts: Jack's IRA: $100,000 invested in growth stocks Jack's 401(k): $600,000 invested in Dyno-Mite Corp. stock Jack's 529 Plan for Grandchild: $20,000 in growth mutual fund As the representative for this customer, your main concern would be that: A. Jack has too much of his portfolio concentrated in the common stock of a single company - Dyno-Mite Corporation, which happens to be the customer's employer B. Jill has not set up a retirement account based upon her income C. Jack has too much of his portfolio invested in growth stocks that have a higher risk level than Jack's stated tolerance D. Jack is maximizing his annual permitted contributions to his IRA and 401(k) accounts, since he is nearing retirement age

The best answer is A. Jack's portfolio is overloaded with growth investments, which does not fit his current objective of receiving income. However, $600,000 of Jack's $1,000,000 portfolio value is in a single stock - Dyno-Mite Corporation that is also Jack's employer. It is quite noble to own your own company's stock; but it is also pretty reckless to stake your future on that single company's fortunes. Jack should be informed that he is pursuing a very risky strategy with such a large Dyno-Mite holding and may want to liquidate a portion of that holding and reallocate it to income yielding investments to better meet his investment objective.

Selling a put against a stock position sold short is a suitable strategy when the market is expected to: A. remain stable B. rise sharply C. fall sharply D. fluctuate sharply

The best answer is A. Selling stock short alone is a bearish position. Selling a put alone is neutral or bullish strategy. Selling a put against a short stock position is a neutral strategy (as is any income strategy). If the stock is sold short and a put is sold with the same strike price, then if the market stays the same, the put expires "at the money" and the premium collected is retained. If the stock falls, the short put is exercised, obligating the customer to buy the stock at the same price at which it was sold. In this case, only the premium is earned. If the put had not been sold, then the customer would have had an increasing gain on the short stock position as the market fell - so he does not make as much in a falling market. On the other hand, if the market rises, the short put expires "out the money" and the customer is exposed to unlimited upside risk on the short stock position that remains.

Under the "penny stock rule," an established customer that is exempt from the rule is defined as a person who has effected a securities transaction or made a deposit of funds or securities with that broker-dealer more than: A. 1 year previously B. 2 years previously C. 3 years previously D. 5 years previously

The best answer is A. Suitability statements are not required under the "penny stock rule" for so-called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer

Which of the following is a promise by the issuer to not sell the facility, nor to allow liens to be placed on the facility? A. No sale covenant B. Additional bonds covenant C. Segregation of funds covenant D. Books and records covenant

The best answer is A. The no sale covenant is the promise by the issuer not to sell the facility or to allow liens to be placed on the facility (i.e. obtain a mortgage which would jeopardize the bondholders' position in a liquidation).

Regular way trades of U.S. Government bonds settle: I in Fed Funds II in Clearing House Funds III next business day IV in 2 business days A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Trades of U.S. Government bonds settle in Fed Funds. Regular way settlement of government securities trades takes place the business day following trade date.

The expense ratio of a mutual fund is a measure of: A. profitability B. operating efficiency C. liquidity D. stability

The best answer is B. The expense ratio is: fund operating expenses/total net assets The ratio really represents that portion of the fund's return on net assets that is eaten up by expenses. The lower the ratio, the greater the residual income for investors making the fund more efficient.

Under NYSE rules, a company moving its listing from another market must meet which requirements? I 2,200 shareholders II 4,400 shareholders III Average monthly trading volume of 100,000 shares IV Average monthly trading volume of 1,000,000 shares A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Under NYSE rules, the numerical standards for a company wishing to move its listing from another market include 2,200 or more shareholders, with an average monthly trading volume of 100,000 shares for the past 6 months. Also, there must be a national interest in trading the stock and the company must agree to distribute proxies to be listed.

Regarding an investor's basis in a limited partnership investment which of the following statements are TRUE? I Recourse financing is included in the tax basis II Non-recourse financing is included in the tax basis III The investor is "at risk" for any recourse financing IV The investor is "at risk" for any non-recourse financing A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Under the "at risk rule," only amounts for which an investor is personally at risk can be included in the basis. An investor is personally liable and "at risk" for any recourse financing. (The lender has recourse to the investor personally to repay the loan). Non-recourse financing is not included in the basis, since the investor is not personally "at risk" for this (with one major exception, non-recourse financing (e.g., a mortgage) is allowed to be included in the basis for real estate investments).

Under the "market expectations" theory of yield curves, when investors expect interest rates to rise in the future, the yield curve should be: A. ascending B. descending C. inverted D. flat

The best answer is A. Under the "market expectations" theory of yield curves, when investors expect interest rates to rise in the future, the yield curve will have an upward slope. Conversely, when investors expect interest rates to fall in the future, the yield curve will have a downward slope. If investors are uncertain as to the future direction of market interest rates, then the yield curve will be flat.

A variable annuity is a(n): I security regulated under the Investment Company Act of 1940 II insurance product that is not regulated under the Investment Company Act of 1940 III security that must be sold with a prospectus IV insurance product that has no prospectus requirement A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. Because these are structured as participating unit trusts, variable annuities are regulated under the Investment Company Act of 1940.

When monies are deposited into a sinking fund to retire municipal debt under mandatory call provisions found in the bond contract, the issuer: I calls bonds by random selection at preset dates and at preset prices II tenders for the bonds at preset dates and at preset prices III is permitted to retire outstanding bonds by making purchases of that issue in the open market IV is prohibited from retiring outstanding bonds by making purchases of that issue in the open market Correct Answer A. I and III Incorrect Answer B. I and IV C. II and III D. II and IV

The best answer is A. When monies are deposited into a sinking fund to retire debt, the issuer has the choice of either calling in bonds at preset dates or buying the bonds in the open market. (The issuer will do whatever is cheaper). The specific bonds to be called are chosen by random lot.

A client wants to transfer her account from one brokerage firm to another brokerage firm. How would she initiate the process? A. The customer must complete and sign an ACATS form at the delivering firm B. The customer must start the transfer process by completing and signing a TIF at the receiving firm C. The customer must initiate the transfer process by accessing the BrokerCheck website D. The customer must initiate the transfer process by using the DTCC portal

The best answer is B. FINRA attempts to make it as seamless as possible for a customer to transfer his or her account to another broker-dealer. The electronic system that processes the transfer is "ACATS" - the Automated Customer Account Transfer System - run by Depository Trust and Clearing Corporation (which actually holds all customer securities positions for broker-dealer firms). The scenario works likes this: A customer comes into you firm saying she no longer wants to work with her old broker and wants to transfer her account to you. No problem! You ask her for a copy of her most recent account statement from her old broker and enter those positions onto a "TIF" (Transfer Initiation Form), which the customer signs and then your firm guarantees the signature. This is sent to the carrying firm immediately. Upon receipt, the carrying firm must freeze the account and then the carrying firm has 1 business day to validate the positions and another 3 business days to physically complete the transfer.

A customer makes the following trades when the market price of ABC is $59: Sell 1 ABC Jan 50 Put @ $ 4 Buy 1 ABC Jan 65 Put @ $11 The maximum potential gain is: A. $700 B. $800 C. $1,100 D. $1,500

The best answer is B. The customer has created a long put spread resulting in a $700 debit. This position is profitable if the market should fall (bearish). The positions set up as (note that the question did not "stack" the positions correctly - this is done below): Buy 1 ABC Jan 65 Put @ $11 Sell 1 ABC Jan 50 Put @ $ 4 $ 7 Debit If the market should fall below $50, both contracts are "in the money" and are exercised. The customer sells the stock at $65 and must purchase the stock at $50. Here there is a 15 point, or $1,500 gain. But, he also paid out $700 in premiums (or the debit), so his maximum potential gain is $800.

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

The best answer is B. The customer has created a short call spread, which is profitable if the market price stays the same or falls. Sell 1 ABC Jan 60 Call @ $5 Buy 1 ABC Jan 70 Call @ $1 $4 Credit If the market rises above $70, both calls are exercised, obligating the customer to deliver stock at $60 that can be purchased at $70, for a 10 point loss. Since 4 points were collected in premiums, the net loss is 6 points or $600.

On August 22nd, a customer buys 1,000 shares of ABC stock at $40 per share. On November 1st of that year, the customer buys 30 ABC 4 1/4% Convertible debentures at 102. The debentures are convertible at $40 per share. On November 20th of the same year, the customer sells 1,000 shares of ABC at $30. The reported loss for tax purposes is: A. 0 B. $2,500 C. $7,500 D. $10,000

The best answer is B. This customer has created a "wash sale" by purchasing the 30 ABC convertible debentures, convertible at $40 per share, only 20 days prior to selling the 1,000 shares of ABC stock at a loss (ABC stock was bought at $40, and then sold at $30 per share). The customer sold 1,000 shares of ABC stock with a cost basis of $40 for $30 per share, creating a $10,000 loss on November 20th. Because the customer bought the equivalent of 750 shares (30 convertible bonds, convertible into common stock at $40 per share. If converted, each bond would create $1,000 par/$40 conversion price = 25 shares per bond x 30 bonds = 750 shares), the loss deduction is disallowed on 750 out of the 1,000 shares sold. Thus, the customer could only claim the loss deduction on 250 shares x $10 loss per share = $2,500 loss deduction allowed. Please note that if the convertible bonds were purchased more than 30 days prior to the date that the loss was taken, the wash sale rule would not apply and the entire $10,000 loss would be deductible.

Which of the following indicators would be evaluated by a technical analyst? I Quick Ratio II Price Earnings Ratio III 200 Day Stock Price Moving Average IV Advance / Decline Ratio A. I and II B. III and IV C. I and III D. II and IV

The best answer is B. A technical analyst makes buy and sell decisions on "technical" market factors such as trading volume, breadth of market movement (advance / decline line), and the movement of market averages. Fundamental analysts are concerned with the "fundamentals" of a company such as the quality of its management, earnings, balance sheet, etc. Therefore, a fundamental analyst would examine a company's Quick Ratio (Current Assets net of inventories divided by Current Liabilities) as well as its Price-Earnings Ratio.

All of the following are violations of FINRA's Conduct Rules EXCEPT: A. guaranteeing a customer account against loss B. selling a customer an exempt security with a written agreement to buy back that security at a fixed price C. making blanket recommendations of low price speculative stocks to customers D. selling dividends to customers by inducing customers to buy stocks just prior to the ex date

The best answer is B. Choice B defines a repurchase agreement, which typically involves two government securities dealers; or the Federal Reserve and a government dealer. These are permitted, since they are essentially overnight loans of monies at a predetermined interest rate. Prohibited activities include guaranteeing a customer account against loss; making blanket recommendations of low price speculative stocks; and selling dividends to customers.

State registration (Blue Sky) requirements apply to: I registration of government and municipal securities II registration of corporate securities III registration of state chartered bank issues A. I only B. II only C. III only D. I, II, III

The best answer is B. Generally speaking, if a security is exempt from Federal law, it will be exempt under Blue Sky laws (though there are some exceptions). Governments, municipals, and state chartered bank issues are exempt under both Federal and State law; corporate issues are non-exempt.

Under the requirements of the USA PATRIOT Act, if a member firm suspects that an account is engaging in money laundering, the firm is obligated to file: I an SAR II a FOCUS III with the SEC IV with FinCEN A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. If a member firm suspects that a customer is engaging in money laundering, a Suspicious Activities Report ("SAR") must be filed with FinCEN - the Financial Crimes Enforcement Network.

If the Federal Reserve Open Market Committee authorizes its trading desk to enter into system wide reverse repurchase agreements, the effect will be to: I increase yields II decrease yields III raise debt prices IV lower debt prices A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. If the Federal Reserve trading desk enters into reverse repurchase agreements with bank dealers, it is temporarily selling government securities to the dealers, draining them of cash. This decreases free reserves which can be loaned out by the banks. The net effect is to raise market interest rates since funds are not readily available. If interest rates rise, debt prices will fall. The Fed will take such action if it believes the economy is growing too rapidly.

Royalties received from an oil and gas program are: A. partnership income B. passive income C. earned income D. portfolio income

The best answer is B. Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.

NYSE MARKET DIARY Yesterday Prev. Day Advanced 866 1326 Declined 1577 1327 Unchanged 455 292 Total Issues 2898 2945 New Highs 121 98 New Lows 724 433 The ratio of advances to declines that occurred on the day prior to yesterday (rounded) is: A. .50 : 1 B. 1.0 : 1 C. 1.5 : 1 D. 2.0 : 1

The best answer is B. On the day prior to yesterday, 1,326 issues advanced against 1,327 issues declined, for a ratio of advances to declines of 1:1.

25 Basis Points equal: A. $.25 B. $2.50 C. $25.00 D. $250.00

The best answer is B. One basis point = .01% in interest, or .01% of $1,000 par in annual interest = $.10. 25 basis points equal .25% of annual interest on a $1,000 per bond = $2.50.

Just before the NYSE opens, your customer gives you an order to be executed on the NYSE "market - at the opening." The order is transmitted immediately, but reached the exchange floor after the opening. The order will be: A. executed immediately as a market order B. canceled C. executed at the opening the next morning D. executed as a "not held" order at the best time and price for the customer

The best answer is B. One of the basic rules of handling orders is that you follow the exact directions of the customer. The customer placed the order "market-at the opening." An order placed "at the opening" must be filled at the opening price. The order did not reach the trading floor in time for the opening, and so it will be canceled. As a registered representative, this would be reported to you fairly rapidly, and you could call the customer to determine what he wished to do at this point.

A customer buys pharmaceutical and utility stocks in his portfolio. This portfolio would be best characterized as: A. balanced B. defensive C. aggressive D. cyclical

The best answer is B. Pharmaceutical stocks and utilities are defensive issues that are not affected much by the economic cycle. Cyclical stocks such as housing and autos, are greatly affected by the economic cycle. Aggressive portfolios consist of growth stocks such as high technology issues. Balanced portfolios buy a balance of stocks and bonds.

A customer is long 1,000 shares of fully paid XYZ stock, valued at $75 per share. The customer sells "short against the box" another 1,000 shares of XYZ. The minimum maintenance margin requirement is: A. 0 B. $3,750 C. $71,250 D. $75,000

The best answer is B. The margin in an arbitrage account is 5% minimum maintenance on the long side under FINRA rules. There is no Regulation T requirement, since the customer has no risk - his net position = "0." Since the market value of the securities is $75,000, the minimum margin is 5% = $3,750. The customer can borrow the remaining $71,250.

A variable annuity is a(n) A. exempt security under the Securities Act of 1933 B. non-exempt security under the Securities Act of 1933 because the purchaser bears the investment risk C. non-exempt security under the Securities Act of 1933 because the issuer bears the investment risk D. insurance product that is not defined as a security, and thus is not subject to securities regulations

The best answer is B. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.

A registered representative in your firm has died and one of his customers with a $100,000 account has been turned over to you. You should: A. complete a broker to broker account transfer form B. update the new account (client information) form C. verify all account trading during the preceding 3 months D. obtain an inheritance tax waiver

The best answer is B. When the customer's account is turned over to you, you should contact the customer to update the new account form and to establish a working relationship with the customer.

A customer buys a corporate bond in the secondary market, paying a premium over par, plus accrued interest. The customer chooses not to amortize the bond premium for tax purposes. Regarding the customer's cost basis in the bond which of the following statements are TRUE? I The cost basis is inclusive of any accrued interest paid by the customer II The cost basis excludes any accrued interest paid by the customer III The cost basis is inclusive of any mark-up or commission paid by the customer IV The cost basis excludes any mark-up or commission paid by the customer A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Accrued interest paid is not included in the customer's cost basis in the bond. Rather it is an offset against other interest received by the customer in that tax year. The cost basis is the price paid for the bond, inclusive of any mark-up or commission paid by the customer.

A 50-year old man owns a non-qualified variable annuity contract that has appreciated substantially over the years. He wishes to annuitize the account for additional income using IRS Rule 72t. How will the first payment be taxed? A. 100% taxable ordinary income B. 100% non-taxable cost basis C. Part ordinary income and part cost basis D. 10% penalty tax applied because the client is under age 59 1/2

The best answer is C. Instead of taking a lump sum distribution, the owner of a variable annuity contract can "annuitize" and receive annuity payments for life. Each payment has 2 components - an earnings portion that is taxable and a return of capital portion (cost basis) that is not taxable. The non-taxable portion represents the return of the original investment that was made with "after tax" dollars. IRS Rule 72t gives a way for payments to be taken from the annuity prior to age 59 1/2 without the 10% penalty tax being applied. Rule 72t basically requires that annual payments deplete the account over that individual's expected life (the IRS has 3 approved methods for this). The rule also requires that a minimum of 5 annual "Substantially Equal Periodic Payments" (SEPPs) be taken, but that payments must continue until at least age 59 1/2.

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

All of the following statements are true about stock options contracts EXCEPT they: A. are American style B. can be traded at any time C. can be issued at any time D. can be exercised at any time

The best answer is C. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts cannot be redeemed and they can only be issued based on the cycles set by the Options Clearing Corporation.

An income fund would likely invest in which of the following securities? I Common stocks II Preferred stocks III Debentures IV Income bonds A. I and II only B. III and IV only C. II and III only D. I and IV only

The best answer is C. Income funds invest primarily in bonds and preferred stocks for a high level of current income. Common stocks are not typically a choice for investment because the dividend yields are comparatively low. Income bonds would not be chosen as an investment because they only pay interest if the corporation has enough income; otherwise no payment is made

Investment banks perform which of the following functions? I Buy new securities offerings from issuers on a principal basis II Accept time and demand deposits III Distribute new issues on an agency basis IV Assist issuers in publicizing new issue offerings A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

The best answer is C. Investment banks are prohibited from accepting time and demand deposits. These can only be accepted by commercial and savings banks. Investment banks can underwrite new issues on a principal basis, an agency basis, and can help publicize the issues underwritten.

A registered representative has a wealthy client who has placed $1 million under management with the representative. The client has recently been elected to his town's Board of Estimate and Taxation, and the municipal securities firm that employs the representative has done underwritings in the past for the town. The representative wishes to take the client out to dinner, which is expected to cost $250. Which statement is TRUE about doing this? A. Taking this individual to dinner violates the MSRB $100 gift limit B. Taking this individual to dinner is permitted because it has a de minimis value under the MSRB Political Contribution rule C. Taking this individual to dinner is permitted because this is business entertainment D. This individual cannot be taken to dinner because it is a conflict of interest

The best answer is C. This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario! The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official's campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution - rather, it is taking a client to dinner. The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm's policies and procedures.

An officer of a company has acquired shares of that issuer in the open market. If the officer wishes to sell the shares, the officer must meet all of the following requirements EXCEPT: A. filing of the Form 144 with the SEC B. a maximum of 4 sales per year are permitted C. the stock must be held for 6 months, fully paid D. each sale is limited to the greater of 1% of the outstanding shares; or the weekly average of the prior 4 weeks' trading volume

The best answer is C. "Control stock," which is registered stock of a company bought in the open market by an officer or director of that company, is subject to all Rule 144 requirements when the officer or director wishes to sell, except for the 6-month holding period. The 6-month holding period is required for restricted stock, but not for control stock.

A customer who is long 1 ABC Jan 60 Put wishes to create a "long put spread." The second option position that the customer must take is: A. long 1 ABC Jan 50 Call B. long 1 ABC Jan 70 Call C. short 1 ABC Jan 50 Put D. short 1 ABC Jan 70 Put

The best answer is C. A spread consists of the purchase and sale of the same type of option, with different strike prices or expirations - therefore Choices A and B are incorrect. In a bear put spread (long put spreads are bearish strategies), the customer purchases the higher strike price - the long 60 put - (higher premium since the contract gives the right to sell at the higher strike price) and sells the one with the lower strike price - the short 50 put (lower premium since the contract gives the right to sell at the lower price). The customer wants the market to fall, so that he can exercise the long put with the higher strike price for a profit. However, if the market falls too much, the short put is exercised at the lower strike price, and the customer must buy the stock, locking in the gain of 10 points (sell at $60; buy at $50). Conversely, if the market rises above $60, both puts expire and the customer loses the net premium paid.

An exporter is shipping goods to Japan and Britain. The exporter expects to receive payment of 1,000,000 Japanese Yen and 1,000,000 British Pounds. To hedge these positions, the exporter should buy: A. 1 Japanese Yen Put contract and 1 British Pound Put contract B. 100 Japanese Yen Put contracts and 100 British Pound Put contracts C. 1 Japanese Yen Put contract and 100 British Pound Put contracts D. 100 Japanese Yen Put contracts and 1 British Pound Put contract

The best answer is C. All World Currency option contracts cover 10,000 units of currency, with the exception of the Japanese Yen, which covers 1,000,000 Yen. Since the customer will receive 1,000,000 Yen, only 1 Yen put contract is needed to hedge. Since the customer will receive 1,000,000 British Pounds, the customer needs 1,000,000 / 10,000 = 100 contracts to hedge.

Which of the following securities are eligible for Fed trading? I Treasury Bonds II Prime Banker's Acceptances III Treasury Bills IV Commercial Paper A. III only B. I and II only C. I, II, III D. I, II, III, IV

The best answer is C. Commercial paper, which is issued by corporations, is not eligible for Fed trading. The eligible securities are U.S. Government debt, Government Agency debt, and prime Banker's Acceptances. These are the securities that the Fed trades with the primary U.S. Government dealers (the major commercial banks and brokerage firms) to control credit availability in the economy.

A registered representative is notified that a customer has just died. The registered representative should do which of the following? I Cancel all open orders II Notify the branch manager III Cover all short positions IV Mark the date of death on the account A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV

The best answer is C. If a customer dies, the procedure is: Note the date of death on the account; cancel all open orders; and wait for instructions. Notifying the branch manager of the death makes sense as well. There is no requirement to cover all short positions in the account upon notification of death.

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 sells 1 ABC Jul 60 Put at $7 when the market price of ABC is $56. ABC stock rises to $65 and stays there through July. The customer: A. gains $200 B. loses $200 C. gains $700 D. loses $700

The best answer is C. If the market rises to $65, the put expires "out the money" (since the strike price is $60). The writer keeps the $700 collected in premiums.

Long Margin Account Market Value: $80,000 Debit Balance: $30,000 If the customer buys $80,000 of listed stocks and sells $20,000 of listed stocks on the same day, the customer must deposit: A. 0 B. $10,000 C. $20,000 D. $30,000

The best answer is C. Margin is computed on net purchases for the day. The customer purchased $80,000 of stock and sold $20,000 of stock, for a net purchase of $60,000. To buy $60,000 of stock, the customer must deposit $30,000 of cash. Since the customer has $10,000 of SMA available, $20,000 of stock can be purchased. Thus, $20,000 more must be deposited to purchase the remaining $40,000.

An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Home Loan Bank bonds with a 20 year maturity. The new issue of Federal Home Loan Bank Bonds will be sold: A. through competitive bid at the weekly Treasury Auction B. directly by the Federal Home Loan Bank to interested investors C. through a selling group appointed by the Federal Home Loan Bank D. through the "Dutch" auction method that awards the bonds to the lowest rate bidders at an "average" winning rate

The best answer is C. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. Direct U.S. Government obligations are sold through auction.

"QUBES" are: I a mutual fund II an exchange traded fund III based on the NASDAQ 100 Index IV based on the NASDAQ Composite Index A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. QQQ is the symbol for the "Qube" - the NASDAQ 100 Index Depository Receipt. This is an Exchange Traded Fund traded on NASDAQ.

Which of the following terms describe rights? I Exercisable II Negotiable III Redeemable IV Giftable A. I and IV only B. II and III only C. I, II, IV D. I, II, III, IV

The best answer is C. Rights are exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.

All of the following statements are true regarding defined benefit plans EXCEPT: A. contributions made to the plan can vary from year to year B. employees with the highest salaries and the fewest years to retirement benefit the most C. benefits paid to employees consists of a tax free return of capital and a taxable return of earnings D. actuarial tables are used to determine contribution rates for each employee

The best answer is C. Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true.

A corporation publishes a Notice of Redemption for the purpose of retiring an entire debt issue at par by calling it at the first call date. The corporation plans to refund the debt by issuing new bonds at lower current interest rates. Which action could be taken by a holder of the outstanding bonds? The holder could: A. retain the old bonds and continue to receive the higher interest rate B. retain the old bonds and receive the lower interest rate of the new refunding bonds C. sell the bonds at the current market price D. exchange the old bonds for the new refunding bonds

The best answer is C. The bondholder can either sell the bonds at the current market price or can tender the bonds and receive the call price. When bonds are called, interest payments cease, so Choices A and B are incorrect. Regarding Choice D, an investor would not be allowed to exchange the old bond for a new one. If an investor wanted one of the new bonds, he or she would have to buy it in the market.

On the same day in a margin account, a customer buys 1 ABC Jan 45 Put @ $4 and sells 1 ABC Jan 60 Put @ $11 when the market price of ABC is $56. The customer must deposit: A. $400 B. $700 C. $800 D. $1,500

The best answer is C. The customer has created a short put spread resulting in a $700 credit. This position is profitable if the market should rise (bullish). The positions set up as: Sell 1 ABC Jan 60 Put @ $11 Buy 1 ABC Jan 45 Put @ $4 $7 Credit If the market should rise, both contracts expire "out the money" and the customer keeps the $700 credit (maximum potential gain). On the other hand, if the market drops, the short put is first to be exercised, requiring the customer to buy the stock at $60. If the market continues to fall, the long put allows the customer to sell the stock at $45, for a maximum loss on the stock of 15 points. Since 7 points were received in premiums, the maximum potential loss is $800. Margin rules require that the customer put up the $800, since this is his or her maximum loss exposure.

When opening an account to trade stocks and options, which of the following signatures are needed on the new account form(s)? I Registered options principal signature II General principal signature III Registered representative signature IV Customer signature A. I and III B. II and IV C. I, II, III D. I, II, III, IV

The best answer is C. The customer's signature is not required on a new account form. It is required on the options agreement, margin agreement and loan consent agreement. The regular new account form for equity securities requires the signature of the registered representative and the general principal. The options new account form, required for options trading, is signed by the registered representative, who is attesting to the fact that the information on the form is true; and must be approved before the account is traded by the registered options principal. The same person can hold both the Series 24 General Principal and Series 4 Registered Options Principal licenses, and could approve both accounts.

A tender offer has been made for PDQ common shares. The brokerage firm department that would handle the tendering of shares is the: A. margin department B. purchase and sales department C. reorganization department D. order department

The best answer is C. The reorganization department of a brokerage firm handles corporate reorganizations such as tender offers and takeovers.

On the same day in a margin account, a customer buys 1 ABC Jan 50 Put @ $5 and sells 1 ABC Jan 40 Put @ $2. Below which of the following prices will every dollar gained on the long put be exactly offset by a dollar lost on the short put? A. $50 B. $47 C. $42 D. $40

The best answer is D. The breakeven point is $47 per share. As the market falls below $47, the customer gains 1 point on the long 50 put for every $1 fall in the price of ABC stock. Once the market goes below $40, the short put will be "in the money," and a dollar will be lost on the short put for every dollar gained on the long put. Thus, below $40, there is no further gain. The maximum gain potential is 7 points or $700.

A customer owns a real estate limited partnership interest, with an adjusted cost basis of $22,000. This interest has generated unused passive losses totaling $10,000. If the partnership interest is sold for $20,000, which statement is TRUE regarding the tax treatment of the unused passive losses? A. The $10,000 of passive losses must be deducted in full B. The $10,000 of passive losses must be carried forward, to be offset against passive income in future years C. The $10,000 of passive losses is added to the partnership basis, reducing any gain upon sale D. The $10,000 of passive losses cannot be used in any manner

The best answer is C. The tax treatment of unused passive losses when a partnership interest is sold, is to add them to the cost basis. In this example, the customer has a partnership basis of $22,000 and $10,000 of unused passive losses, for an adjusted cost basis of $32,000. Since the sale proceeds from disposing of the partnership interest are $20,000, the customer has a capital loss of $12,000 on this investment for tax purposes. The end result is that the unused passive loss is converted into a capital loss when the partnership unit is sold.

Which of the following statements are TRUE regarding Official Statements? I Official Statements are required under the Securities Act of 1933 II Official Statements are requested by underwriters in order to sell the bonds III If an Official Statement is prepared, it must be sent to the purchaser no later than settlement IV If an Official Statement is prepared, it only has to be sent to the purchaser at his or her request A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. There is no legal requirement for an issuer to prepare an Official Statement because municipalities are specifically excluded from regulation under the Securities Acts. Thus, it cannot be mandated that municipal issuers provide Official Statements. However, underwriters will not bid on a new municipal issue unless an Official Statement is prepared by the issuer, since under an SEC rule, the underwriter must obtain a copy of the Official Statement and perform due diligence on it prior to buying the issue. So the Official Statement will be prepared, and since this will occur, the MSRB requires that the customer receive a copy no later than settlement.

Which statement about required signatures when opening an account is FALSE? A. To open an account, joint tenants with rights of survivorship, the signature of each tenant is required B. To open an account, joint tenants in common, the signature of each tenant is required C. To open a general partnership account, the signature of each partner is required D. To open a community property account, the signature of each participant is required

The best answer is C. To open any joint account, the signatures of each party to the joint account must be obtained. The same is true when opening a community property account - another type of joint account (required in some States, such as California, for joint tenants with rights of survivorship accounts). To open a general partnership account, only the signature of one general partner is required. The name of this general partner will be detailed in the partnership agreement - this is typically the managing partner in the firm.

A NASDAQ security is bid at $35 and offered at $35.50. An over-the-counter trader effects a trade at $35.25 and charges a commission of $.25 to the customer. The price that will show on the tape is: A. $34.75 B. $35.00 C. $35.25 D. $35.75

The best answer is C. Trade prices that are shown on the tape do not include commissions to customers. This trade was effected at $35.25, and this is the price that will show on the tape.

Under NYSE rules, every broker or dealer who communicates bids and offers on the exchange floor must comply with which of the following rules? I The highest bid and the lowest offer have precedence in all cases II Bids and offers must be publicly announced III Any bid or offer for less than the normal trading unit has no standing in the trading crowd IV Bids and offers must be set by floor officials A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). Bids and offers are always set by market participants; they are not set by floor officials (the regulators) under any circumstances.

Which of the following retirement plans is funded by an annual employee salary reduction of $7,000 (indexed for inflation annually)? A. Defined contribution plan B. Defined benefit plan C. Tax deferred annuity D. 401(k) plan

The best answer is D. 401(k) plans are so-called "salary reduction" plans that allow an individual to contribute a dollar amount annually that is tax deductible. The original contribution limit was set at $7,000 annually (in 1986), but this amount is indexed each year for inflation (for example, $18,500 can be contributed for tax year 2018). Tax deferred annuities (403(b) plans) allow non-profit employees to contribute up to 25% of income (up to $18,500 in 2018). Defined contribution plans generally require that a fixed percentage of salary be contributed annually, with the defined maximum contribution percentage being an effective rate of 25% of income (statutory rate; 20% effective rate), up to $55,000 in 2018. Defined benefit plans have a varying contribution amount annually, because the plan is designed to fund a future pension benefit; and the amount to be contributed each year depends on actuarial formulas that take into account expected investment returns and expected benefits to be paid.

All of the following persons require additional documentation to open an account at FINRA member firm EXCEPT a(n): A. registered employee of another FINRA member firm B. unregistered employee of another FINRA member firm C. officer of another FINRA member firm D. clerical employee of another FINRA member firm

The best answer is D. FINRA requires that if an employee of another FINRA member firm (whether registered or unregistered) wishes to open an account: •prior written consent of the employing member firm must be obtained; •the executing member must be notified in writing of the employee's association with another member firm; and •on written request of the employer member, the executing member must provide duplicate confirmations and statements. Note that the rule applies to "associated persons" of a member firm opening an account at another member - and an associated person is either an officer or a registered or unregistered employee of the member firm, with an exception given to anyone who only performs clerical or ministerial duties. Not only does the rule apply to accounts opened at other member firms by associated persons, it also applies to securities accounts opened at non-member financial institutions such as banks and investment advisers

Which of the following disclosures are required in a research report? I Whether the member firm has a position in the subject company II Whether the member firm is a market maker in the stock III If the member firm has been a manager in a underwriting of the subject company's stock in the past 12 months IV If the member firm intends to seek underwriting business from the subject company in the next 3 months A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is D. When a member firm publishes a research report about an issuer, it must disclose if the member firm: •holds the stock; •is a market maker in the stock; •has been a manager or co-manager of an underwriting of that company's securities in the past 12 months; or •intends to seek underwriting business from that issuer in the upcoming 3 months. Also note that these are just a "handful" of the numerous disclosures required.

Last sale information is available for which of the following? I NYSE listed issues II NASDAQ listed issues III Pink Sheet issues IV CBOE listed issues A. I only B. II and III only C. I, II, and IV only D. I, II, III, IV

The best answer is D. Any exchange reports last sale information for securities traded there. Thus, the NYSE, NYSE American (AMEX), NASDAQ and regional exchanges, as well as the CBOE all report trades as they occur. Regarding the "over-the-counter" market, last sale reports are provided for all OTC equity issues - OTCBB, and Pink Sheets.

To determine the Net Interest Cost on a bid for a new municipal issuer, any premium paid by the bidder to the issuer: I increases the Net Interest Cost II reduces the Net Interest Cost III is added when determining Net Interest Cost IV is deducted when determining Net Interest Cost A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Any premium paid by the bidder to the issuer is more money being paid to the issuer, hence it reduces the net interest cost to the issuer, and thus is deducted when determining Net Interest Cost.

The issuer is responsible for all of the following in a new corporate offering EXCEPT: A. printing of the prospectus B. printing of the certificates C. registration of the Securities and Exchange Commission D. selling the securities to the investment community

The best answer is D. In a new corporate offering, the issuer is responsible for printing the certificates; printing the prospectus; and registering the issue with SEC and each state in which the issue will be sold. The underwriter is responsible for all selling expenses incurred in completing the offering.

Which of the following taxes is NOT a concern to investors in ADRs? A. Federal B. State C. Foreign D. Excise

The best answer is D. Income received from any investment, whether domestic or foreign, is taxable in the United States at both the Federal and State level, unless there is a specific statutory exemption from taxation. In addition, foreign investments that make dividend or interest payments are often subject to income withholding tax in the country of origin (though this can be taken as a credit on the U.S. tax return). ADRs - American Depositary Receipts - represent ownership interests in foreign securities, with the ADRs traded in the U.S. markets. Investment income is not subject to excise tax - excise taxes are imposed at both the Federal and State level on consumable items such as gasoline, alcohol and tobacco.

Municipal bonds would be an appropriate investment for which of the following? I Individuals II Individual Retirement Accounts III Bank Holding Companies IV Casualty Companies A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV

The best answer is D. It makes no sense to place "federally tax exempt" municipal bonds into a "tax deferred vehicle" such as an IRA or Keogh account. Since the account is tax deferred, one would place securities earning the highest "before tax" return, such as corporates or governments into the account.

The Securities Exchange Act of 1934 established "self regulatory organizations" (SROs) and empowered these organizations to: I set guidelines for fair dealing with the public II handle complaints against broker-dealers for securities law violations III take administrative action against broker-dealers that violate industry regulations IV establish arbitration procedures to settle intra-industry disputes A. I and II only B. I, II, III C. II, III, IV D. I, II, III, IV

The best answer is D. Originally, the exchanges, such as the NYSE and NASD (National Association of Securities Dealers) were both marketplaces and regulators of their member firms. This changed when FINRA was created in 2006. Each exchange now only regulates its trading operation, and FINRA regulates the broker-dealer member firms and is its own SRO (Self Regulatory Organization). FINRA sets guidelines for fair dealing with the public with its Conduct Rules; it handles complaints against broker-dealers for securities law violations under the Code of Procedure; it can take administrative action against broker-dealers that violate industry regulations; and it establishes arbitration procedures to settle intra-industry disputes.

Stabilization of new issues is: I a provision of the Securities Act of 1933 II a provision of the Securities Exchange Act of 1934 III permitted at, or above, the Public Offering Price IV permitted at, or below, the Public Offering Price A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Since a stabilizing bid is placed in the trading (secondary) market, the rules for stabilizing bids come under the Securities Exchange Act of 1934. Stabilizing bids are permitted at, or below, the Public Offering Price - never above.

A company which is included in the Standard and Poor's 100 Average (the OEX) splits its stock 2:1. This will result in: A. the number of OEX contracts being adjusted upwards and the index value being adjusted downwards B. the number of OEX contracts being adjusted downwards and the index value being adjusted upwards C. no change in the number of contracts but a reduction in the index value D. no change in either the number of contracts or the index value

The best answer is D. Stock indexes are not reduced for stock splits or stock dividends. Since the aggregate value of all of that company's shares is included in the index, a stock split or dividend has no effect. The number of shares increases, while the market price per share decreases, but the total value of the company included in the index remains the same.

Which statements are TRUE regarding the procedures followed at the weekly Treasury Bill auction? I The minimum competitive bid amount is $100 II The minimum non-competitive bid amount is $100 III The maximum competitive bid amount is $5,000,000 IV The maximum non-competitive bid amount is $5,000,000 A. I and II only B. III and IV only C. I and III only D. II and IV only

The best answer is D. The minimum non-competitive bid amount in the weekly Treasury Bill auction is $100; the maximum non-competitive bid amount is $5,000,000. For competitive bids, the minimum is $5,000,000. There is no dollar maximum, although the Treasury imposes a maximum competitive bid limit per primary dealer of 35% of securities offered in any single auction.

PDQ Corporation has declared a rights offering to stockholders of record on Thursday, July 22nd, payable on Monday, August 9th. Under the offer, shareholders need 25 rights to subscribe to 1 new share at a price of $75. Fractional shares can be rounded up to purchase 1 full share. The last day to buy PDQ shares before they go ex rights is: A. Monday, July 19th B. Tuesday, July 20th C. Friday, August 6th D. Monday, August 9th

The best answer is D. The regular way ex date for cash dividends is 1 business day prior to the record date. However, the ex date for stock dividends, stock splits and rights offerings is different. For non-cash distributions, the ex date is set at the business day following the payable date. The payable date is Monday, August 9th, therefore the ex date is Tuesday, August 10th. To buy the shares before they go ex rights, the shares must be purchased before Tuesday, August 10th, meaning they must be purchased on Monday, August 9th.

Which of the following statements are TRUE about new issue municipal selling practices? I The customer must receive a copy of the Final Official Statement if one is printed II The customer must receive a copy of the Agreement Among Underwriters III If requested, the customer must receive the order priority provisions used by the manager IV The customer must receive a confirmation showing the purchase price A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV

The best answer is D. Under MSRB rules, a customer buying a new issue must receive a confirmation accompanied by a copy of the final Official Statement if one has been prepared. (If one has not been prepared by the issuer, there is no requirement to provide the document) If the customer requests, the order priority provisions must also be disclosed (Pre-Sale, Group, Designated, Member). There is no requirement to send the customer a copy of the Agreement Among Underwriters.

A middle-aged widowed customer has an investment objective of stable income and wants minimal market and liquidity risk. 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 D. 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. When market interest rates rise, the dividend rate rises; when market interest rates fall, the dividend rate falls. Because the dividend rate varies, the price of the security stays right at par value and has minimal market risk. In contrast, any fixed income security, which includes the other types of preferred stock, is subject to market risk. When market interest rates rise, the value of any fixed rate security must fall, making its yield competitive with current market rates. Finally, all preferred stock has minimal liquidity risk. Preferred shares are listed and trade, so the shares can be sold readily at low cost.

Corporate bonds are issued with an "anti-dilutive" covenant. If the corporation declares a 5% stock dividend, all of the following will be reduced EXCEPT the: A. market price of the stock B. conversion price of the stock C. parity price of the stock D. conversion ratio

The best answer is D. 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 when the stock's market price is reduced for the dividend. To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible is therefore increased. Since the parity price of the stock is: Par / Conversion Ratio, if the conversion ratio increases, the parity price of the stock will decrease as well.

A registered representative recommends the purchase of a new issue security registered under the Securities Act of 1933 to a customer. Which statement(s) is (are) TRUE? I The customer may be sent a prospectus about the issue II The customer may be sent a prospectus that is "highlighted" by the registered representative to emphasize important information III The customer may be sent an abstract of the prospectus that summarizes important information A. I only B. I and II C. II and III D. I, II, III

he best answer is A. Alterations to a preliminary prospectus or final prospectus are prohibited. These documents have been filed with the SEC; and it is expected that the public will receive them in the exact form as filed with the SEC. Any changes to the documents invalidate the filing.