S7-Final 3

All of the following debt securities may be issued by corporations EXCEPT: A. Equipment trust certificates B. Mortgage bonds C. Adjustment bondsD. Moral obligation bonds

moral obligation bonds

What is important to remember about rights?

they are NOT considered to be redeemable

The best answer is C.An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.

All of the following are allowed investments into an Individual Retirement Account EXCEPT: A. Preferred Stock B. U.S. Government Bonds C. U.S. Government Gold CoinsD. Antiques, Art, and Other Collectibles

An investor buys a bond at a premium. Later in the year, the bond is trading at a discount. This is termed: A. AmortizationB. Depreciation C. Accretion D. Devaluation

If a bond is purchased at a premium, which of the following statements are TRUE? I Yield to call is higher than the yield to maturityII Yield to call is lower than the yield to maturityIII Yield to maturity is higher than the current yieldIV Yield to maturity is lower than the current yield A. I and III B. I and IV C. II and IIID. II and IV

Which statements are TRUE about Roth IRAs for tax year 2019? I The maximum permitted contribution for an individual is $3,000II The maximum permitted contribution for an individual is $6,000III If an individual contributes $6,000 to a Traditional IRA in that year, no additional contribution to a Roth IRA is permittedIV If an individual contributes $6,000 to a Traditional IRA in that year, an additional contribution to a Roth IRA is permitted A. I and III B. I and IVC. II and III D. II and IV

If a corporation has an unfunded pension liability, this means that: A. inflation has eroded the value of the portfolio funding the plan B. the plan is in default because the existing retirees' benefit claims are not being metC. the expected future value of fund assets is less than projected benefit claims D. the expected future value of fund assets is more than projected benefit claims

A municipal bond originally issued at par, is trading in the market at 90. The bond has 10 years to maturity. If the bond is sold after 8 years at 99, the tax consequence per bond is: A. no tax due B. $10 of taxable interest incomeC. $80 of taxable interest income and a $10 capital gain D. a $90 capital gain The best answer is C.

If a municipal bond is issued at par, and subsequently goes to a discount in the market (for example if interest rates have risen), then the market discount is treated as taxable interest income, earned over the remaining life of the bond. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder has the option of accreting the discount each year and paying tax for that year, or of waiting to maturity, or the sale date of the bond, to pay tax on the accreted discount as interest income earned. If the bond is sold for more than the accreted amount, there will be a capital gain; if it is sold for less than the accreted amount, there will be a capital loss. This bond was purchased at 90, with 10 years to maturity. Thus, the discount is earned at the rate of 1 point per year. After 8 years, the discount is accreted to 98, with the 8 points ($80) being treated as taxable interest income. The bond is sold for 99, with the 1 point ($10) difference (between 98 accreted value and 99 sale price) being a capital gain.

A customer has an existing portfolio that is mainly invested in high quality corporate bonds for stable income. As market interest rates have dropped, the customer's income has declined and she would like to reallocate part of the portfolio to corporate bonds that offer potential growth. The BEST recommendation is to buy: A. convertible debenturesB. equipment trust certificates C. long term zero coupon bonds D. commercial paper

The best answer is A. Convertible bonds trade as equivalent to the common stock if the market price of the common rises above the conversion price. Thus, as the market price of the common rises, the convertible bond price will rise as well. This gives the customer the potential for growth. Equipment trust certificates are a secured bond that pays a fixed rate of interest, backed by airplanes, railroad cars, etc. Long term zero coupon bonds are sold at a deep discount price and the yearly earning of the discount is the interest income - but this is not received until maturity. They are designed for long term investors that wish to avoid reinvestment risk - but note that they do not offer "growth." Commercial paper is a short term corporate IOU that has no growth potential.

An investor in 30 year Treasury Bonds would be most concerned with: A. credit riskB. purchasing power risk C. marketability risk D. call risk

The best answer is B.The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk. This is the risk that inflation reduces the value of future interest payments and the principal repayment yet to be received in the future.

Which of the following trades settle in "clearing house" funds? I General Obligation BondsII U.S. Government BondsIII Agency BondsIV GNMA Pass-Through Certificates A. I only B. I and IIC. II and IV D. III and IV

The best answer is A. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.

(Refer to the exhibit window to answer the following question) The selling shareholders are required to offer their shares via a prospectus because: A. they are likely to be officers and large shareholders of the company who must sell their shares either under the provisions of Rule 144 or who must sell their shares in a managed offering so that the existing trading market for the stock is not distortedB. by using an underwriter, the selling shareholders can offer their shares to the public at a premium to the current market price of the stock and maximize their potential profit on the sale C. under the tax laws, gains on shares that are sold using underwriters are subject to long term capital gains treatment, whereas gains on shares that are sold in the secondary market are subject to short term capital gains treatment D. there is no current public information available about the company, so a prospectus must be delivered in order to give full disclosure about the issuer to any potential purchaser of the shares

The best answer is A. Generally, registered secondary distributions are used by officers of public held companies and larger shareholders, who when selling shares, are subject to the requirements of Rule 144 (public notice of sale and limits on the amount of shares that can be sold each quarter). If an officer or selling shareholder wishes to sell a large amount of shares (in excess of Rule 144 limits) of that company, it must register the sale with the SEC, use an underwriter to manage the sale of the shares, and sell with a prospectus. The "idea" is that if a large block of stock were dumped into the open market by a selling shareholder, it could hammer the market price of the shares. By using a manager, the stock will be sold in an orderly fashion into the market and the market price of the outstanding shares should not be adversely affected. Since the shares are being offered at the current market price of the stock, Choice B is false. The tax laws are the same for capital gains treatment of shares that are sold either using underwriters or that are sold on an exchange, making Choice C incorrect. This company is already publicly traded, therefore it is filing its financial information with the SEC, which makes the information available to the public, making Choice D incorrect.

Which statements are TRUE about OEX index options? I OEX index options are issued "American Style"II OEX index options are issued "European Style"III OEX index LEAP options are issued "American Style"IV OEX index LEAP options are issued "European Style" A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Regular stock options, LEAPs on these issues, OEX index options, and OEX LEAPs, are all American style options that are exercisable by the holder at any time. Almost all other index options, on the other hand, are European style options. Such an option is only exercisable at expiration, not before. Prior to expiration, the contract can be traded; but cannot be exercised.

A customer in a low tax bracket has just inherited $10,000 and is looking for an investment that will provide current income and liquidity. The BEST recommendation is a: A. Corporate Bond ETF B. Variable Rate Bond C. Municipal Bond Fund D. Treasury STRIPS

The best answer is A. The Corporate Bond ETF is liquid because it is exchange traded, and it provides taxable income from its bond investments. Because the customer is in a low tax bracket, lower yielding tax-free municipal bond investments are not appropriate. Variable rate bonds would be good investment if it is expected that interest rates would rise (a point not addressed in this question), but direct bond investments are not that liquid, unless they are Treasury or Agency bonds. Treasury STRIPS are a liquid investment (a ready market exists at all times and they are easy to trade with low transaction costs), but they do not give current income. These are zero-coupon issues.

The manager of an unregistered hedge fund is typically compensated by a fee based on a: I percentage of assets under managementII percentage of net investment incomeIII performance fee based on profitsIV performance fee based on exceeding a benchmark index A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. The typical hedge fund fee is "2 and 20" - a 2% annual management fee as a percent of assets under management, plus 20% of profits. Hedge fund managers are not subject to the Investment Company Act of 1940 that limits manager's compensation to a percentage of assets under management - no performance fees are allowed. They are structured as private placement limited partnerships that are only available to wealthy accredited investors. They are exempt from securities regulation since the general public cannot invest, except for the anti-fraud rules. Hedge funds started in the 1990s and the managers produced superior returns and were able to charge high fees. Nowadays, most hedge funds are not doing much better than the overall market, and managers are moving towards a performance fee based on return achieved over a benchmark index, as opposed to a fee based on absolute profits (which might be achieved not because of superior investment choices, but because the market simply went up). However, the majority of hedge funds still charge a performance fee based on profits, not a performance fee based on exceeding a benchmark index.

A distribution from a Section 529 Plan would be taxable if the beneficiary: A. does not go to college B. gets a full scholarship C. goes on disabilityD. goes to vocational school

The best answer is A.Payments from Section 529 plans made to colleges, universities, vocational schools, and any other accredited post secondary education institution are not taxable. Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level. In addition, refunds made because of death or disability of the beneficiary, or because the beneficiary received a scholarship, are not taxable. Distributions made for any other reason are taxable.

American style options are: A. exercisable at any time B. exercisable only in the week prior to expiration C. exercisable only at expiration D. not exercisable

The best answer is A."American" style options are exercisable at any time until expiration. "European" style options are only exercisable on the expiration date, not before.

A breakout through a resistance level is: I an upside breakoutII a downside breakoutIII bullishIV bearish A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.A "resistance" level is a price above the current market, through which a stock's price tends not to rise. Thus, the stock is said to have "resistance" at this price, meaning it is resisting further price rises, because investors are willing to sell at this price. If a stock breaks the resistance level, this is strongly bullish, since all of the ready sellers have been "cleaned out" and there are still buyers for the stock. If there are many more buyers than sellers, prices will rise.

If a technical analyst believes that a stock will break through a "support" level, the analyst: I believes that the stock price will fallII believes that the stock price will riseIII will place a sell (short) stop orderIV will place a sell (short) limit order A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.A stock breaks a "support" level as the market falls. If the stock breaks the stop price, the investor feels that the price will plummet. To profit, he wants to sell short, and the order he places is to sell (short) stop. The order must be a sell stop because it is placed lower than the current market. If the market falls to the stop price, the order is triggered and becomes a market order to sell short. The order can then be executed on the next trade. Once the short stock position is established, the customer believes that the price will plummet, and that the stock can be purchased later to cover the short sale at a much lower price for a profit.

To avoid penalties, funds cannot be withdrawn from a Keogh retirement plan before age: A. 59 1/2 B. 65C. 70 1/2 D. 75

The best answer is A.Before age 59 1/2, distributions from a Keogh Plan are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.

A customer that wishes to open a portfolio margin account must: I receive a copy of the risk disclosure statement describing the risks and nature of portfolio margining at, or prior to, the initial transaction in a portfolio margin accountII receive a copy of the risk disclosure statement describing the risks and nature of portfolio margining, within 15 days of opening a portfolio margin accountIII sign an acknowledgment attesting that he or she has read and understands the disclosure document at, or prior to, the initial transaction in a portfolio margin accountIV sign an acknowledgment attesting that he or she has read and understands the disclosure document within 15 days of opening a portfolio margin account A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is A.FINRA requires that a portfolio margin account be opened as an options account that is qualified for naked options writing. This requires a more-detailed suitability determination and requires not only branch manager approval, but also separate approval of the designated Registered Options Principal (this is the "main office" ROP in charge of compliance as opposed to a regular branch manager-ROP). The customer must be provided with a portfolio margin risk disclosure document at, or prior to, the initial transaction in the account and must sign an acknowledgment that he or she has read and understands the disclosure document prior to the initial transaction in the account. Note that this is a more stringent requirement than the procedure for opening a regular options account, where the Options Agreement must be signed and returned within 15 days of account opening.

A customer buys a municipal bond in the primary market at a discount. Which of the following statements are TRUE regarding the discount and the tax consequence? I The discount must be accretedII The discount may be accreted at the option of the bondholderIII If the bond is held to maturity there is no taxable capital gainIV If the bond is held to maturity, there is taxable capital gain A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.If a customer buys a new issue municipal bond at a discount, the discount must be accreted. Every year, a portion of the discount is "earned" and is taxed as interest income. In this case, since municipal issues are exempt from Federal income tax, no tax is due. As the bond is accreted, its cost basis is increased yearly by the accretion amount. At maturity, the bond's cost basis has been accreted to par. Since it is redeemed at par, there is no capital gain or loss at maturity.

Many years ago, a customer bought 100 shares of ABC stock at $15. The customer makes a single gift to his daughter this year of the stock when it is valued at $30. The stock is sold by the daughter when it is worth $60. For tax purposes, the daughter's cost basis in the security is: A. $15 per share B. $30 per share C. $45 per share D. $60 per share

The best answer is A.If a person (other than a charity) receives a gift of property upon which no gift tax has been paid, the cost basis to the recipient is the original cost basis of that security - in this case $15 per share. We know that no gift tax was due, since the aggregate value of the securities at the time the gift was given was 100 x $30 per share = $3,000, which is under the annual gift exclusion of $15,000 in 2019.

A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statements are TRUE? I The entire withdrawal is taxed as ordinary incomeII Since half the account balance has been withdrawn, the withdrawal is taxed at 50% of ordinary ratesIII The entire withdrawal is subject to a 10% penalty taxIV Since half of the account has been withdrawn, the withdrawal is subject to half of the 10% penalty tax A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full.

Custodian accounts can be opened as a: I Cash accountII Margin accountIII Arbitrage account A. I only B. I and II C. II and III D. I, II, III

The best answer is A.The "default" setting of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act is that custodian accounts can only be opened as cash accounts. They can be opened as margin accounts only if the State permits it in its version of the law (which some States do, most do not). For the exam, custodian accounts can only be opened as cash accounts, since this is the rule in most States.

The MSRB requires that if an employee of another municipal broker-dealer wishes to open an account at your firm: A. duplicate copies of each confirmation must be sent to the employerB. duplicate copies of each confirmation must be sent to the MSRB C. the employer must approve each trade before execution D. the municipal principal must approve each trade before execution

The best answer is A.The MSRB requires that duplicate confirmations of each trade be sent to the employer if an employee of another municipal firm opens an account at your firm. In contrast, FINRA requires that confirmations and/or statements be sent only if the employer requests in writing.

Odd lot transactions on the NYSE are: I orders for less than 100 sharesII orders for multiples of 100 sharesIII handled by the Specialist (DMM)IV handled by the $2 Broker A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is A.The Specialist (now renamed the DMM - Designated Market Maker) acts as the "odd lot" dealer on the NYSE for orders in the assigned stock that are less than 100 shares. Note that these orders are handled separately from the Specialist's (DMM's) "book."

A customer is short 400 shares of ABC stock at $50 per share in a margin account. The customer wishes to sell 4 ABC Jan 50 Puts @ $5. The customer must deposit: A. 0 B. $500C. $2,000 D. $20,000

The best answer is A.The existing short stock position covers the sale of the puts. The customer does not deposit anything to sell the puts; as a matter of fact, he or she can take the $500 received per contract x 4 contracts = $2,000 total premium received for selling the puts from the account. Please note, however, that the short stock position must be properly margined.

To find the NAV (Net Asset Value) of a mutual fund, which is deducted from the value of all assets owned by the fund? A. Liabilities B. Operating Expenses C. Management Fees D. Redemption Fees

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

Which statements are TRUE regarding the Federal taxation of investments in foreign government bonds? I Interest is taxable in the year receivedII Interest is exempt from Federal taxationIII Capital gains are taxable in the year realizedIV Capital gains are exempt from Federal taxation A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.The interest earned by holders of foreign government securities who reside in the United States; and any capital gains on these holdings; are subject to both Federal Income tax and to state and local income tax.

Which statements are TRUE regarding Real Estate Investment Trusts? I REITs must distribute at least 90% of Net Investment Income to shareholdersII REITs must invest at least 90% of assets in other REIT securitiesIII Interest expense paid by REITs is deductible to the REITIV REITs are registered as investment companies under the Investment Company Act of 1940 A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is A.To be regulated, REITs must distribute at least 90% of their Net Investment Income to shareholders. REITs can invest in other REIT securities, but this can be no more than 25% of assets. Interest expense paid is tax deductible. Finally, REITs are not registered as investment companies because they are primarily investing in real estate assets, whereas investment companies invest in securities.

Completed trades of NASDAQ stocks must be reported within: A. 10 seconds B. 45 seconds C. 60 seconds D. 90 seconds

The best answer is A.Trades of NASDAQ stocks must be reported by the executing member within 10 seconds of execution to the Network C tape. This is FINRA's reporting rule for NASDAQ trades and all OTC equity trades, including OTC trades of NYSE-listed issues (Third Market trades), OTCBB trades and trades of Pink Sheet issues. Note that the NYSE operates under the same rule.

The maximum life of an index option contract is: A. 4 months B. 8 months C. 12 monthsD. 24 months

The best answer is A.Unlike regular stock options that have a maximum life of 8 months (though this can be tested as 9 months), index options have a maximum life of 4 months (though this may still be tested as 3 months, which used to be the maximum life). In any event, in no question will both 3 and 4 months be given as choices.

`A customer who is retired wants to select an investment that is liquid, marketable, and that provides regular income. The BEST choice would be to recommend: A. Treasury BillsB. Treasury NotesC. Preferred Stock D. Certificates of Deposit

The best answer is B. Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, but not as marketable as Treasury securities, making Treasury securities the better choice. So we are left with either a T-Bill or a T-Note. Treasury notes pay interest semi-annually; while Treasury Bills do not provide a regular income stream, so a T-Note is the better choice. (One could argue that buying T-Bills at a discount and letting them mature at par and then rolling over the original investment amount into a new T-Bill purchase will also provide an income stream, but this requires continuous reinvestment on the part of the customer. Buying a T-Note is a completely passive investment in terms of the customer's needs.)

Regarding Ginnie Mae Pass Through Certificates: I The certificates pay holders on a monthly basisII The certificates pay holders on a semi-annual basisIII Each payment consists of interest onlyIV Each payment consists of a combination of interest and principal A. I and IIIB. I and IV C. II and IIID. II and IV

The best answer is B.Ginnie Mae Pass Through Certificates "pass through" monthly mortgage payments to the certificate holders. Each payment is a combination of both interest and principal paid from the underlying mortgage pool.

Which of the following statements are TRUE regarding Rule 415? I This rule allows seasoned issuers to file a blanket registration which covers a 3 year periodII This rule allows seasoned issuers to file a blanket registration which covers a 5 year periodIII The issuer must still go through a 20 day cooling off period during which the SEC may require more information to be submittedIV The issuer avoids the 20 day cooling off period and is allowed to issue the securities 2 business days after filing A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B. SEC Rule 415, the "shelf registration rule" allows "seasoned issuers" to file a blanket registration statement with the SEC, covering a period of 3 years, for any securities that the issuer may wish to sell. It is only available to "seasoned" companies that already have completed a registered IPO, that have been registered for 1 year, and that have a minimum market capitalization of $75 million. If the seasoned issuer wishes to sell any securities during this 3 year period, it simply files a notification with the SEC that it is selling under that registration statement. This procedure avoids the "20 day cooling" off period, and allows seasoned issuers to enter the market quickly (such as when interest rates have dipped) to sell their securities.

Growth companies are characterized by: A. low dividend payout ratios and low price / earnings ratiosB. low dividend payout ratios and high price / earnings ratios C. high dividend payout ratios and low price / earnings ratios D. high dividend payout ratios and high price / earnings ratios

The best answer is B.Growth companies are characterized by high price-earnings ratios and low dividend payout ratios. Mature companies are characterized by low price-earnings ratios and high dividend payout ratios.

If a customer effects a short sale, the broker-dealer: I will borrow the shares to be sold from someone elseII will buy the shares to be sold from someone elseIII can demand that shares be replaced within the first 7 days of establishment of the positionIV can demand that the shares be replaced at any time A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B. When a customer shorts stock, the shares to be sold are borrowed by the brokerage firm, usually from another client at the same firm who has signed a loan consent agreement. The short seller agrees that the broker has the right to demand, at anytime, that the short seller "close out" the position by purchasing the shares in the market and returning them to the lender of the shares. As an example of why this could occur, maybe the customer (lender of the stock) who is long those shares now wants the stock transferred and shipped. In the real world, this rarely happens - if the original lender of the shares wants them returned, the broker will "move over" the IOU to another customer who is long the stock at the same firm and who has signed a loan consent agreement, returning that stock to the original lender of the shares.

ABC Corporation, after many profitable years, declares a one-time special cash dividend of $10.00 per share. After the announcement, the stock is trading at $100 per share. Your customer holds 1 ABC Jan 110 Call. As of the ex date, the customer will have: A. 1 ABC Jan 90 CallB. 1 ABC Jan 100 CallC. 1 ABC Jan 110 Call D. 1 ABC Jan 120 Call

The best answer is B. While the OCC does not adjust the strike prices of listed options contracts for regular quarterly cash dividends, since they are a "known quantity" that the market prices into options premiums, "special cash dividends" are a one-time event that the market does not know about. Therefore, the OCC does adjust listed options for special cash dividends that amount to at least $12.50 per contract. Since this special cash dividend amounts to $10 per share x 100 shares = $1,000 value per contract, it will be adjusted. The new strike price will be 110 - $10 cash dividend = 100. The number of shares covered by the contract does not change.

An options strategy where the maximum potential loss is equal to the difference between the value of the underlying long securities position and premiums received is a: A. naked call writerB. covered call writer C. naked put writer D. covered put writer

The best answer is B.A covered call writer sells a call contract against the underlying stock that is owned by that customer. If the market drops, the call expires unexercised and the customer keeps the premium. However, as the market drops, the customer loses on the long stock position. Thus, the maximum potential loss is the full value of the stock position, net of collected premiums.

A 60-year old man wishes to receive an annuity payment for himself and his beneficiary for at least 15 years. The recommended payout option is: A. life annuityB. life annuity - period certain C. life annuity - unit refund D. installments for a designated amount

The best answer is B.A life annuity-period certain will pay for one's life, however if that person dies early, the annuity will still pay for a designated period. In this case, the period certain would be 15 years. A life annuity simply pays for one's life. Once that person dies, payments cease. A unit refund annuity pays the remaining balance as a lump sum if the annuitant dies "early". The annuity option that chooses installments for a designated amount allows the annuitant to choose the monthly amount to be received. Payments continue for that amount until the account is exhausted. ques

Accelerated depreciation deductions: I increase reported income in later yearsII decrease reported income in later yearsIII increase reported expenses in later yearsIV decrease reported expenses in later years A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Accelerated depreciation deductions, when compared to straight-line depreciation deductions, are "front loaded." The depreciation deduction is higher in earlier years; but the deduction is lower in later years (as compared to straight line depreciation). Because there are higher deductions in the earlier years, this will reduce reported income in those years; while the lower deductions in later years will increase reported income for those years.

An ADR is: A. a U.S. security held in U.S. branches of foreign banksB. a foreign security held in foreign branches of U.S. banks C. a negotiable certificate denominated in a foreign currency D. a negotiable certificate denominated in U.S. currency

The best answer is B.An American Depositary Receipt is a foreign security that is held in a foreign branch of a U.S. bank. The bank issues receipts against these shares, and the receipts are registered in the United States as securities and are listed and traded on U.S. stock exchanges. In this manner, the foreign corporation does not have to register its shares with the SEC in order to have trading take place in the U.S.

All of the following statements are true regarding Eurodollar bonds EXCEPT: A. U.S. issuers of Eurodollar bonds are not subject to foreign currency riskB. Eurodollar bond issues are sold all over the world, including the United States C. Non-U.S. issuers of Eurodollar bonds are subject to foreign currency risk D. Eurodollar bonds are denominated in U.S. currency only

The best answer is B.Eurodollar bond issues are sold overseas (in Europe), but pay in U.S. Dollars. They are not registered with the SEC and thus, are not sold in the United States. Multinational U.S. issuers tap the Eurodollar bond market if interest rates are lower in this market than those available in the U.S. Foreign issuers may also sell Eurodollar issues. For U.S. issuers, there is no currency exchange risk, since payments are made in U.S. dollars. However, foreign issuers are exposed to currency risk, since they must convert their currency into U.S. dollars to make payments on Eurodollar issues.

Customer Name:Joey JonesAge:30Marital Status:SingleDependents:NoneOccupation:VP - Marketing - ACCO Corp.Household Income:$250,000Net Worth:$110,000 (excluding residence)Own Home:No - RentsInvestment Objectives:Aggressive Growth / Early RetirementInvestment Time Horizon:20 yearsInvestment Experience:0 yearsCurrent Portfolio Composition:401k:$70,000Cash in Bank:$40,000 The customer informs you that he just got married and that his wife intends to work for the next 5 years before they think about children. In order to make recommendations to the client due to these changed circumstances, the registered representative should: A. ask the customer if he wishes to open a joint account with his wifeB. update the account profile to include the wife's financial information C. obtain the wife's social security number and perform a credit check D. update the account file with a copy of the customer's marriage certificate

The best answer is B.Getting married is a life-changing event, both from a personal standpoint and a financial planning standpoint. Since the new wife will be working for 5 years, there will be additional income that can be invested. The financial goals and investment time horizon are likely to change as well. The first step is to update the financial profile based on the new circumstances.

A customer owns 100 shares of ABC stock in a margin account, valued at $40 per share. The customer sells 2 ABC Jul 40 Calls @ $4. The customer will lose money at all of the following prices EXCEPT: A. $30B. $35 C. $50 D. $55

The best answer is B.If the stock rises by more than the 8 points collected in premiums, there will be a loss on the one naked call (above $48). If the stock drops below $32 (40 - 8), there will be a loss on the long stock position (the 2 calls will expire unexercised). Therefore, breakeven occurs at $32 and $48. Between $32 and $48, the position is profitable. Below $32 or above $48, there is a loss. que

Once registration is effective for a non-exempt new issue, customers that previously received a preliminary prospectus during the 20-day cooling off period are: A. automatically confirmed with a purchase of the issueB. contacted by the underwriter to see if they wish to purchase the issue C. obligated to buy an amount of the issue determined by the underwriter D. permitted to make a competitive bid for the issue

The best answer is B.Once registration is effective, customers, who previously received a preliminary prospectus during the 20-day cooling off period, may be contacted by the underwriter to see if they wish to purchase the issue

Which of the following statements are TRUE about a regular way stock trade effected in a margin account? I Payment is required in partII Payment is required in fullIII Settlement occurs the same business dayIV Settlement occurs in 2 business days A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Regular way trades settle in 2 business days. In a margin account, partial payment is required on settlement. In a cash account, full payment must be deposited on settlement.

Which statement is TRUE about the activities of Sallie Mae? A. Sallie Mae makes direct loans to eligible studentsB. Sallie Mae buys student loans from originating financial institutions C. Sallie Mae buys conventional mortgages from originating financial institutions D. Sallie Mae buys VA and FHA insured mortgages from originating financial institutions

The best answer is B.Sallie Mae is the Student Loan Marketing Association. It is a privatized agency that is listed on NASDAQ. Sallie Mae makes a secondary market in student loans, buying the loans from the originating lenders. To finance its activities, Sallie Mae issues conventional debentures. Sallie Mae does not lend directly to students.

he real interest rate is the: A. nominal rate plus the inflation rateB. nominal rate minus the inflation rate C. prime rate plus the federal funds rate D. prime rate minus the federal funds rate

The best answer is B.The "real" interest rate dials out the effect of inflation. It is the nominal interest rate minus the inflation rate.

The Market Maker on the CBOE: I buys and sells for his own accountII does not buy or sell for his own accountIII holds a book of public ordersIV does not hold a book of public orders A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.The CBOE splits the NYSE Specialist's (now renamed the DMM - Designated Market Maker's) functions into two jobs for 2 separate individuals. The market maker on the CBOE buys and sells for his own account but does not hold a book of public orders. The "book" of orders is handled by an exchange employee known as the order book official. OBOs cannot make markets in options contracts. Note that on the NYSE, the Specialist/DMM is 1 person who performs both of these functions.

Under Rule 144, the Form 144 is filed: I by the seller of the restricted sharesII by the buyer of the restricted sharesIII 10 business days prior of the placement of the orderIV at, or prior to, the placement of the order A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.

All of the following statements are true about the NYSE automated trading system EXCEPT: A. completed trades are reported electronically without the use of floor generated execution ticketsB. any size order can be accommodated on the system C. orders are routed directly to the Specialist (DMM) for execution D. use of the system eliminates floor brokerage fees

The best answer is B.The Super Display Book system can only handle orders up to specified maximum sizes. The system routes orders directly to the Specialist's (now renamed the DMM - Designated Market Maker's) post for execution, and execution reports are returned directly to the originating firm through the computer system, without the use of hand generated floor trading tickets. The system avoids floor brokerage fees, and so is both faster and cheaper to use.

Two years ago, a customer purchased 1,000 shares of ABC stock at $45 per share. The stock has appreciated in value and is currently worth $60,000. The company announces that it is spinning off a subsidiary, DEF, to its shareholders. The value of the new company being spun off equals 5% of the old company. The customer will have: A. $45,000 cost basis in ABC; $0 cost basis in DEFB. $42,750 cost basis in ABC; $2,250 cost basis in DEF C. $60,000 cost basis in ABC; $0 cost basis in DEF D. $57,000 cost basis in ABC; $3,000 cost basis in DEF

The best answer is B.The aggregate cost basis does not change in a spin-off. The original investment in ABC stock had a cost basis of $45,000. The 5% spin off means that 5% of this value is now attributed to the newly spun-off DEF shares = $2,250. The remaining value of the ABC shares is $45,000 - $2,250 = $42,750. The current market value has nothing to do with cost basis.

A municipal bond "tax swap" is the: A. purchase and sale of similar, but not identical bonds, to incur a taxable gain for that yearB. purchase and sale of similar, but not identical bonds, to incur a tax deductible loss for that year C. "like kind" exchange of identical bonds without incurring any tax consequencesD. purchase and sale of identical bonds to incur either a taxable gain or tax deductible loss for that year

The best answer is B.The definition of a municipal bond tax swap is the purchase and sale of similar, but not identical bonds, to incur a tax deductible capital loss for that year. The bonds cannot be identical, otherwise the wash sale rule comes into play.

The lowest interest rate listed below is the: A. discount rateB. federal funds rate C. prime rate D. broker loan rate

The best answer is B.The lowest major interest rate in the economy is the Federal Funds rate. Ranking the major interest rate measures from lowest to highest: Fed Funds Rate, Discount Rate, Broker Loan Rate, Prime Rate.

To impose the maximum sales charge, under FINRA rules, mutual funds must offer investors all of the following benefits EXCEPT: A. BreakpointsB. Plan Completion Insurance C. Rights of Accumulation D. Letter of Intent

The best answer is B.To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor's accumulated position counts towards completion of a breakpoint). There is no requirement for the sponsor to offer plan completion insurance, which is often included in variable annuity contracts; and which funds the annuity for a beneficiary if the contract holder dies prematurely.

Which of the following statements are TRUE regarding the settlement of trades in U.S. Government bonds? I Trades settle next business dayII Trades settle 2 business days after trade dateIII Trades settle in Clearing House FundsIV Trades settle in Federal Funds A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Trades of U.S. Government securities settle next business day in Fed Funds (payment by check is not permitted since the clearance time is greater). Do not confuse this with settlement of the weekly Treasury Bill auctions. The Federal Reserve auctions T-Bills each Monday and Tuesday, with the bills issued, and paid for in Fed Funds, the following Thursday.

Which of the following statements are TRUE regarding Treasury Stock? I Treasury Stock receives dividendsII Treasury Stock votesIII Treasury Stock reduces the number of shares outstandingIV Treasury Stock purchases are used to increase reported Earnings Per Share A. I and IIB. III and IV C. II, III, IV D. I, II, III, IV

The best answer is B.Treasury stock does not vote nor receive dividends. Treasury stock is deducted from outstanding shares, and since outstanding shares are reduced, Earnings Per Share increases.

Which of the following statements are TRUE regarding new issue U.S. Government and Agency securities? I U.S. Government securities are sold at auction conducted by the Federal ReserveII U.S. Government securities are sold through a selling groupIII Agency securities are sold at auction conducted by the Federal ReserveIV Agency securities are sold through a selling group A. I and IIIB. I and IV C. II and IIID. II and IV

The best answer is B.U.S. Government securities are sold at auction conducted by the Federal Reserve; agency securities are sold to the public through a selling group of broker-dealers assembled by the agency.

A customer buys 1 ABC Jan 35 Put @ $6 when the market price of ABC is $34. The put is exercised when the market price is $29. The tax consequence is a: A. cost basis of $2,900B. sale proceeds of $2,900 C. cost basis of $4,100 D. sale proceeds of $4,100

The best answer is B.When a put is exercised, a holder is selling the stock at the strike price. The premium paid for the put reduces the sale proceeds. The stock is being sold at $35, but since $6 was paid in premiums, the net sale proceeds are $29 per share or $2,900 for the contract. Note that this is the same as the breakeven point.

If a corporation has an operating margin of profit of 9.50%, this means that for every $1 of revenue, the company has: A. $.095 of expenses B. $.95 of expensesC. $.905 of expenses D. $.0905 of expenses

The best answer is C. An income statement starts with revenues and deducts all operating expenses to arrive at operating income. The "margin" is a profitability or loss percentage. Gross Sales-Operating ExpensesOperating Income The "margin" is a profitability or loss percentage. The Operating Margin of Profit is: Operating Income / Revenues. (Also note that the term "Operating Margin of Profit" is a wording that is now rarely used - instead the current wording is simply Operating Profit Margin or Operating Margin - but it may still be used on the exam.) If the company has an Operating Margin of Profit of 9.50%, this means that it had operating income of $.095 for each $1 of revenue ($.095 / $1 = 9.50%). Because operating expenses are deducted from revenue to arrive at the operating margin, this means that for every $1 of revenue, there were $.905 of expenses.

Trading in the Interbank market will affect: I foreign currency prices in terms of U.S. dollarsII future trade deficit or surplus figuresIII future economic growthIV future inflation levels A. I and II only B. III and IV onlyC. I, II, IIID. I, II, III, IV

The best answer is C. Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. Inflation levels are determined by the relative balance of output of goods and services versus the U.S. dollars available to "pay" for these. If the money supply is allowed to grow too quickly by the Fed relative to real economic growth, then there will be inflation. Therefore, future inflation levels are basically determined by Federal Reserve actions, not by the interbank market.

Short sales of municipal bonds rarely occur because: A. Rule 10b-5 of the Securities Exchange Act of 1934 prohibits the short sale of municipal bonds for most traders B. round lot trades ($100,000 face value) are too expensive to carryC. the trading market is thin, making short covering difficult D. only municipal broker's brokers are allowed to take short positions

The best answer is C. Municipal bonds are usually not sold short because the trading market is very limited. Unlike corporate securities and government securities which receive no special tax status, municipal bonds are typically exempt from state and local tax if purchased by a resident of that state (in addition to the federal tax exemption). Thus, trading of municipal issues is typically confined to the state in which it was issued: there is no national trading market. Shorting a security requires the trader to buy back (and therefore replace) the exact security that was sold. This is difficult to do if there are few bonds trading at any one time. Another important reason why muni's are not shorted is because most issues are serial bonds. Serial bonds mature over a sequence of years. Thus, if a bond maturing in the year 2030 is shorted, it must be replaced with a 2030 bond. Out of the total issue, there may have been very few 2030 bonds, further limiting the potential trading market.

All of the following statements are true about Regulation NMS EXCEPT: A. the "Order Protection Rule" requires that all orders be protected and receive the best execution price during normal market hours B. market makers are obligated to display customer limit orders at the same or better price than the market maker's quoteC. all exchange listed, NASDAQ and OTC stocks are subject to the rule D. quotes from all markets must be consolidated to display a National Best Bid and Offer (NBBO) for each covered security

The best answer is C. Regulation NMS requires all market centers to electronically link and provide automated execution at the best price of all markets within 1 second for orders that are executable. It mandates that market centers cannot discriminate against customers who access their quotes. It requires that markets have procedures in place to prevent trade-throughs - which is "trading through" another market's better priced quote (the same thing as executing an order at an inferior price in that market). This is called the Order Protection Rule (Rule 611). Regulation NMS requires market makers to display all customer orders that are at the same or better price than the market maker's price. This is called the Limit Order Display Rule (Rule 604). Thus, market makers cannot bury customer orders and must show all trading interest. Regulation NMS only applies to exchange listed and NASDAQ stocks. These are called the NMS stocks. It does not apply to OTC stocks - therefore Choice C is incorrect. To make sure that orders for NMS stocks are protected and filled at the best price, quotes for that stock must be collected from each market, aggregated and displayed, so that the NBBO (National Best Bid and Offer) is shown.

A "double barreled" municipal issue has: I primary backing of a general obligation pledgeII primary backing of a revenue pledgeIII secondary backing of a general obligation pledgeIV secondary backing of a revenue pledge A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.A "double barreled" bond is a municipal revenue bond whose principal and interest payments are backed by a revenue pledge; however, if the revenues are insufficient to cover the debt service requirements, the municipality will use its ad valorem taxing power to meet the deficit.

When comparing an ETN to an ETF, which statements are TRUE? I ETNs are a type of investment company offeringII ETFs are a type of investment company offeringIII ETNs are a debt instrumentIV ETFs are a debt instrument A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. An ETF is an Exchange Traded Fund. It is an investment company that owns an underlying portfolio of securities. The shares of the ETF are listed and trade like any other stock.

Which of the following individuals would be considered an insider? I A person who uses public information to trade in that company's stock for a profitII A person who uses non-public information to trade in that company's stock for a profitIII A Chairman of a corporation who uses non-public information to trade in that company's stock for a profitIV A wife of a Chairman of a corporation who uses non-public information to trade in that company's stock for a profit A. I and II B. III and IVC. II, III, IV D. I, II, III, IV

The best answer is C.Anyone can use public information to trade stock for a profit. However, any person who uses material non-public information to trade in a company's stock for profit (or to avoid a loss) can be considered to be an "insider."

A single mother has 2 children, ages 5 and 9. She earns $150,000 per year and wishes to open Coverdell ESAs for each child to pay for qualified education expenses. Which statement is TRUE? A. She can open the account for each child and make an annual $2,000 tax-deductible contribution for each B. She can open the account for each child and make an annual $2,000 non tax-deductible contribution for eachC. She is prohibited from opening an account for each child because she earns too much D. She is prohibited from opening an account for each child because Coverdell ESAs are only available to married couples with children

The best answer is C.Both Roth IRAs and Coverdell ESAs are not available to high-earning individuals. There is an income phase-out range, above which contributions are prohibited to either of these. For 2019, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

Which of the following investment portfolios is MOST liquid? A. An aggressive growth fund B. A U.S. Government bond fundC. A money market fund D. An income fund

The best answer is C.By definition, a money market instrument is liquid. They are readily traded at a discount equal to the market rate of interest because any purchaser knows that he or she will be paid when it matures in the near future. Long term governments are not as liquid - there is not nearly as much long term government debt outstanding as there are T-Bills (the biggest of the money market instruments), making these somewhat less liquid. Income funds are composed mainly of high yielding preferred stocks and corporate bonds. These are not as liquid as U.S. Government issues. Finally, aggressive growth stocks are the least liquid of the choices offered, since they are not traded on the NYSE, but rather OTC - which is a less liquid marketplace.

A customer who is retired wants to select an investment that is marketable, and that provides the highest rate of return. The BEST choice would be to recommend: A. Treasury Bills B. Treasury NotesC. Investment Grade Preferred Stock D. Certificates of Deposit

The best answer is C.Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, and Treasury securities are extremely marketable, so any of these meet this requirement. However, investment grade preferred stock issued by a top-shelf corporation will provide a higher investment return than ultra-safe Treasury securities, making this the best choice.

All of the following are benefits of tax advantaged investments EXCEPT: A. depreciationB. depletionC. recapture D. tax credits

The best answer is C.Depreciation deductions, depletion deductions and tax credits are all tax benefits. Recapture rules require that those benefits be "recaptured" and taxed as ordinary income if the asset that was the subject of the benefits is sold at a gain.

Diversification among multiple asset classes reduces the: I market risk of the portfolioII marketability risk of the portfolioIII standard deviation of portfolio returns A. I only B. II and III onlyC. I and III onlyD. I, II, III

The best answer is C.Diversification of a portfolio reduces market risk; and also reduces the variability of investment returns. It does not affect marketability risk - that is, how difficult is it to liquidate given position in the portfolio.

Which of the following statements are TRUE during the period that a non-exempt new issue is "in registration"? I No advertising or sale of the issue is permittedII The SEC may issue a deficiency letter requesting additional information before allowing registration to become "effective"III The preliminary prospectus with the final price is distributedIV The offering participants perform due diligence on the offering A. I and II only B. III and IV onlyC. I, II, IV D. I, II, III, IV

The best answer is C.During the 20 day cooling off period, no advertising or sale of the issue is permitted because registration is not yet effective. If the SEC has problems with the filing, it will issue a deficiency letter requiring more information. During the cooling off period, due diligence is performed by the parties involved in the offering. A preliminary prospectus (red herring) may be distributed, but it does not contain the final offering price because this is not known until the effective date.

(Refer to the exhibit window to answer the following question) Which statements are TRUE about this offering? I This is a registered primary distributionII The debentures are junior to other corporate debt in a liquidationIII The bonds cannot be purchased on marginIV The bonds are priced to yield 10.50% A. I and II only B. II and III onlyC. I, II, III D. I, II, III, IV

The best answer is C.Since this is a new issue prospectus offering, this is a primary distribution with all proceeds going to the issuer. New issues are not marginable for 30 days under Federal Reserve Board rules. These are subordinated debentures, so they are junior to other senior debentures in the event of a liquidation. The bonds have a 10% Coupon and are priced at 100 to yield 10%.

A customer has marginable securities held in account that has a debit balance at the brokerage firm. Which statements are TRUE? I The securities must be segregated and placed in safekeepingII The securities can be commingled with those of other margin customersIII The securities may be rehypothecated to a bank for a loan by the brokerIV The securities cannot be rehypothecated to a bank for a loan by the broker A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.Fully paid customer securities must be segregated by the brokerage firm and placed in safekeeping. Such fully paid customer securities cannot be commingled with customer margin securities; cannot be commingled with firm positions; and cannot be rehypothecated to a bank. However, margin securities are pledged to the broker-dealer as collateral for the margin loan (debit balance). It is these securities that may be commingled with other customer margin securities; and these securities can be rehypothecated to a bank for a loan by the broker.

A growth investor would consider a company's: A. Price / Earnings ratio B. Price / Book Value ratioC. Stock price appreciation rate D. Market share

The best answer is C.Growth investors select investments based simply on growth in earnings or growth in market price; on the assumption that these will always be the best performing investments. Value investors invest in undervalued companies - as measured by low Price/Earnings ratios and low Price/Book Value ratios - that have good market prospects. Thus, they also consider product line, market share, management, etc.

A customer buys stock in a margin account, but does not pay in the 4 business days required under Regulation T. The brokerage firm can take all of the following actions EXCEPT: A. sell out the position and freeze the account for 90 days B. request an extension from FINRAC. sell short the position D. use existing SMA (credit line) in the margin account to meet the requirement

The best answer is C.If a customer does not meet a Reg. T. call, the firm can sell out the unpaid position; or can request an extension from FINRA. If there is existing SMA (SMA is the available credit line) in the account, it can be applied towards the call. The firm cannot create a short position (a new position) to cover the long position for which the customer did not pay.

A managed limited partnership offering is one which is sold to investors on a? A. best efforts basis B. not held basisC. firm commitment basis D. stand-by basis

The best answer is C.Managed direct participation program offerings are firm commitments by underwriters who buy the issue and then sell it to the public through a syndicate - the underwriter is said to be "managing" the sale of the offering. An unmanaged direct participation program is one which is sold to investors through wholesalers, acting as agents for the issuer. These offerings are sold on a best efforts basis. The wholesalers take no financial responsibility for the issue.

Mature companies are characterized by: A. low dividend payout ratios and low price / earnings ratios B. low dividend payout ratios and high price / earnings ratiosC. high dividend payout ratios and low price / earnings ratios D. high dividend payout ratios and high price / earnings ratios

The best answer is C.Mature companies are characterized by low price-earnings ratios and high dividend payout ratios. Growth companies are characterized by high price-earnings ratios and low dividend payout ratios.

Which of the following can be purchased on margin? A. Mutual Funds B. Initial public offerings of Closed End FundsC. Closed End Funds trading on the NYSE D. Initial public offerings of Fixed Unit Investment Trusts

The best answer is C.New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund or a unit trust. Both are made with a prospectus. However, once closed-end fund shares are listed on an exchange and begin trading in the market, they are marginable like any other listed stock.

Which of the following statements are TRUE about REITs? I 90% of Net Investment Income must be distributed to shareholders to be "regulated" under Subchapter MII 75% of assets must be invested in real estate related activities to be "regulated" under Subchapter MIII Gains may be passed through to shareholders under "conduit" tax treatmentIV Losses may be passed through to shareholders under "conduit" treatment A. I and IV only B. II and III onlyC. I, II, III D. I, III, IV

The best answer is C.Real Estate Investment Trusts must distribute at least 90% of their Net Investment Income to shareholders; and invest at least 75% of their assets in real estate activities; to be regulated under Subchapter M. Gains may be passed through to shareholders, but losses cannot be passed through under "conduit" tax treatment.

Which of the following are types of accounts in which securities transactions can be effected under Regulation T? I Cash accountII Margin accountIII Arbitrage accountIV Non-securities credit account A. II only B. II and IVC. I, II, III D. I, II, III, IV

The best answer is C.Regulation T defines 3 types of accounts in which securities transactions can occur - a cash account where full payment is required; a margin account where partial payment is required; and an arbitrage account for going "short against the box." A non-securities credit account is an account to do futures transactions (which are NOT securities). These do not fall under Regulation T because they do not hold securities.

Which of the following terms describe rights? I ExercisableII NegotiableIII RedeemableIV Giftable A. I and IV only B. II and III onlyC. I, II, IVD. 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.

Permitted purchasers of Rule 144A issues are: A. Accredited Investors B. Financial InstitutionsC. Qualified Institutional Buyers D. Major Institutional Investors

The best answer is C.Rule 144A is not to be confused with Rule 144. Rule 144A allows issuers to sell large blocks of private placements without SEC registration to "QIBs" - Qualified Institutional Buyers. Basically, a QIB is an institutional investor with at least $100MM of assets available for investment. The issue with private placements is that they are illiquid. They cannot be sold in the public markets. Rule 144A "fixes" this problem by allowing 144A issues to be traded from QIB to QIB. The market for this is "PORTAL" - an electronic trading market only for 144A issues. PORTAL is owned by a consortium consisting of NASDAQ and the larger broker-dealers who cater to institutional clients.

The first price at which a customer sell order on the book will be filled is: A. 50.04 B. 50.06C. 50.07D. 50.08

The best answer is C.The "open" area on the book is where the stock is currently trading since any orders that were there would have been filled by the Specialist/DMM (Designated Market Maker). Therefore, the stock is trading around 50.05 - 50.06. If the market rises, the Specialist/DMM will have to sell for the customers on the book. The first order to sell as the market rises is at 50.07. The Specialist/DMM can sell LOWER than this price for his own account, but cannot sell at 50.07 until the customer order is cleared. Therefore, the Specialist/DMM can sell for his own account at 50.06 or lower, but not at 50.07.

The "AIR" shown in a variable annuity prospectus is the: A. minimum guaranteed rate of return on investment B. maximum guaranteed rate of return on investmentC. conservative illustration of the rate of return on investmentD. aggressive illustration of the rate of return on investment

The best answer is C.The AIR - Assumed Interest Rate - shown in a variable annuity prospectus illustrates the annuity that will be available if the separate account performs at that interest rate. It is conservatively estimated, but is no guarantee of a specific return.

Which of the following callers are subject to the provisions of the Federal Telephone Consumer Protection Act of 1991? I Non-profit OrganizationII Securities FirmIII Telemarketing FirmIV Real Estate Company A. II only B. III onlyC. II, III, IV D. I, II, III, IV

The best answer is C.The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited "commercial" phone calls. Charitable (not-for-profit) institutions are exempt from the Act's provisions.

The Securities and Exchange Commission was: I created under the Securities Act of 1933II created under the Securities Exchange Act of 1934III given regulatory authority over securities exchangesIV given regulatory authority over futures exchanges A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The Securities and Exchange Commission was created under the Securities Exchange Act of 1934. It has overall regulatory authority over the securities markets and securities market participants. It has no power over the futures markets - these are regulated by the CFTC - the Commodities Futures Trading Commission.

The NYSE Specialist (DMM), when trading for his own account, trades: I the market trendII against the market trendIII to dampen market volatilityIV to enhance market volatility A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The Specialist (now renamed the DMM - Designated Market Maker) is obligated to make a "fair and orderly" market in the assigned stock. Thus, the Specialist/DMM is obligated to trade in a manner that tends to dampen market volatility - if the market is falling rapidly, the Specialist/DMM must buy that security for its own inventory account to slow down that rate of price decline. If the market is rising rapidly, the Specialist/DMM must sell that security from its own inventory account to slow down that rate of price increase. Thus, the Specialist/DMM tends to trade against the market trend.

A customer sells 1 ABC Jul 75 Call @ $9 and sells 1 ABC Jul 75 Put @ $6 when the market price of ABC is $77. The maximum potential gain is: A. $600 B. $900C. $1,500 D. unlimited

The best answer is C.The customer created a short straddle. The maximum potential gain would be the credit (or the premiums) received. This occurs when the market remains at $75. If the market moves either up or down, the writer begins to lose from the naked short options positions.

To make a suitable recommendation, the registered representative must have sufficient knowledge of the customer's financial background. Regarding recommendations to a customer, which of the following statements are TRUE under MSRB rules? I If the customer refuses to disclose sufficient financial information, recommendations are still allowedII If the customer refuses to disclose sufficient financial information, recommendations are not permittedIII If the customer insists upon performing a trade that is deemed to be unsuitable, the registered representative should follow the customer's instructionsIV If the customer insists upon performing a trade that is deemed to be unsuitable, the registered representative must refuse the trade A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The registered representative should inquire as to the customer's "financial background" under MSRB rules, asking information such as income and net worth. The customer may refuse to provide this information, stating that it is an invasion of privacy. The account can still be opened, however when the customer fails to provide sufficient personal information on his financial status or investment objective, no recommendations can be made. If the customer wishes to execute an unsuitable trade, the registered representative should note this and mark the order ticket as "unsolicited" and execute the order. The registered representative is obligated to do what the customer instructs.

Which of the following are TRUE statements regarding the activities of the registrar? I The registrar cancels old sharesII The registrar transfers shares to new ownersIII The registrar accounts for the number of shares issuedIV The registrar keeps the integrity of the shareholder record . I and II B. II and IVC. III and IVD. I, II, III, IV

The best answer is C.The transfer agent cancels old shares and issues new shares, keeping a record of current shareholder names and addresses. The registrar ensures that all shares are properly accounted for and also verifies the integrity of the record of shareholders' names and addresses.

Under Federal law, stock can be tendered from which of the following accounts? I Restricted margin accountII Short margin accountIII Long margin accountIV Cash account A. IV only B. I and III onlyC. I, III, IVD. I, II, III, IV

The best answer is C.Under the "short tender rule," a person cannot tender borrowed shares. To tender stock, the person must be in a "net long" position in that security. Long stock can be held in a cash or margin account. Restriction (an account below 50% initial Regulation T margin) has no bearing on tendering shares. If shares are tendered from a margin account, the account must still meet the exchange minimum maintenance margin after those shares leave the account. If not, a maintenance call will be generated to bring the account back to minimum margin.

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

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

customer makes the following trades: Buy 1 ABC Jan 50 Put @ $4Sell 1 ABC Jan 65 Put @ $11 when the market price of ABC is $59. The customer must deposit: A. $400B. $700C. $800 D. $1,000

The best answer is C.This is a bull put spread which is created at a $7 net credit consisting of a $4 premium paid vs $11 premium received. If the market rises, both puts will expire out of the money and the customer keeps the $7 credit. This is the maximum potential gain. However, if the market drops, the customer will first be exercised on the short put and must buy the stock at $65. If the market continues falling, the customer can always sell the stock at $50 by exercising the long put, resulting in a maximum 15 point loss. Since $7 was collected in premiums, the maximum net loss is $800. Margin rules for spreads require that the maximum potential "loss" is the deposit amount.

An elderly client has a $400,000 portfolio that is conservatively invested in blue chip stocks and government bonds. He calls his representative and tells him that he wants to liquidate the entire portfolio and buy growth stocks. His son also has an account serviced by the same representative, so the representative calls the son to ask him about how his father is doing, to which the son responds: "Dad has not been himself lately." What step should the representative take? A. The representative should follow the customer's instructions, liquidate the portfolio, and buy growth stocks B. The representative should refuse to follow the customer's instructionsC. The representative should contact the client and explain the risks inherent in the customer's strategyD. The representative should contact compliance and ask them to file a SAR

The best answer is C.This one is kinda cute! The basic rule for elderly clients that appear to be "out of it" is to escalate the matter to compliance and let them deal with it. However, a SAR is a Suspicious Activities Report, which is filed with the Federal Government if the firm is suspicious that a client is money laundering or supporting terrorism. So Choice D is incorrect! Looking at the other choices, representatives are supposed to follow client instructions, but they also have an obligation to steer customers away from doing something really stupid. The representative should neither do what the customer wants (which is stupid) or refuse to do what the customer wants. Sitting down with the customer and explaining why this is stupid appears to be the best choice. If the customer appears to be unable to understand when the registered representative is explaining why the customer's request is not a good idea, then escalate the matter to compliance and let them deal with it!

All of the following statements are true regarding municipal new issue syndicates EXCEPT: A. the same municipal dealers typically join together in a syndicate to bid B. if the syndicate is bidding on a larger than normal issue, it may join with another syndicate to bidC. the manager can force syndicate members to increase the size of their commitment to bid on a larger than normal issue D. the manager can allow additional municipal dealers into the syndicate to bid on a larger than normal issue

The best answer is C.To bid on a larger than normal offering, the manager of the syndicate can request that syndicate members take larger participations (but cannot force them to do so), can add additional syndicate members to the syndicate, or can join forces to bid with another syndicate.

A customer has a term loan that is maturing in 3 years in the amount of $100,000. The customer has the cash now, and wants to know the best investment to make for the 3 years until the loan payment is due. The BEST recommendation is to buy: A. Blue chip stocks B. AA rated debentures with a 3 year maturityC. Treasury notes maturing in 3 years D. AA general obligation bonds maturing in 3 years

The best answer is C.Treasury securities have no credit risk, so this is the best choice. The customer knows he will get back the $100,000 in 3 years, plus will have earned interest every 6 months until maturity. A corporate debenture that is rated AA sounds good, but companies can get into business trouble quickly and the bonds could be downgraded in 3 years. AA general obligation bonds are safe (though not as safe as Treasuries), but their yield is lower, so they are not the best choice. Stocks prices can be volatile, so this is another bad choice.

When advertising the availability of a municipal security at a "yield," a municipal firm: I must own the securityII does not have to own the securityIII must disclose whether the yield is the coupon rate or yield to maturityIV must disclose whether the yield is the coupon rate or current yield A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.Under MSRB rules, a municipal firm is permitted to offer a security that it does not own as long as the firm is prepared to sell that security at the quoted price (the MSRB states that the dealer must know that the bond can be acquired - this is the equivalent of a car dealer selling you a new car that the dealer does not have on the lot. As long as the car dealer knows where the car can be purchased, say from another dealer, then it can be sold to you). Any yield quoted must state whether the yield is the coupon rate, yield to maturity, or yield to call date. Current yield is thought by the MSRB to be somewhat misleading and may not be shown unless the yield to maturity is also shown.

When a bond discount is accreted annually, all of the following statements are true EXCEPT: A. the bond's cost basis is increased proportionally each year B. the bond's accretion amount is shown as an increase of reported interest income receivedC. the bond's accretion amount is reported as a decrease to the annual reported interest D. there will be no capital gain on the bond if held to maturity

The best answer is C.When a bond discount is accreted, annually, the bond's cost basis is increased by the pro-rata amount of the discount and the accretion amount is shown as interest income received for tax purposes. Over the life of the bond, the entire discount will be accreted, increasing the cost basis to par at maturity. Thus, there will be no capital gain or loss at maturity; and the entire discount will have been taxed as interest income over the bond's life.

When a dealer says "The price is 42.25," the quote is considered a: A. nominal quote B. workout quoteC. firm quote D. subject quote

The best answer is C.When a dealer says "the price is," the quote is firm for a normal trading unit at the stated price. A nominal quote is a dealer's guess at the current price - he or she is not committed to trading at that quote. A "work-out" quote is sometimes given for very thinly traded issues, where there is no current trading in the issue, but the trader believes that the trade can be executed in a given price range. After giving the "work out" quote, the trader will search the market to "work out" the trade within the stated price range. A subject quote is subject to confirmation and can change - it is very close to a nominal quote.

A customer who invests in a "fund of hedge funds" should be made aware that: I there are 2 layers of fees associated with the investment - those of the fund manager; and those charged by the underlying hedge fund managersII the computation of NAV is difficult because investments may be made in highly illiquid securities that are infrequently tradedIII the level of risk associated with the investment is typically higher than that of a mutual fundIV fund distributions will generally consist of more highly taxed ordinary income and short term capital gains I and II only B. III and IV onlyC. I, II, IIID. I, II, III, IV

The best answer is D. A "fund of hedge funds" is a closed end fund registered under the Investment Company Act of 1940 (and therefore sold with a prospectus) that makes investments in selected hedge funds. These "funds of funds" allow smaller investors to participate in alternate investments like hedge funds, though they generally have a minimum $25,000 investment amount, cutting out the truly small investor. In addition, these closed end funds are not listed on an exchange - they do not trade. Rather, they are issued either monthly or quarterly, and they are redeemed through tender offer by the sponsor. Since the underlying investments are hedge funds, these "funds of funds" are characterized by aggressive trading, high risk, and potentially high reward. Many of the investments made by hedge fund managers are "exotic" and "illiquid," making the daily mutual fund NAV determination difficult. The underlying hedge fund manager is compensated with management fees, in addition to the mutual fund manager that selects the hedge fund investments earning management fees, so there is a double layer of fees to this investment. Because the underlying hedge funds are aggressively traded, resulting gains (and losses) tend to be short-term, making these tax-inefficient investment vehicles.

Which statement is FALSE about Exchange Traded Funds (ETFs)? A. ETFs are registered under the Investment Company Act of 1940 B. ETFs are typically structured as open-end management companies C. ETFs hold the underlying shares of companies included in a stock indexD. ETFs permit individual investors to buy creation units

The best answer is D. ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Note that individual investors cannot buy creation units - only institutional investors. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA.

A customer, age 51, has a 20 year investment time horizon, a moderate risk tolerance, and is looking for investments that provide both income and growth. The best recommendation would be: A. money market instruments B. mutual funds C. bondsD. large capitalization growth stocks

The best answer is D. Money market instruments are very safe, but provide little income and no growth. These would be recommended to a customer seeking preservation of capital - not to a customer seeking income and growth. Choice B, mutual funds, is too generic to be a valid choice. There are all kinds of mutual funds out there, for all types of investment objectives. Choice C, bonds, is also too generic to be a valid choice. Also, while bonds provide income, they do not provide growth. Choice D, large capitalization growth stocks, is the best one offered. Large capitalization stocks pay dividends for income, and also offer long term growth potential, meeting both of the customer's objectives.

Which of the following options communications sent to more than 25 prospective customers must be approved by the designated Registered Options Principal prior to use? A. Advertising B. Sales literature C. Independently prepared reprintsD. All of the above

The best answer is D. Options communications that are distributed to more than 25 existing or prospective clients must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP). Retail communications include advertising, sales literature and independently prepared reprints distributed to more than 25 existing or prospective clients. Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm's policies and procedures. Options correspondence is a communication to up to 25 existing or prospective clients. It is subject to "post use review and approval" by a branch manager or ROP.

The figures presented for GDP, Currency Value and Trade Balance show the change from 1 year ago. Which of the following would have had a profit in the past year? I Holder of Japanese Yen CallsII Holder of Japanese Yen PutsIII Writer of Japanese Yen CallsIV Writer of Japanese Yen Puts A. I and II only B. III and IV only C. II and III onlyD. I and IV only

The best answer is D.Because the Japanese Yen strengthened in the last year, with the currency value increasing by 8%, the holder of yen calls would have had a profit, as would the writer of yen put contracts (which would have expired "out the money" earning the premium for the writer). question # 12-3-11

Recommendations by a registered representative to a customer about uncovered call writing strategies are unsuitable if the: I customer has not received the Options Disclosure DocumentII opening of the account has not been approved by the Registered Options PrincipalIII representative is unsure about the client's ability to assume the risk associated with this strategy A. I only B. II only C. III onlyD. I, II, III

The best answer is D.Recommendations about options should not be made to a customer unless he has received an Options Disclosure Document; and the account has been approved by the Registered Options Principal; and the registered representative believes that the recommendations made are suitable for the customer.

Which of the following are considered in determining a fair and reasonable price in a municipal principal transaction? I Best judgment of the dealer as to the value of the securitiesII Dollar amount of the transactionIII Expenses incurred by the municipal dealer in effecting the transactionIV The fact that the municipal dealer is entitled to a profit in this transaction A. I and III only B. II and IV onlyC. I, II, IIID. I, II, III, IV

The best answer is D. The MSRB Fair Pricing Rule states that the factors that should be considered when pricing a municipal bond for BOTH agency and principal transactions are the: best judgment of the fair market value of the security; expense of filling the order; fact that the firm is entitled to a profit; availability of the security; total dollar amount of the transaction - a larger dollar amount should result in a smaller mark-up percentage; and value of services rendered in effecting the trade The factors to be considered ONLY for principal transactions are the: yield should be comparable to other similar securities available in the market; maturity, rating and call features of the security; nature of the dealer's business; and existence of material information about the issuer. The factors to be considered that ONLY apply to agency trades are the: price of the transaction; value of any other compensation received in connection with this transaction (for example, a customer directs a municipal dealer to sell one bond and use the proceeds to buy another in a "bond swap." The dealer is performing 2 trades instead of 1, and so, should charge a bit less for each trade).

A breakout through a support level is: I an upside breakoutII a downside breakoutIII bullishIV bearish A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.A "support" level is a price below the current market, through which a stock's price tends not to fall. Thus, the stock is said to have "support" at this price, meaning it is resisting further price declines, because investors are willing to buy at this price. If a stock breaks the support level, this is strongly bearish, since all of the ready buyers have been "cleaned out" and there are still sellers of the stock. If there are many more sellers than buyers, prices will fall.

A customer who is short 1 ABC Jan 50 Call wishes to create a "short straddle." The second option position that the customer must take is: A. Long 1 ABC Jan 50 Call B. Long 1 ABC Jan 50 Put C. Short 1 ABC Jan 50 CallD. Short 1 ABC Jan 50 Put

The best answer is D.A short straddle consists of a short call and a short put on the same stock, with both contracts having the same strike price and expiration. With a short straddle, the customer is hoping that the market remains flat; he loses if the market goes either up or down. If the market rises, the customer loses on the short naked call (the put expires). If the market falls, the customer loses on the short naked put (the call expires). If the market stays the same, both contracts expire "at the money" and the customer gains both premiums collected.

Accrued interest is computed on a 30 day month / 360 day year basis for all of the following EXCEPT: A. Corporate Debentures B. Revenue Bonds C. General Obligation BondsD. U.S. Government Bonds

The best answer is D.Accrued interest on U.S. Government bonds is computed on an actual day month / actual day year basis. Accrued interest for corporate and municipal bonds is computed on a 30 day month / 360 day year basis.

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

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

An existing customer of a brokerage firm wishes to buy an initial public offering that he has heard good things about. The registered representative only has a limited number of shares to sell and explains to the customer that the offering is already "sold out." The customer tells the registered representative "If you can get me some of the stock, I will drop off cash payment in full today, with a little extra for you." The registered representative: A. can accept the customer's offer without restriction B. can accept the customer's offer if the cash payment does not exceed $500 C. can accept the customer's offer if the gift is reported to the IRSD. cannot accept the customer's offer

The best answer is D.Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer.

Failure to complete the Regulatory Element within the stated time period will result in a registered representative's: A. termination B. censure C. expulsionD. suspension

The best answer is D.If a registered representative fails to complete the Regulatory Element of the Continuing Education requirement within 120 days of the notification date, that person's registration is suspended and that person cannot continue to perform any of the functions of a registered representative.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $44 and $49 per share for the past 3 months. If the analyst expects a breakout through the resistance level, which order should be placed? A. Buy ABC @ $48 Stop GTC B. Buy ABC @ $49 GTCC. Buy ABC @ $50 GTCD. Buy ABC @ $50 Stop GTC

The best answer is D.If a stock moves through a resistance level, it is breaking out to the upside. In this example, the resistance level is at $49. If the stock moves through this price, it is expected that it will move sharply upward. To buy above the current market, a buy stop order must be used. Therefore, the order to buy ABC @ $50 Stop GTC is appropriate. Once the long stock position is established, the customer believes the price will skyrocket, so that it can be sold at a higher price for a profit. A buy limit order cannot be used, since these are orders to buy lower than the current market.

A repurchase agreement is effected between two U.S. Government securities dealers. The interest charged under the agreement is the: A. coupon rate of the underlying U.S. Government securities, paid directly from the issuer to the securities' original buyer B. coupon rate of the underlying U.S. Government securities, paid directly from the issuer to the securities' original sellerC. "repo" rate, paid by the buyer of the securities to the sellerD. "repo" rate, paid by the seller of the securities to the buyer

The best answer is D.In a repurchase agreement between 2 government dealers, a government securities dealer "sells" securities to another dealer, with an agreement to buy them back at a later date. The selling dealer obtains cash, and for this, agrees to pay interest to the buying dealer. The interest rate charged is known as the "repo" rate - the repurchase agreement interest rate. The rate fluctuates with, and parallels, the Federal Funds rate.

All of the following are defined as "portfolio income" under IRS guidelines EXCEPT: A. dividends received from common stock holdings B. interest income received from bond holdings C. proceeds from the sale of securities in excess of the tax basis of those securitiesD. royalties received from oil and gas limited partnership holdings

The best answer is D.Income from partnership interests is defined as "passive income" under IRS rules. Royalties from oil and gas limited partnerships are thus "passive income." Passive income can only be offset by passive losses. Portfolio income consists of dividends, interest, and net capital gains on securities (except for direct participation program interests, which are considered to be passive investments). Portfolio gains can only be offset against portfolio losses.

Which of the following statements are TRUE about listed securities? I Under Regulation T, all listed securities are marginableII Listed securities are subject to "Regulation SHO"III Listed issuers must register any new issue offerings with the SECIV Listed issuers must report their results to the SEC A. I and II only B. II and III only C. I, II, IVD. I, II, III, IV

The best answer is D.Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the "locate" requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink Sheet issues. Listed companies must register with, and report their results to, the SEC.

A municipal bond dealer typically engages in which of the following activities? I Distributing bona-fide quotes to interested partiesII Participating in syndicates bidding on new issuesIII Acting as a market maker by taking long positionsIV Acting as an agent, buying and selling positions for customers A. I and II only B. III and IV onlyC. I, II, IIID. I, II, III, IV

The best answer is D.Municipal dealers participate in bidding for new issues, distribute quotes; take inventory positions (long positions) in municipal issues; and handle transactions for customers on an agency basis.

Which risk is NOT associated with Long Term Negotiable Certificates of Deposit? A. Market risk B. Call risk C. Reinvestment riskD. Prepayment risk

The best answer is D.Prepayment risk is the risk that, as interest rates fall, homeowners will pay off their mortgages earlier than anticipated and refinance at lower rates. This risk is applicable to mortgage-backed securities. It is not applicable to Long-term Certificates of Deposit. Long-term negotiable Certificates of Deposit (over 1 year maturity) are subject to market risk, as are any long-term fixed rate debt instruments. Market risk for fixed income securities is the risk that if market interest rates rise, securities prices, as a whole, will fall, dragging down both good and bad investments. Long-term CDs can be callable, so they are subject to call risk in a declining interest rate environment. Interest is paid semi-annually and, again in a declining interest rate environment, if these payments are reinvested in new CDs, the rate of return on reinvested monies will decline - thus Long Term CDs have reinvestment risk.

A customer has a cash account and a margin account at a brokerage firm. In a liquidation under SIPC: A. only the equity in the margin account is covered B. only the cash account value is covered C. each account is covered separately up to $500,000 total coverage per accountD. both accounts are treated as one account with coverage limited to $500,000

The best answer is D.SIPC coverage limits are applied by customer name; thus if John Jones has both a cash account and a margin account at a firm, they are treated as one account under SIPC. If John and Mary Jones also have a joint cash account and a joint margin account, these are lumped together and considered to be one account under SIPC rules.

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

Which of the following CANNOT be a stabilizing bid for a new issue that has a Public Offering Price of $20 per share? A. $19.00 B. $19.88 C. $20.00D. $20.15

The best answer is D.Stabilizing bids can only be entered at or below the public offering price, never above.

The Bond Buyer Revdex contains: A. 20 general obligation bonds with 20 years to maturity, rated A or better B. 25 general obligation bonds with 30 years to maturity, rated A or better C. 20 revenue bonds with 20 years to maturity, rated A or betterD. 25 revenue bonds with 30 years to maturity, rated A or better

The best answer is D.The Revdex consists of 25 revenue bonds with 30 years to maturity, all rated A or better.

An assessment of an existing client's financial status shows the following: Name:Jack/Jill MillerAges:57 and 59Marital Status:Married - 3 Adult ChildrenIncome:$80,000 per yearRetirement Plan:Yes - Vested Defined Benefit PlanLife Insurance:YesRisk Tolerance:LowHome Ownership:Yes Client Balance Sheet:AssetsCash on Hand:$22,000Marketable Securities:$96,000($15,000 in Money Market Fund; $25,000 in Treasury Notes; $56,000 in Blue Chips)Retirement Plans:$458,000(Defined Benefit Plan Valuation)Auto:$39,000Home Ownership:$404,000LiabilitiesCredit Cards Payable:$14,000Mortgage Payable:$104,000Net Worth: $901,000 The couple plans to retire in the next year, sell their home and move to a retirement community where a new home will cost $190,000. They wish to supplement their retirement income, which will be approximately $40,000 from their retirement plan and $8,000 from Social Security. The best recommendation to the couple is to take the $300,000 net proceeds from the sale of the home after paying off its mortgage and: A. put a $50,000 down payment on the new home, finance the balance of the purchase with a $140,000 mortgage, and invest the remaining cash proceeds of $250,000 in growth common stocks B. put a $50,000 down payment on the new home, finance the balance of the purchase with a $140,000 mortgage, and invest the remaining cash proceeds of $250,000 in Treasury STRIPs C. pay for the $190,000 new home in full and invest the extra $110,000 in high yield bonds to provide retirement incomeD. pay for the $190,000 new home in full and invest the extra $110,000 in high yielding blue chip preferred stocks to provide retirement income

The best answer is D.The key here is that this couple is looking for additional retirement income. Investing in growth stocks does not provide current income, so this is a bad choice. STRIPs are a zero-coupon government security and also do not provide current income - so this is another bad choice. High yield bond investments provide income (assuming that the bonds do not default); but they are high risk; and this couple has a low risk tolerance. Investing in high yielding blue chip preferred stocks gives income and safety, along with the benefit of a low 15% maximum tax rate on cash dividends received. This is the best of the choices offered.

A customer sells short 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has risen to $80. The minimum maintenance margin requirement is: A. $15,000 B. $18,000 C. $20,000D. $24,000

The best answer is D.The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $80,000 = $24,000. Note that minimum margins are based on the closing market value each day.

Standards for options advertising that is not preceded by delivery of the ODD (Options Disclosure Document) allow all of the following EXCEPT: A. making reference to the Options Clearing Corporation B. using a corporate logo C. referring to a specific options exchangeD. referring to a specific option contract

The best answer is D.The recommendation or reference to specific options contracts is prohibited in any options communication that is not accompanied or preceded by delivery of the ODD. However, advertising can mention the functions of the Options Clearing Corporation, can include the broker-dealer's name and logo; and can explain the functions of the options exchanges.

All of the following sources of REIT income are counted towards the 75% test required by Subchapter M EXCEPT: A. net rental income B. interest income from mortgagesC. real estate tax refundsD. dividend income from investments

The best answer is D.To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).

Variable rate municipal notes are NOT subject to which of the following risks? A. legislative risk B. default risk C. marketability riskD. interest rate risk

The best answer is D.Variable rate municipal notes avoid market risk, also known as "interest rate risk." A rise in interest rates will not devalue these securities, since they can be put to the issuer at par at each weekly reset date. Thus, the price will not fall below par if interest rates rise. These notes are subject to legislative risk; marketability risk (Can they be liquidated quickly?); and default risk.

A customer buys 1 ABC Jan 50 Call @ $3 when the market price is $51. The customer exercises the call when the market rises to $53. The tax consequence is: A. no gain or loss B. a $300 capital gain C. a cost basis in the stock of $5,000D. a cost basis in the stock of $5,300

The best answer is D.When a call is exercised, the customer is buying the stock (no taxable event occurs until those shares are sold). The call premium paid is considered to be part of the acquisition cost of the stock. For tax purposes, the customer is buying the stock at the strike price + call premium paid ($50 + $3) with the stock's holding period commencing on the exercise date.

When a corporation declares a reverse stock split, all of the following will occur EXCEPT: A. the market price per share will be increased B. the number of outstanding shares will be reduced C. institutional investors are more likely to buy the stockD. each shareholder's proportionate ownership in the corporation will be decreased

The best answer is D.When a corporation declares a reverse stock split, each shareholder's proportionate ownership in the corporation remains the same. For example, if a customer owns 5,000 shares at $1 and the corporation splits its stock 1 for 5, the customer will now own 1,000 shares at $5 (in both cases, it's a $5,000 investment). The other statements are true. If there is a reverse stock split, the market price per share will be increased and the number of outstanding shares will be reduced. Also, institutional purchasers are often restricted by their investment policy guidelines from buying "cheap" stocks. Corporations will declare a reverse stock split so that the stock price increases to an acceptable level to institutional investors.

A registered representative receives a written complaint from a customer regarding a purchase of G.O. bonds. The registered representative should: A. send a copy of the complaint to the MSRBB. send a copy of the complaint to the SEC C. submit the complaint for arbitrationD. attempt to resolve the complaint with the approval of the municipal principal

The best answer is D.Written customer complaints should be resolved. The MSRB requires that every customer complaint be given to the principal for review and resolution.

Which statement is TRUE about a non-qualified variable annuity? A. Contributions to the contract are tax-deductibleB. Investments held in the separate account grow tax-deferred C. Withdrawals from the contract prior to retirement age are tax-free D. Withdrawals from the contract after retirement age are tax-free

he best answer is B.Contributions to a non-qualified variable annuity contract are not deductible. The separate account grows tax-deferred (the main benefit of the contract), making Choice B true. Any distributions are taxable on amounts above that contributed to the contract. Furthermore, if a premature distribution is taken (prior to age 59 1/2), a 10% penalty tax is imposed as well.