S7 Mock Exam 8 (Part 2)
If an index is up 2%, a 3× leveraged inverse ETF tracking that index should be A) down 6%. B) up 2%. C) down 3%. D) up 6%.
A) down 6%. Inverse, or reverse, funds attempt to deliver returns that are the opposite of the index they are tracking. If the index is up, the inverse fund should be down. A leverage fund attempts to deliver returns that are a multiple of the index it is tracking. Therefore, an inverse 3× leveraged fund should be down 3× as much as the index is up if it performs as it should—so in this example, down 6% (3 × 2%). LO 8.h
An American depositary receipt (ADR) is used to A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. B) sweeten a bond offering. C) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. D) finance foreign trade in which U.S. citizens are engaged.
A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. ADRs make trading in foreign securities easier in U.S. markets for U.S. investors. LO 3.g
Stocks that are listed on the NYSE can also traded in all of the following except A) the CBOE (Chicago Board Options Exchange). B) the fourth market. C) the third market. D) an electronic communications network (ECN).
A) the CBOE (Chicago Board Options Exchange). NYSE-listed stocks would never be listed on an options exchange such as the CBOE; those are strictly for trading options, not stock. The third market is the trading of listed securities in the over--the-counter market. The fourth market is the use of ECNs for institutions to trade without the "middleman," a broker-dealer. LO 3.h
If a customer holds certificates of beneficial interest in a real estate investment trust (REIT), all of the following statements regarding this investment are true except A) the issuer must redeem certificates on shareholder request. B) the certificates are publicly traded. C) investors receive dividends periodically. D) a mortgage REIT represents pooled capital for real estate financing.
A) the issuer must redeem certificates on shareholder request. REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market. LO 11.a
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. FINRA's suitability rules would likely find a registered representative is not in violation of complying with those three if A) the recommendation made would be suitable for at least some customers. B) the recommendation was profitable for the investors. C) control relationships were disclosed. D) proper disclosures were made of the representative's compensation received.
A) the recommendation made would be suitable for at least some customers. This question refers to the three specific obligations under Rule 2111. Those three are reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Complying with the first of the three means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors. Control relationships must always be disclosed, but that is not part of the three obligations. Compensation may have to be disclosed, but, once again, that is not part of the three obligations. Be sure to focus on answering the question being asked. LO 2.f
It is common for an employer offering an ERISA-qualified retirement plan to match contributions made by employees. The plan documents state the matching percentage. When matching is part of the plan, another important item in those documents is the length of time before those matching contributions become the property of the employee. This is known as A) the vesting schedule. B) the nondiscrimination requirements. C) the eligibility requirements. D) the participation schedule.
A) the vesting schedule. Vesting defines when an employer contribution to a plan becomes the employee's money. The vesting schedule lets the employees know when they will become fully vested. There are several different acceptable methods, but we have heard nothing about them being tested. The participation information is the eligibility requirements, such as minimum age and hours worked. Nondiscrimination rules are in force to ensure that all eligible employees are treated impartially through a uniformly applied formula. LO 1.i
If a customer has a restricted margin account with special memorandum account (SMA) of $2,500, how much must he deposit to purchase $10,000 worth of stock? A) $10,000 B) $2,500 C) $5,000 D) $0
B) $2,500 When a margin account is restricted, any new purchase must meet the 50% Regulation T requirement. Therefore, a purchase of $10,000 of stock will require a margin call of $5,000. The $2,500 of SMA is, in essence, a line of credit and represents the sum that may be applied to a margin call. By using that SMA of $2,500, the customer need only deposit an additional $2,500. LO 16.d
An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $41 per share. B) $47 per share. C) $44 per share. D) $38 per share.
B) $47 per share. This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share. LO 13.h
Your client feels that GGZ, currently trading around 39, would be a good buy at 38. Therefore, she places an order to buy 200 GGZ at 38 GTC. On the ex-date, when the stock splits 2:1, the order is still on the order book. How is the order adjusted on the ex-date? A) Buy 400 GGZ at 38 GTC B) Buy 400 GGZ at 19 GTC C) Buy 200 GGZ at 19 GTC D) Buy 100 GGZ at 76 GTC
B) Buy 400 GGZ at 19 GTC In a stock split, the number of shares is increased and the price is reduced proportionately on the ex-date (200 shares × 2 = 400 shares; the new price is 38 × 0.5, or 19). LO 16.a
A registered representative is interviewing a new customer, age 27. The customer wants to list capital appreciation as the primary investment objective for the account and is willing to take a moderate degree of risk at this time in her life. The customer also notes concern about inflation and how it will impact her portfolio over time. Which of the following investments is the most suitable recommendation? A) Corporate debt securities B) Equities such as common and preferred stock C) Municipal debt securities D) Long-term government bonds
B) Equities such as common and preferred stock Equities would be the most appropriate investment, given the customer's age, capital appreciation investment objective, and willingness to accept moderate risk. The remaining answer choices, each with varying risk characteristics, are not likely to meet the capital appreciation objective. LO 14.a
Which of the following would be the usual use of a stop order? I. To protect the profit on a long position II. To prevent loss on a short position III. To buy at a specific price only IV. To guarantee execution at or near the close
B) I and II A buy stop could be used to protect an investor who is short, and a sell stop could be used to protect an investor who is long. Stop orders never guarantee execution price. LO 16.a
Which of the following statements regarding variable annuities are true? I. The number of accumulation units is always fixed throughout the accumulation period. II. The number of accumulation units can rise during the accumulation period. III. The number of annuity units is fixed at the time of annuitization. IV. The number of annuity units rises once annuitization begins.
B) II and III The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. When a variable annuity contract is annuitized, the number of annuity units is fixed. LO 9.c
A customer of your broker-dealer is bullish on U.S. equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general? A) Real estate investment trusts (REITs) B) Standard & Poor's depository receipts (SPDRs) C) American depositary receipts (ADRs) D) Variable rate demand obligations (VRDOs)
B) Standard & Poor's depository receipts (SPDRs) The SPDR is an index fund designed to replicate and track the performance of the S&P 500, a broad-based equity index. LO 8.h
For a retired person, which of the following investments would provide the greatest protection against inflation? A) Municipal bonds B) Variable annuities C) Fixed annuities D) Corporate bonds
B) Variable annuities Fixed-income instruments, like bonds and fixed annuities, are subject to purchasing power risk. Variable annuities provide protection from inflation because their monthly income can increase depending on the separate account's performance. LO 9.a
An investor wanting to know about the tax consequences of a direct participation program should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated except A) buildings. B) crops. C) oil. D) gas.
B) crops. Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered renewable assets. LO 11.f
The terminology guaranteed full faith and credit is most applicable to A) interest only on a U.S. government-issued bond. B) interest and principal on a U.S. government-issued bond. C) interest and principal on a corporate bond. D) interest and principal on a municipal revenue bond.
B) interest and principal on a U.S. government-issued bond. Of the choices given, the terminology would be most applicable to both interest and principal on a U.S. government bond. Remember that the U.S. government's guarantee is backed by their authority to tax and print money. While corporate bonds can be backed by the issuer's full faith and credit, the guarantee is only as good as the corporation's ability to pay. Municipal revenue bonds are backed by the expected revenue generated from the project being financed. LO 7.a
You are at a social gathering speaking with an individual who is a tenured professor of astrophysics at the state university. She mentions that she participates in the school's TSA plan. That means she A) is training employees of the Transportation Security Administration. B) is participating in a retirement plan likely offering tax sheltered annuities. C) has qualified for additional compensation because she has earned tenure. D) is a participant in the teacher-student-administration plan for school betterment.
B) is participating in a retirement plan likely offering tax sheltered annuities. TSA stands for tax-sheltered annuity and is the most common name for the 403(b) retirement plan. Although investments can be made into mutual funds, some 85% of the funding is through annuities. LO 1.h
A variable-rate municipal bond investment's main advantage is that A) its interest is exempt from all taxes. B) its price should remain relatively stable. C) it is likely to increase in value. D) it is noncallable.
B) its price should remain relatively stable. A variable-rate bond has no fixed coupon rate. The coupon is tied to a market rate (e.g., T-bond yields) and subject to change at regular intervals. Because the interest paid reflects changes in overall interest rates, the bond price remains relatively close to its par value. Its coupon is always representative of the current market rate. As rates rise, the coupon is adjusted upward. As rates fall, the coupon is adjusted downward. LO 6.b
The latest issue of a newsletter your firm subscribes to is especially relevant to one of your firm's investment products. If you decide to send it to clients and prospects, you must disclose that A) the newsletter discusses only those products that you have available through your firm. B) the newsletter is written and produced by a third party. C) future articles sent will provide similar discussions and information. D) the newsletter's purpose is to provide clients with a choice of products that are suitable for everyone's portfolios.
B) the newsletter is written and produced by a third party. If a third party is the creator of the newsletter, that fact must be disclosed, along with the name of the third party and the date of publication. LO 19.b
If an investor purchases 2 Dec 81.50 Swiss franc calls at 2.5 (each contract is 10,000 francs), how much does the investor pay for the position? A) $500 B) $250 C) $2,500 D) $81,500
A) $500 Remember that foreign currency options (except for the Japanese Yen) are quoted in cents. That means a purchase at 2.5 means $0.025. One call offered at 2.5 is equal to $0.025 times 10,000 which equals $250. With two contracts, the total premium is $500. LO 10.g
When must a new options customer—who has not yet traded options—receive the Options Clearing Corporation's (OCC's) current disclosure document? A) At or before the time the account receives approval for options trading B) No later than 15 days after the ROP signs the options customer approval form. C) Within 15 days of the ROP's approval of the customer's account for options trading D) At or before the time the registered representative signs the customer approval form
A) At or before the time the account receives approval for options trading Customers must receive the OCC Disclosure Booklet at or before the time their account is approved for options trading. LO 10.j
Which of the following mortgage-backed securities would be expected to carry the greatest credit risk? A) CMOs B) Fannie Maes C) Freddie Macs D) Ginnie Maes
A) CMOs Ginnie Maes, backed by the full faith and credit of the U.S. government, guarantee that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. On the other hand, there are private label CMOs. These are collateralized mortgage obligations issued by investment banks or their subsidiaries, financial institutions, or home builders. These private label CMOs are the sole obligation of their issuer. When the collateral consists of agency mortgage-backed securities, that portion is treated as an obligation of the agency. To the extent the collateral is not an agency issue, there is a somewhat greater default risk with the private label issues. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 12.c
Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid? A) Six percent coupon with premiums over par B) Seven percent coupon with no premiums over par C) Six percent coupon with no premiums over par D) Eight percent coupon with premiums over par
A) Six percent coupon with premiums over par In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the 6% coupon on the bonds. LO 20.b
If an investor has an established margin account with a current market value of $6,000 and a debit balance of $2,500, with Regulation T at 50%, how much buying power does the investor have? A) $3,500 B) $2,500 C) $1,000 D) $6,000
C) $1,000 The Regulation T requirement is 50% of the current market value of $6,000 ($3,000). Equity is equal to the current market value of $6,000 minus the debit balance of $2,500 ($3,500). Excess equity is calculated by subtracting the Regulation T requirement of $3,000 from the current equity of $3,500 ($500). Buying power is calculated by multiplying the excess equity of $500 by 2 ($1,000). LO 16.d
A corporation is having a rights offering. The terms of the offering require eight rights plus $88 to purchase one share. With the stock's current market price at $112 per share, the theoretical value of one right on the ex-rights date is A) $2.67. B) $0.30. C) $3.00. D) $0.27.
C) $3.00. Because the question is asking about the value on the ex-rights, it means we use the regular formula. That is, the (market price minus the subscription price) divided by the (number of rights it takes to buy one share). Plugging in the numbers gives us ($112 - $88) ÷ (8) = $24 ÷ 8 = $3.00 LO 3.f
A new customer has given you written authorization to transfer the holdings in her account at another broker-dealer to her new account at your broker-dealer. Under the Uniform Practice Code, using the automated customer account transfer system form, the carrying broker-dealer would have how many days to validate the positions and how many days to complete the transfer after validation? I. One business day to validate II. Two business days to validate III. Two business days to transfer after validation IV. Three business days to transfer after validation
C) I and IV Under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer to the receiving broker-dealer after validation. LO 15.d
An initial Regulation T margin call may be met by depositing I. cash equal to the call. II. listed marginable securities with a loan value equal to the call. III. listed stock with a market value equal to the call. IV. cash equal to 50% of the call.
C) I or II An investor may meet a Regulation T margin call either by depositing cash or by sending in securities equal to the loan value of the call. With Regulation T at 50%, the investor would have to deposit securities with a value equal to twice the amount of the call. LO 16.d
If LMN, Inc., has filed for bankruptcy, in what order would interested parties be paid? I. Holders of secured debt II. Holders of subordinated debentures III. General creditors IV. Preferred stockholders
C) I, III, II, IV. The liquidation order is as follows: the IRS (and other government agencies), secured debt holders, unsecured debt holders and general creditors, holders of subordinated debt, preferred stockholders, and common stockholders. LO 5.b
A business owner pays himself a salary of $80,000 per year. He employs his spouse and pays her $45,000 per year. What is the maximum contribution they may make to their traditional IRAs? A) No traditional IRA contributions can be made by business owners or their spouses. B) They cannot make contributions because their joint incomes are too high. C) They can each contribute 100% of earned income or the maximum allowable limit, whichever is less, to their individual IRAs. D) They can contribute 100% of the lower income to one IRA only.
C) They can each contribute 100% of earned income or the maximum allowable limit, whichever is less, to their individual IRAs. They both may make annual contributions of 100% of earned income up to the maximum allowable limit, whichever is less, to their own respective IRAs. LO 1.g
The writer of an IRX U.S. Treasury bill yield-based option, if exercised, must A) receive cash.equal to amount the contract is in-the-money B) deliver T-bills.equal to the dollar amount of T-bills in the contract C) deliver cash equal to the intrinsic value of the contract. D) receive Treasury bills
C) deliver cash equal to the intrinsic value of the contract. The IRX is the 13-week Treasury bill. It is generally accepted that this security, more than any other, directly reflects changes in interest rates. Investors in yield-based options are making a bet on the future trend of interest rates. Just as with equity options, we use the phrase "call up and put down." That is, if the investor believes interest rates will rise, the strategy is to buy a call option. If a decline in rates is expected, the investor will buy a put option. Like some other of the non-equity based options, upon exercise, yield-based options settle in cash. That is because there is no delivery of the underlying security. If you buy an IRX call and exercise it, you're not going to be buying Treasury bills. The writer must deliver the in-the-money amount in cash. For example, a yield-based option with a strike price of 15 reflects a yield of 1.5%. Assume an investor believes that rates on T-bills—currently at 1.5%—will rise in the near term. The investor could purchase a call option with a 15 strike price (at the money). If rates rise to 2.0%, the investor could exercise and receive cash equal to the intrinsic value of the option. Rates have gone up by 5 points—15 to 20—so the investor would receive $500 because each point is worth $100. Profit would be the $500 received on exercise less the premium paid. On the other hand, the investor could have closed her position, profiting from the difference between the premium paid and the premium received on closing. LO 10.g
How much would the special memorandum account (SMA) price increase if a customer bought $22,000 worth of marginable stock in the existing margin account and fully paid for the transaction? A) $22,000 B) $5,500 C) $0 D) $11,000
D) $11,000 Assuming the customer paid for the securities in full, he would generate $11,000 in SMA. Because the customer needs to pay only half of the securities' value ($11,000), the additional cash paid ($11,000) would be considered a non required cash deposit and be credited to SMA. Another way to view the transaction is the customer has fully paid securities with a loan value of 50%, or $11,000. LO 16.d
Which of the following quotes represents a municipal dollar bond quote? A) 8.20 - 8.00 B) $850 - $870 C) 0.085 D) 85½
D) 85½ Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85.5% of $1,000, or $855. LO 6.a
Under FINRA's Rule 2210 on communications with the public, which of the following is excluded from the filing requirements? A) Retail communications concerning public direct participation programs B) Retail communications that previously have been filed with FINRA and that are to be used with material change C) Retail communications concerning collateralized mortgage obligations registered under the Securities Act of 1933 D) Correspondence with prospective clients that is delivered through electronic media
D) Correspondence with prospective clients that is delivered through electronic media In most cases, retail communications must be filed with FINRA while correspondence, regardless of the method of delivery, is not. If the retail communication has previously been filed with FINRA and is being used without material change, it does not have to be refiled. LO 19.c
Which of the following covers a short call? I. Long stock II. Short stock III. Long put IV. Stock rights
D) I and IV Covering a short call requires taking action to eliminate the risk of being exercised. If the customer owns the stock or has the right to acquire it, the customer is covered. Stock rights (preemptive rights) give the holder the right to purchase the stock. Short stock and long puts both have the same market attitude as a short call (bearish), and therefore, would not cover the risk associated with a short call. LO 10.d
One of your customers called you with the good news that they are new grandparents. They are looking for a way to provide funds for the new child's college education and would like some kind of tax break if possible. What would be the most suitable suggestion? A) Donate money to an UTMA account naming the child's parent as custodian B) Purchase zero-coupon bonds maturing in 18-20 years C) Start an IRA in the child's name and make annual contributions on the child's behalf. D) Start a Section 529 plan for the child
D) Start a Section 529 plan for the child Among the many benefits of the Section 529 plan is that all earnings between now and withdrawal can be tax free when used for qualified expenses. In addition, if the grandparents have a substantial estate, they can contribute up to $75,000 ($150,000 if a joint gift) without any gift tax ramifications. The income from an UTMA account is taxable in the year received. The annual accretion is taxable on the zero-coupon bonds. Although it is true that the child's income from the investments may be below the taxable threshold today, in the later years that might not be the case. IRAs can only be funded from earned income, not gifts. LO 6.g
The most current information on new releases of municipal bonds can be found in A) Thomson's Muni Market Monitor (formerly Munifacts). B) the broker-dealer's quote sheets. C) The Bond Buyer's Guide. D) The Bond Buyer.
D) The Bond Buyer. The Bond Buyer is a daily trade publication containing news about new municipal bond issues. LO 13.f
An investor purchased 100 shares of RAVAD common stock at $40 per share on June 17, 2019. On May 11, 2020, with the RAVAD selling at $60, the investor hedges by purchasing one RAVAD Oct 55 put at 2. The put expires with the RAVAD selling at $65 and the investor liquidates the long stock position at that price. This would result in A) a long-term capital gain of $2,500 and a short-term capital loss of $200. B) a long-term capital gain of $2,300. C) a short-term capital gain of $2,700. D) a short-term capital gain of $2,500 and a short-term capital loss of $200.
D) a short-term capital gain of $2,500 and a short-term capital loss of $200. The investor purchased a protective put on the long RAVAD position. At the time of the purchase of the put, the holding period of the stock was less than the long-term requirement of more than 12 months. When that happens, the IRS rules that the short-term holding period (June to May is short term) is erased. Your new holding period for the underlying stock begins on the earliest of the date you dispose of the stock, the date you exercise the put, the date you sell the put, or the date the put expires. Because the investor disposed of the stock at the same time the put expired, there is no holding period, so any gains will be short term. As far as the math, the stock was purchased for $4,000 (100 shares @ $40 per share). The stock is sold for $6,500 (100 shares @ $65 per share). That is a gain of $2,500 (short term). When a long put expires, it is a capital loss in the amount of the premium. In our question, the premium was 2 points ($200) and that is a complete loss. Because the put has a five-month holding period (May to October), the loss is short term. In the real world, most accountants would just net the $2,500 short-term gains and the $200 short-term loss and report a $2,300 short-term gain. It is possible that could appear on the exam, but unlikely that you would have both choices. Please let us know if you do see something like this. LO 10.i
An issuer may be able to diversify a single municipal bond issue by maturity because A) every state issues municipal bonds. B) many municipal securities are very marketable. C) municipal securities are mostly long term. D) many municipal bonds are serial issues.
D) many municipal bonds are serial issues. Serial maturity means that within a single issue, portions of the issue mature at intervals. Municipal bonds typically mature serially. LO 6.a
A client approved to trade options has taken the opinion that a company's stock might be extremely volatile in the wake of upcoming earnings reports and new product reviews currently being mixed. The client does not own the stock but asks what might be a cost-efficient way to gain if that volatility occurs. You recommend A) either purchasing or shorting the stock. B) both purchasing and shorting the stock simultaneously. C) selling all spreads. D) purchasing straddles.
D) purchasing straddles. Long (purchasing) straddles are an appropriate strategy when volatility is expected, with potential gain occurring for moves in either direction. Costs are limited to the premiums paid. LO 10.f
Your customer opens a Coverdell ESA for his niece. To meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) nontaxable to either party. B) taxable to the uncle, the donor to the plan. C) automatically reinvested back into the plan. D) taxable to the niece, the beneficiary of the plan.
D) taxable to the niece, the beneficiary of the plan. Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution. LO 1.g
