Series 7 Final Exam 2

sinking fund

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

A registered representative is looking to sell a client Class B shares with a 7-year contingent deferred sales charge (CDSC). Which of the following representations is appropriate?

"All of your money goes to work since there is no up-front sales charge." potentially higher ongoing costs when compared to class A shares

Which of the following Moody's ratings is the most speculative?

Ba

A municipality borrowing for a short-term period to finance a capital project would issue:

Bond anticipation notes

If a company pays a cash dividend, which of the following is TRUE?

Current Assets decreases. Funds being paid out come from companies cash

A customer owns a JRF October 50 listed call option. JRF has declared a $1.00 cash dividend. When JRF sells ex-dividend, which of the following choices will reflect the price and the number of shares of the JRF October 50 option?

$50 strike, 100 shares Listed call options are not reduced for cash dividends. Strike and number of shares will remain same after it sells ex-div.

All of the following are advantages of CMOs, EXCEPT: tax free interest AAA ratings variety of bond classes denominations as low as $1000

-Interest payments from CMO are fully taxable. - offer various bond classes (tranches) -underlying securities are gov agencies giving AAA rating

A municipal securities principal must approve:

-Memos in response to customer complaints -The opening of accounts -Advertisements to be used for a seminar -Correspondence to customers -& all transactions and must frequently review all discretionary accounts

Which TWO of the following statements are TRUE about real estate investment trusts (REITs)? They must distribute 90% of their earnings to shareholders They may invest only in short-term construction loans They must invest in mortgages and securities Their profits are derived from the difference between the payments made on outstanding mortgages and the amount received in rental income

1 and 4 raise capital and invest the proceeds in the real estate and mortgages. Profit derived from rental income they receive as well as the difference between the interest they pay and greater amount of interest they receive. Favorable tax treatment, must pay 90% of income to shareholders.

The ABC Growth Fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for:

1 and 5 year periods by the same ranking entity.

Max underwriting compensation for selling limited partnerships in public offerings is:

10%

Premature withdrawals from a traditional IRA are subject to a penalty of:

10% under age of 59 1/2

LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio?

10.9 PE is found by dividing the market price of $48 by annual earnings per share 1.10*4 = 4.40 48/4.40 = 10.9

An individual purchased 100 shares of stock at $35 per share. The stock is now trading at $44 per share and the issuer decides to split the stock 2-for-1. After the split, the individual's cost basis per share will be:

17.50 -stock split or dividend results in an adjustment in number of shares out. -CMV adjusted to reflect the increase or decrease in shares. -Same change made to cost basis, 2for1 results in twice as many shares, values being adjusted to 1/2 of what they were before the split.

An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:

3 Foreign currency put option is in the money when spot price is less that strike price. Spot 157 Strike 160 in money by 3

Ms. Green buys 300 shares of RSW at $15 per share. She then writes 3 RSW July 20 calls at 1 and writes 3 RSW July 10 puts at 50 cents. Ms. Green's maximum potential loss on the entire position is:

3 covered calls, 3 uncovered puts. Max loss occurs if underlying stock becomes worthless. Mkt Price 0: 3 covered calls will result in a $4200 loss. (300*15-$300) 3 covered puts exercised if stock hits 0. -max loss on uncovered put is total value of option less premium received. -($10*100share*3cont)=$3000 strike price minus premium $150 = $2850 4200+2850 = 7050 long stock, investor loses by stock declining in value.

An investor purchases an ABC Corporation October 50 put and pays a premium of $7. The underlying security declines to $40 per share. For tax purposes, the proceeds of the sale are:

4300 sell security at 50, minus premium paid

A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive:

50k plus last interest payment. at maturity, holder will receive par value, plus last interest payment.

A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of:

5300

A new issue of municipal bonds has an aggregate par value of $10,000,000. The syndicate received $5,000,000 in designated orders, $5,000,000 in group orders, and $5,000,000 in member orders. How will the issue be allocated?

5M group and 5M designated

A bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield-to-maturity increases by 40 basis points, the yield would be:

7.6%

A variable annuity would be MOST suitable for which of the following customers?

A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs. Investor seeking long term tax-deferred income for retirement. Tax-deferred investment, as with a variable annuity, becomes more advantageous for investor with higher tax bracket. Unsuitable for short-term needs and 401k or IRA since these accounts are tax-deferred already.

Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident:

After six months

S&P

AAA --> D (+) (-)

A customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share, which of the following statements is TRUE?

Account will be adjusted on October 23 and a margin maintenance call will be issued. -Short margin account is marked to the market once a day. -Initial Reg T margin is 30k -Market value increases to 75k -Equity in account will decline to 15k -Current equity in account is below required 30% margin maintenance

A REIT is NOT used for a tax shelter because it does NOT:

Allow flow-through of losses. Allows flow-through of income, but not losses. SH have limited liability. Similar in structure to mutual fund, is not investment company. May invest in real estate properties, not considered to be limited partnership.

An investor owns a $100 convertible preferred stock that is convertible into 2 shares of common stock. The common is selling at $52 and the preferred is selling at $104. The preferred stock is called at 105. What should the investor do?

Allow preferred to be called.

In a new municipal issue, what is a group order?

An order allowing all members to benefit

Member Order

An order placed by members for their customers

Which of the following formulas is used to calculate the current yield on a bond?

Annual Interest/CMV

Presale Order

Any order placed before the syndicate that actually purchases the issue from the issuer

Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond?

Approval by State Legislature.

Which of the following choices represent logical strategies for a technical analyst?

Buy calls when a stock breaks through a resistance level Buy puts when a stock breaks through a support level

ABC Corporation has issued a call notice on its 5% convertible preferred stock. The preferred stock, which is convertible at $20, is being called at $110 and is currently trading at $111. If ABC's common stock is currently trading at $23, what should an RR recommend to an investor who holds the preferred stock?

Convert the P stock into C stock and sell C stock. -P stock may be converted into five shares of C stock: ($100 par value/ $20 conversion) Five common shares may be sold at market price of $23, total of $115.

Which of the following will not offer protection in the event of a municipal bond declining in value due to rising interest rates or financial difficulties of the issuer?

Call provisions

Which of the following risks affects bonds primarily when interest rates decline?

Call risk. -Interest rates decline, bond issuers are more likely to call in existing higher rate bonds and replace them with lower rate bonds. -Investors then face reinvesting principal at lower rates

If a customer is short 1,000 shares of RST stock, the customer:

Can use a buy stop order to limit losses if the stock advances

A registered representative (RR) wants to open a new account for a client who is a resident of Mexico. Which of the following statements is TRUE?

Client can have either a taxpayer identification number or a passport number and country of origin.

When analyzing the credit strength of a municipal issuer, consideration should include which TWO of the following factors?

Current financial status of muni General capability of fiscal officers of muni Local not US economy Money supply figures are published by FRB not relevant with regard to credit strength of muni

If a bond is currently selling for less than par value, then:

Current yield is higher than nominal yield

Company declares cash dividend

Dividends Payable -- Current Liabilities increased by amount of the announced dividend, Retained earnings reduced (SHE)

Which of the following terms relates to the graph that is used to determine optimal portfolios resulting from a comparison of risk and return?

Efficient frontier

Mike is long a yield-based put option in his account. Mike would like to see interest rates:

Fall Value of YBO determined by difference between yield of a treasury index and the strike price. In money when yield is above strike price. Puts have intrinsic value when TIY is below strike price. Yields decrease, long position in put, or short position in call will be profitable

Which of the following choices is a feature of the Nasdaq Level II System?

Firm quotes of all the market makers in a stock

In a direct participation program, which party is the last to be paid in a liquidation?

General Partner Secured, General Cred, Lim partner, Gen Partner

Municipal notes are used for:

Interim Financing (temporary)

Which of the following statements is TRUE concerning the tax treatment of municipal bonds?

If the bond was purchased as an original issue discount (OID), discount will be accreted based on a constant yield method. Mun Bond purchased as OID is accreted (not amorit) each year for tax purposes based on constant yield method (constant interest method), uses the bonds yield to maturity. Mun bond purchased at premium are amoritized (not accret) each year based on a constant yield method.

On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered:

Institutional communication. Any comm directed only to RR is defined as institutional communication.

Which of the following statements is TRUE concerning reverse convertible securities?

Investor is anticipating that the price of the underlying asset would be above the knock-in value.

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? Provide loan to education inst purchases fed sponsored student loans issues securities that can be redeemed to pay for college education issues securities that are not backed by the US govt

Issues securities that can be redeemed to pay for college education. SLMA provides liquidity to student loan makers by purchasing federally sponsored student loans lends funds directly to institutions not backed by full faith and credit of us gov but SLMA maintains direct line of credit with US gov.

How would preferred stock most likely be affected by an increase in interest rates?

Its market value would decrease since it is a fixed income security affected same way as bonds.

Which of the following annuity settlement options would provide the longest stream of income over the lives of two individuals?

Joint and last survivor settlement option would provide longest stream of income as guarantees payments until last annuitant dies. Life annuity with period certain result in payments ending after XX years even if survivor still alive. Unit Refund life refund the balance of what is left over after annuitant dies. Payment cease after the annuitant dies in straight life.

Which of the following bonds would increase most in price if interest rates decline?

L-T bonds selling at a discount. Interest rates decline, bond prices rise. longer maturities will rise more than the shorter maturities due to market risk. Bonds selling at discount will rise sharper than selling at a premium.

A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy?

LP for capital contribution, creditor for the loan.

Rule 145 applies to a(n):

Merger or acquisition Explanation: Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

A broker-dealer acting for a customer purchases stock from a market maker at $25 and sells it to a customer at $25 plus commission. The broker-dealer:

Must disclose amount of its commission. If BD had sold securities to customer at a net price, would have been acting in dealer capacity, no commission.

When pricing a bond in the secondary market, what information is NOT required?

Name of lead underwriter that conducted issuance

Under Regulation T, which of the following securities is NOT marginable? -MF shares held for more than 30 days -Nasdaq securities -Securities quoted on the OTCBB -Securities listed on NYSE

OTC equity securities, which are not listed on a national securities exhange such as NYSE or Nasdaq, are not marginable. Reg T considers mutual funds marginable securities, SEA 1934 prohibits MF dealers from extending credit on MF shares until 30 days after their purchase.

The spouse of a brokerage firm employee wants to open a brokerage account in order to invest in bonds. If this account is opened at a firm that does not employ her spouse, the employee of the firm is required to:

Obtain prior written consent of the employing firm in order to open the account. Employees of BD who intend to open outside accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. Also applies to accounts being opened for spouse or dependent children of member firm employees.

Which of the following statements is NOT TRUE regarding the purchaser of a put option?

Only way to realize a profit is to exercise the option

A high net worth individual with a significant margin portfolio employs numerous hedging strategies to hedge the risk on his investments. He will find it most beneficial to use:

Portfolio-based margin evaluates total risk in margin account by taking into consideration the long and short positions as well as various hedging strategies put in place. Margin requirement is based on net risk in account.

You are the portfolio manager for Home Fund, Inc., a mortgage-backed securities mutual fund. Which type of risk concerns you in a falling interest rate environment?

Prepayment risk

Which of the following choices is another way of expressing the earnings multiple?

Price-earnings ratio

What capacity is reported by a member firm that has conducted a net basis transaction?

Principal

All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT: -issued my muni -int rates set at specified interval -L-T securities w/ S-T trading -Put feature allowing holder to redeem security at par

Put feature allowing holder to redeem security at par. only VRDO have put feature that permits holder to sell securities back to issuer or 3rd party. ARS -if auction fails, investor may not have immediate access to her funds. -use auction process to reset interest rate on securities interest rate on VRDO is reset by dealer at a rate that allows securities to be sold at par value

In a large private placement, an investment banking firm has purchased securities directly from an oil and gas company based in Houston, Texas. These securities may be resold immediately to:

QIBs Rule 144A transaction. Private placement between issuer and investment banking firms and are exempt from SEC registration.

A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site?

RR firms name must be displayed, reference to FINRA membership is permitted. Use of FINRA logo not permitted Must provide hyperlink to FINRA's home page. Links to other web pages available.

Which of the following is an expense or charge NOT normally associated with a variable annuity?

Redemption Fees

A breakpoint sale is best defined as:

The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions

Reverse Convertible Securities

Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. -They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. -The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. -The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. -If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. -If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. -The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

A Regulation A+ exemption is allowed for an issuer that's offering:

Securities with a value not exceeding 50MM

Which of the following positions would be considered a covered option? Short stock, long put Short stock, short put Long stock, long call Long stock, short put

Short stock, short put. covered/uncovered only refer to seller (writer) of option. (also known as being short the option.) Seller of option can fulfill obligation of contract without additional risk, considered covered. EX: seller of put is obligated to purchase stock if put option is exercised against writer. If customer is short stock and put is exercised, seller of put would buy the stock to cover or close out short stock position

An investor writes an XYZ October 70 call at 3 and an XYZ October 70 put at 1. This strategy is known as a:

Short straddle. Long straddle - purchasing a put and a call, on same security, with same strike price/exp. Short straddle - consists of selling a put and a call, on same underlying security, with same strike price and expiration.

The penny stock rules apply under which of the following circumstances?

Stock is quoted on OTC Bulletin Board Dont apply: -existing customer, non recommended or unsolicited, executed by a broker-dealer that's not a market maker in the security

As a customer's tax bracket increases, an RR is likely to allocate more of a customer's portfolio to:

Tax-exempt funds

Which of the following issues will most likely have a mandatory sinking fund?

Term issues

A registered representative enters an order for a client. In error, the registered representative (RR) purchases shares of the wrong security. Which of the following statements is TRUE?

The shares must be placed in the broker-dealers error account

A facility is created by the issuance of industrial development revenue bonds. The bonds are backed by:

The corporation that leases the facility

An individual has been purchasing shares of a mutual fund and has chosen to reinvest all distributions rather than take the payments. If the individual chooses to sell the shares purchased through these reinvestments, the cost basis will be:

The purchase price of these shares Investors must report all distributions from a mutual fund as taxable income, whether reinvested or not. Indv chooses to reinvest distributions, cost basis is the purchase price of the shares.

Which of the following factors is the LEAST useful when analyzing the credit risk of an issuer of revenue bonds?

The ratio of the amount of net overall debt to assessed valuation is used in analyzing the credit risk of an issuer of general obligation (not revenue) bonds.

All of the following statements are TRUE concerning private activity bonds, EXCEPT: The interest on these bonds might not be tax-exempt for some investors. These types of municipal bonds are typically GOs. The possibility that the bonds might be subject to taxation is reflected in the yield at which the bond trades. The interest on these bonds might be subject to the alternative minimum tax (AMT).

These types of municipal bonds are typically GOs. issued to finance construction of a facility that will be used by a private corporation, generally revenue bonds. interest earned on bonds subject to AMT.

What is the basic balance sheet equation?

Total Assets = Total Liabilities + Stockholders' Equity

A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or another person at her firm must notify:

Treasury Department

A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will:

Treat the discount as ordinary income. Muni bond purchased at discount in SECONDARY MARKET and held to maturity, there will be taxable income. Discount is taxed as ORDINARY INCOME, not capital gain. Investor may pay the tax each year or elect to report the entire amount at maturity. Muni bond purchased at ORIGINAL ISSUE DISCOUNT and held to maturity, there will be no federal tax liability.

Real estate investment trusts (REITs) invest in all of the following, EXCEPT:

Undeveloped land REIT is income oriented investment and profit is derived from rental income they receive as well as difference between the interest they pat and the greater amount of interest they receive.

A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:

a price near $60

A level debt service bond issue is one in which:

a. Combined annual interest and principal payments are equal

Which TWO of the following choices would be the most suitable purchasers of municipal zero-coupon bonds?

investor who does not seek present cash flow custodian account where the parent of the minor child is in the highest tax bracket

A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? S&P500 ETF S&P500 MF DJIA ETF Managed CE Fund

all are suitable, mutual fund is most cost-effective method for investor to accomplish goal with $250 per month. CE and ETF are purchased on an exchange and client pays current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no load)

A registered person is concerned that his boss is making inappropriate advances. This allegation must be settled by:

any method of choosing

credit call spread

bear spread

debit put spread

bear spread

serial bonds

bonds of a single issue that mature on different dates

Debit call spread

bull spread

credit put spread

bull spread

The PSA Model is used when pricing: CMO Put Option T note P stock

collateralized mortgage obligations. Cash flows, future payments that bondholder will receive, determine market price of bond. CMO uncertain cash flow due to prepayment (early retire) of mtg. PP risk is risk that homeowners will pay off mtg early and clients will receive principal prior to maturity. PSA = Public Securities Association (now SIFMA), creates standard model for estimating the prepayment rate for mortgage-backed securities.

A municipal bond trader does NOT:

commit to underwritings

suitability requirements

concerning purchase of variable annuities apply to -New purchases -Exchanges -Initial subaccount allocations

Call option writer

covered if long or owns the stock, if call is exercised, seller of the call would be able to deliver the stock he is long

Net basis transaction

dealer holding a customer order to buy, acquires stock on a principal basis, executes customer order at a different price than dealers acquisition price. Both legs of net basis transaction are at different prices, the market maker will report both sides of the transaction as principal

The payout from a variable annuity contract is:

dependent on the investment returns that are earned by the annuitant

Profit from a put option

exercising or liquidating the put. Maximum loss that a purchaser of an option (put or call) is amount of the premium paid.

Which of the following statements is TRUE concerning Modern Portfolio Theory?

focus on diversification among different classes of assets

A corporation is NOT considered to be in default if it fails to pay interest on which of the following bonds?

income bond only pay interest if sufficient income.

A customer has a long margin account with the following securities in the account. (Assume a 50% FRB initial margin requirement.) MV: 12000 DB: 8400

minimum maintenance requirement states that the equity must equal at least 25% of MV. (12000*25%=$3000)

The Bond Buyer Index is based on which of the following securities?

municipal bonds

A brokerage firm erroneously confirms to a customer a purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually made at 28.75. The customer:

must pay 28.75 even though brokerage confirmed to customer purchase at 28.25.

If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact?

no penalty assessed and difference between amount invested and death benefit is taxable at ordinary income tax rates

An individual has invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment will be:

ordinary income on the amount in excess of the original investment. original amount invested treated as a return of capital and earnings in the account as ordinary income

Designated Order

placed by a large institution that designates two or more members to receive credit for the sale.

A municipal securities broker-dealer has a control relationship with an issuer. When selling the bonds subject to the control relationship, the broker-dealer must disclose this relationship to customers:

prior to trade, in writing at or prior to settlement, for all accounts and all types of transactions

Short position

profitable if market price of security decreases. if stock increases, investor will have a loss. Place buy stop order above the market, if executed stock will be purchased preventing further loss. no limit to length of short position. portion of short credit balance must always remain in the account to be used eventually to cover the short position.

Rule 147 and 147A

provide exemption from registration for securities being sold on an intrastate basis. if securities are sold only to residents of a state by an issuer that is also a resident of the same state, securities are exempt from both registration and prospectus requirements. Resident of a state who acquires securities under rule 147 is not allowed to sell securities to a nonresident of state for period of six months following last date of sale by issuer. Individual intends to sell the securities prior to six months, he may do so only to resident of same state.

Which of the following statements is TRUE regarding spreads?

put spread for net debit is bearish.

A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations?

reallocation of assets among subaccounts after initial purchase.

AMT

second method of calculating federal income tax liability. must pay greater of AMT or result of the regular (Form 1040) income tax calculation. issue for higher income taxpayers or those with special tax preference items on their returns. when calculating AMT, need to include interest on private activity bonds. taxpayer subject to AMT may lose tax exemption on Private Activity bonds, generally trade with higher yields than regular municipal bonds to reflect that the interest received might be taxable

Shares bought at $39 in May 2013 Shares bought at $56 in September 2013 Shares bought at $36 in January 2014 Shares bought at $36 in June 2014 The investor sells some of his XAM shares in March 2015 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability?

sell from shares that were purchased in january 2014 highest point gain and tax rate is lower on long term gains (20%)

put spread for net debit

selling lower exercise price and buying higher exercise price. lower exercise price will have the lower premium, spread will be debit

Sales charge

the difference between bid price and offer price/ offer price

Confirmations for transactions must be sent in:

written or electronic

All of the following information must be disclosed to a customer on a confirmation, EXCEPT:

whether order was solicited or unsolicited would be on an order ticket. Must disclose -date and time, identity, price, number of shares, agent or principal, commission or markup

Which of the following positions/strategies is NOT bullish?

writing a straddle. straddle writers expect a neutral market and obtain the maximum gain if each option expires.