SERIES 7: FINAL QUESTIONS ONLY

A short margin account with the only position being 200 shares of ABC stock, shows the following: Credit Balance: $15,000 Short Mkt Value: $10,000 Equity: $5,000 If ABC pays a dividend of $2.00 per share, the result will be an adjusted credit balance of: A. $14,600 B. $14,800 C. $15,000 D. $15,400

A. $14,600 In a short margin account, short sellers owe any dividends to the person from whom they borrowed the stock. Thus, the amount of the dividend is debited to the short seller's account (and in turn, credited to the account of the person from whom the stock was borrowed). In this case, the account starts with a credit balance of $15,000. After the $400 (200 shares at $2 per share = $400) dividend is debited to the account, the net credit is now $14,600.

A customer buys 1 ABC Jan 50 Put @ $7 and sells 1 ABC Jan 40 Put @ $1 when the market price of ABC is $47. The maximum potential loss is: A. $600 B. $700 C. $3,900 D. $4,300

A. $600 The customer has created a long put spread. Buy 1 ABC Jan 50 Put @ $7 Sell 1 ABC Jan 40 Put @ $1 $6 Debit The debit of $600 is the maximum potential loss, occurring if both contracts expire. This occurs if the market rises above $50 per share.

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. $500 C. $2,000 D. $20,000

A. 0 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.

Which of the following persons trades securities for his own account? I Specialist (DMM) II Market Maker III Order Book Official IV Floor Broker A. I and II B. II and IV C. I, II, III D. I, II, III, IV

A. I and II Both the Specialist (now called the DMM - Designated Market Maker) on the NYSE floor; and the Market Maker on the CBOE floor are dealers who buy and sell designated securities into their inventory and from their inventory. Floor brokers handle public orders on the NYSE floor acting as agent only - they do not trade for their own account. Order Book Officials ("OBOs") on the CBOE floor handle the book of public orders that are "away" from the current market.

Which of the following statements are TRUE regarding Brokered CDs? I Any call features could affect the maturity of the instrument II How the instrument is titled can determine whether FDIC insurance covers the investment III There may be a penalty for early withdrawal of principal IV The principal amount will remain stable over the life of the instrument A. I and II B. III and IV C. I and IV D. II and III

A. I and II Brokered CDs, which can have lives of up to 5 years, can be callable. If interest rates drop after issuance, then the issuer can call in the CD, forcing the investor to reinvest the refunded monies at lower current market interest rates. Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity).

Index ETFs are: I passively managed II actively managed III negotiable IV redeemable A. I and III B. I and IV C. II and III D. II and IV

A. I and III Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable.

When comparing arbitration to litigation for settling disputes with brokerage firms, which of the following statements are true? I Arbitration is more time efficient II Arbitration is less time efficient III Arbitration is more cost efficient IV Arbitration is less cost efficient A. I and III B. I and IV C. II and III D. II and IV

A. I and III Arbitration is preferred over litigation as a means for settling disputes because it is simpler and cheaper. Under FINRA rules, arbitration is mandatory for settling all disputes where a member firm or its personnel are involved.

Capital gains that are realized upon the sale of a municipal security are: I subject to Federal Tax II exempt from Federal Tax III subject to State and Local Tax IV exempt from State and Local Tax A. I and III B. I and IV C. II and III D. II and IV

A. I and III Capital gains on municipal securities are taxable at the Federal, State and Local levels. Only the interest income from municipal securities is exempt from Federal income tax.

In a new margin account, a customer purchases 100 ABC shares at $12 per share as the initial transaction. Which of the following statements are TRUE? I The margin call is for $1,200 II The margin call is for $2,000 III The maximum potential loss is $1,200 IV The maximum potential loss is $2,000 A. I and III B. I and IV C. II and III D. II and IV

A. I and III Even though minimum equity to open a long margin account is $2,000, this does not apply if the securities in the account are fully paid. A customer cannot be asked to deposit more than 100% when buying since this is the maximum potential loss. The customer wants to buy $1,200 of stock, so 100% or $1,200 must be deposited. The equity in the account is $1,200 and the account is fully paid, so this is the maximum potential loss.

Under Rule 10b-5-1, pre-arranged trading plans by insiders are: I permitted only if the provisions cannot be altered during the plan's life II permitted only if the provisions can be altered during the plan's life III given a safe harbor to officers and directors against an "insider trading" prosecution if the plan is followed IV given a right of rescission for any trades that are deemed to be a violation of the insider trading rules A. I and III B. I and IV C. II and III D. II and IV

A. I and III We all know that insiders are prohibited from trading based on material non-public information. In 2000, the SEC issued a "safe-harbor" rule that permits statutory insiders (officers, directors and 10% shareholders) to set up a written plan for trading that company's securities. Such a written plan specifies the future date with amount on which securities are to be bought and sold; or specifies the algorithm to be used for determining the amount and date of future purchases or sales. Once the plan is in force, the "insider" cannot have any further influence on trades effected under the plan. As long as the insider adheres to such a written trading plan, that person is given a "safe harbor" from being accused of using "inside information" as the basis for the trades that occur based on adhering to the plan.

Approval of new accounts for FINRA member firms can be performed by the: I Registered Representative II Branch Office Manager III Financial and Operations Principal A. II only B. II and III C. I and III D. I, II, III

A. II only Under FINRA rules, new accounts must be approved, in writing, by a Branch Office Manager (Series 9/10 license). Registered representatives cannot approve the opening of new accounts. The Financial and Operations Principal (Series 27 license) is responsible only for the firm's financial reporting and back office operations.

Qubes (QQQs) are securities whose value is based upon the securities in the: A. NASDAQ 100 Index B. NASDAQ Composite Index C. Standard and Poor's 500 Index D. Russell 2000 Index

A. NASDAQ 100 Index Qubes (QQQs) are Exchange Traded Funds based on the NASDAQ 100 Index - the 100 largest NASDAQ stocks based on market capitalization. Currently the QQQs trade on the NASDAQ exchange.

A start-up company looking to raise a small amount of "seed" capital would most likely use: A. Regulation Crowdfunding B. Regulation A C. Rule 147 D. Regulation D

A. Regulation Crowdfunding "Crowdfunding" is the raising of capital by small start-up businesses through relatively small investment amounts. These are private placement securities that are exempt from registration with the SEC. The intent is to help early-stage companies raise investment capital with little regulatory burden, improving job formation and economic growth in the U.S. economy. SEC Regulation Crowdfunding sets the ground rules for these offerings. Regulation A is an "EZ" registration method for offerings of up to $50 million. Rule 147 is an exemption for an intrastate offering. Regulation D is a private placement exemption, which can be used to raise any dollar amount.

An institutional customer places a marketable order to buy 10,000 shares of ABCD stock, a NASDAQ listed company. The customer directs that the trade be routed to an ECN for execution and not be sent to the NASDAQ. Which statement is TRUE about this? A. The customer's instructions are to be followed and the order must be sent to the designated ECN B. The order must be sent to the NASDAQ for execution C. The order must be sent to the market with the largest display size D. The order cannot be accepted from the customer

A. The customer's instructions are to be followed and the order must be sent to the designated ECN If the customer directs that the trade be sent to a different trading venue, follow the customer's instructions. When the ECN gets the order, it must either fill the order at the best price available in all markets; or it must re-route the order to the better-priced market (the "trade-through" rule); so the customer will get the best price, no matter where the order is actually sent!

Which statement is FALSE about a SIMPLE IRA? A. The maximum contribution amount is the same as for a SEP IRA B. The contribution is made by the employee, who gets a salary reduction for the amount contributed C. The plan is only available to smaller employers D. The employer must make a matching contribution

A. The maximum contribution amount is the same as for a SEP IRA SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administrate than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $12,500 (in 2018) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company. Finally, SEP IRAs allow for a maximum contribution that is much larger than a SIMPLE IRA. In a SEP IRA, a contribution of up to 25% of salary (statutory rate; actual contribution rate is 20%), capped at $55,000 in 2018 is permitted.

All of the following are considered to be a good delivery for a 500 share trade of stock EXCEPT: A. Two 250 share certificates B. Twenty 25 share certificates C. Ten 50 share certificates D. Fifty 10 share certificates

A. Two 250 share certificates To be a good delivery dealer to dealer, stock certificates must be delivered in multiplies of 100 on one certificate or in certificates of less than 100, where the certificates can be added exactly to 100 share units. Choice A does not meet this requirement - two 250 share certificates are not in multiples of 100 on a certificate. Twenty 25 share certificates work because four 25 share certificates = 100. Ten 50 share certificates work because two 50 share certificates = 100. And fifty 10 share certificates work because ten 10 share certificates = 100.

Which CMO tranche is MOST susceptible to interest rate risk? A. Z-Tranche B. Companion Tranche C. PAC tranche D. TAC tranche

A. Z-Tranche A Z-tranche is a "Zero" tranche. It gets no payments until all prior tranches are retired. Then it is paid off at par. It acts like a long-term zero-coupon bond, so it is most susceptible to interest rate risk. The other tranches receive payments earlier in their life, so they are less susceptible to interest rate risk.

The requirement for independent verification of a customer's identity when opening an account CANNOT be satisfied by examining a copy of the customer's: A. birth certificate B. driver's license C. passport D. military ID

A. birth certificate There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information. A birth certificate does not have the required information needed for matching.

A customer's account shows the following: LONG 100 ABC Common 100 DEF Common MARKET VALUE $15,000 $20,000 DEBIT $20,000 SMA $4,000 The customer sells the ABC position. The SMA account will be: A. credited by $7,500 B. debited by $7,500 C. credited by $15,000 D. debited by $15,000

A. credited by $7,500 This margin account is restricted (below 50% margin). Long Market Value - Debit = Equity % $35,000 $20,000 $15,000 43% If stock is sold out of a restricted account, 50% of the proceeds are credited to SMA and can be borrowed out. The other 50% must be retained in the account (the retention requirement). If $15,000 of stock is sold, then 50% or $7,500 is credited to the SMA account.

Accrued interest on a new issue corporate bond is calculated from: A. dated date to settlement date B. dated date to first interest payment C. settlement date to first interest payment D. trade date to settlement date

A. dated date to settlement date Accrued interest on a new issue is calculated from the dated date till settlement date. A new issue is bought from the underwriter. The customer pays the underwriter the price of the bond plus any accrued interest. This interest accrues from the dated date of the issue (the date of legal issuance) until the date the customer settles the purchase with the underwriter.

A customer has $3,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has: A. no taxable capital gain or loss B. a $3,000 capital gain with no capital loss deduction C. a $3,000 capital loss with a $3,000 capital gain carryforward D. a $3,000 capital gain and a $3,000 capital loss carryforward

A. no taxable capital gain or loss The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. This customer has no net capital gain or loss. Here, the $3,000 loss is offset by the $3,000 capital gain, for no gain or loss.

An analyst is reviewing the demographics of a municipality as part of a credit review for a G.O. bond issue. The analyst is reviewing: A. population trends B. assessed value trends C. collection ratio trends D. voter registration records

A. population trends Demographics is the study of the size, distribution, and vital statistics of a population group. Since G.O. bonds are paid by tax collections, a municipal bond analyst would be interested in the makeup of the population that is the source of the tax collections.

Calls for minimum maintenance margin must be met: A. promptly B. no later than 5 business days after the call date C. no later than 7 business days after the call date D. no later than 10 business days after the call date

A. promptly Calls for minimum maintenance margin must be met "promptly." If the call is not met by the date specified in the notice, then the firm must sell securities from the account in an amount necessary to bring the account back to the 25% minimum margin percentage.

A retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement income. An appropriate recommendation would be to: A. sell covered calls B. sell naked calls C. sell covered puts D. sell naked puts

A. sell covered calls Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. If the stock stays flat, the calls expire and the customer keeps the premium. If the stock rises, the calls are exercised and the stock is called away at no loss to the customer. If the market falls, the calls expire and the customer loses on the stock (which he would have lost on anyway!).

During periods when the yield curve is inverted, investors wishing to maximize current income would buy: A. short term maturities B. medium term maturities C. long term maturities D. high yield bonds

A. short term maturities When the yield curve is inverted, short term rates are higher than long term rates. To maximize income, invest in short term securities. This curve is typical during periods of tight credit.

During a period when the yield curve is flat: A. short term rates are more volatile than long term rates B. long term rates are more volatile than short term rates C. short term and long term rates are equally volatile D. no relationship exists between short term and long term rate volatility

A. short term rates are more volatile than long term rates Whether the yield curve is ascending (normal), flat or descending, the true statement always is that short term rates are more volatile than long term rates. Short term rates are susceptible to Federal Reserve influence, and move much faster than do long term rates. Long term rates respond more slowly; and reflect longer term expectations for inflation and economic growth, among other factors.

The formula for the inventory turnover ratio is:

Annual Cost of Goods Sold divided by Year End Inventory = Inventory Turnover Ratio

A customer is short 1,000 shares of ABC stock at $60 in a margin account. The minimum maintenance margin requirement is: A. $15,000 B. $18,000 C. $30,000 D. $60,000

B. $18,000 The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $60,000 = $18,000.

A customer buys 100 shares of ABC stock at $59 and sells 1 ABC Jan 65 Call @ $3. Prior to expiration, the customer closes the short call position at $1. The customer retains the long stock position. The gain or loss on the option is: A. $100 loss B. $200 gain C. $600 loss D. $900 loss

B. $200 gain The short call was opened at $3 and closed with a purchase at $1 for a net gain of 2 points or $200 for the contract.

A 55-year old individual has just retired after working for the same employer for 20 years. She will collect an annual pension benefit of $55,000, but is not yet ready to stop working.She has lined up a part-time job that will pay $4,000 this coming year. How much can she contribute to a Traditional Individual Retirement Account for her first year in retirement? A. 0 B. $4,000 C. $5,500 D. $6,500

B. $4,000 Because this individual is not yet age 70 ½, she can still contribute to a Traditional IRA - but only based on earned income - not on her pension income. The maximum contribution in 2018 is 100% of earned income, capped at $5,500. Because she only has $4,000 of earned income, this is the maximum IRA contribution for this year.

A customer buys 100 shares of ABC stock at $58 and buys 1 ABC Jul 55 Put @ $2.50 on the same day. The maximum potential loss is: A. $250 B. $550 C. $5,550 D. unlimited

B. $550 If the market should fall, the customer will exercise the put and sell the stock at the strike price, limiting potential loss. The put contract gives the customer the right to sell the stock at $55. Since the stock was purchased at $58, 3 points will be lost on the stock. In addition, 2.50 points were paid in premiums for a maximum potential loss of 5.50 points or $550.

A customer owns 400 shares of ABC stock. ABC is having a rights offering where 20 rights are needed to subscribe to 1 new share. How many new shares can the customer purchase through this rights offering? A. 1 share B. 20 shares C. 100 shares D. 400 shares

B. 20 shares The question asks how many additional shares can be purchased, not how many rights the customer has. The customer has 400 shares, and will receive 1 right for each share, so the customer has 400 rights. Since 20 rights are needed to subscribe to 1 new share, this allows the purchase of 20 new shares.

To buy a listed stock in a margin account requires a deposit of: A. 25% of the price of the transaction B. 50% of the price of the transaction C. 25% of the closing price of the security that day D. 50% of the closing price of the security that day

B. 50% of the price of the transaction Regulation T requires that 50% of the purchase amount, based on the price of the trade, be deposited. The closing price has no effect on the deposit amount required.

The options positions listed in each of the following choices are in the same "class" EXCEPT: A. ABC Jan Calls and ABC Mar Calls B. ABC Jan Calls and ABC Jan Puts C. XYZ Feb Calls and XYZ Jul Calls D. XYZ Mar Puts and XYZ Apr Puts

B. ABC Jan Calls and ABC Jan Put A class of options is determined by the underlying security and the type of option (Call or Put). Expiration and strike price are not considered. For example, all ABC Calls are a "class;" all ABC Puts are a "class;" all XYZ Calls are a "class;" all XYZ Puts are a "class."

Which of the following would be considered owners of a corporation? I Common Shareholders II Preferred Shareholders III Right Holders IV Warrant Holders A. I only B. I and II only C. I, II, III, IV D. None of the above

B. I and II only "Owners" have an equity position - and the only owners of a company are shareholders - both common and preferred. Right holders have a short term option to buy the stock; warrant holders have a long term option to buy the stock. Both rights and warrants are considered to be "equity-related" securities. They have neither an equity nor creditor stake in the corporation.

Which statements are TRUE when comparing types of management companies? I Open-end funds are mutual funds II Open-end funds are publicly traded funds III Closed-end funds are mutual funds IV Closed-end funds are publicly traded funds A. I and III B. I and IV C. II and III D. II and IV

B. I and IV Management companies are either open-end or closed-end. An open-end management company is a mutual fund. A closed-end management company is a publicly traded fund.

A municipal dealer buys $100,000 of 8% General Obligation bonds, M '42, at par. The dealer immediately reoffers the bonds to customers. Which TWO of the following quotes would be considered "fair and reasonable" under MSRB rules? I 102 II 110 III 6.00 Net IV 7.50 Net A. I and III B. I and IV C. II and III D. II and IV

B. I and IV The dealer purchases 8% bonds at par. Any mark-up that he earns upon reselling the bonds must be fair and reasonable. A price of 102 equals a mark-up of 2% above par. This is certainly fairer than a price of 110, representing a 10% mark-up from par. To get an "approximate" price for a long-term bond offered on a yield basis, divide the coupon by the basis (this only works for long term bonds). Thus, an 8.00% bond offered on a 6.00% basis would have an approximate price of 8.00/6.00 = 1.33333 x $1,000 par = $1,333.33. This is about a 33% mark-up over par, which is excessive. In contrast, an 8.00% bond offered on a 7.50% basis would have an approximate price of 8.00/7.50 = 1.066666 x $1,000 par = $1,066.66. This is a 6.66% mark-up over par, which is a little high, but not as high as the other choice!

A customer would receive protection on a long stock position from which TWO of the following? I Buy a call II Sell a call III Buy a put IV Sell a put A. I and III B. II and III C. I and IV D. II and IV

B. II and III In order to hedge a long stock position against a downside market move, the best choice is to buy a put. The long put option allows the holder to put the stock at the exercise price if the market falls - protecting the stock position from downside market risk. However, buying a put is not given as a stand alone choice. If one were to sell a call against a long stock position, then if the stock's market price falls, the call expires out the money. The premium received is a form of limited protection as the market drops. However, if the stock's price falls greatly, then the premium received is not enough to compensate for the loss in the value of the stock. Buying a call would not give downside protection - if the market drops, the call expires out the money and the premium is lost, in addition to any loss on the stock position. Writing a put does not give downside protection - in a falling market, the short put would be exercised, obligating the put writer to buy the stock at the strike price. The writer would lose on this stock position, in addition to losing on the original stock position, in a falling market.

Under MSRB rules, which of the following are allowed? I Guaranteeing a customer account against loss II Recommending the purchase of a put option to the customer as protection against loss III Agreeing to repurchase bonds from a customer personally at a preset price IV Recommending the use of a repurchase agreement to the customer as a means of protecting against loss A. I and III B. II and IV C. I, II, III D. None of the above

B. II and IV Recommending the use of put options or repurchase agreements to protect against loss are both valid strategies and are permitted under MSRB rules. However, it is prohibited to guarantee a customer's account against loss and to share in the gain or loss of a customer's account (unless specific tests regarding principal approval and sharing in proportion to capital contributed are met).

Which type of real estate limited partnership offers no depreciation benefit? A. New Construction B. Raw Land C. Existing Housing D. All of the above

B. Raw Land Raw land is not depreciable; only the building on the land is depreciable. Existing housing is immediately depreciable. New construction is only depreciable after the building is completed - during the building phase, no depreciation deductions are permitted.

Which of the following is an exempt security under the Securities Act of 1933? A. Unit Investment Trust B. Small Business Investment Company C. Open-End Investment Company D. Closed-End Investment Company

B. Small Business Investment Company Small business investment companies are an exempt security under the Securities Act of 1933. Other investment companies - whether they be open-end or closed-end management companies; or unit investment trusts; are non-exempt and must be registered with the SEC.

Two 10 year General Obligation bonds with the same maturity and credit rating are quoted on a 6.50 basis. One bond has a 7% coupon, while the other has an 8% coupon. If the quote is changed to 6.40%, which statement is TRUE? A. The price of both bonds will change by the same percentage amount B. The percentage change in price of the 7% bond will be more than the percentage change in price of the 8% bond C. The percentage change in price of the 8% bond will be more than the percentage change in price of the 7% bond D. No relationship exists between the price movements of the two bonds

B. The percentage change in price of the 7% bond will be more than the percentage change in price of the 8% bond Long term bond prices are more volatile than short term bond prices. Both of these bonds have the same maturity, so we cannot determine which bond's price will be more volatile from this fact. The price movement of discount bonds is more volatile than that for premium bonds. Both of these bonds are trading at a premium, so we cannot determine which bond's price movements will be more volatile from this fact. However, we do know that the lower the bond's coupon rate, the more volatile the bond's price movements will be as market interest rates move. Thus, the 7% coupon bond will be more volatile than the 8% coupon bond

The flow of funds for a municipal revenue bond offering is set forth in the: A. Official Notice of Sale B. Trust Indenture C. Official Statement D. Legal Opinion

B. Trust Indenture The trust indenture for a revenue bond issue will include the flow of funds. The flow of funds details the order in which collected revenues will be applied.

A workable quotation given by a municipal dealer represents a(n): A. firm bid B. likely bid C. approximate market value, with no bid or offer D. bid or offer for 100 bonds

B. likely bid A workable quote is one where the dealer indicates a willingness to buy at a stated price. The dealer who solicits the "workable" is usually acting for a customer who wants to sell the bonds. Since there is no active trading market, the customer has no idea what price he can get for the bonds. The selling broker gets the customer a "workable" quote, that is, a likely price at which a dealer will buy, and the customer can then decide whether he wants to sell at that price.

A sharp rise in interest rates would have the greatest effect on the market price of: A. pharmaceutical stocks B. public utility stocks C. electronics stocks D. forest products stocks

B. public utility stocks Utility company revenue streams are very stable, allowing the company to support a large percentage of their capitalization as debt. Since earnings do not vary much with the business cycle, bondholders are not worried about a bad year resulting in insufficient earnings to meet debt service costs. However, as interest rates rise, utility stocks are hit hard precisely because of their high leverage. Each time the utility goes out to refinance its debt as interest rates rise, it will be more expensive, reducing earnings, and hence the stock price. Other types of companies do not have as stable an income stream and are not as highly leveraged.

Which of the following information would NOT be found in the Official Notice of Sale? A. par value of the bonds B. reoffering yield of the bonds C. maturities of the bonds D. income source backing the bonds

B. reoffering yield of the bonds The Official Notice of Sale gives the basic information needed to bid on a new bond offering. Included is the type of bond, dollar amount of each maturity, the names of the bond counsel and authorized person to conduct the bond sale at the township, among numerous other items such as the dated date of the issue (the date from which interest will start accruing) and the award date - the date that the winning bid will be announced. What is not known is the interest rate and the reoffering yield on the bond. Both of these are determined by the winning bidder. The lowest interest rate bid wins - and this interest rate is printed on the bonds when they are delivered to the winning bidder. When the bonds are delivered to the winning bidder, the price is "marked-up" to give the underwriter a profit upon reselling the bonds to the public. When the price is "marked-up," the reoffering yield on the bonds drops below the stated interest rate on

An individual who made a profit of $1,000,000 from insider trading would be subject to a civil penalty of: A. $1,000,000 B. $2,000,000 C. $3,000,000 D. $4,000,000

C. $3,000,000 If an individual is found guilty of insider trading, he or she must pay back the profit achieved or loss avoided, and in addition must pay a penalty equal to 3 times that amount. This is called "treble damages."

A customer buys 5 ABC Jan 60 Calls @ $4 and buys 5 ABC Jan 60 Puts @ $1 on the same day when the market price of ABC stock is $62. Assume that the market price falls to $56 and the call premium falls to $.50, while the put premium rises to $5.50. The customer closes the positions. The customer has a: A. $100 gain B. $100 loss C. $500 gain D. $500 loss

C. $500 gain The customer established the positions with a debit of $5 x 5 contracts = $2,500 debit. When the market is at $56, the customer closes the calls at $.50 and closes the puts at $5.50. Thus, the positions are closed at: Short 5 ABC Jan 60 Calls @ $ .50 Short 5 ABC Jan 60 Puts @ $5.50 $6.00 credit x 5 contracts = $3,000 credit The customer closed for a credit of $3,000. Since the initial positions cost $2,500, the customer has a $500 gain.

In 2018, a customer earns $500,000 as a self-employed doctor. The maximum annual contribution to a Keogh plan is: A. $25,000 B. $45,000 C. $55,000 D. $110,000

C. $55,000 The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $55,000 in 2018, whichever is less. 20% of $500,000 = $100,000. However, only the $55,000 maximum can be contributed in 2018. (Note that this amount is adjusted each year for inflation.)

On the same day in a margin account, a customer buys 1 ABC Jan 60 Put @ $2 and sells 1 ABC Jan 70 Put @ $6 when the market price of ABC is $67. The point where the customer breaks even is: A. $62 B. $64 C. $66 D. $68

C. $66 In a short put spread, the customer receives a credit in return for exposing himself to loss on the short put position. However, an offsetting long put position limits the maximum potential loss. To breakeven, the customer must lose the $4 credit received. This will be lost if the market falls 4 points below the 70 strike price on the short put. At $66, the short put will be exercised, requiring the customer to buy the stock at $70 (4 point loss). The long 60 put expires "out the money." Since $4 was collected in premiums, the customer breaks even. To summarize, the breakeven formula for a short put spread is:

A customer buys 1 ABC Jan 60 LEAP Call @ $8 that has 6 months left until expiration in a margin account. Regulation T requires that the customer deposit: A. $400 B. $600 C. $800 D. $6,000

C. $800 Regulation T sets the initial margin requirement to buy LEAP options with over 9 months to expiration at 75% of the purchase amount. However, once a LEAP has 9 months or less to expiration, the margin increases to 100% - the same as buying a regular option contract.

100 Basis points equals: A. .01% B. .1% C. 1% D. 10%

C. 1% One basis point equals .01%, so 100 basis points equals 1%.

Which of the following is NOT personal information related to a customer account? A. Information received from a credit rating agency about that customer B. Data mined from that customer's activities on the member firm's website C. Aggregated information about activities in all customer accounts at that broker-dealer D. Data mined from that customer's activities on web sites linked to the member firm's web site

C. Aggregated information about activities in all customer accounts at that broker-dealer Personal information about a customer account cannot be divulged to anyone, unless so ordered by a court of law. This includes information received about that customer from a credit ratings agency or from data collected about the customer's Internet activities (known as "data mining" - the customer's Internet trail is easily collectible via the "cookies" that record each page that the customer accesses). Aggregated information about all customers is not "personal" and can be divulged to others.

Which of the following would be least important in determining the level of diversification in a corporate bond portfolio? A. Bond ratings B. Industries represented in portfolio C. Domicile of issuers D. Maturities of the bonds in the portfolio

C. Domicile of issuers The "domicile" of an issuer is the state where the issuer legally resides. It has no bearing on the quality of the issuer's securities. Bond rating, type of industry, and maturity would all be considered when examining the diversification of a bond portfolio.

A municipal dealer who wishes to buy bonds has received a quote which is "out firm for 1/2 hour with a 5 minute recall." This means that the: I buying dealer can buy the bonds at the stated price during the next half hour II selling dealer can call during the next half hour and demand a purchase decision be made in the next 5 minutes III buying dealer is free to sell the bonds before actually making the purchase IV buying dealer can renegotiate the price during the next half hour, but the deal can be canceled by giving 5 minutes' notice A. I and III B. II and IV C. I, II, III D. I, II, IV

C. I, II, III The buying dealer has been given a firm quote, good for 1/2 hour. During this time, the buying dealer is free to sell the bonds before making the actual purchase, since he has been guaranteed a firm price. The "5 minute recall" means that the selling dealer can call at any time during the 1/2 hour and demand that a decision to buy be made within 5 minutes, or the quote is invalid.

Which of the following are functions of the transfer agent? I Mailing dividend payments to shareholders II Canceling old shares and issuing new shares III Preparing and mailing proxies IV Setting the Declaration Date A. I and II B. III and IV C. I, II, III D. I, II, III, IV

C. I, II, III The declaration date is set by the Board of Directors of the company. The transfer agent cancels old shares and issues new shares; and mails voting materials (proxies), annual reports, and dividend payments to the shareholders.

Which of the following features are common to both preferred stock and bonds? I Fixed rate II Can be callable III Fixed maturity date IV Semi-annual payments A. I and II B. III and IV C. I, II, IV D. I, II, III, IV

C. I, II, IV Like bonds, preferred stock has a fixed rate, can be callable and pays interest semi-annually. But unlike bonds, preferred stock has no maturity.

Which of the following statements regarding collateralized mortgage obligations are TRUE? I Each tranche has a different level of market risk II Each tranche has a different level of credit risk III Each tranche has a different yield IV Each tranche has a different expected maturity A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

C. I, III, IV A CMO divides the cash flows from underlying mortgage backed pass-through certificates into "tranches." Each tranche, in effect, represents a differing expected maturity, hence each tranche has a different level of market risk. Since each tranche represents a differing maturity, the yield on each will differ. New CMOs have special classes of tranches called PAC (Planned Amortization Class) and TAC (Targeted Amortization Class) tranches. These tranches are given a greater certainty of repayment at the projected date, by allocating earlier than expected repayments to so-called "companion" tranches, before prepayments are applied to these tranches. Credit risk for CMO tranches is the same for all tranches, since it is based on the quality of the underlying mortgage backed securities held in trust.

Which of the following can result in the creation of a short position? I Buying a stock on one exchange and simultaneously selling it on another exchange II Selling stock for a customer that is owned by that customer III Selling stock for a customer that is not owned by that customer IV Selling stock for the firm's account that is not owned by the firm A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

C. I, III, IV Short sales are sales of borrowed shares, so Choices III and IV are clearly short sales. Choice II is a long sale - selling stock that is owned. Choice I is an arbitrage transaction, where stock is bought on one exchange and simultaneously sold short on another exchange to lock in a price difference. The long position is delivered later to replace the borrowed shares.

PHLX traded option contracts are available for which of the following currencies? I Euro II U.S. Dollar III Japanese Yen IV Canadian Dollar A. II only B. I and II C. I, III, IV D. I, II, III, IV

C. I, III, IV The PHLX World Currency options are available on the 6 major foreign currencies - Euro, British Pound, Swiss Franc, Japanese Yen, Australian Dollar, and Canadian Dollar. Note that there is no trading of U.S. Dollar options in the U.S. markets because U.S. law prohibits speculation in its own currency.

Under Regulation M, which statements are TRUE? I Syndicate members that are not market makers are restricted from buying Tier 1 securities for the 5 business day window of time prior to the effective date II Syndicate members that are not market makers are permitted to buy Tier 1 securities anytime prior to the effective date III Syndicate members that are not market makers are restricted from buying Tier 3 securities for the 5 business day window of time prior to the effective date IV Syndicate members that are not market makers are permitted to buy Tier 3 securities anytime prior to the effective date A. I and III B. I and IV C. II AND III D. II and IV

C. II AND III Rule 101 of Regulation M covers syndicate members who are not market makers in that stock that are in an underwriting group for an "add on" stock offering. The intent is to make sure that they do not try and manipulate the price of the security upwards prior to the effective date, so that a higher POP could be set. They are subject to a restricted period for secondary offerings, of either 1 business day or 5 business days prior to the effective date, where they are prohibited from purchasing, making a bid for, or inducing the purchase of, the underwritten security. If the security is very actively traded, there is no restricted period. Note that they can accept unsolicited orders to buy the security. The rule states that: Tier 1 Issue - if the security is actively traded (average daily trading volume of $1,000,000 or more and public float of at least $150,000,000), there are no restrictions placed on market makers trading the issue prior to the distribution. The idea here is that this issue is too big for the price to be manipulated. This is called a "Tier 1" issue. Tier 2 Issue - if the security has an average daily trading volume of $100,000 and a public float of at least $25,000,000 the restricted period is the business day prior to the effective date. This is called a "Tier 2" issue. Tier 3 Issue - any other security not meeting these minimums is a "Tier 3" issue and is subject to a restricted period of 5 business days prior to the effective date.

In riskless principal transaction, the dealer: I buys a security into inventory in advance of filling a customer order to buy that security II buys a security into inventory after receiving a customer order to buy that security III charges a mark-up to the customer IV does not charge a mark-up to the customer A. I and III B. I and IV C. II and III D. II and IV

C. II and III A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer.

Retail member firms that route orders to market makers in return for compensation: I are engaging in a prohibited practice under SEC rules II permitted to do so, subject to best execution requirements III must disclose the practice on customer confirmations IV are not required to disclose the practice on customer confirmations A. I and III B. I and IV C. II and III D. II and IV

C. II and III If a retail member firm chooses a market maker to execute its orders in return for compensation from that market maker, then the retail firm is earning so-called "payment for order flow." The SEC permits this practice, subject to the retail member firm always executing its trades at the best available price. And payments made for order flow must be disclosed on customer confirmations.

Which of the following statements are TRUE regarding joint accounts? I Minors can participate in a joint account II Minors cannot participate in a joint account III Adults can participate in a joint account IV Adults cannot participate in a joint account A. I and III B. I and IV C. II and III D. II and IV

C. II and III Only adults can participate in a joint account, since only adults have the legal capacity to sign a binding joint account agreement. Minors cannot participate in a joint account - the only way to open an account for a minor is via a fiduciary account such as a custodian, guardian, or trust account. In such an account, the fiduciary opens an account for the benefit of the designated individual. Only the fiduciary can trade the account or draw checks on the account.

A customer places an order to buy 1,000 shares of a stock at $40. The registered representative enters the order. After execution, the registered representative notices that he had erroneously entered the wrong number of shares on the order ticket. The amount read 100 shares, and this amount was purchased. Which of the following statements are TRUE? I The firm is only obligated to provide 100 shares at $40 II The firm is obligated to provide 1,000 shares at $40 III Any additional cost of filling the remaining 900 share order is the responsibility of the firm IV Any additional cost of filling the remaining 900 share order is the responsibility of the customer A. I and III B. I and IV C. II and III D. II and IV

C. II and III The firm is obligated to make good on the order and provide the customer with 1,000 shares at $40 - as long as the market would have allowed that particular order to be executed. This is an error in execution, and such errors are the responsibility of the firm.

The economic theory that postulates that production and economic growth are stimulated by increased government spending and transfer payments is: A. Supply Side Theory B. Monetarist Theory C. Keynesian Theory D. Demand Side Theory

C. Keynesian Theory Keynesian Economic Theory states that economic growth is controlled by government spending and transfer payments (e.g., Social Security). This theory gained adherents in the 1930s during the Great Depression. With the private economy shattered at that time, the only way out was to have the government employ workers in large projects. This increased Government spending; and helped to stimulate economic activity as earnings were placed in individual pockets.

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 each C. 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

C. She is prohibited from opening an account for each child because she earns too much 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 2018, the top end of the income phase out range for individuals is $110,000 and for couples it is $220,000.

Spiders (SPDRs) are securities whose value is based upon the securities in the: A. Standard and Poor's 100 Index B. Standard and Poor's 400 MidCap Index C. Standard and Poor's 500 Index D. Standard and Poor's 1000 Index

C. Standard and Poor's 500 Index Spiders (SPDRs) are Exchange Traded Funds based on the Standard and Poor's 500 Index. These are an extremely popular product traded on the exchanges.

Which of the following actions were taken by the NYSE in response to large increases in trading activity experienced in the 1980s? A. The establishment of more stringent listing requirements B. The expansion of trading hours C. The introduction of automated routing and execution systems D. The admission of more specialist members

C. The introduction of automated routing and execution system To handle the greatly increased trading volume that occurred in the 1980s, the NYSE introduced the SuperDOT system - an automated order routing and execution system, which was replaced in late 2009 by the Super Display Book system. The Exchange has kept its listing requirements at about the same levels as in the past; has forced the Specialist/DMM firms to merge to increase their capital so that they could take larger trading positions; and has considered expansion of trading hours but has not taken any action as of yet. Expansion of trading hours will occur because of increased global competition - not because of the Exchange's inability to handle large trading volumes. Currently, the Exchange can comfortably handle over 10 billion share trading days - well in excess of the 4 billion share daily trading average.

Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk"? A. Treasury Notes B. Treasury Stock C. Treasury Strips D. Treasury Bonds

C. Treasury Strips Treasury "STRIPS" are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rates.

A customer buys 100 shares of XYZ stock at $51 and buys 1 XYZ Jan 50 Put @ $4 on the same day. The put expires and the stock is sold in the market for 59. For tax purposes, the put premium is: A. a capital loss at expiration date B. a capital loss at the date the stock is sold C. added to the cost basis of the stock, reducing any capital gain when the stock is sold D. subtracted from the strike price of the put, reducing any capital gain when the stock is sold

C. added to the cost basis of the stock, reducing any capital gain when the stock is sold When a put is purchased on a stock on the same day that the stock is bought, the put is said to be "married" to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a "married" put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock's cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor. The cost of the stock is $51 + $4 premium = $55 per share. When the stock is sold at $59, the customer reports a 4 point capital gain.

The municipal bond counsel opines on all of the following EXCEPT: A. validity B. legality C. feasibility D. tax exempt status

C. feasibility The bond counsel examines new municipal issues for legal or tax problems and renders an opinion on the validity, legality and tax exempt status of the issue. Bond counsels do not render economic opinions, which is the same as rendering an opinion on feasibility of an issue.

Each of the following individuals can buy options for his own account on an exchange floor EXCEPT the: A. specialist B. market maker C. floor broker D. competitive trader

C. floor broker The Floor Broker acts as an agent only, handling transactions for his or her firm, or for other firms. Floor brokers are prohibited from trading for their own accounts. On the Chicago Board Options Exchange, there are Market Makers, who only make markets in options contracts. On the American Stock Exchange and the Philadelphia Stock Exchange, there are Specialists that are market makers in options. Also on the CBOE, there are competitive traders, who trade for their own accounts for profit, adding liquidity to the market.

A 50-year old man has purchased a variable annuity contract. He wants payments for his life, but wants to make sure that payments are made for at least 20 years, should he die prematurely. He should choose a: A. joint and last survivor annuity option B. systematic withdrawal plan that provides for 20 years of payments C. life annuity with a 20 year period certain D. unit refund annuity

C. life annuity with a 20 year period certain A life annuity with a 20 year period certain will pay for the life of the annuitant, but if the annuitant dies early, it will pay for a minimum of 20 years regardless. These payments will be made to a designated beneficiary.

Under Regulation D, all of the following are accredited investors EXCEPT a(n): A. investment company B. trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person C. partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered D. savings and loan institution

C. partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered There is no limit on the number of accredited investors that can purchase a private placement under Regulation D. Regarding institutional investors, any investment company, insurance company, bank, or savings and loan is accredited. A non-profit organization, trust, or institutional investor is accredited if it has at least $5,000,000 of assets and was NOT formed with the intent of buying the private placement. The idea here is that people could attempt to get around the 35 non-accredited investor limit by having these non-accredited investors contribute to a trust that would buy the issue. If the trust accumulated $5,000,000 for investment, it would be accredited. But the rule disallows this if the trust is formed for the purpose of buying the private placement!

On the same day in a margin account, a customer buys 5 ABC January 40 Calls @ $6 and sells 10 ABC January 50 Calls @ $1 when the market price of ABC is at $43. The customer has created a: A. short combination B. long combination C. ratio spread D. back spread

C. ratio spread This is a very difficult question. The customer is taking the following positions: Buy 5 ABC Jan 40 Calls @ $6 Sell 5 ABC Jan 50 Calls @ $1 $5 Debit Sell 5 ABC Jan 50 Calls @ $1 Credit The customer is creating 5 "long call spreads" and has 5 naked calls. In effect, he is writing 2 times the number of short calls needed to create the spread. Therefore he is "writing at a 2:1 ratio." This is termed a ratio spread. Long call spreads are used when a customer is moderately bullish, and wishes to reduce the cost of the long position by selling an equal number of "out the money" calls. This limits upside gain potential, but also reduces the cost of the positions. By writing twice the number of calls, the customer further reduces the cost of the positions, but also assumes unlimited upside risk on the 5 naked calls that are left.

All of the following statements are true regarding the Official Statement EXCEPT that the Official Statement is: A. not required by the Securities Act of 1933 because municipal issues are exempt securities B. required to be delivered to all purchasers of a new municipal issue at or prior to settlement, if available C. required to be prepared by issuers by the Municipal Securities Rulemaking Board for all new issue municipal bonds D. requested by underwriters to satisfy the disclosure requirements of new issue purchasers

C. required to be prepared by issuers by the Municipal Securities Rulemaking Board for all new issue municipal bonds The Official Statement for a new municipal issue is not required under the Securities Act of 1933 since municipal issues are exempt, nor is it required to be prepared by issuers by the MSRB, since the MSRB has no authority over municipal issuers. It is requested by underwriters to help sell the new issue and the MSRB states that if one is available, it must be given to purchasers at or prior to settlement of the transaction.

Strategic portfolio management is the selection of the: A. securities in which to invest B. asset classes in which to invest C. target asset allocation for each asset class selected for investment D. variation permitted in target asset allocation for each asset class selected for investment

C. target asset allocation for each asset class selected for investment Strategic asset allocation is the determination of the target percentage to be allocated to each asset class (e.g., 25% Treasuries; 25% Corp. Debt; 50% Equities). Tactical asset allocation is the permitted variation around each of the chosen percentages - for example, even though Equities are targeted at 50%, this might be allowed to be dropped to as low as 40%, or as high as 60%, depending on market conditions.

As an initial transaction in a new margin account, a customer sells short 100 shares of ABC at $20 per share. After the customer deposits the appropriate margin, the credit balance in the account will be: A. $1,000 B. $2,000 C. $3,000 D. $4,000

D. $4,000 As an initial transaction in a new margin account, the customer sold 100 shares of ABC at 20. Regulation T requires 50% margin. 50% of $2,000 = $1,000 Regulation T requirement. However, since this is a new account, the FINRA minimum maintenance margin requirement of $2,000 must be met. Therefore, $2,000 must be deposited. This shows as a credit to the account. In addition, the short sale results in a credit of $2,000, for a combined credit of $4,000. Credit Balance - Short Market Value = Equity

On the same day, a customer buys 1 ABC Jan 50 Call @ $5 and sells 1 ABC Jan 60 Call @ $2. Above which of the following prices will every dollar gained on the long call be exactly offset by a dollar lost on the short call? A. $50 B. $53 C. $58 D. $60

D. $60 The breakeven point is $53 per share. As the market rises above $53, the customer gains 1 point on the long 50 call for every $1 rise in the price of ABC stock. Once the market goes above $60, the short call will be "in the money," and a dollar will be lost on the short call for every dollar gained on the long call. Thus, above 60, there is no further gain. The maximum gain potential is 7 points or $700.

An older customer, age 63, who is in the lowest tax bracket, seeks an investment that will give him an income stream. The BEST recommendation would be: A. Variable annuity B. Municipal bond C. Certificate of deposit D. AAA Corporate bond

D. AAA Corporate bond Because the customer is in a low tax bracket, you would not recommend the municipal bond. Most variable annuity separate accounts are invested in equities for growth to supplement other forms of retirement income. Because they are equity funds, they do not give much of an income stream. The CD and the AAA Corporate bond both provide income, which is the stated objective. However, the AAA corporate bond is top-rated and will give a higher income stream than a CD. This is the best choice. Note that the question tells us nothing about risk tolerance, which would certainly be helpful, but this is typical of "test-like" questions!

The DMM (Specialist) on the NYSE, just prior to market opening, has orders to sell 100,000,000 shares of ABC stock at the open, but only has orders to buy 5,000,000 shares. Because of the extreme order imbalance, the DMM, at the open, displays "ABC - OPD" on the Network A Tape. Which statement about this is FALSE? A. The NYSE has delayed the opening of the stock B. Other markets are permitted to trade the stock C. This is a non-regulatory trading halt D. Any other market that wishes to trade the stock during the halt must get prior FINRA approval

D. Any other market that wishes to trade the stock during the halt must get prior FINRA approval OPD stands for "Opening Delayed." This is a non-regulatory halt, which is quite different from a "halt" imposed by a regulator, such as the SEC or FINRA. For example, in the "good old days," the NYSE would routinely delay the opening of trading in a stock if there was a large opening order imbalance (many more opening sell orders than buy orders). During the halt, the Specialist/DMM would attempt to round up matching buy orders, so that there could be an orderly opening. The NYSE learned that this was not such a great idea, because institutions that could not trade the stock on the NYSE simply went to regional exchanges, Third Market Makers and ECNs to do their trades instead. So each time the NYSE did this, they lost market share! Needless to say, they don't do this anymore - except in test questions of course!

Which of the following statements are TRUE regarding a municipal bond issue that is advance refunded? I The security that backs the advance refunded bonds will change after the issue is refinanced II The bondholder's lien on pledged revenues will be defeased in accordance with the terms of the bond contract III The marketability of the advance refunded bonds will increase IV The funds to pay the debt service requirements on the advance refunded bonds are set aside in escrow A. II only B. III and IV only C. I, II, IV D. I, II, III, IV

D. I, II, III, IV All of the statements are true regarding advance refunding of a municipal bond issue. In an advance refunding, the issuer floats a new bond issue and uses the proceeds to "retire" outstanding bonds that have not yet matured. These funds are deposited to an escrow account and are used to buy U.S. Government securities. The escrowed Government securities become the pledged revenue source backing the refunded bonds. These bonds no longer have claim to the original revenue source. Since there is a new source of backing for the bonds (and an extremely safe one!), the credit rating on the advance-refunded bonds increases, as does their marketability. The advance-refunded bonds no longer have any claim to the original pledged revenues - and thus have been "defeased" - that is, removed as a liability of the issuer. (Also note that the tax law changes that took effect at the beginning of 2018 banned municipalities from doing any more advance refundings or pre-refundings. However, all the bonds that have been advance refunded remain outstanding until they reach their maturity date, while those that have been pre-refunded remain outstanding until their first call date.)

Which sources of REIT income are counted towards the 75% test required by Subchapter M? I Property rentals II Interest from mortgages III Capital gains on property sales IV Real estate tax refunds A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

D. I, II, III, IV To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, gains on property sales, income from foreclosed properties, 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).

Which of the following statements are TRUE regarding corporate bonds purchased in the secondary market at a discount? I The discount must be accreted II The discount may be accreted III The discount may be taxed as a long term capital gain if held for over 1 year IV The discount will be taxed as ordinary income A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Corporate bonds bought in the secondary market at a discount are termed "market discount bonds." There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond's life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).

Equity options contracts for a given month expire: I on the 2nd Friday of the month II on the 3rd Friday of the month III at 4:00 PM Eastern Standard Time IV at 11:59 PM Eastern Standard Time A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Equity options contracts for a given month expire on third Friday of the month at 11:59 PM Eastern Standard Time. The trading cut-off is 4:00 PM ET on the same day.

Which orders guarantee execution but not price? I Buy Limits II Buy Stops III Sell Limits IV Sell Stops A. I and II B. III and IV C. I and III D. II and IV

D. II and IV If a "Stop" order is elected, it becomes a market order to be filled at the first opportunity. Thus, the actual price at which the order is executed is not known. On the other hand, a "Limit" order specifies that the execution must comply with the limit price specified or better. Thus, limit orders are filled at that price or better.

Index options contracts expire: I on the second Friday of the month II on the third Friday of the month III at 10:59 PM Eastern Standard Time IV at 11:59 PM Eastern Standard Time A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Index options contracts expire on the third Friday of the month at 11:59 PM Eastern Standard Time.

Exchange rate risk is a factor to consider when investing in debt issues: I within the U.S. II outside the U.S. III that are denominated in U.S. dollars IV that are denominated in a foreign currency A. I and III B. I and IV C. II and III D. II and IV

D. II and IV When an investment is made outside the U.S. that is denominated in a foreign currency, the investor assumes exchange rate risk. This is the risk that the foreign currency weakens against the U.S. dollar (which is the same as the U.S. dollar strengthening). For example, assume that an investment is made in $100,000 of bonds denominated in Japanese Yen when the Yen is trading at 100 to the U.S. dollar. Thus, $100,000 x 100 Yen per U.S. dollar = 1,000,000 Yen being spent. Also assume that each bond costs 10,000 Yen, so 100 bonds are purchased at $100 each. Now assume that the bonds do not move in price, but the Yen weakens to 200 Yen to the U.S. dollar (each U.S. dollar now "buys" 200 Yen instead of 100 Yen). This means that 100 bonds are still priced at 10,000 Yen each in Japan. However, because each U.S. dollar is worth 200 Yen, the bonds are now worth 10,000 Yen / 200 Yen per U.S. dollar = $50 each. Thus, the bonds are now worth 1/2 of what was paid for them, solely due to the movement in currency exchange rates.

An investor wishes to do a municipal bond tax swap. The investor can expect to pay extra funds for the swap if the newly purchased bonds have a: I lower coupon II higher coupon III lower rating IV higher rating A. I and III B. I and IV C. II and III D. II and IV

D. II and IV When doing a tax swap, an investor sells a bond at year end at a loss (for the capital loss tax deduction) and invests the proceeds in a different bond issue (to avoid the wash sale rule which applies if he buys back the same bond). The investor establishes a new cost basis in the new bond, but no tax is due until that position is sold. The new bond will cost more if it is of higher quality or pays a greater amount of interest.

In a corporate underwriting, which of the following is earned by the lead underwriter on each security sold? A. Underwriter's Concession B. Selling Concession C. Spread D. Management Fee

D. Management Fee The spread is the gross compensation earned by the syndicate. Out of this gross amount, portions can be earned by the members of the underwriting group. The syndicate manager earns the management fee for running the syndicate - typically the smallest portion of the spread. Once the management fee is deducted from the spread, this leaves the underwriter's concession. This is the amount earned by a syndicate member who sells the issue to the public. Out of the underwriter's concession, the syndicate member can give up a selling concession to a selling group member for helping find a customer for the issue. Also out of the underwriters concession, a syndicate member can give up a reallowance (a small amount) to a non-member of the selling group who sells some of the issue.

In a corporate liquidation, the priority of claim to corporate assets is: A. Unpaid wages and taxes, debenture holders, mortgage bond holders, preferred stockholders B. Unpaid wages and taxes, preferred stockholders, debenture holders, mortgage bondholders C. Mortgage bond holders, debenture holders, unpaid wages and taxes, preferred stockholders D. Mortgage bond holders, unpaid wages and taxes, debenture holders, preferred stockholders

D. Mortgage bond holders, unpaid wages and taxes, debenture holders, preferred stockholders The priority of claim to corporate assets in a liquidation is: Secured creditors, unpaid wages and taxes, trade creditors, unsecured bondholders, preferred stockholders, common stockholders.

A partner in a law firm renders investment advice to a customer as part of an overall estate plan being prepared by that firm. Which statement is TRUE? A. The lawyer must be registered with the Securities and Exchange Commission (SEC) as an investment adviser B. The lawyer must be registered with FINRA as a representative C. The lawyer must be registered with both the SEC as an investment adviser and with FINRA as a representative D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative

D. The lawyer is not required to be registered with the SEC as an investment adviser nor with FINRA as a representative Anyone who renders investment advice in the normal course of business for a fee is considered to be an investment adviser. An exemption is granted if a lawyer or other professional renders investment advice that is solely incidental to the regular business of that person. Thus, a lawyer who renders investment advice as part of an overall estate tax plan would be exempt from registration as an adviser. If the lawyer charged separately for giving advice about investing, then the lawyer would be defined as an investment adviser that must register. Registration with the SEC is required as a federal covered adviser if the adviser has $100 million or more of assets under management. If it does not meet the threshold, then it must register in the State and not with the SEC.

The Placement Ratio has been steadily decreasing over the last 30 days. This is an indication that municipal: A. interest rates are likely to fall B. interest rates are likely to rise C. dealers have a decreasing inventory position D. dealers have an increasing inventory position

D. dealers have an increasing inventory position The Placement Ratio measures how well the market is absorbing the output of new bonds. A high Placement Ratio means that most of the new bonds are "being placed" or resold. A low ratio means that the market is not absorbing the bonds, therefore they are sitting on dealers' shelves.

Trading in the Interbank market will affect all of the following EXCEPT: A. foreign currency prices in terms of U.S. dollars B. future trade deficit or surplus figures C. future economic growth D. future inflation levels

D. future inflation levels 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.

A "saucer" formation is a(n): A. uptrend B. downtrend C. reverse upward trend D. reverse downward trend

D. reverse downward trend A saucer formation is bullish since the market has bottomed out and is now moving back upwards. It is a downtrend that has reversed itself.

All of the following statements are true about Treasury Receipts EXCEPT: A. the full faith and credit of the U.S. Government backs the securities underlying the issue B. they are "packaged" by broker-dealers C. the interest coupons are sold off separately from the principal portion of the obligation D. the securities are purchased at par

D. the securities are purchased at par Treasury Receipts are zero coupon Treasury obligations created by broker/dealers who buy Treasury Bonds or Treasury Notes and strip them of their coupons, keeping the corpus of the bond only. The bonds are put into a trust, and "units" of the trust are sold to investors. Treasury Receipts are purchased at a discount and mature at par. The discount earned over the life of the bond is the "interest income." Once the Federal government started "stripping" bonds itself (in 1986) and selling them to investors, this market evaporated. However, 30 year T-Receipts will trade until they all mature.

A customer buys 1 ABC Jan 50 Call @ $4 and buys 1 ABC Jan 50 Put @ $3 when the market price of ABC = $51. The maximum potential gain is: A. $700 B. $4,300 C. $5,700 D. unlimited

D. unlimited The customer created a long straddle, which is the purchase of a call and a put on the same stock, with the same strike price and expiration. Since one side of the straddle is a long call, there is unlimited upside gain potential. On the put side of the straddle, the maximum potential gain occurs if the stock drops to zero.

Dividend Payout Ratio:

Is the percentage of a company's total earnings for common shareholders that were actually distributed as dividends to the common shareholders. The formula is: Dividends paid in that year divided by Earnings per Common Share. $2.50 of Dividends paid in 2016 divided by $5.00 Earnings per Common Share = 50% Dividend Payout Ratio.

The "size" of the market refers to:

The highest bid and lowest ask currently on the book The "size" of the market refers to the highest bid and lowest ask currently on the book. The highest bid is 40.04, with 200 shares offered (100 from GS, 100 from DB); the lowest ask is 40.07, with 100 shares offered (from GS). The size of the market is 200 bid at 40.04 by 100 asked at 40.07. So, the answer is 200 by 100.