Series 7
SEC Rule 15c2-1 mandates that the maximum rehypothecation permissible by a member firm is:
140% of the customer debit balance The member firm may use margin securities worth up to 140% of the customer's debit balance in order to secure the margin loan to the customer.
A customer owns an AMF October 30 call option. If AMF should split 2 for 1, the customer will own:
2 AMF October 15 calls each for 100 shares When a stock splits 2 for 1 (an even split), the number of contracts increases and the strike price is reduced proportionately. The number of shares representing each listed option remains at 100 shares. The customer will now have 2 calls for 100 shares each at the adjusted strike price of $15 or 2 AMF October 15 calls for 100 shares each of AMF. Listed options are adjusted for stock splits, stock dividends, and rights offerings, but are not adjusted for cash dividends.
Lyon Technology is being quoted by 3 market makers as follows: Market Maker A 42.22 - 42.72 10 by 15 Market Maker B 42.28 - 42.75 15 by 10 Market Maker C 42.20 - 42.68 5 by 5 If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech common, the mark-up or mark-down would be based upon:
42.28 The key words in this question are 'customer sell order.' Your client is selling TO your firm. Your firm will give the client the BEST BID price available at this time, then charge a fair reasonable mark-down in accordance with the FINRA 5% policy. The best bid is the HIGHEST of all the bids on the NASDAQ screen, which in this case is $42.28, the bid of Market Maker B.
Gamma Medical, a domestic NASDAQ listed company, has each of the below investments in its corporate investment portfolio. Identify the one with the best after-tax yield, assuming a 21% corporate tax bracket.
5.4% Ford preferred stock The 50% corporate dividend exclusion rule exempts 50% of the dividends received, by domestic (US) corporations on their investments in stocks of other domestic corporations, from tax — so 50% of the Ford dividend is tax-free. The remaining 50% of the dividend is taxed at 21%. This leaves us with an after-tax return on the 5.4% preferred of just over 4.8%... which is a higher after-tax return than the other three choices.
Mr. Poulter is a high risk tolerant high net worth client who enjoys trading options and shorting the market. As such, he places an order to short 1000 shares of Citigroup common at $2.25 per share. His deposit requirement with Reg. T at 50% would be:
$2,500 The NYSE and FINRA require that short sales of 'cheap' stocks have substantially higher deposit and maintenance requirements than traditional margin transactions. In this case, the 'cheap stock rule' dictates that a minimum of $2.50 per share is required when shorting stock priced at $2.50 or below. For a 1000 share short sale, the deposit requirement is $2,500.
Rose McGraw has given 1,000 shares of ABC common to her granddaughter under the UGMA regulations. ABC is currently trading at $14 and Rose's initial cost for the shares nearly a decade ago was $7/share. For taxation purposes, the cost basis and date of acquisition for the granddaughter would be:
$7 cost basis and the date of acquisition is the donor's date of purchase IRS regulations state that the donor's cost and the donor's date of purchase transfer over to the minor when a gift of securities is given under UGMA.
In accordance with the latest FINRA rules, under what circumstances may associated persons buy common shares of an IPO on the offering in their own account?
A Under no circumstances (CORRECT) B When the purchase is consistent with their normal investment practice and is not disproportionate in size to the overall offering. C When the purchase is being made in an account held at a brokerage firm other than their own. D Both (B) and (C). FINRA rules prohibit personnel working in the brokerage industry from purchasing equity IPOs on the offering. There are some extremely narrowly-defined exceptions, however it is unlikely you would find those showing up on a registered rep examination.
In the opening of a new options account, certain procedures must be followed in accordance with CBOE and/or other SRO requirements. Which of the following represents the final step in the options account procedures?
A furnish a copy of the options disclosure document (ODD) B branch manager approval of account opening C the client's first options trade D the special options agreement is signed and in the firm's files The special option agreement form is required to be reviewed and signed by the new options account customer and returned to the firm within 15 days of account opening. One can actually engage in trading in the account during those 15 days, but if this agreement is not returned to the firm in time, no further opening transactions are permitted until this agreement has been returned to the firm.
Which of the portfolio positions described below has the greatest risk exposure?
A long stock B short put C short stock/short put (CORRECT) D short stock/long call In this type of question, you have to evaluate all four answers to determine the maximum potential loss of each one in order to know the one with the greatest risk of loss. Shorting stock has unlimited risk of loss. Even when selling a put option to go with the short sale of stock, the risk of unlimited loss remains in place. Why answer D is not correct is that when one shorts stock, one can buy a call option to provide a hedge which serves to eliminate the risk of unlimited loss.
The Uniform Practice Code of FINRA sets forth requirements regarding deliveries, eligibility for issuer distributions, and a wide variety of rules pertaining to dealer to dealer day to day activities. When it comes to the determination of ex-dividend dates:
A the ex dividend date for open-end investment company shares is set by the Board or the principal underwriter of the fund. B the ex dividend date in respect of listed common shares is normally 2 business days prior to the designated record date set by the Board. C the ex-date for stock dividends 25% or greater is normally 1 business day past the payable date. D all of the above All of these statements are correct with respect to ex-dividend dates under FINRA's rules.
According to FINRA rules, the best approach when investigating allegations of churning a customer's account is to focus on:
A the frequency of trades B the size of the trades C the investment objectives of the customer (CORRECT) D the amount of time that the customer allowed to elapse between the questionable trades and the filing of the complaint Though one could argue that any of these answers could provide evidence that a churning violation has occurred, FINRA's interpretation states that #1 on the list of considerations is the investment objective of the customer. Case in point: a day trader would have a very difficult time claiming churning for excessive frequency of trades - constant in and out trading is, by definition, the day trader's investment objective!
According to the rules and regulations of the Options Clearing Corporation and the options exchanges, an equity call option may be covered by each of these except:
A 100 shares of the underlying common stock cash equal to the aggregate exercise price of the option B cash equal to the aggregate exercise price of the option C a depository receipt for 100 shares of the underlying common stock D none of these are exceptions. Covered call writing requires the writer to own 100 shares of the underlying stock in their brokerage account, or provide their brokerage firm with a receipt from a bank or other depository institution showing that the bank is holding 100 shares of the underlying stock in their vault, stock which belongs to the option writer. Having enough cash on hand to buy 100 shares of the stock is not considered 'covered' under the OCC rules.
A Eurodollar bond has each of the following characteristics except:
Answer = A A interest payments may be made in either US dollars or the currency of the nation in which the bond was issued. B its interest payments will be made in US dollars only. C these bonds are issued by either US or foreign corporations but are not issued in the United States. D principal is repaid at maturity in US dollars.
Each of the below will have no impact upon the NAV per share of an open-end management investment company with the exception of:
Answer = D (NONE OF THE ABOVE) A shareholder redemptions B investors purchasing fund shares at the POP C investors reinvesting distributions at the NAV D none of the above Since all purchases and redemptions of mutual fund shares take place based upon the Net Asset Value, purchases and redemptions don't change the NAV per share of the fund. One example of an event that does change NAV per share would be day to day changes in the market prices of the investment securities inside the fund's portfolio.
When viewing the latest quotes on T-bills, you note that the current quote on the new 3 month Bills, 0.55 − 0.50, is somewhat higher than the quote on new 3 month Bills at the previous auction.
T-bill discounts have increased T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes represent the percentage of Discount from Par Value at which banks and dealers purchase T-bills at the Fed Auction. If you're told that this week's quotes, which are discounts from par, are HIGHER than the discounts from last week, that means T-Bill purchase prices have gotten LOWER -----we all know that when department stores increase the DISCOUNT, the price in dollars gets cheaper. It's the same with T-bills. For any of you who put answer A, it is wrong because it says prices have gone up. When a discount gets higher/bigger, the sale price goes down.
One of the best ways to hedge against loss when long a listed stock is to acquire a long put position. As such, your client who had purchased 100 shares of Alpha Beta common six months ago at 12.40 takes your advice and buys 1 Alpha Beta May 20 put at 3 with the stock trading at 22.40 to protect against erosion of the 10 point unrealized capital gain. Which of the below statements is correct?
The Internal Revenue Code states that buying a put option to protect a long stock position showing an unrealized short term capital gain wipes out the holding period that has accumulated to that point in time. In this case, there is a $10 unrealized gain on a stock position held only six months (short term). Buying the put will erase the six month holding period. The holding period on the stock will begin again from scratch once the put has been disposed of or has expired.
Mrs. Ko's portfolio has an aggressive bias towards growth stocks. As such, its beta is 1.4 and she is concerned about downside exposure due to overall market risk over the near term. The S&P 500 Index is currently at 2000.00 and her portfolio has a current market value of $1,000,000. Which of the following recommendations would provide the best hedge?
The S&P 500 has a beta of 1.0. Long Index puts provide an effective hedge against downside portfolio risk. But a portfolio with a beta of 1.4, which is 40% higher than 1.0, requires 40% more put options to acquire the appropriate amount of hedging. Each S&P 500 Index option contract with a 2000 strike price provides protection for $200,000 of portfolio value, which is 2000 times the multiplier of 100. A $1,000,000 portfolio would require 5 put options if the portfolio had a beta of 1.0. This portfolio requires 40% more options: 7 long puts.
Stabilizing a new stock issue I. May occur once the S-1 has been filed with the SEC II. May only occur if disclosed in the final prospectus III. May not occur at or above the POP IV. If necessary, is normally a function performed by a syndicate manager
II and IV Stabilizing a new issue can only be done once the effective date of the new issue has arrived. It isn't done during the cooling off period, which is prior to the effective date. Stabilizing is normally done by the managing underwriting either at, or just below, the POP (public offering price). It cannot be done above the POP.
For the customer who is seeking to hedge a short stock position, which of these strategies can provide some degree of protection? I. buy limit order II. long call III. short put IV. buy stop order
II, III and IV When shorting stock, loss results from a rise in CMV. A long call locks in the price at which the borrowed stock may be repurchased. A short put provides premium income which provides a partial or limited amount of upside hedge. A buy stop order will close out the short position once the stop order has been triggered by a rise in market price. A buy limit order is placed below CMV and as such, would not be executed in a rising market, and therefore does not provide a hedge against loss in a short sale.
Place the following in their proper order in the handling of an order. I. P & S dept. II. Cashier III. Margin dept. IV. Wire room
IV, I, III, II The 'flow of an order' has the Order department, a/k/a the wire room, handling the order first. They pass the executed order ticket to the P&S dept. (purchase & sale), who then passes it along to the Margin dept. The last stop in the flow of the order is the Cashier dept. which handles the money and securities to complete the settlement of the transaction.
In anticipation of a weaker dollar, one would expect
In simplistic terms, when the US dollar is weak compared to foreign currencies, American goods become cheaper/more competitive/more affordable for foreign businesses, individuals and foreign governments. They buy more US goods, causing US exports to increase, which in turn tends to cause the US trade deficit to decrease.
The State of New Mexico has outstanding $100,000,000 of 5.5% general obligation debt maturing 7/1/35, callable in 2 years at 100½. If the State issues new GOs with a 4.5% coupon in sufficient quantity to retired the 5.5% bonds in 2 years when callable, and escrows the money for that specific purpose, this is referred to as:
advance refunding Refunding is the act of selling new bonds with a lower interest rate to retire bonds with a higher interest rate. But when the new bonds are sold in advance of the callable date, it is more specifically referred to as advance refunding.
Which of the following mutual funds would be most suitable for the client seeking stability of capital?
balanced fund Stability of capital is the stated investment objective of a Balanced Mutual Fund.
An option trader who simultaneously goes long an XYZ Oct 40 put and short an XYZ Nov 40 put will profit if:
both options expire unexercised This strategy is a calendar spread, a/k/a a time or a horizontal spread. The months are different; the strike prices are the same. The option with the longer duration (more distant expiration month) will have a larger premium, due to its additional time value. This investor sold the November and bought the October. Because the November contract will have a larger premium, this spread is a Credit Spread. Credit spreads profit when both options expire (the investor keeps the credit).
A new stock issue may begin trading on NASDAQ
following the opening trade on the morning of the effective date There is no waiting period for new shares to begin trading in the secondary market.
A margin account customer buys 100 shares of JKS common at 80 and deposits the required Reg. T margin. A week later with JKS at 90, the account has SMA of:
The initial purchase of $8,000 at 50% Reg. T requires a down payment of $4,000 and creates a loan from the broker to the client of $4,000, referred to as the customer's debit balance. With the stock rising to 90, the CMV is now $9,000 while the debit balance does not change. The client's new equity is $5,000, found by taking CMV minus debit balance = $9,000 minus $4,000.However, Reg. T only requires equity of 50% of CMV, which on a $9,000 position is a Reg. T required equity of $4,500.Your client's equity of $5,000 exceeds Reg. T by $500. The new equity of $5,000 minus the Reg. T equity of $4,500 = $500. This $500 is commonly referred to as SMA, and is also called excess equity, also called Reg. T excess, and is also referred to as the client's 'line of credit.'
As the result of a client complaint involving accusations of churning, and allegations of unauthorized trades, a duly qualified panel of arbitrators has heard the case and rendered its ruling against the registered rep on all counts, as well as the branch manager and the member firm for failure to supervise. FINRA rules set forth the normal procedure for the filing of an appeal to the adverse ruling with which of the following?
There is one word in this question that is critical: arbitrators. Arbitrator rulings may NOT be appealed. Arbitration decisions are FINAL and BINDING upon all parties, no appeal is permitted.
During normal trading hours, trades in listed stocks must be reported to the appropriate 'tape'
Transactions are reported within 10 seconds of execution to the appropriate reporting medium, a/k/a the 'tape.'
An investment in United States Treasury bonds may be subject to which of the following taxes? I. capital gains II. federal income III. state income IV. ad valorem
US Treasury securities are subject to Federal Income Tax, but are exempt from State Income Tax. Ad valorem taxes are taxes on property, such as a home or commercial building, not on securities investments. **If an investor sells a T-bond in the secondary market at a capital gain, that gain is taxable.
Which of the below statements is/are not untrue regarding a Roth IRA? I. The maximum contribution below age 50 is $6,000 II. Withdrawals must begin by April 1 of the year after attainment of age 70½ III. Anyone with earned income may open a Roth IRA IV. Withdrawals after age 59½ are taxable as ordinary income only to the extent they exceed the original principal/cost basis
Warning! Double negatives such as 'not untrue' must be dealt with carefully. Not untrue = not false = true. Which of these Roman numeral answers is true: I only. The max contribution in 2021 for those under 50 is $6,000. For those who are 50 or over it is $7,000. As for why the other answer choices are false: age 70½ has no significance in the Roth IRA; persons who have earned income above a Congressionally-set threshold are ineligible for a Roth IRA; post-59½ withdrawals from the Roth IRA are normally tax-free.
On December 30th, with no other gains or losses for the year, Mr. Mickelson liquidated 300 shares of Ford common at $10 in which he had a cost basis of $20. Because of his long-term bullish belief in Ford, he acquired 300 shares of Ford at $11 on January 10th. His year-end loss of $3,000 is:
not deductible in the year of sale The 30-day wash sale rule states that a sale at a loss, though normally permitted to be included on a taxpayer's year-end computation of net gains or losses for that year, will be disallowed from current deductibility if the investor buys that same security or one substantially identical to it within 30 days after, or 30 days before the date of the sale that generated the loss. Buying 300 shares of Ford on January 10th took place within 30 days after the December 30th sale at a loss. As a result of purchasing the Ford stock in early January, the December 30th loss cannot be deducted in the year of sale.
One of your customers who is an active trader and is a student of technical analysis has called you to discuss his findings regarding the price action on MMM common. He believes that it is fast approaching its resistance level of 60. If he does not think the stock will break out, which of the below would be most appropriate?
sell most if not all of his current long position Active traders take profit off the table when they believe the market is about to turn around. Resistance at 60 tells us that if the stock is currently in the upper 50's, it will not go above 60: it will encounter 'resistance' at that point. Unless the client believes the stock is about the 'break out' to the upside and pierce through the resistance level, the client will sell, taking the profit.
Mr. Woods, an existing cash account customer of yours, has spoken with you regarding his travel plans for the upcoming 3 months. He's indicated he does not want to receive the regular monthly customer statements and confirmations of transactions while he's out of town for this extended period of time. As his registered rep, you inform Mr. Woods:
that your firm can hold mail for up to 3 months if he's traveling abroad. A firm, under normal circumstances, may hold a customer mail for 90 days.
Underwriting compensation in IPOs is subject to a thorough review by FINRA. Finra will make a definitive ruling on the fairness and reasonability of each of the following issue attributes with the exception of:
the POP (public offering price) of the new shares
A restricted margin account is one in which
the equity is less than Reg. T The definition of a restricted margin account is one in which the equity is less than the Reg. T percentage, which has been unchanged at 50% for decades.
Direct institution to institution securities transactions are considered
the fourth market a violation of the Securities & Exchange Act of 1934 b the secondary market c the third market d the fourth market
SEC Rule 144 restricts sales of control stock by corporate insiders to which of the following limits?
Control stock may be sold over a 90 day period in an amount not to exceed the greater of 1% of the issuer's outstanding shares or the average weekly volume over the 4 week period preceding the sale.
The Van Buren Growth Fund has its first breakpoint at $10,000, and its second breakpoint at $25,000. You have a customer for whom this fund is suitable and has told you he would like to invest $8,000 at this time. Without further discussion, you process the client's purchase order.
FINRA defines a 'breakpoint sale' as the violation which occurs when a registered rep fails to inform, or remind a mutual fund investor of the availability of reduced sales charges at breakpoints, in particular when that investor is purchasing an amount not far from a breakpoint. In this example, a client prepared to write a check for $8,000 should have been told that for an additional $2,000, they would qualify for a reduced commission on the entire $10,000 investment. By failing to discuss this, the rep has engaged in an unfair and unethical practice known as a 'breakpoint sale.'
As an RR, you've determined that investment companies would be a suitable product for several of your customers. In your research, you've located two companies and their NAV and Offer Prices respectively are shown below: Company A: 18.45 − 20.25 Company B: 8.79 − 8.15 Which of these companies could be an open-end management investment company?
Neither A nor B The rules regarding mutual funds (open-end investment companies) require that the purchase price be no less than the Net Asset Value. That eliminates Company B whose purchase price/offer price is LESS than the NAV. What is wrong with Company A? The spread between the NAV and the Offer price is so large it violates the maximum sales charge permitted by the regulators, which is set at 8.5% of POP. Company A has a spread of $1.80. Dividing $1.80 by the POP of $20.25 gives us 8.89%. Therefore, Company A cannot be a mutual fund. Neither of these 2 investment companies could be open-end mutual funds. They are most likely closed-end investment companies, listed for trading on a stock exchange, and trading every day at prices based upon supply & demand, not NAV.
All member broker-dealers are required to comply with the USA Patriot Act and related protective regulations. At the time of account opening, individuals filling out a new account form must supply certain information which will enable which of the following agencies to verify they are not on the list of known money launderers, terrorists or others deemed ineligible to open an account at a financial institution?
OFAC
The stock of which of the following listed corporations is generally considered the most sensitive to interest rate changes?
Public Utility companies tend to be highly leveraged, having a capital structure comprised of a substantial amount of long term debt/bonds. The stocks of these companies are referred to as 'interest rate sensitive' due to the magnified impact interest rate increases have upon these highly leveraged heavily indebted corporations.
A publicly-traded NYSE issuer has made a decision to raise capital abroad. The offering will be $150,000,000 of 7% 10 year debentures with warrants attached and will be offered only to investors outside the United States.
Regulation S is one of several registration exemptions found in the Act of 1933. So long as no initial sales of the bonds are directed into the US, registration with SEC is not required. Resale into the US is permitted, but restricted in accordance with specific requirements under SEC Rule 144.
Prior to the execution of a short sale of stock, it is the responsibility of the member firm handling the order to obtain an appropriate level of certainty that the shares are available for borrowing and within a time frame which will allow regular way delivery. the regulation which requires this is:
Regulation SHO
Trades appear on Tape A as follows: XYZ 49........XYZ 48.95........XYZ 48.90.......XYZ 49.05 Your customer's 100 share order to sell XYZ at 49 stop, GTC placed prior to the above trade reports would be executed at:
Sell stop orders are placed below the market. Sell stop orders must first be triggered, also called activated or elected, by a trade at or below the stop price. Once triggered, they become market orders and will be executed at the next available price. The trade at 49 triggers this order. The execution takes place at 48.95.
CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures outstanding with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are above parity, CPU common must be trading:
Solving this problem involves a number of steps. Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is $1,100. The bond is convertible into 40 shares: that's the 40 to 1 conversion ratio given in the question. By dividing $1,100 by 40 shares, one gets $27.50. That is the price the stock should be trading at, in order to be exactly equal to the current market value of the bond: therefore, $27.50 is the parity price of the stock. However, you are specifically being told that the bond is 'trading above parity.' In plain English, this means that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the stock can't be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49 (or below) is less than $1,100.
Your customer Mr. Furyk has expressed an interest in adding technology stocks to his portfolio. He informs you that he likes ABC Technology, Inc. and has instructed you to buy it when you think the time and price are right and to buy as much of it as you believe is reasonable when considering his portfolio mix and investment objectives.
you must have written discretionary power in order to do what this client wants Your customer wants to BUY, and he told you the name of the STOCK, but he did not tell you the AMOUNT to buy. Therefore, discretionary authority in writing is required.
