Series 7 - Mastery Exam III #1 (Q1 - Q36)

Value investors: A seek to find investments that are undervalued by the market B determine the value of a security through fundamental analysis C invest in securities included in the Value Line Index D make their investment decision based upon the market performance of the security

The best answer is A. Value investors believe that the market is not completely efficient at pricing securities and that undervalued securities can be found in the marketplace. Once the market realizes the true worth of these undervalued companies, their prices should rise at a greater rate than the general market.

A client, age 67, owns his own home free and clear. The customer has an annual income of $25,000, mainly from social security and interest on funds held in a bank savings account. The customer has never invested and is told by his nephew that the technology company that he works for is coming out with a hot new product that will really increase the company's stock price. The BEST recommendation to be made to this client is to: A. do nothing B. only invest enough of his savings account in the technology company's stock so that his reduced income still covers his bills as they come due C. take out a mortgage on his fully paid house and use the proceeds to make the investment in the technology company and then pay off the mortgage from the profits on the investment D. liquidate the entire savings account and use the proceeds to make the technology company investment because the customer can still live on this social security

The best answer is A. This customer is age 67 and has very little income and no other liquid assets. He cannot afford to lose a bunch of money and he should do nothing!

A U.S. investor has realized a $4,000 capital gain on Kingdom of Norway bonds. Which statement is TRUE regarding the taxation of the gain? A. The gain is 100% taxable within the United States at U.S. tax rates B. The gain is 100% taxable within Norway at Norwegian tax rates C. The gain is 100% taxable within the United States at Norwegian tax rates D. The gain is not taxed in the United States

The best answer is A. U.S. holders of foreign securities are subject to Federal (and State) taxation on these holdings. Both the interest income is taxable in the U.S., and any capital gains on these holdings are taxable in the U.S. as well. This is the same treatment as for corporate obligations.

A director of a publicly held company wants to sell 5,000 registered shares of that company's stock at $8 per share that she has held for 3 months. Does the Form 144 filing requirement apply to this sale? A. Yes, because any sale of shares by a director requires the filing of a Form 144 B. No, because the shares are being sold under a "de minimis" exemption C. Yes, because she has not held the shares for 6 months D. No, because the shares are not restricted

The best answer is B. Rule 144 includes a "de minimis" exemption, permitting the sale every 3 months of 5,000 shares or less, worth $50,000 or less, without having to file a Form 144. The transfer agent is authorized by the SEC to transfer the shares without a copy of the Form 144. Because this sale is 5,000 shares @ $8 = $40,000, it can be done under this exemption. Rule 144 applies to the public resale of restricted (unregistered private placement) stock and to the sale of registered control shares. Control shares are registered shares owned by a key officer or director. These do not have to complete the 6 month holding period requirement because they are registered, but to sell them, the officer must file a Form 144 Notice of Sale and is subject to the rule's volume restrictions.

Which statements are TRUE? I Strategic portfolio management is the determination of the asset allocation percentages among different asset classes in the portfolio II Strategic portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class III Tactical portfolio management is the determination of the asset allocation percentages among different asset classes in the portfolio IV Tactical portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class A. I and III B. I and IV C II and III D II and IV

The best answer is B. Strategic portfolio management is the determination of the percentage allocation to be given to each asset class - for example a portfolio might be strategically allocated as follows: Money Market Instruments 10% Corporate Bonds 30% Large Cap Equities 50% Small Cap Equities 10% Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will under-perform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold.

The largest component of the Standard and Poor's 500 Average is the: A. utilities B. technology C. Consumer staples D. industrials

The best answer is B. The S&P 500 Index was "recategorized" about 15 years ago into different sectors to allow the creation of "Sector SPDRs" - index funds based on these sectors. The new breakdown, by approximate size, is: Technology 24% Financials 15% Healthcare 14% Consumer Discretionary 12% Industrials 10% Consumer Staples 9% Energy 6% Utilities 3%

Which of the following formations are bullish? I Saucer II Head and Shoulders III Inverted Saucer IV Inverted Head and Shoulders A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. A saucer formation, and an inverted head and shoulders formation, show a market that is bottoming out, and hence are bullish. Both an inverted saucer formation, and a head and shoulders top formation show a market that is "topping out" and hence are bearish.

What portfolio construction is most appropriate for a retired school teacher who is age 60? A 100% common stocks B 40% common stock / 60% bonds C 60% common stock / 40% bonds D 100% bonds

The best answer is B. As one gets older, portfolio composition should shift to "safer" assets that generate reliable income. The general rule is to take "100 minus the investor's age" to get the appropriate investment portion to be held in stocks. Since this investor is age 60, this gives 40% of the portfolio holding in stocks; with the remaining 60% of the holding in bonds. Note that a 100% bond holding is not appropriate because people are living much longer and they need the "extra return" that is provided by stocks that can grow in value, on top of the somewhat lower fixed return provided by bonds.

Which of the following is (are) taxable in the year of receipt? I Interest earned from investments II Cash dividends from investments III Stock dividends from investments IV Stock splits on investments A. I only B. I and II C. III and IV D. I, II, III, IV

The best answer is B. Cash dividends and interest are taxable each year (unless the interest is exempt). Stock dividends and stock splits are treated as a "return of capital." The cost basis of the shares is reduced proportionately and the number of shares is increased for the stock dividend or stock split.

During prolonged periods of economic recession, interest rates can be expected to: A increase B decrease C remain stable D move independently of the economic cycle

The best answer is B. During prolonged periods of recession, interest rates drop. This occurs because the Federal Reserve loosens credit to get the economy moving again; and because demand for loans falls as business activity drops.

NYSE MARKET DIARY Yesterday Prev. Day Adv. 1677 827 Dec. 863 1757 Unch. 455 388 Total Issues 2995 2972 New Highs 31 13 New Lows 11 78 The ratio of advances to declines that occurred yesterday is: A. 1 : 2 B. 2 : 1 C. 3 : 2 D. 7 : 2

The best answer is B. Notice that the question specifies "yesterday" and NOT "Pre. Day" 1,677 issues advanced against 863 issues declined, for a ratio of advances to declines of 1.94, which is rounded to a 2:1 ratio. This is a bullish sign.

Investing in a manner that will emulate the performance of the S&P 500 Index as closely as possible is an example of: A active management B passive management C fundamental analysis D technical analysis

The best answer is B. Passive asset management is simply matching a portfolio composition to a recognized index. This is also called benchmarking. The intent is to earn the return of the index, with the theory being that no one can outperform the market over a long period of time. In contrast, active asset management employs a manager to actively decide what to buy and what to sell to produce a superior return. Active management is more expensive than passive management.

Capital Asset Pricing Theory is used to identify investments that give the: A lowest expected level of return for the level of risk assumed B highest expected level of return for the level of risk assumed C lowest beta coefficient as companies are added to the portfolio D highest beta coefficient as companies are added to the portfolio

The best answer is B. The Capital Asset Pricing Model is a methodology for finding the most efficient investments - those that give the greatest return for the amount of risk assumed. The model identifies the most efficient investments as those that give a rate of return equal to the "risk-free" rate of return (the rate of return for investments only having systematic risk) plus a premium for any non-systematic risk inherent in the investment.

A retired married customer, age 73, has a portfolio that is invested in Blue Chip stocks and Treasury bonds that provides current income. The customer is concerned that he is paying a very high Federal and State combined income tax rate. An appropriate recommendation for this customer would be to diversify part of his portfolio into an investment in: A tax-qualified annuities B municipal bonds C securities held in offshore accounts D short-term promissory notes

The best answer is B. This customer is concerned about paying a high Federal income tax rate and a high State income tax rate. By purchasing municipal bonds of his State of residence, the income from those bonds would be free of Federal, State and Local income taxes. This customer is too old to be able to contribute to tax-qualified retirement plans (the cut-off is age 72), making Choice A incorrect. Note that the customer could buy a non-tax qualified annuity, but the income from the annuity would be taxable anyway. The income from securities held in offshore accounts must still be reported on the customer's U.S. tax return and taxes paid in the U.S. on that income. Finally, the income from promissory notes is fully taxable at the Federal and State levels.

An officer of a listed company calls his registered representative and tells him to buy a large block of that stock. Prior to placing the order to buy, the registered representative calls ten of his customers and tells them to buy that company's stock. Which statement is TRUE? A This action is permitted under SEC rules B This action is a violation of the insider trading rules C This action is an ethical business practice D This action is beneficial to the customer, and thus is allowed

The best answer is B. When the registered representative received the buy order from the officer, he is obligated to execute that order before acting on the information he has received. Once the order is executed, it is public information. At this point, he can trade for himself or his customers, and he is no longer considered to be an "insider." In effect, the registered representative is "front running" the officer by telling his other customers to buy before placing the officer's buy order. This is a violation of the Securities Exchange Act Rule 10b-5.

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

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

A self-employed individual makes $200,000 per year. To which type of retirement plan can the maximum contribution be made? A. Traditional IRA B. Roth IRA C. SEP IRA D. SIMPLE IRA

The best answer is C. A SEP (Simplified Employee Pension) IRA is usually set up by small business because it simplifies all of the recordkeeping associated with retirement plans (though there actually no limit of the size of the company to open up a SEP IRA). Contribution amounts made by the employer cannot exceed 25% (statutory rate; effective rate is 20%) of the employee's income, up to a maximum of $58,000 in 2021. SIMPLE IRAs also are relatively "simple" for a business to set up, but they only allow a maximum contribution of $13,500 (in 2021). So the SEP IRA is better. In contrast, the maximum contribution to either a Traditional or Roth IRA in 2021 is $6,000 (plus an extra $1,000 catch-up contribution for individuals age 50 or older). Also note that because this individual is a high-earner, he or she cannot open a Roth IRA.

Which SEC rule gives an exemption to offerings of no more than $50 million within a 12 month time frame? A. Rule 144 B. Rule 144A C. Regulation A D. Regulation D

The best answer is C. Regulation A is intended to make it easier for start-up companies to raise capital. It gives an exemption from full registration for offerings of up to $50 million within a 12 month period. The rule is split into Tier 1 and Tier 2. Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements. Tier 2 offerings allow a maximum of $50 million to be raised, but require audited financial statements. Tier 2 issues are also called Regulation A+ issues and can be exchange listed. Form 1-A is filed with the SEC to claim the exemption. It gives disclosure about the issue and a "20 day review period" must be completed before the issue can be sold. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

Which SEC rule gives an exemption to offerings of no more than $50 million within a 12 month time frame? A. Rule 144 B. Rule 144A C. Regulation A D. Regulation D

The best answer is C. Regulation A is intended to make it easier for start-up companies to raise capital. It gives an exemption from full registration for offerings of up to $50 million within a 12 month period. The rule is split into Tier 1 and Tier 2. Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements. Tier 2 offerings allow a maximum of $50 million to be raised, but require audited financial statements. Tier 2 issues are also called Regulation A+ issues and can be exchange listed. Form 1-A is filed with the SEC to claim the exemption. It gives disclosure about the issue and a "20 day review period" must be completed before the issue can be sold. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT: A. U.S. Government bonds B. Government National Mortgage Association Pass Through certificates C. Collateral Trust certificate D. General Obligation bonds

The best answer is C. Securities that are exempt from the registration provisions of the Securities Act of 1933 are principally governmental debt issues, including U.S. Government debt, U.S. Government agency debt, such as Ginnie Mae debt, and municipal debt such as general obligation bonds. Collateral trust certificates are issued by corporations, where the stock of a subsidiary is put up as collateral for the bond issue. This is a non-exempt security.

A customer has invested $200,000 in a CMO. In the first year, the customer receives $30,000 of payments, which consist of $20,000 of interest and $10,000 of principal. Which statement is TRUE? A. All $30,000 received is not taxable B. All $30,000 received is taxable C. The $10,000 of principal is not taxable and the $20,000 of interest is taxable D. The $10,000 of principal is taxable and the $20,000 of interest is not taxable

The best answer is C. A CMO (Collateralized Mortgage Obligation) passes-through the monthly mortgage payments to the certificate holders. The monthly mortgage payment is a combined payment of principal and interest, and the principal received reduces the outstanding principal (debt) amount. Only the interest component received is taxable; the principal component is a return of original investment.

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT: A. U.S. Government bonds B. Government National Mortgage Association Pass Through certificates C. Collateral Trust certificate D. General Obligation bonds

The best answer is C. Securities that are exempt from the registration provisions of the Securities Act of 1933 are principally governmental debt issues, including U.S. Government debt, U.S. Government agency debt, such as Ginnie Mae debt, and municipal debt such as general obligation bonds. Collateral trust certificates are issued by corporations, where the stock of a subsidiary is put up as collateral for the bond issue. This is a non-exempt security.

The provisions of the Penny Stock Rule, which require the pre-qualifying of a new customer before a "penny" stock can be sold to that individual, only apply to the recommendations of: A NYSE securities B NASDAQ securities C OTCBB securities D AMEX securities

The best answer is C. The "penny stock rule" (Rules 15g-1 through 15g-6) requires that new customers who receive a recommendation and purchase non-exchange listed securities (meaning OTCBB or Pink Sheet issues) priced under $5 per share sign and return a suitability statement before sale can be confirmed. This rule is intended to stop "boiler room" high pressure phone sales of speculative penny stocks.

A non-MFP (non-Municipal Finance Professional) contributes $300 to an elected official's campaign in which he is not entitled to vote. Which statement is TRUE about this? A. This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount exceeded $250 B. This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the individual was not entitled to vote C. This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the MSRB rule only applies to MFPs D. This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount involved is under the "de minimis" exemption

The best answer is C. The MSRB political contribution rule only applies to contributions made to elected officials' campaigns by "MFPs" - Municipal Finance Professionals. MFPs are registered individuals in municipal finance departments and their supervisors. If a non-MFP, such as a typical registered representative, gives a political contribution of any amount to an elected official's campaign in which he or she is, or is not, entitled to vote, this will not trigger a ban!

Which of the following statements are TRUE regarding the Official Statement? I The Official Statement is required by the Securities Act of 1933 for all new municipal issues II The Official Statement is requested by underwriters to satisfy SEC due diligence requirements and the disclosure requirements of new issue purchasers III The Official Statement is required to be delivered to customers at, or prior to settlement, if available IV The Official Statement is required to be delivered only to those customers who request one in writing A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. 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 by the MSRB, since the MSRB has no regulatory authority over municipal issuers. It is requested by underwriters to help them perform due diligence on the offering (as required by the SEC) and also to help sell the issue. The MSRB states that if the Official Statement is available, it must be given to purchasers at, or prior to, settlement of sale.

Under Regulation M, which statements are TRUE regarding stabilizing bids entered by market makers? I Stabilizing bids can only be maintained for 5 consecutive business days II There is no time limitation on the period that a stabilizing bid can be maintained III A stabilizing bid cannot be placed unless a "Notice of Stabilization" is included in the prospectus IV A stabilizing bid cannot be placed unless an "Official Notice of Sale" is placed in the prospectus A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. There is no time limitation on the period that a stabilizing bid can be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager. A "Notice of Stabilization" must be included in the prospectus (on the inside front cover) that details the fact that the manager can start and stop stabilizing at any time and that when stabilization stops, the price of the issue may drop. An Official Notice of Sale is used to solicit competitive bids for municipal new issues and has nothing to do with stabilization.

Client A's portfolio consists of the following: Equities: 85% Fixed Income: 10% Cash: 5% The breakdown of these holdings is: Equities 35% DEFF Total Market Index Fund 30% 2,100 shares of ABCD 25% 3,100 shares of XYZZ 10% PDQQ International Small Cap Growth Fund Fixed Income: 75% Investment Grade 25% Speculative Cash: 100% Money Market Fund Client A is 55 years old, single with no children. He is beginning to think about retirement and wishes to modify his portfolio so that he can start receiving an assured income stream starting at age 65. Which recommendation would be the BEST choice to meet the customer's changed investment objective? A. The ABCD and XYZZ stock holdings should be liquidated in full immediately, with the proceeds invested in 10 year income bonds of companies in special situations B. The DEFF Total Market Index Fund holding should be liquidated in full immediately, with the proceeds invested in 10-30 year Treasury bonds C. The customer should set minimum and maximum threshold prices at which the ABCD and XYZZ stock positions are to be liquidated; and if this occurs, the proceeds should be invested in 10-30 year maturity Treasuries D. The customer should liquidate the ABCD and XYZZ stock holding to purchase 10, 15 and 20 years STRIPs that will mature in even installments

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

In January, 20XX a customer buys 100 shares of ABC stock at $50 per share and pays a $2 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is: A $49 per share B $50 per share C $52 per share D $53 per share

The best answer is C. When the stock is purchased, any commission paid is not deductible - it is part of the cost basis of the shares. Thus, the cost basis for tax purposes is $50 + $2 commission = $52 per share. The $1 dividend received is included in taxable income for this year, and is not part of the stock's cost basis.

All of the following are bond portfolio construction methods designed to reduce interest rate risk EXCEPT: A. Ladder B. Bullet C. Barbell D. Balloon

The best answer is D. Bullets, Bond Ladders, and Barbells are portfolio constructions that are used to limit interest rate risk. A bullet portfolio construction only has a single maturity, typically in an intermediate range of around 10 years. The way that interest rate risk is offset here is that all of the investment is not made at one time - rather, the investment is made in installments at fixed intervals. If market interest rates rise, new investment will be made at higher rates, offsetting any loss on the already purchased bonds. The idea behind a bond ladder is to spread bond maturities in a portfolio over fixed intervals, typically 10 maturities in intervals of 2 years each. A typical ladder might have 10 maturities ranging from 2 to 20 years, with an average maturity of around 10 years. Because of this broad diversification by maturity, a rise in interest rates will not impact the portfolio as negatively as compared to a bullet or barbell portfolio construction. If interest rates rise, the loss on the longer term bonds in the portfolio is offset by the fact that shorter term bonds are maturing soon and the proceeds can be reinvested at higher rates. A barbell portfolio only has 2 maturities - a very short term and a very long term - say 2 years and 20 years, for an average life around 10 years (actually 11 years here, but we are simplifying things). The longer term bonds give a higher yield but have higher interest rate risk. This risk is offset by the fact that the 2 year bonds will mature soon and the proceeds can be reinvested at higher rates. The big risk here is that long rates rise sharply as compared to short rates (a steepening of the yield curve). In this scenario, the loss on the long term bonds will be much greater than the fact that the short term bond proceeds can be reinvested in 2 years at somewhat higher rates. A balloon is a type of bond issue structure, where most of the bonds mature as a "balloon" at a long term maturity date. It is not a type of bond portfolio construction.

Which of the following is NOT required to be disclosed when a brokerage firm makes a securities recommendation? A. Whether the firm is an investment banker for that issuer B. Whether the firm is a market maker in that issuer's securities C. Whether the firm's officers own that issuer's securities D. Whether the issuer's employees own that issuer's securities

The best answer is D. If a recommendation is made, the brokerage firm must disclose if it: -has managed or co-managed any equity securities offering of that issuer within the past 12 months; -has received compensation from investment banking services from that issuer in the past 12 months; -expects to receive or intends to seek investment banking compensation from that issuer in the next 3 months; -is an investment banking services client of the firm; or -is a market maker in the issuer's stock. Also, the brokerage firm must disclose if it or its affiliates own(s) the issuer's securities (including options). It is normal and expected for the issuer's employees to own that issuer's securities - there is no conflict of interest.

Which statements are TRUE about defensive stocks that are included in a portfolio allocation model? Defensive stocks have: I higher expected returns than other equities included in the portfolio II lower expected returns than other equities included in the portfolio III higher standard deviations (risk) than other equities included in the portfolio IV lower standard deviations (risk) than other equities included in the portfolio A I and III B I and IV C II and III D II and IV

The best answer is D. Defensive stocks are minimally affected by the business cycle, with classic defensive stocks being food and pharmaceuticals (in bad times, people must still eat, and must still take prescription drugs for their illnesses or suffer the consequences!) Because their earnings stream is so stable, defensive stocks have lower risk (as measured by variability of returns - AKA standard deviation) than other equity securities. Because of their lower risk, their returns are correspondingly lower as well.

Fines assessed for convictions involving violations of insider trading laws are paid to the: A Department of Justice B Securities and Exchange Commission C Securities Investor Protection Corporation D Department of Treasury

The best answer is D. Fines assessed for insider trading convictions are paid to the Department of Treasury. The fines are not paid to the SEC. If they were, then the SEC might be tempted to "go crazy" prosecuting insider trading cases to pump up its operating budget (raises for everyone!)

The BEST investment during a period of high inflation is: A Common Stock B Preferred Stock C 30-Year Bonds D Money Market Instruments

The best answer is D. In an inflationary period, interest rates will rise dramatically, because the Fed will start tightening credit to get inflation under control. As interest rates rise, both preferred stock and long-term bond prices drop dramatically. Equity securities' prices drop as well, because companies are not able to increases their prices as fast as their costs are rising, so earnings suffer. Money market instruments, on the other hand, do well when short term rates are rising - because they give an increasing rate of return.

Which of the following statements are TRUE regarding the tax status of limited partnerships? I Partnerships are taxable entities II Partnerships are not taxable entities III Tax liability exists at the partnership level IV Tax liability exists at the partner level A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Partnerships are not taxable entities; all items of income and loss "flow through" to the tax returns of the partners. Tax liability only exists at the partner level - not at the partnership level.

A customer buys 1 ABC Oct 50 Call @ $3 and exercises the contract. What is the cost basis for tax purposes? A $3 B $47 C $50 D $53

The best answer is D. When a call contract is exercised, the customer is buying the stock. The customer establishes a cost basis equal to all monies paid for the stock - $50 per share strike price plus $3 per share paid in premiums equals a $53 per share cost basis. Notice that the basis is the same as the breakeven.

A customer buys an equity LEAP contract on the first day that the option starts trading. If the contract expires "out the money," the customer will have a: A short term capital gain B short term capital loss C long term capital gain D long term capital loss

The best answer is D. Equity LEAPs are Long Term Equity AnticiPation options with lives of 28 months. Thus, a purchaser who buys a LEAP when it first starts trading, must have held the contract for over 1 year when it expires - thus, the holder has a long term capital loss.