Series 7 Missed Questions

Gross Domestic Product (GDP) has declined for two consecutive quarters in the U.S. Which of the following industries will most likely be negatively affected by this downturn in the economy? A) Cosmetics B) Transportation C) Food D) Medical

B) Transportation Two consecutive quarters of declining GDP figures would be considered recessionary by most economists. Transportation stocks (e.g., railroads, trucking, airlines) are cyclical and the performance of these companies will be affected directly by this event.

According to Regulation T, when purchasing an option contract the transaction must be paid for within: A) 1 business day B) 3 business days C) 5 business days D) 7 business days

C) 5 business days According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase.

Cash dividends received from which of the following securities will be taxed as ordinary income? A) Preferred stock issued by a bank B) Common stock issued by an oil company C) A real estate investment trust D) Convertible preferred stock issued by a software company

C) A real estate investment trust (REIT) Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is not relevant to the tax status of the cash dividend.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is: A) $2,000 B) $3,000 C) $4,000 D) $6,000

A) $2,000 This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio? A) 10.9 B) 13.6 C) 21.8 D) 43.6

A) 10.9 P/E ratio = mrkt price/annual EPS Annual EPS = 1.10 x 4= $4.40 48/4.40 = 10.9 Amount of the dividend is not relevant in calculating the P/E ratio.

How many days must pass before a member of a syndicate may extend credit for a customer on a security that was part of a new issue? A) 30 days B) 60 days C) 90 days D) 120 days

A) 30 days 30 days must pass before a member of a syndicate may extend credit for a customer on a new issue.

The Bond Buyer Municipal Bond Index is based on: A) A 40-Bond Index B) Noncallable long-term bonds C) A cross section of zero-coupon bonds D) Diversified bonds with approximately 40 years to maturity

A) A 40-Bond Index The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.

A corporation is in the 34% tax bracket. Which of the following choices provides the best return if the corporation wants to invest some of its surplus cash? A) A preferred stock paying a 7.50% dividend B) A corporate bond yielding 8% C) A common stock yielding 6% D) A municipal bond yielding 6%

A) A preferred stock paying a 7.50% dividend Corporations have a tax advantage on dividends received from investments in preferred stock and common stock of other corporations. If the corporation owns at least 20% of the distributing corporation, it must declare, as income, only 20% of the dividends received (80% is excluded). If the corporation owns less than 20% of the distributing corporation, it must declare as income only 30% of the dividends received (70% is excluded). The 7.50% preferred stock provides the best return since at least 70% is excluded for tax purposes.

Which of the following choices is NOT governed by MSRB rules? A) An issuer of general obligation bonds B) The head of the municipal finance department of a broker-dealer C) A bank that underwrites revenue bonds D) An online broker-dealer that accepts only unsolicited orders for municipal bonds

A) An issuer of general obligation bonds The rules of the Municipal Securities Rulemaking Board apply to MSRB members and their associated persons. Members include broker-dealers and bank dealers that engage in municipal securities sales, trading, underwriting, or financial advice to issuers. MSRB rules do not apply to municipal issuers.

An investor purchases a Canadian dollar September 80 call and writes a Canadian dollar September 82 call. This position is a: A) Bullish spread B) Bearish spread C) Long straddle D) Credit combination

A) Bullish Spread A spread is the simultaneous sale and purchase of two options of the same class (same underlying interest and same type), on the same underlying security, with different strike prices and/or expiration months. The challenge to this question is that the premium for each option is not provided. To handle these types of questions, remember that call options gain intrinsic value as the movement of the underlying interest rises. For that reason, the 80 call will have a higher premium than the 82 call. Since the premium is larger on the option being purchased than the option being sold, this is a debit spread. Also, since buying calls is bullish, a call debit spread is a bullish strategy. Keep in mind, for call spreads, the lower strike price is always the dominant leg; however, for put spreads, the higher strike price is the dominant leg.

An article in The Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This indicates that: A) Buyers of new bills paid more than buyers paid the previous month B) Buyers of new bills paid less than buyers paid the previous month C) Interest rates are increasing D) Buyers of new bills purchased the bills above par

A) Buyers of new bills paid more than buyers paid the previous month Treasury bills are purchased at a discount from the dollar amount on its face. The larger the discount, the higher the discounted yield to maturity. In this example, the discounted yield to maturity has gone down to 4.58% from 4.61% from the previous month. This indicates that buyers of new bills paid more for the Treasury bills (meaning the discount was less) than buyers paid the previous month.

A level debt service bond issue is one in which: A) Combined annual interest and principal payments are equal B) Annual interest payments are equal C) Annual principal payments are equal D) All principal is paid at the issue's final maturity

A) Combined annual interest and principal payments are equal A level debt service bond issue is one in which combined annual interest and principal payments are equal.

The dividend policy of most money-market funds is to declare dividends: A) Daily and pay, credit, or reinvest the dividends on a monthly basis B) Monthly and pay, credit, or reinvest the dividends on a monthly basis C) Monthly and pay, credit, or reinvest the dividends on a quarterly basis D) Quarterly and pay, credit, or reinvest the dividends on a quarterly basis

A) Daily and pay, credit, or reinvest the dividends on a monthly basis This info is usually found in the prospectus of the money-market fund.

Which TWO of the following statements are TRUE concerning stop orders? I) A buy stop can be placed above an area of resistance II) A sell stop can be placed below an area of support III) All stop orders must be executed at a specific price or better IV) Brokers may execute stop orders whenever they wish A) I and II B) I and III C) II and IV D) III and IV

A) I and II Stop orders become market orders once the stop price is touched. A buy stop order may be used to establish a long position once a stock has risen above a resistance level. A sell stop order may be used to sell stock in the event that a stock goes below a support level. Stop orders become market orders once the stop price is touched. There is no guarantee as to the execution price for a stop order. Stop orders are left on the specialist's book for execution in the future. Brokers do not have discretion as to when to execute stop orders.

Wireless Communications is offering 2,000,000 common shares (par value $.10) at $15. Which TWO of the following choices describe the financial impact on the company? I) An increase in paid-in capital II) A reduction in the long-term debt ratio III) A reduction in liquidity IV) An increase in fixed assets by $30,000,000 A) I and II B) I and IV C) II and III D) III and IV

A) I and II The company will receive cash from the sale of the stock, so liquidity will increase. The common stock account and the paid-in capital account, which are part of stockholders' equity, will also increase. The long-term debt ratio will fall as the equity capital rises and, since the company is raising cash, current assets will increase. Finally, fixed assets will be unchanged.

A registered representative should know all the essential facts about a customer's financial status, investment objectives, ability to assume risk, age, occupation, and other pertinent information: I) For the registered representative to determine if option trading is suitable for the customer II) For the brokerage firm to determine if it should approve the customer's account for option trading III) For the brokerage firm to determine if it should send an options risk disclosure document to the customer IV) Before the registered representative answers questions the client has about options A) I and II only B) I and III only C) II and III only D) II and IV only

A) I and II only Option trading is not suitable for all investors because of the risks involved. The registered representative must obtain all the essential facts about the customer to determine if option trading meets the customer's investment objectives, financial background, and ability to assume the added risk. An option order (to buy or write the option) may not be accepted from a customer unless the customer's account has first been approved for option trading by the brokerage firm. Whether the account is approved or not depends on the essential facts about the customer. The answer therefore is (I) and (II) only. A customer must be sent a current option disclosure document at or prior to the time the account is approved for option transactions.

Which TWO of the following statements are TRUE concerning a Health Savings Account? I) The contribution is made in pretax dollars II) The contribution is made in after-tax dollars III) The funds grow tax-free if used to pay qualified medical expenses IV) The funds grow tax-deferred if used to pay qualified medical expenses A) I and III B) I and IV C) II and III D) II and IV

A) I and III A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to those persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. All funds withdrawn that are used for nonqualified medical expenses are taxable and subject to a 20% IRS tax penalty

Which TWO of the following statements concerning The Bond Buyer 20-Bond Index are TRUE? I) It is compiled weekly II) It consists of revenue bonds III) It is used to show trends in yields IV) It is used as an indication of the new issue market for municipal securities A) I and III B) I and IV C) II and III D) II and IV

A) I and III The Bond Buyer 20-Bond Index is compiled each week and is calculated from the yields on 20 specific general obligation issues with an average rating of AA and its purpose is to show trends in municipal yields. The 20-Bond Index does not contain any revenue bonds. It is the Bond Buyer's Visible Supply and Placement Ratio statistics that are used as indicators of the new issue market for municipal securities.

A client owns 400 shares of stock in a European company. The client receives a cash dividend and tax is withheld by the European country. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client? I) The taxes paid may be used as a credit II) The dividends are considered a return of capital III) The taxes paid may be used as a deduction IV) The dividend paid is exempt from taxes A) I and III B) I and IV C) II and III D) II and IV

A) I and III U.S. citizens and corporations owning foreign stock may receive dividends from which foreign taxes have been withheld. The investor still owes U.S. income tax on the net dividend. The amount of the foreign tax, however, may be claimed by the investor as a deduction against income, or may be applied as a credit against U.S. income tax.

An investor purchased a municipal bond at a discount. If the investor holds the bond to maturity, a gain will be considered: I) Tax-free interest if the bond is an OID II) A capital gain if the bond is an OID III) Ordinary income if the bond is not an OID IV) Tax-free interest if the bond is not an OID A) I and III only B) I and IV only C) II and III only D) II and IV only

A) I and III only For an OID (original issue discount), the discount is considered interest. Because this is a municipal bond, the interest is tax-exempt. For a non-OID (a secondary market discount), the discount is reported as ordinary income.

A client buys 100 shares of XYZ Corporation at $27 per share and writes an XYZ October 30 call at a $3 premium.The option order ticket would be marked: A) Opening sale, covered B) Opening buy, covered C) Opening sale, uncovered D) Opening buy, uncovered

A) Opening sale, covered The question states that the individual writes an option after buying the underlying stock. The initial sale of the option would be an opening sale. Since he is long the underlying stock, he is covered. If he did not own 100 shares of XYZ stock, his position would be uncovered and must be executed in the margin account.

An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day's NAV for the investor. Which of the following statements concerning this potential trade is TRUE? A) This is a sales practice violation known as late trading B) This is an acceptable practice known as market timing C) The RR would need to have prior written approval by a principal of the firm to execute this order D) The investor may only purchase Class B shares in this case, since Class A shares are not available under this arrangement

A) This is a sales practice violation known as late trading This activity would constitute a sales practice known as late trading, which is prohibited under federal securities laws. According to securities law, orders placed after the close of trading for the day (and after the determination of the closing NAV) must be filled at the next calculated NAV, which is usually the price at the end of the next business day. Investors placing orders after the close of the market (based on information that they have learned after the close), and seeking to purchase shares at prices determined before the close, are engaging in late trading, which clearly places other investors in that mutual fund at a clear disadvantage. The investor must receive the price as calculated by the fund company at the NAV on the following day.

A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will: A) Treat the discount as ordinary income B) Treat part of the discount as a capital gain and part as ordinary income C) Treat the discount as a capital gain D) Not have to pay tax on the amount of the discount

A) Treat the discount as ordinary income If a municipal bond is purchased at a discount in the secondary market and held to maturity, there will be reportable taxable income. The discount is taxed as ordinary income, not a capital gain. The investor may pay the tax each year or elect to report the entire amount at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability.

A customer has a restricted margin account. The customer sells $7,000 worth of securities and on the same day buys $5,000 worth of other securities. The Regulation T margin requirement is 50%. The customer may: A) Withdraw cash equal to the margin requirement on the net amount B) Not withdraw anything because the account is restricted C) Withdraw the entire $2,000 net amount D) Withdraw 50% of $7,000

A) Withdraw cash equal to the margin requirement on the net amount When a customer buys and sells securities in a restricted margin account on the same day, it is called a same-day substitution and the transactions are netted against each other. In this question, the sale of $7,000 and the purchase of $5,000 result in a net sale of $2,000. The entire amount will be used to reduce the customer's debit balance, and the customer's SMA will be credited with an amount equal to the net sale proceeds multiplied by the Reg T requirement ($2,000 x 50% = $1,000). If desired, the customer may then borrow this amount.

You are a registered representative at a member firm. Which of the following persons are bound by industry rules when opening an account at another member firm? A) Your spouse and minor children B) Your spouse only C) All blood relatives D) All persons living at your residence

A) Your spouse and minor children Industry rules regarding accounts of employees or partners of other member firms also apply to the employee's spouse and minor children. FINRA uses the benchmark of whether the associated person has a financial interest in the account when making the determination. Choice (d) is incorrect since some persons living with you may not be relatives and may not share your financial interests (e.g., roommates).

A sell stop order most likely will be entered by a technical analyst or chartist: A) Below a support level for the stock B) Above a resistance level for the stock C) Below a previous low for the stock D) To take advantage of a rising market

A) below a support level for the stock Sell stop orders are entered below the current market. The order will most likely be entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside. This is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.

A customer makes an initial purchase of 100 shares of XYZ on the NYSE at $30 per share. The Federal Reserve margin requirement according to Regulation T is 50%. The customer will need to deposit: A) $1,500 B) $2,000 C) $2,500 D) $3,000

B) $2,000 Industry rules require minimum equity in a margin account of $2,000, unless the securities are paid in full. If the customer already had an account with enough equity in it, the call would be for $1,500 (50% of $3,000). However, the question states that it is an initial purchase and we must assume that this is a new margin account. Therefore, $2,000 must be deposited.

A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of: A) $150 B) $300 C) $420 D) $525

B) $300 Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).

What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF? A) $1,000,000, since these securities are not eligible for additional margin B) $500,000 C) $250,000 D) $125,000

B) $500,000 Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The process for determining the margin requirement on these securities uses the standard SRO maintenance requirement and multiplies by the portfolio leverage factor. In this case, the standard long requirement is 25% which is multiplied by a factor of 2; therefore, the client must maintain a 50% margin. $1,000,000 x 25% = $250,000. $250,000 x 2 = $500,000

A customer writes an ABCD October 220 call, receiving an $11 premium, and buys an ABCD October 235 call, paying a $3 premium. ABCD is currently selling at $227.50. The customer's maximum risk is: A) $300 B) $700 C) $800 D) $1,100

B) $700 The customer wrote (sold) an ABCD October 220 call and received $1,100. The customer bought an ABCD October 235 call and paid $300. The customer has created a credit spread position. The maximum risk for a credit spread is the difference between the strike prices minus the net premium received. If, in this example, ABCD stock is above $235 per share and both options are exercised, the customer is obligated to sell the stock at the strike price of $220, which he has the right to buy at $235. This results is a net loss of $1,500. Since the customer received the net premium of $800 when he created the spread, his maximum risk (loss) is $700 ($1,500 - $800).

A limited partner has a $10,000 basis in a partnership. During the year, he receives a $6,000 cash distribution and a $9,000 loss. The limited partner's basis at the end of the year is: A) $5,000 B) 0 C) $1,000 D) $9,000

B) 0 A cash distribution and an operating loss will decrease a partner's basis. The $6,000 cash distribution reduces the partner's interest in the partnership to $4,000. As a rule, a partner may receive losses to the extent of his adjusted basis (the amount that is at risk). After $4,000 of loss is deducted, the partner's basis is reduced to zero. $5,000 of the loss may not be deducted. This amount will be left in suspense and may be subsequently deducted when the individual's basis increases above zero.

A call option is covered by all of the following choices, EXCEPT: A) An escrow receipt B) A short position in the underlying stock C) A bond convertible into 100 shares of the underlying stock D) 100 shares of the underlying stock

B) A short position in the underlying stock For a call option writer to be considered covered, the writer could own 100 shares of the underlying stock, have an escrow receipt, or own bonds convertible into at least 100 shares of the underlying stock. Since the writer's obligation is to deliver stock if the option is exercised, a short position would not cover a call.

An investor is looking for a fund that, with little risk to her principal investment, will supplement her current wages. Which of the following funds best suits this investor? A) A growth fund B) An income fund C) A sector fund D) A no-load fund

B) An income fund A mutual fund investor most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.

Which of the following information does NOT have an effect on the credit quality of an airport revenue bond? A) Tourism B) Debt per capita C) Airport traffic D) Energy costs

B) Debt per capita Debt per capita is used when analyzing a general obligation bond and would not be considered for a revenue issue

If interest rates are increasing, the PSA Model will show that prepayment speeds on mortgages are: A) Increasing B) Decreasing C) Staying the same D) Fluctuating

B) Decreasing The PSA Model is used to estimate the prepayment rate for mortgage-backed securities. If interest rates are increasing, borrower's would be less inclined to refinance and mortgages would take longer to get repaid. If interest rates are falling, borrower's would be more likely to refinance and mortgages would be paid faster.

An investor purchasing a reverse convertible security would be MOST interested in: A) Preservation of capital B) High current income C) Capital appreciation D) Conservative income

B) High current income An investor purchasing a reverse convertible security is seeking an above-market coupon rate. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). The investor will not be able to participate if the underlying asset increased. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

When a registered representative makes a recommendation to a customer involving a leveraged exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST important? I) The security may be recommended to at least some investors II) The security may be able to produce a profit over a long period III) The security may be able to be sold quickly IV) The security may be a good investment for a specific customer A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Although all of the choices are important factors for determining the suitability of a recommendation, the FINRA suitability rule has listed three main suitability obligations. 1. The reasonable-basis obligation requires a member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for at least some investors. If the firm or its RRs do not understand the product, it should not be recommended to customers. 2. The customer-specific obligation requires the member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer's investment profile. A customer's investment profile would include, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives and experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose. Even though a customer is not obligated to provide all of this information, the RR should try to obtain the information necessary to make a suitable recommendation. 3. The quantitative obligation requires the member firm and an RR to have a reasonable basis for believing that a series of recommended transactions, even if suitable for a customer, are not excessive when taken together in light of the customer's investment profile.

Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds? I) To qualify, the municipality may only issue up to $10,000,000 annually II) To qualify, the municipality must issue more than $10,000,000 annually III) Commercial banks are not permitted to purchase this type of security IV) Commercial banks are permitted to purchase this type of security A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Bank-qualified bonds are issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds.

When the market price of MMS is $24, a customer purchases 10 MMS May 20 puts at 2 in a cash account. Which TWO of the following statements are TRUE regarding the option purchase? I) The settlement date for the option purchase is one business day II) The settlement date for the option purchase is three business days III) The Regulation T payment date is three business days IV) The Regulation T payment date is five business days A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Option transactions (purchases or sales) settle on the next business day following the trade date (T+1). On the other hand, stock transactions settle three business days following the trade date (T+3). According to Regulation T, payment for transactions that are executed in cash and margin accounts must be made by the customer within five business days (i.e., both stock and option trades must be paid for in five business days).

Which TWO of the following statements are TRUE regarding the sale of restricted securities under SEC Rule 144? I) The securities must be fully paid II) The sale may be made on an agency basis only III) A Form 144 notice of sale must be filed with the SEC no later than 30 days after the sale IV) The securities must be owned for six months A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Restricted securities must be fully paid, owned for six months, and may be sold on an agency or principal basis. A Form 144 notice of sale, which is good for 90 days, must be filed with the SEC prior to, or at the time of, the sale. Control securities have no required holding period.

If a broker-dealer is preparing sales literature on CMOs, which TWO of the following statements is TRUE? I) The term collateralized mortgage obligation must be included within the name of the product II) The basis point spread that a client will receive in interest above a comparable Treasury security must be included III) The lower of the yield-to-call or yield-to-maturity must be included IV) The backing of a government agency only applies to the face value of the securities A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Retail communications (e.g., sales literature) and correspondence that relate to collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the backing of a government agency only applies to the face value of the securities (not any premium paid). In other words, if the client paid a premium to purchase a CMO, only the par value is backed by the entity backing the security. Only the actual coupon rate, not the spread above Treasuries, is required to be disclosed. Due to the prepayment risk of CMOs, the yield to average life is required to be disclosed, not the yield-to-call or yield-to-maturity.

Variable annuities sold by insurance companies must be registered with: I) The SEC II) The FRB III) FINRA IV) The State Insurance Commission A) I and III only B) I and IV only C) III and IV only D) I, II, III, and IV

B) I and IV only Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents.

Place in order from first to last, the normal manner in which an underwriting manager would allocate bonds in an underwriting. I) Group net II) Presale III) Member IV) Group less concession A) II, I, IV, III B) II, I, III, IV C) IV, II, I, III D) II, IV, I, III

B) II, I, III, IV The confusion with this question is with the group less concession allocation. This is an order for which the selling group gets credit—receiving the concession for introducing the customer. The members would still receive the additional takedown. The selling group generally gets credit for orders only after all others are allocated to the members.

The following four bonds have the same maturity. On a pre-tax basis, place them in their order of yield (during most economic times), from the highest to lowest. I) Treasury bond II) Investment-grade corporate bond III) Investment-grade municipal general obligation bond IV) Investment-grade municipal revenue bond A) I, II, III, IV B) II, I, IV, III C) II, IV, III, I D) III, I, IV, II

B) II, I, IV, III To answer this question, it is important to first recognize that corporate bonds (which have fully taxable yields and generally lower quality) offer the highest yield. This identification eliminates choices (a) and (d) since they do not list corporate bond yields as the highest. Corporate bond yields are followed by the yield on Treasuries (yields taxable at the federal level), and then finally the yield on municipal bonds (yields are federally tax-free). Municipal bonds typically have the lowest yield since they are exempt from federal income tax. When comparing the different types of municipal bonds, general obligation bonds are generally considered safer than revenue bonds and, therefore, carry a lower yield.

Which of the following statements is TRUE concerning the tax treatment of municipal bonds? A) If the bond was purchased at a premium, it will be accreted based on the constant yield method B) If the bond was purchased as an original issue discount (OID), the discount will be accreted based on a constant yield method C) The premium will not be amortized if the bond was purchased at a premium D) The discount will be amortized if the bond was purchased as an original issue discount (OID)

B) If the bond was purchased as an original issue discount (OID), the discount will be accreted based on a constant yield method A municipal bond purchased as an original issue discount (OID) is accreted (not amortized) each year for tax purposes based on a constant yield method (also called constant interest method), which uses the bond's yield to maturity. Municipal bonds purchased at a premium are amortized (not accreted) each year based on a constant yield method.

Which of the following securities would be the LEAST appropriate for an IRA account? A) Growth stocks B) Investment-grade revenue bonds C) Exchange-traded funds (ETFs) D) High-yield corporate bonds

B) Investment-grade revenue bonds IRAs are tax-advantaged retirement accounts. Municipal bonds (revenue bonds) would be the least appropriate because, when placed in an IRA, the interest becomes taxable at retirement. The main reason that investors buy municipal bonds is to take advantage of tax-exempt interest. If that characteristic is removed, municipal bonds are not as attractive.

Which of the following outside business activities would RRs NOT need to report to their employing broker-dealer? A) Part-time employment as a bartender B) Participation as a silent partner in a relative's business C) Acting as the manager of a sporting goods store on the weekends D) Operating an Internet business from home as a sole proprietor

B) Participation as a silent partner in a relative's business FINRA rules require registered representatives to report to their firm any outside business activities for which they earn compensation. However, a passive investment would generally not need to be reported, nor would participation in charitable activities for which no compensation is received.

A registered representative is permitted to borrow from, or lend funds to, customers in all of the following situations, EXCEPT: A) The customer is an immediate family member of the registered representative B) The customer is an accredited investor C) The loan is based on a business relationship independent from the member firm customer relationship D) The customer has a personal relationship with the registered representative

B) The customer is an accredited investor Registered personnel of a member firm are generally prohibited from borrowing money from, or lending money to, any customer. However, if the firm has written rules and procedures that allow borrowing and lending between registered personnel and their customers that meet one of the following conditions, the activities are permissible. The customer is an immediate family member of the registered person. The customer is a financial institution or other entity that engages in the business of providing credit, financing, or loans in the course of its business. The customer and the registered person are both registered with the same member firm. The customer has a personal relationship with the registered person wherein the loan would not have been solicited, offered, or given if the relationship did not exist. The loan is based on a business relationship other than that of a member firm customer. There is no exception based on the type of customer, for example, an accredited investor.

Which of the following statements about municipal revenue bonds is NOT TRUE? A) They are not subject to the debt limitations that apply to general obligation bonds B) The maturity of the bonds will equal the useful life of the facility being built C) They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities D) The interest and principal payments are derived from the funds being generated by the facility

B) The maturity of the bonds will equal the useful life of the facility being built Municipal revenue bonds do not always have maturity schedules that equal the useful life of the facility being built. Instead, the facility's useful life should significantly exceed the maturity of the bonds. Municipal revenue bonds do not have the debt limitations that apply to general obligation bonds. A debt limitation is considered the statutory or constitutional maximum debt that an issuer may legally incur. Revenue bonds can be issued by states, political subdivisions (e.g., counties and townships), interstate authorities, and intrastate authorities. Municipal revenue bond interest and principal payments are derived from the funds being generated by the facility.

The purchaser of a variable life insurance policy bears which of the following risks? A) The death benefit may fall to zero due to poor market performance B) The policy may have no cash value if the separate account performance is negative C) The insurance company may increase the premiums if the investment performance of the separate account is poor D) The increasing cost of doing business may force the insurance company to raise expense charges against the separate account

B) The policy may have no cash value if the separate account performance is negative The cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. Poor performance could cause the cash value to decline to zero. Although the death benefit can also increase or decrease, it may never fall below a set minimum. The premiums for variable life policies are fixed for the life of the policy. An expense guarantee clause in life insurance contracts prevents the insurance company from raising expense charges for the administration of the policy.

A customer's initial transaction in a margin account is the purchase of 100 shares of XYZ at $15 per share. What amount must be deposited by the customer in this new account? A) $375 B) $750 C) $1,500 D) $2,000

C) $1,500 The key to this question is recognizing that this represents the customer's initial purchase of securities in the new margin account. The minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less. Since the transaction represents a $1,500 purchase (which is less than $2,000), the customer must deposit the full $1,500. A broker-dealer will not provide a loan in a new margin account unless the customer has equity of at least $2,000.

An investor has taken the following gains and losses during the tax year: a $19,000 capital gain on stock positions and a $24,000 loss on option positions. What amount of ordinary income may the investor offset this year? A) 0 B) $2,000 C) $3,000 D) $5,000

C) $3,000 Capital gains may be offset against capital losses regardless of whether they are from stocks or options. The maximum capital loss an investor may write off against ordinary income in one tax year is $3,000. The balance of the $2,000 capital loss must be carried forward to the next year.

A customer's margin account has a current market value of $10,000, a debit balance of $8,000, and SMA of $1,000. The customer could meet a maintenance call with: A) $100 cash B) $500 SMA C) $500 cash D) $1,000 SMA

C) $500 cash A long margin account must maintain equity equal to 25% of the market value. The account is $500 below the minimum ($2,500 required minus $2,000 equity). Using SMA will increase the debit balance and, therefore, may not be used to meet a maintenance call.

On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is: A) 24 B) 27 C) 30 D) 31

C) 30 When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.

Which of the following is NOT required to be filed with FINRA? A) A retail communication concerning direct participation programs B) A retail communication concerning collateralized mortgage obligations C) A retail communication that provides information on a broker-dealer D) A retail communication that provides information on variable insurance products

C) A retail communication that provides information on a broker-dealer A retail communication concerning direct participation programs (DPPs), collateralized mortgage obligations (CMOs), and investment companies are all required to be filed with FINRA. Investment companies include variable insurance products, mutual funds, closed-end funds, unit investment trusts (UITs), and exchange-traded funds (ETFs). A retail communication that does not make any financial or investment recommendation, or promote a product or service, such as providing information about a broker-dealer, does not need to be filed with FINRA.

The Bond Buyer contains a 20-Bond Index and an 11-Bond Index. The bonds included in the 11-Bond Index have an average rating of: A) AAA- B) AA C) AA+ D) A+

C) AA+ The 11-Bond Index contains general obligation bonds with an average rating on S&P of AA+ and on Moody's of Aa1. The 20-Bond Index has an average rating on S&P of AA and on Moody's of Aa2.

Under Rule 144A, a registered representative is NOT permitted to sell unregistered securities to which of the following? A) An investment company B) An insurance company C) An accredited investor D) An investment adviser

C) An accredited investor Under Rule 144A of the Securities Act of 1933, unregistered securities may be resold only to qualified institutional buyers (QIBs). Qualified institutional buyers are entities that have at least $100 million of investable assets. The term institution includes insurance companies, investment advisers, investment companies, employee benefit plans, or other types of institutional investors. Individual investors, even if they are deemed to be accredited investors, are not considered to be QIBs.

A guaranteed bond is: A) Insured B) One that has a mandatory sinking fund C) Backed by a pledge of another corporation to pay principal and interest D) Backed by a pledge of a federal agency to pay principal

C) Backed by a pledge of another corporation to pay principal and interest The definition of a guaranteed bond is a corporate bond guaranteed by a corporation other than the issuer. An example is a U.S subsidiary of a foreign corporation issuing debt that is backed by the parent company.

Which of the following securities is an example of a collateralized time draft? A) Commercial paper B) American Depositary Receipts C) Bankers' acceptances D) Eurodollars

C) Banker's Acceptances A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank.

The additional bonds covenant for a revenue bond is found normally in the: A) Official notice of sale B) Prospectus C) Bond indenture D) Syndicate agreement

C) Bond indenture All protective covenants for a revenue bond are found in the bond's indenture. Also included in the indenture are the rights and obligations of the issuer and the bondholders. The official notice of sale contains the information and procedures necessary for syndicates that wish to bid on a competitive issue of bonds. The syndicate agreement is a contract among the underwriters that defines their working relationship and addresses such items as the priority of orders and sharing of the underwriting spread. A prospectus is a disclosure document for issues that are registered under the Securities Act of 1933. Municipal revenue bonds are exempt from that Act.

All of the following statements regarding a SEP-IRA are TRUE, EXCEPT: A) An employer that sets up a SEP must make it available to each eligible employee B) All SEP contributions are directed into Traditional IRAs C) Employees must wait five years before they are fully vested in the contributions D) The maximum annual deductible contribution is 20% of a person's income up to a certain dollar amount

C) Employees must wait five years before they are fully vested in the contributions In a SEP-IRA, employees are always immediately vested in all SEP-IRA money, which makes choice (c) the untrue statement. When an employer sets up a Simplified Employee Pension (SEP), it must be made available to all eligible employees. Only the employer makes contributions to Traditional IRAs that have been established for the employees. The maximum annual contribution is 20% of a person's income up to a certain dollar amount.

Prior to being listed on an exchange, which of the following factors must be evaluated? I) The number of shareholders II) The dividend payout III) The earnings record IV) The current market price A) I and III only B) III and IV only C) I, III, and IV only D) I, II, III, and IV

C) I, III, and IV only Listing requirements include: a minimum number of round-lot shareholders, a minimum number of shares publicly held, minimum market values, a positive earnings history, and national interest in the stock. The amount of dividends paid or the dividend payout ratio is not a factor.

An insider of XYZ Corporation buys XYZ stock in the open market at $63 per share. Now, 10 months later, the insider intends to sell the stock at its current market price of $68 per share. Which TWO of the following statements are TRUE regarding this transaction? I) The sale is subject to the six-month holding period under Rule 144 II) This sale is not subject to the six-month holding period under Rule 144 III) The sale is subject to the volume limitations under Rule 144 IV) The sale is not subject to the volume limitations under Rule 144 A) I and III B) I and IV C) II and III D) II and IV

C) II and III The key to this question is to realize that the investor is an insider who acquired his shares through an open market purchase; therefore, he is holding control stock. Under Rule 144, control stock is not subject to the holding period requirement. However, both control and restricted stock are subject to the volume limitations that are imposed by the rule. If an investor is holding restricted (unregistered) stock, Rule 144 requires that it be held for six months before it may be resold.

Which of the following statements is NOT TRUE regarding the characteristics of options and warrants? A) Warrants are created by the corporation whose stock underlies the instrument, and options are created by contract between an option buyer and an option writer B) Both options and warrants can expire worthless if they are not exercised C) If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost D) Both options and warrants can be bought and sold in the secondary market

C) If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost Both options and warrants have a strike price. If exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or convertible preferred stock that investors can convert the security into the underlying stock with no additional payment of money.

According to MSRB rules, if an individual passes the General Securities Representative Examination (Series 7), the individual may sell municipal securities to customers: A) After an apprenticeship period along with an MSRB qualifying examination B) After an MSRB qualifying examination, only C) Immediately, as nothing more is required D) After an apprenticeship period without any further qualifying examinations

C) Immediately, as nothing more is required Passing the General Securities Representative Examination (Series 7) satisfies the MSRB examination requirement for municipal securities sales limited representatives. This registration allows a person to engage in sales to, or purchases from, customers in municipal securities. The MSRB has eliminated the requirement that municipal securities representatives serve an apprenticeship period of 90 days.

Treasury arbitrage restrictions generally prohibit issuers of municipal securities from: A) Selling municipal securities with coupon rates that are lower than Treasury securities B) Selling municipal securities with coupon rates that are higher than Treasury securities C) Investing bond proceeds in higher-yielding Treasury securities D) Investing bond proceeds in lower-yielding Treasury securities

C) Investing bond proceeds in higher-yielding Treasury securities Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.

The advance-decline theory states that: A) A bull market exists if the Dow industrials and transportations averages make new highs B) A bear market exists if more put options have been purchased by investors than call options C) It is bullish if more stocks go up than go down during the day D) A large number of shares sold short is bullish

C) It is bullish if more stocks go up than go down during the day A technical indicator that measures the strength of the market by comparing the number of stocks that increase and decrease is called the advance-decline theory. It shows the general direction and breadth of a market movement on a given day.

Which of the following positions best enables an investor to take advantage of a significant appreciation in DEF stock? A) A debit DEF call spread B) A credit DEF put spread C) Long a DEF straddle D) Short a DEF straddle

C) Long a DEF straddle The long straddle offers an investor the ability to realize unlimited gains since the client is long a call option. The gains are determined by the amount the stock appreciates. While a debit call spread is bullish, the gain is limited to the difference between the strike price on the long call and the strike price on the short call. The credit put spread is also bullish, but the gain is limited to the net premium received. The short straddle exposes an investor to unlimited risk if the stock rises.

For tax purposes, which of the following is NOT deducted from rental income in a real estate program? A) Depreciation B) Maintenance C) Mortgage amortization D) Property tax

C) Mortgage amortization Expenses that are deducted from rental income in a real estate program include maintenance, property tax, depreciation, and mortgage interest. Paying off (amortizing) the principal of a mortgage is not an expense and may not be deducted from rental income for tax purposes.

Which of the following money-market instruments does NOT trade in the secondary market? A) Directly placed commercial paper B) Eurodollar CDs C) Repurchase agreements D) Bankers' acceptances (BAs)

C) Repurchase agreements Repurchase agreements typically are not traded in the secondary market. Eurodollar CDs are certificates of deposit payable in Eurodollars (U.S. currency on deposit in foreign banks). Eurodollar CDs, commercial paper, and BAs are traded in the secondary market.

Which of the following statements is NOT considered misleading regarding a variable annuity communication? A) Telling a client that a variable annuity is a mutual fund B) Representing that a variable annuity will meet short-term liquidity needs C) Telling a client about the negative impact of an early redemption D) Making a representation that a death benefit guarantee applies to the investment return of the annuity

C) Telling a client about the negative impact of an early redemption FINRA is concerned about misleading communications regarding product identification, liquidity, and claims regarding guarantees. A firm should not imply that the underlying account is a mutual fund. Annuities should be purchased with long-term goals in mind, not short-term liquidity needs. Death benefits may be guaranteed, but investment results may not. It would be advisable to inform a potential investor of surrender charges incurred as a result of early redemption.

For an investor to be permitted to purchase an over-the-counter stock on margin, approval must be obtained from: A) A state securities Administrator B) The Securities and Exchange Commission C) The Federal Reserve Board D) FINRA

C) The Federal Reserve Board Under Regulation T, the Federal Reserve Board is given the authority to set the margin requirements for different securities as well as to determine which securities are marginable.

A customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share, which of the following statements is TRUE? A) The account will be closed by the broker-dealer B) The account will be adjusted on October 23 and no margin maintenance call will be issued C) The account will be adjusted on October 23 and a margin maintenance call will be issued D) The account will be adjusted on October 24 and a margin maintenance call will be issued

C) The account will be adjusted on October 23 and a margin maintenance call will be issued A short margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued.

An investor purchases $40,000 of a mutual fund when the price of the fund is $18.50. In the same year, the investor receives a $700 dividend distribution and a capital gain distribution of $1,100. Both distributions are reinvested in additional shares at a price of $17.90. If the fund has a current value of is $22.80 and the investor sells $9,000 worth of the fund, what is the investor's capital gain using the average cost method? A) No gain or loss is reported B) $118 C) $456 D) $1,710

D) $1,710 Using the average cost method, the gain is found by subtracting the cost basis from the sales proceeds. To calculate the cost basis using the average cost method, divide the sum of all investments by the number of shares owned by the investor. The investor purchased $40,000 of the fund at a price of $18.50, The total number of shares purchased is 2,162.16. The investor also received a total of $1,800 in distributions, all reinvested in additional shares when the price is $17.90. The total number of shares purchased is 100.59. The total amount invested is $41,800. The total number of shares owned is 2,262.75. Therefore, the average cost is $18.47. The number of shares being sold is 394.74 ($9,000 / 22.80). If we subtract the cost basis of $7,290 (394.74 x $18.47) from $9,000, this equals a capital gain of $1,710.

ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC? A) $6.40 B) $7.72 C) $10.91 D) $11.80

D) $11.80 Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.

If a customer's confirmation shows that a transaction was executed at $65 per share plus a markup of $.50, the consolidated tape will show: A) $65.50 B) $64.50 C) $65.00 +.50 D) $65.00

D) $65.00 Transactions that are reported on the consolidated tape do not include markups, markdowns, or commissions.

A client has a margin account in which she is long and short 1,000 shares of the same security. Based on this position, if the current market value of the stock is $80 per share, the client is permitted to borrow up to: A) $4,000 B) $20,000 C) $40,000 D) $76,000

D) $76,000 This is a tricky question and the answer is based on the margin maintenance requirement of a short against the box position. If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000. Choice (c) which is $40,000 (the Reg. T requirement of $80,000) is incorrect since it fails to take into account the client's total position

An investor purchases 200 shares of STC at $35 and subsequently purchases 2 STC Jan 35 puts at 2. At what market price must STC trade for the investor to have a profit? A) 32 B) 34 C) 36 D) 38

D) 38 If an investor is long stock and long a put, he will have a profit if the market price exceeds the cost of his stock plus the premium for the option. The stock must trade above 37 (35 cost + 2 premium).

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? A) A 6.40% in-state municipal bond B) A 7.10% out-of-state municipal bond C) A 10.95% investment-grade corporate bond D) A 11.50% mortgage bond

D) A 11.50% mortgage bond The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.40%. 6.40% (Municipal Bond Yield) / 58% (100% - 42%) = 11.03% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The mortgage bond has the best or highest after-tax yield.

An investor is in the 35% tax bracket. Which of the following investments would afford him the BEST after-tax yield? A) A 3.50% general obligation bond B) A 4.10% Treasury bond C) A 5.25% investment-grade corporate bond D) A 5.75% non-investment-grade corporate bond

D) A 5.75% non-investment-grade corporate bond The 3.50% general obligation bond (municipal bond) is exempt from federal income taxes. The other investments are subject to federal income taxes and 35% of the income received would be taxable. The taxable equivalent yield of the 3.50% municipal bond is 5.38%. This is calculated by dividing the 3.50% municipal yield by the complement of the tax bracket which is 65%. The highest (best after-tax yield) would be found in the 5.75% non-investment-grade corporate bond.

An investor is seeking an investment that will outperform the market, but does not involve buying and holding individual securities. All of the following are considered suitable, EXCEPT: A) A hedge fund B) A liquid alternative investment C) A global allocation fund D) A business development company

D) A business development company

If a customer is currently short ABC stock and also short an ABC put, this position is referred to as: A) A covered call B) Short against the box C) An uncovered put D) A covered put

D) A covered put A covered put is created when an investor sells (writes) a put against an existing short stock position. This position is suitable for a client who believes that the stock will remain stable or decline slightly. However, due to the potential risk of the stock's increase in value against the short stock position, a covered put should only be created by clients with a high risk tolerance.

For the following size transactions, ABC mutual fund has a bid price of $8.50 and an asked price of $9.26. Which of the following sales is allowed under the Conduct Rules? A) A member sells 250 shares of ABC fund at $9.10 to a nonmember firm B) A member sells 250 shares of ABC fund at $9.10 to another firm through a nonmember firm C) A member sells 250 shares of ABC fund at $9.10 to one of the firm's customers D) A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients

D) A member sells 250 share of ABC fund at $9.26 to one of the firm's clients A FINRA member firm may not sell the fund at a discount ($9.10) to a nonmember firm or to one of the firm's customers (the public). According to the Conduct Rules, a member firm can only give a discount from the public offering price to another member firm. The discounts and selling concessions member firms give to each other are inducements for firms to be members of FINRA (the self-regulatory organization of over-the-counter broker-dealers) and to abide by its rules and regulations.

Approval by a principal is NOT required when sending a customer which of the following documents? A) An abstract from an Official Statement B) A form letter C) A research report D) A red herring

D) A red herring An abstract from an Official Statement, a form letter, and a research report are considered advertising or sales literature and must be approved. A red herring (preliminary prospectus) is used to provide a potential investor with information and is regulated by the SEC.

Which of the following statements is NOT TRUE relating to a Keogh plan? A) It must follow ERISA standards for eligibility, funding, and vesting B) It may be a defined benefit or defined contribution plan C) Distributions paid to participants at retirement are fully taxable as ordinary income D) An individual covered by a Keogh plan may not maintain an IRA

D) An individual covered by a Keogh plan may not maintain an IRA A Keogh plan must follow all ERISA standards. It may be established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is made each year and benefits are whatever is provided by the total of contributions and earnings in the plan. A defined benefit plan promises specific benefits at retirement. Payments made at retirement under either method are fully taxable as ordinary income. An individual may maintain a Keogh and an IRA. However, deductions may only be claimed for IRA contributions if the individual's income is below a specified amount.

Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds? A) Increasing interest rates B) Stable interest rates C) Volatile interest rates D) Decreasing interest rates

D) Decreasing interest rates Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds.

A buy stop order is entered: I) Below a support level II) Above a resistance level III) To limit a loss on a long stock position IV) To limit a loss on a short stock position A) I and III B) I and IV C) II and III D) II and IV

D) II and IV A stop order may be used to limit a loss or protect a profit on an existing position. If an investor is short stock, he can enter a buy stop order which, if activated, will cover his short position and protect the profit or limit the loss on the short position. A technical analyst may also place a buy stop above the resistance level to purchase the stock should there be a price breakout.

Which TWO of the following securities will enable an investor to consistently receive interest income and also have a maturity date on which their principal will be returned in one lump sum without requiring the investor to sell the securities? I) A municipal bond fund that contains mostly revenue bonds II) Municipal bonds that are subject to the alternative minimum tax III) A closed-end fund that contains the municipal bonds of one state IV) A portfolio of municipal bonds, some which have call provisions A) I and III B) I and IV C) II and III D) II and IV

D) II and IV All of the securities listed will pay interest income to investors. The municipal bond fund and the closed-end fund invest in municipal bonds that pay interest which will then be passed through to the holders of these securities, either monthly, quarterly, or semiannually. Only by investing in actual bonds will an investor be able to have her principal returned in one lump sum when the bonds mature, rather than being required to sell the securities. The type of municipal bond, whether they are callable, and whether they are subject to the AMT is irrelevant to the question. One of the major differences between investing in actual bonds versus bond funds is that the actual bonds will have a maturity date, while bond funds do not. If an investor owns shares of a bond and wants to receive her principal back, she is required to sell or redeem her shares of the fund.

Which TWO of the following statements concerning convertible bonds are TRUE? I) Coupon rates are usually higher than nonconvertible bonds of the same issuer II) Convertible bondholders are considered creditors of the corporation III) Convertible bonds are usually issued by companies with strong credit ratings IV) It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Convertible bondholders are considered creditors of a corporation and provide investors with the ability to convert their bonds into shares of common stock of the same issuer at a set price (conversion price). This feature links these types of bonds to the equity markets and the price of a convertible bond is affected by the price of the underlying stock. However, if the price of the underlying stock declines to the point where there is no advantage to the conversion feature, the bond may sell at a price based on its inherent value as a bond, disregarding the convertible feature. Moreover, convertible bonds are issued by companies with weaker credit ratings and allow the issuer to sell debt at a lower cost. Since the conversion feature is a benefit to the bondholder, convertible bonds will have a lower coupon than similar nonconvertible bonds.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? I) ETFs may be traded in the secondary market and ETNs cannot II) ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note and ETFs do not have issuer credit risk III) ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate IV) ETNs have a maturity date and ETFs do not A) I and III B) I and IV C) II and III D) II and IV

D) II and IV ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.

The State of North Carolina is offering $50,000,000 of 5 1/2% sewer improvement bonds. Which TWO of the following choices apply to the bonds? I) They are subject to the margin requirements of Regulation T II) They are subject to the antifraud provisions of the Securities Act of 1933 III) They are subject to the Trust Indenture Act of 1939 IV) They are exempt from the registration requirements of the Securities Act of 1933 A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Municipal bonds are exempt from the registration provisions of the '33 Act, but are subject to the antifraud provisions. They are also exempt from Regulation T and the Trust Indenture Act of 1939.

Retail communications regarding options: I) Must be submitted to the exchange 15 days prior to initial use II) Must be submitted to the exchange 10 days prior to initial use III) Must be kept on file by the member firm for six years IV) Must be kept on file by the member firm for three years A) I and III only B) I and IV only C) II and III only D) II and IV only

D) II and IV only Retail communications regarding options must be submitted to the firms option regulator (an exchange or FINRA) for approval at least 10 days prior to initial use. All retail communications must be maintained on file by the member firm for three years.

If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be: I) An increase in current assets II) A decrease in total liabilities III) A decrease in stockholders' equity IV) An increase in stockholders' equity A) I and III only B) I and IV only C) II and III only D) II and IV only

D) II and IV only The conversion of bonds to common stock reduces the total debt of the corporation while increasing stockholders' equity (additional shares of common stock). The answer, therefore, will be a decrease in the total liabilities and an increase in stockholders' equity.

A municipal tombstone ad shows bonds maturing serially from 2012 through 2030. The 2030 maturity is a 6.00% bond offered at a 6.75 basis. The bonds maturing in 2020 and thereafter are callable beginning in 2018 @ 102, at 101 in 2019, and at par on any interest date after 2019. The bonds maturing in 2030 should be priced to the: A) 2018 call date B) 2019 call date C) 2020 call date D) Maturity date

D) Maturity date The bonds are being offered at a discount since the yield to maturity (6.75%) is greater than the coupon rate (6.00%). A discount bond is always priced to maturity.

All of the following characteristics are TRUE of REITs, EXCEPT they: A) Are not exempt from the Securities Act of 1933 B) Are not regulated investment companies C) May not pass losses through to the investors D) May not be traded on an exchange

D) May not be traded on an exchange REIT shares may be traded either OTC or on an exchange. REITs are nonexempt securities under the 1933 Act. REITs are not regulated investment companies and may not pass losses to the investors.

Given the following choices, in which security would a pension fund manager LEAST likely invest? A) Treasury notes B) AA-rated corporate bonds C) Blue-chip stocks D) Municipal bonds

D) Municipal bonds Since a pension fund pays no taxes, it would not purchase municipal bonds. The most typical investment would be in high-grade, fixed-income securities such as corporate bonds and U.S. government securities. The pension fund can also buy equities, typically blue-chip stocks.

Which of the following statements is TRUE concerning reverse convertible securities? A) An investor will receive a coupon rate below prevailing market rates B) An investor is anticipating a decrease in the value of the underlying asset C) They would be suitable for an investor who wants to own shares of the underlying asset D) The investor is anticipating that the price of the underlying asset would be above the knock-in value

D) The investor is anticipating that the price of the underlying asset would be above the knock-in value

Volume and holding-period restrictions do NOT apply to the resale of private placements when: A) Purchasers' representatives assist investors B) Both parties are accredited investors C) The transaction is initiated by a registered principal D) The purchaser is a qualified institutional buyer

D) The purchaser is a qualified institutional buyer Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets.

All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT: A) Interest rates are set at specified intervals B) They are often issued by municipalities C) They are long-term securities with short-term trading features D) They have a put feature allowing the holder to redeem the security at par

D) They have a put feature allowing the holder to redeem the security at par Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.

Alan and Marie Johnson have one child and have just purchased a home. The Johnsons count on Marie's regular income from her medical practice to pay their mortgage and other regular bills. Alan's irregular income from the sale of his sculptures provides investment and discretionary income. The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan's income. Which of the following types of insurance is MOST appropriate for the Johnsons? A) Whole life insurance B) Variable life insurance C) Universal life insurance D) Variable universal life insurance

D) Variable universal life insurance Universal life insurance will allow the Johnsons to vary their premiums based on current income levels and insurance requirements, while variable life insurance will provide returns based on the performance of a separate account. A combination of the two types, called variable universal life or flexible premium variable life, is most appropriate.