Series 7 mock test 7

Retail communications that pertain to mutual fund shares must be: AFiled with FINRA within 10 business days of first use BFiled with the issuer at least 10 business days prior to use CRetained by the firm in an easily accessible location for two years, but there is no requirement for the communications to be filed since that is the responsibility of the underwriter DFiled with the SEC at least 10 business days prior to use

A All retail communications pertaining to mutual funds must be filed with FINRA within 10 business days of first use or publication.

Math Industries is seeking to maximize shareholder value by spinning off its Algebra Analytics Division. If this action is undertaken, Math Industries' current shareholders would own stock in: ABoth companies with no immediate tax consequences BBoth companies with capital gains due on the spinoff CThe parent company and would receive a special capital gains distribution from the spinoff DThe parent company and would receive a special dividend in the form of the spinoff

A In a spinoff, each shareholder retains shares in the parent corporation and is also granted shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers with the expectation that the combined valuation of the two entities will be greater than that of the single entity.

When computing coverage for revenue bonds, the ratio used is: ANet revenue to debt service BGross revenue to annual interest payments CNet revenue to operating expenses DGross revenue to operating expenses

A The term coverage (short for coverage ratio) is used when discussing revenue bonds. It is an indication of the number of times by which the earnings generated over a certain period will exceed the debt service requirement. The debt service is the required payments for interest and retirement of principal. The coverage is computed by comparing the ratio of net revenue (gross revenue minus operating and maintenance expense) to debt service.

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is: A7.60% B5.60% C6.40% D6.80%

A The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

If a municipal bond is selling at a premium and is callable at par, how is the yield calculated? ATo the call date BTo the final maturity date CBy dividing the annual income by the current price DAs a percentage of the par value

A The yield for a municipal bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that will be earned if the bonds are called at the call price and not held to the maturity date. MSRB rules require dealers to quote the lower of the yield to call or the yield to maturity. If the bond is selling at a discount, the bond is quoted on a yield to maturity basis. If the bond sells at a premium and is callable at a premium, the yield may be to the final maturity or the call date, whichever is lower.

The most appropriate buyer for a variable life insurance policy is/are: AA person who requires the discipline of forced savings BA person with an understanding of investments who can tolerate risk CParents with a modest income who have young children DA person who wants the assurance of a guaranteed cash value

B A person who is knowledgeable about investments is a candidate for variable life insurance because stocks and bonds are the foundation of the policy. As the market values of the securities fluctuate, cash value and death benefits change. Therefore, the insured must be able to tolerate risk.

36 of 135What type of options will be used to hedge a portfolio of computer stocks? AInterest-rate options BNarrow-based index options CYield-based options DBroad-based index options

B A portfolio containing only computer stocks represents just one segment of the market. A narrow-based index also contains stocks from only one segment of the market. (71833)

If a registered representative opens an account for an investor, the registered representative would need to know all of the following information, EXCEPT: AIf the investor is a U.S. citizen BThe investor's educational background CThe investor's tax identification number DThe investor's investment objectives

B A registered representative does not need to know the customer's educational background to open an account. A reasonable attempt should be made to obtain all the other information when opening an account for a customer.

Which of the following choices is NOT considered a short-term municipal note? AA BAN BAn AON CA RAN DA TAN

B All of the choices given are the acronyms for short-term municipal notes except an AON, which are the letters for an all-or-none order. RAN is the acronym for a revenue anticipation note, BAN for a bond anticipation note, and TAN for a tax anticipation note.

Regarding ETFs, which of the following statements is TRUE? AETFs grow tax-deferred. BTypically, ETFs may be sold short. CETFs may only hold equity positions. DETFs are considered hedge funds by the SEC.

B Exchange-traded funds (ETFs) are investments that resemble UITs. These products may be sold short, may be purchased on margin, and may invest in either equity or debt instruments. A fixed portfolio is typically constructed to either track a specific index (e.g., the Wilshire 5000) or a given market segment (e.g., airlines or medical companies). An ETF's portfolio typically remains constant unless there is a change to the underlying index or in one of the individual investments within the fund. Since ETFs are not hedge funds, there is no requirement for the investors to be accredited.

An exercise limit is the maximum number of options contracts that a customer may exercise in a five-consecutive-business-day period for each: AAccount that she maintains at each brokerage firm BUnderlying stock on each side of the market CUnderlying stock on the long side of the market only DSeries of options in an underlying stock

B Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply cumulatively to all accounts that a customer maintains at all brokerage firms, not for each account at each firm.

Which TWO of the following statements are TRUE concerning the characteristics of preferred stock?The securities do not have a fixed maturity dateThe price of these securities is more volatile than common stockThe dividend will be paid annuallyThe price will fluctuate based primarily on changes in interest rates AII and IV BI and IV CI and III DII and III

B Most preferred stock does not have a maturity date and, therefore, one of the risks of purchasing this type of security is that there is no fixed date when you will receive your principal back. These securities are less volatile than common stock, and the prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. The dividend usually is paid quarterly, not annually.

A broker-dealer is preparing a client's monthly statement and realizes that, due to market volatility, the account shows a significant decline in value. The market has corrected itself and the account values have appreciated significantly. The firm would like to delay sending the statement in order to reflect the appreciated value. This practice is: APermitted since statements are normally sent quarterly BNot permitted because the broker-dealer is withholding sending the monthly statement CNot permitted unless the client is notified DPermitted since it will provide the client with a more accurate portfolio valuation

B The broker-dealer is not permitted to withhold sending the monthly statement. Monthly statements are normally sent when activities have occurred in the account. If an account is inactive, quarterly statements are sent.

If a member firm brokers a customer purchase of a security, the member firm must disclose:The amount of commission charged on the transactionEither the name of the person who sold the security or the fact that such information will be furnished on requestEither the time when the transaction took place or the fact that such information will be furnished on requestThe fact that the member acted as broker for the selling party, if that is the case AI only BI, II, III, and IV CNone of the above DI, II, and III only

B The broker-dealer must disclose the amount of commission it charged if it acted in an agency capacity. If it acted as agent for both the buyer and the seller in a single transaction, it must disclose this fact to both the buyer and the seller. In addition, the broker-dealer must disclose, or offer to disclose, the time when the transaction occurred and the name of the other party to the transaction.

A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of: A$0.08 B$8.00 C$2.50 D$0.80

C GNMA pass-through certificates (as well as T-notes and T-bonds) are quoted in 32nds of a point. The spread of .08 represents 8/32 or 1/4 (.25) of a point. One point (1%) for a bond is equal to $10 ($1,000 x 1%); therefore, 1/4 of a point is equal to $2.50 per $1,000.

A real estate limited partnership that does not specify the actual properties to be purchased is known as a: AStaged program BSection 8 housing program CBlind pool DPrivate placement

C If a real estate program's prospectus does not specify the actual properties to be purchased, it is known as a blind pool (or nonspecified property) program. An oil and gas program may also be considered a blind pool if the properties to be drilled are not specified in the prospectus.

Which type of equity capital would have a delayed, diluted effect on a corporation? ANonconvertible debt BThe sale of restricted stock under SEC Rule 144 CConvertible debt DA follow-on offering of common shares

C If the convertible debt is issued by a corporation and the securities are later converted, there will be more common shares outstanding, diluting the earnings of the shareholders. The sale of restricted stock under SEC Rule 144 is the sale of existing shares. It does not create additional shares. A follow-on offering of common shares has an immediate, not a delayed, dilutive effect. Nonconvertible bonds, also referred to as straight debt, do not produce a dilutive effect since no new common shares are issued.

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: AInterest rates are increasing BBuyers of new bills purchased the bills above par CBuyers of new bills paid more than buyers paid the previous month DBuyers of new bills paid less than buyers paid the previous month

C 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.

An investor has been making payments into a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? The investment risk is assumed by the insurance company The investment risk is assumed by the customer The amount of the payment to the customer is guaranteed by the insurance company The amount of the payment to the customer is not guaranteed A I and III B II and III C II and IV D I and IV

C Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment could increase, decrease, or remain the same since the amount is not guaranteed.

Which of the following lists assists a broker-dealer in making a reasonable determination that a security is available to be borrowed from another broker-dealer in order to effect a short sale transaction? AA Restricted Stock List BA Threshold Security List CA Hard-to-Borrow List DAn Easy-to-Borrow List

D In order to aid in the process of locating securities, the SEC has accepted the use of Easy-to-Borrow lists. These lists, which must be less than 24 hours old, provide reasonable grounds for belief that a security on the list will be available to be borrowed. The securities on the list must be readily available to avoid fails to deliver. Use of an Easy-to-Borrow list expedites the fulfillment of the locate provision. A Hard-to-Borrow list refers to securities that a clearing broker-dealer may have difficulty in borrowing.

In August, an investor sells an uncovered listed option and receives a $1,100 premium. The following February, the customer makes a closing purchase transaction at 3. The result of the transactions is: AOrdinary income of $800 BA capital loss of $800 CA non-taxable event DA short-term capital gain of $800

D The investor made an $800 profit on the closing transaction (sale at $1,100 and purchase at $300). The profit is treated as a short-term capital gain in the year in which the transaction is closed out. Although short-term capital gains are taxed at the same rate as the investor's ordinary income, they're not considered ordinary income. Ordinary income typically includes a person's salary, wages, tips, bonuses, commission, or income earned from self-employment.

Which of the following choices would have the LEAST amount of interest-rate risk? AA Treasury bond maturing in 30 years BA BB-rated corporate debenture that matures in two years CA newly-issued GNMA backed by 15-year mortgages DA Treasury STRIP maturing in eight years

Interest-rate risk is primarily related to the maturity of a bond. The longer the bond's maturity, the more interest-rate risk it has. In this case, the two-year debenture has the least interest-rate risk because it has the shortest maturity. Note, however, that its below-investment-grade rating translates into the greatest amount of credit risk of the securities listed.

A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is a member of the syndicate, the firm is entitled to the: ATotal takedown BTakedown less the concession CTotal takedown less the management fee DAdditional takedown plus the management fee

A A member of the syndicate is entitled to the additional takedown plus the concession, which is also known as the total takedown. Only the syndicate manager is entitled to the management fee. A broker-dealer that is not a member of the syndicate selling part of a new issue of municipal bonds is entitled to the concession.

Which of the following is NOT required to be filed with FINRA? AA retail communication that provides information on a broker-dealer BA retail communication that provides information on variable insurance products CA retail communication concerning direct participation programs DA retail communication concerning collateralized mortgage obligations

A 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.

An investor purchases an ABC Jan 40 call @ 4 and sells an ABC April 30 call @ 9. This is an example of a: ADiagonal spread BHorizontal spread CVertical spread DVariable hedge

A A spread involves the purchase and sale of the same type of options (calls or puts). If the contracts differ in expiration, it is a horizontal spread. If the contracts differ in exercise (strike) price, it is a vertical spread. If both expiration and exercise price are different, it is a diagonal spread. (71824)

Which of the following increases would NOT indicate a deteriorating credit situation for a municipality? AAn increase in municipal assessed valuations BAn increase in personal bankruptcies CAn increase in tax delinquencies DAn increase in per-capita debt

A All of the items listed would be indications of a deteriorating credit situation except an increase in municipal assessed valuations. This indicates that property values have increased, thereby generating a higher tax base.

A customer is in her late 40s and is currently in the 15% tax bracket, but she's recently inherited $7 million. While visiting a broker-dealer, she informs a registered representative that she's a conservative investor and is seeking advice about how to invest the inheritance. Which of the following choices is the BEST method for investing the funds? A30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds B20% in-state municipal bonds, 20% in out-of-state municipal bonds, 20% in corporate bonds, 20% in Treasury bonds, 10% in revenue anticipation notes, and 10% in tax-exempt money- market funds C20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes D80% in equities, a 10% mixture of in-state and out-of-state municipal bonds, 10% in corporate bonds

A Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. To determine the percentage of an investor's portfolio that should be allocated to equities, many strategists recommend taking 100% and subtracting the investor's age. Using this formula, allocating 30% to equities is reasonable (lower than the roughly 50% result) since she's a conservative investor. The remainder can be invested in various fixed-income securities and cash. Prior to inheriting the funds, the customer wouldn't have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. However, after investing in the different funds, the income/dividends/potential capital gains will have the effect of increasing her tax rate, which makes the municipal bonds an attractive investment. In fact, the in-state municipal bonds will offer a higher after-tax return for this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities will be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds in short-term municipal securities, such as tax or revenue anticipation notes and tax-exempt money-market funds. Choosing to allocate only 20% in equities and 50% in tax anticipation notes will offer no growth potential. Ultimately, allocating 100% of the funds in fixed-income investments doesn't offer the customer a balanced approach and, therefore, the other choices are not appropriate allocations for the investor's funds. (15662)

When bond issues have staggered maturity dates, they're referred to as: ASerial bonds BZero-coupon bonds CTerm bonds DSinking fund bonds

A Bonds with staggered maturity dates are referred to as serial bonds. For serial bonds, the principal amount outstanding is reduced over time. On the other hand, term bonds have one maturity date.

A broker-dealer's suitability obligation is: ATo make sure the recommended security fits the customer investment objectives BTo make sure a customer does not invest in risky securities CA requirement by a broker-dealer to avoid conflicts of interest DTo protect the customer against a loss

A Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning his investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. A broker-dealer may assist a customer in limiting a loss but not guarantee a customer against a loss. Conflicts of interest must be disclosed, but do not need to be avoided. A firm may recommend that a small amount of a customer's portfolio be invested in riskier securities if they fit into an overall investment strategy.

A cash trade would settle: AOn the trade date BTwo calendar days after the trade date COne business day after the trade date DTwo business days after the trade date

A Cash settlement is completed on the day the trade is executed.

Which of the following is NOT one of the "doing business" requirements that are established under Rule 147 or Rule 147A? AAt least 80% of the issuer's employees are based in one state BAt least 80% of the net proceeds from the offering are intended to be used by the issuer, and are in fact used in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within the state or territory CAt least 80% of the issuer's gross revenues are derived from the operation of a business or of real property that is located in the state or territory or from the rendering of services within the state DAt least 80% of the issuer's assets are located within the state or territory at the end of its most recent semiannual fiscal period prior to the first offer of securities under the exemption

A Companies that are selling new securities are typically required to register their securities with the SEC. However, under Rule 147 and Rule 147A, if a company is conducting an offering and only selling its securities to its state residents, the offering is exempt from registration. A condition of this exemption is that the issuer must meet at least one of the four doing business requirements that are listed below. At least 80% of its consolidated gross revenues are derived from the operation of a business or of real property that is located in the state or territory or from the rendering of services within the state or territory; At least 80% of its consolidated assets are located within the state or territory at the end of its most recent semiannual fiscal period prior to the first offer of securities under the exemption; At least 80% of the net proceeds from the offering are intended to be used by the issuer, and are in fact used in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within the state or territory; or A majority of the issuer's employees are based in the state or territory (this fourth requirement was not included in the original Rule 147) The choice "At least 80% of the issuer's employees are based in one state" is not a requirement since the threshold is for a majority of the issuer's employees to be based in the state, not at least 80% of them. (31812)

Which of the following is NOT considered a don't know (DK) trade? AThe buyer is suspicious of insider trading BThere is a disagreement on the price of the trade CThere is no record of the trade at one of the firms DThere is a mismatch on the size of the trade

A Don't know (DK) trades occur when the contrabrokers disagree or have conflicting details of a trade. While insider trading is illegal, suspicion of insider trading would not cause a DK notice to be sent.

When doing a municipal bond swap, which of the following items is NOT a factor when trying to avoid the wash sale rule? AThe rating BThe coupon CThe issuer DMaturity date

A If a security is sold at a loss, and within 30 days (prior to and after the sale), substantially the same security is purchased, the IRS, considers it a wash sale and will disallow the loss. To avoid purchasing a security that the IRS will consider substantially the same as the security sold, you should purchase bonds either by a different issuer or with a different coupon or maturity. The rating of the bonds would not be a factor.

An individual who's considering moving to the payout phase of a variable annuity should understand that the payments will: ABe based on the performance of the subaccount products in the separate account compared to the AIR BBe based on the performance of the subaccount products in the separate account minus the AIR CBe based on the performance of the subaccount products in the separate account plus the AIR DNever be less than the cost basis in the separate account

A Once a variable annuity is annuitized, each payment will represent the same number of annuity units, but the payment amounts are based on the performance of the subaccount products in the separate account compared to the assumed interest rate (AIR). If the performance of the separate account exceeds the AIR, the payment will increase. If the performance of the separate account is below the AIR, the payment will decrease. If the performance of the separate account equals the AIR, the payment will remain the same as the previous payment.

A U.S. Treasury bill is sold in the secondary market on Thursday, March 14. It has a regular-way settlement of: AFriday, March 15 BThursday, March 14 CWednesday, March 20 DMonday, March 18

A Secondary market trades in U.S. Government bonds, notes, and bills settle one business day after the trade date.

Which of the following is NOT a characteristic of preferred stock? AIt carries voting rights BIt has a dividend that is not guaranteed CThe board of directors must declare the dividends DIt has a fixed dividend

A The board of directors must declare dividends for both common and preferred stock. Neither common nor preferred stockholders are guaranteed a dividend. Preferred stock normally has a fixed dividend. Preferred stock does not have voting rights, only common shares may vote.

During a period of stable interest rates, which bond has the most potential to show a significant change in price? AA 7 1/2%, 10-year convertible subordinated debenture BAn 8%, 5-year high-grade corporate bond CA 7%, 30-year U.S. Treasury Bond DA 6%, 6-month Revenue Anticipation Note

A The key to this question is to recognize that if interest rates are stable, then most bond prices will experience little movement. However, to identify the bond that is still expected to fluctuate the most, find the answer that is the most unique. In this question, the convertible debenture may still experience a significant change in price based on the changing value of the underlying equity (i.e., the security into which the bond may be converted). For example, if the value of the underlying stock increases, the value of the bond will also increase to keep the bond's price in the vicinity of conversion parity. Parity is achieved when the value of the bond is equal to the value of the common stock which is able to be obtained at conversion.

A bond's nominal yield :Does not change Indicates the amount per thousand that bondholders will receive as income Needs to be approved by the board of directors Will go up if interest rates go down AI and II only BII and III only CIII and IV only DI and III only

A The nominal yield is set at the time of issuance and does not change. It indicates the dollar amount of income the bondholder will earn on each $1,000 of principal invested. For example, a 6% nominal yield indicates a return of $60 per year. Prices of bonds go up if interest rates go down. However, the nominal yield will remain the same.

A 75-year-old client is looking for a high level of income for his retirement fund. He wishes to maintain a balance between income and safety of principal. Which of the following funds would MOST likely meet this requirement? AA GNMA fund BA high grade fund CA balanced fund DA high yield fund

A This question is a bit tricky, since there are two potentially correct answers. This is a situation you will encounter on the Series 7 Examination as well. The key here in answering these types of questions is to look for the MOST correct answer. When a client states he needs both safety of principal and income, it can be assumed a large portion of his money should be in bonds. This makes a balanced fund a poor choice, since a balanced fund contains both stocks and bonds, which implies a higher principal risk. A balanced fund is also not a very good vehicle for someone who needs income, since stocks generally pay less in percentage terms than bonds. A high yield fund invests in junk bonds. High yield equals high risk, so this is not a good choice either. Now we are left with the high grade fund and the GNMA fund. The GNMA fund is a better choice; but why? For starters, GNMA securities are backed by the U.S. government. In contrast, high grade bonds are still corporate bonds. While neither fund is backed by the government, the GNMA is still a safer choice. Also, while the high grade fund may pay a little more in income, GNMA funds pay more interest than Treasuries because GNMA yields are based on mortgages. These two facts are what make the GNMA fund a better choice for this investor. (84498)

An investor writes an uncovered ABC March 45 put for a premium of 4. At expiration, ABC is at $36 per share and the put option is exercised. If the stock is immediately sold by the writer at the current market price, what is the writer's profit or loss? A$500 loss B$900 profit C$400 profit D$400 loss

A When the stock is put to the writer, he must buy the stock for $4,500. His cost basis for tax purposes is $4,100 ($4,500 strike price - $400 premium received). Since he sold the stock for $3,600, he has a net $500 loss ($4,100 - $3,600).

An investor purchases 1 XYZ October 40 put when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum profit the investor can have? A$3,700 B$3,800 C$300 DUnlimited

A XYZ shares could possibly become worthless. The investor can then buy 100 shares for pennies and put (sell) it to the writer for the $40 per share strike price. This equals $4,000 ($40 x 100 shares). The investors' profit is $4,000 minus the $300 premium paid for the put, which equals $3,700. The $3,700 is the maximum profit the investor can have since the share's price cannot go lower than zero.

The taxing power of an issuer of a limited tax bond is limited to a specified: ACollateral BMaximum rate CMinimum rate DTax source

B

According to suitability rules, 1035 exchanges should occur not more frequently than once every: A12 months B36 months C24 months D48 months

B 1035 exchanges which occur within 36 months of previous exchanges may be considered churning and unsuitable. In order for an exchange of one variable annuity for another to be suitable, an adequate analysis of the investor's situation should include: Age Annual income Financial situation and needs Investment experience and objectives Intended use of the deferred variable annuity Investment time horizon (not intended for senior citizens) Existing assets Liquidity needs Liquid net worth Risk tolerance Tax status

An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should NOT recommend which of the following municipal securities? AA variable-rate demand obligation (VRDO) BAn auction-rate security (ARS) CA bond anticipation note (BAN) DA tax-anticipation note (TAN)

B A VRDO and an ARS are both long-term securities with short-term trading features. A VRDO has a put feature that permits the holder to sell the securities back to the issuer or third party. An auction rate security (ARS) does not have this feature and, if the auction fails, the investor may not have immediate access to his funds. TANs and BANs are short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market. (73681)

When trading equity securities, the term dark pool is BEST defined as trading: ABetween investors, allowing them to buy and sell securities anonymously with quotes being displayed BBetween investors, allowing them to buy and sell securities anonymously without quotes being displayed CAfter an exchange ends its normal market hours DPrior to an exchange's normal market hours

B A dark pool is a source of liquidity for large institutional investors and high-frequency traders; however the system doesn't disseminate quotes. The system can be operated by broker-dealers or exchanges, and allows these investors to buy and sell large blocks of stock anonymously. The objective is to allow these investors to trade with the least amount of market impact and with low transaction costs. Some dark pools provide matching systems and can also allow for participants to negotiate prices.

Which of the following statements is TRUE regarding a Coverdell Education Savings Account? AContributions must be invested conservatively BGrandparents may make contributions for their grandchildren until the children reach the age of 18 CThe maximum contribution is $6,000. DIf the funds are not used for educational expenses, the account may be used for tax-deferred retirement savings

B A parent, grandparent, or any other person whose adjusted gross income is within certain limits may contribute a maximum of $2,000 per year to an account that is established for the benefit of a child who is under the age of 18. If the withdrawals are not used to pay for the child's education expenses, then the earnings portion of the withdrawal is subject to taxation as ordinary income plus a 10% tax penalty is assessed.

Which of the following statements is NOT TRUE about exchange-traded notes (ETNs)? AIf the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs BETNs generally pay a fixed coupon rate CETNs may be sold at any time in the secondary markets or held until maturity DETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note

B All of the statements about ETNs are true except ETNs pay a fixed coupon rate. ETNs do not usually pay an annual coupon or specified dividend. They are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes since ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. 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. (73446)

If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: ARating BAlpha CExpense ratio DBeta

B Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market. (89715)

All of the following statements are TRUE regarding ADRs, EXCEPT: AThe securities are priced in dollars BThe increased trading volume and enhanced liquidity in the U.S. markets lead to prices that are virtually identical to those of the underlying stock in the issuer's host country CThe instrument's price reflects the value of the underlying stock and currency fluctuations of the underlying issuer's host country DThe securities may be listed on an exchange, and may be sponsored by the company

B American Depositary Receipts (ADRs) are priced in dollars and are sensitive to the value of the stock and the fluctuations of the currency in the underlying issuer's host country. ADRs may be listed on an exchange and may be sponsored by the company (issuer). The trading volume of ADRs varies considerably among issues. Securities that are not heavily traded may have significant disparities between the price of the ADR and the underlying stock.

A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid a dividend of $2.00 per share on the common stock. The dividend payout ratio is: A100% B60% C40% D25%

C Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%.

Which of the following situations should be escalated to the firm's compliance department? AThe customer's mail is sent only to the primary address. BThe customer's mail is sent only to the registered representative's primary address. CThe customer's mail is sent both to the primary address and her daughter's address. DThe customer's mail is sent only to a post office address.

B New account procedures require a primary address (e.g., a single family home), apartment number, condominium, or other permanent address. Once this is obtained, communications (mail) may have a different mailing address such as a business address, vacation address, or a post office box. In addition, with the customer's written permission, communications may also be sent to a third party such as a relative or investment adviser. If communications are sent only to the registered representative's primary address, this is a red flag since neither the customer nor a fiduciary for the customer is receiving communications from the broker-dealer. This situation should be investigated by the compliance department.

The term all-or-none, in trading municipal bonds, applies to: AAgency transactions BSellers' offering terms CPremium bonds DDiscount bonds

B Offerings are sometimes made on an all-or-none basis (an AON offering), which is a situation where the offerer agrees to sell the bonds only if all that he has available will be bought.

According to SRO rules, an email message complaining about excessive commissions sent to an RR's personal electronic device: ADoes not constitute an official complaint since the electronic device is not an official broker-dealer contact channel and its use for business is typically prohibited BIs a complaint and must be maintained by the broker-dealer CIs a complaint and must be forwarded to the appropriate SRO DMust be followed up within 10 business days by a written document from the client to be considered an official complaint

B Records of customer complaints must be maintained according to SRO record-keeping rules. Complaints may be delivered in any written format, including letters, email, IMs, and text messages. There is no requirement to follow up an electronic communication with a paper document or to send the complaint to the appropriate SRO. (73407)

An investor wrote a 115 index option call. The option was exercised and the index closed at 125. The writer will: AReceive the index BReceive cash CDeliver cash DDeliver the index

B Settlement on an index option contract is made in cash. The writer must pay the contract's in-the-money amount times $100.

An investor purchases a PRT Oct 45 call @ 3. When PRT is selling at 51, the investor exercises the call. The investor has a: A$5,100 gain BCost basis of 48 C$300 gain D$600 gain

B Since the question does not say that the investor sold the stock after exercising the call, it is not possible to calculate a profit or loss. The investor exercised the call and, therefore, purchased 100 shares of stock at a cost of 48 (45 strike price + 3 premium).

If a stock is not listed on an exchange and not quoted in the OTC market, the stock is considered to be in the: ASecondary market BFourth market CGrey market DThird market

C Stocks that are unlisted and not quoted in the OTC market are considered to be grey (or gray) market stocks.

A margin disclosure document would NOT include which of the following statements? AThe firm can increase the house maintenance without advance written notice. BThe firm can change the method of calculating interest charges without advance written notice. CYou can lose more funds than you deposit in the margin account. DThe firm can sell your securities without contacting you.

B The margin disclosure document describes the different types of risk associated with margin accounts and includes the following declarations. You can lose more funds than you deposit. The firm can force the sale of securities in your account. The firm can sell your securities without contacting you. You are not entitled to choose which securities are liquidated in order to meet a margin call. The firm's house maintenance margin requirements may change without providing you advance written notice. You are not entitled to an extension of time on a margin call. The firm definitely needs to provide advance written notice if the method of calculating interest charges is changed.

The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called: AStructured notes BPrerefunded bonds CGuaranteed bonds DDouble-barreled bonds

B The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs.

An investor purchases an EPG Jan 40 put at 5 and writes an EPG Jan 50 put at 13. The investor would profit in all of the following situations, EXCEPT: ABoth options expire BThe spread widens CThe spread narrows DThe Jan 50 put is closed out at 10 and the Jan 40 put is closed out at 4

B This is an example of a credit spread (more premium received for the option sold than paid for the option purchased). In a credit spread, the investor will profit if the spread (difference in premium) narrows.

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term bond prices compared to long-term bond prices? ABoth long- and short-term rates fluctuate equally. BLong-term bonds are more volatile than short-term bonds. CThere is no relationship between the fluctuations in long-term and short-term bonds. DShort-term bonds are more volatile than long-term bonds.

B When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices.

On Tuesday, June 16, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. What is the dollar amount of accrued interest that the investor is required to pay? A$75.55 B$208.88 C$1008.88 D$213.33

B With the maturity falling on November 1, the other interest payment date would be May 1. The trade on Tuesday, June 16, would settle on Thursday, June 18. Accrued interest on municipal bonds is calculated on a 30/360 day basis resulting in 30 days for the month of May and 17 days for June, (up to but not including settlement), for a total of 47 days. The amount of interest paid is calculated based on the following Accrued Interest formula. Accrued Interest = (Principal x Rate x Days of Interest) / 360 = ($20,000 x 8% x 47) / 360 = $208.88 (33217)

A bank sells its credit card receivables to a trust. If the trust creates a bond backed by these receivables: AThis type of security is backed by the FDIC BThis is an asset-backed security CThis is a collateral trust bond DThe bank is responsible for paying back the credit card receivables

B Securities that are secured by mortgages, car loans, and credit card receivables are called asset-backed securities.

An investor who sells a July 50 put and buys a July 60 put on the same stock is establishing a: ABull spread BShort straddle CBear spread DLong straddle

C A bear spread always involves buying the higher exercise price and selling the lower exercise price. This applies to both call spreads and put spreads. A bull spread always involves buying the lower exercise price and selling the higher exercise price. This applies to both call spreads and put spreads.

When a client buys a bond above par, the confirmations must indicate the: ARating BContraparty CLower of yield to call or yield to maturity DCatastrophe call provisions

C A bond's confirmation must disclose the lower of the yield to maturity or the yield to call. This is sometimes referred to as the yield to worst.

A corporation wishes to open a cash account. Which of the following documents is required? AA copy of the corporate charter BA hypothecation agreement CA corporate resolution DA risk disclosure document

C A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account. (72204)

A corporation is about to go public. Its shares will be quoted on the OTCBB. A broker-dealer selling the securities in the aftermarket is required to deliver a prospectus to purchasers for how many days following the effective date of registration? A120 B25 C90 D40

C A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs. There are two exceptions. If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there is no aftermarket prospectus delivery requirement for dealers. If the issuer was not a reporting company prior to filing, but will be listed on an exchange including Nasdaq as of the effective date, the requirement applies for 25 days. The main purpose of this rule is to provide investors with information concerning an issue of securities. If the issuer was already a reporting company, information is readily available to the public through the SEC's EDGAR system. (17325)

The underwriter makes financial commitments in which of the following situations? AAn all-or-none deal BA mini-max deal CA firm-commitment deal DA best-efforts deal

C A financial commitment is a different way of saying a firm commitment. In a firm-commitment deal the underwriter puts its own capital at risk and acts as a principal. All-or-none and mini-max are types of best-efforts deals. In best-efforts deals, the underwriter acts as a simple agent who is not making a financial commitment since it is not placing its capital at risk.

Which of the following is NOT acceptable under a soft-dollar relationship? AProviding subscriptions to industry trade publications BProviding in-house research CProviding software for accounting services DProviding third-party research

C A soft-dollar arrangement is a practice in which an investment adviser pays for research or other services from a broker-dealer with commission dollars rather than buying these services separately. Providing software for accounting services would not assist the client in making an investment decision.

A bond is selling at a premium and yields have remained constant. As the bond gets closer to its maturity, what happens to its price? AIt remains the same BIt will experience significant price changes CIt decreases DIt increases

C Although fixed income securities are subject to some degree of interest rate risk, that risk is of less concern if the security is being held to maturity. Assuming there is no default by the issuer, the price of a bond selling at a premium will decrease (move towards par value) as it gets closer to its maturity.

The interest income on which of the following bonds is exempt from federal, state, and local taxes? AAlaska BNew York CPuerto Rico DHawaii

C Bonds issued by Puerto Rico are exempt from federal, state, and local taxes. The triple-tax exemption of bonds issued by the Commonwealth of Puerto Rico was provided for by a special act of Congress. The triple exemption also applies to obligations of other territories and possessions of the United States such as the Virgin Islands and Guam. Bonds issued by New York, Alaska, and Hawaii have the interest income exempt from federal taxes, but may be subject to state taxes.

If a company declares a cash dividend, which of the following is TRUE? AShareholders' equity increases BCurrent assets decrease CShareholders' equity decreases DCurrent assets increase

C It is important to note that this question refers to the declaration of a cash dividend, not the payment of a cash dividend. If a company declares a cash dividend, dividends payable (a current liability) will increase by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. The announcement has no impact on the assets of the company; however, assets will be reduced once the company actually pays the cash dividend. Regardless of the specific corporate transaction, the balance sheet must remain balanced.

An investor has a $5 million position in long-term Treasury bonds. Which of the following types of risk is the investor's greatest concern? ALiquidity risk BCredit risk CInflationary risk DPrepayment risk

C Of the choices listed, the greatest concern would be inflationary risk, which is the risk that inflation would erode the investor's purchasing power. When invested in a fixed-income security, an increase in inflation may be detrimental. Note: If it was Treasury Inflation-Protected Securities (TIPS), they would be adjusted for the inflation rate. The Treasury market is generally a liquid market (being able to sell quickly). Treasury bonds are backed by the U.S. government (they have no credit risk) and may not be prepaid prior to maturity (they have no prepayment risk). Another risk the investor would have is interest-rate risk, the risk that an increase in interest rates could cause the bond price to fall, which is not one of the choices.

The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered: AAt par BTo yield 5 1/2% CAt a discount DAt a premium

C Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.

Your firm has completed an underwriting of Zylo Plastics subordinated debentures. The bond indenture contains a five-year call protection provision. This covenant would be most valuable to bond purchasers if, during the five years following issuance: AThe yield curve slopes downward BInterest rates increase CInterest rates decline DInterest rates remain stable

C The call protection would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, bond prices rise. Corporations will call back bonds when interest rates decline and issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.

The Statement of Additional Information is supplied to a client: AWhen the semiannual report is mailed BWhen the customer purchases shares CWhen a customer requests it DWhen the account is opened

C The cover page of a mutual fund prospectus indicates that an investor may receive a Statement of Additional Information upon request. There is no requirement for periodic distribution.

A revenue bond is backed by a pledge of net revenues. This indicates that: AThe first use of net revenues is to pay the debt service on the bonds BAll revenues are pledged to pay debt service on the bonds CNet revenues are pledged to pay operating and maintenance expenses DThe issuer guarantees that net revenues from the facility will be sufficient to pay debt service on the bonds

C The issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues.

Which of the following risks is considered unique to an investor holding a CMO? ACredit risk BInterest-rate risk CPrepayment risk DReinvestment risk

C The risk that an investor will receive her principal earlier than projected (prepayment risk) instead of at one time is the most important risk concerning mortgage-backed securities such as CMOs. Although all fixed-income securities will have interest-rate risk, prepayment risk is unique to CMOs. Historically, CMOs have been highly rated, due to the underlying mortgages backing these securities. This risk did increase significantly in 2008.

A mutual fund has a bid price of $13.00 and an offer price of $14.20. The sales charge, when computed as a percentage of the offering price, is approximately: A8.1% B8.7% C8.5% D9.1%

C The sales charge, in this example, is $1.20 which is found by subtracting the bid price of $13 from the offer price of $14.20. To find the sales charge percentage, divide the sales charge of $1.20 by the offer price of $14.20, which comes to approximately 8.5% ($1.20 divided by $14.20 = 8.5%).

A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis? A106 B100 C101.50 D104.50

C When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).

When determining whether a customer is suitable to invest in a direct participation program, which of the following is NOT required? AThe customer has a net worth that's sufficient to sustain the risks inherent in the program, including the loss of investment. BThe customer has a net worth that's sufficient to sustain the risks inherent in the program, including lack of liquidity. CThe customer is or will be in an appropriate financial position that will enable him to benefit from passive losses which are significant aspect of the program. DThe customer is or will be in an appropriate financial position that will enable him to realize the tax benefits which are a significant aspect of the program.

C When recommending a direct participation program, an RR must have reasonable grounds to believe that the investment is suitable on the basis of information that's been obtained from the customer, his investment objectives, other investments, financial situation and needs, and any other information that's known by the member or associated person. Through this information, the firm is confident that the customer is or will be in an appropriate financial position that will enable him to realize the tax benefits which are a significant aspect of the program, and that the customer has a net worth that's sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity. Additionally, the program must otherwise be suitable for the customer. There's no requirement that the client is or will be in an appropriate financial position that will enable him to benefit from passive losses. (17054)

A security that pays a fixed amount twice a year, and also allows the holder to profit if the common stock rises, is known as a: AConvertible preferred stock BWarrant CRight DConvertible bond

D A convertible bond pays interest on a semiannual basis (twice a year). Preferred stock pays a dividend to shareholders on a quarterly basis. A convertible security (bond or preferred stock) would allow an investor to convert the security into shares of the company's common stock, at a predetermined ratio. If a security is convertible into common stock, the price of the security will tend to move with the price of the stock.

Which of the following option positions obligates the investor to sell shares if exercised against? ALong a put BShort a put CLong a call DShort a call

D A short call position obligates the investor to sell shares if exercised against. Remember, buyers of options have the right to exercise, while sellers of options assume obligations if exercised against.

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered: AToo aggressive BA tactical asset allocation strategy CChurning DA strategic asset allocation strategy

D A strategic asset allocation strategy may include the periodic rebalancing of the portfolio on a monthly, quarterly or annual basis in order to keep the original asset allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.

In a limited partnership, a general partner's minimum participation in profits and losses is: A10% B5% C15% D1%

D According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status.

Which of the following investors would be LEAST suitable for an oil and gas direct participation program (DPP)? AA retired investor who is in the highest federal tax bracket BAn investor who recently inherited $5,000,000 CAn investor in the highest federal tax bracket DAn investor who is concerned about the alternative minimum tax

D An investment in an oil and gas limited partnership may have excess depletion and depreciation as well as excess intangible drilling costs. These are tax preference items and may result in an investor being subject to the alternative minimum tax (AMT). The other investors may or may not be suitable for an oil and gas DPP. It would depend on many other factors. However, an investor concerned about the AMT would not want to invest in a security that normally has tax preference items. (73594)

A registered representative has recommended the purchase of a variable annuity to a customer who subsequently completes the application. Which TWO of the following statements are TRUE concerning the application?The contract is forwarded directly to the insurance companyThe contract is forwarded to the representative's Office of Supervisory Jurisdiction (OSJ)A principal need not approve the transactionA principal must approve the transaction within 7 business days AI and IV BI and III CII and III DII and IV

D Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company.

All of the following statements are TRUE about closed-end investment companies, EXCEPT that the: AShares are sold at the current market price BShares may be listed on the NYSE CNumber of outstanding shares is constant DShares may not sell below the current net asset value

D Closed-end investment companies are bought and sold in the same manner as common stocks. If a customer wants to sell a closed-end fund at the market, he would receive the current bid price (the market quote, not the net asset value). If a customer wants to buy a closed-end investment company at the market, he would buy it at the current offering (asked) price. The market price of the shares can be at, above, or below the net asset value. Closed-end investment companies have only one issue of shares. Once sold, no new shares are issued. The amount of outstanding shares remains constant. The shares may be listed on an exchange or may trade in the OTC market.

Which of the following terms is used when pricing an entire issue of municipal bonds on a yield-to-call basis? ASinking fund BOptional CCatastrophe DMandatory in-whole

D Municipal bonds may be called based on various scenarios. They may be called based on funds being held in a sinking fund, as a result of an extraordinary or catastrophe situation, as an optional decision made by the issuer for all or part of an offering, or due to mandatory, in-whole call provisions in the offering. Yield-to-call will be used when bonds are subject to mandatory in-whole calls and are priced at a premium. (17046)

Which of the following securities would be LEAST suitable for an investor interested in preservation of capital? AA corporate bond fund BA floating rate bond maturing in five years CLong-term CDs DReverse convertible bonds

D Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the "knock-in level". If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). 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. (73550)

An individual wants to buy an interest in an oil and gas limited partnership that has the LEAST amount of risk. The MOST suitable recommendation is a(n): AExploratory program BBalanced program CDevelopmental program DIncome program

D Since an income program purchases producing wells and the risk of not finding oil is eliminated, it's the safest investment of the four types of oil and gas programs. Developmental programs drill in areas of known reserves and reduce the risk of not striking oil and/or gas. Exploratory programs drill in new areas and have the highest risk of not striking oil and/or gas. A balanced program does both developmental and exploratory drilling. For that reason, it's more risky than a developmental program, but less risky than an exploratory program. (15629)

Which TWO of the following statements are TRUE of Treasury bills?The interest received is taxed in the year the securities are purchasedThe interest received is exempt from state and local taxesThe interest received is based on the difference between the purchase price and face valueThe difference between the purchase price and face value is considered a capital gain AII and IV BI and III CI and IV DII and IIl

D The interest received on a Treasury bill is based on the difference between the discounted purchase price and the face value received when the bill is redeemed at maturity, and is taxable as interest, not a capital gain. This amount is taxable in the year the bill matures (not when it is purchased), and the interest is subject to federal income tax, but exempt from state and local income taxes.

An investor is in the third year of accumulating an interest in a variable annuity that assesses a deferred sales charge. The investor's registered representative recommends for her to switch to a newly created variable annuity that offers a larger number of subaccount choices, also offered with a deferred sales charge. Which TWO of the following statements may be considered TRUE of this switch?FINRA will likely consider the switch unsuitable.FINRA will likely consider the switch suitable, since both annuities are offered with a deferred sales charge.The switch will be taxable if it qualifies as a 1035 exchange.The switch will not be taxable if it qualifies as a 1035 exchange. AI and III BII and IV CII and III DI and IV

D Since the investor is in the third year of accumulation, if she accepts the switch recommendation, she will incur a deferred sales charge. Additionally, by switching to another variable annuity, the investor's holding period will restart with the new annuity and she will be subject to the highest deferred sales charge. For these reasons, the switch recommendation is likely unsuitable. Under IRS Section 1035, an exchange of annuities is not a taxable event.

In a soft-dollar arrangement between an investment adviser and a broker-dealer, the broker-dealer is permitted to pay: AA percentage of the salaries of the adviser's internal research staff BThe cost of a coach flight for a portfolio manager to attend a conference CThe cost of computer terminals used to deliver market data services DThe cost of a conference concerning the future of the computer software industry

D Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its customers. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be investing. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. While the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.

An issuer currently has an S&P AA rating. If the ratings service notifies the firm that it has been downgraded by one notch, its new rating would be: ABBB+ BBBB CA DAA-

D Standard & Poor's highest rating is AAA and its lowest rating is D. The company also uses a (+) or (-) to further distinguish between ratings. Each upgrade or downgrade is referred to as a notch. If an issuer currently has a AA rating, one notch below would be AA- and two notches below would be an A+ rating.

A market maker is quoting a stock as follows: Bid 23.50, Offer 23.70. This means that the market maker will: ASell shares at a price higher than 23.70 and buy shares at a price lower than 23.70 BSell and buy shares at a price between 23.70 and 23.50 CBuy shares at 23.70 and sell shares at 23.50 DBuy shares at 23.50 and sell shares at 23.70

D The bid is the highest price at which a market maker is willing to buy stock, and the offer is the lowest price at which a market maker is willing to sell stock. Therefore, the client will buy from the market maker at the market maker's offer price and sell to the market maker at the market maker's bid price. The difference between the bid and offer is referred to as the spread. In this example, the market maker is obligated to buy shares at the bid price of 23.50 and sell shares at the offer price of 23.70.

The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is: A4.46% B4.15% C4.50% D4.26%

D The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.

An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25 and has a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, the cost basis per share for the newly acquired common stock is: A$28.00 B$27.75 C$27.50 D$26.50

D To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The formula for calculating conversion ratio is the par value of the preferred stock ($100) divided by the conversion price ($25). As a result, four shares of common stock are received if the preferred stock is converted into common stock. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4) ($106 ÷ 4 = $26.50). Any future gains or losses on the sale of the common stock will be calculated by using the basis of $26.50.

An open-end investment company with a NAV of $22.20 and a sales charge of 8% would have an offer price of what amount? A$20.42 B$22.20 C$23.98 D$24.13

D To find the asked price, divide the net asset value by the complement of the sales charge, as follows. NAV / (100% - sales charge)= $22.20 / (100% - 8%)= $22.20 / 92%= $22.20 / .92= $24.13 The asked price is also referred to as the public offering price (POP). (84368)

Use the following quote to answer this question. ABC25.13 + .25B 25A 25.25 Excluding any markups, what price will a customer pay to purchase the security? A25 B25.38 C25.13 D25.25

D When purchasing stock, a customer will pay the ask (offer) price. A customer selling stock will receive the bid price.

To be considered a regulated investment company, a mutual fund must: ADistribute all of its net investment income to shareholders Distribute a minimum amount of its net investment income to shareholders Pay tax on all net investment income prior to making distributions to shareholders DRetain all net investment income to avoid paying tax

To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders. Meeting this requirement allows the investment company to pass on distributions to shareholders without the company having to first pay taxes on the income distributed