series 7 practice questions
A convertible preferred stock with a par value of $100 is currently trading at $125 per share. The conversion ratio is 5:1. If the common stock is trading at $30 per share, what must the preferred stock's price be to be at parity? A) $150 B) $130 C) $70 D) $103
A) $150 The math is 5 × $30 = $150. The logic is, you can convert the preferred stock into five shares of the common. If the common is trading at $30 per share, to be equal, the preferred stock must be selling for five times that price.
.An investor establishes the following positions: Long 1 XYZ Apr 40 call for 6 Long 1 XYZ Apr 50 put for 8 If both options are sold for intrinsic value when XYZ trades at 44, the investor realizes a loss of A) $400. B) $200. C) $1,000. D) $100.
A) $400. Let's take this one step at a time. Beginning with the call, the opening purchase of the XYZ Apr 40 call was made at 6, and the closing sale of that call was made at the intrinsic value. When the market price of the stock is $44, a 40 call has intrinsic value (is in the money) of 4 points. When something purchased at 6 ($600) is sold for 4 ($400), the difference of 2 represents a $200 loss. Moving on to the put, the opening purchase of the XYZ Apr 50 put was made at 8, and the closing sale of that put was made at intrinsic value. With the market price of the stock at $44, a 50 put has intrinsic value (is in the money) of 6 points (50 - 44). When something purchased at 8 ($800) is sold for 6 ($600), the difference of 2 represents a $200 loss. With each position losing $200, the total loss for the account is $400.
The MSRB classifies municipal securities into two categories: notes and bonds. They define bonds as any municipal debt security with a maturity of A) 3 years or more. B) 2 years or more. C) 10 years or more. D) 1 year or more.
A) 3 years or more. Municipal notes have a maximum maturity of less than three years. Once the municipal security is issued with a maturity of 3 years or longer, it is considered a municipal bond
Which of the following would be considered improper by FINRA? A) A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of the company's proprietary mutual fund B) A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of any mutual funds the firm has sales agreements with C) A registered representative giving a $500 wedding gift to her brother who is one of her clients. D) A mutual fund distributor offering a member firm a free training seminar held at the distributor's home office for up to two representatives selected by the member firm.
A) A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of the company's proprietary mutual fund No compensation, especially in the form of a bonus, may be conditioned on the sale of a specific product. This is particularly egregious behavior when the product is proprietary. Paying a $1,000 bonus for reaching a sales goal is fine, as long as no specific product is targeted. Training seminars, even with all expenses paid by a fund distributor, are fine as long as the firm selects the attendees based on other considerations than sales of that distributor's funds and the location is appropriate. It would be hard for FINRA to fault this wedding gift to a brother in spite of the client relationship.
In what order would claimants receive payment in the event of a corporate bankruptcy? A) Holders of secured debt B) Holders of subordinated debt instruments C) General creditors D) Preferred stockholders
A) Holders of secured debt C) General creditors B) Holders of subordinated debt instruments D) Preferred stockholders
A customer purchases $100,000 of original issue discount municipal bonds. How will this trade be considered for tax purposes when the bonds mature? A) No capital gain B) Fully taxable on capital gain C) Taxable as long-term gain D) Taxable as short-term gain
A) No capital gain
Which of the following securities would have a Moody's MIG rating? A) TANs B) T-bills C) GOs D) BAs
A) TANs TANs are tax anticipation notes. These are short-term municipal securities and that is what Moody's MIG ratings represent.
You and your spouse like to invest in option contracts. You each have separate individual accounts with different brokers for executing your trades. The current level of contract position limits for ABC stock is 75,000 contracts. Which of the following would be a violation of the contract limit? A) You are long 37,650 ABC puts, and your spouse is short 37,560 ABC calls. B) You are long 36,650 ABC calls, and your spouse is long 38,350 ABC puts. C) You are long 37,950 ABC calls, and your spouse is short 37,020 ABC calls. D) You are short 38,650 ABC calls, and your spouse is short 36,345 ABC calls.
A) You are long 37,650 ABC puts; your spouse is short 37,560 ABC calls.
An investor writes 1 IBS 280 put for 16.60. The position is closed, and the put is bought for its intrinsic value when IBS is trading at 265.25. The investor realizes A) a $185 profit. B) a $235 loss. C) a $185 loss. D) a $145 profit.
A) a $185 profit. The opening sale of the IBS put was made for 16.60, and the closing purchase was made for the intrinsic value of 14.75. The put's intrinsic value is determined by how far the stock's market price is below the strike price. (In this case, 280 minus 265.25.) 16.60 − 14.75 = 1.85 × 100 shares = $185.00. The investor profits because the sale's proceeds exceed the purchase price.
Covered call writing normally occurs in A) a stable market. B) a falling market. C) a volatile market. D) a rising market.
A) a stable market.
After a company splits its stock 2 for 1, an investor who owns 100 shares receives A) another certificate for 100 shares. B) another certificate for 200 shares. C) notice that the investor's 100-share certificate now represents 200 shares. D) notice to send in the current certificate to be replaced by a new certificate for 200 shares.
A) another certificate for 100 shares.
A general partner may do all of the following except A) borrow money from the partnership. B) sell property to the limited partnership. C) make general management decisions regarding the partnership. D) act as an agent for the partnership in managing partnership assets.
A) borrow money from the partnership. All these situations offer the potential for conflicts of interest. However, the general partner is not forbidden by law to engage in any of these acts, except for borrowing money; the general partner may never borrow money from the partnership.
All of the following securities are exempt from the registration provisions of the Securities Act of 1933 except A) commercial bank holding company securities. B) national and state bank securities. C) commercial paper and bankers' acceptances that have maturities of no more than 270 days. D) state and municipal bonds.
A) commercial bank holding company securities. Commercial bank holding companies are corporations that have to register with the SEC. State and municipal bonds do not have to be registered under the Securities Act of 1933. Commercial paper and bankers' acceptances that have maturities of no more than 270 days are exempt from the registration provisions. National and state banks are regulated by various state and federal agencies.
You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation in late August. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $43 Feb 8 100 shares @ $39 May 11, 200 shares @$48 The client needs about $4,000 and the CDL is currently selling for $44 per share on July 31. From a tax standpoint, you should probably recommend that the client A) sell 100 of the shares purchased on May 11. B) sell all of the shares purchased on January 4. C) sell all of the shares purchased on February 8. D) sell half of the shares purchased on January 4, and half of the shares bought on February 8
A) sell 100 of the shares purchased on May 11. By using the share identification basis and selling the shares purchased in May at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates (all transactions are less than a 12-month holding period). Don't get hung up on the fact that the investor will receive $400 more than needed (100 shares @ $44 = $4,400); the question is looking for tax considerations.
Several years ago, one of your customers bought an original issue discount (OID) municipal bond at $960. The bond has now matured. For federal income tax purposes, the discount is A) tax free. B) taxed at maturity as ordinary income. C) taxed each year as ordinary income. D) taxed as a long-term capital gain.
A) tax free.
A pension plan might invest in each of the following except A) tax-free municipal bonds. B) corporate bonds. C) variable annuities. D) equities.
A) tax-free municipal bonds. It is inappropriate to place tax-free investments into a tax-deferred plan because there is no benefit to the deferral.
If a municipal bond rated BBB is prerefunded, all of the following statements are true except A) the marketability of the issue will decrease. B) the rating of the issue will increase. C) the issue is now backed by U.S. government securities. D) funds required to meet debt servicing have been set aside in escrow.
A) the marketability of the issue will decrease. When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities.
When an investor in a mutual fund elects to reinvest dividends into additional shares, the price paid is A) the net asset value per share (NAV). B) the public offering price POP) without a sales charge. C) the public offering price (POP) plus a sales charge. D) the net asset value per share (NAV) plus a sales charge.
A) the net asset value per share (NAV).
When customers receive their account statements, they will generally not include A) trade dates of all transactions during the statement period. B) security positions at the end of the statement period. C) interest charged on debit balances in margin accounts during the statement period. D) total cost of purchases and net proceeds of sales made during the statement period.
A) trade dates of all transactions during the statement period. Trade dates appear on the trade confirmations.
A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be A)taxed as ordinary income. B)tax free. C)taxed as a capital gain if the underlying mortgage is prepaid. D)treated partly as ordinary income and partly as a tax-free return of principal.
A*Interest-only payments made by CMOs are taxed as ordinary income.
Treasury STRIPS and Treasury receipts are quoted based on A) yield to maturity B) amortization of premiums C) 0.125 (1/8 of a point in dollars) D) 0.03125 (1/32 of a point in dollars)
A.Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.
A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though she made no new investments. Which of the following statements regarding this situation is true? A) The representative should remind the customer that she signed a letter of intent 12 months ago. B) Shares held in escrow will be liquidated at the appreciated value. C) The investment no longer qualifies for a breakpoint. D) The letter of intent is considered to be fulfilled.
Answer: A. The letter of intent is not satisfied by the price appreciation of the shares. A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed.
All of the following sources of revenue could be used to service general obligation debt except A) sales taxes. B) fines. C) user charges. D) ad valorem taxes.
Answer: C Historically, municipalities get most of their revenues from property taxes (ad valorem taxes). Other sources of revenue include sales taxes, income taxes, gasoline taxes, license fees, fines, and assessments. User charges would be used to service revenue bonds.
A customer expresses the need to invest a fixed-dollar sum now that will return a fixed-dollar sum in 10 years. He mentions several investments. Of those listed, which would not be a suitable recommendation for his objective? A) A high-yield corporate bond maturing in 10 years B) Collateralized mortgage obligations (CMOs) C) A zero-coupon bond maturing in 10 years D) Treasury Inflation Protection Securities (TIPS)
B) Collateralized mortgage obligations (CMOs)
Class A shares of the JILCO Fund are offered to the public at net asset value per share plus a sales charge of 4.25%. If the next computed net asset value per share is $39.39, an investment of $10,000 will acquire A) 253.871 shares. B) 243.072 shares. C) 265.816 shares. D) 243.546 shares.
B) Explanation The first step is computing the public offering price (POP). When the NAV and sales charge percentage are given, the computation is: NAV divided by (100% - sales charge %). The numbers are $39.39 ÷ 95.75% which equals $41.14 per share. Then, divide the $10,000 purchase by the POP of $41.14 to arrive at 243.72 shares. The key point to remember is that the sales charge is always a percentage of the POP, not the NAV.LO 8.d
Which of the following statements regarding index options are true? 1. Exercise is settled in cash. 2. Exercise settlement value is based on the value of the index at the time exercise instructions are received. 3. Exercise settlement value is based on the closing index value on the day exercise instructions are tendered. 4. Exercise settlement is T+2. A) I and II B) I and III C) II and IV D) II and III
B) I and III All index option exercises are settled in cash. The amount a writer owes the holder is known as the intrinsic value of the option, and the settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is the next business day.
If a high-income customer is subject to alternative minimum tax (AMT), which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Income from a municipal security issued to finance parking garages B) Interest on a private-purpose municipal bond C) Distributions from a corporate bond mutual fund D) Interest on a municipal bond issued to finance highway construction
B) Interest on a private-purpose municipal bond If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for AMT purposes.
A customer shorts 100 XYZ at 51 and buys 1 XYZ Aug 50 call at 4. The stock falls to 45, at which time, the customer closes the options contract at 1 and covers his short position at the current market price for A) a $400 gain. B) a $300 gain. C) a $300 loss. D) a $400 loss.
B) a $300 gain. The customer shorted stock at 51 and covered at 45 for a $600 gain, and then he bought a call at 4 and sold it at 1 for a $300 loss. Overall, the gain is $300.
A designated market maker is permitted to do all of the following except A) represent a bid and offer simultaneously. B) accept a not-held order. C) buy and sell for a proprietary account. D) accept a limit order.
B) accept a not-held order. A specialist (designated market maker) on the floor does not deal directly with the public. Therefore, a designated market maker cannot accept any order that requires the exercise of discretion. A not-held order is one in which the floor broker can choose the price or time of execution.
Accrued interest for U.S. government bonds is computed on the basis of A) 30-day months. B) actual days elapsed. C) SEC accrued interest guidelines. D) 31-day months.
B) actual days elapsed.
An individual purchases a single premium deferred variable annuity. There will be income tax ramifications in all of the following situations except A) death prior to annuitization. B) during the accumulation period. C) surrender of the contract. D) during the payout period.
B) during the accumulation period. One of the features of annuities, fixed and variable, is that there are no taxes during the accumulation phase. However, anytime money comes out of the account, whether when annuitized, surrendered voluntarily, or not (as in death), any earnings are subject to taxation.
An investor owns 500 shares of JKL common stock. The investor's cost is $50 per share and the last quote on JKL was $60. One method the investor could use that would increase current income and offer some downside protection would be to A) sell a JKL $60 call @4. B) sell five JKL $60 calls @4. C) buy a JKL $60 put @4. D) buy five JKL $60 puts @4.
B) sell five JKL $60 calls @4 Understand that with 500 shares, the protection needs five options. Selling five calls @4 generates $2,000 of premium income credited to the account one day after the sale. In addition, the sale has effectively lowered the cost from $60 to $56 per share. That is the partial protection offered when writing a covered call. Full protection would come from buying five JKL 60 puts, but the question specifically mentions receiving income and buying an option costs money rather than receiving money. Please note that some questions, like this one, do require you to consider the number of shares or options. Others, such as breakeven points, ignore the number of contracts.
Responding to the student loan crisis, the SECURE Act now permits qualified withdrawals from Section 529 plans to include payments of A) student loan interest up to a maximum of $10,000 per family. B) student loan interest up to a lifetime maximum of $10,000 per child. C) student loan interest up to a maximum of $10,000 per year. D) student loan principal up to an annual maximum of $10,000 per child.
B) student loan interest up to a lifetime maximum of $10,000 per child. The lifetime limit is $10,000 of interest or principal per child. If the child who is the beneficiary of the plan does not use all the money by graduation, the remaining funds can be used to pay the interest or principal (subject to the standard limits) for other siblings.
After an extensive feasibility study on the viability of a new shopping mall, the City of Mount Vernon decided to issue bonds that depend on the earning requirements of the facilities. All of the following statements are true except A) that rental revenues collected from shop owners within the mall will pay the bonds' debt service. B) that the bonds are backed by the full faith and credit of the City of Mount Vernon. C) that investor risk depends on the specific characteristics of the project. D) that the city is issuing revenue bonds.
B) that the bonds are backed by the full faith and credit of the City of Mount Vernon. These are revenue bonds that will be paid for by the users of the facility, not the taxing power of the municipality. The issuance of revenue bonds depends on the completion of a proper feasibility study. Such a study projects the revenues and costs associated with a project. If the feasibility study does not show sufficient earnings, then the bonds will not be issued. The risk level depends on the characteristics of each particular project.
Trade confirmations must show yield to call on which of the following callable bonds? A) 6.5%, 7% basis, maturing 2038 B) 6.5%, at par, maturing 2042 C) 5.5%, 5% basis, maturing 2038 D) 5.5%, at par, maturing 2038
B)5-½%, 5% basis, maturing 2038 Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a premium bond, the yield to call is the lower of the two. The 5-½% bond with a 5% basis is the only bond trading at a premium because the yield to maturity (or basis) is lower than the coupon.
A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It requires written discretionary authorization. B) It is good only for the day entered. C) It may be executed at any price or any time the broker-dealer feels is best. D) It cannot be accepted without a price being specified.
B. Explanation This is a time or price order and is excluded from the definition of discretion. One of the characteristics of this type of order is that, unless written instructions to the contrary have been received, it is effective only the day entered.
An example of a taxable bond issued by a municipal government is A) a tax anticipation note (TAN). B) Series EE bonds. C) a general obligation bond (GO). D) a Build America Bond (BAB).
Build America Bond (BABs) are an example of taxable municipal bonds.
Which of the following regarding yield-based (interest rate) debt options is true? A) Calls are purchased by those who believe prices of debt securities are rising. B) Their strike prices reflect dollar amounts. C) They are European-style exercise. D) Debt securities are delivered to the contract owner when exercised.
C) Explanation Yield-based debt options are European-style contracts, meaning that they can only be exercised on the last day of trading. All yield-based contracts, when exercised, are settled in cash. There is no delivery of debt instruments when these contracts are exercised. All strike prices reflect yield. (35 strike price represents 3.5% yield.) Yield-based options are a bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).
Your customer's broad-based portfolio consisting of quality equity securities has returned 4% this year. The S&P 500, a bench mark index, has returned an average 6% over the past several years. Compared to the benchmark index, the customer's portfolio has an alpha of A) +4%. B) -1.5%. C) -2%. D) +2%.
C) -2%. The alpha for any investment, such as a particular asset or portfolio, is the abnormal rate of return on the investment in relation to what would normally be predicted by a known benchmark. Alpha can be positive or negative, and in this case, because the portfolio underperformed the benchmark index by 2%, it currently has an alpha of -2%.
An investor purchases five Mount Vernon Port Authority J & J 1 bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price? A) 110 B) 114 C) 109 D) 108
C) 109 Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. This bond pays interest on January and July 1 (J & J 1). Therefore, July, August, and September each have 30 days of accrued interest, and October has 19 days of accrued interest; this totals 109 days. Settlement date is Friday, October 20. The easiest way to do these accrued interest questions is to set the dates up numerically. That is, the settlement date is 10/20 and the previous interest payment date is 7/01. Do the subtraction: 10/20 -7/01 3/19 3 times 30 = 90 +19 = 109
In a new margin account, a customer sells short $60,000 worth of ABC stock and deposits $30,000 to meet the Regulation T requirement. If the value of ABC falls to $55,000, the special memorandum account (SMA) balance in the account would be
C) 7500. For every $1 decrease in market value in a short account, $1.50 of SMA is created. Therefore, if the market value falls by $5,000, the SMA balance would be $7,500
A tool used by investment banking firms to combine several unsuccessful limited partnership programs into one new entity is A) a DPP rescue. B) a multiprogram partnership. C) a DPP rollup. D) a merger.
C) A DDP Rollup. A Muli-program partnership. A DPP Rollup is a transaction involving the combination or reorganization or one of more limited partnerships into securities of a successor entity.
Which of the following businesses must have more than one owner? A) An S corporation B) An LLC C) A partnership D) A C corporation
C) A partnership
An options investor wishing to follow a market-neutral strategy would be most likely to find which of the following most appropriate? A) A long straddle B) A long broad index call C) A time spread D) A debit put spread
C) A time spread
If a Nasdaq market maker is selling stock to a customer from inventory and the firm has held the shares to be sold for several months, what price should the dealer use as a basis for a markup? A) Offer price shown in the electronic OTC Pink on the day of the current sale B) Price at which it purchased the securities C) Best offering price quoted in the interdealer market D) Broker/dealer's own current offer price
C) Best offering price quoted in the interdealer market FINRA rules require that a dealer's markup to a customer be based on the current market rather than the dealer's cost in an active, competitive market. The dealer's potential loss on inventory is considered to be a risk of making a market.
Which of the following statements regarding convertible bonds is not true? A) Convertible bondholders are creditors of the corporation. B) Coupon rates are usually lower than nonconvertible bond rates of the same issuer. C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. D) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature.
C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. Coupon rates are not higher; they are lower because of the value of the conversion feature. The bondholders are creditors. If the stock price falls, the conversion feature will not influence the bond's price.
Which of the following statements regarding variable annuities are true? 1. The number of accumulation units is always fixed throughout the accumulation period. 2. The number of accumulation units can rise during the accumulation period. 3. The number of annuity units is fixed at the time of annuitization. 4. The number of annuity units rises once annuitization begins. A) I and IV B) II and IV C) II and III D) I and III
C) II and III The number of variable annuity accumulation units can rise during the accumulation period when additional units are being purchased. When a variable annuity contract is annuitized, the number of annuity units is fixed.
Which of the following are likely to have a low beta? A) Technology stocks B) Software stocks C) Public utility stocks D) Aerospace stocks
C) Public utility stocks Public utility stocks tend to have low betas, as do other defensive stocks. Technology, aerospace, and software stocks tend to have high betas.
A customer wishes to diversify an investment portfolio to include real estate. However, the customer is concerned that real estate tends to be illiquid. Which of the following would be a suitable recommendation? A) Real estate limited partnership offerings B) Diversified open-end investment companies C) Real estate investment trusts D) Government National Mortgage Association securities
C) Real estate investment trusts REITs (real estate investment trusts) allow investors the opportunity to invest in real estate and provide a high level of liquidity because they are publicly traded on exchanges and OTC. The real estate DPP does provide an opportunity to invest in real estate, but it is considered illiquid because there is generally no available secondary market. When a mutual fund is a diversified company, it means that it complies with the 75-5-10 rule, not that its portfolio is diversified into real estate. GNMA securities are debt obligations and do not provide the equity diversification this investor is seeking. Please note: As pointed out in the LEM, there has been a growth in the number of nontraded REITs. Obviously, they do not have the liquidity of those that are publicly traded. For exam purposes, unless something in the question indicates that the REIT is nontraded, you can safely assume it is a liquid investment.
Pursuant to Regulation T, cash dividends received in a customer's margin account A) must be removed within 30 days of receipt. B) can only be withdrawn if the account is not restricted. C) can be withdrawn anytime within the first 30 days of receipt. D) cannot be removed.
C) can be withdrawn anytime within the first 30 days of receipt. If a customer wishes to withdraw cash dividends, the customer must do so within 30 days of receipt. Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account. As the debit balance falls, equity in the account goes up dollar for dollar.
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, she will pay A) no tax until she liquidates the shares. B) long-term or short-term capital gains rates, depending on the length of time the customer has held the fund shares. C) capital gains rates on capital gains distributions and ordinary income rates on dividends. D) ordinary income tax rates on the capital gains and dividends
C) capital gains rates on capital gains distributions and ordinary income rates on dividends.
When a well-established corporation needs short-term borrowing for working capital needs, it will most likely issue A) a letter of credit. B) a jumbo CD. C) commercial paper. D) preemptive rights.
C) commercial paper. Commercial paper is the most common tool for corporations to raise short-term funds. A letter of credit is issued by a bank. On the exam, this would usually take the form of bankers' acceptances for those in the import/export business. Banks issue CDs, and preemptive rights are used for the sale of common stock. Stock is long-term capital.
A legal contract—known as an indenture—between a bond issuer and a trustee appointed to represent the bondholders is required for A) government bond issues of any size sold to domestic (U.S.) investors. B) municipal bond issues of $100 million or more sold within one municipality. C) corporate bond issues of $50 million or more sold interstate. D) corporate bond issues of $25 million or more sold interstate.
C) corporate bond issues of $50 million or more sold interstate.
An underwriting spread is A) the amount a managing underwriter receives. B) the amount a syndicate receives. C) the difference between an offering price and the proceeds to an issuer. D) the amount a selling group receives.
C) the difference between an offering price and the proceeds to an issuer.
The spread in a municipal competitive bid is A) the excess of the dollar bid over par. B) the difference between the stated yield and reoffering price. C) the difference between the bid and production (the price at which the bonds are reoffered to the public). D) the difference between the takedown price and reoffering price.
C) the difference between the bid and production (the price at which the bonds are reoffered to the public). The spread on a competitive bid municipal issue is the difference between the dollar amount bid (which is usually par value) and the "production" - the expected dollar amount to be realized upon reoffering the bonds at a premium over par.
Under ERISA, a plan trustee wishing to write uncovered calls may do so A) without restriction. B) if approved by the IRS in writing. C) under no circumstances. D) if explicitly allowed in the plan document.
C) under no circumstances.
The visible supply has been increasing steadily over the past 30 days. This is an indication that A) yields are likely to fall. B) prices are likely to rise. C) yields are likely to rise. D) fewer new issues will be offered in the next 30 days.
C) yields are likely to rise. When the visible supply increases it tells us that the number of bond issues coming to market is increasing Greater supply puts downward pressure on prices. As bond prices fall, yields increase.
All of the following trade with accrued interest except A) Treasury bonds. B) convertible bonds. C) zero coupon bonds. D) jumbo certificates of deposit.
C) zero coupon bonds. Explanation Zero coupon bonds are issued at a deep discount from face value instead of providing semiannual interest payments.
A direct participation program (DPP) would not be structured as A) an LLC B) a limited partnership. C) a C corporation D) an S corporation
C. Although most DPPs are structured as limited partnerships, they may also use the other business forms allowing flow-through of income and losses (s corporations and LLCs). Because the C corporation is a taxable entity, it is not used as the structure for a DPP.
The SEC requires that all sell orders be identified as either long or short. A person is not considered to be long a security if he A) has title to it. B) owns a security convertible into or exchangeable for the security and has tendered such security for conversion or exchange. C) has sold an in-the-money put option on that security simultaneously with entering the short sale order. D) has purchased the security but the trade has not yet settled.
C. has sold an in-the-money put option on that security simultaneously with entering the short sale order.
One of the most common cases of overlapping municipal debt is when a city's portion of the debt is shared with A.) the federal government B.) the state C.) the county D.) the revenue authority
C.) the county
A testimonial used by a member firm in connection with retail communications must state all of the following except A.) the fact that compensation was paid to the person giving the testimonial if there are more $100 in value was paid B.) the qualifications of the person giving the testimonial if a specialized or experienced opinion is implied C.) the time period covered by the testimonial D.) that past performance is not indicative of future performance and that other investors may not obtain compare results
C.) the time period covered by the testimonial
A market order to purchase 100 shares of XYZ common stock is A) valid at the stipulated price only. B) executed at the lowest price of the day. C) executed at the market close. D) good for that day only.
D Explanation A market order is executed at the best price in the market at the time the order is entered. Because these orders have guaranteed execution (there is always a "best" price), there would be no practical reason for the order to be carried over to another day. There is a market on close order, but that would have to be specified in the order. A stipulated price is a limit order.
A direct participation program shows the following operating results for the year: Revenues: $3 million Operating expense: $1 million Interest expense: $200,000 Management fees: $200,000 Depreciation: $3 million The cash flow from program operations is A) a loss of $1.4 million. B) $1.4 million. C) $3 million. D) $1.6 million.
D) $1.6 million. The cash flow for a direct participation program is the net income (or loss) plus the depreciation. In this question, there is a loss of $1.4 million. When the depreciation of $3 million is added to the negative $1.4 million, the cash flow is a positive $1.6 million. How did we get the loss of $1.4 million? The money that came in was the revenue of $3 million. From that, we subtract all of the expenses. Total operating expense of $1.2 million ($1 million plus $200,000 management fees) Interest expense of $200,000 Depreciation of $3 million Total expenses: $4.4 million Net loss of $1.4 million
If an investor opens a new margin account and sells short 100 shares of ABC at 32.50, with Regulation T at 50%, what is the investor's required deposit? A) 1625 B) 812.5 C) 3250 D) 2000
D) $2000 The Regulation T requirement is $1,625 ($3,250 × 50%). When selling stock short in a new account, an investor must meet the minimum requirement of $2,000 for any short sales of $4,000 or less. Above $4,000, the deposit is 50% of the short market value.
Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2015. The maturity date of the bonds is July 1, 2035. What is the number of days of accrued interest on the 10-bond trade? A) 29 B) 37 C) 31 D) 30
D) 30. The maturity month and day will always match one of the two semiannual coupon dates. Since maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 (30 days).
If a member firm wishes to have a clearly erroneous trade reviewed, it must notify A) the contra party to the trade. B) the Uniform Practice Committee. C) the National Adjudicatory Council (NAC). D) Nasdaq Market Operations
D) Nasdaq Market Operations
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is not one of those three? A) Quantitative suitability B) Reasonable-basis suitability C) Customer-specific suitability D) Qualitative-basis suitability
D) Qualitative-basis suitability Rule 2111 is composed of three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability.
A registered representative of a FINRA member broker-dealer is gathering information from a prospective customer. When the representative uses the information to prepare a financial profile, which of the following would not be included? A) Current value of any IRAs B) Cash value in life insurance policies C) Outstanding credit card balances D) The individual's risk tolerance
D) The individual's risk tolerance The financial profile includes items with numbers. While risk tolerance is one of the most important aspects of information gathering, it cannot be quantified in the manner that debts, cash value, and IRA accounts are.
Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Treasury notes B) Corporate bonds C) Common stock D) Variable annuities
D) Variable annuities Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, et cetera. In five years, your client will have to begin making withdrawals, regardless of any surrender charges the annuity may impose.
In a proceeds transaction for a customer where the proceeds from the liquidation of one stock are used to purchase another stock, the 5% markup policy is computed on the basis of A) the markup on the buy side only. B) the markdown on the sell side only. C) each side of the transaction separately. D) a combination of both the buy side and the sell side.
D) a combination of both the buy side and the sell side. In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side and applying the total to the inside market on the buy side.
All of the following will affect special memorandum account (SMA) in a short account except A) the sale of securities. B) the purchase of securities. C) a decline in CMV. D) appreciation of CMV.
D) appreciation of CMV. In a short account, the customer benefits if the current market value (CMV) falls. If the CMV is falling, the equity is increasing, thus increasing SMA. If the CMV is rising, the equity is falling, with no effect on SMA.
All of the following statements regarding dollar cost averaging are correct except A) an employee stock purchase plan is one way to use dollar cost averaging. B) dollar cost averaging is the investment of a fixed amount of money each period. C) dollar cost averaging is a passive investment strategy. D) dollar cost averaging decreases the risk of loss.
D) dollar cost averaging decreases the risk of loss.
The Securities Exchange Act of 1934 regulates or mandates all of the following except A) creation of the SEC. B) extension of credit to customers. C) manipulation of the secondary market. D) full and fair disclosure on new offerings.
D) full and fair disclosure on new offerings. The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses these issues.
All of the following statements regarding a qualified pension plan are true except A) it must cover all of its eligible employees. B) it requires advance approval from the IRS. C) it must comply with nondiscrimination rules. D) growth in the account is tax free.
D) growth in the account is tax free. Growth in qualified pension plans, as well as other qualified plans, is tax deferred, not tax free. All growth is taxable at the time of distribution.
An investor takes a short position in one XYZ Nov 140 put @7. Disregarding any commissions, on settlement date the investor A) must pay $14,000. B) receives $14,000. C) must pay $700. D) receives $700.
D) receives $700. When an investor takes a short position in an option, it means the investor has sold, or written the option. As a seller, the investor receives the premium on the settlement date.
An investor purchases an original issue discount general obligation municipal bond (OID) on the offering and holds it to maturity. The IRS treats the accretion of the discount as A.) short-term capital gain. B.) long-term capital gain. C.) taxable interest income D.) tax-free interest income.
D.) tax-free interest income.
If a customer owns a $10,000 8% U.S. Treasury Bond, and she is in the 28% federal tax bracket and a 2.5% state tax bracket, what amount of tax will she pay on the income received from the bond? A) $20 B) $224 C) $80 D) $100
Interest on U.S. Treasury bonds is taxable at the federal level only; $800 of interest taxed at 28% = $224.
A customer owns 10M of 7% U.S. Treasury bonds. He is in the 28% federal tax bracket and the 10% state tax bracket. What is his annual tax liability on these bonds?
The 10M means $10,000. (Remember your Roman numerals? M equals 1,000). His tax liability is as follows: $1,000 times 7% equals $70 annual interest per bond; $70 times 10 equals $700 annual interest, which is taxable only by the federal government; and $700 times 28% equals a $196 tax liability.
A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Which of the following recommendations would best meet the customer profile? A) IPO. B) Variable annuity. C) Universal variable life policy. D) Money market fund.
Your answer, Variable annuity., was correct! Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. For this potential advantage, the investor, rather than the insurance company, assumes the investment risk. A universal variable life policy should be purchased primarily for its insurance features, not its investment features. Reference: 12.1.2 in the License Exam Manual.