Series 7 Practice Test #1

An investor has 500 shares and is voting for 3 open board seats. Which statement is correct if the election employs the statutory voting method? A Statutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 500 votes for a favored director. B Statutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director. C Statutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 500 votes for a favored director. D Statutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director.

The best answer is A. Statutory voting is also know as proportionate voting. Under the statutory method, the number of shares held (500) is the number of votes that the shareholder can apply to each directorship. Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships (3 x 500) and apply them to favored individuals. Cumulative voting gives the shareholders disproportionate voting weight as compared to statutory voting and is considered to be an advantage for the small investor.

Western syndicate accounts are: I divided as to selling responsibility II undivided as to selling responsibility III divided as to liability IV undivided as to liability A I and III B I and IV C II and III D II and IV

The best answer is A. A Western syndicate account is divided as to selling responsibility and divided as to liability. This contrasts to an Eastern syndicate account which is undivided as to selling responsibility and undivided as to liability.

A type of limited partnership where the specific investments of the partnership are not known at the time the partnership is formed is known as a(n): A. Blind pool limited partnership B. Unmanaged limited partnership C. Indirect participation program D. Indexed limited partnership

The best answer is A. A blind pool is one where the specific investments of the partnership are not known at the time the partnership is formed. The actual investments are selected later. While this may sound like a way to buy a "pig in a poke," it is not conceptually different from buying a mutual fund, where the specific investments made by the manager are not known either!

A $10,000 municipal bond with 10 years to maturity is purchased in the primary market at 105. The bond is sold after 2 years at 105. The taxable gain or loss is a: A 1 point capital gain B 2 point capital gain C 2 point capital loss D 4 point capital loss

The best answer is A. All municipal premium bonds, whether original issue premium or trading market premium bonds, are subject to straight line amortization. The 5 point premium must be amortized over 10 years, so 1/2 point per year is amortized (with no tax deduction allowed for the annual amortization amount). After 2 years, the bond has an adjusted cost basis of 104 (105 purchase - 1 point total amortization). Since the bond is being sold at 105, there is a 1 point capital gain.

Capital gains that are realized upon the sale of a municipal security are: I subject to Federal Tax II exempt from Federal Tax III subject to State and Local Tax IV exempt from State and Local Tax A I and III B I and IV C II and III D II and IV

The best answer is A. Capital gains on municipal securities are taxable at the Federal, State and Local levels. Only the interest income from municipal securities is exempt from Federal income tax.

In 2022, a self-employed individual has an adjusted gross income of $100,000 per year. This person has no other retirement plan and contributes $6,000 to an Individual Retirement Account. Which statement is TRUE? A The contribution is fully tax deductible B The contribution is partially tax deductible C The contribution is not tax deductible D The contribution is prohibited because income limitations are exceeded

The best answer is A. If a person is not covered by another retirement plan, contributions to an IRA are tax deductible, without any income limitation. If the person is covered by another plan, as that person's income rises, the tax deduction for the IRA contribution phases out.

If the U.S. economy runs balance of trade surpluses, which of the following statements are TRUE? I U.S. currency values will increase relative to that of foreign countries II U.S. currency values will decrease relative to that of foreign countries III U.S. exports should become more expensive to foreign countries IV U.S. exports should become less expensive to foreign countries A I and III B I and IV C II and III D II and IV

The best answer is A. If our economy consistently runs balance of trade surpluses, then the country is becoming "richer" and its currency value increases relative to that of foreign countries. As the currency value increases, exports become more expensive to foreign countries, so exports decline and the surplus should dissipate over time.

Your customer, age 68, who has an IRA account at your firm valued at $500,000, passes away. The customer leaves the account to his wife, age 62, who does not work. She needs current income and wishes to receive payments over the longest time frame possible. You should advise the spouse to: A roll the funds over into a new IRA in the spouse's name B transfer the IRA funds to a beneficiary distribution account C cash out the inherited IRA account D disclaim or give away the inherited IRA account

The best answer is A. If the spouse rolls over the IRA into a new account in her name, and begins to take distributions immediately (which is not required in a roll over), then she can take distributions over her remaining life expectancy - which is around age 80. Since she is age 62, the account would be depleted over 18 years. If the funds are transferred into an IRA beneficiary distribution account, then it is titled in the decedent's name "for the benefit of" the beneficiary. Distributions from inherited IRAs must be taken over 10 years. Immediate cash out of the account would subject the entire proceeds to ordinary income tax that year - not meeting the customer's goal of receiving payments over the longest time frame possible. Finally, the customer needs the income, so disclaiming (giving away) the account makes no sense.

Long Margin Account Market Value: $200,000 Debit Balance: $80,000 If the customer buys $20,000 of listed stocks and sells $16,000 of listed stocks on the same day, the customer must deposit: A0 B$1,000 C$2,000 D$4,000

The best answer is A. Margin is computed on net purchases for the day. The customer purchased $20,000 of stock and sold $16,000 of stock, for a net purchase of $4,000. To buy $4,000 of stock, the customer must deposit $2,000 of cash. Since the customer has $20,000 of SMA available, no cash need be deposited in this account. The SMA is computed as follows: The customer can borrow 50% of the $200,000 securities position = $100,000 that can be borrowed. Since the customer has already borrowed $80,000, another $20,000 is available to be borrowed from SMA.

Restricted securities can be sold under Rule 144 if all of the following conditions are met EXCEPT: A they are sold on a dealer basis B they are sold on an agency basis C solicitation of orders to buy is restricted to customers expressing interest within the past 10 days D the issuer is reporting currently to the SEC

The best answer is A. Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in "144" shares. Solicitation of orders to buy "144" shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push the price up). However you are allowed to recontact individuals expressing buying interest in "144" transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.

Which statement is TRUE regarding Banker's Acceptances? A. Banker's Acceptances may be sold without a prospectus B. Banker's Acceptances must be sold with a prospectus C. Banker's Acceptances must be sold with an Official Statement D. Banker's Acceptances must be sold with an Offering Memorandum

The best answer is A. Since Bankers Acceptances are an exempt security under the Securities Act of 1933, they may be sold without a prospectus. The prospectus is the disclosure document for new issues that are not exempt from registration. The Official Statement is the disclosure document for municipal bonds (which are an exempt issue). An Offering Memorandum is the disclosure document for a private placement - which is a security sold in an exempt transaction.

A customer owns 100 shares of an NYSE listed preferred stock and notices that the typical daily trading volume in the issue is less than 1,000 shares. The customer wants to sell the stock and asks his broker what will happen if there is no ready buyer for the stock. The broker should respond that the Specialist (DMM) on the NYSE floor: A is obligated to buy the stock at the current market B is obligated to buy the stock at the limit price, if one is specified by the customer C must look for a buyer for the shares on the NYSE floor D is not obligated to buy the stock at the market

The best answer is A. Specialist/DMMs (Designated Market Makers) are obligated, under NYSE rules, to make a continuous market in the assigned stock. Thus, on the NYSE floor, a customer is always assured that the trade will be executed - however the price at which the trade is executed is always subject to market conditions.

Under the "penny stock rule," an established customer that is exempt from the rule is defined as a person who has effected a securities transaction or made a deposit of funds or securities with that broker-dealer more than: A 1 year previously B 2 years previously C 3 years previously D 5 years previously

The best answer is A. Suitability statements are not required under the "penny stock rule" for so-called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.

Which of the following Securities Acts define(s) exempt issuers and exempt transactions? I The Securities Act of 1933 defines exempt issuers II The Securities Exchange Act of 1934 defines exempt issuers III The Securities Act of 1933 defines exempt transactions IV The Securities Exchange Act of 1934 defines exempt transactions A I and III B I and IV C II and III D II and IV

The best answer is A. The Securities Act of 1933 covers the new issue (primary market) and defines exempt issuers and exempt transactions. If an issuer is exempt or if a new non-exempt issue is sold in an exempt transaction, that new issue does not have to be registered under the Act. Otherwise, registration is required. The Act of 1934 consists of a variety of rules covering the secondary (trading) market.

Which brokerage firm department would be responsible for keeping customer account records? A. margin department B. purchase and sales department C. reorganization department D. order department

The best answer is A. The margin department is a bit of a misnomer since this department keeps a record of all stock positions, and debit and credit balances in customer accounts.

A customer has an existing margin account with the following positions: Long: 1,000 PDS CmnMkt Value: $60,000Debit Bal: $45,000SMA: $5,000 How much cash can the customer withdraw (borrow) from the account? A0 B$2,500 C$5,000 D$10,000

The best answer is A. This account sets up as: Long Market Value-Debit=Equity %$60,000 $45,000 $15,000 25% This account is at minimum maintenance margin. If the SMA of $5,000 were borrowed from the account, the margin would go below 25% minimum maintenance. If the withdrawal causes the account to fall below minimum maintenance, no withdrawal is permitted. SMA can only be borrowed if the account is above minimum maintenance margin - and it can only be borrowed in an amount that brings the account to maintenance - not below maintenance.

A Municipal Finance Professional (MFP) can give what dollar amount to an elected official's campaign in which he or she is NOT entitled to vote without this action resulting in a 2 year ban? A0 B$100 C$250 D$500

The best answer is A. Under MSRB Rule G-37, a Municipal Finance Professional can give up to $250 to an elected official's campaign in which the MFP is entitled to vote without any problems. If the amount given is more than $250, or if ANY dollar amount is given to an elected official's campaign in which the MFP is not entitled to vote (as in this case), then the municipal broker-dealer is banned from doing negotiated underwritings and municipal financial advisory work for that municipality for 2 years. Therefore, an MFP can give nothing to an elected official's campaign in which he or she is not entitled to vote, otherwise a ban will result. The idea here is simple - why would an MFP give any campaign contribution where he or she is not entitled to vote, other than to curry favor with that issuer official?

All of the following dates are needed to compute the total purchase price of a municipal bond traded in the secondary market that is quoted on a yield basis EXCEPT: A dated date B maturity date C settlement date D in whole call date

The best answer is A. When a municipal dealer gives a basis quote, he is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract. This is an "in whole" call. Settlement date is needed to compute the amount of accrued interest. The dated date has no meaning for pricing a bond trading in the secondary market. It is simply the legal date of issuance of the bond, and is the date from which interest started accruing on the issue.

During a period when the yield curve is inverted: A. short term rates are more volatile than long term rates B. long term rates are more volatile than short term rates C. short term and long term rates are equally volatile D. no relationship exists between short term and long term rate volatility

The best answer is A. Whether the yield curve is ascending (normal), flat or inverted, the true statement always is that short term rates are more volatile than long term rates. Short term rates are susceptible to Federal Reserve influence, and move much faster than do long term rates. Long term rates respond more slowly; and reflect longer term expectations for inflation and economic growth, among other factors.

Collateralized mortgage obligation issues have: A term structures B serial structures C series structures D combined serial and series structures

The best answer is B. A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. All of the tranches are issued on the same date; but the maturities extend over a sequence of years. This is a serial structure.

All of the following terms are synonomous EXCEPT: A. Clearing broker-dealer B. Introducing broker-dealer C. Carrying broker-dealer D. General securities broker-dealer

The best answer is B. A clearing broker-dealer is one which holds customer funds and securities. It is subject to the highest net capital requirements. Other names for a clearing broker-dealer are a carrying broker-dealer or a general securities broker-dealer.In contrast, an "introducing" broker-dealer signs a clearing agreement with a clearing firm. The introducing broker-dealer "introduces" its accounts into the clearing firm, which acts as the "back office." It is the clearing firm's responsibility to send trade confirmations and statements to the introducing firm's customers. Introducing firms do not hold customer funds or securities, and are subject to much lower net capital requirements.

A corporation's Debt / Equity ratio would measure: A. liquidity B. leverage C. profitability D. marketability

The best answer is B. A corporation's Debt/Equity ratio is a capitalization measure that looks at the relative weight of corporate debt versus equity capitalization of that corporation. The greater the debt, the greater the so-called "leverage" of the corporation. Because debt requires that fixed interest payments be made, as corporate sales rise, interest charges remain fixed, resulting in greater earnings for shareholders (the result of greater "leverage"). However, leverage is a double-edged sword. When sales drop, fixed interest charges must still be paid, and earnings for shareholders will be reduced, or become nonexistent.

Which of the following are vertical spreads? I Long 1 ABC Oct 45 Call Short 1 ABC Jan 45 Call II Long 1 ABC Jan 45 Call Short 1 ABC Oct 55 Call III Long 1 ABC Oct 45 Call Short 1 ABC Oct 55 Call IV Long 1 ABC Jan 55 Call Short 1 ABC Apr 65 Call A II only B III only C I and III D II and IV

The best answer is B. A vertical spread (also called a "price" spread) is the purchase and sale of a call; or the purchase and sale of a put; at different strike prices. A horizontal spread is the purchase and sale of a call; or the purchase and sale of a put; at different expirations. A diagonal spread is the purchase and sale of a call; or the purchase and sale of a put; with both different expirations and different strike prices.

An issuer making a tender offer for its non-convertible bonds and later increases the price being offered by 10%. Which statement is TRUE? A. The increase in the tender price has no effect on the life of the offer B. The increase in the tender price increases the life of the offer by another 5 business days C. The increase in the tender price increases the life of the offer by another 10 business days D. The increase in the tender price increases the life of the offer by another 20 business days

The best answer is B. An issuer would consider tendering for its outstanding bonds when it has debt outstanding that is not callable, but it has excess funds that it believes would be best used to reduce the amount of debt outstanding. A tender offer is made to the bondholders, who have the choice of tendering or not. Unlike stock tender offers, where the initial offer must be held out for 20 business days, here the initial life of the offer is only 5 business days. (The life is shorter because this tender offer is being made by the issuer, not an outsider.) Unlike stock tender offers, where there is typically a contingency that a minimum number of shares be tendered, these are "any and all offers" - so if a bondholder tenders, he or she will receive the tender price for the bonds. If the issuer does not get enough bonds tendered, the issuer can "sweeten" the offer. This extends the offer by another 5 business days, and the sweetened price is given to all bonds tendered. (While the initial offer specifies a price to be paid, or a price based on a spread to a benchmark debt security, the actual price paid on the tendered bonds is not set until that last business day of the offer).

A customer owns 1,000 shares of ABC preferred stock trading at $120 per share. Following a 2:1 common stock split, the customer will have: I 1,000 shares II 2,000 shares III at $60 per share IV at $120 per share A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Be careful! Only common stock is affected by a stock split or stock dividend. The intent of a stock split or stock dividend is to reduce the price of the common stock to make it more marketable. It has NO effect on the preferred stockholder. Preferred stockholders receive a fixed dividend rate based on par value. Just like a bondholder, the price moves inversely to market interest rates. When there is a stock split or stock dividend, the price of preferred stock and bonds of that company are unaffected.

The "Efficient Market Theory" states that securities markets are efficient if: A. trades are executed instantaneously and accurately B. prices instantaneously and fully reflect all relevant available information C. trades are reported instantaneously and accurately D. dealers report all trades within 10 seconds of execution for dissemination to the public

The best answer is B. Efficient market theory is an academic approach to securities pricing in the market that states that securities prices instantaneously and fully reflect all available information. There are 3 versions of this theory: Weak Form: States that historical patterns in stock prices are of no use in predicting future price movements. The use of technical analysis to create "trendlines" is therefore, useless. This version is not widely accepted. Semi-Strong Form: States that current securities prices reflect all publicly available information. Thus, the value of securities in the market reflects publicly distributed information, but does not reflect information known by "insiders." This is the most widely accepted version. Strong Form: States that current securities prices reflect all information, whether publicly available or not. Thus, information known by "insiders" that has not been publicly disseminated, is already reflected in a security's price. This version is also not widely accepted.

All of the following terms apply to fixed unit investment trusts EXCEPT: A regulated B managed C redeemable D registered

The best answer is B. Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who m

Growth in the separate account of a variable annuity offering a GMIB is: I guaranteed as to minimum rate II not guaranteed as to minimum rate III capped as to maximum rate IV not capped as to maximum rate AI and III BI and IV CII and III DII and IV

The best answer is B. GMIB - Guaranteed Minimum Income Benefit will give a minimum guaranteed growth rate for an additional cost. This guarantee only occurs at annuitization and covers the accumulation phase. The maximum rate that can be earned in the separate account during the accumulation phase is not capped by the GMIB rider.

A customer margin account shows: 100 shares of ABC @ $50 300 shares of DEF @ $80 200 shares of PDQ @ $30 Debit = $6,000 SMA = $11,500 Reg. T = 50% What is the minimum maintenance margin requirement? A$2,000 B$8,750 C$10,500 D$17,500

The best answer is B. Minimum maintenance margin for a long account is 25% of the market value. 25% of $35,000 = $8,750. Since this account has equity of $29,000, it is well above the minimum requirement.

The following order is entered: Sell 100 ABC @ 45 Stop. Which of the following statements are TRUE? I The order may be elected at 45 or lower II The order may be elected at 45 or higher III The order may be executed, at 45 or lower IV The order may be executed, at, above, or below 45 A I and III B I and IV C II and III D II and IV

The best answer is B. Sell Stop orders are elected as the market moves down to the stop price or lower. As soon as the order is elected, it becomes a market order to sell and gets executed at the next available price, whether at, above, or below the stop price.

The Vice-President of ACME Corporation, an NYSE listed firm, places an order to buy 10,000 shares of ACME common at the market. 3 months later, ACME stock's price has increased by 20% and the officer places an order to sell. Which statements are TRUE? I The sale of the stock is subject to Rule 144 II The stock cannot be sold unless it has been held, fully paid, for 6 months III The sale is prohibited until a "waiver of liability" has been obtained from the issuer IV The officer must forfeit the profit on the sale A I and II only B I and IV only C II and III only D I, II, III, IV

The best answer is B. Since the seller is an officer of that company, he is a control person under Rule 144, and any sales must conform with the Rule. Rule 144 requires that restricted shares be held for 6 months, fully paid, before being sold. Since these shares are registered, they are not "restricted" and the 6-month holding period requirement does not apply. There is no requirement for a "waiver of liability" from the issuer. Since the officer did not hold the appreciated securities for at least 6 months, he or she has a "short swing" profit that must be paid back to the issuer under the Securities Exchange Act of 1934 "Insider" rules.

A married couple, ages 55 and 52, with no children, are both employed at DEF Corporation. They have asked for an evaluation of their current portfolio. They have a combined annual income of $200,000 per year and a fully paid home worth $500,000. Their current portfolio shows: $50,000Common Stock of DEF Corp in a 401K account$100,000Large Cap Growth Fund$150,000Government Bond Fund$150,000Corporate Bond Fund$200,000Money Market Fund Both intend to retire in 20 years and are conservative investors, looking for moderate growth and moderate risk. Which of the following recommendations is BEST for this couple? A. The current portfolio allocation is consistent with their stated investment objective and risk-tolerance level B. The portfolio should be reallocated based on their stated investment objective, reducing the cash and bond percentage by 50% and using the proceeds to buy a small or mid-cap growth mutual fund C. The portfolio is overweighted in fixed income securities, which should be completely liquidated and the proceeds used to buy aggressive growth stocks D. The current portfolio allocation overexposes the couple to stock-specific risk if the fortunes of DEF

The best answer is B. Since this couple has a stated investment objective of growth with moderate risk, a portfolio that only has about 25% equities and that has 75% fixed income securities is inappropriate - since it will provide income; but little growth. The long-term bond and cash allocation should be reduced and replaced with growth stocks to better balance the portfolio. Choice C is way too speculative for a "conservative investor." Choice D is somewhat true since this couple is investing in their employer's stock - but since the stock only represents 8% of the customer's total portfolio, this is not an excessively large percentage.

The essential difference between a sponsored and an unsponsored ADR is: A. SEC registration B. Issuer sponsorship C. Bank sponsorship D. Broker-dealer market making

The best answer is B. Sponsored ADRs are sponsored by the issuing foreign corporation. When an ADR is sponsored, the issuer agrees to provide financial statements to the ADR holder in English. The NYSE, AMEX (NYSE American) and NASDAQ will only list sponsored ADRs. Unsponsored ADRs are assembled without the participation of the issuer. For example, a bank may assemble an ADR issue consisting of shares of a Japanese computer manufacturer. Since the Japanese firm is not "sponsoring" the ADR, any financial information received about the company will be in Japanese (unless the company also happens to prepare English language reports).

Which of the following statements are TRUE about the Investment Company Act of 1940's requirements for management companies? I At least 40% of the Board of Directors must be "non-interested" persons II At least 60% of the Board of Directors must be non-interested III To establish a fund, a minimum of $10,000 of Total Net Assets is required IV To establish a fund, a minimum of $100,000 of Total Net Assets is required A I and III B I and IV C II and III D II and IV

The best answer is B. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000. It also requires that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group.

A customer buys 10M of $1,000 par corporate bonds in the secondary market. The purchase confirmation shows that the customer paid 90 + $150 of accrued interest. Six months later, the customer sells the bonds in the market at 91 + $50 of accrued interest. The capital gain or loss is: A 0 B $100 capital gain C $100 capital loss D $200 capital gain

The best answer is B. The accrued interest on a bond has no bearing on the capital gain or loss that results from the liquidation of a position. Rather, the accrued interest is an adjustment to interest income paid or received for that tax year. These bonds were purchased in the secondary market at 90% of $10,000 = $9,000. The bonds were sold at 91% of $10,000 = $9,100. Thus, the capital gain is $100. The accrued interest paid when the bonds were purchased is a reduction of the investor's investment income in that tax year; while the accrued interest received upon sale is an increase of the investor's investment income for that year. Also note that because the bond was held for less than 1 year, the rule requiring the annual accretion of the market discount to be taxed as ordinary income does not "kick in" because any gain or loss is short term and would be taxed at the same higher tax rate as ordinary income. The bond must be held for more than 1 year to qualify for long term capital gains treatment, and the lower tax rate that comes with it. For positions held over 1 year, the tax rate drops to 15% (or 20% for very high earning taxpayers), from a maximum rate of 37%.

An investor has sold short 500 shares of ABC at $60. The stock has since declined to 38. All of the following can be used to protect the gain EXCEPT: A place a buy stop order at $40 B buy 5 ABC 40 puts C buy 5 ABC 40 calls D sell 5 ABC 40 puts

The best answer is B. The investor has a gain on the short stock position that will evaporate as the market rises. To protect the gain, the stock must be bought in if the market begins to rise. A buy stop order is executed in a rising market, and would be appropriate to close the short position if the market rises. The purchase of a call allows the stock to be bought in at the strike price if the market rises, protecting the gain. If a put is sold and the market rises, the put will expire worthless, and the writer will keep the premium received. This amount of premium received will reduce any loss on the short stock position if the market rises. The purchase of a put will not protect the gain, since it allows the stock to be sold at the strike price. If exercised, the long put will cause the customer to have sold the stock TWICE.

A couple earning $70,000 in 2022 makes an annual contribution of $6,000 to a Traditional IRA. Which statement is TRUE? A This couple can contribute a maximum of $3,000 to a Roth IRA B This couple can contribute a maximum of $6,000 to a Roth IRA C This couple can contribute a maximum of $12,000 to a Roth IRA D This couple is prohibited from contributing to a Traditional Individual Retirement Account in that year

The best answer is B. The maximum permitted contribution to a Traditional IRA or Roth IRA for a couple is $12,000 total in 2022. This can be divided between the 2 types of accounts. In this case, since $6,000 was contributed to the Traditional IRA, another $6,000 can be contributed to a Roth IRA for that tax year. Also note that this couple's income is too low for the Roth IRA phase-out (which occurs between $204,000 and $214,000 for couples in 2022).

A customer sells short 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has dropped to $40. The minimum maintenance margin requirement is: A$10,000 B$12,000 C$15,000 D$18,000

The best answer is B. The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $40,000 = $12,000. Note that minimum margins are based on the closing market value each day.

ABC Corporation has declared a cash dividend to stockholders of record on Friday, December 10th. The last day to buy ABC shares BEFORE they go ex dividend is? A. Tuesday, December 7th B. Wednesday, December 8th C. Thursday, December 9th D. Friday, December 10th

The best answer is B. The regular way ex date is 1 business day prior to the record date for cash dividends. The record date is Friday, December 10th, therefore the ex date is Thursday, December 9th. To buy the shares before they go ex dividend, the shares must be purchased before December 9th, meaning they must be purchased on Wednesday, December 8th.

An investor has a long-term investment time horizon, no liquidity needs and is very risk averse. Your main concern when making a recommendation to this client is: A preservation of capital B safety of principal C continuing income D adequate yield

The best answer is B. This client has no liquidity needs, so Choices C and D - continuing income and adequate yield, are not concerns. So it comes down to whether the main concern is preservation of capital or safety of principal. Preservation of capital is a concern for client who has no buffer if investment values decline. Such a client cannot afford to lose any money and should only be recommended CDs and money market funds as an investment. Because this client has "no liquidity needs," he or she is not in this situation. Safety of principal is the better answer as a "concern." This type of client doesn't want his or her principal put at risk - he or she is just averse to taking on risk, but can afford to do so. Such a client could be recommended CDs, money market funds, short term bonds and laddered bond portfolios.

A customer buys 100 shares of ABC stock in a cash account at $49 and sells 1 ABC Jan 50 Call @ $5. The customer must deposit: A. $500 B. $4,400 C. $4,500 D. $5,000

The best answer is B. To buy the stock, the customer must deposit 100% of the purchase price of $4,900 in a cash account. There is no margin requirement on the short call because it is covered by the long stock position. Since $500 of premiums is credited to the account from selling the call, the customer must deposit $4,400 ($4,900 - $500).

customer is long 100 shares of ABC stock, believes that the market will remain flat for the next 6 months. To maximize income from the position, which strategy is best? A covered call write B ratio call write C short call spread D short against the box

The best answer is B. To get income from a long stock position, the customer would sell a call to collect the premium. If the customer is certain that the market will not move, even greater income can be generated by "ratio writing" - that is, selling more call contracts (collecting more premiums) than shares owned. However, for the extra income received also comes extra risk if the market should rise.

A constant dollar investment plan requires: A. that the same dollar amount be invested periodically in new equities purchases B. that the same aggregate dollar amount be kept invested in equities C. the constant reinvestment of all dividends and interest received in the same securities D. that a constant dollar amount be invested in U.S. securities

The best answer is B. Under a constant dollar plan, a portfolio manager sets a dollar level (say $200,000) to be maintained in equity securities. If the value rises to $230,000, the $30,000 excess is invested in debt securities. Conversely, if the equity market value drops below $200,000, bonds are liquidated and invested in equities to bring the equity balance to the constant $200,000.

A customer buys a stock and the confirmation discloses that a $.05 mark-up was charged. What is this? A. An agency transaction B. A principal transaction C. A broker transaction D. A riskless transaction

The best answer is B. When a firm sells a security to a customer out of its inventory, it acts as a principal in the transaction. In this case, the firm gets to "mark-up" the stock to the client, so that the firm makes a profit on the transaction. In contrast, when a firm matches a customer order to buy to another customer who wants to sell, say on an exchange, the firm is acting as an agent (middleman), and it charges a commission that is disclosed on the confirm. A firm cannot charge both a commission and a mark-up in the same transaction.

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

The best answer is C. A SEP (Simplified Employee Pension) IRA is usually set up by small business because it simplifies all of the recordkeeping associated with retirement plans (though there actually no limit of the size of the company to open up a SEP IRA). Contribution amounts made by the employer cannot exceed 25% (statutory rate; effective rate is 20%) of the employee's income, up to a maximum of $61,000 in 2022. SIMPLE IRAs also are relatively "simple" for a business to set up, but they only allow a maximum contribution of $14,000 (in 2022). So the SEP IRA is better. In contrast, the maximum contribution to either a Traditional or Roth IRA in 2022 is $6,000 (plus an extra $1,000 catch-up contribution for individuals age 50 or older). Also note that because this individual is a high-earner, he or she cannot open a Roth IRA.

An elderly customer has a discretionary account with your firm. The power of attorney signed by the customer for the account is durable. If the customer becomes mentally incapacitated, the registered representative handling the account: A can no longer effect discretionary trades for that customer B must liquidate the account and wait for instructions from the court appointed guardian C can continue to execute discretionary trades for that customer D can only close existing positions but cannot introduce new positions in the account

The best answer is C. A durable power of attorney continues in force if the grantor becomes mentally incompetent. A non-durable power of attorney ceases if the grantor becomes mentally incompetent. All powers of attorney die when the grantor dies.

ABLE accounts are: A used to save funds on a tax-deferred basis and may only be used to pay for medical expenses B used to save funds on a tax-deferred basis to pay for the ongoing care of disabled children below age 21 C regulated by the MSRB D regulated by FINRA

The best answer is C. ABLE accounts were enacted by Congress in late 2014. ABLE stands for "Achieving a Better Life Experience Act." It allows each state to set up a "municipal fund security" regulated by the MSRB that permits an account to be established to pay for the ongoing expenses of a disabled person. One of the key features of an ABLE account is that accumulated savings do not affect that person's eligibility for other Federal benefits (it used to be the case that having too much in assets would disqualify that person from other Federal benefits such as Medicaid). The Federal gift tax exclusion amount can be contributed to an ABLE account, with no tax deduction ($15,000 in 2021; $16,000 in 2022). The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses.

A customer buys 10 Allied Corporation 8% debentures, M '28, at 90 on Thursday, April 19th. The interest payment dates are March 1st and September 1st. The trade settled on Monday, April 23rd. How many days of accrued interest will the buyer pay to the seller? A. 23 B. 30 C. 52 D. 53

The best answer is C. Accrued interest for corporate bonds is calculated on a 30 day month / 360 day year. Interest accrues from the morning of the last interest payment up to but not including settlement date. So, there are 30 days due for March and 22 days due for April (up to but not including settlement date of April 23rd) or 52 days total.

All of the following non-exempt securities are marginable EXCEPT: A. American Stock Exchange listed securities B. Securities included in the NASDAQ Global Market C. Securities included in the Pink Sheets D. New York Stock Exchange listed securities

The best answer is C. All securities listed on an exchange, such as the NYSE, NYSE American (AMEX) or NASDAQ, are marginable. Regarding over-the-counter securities, those quoted by OTC Markets Group (formerly the Pink Sheets) are not marginable (since the market is illiquid).

Which statement is TRUE about federal taxation of contributions to 529 plans? A Contributions are tax deductible to the donor B Contributions are capped at $10,000 annually C A 1-time gift of up to 5 times the gift tax exclusion amount can be given that will not be subject to gift tax D A 1-time gift of up to 10 times the gift tax exclusion amount can be given that will not be subject to gift tax

The best answer is C. Contributions to 529 Plans are not federally tax deductible. Any gifts above the annual gift tax exclusion amount ($16,000 in 2022) are subject to gift tax. Gift tax is paid by the donor, not the recipient. Note that a tax benefit offered by 529 Plans is a 1-time gift that can be made into the account equal to 5 times the current gift tax exclusion, without the donor worrying about having to pay gift tax. Since the current exclusion is $16,000 in 2022, 5 times this amount or $80,000 can be donated as a 1-time gift and not be subject to gift tax.

All of the following statements are true for both mutual funds and variable annuities that are in the accumulation phase EXCEPT: A both are regulated by the Investment Company Act of 1940 B both have portfolios that are managed C dividend and capital gains distributions are taxable each year for both D asset appreciation is untaxed for both

The best answer is C. Dividend and capital gain distributions made by variable annuity separate accounts must be reinvested and are tax deferred. Dividend and capital gain distributions from other investment companies do not have to be reinvested and are always taxable, whether reinvested or not. Both variable annuities and mutual funds are regulated under the Investment Company Act of 1940; have managed portfolios; and asset appreciation is untaxed. Mutual fund asset appreciation is taxable only when a capital gains distribution is made.

All of the following can issue Eurodollar Bonds EXCEPT: A Domestic Corporations B Foreign Corporations C U.S. Government D Foreign Governments

The best answer is C. Eurodollar bonds are issued by U.S. corporations, U.S. State and local municipalities, foreign corporations, and foreign governments. The bonds are issued in foreign countries but are payable in dollars. The U.S. Government does not issue Eurodollar Bonds.

A municipal dealer buys a $1,000 par 30 year, 12% bond on a 12% basis. The dealer reoffers the bond, marking it up by 40 basis points. The yield at which the dealer is reoffering the bond is: A 8% B 16% C 11.60% D 12.40%

The best answer is C. If the municipal dealer buys a 12% coupon bond quoted on a 12% basis, the bond is being purchased at par. To make money, the dealer must sell (reoffer) the bond at a premium to par. To reoffer the bond at a premium, the yield must be lowered, in this case by .40% = 40 basis points). If the 12% bond is reoffered on an 11.60 basis the approximate price for the bond is found by dividing the coupon by the basis. Coupon /Basis = 12/11.60 = 1.03448% of $1,000 par = $1,034.48 (Note that this approximation only works for long term bonds quoted on a yield basis.)

Which of the following are included in the 10 leading economic indicators? I Standard and Poor's 500 Index II Supplier Delivery Delays III Consumer Price Index IV Initial Unemployment Claims A I only B II and III C I, II, IV D II, III, IV

The best answer is C. Leading economic indicators include stock prices (as stock prices rise, people feel richer and spend more), supplier delivery delays (as capacity tightens, delays increase), and initial unemployment claims (high levels indicate future production cutbacks). The consumer price index is not a future indicator.

Regarding bonds with put options, all of the following statements are true EXCEPT: A exercise of the put is at the option of the bondholder B once the option is exercisable, the bond's price will not fall below the option price if interest rates rise C yields on bonds with put options are higher than similar bonds without this feature D the put option represents a floor on the market price of the bond

The best answer is C. Put options are exercisable at the option of the bondholder; once the option is exercisable, the bond price cannot fall below the option price, since the bondholder can always "put" the bond to the issuer for this amount. The put price represents a floor on the market price of the bond. Because the put option removes some of the market risk from the bond, this feature is valued by bondholders, who will accept lower yields on bonds having this option.

A corporation has issued $20,000,000 of 7%, 15 year, $1,000 par, convertible debentures, convertible at a ratio of 32:1. The bond is currently trading at 105, while the company's common stock is at $35. Which statements are TRUE? I For an immediate profit, the bond should be sold short and the equivalent number of common shares purchased II For an immediate profit, the common shares should be sold short and the equivalent number of bonds purchased III An arbitrage opportunity exists between the price of the convertible and the price of the common IV An arbitrage opportunity does not exist between the price of the convertible and the price of the common AI and III BI and IV CII and III DII and IV

The best answer is C. Since the common stock is trading at $35 per share and the parity price is $32.81 per share (market price of bond / conversion ratio = $1,050 / 32 = $32.81), the stock is trading at a premium to parity. There is a profit opportunity here that should be immediately locked-in by selling short 32 shares of stock at $35 = $1,120 received and simultaneously buying 1 bond at $1,050. The bond can be converted into 32 common shares, which are used to replace the borrowed stock, closing out the short position. The resultant profit is: $1,120 - $1,050 = $70.

The "Monetary Environment" is: A. the spending and taxation policies in current use by the U.S. Government B. the dollar level of imports entering the United States versus the dollar level of exports leaving the United States C. current money supply levels, interest rate levels, and economic policies D. the current rate of exchange of the U.S. Dollar against major foreign currencies

The best answer is C. The "Monetary Environment" is a reflection of whether credit is easy or tight, as shown by interest rate levels, money supply levels, and current economic policies of the Government (for example, is the government using moral suasion to encourage lending or to discourage lending?)

A customer buys 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. ABC stock falls to $40 and the customer buys the stock in the market and exercises the puts. The gain is: A$800 B$1,600 C$3,200 D$4,000

The best answer is C. The customer buys the stock for $40, and exercises the put to sell at $60 for a 20 point profit. Since 4 points were paid in premiums, the net profit per contract is 16 points or $1,600. The profit on 2 contracts is $3,200.

A customer buys 1 ABC Jan 50 Put @ $2 and sells 1 ABC Jan 60 Put @ $5 when the market price of ABC is $58. The customer must deposit: A$200 B$300 C$700 D$1,000

The best answer is C. The customer has created a credit spread:Sell 1 ABC Jan 60 Put@ $5Buy 1 ABC Jan 50 Put@ $2$3CreditThe customer receives $300 in premiums for exposing himself to a potential 10 point ($1,000) loss on the options (obligated to buy at $60 under the short put; can sell at $50 with the long put). The potential loss must be deposited, which is $1,000 - $300 collected = $700.

An investor originally invested $10,000 in a mutual fund. Over the course of two years, the fund distributed $200 of dividends and $150 of capital gains, which have been automatically reinvested in additional shares. The fund is now worth $17,500 and the customer wishes to liquidate his holding. What is the aggregate cost basis of the mutual fund holding? A $10,000 B $10,200 C $10,350 D $17,500

The best answer is C. The investor's cost basis of the shares is the original purchase price plus all reinvested dividends and capital gains. This makes sense, since every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return. Since the monies have already been taxed, the cost basis will include all reinvested distributions (so that there is no double taxation). The investor's cost basis is $10,350.

All of the following statements are true about limited partners EXCEPT the limited partner: A is a passive investor B assumes limited liability C decides which properties to buy and sell D has the right to inspect the books and records of the partnership

The best answer is C. The limited partner is the passive investor and has limited liability. The limited partner has the right to inspect the books and records of the partnership; and has the right to his or her share of net partnership assets upon dissolution of the partnership. The general partner is the key executive; makes management decisions such as deciding which properties to buy and sell; and either manages the program or oversees a manager. The general partner (GP) collects a management fee for these duties and assumes unlimited liability.

The person who acts as agent helping find customers for a new issue, but neither participates in selling responsibility nor liability in a new issue syndicate, is known as the: A. managing underwriter B. syndicate member C. selling group member D. broker's broker

The best answer is C. The managing underwriter forms the syndicate and selling group, establishes the spread and the portions of the spread to be earned by each member of the underwriting group, and manages the offering of the securities. For this work, the manager earns the management fee out of the spread. The syndicate members share in the financial liability and profit potential for selling the issue. For selling his or her allotment, the syndicate member earns the "underwriter's concession." The selling group members help the syndicate find purchasers for the issue, but take no financial liability. For this work, the selling group members earn the "selling concession."

The maximum amount that can be raised by an issuer under Regulation Crowdfunding is: A$107,000 B$514,000 C$5,000,000 D$10,000,000

The best answer is C. The maximum amount that can be raised in a single offering under Regulation Crowdfunding is $5,000,000.

The normal priority for handling municipal new issue orders is: A. Pre-Sale, Designated, Member, Group B. Group, Pre-Sale, Member, Designated C. Pre-Sale, Group, Designated, Member D. Designated, Group, Pre-Sale, Member

The best answer is C. The normal priority for handling municipal new issue orders is: Pre-Sale Net, Group Net, Designated Net, Member Takedown.

The "spread priority rule" affords precedence to: I One-on-one transactions II Sales of covered calls and puts III Simultaneous purchase and sale of option positions A I only B II only C I and III DI, II, III

The best answer is C. The spread priority rule gives priority to "combination" orders (e.g., spreads and straddles) that require 2 positions to be filled at 1 net debit or credit. Choice III describes a spread position and falls under the rule. A "one-on-one" transaction describes an order that requires one trade followed by another (e.g., a long straddle requires the purchase of a call and the purchase of a put) and also falls under the rule. The sale of covered calls and puts does not fall under the rule.

Customer Name: John DoeAge:41 Marital Status: Married Dependents:1 Child, Age 13 Occupation: Engineer Household Income:$140,000 Net Worth:$240,000 (excluding residence) Own Home: Yes Investment Objectives: Total Return / Tax Advantaged Investment Experience: 12 years Current Portfolio Composition: 8% Common Stocks 62% Corporate Bonds 30% Money Market Fund This client has just been informed that he has been promoted and will be earning $190,000 per year instead of $140,000 per year. The customer intends to use this extra income to fund his 13-year old child's college education. Based on the customer's existing asset mix, the best recommendation would be for the customer to invest the extra $50,000 per year into a(n): A. money market fund B. income fund C. growth fund D. inflation protected fund

The best answer is C. This customer's portfolio is 92% invested in cash and bonds with only 8% in equities. Since he has 6 years to fund the child's education, growth stocks would help balance the portfolio and enhance the overall return.

A registered representative works in the municipal finance department of a municipal securities firm in a large city and is defined as a Municipal Finance Professional (MFP). The firm recently completed a $100 million underwriting for the city and the firm is hosting a dinner to celebrate the closing of the deal. The event is expected to cost $300 per person, including the cost of a cocktail reception, dinner, and the cost transporting the group to and from the venue where the event is being held. The representative wishes to invite one of the town officials with whom he worked on the underwriting to the event. Which statement is TRUE about doing this? A Taking this individual to dinner violates the MSRB $100 gift limit B Taking this individual to dinner is a violation because the $300 value exceeds the MSRB Political Contribution rule limit C Taking this individual to dinner is permitted because this is business entertainment D This individual cannot be taken to dinner because it is a conflict of interest

The best answer is C. This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario! The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official's campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution - rather, it is taking a client to dinner. The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm's policies and procedures.

A customer's short margin account shows the following balances: Credit Balance: $120,000SMV: $60,000SMA: $30,000 What would the adjusted SMA balance be in the account after a short cover of 100 shares of MMM stock at $100 in the account? A$15,000 B$30,000 C$35,000 D$45,000

The best answer is C. This short margin account sets up as follows:Credits-Short Market Value=Equity$120,000 $60,000 $60,000 If there is a short cover of 100 shares of MMM stock at $100 in the account, then $10,000 of this stock is being purchased (a debit to the account). After this transaction, the account will show: Credits-Short Market Value=Equity$110,000 $50,000 $60,000 To compute SMA, the question that must be asked is "What is the equity required to support a $50,000 market value at 50% margin?" 50% of $50,000 market value = $25,000 equity requirement. Since the actual equity is $60,000, there is $35,000 of SMA.

Which of the following movements in the Standard and Poor's 500 Index before 3:25 PM would INITIATE the market-wide "circuit breaker"? A. 2,400 to 2,352 B. 2,400 to 2,280 C. 2,400 to 2,232 D. 2,400 to 2,160

The best answer is C. Under the circuit breaker rule, if the Standard and Poor's 500 Index moves down by 7% or more from the prior day's closing price, the listed equity markets will be shut down for 15 minutes. After reopening, if the index falls by a total of 13% or more from the prior day's closing price, the markets will close again for 15 minutes. This is intended to allow investors to calmly evaluate market conditions, so that a "domino effect" of panic selling does not occur. Finally, after reopening, if the index falls by a total of 20%, the markets will close until the next day. Also note that any 7% or 13% drop that occurs after 3:25 PM will not close the markets - they will stay open until the 4:00 PM close. This is the case because funds base their NAVs on closing prices, and it was felt that having a lack of pricing to investors would be overly disruptive. On the other hand, any 20% drop at any time will shut the markets until the next day, since such a dramatic price drop is usually caused by a major news event.

If an individual joins a broker-dealer to sell wrap accounts, under uniform state law, this person: A must register and pass the Series 63 examination B must register and pass the Series 65 examination C both of the above D neither of the above

The best answer is C. Uniform state law, in most states, requires individuals who sell securities in a state to register as an agent and pass the Series 63 examination. In addition, most states define managed accounts as "investment advisers" and individuals who sell these accounts must register as "investment adviser representatives" and pass the Series 65 examination.

A customer sells 1 ABC Jan 50 Call @ $4 when the market price of ABC is $51. The stock then moves to $58 and the customer is assigned. The tax consequence upon exercise is a: A capital loss of $400 B capital gain of $400 C sales proceeds of $5,400 D cost basis of $5,400

The best answer is C. When a call option is exercised by the holder, the Options Clearing Corporation "assigns" the contract to any one of the individuals or firms that sold that option on a random basis. The customer's sales proceeds is the sale price of the stock ($50) plus the premium received ($4) = $54. Notice that this is the same as the breakeven. No taxable event occurs until the stock is bought.

In January, 20XX a customer buys 100 shares of ABC stock at $50 per share and pays a $2 commission per share. The customer receives $2 in cash dividends during the year. The customer's cost basis in the stock is: A $48 per share B $50 per share C $52 per share D $54 per share

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

If the rate of inflation in the year 2021 is 2%; in the year 2020 the rate of inflation was 4%; and in the year 2019 the rate of inflation was 6%; this is known as: A. deflation B. depression C. recession D. disinflation

The best answer is D. "Disinflation" is a decline in the inflation rate - so it means that the rate of inflation is decreasing. In contrast, deflation is a decline in asset prices. A recession is 2 consecutive quarters of GDP decline. A depression is 6 consecutive quarters of GDP decline.

Purchasing power risk is the risk that: A. the issuer will default B. the security will be difficult to sell C. the security will be called prior to maturity D. inflation will reduce the value of future interest payments

The best answer is D. "Purchasing power" risk is the risk that inflation reduces the value of future interest payments and the principal repayment yet to be received in the future.

At the time of a "when, as and if issued" trade the: I trade date is known II settlement date is not known III trade price is known IV total transaction price is not known A I and III only B II and IV only C I, II, III D I, II, III, IV

The best answer is D. "When, as, and if issued" trades are used for new issues where the certificates are not as yet physically printed and delivered. At the time of the "when issued" trade, the final settlement date is not known. Therefore, the amount of accrued interest due to the underwriters is not known, thus the total transaction price is not known. Of course, the trade date is known and the trade price is known at the time of the "when issued" confirmation.

A client of yours has heard about private equity investing from some wealthy friends and asks you, the registered representative about it. This customer is age 51 and earns $160,000 per year. He is willing to assume a moderate level of risk in pursuit of higher returns. This customer has a liquid net worth of $450,000 and has a diversified equity and bond portfolio. You should tell the customer that the best way to make a private equity investment is to invest in a(n): A Hedge Fund B VC Fund C REIT D BDC

The best answer is D. A customer can participate in the private equity market by either investing in a BDC - Business Development Company - or a VC (Venture Capital) Fund. Both of these invest in privately-held start-up companies, with the ultimate goal of cashing out by taking them public years into the future. A BDC is a registered investment company under the 1940 Act that is listed and trades like any other stock. In contrast, a VC fund is a limited partnership that is only sold in private placements to very wealthy accredited investors. This customer is not wealthy enough to be accredited investor (minimum annual income of $200,000 per year or a liquid net worth of $1,000,000) and most VC funds require that the investors be much wealthier than this. So the way for this customer to participate in the private equity market is by investing in a publicly traded BDC.

Which of the following would be considered a "control" relationship to be disclosed to customers? I A principal in a municipal firm is the supervisor of the school board whose bonds the firm is underwriting II A principal in a municipal firm is the supervisor of the school board whose bonds the firm is trading III The Treasurer of the township, whose bonds the firm is offering on a principal basis, is on the Board of Directors of the municipal firm IV The Treasurer of the township, whose bonds the firm is offering on an agency basis, is on the Board of Directors of the municipal firm A I and II B III and IV C I and III D I, II, III, IV

The best answer is D. Any control relationship, wherein a person at the municipal securities firm is in a position to influence a municipal issuer whose securities are being traded by that firm, must be disclosed. It makes no difference if the firm is effecting trades on a principal or agency basis - any control relationship must be disclosed.

The time window during which the wash sale rule is in effect covers a total of: A 30 days B 31 days C 60 days D 61 days

The best answer is D. Because the wash sale rule starts with the date of sale that gave rise to the loss, and then goes back 30 days and forward 30 days to look for a repurchase of that security, the total time window when the rule is in effect is 61 days (the date of the sale plus 30 days back and 30 days forward.)

If a customer places an order to purchase securities in an existing cash account and does not pay for the trade by Regulation T, which of the following statements are TRUE?I The entire account must be liquidated II The unpaid position must be liquidated III The account is frozen for 60 days IV The account is frozen for 90 days A I and III B I and IV C II and III D II and IV

The best answer is D. If a customer places an order to purchase securities but does not pay for the trade by Regulation T, then the unpaid position must be liquidated and the account would be frozen for 90 days. During the freeze period, all purchases must be paid in advance.

Retail member firms that route orders to market makers in return for compensation earn: A mark-ups B mark-downs C commissions D payments for order flow

The best answer is D. If a retail member firm chooses a market maker to execute its orders in return for compensation from that market maker, then the retail firm is earning so-called "payment for order flow." The SEC permits this practice, subject to the retail member firm always executing its trades at the best available price.

n 2022, a customer earns $400,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $40,000 per year. The contribution to be made for the nurse is: A$0 B$2,500 C$3,000 D$10,000

The best answer is D. If an employer earns $305,000 or more and contributes the maximum of $61,000 to a Keogh in 2022, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $400,000 and contributes $61,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $305,000. $305,000 - $61,000 = $244,000 of "after Keogh deduction" income. $61,000/$244,000 = 25%. Thus, for the nurse, $40,000 of income x 25% = $10,000 contribution.

All of the following statements are true about the activities of an investment banker EXCEPT the investment banker: A. helps the issuer structure the offering, advising on the type and amount of securities to be sold B. analyzes the prospects for the industry in which the issuer operates before handling the offering C. can either act as an agent or principal in an underwriting D. can accept time deposits from customers who buy new issue offerings

The best answer is D. Investment bankers can not accept deposits nor make commercial loans to customers. These activities can only be performed by commercial or savings banks. Investment bankers help structure new securities offerings; decide the pricing on the issue based on market conditions; and act as either principals (firm commitment) or agents (best efforts), handling the offering.

Investment bankers perform which of the following functions? I Purchase securities from issuers on a principal basis II Sell securities for issuers on an agency basis III Advise issuers on potential mergers and acquisitions IV Advise issuers on potential spin-offs and divestitures A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. Investment banks underwrite securities on a firm commitment (principal) basis; and on a best efforts (agency) basis. Investment banks also advise companies on mergers, acquisitions, divestitures and spin-offs

All of the statements are true about municipal dollar bonds EXCEPT dollar bonds A are usually term issues B can be a component of a large combination serial and term municipal offering C are traded in the secondary market D are quoted on a yield to maturity basis

The best answer is D. Municipal dollar bonds are term issues that are quoted on a dollar basis. They are usually part of large combined serial and term bond offerings made by municipal issuers. These bonds are traded in the secondary market. Only serial bonds are quoted on a yield basis - dollar bonds, as their name implies, are quoted on a dollar price basis.

What is the primary benefit of a municipal zero-coupon bond? A. Stable interest payment stream B. Stable market price C. Capital preservation D. Capital appreciation

The best answer is D. Municipal zero coupon bonds are often called "CABs"- Capital Appreciation Bonds. The bonds are sold at a deep discount and the annual interest accretes the value of the bond until it is redeemed at par at maturity. And because this is a municipal bond, the annual interest accretion is free from federal income tax. Municipalities will issue G.O. CABs because they count against the issuer's debt limit at the discount purchase price - not at the par value to be paid at redemption. As with any long-term zero-coupon bond, the market value will vary inversely with interest rates, so the market price is not stable. Because these are subject to market risk, they do not offer capital preservation - if market interest rates rise and the owner must sell prior to maturity, that sale will be at a loss. But remember that these are "buy and hold" investments and the vast majority are held until majority. They do not provide an interest payment stream, since no payment is made until maturity.

Which of the following options retail communications must be approved by the designated Registered Options Principal prior to use? I Advertising II Sales literature III Independently prepared reprints A I only B I and II C II and III D I, II, III

The best answer is D. Options communications that are distributed to more than 25 existing or prospective clients must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP). Retail communications include advertising, sales literature and independently prepared reprints distributed to more than 25 existing or prospective clients. Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm's policies and procedures. Options correspondence is a communication to up to 25 existing or prospective clients. It is subject to "post use review and approval" by a branch manager or ROP.

Which of the following statements are TRUE regarding REITs? I The REIT issues common shares representing a proportional interest in the investment company II The REIT issues shares of beneficial interest representing an undivided interest in a pool of real estate investments III REITs are similar to open end investment company shares IV REITs are similar to closed end investment company shares A I and III B I and IV C II and III D II and IV

The best answer is D. REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments. Other than this difference, the trust is run in a similar fashion to a corporation. REITs are registered securities under the Securities Act of 1933 and trade on an exchange or OTC. Thus, they are similar to closed-end investment companies under the Investment Company Act of 1940, except that investments are made in real estate and mortgages, instead of in securities.

Under Regulation D regarding private placements, how many accredited investors are allowed to invest in the offering? A 10 B 35 C 50 D An unlimited number

The best answer is D. Regulation D permits a private placement to be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy and institutional) investors.

Trades of all of the following will settle in Fed Funds EXCEPT: A Prime Banker's Acceptances B Treasury Bills C Treasury Bonds D Prime Commercial Paper

The best answer is D. Securities that are eligible to be traded by the Federal Reserve are those backed by the guarantee of the U.S. Government as well as certain agency obligations, and Prime Banker's Acceptances. Trades in eligible securities settle through the Federal Reserve system, and therefore settle in "Fed Funds." Corporate securities such as commercial paper are not eligible for trading and settling through the Federal Reserve system; trades of these securities settle in "clearing house" funds.

Which of the following can result in the establishment of a short position? I Arbitrage transaction II Sale of a security "against the box" III Position trades of borrowed shares A I only B I and III C II and III D I, II, III

The best answer is D. Short positions are established in arbitrage transactions (the simultaneous purchase and short sale of a security in two different markets to lock in a temporary price difference). A short position is taken when a security is sold "against the box" - meaning that the long position is being held and an equivalent number of shares are being borrowed and sold to lock in a profit. Finally, position trades (position trading is trading for the firm account, using the firm's "positions") of borrowed shares are short sales.

How much can a Municipal Finance Professional (MFP) contribute to the "clean up" campaign to pay off campaign debt of an ex-issuer official that is now out of office because she lost the general election? A. 0 B $100 C $250 D an unlimited amount

The best answer is D. The MSRB's stance in this situation is that the elected official is now out of office and has no ability to steer municipal securities business to the MFP's firm in return for a large campaign contribution. Because he or she is out of office, the MFP can contribute any dollar amount to the "clean-up" campaign.

Which of the following technical indicators is considered to be bullish? A. Breakout through a support level B. Head and shoulders top formation C. Inverted Saucer formation D. Odd lot short sales

The best answer is D. The Odd Lot theory states that the small investor tends to trade odd lots and that the small investor is always wrong. Thus, the knowledgeable investor should do the opposite of what the small investor does. In this case, the small investor is selling, so, one should buy (a bullish indicator). A breakout through a support level is a downside breakout and is bearish. A head and shoulders top formation shows that the market has topped and is heading downward; an inverted saucer formation shows the same - that the market has topped and is heading downward.

A customer has a combined long and short margin account with the following positions: Long Market Value:$80,000 Short Market Value:$40,000 Debit Balance:$20,000 Credit Balance:$100,000 The Buying/Selling Power in the account is: A$40,000 B$60,000 C$80,000 D$120,000

The best answer is D. The equity in the long account is LMV - Debit = $80,000 - $20,000 = $60,000. The SMA is any equity above 50% margin. 50% of $80,000 LMV = $40,000 equity to be at 50%. Because actual equity is $60,000, the excess equity is $20,000. The equity in the short account is Credit - SMV = $100,000 - $40,000 = $60,000. The SMA is any equity above 50% margin. 50% of $40,000 SMV = $20,000 equity to be at 50%. Because actual equity is $60,000, the excess equity is $40,000. The excess equity, or SMA, in the combined account is $20,000 + $40,000 = $60,000. Buying (or selling) power is 2 x SMA = $60,000 x 2, or $120,000.

The December stock option contracts of a company assigned to Cycle 2 have just expired. Which contracts will commence trading on the CBOE? A January B February C May D August

The best answer is D. The options cycles are: Cycle 1JanAprJulOctCycle 2FebMayAugNovCycle 3MarJunSepDec Cycle 2 contracts are issued for the months of Feb - May - Aug - Nov. One can always get a contract for this month, next month, and the next 2 months in the Cycle. In December, prior to expiration, the contracts that will trade are December (this month), January (next month), February and May (the next 2 months in the cycle). After December contracts expire, the contracts that will trade are January (this month), February (next month), May and August (the next 2 months in the cycle).

A customer owns 256 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $24 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? AThe shareholder can buy a maximum of 15 shares by paying $360 BThe shareholder can buy a maximum of 16 shares by paying $384 CThe shareholder can buy a maximum of 17 shares by paying $408 DThe shareholder can buy a maximum of 18 shares by paying $432

The best answer is D. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 256 shares and thus, will receive 256 rights. 256 rights / 15 rights per share = 17.06 shares, which is rounded up to 18 shares @ $24 each = $432 necessary to subscribe.

A customer opens a short margin account by selling short 600 shares of XYZ stock at $80 per share and deposits the required margin. If the stock declines in value by 25%, the customer's equity in the account will: A. remain unchanged B. increase by 12.5% C. increase by 25% D. increase by 50%

The best answer is D. This customer account sets up as: Credit Balance-Short Market Value=Equity%Sale$48,000 $48,000 $0Margin$24,000 $24,000$72,000 $48,000 $24,00050If the market value declines by 25%, the new market value will be 75% of $48,000 = $36,000. The account will now show:Credit Balance-Short Market Value=Equity%$72,000 $36,000 $36,000100 The equity has increased from $24,000 to $36,000 - a 50% increase.

A customer buys 1,000 shares of ABCD $25 par 8% cumulative preferred stock. This preferred issue pays quarterly dividends. This year, it missed the first 3 quarterly dividends. In the 4th quarter, it paid a common dividend of $.25 per share. In order to do this, it must have paid this preferred shareholder: A$400 B$500 C$1,600 D$2,000

The best answer is D. This customer owns 1,000 shares of $25 par cumulative preferred, for a face value of $25,000. In order to have paid the common dividend,the company must have paid the preferred shareholder the 3 missed quarterly dividends in addition to the current quarterly dividend. Therefore, it must pay the annual dividend amount of 8% of $25,000 = $2,000 to this preferred shareholder.

Which bond recommendation would be the LEAST safe for an individual who seeks income that is free from federal income tax? A. AA-rated revenue bond that is escrowed to maturity B. AAA-rated general obligation bond C. PHA bond D. Double-barreled bond

The best answer is D. This one is special! A bond that is escrowed to maturity (ETM) is backed by escrowed U.S. Government securities - so it becomes the "safest" municipal bond because it becomes government backed. A PHA bond is a Public Housing Authority revenue bond - this is backed by the rental income from subsidized housing, and also backed by the full faith and credit of the U.S. Government to make it marketable. Again, this is another "safest" municipal bond because it is government backed. AAA rated general obligation bonds are extremely safe - they are backed by unlimited tax collections and have a top credit rating. Finally, a double-barreled bond is a revenue bond that is additionally backed by a municipality's "full faith and credit" if the revenues fall short, so it has a back-up G.O. backing. It is also extremely safe - just not as safe as the other choices. Note that this choice does not have a credit rating as a guide - if it did, it would be much easier to answer this question!

A corporation issues $100 par convertible preferred stock, convertible at $10 per share, when the market price of the common is currently $5. The preferred is issued under an "anti-dilutive covenant." If the company declares a 25% stock dividend, which statements are TRUE? I The conversion price remains at $10 II The conversion price is adjusted to $8 III The conversion ratio remains at 10:1 IV The conversion ratio is adjusted to 12.5:1 A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Under an "anti-dilutive" covenant, if there is a stock split or stock dividend resulting in the issuance of additional common shares, the conversion price and hence the conversion ratio are adjusted to reflect the fact that the market price of each common share will drop on the ex date. Prior to the stock dividend, the conversion price was $10 per share. If there is a 25% stock dividend, the new conversion price will be adjusted to $10/1.25 = $8 per share. Since each preferred share is $100 par, the new conversion ratio will be $100/$8 = 12.5.

In January, 20XX a customer buys 100 shares of ABC stock at $30 per share and pays a $2 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is: A$28 per share B$30 per share C$31 per share D$32 per share

The best answer is D. When the stock is purchased, any commission paid is not deductible - it is part of the cost basis of the shares. Thus, the cost basis for tax purposes is $30 + $2 commission = $32 per share. The $1 dividend received is included in taxable income for this year, and is not part of the stock's cost basis.