Series 7 Simulated Exam Wrong Questions Only

When a registered representative opens an options account for a new client, in which order must the following actions take place? Obtain approval from the branch manager Obtain essential facts from the customer Obtain a signed options agreement Enter the initial order

1) Obtain essential facts from the customer 2) Obtain approval from the branch manager 3) Enter the initial order 4) Obtain a signed options agreement

If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date? A) 30 B) 40 C) 45 D) 25

D) 25

Which of the following is an interest-bearing instrument? A) Treasury bill B) Zero-coupon bond C) Commercial paper D) Jumbo CD

D) Jumbo CD Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

A group of underwriters has agreed to engage in a mini-max underwriting for a new issue of equity securities with the issuer of those securities. Which of the following best describes this underwriting agreement? A) A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. B) A mini-max agreement is a firm underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. C) A mini-max agreement is a firm underwriting setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a minimum dollar amount of securities the issuer is willing to sell. D) A mini-max agreement is a best efforts underwriting, setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.

A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. A mini-max agreement is a type of best efforts underwriting agreement. In a best efforts agreement, the underwriters are not purchasing unsold shares from the issuer. There are two components to a mini-max agreement. The first sets a floor, or minimum, amount the issuer needs to raise to move forward with the underwriting, and the other sets a ceiling, or maximum, dollar amount of securities the issuer is willing to sell.

You are listening to another registered representative (RR) speak about Rule 147 offerings and recognize that one of his statements is incorrect. Which of these is not correct? A) Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident. B) Stock sold under Rule 147 is sold in an exempt transaction. C) Rule 147 applies to intrastate stock offerings. D) Under one Rule 147 provision that can be met, an issuer must derive 80% or more of its revenue from the state in which its principal office is located.

A) Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident. Holders of shares issued under Rule 147, the intrastate offering exemption, cannot resell their shares to nonresidents of the state for a period of six months from the date of purchase.

A registered representative (RR) has prepared a sales piece for one of his retail customers demonstrating a trading strategy. Regarding the piece, which of the following statements is true? A) The piece will be regulated as correspondence. B) The piece must be approved by a principal before being sent to the customer. C) All material sent to individual clients must be submitted to FINRA before use. D) The piece will be regulated as a retail communication with the public.

A) The piece will be regulated as correspondence. A sales piece that is being sent to one customer will be regulated as correspondence (25 or fewer recipients = correspondence). While it must be reviewed and approved by a principal in accordance with the firms rules and procedures, there is no requirement to be approved in advance by a principal or FINRA.

Your client asks you to explain a not-held order. You could correctly explain that a not-held order A) gives time or price discretion to the floor broker. B) must be executed immediately and in its entirety. C) can be filled only on the last trade of the day. D) can only be done in a discretionary account.

A) gives time or price discretion to the floor broker. With a not-held order, the customer gives the firm's time or price broker the discretion as to time or price. Remember, however, that time and price alone do not require the order to be done in a discretionary account.

A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be A) no tax is due. B) ordinary income on the $5,000 difference between the purchase price and the current value. C) ordinary income on the $5,000 difference between the purchase price and the current value plus a penalty of 10% because the investor is only 55 years old. D) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old.

A) no tax is due. Investors in variable annuities are only taxed on the earnings of the account. This account lost money—there were no earnings to be taxed.

A broker-dealer wants to reference its membership with FINRA on its website. Regarding the reference, all of the following are true except A) the FINRA reference is intended to demonstrate that the broker-dealer has the approval of FINRA in all of its business dealings. B) if the FINRA reference is made, a hyperlink to FINRA's website is mandated by FINRA. C) there is no requirement that any FINRA member broker-dealer shall reference FINRA by name or logo on its website. D) if the FINRA reference is made, a hyperlink to FINRA's website must be in close proximity to the reference.

A) the FINRA reference is intended to demonstrate that the broker-dealer has the approval of FINRA in all of its business dealings.

An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct? A) Only the 3% employee contribution being matched by the employer is immediately vested. B) Only the 7% contributed by the employee is immediately vested. C) Only the 3% employer contribution is immediately vested. D) Only the 4% employee contribution in excess of the employer's match is immediately vested.

B) Only the 7% contributed by the employee is immediately vested.

A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments? A) FINRA B) PSA C) DEA D) Bond Buyer

B) PSA The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.

One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed? A) A portion of each payment will be taxed as ordinary income with the balance considered a return of principal. B) The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. C) The earnings will be taxed as capital gains and will be withdrawn first using LIFO. D) There is a combination of ordinary income and return of principal based on the exclusion allowance.

B) The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. Because this is a nonqualified annuity, there are no contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment.

Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) they generally pay a higher interest rate than nonconvertible debentures. B) although they trade in line with the issuer's common stock, they are less volatile than the common shares. C) it is generally best to convert when the common stock is selling below its parity price. D) the conversion feature protects against an early call.

B) although they trade in line with the issuer's common stock, they are less volatile than the common shares.

A bond is quoted as QRS Zr 39. This quote tells an investor that the bond A) is backed by the U.S. government. B) pays no interest until maturity. C) pays interest annually. D) pays interest semiannually.

B) pays no interest until maturity. The initials Zr in the bond quote indicate that this is a zero-coupon bond. Zero-coupon bonds pay all interest at maturity even though the investor is taxed annually as if he had been receiving the interest over the life of the bond.

An hour ago, you entered a sell limit order for your customer in XYZ stock. Looking at a current quote, you could expect the order to have been executed if A) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is below the sell limit price. B) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price. C) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is above the sell limit price. D) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is below the sell limit price.

B) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price. A sell limit order sets the minimum price an investor will accept. The order should have been executed if the current bid price is higher than the sell limit or the last reported price in the stock is higher than the sell limit.

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) U.S. Treasury bonds with 18 years to maturity date B) AAA rated municipal bonds maturing in 18 years C) U.S. Treasury STRIPS maturing in 18 years D) Blue-chip stocks

C) U.S. Treasury STRIPS maturing in 18 years STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future.

A violation of MSRB rules would occur if A) a registered representative (RR) recommended geographic diversification to limit risk. B) a representative made a recommendation to a customer after gathering information about the customer's financial status, tax status, investment objectives, and other holdings. C) a representative gave a gift to an associated person of another broker-dealer that was valued just under $250. D) an associated person held a joint account with a spouse.

C) a representative gave a gift to an associated person of another broker-dealer that was valued just under $250. MSRB rules limit gift-giving to a maximum of $100 per person per year in cash or value. The $250 is the amount a municipal finance professional can make as a political contribution to a candidate for whom the MFP is eligible to vote.

A customer is trying to understand any differences between a rollover and a trustee-to-trustee transfer as they relate to his qualified retirement plans. An accurate explanation would be that A) both rollovers and trustee-to-trustee transfers can occur only once every 12-month period. B) a rollover can occur as often as one wishes, but a trustee-to-trustee transfer can occur only once every 12-month period. C) a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes. D) both rollovers and trustee-to-trustee transfers can occur as often as one wishes.

C) a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes. For qualified retirement plans, a rollover is permitted only once in every 12-month period, while a trustee-to-trustee direct transfer can occur as often as one wishes.

A registered representative is the subject of a disciplinary action that results in a fine and a 60-day suspension of registration. During the 60-day suspension period, the registered representative may A) be paid for business that they refer to other registered representatives while serving the suspension. B) only perform investment advisory services. C) be paid for business generated before the suspension date. D) only perform clerical or administrative functions for the member.

C) be paid for business generated before the suspension date. During a period of suspension of registration, the individual may not perform any duties for the broker-dealer, whether they require registration or not. They may not be paid for business referred to other registered personnel, but they may receive commissions for business placed before the date of the suspension.

Which of the following municipal securities are backed by the full faith and credit of the U.S. government? A) Industrial revenue bonds (IRBs) B) General obligation bonds (GOs) C) Tax assessment bonds (TAs) D) Public Housing Authority bonds (PHAs)

D) Public Housing Authority bonds (PHAs)

An investor has purchased American depositary receipts (ADRs) to achieve portfolio diversification. Holding the ADRs in a portfolio entitles the investor to dividends paid in A) U.S. dollars and the ability to trade ADRs on foreign markets. B) the foreign currency and the ability to trade ADRs on foreign markets. C) the foreign currency and the ability to trade ADRs on U.S. securities markets. D) U.S. dollars and the ability to trade ADRs on U.S. securities markets.

D) U.S. dollars and the ability to trade ADRs on U.S. securities markets.

One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on A) a pretax basis, and those contributions are deductible on his tax return. B) a pretax basis, and those contributions are not deductible on his tax return. C) an after-tax basis, and those contributions will be deductible on his tax return. D) an after-tax basis, and those contributions are not deductible on his tax return.

D) an after-tax basis, and those contributions are not deductible on his tax return.

A U.S. investor owns an American depositary receipt (ADR). The net tax liability to the investor for any dividends received is A) zero, because there is no tax liability to U.S. investors who purchase foreign government issues. B) the total of both foreign and U.S. income tax due. C) any foreign income tax due, but not U.S. income tax. D) any U.S. income tax due, credited by any amount of foreign income tax withheld.

D) any U.S. income tax due, credited by any amount of foreign income tax withheld. Any income to a U.S. investor is always subject to U.S. income tax. If foreign income tax is withheld in the country of origin, then that tax may be taken as a credit against the U.S. tax due.

All of the following statements regarding municipal advertising are true except A) it must be approved by a principal. B) it must not be misleading. C) copies must be kept for four years. D) copies must be sent to the Municipal Securities Rulemaking Board (MSRB).

D) copies must be sent to the Municipal Securities Rulemaking Board (MSRB).

A client, age 52, wants to know if there are any circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty. One example you could give is A) housing expenses while she is unemployed. B) up to $10,000 annually for the first-time purchase of a principal residence. C) premiums for medical insurance in excess of defined adjusted gross income (AGI) limits. D) education expenses for one of her grandchildren.

D) education expenses for one of her grandchildren. Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following: death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.

Your customer has made a margin purchase of 100 shares of DMF at 50. Two days later, before the customer has met his call, the current market value of DMF is 60. How much must your customer now deposit? (Regulation T is 50%.) A) $2,500 B) $3,000 C) $1,500 D) $2,000

A) $2,500 The investor must come up with the initial call of $2,500. The amount of margin required for a new purchase is based on the current market value of the security at the time of purchase.

To meet the initial Regulation T call in a margin account, a customer could deposit A) 200% of the call in fully paid-for marginable securities. B) 50% of the call in fully paid-for marginable securities. C) 100% of the call in fully paid-for marginable securities. D) 50% of the call in cash.

A) 200% of the call in fully paid-for marginable securities.

A customer has sold short 100 GM at 70. GM is selling for 81. The customer had previously placed a good-til canceled buy stop order at 83. GM announces a stock split and an increase in the dividend. The stock starts to move up and the customer decides to cover the short sale at a loss and instructs his broker to buy 100 shares of GM at the market. The registered representative will A) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop good til canceled. B) buy 100 GM at the market. C) sell 100 GM at 83. D) sell 100 GM at the market.

A) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop good til canceled. It is incumbent upon the registered representative to cancel the old order.

A customer sells $5,000 worth of a security in a cash account and on the same day purchases $8,000 worth of a different security in the same account. At the close of the fourth business day following these transactions, no payment has been received from the customer and no extension has been obtained. Assuming no change in market value, the firm must A) liquidate $3,000 of securities and freeze the account for 90 days. B) liquidate $5,000 of securities and freeze the account for 90 days. C) liquidate the $8,000 transaction and freeze the account for 90 days. D) cancel both the purchase and the sale and freeze the account for 90 days.

A) liquidate $3,000 of securities and freeze the account for 90 days. When an investor buys and sells different securities in the same account on the same day, the two transactions can be netted against each other to determine whether money is due to the client or the client owes money to the firm. In this question the client owes the firm $3,000 (an $8,000 purchase netted against a $5,000 sale). According to Regulation T, the investor has two additional business days after settlement (four days total) to pay the amount owed. Because he has failed to do so and no extension has been obtained, the unpaid-for portion of the trade, which is $3,000, will be liquidated and, according to Regulation T, the account will be frozen for 90 days.

The result of dollar cost averaging is to A) obtain a lower average cost per share than average price per share. B) take advantage of a bullish market by buying more shares in a rising market. C) take advantage of a nonfluctuating market. D) obtain a lower average price per share than average cost per share.

A) obtain a lower average cost per share than average price per share.

Which of the following statements regarding Coverdell ESAs is true? A) Contributions are not tax deductible, and distributions for any reason are tax free. B) Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses. C) Contributions are tax deductible, and distributions are always taxable. D) Contributions are tax deductible, and distributions for any reason are tax free.

B) Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses. Coverdell ESAs offer after-tax contributions of up to $2,000 per student, per year for children under age 18. Distributions are tax free as long as the funds are used for education.

If the holder of a call tenders an exercise notice after the ex-dividend date for a cash dividend, which of the following statements is true? A) He is entitled to the dividend. B) He is not entitled to the dividend. C) He is entitled to the dividend only if he sells the underlying stock. D) He must pay the dividend to the writer.

B) He is not entitled to the dividend. If the holder of a call exercises before the ex-date, the trade settles on or before the record date, and he is on record for the dividend. If the holder exercises on or after the ex-date, the trade settles after the record date, and he is neither on record for the dividend nor entitled to it.

Because of their unlimited potential loss, short positions A) can only be taken by those who are accredited investors. B) are marked to the market at the close of each day. C) must be approved by a designated principal before execution. D) require a higher initial margin deposit.

B) are marked to the market at the close of each day. Although most securities positions are marked to the marked on a daily basis, it is more important that this be done with short positions because of how quickly they can reach the maintenance margin level. The initial margin is the same as long purchases, and the term accredited investors applies principally to private placements. Short sales, just as with any transaction, must approved by a principal, but not in advance.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except A) profit-sharing plans. B) deferred compensation plans. C) 401(k) plans. D) corporate pension plans.

B) deferred compensation plans. Deferred compensation plans are not qualified plans and may be discriminatory. 401(k), profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

To achieve its goals, an inverse ETF uses A) preemptive rights. B) derivatives and debt. C) arbitrage. D) short selling.

B) derivatives and debt. An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to the advantage of temporary imbalances between the ETF's net asset value and market price.

Under FINRA rules, members are prohibited from soliciting votes from limited partners in connection with a proposed rollup unless any compensation to be received by the member A) does not exceed 5% of the value of the securities to be received in the exchange. B) does not exceed 2% of the value of the securities to be received in the exchange. C) does not exceed 15% of the value of the securities to be received in the exchange. D) does not exceed 10% of the value of the securities to be received in the exchange.

B) does not exceed 2% of the value of the securities to be received in the exchange. In connection with a DPP rollup, member firms may not solicit votes from limited partners unless the compensation is 2% or less. The 10% limitation is the maximum compensation in the sale of a DPP. The 15% limitation is the maximum percentage of the gross proceeds of a DPP that may be used for the organization and offering expenses. The 5% is likely an attempt to make you think about the FINRA 5% markup policy. That does not apply to DPPs.

The Investment Company Act of 1940 has certain requirements for the board of directors of a mutual fund. The members of the board are A) appointed by the fund's custodian bank. B) elected by a vote of the shareholders. C) elected by a vote of the management. D) appointed by the fund's investment adviser.

B) elected by a vote of the shareholders. One of the rights of investors in mutual funds is the same right offered to shareholders in regular corporations. That right is the right to vote on certain business matters. One of those is the election of members of the fund's board of directors. They also have the right to vote on the selection of the fund's investment adviser(s).

Bob and Tori are a married couple in their 40s filing a joint tax return. Both contribute to their employer's qualified retirement plan and will have a combined adjusted gross income of $4,000,000 this year. Bob and Tori are A) permitted to make tax-deductible contributions to their traditional IRAs. B) permitted to make nondeductible contributions to their traditional IRAs. C) not permitted to contribute to their traditional IRAs. D) permitted to make fully deductible contributions to their traditional IRAs, as long as their contributions to their employer-sponsored plans do not exceed certain limits.

B) permitted to make nondeductible contributions to their traditional IRAs. Once both parties to a joint tax return participate in qualified employer-sponsored retirement plans, there are limits beyond which contributions are no longer tax-deductible. The exam will never ask for those exact numbers because they change every year. As example of the numbers is found in your LEM. That said, the earnings level for this couple is so far above the allowable limits that you are expected to recognize that their contributions would not be tax favored. The key point this question is making is that anyone with earned income, regardless of how much, can open a traditional IRA and receive tax deferral on the earnings in the account. Compare this to the Roth IRA, where there is a limit beyond which contributions are nonallowable.

An investment banker purchasing what is left unsold from a rights offering is engaging in A) all or none underwriting. B) standby underwriting. C) firm commitment underwriting. D) preemptive rights underwriting.

B) standby underwriting. In many cases, when a corporation is issuing new shares, existing shareholders receive preemptive or stock rights to buy these new shares to maintain their current proportionate ownership. In the event some of the rights are not used, the standby underwriter agrees to purchase those unsubscribed for shares.

As defined by FINRA, all of the following are considered a restricted person except A) employees of member firms. B) the aunt of a member firm employee. C) member firms. D) the sibling of a member firm employee.

B) the aunt of a member firm employee. Member firms, their employees, and their immediate family members—such as parents and siblings—are considered restricted. Aunts, uncles, and grandparents are not considered immediate family and therefore, are not restricted unless they live in the same household as a restricted person.

Under SEC Rule 134, a tombstone advertisement includes all of the following except A) the names of the syndicate members. B) the net proceeds to the issuer. C) the public offering price. D) the number of shares to be sold.

B) the net proceeds to the issuer. Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members. Please note: you did note have to know that Rule 134 deals with tombstone ads because the question tells you so.

The latest issue of a newsletter your firm subscribes to is especially relevant to one of your firm's investment products. If you decide to send it to clients and prospects, you must disclose that A) the newsletter's purpose is to provide clients with a choice of products that are suitable for everyone's portfolios. B) the newsletter is written and produced by a third party. C) the newsletter discusses only those products that you have available through your firm. D) future articles sent will provide similar discussions and information.

B) the newsletter is written and produced by a third party.

The management fees paid by an investment company are part of A) the sales load. B) the operating expense of the fund. C) the underwriting agreement. D) the custodial fees.

B) the operating expense of the fund. The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A) brokers acting as agents in all order execution scenarios. B) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor. C) brokers executing orders as agents in an auction market on any exchange trading floors. D) trades in NYSE-listed securities occurring on the NYSE.

B) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.

For a new issue municipal syndicate account, settlement of the account must occur A) as soon as dealers who are not members of the syndicate request a bond. B) within 30 calendar days after the issuer delivers the securities to the syndicate. C) within one year after the issuer delivers the securities to the syndicate. D) when the last bond is sold with no time limit imposed.

B) within 30 calendar days after the issuer delivers the securities to the syndicate. The maximum length of time a new issue municipal bond syndicate can exist is 30 calendar days after the issuer delivers the securities to the syndicate. At that time, the account must be settled and allocation of unsold bonds must be determined in accordance with each member's original allocation and whether the syndicate was set up as divided (western) or undivided (eastern).

Which of the following statements regarding real estate investment trusts (REITs) and limited partnerships (LPs) is true? A) Only the REIT has centralized management, but both pass through investment gains to the investor. B) They both pass through investment gains and losses to the investor. C) They both pass through investment gains to the investor and have centralized management. D) They both trade on securities exchanges and OTC and have centralized management.

C) They both pass through investment gains to the investor and have centralized management.

Having been a customer of a broker-dealer for over 10 years, currently holding equity positions and cash in his account, Daryl Smith wants to purchase 1,000 shares of a penny stock. Smith is A) exempt from both the requirement to receive a suitability statement and the disclosure requirement. B) required to receive both the suitability statement and the disclosure. C) exempt from the disclosure requirement but must receive a suitability statement. D) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement.

D) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement. Smith meets the criteria for an established customer under the penny stock rules. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements.

All of the following would flow through as a loss to limited partners except A) depletion. B) interest payments on recourse debt. C) accelerated depreciation. D) principal repayment on recourse debt.

D) principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.

The Municipal Securities Rulemaking Board (MSRB) is authorized to adopt rules concerning all of the following except A) the sale of new issues to related portfolios. B) the regulation of municipal securities advertising. C) the form and content of price quotations. D) the information to be provided by municipal issuers.

D) the information to be provided by municipal issuers. The MSRB does not regulate issuers. Rather, it regulates the underwriting of municipal securities and subsequent secondary market trading. Disclosure requirements for issuers are mandated by the SEC.

Regulation T requires payment from a customer in a margin account A) within three business days. B) business 10 days. C) before purchase. D) within four business days.

D) within four business days. The Regulation T payment date is the fourth business day from the trade date. Regular way settlement, according to FINRA rules, is two business days from the trade date, and Regulation T allows for two additional business days after settlement date—four business days total.

Which of the following entities guarantees a listed yield-based option? A) Options Clearing Corporation (OCC) B) U.S. government C) Broker-dealer D) Federal Reserve Board (FRB)

A) Options Clearing Corporation (OCC) The OCC guarantees the performance of listed option contracts.

A municipal securities advertising piece intended to be distributed to retail customers must be approved by A) a branch manager and the MSRB. B) a general securities principal or a branch manager. C) a municipal securities principal and the MSRB. D) a municipal securities principal or a general securities principal.

D) a municipal securities principal or a general securities principal.

Rank the following in the usual sequence of order allocation. Syndicate Member at the take down Presale Designated

1) Presale 2) Syndicate 3) Designated 4) Member at the takedown The standard order priority for allocation of municipal bond issues is (as stated within the syndicate letter) as follows: presale, syndicate, designated, and member. Orders that benefit all syndicate members have the highest priority.

A customer invests $20,000 in a direct participation program and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution of $15,000 from the partnership. At year's end, the customer receives a K-1 statement reporting his share of partnership losses of $75,000. How much of the loss may the customer deduct from passive income? A) $55,000 B) $0 C) $75,000 D) $35,000

A) $55,000 Cost Basis = (Investment + Any Recourse Note) - Cash Distribution $55,000 = (20,000 + 50,000) - 15,000

Your client has a combined margin account. The market value of the long stock position has increased by $5,000, and the market value of the short stock position has dropped by $2,000. What is the net change to the equity in the account? A) $7,000 increase B) $3,000 decrease C) $7,000 decrease D) $3,000 increase

A) $7,000 increase A combined margin account is one with both long and short positions. When an investor is long a stock (owns it), any increase in the market value will increase equity. Investors who sell short benefit when the market price of the security sold declines. Therefore, both the long and short positions in this combined account have seen an increase in equity: the $5,000 increase in the long market value and the $2,000 increase in the short market value. That is a total increase to the equity of $7,000.

Which of the following circumstances would not cause a registered representative to be identified as a fiduciary? A) A registered representative names one of his customers the executor of his estate B) A registered representative holds himself out as a fiduciary for ERISA plans and pensions. C) A registered representative receives discretionary authorization from a client D) A registered representative becomes a member of the board of directors of a charitable foundation.

A) A registered representative names one of his customers the executor of his estate

A customer is considering adding a real estate investment trust (REIT) to her portfolio. She lists all of the following as advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is not an advantage of investing in REITs? A) Dividend treatment B) Using real estate as a potential hedge against the movement of other equity securities the customer owns C) Being able to divest of the shares easily D) Having a professionally managed portfolio of commercial real estate assets

A) Dividend treatment Of those listed, only dividend treatment can be identified as not being an advantage. While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified and are therefore taxable to the investor at their full ordinary income tax rate. The shares are traded on exchanges or over the counter and are considered liquid, and having professionally managed assets should be a plus. While real estate valuation and price movements are subject to many forces, historically, real estate has provided some hedge against the movements of other equity securities.

Which of the following positions violate the rules governing position limits? (Assume SSS stock is subject to a 100,000-option position limit.) Long 50,000 SSS Aug 40 calls, short 55,000 SSS Aug 40 puts Long 50,000 SSS Aug 40 calls, short 55,000 SSS Jan 40 puts Long 50,000 SSS Aug 40 calls, short 30,000 SSS Jan 40 calls Long 50,000 SSS Sep 40 puts, short 45,000 SSS Sep 40 calls A) I and II B) II and III C) III and IV D) I and IV

A) I and II The expiration dates and strike prices may be different or the same. However, the total number of contracts on the same side of the market is limited to 100,000 for this stock. Long calls and short puts are on the same side of the market (the bull side), and short calls and long puts are on the same side of the market (the bear side).

An investment strategy often used when purchasing mutual funds is dollar cost averaging (DCA). Which of the following statements concerning dollar cost averaging as a portfolio management technique is not correct? A) If prices rise, the fixed investment amount will purchase a greater amount of the security. B) This technique involves investing a specific amount into an investment vehicle, regardless of whether the recent price trend in the investment has been up or down. C) For the long-term investor, the presumption is that prices will eventually rise, so a lower average cost per share translates into greater profits. D) If prices decline, the fixed investment amount will purchase a greater quantity of the security.

A) If prices rise, the fixed investment amount will purchase a greater amount of the security. Dollar cost averaging involves investing a fixed amount at regular intervals. If the prices rise, the fixed investment amount will purchase less of the security, not more. In a fluctuating market, DCA always results in a lower average cost per share.

The most current information on new releases of municipal bonds can be found in A) The Bond Buyer. B) Thomson's Muni Market Monitor (formerly Munifacts). C) the broker-dealer's quote sheets. D) The Bond Buyer's Guide.

A) The Bond Buyer. The Bond Buyer is a daily trade publication containing news about new municipal bond issues.

In what is commonly known as a proceeds transaction, one of your clients is using the proceeds from the liquidation of one stock to purchase another stock. In compliance with the 5% markup policy for these transactions, the markup will be computed based on A) a combination of both the buy side and the sell side compensation to the dealer. B) the compensation to the dealer for each side of the transaction separately. C) the markup or compensation to the dealer on the buy side of the transaction. D) the markdown or compensation to the dealer on the sale side of the transaction.

A) a combination of both the buy side and the sell side compensation to the dealer. This is known as a proceeds transaction, which is the sale of one position, and the purchase of another with the proceeds of the sale. The 5% markup policy is applicable to proceeds transactions. In compliance with the policy, the 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.

SEC Regulation FD is best described as a rule requiring disclosure by A) an issuer of securities. B) only issuers of NMS securities. C) securities market professionals that trade on nonpublic information. D) only those who provide "tips" of select information to securities market professionals.

A) an issuer of securities. Regulation FD (Fair Disclosure) is an issuer disclosure rule (all issuers) that addresses selective disclosure such as may be given to securities market professionals and others that may trade on the basis of the information. If the disclosure of information is intentional, the issuer must make a simultaneous disclosure to the public. If the disclosure was unintentional, the issuer must make disclosure promptly. Promptly means under the regulation not later than 24 hours or the commencement of the next day's trading on the New York Stock Exchange, whichever is later (which accommodates for weekends and holidays) after a senior official of the issuer learns of the disclosure.

An investor purchased a REIT from her broker-dealer in an SEC-registered public offering. The following year, she asked her registered representative for a quote. When told there is no current quote available, you would gather that this is A) an untraded REIT. B) a hybrid REIT. C) an OTC traded REIT. D) an unregistered REIT.

A) an untraded REIT. Untraded or unlisted REITs are those not traded in the secondary markets (exchanges or OTC). Therefore, there is limited to no liquidity. As described in the question, this security is registered with the SEC, so it is not a private placement. Hybrid REITs are those that take equity and debt positions. With this lack of liquidity, you can expect suitability standards to be higher, and the trades would be subject to increased regulatory review.

Covered put writing is a strategy where an investor A) sells a put on a stock he has sold short. B) sells a put and sells a call on the same stock. C) sells a put on a stock that he owns. D) sells a put and buys a call on the same stock.

A) sells a put on a stock he has sold short. If you sell a put and the option is exercised by the holder, meeting the obligation requires having sufficient cash to purchase the stock being "put" to you. Owning the shares would not help you meet your obligation; you need cash. You would be "covered" if you have cash available to cover the purchase. One way is a deposit of cash at the time the put is written. Alternatively, if you sell 100 shares short for each put sold, you would have cash from the short sale that could be used to cover the obligation to buy the stock at the strike price. Notice that selling a put is bullish; the short stock position is bearish.

One of your customers exercises a put option. The stock is in the customer's account and your firm makes timely delivery. The proceeds from the sale of the stock will be paid to your firm by A) the broker-dealer to whom the exercise notice was assigned. B) the exchange where the option exercise took place. C) the OCC. D) the writer to whom the exercise notice was assigned.

A) the broker-dealer to whom the exercise notice was assigned. Look at this as a regular buy and sell. When the customer exercises the put, it is a sale of stock. When customers of member firms sell stock, those firms collect the sales proceeds from the contra party (the other member firm representing the buyer). The OCC assigns the exercise to a member firm that is then responsible for paying the broker-dealer representing the seller of the stock.

Aenical Corporation issued $100 million of $100 par value preferred stock a number of years ago. The stock pays semiannual dividends of $1.25. Recent issues of comparable preferred stock carry a dividend yield of 10%. One could expect the market price of the Aenical preferred stock to be closest to A) $50. B) $25. C) $100. D) $75.

B) $25. Price (Preferred) = Annual Income / Dividend yield of comparable preferred stock (%) 25 = 2.50 / 10% As with other fixed-income securities, as market yields change, the price of previously issued securities increase or decrease to offer a comparable return. The logic is that investors will purchase fixed-income securities only if they can receive a return comparable to the current market rate. This stock is paying an annual dividend of $2.50 ($1.25 every six months). If not stated, dividends are always paid quarterly. This question specifically states the dividends are semiannual; do not get tripped up with something like this on the exam. Investors will be most interested in this stock if their return will be approximately 10%, the current rate being paid in the market. The math here must first answer "$2.50 is 10% of what number?" Divide $2.50 by 10% and the answer is $25. At $25 per share, Aenical stock paying a $2.50 annual dividend is offering a 10% return on investment.

If a customer buys 300 ABC at 53 and writes 3 ABC Jun 55 calls at 4, and the contracts expire unexercised, the customer's cost basis in ABC stock at expiration is A) $57. B) $53. C) $49. D) $51.

B) $53. The cost basis in the stock remains at the original purchase price. The premium received must be declared by the investor as a capital gain for tax purposes. Premiums on options will only affect the stock's cost basis or sales proceeds if the option is exercised, or if (on the same day) a customer buys stock and buys a put.

Disregarding commissions, and investor purchasing $10,000 face amount of Treasury notes at a price of 98.12 would expect to pay A) $9,812.00. B) $9,837.50. C) $981.20. D) $983.75.

B) $9,837.50.

Which of the following is true regarding a summary section and a statement of additional information (SAI) for management investment companies? A) A summary section need not be included in the prospectus of a mutual fund. B) A SAI need not be included in the prospectus of a management company. C) Neither are required to be in the prospectus of a mutual fund. D) Both must be included in the prospectus of a management company.

B) A SAI need not be included in the prospectus of a management company.

A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation? A) An exploratory oil and gas drilling program B) An oil and gas income program C) A raw land real estate limited partnership D) A new-construction real estate limited partnership

B) An oil and gas income program

An investor follows a program of buying 100 shares of Mutable Precision Castings Corporation (MPCC) common stock every six months. Over the past two years, the purchase prices have been: February 1, 2020, $50; August 1, 2020, $55; February 1, 2021, $60; August 1, 2021, $48. Needing some cash before the end of the year, the investor desires to sell 200 shares of the MPCC stock in November 2021. The investor is in the 35% income tax bracket and MPCC stock is trading at $53 per share. From a tax minimization standpoint, you would recommend selling the shares bought on A) February 1, 2020 and the shares bought on August 1, 2020. B) August 1, 2020 and the shares bought on February 1, 2021. C) August 1, 2020 and the shares bought on August 1, 2021. D) February 1, 2021 and the shares bought on August 1, 2021.

B) August 1, 2020 and the shares bought on February 1, 2021. Minimizing taxes means selling the shares with the highest cost. The higher the cost, the lower the taxable gain. By default, the IRS would use FIFO (first-in, first out). That would mean using a cost basis of $50 for the first 100 shares and $55 for the next 100 (the two purchases in 2020). That is a cost basis of $52.50 per share (50 + 55 divided by 2, or $5,000 + $5,500 divided by 200 shares). When selling 200 shares at $53 each, there is a long-term capital gain of $100 (a $0.50 profit on 200 shares, or $10,600 minus $10,500). On the other hand, if the investor uses the identified shares method and tells the registered representative to sell the shares bought at $55 per share, and the shares bought at $60 per share, the cost basis is $57.50 per share (55 + 60 divided by 2), and that generates a $900 capital loss ($57.50 - $53 = $4.50 loss per share times 200 shares). Regardless of which shares are sold, the investor still receives $10,600 (200 times $53), but by selecting properly, the investor can have a $900 write off against other gains or, if there are no other gains, against income to the extent permitted by law.

A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 six months later, which of the following statements is true? A) He will receive a reduced load on $10,000 worth of shares. B) He will receive a reduced load on $13,200 worth of shares. C) He will receive a reduced load on $8,800 worth of shares. D) He will not receive any reduction in the sales load.

B) He will receive a reduced load on $13,200 worth of shares. A letter of intent (LOI), which is sometimes called a statement of intention, is an agreement between an investor and a mutual fund distributor. It involves the purchase of Class A shares where there are reductions in the sales charge at specified dollar amounts. These dollar amounts are known as breakpoints. In our question, the breakpoint is at $10,000. That means any investor initially purchasing $10,000 or more of the fund's shares is entitled to a reduced sales charge. An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. From the initial purchase and all other purchases during that 13-month period, the sales charge will be at the reduced rate based on a $10,000 breakpoint. If, as in this case, the investor exceeds the breakpoint but does not reach the next one, the sales charge applicable to the $10,000 level applies to the entire investment . It the investor had not meet the terms of the LOI, the fund would have liquidated enough shares to pay the difference in sales load actually paid and the higher load applicable to a smaller purchase.

Which of the following statements regarding the discussion of options with customers is true? A) An Options Clearing Corporation options disclosure document must be in a customer's hands before options can be discussed. B) In every discussion about the benefits of options, a statement must be made regarding the corresponding risks. C) Buying or selling straddles only would require no risk disclosures. D) Covered call writing has such a limited risk that it is unnecessary to point out risk factors.

B) In every discussion about the benefits of options, a statement must be made regarding the corresponding risks.

A letter of intent for a mutual fund does not contain which of the following provisions? A) The time limit is 13 months. B) The fund can halt redemption during the time the letter of intent is in effect. C) The letter can be backdated 90 days to include a previous deposit. D) The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load.

B) The fund can halt redemption during the time the letter of intent is in effect. A letter of intent is not binding on the client in any way. Should the client decide to liquidate the account before completing the letter, the company will reduce the redemption by the amount of shares held in escrow.

You receive a not-held order from a customer who wants you to buy 1,000 shares of ABC when the price is right. Under NYSE rules, this order is A) a limit order. B) a day order. C) a fill-or-kill order. D) a good-til-canceled order.

B) a day order.

Your customer, age 46, has been investing money in a variable annuity for several years. He plans to stop the deposits to meet current financial obligations, but he does not intend to withdraw any of the funds already invested until retirement, which is still several years away. Until the withdrawals are made, the client will be holding A) accumulation shares. B) accumulation units. C) annuity units. D) deferred units.

B) accumulation units. Until the customer withdraws funds or annuitizes, the annuity is still in the deferral stage, and the customer is holding accumulation units.

If an indenture has a closed-end provision, this means A) the bonds must be called before maturity. B) additional issues will have junior liens. C) additional issues have no lien on the revenue stream. D) a sinking or surplus fund must be established.

B) additional issues will have junior liens. These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.

In a municipal underwriting, total takedown can be described as A) underwriting fee plus additional takedown. B) additional takedown plus concession. C) additional takedown plus management fee. D) underwriting fee plus manager's fee.

B) additional takedown plus concession. The total takedown has two components: concession and additional takedown.

A company has reverse split its common stock. The effect on the earnings per share will be A) none of these. B) an increase. C) a decrease. D) no effect.

B) an increase.

When part of an issue of speculative bonds with a 25-year maturity are called, the effect on the remaining bonds will be to A) increase their coupon rate. B) improve their quality. C) decrease their coupon rate. D) decrease their quality.

B) improve their quality. Speculative bonds are those with lower ratings. They are considered to be of lower quality because the risk of timely payment and principal are higher than investment-grade bonds. When a company shows its determination to honor its debt by paying off some of it in advance, the rating associations take note of that and invariably increase the rating. Compare this to your personal credit score. Your score might be relatively low because you have a lot of outstanding debt. As you pay down that debt, your credit score is likely to increase. It is the same logic here.

Establishing short positions is typical for all of the following except A) listed stock. B) municipal bonds. C) over-the-counter common stock. D) preferred stock.

B) municipal bonds.

Expressed as a percentage of par, one basis point equals A) one-one thousandth of 1%. B) one-one hundredth of 1%. C) one-tenth of 1%. D) 10%.

B) one-one hundredth of 1%. 1 Basis Point = 10 cents or 0.0001% of par One basis point equals one-one hundredth of 1% of par. One percent of par ($1,000) equals $10; therefore, 1 basis point equals one-one hundredth of $10, or $0.10 (10 cents).

Regressive taxes would include A) estate tax. B) sales tax. C) personal income tax. D) gift tax.

B) sales tax. A regressive tax is one that is flat regardless of the amount being taxed. Sales tax is probably the most common of those. Certain excise taxes, such as fuel tax, are also regressive because the percentage of tax levied is level. Progressive taxes are those where the tax rate increases as the taxable amount increases. The most familiar is personal income tax. Gift and estate taxes are also progressive.

The Bond Buyer's 20-Bond Index reflects A) the average yield of 20 high-quality municipal bonds. B) the average yield of 20 high-quality general obligation bonds. C) the average yield of 20 high-quality revenue bonds. D) the average maturity of 20 high-quality municipal bonds.

B) the average yield of 20 high-quality general obligation bonds. The Bond Buyer 20-Bond Index is defined as the average yield of 20 general obligation bonds having a rating of A or better and a maturity of 20 years. Bonds that have a rating of AAA and AA are included in the 11-Bond Index. Revenue bond yields are reported in the Revdex 25. Although all but the Revdex include bonds with a 20-year maturity (Revdex is 30 years), it is the yields that are reported, not the average maturities.

When referring to a stock, the term spread refers to A) the dealer's markup. B) the difference between the bid and asked prices. C) the range between the high and low price for a particular year. D) the range between the high and low price for a particular trading day.

B) the difference between the bid and asked prices.

Covenants in the trust indenture of a municipal revenue bond are promises made by the issuer to the bondholders. All of the following are potential covenants except A) the maintenance covenant. B) the interest rate covenant. C) the insurance covenant. D) the rate covenant.

B) the interest rate covenant. There is no such thing as an interest rate covenant in a trust indenture. The interest rate will be stated, but not in the form of a covenant. In the maintenance covenant, the bond issuer promises to perform proper maintenance on the facility the bonds are financing. The insurance covenant requires the issuer to maintain property insurance on the facility to repair or replace the facility. The rate covenant requires the issuer to maintain the user fee for a revenue bond at a level sufficient to service the debt.

Equity options that are in the money by what amount will be automatically exercised at expiration, barring any other instructions from the customer? A) $1.00 B) $0.10 C) $0.01 D) $0.05

C) $0.01

In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is A) $2,000. B) $2,400. C) $5,600. D) $5,400.

C) $5,600. The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600).

A registered representative of a FINRA member firm specializes in handling business accounts. In which of the following accounts are the business owners subject to double taxation? A) Sole proprietorships B) LLCs C) C corporations D) S corporations

C) C corporations

Which of the following does the capital asset pricing model (CAPM) assume? A) Investors are comfortable with risk and believe that diversification can be used to reduce risk. B) Investors are comfortable with risk because they do not believe that it can be diversified away. C) Investors are averse to risk and believe that diversification can be used to reduce risk. D) Investors are averse to risk and believe that no type of risk can be diversified away.

C) Investors are averse to risk and believe that diversification can be used to reduce risk. The CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it. Therefore, the pricing of an asset must reflect that.

During the onboarding process of a personal securities account for a 65-year-old investor, the registered representative (RR) attempts to obtain the name of a trusted contact person who will be notified if the firm suspects exploitation. However, the investor looking to open the account declines to provide a contact name and information of a trusted adult. What is the best course of action? A) The firm cannot open an account of someone age 65 or older without the name of a trusted contact person. B) Open the account, and inform the investor that disbursements from the account must be made on the extended disbursement form providing a detailed explanation of the disbursement. C) Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person. D) Open the account, but place a dollar limit on disbursements from the account.

C) Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person. The firm is required to make a reasonable attempt to obtain the name and contact information of a trusted person. In the event the customer chooses not to provide it, the account may be opened without restriction.

Advantages of oil and gas direct participation programs (DPP) do not generally include which of the following? A) Depletion B) Intangible drilling costs (IDC) C) Potential alternative minimum tax D) Potential cash flow and/or income

C) Potential alternative minimum tax

Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is not allowable under the safe harbor provisions of Section 28(e)? A) Financial planning software B) Research reports C) Reimbursement for meal expenses incurred while attending an investment seminar D) Registration fees to attend an investment seminar

C) Reimbursement for meal expenses incurred while attending an investment seminar

Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? A) Treasury bond B) Treasury bill C) Treasury STRIPS D) Corporate A-rated zero-coupon bond

C) Treasury STRIPS The Treasury STRIPS is long-term, no-interim income security and has a locked-in yield because it is purchased at a discount from par. The Treasury bill is short term, the Treasury bond provides semiannual interest, and the corporate zero is riskier than the STRIPS.

Your customer contacts you proposing to invest a large sum of money in five different mutual fund families using Class A shares. Which of the following is correct and important to disclose to your customer regarding suitability and her proposal? A) She will not be able to switch between different funds within each family. B) She will not be able to achieve diversification this way. C) Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families. D) She should consider Class B shares only if investing a large sum to avoid paying the sales charge up front.

C) Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families. The larger the investment amount, the greater the breakpoint sales charge discount on Class A shares would likely be at a single fund company. While Class A shares are appropriate for larger investments because of breakpoint discounts, Class B (back-end load) shares, which offer no breakpoint discounts, are not. Therefore, the most important disclosure would be to explain that the advantage of breakpoint discounts on Class A shares could be lessened or lost if the investment is divided among so many different fund families. Diversification can occur within one fund family or across many, and moving funds from one fund to another within a single fund family is still possible.

An inherent risk associated with auction rate securities (ARS) is the potential to have A) a Dutch auction. B) a clearing rate. C) a failed auction. D) a reset rate.

C) a failed auction. An inherent risk associated with ARS is the potential for a failed auction. These can occur due to a lack of demand, resulting in no bids being submitted when it is time to reset the rate. ARS use a Dutch auction method to reset the clearing rate paid in the upcoming period.

Regulation T applies to A) margin accounts only for nonexempt securities. B) margin accounts only for listed securities. C) both cash and margin accounts for nonexempt securities. D) both cash and margin accounts for all unlisted securities.

C) both cash and margin accounts for nonexempt securities. Regulation T controls the credit that broker-dealers extend in all types of accounts and only applies to nonexempt securities.

An investor who buys a stock and wishes to limit the potential downside risk should A) buy a call option on that stock. B) enter a buy stop order. C) buy a put option on that stock. D) enter a sell limit order.

C) buy a put option on that stock. The purchase of a put option limits the downside risk to the difference between the stock price and the put's strike price. To that, the investor must add the cost of the "insurance" (the put). For example, consider an investor who purchases 100 shares of ABC stock at $55 per share and purchases one ABC 50 put for a premium of 2. If the stock price declines to $45 per share, the investor can put the 100 shares to the option writer and receive the $50 exercise price. Buying at $55 and selling at $50 is a loss of $5 per share ($500 on 100 shares). In addition, the investor paid $200 for the put so the maximum loss is $700. Expressed in math terms, the maximum loss is the purchase price of the stock minus the strike price of the put plus the premium ($55 minus $50 = $5 + $2 = $7 per share or $700). Because sell limit and buy stop orders are placed above the current market price, they don't hedge a decline in price. A sell stop order would work, but that is not a choice here.

Nasdaq Level 1 service A) displays the bid and ask quotes, with size, for each market maker in a particular listed security. B) enables market makers to update their quotes. C) displays the inside market: highest bid and lowest ask. D) displays the bid and ask quotes, with size, for each market maker in a particular unlisted security.

C) displays the inside market: highest bid and lowest ask.

An investor would assume all of the following risks when investing in a collateralized mortgage obligation (CMO) except A) interest rate risk. B) extension risk. C) regulatory risk. D) prepayment risk.

C) regulatory risk. Regulatory risk is generally not associated with investing in CMOs. All of the other risks are associated with CMOs. Extension risk is the uncertainty that the mortgages will be paid off later than expected. This typically happens when interest rates rise. After all, who is going to refinance a mortgage at a higher rate? Prepayment risk is just the opposite; the mortgages might be paid off more quickly and the income stream will cease. This typically happens when interest rates decline, but they are also factor in people moving and selling their homes. CMOs are subject to interest rate risk just like other debt securities.

Revenue bonds may be called for all of the following reasons except A) the facility has been destroyed. B) interest rates have fallen. C) the issuer has reached a statutory debt limit. D) a provision in a sinking fund agreement is calling for a partial call.

C) the issuer has reached a statutory debt limit.

The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than A) the temporary withholding of a disbursement from the account under Rule 2165. B) a change to the beneficiary of an existing Roth IRA. C) the opening of a new margin account. D) a change to the customer's investment objectives.

C) the opening of a new margin account. Existing customers received their initial Form CRS no later than July 30, 2020. They must also be sent a revised copy at or before the opening of a new account that is different from the retail investor's existing account. An example of this would be the opening of a margin account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

In a restricted margin account, if a customer fails to pay for a new purchase, the broker-dealer must sell out stock with a value of A) three times the margin call. B) stock cannot be purchased if the account is restricted. C) twice the margin call. D) the margin call.

C) twice the margin call. Twice the value must be sold out of the account to meet a Regulation T margin call. Cash buys stock in a margin account at a 2:1 ratio; therefore, stock will cover a cash debt at the rate of $2 of stock market value to $1 of cash debt.

When a client calls you and says they have some "lettered" stock, you know this stock A) has the number of shares written out on the certificate. B) is common stock. C) was acquired in a private placement. D) has the client's name on the certificate.

C) was acquired in a private placement.

A direct participation program (DPP) would not be structured as A) an S corporation B) an LLC C) a limited partnership. D) a C corporation

D) a C corporation 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.

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) $3 million. B) $1.4 million. C) a loss of $1.4 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

On April 15, 2016, your client purchased a variable life insurance policy with a death benefit of $450,000. The November 2019 statement showed a cash value of $28,000. If the client wanted to borrow as much as possible, the insurance company would have to allow a loan of at least A) $28,000. B) $25,200. C) $14,000. D) $21,000.

D) $21,000. Once a variable life policy is in force for a minimum of three years (this one is a bit longer than that), there is a requirement to make the loan provision available. At the three-year mark, that minimum becomes 75% of the computed cash value. Seventy-five percent of cash value of $28,000 is $21,000.

Benefits of a municipal bond advance refunding include A) tax savings. B) a higher rating and lower coupon rate. C) a decrease to the issuer's current interest cost. D) a higher rating and greater marketability.

D) a higher rating and greater marketability. Advance or prerefunding is refinancing an existing municipal bond issue before its maturity or call date by using money from the sale of a new bond issue. Because the proceeds of the new issue are placed into special U.S. government securities, the rating is automatically at the top. The higher rating increases the marketability. The current bond still exists until the specified call date. As such, the coupon has not changed. There are no taxes to be saved.

Which of the following statements regarding the visible supply in The Bond Buyer is true? A) It is a weekly listing of bonds sold in the past 30 days. B) It is a daily listing of available bonds. C) It is the total of the bonds offered in the Blue List. D) It is a daily listing of bonds to be offered in the next 30 days.

D) It is a daily listing of bonds to be offered in the next 30 days. The visible supply implies that the supply of bonds will be available for the visible future.

All of the following statements regarding planned amortization class (PAC) collateralized mortgage obligations are true except A) PACs have companion tranches. B) PACs have a more certain maturity date than comparable TACs. C) PACs have a lower-than-average prepayment risk. D) PACs have higher yields than comparable TACs.

D) PACs have higher yields than comparable TACs. PACs have two companion tranches: one to absorb prepayments and one to buffer against extension risk. Because there is less risk and a more certain maturity date, PACs tend to have lower yields than comparable TACs.

Which term describes the following position? Write 1 DOH Jan 30 call Write 1 DOH Jan 40 put A) Diagonal spread B) Short straddle C) Price spread D) Short combination

D) Short combination A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security.

Which of the following is not part of the Federal Farm Credit System? A) The Federal Land Banks B) The Bank for Cooperatives C) The Federal Intermediate Credit Bank D) The Federal Home Loan Banks

D) The Federal Home Loan Banks

When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include A) a detailed explanation of the reason for the change. B) a description of the objectives of the new fund and its prospectus. C) a statement that the change will not take place until at least 45 days after the communication was sent. D) a tabular comparison of the nature and amount of the fees charged by each fund.

D) a tabular comparison of the nature and amount of the fees charged by each fund. The only one of these meeting FINRA's requirement when a negative response letter is sent is the tabular comparison. While a description of the new fund and its prospectus is required, the communication must also include a comparison of the objectives of the two funds. The minimum time is 30 days (not 45) and there is no requirement to include an explanation.

In general, FINRA rules prohibit member firms from improper use of customer funds. One example is intentionally holding up an account transfer. Another is holding on to funds that belong to the customer. One of the features of FINRA Rule 2165 dealing with senior exploitation is the ability of a member firm to place a temporary hold on disbursements from the account of a specified adult. This serves as a safe harbor for funds held in the manner described above. A member relying on this rule must A) place temporary holds on disbursements of funds or securities from the accounts of specified adults whenever there is suspected exploitation. B) report all temporary holds to FINRA within 15 days of the end of the month in which the hold took place. C) segregate customer funds from those of the firm to avoid commingling of assets. D) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule.

D) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule. In FINRA's eyes, this is all about making sure that associated persons of the firm are adequately (and frequently) trained. Although customer and firm assets must be segregated, that is not part of the senior exploitation rule. The rule permits, but does not require, that these holds be placed on disbursements from the affected accounts−it is voluntary. There is no reporting of this activity, but detailed reports must be made and retained, containing the relevant information leading to the decision to enforce the hold.

An investor wanting to purchase municipal bonds should be aware that in most instances, if she buys the bond and then later sells it for a profit, then A) both interest received and capital gains will be exempt from taxation. B) neither interest received nor capital gains will be exempt from taxation. C) interest received will be taxable, but the capital gains are exempt from taxation. D) interest received will be exempt from taxation, but not the capital gains.

D) interest received will be exempt from taxation, but not the capital gains. The interest on municipal debt is largely exempt from taxation, but not the capital gains.

Private placements A) can only be advertised when 35 or fewer of the investors are nonaccredited. B) may never be advertised under any circumstance. C) may be advertised under all circumstances. D) may be advertised if all of those solicited are accredited investors.

D) may be advertised if all of those solicited are accredited investors. To solicit or advertise private securities offerings, all purchasers of the advertised securities must be accredited investors, or the business must reasonably believe that the investors are accredited investors at the time of the sale.

Market interest rates have risen steadily over the past several months. The market price of which two of the following shares would probably reflect the biggest impact of this change? I. Growth stock II. Money market mutual fund III. Preferred stock IV. Public utility stock

III. Preferred stock IV. Public utility stock Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock, with its fixed dividend, and utility stocks, with their high degree of debt leverage, are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

Unrealized gain in a mutual fund portfolio does which of the following? Increases the dividends paid to shareholders Represents the undistributed income and the growth in market value of securities held in the portfolio Is realized by shareholders only when they redeem their shares Has no effect on shareholders until the annual long-term capital gains distribution is paid

Represents the undistributed income and the growth in market value of securities held in the portfolio Is realized by shareholders only when they redeem their shares

In a functional allocation oil and gas program, which of the following statements are true? The general partner picks up all tangible drilling costs. The general partner picks up all intangible drilling costs. The limited partners pick up all tangible drilling costs. The limited partners pick up all intangible drilling costs.

The general partner picks up all tangible drilling costs. The limited partners pick up all intangible drilling costs. In a functional allocation program, the general partner picks up all tangible drilling costs, while the limited partners pick up all intangible drilling costs. As intangible drilling costs are deductible as they are incurred, this type of program benefits the limited partners. Tangible drilling costs, however, are deductible pro rata over the estimated life of the well.

On the same day in a new margin account, a customer buys 1,000 XYZ at $80 and sells short 1,000 ABC at $20. Which statements are true? The margin deposit is $50,000. The margin deposit is $60,000. The minimum maintenance margin requirement is $25,000. The minimum maintenance margin requirement is $26,000.

The margin deposit is $50,000. - The customer must put up 50% on both the purchase and short sale. That results in a margin deposit of $50,000. The minimum maintenance margin requirement is $26,000. The maintenance requirement on the long position is 25% of the current market value (25% × $80,000 = $20,000). The maintenance requirement on the short position is 30% of the current market value (30% × $20,000 = $6,000). Those two total $26,000.

An investor purchased a corporate bond with a 6% coupon at a net price of 101. The bond had accrued interest for 45 days. Which of the following statements regarding the confirmation of this trade is correct? A) The total amount due on the purchaser's confirmation will appear as $1,017.50. B) The total amount due on the purchaser's confirmation will appear as $1,025. C) The total amount due on the purchaser's confirmation will appear as $1,010. D) The total amount received on the seller's confirmation will appear as $1,002.50.

The total amount due on the purchaser's confirmation will appear as $1,017.50. Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 6% coupon, the bond pays $30 every 6 months. One quarter of that is $7.50 so the total cost to the purchaser is the $1,010 plus the $7.50, or $1,017.50.

A broker-dealer that is a financial advisor to a municipal issuer cannot act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. cannot act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both services. may always act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. may always act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both service.

cannot act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. cannot act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both services. Broker-dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by Municipal Securities Rulemaking Board Rule G-23 to also act as underwriters for the same issue, regardless of whether the underwriting process has been done by competitive bid or was negotiated. In the event that an exception is allowed, or the broker-dealer performs an advisory function specifically associated with the underwriting, the broker-dealer would be limited to accepting fees for the advisory service only and not be allowed to accept fees for any underwriting services.