Series 7 Test Review

5. A customer has an investment of 10% of a leasing partnership, giving him a cost basis of $100,000. If the DPP operator fails, leaving $1 million to pay for a $2 million non-recourse loan, what is the maximum liability of the investor?

$100,000 $2 million of the debt is unpaid. However, the investor has no liability beyond the original investment of $100,000. The loan is non-recourse so the customer's basis is $100,000, which represents his maximum liability. Limited partners are not liable for non-recourse debt.

4. A customer writes 2 ABC July 15 puts at 2 when ABC is 14. If the contracts are closed at a premium of 4 when ABC is 13, the customer has a

$400 loss The investor receives $400 in premiums (2 × $200) and pays $800 to close out the options (2 × $400), resulting in a net loss of $400 ($800 − $400).

3. You are reviewing an investor's balance sheet. The following items would be found on a balance sheet and help determine net worth:

401k balance and credit card balance The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills such as the electric bill are found on the income statement.

3. ABC Company has issued $20,000,000 of convertible bonds with a coupon of 5% and a current market value of 120. The conversion price is $40. If all the bonds are converted, how many additional shares of common stock will ABC have outstanding?

500,000 Each bond will convert to 25 shares of common stock ($1,000/$40). 20,000 bonds were issued ($20,000,000/$1,000). Therefore, 500,000 additional shares (20,000 x 25) will be outstanding if all the bonds are converted.

4. On November 4, a customer writes an S&P 100 Jan. 785 put at 6. The maximum potential gain on this position

600 The potential gain on a short option is the premium received on the transaction.

4. A customer establishes the following positions: Buy 100 ABC for 63 Write 1 ABC Jan 70 call for 1 What is the customer's maximum gain?

800 Maximum gain on the covered call position occurs when the stock's market value rises. The short call is exercised when the stock is above 70, so the stock bought for 63 will be sold for 70—a profit of $7 per share. In addition, the customer receives the premium of $1, so the total profit is $800 ($700 + $100).

3. A complete customer profile includes both financial and nonfinancial investment considerations. Which of the following is considered financial investment information?

Amount of discretionary income Discretionary income involves a concrete sum of money and cash flow and, thus, is financial information. The other choices involves goals and risk and do not represent items on a balance sheet or income statement and, thus, are nonfinancial considerations.

5. Require an amendment to a certificate of limited partnership:

An increase in contribution by any partner, general or limited A change in partnership sharing agreements The discovery of an error in the partnership certificate currently on file The certificate would not be amended unless the information provided in the certificate changes. The certificate contains no operating information regarding profits or losses.

4. A customer establishes the following positions: Long 1 ABC Jun. 25 call at 2 Long 1 ABC Jun. 25 put at 2 At expiration, the position is profitable if the stock price is:

Below 21 and above 29 The investor purchased a long straddle (both a call and put with the same strike prices and expiration months). While straddle investors are uncertain about the direction of the market, long straddles require substantial price movement (volatility) for profit because the two premiums paid must be recovered. In this example the breakeven of the call is found by adding the total premiums of 4 to the call strike price of 25 (25 + 4 = 29). The breakeven of the put is found by subtracting the total premiums of 4 from the put strike price of 25 (25 − 4 = 21). The market must either move up by 4 (total premiums paid) or down by 4 to be at breakeven. For profit, the market must be above or below the breakeven points.

4. A customer purchased 100 shares of stock and told her registered representative that she is nervous about the stock going down and losing a great deal of money. Which of the following strategies would give the customer the most protection if the stock falls in value?

Buy a put contract Buying a put option contract on the stock provides a hedge (for protection). If the stock were to fall below the strike price, the customer, in this case, would be able to exercise the put option and sell the 100 shares at the strike price, closing her position and limiting her losses.

4. A customer believes ABC's stock price will rise, but does not currently have the money to buy 100 shares. How could the customer use options to profit from a rise in the stock's price?

Buy calls and write puts They are both bullish strategies.

4. If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk?

Buying 5 puts on the stock A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk.

4. A technology fund manager concerned about a downturn in the value of his portfolio would hedge by

Buying narrow-based index puts The portfolio consists of sector-specific securities, so broad-based index puts such as the OEX would not be appropriate. Instead, the manager should buy narrow-based index puts (for example, indices on technology and electronics).

3. Must be registered as investment companies under the Investment Company Act of 1940:

Closed-end investment companies Separate accounts of insurance companies offering variable products Under the Investment Company Act of 1940, face amount certificate companies, unit investment trusts, open- and closed-end management companies, and separate accounts of insurance companies used to fund variable annuity and variable life contracts, must register with the SEC as investment companies. Note that the separate account is registered as an investment company, not the variable contract.

3. A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. Her current portfolio consists of $50,000 cash $200,000 in retirement accounts $100,000 in various individual stocks in different industries $100,000 in a balance fund She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which of the following investments would be the most appropriate?

For someone that is willing to take the risk and invest for the long haul, a small or mid-cap growth fund would be appropriate.

3. A fund seeks maximum capital appreciation by investing in common stocks of companies located outside the United States. The management selects well-established companies that are listed on their national stock exchanges and that have demonstrated high earnings potential. This information describes which of the following mutual funds?

Foreign funds, which may also be called international funds, invest in common stocks of companies located outside the United States.

3. Conduit Theory of Taxation

Funds are not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are taxed on earnings they receive in cash. By qualifying as a regulated investment company (the conduit, or pipeline, tax theory), the fund is liable only for taxes on retained income if it distributes at least 90% of its net investment income to shareholders. Investors will pay taxes on distributed income whether received in cash or reinvested.

3. An 18 year old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is unsuitable because:

Her situation exposes her to surrender charges and early withdrawal penalties The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59½.

4. In a strong bull market, which of the following positions utilizing leverage has the potential for the highest percentage gain?

Holding calls Both a long call and a long stock position are profitable in a rising market. However, because options use leverage, the profit relative to the money invested is larger with option positions. A put writer also profits in a rising market, but only by the amount of the premium. A short seller loses money if the stock rises.

4. Call Options

In-the-money whenever the market price is greater than the strike price.

4. Put Options

In-the-money whenever the market price is lower than the strike price

4. If TCB is trading at 43 and the TCB Apr. 40 call is trading at 4, what are the intrinsic value and the time value of the call premium?

Intrinsic value 3; time value 1 The option is in-the-money by 3 points because the strike price is 40 and the market price is 43. This sets a minimum premium of $3 per share. Because the actual premium is 4, the balance of 1 represents time value.

3. ADRs:

Key risks to identify include currency and political risks ADRs make it easy to own a foreign security. Dividends are received in US dollars

1. Correspondence

Letters sent to fewer than 26 retail investors within a 30 calendar-day period are considered correspondence, which does not need prior approval, but it is subject to subsequent review.

1. Retail communication

Letters sent to more than 25 retail investors within any 30-calendar-day period are considered retail communication and must be approved by a principal before use

3. SEC regulations for securities issued by investment companies prohibit which of the following.

Open-end funds from issuing preferred stock, open-end funds from issuing bonds.

5. The rights and liabilities of general and limited partners are listed in the

Partnership agreement The agreement is the contract between the general and limited partners, and contains each entity's rights and duties

5. Common to both DPPs and REITs

Pass-through of income Centralized management Capital gains distributions Both DPPs and REITS are professionally managed pools that pass through income and capital gains distributions to participants. REITS, unlike DPPs, do not pass through losses.

3. Characteristics of Money Market Funds:

Portfolio of short-term debt instruments Offered without a sales load NAV of $1.00 per share A beta of 1.00 means that a security (or portfolio) has the same price volatility as the overall market. That is certainly not the case with money market fund shares. Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share).

5. In discussing a direct participation program with your customer, she notes investment characteristics that are important to her and some that are not. For a DPP to be considered suitable for the customer, rank the following items in order of those that should be most important to least important:

Potential for economic gain Tax write-offs Liquidity and marketability SEC approval In the eyes of the IRS, a program's economic viability should be the most important aspect of the investment for a limited partner and the first priority in the assessment of the DPP. While the IRS considers programs designed solely to generate tax benefits abusive, they do allow for some in terms of writing off passive income and allowable tax credits so these factors would be the next concern for an investor. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority, and because there is no SEC approval of any investment, it would be of no concern.

5. Priority of payments when a limited partnership is liquidated:

Secured creditors General creditors Limited partners General partners

4. A stock selling for $62 is expected to decline temporarily in price, but the long-term trend is favorable. To take advantage of the temporary decline and generate income, the stockholder should

Sell a call The sale of a call allows the investor to collect premiums. Because he owns the stock, the option is covered and no margin is required. Alternatively, the investor could buy a put to move more in-the-money as the stock price falls temporarily. He could later liquidate the put at a profit, but buying a put would not generate income.

3. If your customer invests in a variable annuity and chooses to annuitize at age 65, then:

She may choose to receive monthly payments for the rest of her life The accumulation unit's value is used to calculate the total value of the account. When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account's performance.

4. Which of the following positions subject an investor to unlimited risk? Short naked call Short naked put Long put Short sale of stock

Short naked call and short sale of stock Short stock and short naked calls subject an investor to unlimited risk because there is no limit on how high a stock's price might rise. Risk is limited for the other positions.

4. In a volatile market, what option strategy carries the most risk?

Short straddle To establish a short straddle, the investor sells a call and a put; the short call carries unlimited loss potential.

4. On a single day, a customer purchases 15 TPL Sep. 50 puts at 6 and 15 TPL Sep. 50 calls at 1. If the price of TPL is $45 per share and the customer has no other security positions, what is this position called?

Straddle A long straddle is the purchase of a call and a put on the same stock with the same strike price and expiration.

5. The certificate of limited partnership contains

The amount of time the partnership expects to exist All conditions of dissolution The certificate contains, among other information, the limited partnership's name and business, the amount of time the partnership intends to exist, and the conditions of dissolution. It does not contain each partner's net worth, nor is there a market-out clause like those generally associated with underwriting agreements for new issues.

3. In July, a customer invested $10,000 in the ABC mutual fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes?

The capital gain distribution is treated as long term The capital gain from redemption is treated as short term.

3. An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for 3 years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer?

The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best, because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the 3 years of his investment.

3. An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose:

The scheduled premium policy because the contract is issued with a minimum guaranteed face amount.

4. If a customer writes 1 uncovered in-the-money put, the maximum loss to the customer is

The strike price minus the premium multiplied by 100 shares If the stock becomes worthless, the investor will be forced to buy the stock at the strike price, but still keeps the premium received when the option was written. Essentially, maximum loss is breakeven multiplied by 100 shares.

2. One of your existing clients wishes to open a new account in the name of his spouse and enter orders on her behalf.

This action is prohibited unless the spouse signs a trading authorization.

1. Accredited investors

To be accredited, a couple must have at least $300,000 in annual income. For individuals, the income threshold is $200,000.

4. Index options

Used to protect against systematic risk Systematic risk is the market risk applied to the value of an entire portfolio instead of just one stock. Therefore, an investor would use index options to protect against systematic risk.

2. A customer with low net worth contacts you and wants to purchase penny stocks. Althought the customer is willing to speculate you feel that penny stocks are not appropriate for this person.

Your responsibility is to inform the customer that in your opinion this is a trade that is not suitable.

2. In a JTWROS account, each party has

an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

2. If an investor wishes to open a cash account in her name only and allow her spouse to make trading decisions as well as withdraw cash and securities, she must instruct her broker-dealer to open a

cash account with full power of attorney

3. A customer is very concerned about investments that may not keep pace with inflation. He asks about what securities would have the least exposure to inflation risk. Which of the following would be the best answer?

common stock

Current ratio

current assets / current liabilities

3. Liquidity Ratios

current, quick, days cash on hand

1. Rule 144

does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

1. firm commitment

is the most commonly used type of underwriting contract. Under its terms the underwriter commits to buy the securities from the issuer, and as such is acting in a dealer capacity.

1. Generic advertising of investment companies

presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker-dealer who is placing the ad must be named.

3. t-bill

priced on bid and ask percentages This represents a quote for a T-bill. The quote represents a percentage discount from 100%. It is easy to identify because it looks like the bid price is greater than the ask price. This is the only quote you will see on the Series 7 that looks like this. But if you take 2% from 100%, that is 98%, and if you take 1.5% from 100%, that is $985. Therefore the quote is Bid $980 and the ask is $985. For your exam it is only important to identify the quote as a T-bill quote, not do the calculation.

4. If an investor establishes a call spread, and buys the lower exercise price and sells the higher exercise price at a net debit, he anticipates that the:

spread will widen Debit spreads are profitable when both sides are exercised or the spread widens between the premiums. Credit spreads are profitable when both sides expire or the spread narrows between the premiums.

2. When a customer, who is at least 59 ½, withdraws money from a traditional IRA that has been funded totally with deductible contributions the entire amount withdrawn is subject to

taxation at ordinary income tax rates

3. A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined

that selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk.

2. The owner of an IRA, age 45, has contributed $10,000 into the account and the IRA is now worth $20,000. The owner is going to convert the entire $20,000 into a Roth IRA. The tax consequences are

that the $20,000 is taxable as ordinary income in the year of the conversion.

3. Section 529

the maximum annual contribution varies from state to state. Have no age limits. No state residency requirement for owners or beneficiaries.

2. Perhaps the most important thing to understand when a business is organized as a sole proprietorship

the owner is liable for all the debts of the business

1. The SEC regulates

the secondary market, investment adviser and client relationships, initial public stock offerings. It does not regulate intrastate securities offerings.

1. Primary difference between underwriting syndicate member and a selling group member in a firm commitment underwriting

the syndicate assumes liability for unsold shares, the selling group does not.

2. If two customers are tenants in common in a joint account

they need not make equal investments in the account, and they need not have equal interests in the property in the account.

6. A Western account underwriting of $100 million in municipal bonds is established. A member firm agrees to underwrite 10% of the issue and sells out its entire allotment of $10 million. However, some of the other firms participating in the underwriting are unable to sell their full allocation, and $15 million of the bonds remain unsold. Regarding the underwriting firm who sold their entire allotment, what is their financial obligation?

$0 Divided liability in a Western account means that if a member meets its commitment, it has no further liability for unsold bonds.

4. On December 13, an investor buys 6 ABC Feb. 60 calls at 2.25 each, when ABC is trading at 59.50 per share. If the calls expire unexercised, how much money will the investor lose.

$1,350 Buyers of options lose premiums if the options expire unexercised. The most this investor can lose is the number of contracts (6) multiplied by the amount of the premium (2.25). This investor's maximum loss is $1,350.

4. A customer is short a DMF 50 call for which he received a premium of 4. Seven months later, the call was exercised when the current market for DMF was 56. Under the internal revenue code, what were the proceeds?

$5,400 He wrote a call and received a premium of 4. He later sold the security at $50, which made his total receipts for the stock $54. Proceeds in this case refer to the total amount he took in (a $400 premium plus $5,000 upon the sale).

4. If an investor buys 1 KLP Oct. 95 put at 6.50, what is the investor's maximum potential gain

$8,850 The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). One contract represents 100 shares, so the buyer's maximum gain is $8,850 if the stock declines to 0. Because put buyers are bearish, they will make money if the stock falls below the breakeven point of 88.50.

2. Under FINRA rules, the carrying member, after receiving account transfer instructions from the receiving member must validate the positions within the account in

1 business day of receipt.

3. Commercial paper is defined as a money market security if its maturity does not exceed how many days?

270 days

4. A customer establishes the following positions: Buy 100 ABC at 28 Buy 1 ABC Dec. 25 put at 2 What is the breakeven point?

30 The breakeven point is where an investor neither makes nor loses money. In this hedged position, the buyer must recover the cost of the stock and the premium paid to break even (28 + 2 = 30).

4. Your client sells 1 naked MAV Oct. 40 call at 2 when the market price of MAV is $41. What must MAV be selling at for the client to break even?

42 The breakeven point for a call is the strike price plus the premium. The breakeven point is the same for both the buyer and writer.

4. A customer wrote 10 KLM Jun. 80 calls for a premium of 4.75 at a time when the market value of KLM was 81.75. What is his gain or loss if he now closes out his positions at 2.12?

A $2,630 gain If the customer sold at 4.75 and purchased at 2.12, the customer nets 2.63, which is multiplied by 100 to yield a $263 gain per contract: 10 x 263 = 2630

3. In portfolio theory, the alpha of a security or a portfolio:

A measure of variance in returns of a portfolio divided by its average return

3. Hedge fund

A private and unregistered investment pool that accepts investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets As of the date of this course, hedge funds are not registered with the SEC (their managers generally are) and are invariably sold in private offerings, usually under Regulation D of the Securities Act of 1933. Hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets are some of the primary techniques used by these funds.

3. US Gov't agency issues differ from those offered directly by the US Treasury in that:

Agency issues typically carry higher returns than Treasury issue because of the lack of direct government backing. Agencies, with only a very few exceptions, GNMA being one, do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

3. Segment rotation

Altering portfolio composition based on which sectors are poised to outperform as the business cycle is changing phases.

5. A limited partnership brought to market through a private placement may be sold to:

An investor with over $1 million net worth 35 unaccredited investors An unlimited number of accredited investors The primary sale of a limited partnership through a private placement is covered by Regulation D. Sales of the issue may be made to 35 individuals, which need not meet any financial standards. If, however, sales are made to more than 35 individuals, any other purchasers must meet certain standards of financial accreditation, known as accredited investors. An accredited investor would include an investor with $1 million or more in net worth not including net equity in a primary residence, or an individual who has earnings of $200,000 in the current year and $200,000 in the previous 2 years, or is an officer or insider of the offering. Also, any large financial institution, such as a bank, an insurance company, a savings and loan, etc., would be considered an accredited investor.

5. Investing in undeveloped land satisfies which of the following primary objectives?

Appreciation The primary reason to invest in raw land is the appreciation in value.

4. Under FINRA rules, customers who are approved to trade options must receive a copy of the OCC disclosure booklet

At the time of or before account approval All customers who are approved by the ROP to trade options must receive a copy of the OCC Disclosure Booklet at or before the time the account is approved to trade options.

4. A client writes 1 Dec. 45 put and buys 1 Dec. 60 put. This is a

Bear spread and debit spread This is a put debit spread, and bears buy puts. The 60 put is worth more because it has a higher strike price.

2. suitable investments for traditional IRA

Blue chip common stocks, A corporate bonds, and AAA US government agency bonds are all suitable investments for a traditional IRA. AAA municipal bonds are not.

4. A client buys 1 Jul. 50 call and writes 1 Jul. 60 call. This is

Bull and debit spread This is a call debit spread, and bulls buy calls. The 50 call is worth more because it has a lower strike price. Long the lower call is bullish; short the lower call is bearish.

5. Advantages of owning a real estate DPP program include all of the following:

Cash flow Appreciation Depreciation It is impossible to deplete (use up) real estate; depletion only applies to natural resources, such as oil or gas.

5. A method of analyzing limited partnerships by identifying the sources of revenues and expenses is known as:

Cash flow analysis

5. An investor in an oil and gas limited partnership program is a subject to the economic consequences of:

Depreciation on tangible assets Operating losses Recourse loans Nonrecourse loans only have economic consequences for investors in real estate programs.

6. PHAs and NHAs

Directly backed by the US government Public Housing Authority and New Housing Authority issues are unique as municipal instruments because they are fully backed by the U.S. government.

4. On exercise of the option, the holder of a long call will realize a profit if the price of the underlying stock:

Exceeds the exercise price plus the premium paid. To profit on a long call, the market price must exceed the strike price plus the premium paid (the breakeven point).

5. Limited partnership programs are categorized as direct participation programs. The term "direct participation" refers to the:

Flow-through of profits and losses of the partnership to the individual limited partners Understanding the flow-through concept is critical with DPPs. Only DPPs allow flow-through of losses.

5. An investor acquires limited partner status in a direct participation program when

He and the general partner have both signed the subscription agreement The investor must sign a copy of the subscription agreement, but he is not considered a limited partner until the agreement is also signed by the general partner indicating acceptance of the limited partner.

1. When to discuss an investment

He may discuss the investment returns of the mutual fund as long as he uses a specific time frame. When discussing an investment, he must disclose all material facts pertaining to the investment, both negative and positive.

5. What happens if a limited partner begins making business decisions for the partnership?

He might jeopardize his limited liability status. If a limited partner has control over the partnership operation (i.e., he makes partnership decisions), he could be judged a general partner and, thus, have unlimited liability.

6. Your customer, a small business owner, likes investments that are short term, relatively safe from credit risk, and liquid. He's heard that higher rates of return can be realized from auction rate securities than the rates he is currently getting on the Treasury bills in his portfolio. He asks you to explain them to him. Which of the following would you note as reasons why they're not suitable? I. Auction rate securities are intended as long-term investments II. Interest or dividend rates are reset at establish intervals based on a Dutch auction III. If the auction fails, holders of ARSs may not have immediate access to his funds IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the time of the auction.

I and III Auction rate securities (ARSs) are long-term variable rate bonds with maturities of 20 to 30 years tied to short-term interest rates. As long-term instruments they are not suitable for an investor favoring short-term investments. Additionally, interest rates are reset using a Dutch auction method at predetermined intervals, typically 7, 28, or 35 days. A failed auction can occur due to lack of demand and hence no bids are received to reset the rate. This risk would not align with investment objectives such as safety and liquidity.

1. Rule 506

If the private placement sells to any nonaccredited investors, no advertising or general solicitation is allowed. If the sale is exclusively to accredited investors, the private placement may advertise.

6. Private purpose bonds

Interest on private activity municipal bonds is included in the taxable income of an investor who is subject to the alternative minimum tax.

6. Revenue bonds issued by a state or municipality:

Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve Because revenue bonds are not backed by the full faith and credit of the municipality that issues them, the earnings of the revenue-producing project must be large enough to cover the interest and principal payments.

4. Bull Spread example

Long July 30 put, short July 35 put A debit call spread is bullish and a credit put spread is bullish. Long July 30 put, short July 35 put is the only bullish position in the answer choices. Short August 40 call, short August 40 put is a short straddle, not a spread, and the remaining two positions are bearish; long August 30 call, short August 25 call and long May 40 put, short May 35 put.

3. A fundamental analyst researching a stock is concerned with:

Management efficiency Stock's market price as a multiple of the company's earnings Capitalization ratio

2. To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes

Name and taxpayer identification number

3. A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus were that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken?

No action would be taken

4. Your clients, an elderly retired couple on a small fixed monthly income, want to write uncovered (naked) calls in their joint account to generate income. For this account, this option strategy would most likely be deemed

Not suitable, as this is a speculative strategy with unlimited loss potential Writing naked calls has an unlimited loss potential and is considered a speculative option strategy. While it can be employed in any investment account (single or joint) to generate income, its speculative nature and unlimited loss potential would make it unsuitable for retired persons currently on a small fixed monthly income.

3. Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86 while the NAV was $10 per share. The client's order is placed at 2:00 PM eastern time. On the basis of this information, you could confirm to the client a purchase of:

Nothing yet, as you must wait for the POP to be computed based on the day's close. Mutual funds use forward pricing, so we never know what we'll be paying per share (if purchasing) or receiving per share (if redeeming) until the next calculated price.

5. If an investor expects to have a large amount of passive income over the next 2 years, which of the following programs listed will most likely lead to the largest amount of shelter?

Oil and gas drilling Passive income can only be sheltered by passive loss. Oil and gas drilling programs allocate the majority of investment dollars to drilling. These are intangible drilling costs (IDCs), which are 100% deductible when drilling occurs.

6. Moral Obligation

Paid by a state's legislative apportionment of funds to service the debt If a moral obligation bond goes into default, bondholders do not have the right to sue to force a tax to pay off the bonds. The only way bondholders can recover the principle is through legislative apportionment. The issuer's legislative body has to appropriate funds to pay off the bonds. With a moral obligation bond, issuers have the moral, but not legal, obligation to service the debt.

6. If the state of Texas has solicited bids for a proposed municipal bond offering, the underwriters for that offering would be the syndicate that would

Sell the issue at the lowest cost to the State of Texas The syndicate manager that offers the lowest net interest cost to the State of Texas will be awarded the bid. Once the State of Texas decides how much money it must raise, the question is how much this issue will cost in net interest during its entire life.

6. Syndicate Letter

Spells out the rights of each member of the underwriting syndicate and how the issue is allocated The syndicate letter (also called the agreement among underwriters, syndicate agreement, syndicate account letter, or account summary report) is the document that forms the syndicate and spells out each member's rights and obligations. The allocation of the new bond offering that is accorded each syndicate member is detailed in this agreement.

5. Limited partners in a real estate partnership:

Sue the general partner for violating the partnership Monitor the partnership on an ongoing basis Receive their pro rate share of income or loss The limited partners have the right to inspect partnership records and to sue a general partner who acts outside the partnership agreement. The general partner normally sets his own compensation in the original agreement and makes all management decisions relative to the partnership's interests.

5. Limited partnerships

The maximum commission in selling partnership offerings is 10% Commissions taken are not deducted from the original investment to determine beginning cost basis Under FINRA rules, the maximum compensation that can be taken by sponsors selling direct participation programs is 10%. Up-front costs, such as commissions taken and accounting costs, do not reduce the beginning cost basis.

3. Variable Annuities:

The rate of return is determined by the underlying portfolio's value Such an annuity is designed to combat inflation risk Number of annuity units becomes fixed when the contract is annuitized The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates.

6. Suitability of Municipal Bonds

The tax-free interest payments make them more suitable for those in higher tax brackets. The tax-free interest is why municipal bonds are not considered suitable investments to be included in one's retirement account such as an IRA. Tax-free interest payments are more suitable for those where the tax advantage has the most impact. That would be for those in higher tax brackets who would pay more taxes on the interest received if the interest payments were taxable. Additionally the tax-free interest is why municipal bonds are not suitable for retirement accounts. This is because the earnings in retirement accounts are already tax deferred and the impact of receiving tax-free interest is lost or diminished.

5. In a direct participation program limited partnership, the general partner has:

Unlimited liability and an active role In a direct participation program (DPP) limited partnership, the general partner is the active partner managing the business who assumes unlimited liability.

5. When a certificate of limited partnership is required to be rerecorded or amended, the general partner must file

Within 30 days of the change Refiling must occur within 30 days of any significant change to partnership information on file.

3. A corporation has determined that if it were to go bankrupt, common stockholders would receive $8.47 per share. This calculation is known as:

book value per share

2. A customer asks your advice regarding a deferred compensation plan at work. You state that deferred compensation plans

may be somewhat risky because the employee covered by the plan has no right to plan benefits if the business fails.

1. Qualification

means that the state will collect all the information and decide whether or not to clear the offering for sale in the state. Done through one state

6. Moody's Investment Grade (MIG) Ratings are applied to:

municipal notes

1. Sales literature for money market mutual funds

must include the fact that it is possible to lose money when investing in the fund.

2. Deferred compensation plans

not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

2. All taxable distributions from a retirement account, including IRAs, are taxed as

ordinary income, not capital gains.

Quick Asset Ratio

quick assets (cash and debtors) /current liabilities (share premium account) quick assets = current assets - inventory

2. If a customer has contributed $1,000 annually into her Roth IRA for 7 years, the customer will not be taxed on the distributions if

she is over the age of 59 ½ and the money has been held in the account for 5 years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual.