Series 7 Top-off Question Review:

A commercial bank purchasing qualified GO bonds may deduct what percentage of the interest cost necessary to fund the purchase? A) 80%. B) 50%. C) 100%. D) 20%.

A A bank-qualified municipal bond issue is a small issue, generally a GO issue of $10 million or less. If a bank were to purchase any part of a qualified issue, 80% of the annual costs necessary to fund the purchase would be tax deductible to the bank

All of the following statements regarding municipal bond official statements are true EXCEPT: A) an official statement must be delivered only upon request of a retail customer. B) the MSRB does not require the preparation of a final official statement for new municipal bond issues. C) all retail purchasers of a new municipal bond issue must receive a final official statement. D) a retail customer must receive an official statement no later than the settlement date.

A A final official statement must be delivered to retail buyers of a new issue on or before the settlement date. The MSRB does not regulate issuers, but does make this requirement of bond dealers.

A 3× leveraged inverse exchange-traded fund means: A) The goal of the fund is to have the shares go up by 3 times the amount that the targeted index falls. B) The fund may not use more than 3 leverage producing derivative products within its fund portfolio like options or futures. C) The fund shares cannot be purchased on margin by investors. D) There is no risk if the targeted index rises.

A A leveraged inverse fund attempts to produce returns opposite of the targeted index in the amount designated by the leverage multiplier; in this case, three times. If the targeted index rose, the inverse fund would fall by the leverage multiplier and in that regard substantial risk must be recognized due to the leverage. Leveraged funds will utilize derivative products like options and futures to help meet the desired goal and can use investment strategies such as margin to purchase securities for the fund portfolio as well. Lastly, because the fund shares are exchange-traded, they can be purchased on margin by investors.

Because money market instruments are designed to meet the short-term cash needs of issuing institutions, which of the following is NOT a money market instrument? A) Newly issued Treasury notes issued to meet a specific government funding requirement. B) Commercial paper issued by the finance corporation of a major automobile manufacturer. C) Municipal Construction Loan Note. D) Federal Farm Credit Bank note maturing in one year or less.

A A newly issued Treasury note would have a maturity of 2 to 10 years and would not be considered a money market instrument. A Federal Farm Credit Bank note maturing in one year or less is a money market instrument, as is commercial paper issued by the finance corporation of a major automobile manufacturer with a maturity of less than one year. Municipal construction loans issued to provide short-term financing for a construction project are money market securities.

When XYZ stock trades at 40 and an XYZ Oct 35 call trades at 5, which of the following is TRUE? A) The time value is zero. B) The option's time value equals its intrinsic value. C) The option is out-of-the-money. D) The option is at-the-money.

A An option's premium consists of time value and intrinsic value. In this situation, the call is in-the-money by 5 (intrinsic value is 5), because the market value of 40 exceeds the strike price of 35 by 5. If the total premium is 5 and the intrinsic value is 5, the time value must be 0. The option is at parity, which means the premium equals the intrinsic value

All of the following are true regarding nonqualified deferred compensation plans EXCEPT: A) employees may use accumulated funds as collateral for a bank loan. B) income taxes on compensation are not due until constructive receipt. C) the plans need not be offered to all employees. D) IRS approval is not needed for deferred compensation plans.

A Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.

XYZ Corp. has set Friday, January 23rd, as the record date for its next quarterly dividend distribution. To receive the dividend, a customer, long 1 XYZ Feb 40 call, must issue exercise instructions on or before A) Wednesday, January 21st B) Monday, January 19th C) Tuesday, January 20th D) Friday, January 23rd

A Dividends are paid to investors who are owners of record as of the close of business on the record date. When a call option is exercised, money and stock are exchanged (settlement) on the second business day after notice is given to the OCC. Therefore, an investor who wishes to receive a dividend must exercise a call no later than the second business day prior to the record date (i.e., the day before the ex-date).

If a fund has a fixed portfolio of municipal bonds with long maturities, how will substantial changes in general interest rates affect the fund's portfolio? A) The current value will fluctuate significantly, but the investment income will remain relatively unchanged. B) The current value will not change, but the investment income will fluctuate significantly. C) Both the income and the current value will fluctuate significantly. D) Both the income and the current value will remain unchanged.

A For a fund with a fixed portfolio of long-term municipal bonds, the market value of the portfolio will fluctuate with changing interest rates, but the income will remain unchanged.

A callable municipal bond maturing in 30 years is purchased at 102. The bond is callable at par in 15 years. If the bond is called at the first call date, the effective yield earned on the bond is: A) lower than the yield to maturity B) higher than the yield to maturity. C) not determinable. D) the same as the yield to maturity.

A If a premium bond ($1,020) is called the effective yield is the YTC (yield to call) and that yield is lower than the YTM (yield to maturity).

The writer of an equity call option who is assigned A) must deliver stock in 2 business days B) can enter a closing transaction on the day the exercise notice is received C) must deliver stock in 1 business day D) can enter a closing transaction any time before exercise settlement

A If exercised, the assigned call writer must deliver the underlying stock within 2 business days (regular way settlement for equity transactions).

If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that: I. dividend distributions will be reinvested at net asset value. II. dividend distributions will be reinvested at the public offering price. III. capital gains distributions will be reinvested at net asset value. IV. capital gains distributions will be reinvested at the public offering price. A) I and III. B) I and IV. C) II and IV. D) II and III.

A Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value.

Which of the following statements regarding a discretionary account is NOT true? A) Securities in a discretionary account may not be rehypothecated. B) A principal must review all account activity frequently. C) A principal must accept the account in writing. D) A principal must review all trades in the account promptly after execution.

A No limits are placed on the rehypothecation of securities in an account based solely on its discretionary status. Both cash and margin accounts may be discretionary.

Which of the following is applicable to the NASDAQ OMX PHLX? I. Regional exchange operated by Nasdaq II. Offers trading in equity securities and options contracts III. Is a completely electronic exchange with no physical trading floor IV. Regional exchange operated by FINRA for the execution of OTC stocks only A) I and II B) I and IV C) I and III D) II and III

A The OMX PHLX is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on floor.

If stock market indexes, such as the S&P 500 and the DJIA, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is: A) overbought. B) unstable. C) becoming volatile. D) oversold.

A The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom.

In what order, from first to last, would a syndicate member allocate orders for a new municipal bond issue? I. Presale orders. II. Designated orders. III. Member orders. IV. Group net orders. A) I, IV, II and III. B) III, I, II and IV. C) IV, II, I and III. D) III, II, I and IV.

A The standard order priority for municipal bond issue allocation as stated within the syndicate letter is: presale, group, designated, and member. Orders that benefit all syndicate members have the highest priority.

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

A The total takedown has two components: concession and additional takedown.

The purchase of 200 shares of HGF at 45 and the subsequent sale of 2 HGF 50 calls at 3 could produce all of the following EXCEPT: A) a profit of $2,000. B) a loss of $8,400. C) a profit of $1,600. D) a loss of $6,000.

A This is covered call writing. The maximum loss that could be incurred is $8,400 ($9,000 paid for shares less premiums of $600 received). If you can lose $8,400 then you can certainly lose $6,000 (if, for example the value of the stock drops to 12). The maximum profit that can be expected is $1,600 (strike price of $10,000 received when calls are exercised less the purchase price of $9,000, plus $600 in premiums received). Since the maximum profit possible is $1,600, it is impossible to have a profit of $2,000.

A customer sells short 1,000 ZOO at $30 per share. If the ZOO stock declines to $25 per share and the customer is worried the stock may reverse its trend, what should the customer do? A) Buy 10 ZOO calls. B) Write 10 ZOO calls. C) Write 10 ZOO puts. D) Buy 10 ZOO puts.

A To protect the profit on the short stock position, the customer must be able to buy stock at the existing low price if the market moves up. By purchasing calls (say, at a $25 strike price), the customer can capture existing profit by exercising and buying stock at $25, regardless of how high the market moves.

Which of the following is a tax-qualified retirement plan for employees of nonprofit organizations? A) 403(b). B) SEP IRA. C) 401(k) payroll deduction plan. D) Keogh plan.

A Under Section 403(b) of the Internal Revenue Code, employees of nonprofit organizations (such as hospitals and schools) may make tax-deductible contributions from their paychecks into a retirement plan operated through their employer.

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation? A) Reduction of the debt securities' interest rate. B) Reduction of the number of shares outstanding. C) Dilution of shareholders' equity. D) Increase in earnings per share.

A Usually, a warrant is issued along with a debt instrument, an enhancement that allows the issuer to offer a slightly lower rate of interest.

A customer purchases five 6-1/4% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date? A) $156.25. B) $468.75. C) $312.50. D) $625.00.

A While minimum purchase denominations can be less, always use par value ($1,000) for these calculations. A 6-1/4% bond pays $62.50 annually (6-1/4% × $1,000 = $62.50). Therefore, a customer purchasing 5 bonds receives $312.50 each year. As Treasury notes pay semiannually, each interest payment equals $156.25.

Which of the following positions exposes a customer to unlimited risk? A) Short 200 shares of XYZ. B) All of these. C) Short 200 shares of XYZ and short 2 XYZ puts. D) Short 2 XYZ uncovered calls

B All of the positions expose the client to unlimited risk because a loss will occur if the stock price rises

An investor interested in acquiring a convertible bond as part of his investment portfolio would: A) want the assurance of a guaranteed dividend on the underlying common stock. B) want the safety of a fixed-income investment along with potential capital appreciation. C) seek to minimize changes in the bond price during periods of steady interest rates. D) be interested in tax advantages available to convertible debt securities.

B An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities.

Which of the following is NOT generally associated with an existing real estate DPP? A) Known history of income and expenses B) Appreciation potential C) Lower risk than other types of real estate programs D) Immediate income stream

B Appreciation potential is generally not associated with existing real estate programs because most appreciation occurs in the earliest years for real estate assets.

An officer of a broker/dealer firm would be categorized as a restricted person if he attempted to purchase: A) closed-end funds on the secondary market. B) a new issue. C) call options on a stock he believed was going down in price. D) a municipal bond in a state where he does not reside.

B As restricted persons officers of broker/dealer firms or other institutional investors are prohibited from purchasing a new issue.

A buy stop order may be used for all of the following EXCEPT: A) to protect against loss in a short position. B) to protect a profit in a long position. C) to acquire a long position as a stock breaks through resistance. D) to protect a profit in a short position.

B Buying can only protect short positions, not long positions.

Which of the following increases SMA? A) Purchase of margin securities. B) Receipt of a cash dividend. C) Withdrawal of margin securities. D) Decline in market value of long positions.

B Cash dividends are credited to SMA dollar for dollar

According to MSRB rules, if a customer purchases a municipal bond from your firm, the confirmation must disclose: I. where your firm acquired the bonds. II. whether your firm acted as agent or principal. III. your firm's address. IV. the price your firm paid for the bonds. A) II and IV. B) II and III. C)I and IV. D) I and III.

B Customer trade confirmations must make explicit disclosures regarding the terms of the transaction and the parties involved. The broker/dealer must always disclose the capacity in which it acted (i.e., principal or agent.) The confirmation must show the name of the person for whom the trade was executed (i.e., the customer). The name, address, and telephone number of the broker/dealer must be shown so a customer may contact the firm easily. The settlement date is also required, but the broker/dealer is not required to disclose where it acquired the bonds or the price it paid.

All of the following are oil and gas program sharing arrangements EXCEPT: A) functional allocation. B) all or none underwriting arrangement. C) disproportionate sharing. D) reversionary working interest.

B Functional allocation, disproportionate sharing, and reversionary working interest are all types of oil and gas sharing arrangements. All or none is a type of best efforts underwriting agreement.

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) future articles sent will provide similar discussions and information. B) the newsletter is written and produced by a third party. C) the newsletter discusses only those products which you have available through your firm. D) the newsletter's purpose is to provide your clients with a choice of products that are suitable for all of their portfolios.

B If a third party is the creator of the newsletter, that fact must be disclosed together with the name of the third party and the date of publication.

A customer purchases a municipal bond in the secondary market and settles the trade in cash on August 1. If the next interest payment is September 1, which of the following statements regarding interest on this bond are TRUE? I. The bond pays interest on March 1 and September 1 each year. II. The seller must pay accrued interest no later than settlement day. III. Accrued interest on this bond is computed using actual days elapsed. IV. On September 1, the buyer will receive from the issuer interest for the period March 1 through August 31. A) II and IV B) I and IV C) I and III D) II and III

B Municipal bond accrued interest is calculated using a 30-day month and a 360-day year, with interest paid every 6 months. On settlement day, August 1, the buyer will pay the seller accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive 6 months' interest directly from the issuer.

Net overall debt of a municipality is: A) funded debt minus overlapping debt. B) net direct debt plus overlapping debt. C) funded debt plus overlapping debt. D) net direct debt minus overlapping debt.

B Net overall debt of a municipality is defined as net direct debt plus overlapping debt

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A) 30. B) 60. C) 45. D) 90.

B Rollovers from pension plans into IRAs must be accomplished within 60 days in order to retain tax-deferred status.

Which of the following would be of least interest to a technical analyst? A) Trading volume. B) PE ratio. C) Short interest ratio. D) Advance/decline line.

B Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer; PE ratios are of greater interest to fundamental analysts.

All of the following MSRB Rules of Uniform Practice requirements may be altered by mutual agreement between dealers EXCEPT the: A) price and time of delivery. B) content of confirmations. C) terms of delivery. D) payment of shipping expenses.

B The MSRB regulates the contents of confirmations to standardize information. There must be an original record of the agreement even though dealers may mutually agree to change the terms.

All of the following have an impact on the marketability of a block of municipal bonds EXCEPT the: A) quantity and quality of the bonds in the block available. B) dated date of the bonds in the block. C) price and date of call provisions. D) length of time until the bonds mature.

B The dated date has no effect on marketability. A close call date or low call premium can make an issue less marketable because the chance of a call is greater. Maturity, quality and the size of the block affect marketability.

In the underwriting of a municipal bond, which of the following is determined by the issuer rather than the underwriter? A) Underwriting spread. B) Maturity. C) Yield to maturity. D) Net interest cost.

B The maturity is determined by the issuer and stated in the official notice of sale before bids are received.

If a person wishes to enter orders in his spouse's account, he: A) could never be permitted to do so as there is no provision that would allow for it to occur B) needs written permission from his spouse via a power of attorney. C) is free to do so. D) needs verbal permission from his spouse.

B The only persons permitted to enter orders in an account are the account owners. For a person to enter orders in his spouse's account, the spouse whose name is on the account must sign a power of attorney.

An official statement has a dated date of March 1, but the first interest payment is October 15. This most likely reflects: A) a when-issued transaction. B) a long coupon. C) a misprint in the official statement. D) a normal payment cycle on the bond of 7-½ months.

B This is a long coupon, and, after the first payment, subsequent payments will be made every 6 months.

A customer owns a 7-½% ABC convertible bond currently trading at 115. The conversion price is $40. What is the parity price of the common? A) $28.75. B) $46. C) $44. D) $34.

B To compute the parity price of common stock, divide the market price of the convertible bond by the conversion ratio. $1,150 / 25 (the number of common shares that the bond is convertible into) = $46 (115% × $40 = $46).

Which of the following statements describe the conduit theory of taxation? I. A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income. II. Earnings distributed by a regulated investment company are taxed three times. III. Dividends and interest are passed through to the investor without the fund being taxed. IV. Dividends and interest accumulate tax free to the shareholder. A) II and III. B) I and III. C) II and IV. D) I and IV.

B Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.

Which of the following statements regarding quotes and information for stocks on the electronic "OTC Pink" are TRUE? I. Quotes are firm. II. Quotes are not firm. III. Updates are made throughout the trading day and quotes are kept current. IV. Updates may not be current or made intra-day. A) II and III B) II and IV C) I and IV D) I and III

B With updates made infrequently, quotes found on the electronic OTC Pink are never firm. Quotes on such systems are for informational purposes only; subject to change

A calamity (catastrophe) call may be made by a municipal issuer if A) interest rates have fallen B) the issuer has accumulated excess money in its surplus account C) a building constructed with revenue bond financing has been condemned D) the issuer is required to call outstanding bonds on a predetermined schedule as outlined in the bond contract

C A calamity call is also known as a catastrophe call. If a facility built with revenue bond financing is destroyed or condemned, the issuer must call the bonds with the bulk of the funds provided by insurance proceeds.

A customer who is long 1 XYZ Sep 50 call could create a spread by combining it with which of the following positions? A) Long 1 XYZ Sep 60 call. B) Short 1 XYZ Sep 50 put. C) Short 1 XYZ Sep 60 call. D) Long 1 XYZ Sep 50 put.

C A spread involves two simultaneous positions in related options of the same type-one long and the other short of the same underlying security.

An underwriting spread is the: A) amount a managing underwriter receives. B) amount a selling group receives. C) difference between an offering price and the proceeds to an issuer. D) amount a syndicate receives.

C A spread is the difference between the public offering price and the price an underwriter pays an issuer.

Depletion allowances apply to all of the following EXCEPT: A) timber. B) oil and gas. C) real estate. D) copper mining.

C Depletion is applicable to natural resources such as mining or timber. It is not applicable to real estate. However, buildings can be depreciated.

An investor owns 100 shares of IBM. Which of the following would make a long hedge? A) Writing a call. B) Writing a put. C) Buying a put on IBM. D) Buying a call on IBM.

C If you own the stock, you want the market value to rise. To hedge the position against a decrease in value, you would buy a put option.

An individual who invests in an undeveloped land limited partnership would be most interested in: A) operating expense deductions. B) depreciation. C) appreciation. D) depletion.

C Investors seek appreciation when investing in undeveloped land limited partnerships.

Last-sale information is always available for all of the following securities EXCEPT A) NYSE-listed B) Nasdaq C) OTC, non-Nasdaq D) CBOE listed option contracts

C Last-sale information is available for listed (exchange traded) securities and for all Nasdaq securities. While there are a number of sources for last sale information in general, it may not always be available for a security that is OTC non-Nasdaq.

Three 3% bonds are listed in the newspaper. One bond will mature in 1 year, another bond will mature in 10 years, and the third bond will mature in 20 years. If interest rates are going up, which bond will have the greatest decrease in value? A) The bond with the 1-year maturity B) They will all have the same decrease in value C) The bond with the 20-year maturity D) The bond with the 10-year maturity

C Long-term bonds have the greatest interest rate risk. A bond with only 1 year to maturity will trade very close to par.

Your firm is interested in submitting a bid on a forthcoming general obligation municipal bond issue. Your firm could obtain the appropriate bid worksheets through a service provided by: A) Standard & Poor's. B) The Wall Street Journal. C) the Bond Buyer. D) the MSRB.

C Official notices of sale announcing the offering of municipal issues to competitive bidders are published in the Bond Buyer, which offers a service to subscribers-called the New Issue Worksheet and Record Service-that summarizes each notice. It provides information about new issues put up for bid and worksheets for underwriters to determine yields and prices when bidding

If trading is halted in a listed stock, what happens to the trading in the stock's listed options? A) It is restricted to closing transactions. B) It increases. C) It is halted. D) It continues to trade.

C Options trading is always halted when the trading of the underlying security is halted. Options rely primarily on the underlying market value for premium determination.

Regarding Regulation D (Private Placement) offerings, which of the following statements is TRUE? A) The SEC requires no filings be made by the issuer. B) Purchasers need not be provided or have access to offering information normally provided by a prospectus. C) Registration with the SEC is not required. D) The amount of capital that can be raised via a private placement is limited.

C Regulation D offerings are exempt transactions and therefore no SEC registration is required. However, issuers must still file information with the SEC on Form D regarding the issue. This filing will contain all of the information a potential investor might want to know, similar to the information contained on a prospectus. There is no limit to the amount of capital that can be raised via a Regulation D private placement transaction.

To be exempt under Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of: A) shares issued. B) broker/dealers who offer the securities. C) nonaccredited investors to whom the security is sold. D) agents authorized to sell the security.

C Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued nor the number of accredited investors who may purchase the shares.

All of the following statements regarding municipal revenue bonds are true EXCEPT: A) revenue bonds can be issued by inter- or intrastate authorities. B) the interest and principal are paid from revenue received from the facility. C) the maturity of the revenue bond will usually exceed the useful life of the facility being built. D) no debt limitation is set by the issuing municipality.

C Revenue bonds are usually structured so their maturity is shorter than that of the facility they were issued to build.

An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the NAV was $11.08. If the current POP is $12.50 and the NAV is $11.80, the investor receives: A) 3324. B) 3750. C) 3540. D) 3600.

C Shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).

A customer writes 1 XYZ Sept 45 put at 6 and 1 XYZ Sept 35 call at 6 when XYZ is at 40. Prior to expiration, if XYZ is at 43 and the customer closes his positions at intrinsic value, the customer has a: A) $200 loss. B) $600 loss. C) $200 gain. D) $600 gain

C The customer collects $1,200 in premiums for writing the options (6 + 6), but later pays $200 (45 − 43) to close out the put, and $800 to close out the call (43 − 35). In this case, $1,200 received minus $1,000 paid leaves a gain of $200.

For a new issue municipal syndicate account, settlement of the account must occur: A) within 1 year after the issuer delivers the securities to the syndicate. B) as soon as dealers who are not members of the syndicate request a bond. C) within 30 calendar days after the issuer delivers the securities to the syndicate. D) when the last bond is sold with no time limit imposed.

C 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 be determined in accordance with each members original allocation and whether the syndicate was set up as divided (western) or undivided (eastern).

All of the following are fixed option contract terms EXCEPT the: A) units of currency in a currency option. B) expiration month in a debt option. C) premium in a stock option. D) multiplier in an index option.

C The premium is not a predetermined characteristic of the option contract. The premium continually changes throughout the life of the option; reflecting changes in the price of the underlying security, dividends (if any), and interest rates

A customer entered an order to sell short 100 shares of ABC. The stock closed on Friday at 48.00. The stock will trade ex-dividend $.50 on Monday. At what price can the order be executed at the opening? A) 47.51. B) 47.5. C) Any price. D) 47.49.

C The stock's price is adjusted for the dividend at its opening the next morning. The adjustment in the stock does not limit where the short sale can be executed.

If a customer writes 1 ABC Jan 35 call at 13.50 and 1 ABC Jan 55 put at 12.50 when ABC is trading at 45, excluding commissions, this position will be profitable if ABC is: I. above 29. II. below 29. III. above 61. IV. below 61. A) I and II. B) I and IV. C) II and III. D) III and IV.

C This is a short in-the-money combination. To compute the breakeven points, add the combined premiums (26) to the strike price of the call and subtract the combined premiums from the strike price of the put. The breakeven points are 61 (35 + 26) and 29 (55 − 26). With a short combination like a short straddle, the customer makes money if the stock stays inside the breakeven points.

ABC Corporation has outstanding a 7-¾% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is TRUE? A) The bond is at parity with the stock. B) An arbitrage opportunity does not exist in this situation. C) To profit in this situation, the investor should buy the bonds and short the stock. D) To profit in this situation, the investor should buy the stock and short the bonds.

C With a conversion price of $40, the bond is convertible into 25 shares of ABC common stock ($1,000 / $40 = 25 shares). As the common stock is currently trading at $45 per share, the value of the stock as converted would be $1,125 (25 shares × $45 = $1,125), which is greater than the current price of the bond ($1,020). Therefore, the bond and the stock are not at parity. An investor could profit in this situation by shorting the stock and buying an equivalent number of bonds. A bond could be purchased for $1,020 and immediately converted into stock worth $1,125, a risk-free profit opportunity.

Which of the following transactions would be acceptable investments for a pension fund? A) Writing a put B) Writing an S&P Index option C) Writing a covered call D) Writing a naked call

C Writing a covered call has less risk than writing a naked option. A covered call writer is merely using options to increase the income on his portfolio. Fiduciaries such as those who invest for pension fund portfolios should avoid risky transactions.

Which of the following statements describes an oil and gas blind pool offering? A) An unknown number of representatives participates in the sale of known partnership units. B) The oil exploration occurs in an area that is not adjacent to any known oil reserves. C) The income from producing wells is purchased at a discount from the present value of the projected future flows. D) Money is raised without a specific property being stated, and the GP selects the investments.

D A blind pool offering, also known as a nonspecified program, involves an investment in a program without specific prospects or properties being identified.

All of the following statements about SEP IRAs are true EXCEPT A) SEP IRAs are established for small business owners and their employees B) the retirement account is usually set up at a bank or other financial institution C) SEP IRAs allow employers to make contributions D) catch-up contributions for employees age 50 or older are not permitted with SEPs

D An employee age 50 or older is permitted to make catch-up contributions to a SEP.

In a rising market, which of the following is least volatile? A) A stock with an alpha of 0.5 B) A stock with an alpha of 2.0 C) A stock with a beta of 2.0 D) A stock with a beta of 0.5

D Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market.

Holders of common shares may generally vote on A) which member of the board of directors should be chairman B) whether an administrative assistant should be promoted to management C) whether a cash dividend is to be declared D) whether the company should issue additional preferred stock

D Common shareholders must vote to approve the issuance of additional preferred stock because additional preferred shares dilute the common shares' residual assets under a liquidation. Common shareholders do not vote to declare dividends. Board members select the chairman of the board. Shareholders do not get involved in the daily operational activity of the corporation.

Which of the following would NOT be a valid use of the partnership democracy? A) Consenting to an action of a general partner that is contrary to the agreement of limited partnership. B) Consenting to a legal judgment against the partnership. C) Removing the general partner. D) Deciding which partnership assets should be liquidated to pay creditors.

D Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in their being treated as general partners with respect to liability, and possible loss of limited partner status.

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Noncumulative. B) Cumulative. C) Callable. D) Convertible.

D Fixed dollar investments such as bonds and preferred stock are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

A foreign company that exports its products to the United States wishes to protect itself during a time in which the U.S. dollar is expected to be devalued. The company should: I. buy U.S. dollars. II. sell U.S. dollars. III. buy foreign currency. IV. sell the foreign currency. A) III and IV. B) I and III. C) II and IV. D) II and III.

D If the company expects the U.S. dollar to become devalued, that means that the foreign currency will become worth more. It would make sense at this time, therefore, for the company to get rid of its U.S. dollars, which are expected to decline in value, and acquire the foreign currency, which will appreciate relative to the U.S. dollar

In an account opened by 2 individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT: A) in the event of death, the other party assumes full ownership of the account. B) mail may be directed to the joint owner agreed upon by both parties to the account. C) orders may be entered by either party. D) stock certificates may be delivered in the name of either party.

D 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.

A broker/dealer can rehypothecate (repledge) up to: A) 50% of the debit balance in a customer's margin account. B) 140% of the equity in a customer's margin account. C) 50% of the equity balance in a customer's margin account. D) 140% of the debit balance in a customer's margin account.

D In a margin account, hypothecation is the pledging of customer securities as collateral for the margin loan the customer will receive. The broker/dealer re-pledges (rehypothecates) the securities as collateral to the lending bank. Broker/dealers are permitted to pledge up to 140% of the debit balance in the customer's account.

A married couple both hoping to retire within the next 5 to 7 years have expressed having a low risk tolerance regarding the stock market. They have a combined income of $350,000. Given this information which of the following portfolio mixes would be most suitable? A) Treasury bills, corporate bonds, preferred stock B) Direct participation programs, real estate investment trusts, preferred stock C) Treasury bills, common stock, options D) Treasury notes, municipal bonds, GNMAs

D In light of their low risk tolerance, U.S. government securities would certainly be suitable and the time frame noted for retirement allows for middle term T-notes to be useful. Given their higher income level, tax-free municipals bonds could also have a place in the portfolio. Longer term GNMAs would accommodate monthly income should that be desirable upon retirement. The remaining product suggestions are either illiquid (DPPs) or do not align with their risk aversion (common, preferred, options, and REITs).

A customer must present a signed representation letter stating that he is not a restricted purchaser prior to buying a new issue of: A) municipal bonds. B) corporate bonds. C) U.S. government bonds. D) common stock.

D New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Prior to buying an IPO, a customer must present a representation letter stating they are not a restricted person.

A customer is considering adding a real estate investment trust (REIT) to their portfolio. They list all of the following as "plusses" or 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) Having a professionally managed portfolio of commercial real estate assets B) Being able to divest of the shares easily C) Using real estate as a potential hedge against the movement of other equity securities the customer owns D) Dividend treatment

D 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 OTC and 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.

Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority EXCEPT: A) the debt service reserve fund. B) the operations and maintenance. C) the debt service. D) the optional call provisions.

D Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds.

All of the following qualified plans are covered by ERISA guidelines EXCEPT: A) profit-sharing plans. B) 401(k) plans. C) private sector plans. D) public sector plans.

D Public sector plans are not covered by ERISA guidelines. Corporate and certain union retirement plans are subject to ERISA guideline

Underwriters and selling group members violate rules regarding sales of new equity issues to restricted persons when they do which of the following? I. Sell a new issue to one of their own customers. II. Sell blocks of the new issue to accounts of partners or officers of the member firm. III. Sell to member firms that deal only in investment company products. IV. Sell to brokers and dealers outside the selling group who position the securities for later resale at higher prices. A) I and III. B) I and IV. C) II and III. D) II and IV.

D Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules

Which of the following events will cause the special memorandum account to decrease? I. An increase in the SMV. II. A decrease in the LMV. III. The purchase of long securities on margin. IV. The short sale of securities. A) II and IV. B) I and II. C) I and III. D) III and IV.

D SMA, once created, does not go away until used. Using the SMA to buy more securities or sell more short will decrease the amount of SMA.

To calculate a capital gain or loss on the sale of an original issue discount municipal bond, the discount must be: A) depleted. B) amortized. C) depreciated. D) accreted.

D The IRS term for adjusting the cost basis of a discount bond upward is "accretion". Amortization is the means of adjusting a premium bond's cost basis.

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

D 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.

All of the following are true concerning a market's beta EXCEPT: A) it serves as a benchmark for measuring the relative volatility of a stock or portfolio against the movement of the market itself. B) it is by definition equal to 1. C) it shows that if a stock's beta is 1.2 and the market moves by 5%, the stock would move by 6%. D) it provides a measurement of a range that the market may move in any given day.

D The beta is a benchmark and does not indicate anything about market movement as a whole. It only measures the movement of a particular security or portfolio as compared to the movement of the entire market.

Which of the following investment vehicles has the highest credit risk? A) New Housing Authority bonds. B) Ginnie Mae pass-through certificates. C) General obligation bonds. D) Industrial revenue bonds.

D The industrial revenue bonds would have the highest risk because debt service is the responsibility of the corporation leasing the facility rather than the issuing municipality

A 10-year bond, callable in 5 years at par, is sold at a discount. Rank the following yields from lowest to highest. I. Nominal yield II. Current yield III. Yield to call IV. Yield to maturity A) II, I, IV, III B) IV, II, III, I C) I, II, III, IV D) I, II, IV, III

D The lowest of all yields for a discount bond is the nominal yield (coupon rate), which is a fixed percentage of par. The highest possible return to the owner of a bond purchased at a discount would occur if the bond were called before maturity, because less time must elapse for the investor to receive the discount.

If XYZ common stock has a $4 dividend, a yield of 4.2%, a PE ratio of 12, and is trading at $96, its approximate earnings per share (EPS) is: A) $50.40. B) $48.00. C) $4.00. D) $8.00.

D The stock's PE ratio is price to earnings per share (EPS). Dividing the stock's price by the PE will give the earnings per share ($96 / 12 = $8 EPS)

U.S. Treasury bills are issued for all of the following maturities EXCEPT: A) 26 weeks. B) 4 weeks. C) 13 weeks. D) 8 weeks.

D U.S. Treasury bills are issued with 4, 13, and 26-week maturities. There have been 52-week T- bills in the past, but there are no 8-week T-bills.

An index option differs from an equity option in that: A) trading ends earlier in the day. B) they use European-style exercise. C) premiums tend to be somewhat higher. D) the exercise settlement is in cash.

D When an index option is exercised, settlement takes place in cash on the next business day.