Series 7

HOT ISSUE

A new issue that sells or is anticipated to sell at a premium over the public offering price due to so much indications of interest -insiders are prohibited from buying (does not apply to preferred stock or bonds)

On the New York Stock Exchange, which of the following persons will handle odd lot transactions? A) Specialist (DMM) B) Floor Broker C) $2 Broker D) Competitive Trader

The best answer is A.

registered representative gift limit

$100 in a year (record of gifts kept for 3 years)

What is the minimum amount for day trading accounts?

$25,000 --> to insure they are experienced and not "your average investor"

Option Spread

(1) contains either call options or put options (not both), and (2) contains both long and short positions in options with the same underlying asset. (different strike prices) In a long call spread, the position bought will have a higher premium

Acid Test Ratio

(Current Assets - Inventory) / Current Liabilities

Quick Ratio Formula?

(Current Assets - Inventory) / Current Liabilities

Arrange the yields from lowest to highest for PREMIUM Bonds

(Yield to call) Yield to Maturity (basis) Current Yield Nominal Yield

Advance/Decline Ratio

(advances-declines) / total issues

E in PERMS

-EXCHANGE AND MEMBER FIRM CREATION --> FINRA WAS CREATED

If inflation is expected to rise, what are good products to invest in?

-Money Market instruments -Real Estate

Rollovers for variable annuities

-Must be "like-for-like" --> unless rollover from life insurance to variable annuity

Variable Annuity (NOTES)

-NOT a guaranteed rate of return -investor assumes "investment risk" -considered a security -mandatory reinvestment on interest and dividends--> TAX DEFERRED -BENEFIT DURING ACCUMULATION PERIOD -FIXED ANNUITY UNITS--> VALUE/PAYMENTS WILL FLUCTUATE WITH PERFORMANCE -inflation rises-->annuity performance rises SOLD UNDER A PROSPECTUS

Taxation of Variable Annuities

-Non-taxqualified --> only earnings above cost basis are taxable when withdrawals commence -during accumulation period, earning build tax deferred

Rule 104 of Regulation M

-Only 1 stabilizing bid per market or market maker -at or below the POP (never higher)

STOP ORDER

-Price is specified -when the price hits or passes through, the order is officially a market order (can be above or below)

What is included in a Letter of Intent

-Type of security -quantity -price range -market out clause -type of underwriting commitment (Firm/Best-use)

What are examples of exempt securities?

-US Government -Agency Issues -Municipal issues -Commerical Paper these securities do NOT have initial margin, ONLY maintenance margins payment by (S+2)

Facts about custodial accounts

-an adult can open it for a minor (doesnt have to be related) -no cash balances -gifts are irrevocable -minor social security number on account -cash account/no margin

10K vs 10Q vs 8K

-annual report (AUDITED) ---> 10K -quarterly report (UNAUDITED) ---> 10Q -issuer declares bankruptcy, change in board of directors, merger/acquisition (within 4 business days of the event) ---> 8K

What is allowed during the 20 day cooling off period?

-delivery of a preliminary prospectus to interested parties (Red-Herring) -lists of interested customers can be drawn up (Indications of Interest), no orders can be taken and no sales can be made

IRA Distributions

-distributions must being April 1st year after turning 72 for TRADITIONAL IRA's -RMDs Must be taken by December 31st of each year --> 50% tax if not taken -RMDs can be taken in cash but it is rare ROTH IRA ARE NOT REQUIRED TO BEGIN DISTRIBUTIONS AT 72 AND CAN STILL CONTRIBUTE AT THIS AGE CAN DISTRIBUTE IF HELD FOR 5 YEARS AND 59 1/2

2 dollar broker

-handles all order-overflows

Index options

-have multipliers -expire on third friday of every month @ 11:59PM -ALWAYS CASH SETTLEMENT ---> amount is the difference between strike price and underlying index times the multiplier -mostly European options -MAX MATURITY OF 9 MONTHS

current quote for stock

-highest price to buy and lowest price to sell

Super Display Book

-limit and stop orders are held on here until they can be executed

Third party research reports

-prior approval needed if third party research was found on own and given to customers -must disclose who the third party is doing the research

Wash Sale Rule

-securities trading at a loss -Sell these securities at a loss, then rebuy within 30 days prior --> CANNOT USE LOSS MUST WAIT 31 DAYS to rebuy

NASDAQ System

-several market makers for each stock -->buys/sells securities out of own inventory -

estate tax exclusion

-the estate of a deceased person is allowed to exclude 10,000,000 from taxes --> 2021 was 11.7Mill

Interbank Market

-trading of foreign currencies -unregulated GLOBAL market -24hrs a day -occurs between domestic and foreign banks/speculators in large units 5,000,000

Violations for inside trading

-up to 3x profit or loss avoided from the information -up to 5,000,000 fine for each inside trade and 20 years for each inside trade

Standby Underwriting

-used in a rights offering -underwriter sells any shares that existing shareholders dont want to buy (FIRM) -offered at a discounted price (subscription price)

What are the four critical pieces of information when opening a new account?

1. Customer Name 2. Adress 3. Social Security number or Tax ID 4. Date of Birth

Benefit Plans covered under ERISA

1. Defined Contribution Plans: Contributions are made under a predetermined formula, based on company profits or employee earnings. (Keough 25%) 2. Defined Benefit Plans: actuaries are used (older have more benefit) --> closer to retirement=more benefit others 3. Profit-sharing plan: IF PROFITABLE, CONTRIBUTIONS ARE MADE. -AMOUNT CONTRIBUTED IS BASED ON INCOME (25%)- more u make more contributed -TAX DEFERRED Earnings 4. Payroll deduction savings plan (401)k): employers match employee contributions to a savings plan -- EMPLOYEE CONTRIBUTIONS ARE EXCLUDED FROM TAXABLE INCOME -$19,500 MAX -100% TAXABLE WHEN PAYMENTS TAKEN -DISTRIBUTIONS MUST START APRIL 1ST AFTER REACHING 72

EXEMPT ISSUES UNDER THE SECURITIES ACT OF 1933

1. Government and Municipal Issues 2. Insurance company, bank issues, and railroad/trucking company issues 3. Non-profit issues 4. Bankers acceptance and commercial paper (under 270 days maturity) 5. Issues of SBIC (Small Business Investment Companies)

Priority for filing new issues Municipal bonds

1. Pre-sale 2. Group orders 3. Designated 4. Member take down (Please Give a Damn about MUNIES)

Exempt Transactions under the securities act of 1933

1. Private Placement 2. Offers for $5million max to accredited investors where no advertising is used

Public Sector Plans

1. Tax-deferred annuities: for employees of schools, hospitals, etc. 2. TIAA-CREFF: manager of retirement plans for majority of non-profit schools, hospitals, and universities. DO NOT ALLOW DIRECT STOCK INVESTMENTS. -contributions are tax-deductible, earnings are tax deferred. -annual contributions 25% up to $19,500 3. Section 457 Plans: deferred compensation programs for high salary government employees. (NON-TAX QUALIFIED) --Police officers/firefighters typically offer to long serving employees -can take early distributions without 10% penalty 4. Life-cycle/Age-weighted funds: take 100-persons age for equities

Margin on long options?

100% of premium

When buying a straddle, what is the deposit requirement?

100% of the combined premiums (this is the maximum loss)

13D vs 13G Filing

13D- If have 5% position and want to take "control in a company" (must report within 10 days of reaching 5% threshold) 13G- if reached 5% and want to remain a passive investor (must file 45 calendar days after year end)

gift tax exclusion

15,000 annually

Initial Margin and Minimum margin required for Naked calls/Puts

20% initial and 10% minimum

Length of time requirement of Prospectus for an IPO or add on offering that is already listed on an exchange? (NASDAQ or NYSE)

25 Days

CE requirements

2nd anniversary and every 3 years after firm element: annual training

Day trading requirements?

4 or more day trades in 5 days or less 25,000 minimum equity to open account 25% minimum margin

Length of time the issuer must provide a Prospectus for an add-on offering? (secondary offering)

40 days (OTCBB and OTC Pink Markets Issues)

Unlawful tender offer requires how many days for BONDS?

5 business days for tender offer and 5 business days for each "sweetener offer"

What is the minimum margin required to open a short account?

50% BUT amount can never be less than 2,000

progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

LEAPS (long term option) margin requirement?

75% of premium when over 9 months 100% premium when within 9 months

Which of the following statements are TRUE regarding lump sum distributions from qualified plans? I) They may be rolled over into an IRA without dollar limit II) They may be rolled over into an IRA subject a dollar limit of $35,000 III) They remain tax deferred as long as the rollover is performed within 60 days IV) They remain tax deferred as long as the rollover is performed within 90 days A) I and III B) I and IV C) II and III D) II and IV

A

What is a balloon portfolio?

A balloon is a type of bond issue structure, where most of the bonds mature as a "balloon" at a long term maturity date. It is not a type of bond portfolio construction.

insider

A corporate officer or director, other executive, 10% shareholder with access to corporate information that is not available to the public.

efficient market theory

A theory based on the premise that the stock market processes information efficiently. The theory postulates that, as new information becomes known, it is reflected immediately in the price of stock and, therefore, stock prices represent fair prices.

Debit Spreads will be profitable when I. The spread widens II. The spread narrows III. Both options are exercised IV. Both options are expired A. I and III B. I and IV C. II and III D. II and IV

A.

Agency bonds accrued interest

Accrued Interest- 30/360

Rule 144:

Allows the sale of restricted stock and control stock 1) Restricted Stock - unregistered securities (Acquired with Reg D) 2) Control Stock - owned by corporate insiders (officer, director, >10% shareholder) ** Only applies to existing public companies

Omnibus Account

An account opened in the name of an investment adviser or a broker/dealer for the benefit of its customers. The firm carrying the account does not receive disclosure of the individual customers' names or holdings and does not maintain records for the individual customers. Syn. Special omnibus account.

Short Straddle

An option investor's position that results from selling a call and a put on the same stock with the same exercise price and expiration month.

Credit Spread

An option spread position in which the premium of the option sold is greater than the premium of the option purchased More money coming IN

Inventory Turnover Ratio

Annual cost of goods sold / Year-end inventory

when does a purchaser of a new issue receive a copy of the prospectus?

Any purchaser must get a copy of the final prospectus at or prior to confirmation of sale

Margin agreement must be signed when...?

At or prior to the of the first trade in the account

Mutual funds taxation?

Capital gains are made annually-- taxed in that year Cost basis= purchase price + All reinvestments

What are the differences in class A, B, C, and D Mutual Fund Shares?

Class A shares typically charge an up-front sales charge, but have no, or very low, annual 12b-1 fees. (LONG HOLD) Class B shares have no up-front sales charge; instead, they have a contingent deferred sales charge, and impose higher annual 12b-1 fees than A shares. (INTERMEDIATE) Class C shares have a lower contingent deferred sales charge than B shares, but impose the highest 12b-1 fees. (SHORT TERM HOLD) Class D shares are typically sold by investment advisers. There is no sales charge, but they impose annual 12b-1 fees and service fees.

Dividend payout ratio formula

Common Dividends Paid / Earnings for common

ERISA

Covers private plans only (ALL TAX QUALIFIED) -profit sharing, -defined contribution and benefit plans -tax-deferred annuity (403)b) -payroll deduction plans - -

Short Account Equity formula-->

Credit-short market value

Regulation SHO

Every sell order must be marked as either a long sale or a short sale. And if a stock falls by 10% in a single trading day, it can only be sold short on an "up bid" for the remainder of that trading day and the next day.

federal funds rate

Interest rate banks charge each other for loans

What is regulation BI?

It requires broker-dealers and investment advisers to act in the best interest with their customers and minimize conflicts of interests. Broker dealers --> Suitability standard Investment advisers --> Fiduciary Standard

FINRA Maintenance Margins???

LONG- 25% SHORT- 30%

Inherited Securities cost basis

Market value at date of death

A company with a Beta greater than 1 has what risk?

NONsystematic Risk

Arrange the yields from lowest to highest for DISCOUNT Bonds

Nominal Yield Current Yield Yield to Maturity (basis) (Yield to Call)

inside/best market

Price quote that is highest bid and lowest offer price available at that time

Leading indicator of inflation trends

Producer Price Index

Regulation D

Registration exemption for securities sold directly to Accredit Investors (Private Offering) and no more than 35 Non-Accredited Investors Rule 504: Up tom $1mm deal, no limit on Non-Accredited Rule 505: Up to $5mm deal, <35 Non-Accredited Rule 506: Unlimited deal size, < 35 Non-Accredited Reg. D Road shows require pre-qualification of investors

Settlement,Accrued Interest, and Tax Statues for US Government Debt

Regular Way - (T+1) --> Settle in Federal Funds Accrued Interest- Actual/Actual basis (not including settlement) Tax Status: Government Notes and Bonds are taxed Federally but exempt from state and local tax Treasury Bills are taxed as interest income in year received STRIPS must be accreted and taxed annually TIPs annual upward adjustment is taxable in that year Fannie Mae + Freddie Mac are fully taxable (privatized)

Regulation SP

Regulation enacted by the SEC to Protect the privacy of customer information, particularly nonpublic personal information. Your firm must provide a privacy notice describing its privacy policies to customers whenever a new account is opened and annually thereafter. The notice must provide customers a reasonable means to opt out of the disclosure of the customer's nonpublic personal information to unaffiliated third parties.

Length of rights and warrants until expiration

Rights- 30-60 days Warrants- 5 years

Unsystematic risk

Risk of a single investment going sour, CAN BE DIVERSIFIED AWAY (SELECTION RISK)

What are the settlement and taxation of interest for Corporate Bonds?

Settlement: Regular Way (T+2) Interest Accrues: 30/360 Interest income: taxed at income rates up to 37% Taxed: Federal and State Tax

Blue Sky Laws

State laws that regulate the offer and sale of securities.

equivalent taxable yield

Tax-Free Yield / (100% - Tax Bracket)

Equivalent Tax Free Yield

Taxable yield x (100% - Tax Bracket)

What is the Dow theory?

The Dow Theory, which is followed by some technical analysts, states that when both the Dow Jones INDUSTRIAL Average (DJIA) and the Dow Jones TRANSPORTATION nAverage (DJTA) are moving in the same direction, it is confirmation of market direction.

The Network A Consolidated Tape reports all trades of: A) AMEX (NYSE American) Securities B) U.S. Government Securities C) NASDAQ Securities D) NYSE Securities

The Network A Consolidated Tape reports all trades of NYSE listed issues, wherever they occurred.

Investment Company Act of 1940

The act requires an investment company engaged in interstate commerce to register with the SEC. Defines investment companies

A bond issue where every bond has the same issue date, interest rate, and maturity is a: A) term bond offering B) series bond offering C) serial bond offering D) combined serial and term bond offering

The best answer is A.

A customer is short 1 ABC Jan 90 Put @ $5. The put is assigned when the market price of ABC is $80. The cost basis of the shares is: A) strike price minus premium B) strike price plus premium C) market price minus premium D) market price plus premium

The best answer is A.

An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is: A) $10 B) $10 plus a commission C) the market price D) the market price plus a commission

The best answer is A.

If a long margin account is restricted: I) 50% of the proceeds of any sale are credited to SMA II) 100% of the proceeds of any sale are credited to SMA III) 50% of the proceeds of any sale must be retained in the account IV) 100% of the proceeds of any sale must be retained in the account A) I and III B) I and IV C) II and III D) II and IV

The best answer is A.

In order to protect a gain on a long stock position, a customer could: I) place a sell stop order II) place a sell limit order III) buy a put IV) sell a put A) I and III B) I and IV C) II and III D) II and IV

The best answer is A.

Initial approval of options accounts is performed by the: I Branch Office Manager II General Principal III Registered Options Principal IV Financial and Operations Principal A) I and III B) I and IV C) II and III D) II and IV

The best answer is A.

The contact information for customers who wish to report inaccuracies on their account statements CANNOT be the: A) representative servicing the account B) compliance department of the broker-dealer C) operations department of the broker-dealer D) office of supervisory jurisdiction of the broker-dealer

The best answer is A.

Which disclosure is optional when advertising a CMO Tranche? A) Coupon B) Minimum Denomination C) Final Maturity Date D) Average Life Of Investment

The best answer is B.

The ex dividend date for mutual funds is set by: A) FINRA B) the Fund Board of Directors C) the shareholders of the Fund D) the SEC

The best answer is B. Since mutual funds do not trade, the Board of Directors sets the ex (reduction) date for fund distributions.

Which statement is TRUE regarding the VIX? A) It is the Value Line Index of 1700 stocks B) It is a bearish indicator when S&P 500 option premiums are increasing C) It is the broadest measure of the market D) It is a volatility index based on S&P 100 options contracts

The best answer is B. The VIX (Volatility Index Option) is based on the premium movements of S&P 500 Index options.

The nominal yield of a bond will: A) increase as bond prices fall B) remain unchanged as bond prices fluctuate C) increase as bond prices rise D) decrease as bond prices rise

The best answer is B. The nominal yield is the stated rate of interest as a percentage of par value. It does not change as bond prices move. However, the current yield and yield to maturity will be affected by changes in bond prices.

A customer sells 1,000 shares of ABC "short against the box" at $40 per share. Under FINRA rules, the customer may withdraw how much in funds from his or her account? A) $40,000 B) $38,000 C) $36,000 D) $20,000

The best answer is B. This customer has gone "short against the box" and has established a short position in the stock that equals his long position. Thus, the customer's net position is "0," and there is no further risk of loss, since any loss on one side is balanced by an equal gain on the other. This type of transaction would be performed in an "Arbitrage Account." There is no Regulation T initial margin requirement because there is no risk to the position. The only margin is the FINRA minimum maintenance, which is set at a low 5% of the long market value because there is no risk. 5% of $40,000 = $2,000 minimum maintenance margin requirement. Thus, against the $40,000 stock position, $38,000 may be withdrawn.

A customer has a restricted margin account with $5,000 of SMA. If the customer wishes to buy $15,000 of marginable common stock, the customer must deposit: A) 0 B) $2,500 C) $5,000 D) $10,000

The best answer is B. To buy a marginable security, the customer must deposit the Regulation T requirement. To buy $15,000 of a marginable stock, the customer must deposit $7,500 (50% Regulation T requirement). The existing $5,000 of SMA can be used to meet part of this requirement and the customer must deposit the additional $2,500.

Which of the following are characteristics of Defined Contribution Plans? I) Annual contribution amounts are fixed II) Annual contribution amounts will vary III) The benefit amount to be received is fixed IV) The benefit amount to be received will vary A) I and III B) I and IV C) II and III D) II and IV

The best answer is B. Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.

Under the FINRA 5% Policy, all of the following would be considered when determining a fair and reasonable mark-up to a customer in an over-the-counter principal transaction EXCEPT the: A)size of the purchase B) cost of the security to the dealer C) relative frequency of trades in that security D) current market price of the security

The best answer is B. Under the FINRA 5% Policy, the basis for computing a fair and reasonable mark-up is the current market price of the security, the size of the purchase, the ease of performing the trade (more actively traded stocks are easier to trade and get lower mark-ups), the dollar amount involved, and the level of service provided by the firm. The cost to the dealer is irrelevant.

Under a net revenue pledge, bondholders have a first lien on: A) gross revenues B) gross revenues minus operations and maintenance C) gross revenues minus debt service reserve fund D) gross revenues minus deposits to the sinking fund

The best answer is B. Under this pledge, bondholders only have claim to net revenues after operation and maintenance is paid. In this case, the first use of funds is to pay operation and maintenance.

A customer sells 1 ABC Jan 50 Call @ $4 and sells 1 ABC Jan 50 Put @ $3 when the market price of ABC = $51. The breakeven points are: A) $46 and $53 B) $47 and $54 C) $43 and $57 D) $45 and $55

The best answer is C.

Equity options for a given month expire at: I) 4:00 PM EST II) 11:59 PM EST III) on the third Friday of the month IV) on the Saturday following the third Friday of the month A) I and III B) I and IV C) II and III D) II and IV

The best answer is C.

Exchange Traded Funds (ETFs) are: I) registered under the Investment Company Act of 1940 as closed-end management companies II) registered under the Investment Company Act of 1940 as open-end management companies III) regulated by the SEC and FINRA IV) regulated by FDIC and the Department of Treasury A) I and III B) I and IV C) II and III D) II and IV

The best answer is C.

If an execution report shows that an erroneous execution has occurred, the responsibility for the trade rests with the: A) customer B) registered representative C) brokerage firm executing the transaction D) stock exchange on which the trade occurred

The best answer is C.

On the same day in a margin account, a customer buys 1 ABC Jan 45 Put @ $4 and sells 1 ABC Jan 60 Put @ $11 when the market price of ABC is $56. The customer must deposit: A) $400 B) $700 C) $800 D) $1,500

The best answer is C.

The regular way ex date for a dividend with a record date of Tuesday, June 12th, is: A) Thursday, June 7th B) Friday, June 8th C) Monday, June 11th D) Tuesday, June 12th

The best answer is C. The regular way ex date is set at 1 business day prior to record date.

Which of the following paperwork is required for trades to be effected in an account for a deceased person who held an individual account at a brokerage firm? I) Executor's authorization certificate II) Copy of the death certificateI II) Affidavit of domicile IV) Third party trading authorization A) I and II B) II and III C) I, II, III D) I, II, III, IV

The best answer is C. To transfer the assets into an account for the estate: --A certified copy of the death certificate must be provided, proving that the individual really died. --A probate court clerk issues an "executor's letter," signed by a judge, which authorizes the named individual to act on behalf of the estate as the executor. Another name for this document is "letters testamentary." --An Affidavit of Domicile must be completed and notarized. It declares the state of residence of the individual, therefore that State's laws will apply to the estate.

A 65-year old customer wishes to invest part of his retirement funds with the dual objectives of enhanced income and safety of principal. The customer notices that "C" rated corporate bonds yield significantly more than equivalent maturity Treasury issues and asks you, the registered representative, whether these would be an appropriate investment. The best response is to tell the customer that this is a: A) good idea since corporate bonds are extremely safe investments since they are guaranteed by the issuing corporation B) good idea because the yield spread between corporates and Treasuries guarantees a superior return C) bad idea because "C" rated corporate bonds have a much higher risk of default than Treasury issues D) bad idea because "C" rated corporate bonds are not permitted investment vehicles for retirement fund proceeds

The best answer is C. "C" rated bonds are true "junk" with a high risk of default. This is a totally inappropriate investment for a retiree who needs income.

A customer buys 200 shares of ABC 300% Leveraged ETF @ $50 per share in a margin account. The customer must deposit: A) $2,500 B) $5,000 C) $7,500 D) $10,000

The best answer is C. 10,000 x .25= $2,500 $2,500 x 3= $7,500

A customer buys 1 PHLX Euro Jul 143 Call @ 1.75 and 1 PHLX Euro Jul 143 Put @ 1.25 when the Euro is trading at $1.4325. The contract size is 10,000 Euros. This position is a: A) long spread B) short spread C) long straddle D) short straddle

The best answer is C. A long straddle is the purchase of a call and put on the same underlying instrument with the same strike price and expiration.

All of the following terms are synonymous EXCEPT: A) agent B) broker C) dealer D) middleman

The best answer is C. An agent is a broker who is middleman in a transaction, earning a commission. A dealer is a market maker, who is a principal in a transaction, earning a mark-up or mark-down.

Municipalities would issue tax exempt commercial paper for which of the following reasons? I) To smooth out collections of funds that are normally subject to seasonal fluctuations II) To meet a temporary cash shortage due to unforeseen extraordinary expenses III) To refund an outstanding bond issue IV) To provide construction period financing that will be permanently financed by a future bond sale A) I only B) III only C) I, II, IV D) I, II, III, IV

The best answer is C. Commercial paper cannot be used for long term financing such as a bond refunding. Remember, commercial paper is a short term promissory obligation - not long term.

The DSCR applies to: A) Mortgage bonds B) General obligation bonds C) CMOs D) Revenue bonds

The best answer is D.

Regulation U

The federal regulation governing the amount of credit that may be advanced by a bank to brokers for the purchase of securities

Regulation T

The federal regulation governing the amount of credit that may be advanced by brokers and dealers to customers for the purchase of securities Sets initial margin requirements (by the Federal Reserve) -applies to non-exempt securities only

On the same day in a cash account, a customer buys 100 shares of ABC at $50 and sells a sells 1 ABC Jan 50 Call @ $5. What is the requirement? What is the deposit?

The requirement is 100% of the stock purchase ($5,000). The ownership of the stock covers the call, so no deposit for that. The writer of the contract receives the premiums for the options ($500), so the deposit is $4,500.

selling short against the box

The short sale of securities already held by an investor. Locks in gain but generally does not defer taxation

Discount taxation of ORIGINAL ISSUE Corporate and Government Bonds

When issued at a DISCOUNT --> Must be accreted annually When issued at a PREMIUM --> OPTION to AMORTIZE

Positions on SAME side of market

buyer of call and writer of put buyer of put and writer of call

cyclical stock

car manufacturers, washing machines

Eastern vs Western syndicate

eastern- UNDIVIDED (responsible for its percentage of left-over shares) Western- DIVIDED (only responsible for what it doesn't sell)

Inflation increases when..?

expansion (not concerned with prices going up)

Counter-cyclical stock

gold, grain (business cycle goes down these go up)

Oversold market

market falling on decreasing market volume, BULLISH

Series Bonds

mature at same date

Alimony Payments

not taxable to recipient or tax deductible to payer

government assisted housing (SECTION 8)

provided for individuals with low to moderate incomes who need affordable housing or rental assistance. pay 25% of there income as rent

to find the deposit requirement on a debit spread.....?

take the differences and strike prices and subtract the premiums collected

Under Reg. T payment must occur

two days after settlement (S+2) -if not able, can ask for a Reg. T extension of another 2 days or longer in some cases -if payment is not received by (S+2) or the extension, firm is required to sell out that position (NOT the whole account) and freeze the account for 90 days.

Buying a put on a long position---->

used to lock in gain and DEFERS the tax--> HOLDING PERIOD IS WIPED OUT TO 0

EMMA

website run by MSRB -helps retail investors -shows municipal bond ticker

Exploratory oil and gas program

where no man has drilled before (WILDCAT) -HIGH RISK HIGH REWARD

What happens to the stock market if inflation is expected to increase?

- GOES DOWN -Inflation goes up, interest rates RISE, stock prices DOWN

Stop Limit Order

A stop order that becomes a limit order after the specified stop price has been reached or passed. (BUYS AT LIMIT PRICE OR BETTER)

regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

As interest rates rise, preferred stock prices will: A) remain unaffected B) rise C) fall D) fluctuate

C) Fall

What are the requirements for trade confirmations from CBOE, MSRB, and FINRA for employee of other member firms?

CBOE and MSRB must send trade confirmations FINRA must send trade confirmations ON REQUEST

Customer signature on New Account Form is needed for?

Only discretionary accounts

Rule 144A regulates:

allows for the sale of restricted stock to INSTITUIONAL investors (PORTAL MARKET)

Net Working Capital

current assets - current liabilities

Current Ratio

current assets / current liabilities (liquidity)

Defensive Interval Ratio

current assets / daily operational expenses

LEAPS NOTES

-Equity LEAPS- max life 30months -Index LEAPS- Max life of 36months (AMERICAN STYLE)

IRA contributions

-6,000 (married couple double) -if over 50, catch-up provisions allow an extra $1,000 -tax year is April 15th IF NOT COVERED BY A TAX DEDUCTIBLE PLAN, CONTRIBUTIONS ARE ALWAYS TAX DEDUCTIBLE 6% FOR EXCESS CONTRIBUTIONS -can be cash, mutual funds, bonds, stocks, unit trusts, government securities, gold/silver, bullion NO INSURANCE CASH VALUES

IRA ROLLOVER

-60 DAYS AFTER DISTRIBUTIONS--> ONCE PER YEAR --> IF ROLLOVER NOT MADE, DISTRIBUTION IS TAXABLE 20% WITHHOLDING TAX ON PREMATURE DITRIBUTIONS

Partnerships

-Allows for the flow through or GAINS and LOSSES only to other PASSIVE INCOME -Often called Direct Participation Programs -1 Limited and 1 General Partner -if there is more than one general partner and they die, MUSt BE DISSOLVED

Fixed annuity (NOTES)

-Guaranteed rate of return -considered an investment product-->not security -insurance company assumes "investment risk"

accredited investors under Reg D.

-Individuals with an annual income of $200,000 single or $300,000 jointly for past 2 years -Individuals with net worth of $1,000,000 exclusive of residence -person who is an officer or director of the issue -financial institutions such as banks, insurance companies, mutual funds, non-profits with assets in excess of $5,000,000

Immediately deductible costs

-business expense -interest expense on loans -salaries/wages -taxes -intangible drilling costs -management fees

What is a collar?

-buy a put BELOW the current stock price and WRITE a call above the current stock price -WHILE OWNING THE STOCK -for stocks that have appreciated greatly -

Eurodollar Bonds

-centered in London -denominated in US dollars or foreign currency (pound, euro) -bearer form -issued outside US -issued by US STATE GOVERNMENTS, Corporations, foreign governments ----> NOT ISSUED BY US GOVERNMENT

Regulation M

-designed to deal with potential market manipulations occurring during the "20 day cooling off period" of ad-on issues reaching the market.

Developmental oil and gas program

-drilled near existing oil field (STEP OUT) -Moderate RISK Moderate REWARD

Income oil and gas program

-drilled where proven reserves are found (STRIPPER) -LOW RISK LOW REWARD used as a (TAX SHELTER)

Actions of Federal Reserve that tightens credit

-increase in reserve requirement -increase discount rate -increase margins -REVERSE Repurchase Agreements -

Dealer

-makes mark-up/mark-down (no commission) -principal (sells securities out of its own inventory) -disclosure on mark-up/mark-down only requried if trade happens on exchange or NASDAQ

Coverdell ESAs

-maximum annual contribution is $2,000 -for any type of education (Elementary, high school, etc) -Contributions must stop when child reaches 18 and are NOT DEDUCTIBLE -multiple accounts $2,000 altogether (NOT EACH) -build tax-DEFERRED -distributions used for qualifying education expenses are not taxed FUNDS MUST BE USED BY AGE 30 -can rollover unused funds to a family member -CANNOT BE USED OR DISTRIBUTE BY HIGH INCOME EARNERS

DMM or Specialists

-member firm responsible for making a continuous, fair, and orderly market in the stock they are assigned. -execute market, stop, limit orders -must sell/buy stock when no one else wants to -maintain liquidity

CMO Tranche optional disclosures

-minimum denominations -rating

529 Plans

-not deductible -established by individual states -tax-deferred -not taxed when used to pay for college or higher expenses -10,000/yr can be used for lower education -contributions are invested in MUTUAL FUNDS -Subject to MSRB Rules -Donor AND beneficiary can be same person (FOR GRAD SCHOOL) - can make contributions annually to both a coverdell and 529 -NO CAP ON ANNUAL CONTRIBUTIONS ---> if over $!5,000 subject to gift tax however -UNUSED FUNDS CAN BE CONTRIBUTED TO ANOTHER FAMILY MEMBER

Keough Plan

-retirement plan for self employed individuals -cannot exceed 25% of after keough deductions --> with a max of $58,000 -if employer earns more than $290,000 and contriubtes the maximum, then must contribute max to employees -TAX DEFERRED -Distributions must be taken once reach 72 ---> allows for cash value of life insurance to be used as an investment -covered by ERISA

Rehypothecation

-the repledging of customer margin securities to a bank by a broker-dealer to collateralize a broker loan -bank lends funds to the broker at the "broker loan rate" or call loan rate -the maximum amount of customer securities that may be repledged is limited to an amount that does not exceed 140% of customer debit balances

Best use underwriter

-underwriter attempts to sell, --> any unsold shares get returned 1. ALL OR NONE- either all sell or deal is cancelled 2. Mini-maxi- makes all or none on an certain amount of shares, the rest in best use

Competitive Bid Underwriting Spreads

-used for Municipal GO Bonds lead underwiter gets full spread then pays -management fee: goes to lead underwriter then they pay -total takedown: paid to syndicate members if selling group brought in ----> selling concession (from syndicate) -TAKEDOWN IS CALLED ADDITIONAL IF SELLING GROUP USED-- additional plus selling group= total takedown

Negotiated Underwriting

-used for corporate securities and MUNICIPAL REVENUE BONDS -one firm brings in another firm that they usually work with -Letter of intent is included -Issuer files registration statement

If customer owns the underlying stock, then sells a call (covered call), what margin requirement is required?

0 Don't have to pay the premium amount either since the long position covers the option

Trading markets-prohibited practices

1. Front running- trading companies shares before customers 2. trading ahead of research 3. trading ahead of a customers order 4. trading pools 5. wash sales 6. marking the market at open or close 7. inter-positioning- instead of routing to market maker, routes to middle firm, increasing the cost of the trade 8. shredding- dividing a large trade in smaller units, to increase payments of order flow. 9. being a broker and dealer in the same transaction --> Must be ONE

ERISA Requirements

1. Non-Discrimination: All employees must be treated equally. 2. Vesting: Employees must earn their benefits over a reasonable time period. (over 5 years, 20% each year) 3. Fiduciary Responsibility: Plan trustee must act in a fiduciary responsibility. Plan assets must be separated from other company assets. 4. Permitted Investments: allows covered calls, NOT WHOLE LIFE, MUST MEET PRUDENT MAN RULE

circuit breaker rules

1. S&P 500 drops by 7% then all equity markets in US halt for 15min 2. if reopen and decline continues to 13% close for another 15min 3. if reopens and decline reaches 20%, markets close for rest of day

NON-ERISA PLANS

1. deferred compensation plans: PORTIONS OF INCOME ARE DEFERRED UNTIL DEATH -lost if they quit or are fired (tax deferred) 2. SEP IRA- used by small businesses. employer makes contributions to IRA account to each eligible employee -Employer takes deduction for contributions 3. flexible contribution account: contributions cannot exceed 25% of employees income (max $58,000) -employer must contribute same amount to each eligible employee (can vary year-to-year) 4. Simple IRA: companies with a maximum of 100 employees ($13,500 max contributions) --> MUST BE MADE DURING GOOD/BAD TIMES

Money laundering phases

1. placement in the financial system- gambling chips, 2. Layering- moving money from country to country 3. Integration- funds are returned tp the criminal through sources that look legitimate.

buying power.... (just review)

2 times the amount of SMA

What is the minimum margin required to open a long account?

2,000 or 100% of purchase price if under 2,000

Unlawful tender offer requires how many days for COMMON STOCK?

20 business days for tender offer and 10 business days for each "sweetener offer"

Document retentions

3 year -advertising -correspondence -customer orders 4year -customer complaints 6 year -customer account statements

A bond issue where every bond has the same issue date, interest rate, and maturity is a: A) Term bond offering B) Series bond offering C) serial bond offering D) combined serial and term bond offering

A

What is a barbell portfolio?

A barbell portfolio only has 2 maturities - a very short term and a very long term - say 2 years and 20 years, for an average life around 10 years (actually 11 years here, but we are simplifying things). The longer term bonds give a higher yield but have higher interest rate risk. This risk is offset by the fact that the 2 year bonds will mature soon and the proceeds can be reinvested at higher rates. The big risk here is that long rates rise sharply as compared to short rates (a steepening of the yield curve). In this scenario, the loss on the long term bonds will be much greater than the fact that the short term bond proceeds can be reinvested in 2 years at somewhat higher rates.

Types of Retail Communication

Advertising- mass market (newspaper, magazine, tv, billboards) --> CANNOT Recommend Sales literature- directed to specific audience- included research reports, circulars, password protected website. CAN RECOMMEND CAN NEVER PREDICT FUTURE PERFORMANCE

Securities Exchange Act of 1934

An act that regulates the trading of securities such as stocks and bonds in the SECONDARY market

supply-side economics

An economic philosophy that believes reducing government spending and cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government.

Consolidated Quotation System (CQS)

An electronic service that provides QUOTES on issues listed on the NYSE, NYSE American and regional stock exchanges. (NOT TRADES) ALLOWS A BROKER TO FIND THE BEST PRICE AVAILABLE ON ALL EXCHANGES (9-6:30PM)

trade deficit

An excess of imports over exports

When a corporation is making a limited time offer to buy its own securities or the securities of another company at a price that is above the current market price, this is known as a: A) leveraged buy out B) tender offer C) reverse merger D) reorganization

B

Serial Maturity

Bonds within an issue mature on different dates according to a predetermined schedule.

What are examples of HIGH and LOW beta stocks?

High: airlines and toy companies Low: Public Utilities and Drug Companies

Debit Spread

Difference in the value of two options, when the value of the one bought exceeds the value of the one sold. More money is going out than coming in.

Discount taxation of Municipal Bonds in the PRIMARY MARKET

Discount--> MUST ACCRETE Premium--> MUST AMORTIZE

Discount taxation of Municipal Bonds in the SECONDARY MARKET

Discount--> OPTION TO ACCRETE Premium--> MUST AMORTIZE

Cold Call Rule

Established time of day (8am until 9pm) for contracting prospective clients. Firm must also establish policies and procedures for cold calling and retaining do-not-call list -must state name, firm, number calling from

Notes on Different order notations

Fill or kill = immediately all or none= several attempts Immediate or Cancel- as much at one time and one price immediately, then cancel the rest of the order

K-1 form

Form received by partners or owners of LLC, S-Corp., or other entity, that passes through taxes to owners. Prepared by the entity to outline each person's portion of income, loss and deductions.

What does a fundamental analyst focus on?

Fundamental Factors -outlook for the industry -management of the company -product lines -introduction of new products -market share of company uses quantitative analysis to review financial statements?

What companies tend to have low dividend rates and high growth rates?

GROWTH COMPANIES

Annuity Payment Options

Gamblers -Life: Continues for the life of the payment, when they day, it stops. (Highest periodic payment) -Life with Period Certain: continues for the life of annuitant, but if they die early it lasts for a specific period of time. -Joint and Last Survivor: when the annuitant dies, it will cover another persons life (usually the wife) -Unit Refund Life: if annuitant dies before getting the full amount, the Estate will get the remaining amount Non-Gamblers (take a lump sum in order to buy a fixed annuity) -Installments for a designated Period: annuitant specifies the amount of time to which he wants to receive payments. -Installments for a designated Amount: annuitant specifies the dollar amount wanted in each payment FIXED ALLOWS OWNER TO OUTLIVE PAYMENTS

What is the difference between growth and mature companies?

Growth companies are characterized by high P-E ratios and very low dividend payout ratios. Mature companies trade at lower P-E ratios and pay out a reasonable proportion of the earnings as dividends.

What happens to IRAs upon death?

If beneficiary is a spouse -they can rollover in their own ira account -continue making payments until they are 72 --> contributions must start at 72, which tax will be due If beneficiary is a NON SPOUSE -Inherited IRA: Beneficiary must take distributions over 10 years, but can choose when to take the distributions. (is taxable but no penalty if under 59 1/2) -Cashout the IRA: get all the account immediately and receive a tax bill for the amount -DISCLAIM the IRA: give it up to someone else

Approval of Correspondence

Information regarding securities or investment banking of the firm must be approved prior to be sent to customers by manager or principle (includes email, IM, and written) -distributed to 25 or FEWER retail investors within any 30 day period (if correspondence compliance program, post-use review is fine) INSTITUTIONAL CORRESPONDENCE DOES NOT REQUIRE PRINCIPAL APPROVAL

Discount on original issue discount bounds is taxed as?

Interest Income For over 1 year maturities, portion of discount is taxed and accreted each year

Municipal bonds txation

Interest Income- Interest Exempt from Federal Income Tax - subject to state and local UNLESS purchased by the resident of that state Subject to capital gains tax Settlement- (T+2) Interest Accrues 30/360 for LT and Actual/Actual for ST

MISS PERMS

M- Manipulation (becomes fraud under this act) I- Insiders (defined under this act and prohibited from profiting through insider information) S- SEC was created S- Short sale rules (Regulation SHO) P- Proxy Rules (outside proxies of shareholders became regulated to make takeovers easier for shareholders) E- Exchanges (must register themselves with the SEC and regulate themselves under SEC guidance) R- Reports (corporate issuers must file annual and quarterly reports which are public information) M- Margin (control over credit on securities was given to the federal reserve) S- Stabilization (of a new issue is permitted)

What companies tend to have high dividend rates and low growth rates?

MATURE COMPANIES

Negotiated Underwriting Spread

Management Fee: Paid to lead underwriter Underwriters Concession: paid to syndicate members Selling concession: Paid to selling group (if hired) ---> largest fee typically reallowance: small discount to non-syndicate members who place large orders of the issue

Market value of maintenance margin in SHORT account FORMULA

Market Value at Maintenance= credit balance/1.3

Rule 145 applies to a(n):

Merger or acquisition Explanation: Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

Can losses be passed on to shareholders in REIT's????

NO (ONLY RELP's allow losses to flow through to investors)

Cost basis of mutual fund

Paid + reinvested dividends + capital gains distributions.

Conversion Ratio Formula

Par Value / Conversion Price

Length of time for a new issue registered offering that is NOT exchange listed?

Prospectus must be delivered to purchasers for 90days after issue becomes effective After 90 days, prospectus is not needed (information is now readily available)

Recession vs. Depression

Recession: When GDP drops for 2 consecutive quarters Depression: a period of prolonged recession (18 months)

INCOME MAXES FOR ROTH

Single: $125,000-$140,000 Married (JOINT): $198,000-$208,000

What are the differences between straddles and strangles?

Straddles = Same stock, expiration and strike price Strangle= Same stock, expiration, DIFFERENT Strike price

When an investor buys/sells stock when is he considered owner/not owner?

TRADE DATE

DIFFERENCE BETWEEN TRADITIONAL AND ROTH

TRADITIONAL- front loaded tax benefits (deductible) ROTH- Back loaded tax benefits

In the year 2021, a divorced woman under age 50 collects $50,000 of alimony and child support as her sole source of income. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? A) No contribution can be made because the woman does not have earned income B) A contribution of up to $6,000 is permitted, but the contribution is not tax deductible. C) A tax deductible contribution of up to $6,000 is permitted D) A tax deductible contribution of up to $12,000 is permitted

The best answer is A.

Interest income from which of the following bonds is most likely to be considered a "tax preference item" in the Alternative Minimum Tax calculation? A) Airport revenue bond B) Hospital revenue bond C) Water revenue bond D) General obligation bond

The best answer is A.

The prohibited practice of "spinning" is defined under FINRA rules as an arrangement where a: A) member firm gives officers of public companies IPO allocations in return for receiving underwriting business from that company B) customer who promises additional business to a representative receives a new issue allocation that is sold in the market at a profit within 30 days of the issue's effective date C) member firm that is an underwriter gives other retail member firms IPO allocations in return for receiving directed brokerage from those firms in the future D) member firm offers to provide research about a company that is choosing an underwriter to do its IPO, if it is selected to be the underwriter

The best answer is A.

Typically, accumulation units of variable annuities represent an investment interest in underlying: A) mutual fund shares B) life insurance policies C) direct participation programs D) pension fund investments

The best answer is A.

Which recommendation would be most suitable for a 40-year old client whose main objective is retirement income and preservation of capital? A) Fixed deferred annuity B) Fixed immediate annuity C) Variable deferred annuity D) Variable immediate annuity

The best answer is A.

Which statement is TRUE regarding money market funds? A) The Net Asset Value per share is constant at $1 B) The Net Asset Value per share is constant at $10 C) Net Asset Value per share varies with the performance of the portfolio D) Net Asset Value per share cannot be determined in a money market fund

The best answer is A.

Which statements are TRUE about TIPS? I) The coupon rate is less than the rate on an equivalent maturity Treasury Bond II) The coupon rate is more than the rate on an equivalent maturity Treasury Bond III) The coupon rate is a market approximation of the real interest rate IV) The coupon rate is a market approximation of the discount rate A) I and III B) I and IV C) II and III D) II and IV

The best answer is A.

Which statements are TRUE about an issuer making a tender offer for its non-convertible bonds? I) The minimum life of the initial offer is 5 business days II) The minimum life of the initial offer is 10 business days III) Each "sweetening" of the offer must extend the offer for another 5 business days IV) Each "sweetening" of the offer must extend the offer for another 10 business days A) I and III B) I and IV C) II and III D) II and IV

The best answer is A.

Which statements are TRUE when the Federal Reserve enters into reverse repurchase agreements with U.S. Government securities dealers? I The Federal Reserve is tightening credit II The Federal Reserve is loosening credit III Banks will have less money to loan out IV Banks have more money to loan out A) I and III B) I and IV C) II and III D) II and IV

The best answer is A.

Which of the following would create a bear price spread? A) Long 1 ABC Jan 50 Call; Short 1 ABC Jan 40 Call B) Long 1 ABC Apr 40 Call; Short 1 ABC Jan 40 Call C) Long 1 ABC Jan 40 Put; Long 1 ABC Jan 40 Call D) Short 1 ABC Apr 40 Put; Long 1 ABC Jan 40 Put

The best answer is A. A "Bear Spread" is the purchase and sale of either 2 calls or 2 puts with different strike prices and/or different expirations. Since it is a bear spread, it must be profitable in a falling market. Long Put Spreads (buy the higher strike price, sell the lower strike price, resulting in a net debit) and Short Call Spreads (sell the lower strike price, buy the higher strike price, resulting in a net credit) are profitable in a falling market. Choice C is a straddle. Choices B and D are horizontal spreads.

If a stock's price breaks out through a resistance level, it is expected that the price of the stock will: A) rise B) fall C) remain stable D) become volatile

The best answer is A. A "resistance" level is a price above the current market, through which a stock's price tends not to rise. Thus, the stock is said to have "resistance" at this price, meaning it is resisting further price rises, because investors are willing to sell at this price. If a stock breaks the resistance level, this is strongly bullish, since all of the ready sellers have been "cleaned out" and there are still buyers for the stock. If there are many more buyers than sellers, prices will rise.

The market sentiment of a customer who sells a "put spread" is: A) bullish B) bearish C) neutral D) volatile

The best answer is A. A sale of a "put spread" is similar to simply selling a put. In a rising market, the puts expire "out the money" and the profit is the premium received. The difference is that a short put gives ever increasing downside loss potential - all the way to "0" in return for the premium received. A short put spread gives limited downside loss potential in return for a lower premium received.

All of the following indicators would be evaluated by a technical analyst EXCEPT: A) Quick Ratio B) Chart Formations C) 200 Day Stock Price Moving Average D) Advance / Decline Ratio

The best answer is A. A technical analyst makes buy and sell decisions on "technical" market factors such as trading volume, breadth of market movement (advance / decline line), and the movement of market averages. Fundamental analysts are concerned with the "fundamentals" of a company such as the quality of its management, earnings, balance sheet, etc. Therefore, a fundamental analyst would examine a company's Quick Ratio (Current Assets net of inventories divided by Current Liabilities) as well as its Price-Earnings Ratio.

The portfolio management technique that uses a market index as a performance benchmark that the asset manager must meet is called: A) Passive asset management B) Active asset management C) Strategic asset management D) Tactical asset management

The best answer is A. Active asset management is the management of a portfolio to exceed a benchmark return (say the return of a comparable index fund). The manager's "active" return is any incremental return achieved over the benchmark return. In contrast, passive asset management is simply the management of a portfolio to match the benchmark return (the "passive return"). Active managers believe that underpriced securities can be found in the market and that performance of the benchmark can be exceeded. Passive managers believe that the market is efficient at pricing securities and that one cannot do any better than the "market" return as measured by a relevant index.

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

The best answer is A. All securities listed on an exchange, such as the NYSE, NYSE American (AMEX) or NASDAQ, are marginable. Regarding over-the-counter securities, those on the OTCBB or in the Pink Sheets are not marginable (because the market is illiquid).

If a couple that is not covered by another qualified retirement plan makes over $125,000 in year 2021, IRA contributions are: I) permitted II) not permitted III) tax deductible IV) not tax deductible A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $125,000 in year 2021 (the deduction phases out between $105,000 - $125,000 of income).

If an individual, aged 69, takes a withdrawal from his Keogh Plan, which statement is TRUE? A) The amount withdrawn is subject to regular income tax only B) The amount withdrawn is subject to a 10% penalty tax only C) The amount withdrawn is subject to regular income tax plus a 10% penalty tax D) The amount withdrawn is not subject to any tax

The best answer is A. Before age 59 1/2, distributions from a Keogh Plan are subject to regular income tax plus a 10% penalty tax. Afterwards, withdrawals are subject to regular tax; but not to the 10% penalty tax.

Which of the following investment company terms are synonymous? A) Bid; Net Asset Value B) Bid; Public Offering Price C) Ask; Net Asset Value D) Ask; Redemption Price

The best answer is A. Bid and Net Asset Value are the same terms for investment company shares. Bid is also the same thing as Redemption Price. Ask is the same thing as Public Offering Price.

When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), all of the following statements are true EXCEPT: A) Both PACs and TACs offer the same degree of protection against extension risk B) PACs differ from TACs in that TACs do not offer protection against a decrease in prepayment speeds C) PACs are similar to TACs in that both provide call protection against increasing prepayment speeds D) TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates

The best answer is A. Both PACs and TACs provide "call protection" against prepayments during period of falling interest rates. TACs do not offer the same degree of protection against "extension risk" as do PACs

Commercial paper is a(n): I) Money Market Instrument II) Capital Market Instrument III) Exempt Security IV) Non-Exempt Security A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. Commercial paper is a money market instrument issued by corporations. It is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed 270 days and can be sold without a prospectus.

Which statement is TRUE about Coverdell ESAs? A) Assets grow tax-deferred and distributions are not taxable if used for qualified educational purposes B) Contributions into the account are tax deductible to the donor C) Any adult, regardless of income level, can open or contribute into the account D) Distributions are taxable at long term capital gains rates Explanation

The best answer is A. Contributions to Coverdell ESAs are limited to $2,000 per child per year and are not tax deductible. Earnings build tax-deferred and when distributions are taken to pay for qualifying educational expenses, the amount distributed is not taxed. If the distribution is not used to pay for qualifying educational expenses, then it is taxable at ordinary income tax rates. High earning adults are prohibited from opening Coverdell ESAs.

Distributions from Section 403(b) tax deferred annuities are: A) 100% taxable B) partial tax free return of capital and partial taxable income C) 100% tax free D) 100% tax deferred

The best answer is A. Contributions to tax qualified plans such as 403(b) tax deferred annuities for non-profit organization employees are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

A customer buys 5M of 3 1/4% Treasury Bonds at 99-31. The current yield of the Treasury Bond is: A) 3.25% B) 3.50% C) 3.75% D) 4.00%

The best answer is A. Current Yield= Annual income / Market Price $32.50 (per $1,000 face amount) / $999.6875 (per $1,000 face amount) = 3.25%

Which statements are TRUE regarding variable annuities during the accumulation phase? I) Periodic payments of fixed dollar amounts can be made into the separate account II) Periodic payments of varying dollar amounts can be made into the separate account III) Periodic distributions of fixed dollar amounts can be made to the holder from the separate account IV) Periodic distributions of varying dollar amounts can be made to the holder from the separate account A) I and II only B) III and IV only C) I and III only D) II and IV only

The best answer is A. During the accumulation phase of a variable annuity contract, money can be paid into the plan; but distributions cannot be taken. When distributions commence in the annuity phase, no more monies can be paid into the plan. Thus, the accumulation phase allows payments to be made into the plan; but distributions cannot be taken out of the plan.

What is the main objective of investing in Equity REITs? A) Income and growth B) Capital appreciation and stability C) Tax deductions and tax credits D) Speculation and aggressive gains

The best answer is A. Equity REIT investments typically generate good dividend income, because the REIT distributes most of the net rental income to shareholders. In addition, if real estate prices appreciate, there can be capital gains. Thus, Choice A is the best one offered.

All of the following statements are true regarding gift and estate taxes EXCEPT: A) gift and estate taxes are regressive B) estates of married persons that are willed to the surviving spouse are eligible for an unlimited exclusion from tax C) gifts valued up to $15,000 per person in 2021 are excluded from tax D) tax liability rests with the donor or estate

The best answer is A. Estates of married persons are eligible for an unlimited spousal exclusion. Gifts of up to $15,000 per person in 2021 are excluded from the tax. Tax liability rests with the donor or estate (since they have the money!) Tax rates on gifts and estates increase with the size of gift or estate - this is known as a progressive tax. Regressive taxes are flat taxes.

A 5 year 3 1/2% Treasury Note is quoted at 98-4 - 98-9. The note pays interest on Jan 1st and Jul 1st. A customer buys 5M of the notes. Approximately how much will the customer pay, disregarding commissions and accrued interest? A) $4,906.25 B) $4,914.06 C) $4,920.00 D) $4,945.00

The best answer is B. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06.

If a customer calls his registered representative and states the following: "I just got my account statement and I see that your recommendations have lost 15% in value. Clearly, you have made unsuitable recommendations and you will be hearing from my attorney." Which statement is TRUE under FINRA rules regarding how the representative should handle this? A) No action need be taken by the representative because the customer has not complained in writing B) FINRA includes oral complaints in its definition of a complaint that must be documented and resolved by the member firm C) A record of the complaint must be filed with FINRA within 15 business days D) A record of the complaint must be filed with the SEC within 15 business days

The best answer is A. FINRA defines a customer "complaint" as one received in writing - screamers don't count.

Which of the following statements are TRUE regarding Federal Funds? I) Federal funds are overnight loans between member institutions of the Federal Reserve System II) Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution III) The interest rate charged on Federal Funds is the Federal Funds Rate IV) The interest rate charged on Federal Funds is the Discount Rate A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. Federal Funds are overnight loans of reserves from Fed member bank to Fed member bank. The interest rate charged on Fed Funds is the Federal Funds Rate. When the Federal Reserve Bank lends directly to a member bank, it does so at the discount rate.

A customer buys a municipal bond in the primary market at a discount. Which of the following statements are TRUE regarding the discount and the tax consequence? I The discount must be accreted II The discount may be accreted at the option of the bondholder III If the bond is held to maturity there is no taxable capital gain IV If the bond is held to maturity, there is taxable capital gain A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. If a customer buys a new issue municipal bond at a discount, the discount must be accreted. Every year, a portion of the discount is "earned" and is taxed as interest income. In this case, since municipal issues are exempt from Federal income tax, no tax is due. As the bond is accreted, its cost basis is increased yearly by the accretion amount. At maturity, the bond's cost basis has been accreted to par. Since it is redeemed at par, there is no capital gain or loss at maturity.

A customer buys 100 shares of ABC stock at $60 and sells 2 ABC Feb 60 Calls @ $4. This is a: A) ratio call write B) covered call write C) ratio call spread D) butterfly spread

The best answer is A. If a customer who is long stock sells call contracts against the stock position, then as long as the contract amount does not exceed the long stock position, the call writer is "covered." This means that if the short call is exercised, the customer already has the stock for delivery. Hence the customer is covered against the risk of having to go to the market to buy the stock at a sky high price to make delivery. If a customer sells more call contracts than the stock position owned, this is a "ratio" call write. In this example, the customer is selling calls against the stock position at a 2:1 ratio.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $41 and $46 per share for the past 3 months. If the analyst expects a breakout through the support level, which order should be placed? A) Sell (Short) ABC @ $40 Stop GTC B) Sell (Short) ABC @ $41 Stop GTC C) Sell (Short) ABC @ $46 Stop GTC D) Sell (Short) ABC @ $47 Stop GTC

The best answer is A. If a stock moves through a support level, it is breaking out to the downside. In this example, the support level is at $41. If the stock moves through this price, it is expected that it will move sharply downward.

A wealthy retired investor is interested in buying Agency mortgage backed securities collateralized by 30-year mortgages as an investment that will give additional retirement income. When discussing this with the client, you should advise him that if market interest rates fall: A) principal will be repaid earlier than anticipated and will need to be reinvested at lower rates, generating a lower level of income B) there may be a loss of principal because homeowners are likely to default on their mortgage loans at higher rates C) the maturity of the security is likely to extend and principal will be returned to the customer at a slower rate than anticipated D) he will be able to sell the mortgage backed securities at a large profit because of their long maturity

The best answer is A. If market interest rates fall, the homeowners will repay their mortgages faster because they will refinance and use the proceeds to pay off their old high rate mortgages that collateralize this mortgage-backed security. In effect, the maturity will shorten and the investor will be returned principal faster, which will have to be reinvested at lower current rates - another example of reinvestment risk.

Which statement is TRUE about non-competitive bids placed at Treasury auctions? A) Non-competitive bids have priority over competitive bids B) Competitive bids have priority over non-competitive bids C) Both non-competitive and competitive bids have the same priority D) All bids are given priority based on the size of the bid

The best answer is A. In the weekly T-Bill auction, the amount of non-competitive bids is set aside from the total securities to be auctioned and is always filled at the average winning rate. The remaining T-Bills to be auctioned are filled from the lowest interest rate bid on up. Once the issue is "sold out," all of the winning bidders are filled at the highest interest rate bid that completed the sale (so all winning bidders get the same interest rate - this is a "Dutch Auction"). Once the issue is "sold out," the remaining higher rate competitive bids are void. Thus, non-competitive bids have priority at the weekly auction.

Which of the following securities is NOT exempt from the Securities Act of 1933? A) Industrial Company issues B) Benevolent Association issues C) Small Business Investment Company issues D) Common Carrier issues

The best answer is A. Industrial companies are not exempt from the Securities Act of 1933. Common carriers, small business investment companies, and benevolent associations are all exempt.

Interest earned on corporate bonds is: I Subject to Federal tax II Subject to State and Local tax III Exempt from Federal tax IV Exempt from State and Local tax A)I and II B) III and IV C) I and IV D) II and III

The best answer is A. Interest received from corporate bonds is taxable at the Federal, State and Local levels.

Intrastate offerings are exempt from: I) Federal registration II) State registration III) FINRA regulation A) I only B) II only C) I and III only D) I, II, III

The best answer is A. Intrastate offerings are exempt from SEC registration, but are still subject to registration within the state where the offer is being made. In addition, the terms of the offering must be filed with FINRA and must comply with FINRA rules.

Which of the following statements are TRUE regarding lump sum distributions from qualified plans? I) They may be rolled over into an IRA without dollar limit II) They may be rolled over into an IRA subject a dollar limit of $35,000 III) They remain tax deferred as long as the rollover is performed within 60 days IV) They remain tax deferred as long as the rollover is performed within 90 days A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. Lump sum distributions from qualified plans prior to the age of 59 1/2 can be "rolled over" into an IRA without dollar limit and remain tax deferred as long as the rollover is performed within 60 days of the distribution date.

Short sales rarely occur in the trading market for which of the following securities? A) Municipal bonds B) Corporate bonds C) Government bonds D) Agency bonds

The best answer is A. Municipal bonds are usually not sold short because the trading market is very limited.

A husband and wife both have individual accounts at a brokerage firm and they also have a custodial account for their minor child. They have $60,000 that they wish to invest in ABC mutual fund shares, for which breakpoints start at a $25,000 investment. They wish to allocate the investment as follows: $20,000 - Husband's IRA account $20,000 - Wife's IRA account $20,000 - Custodial account As the registered representative handling these accounts, you should tell these customers that: A) These purchases will qualify for a breakpoint B) These purchases will not qualify for a breakpoint because each account is buying less than the $25,000 minimum C) These purchases should be made initially as 1 purchase in 1 account to qualify for the breakpoint and then the investment should be allocated and disbursed in $20,000 amounts to the desired accounts D) These purchases will not qualify for the breakpoint because investors cannot join together to take advantage of breakpoint sales charge reductions

The best answer is A. Mutual fund breakpoints are generally calculated using all investments made within a family - that is, parents and their children. Note, however, that groups of unrelated individuals cannot join together to get the benefit of a breakpoint.

The Network B Consolidated Tape reports all trades of: A) AMEX (NYSE American) Securities B) U.S. Government Securities C) NASDAQ Securities D) NYSE Securities

The best answer is A. NYSE American (AMEX) and regional exchanged listed issues, wherever they occurred.

When a customer buys a new stock issue from a syndicate member, the customer pays: A) the Public Offering Price B) the Public Offering Price plus a commission C) a negotiated price that can be at or below the Public Offering Price D) any price because this is a negotiated market offering

The best answer is A. New stock issues are sold under a prospectus that states the Public Offering Price, which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.

Under FINRA Rule 5130 on IPO distributions, a member may sell shares of a new issue of common stock to a registered representative: A) under no circumstances B) if the principal approves of the sale in writing C) if the issue does not trade at a premium in the aftermarket D) without restriction

The best answer is A. Registered representatives fall into the category of persons who are prohibited from buying a new issue from the underwriter under Rule 5130 regarding IPOs of common stock.

If a municipal bond is purchased regular way on Wednesday, March 11th, when does the trade settle? A) Friday, March 13th B) Monday, March 16th C) Tuesday, March 17th D) Wednesday, March 18th

The best answer is A. Regular way settlement takes place T + 2 or trade date plus 2 business days. So, the trade will settle on Friday, March 13th.

A customer is in the highest tax bracket and will possibly be subject to the AMT. Which of the following is the BEST investment recommendation? A) 5.40% Municipal bond that is not subject to the AMT B) 5.60% Municipal bond that is subject to the AMT C) 6.00% Treasury bond with a long expiration D) 6.00% Corporate bond mutual fund

The best answer is A. Since this customer is in the highest Federal tax bracket (currently 37%), 37% of the return offered by taxable Treasury Bonds or Corporate Bonds would go to tax, and only 63% of the 6% return (3.78%) offered by these would be kept after-tax. Thus, the 5.40% or 5.60% tax-free municipal bonds are the best choices. Since this customer is possibly subject to the AMT (Alternative Minimum Tax), which adds back "tax preferences" to reported income and taxes the adjusted-up figure at a flat 26-28%, buying the bond that is NOT subject to the AMT is the way to go!

The customer has decided to purchase a home instead of renting. The price of the home is $750,000 and the customer intends to put down 20% and obtain a mortgage for the balance. The customer explains that he will need the $150,000 down payment in 30 days. The best recommendation to the customer is to liquidate his: A) growth stocks and blue chip stocks immediately in the amount of $150,000 to obtain the necessary cash down payment B) growth stocks and blue chip stocks in 30 days in the amount of $150,000 to obtain the necessary cash down payment C) retirement accounts in the amount of $150,000 to obtain the necessary cash down payment D) Net Worth in the amount of $150,000 to obtain the necessary cash down payment

The best answer is A. Since this customer needs $150,000 in cash within 30 days for the down payment on the house, the best thing to do is to liquidate his stock positions now (not in 30 days) to get the funds for the down payment. If the customer waited 30 days, these stock positions could suffer a market loss, making it hard to fund the down payment. Liquidation of the pension assets makes no sense, since the customer is 41 years old and must pay regular income tax plus a 10% penalty tax on the liquidation. Net Worth cannot be "liquidated" - it is simply the value left over when all assets are subtracted from all liabilities.

The "death benefit" associated with a variable annuity contract means that if the contract holder dies: A) prior to annuitization, the amount invested in the contract is returned to a beneficiary B) after annuitization, the amount invested in the contract is returned to a beneficiary C) prior to annuitization, the insurance company will make a lump sum payment to complete the terms of the contract D) after annuitization, the insurance company will pay for the insured's burial expenses

The best answer is A. The "death benefit" of a variable annuity contract is not really much of one. If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more "death benefit."

Which of the following statements are TRUE regarding the Daily Bond Buyer "20 Bond" index? I) The index averages the yield of 20 General Obligation bonds rated "A" or better II) The maturity of the bonds is 20 years, with all bonds maturing at par III) The index includes both revenue and general obligation bonds IV) The index is computed monthly A) I and II only B) II and III only C) III and IV only D) II and IV only

The best answer is A. The Daily Bond Buyer 20 Bond index average the yields of 20 General Obligation Bonds rated A or better that have 20 years to maturity. The index is recomputed weekly.

The "cross-over" point in a limited partnership program is defined as the point where: A) taxable income exceeds tax deductions B) tax deductions exceed taxable income C) the program generates positive cash flow D) the program generates negative cash flow

The best answer is A. The cross-over point in a tax advantaged investment is the point where income begins to exceed losses; so that no tax "shelter" is left. The cross-over point happens when either income increases from the program; or tax deductions fall off from the program (or some combination of both). When a program "crosses-over," the general partner may refinance any outstanding debt to a larger principal balance to increase interest deductions; and can return the extra cash borrowed to the partners as a cash distribution. Or the general partner can invest in more properties that will generate losses.

On the same day in a margin account, a customer buys 1 ABC Jan 55 Put @ $5 and sells 1 ABC Jan 70 Put @ $12 when the market price of ABC is $67. The maximum potential gain is: A) $700 B) $800 C) $1,000 D) $1,200

The best answer is A. The customer has created a short put spread resulting in a $700 credit. This position is profitable if the market should rise (bullish). The positions set up as: Sell 1 ABC Jan 70 Put@ $12 Buy 1 ABC Jan 55 Put@ $ 5 $ 7Credit

A customer is short 400 shares of ABC stock at $50 per share in a margin account. The customer wishes to sell 4 ABC Jan 50 Puts @ $5. The customer must deposit: A) 0 B) $500 C) $2,000 D) $20,000

The best answer is A. The existing short stock position covers the sale of the puts.

A registered representative completes a standard options worksheet for a customer. Which of the following statements are TRUE? I) The customer must have received an Options Disclosure Document at or prior to receiving the options worksheet II) The customer must have received an Options Agreement at or prior to receiving the options worksheet III) Prior to its first use, the options worksheet must have been approved by the firm's designated Registered Options Principal IV) Prior to its first use, the options worksheet must have been approved by the CBOE A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. The firm's "standard options worksheet" is a pre-printed form for a specific options strategy, that is "filled in" by the registered representative to show a customer maximum gain, loss, and breakeven for a particular options strategy recommended to that customer. Before standard forms can be used, they must be approved by the firm's designated Registered Options Principal. Once these standard forms have been approved by the designated ROP, they can be completed and used with Branch Manager approval. However, the customer must receive the latest Options Disclosure Document at or prior to receipt of the completed standard options worksheet, since these include a performance projection. There is no filing with, or approval by, the CBOE, since options sales literature is accompanied or preceded by the ODD. Only communications that are not accompanied or preceded by the ODD (basically options advertising) must be pre-filed with the CBOE.

The good faith check is typically: A) 1% or 2% of the total par value of the bonds offered B) 10% or 20% of the total par value of the bonds offered C) 50% or 75% of the total par value of the bonds offered D) 100% of the total par value of the bonds offered

The best answer is A. The good faith check that must be deposited by interested bidders is typically 1% or 2% of the par value of the bonds.

A cyclical stock would be characterized by which of the following? I) Earnings variability due to changes in economic growth II) No earnings variability due to changes in economic growth III) A stock price that tends to move in the same direction of the market as a whole IV) A stock price that tends to move in the opposite direction of the market as a whole A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. The performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. Their earnings and stock prices follow the economic cycle. The classic cyclical stocks are home building, automobile manufacturers and durable goods producers. All of these purchases are deferrable in hard times.

A customer has an existing margin account and wants to write five covered calls against 500 shares of stock in the account. The margin requirement to write the calls is: A) 0 B) 5% of the market value of the stock plus the premium minus any out the money amount C) 10% of the market value of the stock plus the premium minus any out the money amount D) 20% of the market value of the stock plus the premium minus any out the money amount

The best answer is A. The sale of the calls is covered by the ownership of the stock. The margin requirement to sell the calls is "0" since there is no risk on the short calls.

In an underwriting, which of the following is earned by a syndicate member who sells the issue directly to the public? A) Underwriter's Concession B) Selling Concession C) Spread D) Management Fee

The best answer is A. The spread is the gross compensation earned by the syndicate. Out of this gross amount, portions can be earned by the members of the underwriting group. The syndicate manager earns the management fee - typically the smallest portion of the spread. Once the management fee is deducted from the spread, this leaves the underwriter's concession. This is the amount earned by a syndicate member who sells the issue to the public. Out of the underwriter's concession, the syndicate member can give up a selling concession to a selling group member for helping find a customer for the issue. Also out of the underwriters concession, a syndicate member can give up a reallowance (a small amount) to a non-member of the selling group who sells some of the issue.

In 2021, a husband gives a $100,000 gift to his spouse. How much of the gift is subject to gift tax? A) 0 B) $15,000 C) $85,000 D) $100,000

The best answer is A. There is no gift tax due, because the unlimited marital exclusion applies to both gifts and estates.

What portfolio construction is most appropriate for a retired married couple, ages 60 and 70, for the wife and husband respectively? A) 100% common stocks B) 70% common stock/30% bonds C) 35% common stock/65% bonds D) 100% bonds

The best answer is C.

A customer has just received a $100,000 inheritance and wants to know what to do with the money until he decides how to use it. He thinks that he will make his decisions on what to do with the funds within 3 months. The BEST recommendation is for the customer to buy: A) Treasury Bills B) Treasury Notes C) Investment Grade Preferred Stock D) Long Term Certificates of Deposit

The best answer is A. This customer wants to use the funds within 3 months. A short-term T-Bill maturing in 3 months or less would be the best recommendation. The other investments have longer investment time horizons and could subject the customer to a loss if sold or redeemed early. This could be loss of principal in the case of a T-Note or preferred stock purchase, if market interest rates rise after the purchase date driving their prices down; or the loss of income in the case of early redemption of a CD.

On the same day in a cash account, a customer purchases 1 MNO Mar 45 Call @ $3 and 1 MNO Mar 45 Put @ $1, when the market price of MNO is $44.38. Subsequently, MNO goes to $38 and the customer lets the call expire and closes the put at intrinsic value. The customer has: A) $300 gain B) $700 gain C) $300 loss D) $400 loss

The best answer is A. This is a long straddle: Buy 1 MNO Mar 45 Call@ $3Buy 1 MNO Mar 45 Put@ $1 $4 Debit If the market drops below $45, the call will expire "out the money" and the put goes "in the money." Here the put is "in the money" (or has intrinsic value of) 7 points. This results in a 7 point profit on the put, if it is "closed" (sold) at intrinsic value. But, since 4 points were paid in premiums, the customer has a net gain of 3 points per share, or $300.

A customer's short margin account shows the following balances: Credit Balance: $60,000 SMV: $40,000 SMA: $0 What would the adjusted SMA balance be in the account after a short cover of 100 shares of MMM stock at $60 in the account? A) $3,000 B) $6,000 C) $9,000 D) $13,000

The best answer is A. This short margin account sets up as follows: Credits - Short Market Value =Equity $60,000 - $40,000 = $20,000 If there is a short cover of 100 shares of MMM stock at $60 in the account, then $6,000 of this stock is being purchased (a debit to the account). After this transaction, the account will show: Credits - Short Market Value = Equity $54,000 - $34,000 = $20,000 To compute SMA, the question that must be asked is "What is the equity required to support a $34,000 market value at 50% margin?" 50% of $34,000 market value = $17,000 equity requirement. Since the actual equity is $20,000, there is $3,000 of SMA.

In order to sell restricted stock under the provisions of Rule 144, the stock must be: I) fully paid II) either properly margined or fully paid III) held for at least 6 months IV) held for at least 1 year A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. To sell restricted stock under the requirements of Rule 144, the stock must be held, fully paid, for at least 6 months.

An investor sells short 100 shares of ABC stock at $86 and sells 1 ABC Jan 85 Put @ $2 on the same day in a margin account. The customer must deposit: A) $4,100 B) $4,250 C) $4,300 D) $8,600

The best answer is A. To sell short stock, initial margin is 50%. 50% of $8,600 = $4,300. No margin is required on the short puts since they are covered by the short stock position. The $200 of premiums received from writing the puts is applied against the margin requirement of $4,300 for a deposit of $4,100.

Under a gross revenue pledge, bondholders have a first lien on: A) gross revenues B) gross revenues minus operations and maintenance C) gross revenues minus debt service reserve fund D) gross revenues minus deposits to the sinking fund

The best answer is A. Under a gross revenue pledge, bondholders have claim to the gross revenues of the facility.

A corporation issues $100 par convertible preferred stock, convertible at $50 per share when the market price of the common is $30. The preferred is issued under an "anti-dilutive covenant." If the company declares a 25% stock dividend, which statements are TRUE?I) The conversion price is adjusted to $40 II) The conversion price is adjusted to $62.50 III) The conversion ratio is adjusted to 2.5:1 IV) The conversion ratio is adjusted to 1.6:1 A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. Under an "anti-dilutive" covenant, if there is a stock split or stock dividend resulting in the issuance of additional common shares, the conversion price and hence the conversion ratio are adjusted to reflect the fact that the market price of each common share will drop on the ex date. Prior to the stock dividend, the conversion price was $50 per share. If there is a 25% stock dividend, the new conversion price will be adjusted to $50/1.25 = $40 per share. Since each preferred share is $100 par, the new conversion ratio will be $100/$40 = 2.5:1.

A customer has a restricted margin account, with $5,000 of SMA. The customer wishes to buy $10,000 of a marginable listed stock. The customer must deposit: A) $0 B) $2,500 C) $5,000 D) $7,500

The best answer is A. To buy a marginable security, whether the account is restricted or not, the customer must deposit the Regulation T requirement To buy $10,000 of a marginable stock, the customer must deposit $5,000 (50% Regulation T requirement). The existing $5,000 of SMA can be used to meet this requirement.

A hedge fund manager has a large short position in 30-year Treasury Bonds. The manager is concerned that market interest rates are going to fall, causing Treasury Bond prices to rise. To hedge the short Treasury Bond position, the manager should: A) Buy TYX Calls B) Buy TYX Puts C) Sell TYX Calls D) Sell TYX Puts .

The best answer is B

Under MSRB rules, a customer who refuses to disclose financial status can: I. Open an account 2. Receive Recommendations regarding municipal offerings 3. NOT open an account 4. still make trades but not receive recommendations. A) I and III B) I and IV C) II and III D) II and IV

The best answer is B) I and IV

A customer buys 2 ABC Jul 45 Calls @ $5. The customer lets the contracts expire when the market price is $40. Which statement is TRUE? A) The customer has a capital loss of $500 B) The customer has a capital loss of $1,000 C) The customer has a capital loss of $4,000 D) The customer has a capital loss of $4,500

The best answer is B.

A customer purchases an equity option contract in a regular way trade at 1:00 PM Eastern Standard Time on Tuesday, October 10th, and files an exercise notice at 3:00 PM on the same day. The option contract will first be assigned by the Options Clearing Corporation: A) immediately B) no earlier than 10:00 AM Eastern Standard Time, the next business day C) no earlier than 10:00 AM Eastern Standard Time, on the 3rd business day following trade date D) no earlier than the Friday immediately preceding the third Saturday of the expiration month

The best answer is B.

A new client has been employed as a manager at XYZ Corporation (NYSE listed) for the last 20 years and has a defined contribution pension plan at his employer that he has chosen to invest 100% in XYZ Common stock. The value of the pension plan is now $750,000. The customer is 7 years from retirement and has asked for advice about what steps he should take regarding his retirement account. As the adviser to the customer, your IMMEDIATE concern should be the: A) investment outlook for XYZ Corporation over the upcoming 7 years B) fact that the customer is concentrated in one stock and lacks diversification in his portfolio C) dividend rate paid by XYZ and whether it is sufficient to meet the customer's need for income in retirement D) the possibility that XYZ Corporation could go bankrupt prior to the death of the customer

The best answer is B.

All of the following statements are true regarding joint accounts EXCEPT: A) mailing of account statements may be directed to any single party B) checks drawn on the account may be made out in the name of any single party C) orders may be entered into the account by any single party D) open unexecuted orders may be canceled by any single party

The best answer is B.

Assets - Liabilities for a mutual fund equals: A) Net Worth B) Net Asset Value C) Net Operating Margin D) Net Investment Income

The best answer is B.

Index options: I) are issued monthly II) are issued every 4 months III) have a maximum life of 1 month IV) have a maximum life of 4 months A) I and III B) I and IV C) II and III D) II and IV

The best answer is B.

On the same day, a customer buys 100 shares of ABC at $50 and sells short 200 shares of XYZ at $60 in a margin account. The customer then sells 1 ABC Jan 50 Call @ $5 and 2 XYZ Jan 60 Puts @ $4. The customer must deposit: A) $1,300 B) $7,200 C) $8,500 D) $15,700

The best answer is B.

The "crossing" of customer orders by a Floor Broker on the CBOE floor is: A) a prohibited practice B) permitted only if the floor broker could not execute each of the orders with other market participants C) permitted only if a Floor Official approves D) permitted without restriction

The best answer is B.

The customer informs you that he just got married and that his wife intends to work for the next 5 years before they think about children. In order to make recommendations to the client due to these changed circumstances, the registered representative should: A) ask the customer if he wishes to open a joint account with his wife B) update the account profile to include the wife's financial information C) obtain the wife's social security number and perform a credit check D) update the account file with a copy of the customer's marriage certificate

The best answer is B.

Under Internal Revenue guidelines, a short term profit on securities is one which results from a A) short sale of securities that are subsequently repurchased at a higher cost at any date in the future B) long sale, at a price higher than the security's cost basis, made within one year following purchase C) sale of securities within 30 days of purchase D) sale of securities by an insider at a profit within 6 months of purchase

The best answer is B.

What is the formula for equity in a long margin account? A) Long Market Value + Debit = Equity B) Long Market Value - Debit = Equity C) Long Market Value + Credit = Equity D) Long Market Value - Credit = Equity

The best answer is B.

When a corporation is making a limited time offer to buy its own securities or the securities of another company at a price that is above the current market price, this is known as a: A) leveraged buy out B) tender offer C) reverse merger D) reorganization

The best answer is B.

When comparing Fannie Mae certificates to Ginnie Mae certificates, which of the following statements are TRUE? I) Ginnie Mae certificates are rated slightly higher than Fannie Mae certificates II) Fannie Mae certificates are rated slightly higher than Ginnie Mae certificates III) Ginnie Mae certificates will have a slightly higher yield than Fannie Mae certificates IV) Fannie Mae certificates will have a slightly higher yield than Ginnie Mae certificates A)I and III B)I and IV C)II and III D)II and IV

The best answer is B.

Which statements are TRUE about the Specialist (DMM) on the NYSE? I) The Specialist (DMM) has a negative obligation to stand aside from trading for his own account if retail customers are present to trade with each other II) The Specialist (DMM) has a positive obligation to interposition itself between retail customers that are present to trade with each other III) The Specialist (DMM) has a negative obligation to stand aside from trading with a customer if there are no other retail customers present to trade IV) The Specialist (DMM) has a positive obligation to trade with a customer if there are no other retail customers present to trade A) I and III B) I and IV C) II and III D) II and IV

The best answer is B.

Which statements are TRUE regarding SMA in a margin account that is at 50% margin? I) Every increase in market value in a long account results in a 50% increase in SMA II) Every increase in market value in a long account results in a 150% increase in SMA III) Every decrease in market value in a short account results in a 50% increase in SMA IV) Every decrease in market value in a short account results in a 150% increase in SMA A) I and III B) I and IV C) II and III D) II and IV

The best answer is B.

Which statements are TRUE when comparing types of management companies? I) Open-end funds are mutual funds II) Open-end funds are publicly traded funds III) Closed-end funds are mutual funds IV) Closed-end funds are publicly traded funds A) I and III B) I and IV C) II and III D) II and IV

The best answer is B.

Which statements are TRUE? I) Strategic portfolio management is the determination of the asset allocation percentages among differing asset classes in the portfolio II) Strategic portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class III) Tactical portfolio management is the determination of the asset allocation percentages among differing asset classes in the portfolio IV) Tactical portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class A) I and III B) I and IV C) II and III D) II and IV

The best answer is B.

Which of the following dates may be needed to compute the total dollar price of a municipal bond traded on a yield basis in the secondary market? I) Dated date II) Maturity date III) Call date IV) Put date A) I only B) II only C) II and III only D) I, II, III, IV

The best answer is C.

A customer's margin account statement shows the following: LONGMarket Value: $200,000 Debit Balance: $124,000 SHORTMarket Value: $6,000 Credit Balance: $10,000 SMA Available Balance: $12,000 The minimum maintenance margin requirement is: A) $51,500 B) $51,800 C) $52,500 D) $61,800

The best answer is B. 25% of $200,000 Long Market Value = $50,000 30% of $6,000 Short Market Value = $1,800

A customer purchases 8M of City of Los Angeles 4% G.O.'s, maturing in 2038 at 95. The interest payment dates are Jan 1st and Jul 1st. The trade took place on Tuesday, Feb 1st. How much will the customer pay for the bonds, excluding commissions and accrued interest? A) $6,000 B) $7,600 C) $8,000 D) $9,500

The best answer is B. 95% of $8,000 par = $7,600

A municipal note that is issued in anticipation of receiving future revenues is a: A) TAN B) RAN C) TRAN D) BAN

The best answer is B. A Revenue Anticipation Note (RAN) is issued by a municipality that wishes to borrow short-term against revenues that are expected to be received in the near future.

Which bond portfolio construction is based on a phase-in of purchases in installments over time? A) Ladder B) Bullet C) Barbell D) Balloon

The best answer is B. A bullet portfolio construction only has a single maturity, typically in an intermediate range of around 10 years. The way that interest rate risk is offset here is that all of the investment is not made at one time - rather, the investment is made in installments at fixed intervals. If market interest rates rise, new investment will be made at higher rates, offsetting any loss on the already purchased bonds.

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

The best answer is B. All municipal premium bonds, whether original issue premium or trading market premium bonds, are subject to straight line amortization. The 5 point premium must be amortized over 10 years, so 1/2 point per year is amortized (with no tax deduction allowed for the annual amortization amount). After 4 years, the bond has an adjusted cost basis of 103 (105 purchase - 2 point total amortization). Since the bond is being sold at 105, there is a 2 point capital gain.

A technical analyst who monitors stock advances against declines subscribes to the: A) Odd Lot Theory B) Breadth of Market Theory C) Dow Theory D) Efficient Market Theory

The best answer is B. An analyst who charts advances relative to declines is measuring the "breadth" of the market movement as an indicator of future market direction.

Quotes placed by market participants in unlinked ECNs can be accessed through: A) ATS B) ADF C) ACES D) ACT

The best answer is B. An unlinked ECN is one that is not placing its quotes into Single Book. The SEC mandated that the FINRA provide an Alternate Display Facility ("ADF") to publicly display these quotes. Thus, to find the best market for a NASDAQ stock, both NASDAQ and the ADF must be checked.

What type of education savings plan permits an adult donor to be the beneficiary? A) Custodial account opened under UTMA B) 529 Plan C) Coverdell Education Savings Plans D) Any of the above

The best answer is B. An unusual feature of 529 Plans is that the donor and the beneficiary can be the same person. There is no age limit on who can be the account beneficiary.

A client owns 500 shares of a company with 5,000,000 shares outstanding. The company will issue 1,000,000 shares through a rights offering. If the client subscribes to the offering, he or she will now own: A)500 shares B) 600 shares C) 1,000 shares D) 1,500 shares

The best answer is B. Because the company is issuing 20% additional shares (1,000,000 new shares/5,000,000 outstanding shares = 20%), a stockholder with 500 shares will be allowed to subscribe to 100 of the new shares, for a total holding of 600 shares.

The Broker Loan Rate is best described as the rate at which: A) brokers loan money to banks which then purchase securities B) brokers borrow from banks using customer securities as collateral C) customers charge brokers for borrowing their securities for stock loans D) the Federal Reserve charges member banks for overnight loans

The best answer is B. Brokers borrow from banks using customer securities as collateral at the Broker Loan rate.

A customer, age 69, has never invested in securities. She is retired with no dependents, living on a fixed pension of $35,000 per year. She has a savings account with $160,000 and her home is fully paid. She desires to supplement her retirement income, assuming minimal risk. The BEST recommendation would be for the customer to invest $100,000 of her cash savings into a(n): A) variable annuity contract B) CMO planned amortization class tranche C) SPDR D) income (adjustment) bond

The best answer is B. CMO planned amortization classes give a good yield that is 50 or so basis points higher than equivalent maturity Treasuries and are extremely safe. These meet the customer's objective of additional income with low risk. Since this customer is only earning $35,000 per year, she is in a low tax bracket - making tax-deferred variable annuities unattractive. SPDRs - Standard and Poor's 500 Depository Receipts are an exchange traded fund that consists of equities - which don't provide much income. Income bonds only pay interest if the corporation has enough "income" - so these are not appropriate either.

Cabinet trades effected on the CBOE can be used by customers to: I) open worthless long positions II) close out worthless long positions III) open worthless short positions IV) close out worthless short positions A) I and III only B) II and IV only C) I and II only D) I, II, III, IV

The best answer is B. Cabinet trades on the CBOE, also called "accommodation liquidations," are a means for customers to close out worthless contracts. If a contract is left to expire worthless, the customer does not have a printed record of this event. With a cabinet trade, the customer can close out worthless long or short positions at a premium of $.01 per share ($1 per contract). This results in a printed closing trade confirmation for the customer's records. For executing the trade, the broker will charge a commission - which will surely be more than $1!

In 2021, a customer buys 5 GE 10% debentures, M '41 at 90. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2026 at 107. The current yield on the bonds is: A) 10.00% B) 11.11% C) 11.76% D) 12.43%

The best answer is B. The formula for current yield is: Current Yield= Annual Income / Market Price $100 / $900 = 11.11%

Which of the following joint accounts CANNOT be opened? A) Adult brother and sister B) Husband and wife C) Parent and minor D) Business partner and business partner

The best answer is C.

Which statements are TRUE about Coverdell Education Savings Accounts? A) Contributions can continue until the beneficiary reaches age 18; distributions to the beneficiary must be completed upon reaching age 18 B) Contributions can continue until the beneficiary reaches age 18; distributions to the beneficiary must be completed upon reaching age 30 C) Contributions can continue until the beneficiary reaches age 30; distributions to the beneficiary must be completed upon reaching age 18 D) Contributions can continue until the beneficiary reaches age 30; distributions to the beneficiary must be completed upon reaching age 30

The best answer is B. Contributions to Coverdell Education Savings Account must stop once the beneficiary reaches age 18. Distributions must be completed upon reaching age 30.

A customer holds a large portfolio of corporate bonds. The customer is worried about capital risk. Which diversification strategy would be least effective to minimize capital risk for this customer? A) Diversification among differing issuers in differing states B) Diversification among differing denominations C) Diversification among differing industries D) Diversification among differing maturities

The best answer is B. Effective methods of diversifying away the unsystematic risk of a portfolio would be to diversify among different issuers, different states, and different industries. Thus, if one issuer, industry or economic region has problems, this would only affect a small portion of the portfolio. Diversification among differing maturities also provides a measure of risk management. If market interest rates rise, short term maturities (under 1 year) will decline in price by a minimal amount compared with longer maturities. Thus, a mix of maturities helps to minimize capital risk. Bond denominations have no bearing on diversification.

Which of the following statements are TRUE about the taxation of interest on securities issued by the Federal Farm Credit Banks Funding Corporation? I) Interest is exempt from state and local taxes II) Interest is subject to state and local taxes III) Interest is exempt from Federal tax IV) Interest is subject to Federal tax A) I and III B) I and IV C) II and III D) II and IV

The best answer is B. Federal Farm Credit Banks Funding Corporation does not issue pass-through certificates. Interest received gets the same tax treatment as Treasury issues. Interest on Federal Farm Credit issues is subject to federal income tax but exempt from state and local tax.

A customer holds 100 shares of ABC Corp $100 par non-convertible preferred stock. If ABC declares and pays a 10% common stock dividend, then as of the payable date, the customer will now have: A) 90 shares of ABC preferred stock B) 100 shares of ABC preferred stock C) 100 shares of ABC preferred stock and 10 shares of ABC common stock D) 110 shares of ABC preferred stock

The best answer is B. If ABC declares and pays a 10% "common" stock dividend, the customer who holds non-convertible or convertible preferred stock would not benefit in any way. Thus, due to the payment of a common stock dividend, the customer would still have 100 shares of the non-convertible preferred stock.

To create a debit calendar spread: A) Buy the near expiration / Sell the far expiration B) Buy the far expiration / Sell the near expiration C) Buy the near expiration / Buy the far expiration D) Sell the near expiration / Sell the far expiration

The best answer is B. In a calendar spread, the expiration months are different but the strike prices are the same. The nearer expiration will be cheaper than the farther expiration since it has less "time." To create a debit spread, the more expensive option must be bought (the far expiration) and the cheaper option must be sold (the near expiration).

Index puts would be purchased by a customer who: A) is bullish on the direction of the market B) is bearish on the direction of the market C) believes that interest rates will rise D) believes that interest rates will fall

The best answer is B. Index puts are purchased by a customer who believes that the market will fall.

Competitive bidders at Treasury Auctions would typically include all of the following EXCEPT: A) Primary U.S. Government Dealers B) Individuals C) Money Market Mutual Funds D) Pension Funds

The best answer is B. Individuals generally place non-competitive bids at Treasury auctions. Competitive bids are placed by large U.S. Government securities dealers and by institutions.

An order is placed on the NYSE to buy 100 ABC shares at $50 Day. If the order is not executed on that day, who cancels the order? A) the customer B) the Specialist (DMM) C) the registered representative D) ABC corporation

The best answer is B. It is the responsibility of the Specialist (now renamed the DMM - Designated Market Maker) to cancel any "Day" orders at the end of the day that have not been filled.

In 2021, a self-employed person earning $200,000 also has $100,000 of investment income. This person wishes to open a Keogh Plan. Their maximum permitted contribution is: A) $20,000 B) $40,000 C) $58,000 D) $68,000

The best answer is B. Keogh (HR10) contributions are based only on personal service income - not investment income. $200,000 of personal service income x 20% effective contribution rate = $40,000. Note that this is less than the maximum contribution allowed of $58,000 in 2021.

Short Positions: 100 ABC @ $60200 XYZ @ $50Credit = $40,000SMA = $16,000 Reg. T = 50% What is the minimum maintenance margin requirement? A) $4,000 B) $4,800 C) $7,200 D) $12,000

The best answer is B. Minimum maintenance margin for a short account is 30% of the market value. 30% of $16,000 = $4,800.

Municipal variable rate demand notes: I) have a minimum value which will never go below par II) have a maximum value which will never go above par III) are subject to market risk IV) are not subject to market risk A) I and III B) I and IV C) II and III D) II and IV

The best answer is B. Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk. However, if interest rates fall, the price can go above par (by a small amount) until the next reset date.

A floor broker goes to the trading post to buy 10,000 shares of ABC at the market-not held. The Specialist (DMM) says to the trader "One hundred shares are stopped at 19." This means that: A) the trader is stopped from trading with anyone else B) trading has been stopped in the issue C) the Specialist/DMM has guaranteed that the price will not change for a short period D) the Specialist/DMM will not trade with anyone else at the $19 price

The best answer is C.

Rule 103 of Regulation M requires that a market maker in a stock that is also a syndicate member in an "add-on" offering of that issue, during the 20-day cooling off period: A) must effect all trades in that stock on an upbid B) must resign as a market maker C) cannot fill any orders for that security D) can only sell the stock "long" and cannot sell "short"

The best answer is B. Rule 103 of Regulation M covers the situation where a firm in the underwriting group for an add-on securities offering also happens to be a market maker in the stock. The worry of the SEC is that the market maker, during the 20-day cooling off period, would be tempted to aggressively buy the stock to push up the market price. This, in turn, would push up the POP when it is set just prior to the effective date, which would increase the underwriters' spread. To stop this, the SEC requires that either the market maker stop making a market until the effective date; or alternatively, the market maker must act as a "passive" market maker - meaning that it cannot buy the stock at a price higher than the current high bid.

A customer has an account with a brokerage firm that is in receivership. The account holds $350,000 of securities and has a $150,000 debit. Which statement is TRUE regarding SIPC coverage? A) The customer must deposit $150,000 to receive the $350,000 of securities B) The account is covered for $200,000 C) The account is covered for $350,000 D) The account is covered for $500,000

The best answer is B. SIPC covers the equity in a customer's account, with coverage not to exceed $500,000 equity per account in securities. However, cash coverage is limited to $250,000. This account has $350,000 of securities and a $150,000 debit, so the equity is $200,000. The customer will receive $200,000 worth of securities in the liquidation.

A municipal securities firm based in Los Angeles that effects transactions solely on an principal basis places the following advertisement in the local newspaper: "We Search The Market To Buy BondsTo Fill Your Orders At The Lowest Price!" Which statement is TRUE regarding this advertising claim? A) This is prohibited under MSRB rules because such ads can only be placed in trade publications B) This is prohibited under MSRB rules because the statement is materially untrue C) This is prohibited under MSRB rules because the advertisement must be approved by the MSRB prior to use D) This is permitted under MSRB rules without restriction

The best answer is B. Since this firm effects trades solely on a principal basis, it carries inventory and is a market maker. Thus, its claim to "search the market to fill your order" for municipal bonds is untrue, since the firm only sells out of inventory as a dealer. The MSRB does not require any filing of advertising, and advertisements can be placed in any medium. However, statements made in advertising cannot be fraudulent.

A short margin account with the only position being 100 shares of ABC stock, shows the following: Credit Balance: $18,000 Short Mkt Value: $12,000 Equity: $6,000 If ABC pays a dividend of $2.00 per share, the result will be an adjusted: A) credit balance of $18,200 B) credit balance of $17,800 C) short market value of $12,200 D) short market value of $11,800

The best answer is B. Take the dividend amount (2.00 x 100 =$200) out of the credit balance

Which of the following brokerage firm units would need to be separated under "Chinese Wall" requirements? I) U.S. equities trading desk separated from Asian equities trading desk II) U.S. equities trading desk separated from the firm's U.S. investment banking unit III) U.S. equities trading desk separated from the firm's U.S. research unit IV) U.S. equities trading desk separated from the firm's foreign equities trading desk A) I and IV B) II and III C) I only D) I, II, III, IV

The best answer is B. The "Chinese Wall" as used in the securities industry, is the complete separation of a broker-dealer's investment banking unit or research unit from its trading unit.

If a municipal securities firm is subject to a 2-year ban under MSRB Rule G-37, it would be permitted to: A) act as a financial advisor to that municipality during the period of the ban B) place a bid for a competitive offer of general obligation bonds being sold at auction by that issuer C) negotiate with the issuer to be the underwriter on a revenue bond offering D) do none of the above

The best answer is B. The 2-year ban applies to engaging in municipal securities business with that issuer. Municipal securities business includes acting as a financial advisor to that issuer or performing negotiated underwritings for that issuer. It does not include competitive bid underwritings because "favoritism" does not decide the outcome of the auction. Rather, the lowest interest rate bidder wins.

The Dow Jones Transportations Average consists of which of the following? A) 15 stocks B) 20 stocks C) 30 stocks D) 65 stocks

The best answer is B. The Dow Jones Averages consists of 65 stocks - 30 industrials, 20 transportations and 15 utilities. Thus, the Dow Jones Transportations Average has 20 stocks.

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

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

An MFP (Municipal Finance Professional) gives $100 to the primary campaign of an elected official in which she is entitled to vote. The official wins the primary and the MFP gives another $200 to the same official's general election campaign. Which statement is TRUE? A) Because more than $250 was given to campaigns for the same official, this will result in a ban B) Because the amount given to each campaign did not exceed $250, this will not result in a ban C) Because the MFP is prohibited from giving any dollar amount to an elected official's campaign, this will result in a ban D) Because the MSRB rule only applies to non-MFPs, this will not result in a ban

The best answer is B. The MSRB political contribution rule applies a limit of $250 to a contribution made by an MFP (Municipal Financial Professional) to each "campaign" without a 2-year ban being imposed. This MFP gave $100 to one campaign for the candidate (the primary) and $200 to another campaign for the same candidate (the general election), so there is no ban.

A short seller is prohibited from covering short sales with offered securities purchased from an underwriter participating in the offering if the short sale occurred how many days prior to the pricing of the offered securities? A) 1 B) 2 C) 5 D) 10

The best answer is C.

As the initial transaction in a new margin account, a customer buys: 100 shares of ABC @ $30, 300 shares of DEF @ $40, 200 shares of PDQ @ $50 The customer deposits the required margin. Subsequently, ABC stock rises to $40; DEF rises to $50; and PDQ rises to $60. The SMA in the account is: A) $0 B) $3,000 C) $6,000 D) $18,500

The best answer is B. The initial market value of all the securities in the account is $25,000. The account sets up as: Long Market Value -Debit=Equity % SMA $25,000 - $12,500 = $12,500 50% 0 After the increase in market values, the new long market value is $4,000 for ABC stock; $15,000 for DEF stock; and $12,000 for PDQ stock. The account now shows: Long Market Value -Debit=Equity % SMA $31,000 - $12,500 = $18,500 60% $3,000

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

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

The symbol "s/s" comes across the following tape. This means that a(n): A) odd lot of 10 shares was traded B) round lot of 10 shares was traded C) round lot of 100 shares was traded D) round lot of 100 shares was sold short

The best answer is B. The symbol s/s stands for round lot units of 10.

A potential client is 81 years old and has asked his representative for recommendations of speculative "Dot Com" stocks. The customer has a broadly diversified bond and high dividend paying stock portfolio that provides retirement income, in addition to the customer receiving social security. The customer is concerned that his purchasing power is decreasing and wishes to allocate an increased portion of his portfolio to aggressive growth stocks. The BEST recommendation for this customer is to: A) not allocate any of his portfolio to "Dot Com" stocks because they give no current income, which this customer needs B) allocate a portion of the customer's portfolio to "Dot Com" stocks that will not reduce the customer's retirement income below the amount needed for comfortable living C) allocate a portion of the customer's portfolio to "Dot Com" stocks as dictated by the customer, since he is making the investment decision D) tell the customer that aggressive growth stocks are not suitable for a person who is at such a late stage of life

The best answer is B. This client is elderly, but is worried about the risk of inflation (purchasing power risk). A portion of the customer's portfolio could be reallocated to growth stocks to offset this risk, but only an amount that would not compromise the income needed by the customer to support his current living standard. This would likely result in a fairly small allocation. One could argue that such an elderly customer should not be holding any such stocks, but this customer is concerned about purchasing power risk and the only way to limit this is with investments in either growth stocks or TIPs (Treasury Inflation Protection Securities - which are not considered in this question).

A 30-year old single individual wishes to invest for retirement. He is employed at a high paying job at a stable employer, has a high risk tolerance and, has no current income needs from his investments. The BEST asset allocation to recommend to the customer is: A) 50% common stocks / 50% bonds B) 100% common stocks / 0% bonds C) 0% common stocks / 100% bonds D) 33% common stocks / 33% bonds / 33% cash

The best answer is B. This customer can assume risk, has no current income needs, and has a 40-50 year investment time horizon. The best answer is Choice B, since the customer should be weighted at least 70% in common stocks (100% minus one's age as a general guide). This is not offered as an answer, but because this individual has a "high risk" tolerance and a stable job, the equity allocation can be increased.

All of the following statements about warrants are true EXCEPT? A)Warrants are issued to make corporate senior securities offerings more attractive to investors B) Warrants typically give the holder a perpetual interest in the issuer's underlying common stock C) Warrants trade separately from the stock of the company D) Warrants have a longer term than rights

The best answer is B. Warrants typically have a fixed life of 5 years or less and then expire (this is longer than the expiration of rights). Perpetual means everlasting. Companies can issue perpetual warrants, but rarely do so.

When accreting an original issue discount bond, which of the following statements are TRUE? I) The bond's cost basis increases proportionately each year II) The bond's cost basis decreases proportionately each year III) If the bond is held to maturity, there is a capital gain IV) If the bond is held to maturity, there is no capital gain A) I and III B) I and IV C) II and III D) II and IV

The best answer is B. When accreting an original issue discount bond, every year the portion of the discount is included as taxable interest income and the bond's cost basis is increased proportionately. If the bond is held to maturity, the entire discount is accreted and the bond has an adjusted cost basis of par. Since it is redeemed at par, there is no capital gain at maturity.

Which statement is TRUE about the tax treatment of short sales of securities? A) Short sales can result in either a short term or long term capital gain or loss upon covering the short position B) Short sales can only result in short term capital gain or loss upon covering the short position C) Short sales can only result in long term capital gain or loss upon covering the short position D) Short sales are not taxed since a holding period is never established

The best answer is B. When an individual sells stock short, a holding period is never established. Because of this, all gains and losses are always short term.

A 65-year old retired teacher living on a pension has $200,000 invested in 2 year certificates of deposit that are yielding 4%. $20,000 of the CDs are maturing and the customer wants to diversify into an investment that gives a higher return and a moderate level of risk. The BEST recommendation would be: A) High yield corporate bonds B) Treasury strips C) Equity REITs D) Income bonds

The best answer is C.

A customer has a margin account with a long market value of $10,000, a $4,000 debit, and $1,000 of SMA. If the market value of the securities increases by 10%, SMA will increase by: A) 5% B) 10% C) 50% D) 100%

The best answer is C.

All of the following statements are true about the NYSE Super Display Book system EXCEPT: A) market orders are accepted B) limit orders are accepted C not held orders are accepted D) round lot orders are accepted

The best answer is C.

Which of the following statements are TRUE about variable annuities? I) Variable annuities are fixed unit investment trusts II) Variable annuities are non-fixed unit investment trusts III) Variable annuities are regulated under the Securities Act of 1933 and the Investment Company IV) Variable annuities are not regulated under the Securities Act of 1933 and the Investment Company Act of 1940 because they are exempt A) I and III B) I and IV C) II and III D) II and IV

The best answer is C.

Which of the following statements are TRUE regarding the trading of government and agency bonds? I) Trading is performed by primary and secondary dealers II) Trading is performed by the Federal Reserve III) The trading market is active IV) Trading takes place on the New York Stock Exchange A) I and III only B) II and IV only C) I, II, III D) I, II, III, IV

The best answer is C.

Which statements are TRUE about Eurodollar bonds? I) The bonds are issued in bearer form II) U.S. corporate issuers are not subject to foreign currency risk III) Foreign corporate issuers are not subject to foreign currency risk IV)Trading is centered in the European market A) I and II only B) II and III only C) I, II, IV D) I, II, III, IV

The best answer is C.

All of the following statements are true about American Depositary Receipts EXCEPT: A) ADRs facilitate domestic trading of foreign securities B) ADR holders receive dividends C) ADR holders have voting and pre-emptive rights D) ADRs are issued by domestic banks

The best answer is C. ADR holders receive dividends but do not have voting or pre-emptive rights.

A corporation issues $50 par convertible preferred stock, convertible at $20 per share, when the market price of the common is currently $10. Which statement is TRUE? A) The conversion ratio is 10:1 B) The conversion ratio is 5:1 C) The conversion ratio is 2.5:1 D) The conversion ratio is 2:1

The best answer is C. The conversion ratio is Par Value / Conversion Price. $50 Par / $20 Conversion Price = 2.5:1 Conversion Ratio.

Which of the following information items are needed to open a cash account for a customer? I) Customer's name and address II) Customer's social security number or tax I.D. number III) Customer's signature IV) Customer's occupation and employer A) I and II only B) III and IV only C) I, II, IV D) I, II, III, IV

The best answer is C. A customer signature is not needed to open a cash account (thus cash accounts can be opened over the phone). A signature is required for margin accounts only

Regarding options sales literature, which statement is TRUE? A) Options sales literature is prohibited from containing specific recommendations B) Options sales literature must be accompanied by complete documentation that supports any claims C) Options sales literature that shows performance must be accompanied or preceded by the latest Options Disclosure Document D) Options sales literature is prohibited from containing annualized yield calculations

The best answer is C. A customer who receives any options communication that makes a recommendation; shows past performance; or includes a performance projection; must get the latest Options Disclosure Document (ODD) at or prior to the receipt of the material.

A nominal quotation given by an over-the-counter dealer represents a(n): A) firm bid or offer B) likely bid or offer C) approximate market value, with no bid or offer D) bid or offer limited to round lots of 100 shares

The best answer is C. A nominal quote is really no quote - it is simply an approximate price.

After the bid is won in a competitive municipal underwriting, a syndicate member that sells the issue directly to the public would earn the: A) Spread B) Concession C) Total takedown D) Management fee

The best answer is C. A syndicate member that sells the issue directly to the public would earn the total takedown - which is all of the spread, except for the management fee retained by the manager.

All of the following statements are true about ADRs EXCEPT: A) ADRs trade on national stock exchanges B) ADR holders receive dividends C) ADR holders can vote for the Board of Directors D) ADR holders receive the cash value of pre-emptive rights

The best answer is C. ADRs do not vote. The bank that actually owns the shares votes. The bank passes through dividends to receipt holders and sells off pre-emptive rights, sending the cash to the receipt holders. ADRs are listed on stock exchanges and trade like any other stock.

Which of the following sources of income are used to back revenue bond issues? I) Excise taxes II) Lease rentals III) Ad valorem taxes IV) Enterprise activity income A) I and III only B) II and IV only C) I, II, IV D) I, II, III, IV

The best answer is C. Ad valorem taxes back general obligation bonds. Revenue bonds can be backed by any source of revenue other than ad valorem taxes. These sources include revenue from facility operations, grants, excise taxes, or other non-ad valorem taxes like sales and income taxes.

Which of the following are considered to be creditors of a corporation? A) Common Shareholders B) Preferred Shareholders C) Convertible Bondholders D) Right holders

The best answer is C. Bondholders are creditors of a company. Convertible bondholders are creditors of a company as long as they keep their bonds and do not convert to common shares.

In 2021, a customer buys a 3 3/4% U.S. Government bond maturing in 2030 at 104-16. The customer elects to amortize the bond premium for tax purposes. If the bond is sold after 2 years, its cost basis at that time is: A) 104-16 B) 104 C) 103-16 D) 103

The best answer is C. Both Government and corporate bond market premiums may be amortized, if elected by the owner - and this is the best choice for the owner because the annual amortization reduces the taxable interest income received from the bond. This Government bond costs 104-16, for a premium of 4 and 16/32nds = 4 1/2 points. Since the bond has 9 years to maturity, the annual amortization amount is 4 1/2 points divided by 9 years = 1/2 point per year. If the bond is sold after 2 years, 1 point of the premium will have been amortized. Thus, the bond's adjusted cost basis is 104 1/2 - 1 = 103 1/2. Converting to Government bond quotes (in 32nds), this equals 103-16.

Which of the following positions is a Ratio Spread? A) Buy 1 ABC Jan 50 Call; Buy 1 ABC Jan 50 Put B) Buy 100 shares of ABC stock; Sell 2 ABC Jan 50 Calls C) Buy 1 ABC Jan 50 Call; Sell 2 ABC Jan 60 Calls D) Buy 1 ABC Jan 50 Call; Sell 1 ABC Jan 60 Call

The best answer is C. Choice A is a straddle. Choice B is a ratio call write strategy where the customer is selling more call contracts than his long position. Choice D is a simple vertical or price spread. Choice C is a ratio spread because there is more than 1 short call contract (in this case there are 2) written against the 1 long call contract.

A corporate issuer is obligated to file an 8K report of significant events within how many business days of the event? A) 1 day B) 2 days C) 4 days D) 10 days

The best answer is C. Corporations are required to file 8K reports within 4 business days of significant events such as a declaration of bankruptcy, merger, change in the Board of Directors, etc. The 8K is filed with the SEC, and is a public document.

An investor purchases 1,000 mutual fund shares with a Net Asset Value of $10 each, where the fund imposes a 5% contingent deferred sales charge if the shares are redeemed within the first year. The sales charge decreases by 1% for each year the investor remains invested in the fund. If the investor were to redeem within the first year based upon the current NAV, he or she will receive: A) $10,500 B) $10,000 C) $9,500 D) $9,000

The best answer is C. Deferred sales charges are imposed only if a customer redeems, with the amount of the sales charge typically being reduced the longer the investor remains in the fund. This investor is redeeming his $10,000 investment within the 1st year. If this occurs, he must pay full the 5% deferred sales charge, and he will receive $10,000 x .95 = $9,500 upon redemption.

All of the following statements are true regarding joint accounts EXCEPT: A) opening a joint account requires new account information on each account participant B) if a party in a Tenancy in Common account dies, his or her share of the account is included in his taxable estate C) if a party in a Joint Tenants With Rights of Survivorship account dies, his or her share is excluded from his taxable estate D) any party in the account can authorize trades or withdraw funds

The best answer is C. Even though a "Joint Tenancy" gives each owner an undivided interest in an account, if one owner dies, the IRS assigns a portion of the account to that person and taxes it. If the owners are married, then the marital exclusion stops this from happening. The other statements are true - in a joint account any party can trade or draw checks; new account information is needed for each party to the account; and if the account is Tenancy in Common and one person dies, his or her share goes to his estate.

A customer wishes to give a $1,000 cash "bonus" to a registered representative for doing such a good job. The registered representative may: A) accept the bonus without giving notification to the firm B) accept the bonus if notification is given to the firm C) tell the customer to donate the money to a specific charity that the registered representative supports D) tell the customer to donate the money to an immediate family member that the registered representative supports

The best answer is C. FINRA does permit registered representatives to accept gifts of up to $100 in value per year per customer. Since this gift exceeds that amount, it cannot be accepted under any circumstances. There is nothing prohibiting the registered representative having the customer donate this money to a charity - as a matter of fact, it's a rather nice gesture.

A registered representative at a FINRA member firm goes on the Board of Directors of a not-for-profit charity. Which statement is TRUE? A) This event must be reported as an Outside Business Activity to FINRA on the individual's U-4 Form B) This event must be reported to the individual's employer C) This event must be reported as an Outside Business Activity to both FINRA on the individual's U-4 Form and to his or her employer D) No report is required to either FINRA or the employing member firm

The best answer is C. FINRA requires that associated persons give written notice to their employer and receive written approval from their employer, to serve as an officer, director, partner or employee of another business organization.

A customer calls her registered representative and says the following: "I'm looking for a safe investment for $100,000 that I have, that will give me a moderate level of income. I have 2 children, ages 12 and 13, and I will need to use these monies to pay for their college education, starting in 5 years." All of the following recommendations would be suitable EXCEPT: A) Treasury bond mutual fund B) Treasury bonds with 5, 6, 7, 8, and 9 year maturities C) GNMA pass-through certificates with 5, 6, 7, 8, and 9 year maturities D) FNMA debentures with 5, 6, 7, 8, and 9 year maturities

The best answer is C. GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. If interest rates drop, then the homeowners in the pool will refinance their mortgages and prepay their old higher rate mortgages. These prepayments are passed through to the certificate holders, who are paid off much earlier than expected. If these payments are reinvested, since interest rates have fallen, the overall rate of return falls, and the anticipated monies needed to fund the college education will not be available. Prepayment risk does not exist with conventional debt securities.

A limited partnership is formed between two individuals - one acting as the general partner; the other as the limited partner. The general partner wants the limited partner to help manage the venture. This action by the limited partner would: A) be permitted as long as any compensation to be received is stated in the partnership agreement B) be permitted without restriction C) cause the limited partner to be viewed as a general partner - and this individual would assume unlimited liability D) cause the revocation of the Certificate of Limited Partnership

The best answer is C. If a limited partner takes any role in participating in the running of the business, he or she is viewed as a general partner and assumes unlimited liability. To retain limited liability, the limited partner must remain a passive investor.

The Federal Reserve has been aggressively expanding the money supply by using repurchase agreements in its open market operations. Ignoring other factors, this is likely to result in: I) Increased interest rates II) Decreased interest rates III) Increased inflation IV) Decreased inflation A) I and III B) I and IV C) II and III D) II and IV

The best answer is C. If the Federal Reserve is aggressively expanding the money supply, then interest rates will drop. As the money supply is expanded, then it would be expected that as "more money" is chasing the available economic output, that prices will rise - so there should be a rise in inflation (though this happens later than the immediate drop in interest rates).

If a customer directs that a marketable order be sent to a specific trading venue, then the trade must be: A) rejected B) sent to the NYSE for execution C) sent to the market specified by the client D) sent to the market with the largest display size

The best answer is C. If the customer directs that the trade be sent to a specific trading venue, follow the customer's instructions.

Which statements are TRUE regarding trading halts? I) If it is a regulatory halt, only that exchange stops trading the stock II) If it is a regulatory halt, all markets must stop trading the stock III) If it is a non-regulatory halt, only that exchange stops trading the stock IV) If it is a non-regulatory halt, all markets must stop trading the stock A) I and III B) I and IV C) II and III D) II and IV

The best answer is C. If there is a regulatory halt, all trading in that stock must stop in the U.S. in all markets; So what is a non-regulatory halt? An example is, back in the "good old days," when the NYSE would routinely delay the opening of trading in a stock if there was a large opening order imbalance (many more opening sell orders than buy orders).

On the same day, a customer buys 100 shares of XYZ stock at $60 and sells 1 XYZ Nov 60 Call @ $6 and sells 1 XYZ Nov 60 Put @ $2. The customer's maximum potential loss is: A) $800 B) $5,200 C) $11,200 D) Unlimited

The best answer is C. In this case, the customer loses $60 paid per share x 200 shares = $12,000 - $800 collected premiums = $11,200

Income received from partnership investments is characterized under the tax code as: A) earned income B) active income C) passive income D) portfolio income Explanation

The best answer is C. Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.

A customer buys 100 shares of ABC stock at $60 as an initial transaction in a margin account. At the end of the day, the stock is worth $50. The customer must deposit: A) $2,000 B) $2,500 C) $3,000 D) $4,000

The best answer is C. Initial margin to buy stocks is 50% of the market value at the time of the purchase. 50% of $6,000 = $3,000.

An investor has sold short stock worth $45,000 in a margin account, depositing the margin requirement. If the market value of the stock falls to $30,000, what is the SMA in the account? A) $7,500 B) $15,000 C) $22,500 D) $30,000

The best answer is C. Initially, the account sets up as: Credits-Short Market Value=Equity % Sale$45,000 - $45,000 = 0 Margin 45,000 x .50= 22,500 45,000 + 22,500 = 67,500 $67,500 - $45,000 = $22,500--> 50% If the market value falls to $30,000, the account will show: Credits-Short Market Value= Equity% $67,500 - $30,000 = $37,500 --> 125% To support a $30,000 stock position at 50% margin, equity of $15,000 is required. Since the account has $37,500 of equity, the excess of $22,500 may be borrowed and is the SMA amount.

Which statement is TRUE when a non-qualified variable annuity is annuitized prior to age 59 1/2 under the provisions of IRS Rule 72t? A) 100% of each payment will be taxable at ordinary income rates B) 100% of each payment will be non-taxable C) Each payment received will be partially taxable but the 10% penalty tax will not be applied D) Each payment received will be partially taxable and the 10% penalty tax will be applied

The best answer is C. Instead of taking a lump sum distribution, the owner of a variable annuity contract can "annuitize" and receive annuity payments for life. Each payment has 2 components - an earnings portion that is taxable and a return of capital portion (cost basis) that is not taxable. The non-taxable portion represents the return of the original investment that was made with "after tax" dollars. IRS Rule 72t gives a way for payments to be taken from the annuity prior to age 59 1/2 without the 10% penalty tax being applied. Rule 72t basically requires that annual payments deplete the account over that individual's expected life (the IRS has 3 approved methods for this). The rule also requires that a minimum of 5 annual "Substantially Equal Periodic Payments" (SEPPs) be taken, but that payments must continue until at least age 59 1/2.

Which options orders are permitted? I) A corporation selling calls against its underlying stock II) A custodian selling calls against securities in a custodial account III) An individual selling naked calls in a discretionary account IV) An investment company selling calls against securities in its portfolio A) I and II only B) III and IV only C) II, III, and IV D) I, II, III, IV

The best answer is C. Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting each existing stockholders' equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock. There is no prohibition on investment companies selling calls against stocks held in their portfolios - this is a very popular strategy for enhancing income. Custodians can also sell covered calls against securities held in the custodial account to increase income. In a discretionary account, all orders are permitted as long as a written power of attorney is received from the customer and the trades are suitable for the account.

As compared to a cash account, margin accounts have: A) greater volatility B) less volatility C) greater leverage D) less leverage

The best answer is C. Margin accounts have greater leverage than cash accounts because a portion of the purchase price is borrowed.

Which of the following statements are TRUE? I) New issues of Treasury Bills are generally priced at par II) New issues of Treasury Bonds are generally priced at par, or at a slight discount to par III) New issues of Agency Bonds are generally priced at par, or at a slight discount to par A) I only B) III only C) II and III only D) I, II, III

The best answer is C. New issues of T-Bills are always sold at a discount to par value. These are original issue discount obligations, with the accretion of the discount being the interest income earned on these securities. Treasury Bonds and Agency Bonds are issued at par (or at a very slight discount to par), and make periodic interest payments.

When a customer buys a new stock issue from a syndicate member, the customer pays: A) the public offering price as stated in the prospectus plus a commission B) the public offering price as stated in the prospectus plus a mark-up C) the public offering price as stated in the prospectus without any commission D) any price since this is a negotiated market offering

The best answer is C. New stock issues are sold under a prospectus that states the Public Offering Price which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.

The formula for the expense ratio of a mutual fund is: A) Net Investment Income / Distributions to Shareholders B) Net Investment Income - Distributions to Shareholders C) Total Expenses - Total Net Assets D) Total Expenses / Total Net Assets

The best answer is D. The expense ratio is found by taking Total Expenses / Total Net Assets. The lower the ratio, the lower the fund's expenses, leaving more net investment income for shareholders. Thus, the ratio measures the fund's efficiency.

Which of the following trade "and interest" ? I) Treasury Bills II) Treasury Notes III) Treasury Bonds IV) Municipal Bonds A) I only B) III and IV only C) II, III, IV D) I, II, III, IV

The best answer is C. Original issue discount obligations (i.e. T-Bills) trade "flat" - without accrued interest. Every day the issue is held, its value increases towards the redemption price of par. This increase in value is the interest income earned on the obligation. Obligations issued at par make periodic interest payments. They trade "and interest" - with accrued interest. These include Treasury Notes, Treasury Bonds, and Municipal Bonds.

Which statement is FALSE about 401(k) Plans? A) The plan is established by the corporate employer B) The corporate employer can make matching contributions into the plan based on the contribution made by the employee C) All corporate employees must participate in the plan D) All contributions into the plan are made with pre-tax dollars

The best answer is C. Participation in the plan is voluntary, and employers can make matching contributions for employees that contribute.

Pension funds seeking safety of principal and maximum income would use which investment strategies? I) Purchase Government and Agency securities II) Sell short Government and Agency securities III) Sell covered Treasury Bond calls IV) Enter into Overnight Repurchase Agreements with government dealers A) I and IV only B) II and III only C) I, III and IV D) I, II, III, IV

The best answer is C. Pension funds must be prudently managed. The purchase of government and agency securities is appropriate, as is the sale of covered calls against the securities in the portfolio to generate extra income. Short sales are not suitable because of unlimited loss potential, as is the sale of naked calls. Pension funds would lend money overnight via repurchase agreements to government dealers as a way of generating an extra investment return from cash balances that await investment in longer term securities.

Which of the following statements are TRUE regarding REITs? I) REITs are similar to closed end investment companies II) REITs issue shares of beneficial interest representing an undivided interest in a pool of real estate investments III) REITs are similar to open end investment companies IV) REITs are registered under the Securities Act of 1933 A) I and II only B) III and IV only C) I, II and IV D) I, II, III, IV

The best answer is C. REITs, though not defined as a type of investment company under the 1940 Act, are similar to closed end investment companies; not open end management companies. REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments. REITs are registered securities under the Securities Act of 1933 and trade on an exchange or OTC.

Which of the following statements are TRUE about REITs? I) 90% of Net Investment Income must be distributed to shareholders to be "regulated" under Subchapter M II) 75% of assets must be invested in real estate related activities to be "regulated" under Subchapter M III) Gains may be passed through to shareholders under "conduit" tax treatment IV) Losses may be passed through to shareholders under "conduit" treatment A) I and IV only B) II and III only C) I, II, III D) I, III, IV

The best answer is C. Real Estate Investment Trusts must distribute at least 90% of their Net Investment Income to shareholders; and invest at least 75% of their assets in real estate activities; to be regulated under Subchapter M. Gains may be passed through to shareholders, but losses cannot be passed through under "conduit" tax treatment.

Which statement is TRUE about Securities Investor Protection Corporation (SIPC)? A) SIPC protects broker-dealers from falling below minimum net capital requirements B) SIPC protects cash held in bank accounts from the failure of the deposit taking institution C) SIPC protects cash and securities held in brokerage accounts from the failure of the broker-dealer D) SIPC hedges customer accounts at brokerage firms against a loss due to falling market values

The best answer is C. SIPC insures customer accounts holding cash and/or securities against loss if a broker-dealer fails. FDIC insures customer accounts at banks against bank failure.

A foreign currency trade that settles on a mutually agreed date after trade date is a: A) cash settlement B) seller's option settlement C) forward settlement D) spot settlement

The best answer is C. Settlement of "forward" trades in the Interbank market takes place on a mutually agreed date in the future. This contrasts with "spot" settlement of foreign currency trades which occurs either one or two business days after trade date (the more actively traded currencies settle next day; less actively traded currencies settle in 2 business days).

Which of the following statements is TRUE regarding a customer who wishes to write a put in a cash account? A) A customer cannot write a put in a cash account B) 50% of the strike price must be deposited C) 100% of the strike price must be deposited D) 100% of the strike price plus 100% of the premium must be deposited

The best answer is C. Since the maximum loss when writing a put is limited to buying the stock at the strike price, short puts can be written in a cash account if 100% of the potential loss (that is, the strike price) is deposited. Note that short calls cannot be covered with cash, since the potential loss is unlimited on these positions.

Common shares of which of the following issuers are likely to have a Beta coefficient much lower than +1? A) Tool and die maker B) Pharmaceutical manufacturer C) Public utility D) Electronics manufacturer

The best answer is C. The "Beta" coefficient is a measure of market volatility. A Beta of "+1" indicates that a particular security moves as fast as the market. A Beta higher than one means that the security moves faster than the market - for example a Beta of +2 means that the security moves twice as fast as the overall market. A Beta of less than 1, say 1/2, indicates that the stock's prices moves half as fast as the overall market. Thus, a stock with a low beta is one that is strongly defensive - that is one that is not affected by business cycles. Clearly tool and die makers and electronics are affected by business activity levels. Food and pharmaceutical companies have beta coefficients that average around 1. Electric and gas utilities, and railroads have the lowest beta factors - around .5. These companies' betas are the lowest because their rates of return are regulated. Therefore, these firms' profits are generated independently of the business cycle and stay relatively constant - no matter how good or bad business conditions are.

Which of the following actions taken by a fiduciary would be consistent with the obligations imposed by the "Prudent Man Rule"? I) Diversifying a fixed income portfolio with securities of varying maturities II) Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gains III) Investing in small capitalization unlisted new issue investments for long term growth IV) Writing covered calls against securities positions held in the account to increase income A) I and II only B) III and IV only C) I, II, IV D) I, II, III, IV

The best answer is C. The "prudent man rule" is part of Uniform State Law, and it requires fiduciaries to make investments for accounts under their control as would a "prudent man." This makes sense, since fiduciaries are investing for the benefit of others, and the investments are supposed to provide a long term future benefit to these persons. Investing in unproven, speculative new issues would not be consistent with the "prudent man rule." Diversifying a portfolio, investing in AA rated convertible bonds to meet an objective of both income and growth, and writing covered calls against stock positions are all proven, prudent investment strategies.

A customer executes the following transactions during the same year: May 1st:Aug. 1st:Aug. 20th: Buy 100 XYZ at $54 per shareBuy 100 XYZ at $40 per shareSell 100 XYZ at $41 per share After the transactions are effected, the customer's cost basis in XYZ stock is: A) $40 per share B) $41 per share C) $53 per share D) $54 per share

The best answer is C. The "wash sale" rule states that if a customer liquidates a position at a loss, and then reestablishes that position within 30 days, the loss deduction is disallowed. The 30-day time period counts from 30 days prior to the sale date, until 30 days after the sale date. In this case, the stock was purchased at $54 per share on May 1st. The customer buys the stock again on August 1st at $40 before selling the stock at $41, twenty days later. From the IRS's standpoint, the stock was purchased at $54 and sold at $41 on August 20th for a $13 per share loss (the IRS requires FIFO accounting; specific identification is not permitted when there is a "wash sale"). The customer repurchased the stock at $40 within 20 days, so the loss is disallowed under the "wash sale rule." The disallowed loss is added to the customer's basis of $40 on the 2nd purchase of stock, for a new basis in the stock of $53. When the customer liquidates this position at a later date, any gain or loss is computed from the $53 adjusted basis. In essence, the loss is deferred by the "wash sale" rule.

If the Federal Reserve enters into repurchase agreements with member banks, the: I) Federal Reserve is tightening credit availability II) Federal Reserve is loosening credit availability III) Federal Funds rate is likely to go down IV) Federal Funds rate is likely to go up A) I and III B) I and IV C) II and III D) II and IV

The best answer is C. The Federal Funds rate is the interest rate charged between Federal Reserve member banks on overnight loans. The Federal Reserve can influence this rate through open market operations. If the Fed enters into repurchase agreements with member banks, it injects cash into the banks, which tends to drive the Fed Funds rate down (because there is more cash available to lend). Conversely, if the Fed enters into reverse repurchase agreements with member banks, it drains the member banks of reserves, tending to drive up the Fed Funds rate (since there is less cash available to lend).

The Network C Consolidated Tape reports all trades of: A) AMEX (NYSE American) Securities B) U.S. Government Securities C) NASDAQ Securities D) NYSE Securities

The best answer is C. The Network C tape reports trades of NASDAQ listed issues wherever they occur.

A customer in the 28% tax bracket has $4,000 of capital gains and $12,000 of capital losses. How much unused loss is carried forward to the next tax year? A) 0 B) $3,000 C) $5,000 D) $8,000

The best answer is C. The customer has a capital gain of $4,000 and a capital loss of $12,000 for a net capital loss of $8,000. Since only $3,000 of net capital losses can be deducted in a tax year, $5,000 of the loss cannot be deducted. This $5,000 loss is carried forward to the next tax year.

Which of the following statements are TRUE regarding municipal bonds trading in the secondary market? I) Municipal market discount bonds must be accreted II) Municipal market discount bonds may be accreted III) Municipal market premium bonds must be amortized IV) Municipal market premium bonds may be amortized A) I and III B) I and IV C) II and III D) II and IV

The best answer is C. The discount on market discount municipal bonds is treated as taxable interest income earned. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder can either accrete the discount annually as taxable interest income earned and adjust the cost basis of the bond upwards by this amount; or can wait until the bond is sold or matures to reported the accumulated "earned" discount as taxable interest income at that point (this is the better choice from a tax standpoint). The premium on market premium municipal bonds must be amortized over the bond's life. It is reported annually as a reduction of municipal interest income earned (non-taxable), and the cost basis of the bond is adjusted downwards by this amount. If the bond is held to maturity, the entire premium has been amortized and there is no capital gain or loss at maturity.

A 4 ½%, 10-year corporate bond is priced to yield 4%. For an investor in the 35% tax bracket, the equivalent tax free yield is: A) 1.40% B) 2.09% C) 2.60% D) 2.76%

The best answer is C. The formula for the equivalent tax free yield is: Thus, the equivalent tax free yield is = 4% (100% - 35%) = 4% x .65 = 2.6%. Remember that the interest income from municipal bonds is exempt from Federal income tax; whereas the interest income from corporate bonds is subject to Federal income tax. Thus, the corporate yield (taxable) must be equalized to the tax free municipal yield.

ABC corporation has set the record date for a cash dividend at Tuesday, July 16th. The last day to buy the stock "regular way" and receive the dividend is: A) July 10th B) July 11th C) July 12th D) July 13th

The best answer is C. The last day to purchase the stock in a regular way trade and receive the dividend is 2 business days prior to record date or the 12th.

A corporation declares a cash dividend on Friday, December 5th, payable to holders of record on Friday, December 19th. The local newspaper publishes the announcement on Monday, December 8th, while Standard and Poor's reports the dividend on Friday, December 12th. The ex date for regular way trades will be set at: A) Friday, December 5th B) Wednesday, December 17th C) Thursday, December 18th D) Friday, December 19th

The best answer is C. The regular way ex date for cash dividends is set at 1 business day prior to record date.

A young aggressive investor gets laid off from her job. She has a net worth of $80,000 and has received a 1-time severance payment of 3 times her annual salary ($240,000 payment). In addition, she gets medical coverage for 1 year. The appropriate action for the registered representative to take is to: A) change the account investment objective to income and safety and invest the $240,000 severance payment based on these objectives B) do nothing unless written instructions are received from the customer C) discuss the situation with the client to determine if it is appropriate to change the investment objective before making any further investments D) recommend a balanced mutual fund investment that will give this younger client moderate income in addition to growth

The best answer is C. There has been a change in the client's financial situation. Before doing anything in the account, the situation should be discussed with the client to see what her current needs are. Then an appropriate recommendation can be made. At this point, we don't know if Choices A and D might be appropriate for the client - they could be, but only after the representative has a talk with the client.

Under Regulation D, all of the following are accredited investors EXCEPT a(n): A) investment company B) trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person C) partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered D) savings and loan institution

The best answer is C. There is no limit on the number of accredited investors that can purchase a private placement under Regulation D. Regarding institutional investors, any investment company, insurance company, bank, or savings and loan is accredited. A non-profit organization, trust, or institutional investor is accredited if it has at least $5,000,000 of assets and was NOT formed with the intent of buying the private placement. The idea here is that people could attempt to get around the 35 non-accredited investor limit by having these non-accredited investors contribute to a trust that would buy the issue. If the trust accumulated $5,000,000 for investment, it would be accredited. But the rule disallows this if the trust is formed for the purpose of buying the private placement!

A 25-year old client with a low risk tolerance wishes to invest in bonds. The client has invested in equities before, but has no experience investing in bonds. The BEST recommendation would be: A) BB-rated short-term bonds B) BB-rated intermediate-term bonds C) AA-rated short-term bonds D) AA-rated long-term bonds

The best answer is C. This client has a low risk tolerance. Therefore, to minimize credit risk, investment grade bonds are appropriate (BBB or higher). To minimize interest rate risk, short-term maturities are better than long-term maturities. Both of these factors will result in a safer bond investment. However, the customer will get a lower yield, but that is not addressed in the question.

A customer places an order to buy 1 ABC Jan 60 Call and sell 1 ABC Jan 40 Call, at a minimum credit of $4. This order should be: A) rejected because it is uneconomic B) written on 2 separate order tickets, 1 for the buy order; and another for the sell order C) written on 1 ticket and marked as a spread D) written on 1 ticket and marked as a straddle

The best answer is C. This customer is specifying that a spread be sold at a net credit of at least $4. The successful execution of this order requires that both "legs" of the spread be executed at the same time within the customer's limit (the credit). To facilitate the handling of such "one-on-one" orders (the same is also true for straddle and combination orders), the CBOE has the "spread priority rule." This rule states that a spread, straddle or combination order has priority over equivalent single sided orders on the trading floor. In this manner, it is easier for traders to successfully execute spread, straddle and combination orders.

What is the maximum potential loss for a customer who is long 100 ABC at $39 and short 1 ABC Jan 40 Call at $5? A) $500 B) $600 C) $3,400 D) $3,900

The best answer is C. This is a covered call writer. The maximum potential loss occurs when the market for ABC goes to zero. If it does, the customer loses $3,900 on the stock position, however, the customer received $5 in premiums for the now worthless call contract. The net maximum loss is $3,400.

A customer buys 100 shares of ABC stock in a cash account at $50 and sells 1 ABC Jan 50 Call @ $5 on the same day. The customer must deposit: A) $500 B) $2,500 C) $4,500 D) $5,000

The best answer is C. To buy the stock, the customer must deposit 100% of the purchase price of $5,000 in a cash account. There is no margin requirement on the short call because it is covered by the long stock position. Since $500 of premiums is credited to the account from selling the call, the customer must deposit $4,500 ($5,000 - $500).

A customer purchases $4,000 of "when, as, and if issued" common stock in a margin account. The customer must deposit: A) 0 B) $1,000 C) $2,000 D) $4,000

The best answer is C. Under Regulation T, the purchase of "when, as, and if issued" stock in a margin account is treated in the same manner as if the certificates were already issued. Thus, the normal Regulation T initial margin of 50% for stock purchases applies. 50% of $4,000 = $2,000 deposit.

A dealer buys 10,000 shares of ABC common at $20 for its inventory. One week later the stock is quoted at $22 - $23, and a customer sells 100 shares to the dealer at a net price of $21. Under the FINRA 5% Policy, a fair and reasonable mark-down is based upon which price? A) $20 B) $21 C) $22 D) $23

The best answer is C. Under the 5% Policy, commissions and mark-up / mark-down percentages are computed from the current market price (meaning the inside market), not from the dealer's cost. If a customer buys, any mark-up is calculated from the inside ask price of $23. If the customer sells, any "mark-down" is computed from the inside bid price of $22.

The spread on a new municipal offering is set at 3/4 point. The selling concession is 1/4 point and the additional takedown is set at 3/8 point. If a selling group member places an order for the bond, how much will the syndicate member earn on that sale? A) 0 B) 1/4 point C) 3/8 point D) 5/8 point

The best answer is C. When a municipal syndicate member sells to the public, he earns the "total takedown," which is the total of the selling concession plus the additional takedown. In this case, the syndicate member does not earn the total takedown because the bonds were sold through a selling group member. Out of the total takedown of 5/8 point, a selling concession of 1/4 point is given up to the selling group member, leaving the syndicate with the additional takedown of 3/8 point.

Over the last 5 years, a client has bought 200 shares of XYZ Mutual Fund each year in a taxable account and has elected to have dividends and capital gains automatically reinvested in additional fund shares. The aggregate cost of the 1,000 purchased shares is $31,300. In addition, over these 5 years, the customer has bought 300 additional shares through dividend reinvestment at an aggregate cost of $11,300. At the end of the 5th year, the client's statement shows that the customer owns 1,300 shares at an aggregate market value of $49,600. If the client redeems 100 of the shares, the average cost basis per share is: A) $24.08 B) $30.43 C) $32.77 D) $38.15

The best answer is C. When redeeming mutual fund shares, the IRS requires that average cost basis be used, unless another acceptable method is elected (FIFO or specific identification). Because dividends and capital gains are taxable each year, when reinvested in additional share purchases, those dollars increase the number of shares owned. To find the average cost basis, add the cost of the original 1,000 shares ($31,300) and the cost of the additional 300 shares purchased through dividend reinvestment ($11,300) = $42,600 divided by 1,300 shares owned = $32.77 cost per share.

A customer buys 300 shares of ABC at $40, depositing the Regulation T requirement on the 3rd business day after trade date. He holds the position for two months, during which $100 of interest is charged on the debit balance. What is the adjusted debit balance at the end of the two month period? A) $5,900 B) $6,000 C) $6,100 D) $6,200

The best answer is C. initial margin + 100

Which orders guarantee price but not execution? I) Buy Limits II) Buy Stops III) Sell Limits IV) Sell Stops A) I and II B) III and IV C) I and III D) II and IV

The best answer is C. a "Limit" order specifies that the execution must comply with the limit price specified or better. Thus, limit orders are only filled at that price or better. If the market never reaches that price, they are never filled.

Which statements are TRUE when comparing UTMA Custodial Accounts to Coverdell Education Savings Accounts I) Contributions to UTMA accounts are limited to $2,000 annually II) Contributions to Coverdell Education Savings Accounts are limited to $2,000 annually III) Earnings in UTMA accounts are subject to Federal income tax IV) Earnings in Coverdell Education Savings Accounts are subject to Federal Income tax A) I and III B) I and IV C) II and III D) II and IV

The best answer is C. (II and III)

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $44 and $49 per share for the past 3 months. If the analyst expects a breakout through the resistance level, which order should be placed? A) Buy ABC @ $48 Stop GTC B) Buy ABC @ $49 GTC C) Buy ABC @ $50 GTC D) Buy ABC @ $50 Stop GTC

The best answer is D.

An officer of a listed company calls his registered representative and tells him to sell the maximum amount of that company's common shares in accordance with Rule 144. Prior to placing the order to sell, the registered representative calls five of his customers and tells them to sell that company's stock. Which statement is TRUE? A) There is no violation of FINRA rules B) There is no violation of Securities and Exchange Commission rules C) This action violates the Securities Act of 1933 D) This action violates the insider trading provisions of the Securities Exchange Act of 1934

The best answer is D.

Customer fails to deliver must be bought in: A) 5 business days after trade date B) 5 business days after settlement date C) 10 business days after trade date D) 10 business days after settlement date

The best answer is D.

Homeowners will extend the anticipated repayment date of mortgages: I) when interest rates fall II) when interest rates rise III) in order to refinance at higher rates IV) in order to avoid refinancing at higher rates A) I and III B) I and IV C) II and III D) II and IV

The best answer is D.

In a new issue underwriting, which of the following is typically the smallest? A) Underwriter's Concession B) Selling Concession C) Spread D) Management Fee

The best answer is D.

Issuance of which of the following municipal issues is NOT subject to statutory debt limits? I) General obligation bond II) Special tax bond III) Industrial revenue bond IV) Moral obligation bond A) I only B) I and II C) III and IV D) II, III, IV

The best answer is D.

Under the Uniform Gifts To Minors Act, which of the following statements are TRUE? I) Only adults related to the minor may open a custodial account II) Any adult can open a custodial account for a minor III) Any gift donated into the account is revocable IV) Any gift donated into the account is irrevocable A) I and III B) I and IV C) II and III D) II and IV

The best answer is D.

Which of the following statements are TRUE regarding Trust Accounts? I) A copy of the trust agreement must be obtained before any transactions are allowed II) A new account form must be completed III) The trust agreement will specify the transactions that the trustee is allowed to perform IV) The account cannot be a margin account unless authorized by the trust agreement A) I and II only B) III and IV only C) I, II, III D) I, II, III, IV

The best answer is D.

Which sources of REIT income are counted towards the 75% test required by Subchapter M? I) Property rentals II) Interest from mortgages III) Capital gains on property sales IV) Real estate tax refunds A) I and II only B) III and IV only C) I, II, III D) I, II, III, IV

The best answer is D.

A customer buys 100 shares of ABC at 50 in a margin account and deposits the Regulation T requirement. Later, he buys 1 ABC Jan 50 Put @ 5. To buy the put, the customer must deposit: A) 0 B) 25% C) 50% D) 100%

The best answer is D. 100% of the purchase price of a listed option must be deposited to buy.

A support level is: I) above the current market price of the stock II) below the current market price of the stock III) a point through which the stock's price tends not to rise IV) a point through which the stock's price tends not to fall A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. A "support" level is a price below the current market, through which a stock's price tends not to fall. Thus, the stock is said to have "support" at this price, meaning it is resisting further price declines.

A customer, age 40, is concerned that the inflation rate is ready to explode, and wishes to invest funds to protect against the consequences of such an event. The BEST asset allocation mix to recommend to this customer is: A) 100% common stocks B) 100% bonds C) 50% common stocks; 50% bonds D) 100% money market instruments

The best answer is D. A customer who believes that substantial inflation may occur in the future would invest principally in money market instruments. If there is persistent inflation, this forces interest rates up. Thus, the value of long term bonds and preferred stocks drops. At the same time, if there is inflation, stock prices drop, since the cost of doing business tends to inflate faster than companies can raise prices, putting pressure on profit margins. The safe harbor in times of inflation is money market instruments, which are not affected by these forces.

All of the following statements are true about a company that is highly leveraged EXCEPT: A) the company has the greatest portion of its capitalization as debt B) if the company's operating earnings are highly variable, it may default in an economic downturn C) they "trade on the equity," producing a disproportionate increase in earnings per share once earnings cover debt service D) the more highly leveraged the company, the lower the credit risk of the issuer

The best answer is D. A highly leveraged company is one having a disproportionate amount of debt in its capital structure. Because interest on debt is a fixed annual amount, and is quite large in highly leveraged companies, if operating earnings drop in a bad year, debt service costs may not be covered. On the other hand, once debt service costs are covered, if earnings increase, all of the increase accrues to the shareholders. Because of this, leveraged companies are said to "trade on the equity" - meaning that once debt service costs are covered, reported earnings per share can rise dramatically. The more highly leveraged a company, the lower the credit rating because of increased default risk.

If a registered representative wishes to distribute an options retail communication to her customers, which statement is FALSE? A) The retail communication must be approved in advance of distribution by a Registered Options Principal B) The retail communication must be approved 10 days in advance of use with the SRO if it is distributed to customers who have not received an Options Disclosure Document C) The retail communication can be distributed to any customer who has already received an Options Disclosure Document without requiring prior filing with the SRO D) The retail communication must be approved 10 days in advance of use with the SRO, regardless of whether it is distributed to customers who have already received, or who have not already received, an Options Disclosure Document

The best answer is D. A retail communication regarding options is defined as one distributed to more than 25 existing or prospective clients. When a client opens an options account, the customer must be given the latest Options Disclosure Document (the ODD) - which is basically an options primer, explaining how options and the OCC (Options Clearing Corporation) work. If the retail communication is distributed to customers who have already opened options accounts, then they have already received the ODD. These retail communications do not need to be pre-filed with the SRO (either the CBOE or FINRA) If the retail communication is distributed to customers who have not already opened options accounts, then they have not received the ODD. These customers are "new" to options, so the SRO is more concerned about what might be in these communications, therefore the SRO (FINRA or the CBOE) requires that the communication be filed 10 days in advance and get SRO approval before it can be used. Finally, no matter what, any options retail communication must be approved by a Registered Options Principal before it can be distributed.

An elderly customer that is currently invested in bonds for income is concerned about declining yields due to record low interest rates. He has contacted his registered representative and inquires about purchasing a reverse convertible note on a Blue Chip stock because it offers a higher yield. The customer should be informed about all of the following EXCEPT the: A) note is not an obligation Blue Chip corporation B) note is subject to the credit risk of the issuing bank C) customer can potentially lose 100% of the principal amount due to a stock price decline D) "knock-in" price of the underlying security gives the customer the right to put the note back to the issuer at par at maturity

The best answer is D. A reverse convertible note is a structured product that is an obligation of the issuing bank - not the corporation or the corporate securities on which the product is based. As such, the note only as good as the credit of the issuing bank. Furthermore, if the market price of the stock declines to, or through, the "knock-in" price, the customer receives stock at maturity and that stock could potentially be worthless. The customer should be made aware of all of these points.

The rate of inflation as measured by the Consumer Price Index has been rising rapidly over the last months. Ignoring other factors, the effect will be to: I) raise stock market values II) lower stock market values III) raise bond market values IV) lower bond market values A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. A rising inflation rate is a "lose-lose" situation for both the stock and long term bond markets. If the inflation rate rises, then interest rates are likely to rise, with short term rates rising more than long term rates (the yield curve "flattens" as the Fed tightens credit to tame inflation, with short term rates rising more than long term rates). If interest rates rise, then long term bond prices will fall fastest, and long bondholders will have large losses on their positions. Furthermore, during periods of inflation, corporate earnings tend to fall, because companies are not able to keep raising prices at the same pace as their costs rise. This lowered earnings outlook depresses stock prices. Thus, both stock and long bond prices tend to fall in inflationary periods. Instead, during these periods of high inflation, investors "flee to safety" - they abandon the stock and long term bond markets, and put money in short term money market instruments, which offer safety and relatively high interest rates during inflationary periods; and they also put money into real estate and other "hard" assets that tend to keep pace with inflation.

All of the following terms are synonymous EXCEPT: A) Vertical Spread / Price Spread B) Horizontal Spread / Calendar Spread C) Horizontal Spread / Time Spread D) Vertical Spread / Calendar Spread

The best answer is D. A vertical (or "price") spread is so-called, because the strike prices are different. A horizontal spread is so-called, because the expirations are different

firm underwriting

Underwriter buys the ENTIRE issue to sell, thus taking the risk of selling the bonds for whatever price they can get

Which of the following will affect the reported net income per share of a corporation? I) Discontinuance of operations of an operating division II) Decrease in the number of common shares outstanding III) Change in accounting method for valuing inventories IV) Increase in cost of goods sold A) I and II only B) III and IV only C) I, II, III D) I, II, III, IV

The best answer is D. All of the choices will affect the reported net income per share of a company. If a corporation discontinues operations of a division, it usually takes a charge to net income to pay for the cost of the shut down. If the number of common shares is decreased (through the purchase of Treasury stock, for instance), reported net income per share will rise. If a corporation changes accounting methods for valuing inventories, any decrease in inventory value is taken as a charge to net income; while any increase in inventory value will increase reported net income. If a corporation has a higher cost of goods sold, then operating income will decline.

Last sale information is available for which of the following? I) NYSE listed issues II) NASDAQ listed issues III) Pink Sheet issues IV) CBOE listed issues A) I only B) II and III only C) I, II, and IV only D) I, II, III, IV

The best answer is D. Any exchange reports last sale information for securities traded there.

Which of the following does NOT affect SMA in a long margin account? A) purchase of securities B) sale of securities C) increase in market value D) decrease in market value

The best answer is D. As the market drops, SMA locks. The amount available to borrow stays intact. A rising market (above 50% margin in the account) increases SMA. A purchase of securities uses SMA if the margin is not deposited. A sale of securities reduces the debit, increasing SMA.

Which of the following statements is TRUE regarding a brokerage firm holding fully paid customer securities? Brokerage firms: A) cannot hold fully paid customer securities under any circumstances B) can hold fully paid customer securities without restriction C) can hold fully paid customer securities if the dollar value of the positions is kept in a depository institution D) can hold fully paid customer securities if they are segregated from other marginable securities and are kept in safekeeping

The best answer is D. Brokerage firms can hold fully paid customer securities as long as the positions are segregated from other margin securities and are kept in safekeeping.

Which of the following information is available on EMMA?I Official Statements for municipal bond issues, notes, and 529 plansII Details of bonds that have been pre-refundedIII Real-time prices and yields for municipal bond trades, as reported through RTRSIV Real-time price and yields for municipal note trades as reported through SHORT A) I and II B) III and IV C) I, II, III D) I, II, III, IV

The best answer is D. Consider this to be a learning question about EMMA (Electronic Municipal Market Access). The EMMA web portal, run by the MSRB, makes available to the investing public:Official Statements, Preliminary Official Statements, Advance Refunding Documents, and Event Notices;Real time reporting of municipal bond trades through RTRS (Real Time Reporting System); andReal time reporting of municipal note trades through SHORT (Short-Term Obligation Rate Transparency System).

Which of the following statements are TRUE regarding contributions to, and distributions from, non-tax qualified retirement plans? I) Contributions are made with before tax dollars II) Contributions are made with after tax dollars III) Distributions are 100% taxable IV) Distributions are partially tax free, with the amount above the original cost basis being taxed A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. Contributions to non-tax qualified plans are not tax deductible. They are made with "after-tax" dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital contributions made with after-tax dollars is not taxed. Only the tax deferred "build-up" in the account above what was originally contributed is taxed.

A small investor with $2,000 of available funds wishes to make a crowdfunding investment. Which statement is TRUE about this? A) This client cannot make the investment because the dollar amount to be invested is too small B) The client cannot make the investment unless he or she is an accredited investor C) The client cannot make the investment because the offering is only available to institutional investors D) The client can make the investment without restriction

The best answer is D. Crowdfunding offerings are targeted at small investors. The investment minimum is only $2,000 and the investor is not required to meet any income or net worth tests. The intent is to make it easy for start-up company to raise "seed" capital in a private placement offering from a group of relatively small investors. (Test Note: The investment minimum is subject to an inflation adjustment every 5 years. In April 2017, it was adjusted to $2,200. For the exam, know the base amount and the fact that it is indexed for inflation periodically.)

During prolonged periods of economic expansion: I) interest rates can be expected to fall II) interest rates can be expected to rise III) the Federal Reserve will start to loosen credit IV) the Federal Reserve will start to tighten credit A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. During prolonged periods of economic expansion, interest rates rise. This occurs because the Federal Reserve tightens credit to keep the economy from growing too fast; and because demand for loans rises as business activity rises.

A customer buys an equity LEAP contract on the first day that the option starts trading. If the contract expires "out the money," the customer will have a: A) short term capital gain B) short term capital loss C) long term capital gain D) long term capital loss

The best answer is D. Equity LEAPs are Long Term Equity AnticiPation options with lives of 28 months. Thus, a purchaser who buys a LEAP when it first starts trading, must have held the contract for over 1 year when it expires - thus, the holder has a long term capital loss.

A registered representative is permitted to borrow securities from a customer: A) only if the customer has signed a margin agreement B) only if the customer has signed a loan consent agreement C) as long as the securities will be replaced no later than the end of that month D) under no circumstances

The best answer is D. FINRA prohibits registered representatives from either lending money or securities personally to a customer or borrowing money or securities personally from a customer. There are certain exceptions to the prohibition if the customer is a spouse, "significant other" or family member, but this is not the case here.

All of the following procedures are required to open a Portfolio Margin account EXCEPT: A) the account must be approved by the designated ROP for uncovered options writing B) the customer must receive a copy of the risk disclosure document at, or prior to, account opening C) the customer must sign an acknowledgment that he or she has read and understands the risk disclosure document D) the account must be approved by the CBOE or FINRA for exemption from Regulation T margin requirements

The best answer is D. FINRA requires that a portfolio margin account be opened as an options account that is qualified for naked options writing. This requires a more-detailed suitability determination and requires not only branch manager approval, but also separate approval of the designated Registered Options Principal (this is the "main office" ROP in charge of compliance as opposed to a regular branch manager-ROP). The customer must be provided with a portfolio margin risk disclosure document at, or prior to, the initial transaction in the account and must sign an acknowledgment that he or she has read and understands the disclosure document prior to the initial transaction in the account. There is no requirement for the member firm to get each customer account approved by the CBOE or FINRA.

A corporation declares a dividend of $3.00 on Tuesday, December 6th. The record date is set at Friday, December 30th, with the dividend payable on January 6th. Based on this information, the ex date is set at December 28th. For the recipient of the dividend, the "tax event" occurs on: A) December 6th B) December 26th C) December 30th D) January 6th

The best answer is D. For tax purposes, payments by issuers to securities holders are considered to be received as of the date the issuer sends the check. In this case, the check is sent on January 6th (payable date), therefore the income is taxable as of this date.

Trading in the Interbank market will affect all of the following EXCEPT: A) foreign currency prices in terms of U.S. dollars B) future trade deficit or surplus figures C) future economic growth D) future inflation levels

The best answer is D. Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. Inflation levels are determined by the relative balance of output of goods and services versus the U.S. dollars available to "pay" for these. If the money supply is allowed to grow too quickly by the Fed relative to real economic growth, then there will be inflation. Therefore, future inflation levels are basically determined by Federal Reserve actions, not by the interbank market.

Growth investors: A) seek to find investments that are undervalued by the market B) determine the value of a security through fundamental analysis C) invest in securities included in growth funds D) make their investment decision based upon the market performance of the security

The best answer is D. Growth investors select investments based simply on growth in earnings or growth in market price; on the assumption that these will always be the best performing investments.

If the U.S. dollar appreciates against foreign currencies, which statements are TRUE? I) U.S. exports should increase II) U.S. exports should decrease III) Any trade deficit should narrow IV) Any trade deficit should widen A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. If the U.S. dollar appreciates against foreign currencies, then U.S. goods become more expensive to foreigners, while foreign goods become cheaper in the U.S. This should cause exports to decrease, and imports to increase. If the U.S. is running a trade deficit, the increase in net imports will widen the deficit.

Which of the following statements are TRUE regarding negotiated municipal underwritings? I) The spread must be disclosed II) The initial offering price of each maturity must be disclosed III) The participation amount of each underwriter does not have to be disclosed IV) The names of the underwriters do not have to be disclosed A) I and II only B) III and IV only C) I, II, IV D) I, II, III, IV

The best answer is D. In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters (though this information is readily available) nor their participation amounts (since this in no way affects the customer).

A customer, age 51, has a 20 year investment time horizon, a moderate risk tolerance, and is looking for investments that provide both income and growth. The best recommendation would be: A) money market instruments B) mutual funds C) bonds D) large capitalization growth stocks

The best answer is D. Money market instruments are very safe, but provide little income and no growth. These would be recommended to a customer seeking preservation of capital - not to a customer seeking income and growth. Choice B, mutual funds, is too generic to be a valid choice. There are all kinds of mutual funds out there, for all types of investment objectives. Choice C, bonds, is also too generic to be a valid choice. Also, while bonds provide income, they do not provide growth. Choice D, large capitalization growth stocks, is the best one offered. Large capitalization stocks pay dividends for income, and also offer long term growth potential, meeting both of the customer's objectives.

Municipal broker's brokers: I) deal with the general public II) do not deal with the general public III) take inventory positions IV) do not take inventory positions A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. Municipal broker's brokers perform specialized trades for institutional investors on an agency basis only - they do not carry inventory positions nor do they deal with the general public.

A municipal bond dealer typically engages in which of the following activities? I) Distributing bona-fide quotes to interested parties II) Participating in syndicates bidding on new issues III) Acting as a market maker by taking long positions IV) Acting as an agent, buying and selling positions for customers A) I and II only B) III and IV only C) I, II, III D) I, II, III, IV

The best answer is D. Municipal dealers participate in bidding for new issues, distribute quotes; take inventory positions (long positions) in municipal issues; and handle transactions for customers on an agency basis.

Which statements are TRUE regarding the weekly Treasury Bill auction? I) The minimum non-competitive bid has no dollar limit II) The minimum non-competitive bid amount is $100 III) The maximum non-competitive bid has no dollar limit IV) The maximum non-competitive bid amount is $5,000,000 A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. The minimum non-competitive bid amount in the weekly Treasury Bill auction is $100; the maximum non-competitive bid amount is $5,000,000.

Which statements are TRUE regarding dividend and capital gain distributions made by mutual funds? I) Capital gains are only taxable in the year they are distributed if they are not reinvested in additional shares of the mutual fund II) Capital gains are taxable regardless of being reinvested in additional mutual fund shares III) Dividends are only taxable in the year they are distributed if they are not reinvested in additional shares of the mutual fund IV) Dividends are taxable regardless of being reinvested in additional mutual fund shares A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. Mutual fund capital gains and dividend distributions are taxable to the shareholder in the year they are distributed by the fund, whether or not the distributions are automatically reinvested in new fund shares.

Quotes published in the news media for mutual funds show: I) Bid price at NAV less any redemption fee II) Bid price at NAV III) Ask price at NAV plus minimum sales charge IV) Ask price at NAV plus maximum sales charge A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. News media quotes for mutual fund shares show the Bid Price at Net Asset Value. The Ask Price is Net Asset Value plus the maximum sales charge imposed by that fund.

Which of the following items are taxable to a limited partnership? I Short Term Gains II Long Term Gains III Ordinary Income A) I only B) I and II only C) III only D) None of the above

The best answer is D. Partnerships are not taxable entities; all items of income and loss "flow through" to the tax returns of the partners. Tax liability only exists at the partner level - not at the partnership level.

Which statement is TRUE regarding variable annuity contracts? A) The principal amount is guaranteed prior to annuitization by the insurance company that issues the contract B) The principal amount is guaranteed after annuitization by the insurance company that issues the contract C) The contract holder loses control of the principal amount prior to annuitization D) The contract holder loses control of the principal amount after annuitization

The best answer is D. Prior to annuitization, the contract holder is allowed to change his payout option, thus he has control over how the principal will be disbursed. However, once the contract is "annuitized," the contract holder cannot change the payout option - he or she loses control over the principal.

All of the following statements are true regarding Regulation T EXCEPT: A) Regulation T requires payment for purchases within 4 business days B) Regulation T applies to non-exempt securities only C) Regulation T applies to both listed and unlisted securities D) Regulation T sets both initial and maintenance margins

The best answer is D. Regulation T only sets initial margins; maintenance margins are set by FINRA.

Which statements are TRUE? I) Rule 144A issues trade on the NYSE, AMEX and NASDAQ II) Rule 144A issues trade on PORTAL III) The general public can trade Rule 144A issues IV) Only QIBs can trade Rule 144A issues A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.

An order for a New York Stock Exchange listed issue is routed by the member firm to a Third Market Maker rather than to the exchange floor. This practice is: A) prohibited B) permitted only if the customer consents C) permitted only if an attempt to fill the order on the NYSE fails D) permitted if the price offered by the Third Market Maker is better

The best answer is D. SEC rules require that execution must occur at the "best market."

All of the following would be purchasers of Eurodollar bonds EXCEPT: A) British investors B) French investors C) Japanese investors D) United States investors

The best answer is D. Since Eurodollar bonds are not registered with the SEC, and they are not exempt from these registration requirements, they cannot be offered within the United States.

Under Supply Side Theory, which of the following will stimulate the economy? I) Increased government spending II) Decreased government spending III) Tax rate increases IV) Tax rate reductions A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. Supply Side Theory states that economic growth is controlled by individual initiative. If individuals are given the incentive to produce, they will, and the economy will grow. To give this incentive, the theory holds that government spending, and the tax collections necessary to support that government spending, should be reduced. This leaves the individual with an economic incentive to produce, since less of his or her income is being taxed.

Which of the following will decrease the tax basis of a limited partnership interest? I) Cash contribution II) Cash distribution III) Distributive share of partnership income IV) Distributive share of partnership loss A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. The "basis" is the theoretical value of the investment in the partnership. The "basis" amount establishes the limit of tax deductions that may be taken by the partner - so the larger the basis, the better it is for the partner.Cash contributions and assumption of debt will increase the basis (more money going into the partnership investment). In addition, each partner's "distributive" share of income increases the basis (this is income that is retained in the partnership that has not physically been sent to the partner).Cash distributions and pay down of debt by the partnership reduce the basis (this is cash being paid out of the partnership). In addition, each partner's "distributive" share of losses decreases the basis (these are losses that are retained in the partnership that have not physically been sent to the partner).

The issuer of listed options contracts is the: A) holder of the contract B) writer of the contract C) exchange where the contract is traded D) Options Clearing Corporation

The best answer is D. The Options Clearing Corporation (O.C.C.) is the legal issuer and guarantor of all exchange traded options.

The legislation that requires a broker-dealer's research analysts to be completely separated from that firm's investment banking department is the: A) Securities Act of 1933 B) Securities Exchange Act of 1934 C) Trust Indenture Act of 1939 D) Sarbanes-Oxley Act of 2002

The best answer is D. The Sarbanes-Oxley Act of 2002 requires that research analysts at broker-dealers be completely separated from investment banking, so that the analysts are not "encouraged" or "intimidated" by the firm's investment bankers to write favorable reports to get future investment banking business.

All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT: A) the number of outstanding shares is reduced B) the earnings per share is increased C) the market price of the stock will increase D) the number of authorized shares will be reduced

The best answer is D. The purchase of Treasury Stock has no effect on authorized shares. This is the legal amount of shares that the company is authorized to sell, established in the company's corporate charter.

A 65-year old widow that is in a low tax bracket and that has a low risk tolerance wishes to make an investment that will provide income. Which is the BEST recommendation? A) Growth mutual fund B) Emerging markets mutual fund C) Long term municipal bond fund D) Bank certificates of deposit

The best answer is D. This elderly widow is in a low tax bracket and seeks income. Growth stocks and emerging markets stocks do not provide income; rather, they provide capital gains. Municipal bonds are not appropriate for a low tax bracket investor, since the bonds are exempt from Federal income tax, and the market interest rate is lower than that for taxable investments because of this. Municipal bonds are only suitable for high tax bracket investors, where the exemption from federal tax has real value. Thus, we are left with bank certificates of deposit as the only viable choice. They are low risk and will provide income with a higher "after-tax" return for a person in a low tax bracket than equivalent maturity municipal investments.

A 10 year 7% municipal bond, quoted on a 5.00 basis, is priced at 104. A 10 year 6% municipal bond, quoted on a 5.00 basis, is priced at 101. What is the price of a 10 year, 6.40% municipal bond, quoted on a 5.00 basis? A) 101.25 B) 101.80 C) 102.05 D) 102.20

The best answer is D. This question is asking for the following:7%Coupon5.00 Basis1046.4%Coupon5.00 Basis?6%Coupon5.00 Basis101 The difference in price between the 6% and 7% bonds is 3 points. The 6.40% bond is 40% of the way from 6%. 40% x 3 points = 1.20 point price increment from the 6% price. 101 + 1.20 = 102.20 price for the 6.40% bond.

A registered representative employed by ABC broker/dealer is good friends with an independent venture capitalist. The venture capitalist asks the registered representative to obtain investors for a private placement that he is forming. Which statement is TRUE? A) The registered representative can direct customers to the private placement since this is an exempt transaction B) The registered representative cannot direct customers to the private placement since his broker-dealer is not the private placement sponsor C) The registered representative can direct customers to the private placement only if the venture capitalist is a member of FINRA D) The registered representative can direct customers to the private placement only with the prior written approval of his employer

The best answer is D. Under FINRA rules, registered representatives are prohibited from effecting "private securities transactions." As a registered representative, one is an agent for the firm and all transactions must be effected through the firm in one's agency capacity.However, FINRA does allow an exemption from this prohibition. If a registered representative:provides written notice to the member of the transaction, and details in writing any compensation to be received, and obtains express approval in writing from the member firm, then the associated person can perform the transaction. In addition, the member must record the transaction on its books as if it had been effected through the firm.

Under Keogh rules, distributions from a Keogh Plan must commence the year after the individual turns age: A) 55 B) 59 1/2 C) 65 D) 72

The best answer is D. Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 72.

A customer buys 1 ABC Oct 50 Call @ $3 and exercises the contract. What is the cost basis for tax purposes? A) $3 B) $47 C) $50 D) $53

The best answer is D. When a call contract is exercised, the customer is buying the stock. The customer establishes a cost basis equal to all monies paid for the stock - $50 per share strike price plus $3 per share paid in premiums equals a $53 per share cost basis. Notice that the basis is the same as the breakeven.

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

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

Canadian Dollar Feb 80 Calls on the PHLX are quoted at 1.25. Canadian Dollars are trading at 80.25. The contract size is 10,000 dollars (Canadian). What is the total premium for 10 contracts? A) $1.25 B) $12.50 C) $125.00 D) $1,250.00

The best answer is D. World Currency options are standardized, using a multiplier of 100 applied to the premium. A premium of 1.25 x multiplier of 100 = $125 total premium per contract. Since 10 contracts are purchased, 125 x 10 contracts = $1,250 total premium.(Another way of doing this - but not necessarily recommended - is contract size = 10,000 units of currency x a premium of 1.25 cents ($.0125) = $125 per contract x 10 contracts = $1,250.)

Securities Act of 1933

The first major federal law regulating the securities industry. It requires firms issuing NEW stock in a public offering to file a registration statement with the SEC which contains copy of Prospectus (APPLIES TO NON-EXEMPT ISSUES ONLY)

What is a Form D?

The form that is filled out to receive private placement exemption (15 days after the sale of securities)

What is a ladder portfolio?

The idea behind a bond ladder is to spread bond maturities in a portfolio over fixed intervals, typically 10 maturities in intervals of 2 years each. A typical ladder might have 10 maturities ranging from 2 to 20 years, with an average maturity of around 10 years. Because of this broad diversification by maturity, a rise in interest rates will not impact the portfolio as negatively as compared to a bullet or barbell portfolio construction. If interest rates rise, the loss on the longer term bonds in the portfolio is offset by the fact that shorter term bonds are maturing soon and the proceeds can be reinvested at higher rates.

Monetarist Theory

The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation.

discount rate

The interest rate on the loans that the Fed makes to banks

Prohibitions during 20 day cooling off period (1933)

The issue cannot be -sold -advertised -recommended and orders to buy the issue cannot be solicited

Option Settlement rules

Trading (T+1) Exercising Stock: ----> (T+2) Foreign Currency option ----> (T+1)

UTMA vs UGMA

UTMA is age 21-- can be any gifts (real estate, fine art etc.) UGMA is age 18-- can be only financial instruments

What is the SIPC coverage?

Up to a maximum of $500,000, of which no more than $250,00 may be in cash. one coverage per customer (cash and margin accts =1) Securities valued at date of bankruptcy filing

What is regulation A?

Used to help smaller start-ups raise capital through a securities offering. 1. Maximum of $20 Million- No audited financial statements required 2. Maximum of $50 Million- requires audited financial statements file form 1-A to receive exemption (20 day review period) No prospectus-- it is called an "offering circular" and the preliminary version is given during the 20day cooling off period (48 hours before sale) --> after issue is "qualified" final offering circular must be delivered within 48hours of sale test the water-anytime before or even during cooling off period

Long Straddle

a position created by purchasing a call and a put with the same strike price in order to bet on the volatility of the underlying instrument.

LIMIT ORDER

a request to buy or sell a stock at a specified price when the market hits or goes through the specified price, order is eligible for execution at SPECIFIED price or BETTER.

defensive stock

a stock that remains unaffected during declines in the economy DRUG COMPANIES/PUBLIC UTILITIES

Fiscal Policy

actions by congress to stabilize the economy -changing tax rates -changing government spending -changing transfer payments TO STIMULATE ECONOMY--> lower tax rates, increase government spending

Describe the Patriot Act

after September 11th attacks, Congress passed this act that requires securities firms to provide extensive training and money laundering programs. A higher level of scrutiny is given to those: -whose home country is not a member of FATF -countries of origin have bank secrecy laws -who have cash extensive business -review with list of SDN's -terrorist watch list

Keynesian Theory

an economic theory stating that the increased government spending and transfer payments can stabilize the economy "equilibrium level"

writing the scale

assigning coupon rates to bonds looks at -comparable bonds -30 day visible supply -placement ratio -20 GO bond index

Discount taxation of Corporate and Government Bonds in the SECONDARY MARKET

at PREMIUM --> Option of Amortizing the premium at DISCOUNT --> OPTION of accreting discount

Hypothecation Agreement

customer gives permission to the broker/dealer to pledge customer margin securities as collateral in return broker gives money to customer to purchase securities called a "debit balance"

formula to find the market value at maintenence

debit value/.75= market value at maintenence

Sarbanes-Oxley Act of 2002

established requirements for proper financial record keeping for public companies and penalties of as much as 25 years in prison for noncompliance

Investment Advisers Act of 1940

focuses on people and organizations that seek to provide financial advice to investors and defines "investment adviser" Federal- over $100,000,000 AUM State- under $100,000,000 AUM

Overbought market

if the market is rising in a decreasing volume market (downturn expected) BEARISH

Dividend income for common and preferred stock is taxed.....?

in the year they are received

What is a leveraged buyout?

is where an undervalued publicly held company is "bought out" and taken private. The funds to do this are raised by selling bonds, so this is the "leverage" used to complete the buy out.

Dow Jones Composite Average

made up of 65 stocks, including, 30 industrials, 20 transportations, 15 utilities

VIX

measures the volatility of the S&P 500 over the upcoming 30 days When BEARISH buy VIX CALLS

Speculative stocks

mirror the business cycle

Reg. T requires that if a customer sells a security and doesn't deliver the shares on settlemet......?

position must be bought in 10 days after settlement

Crowdfunding

raising money for a project or venture by obtaining many small amounts of money from many people

Trust Indenture Act of 1939

requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture; U.S. governments are exempt.

Guaranteed minimum income benefit (rider)

rider that will give the annuitant the guaranteed minimum % if it did not actually earn that. -comes at a cost

When inflation rises, what happens to interest rates?

rise

Systematic Risk

risk of a general market decline, CANNOT BE DIVERSIFIED AWAY (MARKET RISK)

Stock prices are affected on the ex-dates

stock dividend or stop split- ALL ORDERS AUTOMATICALLY REDUCED Cash dividends- All orders below the market are reduced. ---> orders above the market are Unaffected

Cheap Stock for Short Stock

stock valued under $5.00 a share --> 100% of sale amount or 2.50 per share (whichever greater) Stock valued over $5.00 a share --> $5.00 a share or 30% of sale amount (whichever is greater)

Initial margin requirements on stocks are set by _________. They require _____% for Long positions and _____% for short positions, and ________% for options.

the federal reserve 50% and 50%, 100% of premium (on buys only)

Kiddie Tax

the tax on a child's unearned income based on the child's parents' marginal rate (CUSTODIAL ACCOUNT WITH OVER $2,200 income in a year)