Series 7 Wrong Qs

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC?

50% The corporate dividend exclusion permits a corporation receiving dividends from another corporation to exclude 50% of those payments. Therefore, the corporation will only pay tax on the remaining 50%. This exclusion applies only to dividends, not interest.

If a customer purchases five newly issued municipal bonds for 101 and holds the bonds to maturity, the tax consequence is

$0 gain or loss. If a new issue municipal bond is bought at a premium, the premium must be amortized over the life of the bond. At maturity, no capital gain or loss would occur because the premium would have been fully amortized.

A margin account contains 500 shares of XYZ at $40 per share and 300 shares of ABC at $90 per share. The debit balance is $21,500 and the special memorandum account (SMA) balance is $2,000. If XYZ increases to $50 per share and ABC remains unchanged, the equity in the account would be

$30,500. After the move of the price of XYZ, the long market value in the account is $52,000, computed as follows: 500 XYZ at $50 per share is worth $25,000; and 300 shares of ABC at $90 per share is worth $27,000. The long market value of $52,000 minus the debit balance of $21,500 results in an equity balance of $30,500. SMA is not equity. Some might find it easier to just add the $5,000 increase to the previous equity of $25,500 ($47,000 − $21,500), to arrive at $30,500.

With an initial margin requirement at 50%, a customer purchased 100 shares of ABC Corp. at $100 per share and deposited $5,000. ABC Corp. then increases in value to $150 per share. How much more ABC Corp. can the customer purchase without depositing additional cash?

$5,000 The customer can use SMA to purchase securities with a buying power of 2 to 1, or he can borrow the full value of SMA in cash. Therefore, the customer can purchase up to $5,000 in securities using the SMA balance of $2,500 without having to deposit additional cash.

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement?

10 Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.

An investor indicates that they are looking for a product that will have minimal price fluctuations when there are changes in market interest rates. Which of the following products may be most suitable for this investor?

10 -year general obligation bond The general rule of thumb is that volatility will increase with maturity. In this question, the product with the shortest time to maturity may be most suitable for the investor.

A company has annual sales of $15,000,000, operating expenses of $9,000,000, interest expense of $2,000,000 and principal payments on bonds totaling $1,000,000. What is the company's debt service ratio?

2 to 1 Debt service ratio = [Earnings before Interest & Taxes (aka EBIT)]/(Principal + Interest due). Net income = $15,000,000 in sales -$9,000,000 in expenses = $6,000,000. Total debt due = $2,000,000 + $1,000,000 = $3,000,000. Debt service ratio = $6.0mm/$3.0mm = 2 to 1

The longest initial maturity for U.S. T-bills is

52 weeks. As money market instruments, the longest initial maturity of Treasury bills is 52 weeks. Those bills are auctioned once a month. T-bills of shorter maturities are auctioned weekly. The shortest initial maturity is four weeks.

A customer is long 1 XYZ Jan 50 put. To create a bull put spread, the customer must sell a Jan

55 put. In any spread, put or call, if the customer is buying the lower strike price, the spread is bullish. Therefore, to create a bull put spread, the customer (who is long the 50 put) must sell a put with a higher strike price. A bull put spread is also called a short put spread.

Which of the following best describes a research report?

A blog post containing an analysis of an equity security covered by the firm A research report is a communication that includes an analysis of equity securities of individual companies or industries and that provides information reasonably sufficient upon which to base an investment decision.

Written notice of intent to deliver before an agreed-to settlement date is required in which of the following transactions?

A seller's option A seller's option trade gives the seller a specified settlement date that exceeds the regular way delivery date to deliver the securities. If the seller wishes to deliver them before the agreed-on settlement date, she must provide 24-hour notice to the buyer.

Preferential tax treatment does not apply in which of these instances?

Abagail received a distribution of $2,500 from her real estate investment trust which she has owned for three years Distributions from a Real Estate Investment Trust are subject to regular income tax, unlike ordinary cash dividends from common or preferred shares, which may be subject to regular tax liability depending on the length of time the shares were held surrounding the ex-dividend date. If the shares were held for at least 61 of the 121- day period surrounding the ex-dividend date, any dividends received would be taxable at a preferred rate. Distributions from a Section 529 plan are not taxed if used for qualified educational expenses. Dividends paid to a corporation are taxed at a preferred rate depending on the level of ownership the company has in the business.

Which of the following best represents the total takedown in a municipal underwriting?

Additional takedown plus selling concession In a municipal underwriting, the total takedown is the additional takedown plus the selling concession.

Which of the following would give a bearish sign to a technical analyst?

An increase in odd-lot purchases Odd lots (less than 100 shares) are bought and sold almost exclusively by unsophisticated investors. Technicians believe them to always be on the wrong side of the market. When the odd lotters are buying, it is time to sell (bearish). High short interest is bullish. A head and shoulders bottom indicates that the stock has bottomed and is on its way back up (bullish). It would be bearish if a stock's price fell below the support level.

Lindsey Wolfe, a public school teacher, has been contributing to a 403(b) TSA plan for the past 20 years. Contributions total $50,000 and the current value is $200,000. Wolfe is still teaching full time for the school system. When does Wolfe have to begin taking required minimum distributions?

At age 72 or when no longer working for the school system, whichever is later Wolfe is invested in a qualified annuity. Therefore, the minimum distribution requirements are the same as for any qualified account. RMDs must begin at age 72 but can be postponed as long as continuously employed by the same employer. Unless qualifying for an exception, any withdrawals from a qualified annuity before reaching age 59½ are taxed as ordinary income with the additional 10% penalty.

If industrial development bonds are called because of condemnation, this would be covered under which of the following clauses in the bond indenture?

Catastrophe Condemnation is considered a catastrophe and only applies to revenue bonds.

A new municipal bond offering was priced one month ago, and a printed advertisement showing the initial price and yield was published at the time and continues to circulate. What additional information should be included in the advertisement?

Date of original issuance This advertisement should include the date of the original issuance of the bond offering. As the price and yield will likely have changed, it is very important that investors have the relevant information from the time of the original offering.

Which of the following is a likely issuer of a private label CMO?

Federal Savings & Trust Company Private label CMOs are issued by investment banks and other financial institutions. Agency CMO's are directly issued by the Government National Mortgage Association (GNMA, Ginny Mae), Federal National Mortgage Association (FNMA, Fannie Mae), or Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac).

Which of the following new bond issues would most probably be purchased through competitive bidding?

General obligation bonds General obligation bonds are awarded through a competitive bidding process whereby the issuer awards the deal to the bank offering the lowest net interest costs. Revenue bonds are awarded on a negotiated bidding basis whereby the municipality chooses the investment bank it wants to structure the issue.

In order to form a limited partnership, the tax ID and signature of which of the following parties is required?

General partners In order to form a limited partnership, the tax ID numbers and signatures of all general partners will be required.

Which of the following statements regarding a leveraged exchange-traded fund (ETF) are true? I. The leveraged ETF may be purchased on margin. II. Securities within the leveraged fund portfolio may be purchased on margin. III. The leveraged ETF may never be purchased on margin. IV. Securities within the leveraged fund portfolio may never be purchased on margin.

I and II Because an ETF is purchased and sold on an exchange, the rules generally applying to all exchange products, such as purchasing them on margin, would apply. Leveraged funds can use a number of different securities types, including derivative products, and trading techniques, such as trading on margin, as a means of attaining the leveraged returns they promise.

Tax preference items are used for the purpose of computing the alternative minimum tax. They include I. excess intangible drilling costs (wages, fuel, repairs). II. accelerated depreciation. III. percentage depletion in excess of basis.

I, II, and III All of these are tax preference items. Note that straight-line depreciation is not a tax preference item.

To fund debt services on a general obligation bond, a municipality may use I. Direct taxes. II. Special assessments. III. Fines. IV. Collection of delinquent funds.

I, III and IV only Debt service on GO bonds is an obligation of the municipality and is paid with taxes, fines and other collection of funds. This is in contrast to a revenue bond which is paid with revenues from the facility constructed as a result of the bond. A special assessment is a type of tax used to redeem a special assessment bond, in which the beneficiaries from the proceeds of the bond pay the debt service.

A municipal securities dealer buys $500,000 of 6% bonds at par and immediately reoffers the bonds. Under MSRB rules, which two of the following would most likely be considered bona fide quotes? I. 4.10 net II. 5.8 less 1/2 III. 101 IV. 108

II and III Bona fide quotes must be reasonable compared to the coupon rate and the offering price, therefore 5.8 less ½ and 101 would be appropriate quotes.

An immediate-or-cancel order (IOC) I. must be executed in its entirety. II. may be executed in part or in full. III. must be executed in one attempt. IV. may be executed after several attempts.

II and III In an IOC order, the firm handling the order has one attempt to fill the order but a partial execution is binding on the customer.

Which of the following orders are not placed on the order display book? I. Buy stop limit II. Buy stop III. Market IV. Not held

III and IV Market orders are executed immediately and are not placed on the order book. Not-held orders are not presented to the order book.

Which of the following regarding revenue bonds are true? I. They are secured by a specific pledge of property. II. They are a type of general obligation bond. III. They are not subject to the statutory debt limitations of the issuing jurisdiction. IV. They are analyzed primarily on the project's ability to generate earnings.

III and IV Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond. They are backed by project revenue.

Which of the following describes a quote on Nasdaq Level 1?

Inside market Nasdaq Level 1 quotes represent the highest bid and lowest asking prices of all dealers. This is known as the inside market. Firm quotes are only available on Levels 2 and 3. Level 1 will display the most recent trade, but that is not a quote because it only shows one side, not a bid and ask.

Which of the following statements about the "5% Policy" is true?

It applies to trades in listed and unlisted securities The 5% Policy applies to trades in both listed and unlisted securities, across a wide spectrum of investment products. It is not a hard and fast rule, but a guideline to be used by a broker-dealer. Many factors are considered in assessing whether a given charge to a customer is fair and reasonable. In general, the percentage of mark-up will increase as the price of the security decreases. Stated another way, the percentage of mark-up decreases as the price of the security increases.

If trading is halted in a listed stock, what happens to the trading in the stock's listed options?

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

Planned amortization class (PAC) collateralized mortgage obligation were designed to provide which of the following benefits, compared to plain vanilla tranches?

Reduce prepayment risk for tranche holders PACs reduce, but cannot eliminate, prepayment risk for tranche holders. The companion tranches will have higher prepayment risk than the PAC, as they were designed to absorb the bulk of the prepayment risk.

Following issuance, the least amount of after-market activity would likely be observed with a

Regulation D offering. A private placement, or Regulation D offering, would likely have the least amount of after-market trading activity, when compared to public offerings.

The sale of nonexempt securities may take place without an SEC registration if done in a manner that qualifies for a transactional exemption. An example of this would a sale complying with

Rule 506(b). If the transaction is exempt, a security that would otherwise have to be registered is exempt from registration. Rule 506(b) is part of the private placement exemption under Regulation D of the Securities Act of 1933. Rule 498 deals with a summary prospectus for a mutual fund and Rules 156 and 135A deal with advertising.

An investor purchased 100 shares of AMNZ stock five years ago at $200 per share. With AMNZ currently selling at a price in excess of $1,000 per share, the investor would like to generate some income. Which of the following strategies would you recommend?

Sell an AMNZ call The only way to generate income is to sell something. Because the investor already owns 100 shares of AMNZ, selling a put is probably not the right suggestion. If the stock price goes down, the put will be exercised and the investor will have to buy 100 shares of the stock at the strike price. Selling the call while owning the underlying stock makes this a covered call. It provides income from the premium and offers some downside protection. If the stock goes up, the option will likely be exercised and the investor will have to deliver the stock purchased years ago. This will result in a long-term capital gain equal to the difference between the investor's cost ($200) and the proceeds received (the strike price plus the premium).

Which of the following positions does not expose a customer to unlimited risk?

Short 2 XYZ uncovered puts The maximum potential loss on a short put position is the market price declining to zero reduced by the premium. Remember, a stock's price can never go below "worthless." For example, if the investor sold 2 XYZ 90 puts and received a premium of 4 point each, the maximum loss would be $8,600 (worthless stock is put to the writer for $9,000 but the writer received the $400 premium) per contract or $17,200. That is a significant loss, but all of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises and there is no upper limit to a stock's price.

Which of the following securities can generate phantom income?

TIPS bonds TIPS bonds adjust the principal value each six months based on the inflation rate. If the inflation rate is positive, the value increases. Those increases are reported as income each year even though the investor does not receive the appreciation until the bonds mature (or are sold).

An investor has losses on the sale of municipal bonds. Which of the following, for tax purposes, is true?

The losses can be applied against the gains on the sale of any other security. Losses on the sale of one investment can generally be deducted against gains on the sale of any other investment.

Which of the following is NOT reasonable cause to believe that the seller can make delivery of securities?

The securities are not on a "hard-to-borrow" list If an investor sells stock short, Reg SHO requires the customer to locate the securities. The customer can locate by either borrowing the securities, or by relying on the available securities list. Absence from a "hard-to-borrow" list, is not sufficient to satisfy the locate requirement.

Which of the following regarding yield-based (interest rate) debt options is true?

They are European-style exercise. Yield-based debt options are European-style contracts, meaning that they can only be exercised on the last day of trading. All yield-based contracts, when exercised, are settled in cash. There is no delivery of debt instruments when these contracts are exercised. All strike prices reflect yield. (35 strike price represents 3.5% yield.) Yield-based options are a bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).

Which of the following choices best describes the formula to determine earnings per share?

[EBIT − (interest + taxes)] − preferred dividends] divided by the number of shares of common outstanding

If a credit spread widens,

a loss will be realized. In option spreads, the investor wants a debit spread to widen and a credit spread to narrow. If the opposite happens, a loss may be realized.

If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following except

adjustment bonds. Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for income (adjustment) bonds. Income—or adjustment bonds—require interest to be paid only if declared by the board of directors.

Your firm is distributing units of a direct participation program (DPP) to several high net worth clients. Fred maintains a discretionary account with you. You may purchase these units for Fred's account

after receiving his written consent. A registered representative may not use standing discretion to purchase non-traditional instruments in a customer account. Because of the heightened suitability standards applicable to products such as a direct participation programs, the client must provide advance written consent when purchasing these products.

You are asked to read the prospectus for a new issue of common stock for a client. You would expect the prospectus to include

an overview and history of the issuer's business and any risks associated with the offering. The prospectus will include an overview and history of the business, as well as any risks associated with it. It is the SEC disclaimer that is on the front cover and it is the effective date, not the date of filing that is shown. A legal opinion does not apply to common stock.

An investor who makes transactions once a month using dollar cost averaging would

buy the same dollar amount of a stock. An investor using dollar cost averaging always invests the same amount of money. Depending on the market value of the security, he may buy more or less shares every time he invests.

If a municipal bond with 10 years to maturity is purchased from the issuer for 110, and after two years, it is sold for 110, the bondholder must report

capital gain of two points. Municipal bonds bought at a premium must be amortized. The amount of the premium is 10 points. With 10 years to maturity, the annual amortization is one point. After two years, the bond's cost basis has been amortized down to 108. If at that point it is sold for 110, there is a two-point capital gain.

Ratings or guarantees of variable annuity and variable life products are typically based on the

claims paying ability of the issuing insurance company. These ratings are based on the claims paying ability of the issuing insurance company.

A company that is highly leveraged has as the smallest portion of its capitalization

common stock. A highly leveraged company means that the company has taken on lots of debt and raises the smallest portion of capital from its equity, or common stock.

All the following information must be contained on an order ticket except

customer's name. The customer's name is not required on order tickets. The customer's account number, the type of account (e.g., cash or margin), and time stamps, however, are required.

The number of times by which the annual net revenues of a facility exceed the annual interest charges and principal payments is called the

debt service coverage ratio Debt Service coverage ratio equals net revenues divided by the annual interest plus principal payments

All of the following are characteristics of 529 plans except A) an official statement (OS) must be provided to any prospective purchaser. B) there is no age limit on the beneficiary. C) the assets can be transferred to a family member if not used by the original beneficiary. D) donor income limits apply.

donor income limits apply. Unlike the Coverdell ESA, there are no donor income limits with a 529 plan. All of the other statements are true as to 529 plans.

An intrastate offering is exempt from

federal registration. An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration. Securities do not register with FINRA.

An individual has received a death benefit from the life insurance policy of his father. The payment of this benefit to the beneficiary

is not a taxable event to the recipient. A life insurance benefit paid to a beneficiary is not a taxable event to that individual. However, if the benefit is paid to the estate of the deceased party, it then becomes a taxable event.

An individual has experienced cash value growth in her life insurance contract. This growth is

is not currently taxable. Cash value growth in a life insurance contract is not taxable. If the policy is surrendered for its cash value, any growth over the premiums paid is taxable.

A broker-dealer holds positions in several municipal bonds, including a few private activity bonds. It would likely recommend a private activity bond to a client who

is not subject to the alternative minimum tax (AMT). Private activity bonds are best suited for investors who are not subject to the alternative minimum tax (AMT), as the interest income generated by these types of bonds is subject to the AMT. Investors who are subject to the AMT should purchase public purpose municipal bonds.

J.B. Collingsworth is the CEO and largest single shareholder in Collingsworth Industries, Inc. (CII). Three years ago, J.B. purchased 15,000 shares of CII in the secondary market. J.B. has decided to purchase a vacation home and is going to use the proceeds from a sale of 5,000 of those 15,000 shares as a down payment for the home. With CII selling at $8 per share,

it is not necessary for J.B. to file a Form 144. As a control person, J.B. must comply with Rule 144 when selling shares of CII. Rule 144 has a de minimis exception when 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. In this case, the 5,000 shares at $8 per share is $40,000, so J.B. is within the limits. Form D is used by the issuer of a private placement. Although it is true that no additional filing is required, the reason has nothing to do with the holding period. Having purchased these shares in the secondary market, J.B. could have sold them the next day if desired.

If a registered rep volunteers advice to her clients about how to vote in a proxy contest, she

may have to file under SEC proxy contest rules as a participant. If a registered rep volunteers advice regarding a proxy contest, the rep may be required to register as a participant as the rep is potentially influencing the outcome of the vote.

Leveraged and inverse ETFs are designed to achieve their stated objectives

on a daily basis. Inverse and leveraged exchange funds are designed to achieve their stated investment objectives on a daily basis, making them suitable for investors who have very short- term trading objectives. These products would not be appropriate for a buy- and -hold investor.

Short-term municipal notes generally have all of the following characteristics EXCEPT that they

pay interest every six months. Short-term municipal notes trade as zeroes. They are issued at a deep discount and mature at par, they have maturities of less than one year.

CBA, a British manufacturer, has sold one million units of a software program to ABC, a US retailer. CBA was paid in US dollars. CBA can hedge against an adverse currency movement by

purchasing calls on the British pound. A foreign exporter who receives US dollars as payment would purchase call options on their native currency. If the US dollar weakens, their native currency would strengthen, and calls on that currency would appreciate in value.

A term used to define certain alternative forms of debt financing, such as equity-linked notes (ELNs) and exchange-traded notes (ETNs), is

structured products. In Notice to Members 05-59, FINRA defined a structured product as "securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency." The most important thing for you to know for the exam is that these generally carry higher risk than other debt securities. These should be recommended only when the registered representative has a thorough understanding of the product and believes it is suitable for the specific investor. Yes, these are high-risk investments, but that is not the term used to describe them.

An analysis of a revenue bond would include all of the following items except the

study of overlapping debt. Overlapping debt is a metric used in the evaluation of a general obligation (GO) bond, not a revenue bond. Note that this is an "except" question.

An investor has received a $500 cash dividend from an ADR. This cash dividend is

subject to ordinary income taxes in US, consistent with the tax treatment of domestic equites. Dividends received from ADRs are subject to the same tax treatment as domestic US equites. If the foreign country has withheld taxes from the dividend, the ADR investor may receive a tax credit from the US government.

A bond would be considered speculative below which of the following Standard & Poor's (S&P) ratings?

A rating of BBB is the lowest investment-grade rating assigned by S&P. Any rating beneath this is considered speculative.

A supervising principal of the firm uncovers during a hiring interview that a candidate for a registered position was convicted in a court-martial of felony DUI/DWI (driving while under the influence/driving while impaired). The conviction occurred 15 years ago. The manager would tell the candidate,

"You must disclose the conviction on the Form U4, but you may register." Felony charges and convictions, no matter how long ago they occurred, are reportable. Because the conviction, in this case, occurred more than 10 years ago, it is no longer a statutory disqualification. Had it been within the last 10 years, because it was a DUI (often referred to as an "other felony"), which is a crime unrelated to the securities industry and unlikely to be a threat to the investing public, the firm willing to sponsor such a person may apply for approval to enter or remain in the securities industry.

In a margin account, if a client purchases $15,000 of LMN preferred shares, $15,000 of money market mutual fund shares, and $2,500 of call options, what is the Regulation T call?

$25,000 The amounts that must be deposited are as follows: $7,500 for the preferred shares, $15,000 for the mutual fund, and $2,500 for the options. Mutual fund shares cannot be hypothecated for 30 days, and option purchases are never marginable.

A client's margin account has $650,000 across 3 different securities positions, a debit balance of $275,000, and an SMA balance of $125,000. In the event of the bankruptcy of the broker-dealer, SIPC will cover this client for

$375,000.00 In a margin account, SIPC will cover the net equity in the account. In this example, we subtract the debit balance of $275,000 from the market value of $650,000, to arrive at the net equity position of $375,000. SMA is not covered by SIPC.

An investor has the following tax picture in 2021: - Tax loss carryover from 2020: $9,000 - Capital gains realized in 2021: $15,000 - Capital losses realized in 2021: $2,000 What is the investor's reportable gain or loss for 2021?

$4,000 net capital gains The first thing to remember is that there is no limitation on the amount of capital loss that may be carried over to use against capital gain. The $3,000 limitation is against income. In determining an investor's capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other. In this situation, all of the prior year's loss carryover of $9,000 is added to the current year's loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000, for a net capital gain of $4,000.

An attractive investment for a customer with a very high risk tolerance might be a leveraged ETF. One your firm recommends is the QUID 3x leveraged ETF. You decide to track its performance for several days during a period of high market volatility. The starting date value is $50 per share. Day one ends with the specified index down 3%. Day two sees the index rise by 4%. One the third and final day, the index declines by 1%. The value of the QUID share is now

$49.43 The 3x leverage will multiply the index movement by a factor of three. Should you receive a question like this, use the provided calculator as follows: $50 x 91% (3% drop x 3 = 9%) x 112% (4% up x 3 = 12%) x 97% (1% drop x 3 = 3%) and that rounds to $49.43.

If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of

$5,000. Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).

In a new margin account, a customer sells short $60,000 worth of ABC stock and deposits $30,000 to meet the Regulation T requirement. If the value of ABC falls to $55,000, the special memorandum account (SMA) balance in the account would be

$7,500. For every $1 decrease in market value in a short account, $1.50 of SMA is created. Therefore, if the market value falls by $5,000, the SMA balance would be $7,500.

Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Simultaneously, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. What is the customer's cost basis in SLP?

$98 per share If, on the same day, a customer buys stock and buys a put option on that stock as a hedge, the put is said to be married to the stock. For tax purposes, irrespective of what happens to the put, the cost basis of the stock is adjusted upward by the premium paid. Even if the put expires worthless, there is no capital loss on the put. Rather, the premium paid is reflected in the cost basis of the stock. Therefore the initial cost of $95 per share is now increased by the $3 premium paid resulting in a new cost basis of $98 per share.

If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date?

25 If either side is displeased with a Code of Procedure decision, an appeal must be made within 25 days of the decision date.

An investor has a diversified portfolio of common stock with a market value of $1.7 million and a beta of 1.20. If the OEX (S&P 100) is currently quoted at 680, to protect the portfolio against a decline in value, the investor's best strategy is to buy

30 puts. This investor has a broad-based portfolio with a market value of $1.7 million and wants to protect against a possible downturn in the market. First, the investor's most effective strategy to hedge against a possible market downturn would be to buy puts. If the market does turn downward, the loss on the portfolio would be offset by a gain on the puts. Second, you need to determine the number of put contracts the investor needs to purchase in order to cover (hedge) the $1.7 million portfolio. The math is basically the same as if the question had said the investor owns 1,000 shares of a stock and want to buy puts to hedge. With each put hedging 100 shares, you would have to buy 10 puts. In this case, the math is as follows. You are told OEX is trading at 680, therefore each contract has a value of (680 x 100 = 68,000). In order to hedge a $1.7 million portfolio the investor would need to buy 25 OEX contracts ($1.7 million ÷ $68,000). A portfolio with a beta of 1.2, means it is 20% more volatile than the market (S&P 100), so the investor needs 20% more protection. Therefore, because the portfolio has a beta of 1.2 an additional 20% is required (1.2 x 25 puts = 30 puts).

A branch manager of a retail location is reviewing a registered rep's suggested portfolio consisting of 60% AA+ Debentures, 25% AAA municipals, and 15% CMOs. This portfolio allocation is most suitable for which of these investors?

55-year-old school teacher This portfolio is most appropriate for an investor looking for income without a substantial amount of risk. A middle age professional in a stable career considering retirement in the next few years might find a good balance with this allocation. The tech entrepreneur will be interested in stocks, as will the growth investor. The accredited investor may look for something more speculative.

A customer purchases a 6% municipal bond in the secondary market on a 7% basis. The effective after-tax yield is

6 to 7%. Because the interest on a municipal bond is tax-free on the federal level, the effective after-tax yield is generally the same as the coupon. That is, a bond paying 6% interest, with none of it taxable, will have an after-tax yield of 6%. This question deals with an exception. This bond is purchased in the secondary market on a 7% basis or yield to maturity (YTM). Whenever the YTM is higher than the coupon, the bond is priced at a discount from par. That means the investor is going to receive the difference between the discounted purchase price and the par value when the bond matures. When the bond is purchased in the secondary markets, that difference is amortized over the remaining life of the bond and is taxed each year as ordinary (taxable) income. Therefore with the annual amortization of the discount (that annual profit per se) being taxable, the effective after-tax return will be higher than the 6% coupon, but not equal to the 7% yield to maturity.

Of the following callable bonds, which confirmation must show yield to call?

6% municipal, basis 5.5%, due 2028 The only bond priced at a premium is 6% municipal, basis 5.5%, due 2028. On a premium bond, the yield to call will be lower than the yield to maturity.

An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 8½ % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar)

957 POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 SC = POP - NAV = .957 Total Sales Charge = .957 x 1000 shares = $957

The covered call writing strategy would be most suitable for which of the following investors?

A 65-year-old who is attempting to increase the yield of a portfolio containing equity securities Covered call writing is selling calls on stock held in the portfolio. The premium received from the sale represents income. This income adds to whatever other income (dividends) the portfolio is generating. It is a low-risk strategy because the downside movement of the stock is protected to the extent of the premium received. The 28-year-old saving to buy a house within the next two years should have little exposure to equities. Writing covered calls is an active strategy (calls always expire in nine months or less) and keeping up with them is probably something grandparents are not interested in doing. A much better idea for them is the Coverdell ESA or a 529 plan, both of which offer tax benefits. Writing covered calls is a neutral strategy, tilted very slightly bullish. The strategy would not serve a strongly bullish investor well because the increasing prices to the underlying assets would lead to exercise of the options. In general, those who write options want them to expire unexercised.

Which of the following best describes a special tax bond?

A highway renovation bond backed by a fuel tax A special tax bond is generally backed by a tax on a complimentary product. A fuel or gas tax might be earmarked as the backing on a highway renovation bond

Sally considers herself a buy- and-hold investor with an intermediate term time horizon. Which of the following securities would be least suitable for Sally?

A leveraged ETF An individual with these goals would not be interested in a leveraged ETF, which has very short-term trading objectives.

A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect?

Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund.

A young first-time investor wants to put $10,000 of savings in an investment that she wants to see grow over many years. She intends to add to it in small amounts whenever able. A balanced mutual fund and an equity growth fund are chosen. What would be the most suitable share class for this initial investment?

B shares B class shares have a back-end load (sales charge) only payable when the shares are redeemed, and those sales charges dissipate typically over the first five to seven years. Until they disappear completely, the investment is held beyond that time. This is why B shares are generally most suitable for smaller investments (where taking advantage of breakpoints would not be a factor) made with a longer investment time horizon such as this one.

An investor mentions the term level load fund shares to a registered representative. The investor is referring to

Class C shares. Class C shares are referred to as level load because the charges never fluctuate. Shares are purchased at net asset value (no front-end load), and there is a back-end load (CDSC), generally for 12 months. The 12b-1 fees on Class C shares are higher than on Class A shares and remain so until the position is liquidated. Class C shares are most suitable for investors who will not maintain the position for the long term.

A customer expresses the need to invest a fixed-dollar sum now that will return a fixed-dollar sum in 10 years. He mentions several investments. Of those listed, which would not be a suitable recommendation for his objective?

Collateralized mortgage obligations (CMOs) Due to the interest rate sensitivity of mortgage-backed securities and the possibility of high prepayment risk (receiving the invested funds back earlier than anticipated), CMOs would not be suitable. TIPS, designed to protect against inflation, and the high-yield corporate bond, if held to maturity, could each meet the objective. Zero-coupon bonds are specifically designed to meet the objective of investing a fixed sum now and realizing a fixed sum later, and in this regard, would be the most suitable of those listed.

Which of the following are not included in a preliminary prospectus? I. Final public offering price II. Effective (release) date III. Intended purpose for the funds being raised IV. Financial statements and history of the company

I and II Neither the final public offering price nor the effective date (the date the SEC releases the securities to be sold) are found in a preliminary prospectus.

A specialist (designated market maker) must refuse I. not-held orders. II. good-for-a-month orders. III. stop limit orders. IV. market orders.

I and II Specialists (designated market makers) cannot accept not-held orders or good-for-a-month orders. Not-held orders are the responsibility of floor brokers (commission brokers); these orders give the floor broker discretion as to time and price. Good-for-a-month orders are not standard orders. A time-qualified order must be day or good-til-canceled order.

A firm may assign option exercises using which of the following methods? I. First-in, first-out (FIFO) II. Last-in, first-out (LIFO) III. Random assignment IV. Based on holders of the smallest positions

I and III A firm may assign an exercise either randomly or using the FIFO accounting method. LIFO is not permitted, nor is assigning by position size, smallest, or largest.

A client wants to sell $10,000 worth of Barnett Banks and use those funds to buy $10,000 worth of Bay Banks. Assuming that your firm acts as a dealer in both transactions, which of the following statements is(are) true? I. This set of trades is called a proceeds transaction. II. Your firm must consider each transaction separately in determining a fair markup. III. Your firm must consider the markdown on the liquidated securities in determining a fair markup on the securities purchased. IV. Your firm has acted illegally: it must act as a broker in one of the transactions only.

I and III A proceeds transaction is one where a client closes a position in one security in order to immediately open a position in another security. In a proceeds transaction markups and markdowns cannot exceed the FINRA 5% policy.

Which of the following statements regarding index options are true? I. Exercise is settled in cash. II. Exercise settlement value is based on the value of the index at the time exercise instructions are received. III. Exercise settlement value is based on the closing index value on the day exercise instructions are tendered. IV. Exercise settlement is T+2.

I and III All index option exercises are settled in cash. The amount a writer owes the holder is known as the intrinsic value of the option, and the settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is the next business day.

In which of the following circumstances will dollar cost averaging result in an average cost per share that is lower than the average price per share? I. The price of the stock fluctuates over a period of time. II. A fixed number of shares is purchased regularly. III. A fixed dollar amount is invested regularly. IV. A constant dollar plan is maintained.

I and III Dollar cost averaging can yield a cost per share lower than the price per share when a price fluctuates, and the same amount of money is invested at regular intervals. When the stock is trading lower, more shares will be purchased which will yield a weighted cost per share that is lower than the average price paid per share when they are purchased at regular intervals.

Which of the following statements regarding a Regulation T extension are true? I. It is granted by a self-regulatory organization. II. It is granted by the transfer agent. III. An extension is automatically granted once the extension request is made. IV. Extensions are not automatically granted and may be denied.

I and IV In certain cases where the customer cannot make payment by the fourth business day following the trade date, the broker-dealer can request an extension from the self-regulatory organization (SRO) that is its designated examining authority (DEA), usually FINRA. Extensions are not automatic, may be denied, and are granted at the discretion of the SRO.

A convertible debenture has a conversion price of $40 per share. If the market value of the debenture rises to a 12.5-point premium over par, which of the following are true? I. Conversion ratio is 25:1 II. Conversion ratio is 28:1 III. Parity price of the common stock is $42 IV. Parity price of the common stock is $45

I and IV The conversion ratio is computed by dividing par value by the conversion price ($1,000 par ÷ $40 = 25). The next step is calculating the market price of the debenture. A 12.5% premium to par means the market price is 112.5% of the $1,000 par. That computes to $1,125.00. Parity price of the common stock is computed by dividing the market price of the convertible debenture by the conversion ratio ($1,125 ÷ 25 = $45). Alternatively, if the debenture is at a 12.5% premium, the common stock will be at parity (equal) when it is selling at 112.5% of the $40 conversion price. Or, 112.5% × $40 = $45.

Which of the following statements regarding the flow of funds found within a municipal trust indenture are true? I. It describes the disbursement of funds for revenue bond issues. II. It describes the disbursement of funds for general obligation issues. III. It is found within the official statement. IV. It is found within the bond contract.

I and IV The term flow of funds relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts, as specified in the trust indenture found in the bond contract.

A client chooses to leave a dividend payment in a margin account; as a result, the I. equity increases. II. equity decreases. III. debit balance increases. IV. debit balance decreases.

I and IV When a dividend payment is made to an investor's margin account, that dividend payment is the investor's own cash, so equity will increase, and the debit balance will decrease.

A customer's long margin account has a market value of $60,000, a debit balance of $35,000, and special memorandum account (SMA) of $5,000. To eliminate the restriction, the customer can I. deposit $5,000 in cash. II. borrow $5,000 from the account utilizing the SMA. III. deposit $5,000 in fully paid securities. IV. sell $10,000 of securities in the account.

I and IV When equity is between the initial (50% of long market value [LMV]) requirement and the maintenance requirement (25% of LMV), an account is described as restricted. This account has $25,000 of equity, which is $5,000 below the initial requirement. To bring the equity to 50% of the market value, the customer may deposit $5,000 in cash or sell $10,000 of securities. If $10,000 of securities are sold, LMV becomes $50,000, the debit falls to $25,000, and equity is at $25,000—exactly 50% of the LMV. However, if a customer is using securities to eliminate a restriction (either by selling or depositing fully paid securities), the customer must sell or deposit an amount equal to twice the restriction.

A bond analyst checking a general obligation municipal bond will examine the I. Past performance of the payment of interest II. Per capita income of the citizens III. Population growth of the area IV. Industrial development of the area

I, II III and IV A bond analyst would look at all the listed factors with regard to a general obligation bond, the interest payment history, the per capita income, industrial development and the population growth in the area to determine the credit of the bond and how likely it would be that the municipality would repay the interest and principal on time.

In the time before a registration statement becomes effective, which of the following statement is (are) true? I. No sales may be solicited II. Sales literature may not be used III. Unsolicited inquiries may be answered

I, II and III During the cooling off period an underwriter may not solicit any sales, nor can the underwriter issue any sales literature or advertisements other than a tombstone ad. An underwriter may answer any unsolicited indications of interest expressed by potential investors.

Miss Jones is bullish on the market. In December she buys 1 Jul 490 call on the XMI. Which of the following options might she write to create a debit spread? I. Jan 485 call II. Jan 490 call III. July 500 call IV. July 505 call

II or III or IV To create a debit spread the long call must be the dominant position, meaning it will have the higher premium. The Jul 490 call would have a higher premium than the Jan 490 call because there is more time value, and it would have a higher premium than both the July 500 and the July 505 because of the lower strike price. It will have a lower premium than the Jan 485 call because the Jan 485 call would come into the money first due to the lower strike price.

Which agency has the ultimate authority for determining the amount of the discount on original issue discount municipal bonds?

IRS The IRS determines the amount of the discount on OID bonds as they set the guidelines for OID's, and because it relates to taxes, OID's are under their jurisdiction.

An investor holding an equity linked CD may be least concerned with which of the following risks?

Inflation risk Equity linked CDs typically carry liquidity risk, which is the risk that the investor may not be able to liquidate the investment prior to maturity. There may be a very limited secondary market for these products. Additionally, if the CD is sold prior to maturity, it may be worth less than its purchase amount or face value. These products may also be called by the financial institution that issued them.

Which of the following statements best describes a business development company?

It is usually organized as a closed-end investment company that takes positions in small and mid-sized companies. A business development company is typically organized as a closed-end investment company, with shares that are publicly traded. They invest in small and mid-sized businesses, by either taking equity positions or providing loans. Like traditional investment companies, they must pay out at least 90% of taxable income to investors to avoid taxation, and they usually pay dividends to shareholders either monthly or quarterly.

Your client owns a variable annuity contract with an annual interest rate (AIR) of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would her April payment compare to her March payment?

It will be higher. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment.

A corporation has 1 million shares of common stock outstanding. There is also a $100 par 6% cumulative convertible preferred issue with 100,000 shares outstanding. If the corporation wishes to use a rights offering to raise additional capital by selling 500,000 new shares of common, which of the following statements is true?

It will require two rights to buy one new share. The number of rights necessary to acquire one new share is computed by dividing the number of outstanding shares of common stock by the number of new shares being issued. In this question, that is 1,000,000 ÷ 500,000 = 2. Preferred stock does not receive preemptive rights; the information about the 100,000 shares is included as irrelevant information (makes the question more difficult for some and is something the test loves to do).

Holders of variable annuities receive the largest monthly payments under which of the following payout options?

Life annuity The life annuity provides distributions for the shortest period of time and therefore offers the greatest monthly cash flow.

Which risk is generally lower when holding a municipal bond ETF instead of individual municipal bonds?

Liquidity risk In general, municipal bonds do not have the liquidity of many other securities. The bond ETF, being exchange-traded, does not usually have that issue. Both investments have the other risks (purchasing power and inflation risk are the same).

The end of the month closing price for the common shares of Momentum Growth Industries (MGI) for the past six months has been charted as 88, 95, 100, 103, 104, and 104. Each month has seen a decrease in the daily average trading volume. This is likely a signal to a technical analyst that

MGI stock is overbought. Let's define overbought (and oversold). Over means to an excess. We know that stock prices are based on supply and demand. Increased demand pushes prices up. When the demand slows down, so does the rate of price increase. This is usually accompanied by a reduction in trading volume. Oversold is the opposite. An abundance of sellers leads to a decline in the stock's price, and as the sellers begin to leave the market, the reduced supply along with reduced trading volume indicates a bottom (a support level). In our question, the rate of monthly price increase has slowed and the trading volume is less. This is a sign of an overbought stock (fewer buyers in the market) that has reached a resistance level. The "throwaway" answer here relates to the EPS, something that is not used by a technical analyst.

Which of the following statements describes an oil and gas blind pool offering?

Money is raised without a specific property being stated, and the general partner selects the investments. A blind pool offering, also known as a nonspecified program, involves an investment in a program without specific prospects or properties being identified.

Given the NAV and asking price per share, which of the following could be open-end investment companies?

Nav: $19.00Ask: $20 Open-end investment companies are always priced at net asset value (NAV) plus sales charge (if any). Remembering that makes any choice with an ask price below the NAV an obvious incorrect answer. There is another requirement and that is a maximum sales charge of 8.5% of the ask or public offering price. Only the correct choice fits within that parameter with a sales charge of 5% ($1.00 divided by $20.00). There is another choice that is close, but a bit too high. With an ask price of $12.00 and an NAV of $10.95, the sales charge percentage is 8.75% ($1.05 divided by $12 = 8.75%).

Which of the following debt instruments trades with accrued interest? A) Zero-coupon issues B) Treasury bills C) Bankers acceptances D) Negotiable CDs

Negotiable CDs To trade with accrued interest, the security must pay interest. Of the choices, the only one that is interest bearing is the negotiable (jumbo) CD. All of the others are issued at a discount and return the face value at maturity.

HMK Industries is paying a cash dividend to stockholders of record on May 20. Which of the following is not true?

Net worth declines When a corporation pays a cash dividend, both assets & liabilities decline, meaning there is no change to net worth. Dividends payable is a current liability that will decline once the dividend is paid. Cash is a current asset, and upon paying the dividend, cash and therefore, current assets, will also decline. The firm's net worth is unchanged.

Preferred stock comes with many different options. What type of preferred stock would be most advantageous to the investor if the issuing company had strong revenue and earnings that exceeded industry estimates?

Participating Participating preferred stock may receive an additional amount paid to shareholders based on superior performance of the issuer. Cumulative refers to unpaid dividends that accrue on a preferred issue. Those must be paid before common stockholders receive a dividend. That could be a benefit if the company had dividends in arrears and these higher earnings made it possible to pay them. However, unless something in the question indicated that these higher earnings followed several years of losses, there is no way to infer that the company is behind on its dividends. As you hear us say many times, do not read something into the question that is not there. Adjustable-rate preferred stocks adjust their dividends based on market interest rates, not on the company's earnings. Although it is possible that higher earnings could encourage the company to call in some of the outstanding callable preferred stock, doing so would be considered a benefit to the issuer rather than the investor.

Lorne Walters is a registered representative with Pecuniary Profits Securities, PPS, a FINRA member firm. Walters has decided to conduct virtual meetings using a system called Xoom. Because he has never used the system before, Walters decides to make a trial run of his securities presentation to six family members who are PPS customers. All of these family members are accredited investors. Which of the following choices best describes this situation?

Prior approval of PPS may be required, but it is not mandated by FINRA for this public appearance. The virtual meeting is defined as a public appearance. Prior approval of a broker-dealer is not mandated by FINRA but may be required by the broker-dealer. An associated person of a broker-dealer may make a recommendation of a security in a public appearance but must have a reasonable basis for the recommendation. Individual accredited investors are not institutional investors unless they have assets of at least $50 million, and there is nothing in the question to indicate that is the case with these customers. If such electronic presentations are recorded, the recording must be preserved for a minimum of three years.

Which of the following types of municipal bond issues is associated with a flow of funds?

Revenue bonds The flow of funds only relates to municipal revenue bonds. It describes the priority of disbursing revenues from the project. TANs are backed by taxes to be collected, while GO bonds are backed by the issuer's taxing authority. School districts are funded by GO bonds.

Which of the following covers a customer who sold 1 Jul 50 put at 4?

Short the underlying stock For an investor to cover a short put, the investor must either be short the stock or be long a put option that is in the money first (has a higher strike price).

Various types of call features may exist in the indenture of a bond. Which of the following is not a type of call feature?

Statutory call

Which of the following statements about variable annuities is false?

The AIR guarantees a minimum rate of return The rate of return on a variable annuity is determined by the value of the underlying securities, generally mutual funds. The assumed interest rate is the expected interest rate for a specific annuity but does not guarantee a minimum return as the portfolio may perform below the AIR, thus lowering the monthly distribution.

The KPL Corporation is considering having its stock listed on the New York Stock Exchange (NYSE). Who will make the final decision as to whether it will be listed?

The NYSE The NYSE has certain requirements that a company must meet before its stock can be considered for listing. Because the NYSE sets the requirements, it must make the final decision.

Which of the following is not a requirement to be included on a customer confirmation by the Municipal Securities Rulemaking Board (MSRB)?

The accrued interest on a when issued security Because the settlement date on a when issued security is unknown, it is impossible to compute the accrued interest. MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade must be disclosed. The commission on an agency trade must be disclosed.

A customer's market order to sell 1,000 shares was reported as executed at $559.62 per share. Later it was discovered that the report was an error; the trade was executed at $559.31 per share. Which of the following is true?

The customer must accept the sale for $559,310. A market order means the customer states that he is willing to accept the best price at the time of execution. A mistake made in reporting does not alter that fact. "Stuff happens" and sometimes, in the rush to furnish customers with trade information, an incorrect report is made. Invariably, there is a statement in the new account agreement informing customers that the actual transaction, not the reported one is what counts. This can go both ways. The customer certainly would not complain if the initial report was at $559.31 and it was later confirmed for $310 additional.

Which of the following is an advantage of owning American depositary receipts (ADRs)?

The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency. ADRs permit an American investor to purchase a certificate of deposit for stock (not stock itself) in a foreign company. The advantage is that the transactions are done in dollars, but the ADR itself does not carry a vote or stock rights and subjects the owner to currency risk.

Disclosure to customers of control relationships is required in A) agency transactions. B) principal transactions. C) all of these. D) primary distributions.

The nature of any control relationship or conflict of interest must be disclosed to customers. This includes both primary (new issue) and secondary transactions, regardless of whether the firm acts as agent or principal.

When a municipal bond has a net revenue pledge, what is the first item that gets paid from the revenue received?

The operations and maintenance fund. Under a net revenue pledge, operations and maintenance expenses are paid before all debt service. Payments are made in the following order: operating and maintenance expenses, debt service, debt service reserve, and surplus.

Which of the following will halt trading in listed options when there is a trading halt in the underlying stock?

The options exchange on which the option is listed If trading is halted in any stock on which options trade, trading in those options is also halted by the Chicago Board Options Exchange.

Which of the following statements is correct regarding ETNs?

Their value is based, in part, on the credit rating of the issuer The value of an ETN is based, in part, on the credit rating of the issuer, typically an investment banking firm. It represents a debt instrument, not equity. Many events can occur which will prevent the investor from receiving the full value of their initial investment returned to them, such as the insolvency of the investment bank that issued the note. Returns on ETNs are usually stated after fees are considered, not before.

Which of the following statements about SEP-IRAs is (are) true?

They are used primarily by small corporations SEP-IRAs are set up by small corporations to allow employers to make contributions towards an employee's retirement. Small businesses prefer them because they are very easy to set-up and maintain.

A customer purchases 200 shares of Pyrrhic Trophy Manufacturing Corporation (PTMC) at $105 per share. With the stock at $122 per share, the customer sells one PTMC Jan $120 call option for 3.50. One week prior to expiration, PTMC is selling for $132 per share, and the customer is assigned an exercise notice. The tax consequence of this is

a capital gain of $1,850. Even though the investor purchased 200 shares, only one call option was written. When exercised, it is only 100 shares that are sold. The numbers are: Bought 100 shares for $10,500. Sold them at the strike price of 120 (100 times $120) bringing in $12,000. That is a capital gain of $1,500. In addition there is the $350 premium received when the option was sold. That makes the total $1,850.

A municipal bond is purchased in the secondary market at 102½. The bond has five years to maturity. Two years later, the bond is sold for 102. The tax consequence to the investor is

a capital gain of $5 per bond. Municipal bonds bought at a premium, either in the new issue or secondary market, must be amortized. The amount of the premium is 2½ points, or $25. As the bond has five years to maturity, the annual amortization amount is $5 per bond. After two years, the bond's basis has been amortized down to 101½. At that point, a sale at 102 generates a capital gain of $5 per bond.

All of the following would be found in the legal opinion of a municipal revenue bond EXCEPT

a guarantee that revenue generated will be sufficient to pay the interest when due and the principal at maturity. The legal opinion gives a brief description of the bonds, confirms their tax-exempt status, and confirms that they are a legal and binding debt of the issuer. It does not guarantee the credit, nor does it guarantee against default. The legal opinion can be found in the official statement.

When a customer of a broker-dealer dies, all of the following documents may be required to release the decedent's assets except

a power of attorney. The power of attorney is the only document not required. If the decedent had executed a power of attorney, it would have become invalid upon death. An affidavit of domicile and an inheritance tax waiver may be required. A certified copy of the death certificate is always required.

An investor purchased 100 shares of ABC common stock at $50 per share on June 17, 2019. On May 11, 2020, with the ABC selling at $60, the investor hedges by purchasing one ABC Oct 55 put at 2. Immediately prior to the expiration date, ABC is selling for $45 per share and the put option is exercised using the long stock for delivery. This would result in

a short-term capital gain of $300. The investor purchased a protective put against a long position that had a short-term holding period. That means the holding period of the stock is erased and does not restart until the earliest of the date the investor disposes of the stock, exercises the put, sells the put, or the put expires. That means this investor's gain will be short term. The gain is the difference between the cost and the proceeds. When exercising a put, the cost of the stock is the investor's cost basis. The exercise price minus the option premium paid is the sale price. In our question, the cost is the $50 initial purchase price ($5,000 total). The sale price is the 55 strike minus the $2 premium, or $5,300. That results in a short-term capital gain of $300.

In compliance with the Securities Act of 1933, a prospectus is always required when selling interests in

a unit investment trust. A unit investment trust has a one-time offering of its securities. After that, there is no public secondary market trading (the sponsor may engage in secondary trading solely to redeem units). Therefore, as a public offering of a new security, a prospectus is required when attempting to make a sale. Closed-end funds only require a prospectus on their initial offering. Once that is completed, all transactions are in the secondary market and no prospectus is used. Both municipal bonds and Treasury securities are exempt from the prospectus requirements of the Securities Act (although municipal bonds generally need an official statement).

The duration of a bond will be the same as its maturity when the bond is

a zero-coupon bond. Duration is a measurement of how long it will take for an investor to receive back their cash flows from a bond. A zero-coupon bond will have a duration equal to its maturity. This is because the investor does not receive any interest payment until the bond's maturity date.

Upon the execution of the subscription agreement, an individual will be

accepted as a limited partner in a limited partnership. The subscription agreement is the document an individual must sign and have approved in order to be granted status as a limited partner in a limited partnership.

A variable annuity contact held by an investor is set to annuitize in the next 30 days. When this occurs,

accumulation units will be converted into a fixed number of annuity units. When a variable annuity contract is annuitized, the accumulation units are converted in a fixed number of annuity units. The value of these annuity units will fluctuate from month to month, providing the investor with the 'variable' return which is typical of these products.

Various tax preference items are added back to adjusted gross income when considering

alternative minimum tax. When computing the alternative minimum tax, certain tax preference items are added back to adjusted gross income. This will determine whether an individual is required to pay regular income taxes, or the alternative minimum tax (AMT).

An institution trading securities in the fourth market is likely to be using

an ECN. The fourth market is trading almost exclusively between institutions. It is done on electronic communications networks, ECNs. It is possible they will be using an algorithmic trading system, but will be trading the securities on an ECN.

An investor purchases $100,000 of XYZ stock in her margin account and deposits $100,000 to complete her purchase. The impact to the SMA based on this transaction would be

an increase of $50,000. If an investor makes full payment for securities in a margin account, the SMA for this account will increase by 50% of the purchase. This is based on the premise of $100,000 equity - $50,000 Regulation T requirement.

SEC Regulation FD is best described as a rule requiring disclosure by

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

A mutual fund can use the term, "no-load" as long as

any 12b-1 charge does not exceed .25%. Mutual fund can call themselves no-load as long as they do not have a 12b-1 charge that exceeds .25%. In addition, there cannot be any front-end load.

The "XYZ tax-exempt bond fund" will have a portfolio where

at least 80% of the assets in the fund are tax-free municipal bonds. An investment company that has a specific name suggesting a concentration of securities in a particular security/sector (such as a "tax-exempt" bond fund), must have at least 80% of its assets invested in that security or sector.

Rules regarding restricted persons state that each of the following is considered immediate family except

aunts and uncles. Rules regarding restricted persons define immediate family as spouses, parents, brothers, sisters, in-laws, and children. Aunts and uncles are among those excluded.

Your clients Judy and Irwin own a life-cycle fund. This investment is characterized by

automatic adjustments to the fund's portfolio as an investor approaches retirement. A life-cycle fund is a type of asset allocation mutual fund in which the proportion of various asset classes in a fund's portfolio is automatically adjusted over the course of the fund's time horizon. Typically, the shift will be from more speculative assets to more conservative assets.

Mutual fund shareholders are often advised to enroll in automatic dividend reinvestment programs. In those programs, the investor can elect to have all distributions, or just those from income or just those from capital gains, automatically reinvested in additional shares of the fund. Among the advantages to the investor would be

automatic compounding of the investment. Similar in concept to the compounding of interest in a savings account, when distributions are reinvested rather than withdrawn, the capital has an opportunity to compound. Taxes are due in the year for which the distribution is paid (no tax break here). The shares are purchased at NAV; there are never cases where mutual fund shares are purchased below the NAV. If the fund has a 12b-1 charge, it would apply to the reinvested shares just as any other shares.

Mr. Jones buys 1 ABC Nov 70 put and sells 1 ABC Nov 60 put when ABC is selling for 65. This position is a

bear spread. This is a spread because the investor is simultaneously buying and selling the same class of options (puts) with different series (Nov 70 and Nov 60). The dominant position is the put option with a higher strike price because it will be in the money first. For example, when the MV of ABC = 65, the Nov 70 put is in the money while the Nov 60 put will expire. Given that the dominant position is a long put, this is a bear spread.

The main objective of Regulation SHO is to ensure that

broker-dealers will be able to borrow the security that a client wishes to sell short. Regulation SHO is an SEC rule requiring broker-dealers to make sure they can borrow a security and be able to make a timely delivery of that security, prior to a client effecting a short sale in that security

If an American exporter will be paid 25 million Japanese yen when her goods arrive in 45 days, her best hedge is to

buy yen puts. The exporter does not want to see the value of the yen fall. If she owns yen puts, and the yen does fall, her profit on the puts would help compensate for the decrease in the value of the yen. Selling yen calls would also provide protection if the yen fell in value, but only to the extent of the premium received. Exporters buy puts to hedge; importers buy calls on the foreign currency to hedge.

All of the following are suitable objectives for a covered call writer EXCEPT

buying stock below the market When an investor sells a call and it is exercised, the investor will have the stock called away i.e. the investor will be forced to sell the stock. Selling a call option will never give an investor the opportunity to buy stock below the market.

Investors in all of the following securities could receive dividend payments that increase over time except

cumulative preferred stock. The dividend rate on cumulative preferred stock is fixed. It is never more than the stated rate. The cumulative feature simply means that if there are skipped dividend payments, those must be made up before dividends may be paid on common stock. That is not considered an increase in the dividend rate. Adjustable-rate preferred stock has a dividend that adjusts based on market interest rates. In a period of increasing interest rates, the dividends will increase. Participating preferred stock has a tie-in to the common stock dividend. As companies become more profitable or the need for retaining earnings decreases, the common stock dividend tends to increase, and that increases the payout to the participating preferred shareholders.

A customer purchases a public purpose municipal bond as an OID, at $900 in the primary market. The bond matures in ten years. All of the following statements regarding the purchase are true EXCEPT that the

customer will realize a capital gain of $100. This is an original issue discount bond so the discount is accreted each year by the amount of the discount/number of years to maturity = 100/10 = $10/year. At maturity, the cost basis of the bond is $1,000, so the customer will not realize any capital gain when the principal is repaid.

Market interest rates have been rising, which means the price of bonds traded in the secondary market has

decreased. When interest rates rise, bond prices fall.

With respect to a securities transaction, a procedure that may be used to ensure that delivery of securities is made only if proper payment is secured from the customer is

delivery versus payment. A common settlement procedure, delivery versus payment (DVP) is used primary by institutional investors and ensures that delivery of securities only occurs if proper payment is made.

Your client Henry wishes to engage in the day-trading strategy being promoted by your firm. In order for Henry to participate in this type of trading strategy, you would be least concerned having information about Henry's

educational background. It is not necessary to have information about a client's educational background in your customer account records.

The sale of securities in a restricted margin account affects all of the following except A) debit balance. B) market value. C) special memorandum account. D) equity.

equity. Equity is not affected unless the customer elects to withdraw half the proceeds of the sale.

Broker-dealer X is preparing a retail communication consisting of a comparison of two different mutual funds illustrating their differing performance rankings over a six-month period. This ranking data has been created by an affiliate of the broker-dealer. This information must be

filed with FINRA at least 10 business days prior to first use. Retail communication concerning investment companies that include or incorporate performance rankings or comparisons where the data is created by the investment company itself or one of its underwriters or affiliates must be filed with FINRA at least 10 business days prior to first use.

A customer tells a broker to buy 1,500 shares of XYZ at 33.62 immediately or else to cancel the whole order. This is a(n)

fill-or-kill order. An order to buy an exact number of shares in one trade immediately is a fill-or-kill order. If the trade cannot be filled in its entirety in one attempt, the order is cancelled.

A municipal syndicate account letter includes all of the following EXCEPT the

final reoffering scale. The principal syndicate account letter, which is the agreement between the syndicate members, does not include the final reoffering scale because the syndicate has not yet won the deal.

When purchasing a variable annuity, an investor asks if there is a way to receive a guaranteed minimum investment benefit regardless of market conditions. You should reply

for an additional payment, a GMIB option can be added to the annuity contract. The guaranteed minimum investment benefit (GMIB) can be purchased as an additional option in an annuity contract, whereby the contract holder is promised a minimum payment regardless of market conditions.

One of the distinguishing differences between variable annuities and mutual funds is that variable annuities

have a separate account. The variable part of a variable annuity is the separate account. That is what makes it a security. Fixed annuities do not have a separate account, and they are not securities. The only guarantee with a variable annuity is that, once annuitized, payments will continue for life (or the designated period certain). The amount of those payments will vary based on the performance of the separate account. One of the negative features of variable annuities is that they typically have surrender charges that can last a decade or longer.

"Lock up" provisions are commonly associated with

hedge funds. Hedge funds often have lock up provisions, which are minimum time periods that investors must maintain their holdings in the fund. This makes hedge funds very illiquid, and not a suitable choice for investors who require access to their capital.

Under Rule 144A, unregistered securities can be resold to qualified institutional buyers

immediately. Rule 144A allows qualified institutional buyers (QIBs) to freely trade private placements. A QIB is an institution with at least $100 million in assets.

A six-month holding period is applicable to an investor who has purchased shares

in a Rule 147 offering. A six-month holding period would be applicable to the purchaser of a Rule 147 offering, for state residents selling their shares to out of state residents. Sales of these offerings to same state residents is allowed at any time.

An institutional investor is seeking a quote on $2 million of term bonds issued by the City Water Authority. These are the 3s of 2050 and would be quoted

in dollars as a percentage of par. Term bonds are often called dollar bonds because they are quoted in a dollar price. That price is a percentage of par. Serial bonds are quoted on their basis (yield to maturity). A purchaser is going to be quoted based on the dealer's ask price (the bid price is when the customer is selling). The 3s of 2050 means that the coupon is 3% and the maturity date is 2050.

Losses from direct participation programs can be used to offset

income from limited partnerships. Passive losses can be used only to offset passive income, which is earned from direct participation programs and rental real estate.

The risk of a bond decreasing in value during periods of inflation is known as

interest rate risk. Interest rate risk is the possibility that interest rates might rise, causing bond prices to fall. Periods of inflation are accompanied by rising interest rates.

A portfolio consists of 50% ABC investment grade bond mutual fund, 30% DEF zero-coupon bond fund, and 20% XYZ growth and income fund. The biggest risk associated with this portfolio is

interest rate risk. This portfolio is 80% debt, and therefore, would be most susceptible to interest rate risk. Because the bonds are held in funds, there are many bonds and any individual bond default (credit risk) would make up only a small portion of the overall portfolio. This portfolio does have purchasing power risk, but the zero-coupon bonds are most susceptible to interest rate risk. The zeros also reduce the overall reinvestment risk of the portfolio.

A type of investment company product that is typically organized as a closed-end fund but does not trade on a national exchange and offers investors access to alternative investments that are usually only available to institutional investors is a(n)

interval fund. These are interval funds, which are organized as closed-end funds, and provide investors with access to asset classes that are typically only accessible to institutional investors such as hedge funds. The payouts on these funds can be higher than that of traditional mutual funds.

An investor closed a brokerage account with a FINRA member firm on May 12, 2017. Almost four years later, on May 5, 2021, the same investor has a financial plan developed by a registered representative of a different member firm. While examining the old accounts, the representative discovers a transaction where the individual handling the account, as well as the member itself, were negligent resulting in a loss of over $100,000 to the customer. That transaction occurred on April 30, 2015. If the investor wished to make an arbitration claim,

it is past the statute of limitations of six years from the date of the event. Under the Code of Arbitration Procedure, no claim is eligible for submission to arbitration if six years or more have elapsed from the time of the event giving rise to the claim. The pre-dispute agreement protects the member firm in that the customer's only remedy is arbitration. If not signed, the customer has the choice of arbitration or the courts.

A variable-rate municipal bond investment's main advantage is that

its price should remain relatively stable. A variable-rate bond has no fixed coupon rate. The coupon is tied to a market rate (e.g., T-bond yields) and subject to change at regular intervals. Because the interest paid reflects changes in overall interest rates, the bond price remains relatively close to its par value. Its coupon is always representative of the current market rate. As rates rise, the coupon is adjusted upward. As rates fall, the coupon is adjusted downward.

The bid for WXYZ is 5.27 and the ask is 5.31. Jim wants to place an order to buy WXYZ at 5.275. This order

may not be accepted. Securities regulations prohibit the placement of orders to buy or sell securities in increments of less than $.01. This applies to all securities priced for at least $1.00. Orders are not rounded up or down.

An investor is seeking to purchase shares of a company via a tender offer. During the tender period, the investor

may not purchase shares of the company in the open market. If an investor is participating in a tender offer for the common stock of a company, the investor may not purchase common shares of the same issuer in the open market during the tender period. Note that the investor would be allowed to purchase non-convertible securities of the issuer.

The interest expense incurred from buying securities on margin can be offset with income from all of the following securities EXCEPT

municipal bonds. Interest expense from buying on margin cannot be offset with income from municipal bonds because the interest is not taxed, and therefore, it is not deductible.Interest expense from buying on margin cannot be offset with income from municipal bonds because the interest is not taxed, and therefore, it is not deductible.

When purchasing a new issue, investors generally receive a disclosure document. This document contains the essential information (material facts) necessary to make an investment decision. An investor purchasing which of the following new issues would not receive a prospectus?

municipal revenue bond The disclosure document for a municipal bond, revenue, or general obligation is the official statement. The difference in terminology—prospectus or official statement—is frequently tested.

A broker-dealer is serving as a manager on an equity IPO for XYZ Corporation. The broker-dealer

must wait 10 days before publishing a research report on XYZ. A broker-dealer that serves as a manager for an issuer's IPO must wait 10 days before publishing a research report covering the equity securities of that issuer. In the case of a follow-on offering, the waiting period is 3 days. These waiting period are referred to as the "quiet period".

All of the following are redeemable securities except

real estate investment trusts (REITs). A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or over the counter.

An investor purchased 100 shares of Wilmont Auto Supply Holdings (WASH) on June 1, 2018, at $55 per share. On July 5, 2019, WASH is trading at $40 per share and the investor sells at the market price. On August 1, 2019, the investor purchases a WASH Jan 40 call @4. If there are no other transactions during 2019, the investor's tax consequences are

no taxable loss for 2019 because of the wash sale rule. The investor in WASH has violated the wash sale rule. Anytime a security is sold at a loss and then repurchased within 30 days of the sale (before or after), the loss cannot be taken at that time. The rule includes the purchase of substantially identical securities, such as call options, warrants, and convertibles, when determining if a violation has taken place. Because the question asks for the 2019 tax consequences, the disposition of the option expiring in Jan 2020 is irrelevant.

Advertisements for the Abstemious Balanced Fund (ABF) describe the investment as a no-load fund. In order to make this claim, the fund must

not have a conditional deferred sales charge When a fund promotes itself as a no-load fund, not only must there be no front-end load, there cannot be a back-end load (CDSC) either. The 12b-1 charge maximum is 0.25%. The concept of breakpoints applies solely to Class A shares (front-end load).

All of the following deal with the secondary market except

notice of sale. A notice of sale is published to provide syndicates with information on proposed new (primary market) issues. Dealers are selling out of inventory (secondary trading). A broker's broker executes trades in municipal securities for or on behalf of another Municipal Securities Rulemaking Board member firm. Transactions by a broker's broker could be in both the primary and secondary markets.

Upon arriving for work on Monday morning, you hear a voicemail message left by Peter, one of your clients, over the weekend. The message asks that at the open on Monday, you sell his 2,500 shares of ABC Industries. He asks that you phone him upon completion of the order. You should

notify Peter that you are unable to complete this order based on the instructions he left for you. Your clients are usually told never to leave trading instructions or other time sensitive information in a voice message, as their instructions will not be honored.

Among the differences between a real estate investment trust (REIT) and a real estate limited partnership investment (a DPP) is that

only the DPP is a flow-through vehicle. DPPs are the investment vehicle providing flow-through of income and loss. REITs are required to return at least 90% of their net investment income to investors, but losses do not pass through. Both investments can take equity or debt positions. They can also be hybrid and take both. Because DPPs are almost always private placements, the number of investors is usually small. On the other hand, because most REITs are publicly traded, they can have a large number of investors. As private placements, there is no active secondary market for DPPs.

One of your customers is interested in purchasing the shares of a new issue from a local manufacturing company. The issue is for $15 million of common stock. The investor's net worth is $95,000 and net income is $75,000 per year. The plan is to invest $15,000 into this stock. Under Regulation A of the Securities Act of 1933, this investment is

permitted. Under Regulation A, an offering of $20 million or less in a 12-month period is a Tier 1 offering. Unlike a Tier 2 (up to $50 million) offering, there are no restrictions based on net worth or net income. A separate question, but not relevant to this one, is the suitability of this investment. It is important to stick with the question being asked.

All of the following may be used to service special tax bond issues except

real estate taxes. Special tax bonds are sometimes included in the larger and more general category of revenue bonds. Bonds supported from the proceeds of specified income generators, such as gasoline, cigarettes, liquor, and business licenses, are special tax bonds. Ad valorem (real estate) taxes never service special tax bonds.

Regulation NMS is intended to assure that investors

receive the best price executions for their orders by encouraging market competition. This is the primary objective of Regulation NMS. NMS means National Market System. It was established in 2005 to foster competition among markets and among individual client orders.

A maximum of $3,000 of net capital losses may be used by an investor each year to

reduce ordinary income. An investor may use up to $3,000 per year of net capital losses to reduce ordinary income. Note that there is no limit to the amount of capital losses than can be used to offset capital gains.

A broker-dealer purchased 500 shares of ABC for a retail customer at noon on Friday. This trade should be

reported within 10 seconds exclusive of the commission. Transactions in equity securities must be reported within 10 seconds of execution, and the report should not include any commissions or mark-ups/downs.

A broker-dealer recently participated in a Regulation D offering, also known as a private placement. Records relating to this transaction must be

retained for three years from date of final use.

Steve has written 20 JKL June 25 puts. To complete the combination, Steve should also

sell 20 JKL July 25 calls. To create a combination, Steve must sell both puts and calls on the same security. Options of a different series must be used, thus either the strike price and/ or expiration month of the two contracts must be different.

An investor interested in a tax-exempt security with a maturity of one year or less would most likely invest in a

tax anticipation note. Tax anticipation notes (TANs) are municipal notes that are used to finance current operations in anticipation of future tax receipts. They help provide cash flows to the municipality in between tax collection periods. They mature in one year or less, and combine liquidity with a low rate of tax-exempt interest.

A pension plan might invest in each of the following except

tax-free municipal bonds. It is inappropriate to place tax-free investments into a tax-deferred plan because there is no benefit to the deferral.

A customer buys a 20-year, 7% bond on a 7.35 basis. The bond is callable in six years at 103, in eight years at 102, in 10 years at 101, and at par beginning in the 12th year. The customer's confirmation will show yield to

the 20-year maturity. The confirmation of a bond trade must disclose the lower of yield to call or yield to maturity. This bond is being bought at a discount because the basis is higher than the coupon. Because the yield to maturity on a discount bond is lower than the yield to call, this is the yield that will be shown on the confirmation.

According to the Dow theory, reversal of a primary bullish trend must be confirmed by

the Dow Jones Industrial Average and Transportation Average. Charted price trends can be deceptive, so a trend must be confirmed by the Dow Jones Industrial Average and Transportation Average.

Your broker-dealer is not self-clearing, but instead, is an introducing broker-dealer. Therefore, all extension requests made to your broker-dealers self-regulatory organization (SRO) on behalf of customers would be made by

the broker-dealer's clearing agent. While extension requests are granted on behalf of customers, the request to the SRO cannot come directly from the customer or anyone representing him. For self-clearing broker-dealers, the extension request will come from the broker-dealer. However, for introducing firms that do not clear their own trades, the request comes from the clearing agent.

A customer wants to be a day trader but is interested in the term pattern day trader and asks you to define the term. You state that all of the following are true of pattern day traders except

the buying power in margin accounts is the same as for other customers. Pattern day traders are also treated differently when it comes to buying power. Buying power for day traders is four times the maintenance margin excess. Maintenance margin excess is defined as the equity in the account above the 25% minimum requirement. For regular customers, buying power is double SMA.

All of the following Municipal Securities Rulemaking Board (MSRB) Rules of Uniform Practice requirements may be altered by mutual agreement between dealers except A) the price and time of delivery. B) The content of confirmations. C) the payment of shipping expenses. D) the terms of delivery.

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

All of the following statements regarding Section 529 plans are true except A) the income level of the contributor can affect the annual contribution amount. B) contributions to a 529 plan may be subject to gift taxation. C) states impose very high overall contribution limits. D) the assets in the account are controlled by the account owner, not the child.

the income level of the contributor can affect the annual contribution amount. Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.

When a stock or bond certificate is delivered, it must be in good transferable form. If the certificate is badly mutilated, it must be authenticated. Authentication can be done by

the issuer of the security. Authentication of a mutilated certificate may be done only by a party with access to certain corporate records. That would certainly be the issuer, but it could also be the transfer agent or registrar.

Broker-dealer K is publishing a research report which includes ratings of the 10 companies it is currently covering. This report must also include

the percentage of all securities placed into a particular rating category. When a research report includes ratings of individual companies, it must disclose the percentage of all securities rated by the firm in a particular category. Common ratings include "buy", "hold", and "sell".

When a corporation completes a stock split, it will not have any impact on

the retained earnings. When a stock splits, the par value splits accordingly. Obviously, the number of shares outstanding increases. Because there are now more shares outstanding, there is a reduction to the earnings per share. This split will have no effect on retained earnings because there have been no monetary changes to assets or liabilities.

In a municipal underwriting, the interest cost calculation discounts future interest payments to arrive at present value. This interest cost calculation method is

the true interest cost. When an issuer discounts future interest payments to arrive at present value, the interest cost method being used is the true interest cost. This method takes into consideration the time value of money.

Two weeks ago, Ethan closed a short position in ABC Inc. common stock that he'd been carrying for a few months. He realized a five- point loss on the transaction. Today, Ethan tells you he is considering another short sale, this time of ABC Inc. convertible bonds. You should tell Ethan that

there may be an adverse tax consequence connected to the common stock position that he closed two weeks ago if he chooses to proceed with this trade. If Ethan proceeds with his short sale, this may be considered a wash sale, which would disallow the loss Ethan realized when he covered his short position. A wash sale occurs when a securities position is closed for a loss and that same, or substantially similar, security position is re-established within 30 days.

All of the following statements regarding negotiable jumbo certificates of deposit are true except A) they usually have maturities of less than one year. B) they are fully insured in any denomination by the FDIC. C) they are readily marketable. D) they are usually issued in denominations of $100,000 to $1,000,000.

they are fully insured in any denomination by the FDIC. The FDIC insures only up to $250,000.

Typically, general obligation bonds are not sold short because

thin markets may make it difficult to cover a short municipal position. Because the municipal trading market is thin, it is often difficult to cover (buy back) a municipal security that has been sold short. It is easy to short 100 shares of GM (borrow the stock), for example, because an equivalent 100 shares of GM can be purchased on the NYSE at any time.

When customers receive their account statements, they will generally not include A) trade dates of all transactions during the statement period. B) interest charged on debit balances in margin accounts during the statement period. C) security positions at the end of the statement period. D) total cost of purchases and net proceeds of sales made during the statement period.

trade dates of all transactions during the statement period. Trade dates appear on the trade confirmations.

John is the owner of an IRA at the time of his death, and this account is inherited by his wife Jane. Jane may

treat John's IRA as her own IRA by transferring his account into her personal IRA and take distributions beginning at age 59 ½. In a situation like this, one spouse may transfer the other spouse's IRA into a personal IRA and begin taking distributions upon reaching the age of 59 ½. Ordinary income taxes would apply, as appropriate, to all distributions.

SEC rules require that customers be given a copy of the risk disclosure document before their first transaction in a penny stock. The member firm must receive a signed and dated acknowledgment from the customer that the document has been received. In addition to obtaining the client's signature, the SEC requires the firm to wait at least

two business days after sending the statement before executing the first trade. It is SEC Rule 15g-2 that requires the firm wait at least two business days after sending the risk disclosure document before executing the first penny stock trade for a new customer.

In the context of explaining mortgage backed securities to a client, a registered rep could make all of the following statements EXCEPT

when interest rates decrease, the duration of the bond will increase, resulting in a large increase in market value. When interest rates fall, homeowners are likely to prepay their mortgages. This will have the impact of shortening the average life of the bond, leading to a shorter duration. Shorter duration bonds are less sensitive to fluctuating interest rates, so it is likely that this scenario will lead to only a small increase in market value.

The private placement rule states that the person to whom the offer of securities is made must be an informed person

who either has access to the same type of information contained in a registration statement or is furnished such information. For private placement transactions, any potential investor must have access to, or must be furnished with, the information about the issuer that would normally be available in a registration statement.

A customer of yours expresses an interest in purchasing a deferred variable annuity. After a careful analysis, you have determined that this is a suitable investment for the customer. Under FINRA rules, principal approval of this sale must be obtained

within seven business days of receipt of a complete and correct application package. FINRA Rule 2330 requires a registered principal to review and determine whether to approve a customer's application for a deferred variable annuity before sending the application to the issuing insurance company. This must occur no later than seven business days after the broker-dealer receives a complete and correct application. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

One of the factors used to determine whether a 1035 exchange may be appropriate for an investor is the timing of any previous such exchanges. It is typically considered inappropriate for an investor to effect a 1035 exchange when a prior such transaction was conducted

within the past 36 months. Industry rules indicate that investors should not effect 1035 exchanges more than once every 36 months. There are usually fees associated with this transaction, including surrender fees which can be substantial.

A bond analyst plots the yields of AAA corporate bonds and compares them to the yields of U.S. Treasury bonds with similar maturities. This is known as

yield curve analysis. The plotting of bond yields results in a curve, usually one where the longer the time to maturity, the higher the yield. The term yield curve analysis is the proper way to describe comparing the yields of highly-rated corporate bonds to those of Treasury bonds. When the spread between the yields is narrow, economic conditions in the United States are generally favorable. If the spread (sometimes called the credit spread) widens, it is generally a sign of a worsening economy. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.