SIE Prep: Master Exam 2
A customer buys 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has dropped to $40. The minimum maintenance margin requirement is: A. $10,000 B. $12,000 C. $15,000 D. $18,000
A. $10,000 The minimum maintenance margin requirement for long stock positions is 25% of the current market value = 25% of $40,000 = $10,000. Note that minimum margins are based on the closing market value each day.
Which of the following contracts has the greatest intrinsic value? A. ABC Jan 50 Call when the market price of ABC stock is $55 B. ABC Jan 50 Call when the market price of ABC stock is $45 C. ABC Jan 50 Put when the market price of ABC stock is $50 D. ABC Jan 50 Put when the market price of ABC stock is $55
A. ABC Jan 50 Call when the market price of ABC stock is $55 Calls go "in the money" when the market price rises above the strike price. Puts go "in the money" when the market price falls below the strike price.
Under the rules of the Options Exchanges, if a customer's financial condition changes materially, then which of the following will be amended? A. New Account Form and Options Agreement only B. New Account Form only C. Options Disclosure Document only D. New Account Form and Margin Agreement only
A. New Account Form and Options Agreement only
Which statement is TRUE about Coverdell ESAs? A. assets grow tax-deferred and distributions are not taxable if used for qualified educational purposes B. contributions into the account are tax deductible to the donor C. any adult, regardless of income level, can open or contribute into the account D. distributions are taxable at long term capital gains rates
A. assets grow tax-deferred and distributions are not taxable if used for qualified educational purposes Contributions to Coverdell ESAs are limited to $2,000 per child per year and are not tax deductible. Earnings build tax-deferred and when distributions are taken to pay for qualifying educational expenses, the amount distributed is not taxed. If the distribution is not used to pay for qualifying educational expenses, then it is taxable at ordinary income tax rates. High earning adults are prohibited from opening Coverdell ESAs.
A customer owns 100 shares of ABC stock and owns 1 ABC Put option. The customer wishes to sell the stock by exercising the put, but wishes to retain a recently declared cash dividend. In order to receive the dividend, the customer could NOT exercise the put: A. before the ex date B. on the ex date or after C. before the record date D. on the record date or after
A. before the ex date
IRA contributions can be made with: A. cash B. exempt securities C. non-exempt securities D. money market fund shares
A. cash Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).
You have an elderly client who telephones you at the office, telling you the following: "I have been notified by certified mail that I have just won $100,000 in the Nigerian Government National Lottery, and in order to claim my prize, I need to wire $1,000 from my account to the Nigerian Lottery Overseas Bank." This client has a small individual account with your firm, where her adult daughter is named as the beneficiary. The action that you should take is: A. escalate the request to a supervisor in the firm's compliance department B. contact the daughter to see if the transfer should be made C. refer the matter to the firm's AML officer D. follow the customer's instructions
A. escalate the request to a supervisor in the firm's compliance department Well, this certainly looks like the elderly client is being scammed! It should be escalated to the firm's compliance department, and under the new "elder abuse" rules, compliance can put a 15 day restriction on the account wire transfer while it assesses the situation and decides what action to take - such as referring the case to the state social service department, as well as the state attorney general. Note that the daughter being named the beneficiary on the account is meaningless here. The only way that the daughter can do anything in the account is if she has been given a written power of attorney by her mother in this account - which is not the case here. Also note that this is not a case of suspected money laundering (rather, it appears to be fraud), so reporting this to the firm's AML (Anti-Money Laundering) officer would not be appropriate.
An officer of a trust wishes to open a margin account with your firm. This is allowed: A. if the trust agreement specifically authorizes the opening of a margin account B. as long as the new account form has been properly completed C. if an officer of the trust provides a letter of guarantee D. only with the prior approval of the branch manager
A. if the trust agreement specifically authorizes the opening of a margin account As a general rule fiduciary accounts must be cash accounts. A trust account will be opened as a cash account unless the agreement specifically authorizes the opening of a margin account.
A customer buys 100 shares of XYZ at $49 and buys 1 XYZ Jan 50 Put @ $5. The maximum potential loss is: A. limited B. unlimited C. $4,900 D. $500
A. limited The long put gives the stock owner the right to sell at $50. Since he/she bought the stock at $49, exercising results in a 1 point stock profit. However, the premiums paid of $5 are lost, for a net loss of 4 points or $400 maximum. Note: Students will not likely see calculation questions regarding hedging, but they should realize that the hedge limits the client's loss potential.
A customer buys 200 shares of GE at $72 and sells 2 GE Jun 70 calls @ $6. The maximum potential gain is: A. limited by the call write B. equal to the premium received C. $7,200 D. $14,400
A. limited by the call write A long stock position coupled with a call write is referred to as a covered call writer. This is a bullish position with a capped profit potential since the call will be exercised if the stock rises sharply. Remember, a call writer is obligated to deliver the stock at the strike price in a rising market.
Which document is NOT completed when opening a margin account? A. options agreement B. margin agreement C. loan consent agreement D. credit disclosure statement
A. options agreement
Which statement is TRUE regarding order tickets? A. order tickets must be prepared prior to entry of the order B. order tickets must be prepared by the close of business on the day the order was entered C. order tickets must be reviewed and approved by the customer prior to order entry D. order tickets must be reviewed and approved by the firm prior to order entry
A. order tickets must be prepared prior to entry of the order Under FINRA rules, order tickets (which are now electronic) must be prepared in writing prior to order entry. There is no requirement for customer approval, nor for firm approval, prior to order entry. All transactions that occur in the branch are approved by the end of the day by the branch manager. From an operational standpoint, approving orders prior to order entry is not workable. Note that if, on review at the end of the day, an order is found to be incorrect, it can still be "fixed' and will be taken out of the customer's account. Customer transactions are not recorded in customer accounts until settlement, which is 2 business days after trade date.
A customer that discovers an error on his or her account statement must report the error: A. promptly to the member firm B. before the next account statement is generated C. to the representative servicing the account D. to FINRA
A. promptly to the member firm
A customer, age 60, is looking for an investment that will provide life-long income at retirement. The BEST recommendation would be for the customer to: A. purchase a variable annuity and annuitize the separate account at retirement B. purchase a variable annuity and take installments of a designated amount at retirement C. invest in an income mutual fund and elect not to automatically reinvest distributions D. invest in a GNMA fund since GNMAs make monthly payments
A. purchase a variable annuity and annuitize the separate account at retirement
A money purchase retirement plan would invest in all of the following securities EXCEPT: A. tax free municipal bonds B. US government bonds C. equities D. variable annuities
A. tax free municipal bonds A retirement plan would not invest in tax free municipal bonds because such instruments provide a lower yield than taxable bonds. Since the pension plan itself is a "tax free" envelope in which securities are held, the plan would invest in securities that yield a higher amount.
A customer has a margin account that shows the following positions: Long: 100 ABC @ $6 Debit: 0 Equity: $600 The customer wishes to buy 100 shares of XYZ at $10 in the account. The customer must deposit: A. $500 B. $1,000 C. $1,400 D. $2,000
B. $1,000 Even though minimum equity to open a long margin account is $2,000, this does not apply if the securities in the account are fully paid. A customer cannot be asked to deposit more than 100% when buying since this is the maximum potential loss. The customer holds $600 of fully paid stock in a margin account as the only position. If he wants to buy another $1,000 of stock, 100% or $1,000 must be deposited. The equity in the account is now $1,600 and the account is fully paid with no debit.
A customer buys 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. The maximum potential loss for the customer is: A. $400 B. $800 C. $11,200 D. $12,000
B. $800
A pension plan maintained by a not-for-profit corporation is known as a : A. 401k plan B. 403b plan C. SEP IRA D. HR 10 plan
B. 403b plan
The maximum life on a regular stock option contract is: A. 3 months B. 9 months C. 12 months D. 18 months
B. 9 months
Which statement is TRUE about option contracts? A. Calls go "in the money" when the market price falls below the strike price B. Calls go "in the money" when the market price rises above the strike price C. Puts go "in the money" when the market price rises above the strike price D. Puts go "in the money" when the contract reaches its expiration date
B. Calls go "in the money" when the market price rises above the strike price
To open a cash account for a partnership, in addition to the new account form, which document is required? A. Authorizing resolution B. Partnership agreement C. Corporate charter D. Joint account agreement
B. Partnership agreement To open a partnership account, a copy of the partnership agreement must be obtained. This document will have a paragraph that authorizes the opening of such an account; and which specifies the partners that are permitted to effect transactions in the account.
Which statement is TRUE? A. Regular way trades of listed options settle same day B. Regular way trades of listed options settle on the business day after trade date C. Regular way trades of listed options settle on the calendar day after trade date D. Regular way trades of listed options settle 2 business days after trade date
B. Regular way trades of listed options settle on the business day after trade date Regular way trades of listed stock options settle 1 business day after trade date. In contrast, regular way trades of listed stocks settle 2 business days after trade date.
A couple earning $70,000 in 2022 makes a contribution of $6,000 to a Traditional IRA. Which statement is TRUE? A. This couple can contribute a maximum of $3,000 to a Roth IRA B. This couple can contribute a maximum of $6,000 to a Roth IRA C. This couple can contribute a maximum of $12,000 to a Roth IRA D. This couple is prohibited from contributing to a Traditional Individual Retirement Account in that year
B. This couple can contribute a maximum of $6,000 to a Roth IRA
Any changes in value of a variable annuity accumulation unit are directly related to changes in the: A. Standard and Poor's 500 Average B. Value of the securities funding the separate account C. Consumer Price Index D. Dow Jones Averages
B. Value of the securities funding the separate account
The most efficient way for a client to hedge a broadly diversified $2,500,000 stock portfolio is to: A. buy put contracts on the individual stock positions held in the portfolio B. buy SPX 2500 put options C. sell short the exact same stock positions as those held in the portfolio D. sell long the exact same stock positions as those held in the portfolio
B. buy SPX 2500 put options Index options can be used to "efficiently" hedge a broadly diversified stock portfolio because each contract has a large "notional" value. Each SPX 2500 contract covers 2500 (index value x 100 (multiplier) = $250,000 of portfolio value. The hedge a $2,500,000 portfolio, 10 put contracts are needed. This is much easier than attempting to buy individual put contracts on the stock positions held in the portfolio. If the market drops, the gain on the index puts offsets the loss on the physical stock portfolio. The short sale of stock positions in the portfolio results in a "net 0" position, so there could be no further possible gain if the market rises (and no further loss if it falls). Selling the securities in the portfolio "long" would liquidate those positions - again, that is not a hedge.
An investor sells short 200 shares of ABC stock at $60 and sells 2 ABC Jan 60 Puts @ $4 on the same day in a margin account. The customer is a(n): A. protective put writer B. covered put writer C. bullish put writer D. aggressive bull
B. covered put writer
An investor sells short 200 shares of ABC stock at $60 and sells 2 ABC Jan 60 puts @ $4 on the same day in a margin account. The customer is a: A. protective put writer B. covered put writer C. bullish put writer D. aggressive bull
B. covered put writer Shorting stock and writing a put against the position is referred to as a covered put writer. The client is bearish due to the core short stock position and writes the put to collect the premium. This income-producing strategy limits profits since if the stock moves down sharply, the put will be assigned, and the writer will be forced to buy back stock at the strike price.
OFAC: A. receives Suspicious Activity Reports filed by financial institutions B. creates the Specially Designated Nationals list that must be checked when opening an account for a non-U.S. citizen C. monitors foreign currency inflows into the U.S. markets D. enforces the provisions of the Bank Secrecy Act
B. creates the Specially Designated Nationals list that must be checked when opening an account for a non-U.S. citizen
Which of the following best describes "structuring"? A. depositing or withdrawing cash in amounts just over $10,000 B. depositing or withdrawing cash in amounts just under $10,000 C. diversifying among asset classes in amounts just over $10,000 D. diversifying among asset classes in amount classes in amounts just under $10,000
B. depositing or withdrawing cash in amounts just under $10,000 "Structuring" is the illegal practice of making a pattern of deposits or withdrawals of cash in amounts under $10,000 to avoid currency transaction reporting rules.
The best way to ensure that a brokerage firm has an effective AML program is to: A. perform a credit check on each customer B. have strong KYC procedures C. make sure that all new accounts are approved by a manager or principal D. file a SAR report on each new customer
B. have strong KYC procedures Know Your Customer
A customer would sell call contracts because the customer: A. is bullish on the underlying security B. is bearish on the underlying security C. wishes to generate earned income D. wishes to defer taxation of gains on the underlying stock
B. is bearish on the underlying security Call contracts are sold when a customer is bearish on the market. If the market falls, the calls expire "out the money" and the writer retains the premiums earned. This is the maximum potential gain for the writer of a call.
A customer buys 200 shares of GE at $72 and sells 2 GE 70 Calls @ $6. The customer has a(n): A. limited bear position B. limited bull position C. extreme bull position D. the right to sell stock
B. limited bull position
A customer buys 1 ABC Jul 40 Put at $6 when the market price of ABC is $38. ABC stock rises to $60 and stays there though July. The customer: A. gains $600 B. loses $600 C. gains $1,400 D. loses $1,400
B. loses $600 If the market rises to $60, the put expires "out the money" (since the strike price is $40). The customer loses the $600 premium paid.
If the writer of a put contract is assigned, the put writer must: A. pay the strike price for the security in next business day B. pay the strike price for the security in 2 business days C. deliver the security the next business day D. deliver the security in 2 business days
B. pay the strike price for the security in 2 business days If the writer of a put is "assigned," this means that the OCC has assigned an exercise notice to that put writer. The put writer is then obligated to buy the stock from the put holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.
If the S&P's 500 Index is falling rapidly, it would be expected that the value of the VIX would: A. fall B. rise C. be stable D. be volatile
B. rise The VIX is an extremely successful index option traded on the CBOE that is commonly called the "fear gauge." The VIX is an index that tracks S&P 500 Index volatility. VIX values have ranged from a low of about 10 to a high of about 80 since the product was introduced in 2006. Increased volatility occurs in falling markets, so VIX values increase when the market is falling - the index moves counter to the general market. Therefore, in a falling market, volatility increases and VIX calls become more valuable as the VIX rises; while in a rising market, VIX values tend to fall. Like virtually all index options introduced after the OEX, the VIX is a European style option.
Which procedure is required at, or prior to, opening a new options account? A. a new account form must be signed by the customer B. the customer must be sent the latest Options Disclosure Document C. the customer must sign and return the Options Agreement D. a principal must counter-sign the options agreement
B. the customer must be sent the latest Options Disclosure Document
Which statement is TRUE about a registered rep. who wants to be appointed as a trustee for a trust account being established by a client for the client's children? A. the registered rep. can act as the trustee without restriction B. the registered rep. can act as the trustee only with approval of the firm's compliance department C. the registered rep. can act as trustee only if no trustee fee is accepted D. the registered rep. cannot act as trustee under any circumstances
B. the registered rep. can act as the trustee only with approval of the firm's compliance department The trustee over a trust account is a fiduciary who must manage the account in the best interest of the beneficiaries. It is an inherent conflict of interest for the registered representative to act as the trustee. This is the case because he or she, as "trustee," has the power to trade the account, and that trading activity will result in commissions paid to the representative. Thus, the representative would have an incentive to overtrade the account, earning excessive commissions at the expense of the trust beneficiaries. Typically, a trustee is a bank or an investment adviser, both of whom are already under a fiduciary obligation. The trustee decides who the broker will be. While it is "possible" for a registered representative to be a trustee in such an account (if there is written disclosure to the grantor of the trust of the nature of the conflict of interest and if the fees charged by the trustee are "reasonable"), many brokerage firms have an internal policy of prohibiting their representatives from being trustees in any accounts that they oversee. The only way that this can be overcome is if compliance is informed of the situation and approves.
If a person under the age of 59 1/2 becomes disabled and wishes to withdraw money from her IRA, which statement is TRUE? A. the withdrawal is tax free B. the withdrawal is subject to income tax but no penalty C. the withdrawal is subject to income tax plus a 10% penalty tax D. the withdrawal is not subject to income tax but will incur a 10% penalty tax
B. the withdrawal is subject to income tax but no penalty Distributions from tax qualified pension plans such as IRAs and Keoghs prior to age 59 1/2 are subject to regular tax plus a 10% penalty tax, unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax but are not subject to the 10% penalty tax.
A customer sells short 100 shares of ABC at $46 and buys 1 ABC Jan 45 Call @ $3. The client is a: A. worried bull B. worried bear C. aggressive bull D. aggressive bear
B. worried bear The client's core short stock position makes him or her bearish. The call was purchased as a hedge, which makes the client cautiously bearish. This is a worried bear!
As the initial transaction in a new margin account, a customer places an order to buy 100 shares of XYZ stock at $15. The customer must deposit: A. $750 B. $1,000 C. $1,500 D. $2,000
C. $1,500 Even though there is a $2,000 FINRA minimum for opening a new margin account, this does not apply if the amount purchased is less than $2,000. Then only full payment is required. So this customer must deposit $1,500 - full payment. This is no different than if it were a cash account, and this is the maximum that the customer can lose.
A customer buys 100 shares of ABC stock at $50 as an initial transaction in a margin account. At the end of that day, the stock is valued at $60 per share. The customer must deposit: A. $1,500 B. $2,000 C. $2,500 D. $3,000
C. $2,500
A customer buys 1 ABC Jan 35 Call @ $3 when the market price of ABC is at $34. ABC goes to $42 and the customer exercises the call and sells the stock at the market. The customer has a: A. $200 gain B. $300 gain C. $400 gain D. $700 gain
C. $400 gain The customer buys the stock at $35 through the exercise of the call; and sells position in the market at $42 for a $7 point gain per share. However, since $3 per share was paid in premiums, the net gain is $4 per share, or $400 for the contract covering 100 shares.
A customer buys 10 ABC Jan 50 Calls @ 4.75 when the market price of ABC is $51 per share. The breakeven point is: A. $45.25 B. $46.25 C. $54.75 D. $55.75
C. $54.75 Long Call Breakeven = Strike Price + Premium The holder of a call breaks even if the market price rises by enough to recover the premium paid. The holder paid $4.75 for the right to buy stock at $50. The effective cost if he or she exercises is $54.75. The holder must be able to sell the stock for $54.75 to breakeven.
At what age dies a natural person have the legal capacity to open an individual account at a brokerage firm? A. 15 B. 16 C. 18 D. 25
C. 18
Under Regulation T, the time period granted by FINRA for an extension of payment on monies due is: A. the same business day B. the next business day C. 2 business days D. 5 business days
C. 2 business days
Which statement is TRUE when comparing the purchase of a put and selling a security short? A. The maximum potential loss for both positions is unlimited B. The capital requirement to purchase a put and the capital requirement to sell a security short are the same C. Both positions will have the maximum potential gain if the market falls to "0" D. There is the same amount of risk in owning a put and in selling a security short
C. Both positions will have the maximum potential gain if the market falls to "0"
Which statement is TRUE about index option contracts? A. They are custom OTC contracts where the terms are negotiated between buyer and seller B. They are available in either American or European style C. Exercise settlement is in cash D. Trade settlement is the same day
C. Exercise settlement is in cash Unlike stock options, index options are generally issued European style (exercise can only occur at expiration, not before). Exercise settlement is in cash, unlike stock options where exercise settlement results in a delivery of stock. Like stock options, index options can be traded anytime, and trade settlement is next business day for both.
Which of the following is NOT standardized for listed option contracts? A. Strike price B. Contract size C. Premium D. Expiration date
C. Premium Exchange traded option contracts have standardized contract sizes (e.g., 100 shares of stock), expiration dates (the 3rd Friday of the month), and strike prices (generally 5 point strike price intervals). The premium or "price" of the option is determined minute by minute in the trading market.
Which statement is TRUE when comparing a Roth IRA to a Traditional IRA? A. Anyone with earned income can open a Roth IRA B. Anyone with investment income can open a Traditional IRA C. Roth IRAs are not available to high-earning individuals D. Traditional IRAs are not available to high-earning individuals
C. Roth IRAs are not available to high-earning individuals
All of the following are needed to open a cash account for a customer EXCEPT: A. Customer tax I.D. number B. Name of employer C. Signature of customer D. Customer address
C. Signature of customer
Regulation T applies to transactions in all of the following securities EXCEPT: A. Convertible corporate bonds B. American Depositary Receipts C. U.S. Government Bonds D. Warrants
C. U.S. Government Bonds
A customer buys 100 shares of ABC stock which is trading at $55. Subsequently, she sells 1 ABC Sept 60 Call @ $3. The customer is a: A. bear with a hedge B. bear creating income C. bull creating income D. bull with protection in case the stock falls dramatically
C. bull creating income The customer has a core bullish long stock position but has also written a call. If the stock rises dramatically, it will be called away at the strike price. Covered call writing is a limited bull position. If the client wants an effective insurance policy, she would buy a put, which would give her the right to sell stock.
A customer buys 100 shares of ABC stock at $58 and buys 1 ABC Jul 55 put @ $2.50 on the same day. The position is: A. bearish with limited loss potential B. bearish with unlimited loss potential C. bullish with limited loss potential D. bullish with unlimited loss potential
C. bullish with limited loss potential The customer is bullish due to the core long stock position and buys the put as a hedge. This makes the customer cautiously bullish. The loss is limited by the put hedge. If the stock falls, the client could sell the shares at the $55 strike price.
Which one of the following orders requires specific customer authorization? A. buy 100 shares of ABC at the best price available B. sell 100 shares of ABC at the market C. buy 100 shares of any computer stock priced at under $40 D. sell 100 shares of ABC at $40 if it gets to that level
C. buy 100 shares of any computer stock priced at under $40 A written power of attorney is required only if a registered representative chooses more than price and/or time of execution in a customer transaction - translated, this means that the registered representative either selects the security to be traded or selects the size of the transaction. In Choices A, B, and D, the customer specifies the size and security, so no power of attorney is needed. In Choice C, the choice of the security is left to the registered representative, so a power of attorney is required.
The writer of a put on a listed stock is exercised. Upon assignment, the writer must: A. pay the premium B. deliver cash C. buy stock D. sell stock
C. buy stock If the writer of a put option on listed stocks is exercised, he or she must buy 100 shares of stock, for which the writer will pay the strike price in cash.
The AIR stated in a variable annuity prospectus is a: A. guaranteed fixed interest rate for the annuity B. guaranteed minimum interest rate for the annuity C. conservative illustration of an interest rate for the annuity D. guaranteed maximum interest rate for the annuity
C. conservative illustration of an interest rate for the annuity The Assumed Interest Rate shown in a variable annuity prospectus illustrates the annuity that will be available if the separate account performs at that rate. It is conservatively estimated, but is no guarantee of a specific return.
Retirement plans that must comply with ERISA requirements include all of the following EXCEPT: A. defined benefit plans B. profit sharing plans C. federal government plans D. payroll deduction savings plans
C. federal government plans ERISA rules cover private retirement plans to protect employees from employer mismanagement of pension funds. It does not cover public sector retirement plans, such as federal government and state government plans, since these are funded from tax collections and are closely regulated. The listing of plans that must comply with ERISA include: Profit sharing plans Defined contribution plans Defined benefit plans Tax deferred annuity plans Payroll deduction savings plans
All of the following statements are true regarding joint accounts EXCEPT: A. opening a joint account requires new account info on each account participant B. if a party in a Tenancy in Common account dies, their shares of the account is included in their taxable estate C. if a party in a Joint Tenants with Rights of Survivorship account dies, their shares are excluded from their taxable estate D. any party in the account can authorize trades or withdraw funds
C. if a party in a Joint Tenants with Rights of Survivorship account dies, their shares are excluded from their taxable estate Even though a "Joint Tenancy" gives each owner an undivided interest in an account, if one owner dies, the IRS assigns a portion of the account to that person and taxes it. If the owners are married, then the marital exclusion stops this from happening.
All of the following are true statements about IRAs EXCEPT: A. the earliest a taxpayer may make an annual contribution is January 1st of that tax year B. the latest a taxpayer may make an annual contribution is April 15th of the following tax year C. if the taxpayer obtained a 4 month filing extension, they can make the annual contribution up to the extension date D. annual contributions may be made even if the person is covered by another qualified retirement plan
C. if the taxpayer obtained a 4 month filing extension, they can make the annual contribution up to the extension date Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. IRA contributions can be made even if the employee is covered by another qualified pension plan, but may not be tax deductible in that case.
How must an account opened under the Uniform Gifts to Minors Act, UTMA, be titled? A. in the name of the custodian only B. in the name of the minor only C. in the name of the custodian for the minor D. in the name of the minor for the custodian
C. in the name of the custodian for the minor Under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), any adult can open a custodial account for any minor. The account must be titled in the name of the custodian for the minor - so both names are there. Also note that the social security number of the minor is used on the account, not the social security number of the custodian.
In January, a customer sells 1 ABC Jun 55 Call @ $6 when the market price of ABC is $56. If ABC rises to $62 and the writer is assigned, the customer will: A. breakeven B. gain $100 C. lose $100 D. gain $1,300
C. lose $100 The writer of a call receives the premium for the contract. For a call, as the market price rises above the strike price, the contract is exercised, forcing the writer (seller) to deliver shares at the strike price. Since he or she has to go in the market to buy the shares for delivery, we have: buy at -$62, deliver at +$55, for a -$7 loss offset by the +$6 premium received or a -$1 point, or $100 loss, on the position.
Which joint account CANNOT be opened? A. adult brother and sister B. husband and wife C. parent and minor D. business partner and business partner
C. parent and minor A minor cannot open an account, nor does the minor have legal capacity to participate in any joint account. The acceptable method of opening such an account is an adult custodian opening an account for the benefit of the minor. Any adult can be one of the participants in a joint account.
Prior to opening an options account, all of the following steps must be taken EXCEPT: A. completing the new account form B. delivering the options disclosure document to the customer C. receiving the signed options agreement from the customer D. approving the first transaction in the account
C. receiving the signed options agreement from the customer
Approval of new accounts for MSRB member firms CANNOT be performed by the: A. branch office manager B. municipal securities principal C. registered representative D. general principal
C. registered representative The Municipal Principal (Series 53 license) approves accounts at municipal securities firms. In addition, the MSRB permits the General Principal (Series 24 license) or the Branch Office Manager (Series 9/10 license) to approve new accounts. Registered Representatives may fill out a new account form but lack approval authority.
A single mother has 2 children, ages 5 and 9. She earns $150,000 per year and wishes to open Coverdell ESAs for each child to pay for qualified education expenses. Which statement is TRUE? A. she can open the account for each child and make an annual $2,000 tax deductible contribution for each B. she can open the account for each child and make an annual $2,000 non-tax deductible contribution for each C. she is prohibited from opening an account for each child because she earns too much D. she is prohibited from opening an account for each child because Coverdell ESAs are only available to married couples with children
C. she is prohibited from opening an account for each child because she earns too much
All of the following persons can contribute to a 403b plan EXCEPT: A. professor at a university B. nurse at a hospital C. student at a college D. secretary at a foundation
C. student at a college 403(b) retirement plans are established by non-profit institutions for their employees. Employees of schools, universities, municipalities, hospitals, etc, would fall under this type of plan. Students at a university are not employees of the institution and do not qualify.
An elderly client has a $400,000 portfolio that is conservatively invested in blue chip stocks and government bonds. He calls his representative and tells him that he wants to liquidate the entire portfolio and buy growth stocks. His son also has an account serviced by the same representative, so the representative calls the son to ask him about how his father is doing, to which the son responds: "Dad has not been himself lately." What step should the representative take? A. the rep. should follow the customer's instructions, liquidate the portfolio, and buy growth stocks B. the rep. should refuse to follow the customer's instructions C. the rep. should contact the client and explain the risks inherent in the customer's strategy D. the rep. should contact compliance and ask them to file a SAR
C. the rep. should contact the client and explain the risks inherent in the customer's strategy
Section 529 plans are established by: A. the IRS B. the SEC C. the state D. FINRA
C. the state
A customer sells short 100 shares of DEF stock at $62 and sells 1 DEF Oct 60 Put @ $6. The potential gain while both positions are in place stops when: A. the stock rises to $68 B. the stock rises to $66 C. the stock falls to $60 D. the stock falls to $53
C. the stock falls to $60 If the market drops, the short put is exercised, and the customer must buy the stock at $60. Since the stock was sold at $62, the customer gains 2 points, in addition to collecting 6 points of premiums. Thus, the maximum gain is $800. Conversely, if the market rises, the short put expires, leaving a short stock position that has potentially unlimited loss.
A customer buys 100 shares of XYZ stock at $80 and buys 1 XYZ Oct 80 Put @ $3. The customer has a(n): A. unlimited profit potential and unlimited loss potential B. limited profit potential and limited loss potential C. unlimited profit potential and limited loss potential D. limited profit potential and unlimited loss potential
C. unlimited profit potential and limited loss potential
Earlier this year, a client of yours wrote a letter to the firm, requesting that his mail be held for 2 months, which your firm did. Later in the year, the customer writes another letter, asking that the mail be held for another 2 months. Which statement is TRUE about this? A. you can follow the customer's written instructions and hold the mail for an additional 3 months B. you can follow the customer's written instructions and hold the mail for an additional 3 months only if the branch managers approves C. you can follow the customer's written instructions and hold the mail for an additional 3 months if the letter included an acceptable reason for holding the mail D. you cannot hold the mail for any additional length of time
C. you can follow the customer's written instructions and hold the mail for an additional 3 months if the letter included an acceptable reason for holding the mail
Which of the following contracts is "out the money" by the greatest amount? A. ABC Jan 50 call when the market price of ABC stock is 55 B. ABC Jan 50 call when the market price of ABC stock is 50 C. ABC Jan 50 put when the market price of ABC is 40 D. ABC Jan 50 put when the market price of ABC is 60
D. ABC Jan 50 put when the market price of ABC is 60 Calls go "in the money" when the market price rises above the strike price. Puts go "in the money" when the market price falls below the strike price.
What is the first age at which distributions must commence from a 401(k) Plan? A. 59 1/2 B. April 1st of the year after reaching age 59 1/2 C. 72 D. April 1st of the year after reaching age 72
D. April 1st of the year after reaching age 72
Which statement is TRUE about Coverdell Education Savings Accounts? A. Contributions are tax deductible; Distributions are taxable B. Contributions are tax deductible; Distributions are not taxable C. Contributions are not tax deductible; Distributions are taxable D. Contributions are not tax deductible; Distributions are not taxable
D. Contributions are not tax deductible; Distributions are not taxable Contributions to Coverdell Education Savings Accounts are not tax deductible; and distributions from Coverdell Education Savings Accounts to pay education expenses are not taxable.
A working couple has a combined income of $150,000. Neither are covered by an employer sponsored pension plan. Which statement is TRUE about IRA contributions by these persons? A. IRA contributions are prohibited since these persons can be covered by an employer sponsored plan B. IRA contributions are prohibited since these persons' income exceeds allowed limits C. IRA contributions are permitted; however the contribution amount is not deductible D. IRA contributions are permitted with the contribution amount being tax deductible
D. IRA contributions are permitted with the contribution amount being tax deductible
A registered representative believes that municipal bonds may be an appropriate investment for her customer. In order to determine whether such a recommendation would be suitable, all of the following would be considered EXCEPT: A. The state in which the customer resides B. The components of the customer's existing portfolio C. Whether the customer is subject to the alternative minimum tax D. The cash balance in the customer's IRA available to invest
D. The cash balance in the customer's IRA available to invest
All of the following statements are true about opening a new margin account for the customer of an investment adviser EXCEPT: A. The customer must sign an advisory agreement with the adviser B. The customer must sign a power of attorney, giving trading authorization to the adviser C. The customer must sign a margin agreement D. The investment adviser must sign a margin agreement
D. The investment adviser must sign a margin agreement
All of the following statements are true about a member firm's Business Continuity Plan EXCEPT the BCP must: A. address how the member firm would deal with a significant business disruption B. include scenarios of increasing severity and how the member plans to respond C. be provided to any new customer at account opening D. be provided to customers every 36 months after the account is opened
D. be provided to customers every 36 months after the account is opened Each member firm must prepare a Business Continuity Plan that addresses the possibility of significant business disruptions and how the member plans to respond to events of increasing severity. Customers must be given a summarized version of the BCP at account opening. Additionally, the BCP must be posted on the member firm's Web site and must be mailed to customers on request.
Which statement is FALSE about a clearing broker-dealer? A. clearing broker-dealers maintain custody if customer funds and securities B. clearing broker-dealers send customers trade confirmations and statements of account C. clearing broker-dealers are owners of Depository Trust and Clearing Corporation D. clearing broker-dealers cannot process trades for other broker-dealers
D. clearing broker-dealers cannot process trades for other broker-dealers Clearing firms process trades not only for their own customers, but also for the customers of their introducing broker-dealers.
Under FINRA rules, all of the following are necessary to open a corporate account EXCEPT: A. corporate resolution B. corporate seal C. corporate charter D. corporate minutes
D. corporate minutes To open a corporate account under FINRA rules, a corporate resolution bearing the corporate seal must be obtained. In addition, a copy of the corporate charter must be obtained as part of the firm's CIP (Customer Identification Program) procedures. There is no requirement to obtain minutes of corporation's Board of Directors meetings.
Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would NOT generally inquire about the customer's: A. existing investment holdings B. current investment objective C. financial situation and needs D. daily living expenses
D. daily living expenses
If the writer of a call contract is assigned, the call writer must: A. pay the strike price for the security in next business day B. pay the strike price for the security in 2 business days C. deliver the security the next business day D. deliver the security in 2 business days
D. deliver the security in 2 business days If the writer of a call is "assigned," this means that the OCC has assigned an exercise notice to that call writer. The call writer is then obligated to deliver the stock to the call holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.
A customer buys 100 shares of ABC stock at $58 and wants to hedge the position. The customer should: A. go short a call B. go short a put C. go long a call D. go long a put
D. go long a put In order to hedge a long stock position against a downside market move, the best choice is to buy (also known as "going long") a put. The long put option allows the holder to put (sell) the stock at the exercise price if the market falls - protecting the stock position from downside market risk.
A client buys an ABC Jul 50 call @ $2 when the stock is trading at $55. The contract: A. is out of the money B. has 2 points of intrinsic value C. has 3 points of intrinsic value D. has 5 points of intrinsic value
D. has 5 points of intrinsic value In the money and out the money amounts for options contracts disregard the premium amount. The holder of this call has the right to buy ABC stock at $50 per share when the market price of ABC is at $55, so the contract is 5 points "in the money" - meaning there is a 5 point profit at this moment to the holder, disregarding the premium paid. If the question asked "What is the profit or loss?" then the answer would be a 3 point profit because 2 points were paid in premiums.
The seller of a DEF Jan 50 call is covered by all of the following EXCEPT: A. long 100 shares of DEF stock B. long an escrow receipt for 100 shares of DEF stock C. long 1 DEF Feb 40 Call D. long $5,000 of cash in the account
D. long $5,000 of cash in the account If the seller (writer) of a call is exercised, he or she must deliver the stock at the strike price. A seller of a call who does not own the stock is said to be "naked" because, if exercised, that person must buy the stock in the market and deliver it at the strike price - and the market price will be higher (otherwise the contract would not be exercised by the holder). The seller is said to be "naked" because he or she is exposed to unlimited upside market risk. Now if the seller of the call actually owns the underlying stock, then that stock is delivered on an exercise - this "covers" the seller of the call. He or she is no longer exposed to market risk. The stock can be held at the broker or at an OCC-approved depository bank (evidenced by an escrow receipt for the stock). If the seller owns a call that can be exercised to buy the stock at no loss, then he or she is covered as well. Thus, Choice C covers the sale of the Jan 50 Call, because if that contract is exercised, the long Feb 40 Call can be exercised and the stock is purchased at $40, sold at $50, and there is a $10 per share gain. Choice D does NOT cover the sale of the Jan 50 Call. If the call is exercised, the customer must deliver the stock at $50 that he or she does not own, and the price in the market could have risen to an astronomical amount. Thus, a fixed amount of cash cannot be used to cover the sale of a call.
Which of the following is a bullish income-producing strategy? A. short stock coupled with short call B. short stock coupled with long call C. long stock coupled with long call D. long stock coupled with short call
D. long stock coupled with short call Buying a stock and selling a call against the position is called covered call writing. This strategy is bullish because of the core long stock position. The premiums collected from the call writing produce income for the client but limit his or her upside if the stock is called away.
A customer sells short 100 shares of DEF stock at $63 and sells 1 DEF Oct 60 Put @ $6. This strategy is: A. very bullish B. moderately bullish C. very bearish D. moderately bearish
D. moderately bearish When a client shorts stock and writes a put against the core bearish stock position it is known as "covered put writing." This strategy is used by short sellers who seek to generate income against an existing short position. If the stock falls sharply, the put will be exercised, and the writer will be forced to buy back the shares at the strike price. For this reason, covered put writing is a bearish strategy with limited profit potential.
Section 529 plans generally permit: A. tax deductible contributions by the donor B. tax free withdrawals for first time home buyers C. taxable distributions to the recipient to pay for higher education D. non-taxable distributions to the recipient to pay for higher education
D. non-taxable distributions to the recipient to pay for higher education Any adult can open a Section 529 Plan account to pay for the higher education expenses of a beneficiary. Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level, and starting in 2020, $10,000 in total can be used to pay off qualified education loans. There is no tax deduction for the contribution; earnings build tax-deferred; and distributions to pay qualified higher education expenses are not taxable.
Aggregate contributions into 529 Plans are: A. subject to dollar limits at both the federal and state level B. not subject to dollar limits at either the federal or state level C. only subject to dollar limits at the federal level D. only subject to dollar limits at the state level
D. only subject to dollar limits at the state level Also note that gifts given into a 529 Plan will be subject to gift tax paid by the donor if they exceed the annual federal gift tax exclusion amount - $16,000 in 2022.
To open an options account, inquiry is NOT required regarding: A. net income B. net worth C. liquid net worth D. parent's net worth
D. parent's net worth
To sell a variable annuity, what licenses are needed? A. series 6 B. series 7 C. series 6 or series 7 D. series 6 or series 7 plus a state insurance license
D. series 6 or series 7 plus a state insurance license Because variable annuities are both a securities and insurance product, a state insurance license is needed, in addition to the federal Series 6 (Investment Company Securities) or Series 7 (General Securities) license.
Which statement is TRUE about options contracts? A. Long calls go "out the money" when the market price rises above the strike price B. long puts go "out the money" when the market price falls below the strike price C. short calls go "out the money" when the market price rises above the strike price D. short calls go "out the money" when the market price falls below the strike price
D. short calls go "out the money" when the market price falls below the strike price
Which of the following option positions is used to generate additional income against a short stock position? A. long call B. short call C. long put D. short put
D. short put
If an equity put holder exercises a contract, the holder must deliver: A. cash in 1 business day B. stock in 1 business day C. cash in 2 business days D. stock in 2 business days
D. stock in 2 business days
Which procedure is NOT required for discretionary accounts? A. a written POA must be obtained from the customer before discretionary trades are effected B. every discretionary order ticket must be approved promptly by the manager or principal C. every order ticket initiated by the registered rep. must be marked "discretionary" D. the customer must be contacted before each discretionary trade is executed
D. the customer must be contacted before each discretionary trade is executed In a discretionary account, the customer must give a written power of attorney; the principal must approve all discretionary orders "promptly" (meaning by the end of the day); and every order ticket that is discretionary must be marked as such. There is no requirement to contact a customer before executing each discretionary trade.
In order to recommend a variable annuity to a customer, all of the following statements are true EXCEPT: A. the customer must be informed, in general terms, of the material features of the product B. the rep. must believe that the customer would benefit from the product's features C. the rep. must believe that the variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable D. the customer, rep. and branch manager must all sign a statement that all required representations and determinations were completed
D. the customer, rep. and branch manager must all sign a statement that all required representations and determinations were completed In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that the: customer has been informed, in general terms, of the material features of the product; customer would benefit from one or more of the product's features; and particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable. The representative must sign a statement that all required representations and determinations were completed. Note that there is no customer signature here!
A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statement is TRUE? A. there will be no tax liability B. there will be regular tax liability, but no 10% penalty tax liability C. there will be a 10% penalty tax liability, but no regular tax liability D. there will be both regular tax liability and a 10% penalty tax liability
D. there will be both regular tax liability and a 10% penalty tax liability Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed.
An institutional investor will open a prime brokerage account for all of the following reasons EXCEPT: A. consolidation of account positions with one broker B. lower financing costs on margined positions C. to facilitate reporting and recordkeeping of all transactions D. to achieve lower commission costs by using one executing broker
D. to achieve lower commission costs by using one executing broker The hedge fund, in return for sending trades to different executing brokers at full commission rates, gets valuable research and recommendations in return. By using a prime broker to consolidate all positions, the hedge fund gets lower financing costs on borrowed funds and "front of the line" status when it wishes to borrow securities to effect short sales.
What is the maximum potential loss for a customer who is short 100 shares if ABC stock at $33 and short 1 ABC Jan 35 Put at $6? A. $3,300 B. $600 C. limited D. unlimited
D. unlimited If the market rises, the put contract expires, but the customer is responsible for covering the short stock position. The potential loss on the remaining short stock position is unlimited, since the market can rise an unlimited amount.
A customer buys 100 shares of XYZ at $49 and buys 1 XYZ Jan 50 Put @ $5. The maximum potential gain is: A. $500 B. $4,400 C. $5,500 D. unlimited
D. unlimited Since the customer has a long stock position, his potential gain is unlimited. If the market moves up, he or she lets the put expire "out the money" and sells the stock in the market at the higher price.
