Test topics 1 Equity

A large institution dealing with several different broker-dealers would probably find it beneficial to open A) a combined cash and margin account. B) an institutional brokerage account. C) an accredited investor account. D) a prime brokerage account.

.D) a prime brokerage account. A prime brokerage account is one in which a customer—generally an institution—selects one member firm (the prime broker) to provide custody, trading, and other services, while other firms, called executing brokers, typically execute most of the trades placed by the customer.

An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true? He must file Form 144 to sell the shares. He does not have to file Form 144 to sell the shares. He is considered an affiliated person. He is not considered an affiliated person. II and IV B) I and III C) I and IV D) II and III

2 & 5 Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. Certain family members, such as a spouse or other immediate family member residing in the same home, are required to combine holdings. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.

A customer buys 100 shares of HEX at 52, and at the same time, sells a HEX call for a premium of 4. What is his margin call deposit? A) $2,200 B) $1,560 C) $2,600 D) $1,300

2,200 The margin call for the purchase of the stock is $2,600, and this is reduced by the sale of the call ($400) for a net of $2,200.

If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $600 cash B) $600 in stocks C) $325 cash D) $381 in securities

600 cash Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised.

An inherent risk associated with auction rate securities (ARS) is the potential to have A) a reset rate. B) a failed auction. C) a clearing rate. D) a Dutch auction.

A failed auction An inherent risk associated with ARS is the potential for a failed auction. These can occur due to a lack of demand, resulting in no bids being submitted when it is time to reset the rate. ARS use a Dutch auction method to reset the clearing rate paid in the upcoming period.

GIN Corporation is offering shareholders the right to subscribe to a new issue of stock at $30 per share. The current market price of the GIN stock is $44 per share, and it takes 20 rights plus the subscription price to purchase one share. The theoretical value of a single right, prior to the ex-rights date, is approximately A) $0.67. B) $0.73. C) $1.50. D) $0.70.

A) $0.67. Because this is cum rights (before the ex-rights date), the formula is M ‒ S N + 1 Thus, $44 ‒ $30 = 14 ÷ 21 = $0.67 20 + 1 LO 3.f

One of your customers has $135,000 in her cash account. She also has a long margin account with a market value of $17,000, a debit balance of $10,800 and no SMA. The customer wants to open a custodial account for her niece and transfer money from the cash and the margin accounts into that account. How much can be transferred into the niece's account? A) $135,000 B) $141,200 C) $6,200 D) $15,000

A) $135,000 Custodial accounts for minors can only be opened as cash accounts. Clearly, the $135,000 in the cash account is no problem. Do not be concerned about the $15,000 annual gift limit because the question is not dealing with gift taxes. If the margin account had SMA, it could be withdrawn and the cash put into the child's account. Without SMA and with the account being restricted (below the 50% Regulation T requirement), it is only the money in the cash account that can be transferred.

An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24, and the investor immediately sells the stock in the market, what is the investor's profit or loss? A) $50 profit B) $150 profit C) $150 loss D) $50 loss

A) $50 profit The investor has the obligation to buy the stock at the strike price of 25. The stock is currently worth 24, which is a loss of 1. The investor's premium of 1.50 minus the loss of 1 leaves a net profit of 0.50 (0.50 × 100 = $50).

In April, a customer sold short 100 shares of QRS stock at $50 and simultaneously wrote 1 QRS Jan 50 put for a premium of $7. If the January put is exercised when the market value of QRS is 43 and the stock acquired is used to cover the short stock position, what is the customer's profit or loss per share? A) $7 gain B) $0 C) $7 loss D) $14 loss

A) $7 gain Because the stock is purchased on exercise of the short put for $50 and is used to cover the $50 short sale, the investor incurs no gain or loss on the stock. The customer keeps the $700 collected in premiums for a profit of $7 per share.

Trading in expiring options series concludes the same day as expiration at A) 4:00 pm ET. B) 11:00 pm ET. C) 12:00 pm ET. D) 5:00 pm ET.

A) 4:00 pm ET. The official close is 4:00 pm ET on the third Friday of the expiration month. Expiring options may be exercised until 5:30 pm ET on the same day.

An investor has a portfolio valued at $200,000 invested entirely in the stock of his employer, a manufacturing company with two key products. He believes he has his thumb on the pulse of the company regarding its financial health and tells you that he is comfortable with holding this single stock portfolio. Regarding the obvious lack of diversification, which other risks should be discussed? A)Business risk and regulatory risk B) Interest rate risk and timing risk C) Inflation risk and interest rate risk D) Liquidity risk and reinvestment risk

A) Business risk and regulatory risk Besides the lack of diversification, the other most prominent risks associated with a single stock portfolio would be business risk—the risk of losing principal due to the failure of an issuer to continue keeping the business successful. There could also be regulatory risk—the risk that changes in regulations can negatively impact a particular product or company. Timing risk has to do with trading in and out of the market and wouldn't be of much concern for a position intended to be held. Additionally, stocks are generally considered liquid. Interest rate and inflation risks are more associated with fixed-income (debt) instruments, not stocks.

Which of the following is least likely to be a risk concern to an investor in an oil and gas DPP? A)Deductions for intangible drilling costs B) Legislative risk C) Lack of liquidity D) Risk of an IRS audit

A) Deductions for intangible drilling costs The deductions for intangible drilling costs are a benefit rather than a risk. If the choice said excess intangible drilling costs, then the investor might be subject to the alternative minimum tax (AMT). On the exam, you can count on DPPs having liquidity risk. It is generally believed that tax returns showing ownership of a DPP have a greater audit risk. Because one of the features of a DPP is the tax treatment, a potential change to the tax laws by the Congress constitutes legislative risk.

Which of the following orders would be executed in a rising market? Buy stops Buy limits Sell limits Sell stops A) I and III B) I and IV C) II and IV D) II and III

A) I and III Buy limits and sell stops are entered below the current market and would be executed if the market were falling. Sell limits and buy stops are entered above the current market and would be executed if the market were rising.

A municipal bond in default is in good delivery form if past-due and current coupons are attached. the bond is insured. subsequently due coupons are attached. the issuer files a default guarantee letter with the Municipal Securities Rulemaking Board. A) I and III B) I and IV C) II and IV D) II and III

A) I and III To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: past due, currently due, and subsequently due. Insurance or letters of guarantee do not constitute good delivery.

Which of the following terms are associated with over-the-counter (OTC) trading? Market maker Specialist Auction market Negotiated market

A) I and III B) II and III C) II and IV D) I and IV The OTC market is a negotiated market. Within it, market makers are broker-dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

If a customer wishes to open a new account but declines to provide all of the financial information the member firm requests, which of the following statements are true? The member firm may open the account and make recommendations without meeting any other criteria. The member firm may open the account if it has determined (by other means) that the customer has the financial resources to carry the account and that trading is suitable. The member firm may not recommend any transactions unless the representative is able—through the information available—to make a suitability determination. The member firm may not allow trades in the account until the requested information is received.

A) II and III B) II and IV C) I and III D) I and IV If a customer refuses to provide financial information, the member firm may use whatever information is available to decide whether to open the account. Any recommendation made to a customer must be suitable, taking into account the customer's investment objectives, financial situation, and any other relevant information. If the information is not provided, the account may be opened, but no investment recommendations may be made.

Your customer's portfolio consists of 40% long-term government bonds, 20% preferred stock, and 40% common shares of utility companies. Which of the following may have the single largest impact on the entire portfolio? A) Interest rate movements B) Oil and gas price movements C) Corporate earnings D) Foreign currency fluctuations

A) Interest rate movements Of the four answer choices, interest rate movement is the most likely to impact each of the portfolio components. Interest rates and bond prices have an inverse relationship, and their movement often determines whether investors might seek out investment alternatives with higher returns, such as dividend-paying utilities and fixed-dividend preferred shares.

Why do hedge funds tend to limit the participation to a maximum of 100 investors? A) Keeping it to 100 or less avoids the need to register with the SEC. B) Having more than 100 investors makes the fund more difficult to control. C) Keeping it to 100 or less avoids the need to give the investors voting rights. D) The more investors in the fund, the greater the likelihood that some may want their money back before the end of the lockup period.

A) Keeping it to 100 or less avoids the need to register with the SEC. Under SEC rules, once the number of investors in a hedge fund exceeds 100, the fund will most likely have to register with the SEC. That puts many restrictions on the fund manager's flexibility.

A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account? A) The equity will remain the same. B) The equity will increase. C) The market value will increase. D) The debit balance will be reduced.

A) The equity will remain the same. Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.

ABC, Inc., has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-for-1 stock split? A) The par value would decrease to $5 per share. B) The number of shares outstanding would decrease by 50%. C) The retained earnings would be decreased by $10 million. D) The market price of the stock would double.

A) The par value would decrease to $5 per share. A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not affected by a stock split.

Which of the following would not be found in a municipal revenue bond resolution? A) Underwriting agreement B) Conditions of the maintenance covenant C) Terms of the rate covenant D) Reporting requirements regarding revenues collected

A) Underwriting agreement The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant. The underwriting agreement is between the municipality and underwriters, and it spells out the terms agreed to for the underwriting of a new issue.

Limited partners assisting the general partner to solicit new investors A) could jeopardize their limited partner status. B) is permitted if done within 90 days of her acceptance as limited partner. C) is permitted if stated in the partnership agreement. D) is permitted if no compensation is paid.

A) could jeopardize their limited partner status. If limited partners—either individually or as a group—become too involved with the business of the partnership, they could be considered general partners and lose their limited liability.

An investor wanting to know about the tax consequences of a direct participation program should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated except A) crops. B) oil. C) buildings. D) gas.

A) crops. Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered renewable assets.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except A) deferred compensation plans. B) 401(k) plans. C) profit-sharing plans. D) corporate pension plans.

A) deferred compensation plans. Deferred compensation plans are not qualified plans and may be discriminatory. 401(k), profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

An investor desiring a limited partnership investment with capital gains potential would mostlikely select one investing in A) raw land. B) oil and gas. C) equipment leasing. D) shopping centers.

A) raw land. Historically, raw land has been a source of appreciation. Shopping centers might appreciate in value but are oriented more toward current income. Equipment leasing offers income, and the asset ultimately depreciates. Oil and gas provide income as well, and the asset ultimately depletes.

A married couple has several individual and joint accounts with your firm. One spouse calls you and requests that you make a transfer of funds between the accounts. This would not present a problem if A) the caller is a signatory on both accounts. B) you verify the identity of the caller. C) the caller is a signatory on the account receiving the funds. D) you have the caller send the request in writing.

A) the caller is a signatory on both accounts. It is only when the party initiating the transfer of funds between accounts is not a signatory on both accounts that this request presents a problem. In that case, a principal of the firm needs to get involved.

The dividend payout ratio of common stock is found by dividing the annual dividend per share by A) the earnings per share. B) the capitalization per share. C) the book value. D) the market price.

A) the earnings per share. The key to the question is ratio, which in this case is the relationship between dividends per share and their source of earnings per share.

All of the following are true of real estate investment trusts (REITs) except A) they must pass along losses to shareholders. B) they must, to qualify under Subchapter M, distribute at least 90% of their net investment income. C) shares are publicly traded. D) they must invest at least 75% of their assets in real estate-related activities.

A) they must pass along losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not direct participation programs.

One of your customers is looking for growth with some income. It would not be suitable for you to recommend A) warrants with a five-year expiration. B) ADRs. C) common stock. D) convertible preferred stock.

A) warrants with a five-year expiration. Although warrants can provide growth if the underlying security's prices rises above the exercise price, they never produce any income. Each of the other three choices do. Preferred stock has limited growth possibilities, but this is a convertible preferred where the growth of the underlying common stock influences the price of the preferred. ADRs and common stock can provide income and growth. LO

An investor has a short margin account. The current market value of the stock is $1.50 per share, and the investor owns 1,000 shares. Compliance with SRO minimum maintenance requirements is met with account equity of A) $1,500. B) $2,500. C) $2,000. D) $1,950.

B) $2,500. For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500 (1,000 shares @$2.50) is greater than 100% of $1,500.

In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is A) $2,400. B) $5,600. C) $5,400. D) $2,000.

B) $5,600. The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600).

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered? A) Two stop orders B) A spread order C) Two limit orders D) A straddle order

B) A spread order A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less. (This is one order, not two.)

Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118½ at the close on Friday, April 1. A 30-day call is announced before the opening on Monday, April 4, at a price of 102. The stock is trading at $57.75. What should Reggie do? A) Hold the bond to maturity B) Convert the bond into the stock C) Redeem the bond at the call price D) Sell the bond

B) Convert the bond into the stock Reggie will not be allowed to hold the bond to maturity because it is being called. The real question is whether he should sell the bond, allow it to be called, or convert it to the underlying stock. Now that the call has been announced, the market value of the bond will fall to meet the call price. This occurs as a result of declining demand. (Who wants to buy a bond that is about to be called at a lower price?) Thus, redeeming the bond at the call price and selling the bond would both yield the same results: $1,000 times 102% equals $1,020. If he converts the bond, he will get the following results: 20 shares times $57.75 equals $1,155. Therefore, it makes the most sense to convert the bond.

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

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

Which of the following are characteristics of the volatility market index (VIX)? It is a bullish or bearish measure. It is a measure of implied expectations of market volatility. It is often referred to as the Chicago Board Options Exchange (CBOE) index. It is often referred to as the fear index. A) II and III B) II and IV C) I and III D) I and IV

B) II and IV The VIX is a measure of investors' expectations regarding market volatility. High or low readings are neither bullish nor bearish, but instead, reflect expectations of volatility in the S&P 500 over the next 30 days. This index is referred to as the fear index, and VIX options are traded on the CBOE.

Which of the following statements regarding a unit investment trust is not true? A) It charges no management fee. B) Overall responsibility for the fund rests with the board of directors. C) It is considered an investment company. D) It invests according to stated objectives.

B) Overall responsibility for the fund rests with the board of directors. A unit investment trust (UIT) has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.

Which of the following positions has an unlimited dollar risk? ) Short 1 ABC Jan 35 call; long 1 ABC Jan 40 call B) Short 1 ABC Jan 50 put; short 100 shares of ABC C) Short 1 ABC Jan 50 put D) Short 100 shares of ABC; long 1 ABC call

B) Short 1 ABC Jan 50 put; short 100 shares of ABC An investor faces unlimited dollar risk when short stock, short a naked call, or when a short stock position is combined with a short put. In this position, the unlimited risk of the stock is only protected on the upside by the premium received.

What is the total amount that may be invested in a Coverdell Education Savings Account (ESA) in one year? A) The current maximum per couple B) The current maximum per child C) The current maximum per parent D) The current maximum per family member

B) The current maximum per child An indexed maximum contribution may be invested in each child's Coverdell ESA every year. For instance, if a couple has three children, they may invest the current maximum into each of three accounts.

With bonds subject to a gross revenue pledge, the first priority will be to pay A) operation and maintenance. B) bond interest and principal. C) the first lien on the property. D) the sinking or surplus fund.

B) bond interest and principal. Bonds subject to a gross revenue pledge (gross lien revenue bonds) are backed by the gross revenues of the facility (meaning revenues before expenses). In this case, the first money disbursed is for payment of interest and principal. However, most revenue bonds only pledge net revenues to pay off revenue bonds. In the more common net revenue pledge, the first priority is operation and maintenance; the second priority is interest and principal.

All the following retail communications must be prefiled with FINRA except A) retail communications concerning the member firm's opening for business last month. B) retail communications concerning public DPPs. C) retail communications concerning options without previously providing an ODD. D) retail communications concerning investment companies with custom ratings.

B) retail communications concerning public DPPs. Retail communications concerning public DPPs do not need to be prefiled. Retail communications for all new member firms, concerning investment companies with customratings or options without previously providing an ODD must be prefiled with FINRA. New member firms, defined as being in their first year of business, must file retail communications with FINRA 10 business days in advance of use.

Under Regulation T, action by the broker-dealer is not required when A) the total amount of the transaction does not exceed $1,000. B) the amount due does not exceed $1,000. C) the amount due does not exceed $100. D) the amount due does not exceed $200.

B) the amount due does not exceed $1,000. Regulation T permits a broker-dealer to disregard any amounts due less than $1,000.

Many fixed-income investors diversify their portfolios by maturity. If one were investing in CMOs, that would be done by buying A) yield-based options. B) different tranches. C) serial bonds. D) different issuers.

B) different tranches Although CMOs technically have maturity dates, it is rare for one to ever last that long. The standard way to vary the expected return of principal is by using different tranches. Serial bonds are generally issued by municipalities and are not mortgage-backed. Different issuers has nothing to do with maturities and yield-based options might be used as a hedge, but not to diversify maturities.

Which of the following strategies would most effectively protect an investor with a short stock position? A) Buy a put B) Sell a call C) Buy a call D) Sell a put

C) Buy a call Purchasing a call on the security protects the customer from a loss in excess of the strike price plus the cost of the call, should the security rise in price.

A Japanese manufacturer sells recorders to a U.S. retailing firm. The manufacturer is to receive USD$1 million in 90 days. How can he best protect himself against a decline in the dollar? A) Sell yen puts B) Sell yen calls C) Buy yen calls D) Buy yen puts

C) Buy yen calls Because he is receiving U.S. dollars, his risk is that the U.S. dollar will go down in value against the Japanese yen. If the dollar goes down against the yen, the yen will rise. Therefore, to protect his risk against a rising yen, he should buy yen calls. The yen calls will increase in value if the yen rises.

Which of the following is not true in jurisdictions that recognize the marital property designation known as community property? A) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death. B) Community property laws do not apply to gifts. C) Community property applies to property that was owned individually before the marriage and is now joint property once the marriage has occurred. D) Community property laws do not apply to inheritances.

C) Community property applies to property that was owned individually before the marriage and is now joint property once the marriage has occurred. Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property, and laws in states that recognize community property ownership differ from jurisdiction to jurisdiction.

Which of the following best describes the investment characteristics of a high-quality long-term municipal bond? A) Low inflation risk, low default risk B) High inflation risk, high market risk C) High inflation risk, low default risk D) Low inflation risk, high market risk

C) High inflation risk, low default risk A longer term bond will be subject to more inflation risk. Because the quality of the bond is high, the level of default risk should be low.

Which of the following mortgage-backed securities would provide investors with the mostpredictable maturity date? A) Fannie Maes B) Targeted amortization classes (TACs) C) Planned amortization classes (PACs) D) Ginnie Maes

C) Planned amortization classes (PACs) PACs are planned amortization class collateralized mortgage obligations and have established maturity dates. Prepayment risk is transferred to the PAC companion—or support—class bonds.

Which of the following would have the least market risk? A) Corporate or municipal bonds with long-term maturities B) Fannie Maes C) Revenue anticipation notes D) AAA corporate debentures

C) Revenue anticipation notes Anticipation notes are the shortest term, which gives them the least market risk (the risk that price will fluctuate during the time left to maturity).

You are reviewing the information on a new customer's options account agreement. Which of the following strategies would require the severest scrutiny for suitability purposes? A) Writing covered call options B) Writing uncovered call options C) Taking long straddle positions D) Writing uncovered put options

C) Taking long straddle positions The riskiest of all options strategies is the uncovered (naked) call option. This is because the investor loses when the stock price rises and there is no limit (theoretically) as to how high a stock's price can go. In the case of a short put, the underlying security's price cannot drop below $0.00. Long positions, even with straddles, are limited loss strategies—the maximum loss is the premiums paid. Covered call options are a low-risk strategy.

A businessowner pays himself a salary of $80,000 per year. He employs his spouse and pays her $45,000 per year. What is the maximum contribution they may make to their traditional IRAs? A) They can contribute 100% of the lower income to one IRA only. B) No traditional IRA contributions can be made by businessowners or their spouses. C) They can each contribute 100% of earned income or the maximum allowable limit, whichever is less, to their individual IRAs. D) They cannot make contributions because their joint incomes are too high.

C) They can each contribute 100% of earned income or the maximum allowable limit, whichever is less, to their individual IRAs. They both may make annual contributions of 100% of earned income up to the maximum allowable limit, whichever is less, to their own respective IRAs.

ABC Corporation has outstanding a 7.75% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is true? A) An arbitrage opportunity does not exist in this situation. B) The bond is at parity with the stock. C) To profit in this situation, the investor should buy the bonds and short the stock. D) To profit in this situation, the investor should buy the stock and short the bonds.

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

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

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

A technical analyst notices that the short interest in a particular stock has been steadily rising. The analyst would take this as A) a neutral signal. B) a bearish signal. C) a bullish signal. D) an indication that interest rates are rising.

C) a bullish signal. The short interest indicator monitors the number of outstanding shares that have been sold short. Although it seems counterintuitive, as that number increases, it is a bullish sign to the technicians. The key is that those shares will have to be bought at some time to cover the short positions. When that time comes, the demand for the shares will force the stock's price

If a customer buys 1 XYZ Jan 40 call and 1 XYZ Jan 40 put, paying total premiums of $650, and XYZ becomes worthless, the result is A) a gain of $650. B) a loss of $650. C) a gain of $3,350. D) a loss of $3,350.

C) a gain of $3,350. This is a long straddle in which breakeven points are established by adding and subtracting the combined premiums (6½ points) from strike (breakeven points are 46½ and 33½). The customer makes money if the stock moves above 46½ or below 33½. As the stock becomes worthless, the customer earns a 33½ point gain on 100 shares, or $3,350.

All of the following are allowable municipal dealer quotes except A) bona fide quotes. B) requests for bids only. C) an unidentified nominal quote. D) requests for offers only.

C) an unidentified nominal quote. Municipal Securities Rulemaking Board Rule G-13 requires municipal brokers and dealers to give bona fide bids and offers for municipal securities. (Bona fide quotes are those good for trading.) It also allows for requests for bids (BW = bids wanted) and requests for offers (OW = offers wanted). A nominal quote (those for informational purposes only) is permissible, but only if it is identified as such.

Failure to honor a firm quote is called A) front running. B) trading ahead. C) backing away. D) interpositioning.

C) backing away. Failure to honor a stated quote is a rules violation called backing away.

Limited partners have the right to do all of the following except A) inspect and copy partnership records. B) vote to remove the general partners. C) choose the assets for the partnership. D) sue the general partners for damages if he acts outside of his authority.

C) choose the assets for the partnership. All of these are rights of the limited partner except choosing the assets to be purchased for the partnership, which is a function of the general partner.

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

C) nonaccredited investors to whom the security is sold. Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued or the number of accredited investors who may purchase the shares.

Inverse exchange-traded funds, also known as reverse or short funds, are managed to A) be profitable only when interest rates are rising. B) be used only by professional traders and market makers. C) perform contrary to a benchmark market index such as the S&P 500. D) outperform a benchmark market index such as the S&P 500.

C) perform contrary to a benchmark market index such as the S&P 500. Inverse funds, which are also commonly referred to as short funds, try to deliver returns that are the opposite of the benchmark index they are tracking. When they are exchange traded, they can be bought on margin and are priced throughout the trading day like other exchange-traded products. They are available to individual public investors and firm proprietary traders as well.

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should A) convert the bonds into common and sell the converted shares. B) continue to hold the bonds. C) tender the bonds. D) sell the bonds at the current market price.

C) tender the bonds. The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50).

All of the following are true of stockholders' equity except A) that it is reflected in the book value of the stock. B) that it is also called net worth. C) that it is carried as an asset on the balance sheet. D) that it consists of stock issued, capital surplus, and retained earnings.

C) that it is carried as an asset on the balance sheet. Stockholders' equity or net worth (total assets less liabilities) is what a stockholder is entitled to should a company liquidate.

The bond resolution includes all covenants between A) the bond counsel and the bondholders. B) the issuer and the bond counsel. C) the issuer and the trustee acting for the bondholders. D) the issuer and the Municipal Securities Rulemaking Board.

C) the issuer and the trustee acting for the bondholders. The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders.

Most mutual funds operate as regulated investment companies. This means that A) they register with the SEC under the Investment Advisers Act of 1940. B) their principal underwriter (sponsor) is a FINRA member. C) they qualify for special tax treatment under Subchapter M of the Internal Revenue Code. D) they register with the SEC under the Investment Company Act of 1940.

C) they qualify for special tax treatment under Subchapter M of the Internal Revenue Code. Triple taxation of investment income can be avoided if the mutual fund qualifies under Subchapter M of the IRC. To avoid taxation under Subchapter M, a fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount. This rule applies to management companies (open-end and closed-end) and UITs. That means ETFs are also included. Although not investment companies registered under the Investment Company Act of 1940, REITs can also take advantage of Subchapter M's tax benefits.

Junior security

Common stock last to receive money upon liquidation

An Eastern account underwriting of $100 million in municipal bonds is established. ALFA Securities agrees to underwrite 10% of the issue and sells out its allotment of $10 million. However, some of the other firms participating in the deal are not as successful, and $15 million worth of bonds remain unsold. What is ALFA Securities' financial obligation? A) $0 B) Pooled responsibility for $15 million C) $150,000 D) $1.5 million

D) $1.5 million Undivided liability in an Eastern account means this member is liable for 10% of the unsold bonds (10% × $15 million = $1.5 million).

A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A)$18,000. B) $11,750. C) $16,450. D) $25,200.

D) $25,200. Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $72,000.

A customer goes long an MMM Jan 40 put at 5 and writes an MMM Jan 50 put at 13. The customer will break even or profit when the market price is at all of the following except A) $42. B) $48. C) $45. D) $35.

D) $35 This is a bull spread; the investor wants the stock to rise. Breakeven for put spreads is computed by subtracting the net premium (8) from the higher strike price (50). If it stays above the breakeven price of $42, they will profit.

If your great-grandmother is interested in safety, liquidity, and tax-free income, which of the following would you recommend? A) Income bonds B) An exploratory oil and gas pool C) A high-yield income fund D) An insured short-term municipal bond fund

D) An insured short-term municipal bond fund High-yield income funds usually invest in low-rated bonds, and income bonds do not pay interest unless the board of directors declares a payment. An insured short-term municipal bond mutual fund is relatively safe, very liquid, and provides income free from federal tax.

A customer sold 100 shares of QRS short when the stock was trading at 19. If QRS is now trading at $14, and she wants to protect her gain, which of the following orders should she place? ) Sell stop at 13.75 B) Buy limit at 14 C) Sell limit at 14 D) Buy stop at 14.25

D) Buy stop at 14.25 A buy limit order is used to buy at a lower price (when the market moves down). A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading.

Which of the following real estate limited partnerships allows tax credits to the investor? A) Raw land B) New construction C) Existing property D) Historic rehabilitation

D) Historic rehabilitation Raw land partnerships seek appreciation. Existing property and new-construction partnerships seek passive income and tax deductions from business operations. Historic rehabilitation partnerships allow not just deductions, but actual tax credits.

Which of the following may be affected when a company buys machinery for cash? Shareholders' equity Current assets Total liabilities Working capital A) I and III B) I and IV C) II and III D) II and IV

D) II and IV The purchase of machinery for cash will reduce current assets and working capital.

Which of the following is least important to a municipal bond analyst? A) Debt service to annual revenues B) Tax collection ratio C) Revenue collection record D) Legality of the issue

D) Legality of the issue Municipal bond analysts are concerned with the financial aspects of municipal bonds to ensure that they do not default. Various financial ratios and collection records are critical to their analysis. The legality of the municipal issue, as determined by the legal opinion, is important to issuers.

Which of the following terms does not apply to municipal unit investment trusts (UITs)? A) Redeemable B) Regulated C) Registered D) Managed

D) Managed Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded, so the portfolio is not managed, but rather, overseen by a trustee.

Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid? A) Seven percent coupon with no premiums over par B) Eight percent coupon with premiums over par C) Six percent coupon with no premiums over par D) Six percent coupon with premiums over par

D) Six percent coupon with premiums over par In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the 6% coupon on the bonds.

Which of the following statements best describes the term churning? A) Making false or misleading statements to a customer for the purpose of inducing the customer to purchase or sell a security B) Purchasing the same security in more than one customer account at a time C) Manipulation of market prices by a firm D) Trading in a customer's account considered excessive and for which no discernible investment purpose is detected

D) Trading in a customer's account considered excessive and for which no discernible investment purpose is detected Churning is excessive trading for a particular customer's circumstances or exceeding what would normally be considered suitable. This is equally true for both discretionary and nondiscretionary accounts.

Long an ABC Apr 60 call and short an ABC Apr 70 call is A) a net credit spread. B) a calendar spread. C) a straddle. D) a net debit spread.

D) a net debit spread. This is a vertical spread, not a calendar spread. To determine whether it is a net credit or debit, look at the strike prices. For call options with the same expiry month, the lower strike price will always have a higher value. In this case, the investor is long the higher valued option, which gives a net outflow of cash to enter the entire position. (More money was spent on the lower strike price call than received for the higher strike price call.) Therefore, the investor has a net debit for her account.

An investor purchases a municipal bond at par for $10,000 on February 15, 1997. On August 15, 1997, if the investor sells the bond for $10,500, for tax purposes, the $500 profit is recognized as A) interest income. B) a long-term capital gain. C) a tax-free capital gain. D) a short-term capital gain.

D) a short-term capital gain. When municipal bonds are purchased at par and subsequently sold at a higher price, the resulting profit is taxed as a capital gain. Only interest income from municipal bonds is exempt from taxation. This gain is not classified as long-term because the investor did not hold the bond for more than one year.

Rulings under the Code of Arbitration Procedure A) may be appealed to the FINRA National Adjudicatory Council. B) are binding on members but not on customers. C) may be appealed to the SEC. D) are binding on all parties.

D) are binding on all parties. A customer or member who chooses to submit a claim or dispute to arbitration under the Code of Arbitration Procedure is bound by the arbitration decision, which is not subject to appeal by either party.

If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, she will pay no tax until she liquidates the shares. B) long-term or short-term capital gains rates, depending on the length of time the customer has held the fund shares. C) ordinary income tax rates on the capital gains and dividends. D) capital gains rates on capital gains distributions and ordinary income rates on dividends.

D) capital gains rates on capital gains distributions and ordinary income rates on dividends. Capital gains distributions are taxed as capital gains, with their holding status depending on how long the fund has held the securities, not how long the investor has held the mutual fund shares. Dividend distributions are taxed as ordinary income.

Once a variable annuity has been annuitized A) each annuity unit's value is fixed, but the number of annuity units varies with time. B) each annuity unit's value and the number of annuity units vary with time. C) the number of annuity units is fixed, and their value remains fixed. D) each annuity unit's value varies with time, but the number of annuity units is fixed.

D) each annuity unit's value varies with time, but the number of annuity units is fixed. During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. The value of an annuity unit varies from month to month according to the performance of the separate account, in comparison to the assumed interest rate.

The 5% markup policy applies to A) all of these. B) new issues. C) mutual funds. D) principal over-the-counter (OTC) trades.

D) principal over-the-counter (OTC) trades. The 5% markup policy applies to agency and principal nonexempt securities and transactions, both exchange and OTC traded. It does not apply to prospectus offerings (mutual funds and new issues).

The function of the Federal National Mortgage Association (FNMA) is to issue conventional mortgages. B) guarantee the timely payment of interest and principal on FHA and VA mortgages. C) provide financing for government-assisted housing. D) purchase FHA-insured, VA-guaranteed, and conventional mortgages.

D) purchase FHA-insured, VA-guaranteed, and conventional mortgages. The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.

All of the following may be used to service special tax bond issues except A) gasoline taxes. B) business license taxes. C) excise taxes. D) real estate taxes.

D) 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..

Your broker-dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is A) required to occur no later than the end of the month during which it was used. B) not required. C) required within 10 business days of the time it is first used or published. D) required at least 10 business days before first use or publication.

D) required at least 10 business days before first use or publication. Filing with FINRA is required at least 10 business days before first use or publication for retail communications having to do with options.

Net asset value (NAV) per share for a mutual fund can be expected to decrease if A) the issuers of securities in the portfolio have made dividend distributions. B) the securities in the portfolio have appreciated in value. C) the fund has experienced a net redemption of shares. D) the fund has made dividend distributions to shareholders.

D) the fund has made dividend distributions to shareholders. The NAV per share will rise or fall relative to the value of the underlying portfolio. If dividends are distributed to shareholders, the fund's assets decrease, and their per-share value will decline accordingly. Appreciation of the portfolio and dividends received will increase the value. Redemption of shares will have no impact on the NAV per share, as the money paid out is offset by a reduced number of shares outstanding.

A head and shoulders bottom formation is an indication of A) the reversal of an upward trend. B) a bullish market. C) a bearish market. D) the reversal of a downtrend.

D) the reversal of a downtrend. A head and shoulders bottom formation is also known as an inverted head and shoulders formation. It is that part of a graph in which a downtrend has reversed to become an uptrend. It is not, however, an indicator of the bullishness or bearishness of the market as a whole. It is an indication only of the direction of a trend, which may be either short or long in duration.

The term trading flat means A) the bond is in default. B) the price of the bond has remained level. C) the bond is sold without markup or commission. D) there is no accrued interest.

D) there is no accrued interest. When a bond trades flat, the buyer does not owe accrued interest to the seller. Trading flat means there is no accrued interest due. While it is true that a bond in default trades flat, one cannot say that the term trading flat means the bond is necessarily in default.

Typically, general obligation bonds are not sold short because A) they are backed by the full faith and credit of the issuing authority. B) Municipal Securities Rulemaking Board regulations prohibit short selling. C) they trade over the counter. D) thin markets may make it difficult to cover a short municipal position.

D) 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..

A resident of Minnesota is in the 28% federal tax bracket and the 4% state tax bracket. This person must pay both federal and state taxes on A)Federal National Mortgage Association (FNMA) pass-throughs. B) Minneapolis Housing Authority bonds. C) federal home loan bank notes. D) Treasury bills.

Federal National Mortgage Association (FNMA) pass-throughs. The interest income from most U.S. government and agency securities is exempt from state and local—but not federal—taxes. Mortgage-backed securities (such as FNMA and GNMA obligations) are subject to federal, state, and local taxes. The interest on municipal issues (like the Minneapolis Housing Authority bonds) is exempt from federal taxes and, because this investor is a Minnesota resident, state taxes as well.

Which of the following agency securities has the strongest backing of timely payment of principal and interest? A) Treasury notes B) GNMAs C) FNMA D) FHLMCs

GNMA Of the agency securities listed here, the only one that is a direct obligation of the U.S. government is the GNMA. The others are quite safe but are only a moral obligation. Please do not be fooled by the Treasury note - that is not an agency security. This is a perfect example of why it is so important to carefully read the question. This is a perfect example of why it is so important to carefully read the question.

Preemptive Rights

Give investors the right to maintain a proportionate interest in a company stock

Which of the following transactions in the same security will affect the holding period of a security held for 12 months or less? Buy a put Buy a call Sell short Sell a put A) I and III B) I and II C) II and IV D) II and III

I and III The holding period of a capital asset is based on the amount of time the asset is held at risk. When there is no longer the possibility of a loss, there is no longer any risk. Buying a put or selling short effectively removes the risk from a transaction and destroys any short-term holding period. The short-term holding period will not become a long-term holding period for tax purposes, as long as the offsetting position (put or short) is maintained.

A firm must provide a risk disclosure document to a customer before opening which of the following accounts? A) Transfer on death B) Custodial C) Partnership D) Margin

Margin All customers opening margin accounts must receive a risk disclosure document describing the risks associated with trading on margin (e.g., that a customer could lose more than the initial investment, or that the firm could sell out securities in the account to meet a maintenance call without providing prior notice to the customer). This document must also be provided to customers on an annual basis.

All of the following are used to back collateralized mortgage obligations except A) Fannie Mae. B) Ginnie Mae. C) Freddie Mac. D) Sallie Mae.

Sallie Mae is the Student Loan Marketing Association, which purchases student loans and packages them for the secondary market. The FNMA, GNMA, and FHLMC sell mortgage-backed securities.

An affiliate of an issuer that holds control stock for five months sells 1,000 shares for a $10,000 profit. How will this transaction be treated? A) Any profits can be kept by the seller, subject to tax. B) These short-swing profits must be disgorged from the holder of the stock to the issuing corporation. C) These short-swing profits must be escrowed by the issuer until the holding period is satisfied. D) The sale will be voided by the issuer and the stock returned to the original owner.

These short-swing profits must be disgorged from the holder of the stock to the issuing corporation. If control stock is sold before a six-month holding period, any profits are defined as short-swing profits, and the company receives the profits. The term disgorged refers to the profits being removed from the affiliate and given to the issuer.

A couple in retirement wants to add income to their account. Which of the following would be the least suitable? A) Credit put spreads B) Credit call spreads C) Writing uncovered calls D) Writing covered calls

Writing uncovered calls It should be noted that, pending other factors, engaging in options transactions may not be suitable at all for someone in retirement. All of the selections would initially add income to the account, but based only on the information given, writing uncovered calls would be deemed the least suitable, as it is the only strategy listed with unlimited maximum loss potential. While the other strategies listed all have risk associated with them, the risk is limited to a defined amount.

Common stock can be classified as

authorized issued outstanding treasury

ABC company has authorized 1 million shares of common stock. It issued 800,000 shares one year ago. It then purchased 200,000 shares for its treasury. How many shares of ABC stock are outstanding ?

issued stock - treasury stock = outstanding stock 600,000

A confirmation of each customer trade must be given or sent A) on the trade date. B) before the trade date. C) on or before the settlement date. D) before the settlement date.

jC) on or before the settlement date. A confirmation must be sent to a customer on or before the completion of the transaction (the settlement date).

for an investor who owns 100 shares valued at 20 per share 2:1 stock split results in

owning 20 shares at 10 per share