Unit 13&14 practice questions

Which of the following securities carries the highest degree of purchasing power risk? A) Short-term note B) Long-term, high-grade bond C) Convertible cumulative preferred stock D) Blue-chip stock

b. Long-term, high-grade bond -The longer a fixed-income investment is held, the more vulnerable the investor is to purchasing power risk from inflation. Although preferred stock is also a fixed-income investment, convertible preferred will increase in value with the underlying common stock.

A municipal bond dealer purchased $100,000 of municipal revenue bonds at a 3% yield less 3/8ths. The dealer marks the bond up by ½ point and reoffers them to his customers. The compensation to the firm on each bond is A) $5.00. B) $8.75. C) $10.00. D) $3.75.

a $5.00 -The price paid for the bonds is irrelevant. The important fact is that the dealer put on a markup of ½ point. That is $5 per bond.

A company has filed for an IPO at $20 par value. The IPO is priced at $30 per share. Where on the balance sheet is the extra $10 recorded? A) Capital surplus B) Retained earnings C) Excess par value D) Distributed dividends

a. Capital surplus -When new stock is issued, any funds paid for the stock in excess of the par or stated value is called capital surplus. In this case, it is the $10 above the $20 par. It might also appear on your exam as paid-in surplus.

Which of the following risks would benefit most from portfolio diversification? A) Default risk B) Interest rate risk C) Purchasing power risk D) Market risk

a. Default risk -Diversification works best with nonsystematic (unsystematic) risks. Default risk, the possibility of losing money when a specific company cannot pay off its debts, is a common case where spreading the risk around (diversifying) reduces risk. The other choices are all systematic risk, and diversification is not very useful for them.

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) Foreign currency fluctuations D) Corporate earnings

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.

Which of the following is a risk most often encountered when investing in common stock? A) Market risk B) Default risk C) Interest rate risk D) Inflation risk

a. Market risk -Common stocks have market risk because they move with the overall stock market. Market risk is a systematic risk, probably the one most investors think of when buying stock. Interest rate risk is associated with fixed-income securities. Their prices move inversely with interest rates. Debt securities also have default or credit risk. Investors use the ratings services to fit that risk with their tolerance. Historically, stocks have been a good hedge against inflation while debt instruments have not.

The most current information on new releases of municipal bonds can be found in A) The Bond Buyer. B) the broker-dealer's quote sheets. C) The Bond Buyer's Guide. D) Thomson's Muni Market Monitor (formerly Munifacts).

a. The Bond Buyer. -The Bond Buyer is a daily trade publication containing news about new municipal bond issues.

An investor wishing to determine the liquidity of a corporation would find which of the following most helpful? A) The current ratio B) The book value C) The price-to-earnings ratio D) The dividend payout ratio

a. The current ratio -The current ratio compares the company's current assets to its current liabilities. It is one of the two tested liquidity ratios. The other is the quick ratio (quick asset ratio or acid-test ratio). That is similar to the current ratio except the inventory is excluded.

Which of the following describes additional paid-in capital? A) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value B) Total of all residual claims that stockholders have against the corporation's assets C) May also be called earned surplus D) Total of all earnings since a corporation was formed, less dividends

a. The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value -Additional paid-in capital is the difference between the dollar amount received from the sale of stock and the stock's aggregate par value. Earned surplus is another name for retained earnings.

One of the critical terms used in the discussion of a wash sale is substantially identical. Not wishing to run afoul of the wash sale rule, an investor selling shares of XYZ common stock at a loss would need to avoid purchasing which of the following securities within the 30-day restricted period? A) XYZ convertible preferred stock B) XYZ cumulative preferred stock C) XYX convertible debentures D) XYZ callable preferred stock

a. XYZ convertible preferred stock -Substantially identical securities include those convertible or exchangeable into the common stock sold at a loss. That would be case with the XYZ convertible preferred stock. XYZ convertible debentures would also be in that category, but did you notice these were XYX not XYZ? Will the exam be that tricky? Could be, so it pays to read carefully.

Reinvestment risk is the chance that, after purchasing a bond, interest rates A) fall. B) rise. C) become volatile. D) remain stable.

a. fall. -Reinvestment risk is the danger that after purchasing a bond, interest rates will fall. This means that the fixed interest payments received over the remaining life of the bond will be reinvested at lower rates. The good news is that the price of the bond has probably risen due to falling rates.

If a corporation has a dividend payout ratio of 70%, the undistributed earnings will A) increase retained earnings. B) decrease book value. C) increase capital surplus. D) increase earnings per share.

a. increase retained earnings. -Retained earnings represent income that has not been paid out to shareholders.

For the purpose of reporting sales to the IRS, the method available to investors by the IRS that offers the most flexibility in anticipation of the investor's year-end tax needs is A) share identification. B) average cost basis. C) none of these. D) first in, first out.

a. share identification. -Share identification is the most flexible of the three methods. The investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs. For investors, the idea is to minimize tax liability, if possible, by limiting gains or maximizing loses in anticipation of what one's year-end tax liability might be.

The bond placement ratio, as shown in The Bond Buyer, is computed by taking A) the dollar value of new issues sold divided by the dollar amount of the new issues offered. B) the number of new issues unsold divided by the number of new issues offered. C) the dollar amount of new issues sold divided by the dollar amount of new issues unsold. D) the number of new issues divided by the 30-day visible supply.

a. the dollar value of new issues sold divided by the dollar amount of the new issues offered. -The bond placement ratio is the percentage of new municipal bonds offered last week that were sold last week. Although not a term you'll see on the exam, think of this as the success ratio. It reports how well the underwriters did in moving the week's new issues. For example, if $1 billion of bonds were offered during the week, and $700 million were placed (sold), that is a 70% placement ratio.

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

A C corporation's income statement renders the following information: pretax income: $2,000,000; dividends from preferred stock issued by other corporations: $100,000; interest paid on outstanding debentures: $200,000. This corporation has taxable income of A) $1,850,000. B) $2,050,000. C) $1,900,000. D) $2,100,000.

b. $2,050,000 -Remember the 50% dividend exclusion available to C corporations. All of the $2 million of pretax income is taxable along with half of the $100,000 in dividends. The interest is included (as the exam often does) as an extra number to confuse. Pretax income is always after all expenses including interest.

An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $38 per share. B) $47 per share. C) $41 per share. D) $44 per share.

b. $47 per share -This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.

An inverted head and shoulders formation would mean which of the following to a chartist? A) A bull market B) A reversal of a downtrend C) A bear market D) A reversal of an uptrend

b. A reversal of a downtrend -To chartists, head and shoulders formations indicate the reversal of market trends. An inverted formation would forecast the reversal of a downtrend. A head and shoulder's top formation would forecast the reversal of an uptrend.

If an investor practices value investing, which of the following stock types is he least likely to purchase? A) A stock with a low (P/E) ratio B) A stock with an above-average price-to-earnings (P/E) ratio C) A stock that is presently selling for two-thirds of net current assets D) A stock that has exhibited a high dividend yield in the past

b. A stock with an above-average price-to-earnings (P/E) ratio -A growth investor looks for stocks with above-average (P/E) ratios. Conversely, a value investor focuses on stocks with low P/E ratios, a low price-to-book value, and historically high dividend yields.

Income from which of the following is not partially exempt to a corporate investor? A) Preferred stock mutual funds B) Convertible bonds C) Common stock D) Preferred stock

b. Convertible bonds -Fifty percent of dividend income received from investments in common stock and preferred stock is excluded from taxation for a corporate investor. This exclusion applies to dividends from mutual funds where all of the portfolio securities are preferred or common stock.

Which of the following is not a characteristic of a money market fund? A) Portfolio of short-term debt instruments B) High beta C) Stable net asset value (NAV) D) Offered without a sales load

b. High beta -Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas.

If ALFA Securities, a broker-dealer, is a position-trading firm, which of the following statements is true? A) It is acting as a broker for customers. B) It is trading for its own account. C) It is violating NYSE rules. D) It is underwriting securities in the primary market.

b. It is trading for its own account. -Position trading is simply trading as principal, or dealer, for a firm's own account. This is the typical case with a market maker. The opposite role is that of a broker, or an agent, purchasing or selling securities in the secondary market for customers.

A customer wishes to purchase 100 shares of ABC for $35 but does not wish to be charged a commission. To accommodate this request, the member firm purchases the shares for the customer in its proprietary trading account and sells the shares to the customer with a markup. This trade is A) a cross transaction. B) a principal transaction. C) a proceeds transaction. D) an agency transaction.

b. a principal transaction. -This is an example of a riskless principal trade. The member firm that bought the shares already knows who it will sell to and did not incur inventory risk. While this may seem like an agency trade, the firm is still selling from its own inventory, making it a principal transaction.

If a chart indicates that both the Dow Jones Industrial Average and the advance/decline line have been increasing since January, and the advance/decline line continues to rise, the market should A) turn down moderately. B) continue to rise. C) not change. D) turn down sharply.

b. continue to rise. -A rising advance/decline line indicates that more stocks are rising in price than falling. A rising advance/decline line is a bullish indicator.

Regressive taxes would include A) estate tax. B) sales tax. C) personal income tax. D) gift tax.

b. sales tax. -A regressive tax is one that is flat regardless of the amount being taxed. Sales tax is probably the most common of those. Certain excise taxes, such as fuel tax, are also regressive because the percentage of tax levied is level. Progressive taxes are those where the tax rate increases as the taxable amount increases. The most familiar is personal income tax. Gift and estate taxes are also progressive.

All of the following may be cited to justify a markup on a stock sold from a broker-dealer's inventory except A) the security's price. B) the dealer's cost. C) the availability. D) the overall value of the transaction.

b. the dealer's cost. -The dealer's cost is not a legitimate factor in determining the markup on a stock.

If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities as of April 15 of the year in which the gift is made. B) the market value of the securities on the date of gift. C) the market value of the securities as of December 31 of the year in which the gift is made. D) the cost of the securities.

b. the market value of the securities on the date of gift. -If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is the equity of SSS Corporation's shareholders? A) $170,000 B) $980,000 C) $410,000 D) $1,150,000

c. $410,000 -Total assets minus total liabilities equals shareholders' equity ($780,000 - $370,000 = $410,000).

ABC, with 3 million shares outstanding, reports after-tax earnings of $7.5 million. Annual cash dividends total $1 per share. The dividend payout ratio is A) 20%. B) 33%. C) 40%. D) 25%.

c. 40% -To compute this ratio, multiply the $1 dividend by 3 million shares to get the total dividend paid of $3 million. $3 million is 40% of the $7.5 million in earnings available to common stockholders.

A couple with children ages 13 and 8 have $200,000 saved to put toward their children's college education. Which of the following would be most suitable for these investment dollars and objective? A) 60% equities and equity funds, 30% T-bills, 10% corporate bonds B) 10% zero coupon bonds, 90% corporate bonds C) 80% zero coupon bonds, 20% T-notes D) 60% equities, 40% corporate bonds

c. 80% zero coupon bonds, 20% T-notes -Of the portfolio mixes presented, zero coupon bonds, which are purchased at a discount and mature at face value, are a suitable investment for future anticipated expenses such as college tuition. The T-notes, which are medium-term U.S. government securities, would additionally be a suitable investment where risk of principal loss wouldn't be a concern like it would be with equities.

An investor looking for current income while wishing to reduce interest rate risk would most likely find which of the following investments suitable? A) A U.S. Treasury note maturing in eight years B) U.S. Treasury STRIPS maturing in five years C) A bond unit investment trust (UIT) with a duration of five years D) A $100 par preferred stock callable at 102 in three years

c. A bond unit investment trust (UIT) with a duration of five years -One of the features of a unit investment trust is that it has a defined end date. The bonds held in the UIT in our question all mature in five years. Regardless of how high current market interest rates rise, bonds pay off at face value when they mature. The longer the investor has to wait for maturity, the greater the interest rate risk. That makes the Treasury notes a less acceptable choice. You can assume that a callable security, preferred or debt, is not going to be called unless interest rates go down. Remember, when interest rates decline, fixed income investment rise in price so the investor would not want the stock called away. The STRIPs will mature in five years but, as zero coupon securities, will pay no income in the interim.

A technical analyst would find which of the following to be a bullish indicator? A) More odd-lot purchases than sales B) A head and shoulders top C) An increase in the short interest D) More declines than advances

c. An increase in the short interest -As the short interest increases, it is a bullish signal to technicians. Those short sales are going to have to be covered one day and that buying pressure is bullish on the stock. A head and shoulders top is bearish - it signifies that the market has reached a top. Odd-lot purchasers (the little guy) are always buying and selling at the wrong time. When they are buying more than selling, it is a sign that the market price of the stock is soon going to fall. When the advances outnumber the decliners, it is bullish. When it is reversed, as in the answer choice, it is bearish.

Which of the following statements regarding the Bond Buyer 20 bond index are true? I. It includes only GO bonds. II. It includes both GO bonds and revenue bonds. III. It is computed weekly. IV. It is computed monthly. A) II and IV B) I and IV C) I and III D) II and III

c. I and III -The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week.

An investor purchases 100 shares of XYZ common stock for $70 and sells it one year later for $50. Which of the following activities would violate the wash sale rule? I. Purchasing an XYZ call option 20 days after the sale II. Purchasing an XYZ put option 20 days after the sale III. Purchasing 100 shares of XYZ common stock 20 days after the sale IV. Selling short 100 shares of XYZ common stock 20 days after the sale A) III and IV B) I and II C) I and III D) II and IV

c. I and III -The wash sale rule is violated when an investor sells a security at a loss and purchases the same or a substantially identical security within 30 days of the sale date. The IRS considers a call option substantially identical to the underlying stock because it represents the right to buy the shares.

Which items would change if a company buys equipment for cash? I. The working capital II. The total assets III. The total liabilities IV. The shareholders' equity A) III and IV B) IV only C) I only D) I and II

c. I only -The general balance sheet formula is assets equals liabilities plus shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it affects neither total liabilities nor equity.

Most taxes in the U.S. fit into one of two categories. They are either progressive or regressive. Which of the following taxes are known as progressive taxes? I. Sales II. Cigarette III. Income IV. Estate A) I and III B) I and II C) III and IV D) II and IV

c. III and IV -With a progressive tax, such as income and estate taxes, the percentage amount increases as the taxable amount increases. Sales and cigarette taxes are regressive because everyone pays the same percentage tax regardless of their income.

Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Absent any instructions to the contrary, for tax purposes, the client will report a short-term capital A) loss of $200. B) gain of $300. C) gain of $400. D) gain of $800.

c. gain of $400. -Unless the client gives specific instructions, the IRS will always use the FIFO method of determining the shares sold. In this case, it would be the 100 purchased in February at $50 and the 100 purchased in April at $52. That is a $300 profit on the February purchase and a $100 profit on the April one. That totals $400. Because all transactions are in the same year, any gain (or loss) is short term.

When examining the portfolio of a municipal bond client, you notice that every bond is Aaa or Aa rated. In addition, each bond matures at about the same time and the coupon rates do not vary by more than 50 basis points. You also notice that over 10 different states are represented by the issuers with no state being represented more than twice. It would appear that this client has used A) quality diversification. B) duration diversification. C) geographical diversification. D) interest rate diversification.

c. geographical diversification. -Diversification is a proven way of mitigating certain risks. A popular method in the municipal bond industry is to diversify by purchasing bonds issued in different parts of the country. There are other forms of diversification, but none of those are employed by this client. The coupon rates are all about the same. The quality is all about the same, as are the maturities (duration).

All of the following appear on a corporation's balance sheet as fixed assets except A) computer equipment. B) furniture. C) inventory. D) real estate.

c. inventory. -Inventory is considered a current asset—not a fixed asset—because the company expects to convert its inventory into cash within a short time. The other choices are fixed assets and cannot be liquidated easily.

The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which, $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Due to obsolescence, Acme sells the lathe for $6 million. The impact of this sale on the company's financials would be that A) working capital would decrease. B) long-term debt would increase. C) retained earnings would decrease. D) paid-in capital would decrease.

c. retained earnings would decrease. -Acme's net worth is currently $47 million. Net worth is total assets ($72 million minus total liabilities of $25 million equals $47 million. Or, add together the stock and surplus ($18 + $7 + $22 = $47 million). When the lathe is sold for $2 million less than its value on the books, total assets drop to $70 million, causing a $2 million decrease to net worth. Nothing has changed with the stock, so it is the retained earnings that, so to speak, take the hit. Working capital goes up because we have replaced a fixed asset with cash (the $6 million proceeds from the sale).

Reasons to suggest that your customers name a beneficiary for their accounts would include all of the following except A) the assets generally get into the hand of the heir(s) without delay. B) ensuring the property goes to the proper person. C) saving income taxes. D) avoiding probate.

c. saving income taxes. -While naming a beneficiary may save on estate taxes by using the marital deduction (not tested), passing property through death does not incur income taxes. With a named beneficiary, probate can be avoided and, of course, it limits the disputes on how the property is to be divided when there are multiple heirs. Another benefit is the relatively short time it takes for the assets to be transferred to the heir or heirs.

If DMF Corporation issues $10 million of convertible debentures at par, all of the following balance sheet items will be affected immediately except A) the assets. B) the liabilities. C) the net worth. D) the working capital.

c. the net worth. -Net worth (equity in the company) remains unchanged. Assets and liabilities both increase, as does the working capital.

A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as A) growth. B) tactical. C) value. D) passive.

c. value. -Value investing is the strategy of selecting stocks that trade for less than their book value. Value investors actively seek stocks of companies with sound financial statements that they believe the market has undervalued.

If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $100,000 B) $90,000 C) $50,000 D) $0

d. $0 -Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.

On January 18, your customer sold 500 shares of MNO for a loss of $5 per share. If on March 1 she bought 3 MNO calls, how much of the loss could she declare for tax purposes? A) $1,500 B) None C) $1,000 D) $2,500

d. $2,500 Because the purchase of the calls took place more than 30 days after the sale, the transaction is not a wash sale. She may therefore declare the entire $2,500 as a loss.

At the birth of a grandchild, your customers, the child's grandparents, purchased 1,000 shares of XYZ stock at $10 per share in their JTWROS account. The child is now an adult and the grandparents gift all the shares to their grandchild when the stock price is $50 per share. If the donee sold all the shares at $55 per share, the tax consequences would be a capital gain of A) $55,000. B) $50,000. C) $5,000. D) $45,000.

d. $45,000. -The capital gain would be $45,000 ($55,000 - $10,000). If a gift is made of securities, the donee must use the original cost basis of the donor to calculate the gain or loss on a sale. In this case, the original cost basis for the grandparents was $10,000. The difference between that and the proceeds of $55,000 is a capital gain of $45,000. If the shares were inherited from the grandparents, the grandchild would have received the stock at a stepped-up cost basis, the price of the stock on the decedent's death. Using our numbers, that would be a capital gain of $5,000, the difference between the stepped-up basis of $50,000 and the proceeds of $55,000.

Which of the following is defined as profits after taxes and interest paid, less preferred dividends, divided by the number of shares of outstanding common stock? A) Book value per share B) Cash flow per share C) Price to earnings D) Earnings per share (EPS)

d. Earnings per share (EPS) -Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding determines EPS.

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) Last in, first out (LIFO) B) Wash sale rules C) Identified shares D) First in, first out (FIFO)

d. First in, first out (FIFO) -When a customer does not choose a method, the IRS uses FIFO. This will likely result redeeming shares with the lowest cost basis first, which creates a greater taxable gain.

Which of the following may be affected when a company declares a cash dividend? I. Shareholders' equity II. Total assets III. Total liabilities IV. Current assets A) III and IV B) II and IV C) I and II D) I and III

d. I and III -When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.

An investor wants to purchase fixed-income securities (bonds) as a safe haven because she is uncomfortable with risk associated with stock volatility currently in the market. Before making a suitable recommendation, a registered representative should advise that I. bonds are interest rate sensitive in all environments. II. bond prices are always stable when equities are volatile. III. bond prices can rise sharply when interest rates rise. IV. bond prices may fall as interest rates begin to rise. A) I and III B) II and III C) II and IV D) I and IV

d. I and IV -Bonds are interest rate sensitive in all environments. Their prices have an inverse relationship to interest rate movements. Therefore, if interest rates begin to rise, bond prices will fall, exposing investors who sought them out as a safe haven to risk they might not have been aware of.

A company's changing from straight line to accelerated depreciation will I. increase income in the early years. II. decrease income in the early years. III. increase income in the later years. IV. decrease income in the later years. A) I and III B) II and IV C) I and IV D) II and III

d. II and III -Accelerated depreciation increases charged expenses during the early years of equipment life but decreases charged expenses during the later years.

Which of the following statements regarding the visible supply in The Bond Buyer is true? A) It is a weekly listing of bonds sold in the past 30 days. B) It is a daily listing of available bonds. C) It is the total of the bonds offered in the Blue List. D) It is a daily listing of bonds to be offered in the next 30 days.

d. It is a daily listing of bonds to be offered in the next 30 days. -The visible supply implies that the supply of bonds will be available for the visible future.

When a company issues additional preferred stock and bonds, which of the following will be the net result? A) Leverage is decreased. B) Leverage is not affected because one issue is equity, the other is debt, and the net effect on leverage is zero. C) It is impossible to tell without the specific amounts of equity and debt issued. D) Leverage is increased.

d. Leverage is increased. -Leverage is the use of investors' money at a fixed cost to benefit the common shareholders. Both preferred stock and bonds are fixed-rate issues. Therefore, issuing more preferred stock or bonds increases the leverage of the common stockholders.

Which of the following investments is most suitable for an investor seeking monthly income? A) Growth stock B) Mutual fund investing in small-cap issues C) Zero-coupon bond D) Money market mutual fund

d. Money market mutual fund -The money market mutual fund is the most suitable investment for an investor seeking monthly income. The other securities offer higher long-term growth potential, but they are not designed to provide monthly income.

Which of the following would be of least interest to a technical analyst? A) Short interest ratio B) Advance/decline line C) Trading volume D) Price-to-earnings (P/E) ratio

d. Price-to-earnings (P/E) ratio -Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer. P/E ratios are of greater interest to fundamental analysts.

Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory? A) Interest rate risk B) Liquidity risk C) Business risk D) Systematic risk

d. Systematic risk -Market risk, sometimes referred to as systematic risk, cannot be diversified away. The risk of investing in a single industry or sector can be diversified away by investing in several industries with returns not correlated to each other. A general downturn in the market, however, cannot be eliminated through diversification.

The FINRA 5% policy deals with markups, markdowns, and commissions. When acting as a dealer, what prices are used to compute the member firm's markup or markdown? A) The highest bid and highest ask for all market makers B) The lowest bid and lowest ask for all market makers C) The lowest bid and highest ask for all market makers D) The highest bid and lowest ask for all market makers

d. The highest bid and lowest ask for all market makers -The basis of the fairness of markups and markdowns under the 5% markup policy is the highest bid and the lowest ask shown for all market makers making a market for that security. This is the inside quote or inside market price because it shows the narrowest spread. Comparing the inside market to the price charged (or paid) to the retail customer determines the actual percentage. Depending on the circumstances, it may be 5%, more than 5%, or less than 5%.

The Bond Buyer's revenue index is which of the following? A) A daily balance of municipal revenue bond prices B) Yields of municipal revenue bonds with 20 years to maturity C) A daily composite average of municipal revenue bond yields D) Yields of municipal revenue bonds with 30 years to maturity

d. Yields of municipal revenue bonds with 30 years to maturity -The Bond Buyer's revenue index is an average yield of 25 revenue bonds with 30 years to maturity.

The result of declining inflation on outstanding bonds would be A) lower prices and lower yields. B) higher prices and higher yields. C) lower prices and higher yields. D) higher prices and lower yields.

d. higher prices and lower yields. -Declining inflation means declining interest rates. If interest rates decline, bond prices rise.

If the assets of a company did not change, but stockholders' equity declined, it follows that A) retained earnings increased. B) capital surplus decreased. C) liabilities declined. D) liabilities increased.

d. liabilities increased. -Stockholders' equity is assets minus liabilities. If assets stay the same, then an increase in liabilities will cause a decline in equity.

Growth companies tend to have all of the following characteristics except A) a high earnings retention ratio. B) low dividend payout ratios. C) potential investment return from capital gains rather than income. D) low price-to-earnings (P/E) ratios.

d. low price-to-earnings (P/E) ratios. -Growth companies have high P/E ratios and a low dividend payout ratio because they retain most, if not all, of their earnings. Investors anticipating fast growth bid up prices, so P/E ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income.

Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information A) by contacting the IRS. B) on a firm's income statement by subtracting preferred dividends from EBIT. C) on the firm's most recent balance sheet. D) on the firm's income statement indicated as earnings before interest and taxes (EBIT).

d. on the firm's income statement indicated as earnings before interest and taxes (EBIT). -EBIT is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company.

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor A) the Dow Jones Industrial Average. B) the Value Line Index. C) the betas of the S&P 500 stocks. D) the advance/decline line.

d. the advance/decline line. -The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

A corporation's income statement reports net income of $10 million for the year. The company has one million shares of 4% $50 par value preferred stock and two million shares of common stock. If the corporation paid a quarterly dividend of $0.60 per share of common stock, A) the earnings per share was $5 per share. B) the current return on the preferred stock was 4%. C) the retained earnings increased by $6.8 million. D) the dividend payout ratio was 60%.

d. the dividend payout ratio was 60%. -The dividend payout ratio is the percentage of the net income (after preferred stock dividends) paid out to the common shareholders. The net income is $10 million. The preferred dividend is $2 per share ($50 par times 4% = $2). With one million shares, the total preferred dividend is $2 million (1 million shares at $2 per share). Because the preferred dividend must be paid before any earnings are available to common stockholders, we subtract that $2 million from the net income. That leaves $8 million in earnings available to common. There are 2 million shares receiving an annual dividend of $2.40 ($0.60 quarterly). That means $4.8 million of the $8 million available is paid, or a ratio of 60% ($4.8 million ÷ $8 million = 60%).

A mother makes a gift of appreciated securities to her 10-year-old son. The son's cost basis in the stock is A) the market value of the securities on December 31 of the year the gift is made. B) the market value of the securities on the date of the gift. C) the market value of the securities on April 15 of the year the gift is made. D) the original cost of the securities to the mother.

d. the original cost of the securities to the mother. -When a gift of securities is made while the donor is alive, the original cost of the securities is the cost basis, not the value of the security on the date of the gift. Market value on the date of the gift is used to determine if gift taxes are applicable.

When considering the amount of commission or markup to charge, a member firm should consider all the following except A) the services offered by the member firm. B) the liquidity of the security. C) the price of the security. D) the price the member firm paid.

d. the price the member firm paid. -Member firms should never consider the price they paid as the basis for a markup. Instead, the inside market should be used when making a markup determination. Services offered by the firm, liquidity of the security, and the price of the security (in the open market) can all be used when determining the amount of commission or markup/down to charge.

The visible supply has been increasing steadily over the past 30 days. This is an indication that A) prices are likely to rise. B) yields are likely to fall. C) fewer new issues will be offered in the next 30 days. D) yields are likely to rise.

d. yields are likely to rise. -When the visible supply increases, it tells us that the number of bond issues coming to market is increasing. Greater supply puts downward pressure on prices. As bond prices fall, yields increase.

The ABC Corporation has a long-standing policy of maintaining a dividend payout ratio of 45%. ABC's net income for the year is $12 million, and there are 8 million shares of common stock outstanding. After a 3:2 stock split, the annual dividend per share is A) $0.45. B) $1.0125. C) $1.50. D) $0.675.

a. $0.45. -Take this systematically. A dividend payout ratio of 45% means ABC will distribute 45% of its net income to its common shareholders. Forty-five percent of $12 million is $5,400,000 in dividends. If there were 8 million shares before the split, there are now 12 million (8 times 3/2 = 24 divided by 2 = 12). Divide the amount available for common ($5.4 million) by the number of shares (12 million) to arrive at a dividend per share of $0.45.

A corporation has $12 million net income after taxes, 5 million common shares outstanding, and $10 million of 6% preferred stock ($100 par). What is the corporation's earnings per share (EPS)? A) $2.28 B) $1.20 C) $2.52 D) $2.40

a. $2.28 -Begin by calculating how much of the net income is available for common stockholders (net income after taxes minus preferred dividends equals earnings available for common stockholders). The preferred stockholders received $600,000 in dividends. There are two ways to determine that figure. We are told that the dividend rate is 6% and that means 6% of the par value. With a total par value of $10 million, a 6% dividend will be $600,000. Alternatively, you can figure it on a per share basis. If the par value per share is $100, then dividing the $10 million total par by $100 equals 100,000 shares. 100,000 preferred shares times $6 per share dividends ($100 par times 6% = $6 per share = $600,000). After subtracting $600,000 from the net income of $12 million, this leaves $11.4 million (earnings available for common stockholders). Compute EPS (earnings available for common stockholders / number of common shares outstanding = $11.4 million / 5 million shares = $2.28 per share EPS).

The parent of a customer originally paid $50 per share for a stock. When the parent died, the stock was inherited by a customer of yours. The price at the time of death was $60 per share. Your customer now sells the stock at $62. What is your customer's cost basis in the stock? A) $60 B) $55 C) $62 D) $50

a. $60 -The IRS allows a step-up in basis for inherited stock. The customer's cost basis is the fair market value of the stock on the date that the decedent died.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) $75 B) $100 C) None D) $40

a. $75 -Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. Hence, the investor has "bought back" the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. Look at this question as if it said, "On September 15, he purchased 25 shares of KLP stock." That washes out $25 of the loss, but the rest is okay.

A customer, age 62, wants to retire at age 64 and has accumulated investments in an IRA currently valued at $500,000. The IRA portfolio consisting of all mutual funds is allocated as follows: 70% growth funds, 10% corporate bond funds, and 20% sector funds. Still wanting to use mutual funds, which might be the mostsuitable reallocation of the portfolio as this customer nears retirement? A) 60% U.S. government bond funds, 30% broad market index funds, 10% growth funds B) 80% broad market index funds, 10% corporate bond funds, 10% U.S. government bond funds C) 30% municipal bond funds, 30% corporate bond funds, 40% growth funds D) 70% municipal bond funds, 20% broad market index funds, 10% sector funds

a. 60% U.S. government bond funds, 30% broad market index funds, 10% growth funds -Moving toward retirement, the reallocation should move the portfolio away from equities and sector funds toward fixed-income funds. U.S. government securities funds accommodate that, and the U.S. government securities within the fund are considered safe with no default risk. Coupling the U.S. government bond funds with smaller percentages in broad market index and growth funds that mirror the market can help the portfolio keep pace with inflation. Remember that utilizing municipal securities in a tax-favored account, such as an IRA, would be considered unsuitable because the interest paid by municipal bonds is already tax free.

Which of the following statements is true? A) A measure of a stock or portfolio's volatility is beta, and a measure of its performance is alpha. B) Alpha and beta each use different measures of overall performance expectations but cannot be used to measure volatility. C) Both alpha and beta are measures of volatility only, and neither measures performance. D) A measure of a stock or portfolio's volatility is alpha, and a measure of its performance is beta.

a. A measure of a stock or portfolio's volatility is beta, and a measure of its performance is alpha. -A stock's beta is a measure of its volatility in relation to the overall market. Alpha is a measure of performance that adjusts for risk, relative to a known benchmark.

An investor has a portfolio containing 60% equities, 5% debt instruments, and 35% options and futures. Which of the following would best describe this investor's investment style? A) Aggressive B) Moderate C) Conservative D) Moderate/Aggressive

a. Aggressive -All facets of the portfolio point toward aggressive. The dominate factor would be that over one-third of the portfolio consists of securities considered speculative in nature. Those would include derivative products such as options and futures, high-yield bonds (i.e., junk bonds), and others. Then note that the equity/debt allocation leans more toward aggressive than moderate and isn't conservative in any way.

An investor follows a program of buying 100 shares of Mutable Precision Castings Corporation (MPCC) common stock every six months. Over the past two years, the purchase prices have been: February 1, 2020, $50; August 1, 2020, $55; February 1, 2021, $60; August 1, 2021, $48. Needing some cash before the end of the year, the investor desires to sell 200 shares of the MPCC stock in November 2021. The investor is in the 35% income tax bracket and MPCC stock is trading at $53 per share. From a tax minimization standpoint, you would recommend selling the shares bought on A) August 1, 2020 and the shares bought on February 1, 2021. B) August 1, 2020 and the shares bought on August 1, 2021. C) February 1, 2020 and the shares bought on August 1, 2020. D) February 1, 2021 and the shares bought on August 1, 2021.

a. August 1, 2020 and the shares bought on February 1, 2021. -Minimizing taxes means selling the shares with the highest cost. The higher the cost, the lower the taxable gain. By default, the IRS would use FIFO (first-in, first out). That would mean using a cost basis of $50 for the first 100 shares and $55 for the next 100 (the two purchases in 2020). That is a cost basis of $52.50 per share (50 + 55 divided by 2, or $5,000 + $5,500 divided by 200 shares). When selling 200 shares at $53 each, there is a long-term capital gain of $100 (a $0.50 profit on 200 shares, or $10,600 minus $10,500). On the other hand, if the investor uses the identified shares method and tells the registered representative to sell the shares bought at $55 per share, and the shares bought at $60 per share, the cost basis is $57.50 per share (55 + 60 divided by 2), and that generates a $900 capital loss ($57.50 - $53 = $4.50 loss per share times 200 shares). Regardless of which shares are sold, the investor still receives $10,600 (200 times $53), but by selecting properly, the investor can have a $900 write off against other gains or, if there are no other gains, against income to the extent permitted by law.

One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock? A) Average cost basis B) Share identification C) FIFO D) Dollar cost averaging

a. Average cost basis -The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification. FIFO is the default method used by the IRS if an investor fails to choose. Share identification can frequently result in a lower tax bill, especially if the security was purchased at different intervals at varying prices.

Which of the following is not considered when trying to diversify a municipal bond portfolio? A) Price B) Geographical location C) Maturity D) Quality

a. Price -One of the purposes of diversifying a municipal bond portfolio is to spread the risk among the portfolio's issues. This can be accomplished by buying bonds of differing maturities, geographical locations, and quality.

A senior official of an issuer learns that nonpublic information was disclosed to an institutional shareholder of the issuer and/or an analyst covering the issuer at a private meeting. To avoid violating Regulation FD, the issuer must do which of the following? A) Promptly disclose the information as soon as reasonably practical, but in no event after the later of 24 hours or the start of the next day's trading on the New York Stock Exchange. B) Promptly disclose the information as soon as reasonably practical, but in no event after the later of 24 hours or the start of the next day's trading on the marketplace where that security trades. C) Nothing need be done as long as no trading is done based on the selective disclosure. D) Disclose the selective disclosure in its next SEC filing.

a. Promptly disclose the information as soon as reasonably practical, but in no event after the later of 24 hours or the start of the next day's trading on the New York Stock Exchange. -Regulation FD prohibits selective disclosure to analysts and institutional shareholders. The disclosures must be made to all shareholders of the issuer. The SEC has agreed that public conference calls, press releases or press conferences, and webcasts are FD-compliant methods of public disclosure. Please note that the alternative of the start of the next day's trading is based on the NYSE regardless of where the security is traded.

A new client, age 26, has begun to search for her first home. She's been told that finding the right home within her budget might take four to six months, depending on the availability of homes in the area she is targeting. With $45,000 currently in a checking account to use for the down payment, which of the following would represent the most suitable recommendation for those funds until the right home is found? A) Savings account (cash), money market account, short-term T-bills (1-3 months) B) U.S. government T-bonds, U.S. government T-notes, mutual fund A shares C) IRA, variable annuity D) U.S. government T-notes, GNMA, real estate direct participation program

a. Savings account (cash), money market account, short-term T-bills (1-3 months) -For short-term liquidity, savings or checking accounts are always options; money market funds would generally allow for a slightly better return, as would short-term T-bills. In light of the time horizon and liquidity needs, nothing long term (T-notes or bonds), illiquid (VAs, DPPs), or instruments not intended for short-term trading (mutual funds, particularly front load A shares) would be appropriate.

Which of the following is an automated system of delivering information relating to the market for municipal securities? A) Thomson's Muni News or Muni Market Monitor (Munifacts) B) The Bond Buyer C) The Blue List D) INSTINET

a. Thomson's Muni News or Muni Market Monitor (Munifacts) -Thomson's Muni News or Muni Market Monitor (formerly Munifacts) supplies up-to-the-minute information to its subscribers.

The effect of using the first in, first out (FIFO) method for a sale of some of the securities that were purchased separately during a period of rising prices will be A) an increase in the taxable profits of the investor. B) a decrease in the profits of the investor. C) an increase in the cost basis of the securities. D) a decrease in the tax liabilities of the investor.

a. an increase in the taxable profits of the investor. -FIFO is an inventory accounting term used to standardize the determination of which items are sold first. In this case, if different purchases are made of the same stock, and the per-share price is higher each time, then if a portion (but not the entire inventory) is sold at one price, the taxable gain will be maximized. If last in, first out were used, the taxable gain would be minimized, and the lower cost basis securities would remain in the portfolio.

A client, who is a manager of a large pension plan, has recently changed the plan's portfolio weighting from 80% equities and 20% fixed income to 40% equities, 40% short-term Treasury debt, and 20% cash and cash equivalents. More than likely, this is an indication that the client's outlook concerning the market is A) bearish. B) neutral. C) bullish. D) unknown.

a. bearish. -Because the client has reallocated the portfolio into highly conservative assets, one would think the manager is expecting a bear market. This new allocation is an attempt to protect against incurring losses from the anticipated market decline.

JJQQ trades in the Nasdaq Stock Market and has announced a tender offer for 10% of the outstanding shares of the company. The tendering price will be set at a 10% premium to the stock's closing price as of Friday, September 1, the cutoff date to tender shares. Investors performing all of these actions would be able to take advantage of the tender offer unless they A) bought call options for regular way settlement on Wednesday, August 30. B) tendered JJQQ convertible bonds on Friday, September 1. C) purchased the JJQQ stock on Thursday, August 31, for regular way settlement. D) bought JJQQ common stock for cash settlement on September 1.

a. bought call options for regular way settlement on Wednesday, August 30. -Participation in a tender offer (an offer to buy your shares) requires that investors must have engaged in an irrevocable action to acquire the common stock by the time of the cutoff for the tender offer. In this question, that date is September 1. The purchase of JJQQ call options provides the right, but not the obligation, to purchase the stock. In order to participate in the tender offer, the holder of a call option would have to have exercised the option by the cutoff date of the tender offer. The action does not require that the customer's transaction (to acquire the stock or the option) has settled by the tender cutoff date. Similarly, an investor who tendered a convertible bond has also engaged in an action to acquire the JJQQ common stock.

One of your customers purchased a callable municipal revenue bond at a price of 120. The bond carries a 4.37% coupon and matures in 18 years. Two years after the purchase, the issuer calls the bond at par. This is an example of A) call risk. B) interest rate risk. C) inflation risk. D) legislative risk.

a. call risk. -Call risk is the greatest when purchasing a bond at a premium. If the bond is called much earlier than its maturity date, the amount of loss realized is significantly more than the amount of the bond's adjusted cost basis. In this case, the adjusted cost basis is $1,177.78 (the $200 premium amortized over 18 years is $11.11 per year, or $22.22 for the two years). Legislative risk occurs when there is a change in the law that negatively affects the value of a security. Interest rate risk is if interest rates rise, bond prices fall. This was not evident in this example. The most common case for an issuer calling in bonds is when interest rates fall. This means that the issuer can borrow in the current market at a lower rate than the outstanding debt instrument. Inflation risk is not relevant to the event taking place in this question.

Under SEC rules, soft dollars may be used to pay for all of the following except A) computer hardware. B) seminar registration fees. C) computer software. D) research reports.

a. computer hardware. -Soft dollars is a term used to describe payments made by broker-dealers to investment advisers in return for research and other eligible services. The difference between soft dollars and hard dollars (cash) is that instead of paying a broker-dealer with cash, the fund will pay with brokerage business. Soft dollars may be used to pay for research, software, services for the benefit of clients, and seminar registration fees. Not permitted by the SEC are computer hardware, office equipment, and reimbursement of travel expenses to attend seminars.

A registered representative of a member broker-dealer receives a customer order to sell 100 shares of ABC and use the proceeds to purchase 200 shares of MNO. The trades are made on the NYSE and the execution price is $15 per share for the ABC and $7.50 per share for the MNO. In order to avoid a violation of FINRA's 5% markup policy, the member firm should A) consider this to be one single transaction rather than two separate ones when determining the commission to be charged. B) give advance notice to the customer that the commissions might be slightly higher than normal due to the extra work involved in the two transactions. C) consider this to be one single transaction rather than two separate ones when determining the markup and markdown to be charged. D) consider this to be one single transaction rather than two separate ones when determining the markup to be charged.

a. consider this to be one single transaction rather than two separate ones when determining the commission to be charged. -This is an example of a proceeds transaction. In order to stay within compliance of FINRA's 5% markup policy, the member firm should treat this as a single transaction. We know this BD is acting in an agency capacity because the trade was executed on the NYSE. Therefore, the member firm's charge is commissions rather than markup or markdown. This is not the type of transaction that justifies a higher than normal charge. Indeed, it is the opposite.

All of the following ratios are measures of the liquidity of a corporation except A) debt/equity ratio. B) current ratio. C) quick ratio. D) acid test ratio.

a. debt/equity ratio. -Liquidity ratios measure a firm's ability to meet its current financial obligations and include the current ratio and acid test (quick) ratio. However, the debt/equity ratio is a capitalization ratio and measures the amount of leverage compared to equity in a company's overall capital structure.

Shareholder approval is required for all of the following corporate events except A) dividends. B) the issuance of convertible bonds. C) the acceptance of a tender offer from a nonaffiliated company. D) stock splits.

a. dividends. -Shareholder approval is not required for the payment of dividends but is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval.

An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by A) holding the securities until they mature. B) increasing the duration. C) limiting purchases to investment-grade debt. D) purchasing a bond fund rather than individual bonds.

a. holding the securities until they mature. -As we know, when interest rates go up, bond prices go down. Therefore, bondholders are at risk to their principal when interest rates change. However, there is no interest rate risk to the principal if the bond is held to maturity. Regardless of the current market interest rates, the bond pays off at par value. The risk is highest as the duration lengthens. Because bond funds do not have a maturity date, they cannot avoid this risk. The rating (quality) is irrelevant; even Treasury bonds are affected by changes in interest rates.

An investor purchasing long-term AAA-rated bonds should be concerned most with A) inflation risk. B) marketability risk. C) no risk. D) reinvestment risk.

a. inflation risk. -The major risk assumed by any investor in long-term high-quality bonds is inflation or purchasing power risk. AAA-rated debt securities are likely to earn a lower rate of return, which over a longer period, might not keep up with the rate of inflation.

The capital asset pricing model (CAPM) assumes A) investors are averse to risk and expect to be rewarded for taking risk. B) that no type of risk can be diversified away. C) that those who participate in smaller transactions are generally wrong regarding timing purchases and sales. D) that prices are influenced by supply and demand only.

a. investors are averse to risk and expect to be rewarded for taking risk. -CAPM takes into account unsystematic risk—the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it, and therefore, the pricing of an asset must reflect that.

A moderately risk averse investor is best described as an individual who A) prefers investments with less risk to those with more risk even if the riskier one offers a higher potential return. B) chooses a relatively narrow portfolio concentrated in a limited number of issues. C) invests solely in risk-free investments. D) limits investments to those with a beta below 1.0.

a. prefers investments with less risk to those with more risk even if the riskier one offers a higher potential return. -Investors who are risk averse place more importance on avoiding loss than on realizing gains. Characteristically, they invest in opportunities carrying lower risk, consequently offering lower potential gains. Although investments with a beta below 1.0 are less volatile than the overall market, beta only measures systematic risk. The unsystematic risks, such as bad management decisions or legal problems, are not measured by beta. A moderate risk tolerance means the ability to take some risk; limiting the portfolio to risk-free investments is too severe. A narrow portfolio may not offer enough diversification to provide this investor with the risk-protection desired.

You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation in late August. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $43 Feb 8 100 shares @ $39 May 11, 200 shares @$48 The client needs about $4,000 and the CDL is currently selling for $44 per share on July 31. From a tax standpoint, you should probably recommend that the client A) sell 100 of the shares purchased on May 11. B) sell all of the shares purchased on February 8. C) sell half of the shares purchased on January 4, and half of the shares bought on February 8. D) sell all of the shares purchased on January 4.

a. sell 100 of the shares purchased on May 11. -By using the share identification basis and selling the shares purchased in May at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates (all transactions are less than a 12-month holding period). Don't get hung up on the fact that the investor will receive $400 more than needed (100 shares @ $44 = $4,400); the question is looking for tax considerations.

Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Tax consequences would be minimized if the investor A) sold the shares purchased in June at $55 and the shares purchased in April at $52. B) used the average cost basis. C) used the FIFO method. D) used the LIFO method.

a. sold the shares purchased in June at $55 and the shares purchased in April at $52. -By using the identified cost method, the investor would sell the highest cost purchases. This would result in the lowest taxable gain (or perhaps even a loss). Average cost is only available for mutual funds.

According to the Dow theory, reversal of a primary bullish trend must be confirmed by A) the Dow Jones Industrial Average and Transportation Average. B) the advance/decline line. C) the duration of the secondary movements. D) five consecutive days of upward price trends.

a. the Dow Jones Industrial Average and Transportation Average.

The common stock of Porcine Meat Products, Inc., is currently selling at $60 per share. It has a P/E ratio of 12:1 and pays an annual dividend of $3 per share. That would make Porcine's EPS equal to A) $2. B) $5. C) $3. D) $36.

b. $5 -The P/E ratio measures the relationship between a stock's market price and the earnings per share (EPS). The ratio for this company is 12 times the earnings. If the market price is $60, then the earnings must be 1/12th of that or $5 per share. The annual dividend is irrelevant to the question. It is one of those extra numbers that FINRA likes to include in a question.

Which of the following is the most stringent test of liquidity taken from a corporation's balance sheet? A) Current ratio B) (Current assets - inventory) / current liabilities C) Assets / current liabilities D) Current assets / current liabilities

b. (Current assets - inventory) / current liabilities -Of the answers given, the quick ratio (or the acid test) is the most stringent because it excludes inventory in the calculation. The current ratio is defined as current assets divided by current liabilities.

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement? A) 20 B) 10 C) 15 D) 5

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

It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. Under SEC rules, if the terms of the offer are changed, the revised offer must remain open for at least A) 20 business days from the commencement and 20 business days from the date the terms are changed. B) 20 business days from the commencement and 10 business days from the date the terms are changed. C) 10 business days from the commencement and 20 business days from the date the terms are changed. D) 10 business days from the commencement and 10 business days from the date the terms are changed.

b. 20 business days from the commencement and 10 business days from the date the terms are changed. -The rule is that the offer must remain open for at least 20 business days from the time the tender offer begins, and if there should be a change to the terms of the offer, if must be held open for 10 business days from the change.

While reviewing a new customer's investment profile, you determine that the customer is willing to tolerate a high degree of risk and does not anticipate utilizing the invested funds for at least 15 years. What would be a suitable recommendation regarding asset allocation for the customer's portfolio, given the customer's risk tolerance and time horizon criteria? A) 65% debt and 35% equities B) 70% equities, 20% debt, and 10% money market instruments C) 25% debt, 25% equities, 25% money market instruments, and 25% real estate D) 45% debt, 45% equities, and 10% money market instruments

b. 70% equities, 20% debt, and 10% money market instruments -For an investor who has a long-term investment time horizon and is willing to tolerate higher levels of risk, a recommendation having a higher percentage of the portfolio in equities would be suitable. Of the asset mixes presented, only one has a majority percentage in equities. The remaining choices with higher percentages in debt securities are too conservative.

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

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

Your client's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. If the client is interested in further diversification, which mutual fund would best meet that goal? A) Global equity fund B) Bond fund C) Emerging market fund D) Aggressive growth fund

b. Bond fund -All of the current holdings are equities. To further diversify the current portfolio, the bond fund would be the best choice of those given to meet this objective.

An investor purchases 200 shares of ABC common stock, but is concerned about market risk. While the investor cannot use diversification to reduce market risk by investing in the same asset class, they can hedge against the risk. Which of the following options positions would be used as such a hedge? A) Buy an ABC put B) Buy 2 ABC puts C) Sell 1 ABC put D) Sell 1 ABC call

b. Buy 2 ABC puts -The investor should buy two ABC put options (the investor is long 200 shares). Options can be used as a hedge (protection) against risk or can be used to provide income. To use as a hedge, the investor should buy (go long) the option. To use as income, the investor should sell (go short) the option. Here the investor is using the option to hedge, so they will be buying the option, not selling. Investors use long puts to hedge a long stock position and long call options to hedge a short stock position.

ABC Corporation raised capital through an offering of equity securities. Which component of the balance sheet has changed as a result? A) Long-term liabilities B) Current assets C) Fixed assets D) Current liabilities

b. Current assets -When equity securities are issued, cash (a current asset) and net worth increase. Fixed assets and liabilities remain unchanged as a result of the offering.

A mutual fund invested in bonds with medium-length maturities. As the bonds matured, the fund reinvested the proceeds and purchased long-term bonds with maturities of up to 20 years. What might have happened to the fund if the reinvestment had occurred during a period when interest rates were rising? I. Decrease in yield II. Decrease in income III. Increase in yield IV. Increase in income A) I and II B) III and IV C) II and III D) I and IV

b. III and IV -The longer a bond's maturity, the greater the risk to the investor. As a result, long-term bonds generally pay higher interest rates than medium- or short-term bonds. If a fund replaces medium-term bonds with long-term bonds, the bonds would pay higher interest rates, and thus generate more income. Additionally, as interest rates increase, so do yields.

If XYZ Corporation sells an additional 1 million common stock with a par value of $1 for $10 per share, which of the following is true? A) Its earnings per share will increase. B) Its paid-in surplus will increase. C) Its liquidity ratio will decrease. D) The current ratio will decrease.

b. Its paid-in surplus will increase. -Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase.

A couple in their early 30s have been married for four years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about six months, which of the following mutual funds is most suitable for these customers? A) XYZ Investment-Grade Bond Fund B) LMN Cash Reserves Money Market Fund C) ATF Capital Appreciation Fund D) ABC Growth & Income Fund

b. LMN Cash Reserves Money Market Fund -These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective.

Which of the following carries the least amount of market risk? A) Treasury bonds B) Savings accounts C) Common stock D) Treasury bills

b. Savings accounts -Savings accounts carry no market risk, which, by definition, is the risk that an investor will experience losses due to day-to-day fluctuations in the prices of securities bought and sold in the market.

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

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

A risk associated with investing in most bonds is reinvestment risk. What type of bond can an investor buy that does not expose the investor to reinvestment risk of interest? A) Premium bonds B) Zero-coupon bonds C) Par bonds D) Discount bonds

b. Zero-coupon bonds -Zero-coupon bonds do not expose investors to reinvestment risk of interest. The risk is that as periodic income is received from an investment, such as bond interest, the investor cannot find another investment to reinvest into offering the same rate of return for the same level of risk. Because zero-coupon bonds do not pay periodic interest, (the return of the face value at maturity is the income), there is nothing to reinvest. The fact that a bond is selling at par, premium, or discount does not remove the reinvestment risk.

If a customer sold 1,000 shares of XYZ at a loss, a wash sale will result within 30 days of the date of sale if your customer A) writes 10 XYZ at-the-money puts. B) buys 10 XYZ at-the-money calls. C) writes 10 XYZ at-the-money calls. D) buys 10 XYZ at-the-money puts.

b. buys 10 XYZ at-the-money calls. -If, within 30 days of the date of sale, the customer buys back the security or the right to buy it back (a call option), the loss is disallowed. It will also be disallowed if, within 30 days, the customer writes deep in-the-money puts on the security sold. A deep in-the-money put will likely be exercised, forcing the customer to buy stock.

All of the following risks are considered diversifiable except A) sovereign risk. B) inflation risk C) financial risk. D) business risk.

b. inflation risk -Purchasing power risk, also known as inflation risk, is a systematic risk and, as such, is one that cannot generally be lessened through diversification. The other choices are forms of unsystematic (nonsystematic) risk and can be reduced through diversification.

FINRA's 5% markup policy does not apply to A) third-market trades. B) issues sold by prospectus. C) REITs. D) commissions.

b. issues sold by prospectus. -FINRA's 5% markup policy applies to all secondary market trades, whether customers are charged markups, markdowns, or commissions. Issues sold by prospectus and municipal securities, however, are exempt from the policy.

One of your customers has decided to commit $10,000 to fixed income. She is trying to decide if it makes more sense to invest in the bonds of a single corporate issuer or to buy an exchange-traded fund (ETF) tracking a corporate bond index. You could explain that the purchase of the ETF results in the greatest reduction of A) interest rate risk. B) liquidity risk. C) currency risk. D) inflation risk.

b. liquidity risk. -In general, the bond market has some liquidity risk because bonds, especially in quantities as low as $10,000, do not have the trading activity we see with listed securities. For ETFs, trading on an exchange significantly lessens their liquidity risk. If the ETF contains bonds with maturities similar to the individual bonds she is considering, the interest rate risk and inflation risk are essentially the same. Currency risk applies only when foreign securities are involved.

An investor, age 57, wants to amend an existing portfolio to have a greater percentage be in fixed-income (debt) instruments. Current market sentiment is that interest rates are very high and likely to begin contracting soon. The investor agrees and asks for your thoughts regarding what those debt instruments might be. The most suitably aligned with the market sentiment would be A) variable-rate municipal bonds. B) noncallable corporate bonds. C) callable corporate bonds. D) money market fund.

b. noncallable corporate bonds. -If one anticipates that interest rates will be falling, noncallable bonds would be better, as there is no risk of them being called and you can continue to earn the higher rate the bonds were issued with. Anything with a variable rate will have the interest payable adjusted to align with current rates, and therefore, would not desirable when rates are falling. Money market funds are not debt instruments, and again, the returns they pay reflect trending interest rates.

Annual dividends per common share divided by earnings per share (EPS) is A) the quick ratio. B) the dividend payout ratio. C) the dividend yield. D) the current return.

b. the dividend payout ratio. -The dividend payout ratio is the annual dividend per share to common stockholders divided by the earnings per share (EPS). Alternatively, it is the total common dividends paid divided by the net income after preferred dividends. It measures the percentage of earnings available to common paid out in the form of dividends to common stockholders. Investors looking for current income from stocks generally seek high dividend payout ratios. Investors looking for growth prefer stocks with low dividend payout ratios, wanting the company to reinvest its earnings into growing the company. The quick ratio measures liquidity only. The dividend yield is the same as the current rate of return on a stock. That is the annual dividend divided by the current market price.

Regulation FD covers A) certifications required of research analysts who make public appearances. B) the selective disclosure of material nonpublic information by issuers. C) standardization of financial reporting to the SEC. D) customer notification requirements regarding a firm's privacy policies.

b. the selective disclosure of material nonpublic information by issuers. -Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company's material disclosures at the same time.

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

c. $8.00. -The stock's P/E ratio is price to EPS. Dividing the stock's price by the P/E will give the EPS ($96 / 12 = $8).

An aggressive investor buys ABC stock with a beta of 1.7. The S&P 500 has a 10% rate of return for the year, and ABC's return is 12%. What is the alpha for ABC? A) -3% B) +3% C) -5% D) +5%

c. -5% -With a beta of 1.7, an investor would expect ABC stock to be 70% more volatile than the general market as measured by the S&P 500. Remember, the beta of the market is 1.0. Therefore, we would expect to see the stock return 17% based on the S&P 500's 10% return. However, the actual return on ABC was only 12%. Alpha measures the difference in the actual return vs. the expected return. The difference between the expected return (sometimes referred to as the required return) of 17% and the actual return of 12% is a negative 5%. That represents an alpha of -5% for ABC stock.

Tender offers must be open for how many business days from the first publication of the offer? A) 10 B) 15 C) 20 D) 5

c. 20 -If the terms are changed, the offer must be open for at least 10 business days from the date of change but never for less the original 20 business days.

SEC Regulation 14E requires that tender offers be open for at least A) 30 calendar days. B) 15 calendar days. C) 20 business days. D) 10 business days.

c. 20 business days. -Regulation 14E requires that tender offers be open for at least 20 business days and remain open for at least 10 business days after any change to the offering price.

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) Liquidity risk and reinvestment risk B) Inflation risk and interest rate risk C) Business risk and regulatory risk D) Interest rate risk and timing risk

c. 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.

Under Section 28(e) of the Securities Exchange Act of 1934, which of the following is allowable soft-dollar compensation from a broker-dealer to an investment adviser under the safe harbor provisions? A) Vacations B) Cell phones to rapidly communicate with clients C) Custodial services provided by the broker-dealer D) Office rental payments

c. Custodial services provided by the broker-dealer -The use of a client's commission dollars to purchase a broker-dealer's custodial services is an allowable soft-dollar compensation. It is an investment benefit that accrues directly to the client and not to the adviser. Office rental payments, cell phones, and vacations are not allowable because their benefits do not accrue directly to the client. Other examples of permitted soft-dollar items are research and analytical software because they benefit the client whose commission dollars are, in effect, paying for them.

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

Progressive taxes would include I. personal income tax. II. gift taxes. III. estate taxes. IV. excise taxes. A) I and III B) II, III, and IV C) I, II, and III D) I and II

c. I, II, and III -Progressive taxes are those where the rate of taxation increases as the dollars being taxed increase. Personal income tax, while not as progressive as it was before the 1986 reform, is still considered a progressive tax because the highest tax rate is levied against the highest earnings. Gift taxes and estate taxes are highly progressive, but excise taxes, such as fuel tax and transportation tax, are a fixed rate, and therefore, would not be considered progressive.

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer gifts the securities to his son. Which of the following statements are true? For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000. A) I and IV B) II and IV C) II and III D) I and III

c. II and III -When making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.

When determining whether a tax swap of municipal bonds will result in a wash sale, which of the following is not considered? A) Maturity B) Coupon C) Principal amount D) Issuer

c. Principal amount -In judging whether bonds purchased are substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate. If at least two of the three are different, a wash sale will generally not result.

A portfolio manager using index options is trying to reduce which of the following types of risks? A) Financial B) Purchasing power C) Systematic D) Selection

c. Systematic -Systematic risk refers to the impact the overall market has on an equity portfolio's value. Index options help insure portfolios against systematic risk. The purchase of index puts to protect a portfolio is called portfolio insurance.

If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer's portfolio? A) Blue-chip equity fund B) Growth stocks C) T-bills D) High-yield bond fund

c. T-bills -While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bills make the most sense.

Which of the following best describes a growth investment? A) Only interest and dividends are reinvested. B) Investment appreciation is tax deferred. C) The value of the investment increases over time. D) Both principal and accumulating interest and dividends increase over time.

c. The value of the investment increases over time. -Growth refers to an increase in an investment's value over time. Interest and dividends are income.

One of the key roles of a registered representative is matching a securities recommendation to a customer's risk tolerance. All of the following statements correctly explain investment risk except A) a decline in a firm's share price as a result of a 15% decline in the S&P 500 Index represents market risk. B) rising inflation leads to purchasing power risk. C) a corporation's decision to buy back some of its own stock in the open market using funds borrowed through a new debt issue is an example of reinvestment rate risk. D) a decrease in the NAV of a mutual fund with a substantial position in Japanese companies as a consequence of devaluation of the yen.

c. a corporation's decision to buy back some of its own stock in the open market using funds borrowed through a new debt issue is an example of reinvestment rate risk. -Reinvestment risk applies primarily to debt securities. It is the periodic payment of interest or the repayment of principal at a rate of return different from that earned on the original issue that is reinvestment risk. Borrowing money to repurchase the company's stock could lead to financial risk (the inability to pay back the debt). Inflation eats away at purchasing power. When the overall market suffers a decline, most stock prices follow along. That is market risk. One of the risks in foreign investing is fluctuating values of the different currencies.

It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. This is called A) preemptive rights. B) arbitrage. C) a tender offer. D) recapitalization.

c. a tender offer. -The SEC defines tender offer as "an active and widespread solicitation by a company or third party (often called the bidder or offeror) to purchase a substantial percentage of the company's securities. Bidders may conduct tender offers to acquire equity (common stock) in a particular company or debt issued by the company."

In general, FINRA rules prohibit member firms from improper use of customer funds. One example is intentionally holding up an account transfer. Another is holding on to funds that belong to the customer. One of the features of FINRA Rule 2165 dealing with senior exploitation is the ability of a member firm to place a temporary hold on disbursements from the account of a specified adult. This serves as a safe harbor for funds held in the manner described above. A member relying on this rule must A) segregate customer funds from those of the firm to avoid commingling of assets. B) place temporary holds on disbursements of funds or securities from the accounts of specified adults whenever there is suspected exploitation. C) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule. D) report all temporary holds to FINRA within 15 days of the end of the month in which the hold took place.

c. develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule. -In FINRA's eyes, this is all about making sure that associated persons of the firm are adequately (and frequently) trained. Although customer and firm assets must be segregated, that is not part of the senior exploitation rule. The rule permits, but does not require, that these holds be placed on disbursements from the affected accounts−it is voluntary. There is no reporting of this activity, but detailed reports must be made and retained, containing the relevant information leading to the decision to enforce the hold.

A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 50% of income earned on investments in A) industrial development bonds. B) government and agency securities. C) domestic corporate common and preferred stock. D) municipal bonds from the same state in which the corporation is located.

c. domestic corporate common and preferred stock. -Corporate ownership of another company's stock allows the investor to exclude 50% of the dividends from taxation.

A corporation buys back its stock on the open market for all of the following reasons except A) to use it for stock options. B) to use it for future acquisitions. C) it reduce interest charges. D) it increase earnings per share.

c. it reduce interest charges. -The repurchase of common stock does not reduce interest payments; however, it does reduce total dividends paid.

The placement ratio in The Bond Buyer indicates the relationship for a particular week between the number of bonds sold and the number of bonds A) sold by competitive bid that week. B) to be offered in the next 30 days. C) offered for sale in the market that week. D) sold in negotiated underwritings that week.

c. offered for sale in the market that week. -The placement ratio shows the relationship between the number of bonds placed (sold) and the total number offered for sale. The ratio can range from 0% to 100%.

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

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.

In recent years, the regulators have increased their concern over the financial exploitation of senior adults. FINRA's Rule 2165 became effective on February 5, 2018, and defines financial exploitation as A) making recommendations to a specified adult that are not suitable based on the client's objectives. B) charging markups or commissions on transaction in a specified adult's account that are excessive. C) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult's funds or securities. D) excessive trading in the account of a specified adult.

c. the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult's funds or securities. -Although each of these choices represents improper activity, only one of them relates specifically to the stated rule. A careful reading of the text in your LEM indicates that the actions against the account that the firm has to monitor are those from persons outside of the broker-dealer who are attempting to create activity in the specified adult's account. That is the purpose of the "trusted contact" person for the firm to get in touch with when there is a suspicion that someone may be taking advantage of the specified adult. Excessive trading (churning), unsuitable recommendations, and excessive charges are issues created by the member firm and can lead to disciplinary action.

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within A) 5 business days of the announcement. B) 15 business days of the announcement. C) 20 business days of the announcement. D) 10 business days of the announcement.

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

XYZ Corporation has a market price of $45 per share and earnings per share (EPS) of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings (P/E) ratio of XYZ will be A) 5. B) 3. C) 45. D) 15.

d. 15. -Before the split, the company had a P/E ratio of 15 ($45 per share / $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC? A) 100% B) 65% C) 70% D) 50%

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

BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM? A) 0% (all dividends received are tax free) B) 70% C) 100% D) 50%

d. 50% -When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, 50% of the remaining dividends received are taxable.

Which of the following statements regarding a bond ladder strategy is correct? A) A laddered portfolio of bonds will provide lower yields than a portfolio consisting entirely of short-term bonds. B) A bond ladder strategy works best when interest rates are stable. C) A bond ladder strategy involves the purchase of very long-term and very short-term bonds. D) A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk.

d. A bond ladder strategy is a relatively easy way to immunize a portfolio against interest rate risk. -A bond ladder strategy is a relatively easy way to immunize (protect) a portfolio against interest rate risk. By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher, not lower yields than a portfolio consisting entirely of short-term bonds. Buying bonds with very short maturities and bonds with long maturities is the concept behind the barbell strategy.

Which of the following may not be a reason to reach out to the trusted contact person of an elderly client? A) An urgent request that funds be sent to an overseas bank account not previously known to be associated with the client B) An email received that cannot be verified by the registered representative as having come from the customer C) An emailed request to liquidate certain account holdings and transfer the sales proceeds to a third party D) A request by email regarding a joint account with instructions to sell all securities and forward a check made payable to the named parties to the account

d. A request by email regarding a joint account with instructions to sell all securities and forward a check made payable to the named parties to the account -Scenarios that should raise a red flag are those where unusual instructions are received. For accounts with owners age 65 or older, firms must try to obtain the name of a trusted contact person in the event of a red flag. All firms must have in place written supervisory policies and procedures for reviewing and monitoring the transmittal of funds and a method of verifying that instructions received by email came from the customer and not an unknown third party. Urgency that might be intended to circumvent or deter broker-dealer verification procedures should always be viewed with extreme caution. An email regarding a joint account to liquidate and forward a check to the parties named to the account would not generally be viewed as a red flag. However, if it gave instructions to forward a check to only one party named to the account, it would be deemed unusual and not in keeping with how distributions are made from joint accounts.

Which of the following statements is not true? A) Beta is a volatility measure of a security compared with the overall market. B) A stock with a beta of 1.2 will move 20% more than the market. C) A stock with a beta of 0.8 will move 20% less than the market. D) Beta is a measure of a security's deviation from its historical average returns.

d. Beta is a measure of a security's deviation from its historical average returns. -A measure of a security's deviation from its historical average returns is the security's standard deviation. Beta measures a security's volatility in relation to the overall market. Stocks with a beta greater than 1 are more volatile than the market, and stocks with a beta less than 1 are less volatile than the market.

Interest rate risk is intrinsic to all types of fixed-income investments, including debt securities and preferred stock. When interest rates go up, market prices decline. Although not commonly associated with common stock, some common stock investments are subject to interest rate risk. The common stock of which of the following companies would be most affected by interest rate risk? A) Common stock shares of ABC High Tech Company B) Common stock shares of a company that has recently filed for bankruptcy C) Common stock shares of investment company growth funds D) Common stock shares of public utility companies

d. Common stock shares of public utility companies -Interest rate risk affects the shares of public utility common stock in two ways. First, for most investors, public utility stocks are attractive because of their dividend yield. Therefore, if market interest rates rise, unless the utility can increases the dividend, the price of the stock will decline. That is where the second part comes into play. Public utilities are known for their highly leveraged capital structures. Put simply, they borrow a lot of money. An increase to market interest rates will likely cause their borrowing expenses to rise. With increased expenses, earnings fall and that can lead to a reduction to the dividend payout. The primary factor affecting the market price of shares of growth companies is the future expectations of earnings growth for these companies. Therefore, their market prices are not correlated with current interest rate changes. In addition, these companies rarely pay much, if any, dividend. As stated in the question, interest rate risk applies to companies paying income. Bankrupt companies do not pay dividends. High tech companies typically have very little debt in their capital structure and rarely pay dividends, so their common stock prices are not interest rate sensitive.

If a married couple establishes a joint tenants with right of survivorship (JTWROS) account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A) He pays federal and state taxes on $500,000. B) He pays federal and state taxes on the entire balance. C) He pays federal taxes only on $500,000. D) He pays no estate tax.

d. He pays no estate tax. -Establishing a JTWROS account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

The Bond Buyer's 30-Day visible supply includes I. issues of notes sold on a competitive basis. II. issues of bonds sold on a competitive basis. III. issues of notes sold on a negotiated basis. IV. issues of bonds sold on a negotiated basis. A) I and II B) I and III C) III and IV D) II and IV

d. II and IV -The visible supply includes only bonds. Notes are not considered because they do not compete directly with the bonds.

The amount paid in excess of par value on the sale of common shares by an issuer is reflected in which of the following accounts on the corporate financial records? A) In the retained earnings B) In the capital stock C) In the earned surplus D) In the paid-in surplus

d. In the paid-in surplus -Paid-in surplus, or capital surplus, is the excess over par value that investors pay for stock on its original issue. Generally, par value on common stock is a matter of record for accounting purposes.

Under what circumstances will a dilution of equity occur? A) Stock split B) Issue of mortgage bonds to replace debentures C) Stock dividend D) The conversion of convertible bonds into common stocks

d. The conversion of convertible bonds into common stocks -Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued, and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders.

Three years ago, a customer purchased 300 shares of ACE Fund. He sold the shares on August 15 for a loss of $400. He then purchased 300 shares of the same fund on September 4 of the same year. If the investor is in a 10% tax bracket, how will the loss be treated for tax purposes in the current year? A) The loss is only deductible to the extent that gains of an equal or greater amount were incurred. B) Ten percent of the loss is deductible. C) The loss is fully deductible. D) The loss is not deductible.

d. The loss is not deductible. -Because the customer repurchased the shares within 30 days of the loss transaction, the loss is disallowed under the wash sale rule, and therefore, is not deductible. A wash sale occurs when the same shares are purchased within 30 days before or after the date of sale in which the loss is incurred.

A registered representative of a FINRA member firm has developed a LinkedIn friendship with a registered investment adviser. This has resulted in the investment adviser directing transactions for many of their clients to this representative's broker-dealer. The broker-dealer is promoting an all-day seminar with presentations to be delivered by a number of outstanding economists and securities analysts. The seminar location is in a hotel ballroom down the street from the member firm's office. The firm has invited the investment adviser to attend as its guest. That location requires the adviser to fly in the night before and stay at the hotel. As the broker-dealer's guest, which of the following expenses are reimbursable by the broker-dealer without violating the safe harbor provisions of Section 28(e)? A) The registration fees for the seminar plus the hotel room for the night B) The travel expenses, but not the registration fee C) The registration fees for the seminar plus all of the travel expenses D) The registration fees for the seminar

d. The registration fees for the seminar -Under the safe harbor provisions of Section 28(e) of the Securities Exchange Act of 1934, broker-dealers are permitted to extend seminar invitations to investment advisers with whom they do or hope to do business. The only expense reimbursable by the broker-dealer is the fee to attend the seminar.

SEC Regulation FD is best described as a rule requiring disclosure by A) only those who provide "tips" of select information to securities market professionals. B) securities market professionals that trade on nonpublic information. C) only issuers of NMS securities. D) an issuer of securities.

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

The working capital of a corporation includes all of the following except A) cash. B) accounts receivable. C) marketable securities of other companies. D) convertible bonds.

d. convertible bonds. -The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.

A company very concerned about liquidity would want A) low current ratio. B) high P/E ratio. C) low P/E ratio. D) high current ratio.

d. high current ratio. -The current ratio is a measure of liquidity. It is the current assets divided by the current liabilities. The higher the ratio, the more liquid the company. This has no bearing on whether high or low P/E ratios are desirable.

You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation this August. When checking the account record for this year, you find the following transactions: Jan 4, 100 shares @ $48 Feb 8 100 shares @ $39 May 11, 200 shares @$43 The client needs about $4,000 and the CDL is currently selling for $44 per share. From a tax standpoint, you should probably recommend that the client A) sell all of the shares purchased on February 8. B) sell half of the shares purchased on January 4 and half of the shares purchased on February 8. C) sell 100 of the shares purchased on May 11. D) sell all of the shares purchased on January 4.

d. sell all of the shares purchased on January 4. -By using FIFO, the default method of the IRS, and selling the shares purchased in January at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates. Don't get hung up on the fact that the investor will receive $300 more than needed— the question is looking for tax considerations.