Unit 15 Test Questions

Which of the following are likely to have a low beta? A) Public utility stocks. B) Aerospace stocks. C) Software stocks. D) Technology stocks.

A) Public utility stocks. Explanation Public utility stocks tend to have low betas as do other defensive stocks. Technology, aerospace, and software stocks tend to have high betas. Reference: 15.3.3.1 in the License Exam Manual

Which of the following states that the pricing of a stock should take into account systematic risk as well as the expected return of a theoretical risk-free asset? A) Capital asset pricing model (CAPM) B) The DOW Theory C) Modern Portfolio Theory D) Random Walk Theory

A) Capital asset pricing model (CAPM) The capital asset pricing model takes into account a stock's sensitivity to risk that cannot be lessened by diversification. This is systematic risk. The model also takes into account the expected return of a risk free asset within that class of assets. Reference: 15.4.1 in the License Exam Manual

A registered representative is aware of 3 limited partnerships that might be suitable recommendations for a number of accounts within the firm's client base. Which account classifications would they be least suitable for? A) A trust account B) A UTMA account C) An institutional account D) A corporate account

B) A direct participation partnership (DPP) would be least suitable for a minor's custodial account (UTMA). Limited partnerships are generally not liquid and it is unlikely that a custodial account would be in a position to benefit from any tax advantages the partnership might offer.

Under FINRA rules, the annual limit for gifts received from customers or other firms is A) $25 B) $100 C) $50 D) $250

B) The annual gift limit is $100. This limit applies to gifts given to, or received from, either your customers or employees of other member firms.

A strategy designed to lock in a capital gain, not realize it currently for tax purposes but instead defer it to a later tax period, is known as A) arbitrage B) short against the box C) share identification when closing a position D) hedging

B) short against the box Explanation Shorting against the box is a tax strategy used to lock in capital gains in a long position and defer them to a later period. The strategy involves selling short shares that are currently owned in the long position when a profit already exists in the long position. From that point forward, each dollar lost in the long position, if the stock should fall, is offset by a gain in the short position and vice versa. There are a number of criteria that must be met for the IRS to allow this strategy. Reference: 15.5.9.4 in the License Exam Manual

A customer has realized a capital gain from the sale of a municipal bond. To reduce his tax liability, the capital gain can be offset against a capital loss in which of the following investments? GOs Equity securities. Corporate bonds. Collateralized mortgage obligation. A) I and II. B) II and III. C) I, II, III and IV. D) I and III.

C) I, II, III and IV. Any capital loss will offset a capital gain. Reference: 15.5.6.1.3 in the License Exam Manual

When a FINRA member places a third party between it and the best available market, it is a violation known as A) locking markets B) backing away C) commingling D) interpositioning

D) interpositioning

A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a nonprofit corporation, how much can he claim as a tax deduction for this donation? A) $18,000. B) $12,000. C) $0. D) $6,000.

A) $18,000. Explanation Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than 1 year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000. Reference: 15.5.9.1.1 in the License Exam Manual

For tax purposes, cash dividends are taxable to stockholders as of the: A) payable date. B) declaration date. C) ex-date. D) record date.

A) payable date. Cash dividends are not taxable until paid. Reference: 15.5.5 in the License Exam Manual

A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports a: A) tax credit on the investor's U.S. tax return. B) tax credit on the investor's Canadian tax return. C) non-recoverable loss on the investor's U.S. tax return. D) reduction in the investor's ordinary income.

A) tax credit on the investor's U.S. tax return. Explanation An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability. Reference: 15.5.4.3 in the License Exam Manual

Which of the following provides a measurement of the volatility of a particular stock or portfolio as compared to the volatility of the market as a whole? A) Delta. B) Beta. C) Duration. D) Alpha.

B) Beta. Explanation The beta value is an index that measures the volatility of a stock's or portfolio's movement as compared to the movement of the market as a whole. By definition, the beta of the market is equal to 1.0. Reference: 15.3.3.1 in the License Exam Manual

A change in which of the following should be indicated in a customer's file? Name. Educational degrees held. Investment objectives. Professional society memberships. A) I and II. B) I and III. C) III and IV. D) II and IV.

B) I and III Explanation All primary information, such as name, address, and Social Security number, and all information that could affect recommendations or a customer's financial situation must be noted immediately in the file. Educational degrees and society memberships do not affect investment recommendations. Reference: 15.2.1 in the License Exam Manual

A convertible corporate bond with an 8% coupon yielding 7.1% is available, but may be called sometime this year. Which feature of this bond would probably be least attractive to your client? A) Coupon yield. B) Near-term call. C) Current yield. D) Convertibility.

B) Near-term call. Explanation The near-term call would mean that no matter how attractive the bond's other features, the client may not have very long to enjoy them. Reference: 15.3.2.6 in the License Exam Manual

If a registered representative owns a vacation home and wants to rent it out during the summer, which of the following statements is TRUE? A) No notification is required, provided the vacation home is located in the state where the member firm has its principal office. B) No notification is required. C) Prior notification must be made to the member firm under the rules on outside affiliations. D) Prior notification must be made to the member firm under the rules on private securities transactions.

B) No notification is required. Rental income is passive income. Passive investments are excluded from the notification requirements of the outside affiliations rule. Similarly, renting a vacation home is not a private securities transaction. Reference: 15.1.2.3 in the License Exam Manual

When comparing investment alternatives, all of the following must be considered EXCEPT: A) relative time period of returns on investment. B) state of incorporation of the companies. C) differences in risk exposure between the two companies. D) relative after-tax returns, when appropriate.

B) state of incorporation of the companies. The state of incorporation is generally not a relevant factor when comparing investments. Reference: 15.1.3 in the License Exam Manual

A new customer asks you to offer recommendations of investments that would provide current income. You would include in your list government and agency securities real estate investment trusts (REITs) exploratory oil and gas direct participation programs new IPO issues A) III and IV B) II and III C) I and II D) I and IV

C) Corporate bonds, municipal bonds, government and agency securities, income-oriented mutual funds, some stocks (including utilities and REITs), money market funds, and annuities are among the investments that can contribute current income through dividend or interest payments.

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) passive. B) growth. C) value. D) tactical.

C) value. Explanation 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. Reference: 15.4.3.2 in the License Exam Manual

A customer buys 100 shares of RFTQ at $10 per share. Several months later, the stock is quoted as 4.60 bid - 5 ask, at which time the registered representative offers to buy back the stock from the customer for his own account at $9 per share. This action is A) permitted because it allows the customer to sell at a price higher than the current market B) permitted with the written permission of a principal as long as the RR personally absorbs the loss C) prohibited because industry rules do not allow registered representatives to guarantee customers against loss D) prohibited because it violates the Uniform Practice Code

C) prohibited because FINRA does not allow registered representatives to guarantee customers against loss

A registered representative wishes to lend money to a customer. Under which of the following circumstances would written notice to the broker/dealer be required? The customer is the RRs' spouse The RR and the customer have been close friends since high school The customer is the RRs' mother He and the customer have a business relationship outside the firm that necessitates occasional lending between them A) I and III B) I and IV C) II and III D) II and IV

D) Written notice to the broker/dealer would be required for a loan from the RR to a friend or someone with whom he has a business relationship. It is not required for loans to immediate family members such as spouses or parents.

If a customer buys a Mt. Vernon Port Authority municipal bond in the secondary market at 109 and holds the bond to maturity what are the tax consequences? A) Capital loss of $90. B) Capital loss of $9. C) Capital gain of $9. D) No capital gain or loss.

D) No capital gain or loss. Explanation The investor's cost basis of bonds purchased at a premium is adjusted by amortization of the premium. In this case, there is a $90 premium that will have been completely amortized at maturity. At maturity the adjusted cost basis equals the face value and no loss or gain is realized. Reference: 15.5.7.1 in the License Exam Manual

Your customer's broad-based portfolio consisting of quality equity securities has returned 4% this year. The S&P 500, a bench mark index, has returned an average 6% over the past several years. Compared to the benchmark index, the customer's portfolio has an ALPHA of A) 2% B) 4% C) minus 1.5% D) minus 2%

D) minus 2% Explanation The ALPHA for any investment type, a particular asset or portfolio, is the abnormal rate of return on the investment in relation to what would normally be predicted by a known benchmark. ALPHA can be positive or negative, and in this case, because the portfolio underperformed the benchmark index by 2%, it currently has an ALPHA of minus 2%. Reference: 15.3.3.1 in the License Exam Manual

Changing any of the following characteristics of the stocks and bonds in an investor's portfolio would likely add diversification EXCEPT the: A) issuer's geographic location. B) types of securities. C) industries in which she is investing. D) securities' relative prices.

D) securities' relative prices. Explanation Portfolio diversification is rarely achieved by price alone. Geographic diversification disburses risk if growth rates vary in separate parts of the country. Diversifying holdings among industries helps as different economic situations affect some industries more than others. Diversifying types of securities helps as bonds react differently from stocks and real estate to changing economic situations. Reference: 15.2.2.5 in the License Exam Manual

It is determined that a customer's portfolio has an alpha, which is a measure that adjusts for risk, of minus 2. This would indicate that the portfolio A) underperforms a predictable benchmark by the difference between the portfolios beta and it's alpha B) outperforms a predictable benchmark by 2% C) outperforms a predictable benchmark by 2 times any decrease D) underperforms a predictable benchmark by 2%

D) underperforms a predictable benchmark by 2% Alpha is a measure of performance that adjusts for risk, relative to a known benchmark. It can be positive or negative. With a minus 2 alpha, a portfolio would be expected to underperform the predictable benchmark by 2%. Reference: 15.3.3.1 in the License Exam Manual

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. This investor agrees and asks for your thoughts regarding what those debt instruments might be. Aligning with the market sentiment the most suitable would be A) non-callable corporate bonds B) callable corporate bonds C) money market fund D) variable rate municipal bonds

A) non-callable corporate bonds Explanation If one anticipates that interest rates will be falling, non-callable 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 not desirable when rates are falling. Money market funds are not debt instruments and again the returns they pay reflect trending interest rates. Reference: 15.3.2.6 in the License Exam Manual

A broker dealer has encouraged its registered representatives (RRs) to move all customers into fee-based accounts paying a single annual fee based on a percentage of assets rather than having them pay commissions for every transaction separately. This would be deemed A) inappropriate for those customers who trade infrequently B) appropriate because it is considered the reverse of churning which is a prohibited activity C) appropriate for both large and small clients giving both the equal advantage of paying one annual fee D) inappropriate for those customers who engage in large institutional size transactions

A) inappropriate for those customers who trade infrequently Both churning and reverse churning are prohibited activities. Reverse churning is the practice of placing clients who trade infrequently in fee-based accounts paying a percentage of assets under management as an annual fee instead of paying commissions per transaction. If the annual fee would be greater than the total commissions paid, considering the number of transactions the client could reasonably be expected to do, this would be inappropriate. Fee-based accounts are more appropriate for those who trade frequently and/or commonly participate in larger size transactions. Reference: 15.1.3.1.1 in the License Exam Manual

A registered representative knows that a large block trade order to buy shares of XYZ stock for one of his institutional accounts has been entered and will be executed shortly. The RR enters small orders to buy 100 shares of XYZ for each of his retail discretionary accounts prior to the block trade. This action is A) a violation known as marking the market B) a violation known as front-running C) allowed D) a violation known as capping

B) Having knowledge that is not public knowledge of an orders pending execution and placing orders before it occurs, so as to benefit in price movement after it is executed, is a violation known as front-running.

If a registered representative wishes to open a joint account with his brother, who is a client of his, which of the following rules would NOT apply? A) The account may be opened as either tenants in common or as joint tenants with rights of survivorship. B) The sharing in profits and losses in the account must be proportional to each party's investment in the account. C) The representative's principal must approve the opening of the account. D) Transactions in the account must meet suitability criteria based on the investment objectives noted on the new account form

B) If a registered representative is opening a joint account with an immediate family member, the sharing of profits and losses need not be proportional to each party's investment in the account.

Which of the following statements regarding nonsystematic risk are TRUE? It is the risk that an individual stock will not perform well. It is the same as market risk. Diversification reduces it. Diversification does not reduce it. A) II and III. B) I and III. C) II and IV. D) I and IV.

B) I and III. Explanation Nonsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks. Reference: 15.3.2.7 in the License Exam Manual

Which of the following statements are TRUE? Systematic risk can be diversified away. Systematic risk cannot be diversified away. Nonsystematic risk can be diversified away. Nonsystematic risk cannot be diversified away. A) I and IV. B) II and III. C) I and III. D) II and IV.

B) II and III. Explanation Systematic risk, which affects all investments, cannot be diversified away. Nonsystematic risk, or company risk, can. Reference: 15.3.2.7 in the License Exam Manual

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

B) Savings accounts Explanation 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. Reference: 15.3.2.7 in the License Exam Manual

Your customer, a new investor, 24 years of age, earns $35,000 per year and has saved $10,000 to invest. She would like to purchase her first home in approximately 5 years. Which of the following would be the least suitable recommendation given her objective? A) Large-cap equity fund B) Tax-free municipal bonds C) Preferred stocks D) A balanced fund

B) This new investor is not yet at an income level where the tax-free benefits of municipal bonds would be of great benefit. In addition, municipal bonds would have lower yields than other debt securities and would not be as likely to add to the growth needed to achieve her goal. Given her investment objective, each of the other choices would be more suitable regarding potential growth.

If a customer purchases 5 newly issued municipal bonds for 101 and holds the bonds to maturity, the tax consequence is: A) not possible to calculate with the information provided. B) $50 capital gain. C) $0 gain or loss. D) $50 capital loss.

C) $0 gain or loss. Explanation If a new issue municipal bond is bought at a premium, the premium must be amortized over the life of the bond. At maturity, no capital gain or loss would occur because the premium would have been fully amortized. Reference: 15.5.7.1 in the License Exam Manual

If a customer has $9,000 of capital losses and $2,000 of capital gains in a tax year, that year's consequences are a: A) $7,000 loss deduction with no carry forward. B) $9,000 loss deduction. C) $3,000 loss deduction with $4,000 carry forward. D) $3,000 loss deduction with no carry forward.

C) $3,000 loss deduction with $4,000 carry forward. Explanation For tax purposes, the customer can net gains with losses. In this case, the customer's net losses are $7,000. However, there is an annual capital loss deduction limit of $3,000. Therefore, the investor can deduct $3,000 this year and carry forward $4,000 to the following tax year. Reference: 15.5.6.1.3 in the License Exam Manual

A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and NOT have the sale classified as a wash sale? A) There is no waiting period. B) 5 days. C) 30 days. D) 20 days.

C) 30 days. Explanation According to the wash sale rule, a customer who sells a security at a loss cannot buy back a substantially identical security 30 days prior to or 30 days after the sale that established the loss. Reference: 15.5.6.3 in the License Exam Manual

For tax-reporting purposes, qualified dividends are considered to be what type of income? A) Phantom. B) Passive. C) Portfolio. D) Earned.

C) Portfolio. Explanation Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities. Reference: 15.5.3.3 in the License Exam Manual

What is a basic assumption in an active management investment style? A) The market is efficiently priced and that will make an active management style effective. B) Asset allocation makes no difference. C) Some securities are mispriced and value can be captured through security selection. D) There is no opportunity cost to investing.

C) Some securities are mispriced and value can be captured through security selection. Explanation An investment manager using an active management investment style believes that by using investment expertise he can select securities that are undervalued to achieve superior returns over time. Reference: 15.4.3 in the License Exam Manual

One of your customers has donated securities that have appreciated over time since they were first purchased to her favorite charity. Wanting to use the donation as a tax deduction on her tax return the customer would be advised that she will be allowed to deduct A) no portion of the donation B) the original cost of the securities when initially purchased C) the market value of the securities on the date the donation was made D) the amount by which the securities have gone up in value above the purchase price

C) the market value of the securities on the date the donation was made Explanation When an individual has donated appreciated securities to a charity, the amount of the allowable tax deduction is equal to the current market value of the securities on the day the donation was made. Reference: 15.5.9.1.1 in the License Exam Manual

Market timing is normally associated with which of the following portfolio management styles? A) Modern portfolio theory. B) Passive management. C) Strategic asset allocation. D) Tactical asset allocation.

D) Tactical asset allocation. Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy. Reference: 15.4.2.2 in the License Exam Manual

If a customer attempts to place an order for municipal securities that the registered representative deems completely unsuitable for the customer, the registered representative: A) must obtain the permission of a municipal securities principal before executing the order. B) must refuse to execute the order. C) may execute the order on a not-held basis. D) may execute the order and mark the order ticket as "unsolicited".

D) may execute the order and mark the order ticket as "unsolicited". Explanation A registered representative may enter any unsolicited order from a customer despite the fact that the representative believes the trade to be unsuitable for the customer. The representative must mark the order ticket "unsolicited". Reference: 15.3.1 in the License Exam Manual

A municipal securities registered representative may be allowed to share in a customer's account if which of the following is TRUE? He shares in the losses as well as the profits. The sharing is proportionate to his investment in the account. The registered representative agrees to only share in the gains and not the losses the account might incur. The customer is employed by the same municipal securities dealer. A) I and II B) II and III C) II and IV D) III and IV

A) MSRB rules specifically prohibit an associated person of a municipal securities dealer from sharing in a customer's account unless the sharing is in direct proportion to the associated person's investment in that account. Sharing in losses as well as profits is also a requirement but is not sufficient if the proportionate sharing test is not met. The proportionate test does not apply if there is an immediate family relationship between the two account holders.

A single investor, age 26, wants to begin a long-term saving plan for retirement by opening an IRA with your broker/dealer. Comfortable with mutual funds, an appropriate asset allocation/mix would be A) 80% equity funds, 20% bond funds B) 40% equity funds, 60% bond funds C) 10% equity funds, 90% bond funds D) 50% equity funds, 50% bond funds

A) Your answer, 80% equity funds, 20% bond funds, was correct!. Long-term investors, such as those saving for retirement, would seek growth of capital as an objective over the safety associated with debt securities. An investor age 26 is far enough away from retirement to accommodate a growth objective and the greater risk associated with equities over debt. It would be suitable to initially allocate a high percentage of the portfolio to equities. Reference: 15.2.2.3 in the License Exam Manual.

If a customer buys $28,000 of ABC stock in April of 1999 and at year end, the stock is worth $23,000, how much may the customer deduct on his 1999 tax return? A) $0. B) $5,000. C) $3,000. D) $2,000.

A) $0. Explanation Until the customer realizes the loss by selling, there is no tax deduction. Reference: 15.5.6 in the License Exam Manual

A customer is selling inherited stock. The decedent originally paid $50 per share and on the date of the decedent's death, the stock was worth $60 per share. On the day the customer sells the stock, the price per share is $62. What is the investor's cost basis in the stock? A) 60. B) 62. C) 55. D) 50.

A) 60. Explanation 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. Reference: 15.5.9.1.3 in the License Exam Manual

Which of the following bonds is most affected by interest rate risk? A) 7.6s of '31 yielding 7.2%. B) 7s of '22 yielding 7%. C) 7.5s of '24 yielding 7.2%. D) 7.8s of '27 yielding 7.3%.

A) 7.6s of '31 yielding 7.2%. Explanation Interest rate risk is the loss in value due to a rise in interest rates. Since there is little difference in coupon rates, the bond with the longest maturity (highest duration) will experience the greatest fall in a rising interest rate market. Reference: 15.3.2.4 in the License Exam Manual

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

A) A stock with an above-average price-to-earnings ratio. Explanation A growth investor looks for stocks with above-average price-to-earnings ratios. Conversely, a value investor focuses on stocks with low PE ratios, a low price-to-book value, and historically high dividend yields. Reference: 15.4.3.2 in the License Exam Manual

By which government is the income from eurodollar bonds always taxed? A) Government of the country in which the investor pays taxes. B) No tax is levied. C) Government of the country in whose currency the bonds are denominated. D) Government of the country that issued the bonds.

A) Government of the country in which the investor pays taxes. Explanation The income from a foreign investment is taxable to the investor under the rules of the country in which he pays taxes. The income may also be taxable in the country of issuance. In this case, the investor would receive a tax credit in order to avoid dual liability. Reference: 15.5.4.3 in the License Exam Manual

If a customer buys a new issue municipal bond at a discount in the primary market, which of the following statements are TRUE? The discount must be accreted. The discount may not be accreted. At maturity, there is a capital gain. At maturity, there is no capital gain. A) I and IV. B) I and III. C) II and III. D) II and IV.

A) I and IV. If a new issue municipal bond is bought at a discount in the primary market, the discount must be accreted. The accretion is considered interest income, and therefore is not taxable. Reference: 15.5.7.2 in the License Exam Manual

If a customer wants a year-end tax swap, he can expect to pay more money for the swap if the bonds purchased have a: lower coupon. higher coupon. lower rating. higher rating. A) II and IV. B) I and III. C) II and III. D) I and IV.

A) II and IV. Explanation Higher coupon rates and higher ratings make bonds more valuable. Reference: 15.5.6.3 in the License Exam Manual

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

A) Money-market mutual fund. Explanation 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. Reference: 15.2.2.2 in the License Exam Manual

If an employee of an NYSE member wants to take a second job, which of the following statements is TRUE? A) Prior written notice to the member firm is required B) Prior permission of the NYSE is required C) Prior written notice to the member firm and prior written permission to the employee is required D) Prior notice to the NYSE is required

A) Prior written notice to the member firm is required Explanation Prior written notice to the member firm from the employee is required. While no prior written permission of the firm is required, the member firm does have the right to reject or restrict any outside affiliations if they feel a conflict of interest exists. Reference: 15.1.2.2 in the License Exam Manual

Which type of risk is a mortgage-backed security most likely to experience? A) Reinvestment rate risk. B) Business or corporate risk. C) Exchange rate risk. D) Market risk.

A) Reinvestment rate risk. Explanation A mortgage-backed security, such as a collateralized mortgage obligation (CMO), is most likely to experience reinvestment rate risk. As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower yielding securities. This is the practical effect of prepayment risk. Reference: 15.3.2.5 in the License Exam Manual

An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A) The shares are not subject to taxation. B) As $2,500 ordinary income. C) As a $2,100 capital gain. D) As a $2,500 capital gain.

A) The shares are not subject to taxation. Explanation Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received. Reference: 15.5.6.1 in the License Exam Manual

A customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment? A) The tax loss is not allowed. B) He has a capital loss. C) The holding period for the stock was wiped out. D) By repurchasing the investment at the same price, he keeps the original cost basis.

A) The tax loss is not allowed. Explanation Since the security was repurchased in less than 30 days, the IRS will not allow the loss due to the wash sale rule. It would have been allowed had the customer bought back the security after 30 days. Reference: 15.5.6.3 in the License Exam Manual

All of the following statements regarding dollar-cost averaging are correct EXCEPT: A) dollar-cost averaging decreases the risk of loss. B) dollar-cost averaging is a passive investment strategy. C) an employee stock purchase plan (ESPP) is one way to use dollar-cost averaging. D) dollar-cost averaging is the investment of a fixed amount of money each period.

A) dollar-cost averaging decreases the risk of loss. Explanation Dollar-cost averaging is a passive investment strategy using a fixed dollar amount to purchase shares no matter what the price is. The fixed dollar amount buys more shares when the price is lower and fewer shares when the price is higher. While this strategy can lower the average cost per share over time it does not assure profitability nor does it decrease the risk of loss. Reference: 15.4.1.2 in the License Exam Manual

Your client, age 62, single and just retired with no mortgage, currently owns some growth stocks and AAA rated corporate bonds. He would like to diversify in a way that might add to his current income in order to supplement his pension plan distributions. He tells you he is financially comfortable and willing to accept moderate risk. Of the following choices, which would be the most suitable recommendation for this individual? A) Equity income fund B) Corporate bonds with non-investment grade ratings and higher yields C) New property direct participation real estate program (DPP) D) Selling naked call options to generate income

A)Your answer, Equity income fund, was correct!. Of these choices, an equity income fund would be the most appropriate. These funds seek current income through dividend-paying stocks and generally have a secondary objective of moderate growth. None of the remaining choices would align with the client's moderate risk criteria. Reference: 15.2.2.2 in the License Exam Manual.

A customer has $12,000 of capital gains, $15,000 of capital losses, and $50,000 adjusted gross income. How much unused loss is carried forward to the following tax year? A) $15,000. B) $0. C) $12,000. D) $3,000.

B) $0. Explanation After netting capital gain and losses, the customer has a net capital loss of $3,000. Since $3,000 of net losses can be deducted from income in any single tax year, there is no carry forward. Reference: 15.5.6.1.3 in the License Exam Manual

If a customer owns a $10,000 8% U.S. Treasury Bond and she is in the 28% federal tax bracket and a 2-½% state tax bracket, what amount of tax will she pay on the income received from the bond? A) $20. B) $224. C) $80. D) $100.

B) $224. Explanation Interest on U.S. Treasury bonds is taxable at the federal level only; $800 of interest taxed at 28% = $224. Reference: 15.5.4.1.1 in the License Exam Manual

A customer purchases a 6% municipal bond in the secondary market on a 7% basis. The effective after-tax yield is A) 0.06 B) 6 to 7% C) 0.07 D) greater than 7%

B) 6 to 7% Explanation In every case but one, the yield to maturity is the effective after-tax yield to a municipal-bond buyer. The one exception is a bond bought at a discount in the secondary market. In this case, the annual accretion is taxed as ordinary income. The discount, which is included in the stated yield to maturity, is taxable, reducing the effective after-tax yield to somewhere between the coupon of 6% and the yield to maturity of 7%. Reference: 15.5.7.2 in the License Exam Manual

Which of the following statements is NOT true? A) A stock with a beta of .8 will move 20% less than the market. B) Beta is a measure of a security's deviation from its historical average returns. C) A stock with a beta of 1.2 will move 20% more than the market. D) Beta is a volatility measure of a security compared with the overall market.

B) Beta is a measure of a security's deviation from its historical average returns. Explanation 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. Reference: 15.3.3.1 in the License Exam Manual

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

B) I, II and III. Progressive taxes are those taxes where the rate of taxation increases as the dollars being taxed increase. Personal income tax, while not as progressive as it was prior to the 1986 reform, is still considered a progressive tax since 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. Reference: 15.5.2 in the License Exam Manual

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? Sales. Cigarette. Income. Estate. A) II and IV. B) III and IV. C) I and II. D) I and III.

B) III and IV. Explanation With a progressive tax, the percentage amount increases as the taxable amount increases such as income and estate taxes. Sales and cigarette taxes are regressive because all persons pay the same percentage tax regardless of their income. Reference: 15.5.2 in the License Exam Manual

Which of the following best describes ALPHA for an investor's portfolio? A) It is a measure of risk that adjusts in accordance with the performance of a known benchmark. B) It is a measure of performance that adjusts for risk, relative to a known benchmark. C) It is a measure of each portfolio assets risk to arrive at the risk associated with the entire portfolio. D) It is the prediction of performance aligning with the risk of a known benchmark.

B) It is a measure of performance that adjusts for risk, relative to a known benchmark. Explanation ALPHA is a measure of performance that adjusts for risk, relative to a known benchmark. The ALPHA for any investment type, a particular asset, or portfolio is the abnormal rate of return on the investment in relation to what would normally be predicted by the benchmark. Reference: 15.3.3.1 in the License Exam Manual

A customer purchases a municipal bond in the secondary market at 84 and he holds the bond to maturity. Since the customer must accrete the discount, what are the tax consequences at maturity? A) Capital loss of $16. B) No capital gain or loss. C) Capital gain of $16. D) Capital gain of $160.

B) No capital gain or loss. Explanation When a municipal bond is purchased in the secondary market at a discount, the discount must be accreted for cost-basis purposes. Note that the accretion on a discount municipal purchased in the secondary market is taxable as ordinary income. At maturity, the customer's cost basis has been accreted to par. Therefore, there is no reported gain or loss on redemption. Reference: 15.5.7.2 in the License Exam Manual

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 4 to 6 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) U.S. government T-notes, GNMA, real estate direct participation program B) Savings account (cash), money market account, short-term T-bills (1-3 months) C) IRA, variable annuity D) U.S. government T-bonds, U.S. government T-notes, mutual fund A shares

B) Savings account (cash), money market account, short-term T-bills (1-3 months) Explanation 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. Reference: 15.2.2.6 in the License Exam Manual

An investment adviser who switches among investment classes based upon anticipated market changes is using a technique known as: A) indexing. B) asset allocation. C) dollar cost averaging. D) value investing.

B) asset allocation. Explanation A money management strategy that switches among asset classes based upon anticipated market moves is asset allocation. Indexing is a passive strategy that makes no attempt to anticipate market moves. An index strategy reflects an underlying index with the adviser keeping securities in the portfolio in proportion to their weight in the underlying index. Value investing seeks to actively invest in securities that are selling at a discount to their book value and out of favor with the market. Dollar cost averaging is a method of acquiring shares at a lower average cost over time and is not an investment style. Reference: 15.4.2 in the License Exam Manual

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) corporate common and preferred stock C) government and agency securities D) municipal bonds from the same state in which the corporation is located

B) corporate common and preferred stock Explanation Corporate ownership of another company's stock allows the investor to exclude 50% of the dividends from taxation. Reference: 15.5.11.1 in the License Exam Manual

An investor diversifying a corporate bond portfolio does NOT consider: A) quality. B) domicile of the investor. C) issuer. D) maturity.

B) domicile of the investor. Explanation Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example, it is irrelevant if GM the client is located in Michigan or New Jersey. This could be a factor for municipal bond investors due to the possibility of avoiding state income tax. A corporate bond portfolio can be diversified by issuer, quality (rating), domicile of the issuer and maturity. Reference: 15.2.2.5 in the License Exam Manual

A customer has the following municipal bonds in his portfolio: A-rated, New York State GO 6½, 6-1-12 Baa-rated, M.T.A. (NY) 7½, 7-1-16 Aaa-rated, Buffalo, NY 5%, 2-1-20 The portfolio is diversified in all of the following EXCEPT by: A) issuer. B) geography. C) rating. D) purpose.

B) geography. Explanation While the issuers, ratings, coupons, and purposes are different for all three bonds, they were all issued within the same state. Reference: 15.4.1.1 in the License Exam Manual

] Under FINRA rules, a registered representative is permitted to borrow money from a customer: A) without restriction. B) if written notification is given to the firm and the representative receives written approval. C) under no circumstances. D) if written notification is given to the firm.

B) if written notification is given to the firm and the representative receives written approval. Explanation Firms are not required to permit lending arrangements between registered representatives and their customers. If they do, they must have procedures in place to monitor such arrangements. If permitted by the firm, the arrangement must fall into one of five permissible categories: the customer is a member of the representative's immediate family; the customer is in the business of lending money; the customer and the representative are both registered with the same firm; the arrangement is based on a personal relationship outside of the customer/representative relationship; or the arrangement is based on a business relationship outside of the customer/representative relationship. If permitted by the firm, the representative must advise the firm in writing of the proposed borrowing, and receive written permission. Reference: 15.1.3.4 in the License Exam Manual

Alternative minimum tax (AMT): A) is assessed against high annual income earners and gives them special deductions to take that lower income earners do not get. B) is assessed against high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. C) is assessed against low annual income earners and allows special deductions for them to be taken. D) is assessed against all self-employed individuals.

B) is assessed against high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. The alternative minimum tax (AMT) is assessed against high annual income earners. When calculating adjusted gross income some deductions and exemptions are disallowed resulting in a higher taxable adjusted gross income (AGI). Reference: 15.5.10 in the License Exam Manua

A customer pursuing income using a defensive investment strategy while avoiding volatility would be most interested in: A) limited partnerships. B) short-term government bonds. C) growth stocks. D) high yield corporate debt.

B) short-term government bonds. Explanation Remember to take all investor characteristics into account. Short-term government bonds will produce for the customer safe income with little price volatility. Reference: 15.4 in the License Exam Manual

All of the following require prior notification by a registered representative to his broker/dealer EXCEPT A) when he takes a part-time job during the holiday season to earn extra money B) when he volunteers on the telephones for a fund-raising campaign for the local college C) when he assists in the private distribution of securities for a non-profit organization D) when he is invited to sit on the board of directors of a local business

B) when he volunteers on the telephones for a fund-raising campaign for the local college Volunteer fund raising for the local college, since it is not a business or securities activity, would not require prior notification of his broker/dealer. Reference: 15.1.2.2 in the License Exam Manual

A registered representative is interviewing a new customer, age 27. The customer wants to list capital appreciation as the primary investment objective for the account and is willing to take a moderate degree of risk at this time in his life. The customer also notes concern about inflation and how it will impact his portfolio over time. Which of the following investments is the most suitable recommendation? A) Corporate debt securities B) Long-term government bonds C) Equities such as common and preferred stock D) Municipal debt securities

C) Equities such as common and preferred stock Explanation Equities would be the most appropriate investment given the customer's age, capital appreciation investment objective and willingness to accept moderate risk. The remaining answer choices, while each has varying risk characteristics, are not likely to meet the capital appreciation objective. Reference: 15.2.2.7 in the License Exam Manual

A customer bought 100 ABC at 60 in January of 1998. In February 2000, the stock is worth $100 per share and the customer donated it to charity. The consequences are: a $6,000 deduction. a $10,000 deduction. no tax is due on appreciation. tax is due on appreciation. A) I and IV. B) II and IV. C) II and III. D) I and III.

C) II and III. Explanation When an investor donates appreciated securities to charity, the investor will receive a tax deduction based on their value as of the donation date. There will be no tax due on the amount of appreciation as long as the stock was held long-term as of the date of the charitable donation. Reference: 15.5.9.1.1 in the License Exam Manual

A high net worth couple in their 40s earning a combined $480,000 annually have $100,000 they would like to conservatively invest. Given their income bracket, they stress reducing tax exposure and also note that having access to the funds is important. Which of the following would be the most suitable investment? A) Special situation mutual fund B) GNMA fund C) Municipal bond ETF D) Direct participation program

C) Municipal bond ETF Explanation Municipal bonds and GNMAs are the 2 choices considered conservative offered here. However, distributions of interest from the GNMA fund will be taxed at the federal, state, and local level. Income distributions from the municipal bond ETF will be tax-exempt at federal level, reducing tax exposure at their income level and is the better choice. DPPs are not conservative or liquid and special situation mutual funds offer no reduced tax exposure. Reference: 15.2.2.7 in the License Exam Manual

A couple in a high tax bracket is interested in minimizing its tax liability while diversifying its portfolio. Which of the following best fits its investment objectives? A) GNMAs. B) Preferred stock. C) Tax-exempt unit trusts. D) Corporate convertible bonds.

C) Tax-exempt unit trusts. Explanation Municipal unit trusts provide tax-free income to unit holders. Unit holders have an undivided interest in the underlying portfolio of municipal bonds. The trust consists of a number of different issues, and therefore has an element of diversification. Reference: 15.5.4.1.2 in the License Exam Manual

An investor has losses on the sale of municipal bonds. Which of the following is TRUE for tax purposes? A) The losses can be applied only against gains on the sale of other debt instruments (bonds). B) No losses on municipal bonds can be applied against gains on sales of any securities. C) The losses can be applied against the gains on the sale of any other security. D) The losses can be applied only against gains on the sale of other municipal bonds.

C) The losses can be applied against the gains on the sale of any other security. Losses on the sale of one investment can generally be deducted against gains on the sale of any other investment. Reference: 15.5.6.1.3 in the License Exam Manual

A customer buys a new issue municipal bond at a discount. If held to maturity, the amount of the discount is: A) accreted and taxed as ordinary income. B) taxed as a long-term capital gain. C) accreted and is not taxed. D) taxed as a short-term capital gain.

C) accreted and is not taxed. Explanation Original issue discounts are accreted, which allows for a step-up in cost basis. Accretion on original issue discount municipal bonds is not taxed. Reference: 15.5.7.2 in the License Exam Manual

A registered representative gives 2 tickets for an upcoming college basketball game to a client and his son. Each ticket is valued at $75. This gift would be A) disallowed under the gifts and gratuities rule B) disallowed because the combined value exceeds $100 C) allowed because gifts to clients do not violate the gifts and gratuities rule D) allowed only because each ticket is valued at less than $100

C) allowed because gifts to clients do not violate the gifts and gratuities rule Explanation FINRA's rule regarding gifts and gratuities to employees of other firms to influence them does not apply to gifts and gratuities to customers and clients. If however there was some evidence (none is given here) that the gift was intended as a way to rebate commissions or share in account losses, it would be a violation because those activities are not allowed. Reference: 15.1.3.2 in the License Exam Manual

If a registered representative purchases a limited partnership unit without providing prior written notice to his employing firm, the representative A) must have his firm's written approval before receiving any distributions B) has violated FINRA's rule against interpositioning C) is in compliance with FINRA rules because the partnership is a passive investment D) has violated FINRA's rule prohibiting outside business activities

C) is in compliance with FINRA rules because the partnership is a passive investment

A registered representative (RR) at a FINRA member broker/dealer has a brother who is a Certified Public Accountant (CPA), operating his own accounting firm. The 2 brothers decide that they will pay one another for business referrals in the form of a flat fee each time one of them refers a client to the other. For the FINRA member RR, this arrangement is A) prohibited because finder's fees are disallowed amongst financial firms under the anti-money laundering provisions of the Bank Secrecy Act B) allowed so long as the fee is agreed upon in writing before either of them refers a client to the other C) prohibited because FINRA rules do not allow cash or non-cash payment for customer referrals to anyone who is not a FINRA member D) allowed because the fee is a flat one and, therefore, not connected to the amount of business the referred customer might do

C) prohibited because FINRA rules do not allow cash or non-cash payment for customer referrals to anyone who is not a FINRA member Explanation FINRA rules do not allow cash or non-cash payment for customer referrals to anyone who is not a FINRA member. The prohibition regarding referrals or finder's fees includes payments made in connection with locating, introducing, or referring brokerage account customers to the member firm or registered representative. Reference: 15.1.2.5 in the License Exam Manual

John purchased stock of a company in the business of manufacturing yachts. Two years ago his securities had lost most of their value as a result of a congressionally imposed luxury tax on purchases of more than $30,000. John's investment in the yacht-building business suffered a loss due to: A) interest rate risk. B) business risk. C) regulatory (legislative) risk. D) volatility.

C) regulatory (legislative) risk. Explanation John's investment in the yacht-building business suffered a loss as a result of regulatory (legislative) risk. In other words, the rules of the game (i.e., tax treatment) changed after John purchased the security. Reference: 15.3.2.10 in the License Exam Manual

A foreign company made a private offering of shares to be based on currency transactions and promised a 20% minimum return. A registered representative referred several of his customers to the company and received a $100 referral fee for each customer but no commissions. Because the representative did not execute any transactions, he did not inform his broker/dealer of the referrals. If the investment turned out to be fraudulent, which of the following statements are TRUE? The registered representative may be guilty of assisting in the perpetration of fraud. The investors will also be held liable for the fraud. The investors are victims rather than perpetrators. Because the registered representative did no transactions, he cannot be held liable for the fraud. A) II and IV B) III and IV C) I and IV D) I and III

D) It is the registered representative's responsibility to perform due diligence on any investments he recommends to customers, even referrals. Because of his referrals, he could be found guilty in the perpetration of fraud.

An investor purchases 100 shares of CDE on December 20, 2000, for $2,000. On the same day, he purchases 100 shares of QRS for $2,000. On January 3, 2001, he sells the CDE stock for $1,700 and the QRS stock for $2,200. On January 24, 2001, he purchases 200 shares of CDE for $3,000. What capital gains or losses did he realize from these transactions? A) $300 loss in CDE and $200 gain in QRS. B) $300 loss in CDE. C) $300 loss in QRS and $200 gain in CDE. D) $200 gain in QRS.

D) $200 gain in QRS. Explanation The investor in this question has a $200 capital gain to report on the purchase of QRS stock for $2,000 and its subsequent sale for $2,200. Because the investor repurchased the CDE stock (January 24) within 30 days of selling it (January 3), the $300 loss incurred ($2,000 - $1,700 = $300) when sold (January 3) is disallowed under the wash sale rule. Reference: 15.5.6.3 in the License Exam Manual

An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year? A) $5,000. B) $2,500. C) $0. D) $3,000.

D) $3,000. Explanation The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year. Reference: 15.5.4 in the License Exam Manual

Four years ago, you declared a net capital loss of $23,000 on your tax return. You have had no further capital gains or losses since then. For that year and the following 2, you took the maximum allowable income deduction. How much may you deduct from your income this year, and how much loss will you have to carry forward? A) $3,000/$12,000. B) $2,000/$12,000. C) $2,000/$11,000. D) $3,000/$11,000.

D) $3,000/$11,000. Explanation The maximum allowable deduction against income is $3,000. You will have taken 4 such deductions against $23,000, which leaves you with $11,000 to carry forward ($23,000 - $12,000). Reference: 15.5.6.1.3 in the License Exam Manual

If near term liquidity were the only objective for a client, which of the following pairs of investments would represent the most/least liquid? A) Variable annuity (VA)/money market mutual funds B) Variable annuity (VA)/direct participation programs C) 10-year corporate bonds/U.S. T-bills D) Exchange listed equities/direct participation program (DPP)

D) Exchange listed equities/direct participation program (DPP) Explanation Of the pairings offered to choose from, exchange listed equities are considered liquid as they could be easily divested of, and DPPs all having predetermined (scheduled) end dates, would be the least liquid. Reference: 15.3.2.9 in the License Exam Manual

Which of the following is the best example of a passive investment management style? A) Investment in small capitalization technology securities. B) Value investing. C) Use of index funds in conjunction with selecting specific securities in the index to overweight certain sectors. D) Exclusive use of index funds.

D) Exclusive use of index funds. A passive investment style uses index funds because the manager does not believe that returns above the averages can be sustained for any length of time because the market is priced efficiently. Use of index funds in conjunction with specific securities in order to overweight sectors is an active style. Investment in small capitalization technology securities involves actively selecting securities that the manager believes will perform well or better than the market. Value investing involves the active search for securities that are undervalued by the market. Reference: 15.4.3 in the License Exam Manual

Regarding the taxation of dividends received from corporate securities, which of the following are TRUE? Nonqualified dividends are taxed at the rate the investor's ordinary income will be taxed. Nonqualified dividends are not taxed. Qualified dividends are taxed at a maximum rate specified by the IRS and will depend on the investor's income tax bracket. Qualified dividends are taxed at the rate the investor's ordinary income will be taxed. A) I and IV B) II and III C) II and IV D) I and III

D) I and III Explanation Nonqualified (ordinary) dividends are taxed at the investor's ordinary income tax rate, while qualified dividends will be taxed at a maximum rate as specified by the IRS. Whether or not the qualified dividends are taxed at the maximum rate or a lower rate depends on the investor's income tax bracket. The higher the investor's income tax bracket the higher the tax on qualified dividends will be, up to the maximum. Reference: 15.5.4.2 in the License Exam Manual

When making recommendations to an advisory client, which of the following carry the most weight? The client's risk tolerance. Past performance of the adviser representative's recommendations. The client's investment needs and objectives. The client's previous investment experience with other advisers. A) II and IV. B) II and III. C) I and IV. D) I and III.

D) I and III. Explanation Investment objectives and risk tolerance should determine recommendations to an individual advisory client. Reference: 15.2.1.2 in the License Exam Manual

If a customer, while out of town, receives a margin call for securities purchased a day earlier, which of the following actions would be appropriate? The customer overnights a personal check to cover the call. The broker servicing the account writes a personal check to cover the call. The brokerage firm transfers the position to its trading account until the customer returns. The customer uses a wire transfer of funds to cover the call. A) II and IV. B) I and III. C) II and III. D) I and IV.

D) I and IV. Explanation Personal checks as well as wire transfers can be used to meet the call, but a broker may never loan money to a customer. Furthermore, the brokerage firm may never transfer a customer's position to its proprietary trading account pending the customer's return to satisfy a customer's margin call. Reference: 15.1.3.4 in the License Exam Manual

In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations? Your customer's tolerance of various forms of risk. Your customer's dependents and their ages. Your customer's liquid net worth. Your customer's monthly credit card payments. A) I and III. B) II and IV. C) I and II. D) III and IV.

D) III and IV. Explanation Liquid net worth and expenses such as credit card payments involve concrete sums of money and cash flow and thus, are financial. Number of dependents and risk tolerance should be considered regarding suitability and making appropriate recommendations but they are nonfinancial considerations. Reference: 15.2.1 in the License Exam Manual

Under the Conduct Rules and the concept of "fair dealing" with customers, which of the following is NOT prohibited? A) Discretionary account transactions that are beyond the customer's financial means B) Short-term trading of mutual fund positions C) Recommendations to hold existing positions that no longer align with the customers investment objectives D) Short sales of securities in investment accounts

D) Short sales of securities in investment accounts The Conduct Rules would not prohibit short sales in an investment account unless those transactions did not meet the investor's investment objectives or were not within the investor's financial means. Each of the remaining answer choices would violate the concept of fair dealing with customers under the Conduct Rules and are therefore prohibited.

An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs: A) no taxable result at this time. B) tax-free income. C) a capital loss. D) a capital gain.

D) a capital gain. Explanation Yields fall as bond prices rise. Because the yield to maturity has dropped, the bond is trading at a higher price than when it was purchased. The consequence of the sale is a capital gain, because the investor sold at a premium the bond that was purchased for par. Reference: 15.5.6 in the License Exam Manual

A portfolio that invests in blue-chip stocks and growth stocks can best be described as: A) a high-yield portfolio. B) a balanced portfolio. C) an aggressive portfolio. D) a growth and income portfolio.

D) a growth and income portfolio. Explanation A growth and income portfolio typically combines conservative blue-chip securities for their stability and capital preservation with growth stocks for their appreciation potential. An aggressive portfolio contains securities of smaller companies that have the potential for significant capital appreciation. A balanced portfolio invests in both stocks and bonds. Reference: 15.4.3.1 in the License Exam Manual

To calculate a capital gain or loss on the sale of an original issue discount municipal bond, the discount must be: A) depreciated. B) amortized. C) depleted. D) accreted.

D) accreted. Explanation The IRS term for adjusting the cost basis of a discount bond upward is "accretion". Amortization is the means of adjusting a premium bond's cost basis. Reference: 15.5.7.2 in the License Exam Manual

All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules EXCEPT: A) short-term trading in mutual fund shares. B) switching of Class A shares between fund families. C) excessive activity in the customer's account. D) granting of discretionary authority to a new registered representative.

D) granting of discretionary authority to a new registered representative. Explanation Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer's account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative. Reference: 15.1.3.1 in the License Exam Manual

If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is the: A) original cost of the stock adjusted for any estate taxes paid. B) market value at date of distribution to the customer. C) original cost of the stock. D) market value at date of death.

D) market value at date of death. Explanation When securities are inherited, the heir receives a cost basis calculated as of the deceased party's date of death. Reference: 15.5.9.1.3 in the License Exam Manual