7 - Kaplan Final
A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income? A) An oil and gas exploratory program B) An equipment leasing program C) An oil and gas income program D) A government-assisted housing program
An oil and gas exploratory program
One of your customers is speaking to you about spread strategies for equity options and makes several statements about spreads. Which of her statements is false? A) "No spread can ever have an unlimited maximum loss potential." B) "If a position, whether long or short, begins to move against me, I can always close it out in the market." C) "With a time or horizontal spread, both options expire at the same time, which means the position expires completely." D) "With spreads, I always know exactly how much I can lose or gain once the position is established."
"With a time or horizontal spread, both options expire at the same time, which means the position expires completely."
With ABC stock trading at 33.10, a customer buys 2 ABC Jun 35 puts at 4.35. What is the time value of each contract? A) $4.90 B) $1.90 C) $0 D) $2.45
$2.45
An investor contributes $200,000 in cash to an oil and gas partnership. The partnership has entered into a nonrecourse loan for $500,000. The customer's cost basis in the program is A) $200,000. B) $700,000. C) $300,000. D) $500,000.
$200,000. Cost basis in all direct participation programs (DPPs), other than real estate, consists of actual investment plus any recourse financing. Because this note is nonrecourse, it is not included in the customer's cost basis.
Your 66-year-old customer invested $35,000 in a nonqualified variable annuity. It now has a value of $55,000, and your customer wishes to make a random withdrawal of $30,000. What is the tax liability that results if the customer is in the 28% tax bracket? A) $5,600 B) $7,600 C) $2,800 D) $8,400
$5,600
An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24, and the investor immediately sells the stock in the market, what is the investor's profit or loss? A) $150 loss B) $50 loss C) $150 profit D) $50 profit
$50 profit
An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above A) $13,000. B) $9,000. C) $10,000. D) $11,000.
$9,000.
An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is A) 0. B) 125,000. C) 150,000. D) 30,000.
125,000.
XYZ Corporation declares a 4-for-3 stock split. An investor long 600 shares will receive how many additional shares? A) 100 shares B) 800 shares C) 200 shares D) 300 shares
200 shares
To meet the initial Regulation T call in a margin account, a customer could deposit A) 100% of the call in fully paid-for marginable securities. B) 50% of the call in cash. C) 200% of the call in fully paid-for marginable securities. D) 50% of the call in fully paid-for marginable securities.
200% of the call in fully paid-for marginable securities. With a loan value of 50%, delivering fully paid-for marginable securities in an amount twice the required cash call enables the brokerage firm to lend the client cash sufficient to meet the required call.
The OCC must receive exercise instructions for equity options no later than A) 11:59 pm ET on the Saturday before the third Friday of the expiration month. B) 5:30 pm ET on the third Friday of the expiration month. C) 4:10 pm ET on the third Friday of the expiration month. D) 4:00 pm ET on the third Friday of the expiration month.
5:30 pm ET on the third Friday of the expiration month.
For margin purposes, valuing a short position by marking to market will occur how often? A) No more than once per month B) At the end of business each week on Friday C) Only in months when margin activity in the account will generate a statement to the customer D) At the close of each business day
At the close of each business day
A technical trader tells you that while looking at a chart, he sees a primary trend of higher highs and higher lows. What would this be an indication of, and according to what theory? A) Stagnant market according to the trendline theory B) Bullish market according to the Dow theory C) Bearish market according to the short interest theory D) Bullish market according to the odd-lot theory
Bullish market according to the Dow theory
Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Customized software designed to give clients access to asset allocation programs B) Desks remaining after the broker-dealer redesigned its office C) Meal expenses to attend an investment seminar sponsored by the broker-dealer D) Use of vacant office space in the broker-dealer's facilities
Customized software designed to give clients access to asset allocation programs Among the items generally in the safe harbor are those items designed to assist the firm's customers. Customized software that helps clients would be acceptable. Although seminar registration expenses are in the safe harbor, travel and transportation expenses (such as meals and lodging) are not. Rent and office furniture are specifically listed as out of the safe harbor.
Your client, age 52, is considering taking distributions from her qualified retirement plan. A portion of her contributions were made with after-tax dollars. Which of these is correct? A) Distributions of cost basis is 100% taxable, and a 10% penalty will be applied to the distributions. B) Distributions of earnings are tax free, and there will not be a penalty applied to the distributions. C) Distributions of earnings are tax free, but a 10% penalty will be applied to the distributions. D) Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions.
Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions.
Which of the following statements regarding hedge funds is correct? A) Hedge funds are usually structured as a partnership. B) Hedge funds are typically registered with the SEC as open-end investment companies. C) Hedge funds are passively managed in an attempt to provide predictable returns for investors. D) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management.
Hedge funds are usually structured as a partnership.
Which items would change if a company buys equipment for cash? The working capital The total assets The total liabilities The shareholders' equity A) II and IV B) I only C) I and II D) IV only
I only The general balance sheet formula is assets = liabilities + 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 does not affect total liabilities, nor does it affect equity.
Which of the following is an interest-bearing instrument? A) Treasury bill B) Commercial paper C) Zero-coupon bond D) Jumbo CD
Jumbo CD Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.
A registered representative (RR) at a broker-dealer mentions continuity of life as it pertains to limited partnerships (LPs). The reference can best be explained by which of the following statements? A) LPs will exist until the last partner is deceased. B) LPs have continuity of life, which means they will exist in perpetuity. C) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. D) Continuity of life is a characteristic of LPs because they are scheduled to end on a predetermined date.
LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date.
Which of the following statements regarding the sale of restricted stock under Rule 144 is true? A) Affiliates are never subject to holding periods or volume restrictions. B) Nonaffiliates are not subject to volume restrictions on stock held for more than six months. C) Affiliates are not subject to volume restrictions on stock held for more than six months. D) Form 144 must be filed with the SEC within 10 days of the date of sale.
Nonaffiliates are not subject to volume restrictions on stock held for more than six months. Sellers of restricted stock who are not defined as affiliated persons may sell freely after meeting a six-month holding period. Affiliates may also sell after meeting the six-month holding period but are subject to volume restrictions as mandated in Rule 144. Form 144 must be filed no later than concurrent with the sale.
Your broker-dealer has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new broker-dealer. How long does your broker-dealer have to validate the positions listed on the form? A) No later than the end of business on the Friday of the week the TIF was received B) Three business days C) One business day D) Seven calendar days from the time the TIF is received
One business day
An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct? A) Only the 3% employer contribution is immediately vested. B) Only the 4% employee contribution in excess of the employer's match is immediately vested. C) Only the 7% contributed by the employee is immediately vested. D) Only the 3% employee contribution being matched by the employer is immediately vested.
Only the 7% contributed by the employee is immediately vested. Under ERISA rules, any contribution by an employee is immediately vested. It is only employer contributions that may subject to a vesting schedule.
During the onboarding process of a personal securities account for a 65-year-old investor, the registered representative (RR) attempts to obtain the name of a trusted contact person who will be notified if the firm suspects exploitation. However, the investor looking to open the account declines to provide a contact name and information of a trusted adult. What is the best course of action? A) Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person. B) Open the account, and inform the investor that disbursements from the account must be made on the extended disbursement form providing a detailed explanation of the disbursement. C) The firm cannot open an account of someone age 65 or older without the name of a trusted contact person. D) Open the account, but place a dollar limit on disbursements from the account.
Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person.
A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments? A) Bond Buyer B) PSA C) FINRA D) DEA
PSA The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.
An investor wishes to invest in a limited partnership participation. Listing an investment objective of capital appreciation without producing currently taxable income, which of the following choices would be most suitable regarding the investor's criteria? A) Oil and gas income program B) Raw land C) Equipment leasing D) Low-income housing
Raw land
ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced? A) Sell 100 ABC at 50. B) Buy 100 ABC at the market. C) Buy 100 ABC at 50 stop. D) Sell 100 ABC at 45 stop.
Sell 100 ABC at 45 stop. Orders that are entered below current market value would be reduced unless do not reduce (DNR) instructions are received. Those orders are buy limits, sell stops (BLiSS) orders. These orders are reduced by the amount of the dividend on the ex-dividend date for a cash dividend distribution.
Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory? A) Business risk B) Systematic risk C) Liquidity risk D) Interest rate risk
Systematic risk
A municipality wants to issue industrial revenue bonds to benefit a local company who employs hundreds of the municipality's residents. Regarding these bonds, which of the following is true? A) Interest is paid from revenues collected through property assessments and taxes. B) The credit rating of the bonds is dependent on the credit rating of the company, not the municipality. C) The issuance of these bonds would require voter approval. D) Because these bonds are used for a nonpublic purpose, the interest income will not be subject to the alternative minimum tax.
The credit rating of the bonds is dependent on the credit rating of the company, not the municipality. The debt service for IDRs is derived from the lease payments made by the leasing corporation to the issuing municipality; it is not derived from local property taxes. Therefore, the credit rating of the bonds is dependent on the creditworthiness of the leasing corporation. Because they are revenue bonds, they do not require voter approval, and because they are for nonpublic purpose, they may be subject to the AMT for some investors.
A registered representative (RR) has prepared a sales piece for one of his retail customers demonstrating a trading strategy. Regarding the piece, which of the following statements is true? A) All material sent to individual clients must be submitted to FINRA before use. B) The piece will be regulated as a retail communication with the public. C) The piece will be regulated as correspondence. D) The piece must be approved by a principal before being sent to the customer. Explanation
The piece will be regulated as correspondence. A sales piece that is being sent to one customer will be regulated as correspondence (25 or fewer recipients = correspondence). While it must be reviewed and approved by a principal in accordance with the firms rules and procedures, there is no requirement to be approved in advance by a principal or FINRA.
A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They are quoted with a bid higher than the ask. B) They have a maximum maturity of 365 days. C) They are generally callable after the first 6 months. D) They are all auctioned on a monthly basis.
They are quoted with a bid higher than the ask. T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.
A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) Blue-chip stocks B) U.S. Treasury STRIPS maturing in 18 years C) U.S. Treasury bonds with 18 years to maturity date D) AAA rated municipal bonds maturing in 18 years
U.S. Treasury STRIPS maturing in 18 years
An investor has purchased American depositary receipts (ADRs) to achieve portfolio diversification. Holding the ADRs in a portfolio entitles the investor to dividends paid in A) the foreign currency and the ability to trade ADRs on foreign markets. B) the foreign currency and the ability to trade ADRs on U.S. securities markets. C) U.S. dollars and the ability to trade ADRs on U.S. securities markets. D) U.S. dollars and the ability to trade ADRs on foreign markets.
U.S. dollars and the ability to trade ADRs on U.S. securities markets.
Which of the following statements regarding convertible debentures is true? A) When compared with similar nonconvertible debentures, convertible debentures are issued with a lower coupon rate. B) The issuer pays a higher rate of interest, compared with a comparable nonconvertible debenture. C) The issuer has the right to convert the debentures during the time period specified in the indenture. D) The debenture holders receive a variable rate of interest.
When compared with similar nonconvertible debentures, convertible debentures are issued with a lower coupon rate. A conversion feature is a benefit to the debtholder. It allows the debtholder a choice to either continue holding the debt represented by the debenture or to convert it into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win/win situation. The win for the debtholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the debenture purchaser, that purchaser is willing to accept a lower interest rate on the debt (as compared to a nonconvertible debenture) and therefore giving the issuer a lower cost of capital. It is the debtholder, not the issuer who determines when and if to convert.
Your customer wrote a September 918 index call at 4.15 five months ago. The option expired, and the customer received no assignment notice. For tax purposes, it should be taxed and reported as A) ordinary income of $9,180. B) a $41.50 short-term capital loss. C) ordinary income of $415. D) a $415 short-term capital gain.
a $415 short-term capital gain. When options contracts expire, writers (sellers) report a capital gain equal to the premium amount received; in this case, the amount is $415. Because options only have a nine-month life cycle, all capital gains and losses are short term.
One of your customers asks you to interpret her observation that the short interest in a stock she owns has been rapidly increasing over the past four months. Aligning with the short interest theory, you would tell her that this is A) an indication of predictable stability in the stock. B) a bearish indicator. C) a bullish indicator. D) an indication of predictable volatility in the stock.
a bullish indicator.
In what is commonly known as a proceeds transaction, one of your clients is using the proceeds from the liquidation of one stock to purchase another stock. In compliance with the 5% markup policy for these transactions, the markup will be computed based on A) the compensation to the dealer for each side of the transaction separately. B) a combination of both the buy side and the sell side compensation to the dealer. C) the markup or compensation to the dealer on the buy side of the transaction. D) the markdown or compensation to the dealer on the sale side of the transaction.
a combination of both the buy side and the sell side compensation to the dealer. This is known as a proceeds transaction, which is the sale of one position, and the purchase of another with the proceeds of the sale. The 5% markup policy is applicable to proceeds transactions. In compliance with the policy, the markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side, and applying the total to the inside market on the buy side.
Your customer wants to buy 1,000 shares of XYZ stock and has entered a not-held order with instructions to you to purchase the stock when you feel the price looks right. Under the rules, this order will be treated as A) an immediate-or-cancel (IOC) order. B) a day order. C) a good-til-canceled (GTC) order. D) a limit order.
a day order.
A municipal securities advertising piece intended to be distributed to retail customers must be approved by A) a municipal securities principal or a general securities principal. B) a branch manager and the MSRB. C) a general securities principal or a branch manager. D) a municipal securities principal and the MSRB.
a municipal securities principal or a general securities principal.
An investor is long 300 shares of CTS stock and short 30 CTS May calls. This position can best be described as A) a ratio spread with an unlimited loss potential. B) a credit spread with a limited gain potential. C) a debit spread with no gain potential. D) a long stock, short call hedge with a limited loss potential.
a ratio spread with an unlimited loss potential.
A customer is trying to understand any differences between a rollover and a trustee-to-trustee transfer as they relate to his qualified retirement plans. An accurate explanation would be that A) a rollover can occur as often as one wishes, but a trustee-to-trustee transfer can occur only once every 12-month period. B) both rollovers and trustee-to-trustee transfers can occur as often as one wishes. C) a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes. D) both rollovers and trustee-to-trustee transfers can occur only once every 12-month period.
a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes.
A mutual fund portfolio consists primarily of shares of companies considered to be prime candidates for a takeover attempt. Of these choices, this mutual fund is best described as A) an aggressive growth fund. B) a leveraged fund. C) a special situation fund. D) a specialized (sector) fund.
a special situation fund.
Under the Investment Company Act of 1940, the term investment company would include A) a unit investment trust and a management company. B) a variable annuity and a closed-end management company. C) a unit investment trust and a holding company. D) a holding company and a management company.
a unit investment trust and a management company. The Investment Company Act of 1940 categorizes investment companies as either face amount certificate companies, unit investment trusts, or management companies (open or closed end). The separate account of a variable annuity is characterized as an investment company, but the actual annuity is not.
Your customer, age 46, has been investing money in a variable annuity for several years. He plans to stop the deposits to meet current financial obligations, but he does not intend to withdraw any of the funds already invested until retirement, which is still several years away. Until the withdrawals are made, the client will be holding A) annuity units. B) accumulation units. C) deferred units. D) accumulation shares.
accumulation units.
Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) it is generally best to convert when the common stock is selling below its parity price. B) the conversion feature protects against an early call. C) although they trade in line with the issuer's common stock, they are less volatile than the common shares. D) they generally pay a higher interest rate than nonconvertible debentures.
although they trade in line with the issuer's common stock, they are less volatile than the common shares.
One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on A) an after-tax basis, and those contributions will be deductible on his tax return. B) a pretax basis, and those contributions are deductible on his tax return. C) an after-tax basis, and those contributions are not deductible on his tax return. D) a pretax basis, and those contributions are not deductible on his tax return.
an after-tax basis, and those contributions are not deductible on his tax return.
You are asked to read the preliminary prospectus for a new issue of common stock for a client. You would expect the preliminary prospectus to include A) an overview and history of the issuer's business and any risks associated with the offering. B) an overview and history of the issuer's business and the final offering price. C) the effective date of the offering and the final offering price. D) the effective date of the offering and the risks associated with the offering.
an overview and history of the issuer's business and any risks associated with the offering.
A U.S. investor owns an American depositary receipt (ADR). The net tax liability to the investor for any dividends received is A) zero, because there is no tax liability to U.S. investors who purchase foreign government issues. B) the total of both foreign and U.S. income tax due. C) any foreign income tax due, but not U.S. income tax. D) any U.S. income tax due, credited by any amount of foreign income tax withheld.
any U.S. income tax due, credited by any amount of foreign income tax withheld.
A customer of a broker-dealer has a portfolio of investments where expected payments from mortgages back the securities via a process known as securitization. These securities are best described as A) asset-backed securities. B) high-yield bond options. C) commodity options. D) stock rights.
asset-backed securities. Asset-backed securities are ones whose value is backed by the expected cash flow from a pool of assets such as mortgages, other types of loans, credit card debt, and leases. Pooling individual smaller and sometimes less liquid assets into larger securities allows them to be sold easier to investors. This process is known as securitization, and when done with mortgages, are sold as collateralized mortgage obligations (CMOs).
After providing a firm quote to another broker-dealer, an OTC market maker then refuses to honor the bid price quoted. The market maker has committed a violation known as A) trading away. B) backing away. C) interpositioning. D) freeriding.
backing away.
The manager of an equity fund wishes to hedge the fund's portfolio against a possible market decline. Of the strategies listed, to provide the best protection, the manager would buy A) narrow-based index calls. B) narrow-based index puts. C) broad-based index puts. D) broad-based index calls.
broad-based index puts. The best way to hedge a long position is to buy puts. In this case, the broad-based index would be a better match for the stock portfolio than a narrow-based index.
A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should A) buy yen puts. B) buy yen calls. C) sell yen puts. D) sell yen calls.
buy yen calls.
When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) earnings per share B) net value of fixed assets C) cash flow from operations D) cash flow from investments
cash flow from operations
A corporation has issued debt securities backed by the securities of other companies that it holds in its corporate investment portfolio. These debt securities are known as A) subordinated debentures. B) mortgage bonds. C) equipment trust certificates. D) collateral trust bonds.
collateral trust bonds. A corporation issuing debt securities secured by a pledge of another company's securities it holds is issuing collateral trust bonds.
A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background B) contain information that doesn't have a place in the main body of the financial statements C) contain a detailed history of the enterprise and its products or services D) serve as a bibliography indicating where additional information may be obtained
contain information that doesn't have a place in the main body of the financial statements
All of the following statements regarding municipal advertising are true except A) it must be approved by a principal. B) it must not be misleading. C) copies must be kept for four years. D) copies must be sent to the Municipal Securities Rulemaking Board (MSRB).
copies must be sent to the Municipal Securities Rulemaking Board (MSRB).
When investing in a direct participation program (DPP), an investor should know that some asset types cannot be depreciated or depleted. One example of such an asset would be A) crops. B) oil. C) gas. D) buildings.
crops.
Upon assignment, the writer of an exchange listed equity call option must A) pay for the underlying stock to buy within one business day. B) pay for the underlying stock to buy within two business days. C) deliver the underlying stock to sell within one business day. D) deliver the underlying stock to sell within two business days.
deliver the underlying stock to sell within two business days.
To achieve its goals, an inverse ETF uses A) short selling. B) arbitrage. C) derivatives and debt. D) preemptive rights.
derivatives and debt. An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to the advantage of temporary imbalances between the ETF's net asset value and market price.
An investor wishes to save for her retirement. She arranges to have $250 per month withdrawn from her account to be invested into a commodity fund. This type of savings plan is called A) a constant dollar plan. B) a constant ratio plan. C) dollar cost averaging (DCA). D) a monthly investment plan (MIP).
dollar cost averaging (DCA).
A client, age 52, wants to know if there are any circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty. One example you could give is A) premiums for medical insurance in excess of defined adjusted gross income (AGI) limits. B) up to $10,000 annually for the first-time purchase of a principal residence. C) education expenses for one of her grandchildren. D) housing expenses while she is unemployed.
education expenses for one of her grandchildren. Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following: death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.
With respect to elective deferrals, a 403(b) plan must meet the requirements of the universal availability rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer's employees must be given the opportunity to participate. Certain employees may be excluded, including A) individuals not contributing to an IRA. B) employees who normally work less than 20 hours per week. C) employees who normally work less than 1,200 hours per year. D) any substitute teacher.
employees who normally work less than 20 hours per week. The IRS considers 20 hours per week to be equivalent to 1,000 hours per year (where mandatory eligibility begins). Working less than that allows the employer to exclude the employee from participation. Although most substitute teachers are likely to fall short of the 1,000 hours per year, any who meet that requirement must be given eligibility. Contributing to an IRA has nothing to do with plan eligibility.
Even in the best firms, there are times when a customer files a complaint. FINRA recordkeeping requirements for those complaints is A) six years. B) three years. C) four years. D) two years.
four years. Although the general recordkeeping requirements are three years, with some of the corporate-type documents being six years, FINRA has selected four years as the retention period for customer complaints.
Your client asks you to explain a not-held order. You could correctly explain that a not-held order A) can be filled only on the last trade of the day. B) can only be done in a discretionary account. C) gives time or price discretion to the floor broker. D) must be executed immediately and in its entirety.
gives time or price discretion to the floor broker.
An investor wanting to purchase municipal bonds should be aware that in most instances, if she buys the bond and then later sells it for a profit, then A) neither interest received nor capital gains will be exempt from taxation. B) interest received will be exempt from taxation, but not the capital gains. C) both interest received and capital gains will be exempt from taxation. D) interest received will be taxable, but the capital gains are exempt from taxation.
interest received will be exempt from taxation, but not the capital gains.
A website maintained by a fund company shows that one of the company's mutual funds currently has a NAV of $9.50 and a public offering price (POP) of $10 per share. Your client sees this information and enters an order to make a $10,000 purchase. He asks you to calculate the number of shares he will be able to buy with today's investment. You would respond that A) based on the 5% sales charge, he will be receiving exactly 950 shares into his account immediately. B) based on the $9.50 NAV, he will be receiving exactly 1,052.63 shares into his account at the end of the day. C) it cannot be determined until after the order is processed by the fund at the next calculated (forward) price. D) based on the $10 POP, he will be receiving exactly 1,000 shares into his account immediately.
it cannot be determined until after the order is processed by the fund at the next calculated (forward) price.
With the underlying stock at $37, an ABC Jan 35 call is trading at $2. All of the following statements regarding the option are true except A) it is trading at breakeven. B) it is in the money. C) it is at parity. D) it has time value.
it has time value. This option is at parity or breakeven, which occurs when the premium equals the in-the-money amount. An option trading at parity has no time value. When an option has no time value remaining, it is very near or at the moment of expiration.
One of your customers is exploring the possibility of investing in a limited partnership (LP). To start the conversation, you think it would be wise to caution about what is generally considered to be one of the biggest disadvantages, which is A) the flow-through of certain expenses and losses. B) the flow-through of income. Therefore, investors owning units in the limited partnership may not be able to locate buyers. C) lack of liquidity. D) having an investment managed by general partners.
lack of liquidity.
You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call. B) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. C) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. D) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put.
long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put.
If a municipal bond has a call provision, this will tend to A) make the bond less attractive to investors because a call would terminate the interest payments. B) make the bond more attractive to investors because most bonds are called at a premium. C) place a floor on how low the price will decline. D) have no effect on the price.
make the bond less attractive to investors because a call would terminate the interest payments. The possibility of a call is unattractive to the investor. In most cases, bonds are called when their interest rate is above the current market rate. This means the investor must give up that higher yielding security. It is attractive to the issuer because with a call, the bonds are bought back at par or a small premium, and interest payments end.
The Securities Act of 1933 does not regulate A) review of a registration form submitted to the SEC before a public sale of stock. B) the delivery of a prospectus when selling a municipal bond mutual fund. C) municipalities registering a revenue bond for building an airport terminal. D) the use of a preliminary prospectus during the cooling-off period.
municipalities registering a revenue bond for building an airport terminal.
While looking at a report of trades that had been executed for your customers in the secondary market, you would not see included A) mutual fund shares. B) agency securities. C) American depositary receipts (ADRs). D) municipal bonds.
mutual fund shares.
A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be A) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old. B) ordinary income on the $5,000 difference between the purchase price and the current value. C) ordinary income on the $5,000 difference between the purchase price and the current value plus a penalty of 10% because the investor is only 55 years old. D) no tax is due.
no tax is due.
An immediate dilution to earnings per share (EPS) would be least likely to occur from A) a 10% stock dividend. B) a 2:1 stock split. C) conversion of debentures. D) refunding a bond at par.
refunding a bond at par.
Regarding risk, traders in broad index options are most exposed to A) purchasing power risk. B) systematic risk. C) financial risk. D) nonsystematic risk.
systematic risk. Systematic risk is sometimes referred to as market risk. Because an index tracks the market, or a segment of the market, index options expose traders to systematic or market risk more than other risks.
For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on A) the amount of the natural resource sold. B) the condition or grade of the natural resource. C) the amount of the natural resource extracted. D) the cost of moving the natural resource to refiners and distributors.
the amount of the natural resource sold.
Approval of a new options account by a principal may occur before A) the customer has been furnished an options disclosure document. B) the customer has provided essential suitability information. C) the customer has verified information on the new account form. D) the new account form has been completed.
the customer has verified information on the new account form.
XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative (RR) should know that A) the exercise price is generally lower than the current market price at issuance. B) the value of the right will generally increase after the ex-date. C) XYZ will issue 1 million rights. D) a shareholder will generally have two to three weeks to exercise the rights.
the exercise price is generally lower than the current market price at issuance.
A customer's confirmation of a municipal securities transaction must include A) the highest potential yield the customer may receive and the amount of markup or markdown in a principal transaction. B) the lowest potential yield the customer may receive and information regarding the catastrophic call provision. C) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. D) the highest potential yield the customer may receive and information regarding the catastrophic call provision.
the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
All of the following are accurate statements regarding communications filing requirements with FINRA except A) correspondence pieces are not subject to filing with FINRA. B) pieces intended for institutional customers need not be filed with FINRA. C) retail communications can be subject to filing with FINRA. D) there are no requirements to file any sales or advertising piece with FINRA.
there are no requirements to file any sales or advertising piece with FINRA.
The IRS has determined that the NYNY real estate existing property limited partnership is abusive. The most likely reason would be because A) each partner received enough in losses to shelter all income. B) no net profit was generated after losses were taken. C) there was no viable profit motive. D) all of the assets were found to be rental properties.
there was no viable profit motive. To qualify as a limited partnership direct participation program (DPP), above all else, there must be a viable chance to make a profit. Any DPP established without a profit motive or with the intention of only generating tax losses for investors may be determined abusive by the IRS subjecting the partners to penalties including prosecution for fraud.
Your customer has purchased a 5.8 % LMN corporate bond in a regular way transaction. Settlement for this bond trade is A) trade date plus four business days. B) trade date plus one business day. C) trade date. D) trade date plus two business days.
trade date plus two business days.
FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor. B) brokers executing orders as agents in an auction market on any exchange trading floors. C) trades in NYSE-listed securities occurring on the NYSE. D) brokers acting as agents in all order execution scenarios.
trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.
You use fundamental analysis to help make investment decisions. For this type of analysis, you would not be interested in A) trading volume and price patterns. B) current business conditions. C) positioning of a company within its industry. D) corporate financial statements.
trading volume and price patterns. Fundamental analysis looks at the company itself or the economy, whereas technical analysis looks at trading patterns. The words charts, price, and volume are usually indicators that the analysis is technical.
