Missed Question Part 2

Which of the following securities is NOT eligible for Fed trading? A. Treasury Bonds B. Treasury Bills C. Commercial Paper D. Prime Banker's Acceptances

The best answer is C. Commercial paper, which is issued by corporations, is not eligible for Fed trading. The eligible securities are U.S. Government debt, Government Agency debt, and prime Banker's Acceptances. These are the securities that the Fed trades with the primary U.S. Government dealers (the major commercial banks and brokerage firms) to control credit availability in the economy.

A registered representative receives a written complaint from a customer regarding a purchase of G.O. bonds. The registered representative should: A. send a copy of the complaint to the MSRB B. send a copy of the complaint to the SEC C. submit the complaint for arbitration D. attempt to resolve the complaint with the approval of the municipal principal

The best answer is D. Written customer complaints should be resolved. The MSRB requires that every customer complaint be given to the principal for review and resolution.

High-earning parents would like to invest in equities to fund their child's higher education expenses. The best investment choice would be a: A. 529 College Savings Plan B. Coverdell Education Savings Account C. Uniform Gifts to Minors Account D. Series EE Treasury Bonds

The best answer is A. High-earning individuals cannot contribute to a Coverdell Education Savings Account. High earning individuals who invest in U.S. Government Savings Bonds and use the interest to pay for higher education expenses are taxed on the interest at the Federal level. Contributions to custodian accounts are not deductible regardless of income level and the earnings in the account are taxable annually - there is no tax benefit here, regardless of income level. Investments in 529 Plans are not federally tax-deductible, but the earnings grow tax-deferred, and distributions to pay for qualified higher education expenses are not taxable. This tax benefit is not subject to income phase-out rules, as is the case with Coverdell ESAs and U.S. Government Savings Bond investments to pay for higher education. Also note that starting in 2018, up to $10,000 per year can be withdrawn from a 529 Plan to pay for education below the college level, but that is not part of this question.

A customer in a low tax bracket has just inherited $10,000 and is looking for an investment that will provide current income and liquidity. The BEST recommendation is a: A. Corporate Bond ETF B. Variable Rate Bond C. Municipal Bond Fund D. Treasury STRIPS

The best answer is A. The Corporate Bond ETF is liquid because it is exchange traded, and it provides taxable income from its bond investments. Because the customer is in a low tax bracket, lower yielding tax-free municipal bond investments are not appropriate. Variable rate bonds would be good investment if it is expected that interest rates would rise (a point not addressed in this question), but direct bond investments are not that liquid, unless they are Treasury or Agency bonds. Treasury STRIPS are a liquid investment (a ready market exists at all times and they are easy to trade with low transaction costs), but they do not give current income. These are zero-coupon issues.

An investment strategy where a higher price is paid for a stock based upon expected returns is: A. growth investing B. value investing C. conservative investing D. passive investing

The best answer is A. A growth investor buys a stock based upon demonstrated growth in earnings or sales over time. The theory is that such companies can continue to grow rapidly, and therefore should command a higher market price.

A customer who is short 1 ABC Jan 60 Put wishes to create a "bear put spread." The second option position that the customer must take is: A. Long 1 ABC 75 Put B. Long 1 ABC 50 Put C. Long 1 ABC 75 Call D. Long 1 ABC 50 Call

The best answer is A. A spread consists of the purchase and sale of the same type of option, with different strike prices or expirations - therefore Choices C and D are incorrect. In a bear put spread (long put spreads are bearish strategies), the customer purchases the higher strike price - the long 75 put - (higher premium since the contract gives the right to sell at the higher strike price) and sells the one with the lower strike price - the short 60 put (lower premium since the contract gives the right to sell at the lower price). The customer wants the market to fall, so that he can exercise the long put with the higher strike price for a profit. However, if the market falls too much, the short put is exercised at the lower strike price, and the customer must buy the stock, locking in the gain of 15 points (sell at $75; buy at $60). Conversely, if the market rises above $75, both puts expire and the customer loses the net premium paid.

Active asset managers select investments based primarily upon: A. inefficient market pricing of the investment B. efficient market pricing of the investment C. minimum time needed to achieve projected investment returns D. minimum number of investments needed to achieve projected investment returns

The best answer is A. Active asset managers believe that by performing fundamental analysis, they can find undervalued companies - that is, companies that are not "efficiently priced". Passive asset managers believe that the market is basically efficient, and that one cannot consistently find "undervalued securities" - so why bother? Instead, just invest in an asset that mimics the index - that is, an index fund. This will do as well as the "market" with much lower expenses that those associated with "active" asset management.

Dark Pools are: I regulated as broker-dealers II regulated as exchanges III subject to Regulation ATS IV not subject to Regulation ATS A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. An evolution of the ECN is the "dark pool." Dark pools are operated by the larger broker-dealers (e.g., Goldman Sachs) and there are some that are independent companies (e.g., Liquidnet). They allow institutions to buy or sell very large blocks without displaying their orders in the ADF or in a display system such as the NASDAQ System. They are called dark pools because the size of the trade and the identity of the institution are not displayed. This avoids the problem that could occur where the display of a very large order in such a system, by itself, could move the market. If there is a match in a dark pool and a trade results, it still must be reported to the appropriate tape. The SEC wrote Regulation ATS (Alternative Trading System) in the year 2000, specifically to address the growth of ECNs, including dark pools. Regulation ATS requires Alternative Trading Systems, which include ECNs, member firm internal crossing systems and dark pools, to register with the SEC and be regulated as broker-dealers (as opposed to registering as an exchange and being regulated as such).

Which statements are TRUE regarding hedge funds? I Hedge funds are subject to little regulatory oversight II Hedge funds must register as management companies under the Investment Company Act of 1940 III Hedge fund managers are compensated based on a percentage of capital appreciation in the fund IV Hedge fund managers can only be compensated based on a percentage of assets under management A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Hedge funds are set up as private placements, open only to accredited investors. They are not regulated as investment companies and are subject to minimal regulatory oversight. Unlike regulated mutual funds, which can only compensate the adviser based on a percentage of assets under management, hedge fund managers typically take both a percentage of assets under management (say 2%) plus a percentage of capital gains in the fund (say 20%). Needless to say, this can result in very rich compensation for successful hedge fund managers.

Preferred dividends may be paid as: I Cash II Stock III Stock of another company A. I only B. II only C. I or II D. I, II, III

The best answer is A. Preferred dividends may only be paid in cash. This differs from common stock, which can be paid a dividend in the form of cash, stock, or product.

Under MSRB rules, which of the following call provisions can affect the yield that is shown on a customer's municipal bond confirmation? I In-whole call II Sinking fund call III Extraordinary mandatory call A. I only B. III only C. II and III D. I, II, III

The best answer is A. The MSRB requires that dollar prices of bonds quoted on a yield basis be computed to the lowest dollar amount of Yield to Maturity or Yield to Call. The only calls that must be considered are those where there is reasonable certainty that specified bonds will be called. Under an "in whole" call, the issuer establishes dates when the entire issue can be called. This meets the reasonable certainty test. Sinking fund calls are handled by random choice. It is not known which bonds will be called - only that a preset dollar amount of bonds will be called at the call dates. This does not meet the reasonable certainty test. Extraordinary calls, such as a calamity call, also do not meet the reasonable certainty test.

A customer has a gain on a short stock position that she wishes to protect. The appropriate order is: A. buy stop order B. buy limit order C. market order D. sell stop order

The best answer is A. The customer will "lose" the gain on a short stock position if the market begins to rise. To buy in the position in a rising market, the order must be a buy stop order (placed above the market). To buy in a short position in a falling market the order would be a buy limit order.

A change in each of the following is a coincident economic indicator EXCEPT: A. Money Supply as measured by M-2 B. Personal income levels C. Index of industrial production D. Employment levels

The best answer is A. The money supply level as measured by M-2 is a leading economic indicator, since if the money supply is rising, there is easy credit, encouraging spending. Personal income levels, the index of industrial production, and employment levels all show current activity and are coincident indicators.

Interest income in a custodian account is reported on the tax return of the: A. minor B. custodian C. parent(s) D. grantor

The best answer is A. The social security number placed on a custodian account is the minor's. Any income in the account is taxable to the minor.

Which of the following is a settlement type for foreign currency option trading? A. Cash B. Spot C. Forward D. Future

The best answer is A. Trades of foreign currency options settle either cash (same day) or regular way (next business day). Do not confuse this with trades of foreign currencies. Trades of foreign currencies settle either "spot" (1 or 2 business day settlement - the more actively traded currencies settle in 1 day; less actively traded currencies settle in 2 days) or forward (a mutually agreed date in the future).

A Regulation A exemption from full SEC registration is available for new issue offerings that do not exceed: I $20,000,000 within a 12 month period for Tier 1 offerings II $20,000,000 within a 12 month period for Tier 2 offerings III $50,000,000 within a 12 month period for Tier 1 offerings IV $50,000,000 within a 12 month period for Tier 2 offerings A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Regulation A is intended to make it easier for start-up companies to raise capital. It gives an "E-Z" registration method for offerings of up to $50 million within a 12 month period. The rule is split into Tier 1 and Tier 2. Tier 1 offerings, up to a maximum amount of $20 million, are given the easiest registration method and do not require audited financial statements. Tier 2 offerings allow a maximum of $50 million to be raised, but require audited financial statements. An abbreviated registration statement is filed with the SEC (Form S1-A) and the issue must go through a 20 day review period, similar to a regular registered offering. Disclosure to investors is made through an Offering Circular rather than a Prospectus.

A research analyst who has a buy recommendation on a stock also has a personal holding in that company. The research analyst would be permitted to sell that personal holding: A. under no circumstances B. only if hardship is shown C. only if the transaction is effected on an up-bid D. without restriction

The best answer is B. Research analysts cannot trade a stock personally counter to their recommendation. If a research analyst has a buy recommendation, the research analyst could buy that stock (only after the research report is widely disseminated and as long as the member firm does not prohibit this), but cannot be the one selling the stock. The issue here is the following scenario: A research analyst has a large personal holding and wants to sell it at a profit, so why not issue a favorable research report (so the price goes up) and then sell the stock? The only time when a research analyst with a buy recommendation on a stock can sell a personal holding in that same security is if the analyst can show hardship. Again, such a sale would be subject to the firm's policies and procedures on this.

Sallie Mae debentures are backed by: A. the full faith and credit of the U.S. Government B. the full faith and credit of the Student Loan Marketing Association C. designated pooled mortgages D. designated pooled student college loans

The best answer is B. "Sallie Mae" is the Student Loan Marketing Association. Sallie Mae raises money to lend to college students. It does this primarily by issuing debentures to the public. These debentures are backed by the faith and credit of this agency. Sallie Mae is another agency that is "privatized." Sallie Mae stock is listed and trades on NASDAQ.

A municipal variable rate demand note is a municipal: A. note that may be retired prior to maturity on any interest payment date at the demand of the issuer B. bond that gives the holder a tender option feature, usually at par, as of the reset date C. note that requires the issuer to reset the interest rate to the market rate upon demand of the holder D. bond that allows the issuer to vary the repayment date, upon giving written notice to the holders

The best answer is B. A municipal variable rate demand note is a municipal bond that gives the holder the right to "put" the bond to the issuer at par, typically at the interest payment dates. The interest rate is reset, usually weekly, to an indexed rate, and thus, will vary. It is called a "note" because the actual maturity is unknown - the holder, in effect, can redeem at par whenever he or she wants. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.

An investor holds 1 ABC Jan 40 Call. ABC splits 2 for 1. On the ex date, the holder will have: A. 2 ABC Jan 20 Calls covering 50 shares B. 2 ABC Jan 20 Calls covering 100 shares C. 1 ABC Jan 20 Call covering 200 shares D. 1 ABC Jan 40 Call covering 100 shares

The best answer is B. For 2:1 and 4:1 whole share splits, the number of contracts is increased and the strike price reduced proportionately. 1 ABC Jan 40 Call becomes (after the 2 for 1 split) 2 ABC Jan 20 Calls (the new strike price is 40/2), with each contract covering 100 shares. Note that the aggregate exercise value of the contracts remains unchanged.

Issuers of securities are prohibited from: A. buying calls on their own stock B. selling calls on their own stock C. buying puts on their own stock D. selling puts on their own stock

The best answer is B. Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting each existing stockholder's equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock.

Short Positions: 100 ABC @ $60 200 XYZ @ $50 Credit = $40,000 SMA = $16,000 Reg. T = 50% What is the minimum maintenance margin requirement? A. $4,000 B. $4,800 C. $7,200 D. $12,000

The best answer is B. Minimum maintenance margin for a short account is 30% of the market value. 30% of $16,000 = $4,800. This account currently has equity of $24,000 (Credit - Short Market Value), so it is well above the minimum requirement.

Under MSRB rules, municipal securities traders that participate in secondary market joint accounts: A. can only act as agent in the transactions and cannot carry positions overnight B. cannot disseminate quotes severally for the securities; any quote can only indicate that one market exists for the securities C. cannot place orders to buy bonds for an accumulation account sponsored by a dealer participating in the joint account D. cannot effect customer transactions and can only deal with other municipal broker-dealers

The best answer is B. Municipal secondary market joint accounts are formed by municipal firms to purchase, and subsequently resell, large blocks of bonds. Any quotes disseminated for those bonds must appear as one quote (they are actually grouped and bracketed in Bloomberg to show that they represent a single source for the quote). It cannot appear that there are multiple markets for the bonds when in fact there is only one (the joint account).

The regular hours of operation of the NASDAQ system are: A. 9:00 AM - 4:00 PM ET B. 9:30 AM - 4:00 PM ET C. 9:30 AM - 6:00 PM ET D. 9:00 AM - 8:00 PM ET

The best answer is B. NASDAQ's Regular Hours session is from 9:30 AM to 4:00 PM Eastern Time.

Under MSRB rules, a registered representative can perform all of the following functions EXCEPT: A. offering new municipal issues to retail customers B. approving municipal advertising that will be sent to customers C. trading municipal issues in the secondary market D. offering call and put options on municipal securities to customers

The best answer is B. Registered representatives are not permitted to approve municipal advertising. To do so, the individual must pass the principal's exam. Municipal representatives are permitted to sell new municipal issues to customers; trade municipal issues in the secondary market; and offer call and put options on municipal issues (though this is rarely done because such contracts are customized and are not exchange traded).

SEC Regulation FD covers: A. notification to customers of a member firm's privacy policies and practices B. selective disclosure of material non-public information by issuers C. standardization of disclosure of financial and non-financial information by issuers D. registration filings with the SEC by small business issuers

The best answer is B. Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public.

A distribution of $15,000 is taken from a Coverdell Education Savings Account in a given year, but only $13,000 is used for the beneficiary's qualified education expenses in that year. The tax consequence is: A. $2,000 is taxable B. $2,000 is taxable and a 10% penalty will be imposed C. $15,000 is taxable D. $15,000 is taxable and a 10% penalty will be imposed

The best answer is B. Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, a 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!

The Trust Indenture Act of 1939 applies to which of the following offerings? I $100,000,000 of Sewer Revenue Bonds sold interstate II $100,000,000 of Corporate Debentures sold interstate III $10,000,000 of Corporate Debentures sold interstate IV $100,000,000 of 30 day commercial paper sold interstate A. I and IV B. II only C. II and III D. II, III, IV

The best answer is B. The Trust Indenture Act of 1939 applies solely to non-exempt interstate securities offerings over $50,000,000. Sewer revenue bonds are exempt, as is commercial paper. Corporate debentures are non-exempt, but only the $100,000,000 offering is subject to the Act. The $10,000,000 corporate debt offering is under the $50,000,000 limit.

A customer buys 100 shares of ABC at $87 and buys 1 ABC Jan 85 Put @ $4. ABC goes to $72 and the customer exercises the put. The customer's loss is: A. $400 B. $600 C. $1,500 D. $1,900

The best answer is B. The customer buys the stock at $87 and sells it for $85 by exercising the put for a $2 loss. She paid $4 per share in premiums for the put contract, so the total loss is $6 points.

A customer in the 28% tax bracket has $5,000 of capital losses and $3,000 of capital gains. How much net capital loss is deductible from this year's tax return? A. $0 B. $2,000 C. $3,000 D. $5,000

The best answer is B. The customer has a capital gain of $3,000 and a capital loss of $5,000, for a net capital loss of $2,000. The entire net $2,000 loss is deductible since it does not exceed the maximum $3,000 per year net capital loss deduction.

ABC Corporation has declared a cash dividend to stockholders of record on Monday, November 21st. The last day to buy ABC shares BEFORE they go ex dividend is? A. Wednesday, November 16th B. Thursday, November 17th C. Friday, November 18th D. Sunday, November 20th

The best answer is B. The regular way ex date is 1 business day prior to the record date. The record date is Monday, November 21st, therefore the ex date is Friday, November 18th. To buy the shares before they go ex dividend, the shares must be purchased before Friday, November 18th, meaning they must be purchased on Thursday, November 17th.

A bank qualified municipal issue is one where: I 80% of the interest expense the bank pays on deposits used to fund the purchase of the bonds can be deducted II 100% of the interest expense the bank pays on deposits used to fund the purchase of the bonds can be deducted III 80% of the interest income received is not taxable to the bank holding the bonds IV 100% of the interest income received is not taxable to the bank holding the bonds A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. To be bank qualified, a municipal issue must be a public purpose (not private purpose issue). Any bank that buys the issue can deduct 80% of the interest expense it incurs on deposits used to fund the purchase of the bonds, while the interest income from the municipal issue is not taxable to the bank. This is sometimes termed the 80/20 rule. If an issue is not bank qualified, then none of the interest expense that the bank incurs on deposits used to fund the purchase of the bonds can be deducted, which is logical since the interest income from the bonds is exempt from Federal taxation.

Which of the following statements are TRUE regarding options sales literature that includes a recommendation? I It must be approved prior to use by the designated Registered Options Principal II It must be accompanied or preceded by a copy of the latest Options Disclosure Document III Showing past or projected performance is permitted IV It must be pre-filed with the exchange A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is C. All options communications with the public must be approved by the designated ROP (main office compliance ROP) - not the Branch Manager. Any communication that shows past performance; makes a performance projection; or that makes a recommendation; must be accompanied or preceded by the ODD (Options Disclosure Document). Options sales literature usually falls under these rules. Only options communications that are NOT accompanied by the ODD must be filed with the Exchange 10 days in advance of use. These are basically advertisements seen by the general public.

A U.S. balance of payments deficit would be narrowed by which of the following? A. Increased levels of U.S. imports B. Decreased sales of U.S. securities to foreign holders C. Increased levels of foreign tourists visiting the United States D. Increased dividends paid to foreign holders of U.S. securities

The best answer is C. If the balance of payments is running a deficit, then more U.S. Dollars are being spent abroad for foreign goods and services than are being spent in the United States by foreigners for domestic goods and services. •Increased levels of U.S. imports will cause more dollars to leave the U.S., widening the deficit. •Increased levels of foreign tourists visiting the U.S. will narrow the deficit, since dollars are being spent in the U.S. by more foreigners. •Increased dividends paid to foreign holders of U.S. securities will cause dollars to leave the U.S., widening the deficit. •Finally, decreased sales of U.S. securities to foreign holders will reduce the inflow of dollars resulting from these purchases, widening the balance of payments deficit.

Customer Name: Jane Smith Age: 41 Marital Status: Single Dependents: 1 Child, Age 7 Occupation: Corporate Manager Household Income: $120,000 Net Worth: $150,000 (excluding residence) Own Home: Yes Investment Objectives: Saving For College; Saving for Retirement Investment Experience: 10 years Current Portfolio Composition: $140,000 Market Value 50% Money Market Fund 50% Corporate Bonds This client has just inherited $100,000 and wants to use the funds to pay for her child's college education. She also has asked whether her current portfolio meets her goal of maximizing saving for retirement. Based on this information, the best recommendation to the client is to: A. deposit the additional $100,000 to the money market fund to ensure that the funds will be available to pay for college B. open a 529 plan with the $100,000 inheritance, investing in a growth fund; and liquidate both the money market fund holding and the corporate bond holdings, using the proceeds to buy growth stocks C. open a 529 plan with the $100,000 inheritance, liquidate $50,000 of the money market fund and $50,000 of the corporate bonds, using the proceeds to buy growth stocks D. open an UGMA account with the $100,000 inheritance investing in growth stocks

The best answer is C. This customer is looking to use her $100,000 inheritance to fund her kid's college education. A 529 plan is best for this, since it grows tax-deferred and distributions used to pay for college are tax free. Since the kid is only age 7, a growth fund investment is most suitable, since the child has 10-11 years before college starts. Note that a UGMA (custodian account) does not allow for tax deferral, so it is not the best choice. The customer also wants to save for retirement and she is only age 41, so she has at least 25 years to go before retiring. Her portfolio is way too conservatively invested for someone this age - it will grow at a very low rate since it is only invested in money market funds and corporate bonds. At this age, the customer should be invested 60-70% in growth stocks, with the balance in safer investments. So the best choice is to liquidate most of the money market fund and corporate bond holding, and invest the proceeds in growth stocks (Choice C). Choice C still leaves the customer with $20,000 in the money market fund (for emergencies) and she still has a small investment in corporate bonds ($20,000), but the remaining $100,000 will now be in growth stocks. This is a good mix for a 41 year old person looking to save for retirement. Also note that Choice B is not the best choice because the customer should still have a small portion of her portfolio in safer and more liquid securities (for emergencies) like a money fund.

Brothers Joe and John have a joint account with tenants in common. Which of the following statements are TRUE regarding the activities in the account? I Checks drawn on the account may be made out to Joe only or John only II Checks drawn on the account must be made out to both Joe and John jointly III Orders may be entered into the account by Joe only or John only IV Orders must be entered into the account by Joe and John jointly A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Any checks that are drawn on a joint account must be made out to the full name of the account - in this case checks are made out to both Joe and John. Orders in joint accounts can be entered by any single party - so Joe can enter an order or John can enter the order - they don't have to do this together

Common stockholders and preferred stockholders BOTH have: A. voting rights B. pre-emptive rights C. dividend rights D. subscription rights

The best answer is C. Both common and preferred shareholders have the right to receive dividends, if declared by the Board of Directors. Common shareholders have both voting rights and preemptive/subscription rights (the right to maintain proportionate ownership if the issuer issues additional common shares). Preferred stockholders do not have voting rights and do not have preemptive/subscription rights.

The owner of a variable annuity has which of the following rights? I Right to vote for distributions of income and capital gains II Right to vote to change the separate account's investment objective III Right to vote for the Board of Trustees IV Right to vote for dissolution of the trust A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. Distributions of dividends and capital gains are decided by the variable annuity's Board of Trustees. The unit holder can vote for the Board of Trustees and can vote to change the investment objective of the separate account. In addition, terminating the trust (a very unlikely event) would require unit holder approval as well.

An investor has a $1,000,000 portfolio that is split evenly between "blue chip" stocks and Treasury securities. The current economic environment is characterized by low interest rates and flat stock prices - and this is expected to remain unchanged for a number of years. However, the residential and commercial real estate market is expected to be strong. The investor would like to diversify the portfolio and enhance returns without adding much additional risk. Which of the following investment purchase recommendations would help achieve this objective? A. Mortgage REITs B. Mortgage Bonds C. Equity REITs D. Fannie Mae Pass-Through Certificates

The best answer is C. During periods when financial assets such as stocks and bonds are not doing well, "hard" assets such as real estate and artwork tend to do better (since investors reallocate their investments away from financial assets into housing, etc.) A way that investors can participate in this is by investing in equity REITs. Since equity REITs own real estate, the share price movement of the REIT parallels the value of the real estate owned. Mortgage REITs invest in mortgages (essentially the same as investing in a bond) and thus are not the best choice when interest rates are low, since the yield is meager. And, if market interest rates rise, the value of the mortgages held drops. The same would be true for investments in mortgage bonds and Fannie Mae Pass-Through certificates.

The main risk of investing in an ETN is: A. marketability risk B. liquidity risk C. credit risk D. market risk

The best answer is C. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years (just ask anyone who purchased Lehman Brothers structured products or ETNs).

Which of the following would be purchasers of Eurodollar bonds? I United States investors II British investors III French investors IV Japanese investors A. I only B. II and III only C. II, III, IV D. I, II, III, IV

The best answer is C. Eurodollar bonds are purchased by foreign investors worldwide. They are bonds issued in Europe that pay in U.S. currency; and are attractive to investors who wish to receive payments in U.S. Dollars. U.S. investors cannot buy Eurodollar bonds because they are not registered with the SEC, and hence cannot be offered within the United States. Issuers use Eurodollar bond financing because there are fewer regulatory hassles (and costs) in issuing these securities, than with doing a similar bond offering in the United States.

Which of the following are standardized for listed option contracts? I Strike price II Contract size III Premium IV Expiration date A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV

The best answer is C. Exchange traded option contracts have standardized contract sizes (e.g., 100 shares of stock), expiration dates (the 3rd Friday of the month), and strike prices (generally 5 point strike price intervals). The premium or "price" of the option is determined minute by minute in the trading market.

Which statements are TRUE when comparing exchange traded index funds to index mutual funds? I Expense ratios for exchange traded index funds are higher than those for index mutual funds II Expense ratios for exchange traded index funds are comparable to, or lower than, those for index mutual funds III Net asset values for exchange traded index funds are calculated continuously through the day; while net asset values for mutual funds are computed once each day IV Net asset values for exchange traded index funds are calculated once each day; while net asset values for mutual funds are computed continuously through the day A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Expense ratios for ETFs - Exchange Traded Funds - are comparable to, or lower than, those for mutual funds. Whereas mutual funds can be bought or redeemed at that day's closing Net Asset Value (plus a sales charge, if applicable), ETFs are continuously traded throughout the day at that moment's Net Asset Value (plus a commission for doing the trade).

Which of the following statements are TRUE about the Net Asset Value per share for a mutual fund? I If the securities in the portfolio make dividend distributions, the Net Asset Value per share will increase II If the securities in the portfolio make dividend distributions, the Net Asset Value per share is unaffected III If the mutual fund makes dividend distributions to shareholders, the Net Asset Value per share will decrease IV If the mutual fund makes dividend distributions to shareholders, the Net Asset Value per share is unaffected A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the Fund. The receipt of these monies into the Fund increases NAV per share. However, because the shares were reduced by the exchange for the dividend where they were traded on the ex date, the net effect of the dividend receipt to the fund is "0" (tricky, huh!).

The record date to receive a dividend is set on Tuesday, June 14th. If a stockholder wishes to receive the dividend, he or she must sell the stock in a regular way trade no earlier than: A. Thursday, June 9th B. Friday, June 10th C. Monday, June 13th D. Tuesday, June 14th

The best answer is C. If a person owns common stock and wishes to receive the dividend, that person cannot sell prior to the ex date. The ex date is 1 business day prior to record date - or Monday, June 13th. Thus, if the stock is sold on June 13th or later, the seller would receive the dividend.

In a corporate new issue offering, the issuer is responsible for which of the following? I Printing the certificates II Delivering the certificates III Transferring the certificates into the names of the purchasers IV Registering the securities with the Securities and Exchange Commission A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV

The best answer is C. In a new issue offering, the issuer is responsible for originally printing and delivering the certificates; and for registering the securities with the Securities and Exchange Commission, as well as registering the issue in each state where the issue will be sold. These shares go to the transfer agent, who transfers the shares into the names of the purchasers of the new issue.

All of the following are covered under the Securities Exchange Act of 1934 EXCEPT: A. issuance of corporate annual reports B. registration of broker-dealers C. registration of new issues D. margin on securities

The best answer is C. Registration of new issues falls under the Securities Act of 1933. The Securities Exchange Act of 1934 requires registration of broker-dealers; prescribes the content of corporate annual reports; and gives the Federal Reserve the power to set margins on both new issues and secondary market securities.

Which of the following must be sent to customers of broker-dealers semi-annually? I Broker-dealer securities inventory amounts II Broker-dealer balance sheet III Broker-dealer subordinated loan amounts IV Broker-dealer net capital computation A. II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. Semi-annually, customers receive a balance sheet (which includes a listing of subordinated loans - these are loans to broker-dealers where the lender subordinates his claim to all other creditors and are included as part of the firm's capital base) and a net capital computation from the broker-dealer. There is no requirement for a broker-dealer to disclose his inventory positions to customers.

Which of the following will affect the SMA in a short margin account? I A decrease in market value II An increase in market value III A purchase of securities IV A sale of securities A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

The best answer is C. Similar to a long account, SMA "locks" in a short account if the market value moves adversely, and in a short account, this occurs when the market value increases. If the market value drops, SMA will increase as equity rises. A purchase of securities adds to SMA; and an additional short sale of securities uses SMA.

All of the following are rights of a common shareholder EXCEPT the: A. right to vote B. right to receive a dividend C. right to manage D. right to transfer shares

The best answer is C. The common shareholder does not manage the company - this is the domain of the Board of Directors and corporate officers. The common shareholder does have the right to vote, receive a dividend, and to sell his shares.

Which of the following are acceptable methods for opening an investment adviser account? I Each individual client of the adviser opens an account under the client's name II Each individual client of the adviser opens an account under the adviser's name III The adviser opens a Third Party account for each client IV The adviser opens an Omnibus account holding all of his clients' funds and securities A. I and II only B. III and IV only C. I and IV only D. II and III only

The best answer is C. The parties to an account are: First Party: Brokerage Firm Second Party: Customer Third Party: Someone Other Than the Broker or Customer Only Second Parties can open accounts. A Second Party can give trading authorization to either the First Party (a discretionary account) or to the Third Party (a Third Party trading authorization). An Investment Adviser can have each of his individual clients open an account at a brokerage firm, with the client giving the investment adviser Third Party power of attorney. The account is held in the name of the Second Party - that is, the customer. The other way for an investment adviser to open an account is on an Omnibus basis. In this situation, the Investment Adviser is the Second Party, opening a "group account." The names of the individual customers in the account are not known to the brokerage firm. From the brokerage firm's standpoint, the customer is the Adviser. Third Parties can never open accounts. The purpose of this rule is to make sure that any person cannot walk into a broker-dealer and open an account for someone else.

A retired customer has an existing stock portfolio held in a cash account. He has heard that "leveraging" his portfolio can increase his return. The portfolio holds blue chip stocks that pay current dividends. He wants to transfer the positions to a margin account and use them as collateral to buy more stocks of the same blue chip companies. Which statement is TRUE? A. This is an appropriate strategy that will increase the customer's income B. This is not an appropriate strategy because the customer's tax liability will increase if the securities appreciate and are sold C. This is not an appropriate strategy because the customer's income will decline D. This is an appropriate strategy because the customer has the potential for larger capital gains

The best answer is C. This customer needs income. If he margins the blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%), this does not come for free! He is borrowing the extra money to buy the new shareholding, using his existing stock as collateral, and he must pay interest on the loan. The interest charge will eat up any dividends that the stocks pay - so there goes his income!

An elderly customer seeking extra income who has $100,000 to invest could be recommended which of the following? I The $100,000 purchase of a variable annuity II The $100,000 purchase of dividend paying blue chip stocks in a cash account against which calls are sold III The $200,000 purchase of dividend paying blue chip stocks at 50% margin in a margin account IV The $100,000 purchase of Treasury bonds A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. The purchase of a variable annuity is not suitable for an elderly customer. The whole concept behind a variable annuity is that the product has time to build value on a tax deferred basis in the separate account prior to annuitization. An elderly customer needs the income now. Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. This would be suitable. The margining of blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%) is not suitable because this does not come for free! The customer is borrowing the extra money to buy the new shareholding, using his existing stock as collateral, and he must pay interest on the loan. The interest charge will eat up any dividends that the stocks pay - so there goes his income. The purchase of Treasury bonds is suitable, since they provide current income and they are safe as it gets.

An elderly client has a $400,000 portfolio that is conservatively invested in blue chip stocks and government bonds. He calls his representative and tells him that he wants to liquidate the entire portfolio and buy growth stocks. His son also has an account serviced by the same representative, so the representative calls the son to ask him about how his father is doing, to which the son responds: "Dad has not been himself lately." What step should the representative take? A. The representative should follow the customer's instructions, liquidate the portfolio, and buy growth stocks B. The representative should refuse to follow the customer's instructions C. The representative should contact the client and explain the risks inherent in the customer's strategy D. The representative should contact compliance and ask them to file a SAR

The best answer is C. This one is kinda cute! The basic rule for elderly clients that appear to be "out of it" is to escalate the matter to compliance and let them deal with it. However, a SAR is a Suspicious Activities Report, which is filed with the Federal Government if the firm is suspicious that a client is money laundering or supporting terrorism. So Choice D is incorrect! Looking at the other choices, representatives are supposed to follow client instructions, but they also have an obligation to steer customers away from doing something really stupid. The representative should neither do what the customer wants (which is stupid) or refuse to do what the customer wants. Sitting down with the customer and explaining why this is stupid appears to be the best choice. If the customer appears to be unable to understand when the registered representative is explaining why the customer's request is not a good idea, then escalate the matter to compliance and let them deal with it!

Customer Jane Jennings' suitability information is presented below: Age: 39 Marital Status: Single Dependents: 1 Child - Age 10 Annual Income: $80,000 Tax Bracket: 28% Net Worth: $510,000 excluding home Home: $350,000 fully paid Investment Portfolio: $422,000 (60% equities; 20% long bonds; 20% money market) The customer wants to start a college fund for her child. The anticipated tuition, starting 8 years from now, is $50,000 per year ($200,000 total tuition). Which of the following recommendations is most appropriate for this customer? A. liquidate $200,000 of common stock in the client's portfolio and invest the entire proceeds in 8-year Treasury Notes B. take out a second mortgage on the customer's residence in the amount of $200,000 and invest the proceeds in a tax-deferred annuity funded by an income separate account C. liquidate $160,000 of the common stock and invest the proceeds in laddered Treasury Notes and Bonds of $40,000 amounts maturing 8, 9, 10 and 11 years from now D. liquidate $100,000 of the bonds in the customer's portfolio and $100,000 of common stock in the customer's portfolio and invest the entire proceeds in 8-year Adjustment Bonds

The best answer is C. To fund this child's college education, payments of $50,000 per year are needed over a period of 4 years, starting 8 years from now. There is no reason to fund the entire $200,000 right now, since this amount will grow over the next 8 years - making Choices A, B and D incorrect. Also, please note that this customer is only 39 years old - a fairly young age. She should keep as much of her portfolio in growth stocks as possible.

REITs may be organized as: A. general partnerships B. management companies C. trusts D. limited partnerships

The best answer is C. Usually, REITs are formed as "Trusts," which is why they are called "Real Estate Investment Trusts." However, they trade on an exchange or OTC; and are similar in manner to closed end investment companies.

The spread on a new municipal offering is set at 3/4 point. The selling concession is 1/4 point and the additional takedown is set at 3/8 point. If a syndicate member places an order for the bond, how much will the syndicate member earn on that sale? A. 1/4 point B. 3/8 point C. 5/8 point D. 3/4 point

The best answer is C. When a municipal syndicate member sells to the public, he earns the "total takedown," which is the total of the selling concession plus the additional takedown. Since the selling concession is 1/4 point and the additional takedown is 3/8 point, the total takedown is 5/8 point.

If an investor does not pay within the time period specified under Regulation T, which of the following statements are TRUE? I The investor must pay cash in advance for additional purchases II No trading is permitted in the account for 90 days III The investor must deliver securities in advance for sales IV The account is frozen for a 90 day period A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

The best answer is C. When an account is frozen, this means that the customer did not pay within the maximum time period specified under Regulation T. When an account is frozen, to buy securities, payment must be made in advance; and to sell securities, delivery of the security must be made in advance. The freeze lasts for 90 days.

A representative gives a seminar to investors, making a presentation about successful hedge fund strategies. It is attended by 10 retail clients and 20 institutional clients. FINRA defines this as: A. an advertisement B. a solicitation C. a retail communication D. correspondence

The best answer is D. FINRA has 2 main categories of communications to retail clients: •Correspondence: A communication to 25 or fewer existing or prospective retail clients •Retail Communication: A communication to more than 25 existing or prospective retail clients Excluded from these definitions are Institutional Communications and Public Appearances. Correspondence, Institutional Communications, and Public Appearances are not subject to prior principal approval - rather, FINRA states that as long as the firm has appropriate supervisory procedures in place, they are subject to "post use review and approval." They are also not subject to FINRA filing rules. In contrast, retail communications must be approved by a principal prior to use and are subject to FINRA filing rules. Because this is a communication to 10 retail clients (the number of institutional clients is irrelevant), this is defined as "correspondence."

The purchase of index puts against a portfolio of listed securities is a: A. covered writing strategy B. naked writing strategy C. horizontal spread strategy D. hedging strategy

The best answer is D. One would purchase an index put to hedge a portfolio of securities against a falling market. If the market falls, the loss on the portfolio is offset by a corresponding gain on the long put options. This is commonly known as "portfolio insurance."

A corporation has previously declared a cash dividend. When the dividend is actually paid, all of the following choices are affected EXCEPT: A. Cash B. Current Assets C. Current Liabilities D. Net Working Capital

The best answer is D. When the dividend is paid, cash drops (a current asset) and dividends payable drop (a current liability). Because both current assets and current liabilities fall by the same amount, working capital is unchanged. This transaction has no effect on net worth.

On the same day in a margin account, a customer buys 5 ABC January 40 Calls @ $6 and sells 15 ABC January 50 Calls @ $1 when the market price of ABC is at $43. The maximum potential loss is: A. $1,500 B. $2,000 C. $3,000 D. unlimited

The best answer is D. This is a very difficult question. The customer is taking the following positions: Buy 5 ABC Jan 40 Calls @ $6 Sell 5 ABC Jan 50 Calls @ $1 $5 Debit Sell 10 ABC Jan 50 Calls @ $1 Credit The customer is creating 5 "long call spreads" and has 10 naked calls. In effect, he is writing 3 times the number of short calls needed to create the spread. Therefore he is "writing at a 3:1 ratio." This is termed a ratio spread. Long call spreads are used when a customer is moderately bullish, and wishes to reduce the cost of the long position by selling an equal number of "out the money" calls. This limits upside gain potential, but also reduces the cost of the positions. By writing three times the number of calls, the customer further reduces the cost of the positions, but also assumes unlimited upside risk on the 10 naked calls that are left.

Under Regulation SHO, a "threshold" security is one that: I is easy to borrow II is hard to borrow III cannot be sold short under any circumstances, but can be sold long IV if sold short and not delivered within 13 consecutive settlement days, it must be bought-in A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Threshold securities are those that are "hard to borrow" and the SEC does not want large outstanding short positions that are uncovered to build in these securities. Customer short sales of threshold list securities not resulting in delivery must be bought-in under the rule. If the security was on the exchange's threshold list as of trade date and remains on that list for "13 consecutive settlement days" (counting from trade date), then mandatory buy-in in required.

A sell limit order is executed when the market is: I falling II rising III at or below the limit price IV at or above the limit price A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. A sell limit order is an order to sell at a price that is higher than the current market. The limit is the minimum price needed to sell (Remember the old adage: Buy Low; Sell High - that's how limit orders are placed in the market)

The common stockholder has all of the following rights EXCEPT: A. Voting rights B. Pre-emptive rights C. Dividend rights D. Management rights

The best answer is D. Common stockholders have no management rights; they are passive investors. Common stockholders have voting rights, pre-emptive rights, and dividend rights (if a dividend is declared by the Board of Directors).

Currency valuation in the interbank market is affected by all of the following EXCEPT: A. Intervention B. Revaluation C. Devaluation D. Intermediation

The best answer is D. Currency values in the interbank market are affected by central bank intervention (e.g., the Bank of Japan bolsters the yen by making large purchases); by currency revaluation (e.g., Mexico revalues the Peso against the dollar, changing the official exchange rate); and by devaluation of the currency (which is simply the market mechanism pushing values down). Intermediation is a U.S. banking term that describes periods when deposits flow into "time accounts" at banks - this typically occurs when interest rates are low. Deposits flow out of banks when interest rates are high (e.g., money funds paying higher rates) - this is known as "disintermediation".

Which of the following are prohibited from buying an IPO directly from an underwriter? I A registered investment company II An officer of a registered investment company III An insurance company IV An officer of an insurance company A. I and II only B. III and IV only C. I and III only D. II and IV only

The best answer is D. FINRA prohibits the purchase of equity IPOs (Initial Public Offerings) by industry "insiders." The list of prohibited purchasers includes FINRA member firms for their own accounts, officers and employees of member firms (and their immediate family members), fiduciaries to member firms (such as accountants and lawyers that are retained by FINRA member firms); and investment managers for investment companies, insurance companies, pension plans, etc. Note that investment companies, insurance companies and pension plans may buy IPOs - it is only their investment managers that are restricted from buying IPOs for their personal accounts.

If the writer of a call contract is assigned, the call writer must: A. pay the strike price for the security in next business day B. pay the strike price for the security in 2 business days C. deliver the security the next business day D. deliver the security in 2 business days

The best answer is D. If the writer of a call is "assigned," this means that the OCC has assigned an exercise notice to that call writer. The call writer is then obligated to deliver the stock to the call holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.

Which of the following would be used to evaluate a general obligation bond issue? I The trend of assessed property valuation II The collection ratio of the issuer III The debt ratios of the issuer IV The mill rate trend of the issuer A. I and IV only B. II and III only C. I and III only D. I, II, III, IV

The best answer is D. In order to evaluate a general obligation bond issue, all of the factors listed would be evaluated. One would look for a trend of increasing assessed property valuation; a consistently high collection ratio - meaning that most of the taxes assessed are actually being collected; a low ratio of debt to assessed valuation and low ratio of debt per capita; as well as a consistent mill rate - meaning that property tax rates are not being raised too quickly, causing people to flee from the area.

Which of the following are primary purchasers of Treasury securities? I Investment companies II Broker-dealers III Unit Investment Trusts IV Commercial banks A. I and II only B. III and IV only C. I and III only D. I, II, III, IV

The best answer is D. Investment companies such as government bond mutual funds, money market funds and unit investment trusts bid at auction to buy large blocks of Treasury securities directly, bypassing a dealer or broker and therefore saving commissions or markups. Commercial banks and broker-dealers that are primary dealers bid at Treasury auctions to buy securities for their inventories.

Municipal term bonds are generally quoted on a: A. yield to call basis B. yield to maturity basis C. current yield basis D. dollar price basis

The best answer is D. Municipal term bonds are generally quoted on a dollar price basis (so-called "dollar bonds"). Serial bonds and short term municipal notes are quoted on a yield basis.

All of the following are types of joint accounts EXCEPT: A. Tenancy in Common account B. Joint Tenants with Rights of Survivorship account C. Tenants by Entireties account D. Omnibus account

The best answer is D. Ownership options for joint accounts are either Tenancy in Common, where each person has a specified ownership interest; or Joint Tenants With Rights Of Survivorship, where each tenant owns 100% of the account. In some states, a "JTWROS" account is termed "Tenants By Entireties." An Omnibus account is an account of pooled customer monies, where there is no specific identification to the broker carrying the account of who the specific customers are. Investment advisers who manage money for many customers often use such accounts.

Under SEC rules, customer account information must be verified by the member firm: I within 15 days of account opening II within 30 days of account opening III every 12 months IV every 36 months A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. SEC rules require that the basic customer account information collected at account opening be sent separately to the customer for verification within 30 days of account opening; and this information must be sent for verification and updating (if needed) every 36 months thereafter.

A customer is short 1,000 shares of ABC stock, valued at $6 per share. The minimum maintenance margin requirement is? A. $1.50 per share B. $1.80 per share C. $2.50 per share D. $5.00 per share

The best answer is D. The minimum maintenance margin requirement for short stock positions worth $5 or more is the greater of $5 per share or 30%. Thus, a short stock position valued at $6 per share requires a minimum margin under FINRA rules of $5 per share (30% of $6 = $1.80 per share, which is not enough since $5 is the minimum). For stocks valued under $5, the minimum is the greater of 100% or $2.50 per share.

After the bid is won in a municipal underwriting, a syndicate member that places an order with the manager for a selling group member would earn the: A. Spread B. Concession C. Total takedown D. Additional Takedown

The best answer is D. The takedown (also called the "total takedown") is the discount given by the manager to the syndicate members. This amount is earned by the syndicate member when he or she sells a bond directly to the public. The takedown consists of 2 pieces: the selling concession and the additional takedown. When a syndicate member sells a bond to the public, both pieces are earned. If a selling group member found the customer for the bond, the syndicate member gives up the selling concession to the selling group member, leaving the syndicate member with the additional takedown only on that sale.

In order to open a new account for an individual customer, all of the following information is required on the new account form EXCEPT: A. Date of birth B. Street address C. Social security number D. Telephone number

The best answer is D. There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information.

A customer places an order with a registered representative to sell 5,000,000 shares of ABC stock (NYSE listed) "at the market." The registered representative should: A. submit the order B. contact the Specialist/DMM on the trading floor C. contact a Third Market Maker D. contact the firm's large block trading desk

The best answer is D. This order is too large to be handled in the regular order flow on the NYSE floor - for example, Super Display Book can only take limit orders up to 3,000,000 shares. Such an order would be submitted to the firm's large block trading desk for execution. It is up to the firm's trading desk to decide how an order should be handled; this is not the responsibility of the registered representative. The trading desk would probably give the order to one of the firm's floor brokers for execution.

All of the following are true statements about trust accounts EXCEPT: A. a copy of the trust agreement must be obtained prior to opening the account B. transactions in the account are limited to the types specified in the trust document C. margin transactions are prohibited unless specific authorization to open a margin account is given in the trust document D. securities that may be purchased in the account are restricted to those included in that state's "Legal List"

The best answer is D. To open a trust account, a copy of the trust document must be obtained. The document will spell out the types of transactions that are permitted. The account must be opened as a cash account unless the document specifically permits margin transactions. Finally, there is no requirement that investments be limited to that state's "legal list" (these are lists of so-called "prudent" investments that are considered to be conservative, such as government bonds), though this can be the case if only "legal list" investments are authorized in the trust document.

To open an options account, inquiry must be made as to the customer's: I Financial Status II Marital Status III Income IV Liquid Net Worth A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

The best answer is D. To open an options account, a customer must give detailed financial disclosure. Inquiry must be made as to the customer's investment objective, investment experience, financial situation and financial needs. Inquiry must also be made about the customer's income, net worth, liquid net worth, marital status, and tax status.

All of the following statements are true about variable annuities EXCEPT variable annuities: A. must be registered with the Securities and Exchange Commission B. must be sold with a prospectus C. are a participating unit investment trust form of investment company D. are sold without a sales charge

The best answer is D. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. Because these are structured as participating unit trusts, variable annuities are regulated under the Investment Company Act of 1940. Variable annuities are sold with a sales charge that must be "fair and reasonable" under FINRA rules.

Which of the following would have the greatest impact on a company's "alpha" coefficient? A. A major change in market sentiment B. A major change in the Standard and Poor's 500 Index C. A major change in the corporation's capital structure D. A major change in the Wilshire 5000 Index

the best answer is C. The "alpha" coefficient is a measure of so-called stock specific risk, that is the relative risk of that stock's price moving positively or negatively independent of general market price movements. (The "beta" coefficient is a measure of a stock's price volatility relative to the market as a whole.) Thus, the events that would affect "alpha" are those that relate solely to that company or industry, such as a change of corporation's capital structure. The other measures given are technical indicators of the market as a whole, and would have no impact on "alpha."