Practice Exam

On January 18, your customer sold 500 shares of MNO for a loss of $5 per share. If on March 1 he bought 3 MNO calls, how much of the loss could he declare for tax purposes? A) $2,500. B) He may not declare any loss. C) $1,500. D) $1,000.

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

New Offering: 800,000 units at $6 per unit. Each unit has 2 shares of common stock and 1 warrant. Each warrant is to purchase ½ share of common stock. Based on the information above, how many shares of stock will be sold, and how many warrants will be sold? A) 1.6 million shares and 800,000 warrants. B) 800,000 shares and 200,000 warrants. C) 800,000 shares and 400,000 warrants. D) 1.6 million shares and 400,000 warrants.

A) 1.6 million shares and 800,000 warrants. Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains 2 shares, 1.6 million shares are being distributed. As each unit also includes 1 warrant, 800,000 warrants are being distributed.

If a customer subscribes to a $20,000 public limited partnership interest, which of the following is the maximum underwriting compensation that may be charged? A) 2,000. B) 18,000. C) 1,850. D) 4,000.

A) 2,000. The FINRA rules for limited partnership offerings limit underwriting compensation to 10% of the total money raised (10% of $20,000 is $2,000).

Which of the following municipal securities could have been sold in a negotiated underwriting? A) All of these municipal issues. B) Limited tax bonds. C) Industrial development bonds. D) School bonds.

A) All of these municipal issues. Either municipal revenue or general obligation (GO) bonds can be underwritten using a negotiated underwriting process to set the terms of the new issue. Industrial development bonds are revenue bonds while limited tax bonds and school bonds are each types of GO issues.

Which of the following would have the least impact in marketing a municipal bond issue? A) The dated date of the issue. B) The rating of the issue. C) The maturity of the issue. D) The size of the block offered.

A) The dated date of the issue. The dated date of a bond issue is merely the date on which the issue begins to accrue interest. As such it would have less to do with the marketing efforts related to a new issue than would items such as the size of the block offered, the rating of the issue (how financially strong it is), and the maturity.

A registered representative who leaves the industry must requalify by examination to return to the industry if he is unaffiliated with a broker/dealer for more than: A) 3 years. B) 2 years. C) 5 years. D) 10 years.

B) 2 years. All securities licenses become null and void once an individual is unaffiliated for more than 2 years.

A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into 5 shares of common stock. The conversion price of the common stock is: A) 100. B) 20. C) 1200. D) 25.

B) 20. Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into 5 shares, we need to know what number goes into $100 5 times. That number is $20. The current market value of the preferred stock is unnecessary information.

A margin account customer buys 100 shares of HEX at $70 and writes a HEX Oct 70 call for a premium of 8. What must he deposit? (Regulation T is 50%.) A) 3700. B) 2700. C) 4500. D) 2000.

B) 2700. The normal call would be 50% of $7,000 or $3,500. In this example, subtract the premium of $800 that the customer received. (Remember, in a covered call situation, no margin is required for the call.)

An abstract of a municipal securities issue official statement must be maintained on file for: A) There is no requirement to file abstracts of official statements. B) 3 years. C) 12 months. D) 5 years.

B) 3 years. The MSRB requires firms to retain abstracts of official statements for 3 years, the same as all pieces intended to communicate with the public.

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A) 90. B) 60. C) 45. D) 30.

B) 60 Rollovers from pension plans into IRAs must be accomplished within 60 days in order to retain tax-deferred status.

Which of the following appreciates most during a period of falling interest rates? A) 7.4% coupon, 3-1/3 year maturity. B) 7.6% coupon, 3-1/2 year maturity. C) 7% coupon, 2-7/8 year maturity. D) 7.2% coupon, 3 year maturity.

B) 7.6% coupon, 3-1/2 year maturity. Although all bonds would appreciate in value as a result of falling interest rates, bonds with longer maturities experience a greater appreciation than do shorter maturities. While lower coupon bonds tend to be more price sensitive the over riding factor will first be length of time to maturity.

To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker for 800 shares. The response is "bid 15, ask 15.25." If the order is placed, the market maker must sell: A) 800 shares at no more than $15 per share. B) 800 shares at $15.25 per share. C) 800 shares at $15 per share. D) 100 shares at $15.25 per share.

B) 800 shares at $15.25 per share. A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share.

Which of the following persons may legally open an account to trade on margin? A) A minor child with approval of a court-appointed guardian. B) A corporation. C) An open-end investment company. D) A custodian of an UTMA account.

B) A corporation. A corporation may open an account to trade on margin if provided for in the charter and authorized in the bylaws. Both UTMA and UGMA specifically prohibit custodians from either engaging in speculative trading or borrowing money or securities in the name of the minor through trading on margin. Mutual funds are also prohibited from trading on margin.

A customer sells short 1,000 ZOO at $30 per share. If the ZOO stock declines to $25 per share and the customer is worried the stock may reverse its trend, what should the customer do? A) Buy 10 ZOO puts. B) Buy 10 ZOO calls. C) Write 10 ZOO puts. D) Write 10 ZOO calls.

B) Buy 10 ZOO calls. To protect the profit on the short stock position, the customer must be able to buy stock at the existing low price if the market moves up. By purchasing calls (say, at a $25 strike price), the customer can capture existing profit by exercising and buying stock at $25, regardless of how high the market moves.

Regulations regarding how contributions are made to tax-qualified plans relate to which of the following ERISA requirements? A) Reporting and disclosure. B) Funding. C) Vesting. D) Nondiscrimination.

B) Funding. Funding covers how an employer contributes to, or funds, a retirement plan.

Which of the following would protect a short May 50 put? A) Long June 45 put. B) Long June 55 put. C) Long April 55 put. D) Long April 45 put.

B) Long June 55 put. For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration. This ensures the investor may sell the stock without financial loss if the short put is exercised and he is forced to buy.

One broker/dealer receives a don't know (DK) notice from another. Which of the following would be a reason for a DK to be sent? A) The broker/dealer who sent the DK wants to know if the other broker's customer wants to trade more stock at the same price. B) The broker/dealer who sent the DK was expecting 200 shares of ABC common stock and received 200 shares of ABC preferred shares. C) The broker/dealer who sent the DK is alerting the other broker that one of their clients has opened a new account with them. D) The broker/dealer who sent the DK is confirming that the trade specifications are good.

B) The broker/dealer who sent the DK was expecting 200 shares of ABC common stock and received 200 shares of ABC preferred shares. DKs are sent between brokers when delivery is made that is either not expected or where the specifications of the delivery do not match what was expected.

Which of the following is NOT an advantage of buying listed call options as compared to buying the underlying stock? A) Buying a call allows greater leverage than buying the underlying stock. B) The call has a time value beyond an intrinsic value that gradually dissipates. C) Buying a call would require a smaller capital commitment. D) Buying a call has a lower dollar loss potential than buying the stock.

B) The call has a time value beyond an intrinsic value that gradually dissipates. Call options allow greater leverage than buying the underlying stock and the capital requirements are smaller, allowing for a smaller loss potential. The fact that options expire (i.e., have a time value that erodes as the option nears expiration) is a disadvantage of options. Stock purchases have no time value component-there is no expiration and no resulting value erosion.

If a Japanese exporter wants to hedge a recent sale of stereo equipment to a U.S. buyer, and the exporter will be paid in U.S. dollars upon delivery of the goods, the best hedge would be to: A) sell Japanese yen calls. B) buy Japanese yen calls. C) sell Japanese yen puts. D) buy Japanese yen puts.

B) buy Japanese yen calls. The Japanese exporter will be paid in U.S. dollars upon delivery of the equipment. He would be adversely affected if the dollar dropped in value in relation to the yen. To protect his position he should buy calls on his own currency, the yen. Then, if the yen appreciates, his loss on the dollar is offset by his gain on the calls. Exporters buy puts on foreign currency to hedge, but there are no options on the U.S. dollar. The next best strategy is to buy calls on the home currency.

In making a sales presentation to a prospective customer, a registered representative selling open-end investment company shares should do all of the following EXCEPT A) utilize charts or graphs showing a funds performance over at least a ten year period when the fund has been in existence that long B) disclose only the breakpoint the customer may qualify for regarding sales charges instead of maximum sales charges to avoid confusion C) reveal the source of any charts or graphics used in the presentation D) differentiate between dividend return and capital gains when making statements about returns

B) disclose only the breakpoint the customer may qualify for regarding sales charges instead of maximum sales charges to avoid confusion When discussing sales charges for investment company products only referring to breakpoint discounts the customer may qualify for rather than potential maximum sales charges is considered misleading. Charts and graphs should always encompass at least a ten year period so as to be long enough to reflect variations in value and when used the source of those resources must be disclosed. When speaking to dividend returns a statement should be made concerning the variable amounts of dividend return and they should be differentiated from capital gains and total return.

Your customer, a resident of New York, wants to open up a Section 529 plan for his 10-year-old son. Because his son wants to attend Notre Dame, your customer wants to start a plan sponsored by the state of Indiana. You should: A) not open the plan. B) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. C) open the plan as instructed by your customer. D) explain that the potential federal tax benefits available to residents of New York may not be available when opening out-of-state plans.

B) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. Many states offer tax benefits to residents who open 529 plans in their home state. These benefits are generally not available when opening out-of-state plans. Federal tax benefits are available regardless of the state where the plan is opened.

With respect to municipal discretionary accounts, all of the following statements are true EXCEPT A) unless a customer gives their express authorization, the broker/dealer cannot effect transactions to the customer's account for securities in which it has a control relationship with the securities' issuer B) if a control relationship exists between the broker/dealer and issuer, that relationship must first be terminated in order for the BD to effect transactions of the issuers securities in their customer's discretionary account C) all activity in the account must be reviewed at frequent intervals by a municipal securities principal D) a municipal securities principal must approve all transactions in the account promptly after execution

B) if a control relationship exists between the broker/dealer and issuer, that relationship must first be terminated in order for the BD to effect transactions of the issuers securities in their customer's discretionary account As with all discretionary accounts, a principal must approve transactions promptly after execution and the account must be reviewed frequently by a principal. Because this is a discretionary account which allows municipal securities to be traded in it, these functions must be performed by a municipal securities principal. Without the customer's consent, the broker/dealer cannot effect transactions in the customer's account for municipal securities in which a control relationship exists between the broker/dealer and the issuer. To effect such transactions, the broker/dealer must make full disclosure of the relationship and obtain the customers consent, but termination of the relationship is not required.

A 27-year-old client is in the lowest tax bracket and seeks an aggressive long-term growth investment. If his investment adviser representative recommends a high-rated general obligation municipal bond, the IAR has: A) recommended a suitable investment because GOs are good long-term investments. B) made an unsuitable recommendation based on the client's needs and objectives. C) made an unsuitable recommendation, since a municipal revenue bond would have been more appropriate. D) committed no violation because municipal bonds are well suited for the market's volatility.

B) made an unsuitable recommendation based on the client's needs and objectives. In recommending a conservative, tax-exempt investment to this customer, the investment adviser representative has failed to make a suitable recommendation given the client's objectives. Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential.

An issuer may direct sales of a new issue to all of the following EXCEPT: A) officers of the issuer. B) officers of the managing underwriter. C) officers of its largest customer. D) officers of its largest supplier.

B) officers of the managing underwriter. Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.

In a DPP, a general partner is all of the following EXCEPT A) one who buys and sells the program's property B) one who has limited liability C) one who appoints the property manager D) a key executive who makes day to day business decisions

B) one who has limited liability A general partner of a limited partnership is a key executive of the program who purchases and sells the property and/or appoints someone to manage the property. The general partner does not have limited liability. By not allowing the general partner to have limited liability, the program is able to rule out limited liability as a corporate characteristic.

A customer holds the following positions: Short 100 XYZ shares at 40 Short 1 XYZ Oct 40 put at 5 With XYZ trading at 35, the customer is assigned an exercise notice on the put and he uses the stock purchased to cover the short stock position, the customer has a A) $500 loss. B) $1,000 gain. C) $500 gain. D) $1,000 loss.

C) $500 gain. When exercised, the customer is forced to buy stock at 40 that is used to cover the short position for no gain or loss. Because the premium of $500 was received, the investor has a gain of $500 on this position.

Your client who has not yet attained the age of 59 ½ wants to take a withdrawal from his traditional IRA. Not being disabled or meeting any other qualifying reason allowing for an early withdrawal you explain that the amount taken will be subject to a penalty of: A) 5%. B) 15%. C) 10%. D) 25%.

C) 10%. Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to one-time penalties of 10% of the gross amounts withdrawn in addition to ordinary income taxes.

Which of the following can you find on the Level 1 service of Nasdaq? A) The names of firms making markets. B) Firm bids and offers. C) Inside bids and offers. D) Markups.

C) Inside bids and offers. No Nasdaq service displays markups. Levels 2 and 3 display firm bids and offers and the names of the market makers. Level 1 only indicates the highest bid and the lowest offer, known as an inside quote.

Because money market instruments are designed to meet the short-term cash needs of issuing institutions, which of the following is NOT a money market instrument? A) Federal Farm Credit Bank note maturing in one year or less. B) Municipal Construction Loan Note. C) Newly issued Treasury notes issued to meet a specific government funding requirement. D) Commercial paper issued by the finance corporation of a major automobile manufacturer

C) Newly issued Treasury notes issued to meet a specific government funding requirement. A newly issued Treasury note would have a maturity of 2 to 10 years and would not be considered a money market instrument. A Federal Farm Credit Bank note maturing in one year or less is a money market instrument, as is commercial paper issued by the finance corporation of a major automobile manufacturer with a maturity of less than one year. Municipal construction loans issued to provide short-term financing for a construction project are money market securities.

At 2:15 pm EST, a customer gives his registered representative a market order to buy 100 shares of ABC at the close. What should the registered representative do with the order? A) Execute the order at the closing price first thing next morning. B) Hold it at his desk until just before market close. C) Send the order to the floor immediately. D) Send in the order after the close to ensure receiving the closing price.

C) Send the order to the floor immediately. The registered representative should mark the order ticket at close. His firm's floor broker will take on the responsibility for proper execution.

All of the following are characteristics of certificates of deposit EXCEPT: A) A CD is often issued by a bank. B) A CD may be payable to the bearer or registered in the name of the investor. C) The Federal Deposit Insurance Corporation (FDIC) provides insurance for CDs to $500,000. D) A CD can be negotiable or nonnegotiable.

C) The Federal Deposit Insurance Corporation (FDIC) provides insurance for CDs to $500,000. The FDIC provides insurance for CDs up to $250,000. All of the other characteristics are applicable to CDs.

Under the provisions of an UGMA account, which of the following occurs when the minor reaches the age of majority? A) Any securities in the account must be converted to cash. B) The account must be turned over to the donor. . C) The account must be turned over to the donee. D) The account remains as an UGMA account.

C) The account must be turned over to the donee. Under the terms of the Uniform Gifts to Minors Act, when a minor reaches the age of majority, the proceeds must be handed over to the new adult.

Securities in an UGMA account are sold at a profit. Who is liable for the current year taxes on the sale? A) No one; they are deferred to the age of majority. B) The donor. C) The minor. D) The guardian.

C) The minor. The UGMA account is for the benefit of the minor, which is registered with the minor's Social Security number. All taxes on the account are the responsibility of the minor.

Which of the following securities underlies a yield-based option? A) Revenue bonds. B) Debentures. C) Treasury securities. D) Income bonds.

C) Treasury securities. Yield-based interest rate options are based on the yields of Treasury bills, notes, and bonds.

Under the rules governing the activities of broker/dealer firms, prior notification to the employing firm would be required in order to open a cash account for all of the following EXCEPT: A) a registered representative of another member. B) an exchange employee. C) a bank officer. D) an employee of another member.

C) a bank officer. SROs in the securities industry require prior notification for opening accounts of persons employed in the industry and margin accounts for employees of financial institutions.

An instrument that illustrates the transfer of title to any dividend, interest, or right that pertains to securities contracted for is called: A) a warrant. B) a power of attorney. C) a due bill. D) a right.

C) a due bill. A due bill is an assignment of a forthcoming distribution from the seller to the new owner.

If a customer gives his broker/dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is: A) a stop order. B) a sell limit order. C) a stop limit order. D) a buy limit order.

C) a stop limit order. When an order is entered this way, the client has specified that it should not be triggered until the stock is at or below 69, a stop order. Because the client will not accept an execution below 69 it is a stop limit order.

At 2PM ET a customer enters an order to buy GGZ at the close on the NYSE. GGZ traded between 70 and 71 all day. Then, after a last-minute rally, it closed up 4 points at 74. The customer should expect to pay the: A) price as near to the close as possible, at the floor broker's discretion. B) average price calculated for the entire day. C) closing price. D) opening price the next morning.

C) closing price. When an order is placed market at the close (MOC) on an exchange, a customer should expect execution at the closing price.

Regular way settlement of the following transactions must settle on the third business day after the trade date EXCEPT: A) for a broker/dealer buying a corporate bond from another dealer. B) for a customer selling a municipal bond through a broker/dealer. C) for a broker/dealer buying a Treasury bond for its own account. D) for a customer buying closed-end fund shares through a broker/dealer

C) for a broker/dealer buying a Treasury bond for its own account. Regular way settlement for U.S. government bonds occurs on the business day after the trade date. Corporate bonds and closed-end funds fall under the SEC's settlement rule, and MSRB rules require three-day settlement of municipal bond secondary transactions.

After being approved for options trading, a customer establishes several long option positions but does not return the signed option agreement within the required time period. The broker/dealer may: A) sell out the customer's positions and freeze the account for 90 days. B) only allow the customer opening transactions. C) only allow the customer closing transactions. D) permit no further transactions until the signed agreement is returned .

C) only allow the customer closing transactions. If the customer does not sign and return the option agreement within 15 days of account approval, she may maintain or close out existing positions, but cannot enter any opening transactions until the agreement is returned.

When a member firm sells municipal bonds to a customer out of its inventory, it must: A) disclose the amount of commission on the customer's confirmation. B) comply with the 5% markup policy. C) take into consideration the total dollar amount of the transaction when determining the markup. D) indicate the amount of markup on the customer's confirmation.

C) take into consideration the total dollar amount of the transaction when determining the markup. Under the MSRB Rule G-30, the amount of markup charged by a dealer must take into consideration a number of relevant factors, including the total dollar amount of the transaction. In a principal transaction (out of its inventory) the markup need not be disclosed on a confirmation and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities.

All of the following characteristics regarding industrial development bonds (IDBs) are true EXCEPT: A) the bonds are issued by municipalities or other governmental units. B) funds from the lease are used to pay the principal and interest on the bonds. C) the bonds are normally backed by the full faith and credit of the municipality. D) the funds are used to construct a facility for a private corporation.

C) the bonds are normally backed by the full faith and credit of the municipality. IDBs are issued by a municipality, and the proceeds are used to construct facilities or purchase equipment for a private corporation. The corporation leases the facilities or equipment; funds from the lease are used to repay investors. In addition to a first mortgage on the property, IDBs are backed by the full faith and credit of the corporation (not the municipality).

With no other positions, a customer sells short 100 TIP at 40 and sells 1 TIP Oct 40 put at $5. At what stock price will the customer break even? A) 40. B) 35. C) 50. D) 45.

D) 45. On the downside, the short position fully covers the short put and the profit is the $500 premium. On the upside above 40, the short put expires and the short stock position loses money. The first 5 points of loss (40 to 45) on the short stock position are offset by the premiums received. Above 45, losses begin and are potentially unlimited.

Who signs the agreement among underwriters for a municipal bond issue? A) Managing underwriter and issuer. B) Managing underwriter and bond counsel. C) Managing underwriter and trustee. D) All members of the underwriting syndicate.

D) All members of the underwriting syndicate. All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee.

After selling ABC short at 70, a customer holds the position as ABC gradually falls to $53 per share. Which of the following strategies would best protect his gain? A) Buy 55 puts. B) Write 55 calls. C) Write 55 puts. D) Buy 55 calls.

D) Buy 55 calls. If the investor buys the 55 calls, he has the right to purchase the stock at $55 per share. If exercised, the investor has a 15-point gain, less the premium paid.

If a registered representative is comparing two mutual funds for a customer, which of the following comparisons would NOT be permissible? A) Comparing a long-term bond fund to a shorter-term bond fund to demonstrate the trade-offs that exist between risk and return. B) Comparing two equity funds with slightly different investment objectives, even if the differences and their consequences are carefully explained. C) Comparing diversified growth funds from two different fund families. D) Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund.

D) Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund. A characteristic of money market funds is that they deliberately avoid growth. Thus, for the growth investor, a comparison of a money market fund to a growth fund is an unfair comparison.

Which of the following choices does NOT influence the level of interest rates? A) Inflation expectations. B) Amount of loanable funds in the financial markets. C) Federal Reserve's monetary policy. D) New housing starts.

D) New housing starts. New housing starts are affected by the level of interest rates, but they are not a factor in the determination of interest rates. Interest rates are determined by the supply and demand for loanable funds. The more money that is available for lending, the lower the rates.

Your mutual fund has sent you a Form 1099, listing some long-term capital gains on which you must pay taxes. You are concerned that the 1099 is in error because you have owned your shares for only 4 months. Which of the following statements is TRUE? A) The gain need not be reported since you have not redeemed your shares, and therefore have not realized any gain. B) The 1099 form is incorrect because you have held your shares for less than 1 year, which indicates a short-term gain. C) The gain need not be reported since you have instructed the company to reinvest your dividends and capital gains, thus deferring your tax liability. D) The 1099 is correct because in this case, the holding period to be considered is that of the investment company, not yours.

D) The 1099 is correct because in this case, the holding period to be considered is that of the investment company, not yours. The investment company designated the gains as long term, because the company held the securities for more than a year before selling them. The holding period on your shares is relevant only if you redeem your shares for a gain.

An arbitration proceeding involving a customer in an amount over $100,000 has been agreed to. In such an arbitration dispute, which of the following is TRUE? A) Only nonpublic (industry) arbitrators can be used for disputes in amounts greater than $100,000 B) Disputes in amounts greater than $100,000 are always heard by a single arbitrator. C) Both parties must agree before three arbitrators can be used in disputes involving amounts greater than $100,000. D) The customer can request that all three of the arbitrators selected be from the public sector.

D) The customer can request that all three of the arbitrators selected be from the public sector. In disputes involving a customer for amounts greater than $100,000 three arbitrators will be used unless both parties agree to one. In the case where three arbitrators are used, the customer can request that all three arbitrators be selected from the public sector.

The federal legislation that requires broker/dealers to verify the identity of any person opening an account is the: A) Insider Trading Act. B) Maloney Act. C) Act of 1934. D) U.S.A. PATRIOT Act.

D) U.S.A. PATRIOT Act. The U.S.A. PATRIOT Act requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and to determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Asset Control (OFAC).

When a customer of a broker/dealer dies, all of the following documents may be required to release the decedent's assets EXCEPT: A) a certified copy of the death certificate. B) an affidavit of domicile. C) an inheritance tax waiver. D) a power of attorney.

D) a power of attorney. The power of attorney is the only document not required. If the decedent had executed a power of attorney, it would have become invalid upon death. An affidavit of domicile and an inheritance tax waiver may be required. A certified copy of the death certificate is always required.

A company set up to invest in real estate, mortgages, construction, and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called: A) an open-end investment company. B) a trust indenture. C) a unit investment trust. D) a real estate investment trust.

D) a real estate investment trust. A real estate investment trust, in order to avoid tax on its income, must distribute 90% of its net investment income to investors.

The Trust Indenture Act of 1939 covers all of the following securities transactions EXCEPT: A) a corporate bond issue worth $55 million sold interstate. B) a public issue of debentures worth $60 million sold by a single member firm throughout the United States. C) a sale of an equipment trust bond issue worth $62 million. D) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2025.

D) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2025. The Trust Indenture Act of 1939 requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture; U.S. governments are exempt.

If a 42-year-old customer has been depositing money in a variable annuity for 5 years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding: A) annuity units. B) accumulation shares. C) mutual fund units. D) accumulation units.

D) accumulation units. The customer, in the accumulation stage of the annuity, is holding accumulation units. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract.

A municipal revenue issue's flow of funds statement is contained in the: A) notice of sale. B) legal opinion. C) agreement among underwriters. D) bond contract.

D) bond contract. The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.

All of the following securities are exempt from the Trust Indenture Act of 1939 EXCEPT: A) Treasury bonds. B) municipal bonds. C) preferred stock. D) debentures.

D) debentures. The Trust Indenture Act regulates new corporate debt issues, including debentures.

If an index is up 2%, a 3X leveraged inverse ETF tracking that index should be A) up 6% B) up 2% C) down 3% D) down 6%

D) down 6% Inverse or reverse funds attempt to deliver returns that are the opposite of the index they are tracking. If the index is up, the inverse fund should be down. A leverage fund attempts to deliver returns that are a multiple of the index it is tracking. Therefore, an inverse 3X leveraged fund should be down 3X as much as the index is up if it performs as it should. In this example, down 6% (3 X 2%).

In a seller's option, securities may be delivered before the date specified if the seller A) cannot deliver on the specified date. B) gives notice to the buyer on the day of delivery . C) wishes to be paid earlier. D) gives 1 day's written notice to the buyer.

D) gives 1 day's written notice to the buyer. In a seller's option trade, the seller may (at his option) give the buyer written notice 1 day before making delivery.

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

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

Under MSRB rules, a broker/dealer must disclose control relationships: A) never. B) only for new issues. C) only for secondary market transactions. D) in all customer transactions.

D) in all customer transactions. MSRB rules require disclosure to clients of any control relationship that exists between the broker/dealer and the issuer. The rule applies to all customer transactions including research reports.

Losses from direct participation programs can be used to offset: A) portfolio income. B) earned income from salary or commissions. C) none of these. D) income from limited partnerships

D) income from limited partnerships Passive losses can be used only to offset passive income, which is earned from direct participation programs and rental real estate.

Regulation T permits borrowing money for the purchase of each of the following EXCEPT: A) listed warrants. B) listed stocks and bonds. C) unlisted stocks and bonds. D) listed options with expirations of less than 9 months.

D) listed options with expirations of less than 9 months. Options with expirations of less than 9 months must be fully paid without exception. With some exceptions, warrants, stocks, and bonds may be purchased on margin.

A representative wishes to execute an order for a customer's discretionary account. The municipal dealer has a control relationship with the issuer of the security to be purchased. Under MSRB rules, the representative: A) may not execute the order. B) must wait until the firm terminates the control relationship. C) may refer the customer to a firm that has no control relationship. D) must have specific authorization from the customer.

D) must have specific authorization from the customer. Even in a discretionary account, a registered representative may not exercise discretion when a control relationship exists between the issuer and the dealer without first receiving the customer's permission.

Stock prices in the over-the-counter market are determined by: A) a competitive bid. B) the 5% markup policy. C) an auction. D) negotiation.

D) negotiation. The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market. The 5% markup policy regulates commissions and markups, not prices and competitive bids are a type of underwriting agreement for new issues.

ADR owners have all the following rights EXCEPT: A) the right to receive dividends in U.S. dollars. B) the right to sell in the secondary market. C) the right to receive the underlying foreign security. D) the right to sell the ADR in the foreign market.

D) the right to sell the ADR in the foreign market. The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas.

Which of the following covers a short call? I. Long stock II. Short stock III. Long put IV. Stock rights

I and IV Covering a short call requires taking action to eliminate the risk of being exercised. If the customer owns the stock or has the right to acquire it, the customer is covered. Stock rights (preemptive rights) give the holder the right to purchase the stock. Short stock and long puts both have the same market attitude as a short call (bearish) and therefore would not cover the risk associated with a short call.

Characteristics common to penny stocks would include which of the following? I. Market price less than $5 per share. II. Market price greater than or equal to $5 per share. III. Nasdaq OTC stock IV. Non-Nasdaq OTC stock.

I and IV Penny stocks are generally defined as those with a market price below $5 per share that are not traded on any exchange or Nasdaq.

A convertible corporate bond has been issued with an antidilution covenant. If the issuer declares a 5% stock dividend, which of the following are TRUE as of the ex-date? I. Conversion ratio increases. II. Conversion ratio decreases. III. Conversion price increases. IV. Conversion price decreases.

I and IV The bond will be convertible into 5% more shares, so the conversion price will decrease in proportion. If the conversion price is lowered, the conversion ratio must increase.

The transfer agent of a mutual fund: I. redeems shares. II. sells shares. III. holds custody of fund securities. IV. handles name changes of mutual fund ownership.

I and IV The transfer agent redeems shares of a mutual fund at the price calculated after receiving a request for redemption. The transfer agent also handles the transfer of account ownership for such transactions as an inheritance or gift.

Which of the following statement(s) regarding gift taxes are TRUE? I. Gifts per person per year up to an IRS specified dollar limit can be given without a tax liability. II. Gifts per person per year in excess of the IRS specified dollar limit for that year may be subject to tax. III. The donor, not the recipient, is responsible for any tax liability. IV. The tax rate increases with the size of the gift.

I, II, III, and IV In accordance with gift tax regulations as mandated by the IRS, an individual may give a gift of up to a specified dollar limit per person in one year with no gift tax liability. If the gift exceeds the IRS specified dollar limit it is the donor who is responsible for any tax. The gift tax is a progressive tax, which means that as the size of the gift increases, the percentage of applicable tax will also increase. The IRS specified gift tax limit is subject to change from year to year.

Which of the following investors will sell stock if an option is exercised? I. Owner of a call. II. Owner of a put. III. Writer of a call. IV. Writer of a put.

II and III An owner of a put and writer of a call will sell stock if an option is exercised. Call buyers have the right to buy, and call writers are obligated to sell; put buyers have the right to sell, and put writers are obligated to buy.

Which of the following investors are bearish? I. Buyer of a call. II. Writer of a call. III. Buyer of a put. IV. Writer of a put.

II and III Buyers of puts and writers of calls are bearish investors. Buyers of calls and writers of puts are bullish investors.

A customer buys a long-term, 10% Treasury bond with a current yield of 12% and holds the bond until 1 year before maturity. She sells the bond when the short-term T-bill rate is 8%. Which of the following statements are CORRECT? I. The bond was purchased at a premium. II. The bond was purchased at a discount. III. The bond was sold at a premium. IV. The bond was sold at a discount.

II and III When the yield is higher than the coupon, it means the bond was purchased at a discount. Since the question tells us the T-bills are now yielding 8% and she has a bond maturing within a year with a 10% coupon, she would be able to sell that bond at a premium.

Which of the following are defined as penny stocks? I. Nasdaq stock trading at $4 per share. II. Bulletin Board stock trading at $4 per share. III. Listed stock trading at $4 per share. IV. "OTC Pink" stock trading at $4 per share.

II and IV A penny stock is a non-Nasdaq (Bulletin Board or "OTC Pink") stock trading under $5 per share. If a stock is listed on an exchange or is on Nasdaq, it is not a penny stock regardless of price.

Which of the following statements regarding a shelf offering are TRUE? I. It can be used to distribute an initial public offering only. II. It can be used to distribute an additional offering only. III. Its maximum duration is 90 days. IV. Its maximum duration is 3 years.

II and IV Shelf offerings are used by publicly traded companies to issue additional equity or debt securities. The issuer must sell the securities within 3 years after the registration is declared effective.

Which of the following statements regarding ADRs are TRUE? I. Dividends are payable in the underlying foreign currency. II. Dividends are payable in U.S. dollars. III. Holders have voting rights. IV. Holders do not have voting rights.

II and IV The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well.

Which of the following statements regarding quotes and information for stocks on the electronic "OTC Pink" are TRUE? I. Quotes are firm. II. Quotes are not firm. III. Updates are made throughout the trading day and quotes are kept current. IV. Updates may not be current or made intra-day.

II and IV With updates made infrequently, quotes found on the electronic OTC Pink are never firm. Quotes on such systems are for informational purposes only; subject to change.

Which of the following orders are reduced on the ex-dividend date for a cash dividend? I. Buy 100 XYZ 60 DNR. II. Sell 100 XYZ 70. III. Sell 100 XYZ 60 STOP. IV. Buy 100 XYZ 70 STOP.

III only Orders placed below the market (buy limits and sell stops) are automatically reduced on the ex-date. The exception to this rule is for orders marked DNR (do not reduce).

A qualified legal opinion issued for a municipal bond underwriting means that the: A) legal opinion is qualified with restrictions and conditions. B) bond counsel is considered competent. C) bond attorney is qualified to express his opinion on the bond. D) revenue bond issue has certain debt limitations .

A) legal opinion is qualified with restrictions and conditions. The word "qualified" describes the legal opinion, not the attorney (or bond counsel) who issued it. A qualified legal opinion is one in which the bond counsel expresses reservations about conditions that may affect the bond's status. An unqualified legal opinion is rendered without restriction or condition.

An affiliate of a corporation wants to sell 80 calls covered by 8,000 shares of Rule 144 stock she owns. This transaction is: A) not allowed because Rule 144 stock may not be sold unrestricted by an affiliate. B) allowed because the calls will be considered covered by the stock. C) not allowed because an affiliate of a corporation may not trade options in the company's stock. D) allowed because the 8,000 shares of stock may be sold unrestricted.

A) not allowed because Rule 144 stock may not be sold unrestricted by an affiliate. Rule 144 stock is considered to be illiquid. It cannot be sold unrestricted by an affiliate and could, therefore, not be used to cover the calls in the event the calls were exercised.

ALFA closed at 37.50, the ALFA Jan 35 calls closed at 3.50, and ALFA Feb 35 calls closed at 4.60. What is the difference in the time values between the two options? A) 37.5. B) 1.1. C) 35 D) 2.5.

B) 1.1. The January premium is 3.50 and the February premium is 4.60 (the difference is 1.10). Each option is in the money by 2.50.

Which of the following most quickly reflects changes in FRB policy? A) The prime rate. B) The discount rate. C) The CD rate. D) The call money rate.

B) The discount rate The FRB has direct control of the discount rate. If the FRB changes policy, the discount rate is the key indicator.

A customer purchased a full faith and credit bond. This bond would be known as a: A) sinking fund bond. B) general obligation bond. C) revenue bond. D) moral obligation bond.

B) general obligation bond. General obligation bonds are also known as full faith and credit bonds.

All of the following actions will increase the deficit in the U.S. balance of payments EXCEPT: A) U.S. foreign aid. B) purchase by foreigners of U.S. securities. C) Americans buying Japanese cars. D) investments by U.S. firms abroad.

B) purchase by foreigners of U.S. securities. A debit in the U.S. balance of payments occurs when the country pays out more abroad than it takes in. This occurs when the U.S. imports more than it exports, invests money abroad, or sends money to foreign countries in the form of foreign aid.

All of the following will be included on a confirmation for noncallable municipal bonds purchased on a yield basis EXCEPT: A) yield to maturity. B) taxable equivalent yield. C) dollar price. D) par value.

B) taxable equivalent yield. As investors' tax brackets vary, taxable equivalent yield is never required to be shown.

An index option differs from an equity option in that A) premiums tend to be somewhat higher. B) the exercise settlement is in cash. C) trading ends earlier in the day. D) they use European-style exercise

B) the exercise settlement is in cash. When an index option is exercised, settlement takes place in cash on the next business day.

An option confirmation must include all of the following EXCEPT: A) the strike price. B) the positions market attitude (bullish or bearish). C) the type of option and commission. D) the number of contracts and premium.

B) the positions market attitude (bullish or bearish). An option transaction's confirmation must completely recap the essential elements of the trade including the number of contracts traded, the description of the security traded (type of option and strike price), the price of the security traded (premium), and any commission charges. The positions market attitude (bullish or bearish) is not included on the confirmation.

Your client purchases 100 shares of XYZ common stock at $50 and sells two XYZ Oct 55 calls for a premium of $2 each. This investor's maximum potential loss is: A) 4600. B) unlimited. C) 600. D) 4800.

B) unlimited. This is a ratio write. The client is writing more calls than he has stock to cover. The first call is covered by the 100 shares of stock owned, but the second call is uncovered, or naked. A short naked call has unlimited loss exposure.

All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT: A) IRAs. B) variable annuities. C) Keogh plans. D) defined contribution plans.

B) variable annuities. Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan.

The minimum face amount of a negotiable CD is: A) $10,000. B) $50,000. C) $100,000. D) $25,000.

C) $100,000. Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are traded in blocks of $1 million.

Which of the following statements regarding both traditional and Roth IRAs is TRUE? A) Withdrawals at retirement are tax free. B) Contributions are tax deductible. C) Contribution limits are the same. D) Distributions must begin in the year after the owner reaches age 70½.

C) Contribution limits are the same. The common factor for both traditional and Roth IRAs is that contribution limits are identical.

All of the following have an impact on the marketability of a block of municipal bonds EXCEPT the: A) price and date of call provisions . B) length of time until the bonds mature . C) dated date of the bonds in the block. D) quantity and quality of the bonds in the block available

C) dated date of the bonds in the block. The dated date has no effect on marketability. A close call date or low call premium can make an issue less marketable because the chance of a call is greater. Maturity, quality and the size of the block affect marketability.

All of the following must be part of a registration statement EXCEPT: A) a statement as to whether the company is involved in any legal proceedings. B) a prospectus. C) identification of investors who own 5% or more of the company. D) the signatures of CEO, CFO, CAO, and majority of the board.

C) identification of investors who own 5% or more of the company. The registration statement must identify investors who own 10% or more of the company.

All of the following are true concerning a market's beta EXCEPT: A) it shows that if a stock's beta is 1.2 and the market moves by 5%, the stock would move by 6%. B) it is by definition equal to 1. C) it provides a measurement of a range that the market may move in any given day. D) it serves as a benchmark for measuring the relative volatility of a stock or portfolio against the movement of the market itself.

C) it provides a measurement of a range that the market may move in any given day. The beta is a benchmark and does not indicate anything about market movement as a whole. It only measures the movement of a particular security or portfolio as compared to the movement of the entire market.

An active options trader establishes the following position: Long 10 ALF Apr 40 calls at 6 Short 10 ALF Apr 50 calls at 2 What is the breakeven point? A) 4. B) 40. C) 46. D) 44.

D) 44. The breakeven on a call spread is determined by adding the difference in premiums (6 − 2 = 4) to the lower strike price. In this case, the net debit is 4 points. Therefore, 4 + 40 = 44.

A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. The registered representative wants to sell shares of a common stock IPO to the investment club. This is allowed: A) with written notice to the SEC. B) with written principal approval. C) only if the IPO is suitable for the investment club. D) under no circumstances.

D) under no circumstances. Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules the account would not be restricted if the assets owned by the spouse composed less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.

The letter of intent in a corporate underwriting is typically signed by which of the following parties? I. Issuer. II. Managing underwriter. III. Syndicate members. IV. Selling group members.

I and II The letter of intent initiates the underwriting process and is signed by the issuer and managing underwriter.

Which of the following statements regarding ADRs are TRUE?I. They are issued by large domestic commercial banks. II. They are issued by foreign banks. III. They facilitate U.S. trading in foreign securities. IV. They facilitate a foreign investor who wants to trade U.S. securities.

I and III ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.

An increase in the Federal Reserve Board's (FRB) reserve requirement has which of the following effects on total bank deposits? I. Decrease. II. Increase. III. Multiplier effect. IV. Logarithmic effect.

I and III If the FRB raises the reserve requirement, total bank deposits decrease, with the overall impact being increased because of the multiplier effect. If banks must meet a higher reserve requirement, they will have less money available to lend.

Which of the following statements regarding a Regulation T extension are TRUE? I. It is granted by a self-regulatory organization. II. It is granted by the transfer agent. III. An extension is automatically granted once the extension request is made. IV. Extensions are not automatically granted and may be denied.

I and IV In certain cases where the customer cannot make payment by the fifth business day following the trade date, the broker/dealer can request an extension from its SRO. Extensions are not automatic, may be denied and are granted at the discretion of the SRO.