Practice Exam #6
A 38-year-old investor places $25,000 into a single premium qualified deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $50,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is
$17,500 (50,000 x 35%) Because this is a qualified annuity, the entire withdrawal is taxable. In this case, it is all $50,000. That $50,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $50,000.
An investor has a short margin account. The current market value of the stock is $1.50 per share, and the investor owns 1,000 shares. Compliance with SRO minimum maintenance requirements is met with account equity of
$2,500 For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500 (1,000 shares @$2.50) is greater than 100% of $1,500.
In a margin account, if a client purchases $15,000 of LMN preferred shares, $15,000 of money market mutual fund shares, and $2,500 of call options, what is the Regulation T call?
$25,000 have to know what's marginable The amounts that must be deposited are as follows: $7,500 for the preferred shares, $15,000 for the mutual fund, and $2,500 for the options. Mutual fund shares cannot be hypothecated for 30 days, and option purchases are never marginable.
An investor had a $20,000 capital loss, a $15,000 capital gain, and $50,000 in income for the year. How much of the income is taxable?
$47,000 (20-15=5 net loss) only 3 can be written off (50-3=47) Capital losses may be used to reduce taxable income. The first step is to net the gains and the losses. This investor has a net loss of $5,000. Of that net loss, a maximum of $3,000 can be written off against the income for the year. That reduces the investor's taxable income to $47,000. The unused $2,000 of the net loss is carried forward to subsequent tax years until utilized.
If a customer buys 1 ABC Jan 50 call at 2 and 1 ABC Jan 50 put at 4 when ABC is at 49, the customer must deposit
$600 The customer purchased a straddle and must pay the full cost of both options ($200 + $400 = $600 total premium).
An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true?
-He does not have to file Form 144 to sell the shares. -He is not considered an affiliated person. Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. Certain family members, such as a spouse or other immediate family member residing in the same home, are required to combine holdings. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.
In performing their natural job functions, all of the following may act in a principal capacity in a transaction with customers except A) broker-dealers. B) branch managers of FINRA member firms. C) OTC market makers. D) designated market makers (DMM) on the NYSE.
B) branch managers of FINRA member firms. When acting as a principal in a transaction, you are buying for or selling from inventory. Although branch managers of member firms are generally required to be registered as principals, that is different from acting in a principal capacity in a transaction. DMMs facilitate trading on the floor of the NYSE. Doing that sometimes requires them to buy or sell as principals. OTC market makers, by definition, act as principals. The term broker-dealer means that the firm can act either as a broker or a dealer. There are a number of words used in this exam than can have multiple meanings. Principal is one of those.
Although municipal securities are exempt from SEC registration, full disclosure is still required with the use of
an official statement The disclosure document for a new municipal bond issue is the official statement (OS). It is the equivalent of a prospectus for a registered issue. A preliminary official statement (POS), equivalent to the red herring for a new stock issue, may have preceded the OS.
An investor opens a long position in one XYZ Nov 140 call @7. Disregarding any commissions, if the option is exercised, on settlement date, the investor
must pay $14,000. (When calls are exercised you pay the strike price) When an investor takes a long position in an option, it means the investor has purchased the option. If that option is a call (as is the case in our question), the holder (the owner) has the right to exercise the call option and purchase the stock at the exercise (strike) price. In our question, that strike price is $140 per share. If the holder decides to exercise the option, the exercise (strike) price is paid on the settlement date. Buying 100 shares at a price of $140 per share requires payment of $14,000.
Federal National Mortgage Association (FNMA)
purchase FHA-insured, VA-guaranteed, and conventional mortgages.
Cash dividends from real estate investment trusts (REITs) are
taxed as ordinary income. Cash dividends from REITs are taxed as ordinary income. A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs.
When a member firm receives a written complaint against one of its representatives, the person first informed about the complaint is
the designated principal Complaints must immediately be disclosed to the firm's designated principal for handling complaints.
The predictions of the VIX Index reflect expected change over
the next 30 days
One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the net asset value (NAV) of the fund was $17.20. Today, the NAV is $17.56, and your client wants to know what accounts for the difference. You should advise her that the difference likely represents
unrealized appreciation The NAV of mutual funds is marked to the market daily; the increase reflects higher market prices for the securities in the fund's portfolio.
If a customer has a long margin account with a market value of $12,000, a debit balance of $8,000, and special memorandum account (SMA) of $2,000, how much can the customer withdraw from the account?
$1,000 SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000),0 and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.
bearish indicator
-A breakout through the support level -A decrease in the short interest -More odd-lot purchases than sales
Warrants
1. it has a longer life than a stock right. 2. warrants do not have voting rights. 3. the exercise price is above the current market price. 4. it may be used as a sweetener for a bond issue.
Stop orders may be used
1. to protect profits on short positions. 2. They are used by technical traders to establish positions above or below resistance and support levels, respectively. Stop orders never guarantee a specific execution price. 3. to establish positions. 4. to protect profits on long positions. Stop orders are contingent orders that are triggered when the stock trades at or through a stated price. When triggered, they become market orders to buy or sell
SEC Regulation 14E requires that tender offers be open for at least
20 business days. Regulation 14E requires that tender offers be open for at least 20 business days and remain open for at least 10 business days after any change to the offering price.
When acting as an agent for a customer, Municipal Securities Rulemaking Board (MSRB) rules require the broker to make a reasonable effort to obtain?
Fair & reasonable price in relation to prevailing market conditions
Which of the following would not be a valid use of the partnership democracy? A) Removing the general partner B) Consenting to an action of a general partner that is contrary to the agreement of limited partnership C) Consenting to a legal judgment against the partnership D) Deciding which partnership assets should be liquidated to pay creditors
D) Deciding which partnership assets should be liquidated to pay creditors Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in being treated as general partners with respect to liability and possible loss of limited partner status.
Statutory Voting
Each share gets one vote in the election of each board nominee
If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax (AMT), which of the following securities should an agent recommend?
General obligation (GO) bond Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A GO bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.
bullish indicator (Look up others)
Head & shoulders bottom
Good Faith Deposit
In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. -If the syndicate is not awarded the issue, the check is returned. -If the syndicate is awarded the issue, the money is applied against the payment. However, if the syndicate fails to carry out the provisions of the underwriting, the money is retained by the issuer. - If you have ever bought or sold a house, this is comparable to the earnest money deposit turned in by the buyer with the offer.
Intangible Drilling Costs (IDCs)
Intangible drilling costs are those associated with drilling a well, but do not include the cost of capital equipment (e.g., pumps, casing). They include wages, fuel, repairs, hauling, supplies, surveys, tests, and drilling mud, and they are incidental to and necessary for the drilling activity.
Alpha
It is a measure of performance that adjusts for risk, relative to a known benchmark.
An investor, with a well-diversified portfolio oriented toward growth, has 60% invested in the stocks of 28 different companies. She would like to hedge the downside risk for the equities and is comfortable using options to do so. Which of the following is most suitable?
Purchase index option puts Selling options to hedge adds income to the account (premiums received), but the protection is limited. The best hedging protection is to purchase options, and to hedge long stocks, purchasing puts is the most suitable. With so many stocks to hedge, doing so individually would not be cost effective due to commissions. On the other hand, hedging the entire portfolio with index options allows the hedge to be done in fewer—if not a single—transaction.
If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be mostsuitable for your customer's portfolio?
T-bills While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bills make the most sense.
Bond Resolution
The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant.
A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account?
The equity will remain the same. Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.
Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11¼% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include which of the following?
The issue may have a junior claim to another security issue. The word subordinated is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral, as the bonds are identified as debentures, and having to convert to common stock is not a threat because she is the one that will, if she desires, exercise the conversion privilege.
An investor who wants a long-term tax-free bond with the highest possible safety should invest in
a New Housing Authority bond. The one advantage that NHA bonds (sometimes called PHAs) have is that they are the only municipal bonds with the full backing of the U.S. government. Even a GO or revenue bond with the highest S&P or Moody's rating doesn't have that safety.
Several years ago, a client purchased 1,000 shares of RADAK common stock at $50 per share. Today, the stock is selling for $100 per share and the investor is nervous about the future for the market. An order is turned in to sell 10 RADAK 105 calls at a premium of 2 and buy 10 RADAK 95 puts at a premium of 2. This strategy is
a cashless collar. The answer is a cashless collar. It is cashless is because the calls are sold for 2 and the puts bought for 2. That means no out-of-pocket cash. The investor has "put a collar" on the long position in the stock by selling an out-of-the-money call and buying an out-of-the-money put. If the option purchase was more expensive than the one sold, it is still a collar, but not cashless because the investor would have to come up with the difference. For example, if the cost of the put was 3 while the proceeds from the call was 2, the client's cost would be one point to establish the collar. The exam will want you to know that collars (cashless or not) are used to protect an existing profit.
cumulative voting
a procedure in which a shareholder may cast all votes for one member of the board of directors
If a 42-year-old customer has been depositing money in a variable annuity for five years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding
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.
Thomson's Muni News or Muni Market Monitor (formerly Munifacts)
automated system of delivering information relating to the market for municipal securities?
A general partner is considered to have a conflict of interest with the business of a limited partnership if she
borrows money from the business. The general partner manages the business and acts as agent for the business. The general partner may loan money to the partnership at a reasonable rate of interest but may not borrow from the partnership.
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, she will pay
capital gains rates on capital gains distributions and ordinary income rates on dividends.
In the assessment of a company's stock, a technical analyst takes into consideration all of the following except A) price momentum. B) earnings. C) volume. D) market price.
earnings. A market technician (technical analyst) deals primarily with the timing of activity and market trends, while a fundamental analyst centers on a particular industry or company within an industry and its relative health and market potential.
If a customer does not pay for equity securities purchased within two business days of the regular way settlement date, the broker-dealer may request a time extension from
its designated examining authority. A time extension may be requested from the broker-dealer's designated examining authority, which could be FINRA or one of the exchanges.
Corporations, whether organized as C or S corporations, afford their owners
limited liability, which is the protection of their personal assets from losses incurred by the businesses
FINRA Rule 2310 DPPs
overall expenses and amount of broker-dealer compensation considered fair and reasonable -15% of the gross proceeds -The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. -The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners
When comparing preemptive rights and warrants, one similarity is
their voting privilege In an odd play on words, the only similarity here is that neither of them have voting rights. Warrants are long-term while rights are short-term. The exercise price of a right is below the current market while that of a warrant is above. Only rights are distributed to existing shareholders in proportion to the investor's current stock ownership. Warrants are not sent to shareholders; they are most often part of another issue.
