practice Exam series 7

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A) brokers acting as agents in all order execution scenarios B) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor C) trades in NYSE-listed securities occurring on the NYSE D) brokers executing orders as agents in an auction market on any exchange trading floors Your answer, brokers executing orders as agents in an auction market on any exchange trading floors, was incorrect. The correct answer was: trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor

FINRA's Trade Reporting Facility (TRF) is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent. Reference: 8.2.2.5 in the License Exam Manual.

Which of the following statements about warrants is NOT true? A) Warrants may not be traded in the secondary market. B) Warrants have longer lifetimes than rights. C) Warrants have an exercise price above the current market price of the common stock when issued. D) Warrants may be attached to another of the issuer's securities. Your answer, Warrants have an exercise price above the current market price of the common stock when issued., was incorrect. The correct answer was: Warrants may not be traded in the secondary market.

Warrants usually have lifetimes of 2-10 years; rights expire in 30-45 days. A corporation may attach warrants to other securities, such as bonds, to make the bonds more marketable. Warrants have no intrinsic value when issued and may expire without ever having intrinsic value. Before expiration, they may be, and often are, traded in the secondary market. Reference: 1.7.2 in the License Exam Manual.

An investor buys 2 RST 40 calls and pays a premium of 4 each. He also buys 2 RST 40 puts and pays a premium of 2.50 each. When purchased, RST is trading at $40.75. On the expiration date, RST is trading at $32.50 and the investor closes his positions for intrinsic value. Excluding commission, the investor realizes a: A) $100 loss. B) $200 loss. C) $200 profit. D) $100 profit.

Your answer, $100 loss., was incorrect. The correct answer was: $200 profit. The cost of opening these two straddles is $1,300. On the expiration date, the puts are worth $750 each, for a total of $1,500, giving the investor a $200 profit. The calls will expire worthless. Alternatively, the breakeven points for this long straddle are 33.50 and 46.50 (add the combined premiums of 6.50 to the call strike and subtract combined premiums from the put strike). The investor profits in a long straddle when the stock moves outside the breakeven points. As the stock is at 32.50, the customer makes 1 point (33.50 − 32.50) on each straddle, resulting in a $200 profit. Reference: 4.4.2.1 in the License Exam Manual.

A customer owns 10M of 7% U.S. Treasury bonds. He is in the 28% federal tax bracket and the 10% state tax bracket. What is his annual tax liability on these bonds? A) $196. B) $266. C) $70. D) $98.

Your answer, $196., was correct!. His tax liability is as follows: $1,000 × 7% = $70 annual interest per bond; $70 × 10 = $700 annual interest, which is taxable only by the federal government; $700 × 28% = a $196 tax liability. Reference: 15.5.4.1.1 in the License Exam Manual.

Under SEC rules, a penny stock is defined as an unlisted, non-Nasdaq security trading at less than: A) $2 per share. B) $2.50 per share. C) $5 per share. D) $1 per share.

Your answer, $5 per share., was correct!. SEC rules define penny stocks as unlisted, non-Nasdaq stocks of less than $5 per share. Reference: 16.1.9 in the License Exam Manual.

ABC Corporation, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all of the warrants are exercised, ABC Corporation will receive: A) $12.8 million. B) $6.4 million. C) $10 million. D) $20 million.

Your answer, $6.4 million., was correct!. There are a total of 40,000 warrants outstanding ($40 million of debentures / $1,000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 × 40,000) at $40 per share. 160,000 × $40 = $6.4 million. Reference: 1.7.2 in the License Exam Manual.

If the strike price of a yield-based option is 62.50, this represents a yield of: A) 0.0625. B) 0.00625. C) 0.625. D) 0.000625.

Your answer, 0.00625., was incorrect. The correct answer was: 0.0625. To calculate the percentage yield of the underlying Treasury security, divide the strike price by 10 (62.50 / 10 = 6.25%). Reference: 4.5.2 in the License Exam Manual.

Which of the following is a third-market trade? A) 12,000 shares of XYZ, a stock listed on the New York Stock Exchange, are sold over the counter. B) 10,000 shares of XYZ, a stock listed on the New York Stock Exchange, are sold on the Chicago Stock Exchange floor. C) 10,000 shares of LMNO, a stock listed on Nasdaq, are traded between two financial institutions via an electronic communications network (ECN). D) 12,000 shares of PQ, a stock listed on the Philadelphia Stock Exchange are sold on the Chicago Stock Exchange floor.

Your answer, 10,000 shares of LMNO, a stock listed on Nasdaq, are traded between two financial institutions via an electronic communications network (ECN)., was incorrect. The correct answer was: 12,000 shares of XYZ, a stock listed on the New York Stock Exchange, are sold over the counter. A third-market trade occurs when exchange-listed securities are traded over the counter. Reference: 8.2.1.3 in the License Exam Manual.

The S&P 100 index closed on August 10 at 536.04. "The Wall Street Journal" quotes the closing premium for the OEX September 510 call at 28.90. The time value of the contract is: A) 18.9. B) 26.04. C) 2.86. D) 7.14.

Your answer, 2.86., was correct!. To find time value, subtract the intrinsic value from the premium. The intrinsic value is the in-the-money amount. Calls are in the money if the market price exceeds the strike price. In this case, the intrinsic value of the 510 call is 26.04. If the premium is 28.90, the time value is 2.86. Reference: 4.1.6.2 in the License Exam Manual

Your client writes 2 ABC November 220 calls at 5, and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for each covered call position? A) 210. B) 230. C) 225. D) 215.

Your answer, 230., was incorrect. The correct answer was: 215. The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5). Reference: 4.3.2 in the License Exam Manual.

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) 4500. C) 2700. D) 2000.

Your answer, 2700., was correct!. 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.) Reference: 6.1.3.1 in the License Exam Manual.

The regular way ex-dividend date for cash dividends is the: A) 2nd business day following the record date. B) 3rd business day preceding the record date. C) 2nd business day preceding the settlement date . D) 2nd business day preceding the record date.

Your answer, 2nd business day following the record date., was incorrect. The correct answer was: 2nd business day preceding the record date. The regular way ex-dividend date is 2 business days before the record date. Reference: 1.6.3.2.2 in the License Exam Manual.

A customer writes 1 ABC July 45 put at 3 when ABC is trading at 46. Maximum potential loss is: A) unlimited. B) 4200. C) 300. D) 4300.

Your answer, 4200., was correct!. Writers of puts are bullish. If the stock falls below the strike price, the customer will be exercised and forced to buy stock at 45. If the stock becomes worthless, the customer will lose $4,500. However, the customer received $300 for writing the option. Maximum loss equals the breakeven point (SP minus premiums) multiplied by 100 shares. Reference: 4.2.4.5 in the License Exam Manual.

If a customer writes 10 DEF Aug 50 calls at 1 when DEF is trading at 44, what is the maximum gain? A) 500. B) Unlimited. C) 100. D) 1000.

Your answer, 500., was incorrect. The correct answer was: 1000. When writing options, the maximum gain is equal to the premium received. Because there are 10 calls with a premium of $100 each, the maximum gain is 10 multiplied by $100, or $1,000. Reference: 4.2.2.5 in the License Exam Manual.

If an investor buys 1 KLP Oct 95 put at 6.50, what is the investor's maximum potential gain? A) 8850. B) 9500. C) 9650. D) 10150.

Your answer, 8850., was correct!. The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). One contract represents 100 shares, so the buyer's maximum gain is $8,850 if the stock declines to 0. Because put buyers are bearish, they will make money if the stock falls below the breakeven point of 88.50. Reference: 4.2.3.4 in the License Exam Manual.

A corporate insider may profitably sell the stock of his company, without penalty, after the stock has been held for more than: A) 3 months. B) 9 months. C) 12 months. D) 6 months.

Your answer, 9 months., was incorrect. The correct answer was: 6 months. If corporate insiders sell their stock at a profit, they must do so after having held the stock for at least 6 months. This is termed the short swing profit rule. If they sell at a profit without having met the holding period requirement, any profit earned must be disgorged to the company. Reference: 7.6.2.4 in the License Exam Manual.

Letters of intent may be backdated up to how many days? A) 120. B) 60. C) 90. D) 30.

Your answer, 90., was correct!. The time limit for a letter of intent is 13 months, but the letter may be backdated up to 90 days from the date it was filed. In that case, the investor has 10 months to complete the letter. Reference: 10.7.5.1.1 in the License Exam Manual.

Relative to a corporate bond, what begins on the dated date? A) The computation of principal payment. B) The date of all mathematical computations. C) Accrual of interest. D) Settlement and delivery.

Your answer, Accrual of interest., was correct!. Interest begins accruing on the dated date on new bond issues. Reference: 2.7.1 in the License Exam Manual.

Which of the following would NOT be considered institutional communications with the public? A) A communication with an individual designated to act on behalf of your institutional customer B) A letter to a municipality offering your firm's services as an underwriter C) A letter to another broker/dealer D) An internal memo promoting a new product that will be offered to your firm's institutional customers only

Your answer, An internal memo promoting a new product that will be offered to your firm's institutional customers only, was correct!. Institution communications specifically exclude internal communications. Communications with another member firm, a government entity, such as a municipality or with someone designated to act on behalf of one of your firm's institutional customers, would all fall within the definition of institutional communications. Reference: 17.5 in the License Exam Manual.

Which of the following affects the holding period of XYZ stock, a position that has been held for 6 months? Buying an in-the-money put Buy an out-of-the-money put Writing an in-the-money call Writing an out-of-the-money call. A) III and IV. B) II and III. C) I and IV. D) I and II.

Your answer, I and II., was correct!. Buying a put (in or out-of-the-money) on a stock held short term (one year or less) stops the holding period until the put is disposed of. Reference: 4.7.1 in the License Exam Manual.

Which of the following investors would be exempt from filing form 144 when selling securities they own? A) An investor selling shares acquired in a Regulation D private placement. B) An employee of the company selling registered shares. C) An affiliated person selling unregistered shares. D) An employee of the company selling unregistered shares.

Your answer, An investor selling shares acquired in a Regulation D private placement., was incorrect. The correct answer was: An employee of the company selling registered shares. Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply. Reference: 7.6.2.4 in the License Exam Manual.

A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect? A) Any gain or loss is deferred until he liquidates the AC Income Fund. B) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. C) It is a tax-free exchange. D) The tax basis of AC Income Fund is adjusted to reflect the gain in AC Growth Fund.

Your answer, Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase., was correct!. The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund. Reference: 10.7.5.4.1 in the License Exam Manual.

What is the latest date that an IRA participant may make an IRA deposit for the current year? A) April 15 of the current year. B) April 15 of the following year. C) July 15 of the following year, if extensions have been filed. D) December 31 of the current year.

Your answer, April 15 of the following year., was correct!. Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made. Reference: 11.2 in the License Exam Manual.

As the result of a conversation with an officer of a publicly traded company, a registered representative comes into possession of material, nonpublic information indicating a high probability that the company's stock will increase substantially in value. If the following morning the registered representative buys call options on the stock, which of the following statements is TRUE? A) Both the officer and the registered representative violated insider trading rules. B) Neither the officer nor the registered representative violated insider trading rules. C) The officer violated insider trading rules. D) The registered representative violated insider trading rules.

Your answer, Both the officer and the registered representative violated insider trading rules., was correct!. A violation occurs if insider information is used to trade for profit or to avoid a loss. In such cases, both the tipper and the tippee are liable. Reference: 16.1.8.2 in the License Exam Manual.

A technical analyst has been charting XYZ stock and notes that it fluctuates between $36 and $41. If the analyst expects a breakout through resistance, which of the following orders should be placed? A) Buy XYZ 35 GTC. B) Buy XYZ 42 Stop GTC. C) Buy XYZ 35 Stop GTC. D) Buy XYZ 42 GTC.

Your answer, Buy XYZ 42 Stop GTC., was correct!. A buy stop order is placed above a resistance level. It is triggered if and when the stock trades at or above the stop price. This allows an investor to participate in a bullish breakout through resistance. Reference: 8.4.2.4.1 in the License Exam Manual.

Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Variable annuities. B) Treasury notes. C) Common stock. D) Corporate bonds.

Your answer, Common stock., was incorrect. The correct answer was: Variable annuities. Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose. Reference: 11.2.1.1 in the License Exam Manual.

Which of the following underwriting arrangements is associated with an invitation, typically found in The Bond Buyer, directed at investment bankers and broker dealers, intended to solicit interest in underwriting a new municipal issue? A) Negotiated. B) All or none. C) Competitive bid. D) Best efforts.

Your answer, Competitive bid., was correct!. With a competitive bid underwriting a municipality publishes invitations to bid in The Bond Buyer or other municipal bond publication. Investment bankers and broker/dealers interested in underwriting the new municipal issue would respond to the invitation to bid. Reference: 3.2.2 in the License Exam Manual.

Which of the following statements regarding Coverdell ESAs is TRUE? A) Contributions are tax deductible, and distributions for any reason are tax free. B) Contributions are tax deductible, and distributions are always taxable. C) Contributions are not tax deductible, and distributions for any reason are tax free. D) Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses.

Your answer, Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses., was correct!. Coverdell ESAs offer after-tax contributions of up to $2,000 per student per year for children under age 18. Distributions are tax free as long as the funds are used for education. Reference: 11.2.5.1 in the License Exam Manual.

The investment policy department of an investment firm forecasts that the current business cycle should reach its peak within the next 2 months. Under such circumstances, which of the following portfolio adjustments would be most suitable for the firm's customers who actively invest in common stocks? A) Corporate bonds. B) Defensive stocks. C) Cyclical stocks. D) Aggressive growth stocks.

Your answer, Defensive stocks., was correct!. Defensive stocks such as those in the food, pharmaceuticals, and energy industries would most likely be suitable for investors who actively manage their equity portfolios. Defensive stocks are least likely to be affected by a reversal in the business cycle. Reference: 14.5.1.1 in the License Exam Manual.

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

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

A customer opens a margin account by purchasing 300 shares of XYZ at $60 and deposits the required margin. The stock rises to $70 on the following day. On the third day, after the release of a disappointing earnings report, the stock falls to $50. Which of the following describes the account after the changes in market value? A) Equity of $9,000; SMA of $0. B) Equity of $6,000; SMA of $1,500. C) Equity of $12,000; SMA of $1,500. D) Equity of $6,000; SMA of $0.

Your answer, Equity of $6,000; SMA of $1,500., was correct!. The account starts out as follows: $18,000 − $9,000 = $9,000 (LMV − DB = EQ). After the stock rises to 70, the account looks like this: $21,000 − $9,000 = $12,000; SMA = $1,500. For every $1 increase in market value, 50 cents of SMA is created. After the stock falls to 50, the account looks like this: $15,000 − $9,000 = $6,000; SMA = $1,500. An increase in market value creates SMA but a subsequent decline has no effect. Reference: 6.3 in the License Exam Manual.

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) Wash sale rules. B) FIFO. C) LIFO. D) Identified shares.

Your answer, FIFO., was correct!. When a customer does not choose a method, the IRS uses FIFO (first in, first out). This will likely result in shares with the lowest cost basis being redeemed first, which creates a greater taxable gain. Reference: 10.8.1.5.1 in the License Exam Manual.

If the holder of a call tenders an exercise notice after the ex-dividend date for a cash dividend, which of the following statements is TRUE? A) He is not entitled to the dividend. B) He is entitled to the dividend. C) He must pay the dividend to the writer. D) He is entitled to the dividend only if he sells the underlying stock.

Your answer, He is entitled to the dividend., was incorrect. The correct answer was: He is not entitled to the dividend. If the holder of a call exercises before the ex-date, the trade settles on or before the record date and he is on record for the dividend. If the holder exercises on or after the ex-date, the trade settles after the record date and he is neither on record for the dividend nor entitled to it. Reference: 4.6.1.3 in the License Exam Manual.

Which of the following would make an employee ineligible to participate in a company's qualified retirement plan? A) He is not a member of the company's management team. B) He has been with the company for only 2 years. C) He is only 20 years old. D) He works only 1,200 hours a year for the company.

Your answer, He is only 20 years old., was correct!. Under the Employee Retirement Income Security Act, anyone over the age of 21, management or not, who has been with the company for at least 1 year, and who works 1,000 or more hours per year for the company, must be allowed to participate in the company's qualified plan. Reference: 11.6 in the License Exam Manual.

An individual is employed as a research analyst for a member firm that specializes in investment banking and has just completed a research report comparing two companies in the semiconductor business. Which of the following would be considered prohibited activities by this analyst, under FINRA rules? Purchasing shares of a semiconductor company before that issuer's IPO. Trading in these two stocks or their derivatives in a manner inconsistent with that analyst's recommendation. Purchasing shares of either of these two stocks for a personal account after the research report has been issued. Purchasing shares of the XYZ Semiconductor Fund, a fund qualifying as a diversified management investment company under the Investment Company Act of 1940 but not covered or analyzed in the research report. A) I and IV. B) II and III. C) III and IV. D) I and II.

Your answer, I and II., was correct!. FINRA rules restrict personal trading by research analysts. They are never permitted to acquire shares in advance of an IPO in a company in the same type of business that the analysts research. They are never permitted to engage in trading contrary to their opinions, as published in their firm's research reports. Once the report has been issued, they may trade in accordance with their recommendations. Purchasing shares of a mutual fund, even one that specializes in their field of research, is permitted. Reference: 17.5.5.1.4 in the License Exam Manual.

Which of the following are required to be given to retail customers at settlement in municipal new issue transactions? Confirmation showing the purchase price. Official statement. Names of syndicate members with their participation amounts. Copy of the agreement among underwriters. A) I and III. B) II and IV. C) III and IV. D) I and II.

Your answer, I and II., was correct!. MSRB rules state that a confirmation and an official statement must be sent to the investor no later than at settlement. Reference: 3.2.8.1 in the License Exam Manual.

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

Your answer, I and II., was correct!. The letter of intent initiates the underwriting process and is signed by the issuer and managing underwriter. Reference: 7.5.1 in the License Exam Manual.

Which items would change if a company buys equipment for cash? The working capital. The total assets. The total liabilities. The shareholders' equity. A) II and IV. B) I only. C) IV only. D) I and II.

Your answer, I and II., was incorrect. The correct answer was: I only. The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets since it is an exchange of one asset (cash) for another asset of equal value (equipment). Since no loan was needed, it does not affect total liabilities, nor does it affect equity. Reference: 14.6.1.3.5 in the License Exam Manual.

An investor's cost basis in a real estate program could be increased by: cash contributions. contributions of property. nonrecourse financing. distributions of cash to the partner. A) I and II. B) I, II and III. C) I and III. D) I, II, III and IV.

Your answer, I and II., was incorrect. The correct answer was: I, II and III. An investor's original cost basis will be increased by cash contributions made by the limited partner, property, fully paid securities and in the case of real estate programs, nonrecourse financing. A distribution of cash to a limited partner will decrease the investor's cost basis.

An investor who has purchased a nonqualified variable annuity has the right to: vote on proposed changes in investment policy. approve changes in the plan portfolio. vote for the investment adviser. withdraw funds without any tax consequences. A) II and IV. B) I and IV. C) I and III. D) II and III.

Your answer, I and III., was correct!. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal. Reference: 12.1.4 in the License Exam Manual.

Which of the following are TRUE of the GO "Bond" Index? It includes only GO bonds. It includes both GO bonds and revenue bonds. It is computed weekly. It is computed monthly. A) II and III. B) II and IV. C) I and III. D) I and IV.

Your answer, I and III., was correct!. The Bond Buyer Index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, each with approximately 20 years to maturity. The index is updated each week. Reference: 3.2.3.1 in the License Exam Manual.

Which of the following statements regarding qualified retirement plans are TRUE? Contributions are made with pretax dollars. Contributions are made with after-tax dollars. Distributions are 100% taxable. Distributions are taxable only to the extent of earnings. A) I and IV. B) II and IV. C) II and III. D) I and III.

Your answer, I and III., was correct!. With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax-deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable. Reference: 11.1.1 in the License Exam Manual.

U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are: clipped bonds. stripped bonds. subject to annual taxation on the per year accreted amount. subject to taxation at maturity. A) II and IV. B) I and IV. C) I and III. D) II and III.

Your answer, I and III., was incorrect. The correct answer was: II and III. U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount. Reference: 2.6.1.4.1 in the License Exam Manual.

Which of the following statements regarding red herrings are TRUE? They may be used to obtain indications of interest. They may be sent out with sales literature. They contain the final offering price. Their use ends when the offering becomes effective. A) II and III. B) I and IV. C) I and III. D) II and IV.

Your answer, I and IV., was correct!. A preliminary prospectus, or red herring, is used only during the cooling-off period. The red herring does not contain the final price; offerings are priced immediately before the effective date. Reference: 7.2.2.1 in the License Exam Manual.

A variable annuity's separate account is: used for the investment of funds paid by contract holders. used to escrow late or otherwise delinquent premium payments. required to be located off of the company's premises. regulated under both securities and insurance laws. A) I and III. B) II and III. C) I and IV. D) II and IV.

Your answer, I and IV., was correct!. The separate account is used for both variable life insurance and variable annuity investments. The nature of the securities invested in-bonds and growth stocks-makes it necessary that sales representatives and their principals be licensed in securities as well as insurance. Reference: 12.1.2.1.1 in the License Exam Manual.

Which of the following orders are NOT placed on the order display book? Buy stop limit. Buy stop. Market. Not held. A) II and III. B) I and IV. C) III and IV. D) I and II.

Your answer, I and IV., was incorrect. The correct answer was: III and IV. Market orders are executed immediately and are not placed on the order book. Not held orders are not presented to the order book. Reference: 8.4.2.5 in the License Exam Manual.

Which of the following govern(s) the sale of a publicly offered direct participation program? FINRA Securities Act of 1933. Blue-sky laws. A) I and II. B) I, II and III. C) I only. D) II only.

Your answer, I, II and III., was correct!. The sale of a publicly registered DPP, like any other newly issued nonexempt security, is governed by the Securities Act of 1933, FINRA, and any applicable blue-sky laws. Reference: 13.1.1.2 in the License Exam Manual.

Which of the following are acceptable forms of collateral in a margin account? Listed bonds. Listed stocks. Listed put or call options. A) I and II. B) I and III. C) II and III. D) I, II and III.

Your answer, I, II and III., was incorrect. The correct answer was: I and II. Put and call options have no loan value, and therefore are not acceptable as collateral in a margin account. Reference: 6.1.3.1 in the License Exam Manual.

The Securities Exchange Act of 1934: created the SEC. regulates trading in the secondary market. prohibits fraud in the distribution of new issues. A) I only. B) I and II. C) II and III. D) I, II and III.

Your answer, I, II and III., was incorrect. The correct answer was: I and II. The Securities Exchange Act of 1934 regulates secondary market activity. It created the SEC, which oversees all trading activity. The Securities Act of 1933 prohibits fraud in the distribution of new issues, whereas the Act of 1934 prohibits fraud in the trading of securities. Reference: 7.1.1.2. in the License Exam Manual.

Under SEC rules, which of the following events require a broker/dealer to furnish a copy of the account record to a customer? The opening of a new account. Change of customer's name or address. Change of customer's investment objectives. Change in customer's employment or financial status. A) II and III B) I, II, III and IV C) I and II D) I only

Your answer, I, II, III and IV, was correct!. Any change in a customer's status that may impact the suitability of recommendations requires a broker/dealer to update customer account records. Reference: 5.1.1.3 in the License Exam Manual.

Policies and procedures regarding instructions received from customers by email should identify as red flags which of the following scenarios? An email received that can not be verified by the registered representative as having actually come from the customer An emailed request to liquidate certain account holdings and transfer the sales proceeds to a third party A request by email regarding a joint account with instructions to sell all securities and to forward a check made payable to only one party to the account An urgent request that funds be sent to an overseas bank account not previously known to be associated with the client A) I, II, III and IV B) II and IV C) I and IV D) I and III

Your answer, I, II, III and IV, was correct!. Each of the scenarios should raise a red flag regarding unusual instructions received by email or otherwise. All firms must have in place written supervisory policies and procedures for reviewing and monitoring the transmittal of funds and a method of verifying that instructions received by email came from the customer and not an unknown third party. Urgency that might be intended to circumvent or deter broker/dealer verification procedures should always be viewed with extreme caution. Reference: 5.1.2.4 in the License Exam Manual.

A zero-coupon callable revenue issue has been pre-refunded. Under the rules of the MSRB, which of the following are required to be on a customer's confirmation? Zero coupon. Callable provisions. Pre-refunded. Yield. A) II, III and IV. B) I and IV. C) I, II, III and IV. D) II and III.

Your answer, I, II, III and IV., was correct!. On a customer's confirmation, it is necessary to include the zero-coupon rate, the yield, callable provisions, and whether or not it is pre-refunded, because all of these affect the price of a bond. Reference: 3.4.5.1.2 in the License Exam Manual.

Under SEC rules, a customer short sale on an exchange floor can be executed on which of the following? Plus tick. Zero-plus tick. Minus tick. Zero-minus tick. A) I and III. B) I, II, III and IV. C) I and II. D) II and IV.

Your answer, I, II, III and IV., was correct!. On an exchange floor, a customer short sale can be executed at any time in the trade sequence. Reference: 8.4.4 in the License Exam Manual.

A broker/dealer may charge customers for which of the following services? Safekeeping of customer's securities, exchange, or transfer. Collection of customer's interest or dividends. Forwarding of proxy material to the customer. Loans made to customers. A) I, II, III and IV. B) I, II and IV. C) I and II. D) II and IV.

Your answer, I, II, III and IV., was incorrect. The correct answer was: I, II and IV. The Conduct Rules permit FINRA members to charge reasonable fees to their customers for a variety of services. Included in chargeable services are the collection of interest and dividends, finding a buyer for a client who wishes to sell a relatively illiquid investment, and holding customers' securities in safekeeping. Members may also charge interest on loans made to customers. However, the expenses associated with sending proxy statements to customers whose securities are being held in trust by the member cannot be charged to the customer. Instead, the member may seek (and receive) reimbursement from the issuer for these expenses, since the issuer would have incurred these expenses had the customer/shareholder been holding the securities directly. Reference: 9.1.3.3 in the License Exam Manual.

You have 4 clients each expressing interest in a variable annuity contract. Which 2 of the 4 client profiles would a VA be least suitable for? A 45-year-old employed individual with no other retirement accounts in place A 58-year-old individual near retirement who is in good health and anticipates a lengthy retirement A 32-year-old with a company-sponsored 401k plan and will need a lump sum soon to finance graduate school tuition A 60-year-old individual, nearing retirement who has both IRAs and a 401k in place, is comfortable with market risk associated with the stock market, and has a lump sum in cash available to fund the annuity A) II and IV B) I and III C) II and III D) I and II

Your answer, II and III, was incorrect. The correct answer was: I and III VAs are less suitable for individuals who have not yet made maximum contributions to other retirement accounts such as IRAs and 401ks. They are also not considered suitable for anyone who anticipates needing a lump sum within a short time frame to fund other endeavors. They are more suitable for individuals who can fund the annuity with cash, want to supplement existing retirement benefits they have already funded, are comfortable with the market risk associated with a VA separate account portfolio and anticipate a long retirement. Reference: 12.3.4 in the License Exam Manual.

A company's changing from straight line to accelerated depreciation will: increase income in the early years. decrease income in the early years. increase income in the later years. decrease income in the later years. A) II and IV. B) I and III. C) I and IV. D) II and III.

Your answer, II and III., was correct!. Accelerated depreciation increases charged expenses during the early years of equipment life but decreases charged expenses during the later years. Reference: 14.6.1.4.2 in the License Exam Manual.

Twenty-five basis points on a par bond with 1 year to maturity are equal to: $.25 per $1,000. $2.50 per $1,000. 0.25%. 2.5%. A) I and IV. B) II and IV. C) I and III. D) II and III.

Your answer, II and III., was correct!. If 1 basis point equals .01%, 25 basis points equal .25%. .25% of $10 (which is the value of one full point for a bond) = $2.50. Reference: 2.1.5.1 in the License Exam Manual.

A retail customer purchases a municipal bond from your firm. According to MSRB rules, the confirmation must disclose which of the following? Where your firm acquired the bonds. Whether your firm acted as agent or principal. Your firm's address. The price your firm paid for the bonds. A) II and III. B) II and IV. C) I and IV. D) I and III.

Your answer, II and III., was correct!. The broker/dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker/dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker/dealer is not required to disclose where it acquired the bonds or the price it paid. Reference: 3.4.5.1.2 in the License Exam Manual.

Which of the following statements regarding a Rule 144 sale of restricted stock are TRUE? Stock sold through a 144 sale is considered registered stock after the sale. After holding the stock for 6 months, nonaffiliates may sell unrestricted. After holding the stock for 6 months, there are no volume restrictions for affiliates. Form 144 must be filed with the SEC at least 10 business days before a 144 sale made by an affiliate. A) II and III. B) I and III. C) III and IV. D) I and II.

Your answer, II and III., was incorrect. The correct answer was: I and II. Stock sold through a 144 sale is considered registered stock after the sale. When required to be filed by affiliates or insiders, Form 144 must be filed with the SEC on or before the date of sale. After holding the stock fully paid for 6 months, nonaffiliates may sell unrestricted but affiliates are subject to the volume restrictions of Rule 144. Reference: 7.6.2.4 in the License Exam Manual.

Which of the following statements regarding UGMA accounts are NOT true? Only one custodian may be appointed for an UGMA account in the name of a minor. A gift under UGMA can be revoked. A custodian is liable for imprudence. Short sales are permitted in an UGMA account. A) II and IV. B) I and II. C) I and IV. D) II and III.

Your answer, II and IV., was correct!. An UGMA account is allowed only one custodian and one minor. Short selling is prohibited in UGMA accounts. Once a gift is given, it is irrevocable. The custodian has fiduciary responsibility toward the minor to invest conservatively, and the custodian is liable for imprudence in handling the entrusted funds. Reference: 5.3.1.5 in the License Exam Manual.

In a competitive bid, which of the following would the issuer need to determine net interest cost? Coupon rates. Basis. Dollar price. Spread. A) I and III. B) I and II. C) II and IV. D) III and IV.

Your answer, II and IV., was incorrect. The correct answer was: I and III. The coupon rate and dollar price are important to the issuer because they determine the actual cost of borrowing. The spread and basis at which the bonds will be resold are important to the underwriters, but not to the issuer.

Which of the following fundamental analysis theories might rely on lowering and raising taxes to stimulate or cool down an economy? A) Supply side. B) Breakout. C) Keynesian. D) Short interest.

Your answer, Keynesian., was correct!. Keynesian theory is interventionist. Supply side theory calls for low taxes and low government spending. Both short interest and breakout theories are technical rather than fundamental analysis theories. Reference: 14.1.2.1 in the License Exam Manual.

A couple in their early 30s has been married for 4 years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about 6 months, which of the following mutual funds is the most suitable for these customers? A) XYZ Investment-Grade Bond Fund. B) LMN Cash Reserves Money Market Fund. C) ABC Growth & Income Fund. D) ATF Capital Appreciation Fund.

Your answer, LMN Cash Reserves Money Market Fund., was correct!. These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective. Reference: 15.2.1.2 in the License Exam Manual.

Which of the following order types is permitted in Nasdaq markets but NOT in NYSE equity markets? A) Fill or kill (FOK). B) Limit. C) Market. D) Immediate or cancel (IOC).

Your answer, Market., was incorrect. The correct answer was: Fill or kill (FOK). Fill-or-kill (FOK) and all-or-none (AON) orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq. Reference: 8.4.3.5 in the License Exam Manual.

In its notice of sale in the "Bond Buyer", an issuer states that it will take into consideration the timing of interest payments when evaluating bids. The issuer will be using which of the following methods in its bid selection? A) Net interest cost. B) Real interest cost. C) Low interest cost. D) True interest cost.

Your answer, Net interest cost., was incorrect. The correct answer was: True interest cost. The true interest cost method (TIC) takes into consideration the time value of money. The issuer discounts future interest payments to arrive at a present value. Reference: 3.2.5.1 in the License Exam Manual.

Performance of the terms of a standardized listed option contract are guaranteed by the: A) OCC. B) CBOT-CME. C) SEC. D) NYBOT.

Your answer, OCC., was correct!. The Options Clearing Corporation issues, guarantees, and handles the exercise and assignment of listed options. Reference: 4.6.3 in the License Exam Manual.

At which stage of the money-laundering process are illicit funds most susceptible to detection? A) Relocation. B) Placement. C) Layering. D) Integration.

Your answer, Placement., was correct!. Placement, the first step in laundering money, when no attempt is made to hide its origins, is recognized as the step during which the illegal funds are most vulnerable to detection. There is no step called relocation. Reference: 16.1.10.1.1 in the License Exam Manual.

Which of the following statements regarding investment companies is TRUE? A) Pre-filing for investment company retail communications is never required. B) Pre-filing for investment company retail communications is always required. C) Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. D) Retail communications for investment companies must be pre-filed 10 business days before first use when the communication does not include a performance ranking.

Your answer, Pre-filing for investment company retail communications is always required., was incorrect. The correct answer was: Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. For retail communications that do include a performance ranking, a 10 day pre-filing is required. Reference: 17.5.2.1 in the License Exam Manual.

John is the custodian of his niece's UGMA account. John places an order for 100 shares of a very speculative stock for the account. What should the representative do? A) Refuse to enter the order, because it is unsuitable for a UGMA account. B) Enter the order as requested, without comment. C) Advise the custodian as to the suitability of the stock. D) Consult with his principal before entering the order.

Your answer, Refuse to enter the order, because it is unsuitable for a UGMA account., was incorrect. The correct answer was: Advise the custodian as to the suitability of the stock. The custodian should not place unsuitable orders in a UGMA account. The representative should inform the custodian of this. Reference: 5.3.1.5 in the License Exam Manual.

Which of the following entities was created to protect investors who have money and/or securities on deposit at member firms? A) ERISA. B) CU.S.IP. C) AGA. D) SIPC.

Your answer, SIPC., was correct!. The Securities Investor Protection Act of 1970 created the Securities Investor Protection Corporation (SIPC) to protect securities investors against losses resulting from the financial failure of broker/dealers. SIPC does not provide protection against securities losses arising from decreases in market value. Reference: 16.1.6 in the License Exam Manual.

Which of the following statements regarding SMA balances is TRUE? A) SMA balances may be withdrawn provided the withdrawal does not bring the account below minimum maintenance. B) SMA balances may be withdrawn without restriction. C) SMA balances are free credit balances available upon demand. D) SMA balances may only be used to purchase additional securities.

Your answer, SMA balances may only be used to purchase additional securities., was incorrect. The correct answer was: SMA balances may be withdrawn provided the withdrawal does not bring the account below minimum maintenance. SMA is a line of credit that may always be withdrawn (even in a restricted account), provided the withdrawal does not bring the account below minimum maintenance.

A customer calls you and expresses interest in purchasing nonmarketable U.S. government debt. His primary concern is purchasing power risk. You should advise the customer to consider purchasing: A) Series HH bonds. B) any of these. C) Series I bonds. D) Series EE bonds.

Your answer, Series I bonds., was correct!. Series I bonds have been designed for investors seeking to protect the purchasing power of their investment. The interest rate on these bonds has two components: a fixed rate and an inflation rate tied to the Consumer Price Index. The inflation component is recalculated every six months. Series I bonds are an accrual-type security, meaning the interest is added to the bond's face value each month and is paid when the bond is sold or redeemed. If the customer were interested in buying marketable U.S. government debt, the customer would purchase Treasury Inflation Protection Securities (TIPS). Reference: 2.9.3 in the License Exam Manual.

Which of the following statements regarding revenue bonds issued by a state or municipality is TRUE? A) Interest and principal payment is guaranteed. . B) The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes. C) Interest and principal payment is backed by the full faith and credit of the issuer. D) Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve.

Your answer, The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes., was incorrect. The correct answer was: Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. Because revenue bonds are not backed by the full faith and credit of the municipality that issues them, the earnings of the revenue-producing project must be large enough to cover the interest and principal payments. Reference: 3.1.2.2.2 in the License Exam Manual.

Your customer owns 100 shares of ABC Corporation being held in street name. What procedure will apply regarding your customer's proxy? A) The customer is required to sign one proxy card for his 100 shares. B) The brokerage firm must forward the proxy to your customer. C) The brokerage firm holding the shares must vote the proxy. D) ABC Corporation must send a proxy to your customer.

Your answer, The brokerage firm must forward the proxy to your customer., was correct!. The broker/dealer must forward the proxy to the beneficial owner. Reference: 9.1.3.3 in the License Exam Manual.

Which of the following is TRUE of principal protected notes? A) They are considered to be equity securities. B) They are unsecured debt obligations backed by the full faith and credit of their issuer. C) The investor is always guaranteed that the note is 100% principal protected and, therefore, they cannot, in any circumstance, lose their initial investment. D) They are comprised of 2 bonds linked together and sold as one.

Your answer, The investor is always guaranteed that the note is 100% principal protected and, therefore, they cannot, in any circumstance, lose their initial investment., was incorrect. The correct answer was: They are unsecured debt obligations backed by the full faith and credit of their issuer. A principal protected note (PPN) is a fixed-income security that promises a minimum return equal to the investor's initial investment if held to maturity. It is considered to be a structured product and is comprised of a bond and an option component. PPNs are unsecured debt obligations backed only by the full faith and credit of their issuer Reference: 2.12.1.1 in the License Exam Manual.

All of the following must be considered by an investment adviser representative before recommending a municipal security to a customer EXCEPT: A) Customer's state of residence. B) Customer's tax status. C) Municipal security's rating. D) The municipality's coverage ratio.

Your answer, The municipality's coverage ratio., was correct!. The coverage ratio is specific to revenue bonds only and tells how many times annual revenue from that issue will cover the debt service of the issue. It is not a factor of suitability to be considered when recommending a municipal bond but more of a factor to consider when comparing two municipal revenue bonds. The customer's state of residence and tax status are essential when determining suitability for a municipal security. The security's rating is also important because it measures the overall safety and quality of the bond. Reference: 3.4.3.2 in the License Exam Manual.

Crossover refunding, which is a type of advance refunding, is best described by which of the following statements? A) The revenue stream is halted completely from the project until the new bonds are issued. B) Revenues can never cross over to fund a new issue. C) The new issue will not be funded by the revenue stream from the project that funded the initial bond offering. D) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called.

Your answer, The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called., was correct!. Crossover refunding is a method of advance refunding in which the revenue stream originally pledged to secure the refunded bonds continues to be used to pay debt service on those bonds until they mature or are called in by the issuer. Reference: 2.1.7.3.1 in the License Exam Manual.

Which of the following documents sets forth the priority of sale of securities? A) A tombstone. B) An offering circular. C) The official notice of sale. D) The syndicate letter.

Your answer, The syndicate letter., was correct!. The syndicate letter lists the terms under which members will conduct the sale of the bonds. It also describes each member's sharing of profits and expenses, the type of business entity (i.e., joint venture or partnership), and the good faith deposit required. Reference: 3.2.4 in the License Exam Manual.

A tombstone for a new bond issue announces that 5-year warrants to purchase shares of the company's common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. For what reason were the warrants attached to the bonds by the issuer? A) To increase the dilution of the current shareholders. B) To improve the marketability of the bond issue. C) To make the bonds convertible into the issuer's common stock. D) To decrease the dilution of the current shareholders.

Your answer, To improve the marketability of the bond issue., was correct!. Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock. Reference: 1.7.2.1 in the License Exam Manual.

Which of the following is limited in the case of a limited tax municipal bond? A) Type of tax that can be used to service the debt. B) Number of bonds issued. C) Number of taxpayers. D) Number of buyers.

Your answer, Type of tax that can be used to service the debt., was correct!. A general obligation (GO) bond may be backed by a specific tax. For example, a limited tax GO may be serviced only from sales tax revenue, not income tax revenue. As the source of debt service is limited (it is not backed by the full taxing authority of the issuer), these bonds are sold with higher yields than conventional GOs. Reference: 3.1.2.1.2 in the License Exam Manual.

If a representative possesses material inside information about a publicly traded company, under which of the following circumstances may he communicate this information to a customer? A) If the customer enters an unsolicited order. B) If the information will be made public the next day. C) If the customer knows that it is inside information. D) Under no circumstances.

Your answer, Under no circumstances., was correct!. Inside information may never be divulged to a client. Violations are punishable with both civil and criminal penalties. Reference: 16.1.8.2 in the License Exam Manual.

A customer wishes to close a short option position. The order ticket must be marked as: A) a closing purchase. B) an opening sale. C) an opening purchase. D) a closing sale.

Your answer, a closing purchase., was correct!. The investor opened with a sale, so the position must close with a purchase. Reference: 4.6.3.4 in the License Exam Manual.

Nonmembers of a syndicate who are assisting in its sale of bonds buy the bonds at a discount called: A) the basis price. B) a concession. C) a takedown. D) a net designated price.

Your answer, a concession., was correct!. Members of the syndicate buy the bonds at the offering price minus the takedown, nonmembers buy at offering price minus a concession. The basis price is the yield to maturity. Reference: 3.2.6.3 in the License Exam Manual.

When a customer wishes to open an account as guardian, you would ask for: A) a copy of the court order and other guardianship papers. B) a full power of attorney. C) a signed customer account card, credit agreement, and loan consent. D) a limited power of attorney.

Your answer, a copy of the court order and other guardianship papers., was correct!. Guardianship is one of several account titles that require legal papers to open the account. Because a guardian is appointed by court order, the broker/dealer would need a copy of that court order. Reference: 5.2.1.4 in the License Exam Manual.

If a customer wishes to purchase a nonexempt security in a cash account, Regulation T requires a broker/dealer to receive payment in full: A) within 3 business days. B) within 10 business days. C) within 5 business days. D) before the purchase.

Your answer, before the purchase., was incorrect. The correct answer was: within 5 business days. Regulation T requires that a broker/dealer receive payment in full, from a customer making a purchase of this type in a cash account, no later than 5 business days after the trade date. Reference: 6.1.5 in the License Exam Manual.

A municipal bond underwriter looking in the bond buyer would recognize the percentage of new issues sold versus new issues offered for sale the prior week as the: A) visible supply. B) acceptance or placement ratio. C) GO index. D) revenue index.

Your answer, acceptance or placement ratio., was correct!. The placement ratio also known as the acceptance ratio is compiled weekly and reflects the municipal bonds sold divided by the municipal bonds offered in the previous week. Reference: 3.2.3.1 in the License Exam Manual.

A fund must inform its shareholders of their right to reinvest dividends at NAV: A) quarterly. B) only at the time of original purchase. C) annually. D) at the time of each distribution.

Your answer, annually., was correct!. A fund must notify shareholders of their right to reinvest at least annually (usually communicated through the annual report). Reference: 10.7.5.3 in the License Exam Manual.

A registered representative would recommend a customer establish a short straddle on T-bonds when interest rates are expected to: A) rise. B) be volatile. C) decline. D) remain unchanged.

Your answer, be volatile., was incorrect. The correct answer was: remain unchanged. Any straddle writer is always looking for a stable market. Volatility is the biggest enemy of the writer. Since this question is referring to debt options, their price movements are based upon changes in interest rates. No fluctuations in interest rates means no price changes. Reference: 4.4.2.2 in the License Exam Manual.

The placement ratio, as shown in the "Bond Buyer", is: A) bonds issued/bonds unsold. B) bonds issued/bonds sold. C) bonds sold/bonds issued. D) bonds sold/bonds unsold.

Your answer, bonds issued/bonds sold., was incorrect. The correct answer was: bonds sold/bonds issued. The placement ratio is a measure of investor demand for new issue municipal bonds. It is computed by dividing the amount of bonds sold each week by the amount issued that week. Reference: 3.2.3.1 in the License Exam Manual.

If an American exporter will be paid 25 million Japanese yen when her goods arrive in 45 days, her best hedge is to: A) sell yen puts. B) sell yen calls. C) buy yen calls. D) buy yen puts.

Your answer, buy yen calls., was incorrect. The correct answer was: buy yen puts. The exporter does not want to see the value of the yen fall. If she owns yen puts and the yen does fall, her profit on the puts would help compensate for the decrease in the value of the yen. Selling yen calls would also provide protection if the yen fell in value, but only to the extent of the premium received. Exporters buy puts in order to hedge; importers buy calls on the foreign currency to hedge. Reference: 4.5.3.1.8 in the License Exam Manual.

In a repurchase agreement between a broker/dealer and a large institutional customer, the broker/dealer: A) sells securities to the customer with an agreement to buy them back. B) buys securities from the customer with an agreement to sell them back. C) sells securities to the customer who, with prior agreement, resells the securities to an unrelated third party. D) buys securities from the customer who, with prior agreement, repurchases the securities from an unrelated third party.

Your answer, buys securities from the customer with an agreement to sell them back., was incorrect. The correct answer was: sells securities to the customer with an agreement to buy them back. The dealer agrees to buy back the securities at a specified date at a higher price than they were sold for. The difference represents interest to the party who bought the securities (the lender). Reference: 2.10.2.1 in the License Exam Manual.

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

Your answer, cannot deliver on the specified date., was incorrect. The correct answer was: 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. Reference: 9.1.2.3 in the License Exam Manual.

If a married couple with a long-term growth objective is considering a mutual fund and they are concerned about the fund's annual expenses, they should select a: A) preferred stock fund. B) common stock fund with a low portfolio turnover. C) common stock fund with a high portfolio turnover. D) long-term corporate bond fund.

Your answer, common stock fund with a low portfolio turnover., was correct!. Of the choices given, common stock is the only vehicle capable of providing long-term growth. Preferred stock will provide dividends, but it will not provide much growth as it trades like a bond in line with interest rate changes. Of the two common stock funds, the one with the lower portfolio turnover will have lower annual expenses. Reference: 10.5.1.1 in the License Exam Manual.

All of the following records must be kept for 6 years EXCEPT A) customer account records, like monthly statements B) the general ledger C) blotters D) communications with the public

Your answer, communications with the public, was correct!. Of the answer choices listed, it is important to recognize that communications with the public must be maintained on file for 3 years by a member firm, and therefore, would not fall under the 6-year record retention requirement. Reference: 17.5.3.1 in the License Exam Manual.

All of the following statements are true of the risks of investing in an oil and gas limited partnership EXCEPT: A) development programs have higher risk than exploratory programs. B) income programs have fewer tax benefits than exploratory programs. C) wells may not have sufficient reserves to return drilling costs. D) development programs may involve acquisition of expensive leases

Your answer, development programs have higher risk than exploratory programs., was correct!. Exploratory programs have the highest risks, rewards, and tax benefits. Development wells are drilled to develop a reserve that is already known to be present. Reference: 13.2.2.5 in the License Exam Manual.

Mutual fund shares represent an undivided interest in the fund, which means that: A) the fund can only hold securities of certain companies . B) the number of shares outstanding is limited to a predetermined maximum. C) investors can only purchase full shares. D) each investor owns a proportional part of every security in the portfolio.

Your answer, each investor owns a proportional part of every security in the portfolio., was correct!. Each mutual fund shareholder owns an undivided interest in the investment company's portfolio. Because each share represents one class of voting stock, the investor's interest in the fund is reflected by the number of shares owned. Reference: 10.5 in the License Exam Manual.

In a single day, a customer purchases 15 ACM Sep 50 puts at 6 and 15 ACM Sep 50 calls at 1. The customer would profit from the positions if ACM traded: A) between $43 and $57. B) either below $38 or above $52. C) either below $43 or above $57. D) between $38 and $52.

Your answer, either below $43 or above $57., was correct!. The customer paid $6 for the Sep 50 puts and $1 for the Sep 50 calls. A long straddle is profitable on the call side if the price rises above the strike price plus the combined premiums paid ($57). On the put side, it is profitable if the price falls below the strike price minus the combined premiums paid ($43). Reference: 4.4.2.1 in the License Exam Manual.

The interest that municipal securities pay is: A) not taxed at the state, local, or federal levels. B) exempt from both state and local taxation. C) fully taxed. D) federally tax exempt.

Your answer, federally tax exempt., was correct!. Interest paid on securities issued by municipalities is generally exempt from taxation at the federal level. It may also be exempt from state and local taxation if the purchaser resides in the issuing state. Reference: 3.1.1.1 in the License Exam Manual.

An ADR represents a: A) foreign security trading in both the U.S. and a foreign market. B) foreign security trading in the U.S. market. C) U.S. security trading in a foreign market. D) U.S. security trading in both the U.S. and a foreign market.

Your answer, foreign security trading in the U.S. market., was correct!. ADRs are receipts issued by U.S. banks that represent ownership of a foreign security and are traded in U.S. securities markets. Reference: 1.8.1 in the License Exam Manual.

Upon being informed that one party to a tenants in common account has died, a registered representative should: A) allow the surviving tenants to continue trading. B) transfer all of the assets to the surviving tenants. C) transfer half of the assets to the survivor. D) freeze the account.

Your answer, freeze the account., was correct!. The assets of a deceased tenant in a TIC account eventually go to his estate. A registered representative first freezes the account and then awaits the proper court documents. If the account was JTWROS, trading by the surviving tenants could continue. Reference: 5.2.1.2.1 in the License Exam Manual.

A customer buys 1 XYZ Aug 60 call at 4 and 1 XYZ Aug 60 put at 2 when XYZ is at 61.25. If the stock rises to 68 and the customer lets the put expire and closes out the call at intrinsic value, the result is a: A) gain of $200. B) loss of $200. C) gain of $600. D) loss of $600.

Your answer, gain of $200., was correct!. The customer has established a long straddle. To determine profit or loss, compute the breakeven points by both adding and subtracting the combined premiums (6 points) from strike (the breakeven points are 54 and 66). Because the customer profits if the stock moves outside these points, at 68, the customer has a 2-point ($200) gain. Reference: 4.4.2.1 in the License Exam Manual.

In a 3-for-2 stock split, an investor will: A) have 50% more shares at half the price. B) have two-thirds fewer shares at a 50% higher price. C) have 50% fewer shares at twice the price. D) have 50% more shares at two-thirds the price.

Your answer, have two-thirds fewer shares at a 50% higher price., was incorrect. The correct answer was: have 50% more shares at two-thirds the price. If a stock splits 3 for 2, an investor will receive an additional 50 shares for every 100 shares owned. The price will decline by one-third, but the total value of the position will stay the same. For example, if a shareholder owns 100 shares before the 3 for 2 split, the shareholder will have 150 shares after the split (3 / 2 × 100 = 150). Reference: 1.2.4.1 in the License Exam Manual.

The Nasdaq stock market permits listing for all of the following EXCEPT: A) warrants. B) common stock. C) convertible bonds. D) nonconvertible debt securities.

Your answer, warrants., was incorrect. The correct answer was: nonconvertible debt securities. The Nasdaq stock market is an equity and equity equivalent market. Listed are common stock, preferred stock, warrants, limited partnerships, ADRs, and convertible bonds. Straight debt securities are not part of Nasdaq. Reference: 8.8.1 in the License Exam Manual.

A client of your broker/dealer is interested in collateralized mortgage obligations (CMOs). While determining suitability for the client all of the following should be discussed EXCEPT A) how currency exchange rates may affect the value of the securities B) the tax consequences of CMOs C) the relationship between mortgage loans and mortgage securities D) how changing interest rates may affect the prepayment rates

Your answer, how currency exchange rates may affect the value of the securities, was correct!. Currency exchange rates are not applicable to the risks associated with CMOs. However, when determining suitability, a discussion of all of the characteristics and risks of CMOs, should occur. This would include how changing interest rates may affect prepayment rates and therefore the average life of the security, tax considerations (CMOs are taxable at all levels), and the relationship between actual mortgage loans and mortgage-backed securities. Reference: 2.8.2 in the License Exam Manual.

All of the following statements regarding bonds with both a convertible and callable feature are correct EXCEPT: A) after the call redemption date, interest payments will cease. B) dilution of company stock will occur on conversion of the bonds. C) if called, the owners have the option of retaining the bonds and will continue to receive interest. D) the coupon rate on a convertible bond would be less than the rate for comparable nonconvertible debt.

Your answer, if called, the owners have the option of retaining the bonds and will continue to receive interest., was correct!. After bonds are called, the issuer no longer pays interest. Conversion of convertible bonds causes more shares outstanding, resulting in a reduced proportionate ownership interest (dilution) for current shareholders. The coupon rate paid on convertible bonds is lower than the coupon for nonconvertible bonds. There is a trade-off in the amount of interest for the ability to convert the bonds into common stock. Reference: 2.1.7.1.6 in the License Exam Manual.

As the underlying stock price increases, the premium of a call option generally: A) fluctuates. B) increases. C) remains the same. D) decreases.

Your answer, increases., was correct!. The premium of an option changes as the market price of the underlying security moves; therefore, if the stock price increases, the premium of a call also increases. Reference: 4.1.6.2 in the License Exam Manual.

All of the following appear on a corporation's balance sheet as fixed assets EXCEPT: A) real estate. B) computer equipment. C) inventory. D) furniture.

Your answer, inventory., was correct!. Inventory is considered a current asset, not a fixed asset, because the company expects to convert its inventory into cash within a short period of time. The other choices are fixed assets and cannot be liquidated easily. Reference: 14.6.1.2.1 in the License Exam Manual.

All of the following statements regarding the over-the-counter market are true EXCEPT: A) it is an auction market. B) it trades listed securities. C) more issues trade OTC than on the exchanges. D) it trades unlisted securities.

Your answer, it trades unlisted securities., was incorrect. The correct answer was: it is an auction market. The OTC market is a negotiated market. The exchanges are auction markets. Reference: 8.8.1.1 in the License Exam Manual.

A member firm receives a signed proxy from a customer who failed to indicate how his shares held in street name are to be voted at the annual shareholder's meeting. Under NYSE rules, the member firm: A) cannot vote the shares. B) may vote the shares as it sees fit only if a principal attends the meeting. C) must vote the shares as recommended by management of the issuer. D) may vote the shares as it sees fit.

Your answer, may vote the shares as it sees fit., was incorrect. The correct answer was: must vote the shares as recommended by management of the issuer. If the beneficial owner of street name stock returns a signed proxy statement but fails to indicate how the shares are to be voted, the member must vote the shares as recommended by management of the issuer. Reference: 9.1.3.3 in the License Exam Manual.

With XYZ trading at $47.50, your customer writes 1 XYZ January 50 put and simultaneously writes 1 XYZ January 45 call receiving $600 in combined premiums. Your customer's market attitude is: A) bearish. B) bullish. C) speculative. D) neutral.

Your answer, neutral., was correct!. This position is a short combination where both contracts are in the money. Breakeven points are 51 and 44. Above or below these points, the customer will lose money. Reference: 4.4.2.3 in the License Exam Manual.

Stop orders may be used for each of the following EXCEPT: A) lock in a specific price to close out a position. B) protect profits on long positions. C) protect profits on short positions. D) establish positions.

Your answer, protect profits on long positions., was incorrect. The correct answer was: lock in a specific price to close out a position. 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. 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. Reference: 8.4.2.4 in the License Exam Manual.

Customer statements must be sent at least: A) semiannually. B) monthly. C) annually. D) quarterly.

Your answer, quarterly., was correct!. The SEC and FINRA require member firms to send customer account statements at least once per calendar quarter. Reference: 9.1.1.5 in the License Exam Manual.

A corporate offering of 200,000 additional shares to existing stockholders may be made through a: A) rights offering. B) secondary offering. C) warrant. D) tender offer.

Your answer, rights offering., was correct!. A rights offering is an offering of additional shares of stock to existing shareholders. Reference: 7.3.3 in the License Exam Manual.

Your customer owns shares of LMN stock that have gone up in value. He does not wish to sell the shares now because he does not want to realize the capital gain. To lock in the gain without selling those shares, he sells shares of LMN stock short, holding both the long and short positions simultaneously. You recognize this tax strategy as A) a wash sale B) commingling C) selling or shorting against the box D) advance or pre-refunding

Your answer, selling or shorting against the box, was correct!. Selling or shorting against the box is a tax strategy used to defer capital gains into the next tax year. Selling shares short of a company when you are already long effectively locks in any gain you have on the long position. For every dollar gained in the long position, you lose one in the short position, and vice versa. Ultimately, in the next tax year, the long shares are used to replace the borrowed shares for the short position, which effectively closes both positions, and any gain would then be taxable. The IRS mandates that certain other criteria be met to utilize this tax strategy. Reference: 15.5.9.4 in the License Exam Manual.

All of the following positions have limited loss potential EXCEPT: A) long stock/long put. B) long stock/short call. C) short stock/long call. D) short stock/short put.

Your answer, short stock/short put., was correct!. If the stock rises the put will expire leaving the customer short stock with an unlimited loss potential. Reference: 4.3.4 in the License Exam Manual.

Each of the following statements regarding OTC markets is true EXCEPT: A) the OTC market has no exchange trading floor. B) the bid is the highest price at which a dealer will buy. C) the OTC market is an auction market. D) securities traded OTC include ADRs and municipal bonds.

Your answer, the OTC market is an auction market., was correct!. The OTC market is a negotiated market in which market makers may bargain during a trade. Stock exchanges like the NYSE are an auction market. Reference: 8.8.1.1 in the License Exam Manual.

If an investor is long 5 Dec puts on the Canadian dollar, these options will expire in December on: A) the Friday preceding the third Wednesday. B) the Saturday after the third Friday. C) the Wednesday after the third Saturday. D) the third Friday of the month.

Your answer, the Saturday after the third Friday., was correct!. Currency options, like equity options, expire on the Saturday following the third Friday of the expiry month. Reference: 4.5.3.1.5 in the License Exam Manual.

All of the following are required by the MSRB on customer confirmations EXCEPT: A) the amount of markdown or markup on a principal transaction. B) the source of any commission received on an agency transaction. C) whether the bond is registered or in book-entry form. D) the amount of any commission received on an agency transaction.

Your answer, the amount of markdown or markup on a principal transaction., was correct!. The amount of markup or markdown must be fair and reasonable, but need not be disclosed. Reference: 3.4.5.1.2 in the License Exam Manual.

All of the following would be found in a bond resolution for a new municipal issue EXCEPT: A) covenants to which the issuer must adhere. B) a description of the issue. C) the issuer's obligations to bondholders. D) the costs to be incurred by the issuer in connection with the offering.

Your answer, the costs to be incurred by the issuer in connection with the offering., was correct!. The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer's responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere. Costs to be incurred by the issuer have no impact on bondholders. Reference: 3.1.3.3 in the License Exam Manual.

The latest issue of a newsletter your firm subscribes to is especially relevant to one of your firm's investment products. If you decide to send it to clients and prospects, you must disclose that: A) the newsletter's purpose is to provide your clients with a choice of products that are suitable for all of their portfolios. B) the newsletter discusses only those products which you have available through your firm . C) the newsletter is written and produced by a third party. D) future articles sent will provide similar discussions and information.

Your answer, the newsletter is written and produced by a third party., was correct!. If a third party is the creator of the newsletter, that fact must be disclosed together with the name of the third party and the date of publication. Reference: 17.5.3.1 in the License Exam Manual.

Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority EXCEPT: A) the optional call provisions. B) the operations and maintenance. C) the debt service. D) the debt service reserve fund.

Your answer, the optional call provisions., was correct!. Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds. Reference: 3.1.2.2.4 in the License Exam Manual.

All of the following are true regarding nonqualified deferred compensation plans EXCEPT: A) the plans need not be offered to all employees. B) income taxes on compensation are not due until constructive receipt. C) IRS approval is not needed for deferred compensation plans. D) employees may use accumulated funds as collateral for a bank loan

Your answer, the plans need not be offered to all employees., was incorrect. The correct answer was: employees may use accumulated funds as collateral for a bank loan. Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral. Reference: 11.1.2.1 in the License Exam Manual.

The risk that time value may erode the premium of an equity option even while the underlying issuer remains financially sound is an example of: A) timing risk. B) interest rate risk. C) capital risk. D) currency risk.

Your answer, timing risk., was incorrect. The correct answer was: capital risk. Capital risk is generally associated with equity instruments, such as common stock, and equity-related derivatives, such as options. It is the risk that invested dollars can be lost as the result of circumstances unrelated to an issuer's financial strength. Reference: 15.3.2.2 in the License Exam Manual.

Yield quotes on CMOs are based on the: A) tranche's expected life. B) underlying mortgages' interest rate. C) underlying mortgages' average life. D) underlying mortgages' maturity.

Your answer, underlying mortgages' interest rate., was incorrect. The correct answer was: tranche's expected life. Yield quotes on CMOs are based on the tranche's expected life, not the average life of the mortgages in the pool backing all of the tranches. Reference: 2.8 in the License Exam Manual.

An outstanding municipal bond issue has the following characteristics: 7.50% coupon; maturity in 20 years; puttable in 5 years at 100; callable at 102 in 10 years; declining in a straight-line to maturity; yield-to-maturity is 6.50%. The issues should now be quoted: A) yield-to-call at 102. B) yield-to-maturity. C) yield-to-call at par. D) yield-to-put.

Your answer, yield-to-maturity., was incorrect. The correct answer was: yield-to-call at 102. Since the bond issue is selling at a premium, the yield-to-call is less than the yield-to-maturity. The bonds must be quoted as yield-to-call at the earliest maturity, which would be the 10-year call at 102. If the bonds were selling at a discount, yield-to-maturity would be the proper quote. Yield-to-put is not required to be quoted. Reference: 3.4.5.1 in the License Exam Manual.