Series 7

Is excess intangible drilling costs (wages, fuel, repairs) a tax preference item for AMT?

Yes

What is the 12b-1 maximum charge?

0.25%

What do Corporates and Muni's trade in?

8ths

What is a straddle with different strike prices?

A combination

Reg D, Safe Harbor as long as you sell to

Accredited investors or Institutional Investors

How do you find the Dividend Payout Ratio?

Annual dividend per share / EPS

An individual who invests in an undeveloped land limited partnership would be most interested in

Appreciation

Under the Uniform Practice Code, what date does the ownership change for securities? A) Dated Date B) Trade Date C) Settlement Date D) Record Date

C) Settlement Date

In an exchange market the inside quote emanates from?

Buy Limit orders on the specialists book and Sell Limits on specialists book

Which quote is for informational purposes only? A) Subject Quote B) Workout Quote C) Nominal Quote D) Firm Quote

C) Nominal Quote

Which of the following would be used for trade practice complaints?

Code of Procedure

State and city bonds, being municipals, are exempt from what tax?

Federal income tax

Listed option contracts are issued and guaranteed by the:

Options Clearing Corporation

Who is required to sign a new account form?

Principal

Exercise of a long equity option is T+?

T+2

An investor writes a call that expires in January of next year. When is it taxed?

When the option expires

A client is interest in generating additional income and doesn't think the market will rise necessarily. What is a suitable product for him?

Covered call

An investor is considering purchasing high-yield bonds would be concerned with?

Credit risk

In a new margin account your customer places an order to buy 100 shares of XYZ at $18. How much is required to be deposited?

$1800 If it is between $2000 and $4000 then $2000 minimum needs to be deposited

A customer opens a new margin account and deposits $50,000 of fully paid marginable securities. How much excess equity is created?

$25,000

A company declared a $.50 dividend. The stock closed the day before the Ex Date at $54.50. What should the stock open at on the Ex Date?

$54

What are the main differences between a Coverdell and 529 plan?

- 529 plan has contribution limits that are high (gifts of $15k per year is allowed) - Coverdell has an annual cap of $2,000

Accrued interest process for Government Bonds (Treasury Bonds)?

1) Actual days in a year 2) Count from last interest payment date 3) Settlement date is day after traded date

What are 3 requirements for municipal securities confirmations?

1) Capacity in which the firm acted in filling the order 2) Whether the bonds are in registered or book entry form 3) Any relevant call provisions Municipal Securities Rulemaking Board rules require that certain information be included on all municipal confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form, and any relevant call provisions. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.

When buying a new issue municipal bond, what are steps for counting accrued interest?

1) Count Dated Date to Settlement Date - buyer must pay the syndicate interest from the dated date up to, but not including, the settlement date.

What are the steps for finding the Yield to Maturity in a corporate bond?

1) Find Annual Interest by multiplying the nominal yield by $1,000 2) Divide Annual Interest by Current Market Price to find Current Yield 3) Yield to Maturity is higher or lower depending on if at a discount or premium

What are the 2 requirements for a Fill-Or-Kill order?

1) Must be executed in its entirety 2) Must be executed in one attempt

When calculating accrued interest on a corporate bond, what is the process?

1) Take the coupon percentage and multiply it by $1,000 to find out how much it pays per year 2) The accrued days are what percentage of the year? Then per 180 days. 3) Add that the net corporate bond price

What are the two differences between Roth IRAs and traditional IRAs?

1) Traditional IRA contributions can be deductible while Roth cannot 2) Roth IRA can be tax-free at withdrawal if requirements are met but everything is taxable for traditional IRAs

A customer has sold securities long and failed to make delivery. How many business days before the brokerage firm must buy in the open position?

10 days

Long 1 BFD Dec 110 Call @ 1 Short 1 BFD Dec 100 Call @ 4 What is the Breakeven?

103 Call Add Lower

Short 1 BFD 100 call @ 4. What is the breakeven per share?

104

An F & A municipal bond is purchased on Wednesday May 31st. How many days of accrued interest?

121 days

Amendments to a U-4 need to be made within how many days?

30 Days

What do Treasury securities trade in?

32nds and settle T+1 unlike most

A brokerage firm has how many days to settle for a trade for a DVP account?

35 calendar days (Delivery vs Payment) Delivery of securities rather than cash Might also see this cash on delivery or receipt vs payment

Investors in qualified retirement plans can choose to draw down without penalty at what age?

72

What age are RMD for traditional IRAs?

72 April of the year you turn 72 to be exact

Under Sub chapter M of the tax code a mutual fund and REITS must pass through how much of its net investment income to avoid taxation at the fund level?

90%

A customer is subject to AMT. What investment would be least appropriate?

A Business Development Revenue Bond. Or any private purpose bond

A new customer wants to open a cash account under his company's name, what paperwork is required to fill out?

A New Account Form and Corporate Resolution

A married couple plans on buying a house in a year. What is a suitable investment?

A cash reserve fund

What is the Nasdaq PHLX?

A regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on the floor

What is a penny stock?

A non-Nasdaq OTC stock under $5

All of the following statements regarding municipal advertising are true except A) copies must be sent to the Municipal Securities Rulemaking Board (MSRB). B) copies must be kept for four years. C) it must not be misleading. D) it must be approved by a principal.

A) All municipal advertising must be approved, in writing, by an appropriate principal before the first use and kept on file for four years. It need not be filed with the MSRB because the MSRB has no enforcement authority.

Which of the following terms does not apply to municipal unit investment trusts (UITs)? A) Managed B) Registered C) Redeemable D) Regulated

A) Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded, so the portfolio is not managed, but rather, overseen by a trustee.

A customer wishing to open a numbered account must be informed that A) he must supply a written statement attesting to his ownership of the account. B) the account may only be opened with prior permission from the SEC. C) he must supply proof of U.S. citizenship and reside permanently in the United States. D) numbered accounts are restricted to cash accounts.

A) Numbered—or symbol—accounts require that a written statement, which is signed by the client and acknowledges ownership, be kept on file.

You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. B) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. C) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put. D) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call.

A) Of the choices given, the correct answer is the credit put spread. Credit put spreads are bullish. Anytime the long option in a spread has a lower strike price than the short position, the spread is known as a bullish spread. We refer to that strategy as buy low, sell high (BLSH).

U.S. government securities that let investors hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities are I) clipped bonds. II) stripped bonds. III) subject to annual taxation on the per-year accreted amount. IV) subject to taxation at maturity.

A) U.S. government securities where the interest payments have been stripped from the principal and trade as separate 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.

Congress passed the Trust Indenture Act of 1939 to protect bondholders. It requires that issuers of eligible bonds appoint a trustee to ensure that promises (covenants) between the issuer and the trustee who acts solely for the benefit of the bondholders are carried out. The Trust Indenture Act of 1939 applies to which of the following issues offered on an interstate basis? A) A corporate bond in the amount of $200 million with a maturity of 20 years B) A corporate bond in the amount of $38 million with a maturity of 10 years C) A corporate bond in the amount of $500 million with a maturity of 8 months D) A municipal general obligation bond in the amount of $200 million with a maturity of 20 years

A) A corporate bond in the amount of $200 million with a maturity of 20 years There are four basic elements qualifying a bond issue for coverage under the Trust Indenture Act of 1939. Those are as follows: It is a corporate issue, The issue size is more than $50 million within 12 months. The maturity is 9 months or more. It is offered interstate. A $200 million corporate bond issue with a 20-year maturity would be covered under the act, and the other choices would not. LO 20.c

Which of the following is the computation for the coverage ratio for a municipal revenue bond issue? A) Net revenue divided by annual interest and principal expense B) Revenues collected divided by annual principal expense C) Annual interest and principal expense divided by revenues collected D) Revenues collected divided by annual interest expense

A) Net revenue divided by annual interest and principal expense Debt service coverage measures the amount of money available for debt service compared to the annual debt service requirements. Annual debt service includes both interest and principal expense. LO 6.b

According to MSRB rules, a control relationship would exist between a municipal securities firm and an issuer when A) an officer of the firm is in a position of authority over the issuer. B) the firm has an inventory of the issuer's bonds. C) the firm recently completed a negotiated underwriting for the municipality. D) senior officers of the firm live in the municipality.

A) an officer of the firm is in a position of authority over the issuer. MSRB Rule G-22 deals with control relationships. Their interpretive letters indicate that it is only when the individual has the authority to exercise control that the disclosure rules apply. Here is how they put it: "For example, rule G-22 applies if the associated person is the chairman of an issuing authority and, in that capacity, actually makes the decision on behalf of the issuing authority to issue securities. The rule does not apply if the associated person as chairman does not make that decision and does not have the authority alone to make the decision, or if the decision is made by a governing body of which he is only one of several members." LO 6.h

Each of the following choices are potential sources of funds associated with the backing of a revenue bond issue except A) fines. B) concessions. C) ticket revenues. D) lease payments.

A) Fines Explanation Fines received by a municipality or a state may be used to service the debt of a general obligation bond. Often fines are levied for reasons that include parking tickets, traffic violations, and the late payments of taxes. Concessions and lease payments are sources of funds commonly associated with airport revenue bond issues. Ticket revenue is another term for user fees, as would be the case for the ridership revenue of a municipal bus service.

Which of the following statements regarding mutual fund dividend distributions are true? The fund pays dividends from net investment income. A single taxpayer may exclude $100 worth of dividend income from taxes annually. An investor is liable for taxes on distributions, whether taken in cash or reinvested in the fund. An investor is not liable for taxes if he automatically reinvests distributions. A) I and III B) I and II C) III and IV D) II and IV

A) I and III Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash.

Which of the following statements regarding hedge funds is correct? A) Hedge funds are usually structured as a partnership. B) Hedge funds are typically registered with the SEC as open-end investment companies. C) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management. D) Hedge funds are passively managed in an attempt to provide predictable returns for investors.

A) Hedge funds are usually structured as a partnership with the general partner as investment manager and the investors as limited partners. In general, hedge funds are exempt from registration with the SEC. Hedge funds are actively and aggressively managed, seeking superior returns—and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.

A municipal revenue bond indenture contains a net revenue pledge. The following are reported for the year: $30 million of gross revenues, $18 million of operating expenses, $4 million of interest expenses, and $2 million of principal repayment. What is the debt service coverage ratio? A) 2:1 B) 5:1 C) 9:1 D) 3:1

A) Under a net revenue pledge, bondholders are paid from net revenue, which equals gross revenue minus operating and maintenance expenses. In this example, net revenue is $12 million ($30 million − $18 million). Debt service is the combination of interest and principal repayment. Here, debt service is $6 million ($4 million + $2 million). To compute the debt service ratio, divide net revenue by debt service: $12 million divided by $6 million equals a ratio of 2:1.

A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is A) $2,000. B) $1,000. C) $0. D) $4,000.

A) $2,000. Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SMA. LO 16.d

If a customer owns a $10,000 8% U.S. Treasury Bond, and she is in the 28% federal tax bracket and a 2.5% state tax bracket, what amount of tax will she pay on the income received from the bond? A) $224 B) $80 C) $20 D) $100

A) $224 Interest on U.S. Treasury bonds is taxable at the federal level only; $800 of interest taxed at 28% equals $224. LO 7.e

An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $47 per share. B) $38 per share. C) $41 per share. D) $44 per share.

A) $47 per share This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.

If a customer writes 1 Jul 80 put at 7, and the put is exercised when the market price is at 70, for tax purposes, what is the effective cost basis of the stock put to the seller? A) $73 B) $87 C) $70 D) $80

A) $73 The cost basis is 80 (the price at which the writer must buy) minus 7 (the premium the writer was paid), or $73 per share. LO 10.i

If a customer with no other position sells 1 KLP Jul 80 call for 10 and buys 100 shares of KLP stock for $85 per share, he will break even when KLP stock is trading at A) $75. B) $92. C) $95. D) $70.

A) $75. Breakeven for a covered call writer is the purchase price less premiums received. In this case, breakeven is $85 minus $10, or $75 per share; below $75, the customer loses money. LO 10.h

Morgan Pierce has recently opened a new margin account. The initial purchase was for 100 shares of KAPCO common stock at $120 per share. A week later, KAPCO stock is trading at $90 and Pierce is concerned about receiving a call for additional funds. You respond that a margin maintenance call would be issued once the price of the KAPCO shares falls below A) $80 per share. B) $78 per share. C) $90 per share. D) $60 per share.

A) $80 per share. The purchase of $12,000 of stock on margin results in a debit balance (DR) of $6,000. Computing the point to which an account's value can decline before reaching the minimum maintenance level is done by dividing the debit balance by 0.75. $6,000 divided by 0.75 = $8,000. With 100 shares, that is $80 per share. LO 16.d

A customer buys XYZ stock at $60 per share. The stock is currently trading at a 10:1 price-to-earnings (P/E) ratio. The firm declares a 3:1 stock split. What will the P/E ratio be after the split if earnings remain unchanged? A) 10:1 B) 3:1 C) 5:1 D) 12:1

A) 10:1 Explanation If earnings remain unchanged, the P/E ratio remains the same: 10:1. Earnings are currently $6 per share ($60 / 10). After a 3:1 split, each share will be valued at $20. If earnings are unchanged, the same $6 of earnings is now applicable to three shares, or $2 per share. Price divided by earnings equals P/E ratio ($20 / $2 = 10:1 P/E ratio).

One of your customers would like to purchase a government agency security for the UTMA account of her daughter. The daughter worked in construction over the summer and would like to use $1,275 of her savings for the purchase. Securities issued by which of these agencies could be purchased for this account? A) Federal National Mortgage Association B) Federal Home Loan Mortgage Corporation C) Student Loan Marketing Association D) Federal Farm Credit System

A) Federal National Mortgage Association (Fannie Mae) Of this group, the only agency that would be able to sell $1,275 of securities is Fannie Mae. Their securities are available with a minimum denomination of $1,000 and then increments of $1. FHLMC also has the $1,000 initial minimum, but with $1,000 increments. The same numbers apply to the FCS, and Sallie Mae's minimum is $10,000. Another agency that would have met the investor's need is GNMA.

In a scenario of falling interest rates and a positive yield curve, assuming all to be of equal face value, which of the following bonds will appreciate the most? A) 20-year bond selling at a discount B) 1-year bond selling at a discount C) 20-year bond selling at a premium D) 1-year bond selling at a premium

A) 20-year bond selling at a discount This is all about duration. The longer the duration, the greater the price volatility of the bond. That is why prices of long-term bonds are more volatile than prices of short-term bonds. We know from the inverse relationship between bond prices and interest rates that falling interest rates lead to higher bond prices. Therefore, the 20-year bonds will appreciate more than the 1-year bonds when interest rates fall. Also, prices of bonds with low coupon rates tend to be more volatile than prices of bonds with high coupon rates because they have a longer duration. A bond sells at a discount when its coupon is lower than prevailing interest rates. Because of its lower coupon, the 20-year discount bond tends to appreciate more than the 20-year premium bond.

An affiliate holding restricted stock wishes to sell shares under Rule 144. He has held the shares, fully paid, for six months, and the issuer has 2.4 million outstanding shares. Form 144 is filed on Monday, April 10, and the average weekly trading volume for the past four weeks is 24,500 shares per week. The maximum number of shares the customer can sell with this filing is A) 24,500. B) 24,000. C) 24,250. D) 23,000.

A) 24,500. Under Rule 144, after holding the fully paid restricted shares for six months, the affiliate can begin selling. For affiliates, volume restrictions always apply. They can sell the greater of 1% of the total shares outstanding or the weekly average of the past four weeks' trading volume (the four weeks preceding the Form 144 filing). In this case, 1% of the total shares outstanding is 24,000 (1% × 2.4 million). The weekly average of the past four weeks' trading volume is 24,500. Therefore, the most the affiliate can sell during the 90 days following the Form 144 filing is 24,500 shares. LO 20.f

U.S. Treasury bills are issued for all of the following maturities except A) 39 weeks. B) 26 weeks. C) 4 weeks. D) 13 weeks.

A) 39 weeks As of the authoring date of this question, Treasury bills are issued for terms of 4, 8, 13, 26, and 52 weeks. The Treasury auctions the 52-week bill every four weeks and the 4-, 8-, 13-, and 26-week bills every week.

The basis of a bond with a 5% nominal yield maturing in twenty years and selling at 85 is approximately A) 6.22%. B) 4.59%. C) 5.75%. D) 5.88%.

A) 6.22% Explanation A bond's basis is its yield to maturity (YTM). It is not necessary to do the YTM calculation because it could only be one choice. We can easily compute the current yield by dividing the $50 annual interest by the $850 current market price. That is about 5.88%. The YTM must be higher than that because it includes the eventual profit realized when the bond matures at par. There is only one selection that is higher than 5.88%. The calculation would follow our formula of: Annual interest + (discount ÷ number of years to maturity) ÷ (Current market price + par) ÷ 2) Plugging in the numbers, we have: ($50 + [$150 ÷ 20 years]) = ($50 + $7.50) divided by ([$850 + $1,000] ÷ 2]) = $57.50 ÷ ($1,850 ÷ 2) = $57.50 ÷ $925= 6.22% LO 4.e

Under Municipal Securities Rulemaking Board rules, which of the following would indicate a control relationship between a municipal dealer and an issuer? A) A dealer's officer sits on the issuer's board of trustees B) The principal of the dealer lives within the municipality C) The dealer was an underwriter of the municipality's last issue D) The dealer is engaged as an underwriter for the issuer

A) A dealer's officer sits on the issuer's board of trustees A control relationship exists if someone represents both an issuer and municipal securities dealer.

If your customer bought an original issue discount bond from the Mount Vernon Port Authority, how is the discount on this bond taxed? A) Accreted during the life of the bond and not taxed B) As ordinary income C) Amortized during the life of the bond and not taxed D) As capital gains

A) Accreted during the life of the bond and not taxed Under IRS rules, an owner of an original issue municipal discount bond must adjust the bond's cost basis by accreting the discount over the life of the bond. The accretion is not taxed.

Which of the following handles trade practice complaints within the securities industry? A) Code of Procedure B) Code of Conduct C) Uniform Practice Code D) Code of Arbitration

A) Code of Procedure Think 'Cop' : if you're a market maker, for example, you cant back away

A highly leveraged company has the smallest percentage of its total capitalization in A) common stock. B) preferred stock. C) short-term debt. D) long-term debt.

A) Common Stock Common stock, which represents ownership, would account for the smallest amount of capitalization of a highly leveraged company. Highly leveraged companies have the largest amount of their capitalization in debt instruments. Preferred stock, although an equity, is more like a debt instrument because of the stated dividend rate.

ZYX Corporation has 100 million shares of common stock authorized in its charter, with 80 million shares outstanding. The board of directors of ZYX could vote to take which of the following actions? A) Declare a stock dividend of 10% B) Announce an additional public offering of 40 million shares of common stock C) Issue 20 million shares of a 4%, $100 par preferred stock, convertible at $50 D) Declare a 2:1 stock split

A) Declare a stock dividend of 10% A corporation cannot issue more shares than authorized. True, there could be a vote to amend the charter, but be careful not to read anything into the question that is not given. A 10% stock dividend will require issuing 8 million more shares. That will bring the total outstanding to 88 million. A 2:1 stock split would need an additional 80 million shares and ZYX has only 20 million left. With only 20 million authorized, but unissued shares remaining, where is ZYX going to get 40 million shares for the additional public offering? Likewise, the convertible preferred is convertible into two shares each ($100 par divided by the $50 conversion price). That would also require 40 million shares to be available if everyone elected to convert. As mentioned in the beginning, if Company ZYX wished to conduct a 2:1 stock split, or offer 40 million additional shares, either through a public offering or the issuance of convertible preferred stock, an amendment to the corporate charter, approved by the board of directors and the shareholders, would be necessary.

All of the following are characteristics of 529 plans except A) donor income limits apply. B) an official statement (OS) must be provided to any prospective purchaser. C) the assets can be transferred to a family member if not used by the original beneficiary. D) there is no age limit on the beneficiary.

A) Donor income limits apply Unlike the Coverdell ESA, there are no donor income limits with a 529 plan. All of the other statements are true as to 529 plans.

A customer purchases a municipal bond in the secondary market with a settlement date of August 1. If the next interest payment is September 1, which of the following statements regarding interest on this bond are true? I) The bond pays interest on March 1 and September 1 each year. II) The seller must pay accrued interest no later than settlement day. III) Accrued interest on this bond is computed using actual days elapsed. IV) On September 1, the buyer will receive from the issuer interest for the period March 1 through August 31. A) I and IV B) II and IV C) II and III D) I and III

A) I and IV Municipal bond accrued interest is calculated using a 30-day month and a 360-day year, with interest paid every six months. On settlement day, August 1, the buyer will pay the seller five months accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive payment for the full semiannual interest directly from the issuer. LO 6.e

Which of the following statements regarding Treasury bills are true? I) They are sold in minimum denominations of $10,000. II) They are offered with maturities ranging up to 52 weeks. III) Their interest is exempt from taxation at the state level. IV) They are callable by the U.S. Treasury at any time before maturity.

A) II and III Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. T-bills are regularly offered with maturities from four weeks to as long as 52 weeks from issuance and are issued at a discount. Interest on Treasury bills is taxable at the federal level only.

Which of the following would not be found within the protective covenants for a municipal revenue bond issue? A) The issue's rating B) Additional bonds test C) Catastrophe clause D) Flow of funds

A) Issue's rating There are different sources for bond ratings, but they would not be found within the revenue issue's protective covenants. The municipality agrees to abide by the covenants, and a trustee appointed in the bond indenture supervises the issuer's compliance with them. Some common covenants include rate or fee (promise to maintain user fees high enough to pay expense and debt service) maintenance, insurance, additional bonds test, sinking fund, catastrophe, flow of funds, books and records, and call or put features.

An investor opens the following positions: Sell short 100 shares of BAF @61; short 1 BAF Sep 60 put @3¼. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $425; maximum loss is unlimited; breakeven point is $64.25. B) Maximum gain is $325; maximum loss is unlimited; breakeven point is $57.75. C) Maximum gain is $425; maximum loss is $5,775; breakeven point is $57.75. D) Maximum gain is $5,775; maximum loss is $425; breakeven point is $64.25.

A) Maximum gain is $425; maximum loss is unlimited; breakeven point is $64.25. The first step is to identify the position. This is a short sale of stock and a sale of a put option. The sale of the put provides some income and offers protection only to the extent of the premium. Short sellers want the stock's price to decline. They lose when it rises. The investor has received $6,425 ($6,100 from the sale of the stock and $325 from the sale of the option). That makes the breakeven point $64.25 per share. Once the price of the BAF stock goes above that, the investor loses money. Because there is no limit as to how high the stock's price can go, the maximum loss is unlimited. If, on the other hand, the stock's price declines into the 50s or lower, the owner of the 60 put will exercise and our investor will pay $6,000 to purchase the stock. That stock will be used to cover the short sale. That means the investor sold the stock (short) at $61 and bought it back at $60 for a gain of $100. At that point, the investor's profit is the $325 from the premium on the sale of the put plus the $100 gain (the difference between 61 and 60). That is why the maximum gain is $425. Why doesn't the breakeven follow the "put-down" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven. LO 10.h

Which of the following tracks NASDAQ orders from entry to execution? A) OATS B) TRACE C) EMMA D) TRF

A) OATS Online Application Tracking System

The call premium on a municipal bond trading above par is best described as the difference between A) par and the call price. B) the market price and par. C) the amortized premium and the annual interest. D) the market price and the call price.

A) Par and the call price The call premium represents the difference between the call price and par. The farther away a call date, the lower the call premium.

An investor engages in a wash sale when he repurchases the same security or purchases a substantially identical security of the issuer within 30-days of a sale resulting in a loss. If an issuer's common stock were sold at a loss, all of the following would be considered substantially identical except A) preferred stock. B) warrants. C) call options. D) convertible bonds.

A) Preferred Stock Preferred stock is not substantially identical because it cannot be converted or exchanged into the common shares that were sold. All the other securities could be converted or exchanged into the common stock sold. That makes them considered substantially identical. Please note: Preferred stock is not convertible unless something in the question says it is.

The department of a brokerage firm that is responsible for generating confirmations and matching trades is: A) Purchase and Sales Department B) Margin Department C) Order Department D) Cashiering Department

A) Purchase and Sales Department

An investor is contemplating entering a buy limit order. What recommendation may be suitable as an alternative? A) Short put B) Short call C) Long put D) Long call

A) Short put Sell puts on stocks you don't mind owning

Which of the following registers the securities and packages the program for a limited partnership? A) Syndicator B) General partner C) Property manager D) Limited partners

A) Syndicator A syndicator handles the registration of the limited partnership units.

A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100 even though she made no new investments. Which of the following statements regarding this situation is true? A) The representative should remind the customer that she signed a letter of intent 12 months ago. B) Shares held in escrow will be liquidated at the appreciated value. C) The letter of intent is considered to be fulfilled. D) The investment no longer qualifies for a breakpoint.

A) The representative should remind the customer that she signed a letter of intent 12 months ago A letter of intent must be met with dollars invested within 13 months. The customer needs to invest an additional $7,000 to fulfill her letter of intent. The representative should remind the customer of her intention to qualify for the reduced sales charge.

Who cancels old certificates and issues new certificates? A) Transfer Agent B) Issuer C) Registrar D) Underwriter

A) Transfer Agent Issuer doesn't affect change in ownership. Registrar maintains the shareholder list.

All of the following trade with accrued interest except A) zero coupon bonds. B) convertible bonds. C) jumbo certificates of deposit. D) Treasury bonds.

A) Zero Coupon Bonds Zero coupon bonds are issued at a deep discount from face value instead of providing semiannual interest payments. T-bonds, convertible bonds, and CDs all make periodic interest payments; thus, the seller receives any accrued interest from the buyer.

A client bought 100 XYZ at $65 per share and sold an XYZ 65 call at 8. Closing the short call at 10 and selling XYZ at 68 would result in A) a $100 profit. B) a $100 loss. C) a $500 loss. D) a $500 profit.

A) a $100 profit. Let's use the T-chart to show the flow of the money. The client bought 100 shares of the stock at $65 per share, so $6,500 went out (a debit). At the same time, the call was sold for a premium of 8, which brought in $800 (a credit). The short call was closed out (bought back something you sold) at 10, so we put $1,000 in the out (DR) column, and the stock was sold for $6,800, which goes in the in (CR) column. That means, $6,500 plus $1,000 went out, and $6,800 plus $800 came in. That is a total of $7,500 out and $7,600 in, for a net gain of $100. LO 10.h

A quote of 2.20 bid 2.18 offered would most likely be a quote on A) a T-bill. B) a T-bond. C) a general obligation bond. D) a Ginnie Mae bond.

A) a T-Bill Discounted instruments (such as T-bills) are quoted on a discount yield basis. Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price.

An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs A) a capital gain. B) a capital loss. C) tax-free income. D) no taxable result at this time.

A) a capital gain Yields fall as bond prices rise. Because the yield to maturity has dropped, the bond is trading at a higher price than when it was purchased. The consequence of the sale is a capital gain because the investor sold the bond that was purchased for par at a premium.

Under FINRA's rules governing the activities of member broker-dealers, prior notification to the employing firm and prior written consent from the employing firm would be required to open a brokerage account for all of the following except A) a registered representative of another member opening a 529 plan. B) a registered representative of another member opening an options account. C) a clerical employee of another member opening a margin account. D) an officer of another member firm opening a cash account.

A) a registered representative of another member opening a 529 plan. FINRA requires prior written notification be made and prior written consent be received before any employee can open a brokerage account with other members or financial institutions. Exceptions include accounts where the only activity will be in 529 plans, mutual funds, or variable annuities. LO 1.d

For an out-of-the-money equity option expiring in seven months, the time value of the option will most likely be A) equal to the option premium. B) less than the option premium. C) greater than the option premium. D) less than zero.

A) equal to the option premium An option premium consists of two factors. First is the intrinsic value (the amount the option is in the money). The balance of the premium represents the time value. An out-of-the-money option, by definition, has no intrinsic value. Therefore, the entire premium represents time value. The time value of an option will never be less than zero; it can only be zero or positive.

The State of Maine is issuing $20 million of AAA callable general obligation bonds underwritten by Threadneedle Investment Bankers. The bonds have a par value of $5,000, are insured, and have an unqualified legal opinion. A non-institutional customer purchased 10 of the bonds at par ($50,000). All of the following must be disclosed to the customer on his confirmation except A) evidence of insurance. B) number of bonds purchased. C) trade date and time of execution. D) information on call features.

A) evidence of insurance Delivery of certificates for securities traded as insured securities must be accompanied by evidence of insurance. Although noted on the confirmation, the evidence itself need not accompany or appear on the confirmation.

An investor purchasing long-term AAA-rated bonds should be concerned most with A) inflation risk. B) no risk. C) marketability risk. D) reinvestment risk.

A) inflation risk. The major risk assumed by any investor in long-term high-quality bonds is inflation or purchasing power risk. AAA-rated debt securities are likely to earn a lower rate of return, which over a longer period, might not keep up with the rate of inflation. LO 14.a

The Securities Exchange Act of 1934 applies to all of the following except A) regulation of new issues. B) secondary market trading. C) the extension of credit on purchase of securities. D) registration of broker-dealers.

A) regulation of new issues. The Securities Act of 1933 deals with new issues. The Securities Exchange Act of 1934 created the SEC, required the registration of broker-dealers, empowered the Federal Reserve to control the extension of credit on securities transactions, and created rules dealing with secondary market trading. LO 3.h

An investor would assume all of the following risks when investing in a collateralized mortgage obligation (CMO) except A) regulatory risk. B) interest rate risk. C) extension risk. D) prepayment risk.

A) regulatory risk. Regulatory risk is generally not associated with investing in CMOs. All of the other risks are associated with CMOs. Extension risk is the uncertainty that the mortgages will be paid off later than expected. This typically happens when interest rates rise. After all, who is going to refinance a mortgage at a higher rate? Prepayment risk is just the opposite; the mortgages might be paid off more quickly and the income stream will cease. This typically happens when interest rates decline, but they are also factor in people moving and selling their homes. CMOs are subject to interest rate risk just like other debt securities. LO 12.d

A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true except A) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. B) there is no debt limitation on the issue. C) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used. D) the interest on these bonds is not considered a preference item for the alternative minimum tax.

A) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. As an exclusion question, we are looking for the false statement. The public service commission would have no approval power over revenue bond interest and principal payments. Because the bond is not backed by the taxing authority of the city, it is a revenue bond rather than a general obligation bond. The funds for payment of interest and repayment of principal are generated through the fees paid by those using the city's water and sewage facilities. Being a public, rather than private, facility, these would not be alternative minimum tax bonds.

Your client invests $20,000 to purchase a 10% interest in a movie production limited partnership. At the time of subscribing, the investor signs on an $800,000 recourse loan to the partnership. After completing the first year of operations, the program shows a loss of $1,200,000. All of the following statements are correct except A) the investor's original basis was $20,000. B) the investor's basis is now $0.00. C) the investor's original basis was $100,000. D) the investor has a passive loss deduction of $100,000.

A) the investor's original basis was $20,000 Let's take this step by step. The original check for $20,000 is all cost basis. But, it doesn't stop there. When becoming a limited partner, the investor signed on to the recourse loan. The 10% share of that loan is $80,000, bringing the initial basis up to $100,000. When the end-of-year report shows a loss of $1,200,000, it would appear that the investor takes 10% of that ($120,000) as a passive loss. The problem is that IRS rules do not allow a loss greater than the investor's basis (in this case, $100,000). Once that loss is taken, the basis is wiped out. The extra $20,000 may be carried forward. Unless the investor contributes more money, or the partnership has earnings, this investor cannot use that $20,000 or any further losses.

A customer buys a municipal bond in the secondary market at 96 that has four years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are A) two points of ordinary income and one point of capital gain. B) two points of capital gain and one point of ordinary income. C) three points of ordinary income. D) three points of capital gain.

A) two points of ordinary income and one point of capital gain. When a municipal bond is purchased in the secondary market at a discount, the annual accretion is taxed as ordinary income. The annual accretion is one point per year (four points divided by four years to maturity). Therefore, when the bond is sold two years later, its cost basis is 98. If the bond is sold at 99, there is a long-term capital gain of one point per bond. Also, there is ordinary income taxation on the accretion of two points. LO 6.f

Ae 529 education savings plan contributions made with after-tax or before-tax dollars?

After tax so contributions are not tax deductible

Which of the following are risks of a partnerships? I. Lack of Liquidity II. Recapture of losses III. IRS audit IV. Recourse debt

All of these

Long 1 BFD Dec 110 Call @ 1 Short 1 BFD Dec 100 Call @ 4 What is the maximum gain?

Answer = Net premium, $300 With spreads, you always want to find the dominant position (highest premium). In this case it would be the short. Gain and loss in a spread always equals to difference in strike prices

How do you describe the current yield of a bond?

Annual interest payment divided by current market price

Long 1 BFD Dec 110 Call @ 1 Short 1 BFD Dec 100 Call @ 4 What is the maximum loss?

Answer = $700 Gain and loss in a spread always equals to difference in strike prices

How are dividend distributions taxed for mutual fund shares?

As ordinary income

Which of the following may the client give the registered rep authority to decide without power of attorney or trading authorization? A) Whether to buy or sell B) The amount to buy or sell C) The security to buy or sell D) The time and price at which to buy the security

Asset Action Amount D) Time and Price, does not require authorization

Tax preference items are used for the purpose of computing the alternative minimum tax. They include excess intangible drilling costs (wages, fuel, repairs). accelerated depreciation. percentage depletion in excess of basis. A) I and II B) I, II, and III C) II and III D) I and III

B) All of these are tax preference items. Note that straight-line depreciation is not a tax preference item.

A U.S. investor owns an American depositary receipt (ADR). The net tax liability to the investor for any dividends received is A) the total of both foreign and U.S. income tax due. B) any U.S. income tax due, credited by any amount of foreign income tax withheld. C) any foreign income tax due, but not U.S. income tax. D) zero, because there is no tax liability to U.S. investors who purchase foreign government issues.

B) Any income to a U.S. investor is always subject to U.S. income tax. If foreign income tax is withheld in the country of origin, then that tax may be taken as a credit against the U.S. tax due.

In an existing margin account with no SMA, if a customer buys 300 ABC at 40 and simultaneously buys 3 ABC OCT 40 puts at 2.50, the customer must deposit A) $5,250. B) $6,750. C) $6,100. D) $6,375.

B) Buying 300 shares at 40 ($12,000) requires a deposit of $6,000. In addition, the customer is purchasing 3 puts with a total premium of $750 (3 × 2½). Most options have no loan value and must be paid in full. Adding $6,000 and $750 results in a deposit of $6,750.

A website maintained by a fund company shows that one of the company's mutual funds currently has a NAV of $9.50 and a public offering price (POP) of $10 per share. Your client sees this information and enters an order to make a $10,000 purchase. He asks you to calculate the number of shares he will be able to buy with today's investment. You would respond that: A) based on the 5% sales charge, he will be receiving exactly 950 shares into his account immediately. B) it cannot be determined until after the order is processed by the fund at the next calculated (forward) price. C) based on the $9.50 NAV, he will be receiving exactly 1,052.63 shares into his account at the end of the day. D) based on the $10 POP, he will be receiving exactly 1,000 shares into his account immediately.

B) Mutual funds use forward pricing, so the purchase or redemption price is never known until after the order is processed. This order will be executed at the next calculated POP.

Which of the following does the capital asset pricing model (CAPM) assume? A) Investors are comfortable with risk and believe that diversification can be used to reduce risk. B) Investors are averse to risk and believe that diversification can be used to reduce risk. C) Investors are comfortable with risk because they do not believe that it can be diversified away. D) Investors are averse to risk and believe that no type of risk can be diversified away.

B) The CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it. Therefore, the pricing of an asset must reflect that.

The following information has been reported for ABC stock: Annual dividend = $2 PE ratio = 20 Closing price = $100 What is the dividend payout ratio? A) 20% B) 40% C) 30% D) 2%

B) The dividend payout ratio is computed by dividing the dividend by the earnings per share ($2 ÷ $5 = 0.4, or 40%).

An investor writes 1 XYZ 180 call at 6.65. If the investor makes a closing purchase at the call's intrinsic value when the stock is at $184.75, he realizes a gain of A) $147.50. B) $190.00. C) $265.25. D) $180.00.

B) The investor received a premium of $665. The position was closed with a purchase at intrinsic value: $475. The net profit is the difference, or $190.

Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) the conversion feature protects against an early call. B) although they trade in line with the issuer's common stock, they are less volatile than the common shares. C) they generally pay a higher interest rate than nonconvertible debentures. D) it is generally best to convert when the common stock is selling below its parity price.

B) The lower volatility of a convertible debenture stems from the fact that it has fixed interest payments and will be redeemed at maturity as any other bond or debenture would. No such guarantees apply to common stock.

The Class B shares of the KAPCO Fund carry a conditional deferred sales charge beginning at 5% and reducing each year after the second by 1% per year until eliminated. An investor making an initial purchase of $10,000 of these shares will pay a sales charge of A) $500.00 B) $0.00 C) $50.00 D) $100.00

B) $0.00 Unlike Class A shares, there is no front-end load when purchasing Class B shares. All of the money is invested at the net asset value without any sales charge. Should the investor wish to liquidate shares, there is a back-end load until the end of the seventh year, but that has nothing to do with the question. LO 8.d

A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be A) $43.91. B) $25.25. C) $25.00. D) $40.00.

B) $25.25. To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1,010 / 40 = $25.25). LO 5.d

KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year? A) $120,000 B) $900,000 C) $300,000 D) $1,100,000

B) $900,000 The corporate exclusion is 50% of dividend income; therefore, KLP must pay taxes on all $700,000 of its interest income, but only 50% (or $200,000) of its dividend income, for a total of $900,000. LO 13.g

An investor purchases a zero coupon bond at a price of 64. The bond matures in nine years. Five years later, the investor sells the bond at a price of 80. This would result in A) a long-term capital loss of $200. B) a long-term capital loss of $40. C) a long-term capital gain of $160. D) no gain and no loss.

B) a long-term capital loss of $40. This question deals with accretion of the discount. The discount here is $360 (the difference between the $640 paid and the $1,000 maturity value). With nine years until maturity, the annual accretion is $360 divided by nine, or $40 per year. After five years, the bond's basis has increased by $200 ($40 times 5 years) to $840. The sale at $800 represents a long-term loss of $40. LO 5.e

Debt service is best described as A) services provided by the paying agent for a bond issue. B) the total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking fund. C) net interest on a new issue of a municipal bond. D) total of the direct debt of a municipality and the debt of its political subdivisions.

B) the total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking fund. Debt service is the total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking or surplus fund. LO 6.b

An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following except A) they are a form of municipal revenue bond. B) they would require voter approval before a municipality could issue them. C) the holder of a COP could foreclose on the asset generating the revenue in the case of default. D) the holder of the COP participates in lease or loan payments from a specific piece of equipment or facility purchased or built by the municipality.

B) they would require voter approval before a municipality could issue them. COPs are considered revenue issues and, therefore, do not require voter approval. They are a form of lease revenue bond that allow the holders of the certificates to participate in some revenue stream (lease or loan payments) associated with land, equipment, or facilities purchased or built by the municipality. They are unique in that in the case of default, the holders of the COPs could foreclose on the asset associated with the certificate. LO 6.b

All of the following are true except A) U.S. Treasury bonds are quoted in 32nds and as a percentage of par. B) Treasury bills are quoted in 1/8ths and as a percentage of par. C) income bonds are required to pay interest only if it is earned. D) corporate bonds are quoted in 1/8ths and as a percentage of par.

B) U.S. Treasury bills are issued at a discount and are quoted on an annualized return on a discount basis, the return based on the actual amount paid.

The DERP Corporation has a rights offering. The common stock is currently selling at $45.50. DERP is issuing one new share of stock at $40 per share for each 10 shares owned. What is the theoretical value of one right when the stock is traded ex-rights? A) $0.50 B) $0.55 C) $0.45 D) $0.40

B) $0.55 The formula for the theoretical value of a right when it is ex-rights (the buyer doesn't get the rights) is (M ‒ S) ÷ N where M = market price of the stock, S = the subscription price, and N = number of rights needed. Plug in the numbers and you have ($45.50 ‒ $40) divided by 10. That is $5.50 divided by 10 or $0.55 each LO 3.f

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? A) $1,500 B) $1,000 C) $0 D) $2,000

B) $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. LO 16.d

A corporation is having a rights offering. The terms of the offering require four rights plus $40 to purchase one share. With the stock's current market price at $50 per share, the theoretical value of one right before the ex-rights date is A) $0.20. B) $2.00. C) $0.25. D) $2.50.

B) $2.00 Because the question is asking about the value before ex-rights, it means we use the cum-rights (with rights) formula. That is, the (market price minus the subscription price) divided by the (number of rights it takes to buy one share plus one). Plugging in the numbers gives us ($50 - $40) ÷ (4+1) = $10 ÷ 5 = $2.00 LO 3.f

An investor purchases 100 shares of CDE on December 20, 2019, for $2,000. On the same day, he purchases 100 shares of QRS for $2,000. On January 3, 2020, he sells the CDE stock for $1,700 and the QRS stock for $2,200. On January 24, 2020, he purchases 200 shares of CDE for $3,000. What capital gains or losses did he realize from these transactions? A) $300 loss in QRS and $200 gain in CDE B) $200 gain in QRS C) $300 loss in CDE and $200 gain in QRS D) $300 loss in CDE

B) $200 gain in QRS The investor in this question has a $200 capital gain to report on the purchase of QRS stock for $2,000 and its subsequent sale for $2,200. Because the investor repurchased the CDE stock (January 24) within 30 days of selling it (January 3), the $300 loss incurred ($2,000 - $1,700 = $300) when sold is disallowed under the wash sale rule.

If a customer buys 100 XYZ at 49 and writes 1 XYZ Nov 50 call, receiving $350 in premiums, the breakeven point is A) $52.50. B) $45.50. C) $53.50. D) $46.50.

B) $45.50. This is a covered call, so the investor is protected against declining stock prices to the extent of the premium received, and the breakeven is $45.50 $49 − $3.50). LO 10.h

In a new margin account, if a customer buys 300 XYZ at 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the Regulation T margin requirement is A) $7,350. B) $7,200. C) $7,500. D) $6,900.

B) $7200 Notice the question asks for Reg T requirement, not the deposit that must be made. The Regulation T requirement for purchasing $14,400 (300 × 48) of stock is 50%, or $7,200. The Regulation T requirement for writing covered calls is zero. Therefore, the Regulation T requirement for establishing both of these positions is $7,200. The margin call (deposit) would be $6,900 because the requirement is reduced by the $300 premiums already received into the account for the calls. After depositing $6,900, the customer will have $7,200 in the account, which meets the requirement.

An investor has an established margin account with a short market value (SMV) of $4,000 and a credit balance of $6,750, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $2,750 B) $750 C) $1,500 D) $2,000

B) $750 The Regulation T requirement and equity must be calculated before excess equity can be determined. The Regulation T requirement is 50% of the SMV of $4,000 ($2,000). Equity is calculated by subtracting the SMV of $4,000 from the credit balance of $6,750 ($2,750). Excess equity is calculated by subtracting the Regulation T requirement of $2,000 from the equity of $2,750 ($750). LO 16.d

A 6% cumulative preferred stock has missed 5 quarterly payments. How much the corporation was pay to the cumulative preferred stockholders in the current quarter before it can pay a dividend to common? A) $3 B) $9 C) $6 D) $7.50

B) $9 Don't forget the current dividend period

Which of the following is the most stringent test of liquidity taken from a corporation's balance sheet? A) Assets / current liabilities B) (Current assets - inventory) / current liabilities C) Current ratio D) Current assets / current liabilities

B) (current assets - inventory) / current liabilities Of the answers given, the quick ratio (or the acid test) is the most stringent because it excludes inventory in the calculation. The current ratio is defined as current assets divided by current liabilities.

A customer purchases a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield that must be stated is the yield to A) maturity or yield to call, whichever is higher. B) the 102 call. C) maturity. D) maturity or yield to call, whichever is lower.

B) 102 call Municipal Securities Rulemaking Board rules require that when a call date has been fixed by a prerefunding, the resulting yield to call must be reflected on the confirmation. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event; therefore, it is appropriate to price the bond to the call date. The original maturity on the bond has no further significance.

Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2015. The maturity date of the bonds is July 1, 2035. What is the number of days of accrued interest on the 10-bond trade? A) 31 B) 30 C) 37 D) 29

B) 30 The maturity month and day will always match one of the two semiannual coupon dates. Because maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 up to, but not including, settlement (30 days).

One of your customers is in the 37% federal income tax bracket. The customer prefers purchasing corporate bonds over municipal bonds because the corporation's financials are much easier to understand. On the customer's next purchase, the instructions are to find a corporate bond that will yield the same after-tax return as would be received from a municipal bond with a 3.20 coupon. The bond you suggest must have a coupon of A) 4.38%. B) 5.08%. C) 8.65%. D) 3.20%.

B) 5.08%. This is a tax-equivalent yield question. The interest paid on a corporate bond is taxable, while that of the municipal bond is tax free. The formula is: The coupon of the municipal bond divided by (100% − tax bracket). In our question, that would be 3.20% divided by 63%, or 5.08% LO 6.f

A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that is currently yielding 8.7% to maturity. She is considering buying tax-exempt securities. What is the comparable yield for a municipal bond? A) 1.250% B) 6.480% C) 1.208% D) 6.264%

B) 6.480% When comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 9.0% times 0.72 equals 6.480%. Remember to use the coupon rate, not the yield to maturity. After all, the investor is receiving $90 per year in taxable interest on each bond. In this case, a tax-exempt bond yielding more than 6.480% will provide a higher after-tax return. LO 6.f

Your 30-year-old client has $100,000 to invest and is willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in six months. Which of the following asset allocation strategies would best suit her situation? A) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund C) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund D) 50% government bond fund, 50% large-cap fund

B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund This question is dealing with two different time horizons. First we have the short term of six months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income. LO 8.g

The confirmation for the purchase of a callable bond would show yield to call for which of the following bonds? A) A 7% bond priced to yield 8% B) A 9% bond priced to yield 6.5% C) A 9% bond priced to yield 10% D) A 7% bond priced at par

B) A 9% bond priced to yield 6.5% Confirmations for any bonds that are callable will show yield to call when the transaction is at a premium over par. Of the choices given, only the 9% bond currently trading at a price to yield 6.5% is selling at a premium (the only way a bond with a 9% coupon rate is going to yield less than 9% is if it is purchased at a price above par). Therefore, because we are told the bond is callable, the 6.5% represents the yield to the nearest call date, and this would be shown on the confirmation. Remember if the yield is down, the price goes up. That is when a bond would sell at a premium. LO 15.a

Which of the following investments would be the least appropriate for a customer's IRA? A) A closed-end fund B) An inverse ETF C) A mutual fund D) A unit investment trust

B) An inverse ETF IRAs are long term investments while inverse ETFs are suitable for those with a short time horizon

A registered representative (RR) has just explained to a customer that to purchase a particular security, the customer would pay the asking price plus a commission, not a sales charge. Which of the following is the RR speaking of? A) All management company offerings B) Any closed-end fund C) Mutual funds D) All open-end funds

B) Any closed-end fund Closed-end funds are purchased on an exchange or over the counter where buyers pay the asking price plus a commission. The RR could not be speaking of all open-end funds because mutual funds—one classification of open-end funds—are purchased at the public offering price, which includes a sales charge. Management company offerings include both open-end and closed-end funds.

Who opines on the legislative authority of the municipal issuer? A) MSRB B) Bond counsel C) FINRA D) Manager of the syndicate

B) Bond counsel

A customer sold 100 shares of QRS short when the stock was trading at 19. If QRS is now trading at $14, and she wants to protect her gain, which of the following orders should she place? A) Buy limit at 14 B) Buy stop at 14.25 C) Sell limit at 14 D) Sell stop at 13.75

B) Buy stop at 14.25 A buy limit order is used to buy at a lower price (when the market moves down). A buy stop order is used to buy in a short position at a higher price (when the market moves up). To protect the gain, a buy stop order would be placed just above where the stock is currently trading. LO 16.a

Which of the following establishes the ethical behavior that broker dealers and associated persons owe customers? A) Code of Procedure B) Code of Conduct C) Uniform Practice Code D) Code of Arbitration

B) Code of Conduct

Which of the following is defined as profits after taxes and interest paid, less preferred dividends, divided by the number of shares of outstanding common stock? A) Price to earnings B) Earnings per share (EPS) C) Book value per share D) Cash flow per share

B) Earnings per share (EPS) Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding determines EPS. LO 13.d

Which of the following emnanates from secondary trading? A) Record Date B) Ex Date C) Payable Date D) Declared Date

B) Ex Date

All of the following are set by the Board of Directors EXCEPT? A) Declared Date B) Ex Date C) Record Date D) Payable Date

B) Ex Date 1 business day prior to record. First date when the stock no longer trades with the divided attached.

A customer owns convertible bonds. The bonds have a conversion ration of 25 shares. The common stock is trading at $50 per share. The issuer calls the bond at 105. The issuer has: A) Forced the tender of bonds and will pay 105 to extinguished the bond debt B) Forced the conversion of the bonds C) Caused earnings to decrease D) Has caused the outstanding shares to decrease

B) Forced conversion of the bonds

Which of the following statements regarding the flow of funds found within a municipal trust indenture are true? I) It describes the disbursement of funds for revenue bond issues. II) It describes the disbursement of funds for general obligation issues. III) It is found within the official statement. IV) It is found within the bond contract. A) II and III B) I and IV C) II and IV D) I and III

B) I and IV The term flow of funds relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts, as specified in the trust indenture found in the bond contract. LO 6.c

If an investor keeps $100,000 invested in U.S. Treasury bills at all times during a 10-year period, she is subject to which of the following? I) Stable principal II) Unstable principal III Stable interest IV) Unstable interest

B) I and IV Treasury bills are purchased at a discount and mature at face value. This feature provides principal stability to investors who own them. The discount on bills is determined by current market interest rates and fluctuates accordingly.

Which of the following statements regarding callable municipal bonds are true? Call premiums tend to increase over time. Call premiums tend to decrease over time. Call prices are stated as a percentage of the principal amount to be called. Call prices are stated as a percentage of the market value of the bonds to be called. A) I and III B) II and III C) I and IV D) II and IV

B) II and III Call premiums tend to decrease over time. The longer a customer has to hold the bond (and receive semiannual interest), the less of a premium an issuer will pay to take away the bond before maturity. Call prices are always stated as a percentage of the principal amount (par) to be called. For example, a call price of 103 means the issuer will pay $1,030 for each bond called. LO 6.c

According to industry rules, if a customer purchases a bond from your firm, the confirmation must disclose where your firm acquired the bonds if acting as a principal. whether your firm acted as agent or principal. your firm's address. the price your firm paid for the bonds. A) II and IV B) II and III C) I and IV D) I and III

B) II and III Customer trade confirmations must make explicit disclosures regarding the terms of the transaction and the parties involved. The broker-dealer must always disclose the capacity in which it acted (i.e., principal or agent.) The confirmation must show the name of the person for whom the trade was executed (i.e., the customer). The name, address, and telephone number of the broker-dealer must be shown so a customer may contact the firm easily. The settlement date is also required, but the broker-dealer is not required to disclose where it acquired the bonds or the price it paid. LO 15.a

Which of the following would give a bearish sign to a technical analyst? A) A stock dropping below its resistance level B) An increase in odd-lot purchases C) A head and shoulders bottom pattern D) An increase in the short interest

B) Increase in odd-lot purchases Odd lots (less than 100 shares) are bought and sold almost exclusively by unsophisticated investors. Technicians believe them to always be on the wrong side of the market. When the odd lotters are buying, it is time to sell (bearish). High short interest is bullish. A head and shoulders bottom indicates that the stock has bottomed and is on its way back up (bullish). It would be bearish if a stock's price fell below the support level.

All of the following risks are considered diversifiable except A) business risk. B) inflation risk C) sovereign risk. D) financial risk.

B) Inflation Risk Purchasing Power Risk, also know as Inflation Risk cannot be lessened through diversification. All of the others are forms of unsystematic risk.

Reg S is used for which of the following? A) It allows foreign issuers to sell unregistered securities to domestic institutional investors B) It allows for domestic issuers to sell unregistered securities to foreign institutional investors C) It is a safe harbor or exemption to sell securities on an interstate basis D) Rehypotheication of customer securities

B) It allows for domestic issuers to sell unregistered securities to foreign institutional investors Reg Semester at Sea, me selling to foreign countries

An investor opens the following positions: Sell short 100 shares of ROC @90; sell 1 ROC May 90 put @3. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is $8,700; breakeven point is $87. B) Maximum gain is $300; maximum loss is unlimited; breakeven point is $93. C) Maximum gain is $8,700; maximum loss is $300; breakeven point is $87. D) Maximum gain is $9,300; maximum loss is unlimited; breakeven point is $93.

B) Maximum gain is $300; maximum loss is unlimited; breakeven point is $93. The first step is to identify the position. This is a short sale of stock and a sale of a put option. The sale of the put provides some income and offers protection only to the extent of the premium. Short sellers want the stock's price to decline. They lose when it rises. The investor has received $9,300 ($9,000 from the sale of the stock and $300 from the sale of the option). That makes the breakeven point $93 per share. Once the price of the ROC stock goes above that, the investor loses money. Because there is no limit as to how high the stock's price can go, the maximum loss is unlimited. If, on the other hand, the stock's price declines into the 80s or lower, the owner of the 90 put will exercise and our investor will pay $9,000 to purchase the stock. That stock will be used to cover the short sale. That means the investor sold the stock (short) at $90 and bought it back at $90 for no gain. At that point, the investor's only profit is the $300 from the premium on the sale of the put. Why doesn't the breakeven follow the "put-down" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven. LO 10.h

Which order would be used to establish or add to a short position? A) Opening Purchase B) Opening Sale C) Closing Sale D) Closing Purchase

B) Opening Sale

Which of the following statements best describes a breakpoint sale? A) Compensation generated by commissions from a client who has reached another breakpoint, paid to the registered representative after he no longer works for the member B) Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission C) Sale of investment company shares in dollar amounts above the point at which the sales charge is reduced D) Sale of investment company shares in anticipation of a distribution scheduled to be paid shortly

B) Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.

Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) School districts B) State governments C) County governments D) Municipalities

B) State governments generally do not assess property (ad valorem) taxes. These are assessed by local governments. Generally, state governments receive most of their income from sales and income taxes.

Which of the following details would not be found on the bond resolution for a revenue bond? A) The maintenance covenant B) The tax covenant C) The insurance covenant D) The rate covenant

B) The Tax Covenant Unless something in the question refers to special taxes, revenue bonds do not have tax backing. The other items are included in the bond resolution (or trust indenture). The rate covenant is a promise to maintain rates sufficient to pay expenses and debt service. The maintenance covenant is a promise to maintain the equipment and facility/facilities. The insurance covenant is a promise to insure any facility.

ABC Corporation has outstanding a 7.75% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is true? A) The bond is at parity with the stock. B) To profit in this situation, the investor should buy the bonds and short the stock. C) An arbitrage opportunity does not exist in this situation. D) To profit in this situation, the investor should buy the stock and short the bonds.

B) To profit in this situation, the investor should buy the bonds and short the stock. With a conversion price of $40, the bond is convertible into 25 shares of ABC common stock ($1,000 / $40 = 25 shares). As the common stock is currently trading at $45 per share, the value of the stock as converted would be $1,125 (25 shares × $45 = $1,125), which is greater than the current price of the bond ($1,020). Therefore, the bond and the stock are not at parity. An investor could profit in this situation by shorting the stock and buying an equivalent number of bonds. A bond could be purchased for $1,020 and immediately converted into stock worth $1,125—a risk-free profit opportunity.

An investor purchased a municipal bond at par to yield 5.5% to maturity. If, two years later, she sold the bond at a price equivalent to a 5% yield to maturity, the investor incurred A) taxable interest income. B) a capital gain. C) no taxable result at this time. D) a capital loss.

B) a capital gain. Because the investor sold the bond at a price that will yield less than the yield when she purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor profited by that difference. Remember, the higher the price, the lower the yield.

The purchase of 200 shares of HGF at 45, and the subsequent sale of 2 HGF 50 calls at 3, could produce all of the following except A) a loss of $6,000. B) a profit of $2,000. C) a loss of $8,400. D) a profit of $1,600.

B) a profit of $2,000. This is covered call writing. The maximum loss that could be incurred is $8,400 ($9,000 paid for shares less premiums of $600 received). If you can lose $8,400, then you can certainly lose $6,000 (if, for example the value of the stock drops to 12). The maximum profit that can be expected is $1,600 (strike price of $10,000 received when calls are exercised minus the purchase price of $9,000 plus $600 in premiums received). Because the maximum profit possible is $1,600, it is impossible to have a profit of $2,000. LO 10.h

An investor purchased 100 shares of RAVAD common stock at $40 per share on June 17, 2019. On May 11, 2020, with the RAVAD selling at $60, the investor hedges by purchasing one RAVAD Oct 55 put at 2. The put expires with the RAVAD selling at $65 and the investor liquidates the long stock position at that price. This would result in A) a long-term capital gain of $2,500 and a short-term capital loss of $200. B) a short-term capital gain of $2,500 and a short-term capital loss of $200. C) a short-term capital gain of $2,700. D) a long-term capital gain of $2,300.

B) a short-term capital gain of $2,500 and a short-term capital loss of $200. The investor purchased a protective put on the long RAVAD position. At the time of the purchase of the put, the holding period of the stock was less than the long-term requirement of more than 12 months. When that happens, the IRS rules that the short-term holding period (June to May is short term) is erased. Your new holding period for the underlying stock begins on the earliest of the date you dispose of the stock, the date you exercise the put, the date you sell the put, or the date the put expires. Because the investor disposed of the stock at the same time the put expired, there is no holding period, so any gains will be short term. As far as the math, the stock was purchased for $4,000 (100 shares @ $40 per share). The stock is sold for $6,500 (100 shares @ $65 per share). That is a gain of $2,500 (short term). When a long put expires, it is a capital loss in the amount of the premium. In our question, the premium was 2 points ($200) and that is a complete loss. Because the put has a five-month holding period (May to October), the loss is short term. In the real world, most accountants would just net the $2,500 short-term gains and the $200 short-term loss and report a $2,300 short-term gain. It is possible that could appear on the exam, but unlikely that you would have both choices. LO 10.i

All of the following must register as an investment company under the Investment Company Act of 1940 except A) certificates issued by a face amount certificate company. B) an initial public offering for common shares of Amalgamated Investments, a holding company. C) a new stock fund created by GHI Mutual Fund Distributors. D) an initial public offering for shares of a closed-end management company.

B) an initial public offering for common shares of Amalgamated Investments, a holding company. Holding companies are not included in the definition of investment company under federal law. Amalgamated Investments would register with the SEC, just as any other offering of common stock. Investment companies, such as management companies (open-end or closed-end), unit investment trusts (UITs), and face amount certificate companies (FACs) all register under the Investment Company Act of 1940 as investment companies. LO 8.a

Without any position in the stock, an investor wrote an ABC Jul 60 call for 6. On the expiration date, ABC is selling for 66, and the investor closes the position at the intrinsic value. For tax purposes, the investor has A) realized a short-term capital gain of $600. B) broken even. C) realized a short-term capital loss of $600. D) realized ordinary income of $600.

B) broken even. With the stock at 66, the call is 6 points in the money (call-up rule). That means the option will cost 6 points to close the position. The writer sold the option for 6 points and bought it back for 6 points. That results in breaking even. LO 10.i

An investor submits an immediate-or-cancel order to buy 500 shares of stock at 32.20. When the order reaches the trading floor, the quote is 32.18 - 32.26, 6 × 6. The investor A) bought 500 shares at 32.18. B) did not buy any shares. C) bought 500 shares at 32.20. D) bought 500 shares at 32.26.

B) did not buy any shares. An immediate-or-cancel order (IOC) is a limit order requiring immediate execution or cancellation. Unlike its cousin, the fill-or-kill (FOK) order, a partial fill is permitted with an immediate-or-cancel order. An IOC order to buy 500 shares at 32.20 means that the investor will buy up to and including 500 shares as long as the purchase price is at no higher than $32.20 per share. Buyers pay the lowest ask price (the least a seller is willing to accept for the stock). At the time this order is presented, the lowest ask was 32.26. Even though the seller was willing to sell all 500 shares (the quote size was for 600), the price is not low enough, so the order is canceled. LO 16.a

An individual purchases a single premium deferred variable annuity. There will be income tax ramifications in all of the following situations except A) death prior to annuitization. B) during the accumulation period. C) during the payout period. D) surrender of the contract.

B) during the accumulation period One of the features of annuities, fixed and variable, is that there are no taxes during the accumulation phase. However, anytime money comes out of the account, whether when annuitized, surrendered voluntarily, or not (as in death), any earnings are subject to taxation.

A corporation has $25 million of 5% bonds outstanding. The bonds are callable at 102. Current market interest rates are 6%. If the company would like to retire $10 million of the debt, it might be smart to A) issue $10 million of new bonds at current rates and use the proceeds to call in outstanding ones. B) make a tender offer to purchase $10 million face amount of the bonds. C) exercise the call provision for $10 million face amount of the bonds. D) issue $10 million of treasury stock and use the proceeds to retire the bonds.

B) make a tender offer to purchase $10 million face amount of the bonds

If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is A) overbought. B) oversold. C) unstable. D) becoming volatile. Explanation The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom. LO 13.e

B) oversold. The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom. LO 13.e

A corporation has an IPO of its $5 par common stock. The public offering price (POP) is $15 per share. The difference between the par value and the POP represents A) net income. B) paid-in surplus. C) retained earnings. D) capitalized profit.

B) paid-in surplus When a corporation issues new stock at a price in excess of the par value, the excess is listed on the balance sheet as paid-in or capital surplus.

A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as A) all return of cost basis and nontaxable. B) part earnings and part cost basis. C) exempt from taxes. D) earnings only and taxable

B) part earnings and part cost basis. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free. LO 9.d

An investor submits an immediate-or-cancel order to sell 800 shares of stock at 32.15. When the order reaches the trading floor, the quote is 32.18 - 32.26, 6 × 8. The investor A) sold 600 shares at 32.26. B) sold 600 shares at 32.18. C) sold 600 shares at 32.15. D) did not sell any shares.

B) sold 600 shares at 32.18. An immediate-or-cancel order (IOC) is a limit order requiring immediate execution or cancellation. Unlike its cousin, the fill-or-kill (FOK) order, a partial fill is permitted with an immediate-or-cancel order. An IOC order to sell 800 shares at 32.15 means that the investor will accept the sale of anything up to and including 800 shares as long as the sale price is at least $32.15 per share. Sellers receive the highest bid price (the most an investor is willing to pay for the stock). At the time this order is presented, the highest bid was 32.18. Because the buyer was willing to take only 600 shares (the quote size was for 600), and the sale price exceed the limit, 600 shares are sold, and the balance of the order is canceled. LO 16.a

The term paid-in surplus is frequently found on a corporation's financial statements. Paid-in surplus refers to A) the amount of a corporation's net income that is reinvested into the company rather than paid out as a dividend. B) the amount received by the corporation in excess of the stock's par value when the stock is initially issued. C) the initial seed money contributed to the enterprise by the founders. D) the amount by which the current market price of a corporation's common stock exceeds that stock's par value.

B) the amount received by the corporation in excess of the stock's par value when the stock is initially issued. Paid-in surplus, also called capital surplus, is generated when a corporation issues new stock at a price in excess of the stock's par value. For example, if the corporation has common stock with a par value of $1 and issues that stock at a price of $5 per share, the entry on the balance sheet, paid-in surplus, is credited with $4 per share. It has nothing to do with the current market price; only the price initially received by the issuer. When a corporation retains net income instead of distributing a dividend, those funds are called retained earnings. Although the initial funders of the corporation may have paid more than par value for the stock and created paid-in surplus, that is not as specific a definition.

A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true except A) the interest on these bonds is not considered a preference item for the alternative minimum tax. B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. C) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used. D) there is no debt limitation on the issue.

B) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. As an exclusion question, we are looking for the false statement. The public service commission would have no approval power over revenue bond interest and principal payments. Because the bond is not backed by the taxing authority of the city, it is a revenue bond rather than a general obligation bond. The funds for payment of interest and repayment of principal are generated through the fees paid by those using the city's water and sewage facilities. Being a public, rather than private, facility, these would not be alternative minimum tax bonds.

Revenue bonds may be called for all of the following reasons except A) the facility has been destroyed. B) the issuer has reached a statutory debt limit. C) interest rates have fallen. D) a provision in a sinking fund agreement is calling for a partial call.

B) the issuer has reached a statutory debt limit. Statutory debt limits only apply to general obligation bonds. LO 6.b

One of your customers owns a variable annuity. When asking about how the performance of the separate account is measured, you would respond that A) the separate account performance is the same for all subaccounts. B) the separate account performance depends on the performance of the selected subaccounts. C) the insurance company's actuaries compute the separate account performance. D) the primary determinant is the assumed interest rate (AIR).

B) the separate account performance depends on the performance of the selected subaccounts. Some insurance company separate accounts have dozens of different subaccounts. These subaccounts range from highly aggressive to highly conservative. It is the performance of the specific subaccounts selected by the investor that determines the value of their accumulation unit. The actuaries get involved when determining the payout because that depends on life expectancy. Similarly, the AIR comes into play only during the payout phase. LO 9.c

A bond analyst plots the yields of AAA corporate bonds and compares them to the yields of U.S. Treasury bonds with similar maturities. This is known as A) yield comparison analysis. B) yield curve analysis. C) inverse yield analysis. D) yield plot analysis.

B) yield curve analysis The plotting of bond yields results in a curve, usually one where the longer the time to maturity, the higher the yield. The term yield curve analysis is the proper way to describe comparing the yields of highly-rated corporate bonds to those of Treasury bonds. When the spread between the yields is narrow, economic conditions in the United States are generally favorable. If the spread (sometimes called the credit spread) widens, it is generally a sign of a worsening economy

A member firm completes an agency transaction, which terms describe the transaction?

BAAC (Brokers Act as Agents for Commissions)

Short 1 BFD Dec 100 Put at 4 What is the maximum loss?

Breakeven to zero or $960 If stock goes to $0 I will have to buyer it for $100 minus the premium

Can separate accounts be combined for breakpoint reduced sales charge?

Breakpoint sales are allowed when customers are spouses or dependent children.

What investment company structured as a management company has to have 70% of it's assets in eligible securites?

Business development companies A business development company (BDC) is a closed-end investment company regulated under the Investment Company Act of 1940. It does not have the flexibility of regular closed-end funds because at least 70% of its assets must be invested eligible assets.

A customer is a long a stock and wants to protect his position. What should he do?

Buy a put

Which of the following orders are adjusted for cash dividends? I. Buy limits II. Sell limits III. Sell stops IV. Buy stops

Buy limits and Sell stops BLiSS Do Not Reduce (DNR)

A customer has sold securities and failed to deliver those securities. A broker/dealer would do what next?

Buy the customer in

A customer is long 1 XYZ Jan 50 put. To create a bull put spread, the customer must sell a Jan A) 45 put. B) 50 put. C) 55 put. D) 50 call.

C) 55 put. In any spread, put or call, if the customer is buying the lower strike price, the spread is bullish. Therefore, to create a bull put spread, the customer (who is long the 50 put) must sell a put with a higher strike price. A bull put spread is also called a short put spread. LO 10.e

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) earnings per share B) net value of fixed assets C) cash flow from operations D) cash flow from investments

C) Cash flow from operations is computed by adding the year's depreciation deduction to the net income.

When recommending industrial development revenue bonds, registered representatives would be remiss if they did not discuss A) the speculative nature of the bonds. B) the potential for taxable capital gains. C) the tax bracket of the individual and the alternative minimum tax. D) the guarantees offered by the issuing municipality.

C) Industrial development revenue bonds (IDRs) are municipal bonds generally backed by a lease or similar obligation entered into by a corporation. That is the backing and defines the risk level. The IRS defines interest received from industrial development revenue bonds (IDRs) as a tax preference item. As such, the income received might be subject to taxation under the alternative minimum tax. This tax usually applies to individuals who are in the higher tax brackets and would be an important determinant when evaluating the suitability of the investment.

ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced? A) Buy 100 ABC at the market. B) Buy 100 ABC at 50 stop. C) Sell 100 ABC at 45 stop. D) Sell 100 ABC at 50.

C) Orders that are entered below current market value would be reduced unless do not reduce (DNR) instructions are received. Those orders are buy limits, sell stops (BLiSS) orders. These orders are reduced by the amount of the dividend on the ex-dividend date for a cash dividend distribution.

A TIPS bond has a coupon of 3%. Over a two-year period, the annual inflation rate has been 4.5%. At the end of that time, the principal value of the TIPS would be A) $1,090.00. B) $1,060.00. C) $1,093.08. D) $1,061.36.

C) TIPS bonds have the special feature of adjusting the principal value every six months by the inflation rate. With an annual rate of 4.5%, the adjustment is 2.25% semiannually. There are two ways to solve this. One is to take the calculator given to you at the test center and multiply $1,000 × 102.25%. Take the result and multiply that times 102.25%. Do that two more times (there are four adjustments in two years), and the ending number will be 1,093.08. A faster way is to take the simple interest of 4.5% per year. That is $45 per year or $90 for the two years. Add that to the original principal to get $1,090. That is not the correct answer, but the next highest number in the answer choices is.

With respect to elective deferrals, a 403(b) plan must meet the requirements of the universal availability rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer's employees must be given the opportunity to participate. Certain employees may be excluded, including A) individuals not contributing to an IRA. B) any substitute teacher. C) employees who normally work less than 20 hours per week. D) employees who normally work less than 1,200 hours per year.

C) The IRS considers 20 hours per week to be equivalent to 1,000 hours per year (where mandatory eligibility begins). Working less than that allows the employer to exclude the employee from participation. Although most substitute teachers are likely to fall short of the 1,000 hours per year, any who meet that requirement must be given eligibility. Contributing to an IRA has nothing to do with plan eligibility.

Your manager notifies you that a new municipal revenue bond issue you have been working on has been oversubscribed. How is the order acceptance priority for this issue determined? A) On a first-come, first-served basis B) As outlined in the legal opinion C) As outlined in the agreement among underwriters D) As outlined in the indenture

C) The priority of filling municipal orders is established by the managing underwriter in the release terms letter sent to the syndicate once the bid is won. This letter is an amendment to the agreement among underwriters. The priority is also disclosed in the official statement.

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? A) $17,500 B) $32,500 C) $25,000 D) $16,250

C) $25,000 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. LO 16.d

Your client is considering two bonds: an ABC Corporation mortgage bond with a coupon yield of 9% and a municipal bond issued by the state that she resides in. If your client is in the 32% tax bracket, what is the tax-free equivalent yield for the corporate mortgage bond so that she will be able to compare it to the tax-free municipal bond she is considering? A) 4.10% B) 2.88% C) 6.12% D) 13.24%

C) 6.12%

Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Tax consequences would be minimized if the investor A) used the FIFO method. B) used the LIFO method. C) sold the shares purchased in June at $55 and the shares purchased in April at $52. D) used the average cost basis.

C) sold the shares purchased in June at $55 and the shares purchased in April at $52. By using the identified cost method, the investor would sell the highest cost purchases. This would result in the lowest taxable gain (or perhaps even a loss). Average cost is only available for mutual funds.

A bond convertible at $50 is selling at 105% of parity, while the common stock has a current market value of $45. What is the market value of the bond? A) $1,045 B) $1,000 C) $945 D) $900

C) $945 When a bond is convertible at $50, it means the holder can exchange each $1,000 par value bond for the company's common stock at a rate of $50 per share. Dividing $1,000 (always use the par value, not the market value) by $50 results in a conversion rate of 20 shares per bond. With the bond convertible into 20 shares and the market price of each share currently $45, the parity price, the price at which the value of the stock and the bond are the same, is $900, (20 x $45). The question tells us that the bond is selling for 105% of the parity price. That would be $900 x 105% = $945. An alternative method is to recognize that the stock is selling for 10% below its conversion price ($45 is $5 less than $50 and $5 ÷ $50 = 10%). That means the parity price of the bond must be 10% below the par value, or $900 (which is 10% less than $1,000). Once you have the $900, multiply by 105% to arrive at the correct answer of $945. LO 5.d

Your customer, who lives in State A, is in the highest federal and state income tax bracket. She is considering purchasing some State B municipal bonds with an Aa rating for her portfolio. You correctly explain that municipal bonds generally pay A) lower interest rates than corporate issuers of the same quality and maturity because the interest is tax free on a state, local, and federal level. B) higher interest rates than corporate issuers of the same quality and maturity, but this is offset by the more favorable tax treatment of the interest. C) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their interest. D) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their capital gains.

C) As a result of the tax-advantaged status of municipal bond interest (tax free on the federal basis; sometimes tax free on the state and local basis), municipalities generally pay lower interest rates than corporate issuers when the bonds are of similar quality and maturity. The interest on State B bonds will not be free of taxation on the state and local level in State A—the exemption only applies to residents of State B. Because the interest is tax free, these bonds are more suitable for those in higher tax brackets.

For both U.S. Treasury notes and Ginnie Maes, A) interest is computed on an actual-day basis. B) interest income is taxed at the federal level only. C) quotes are as a percentage of par in 32nds. D) settlement is next business day.

C) Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels. GNMA bonds are treated like corporate bonds in many ways. T-notes settle next day, while Ginnie Maes normally settle T+2. Interest on T-notes is computed on an actual-day basis, and Ginnie Mae interest is computed on a 30-day month/360-day year basis. Both Ginnie Maes and T-notes are quoted in 32nds.

A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They have a maximum maturity of 365 days. B) They are all auctioned on a monthly basis. C) They are quoted with a bid higher than the ask. D) They are generally callable after the first 6 months.

C) T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.

A customer buys 800 shares of ABC at $70 per share in a new margin account. If the price of ABC drops to $50, the minimum maintenance margin requirement for this account is A) $12,000. B) $14,000. C) $10,000. D) $20,000.

C) $10,000. The minimum maintenance margin requirement for a long account is 25% of the current market value (CMV). The CMV is $40,000 (800 shares × $50 = $40,000). Therefore, minimum maintenance equals $10,000 (25% × $40,000 = $10,000). LO 16.d

A customer purchases 10 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,812 B) $10,015 C) $10,116 D) $10,150

C) $10,116 Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 + 1/2 = $1,015; $1,015 × 10 bonds = $10,150. LO 7.b

A customer wants to buy $12,000 worth of stock using other marginable securities owned as collateral for the purchase. With Regulation T at 50%, what must the current market value of the securities deposited be? A) $6,000 B) $24,000 C) $12,000 D) $18,000

C) $12,000 Stock buys stock dollar for dollar. With $12,000 worth of fully paid marginable securities, the customer can borrow $6,000 against them. The $6,000 can be the 50% initial requirement for the additional $12,000 purchase. LO 16.d

A customer purchases five 6.25% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date? A) $312.50 B) $154.30 C) $156.25 D) $153.50

C) $156.25 Although minimum purchase denominations can be less, always use par value ($1,000) for these calculations. A 6.25% bond pays $62.50 annually (6.25% × $1,000 = $62.50). Therefore, a customer purchasing five bonds receives $312.50 each year. Because Treasury notes pay semiannually, each interest payment equals $156.25. LO 7.b

A client of yours wishes to sell 400 shares of LMNO common stock. You contact your trading desk and receive the following quote: "We are currently quoting LMNO at 42-42.15, 6 by 4." You report this to the client who says, "Do it." The customer will receive A) $4,200. B) $16,860. C) $16,800. D) $4,215.

C) $16,800. The statement from the trading desk indicates a firm quote. When the client is selling, the price received is the dealer's bid price. This quote indicates that the firm is willing to buy up to 600 shares at the bid price. Multiply 400 shares times the bid of $42 per share to arrive at $16,800. If the client was a buyer, the cost would be the ask price of $42.15 ($16,860). The other two choices are for students who didn't notice the client had 400 shares. LO 16.b

A customer buys 100 shares of HEX at 52, and at the same time, sells a HEX call for a premium of 4. What is his margin call deposit? A) $1,300 B) $1,560 C) $2,200 D) $2,600

C) $2,200 The margin call for the purchase of the stock is $2,600, and this is reduced by the sale of the call ($400) for a net of $2,200.

An ABC 40 call is quoted at 4.25 - 4.50, and an ABC 45 call is quoted at 1.50 - 2.00. What is the cost of establishing a debit spread? A) $225 B) $250 C) $300 D) $275

C) $300 To establish a debit spread, an investor buys a 40 call at the ask price of 4.50 and sells a 45 call at the bid price of 1.50. The net premium paid is (4.50 minus 1.50) times 100 shares, which equals $300. LO 10.e

Disregarding commissions, and investor purchasing $10,000 face amount of Treasury notes at a price of 98.12 would expect to pay A) $983.75. B) $981.20. C) $9,837.50. D) $9,812.00.

C) $9,837.50. Please note that the purchase is not for $1,000, but for $10,000. Treasury notes (and bonds) are quoted in 32nds. This quote of 98.12 is 98 12/32 or 98 3/8% of $10,000.

A state would receive the least amount from the following: A) Income Taxes B) Sales Taxes C) Property Taxes D) Capital Gain Taxes

C) Property taxes Go to local government

A customer liquidates all the securities in his retirement account and receives a cashiers check for the proceeds. How many days does the customer have to rollover the proceeds into another retirement account? A) 10 days B) 30 days C) 60 days D) 90 days

C) 60 days

In an effort to raise additional capital, which type of registered investment company may issue debt securities? A) An open-end investment company B) A face amount certificate company C) A closed-end investment company D) A unit investment trust

C) A closed-end investment company The capital structure of closed-end investment companies differs from other investment companies. Closed-end investment companies may issue debt securities, as well as preferred stock. Open-end companies and UITs can purchase debt securities for their portfolios but can only issue one class of equity. LO 8.b

ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's P/E ratio is higher, that would indicate that A) ABC's sales are higher than MNO's. B) ABC sales are lower than MNO's. C) ABC's net income is less than MNO's. D) ABC's net income is higher than MNO's.

C) ABC's net income is less than MNO's. If ABC's P/E ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's. Let's use some hypothetical numbers to prove this. The stock price of both companies is $60 per share. Both companies have 1 million shares outstanding. The P/E ratio compares the market price ($60) to the earnings per share. If ABC earned $5 per share and MNO earned $6 per share, their respective P/E ratios would be 12:1 ($60 ÷ $5) and 10:1 ($60 ÷ $6). From that we see, that given the same market price and the same number of shares outstanding, the higher the P/E ratio, the lower the earnings. Taking this one step further, if there was a third company with the same price and number shares and it had earnings per share of $1, the P/E ratio would be much higher at 60:1 ($60 ÷ $1). The information provided does not provide enough detail to know whether ABC or MNO had higher sales.

A company has filed for an IPO at $20 par value. The IPO is priced at $30 per share. Where on the balance sheet is the extra $10 recorded? A) Retained earnings B) Excess par value C) Capital surplus D) Distributed dividends

C) Capital surplus (paid-in surplus) When new stock is issued, any funds paid for the stock in excess of the par or stated value is called capital surplus. In this case, it is the $10 above the $20 par. It might also appear on your exam as paid-in surplus.

Which order would be used to eliminate or reduce a short position? A) Opening Purchase B) Opening Sale C) Closing Sale D) Closing Purchase

C) Closing Purchase

What is the following position? Buy 1 QRS May 40 call Sell 1 QRS May 50 call A) Time spread B) Diagonal spread C) Combination D) Price spread

C) Combination A price spread is composed of a long and short option of the same type with the same expiration but different strike prices. A price spread is also termed a vertical spread. LO 10.e

Which of the following is typically the largest component of a corporate underwriting spread and is received by members of the selling group? A) Reallowance B) Manager's fee C) Concession D) Underwriting fee

C) Concession The concession tends to be the largest component of a corporate underwriting spread. That is paid to the members of the selling group. The manager's fee is generally the smallest component. LO 20.b

If a married couple establishes a joint tenants with right of survivorship (JTWROS) account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A) He pays federal taxes only on $500,000. B) He pays federal and state taxes on the entire balance. C) He pays no estate tax. D) He pays federal and state taxes on $500,000.

C) He pays no estate tax. Establishing a JTWROS account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

Which of the following best describes alpha for an investor's portfolio? A) It is a measure of risk that adjusts in accordance with the performance of a known benchmark. B) It is the prediction of performance aligning with the risk of a known benchmark. C) It is a measure of performance that adjusts for risk, relative to a known benchmark. D) It is a measure of each portfolio asset's risk to arrive at the risk associated with the entire portfolio.

C) It is a measure of performance that adjusts for risk, relative to a known benchmark Alpha is a measure of performance that adjusts for risk, relative to a known benchmark. The alpha for any investment type, a particular asset, or portfolio is the abnormal rate of return on the investment in relation to what would normally be predicted by the benchmark.

What is the following position? Buy 1 QRS May 40 call Sell 1 QRS May 50 call A) Diagonal spread B) Combination C) Price spread D) Time spread

C) Price spread A price spread is composed of a long and short option of the same type with the same expiration but different strike prices. A price spread is also termed a vertical spread. LO 10.e

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 most suitable for your customer's portfolio? A) High-yield bond fund B) Blue-chip equity fund C) T-bills D) Growth stocks

C) 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.

Which of the following securities would have a Moody's MIG rating? A) BAs B) T-bills C) TANs D) GOs

C) TANs TANs are tax anticipation notes. These are short-term municipal securities and that is what Moody's MIG ratings represent. MIG stands for Municipal Investment Grade. GOs are rated with the normal letter ratings and BAs (bankers' acceptances) and T-bills are not municipal securities.

An investor wishing to determine the liquidity of a corporation would find which of the following most helpful? A) The book value B) The price-to-earnings ratio C) The current ratio D) The dividend payout ratio

C) The current ratio The current ratio compares the company's current assets to its current liabilities. It is one of the two tested liquidity ratios. The other is the quick ratio (quick asset ratio or acid-test ratio). That is similar to the current ratio except the inventory is excluded. LO 13.d

An investor is long 1 OEX December 420 call for $1200. When the current market is at 445 the investor exercises his option he would receive: A) The net difference between $1200 and $445 B) 100sh of stock in the underlying security for a cost of $420 C) The difference between the strike price and the market value times a multiplier of 100 D) The difference between the strike price and the market value times a multiplier of 100 less the premium

C) The difference between the strike price and market value times a multiplier of 100 Index Options settle in cash T+1 for exercise and contract

Rodney borrows the funds to purchase municipal bonds. Which of the following regarding the interest on the loan is true? A) He may only deduct as interest expense the excess of his interest expense over the nominal tax-free interest income on the bond. B) The interest expense is fully deductible. C) The interest is a nondeductible expense. D) He may deduct both the income from the bond and his interest expense.

C) The interest is a nondeductible expense. Interest on funds borrowed to purchase municipal bonds is not tax deductible. LO 16.d

An investor sold a corporate bond with a 5% coupon at a net price of 101. The bond had accrued interest for 45 days. Which of the following statements regarding the confirmation of this trade is correct? A) The confirmation will indicate the current yield based on the price of the bond. B) The total amount received on the seller's confirmation will appear as $1,003.75. C) The total amount due on the purchaser's confirmation will appear as $1,016.25. D) The total amount due on the purchaser's confirmation will appear as $1,035.00.

C) The total amount due on the purchaser's confirmation will appear as $1,016.25. Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 5% coupon, the bond pays $25 every 6 months. One-quarter of that is $6.25, so the total proceeds to the seller (and cost to the purchaser) is the $1,010 plus the $6.25, or $1016.25. One of the details included on a bond confirmation is the yield to maturity based on the price of the bond, but not the current yield.

All of the following debt securities trade "add interest" except: A) Corporate bond B) Treasury bond C) Treasury bill D) Muni bond

C) Treasury bill Opposite of add interest is trading flat, bonds that don't accrue interest

Which of the following standardizes practices within the securities industry? A) Code of Procedure B) Code of Conduct C) Uniform Practice Code D) Code of Arbitration

C) Uniform Practice Code

When is the sales charge deducted from purchases of mutual fund shares made under a letter of intent? A) Monthly B) Annually C) When each purchase is made D) When each letter of intent is completed

C) When each purchase is made When the customer makes the first investment under a letter of intent, the reduced sales charge applies immediately and to each subsequent investment. With each additional investment, the same reduced charge is deducted. If the customer does not invest the amount stated in the letter, the full sales load applies retroactively to the total investment. LO 8.d

An investor purchases a PQR convertible bond at 98 on June 18, 1994. The bond is convertible at $25, and on June 19, 1995, when the common stock is trading at $26 per share, the investor converts his bond into the stock. For tax purposes, these transactions will result in A) a $40 capital loss. B) neither gain nor loss. C) a $40 capital gain. D) a $60 capital gain.

C) a $40 capital gain. The process of converting a convertible bond into common stock is not a taxable event. When the stock is sold, the taxable event occurs. LO 5.c

A customer buys 100 DEF at 70, but several months later, the stock is trading at 82.85. The customer, concerned about a possible pullback, buys 1 DEF Aug 80 put at 1.50. If the stock subsequently falls to 77.25, and the customer sells her stock by exercising the put, the result is A) a gain of $575. B) a loss of $150. C) a gain of $850. D) a gain of $875.

C) a gain of $850. The customer bought 100 shares at 70 and sold them at 80 by exercising the put for a gain of $1,000. However, it cost $150 to buy the put, so the customer's gain is $850. In other words, breakeven for long stock-long put is the cost of stock purchased (70) plus the premium paid (1.50). Breakeven is 71.50, and the customer sold stock at 80 (80 − 71.50 = 8.50-point gain). LO 10.h

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

C) a rights offering. A rights offering is an offering of additional shares of stock to existing shareholders. LO 3.f

When an insured person becomes disabled or unable to work, that person may not be required to continue paying premiums on the contract if the contract included A) a disability rider. B) a low-income provision. C) a waiver of premium option. D) a freeriding provision.

C) a waiver of premium option A waiver of premium option allows the premiums on an insurance contract to be waived for a person who has become disabled or otherwise unable to work.

A buy stop order is elected (triggered) when the underlying stock trades A) anywhere below the stop price. B) through the stop price only. C) at or above the stop price. D) at or below the stop price.

C) at or above the stop price. A buy stop order is placed above the prevailing market price and is elected (triggered), becoming a market order to buy when the stock trades at or through (above) the stop price. LO 16.a

An investor submits an immediate-or-cancel order to sell 500 shares of stock at 32.20. When the order reaches the trading floor, the quote is 32.18 - 32.26, 6 × 6. The investor A) sold 600 shares at 32.26. B) sold 500 shares at 32.18. C) did not sell any shares. D) sold 500 shares at 32.26.

C) did not sell any shares. An immediate-or-cancel order (IOC) is a limit order requiring immediate execution or cancellation. Unlike its cousin, the fill-or-kill (FOK) order, a partial fill is permitted with an immediate or cancel order. An IOC order to sell 500 shares at 32.20 means that the investor will accept the sale of anything up to and including 500 shares as long as the sale price is at least $32.20 per share. Sellers receive the highest bid price (the most an investor is willing to pay for the stock). At the time this order is presented, the highest bid was 32.18. Even though the buyer was willing to take all 500 shares (the quote size was for 600), the price is not high enough, so the order is canceled. LO 16.a

A variable-rate municipal bond investment's main advantage is that A) it is noncallable. B) its interest is exempt from all taxes. C) its price should remain relatively stable. D) it is likely to increase in value.

C) its price should remain relatively stable. A variable-rate bond has no fixed coupon rate. The coupon is tied to a market rate (e.g., T-bond yields) and subject to change at regular intervals. Because the interest paid reflects changes in overall interest rates, the bond price remains relatively close to its par value. Its coupon is always representative of the current market rate. As rates rise, the coupon is adjusted upward. As rates fall, the coupon is adjusted downward.

Debt service on an industrial revenue bond is secured by A) sales taxes. B) special assessments. C) lease payments paid by a corporation. D) ad valorem taxes.

C) lease payments paid by a corporation Industrial revenue bonds are issued by a municipality or an authority established by a municipality. No municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the only source of revenue for debt service.

A registered representative with discretionary authority requires customer authorization before purchasing A) junk bond funds. B) noncallable zero-coupon bonds. C) municipal bonds where a control relationship exists. D) noninvestment-grade bonds.

C) municipal bonds where a control relationship exists. Even though the representative has discretionary authority to trade the account, the Municipal Securities Rulemaking Board requires that the representative receive customer permission before purchasing bonds where the firm has a control relationship with the issuer. LO 6.h

Advertisements for the Abstemious Balanced Fund (ABF) describe the investment as a no-load fund. In order to make this claim, the fund must A) not have a front-end load in excess of 0.10% B) not have a 12b-1 charge in excess of 0.75% C) not have a conditional deferred sales charge D) have its first breakpoint no higher than $10,000

C) not have a conditional deferred sales charge When a fund promotes itself as a no-load fund, not only must there be no front-end load, there cannot be a back-end load (CDSC) either. The 12b-1 charge maximum is 0.25%. The concept of breakpoints applies solely to Class A shares (front-end load).

Expressed as a percentage of par, one basis point equals A) one-tenth of 1%. B) 10%. C) one-one hundredth of 1%. D) one-one thousandth of 1%.

C) one-one hundredth of 1%. One basis point equals one-one hundredth of 1% of par. One percent of par ($1,000) equals $10; therefore, 1 basis point equals one-one hundredth of $10, or $0.10 (10 cents). LO 6.a

One of your customers owns a limited partnership interest in an oil and gas drilling program. The program was successful in finding oil and is expected to operate at a loss for the next year. The loss flowing through to the limited partner is generated by all of these except A) interest payments on partnership debt. B) depletion on the sale of oil removed from the ground. C) principal repayment on partnership debt. D) accelerated depreciation taken on the drilling equipment.

C) principal repayment on partnership debt.

The capital asset pricing model (CAPM) assumes A) that no type of risk can be diversified away. B) that those who participate in smaller transactions are generally wrong regarding timing purchases and sales. C) that prices are influenced by supply and demand only. D) investors are averse to risk and expect to be rewarded for taking risk.

C) that prices are influenced by supply and demand only. CAPM takes into account unsystematic risk—the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it, and therefore, the pricing of an asset must reflect that. LO 13.b

How do you find the P/E ratio?

Current market price / EPS

How do you find EPS?

Current market price / PE ratio

The trust indenture of a revenue bond includes a statement explaining rates will be maintained at a level sufficient to cover the debt service and operating expenses. This statement would be found in that part of the indenture dealing with A) the flow of funds. B) the official statement. C) the bond covenants. D) the feasibility study.

C) the bond covenants. The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant, which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue. LO 6.b

The trust indenture of a revenue bond will show all of the following except A) the rate covenant. B) the application of flow of funds. C) the reoffering yields. D) the revenue pledge.

C) the reoffering yields. Reoffering yields are unrelated to trust indentures. However, the trust indenture for a revenue bond issue does include covenants (or promises) between the issuer and the trustee for the bondholders' benefit. Among these covenants are the flow of funds and the rate covenant. LO 6.b

An investor anticipating a rise in interest rates would likely purchase A) bonds issued by the U.S. Treasury. B) corporate bonds. C) variable-rate demand obligations or reset bonds. D) callable bonds.

C) variable-rate demand obligations or reset bonds When interest rates increase, the market price of all fixed-income securities declines. In the case of variable-rate or reset bonds, the interest rate on those is adjusted based on the movements of market interest rates. As a result, when interest rates increase, the rate paid by the variable rate security increases as well. This tends to keep the market price stable rather than declining as well as providing increased income to the investor. A callable bond works to the issuer's advantage when interest rates fall but offers no added benefit to an investor when interest rates rise. Corporate or government-issued bonds offer no advantage for an investor anticipating a rise in interest rates because with fixed interest rates, their price will decline.

The alpha in a common stock has changed significantly. What could be the cause?

CEO steps down

Position limits in options apply to which

Class = Type plus the Stock. E.g. Apple Calls, Apple Puts

An investor owning an option contract liquidates the position. On the order ticket, the R.R would enter a...

Closing sale If you own an option contract, that means you did an opening purchase

A municipal issuer places an "Official Notice of Sale" in the Daily Bond Buyer. This means that this is a

Competitive Underwriting

While at a restaurant a RR overhears that XYZ will report bad earnings in the morning. When she arrives at her office the next morning, you should ...

Contact the legal/compliance department immediately

What is it called if position has more call options written than shares available to cover the call? A) portfolio insurance. B) a vertical spread. C) a long straddle. D) a ratio write.

D) A ratio write is used to describe the position when more call options are written than there are shares of stock available to cover the call. In this case, the customer has 5 covered and 2 uncovered calls. It should also be recognized that the two uncovered calls represent an unlimited maximum loss potential.

One of the goals of target date funds is to help manage A) retirement risk. B) inflation risk. C) liquidity risk. D) investment risk.

D) Although not always successful, target date funds adjust the asset allocation as the investor gets closer to retirement age (or whatever date is selected). In so doing, the goal is to reduce the overall investment risk. As mutual funds, liquidity risk is not a concern. In practice, they actually do not do a great job of managing inflation risk because the portfolio becomes heavily invested in fixed income as the target date approaches. This leaves the investor with little in the way of equities to protect against inflation. Retirement risk is not a term used in the industry.

The OCC must receive exercise instructions for equity options no later than A) 4:00 pm ET on the third Friday of the expiration month. B) 4:10 pm ET on the third Friday of the expiration month. C) 11:59 pm ET on the Saturday before the third Friday of the expiration month. D) 5:30 pm ET on the third Friday of the expiration month.

D) Although trading stops at 4:00 pm ET on the third Friday of the expiration month, the final exercise deadline is 5:30 pm ET (4:30 pm CT) that same day.

What is the major difference between ETFs and mutual funds?

ETFs trade on secondary markets while mutual funds are continuous primary offerings which is the primary market. Both compute their NAV as of 4pm close of the markets. No open-end company can issue preferred stock

A bond is being issued to build a toll road. It has been identified that the state does not own all of the property that the road is going to be built upon. This would most likely be disclosed in A) the prospectus. B) the trust indenture. C) the bond resolution. D) the qualified legal opinion.

D) Any legal uncertainty of which bondholders should be informed is first identified by the legal opinion obtained by the municipality issuing the bond. Municipal bonds are exempt from registration with the SEC, and therefore, do not have a prospectus requirement. The full and fair disclosure document for municipal bonds is called the official statement (which would disclose this information as well).

Which of the following is an interest-bearing instrument? A) Commercial paper B) Zero-coupon bond C) Treasury bill D) Jumbo CD

D) Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income? A) An oil and gas income program B) An equipment leasing program C) A government-assisted housing program D) An oil and gas exploratory program

D) Passive income may be offset by passive losses. Of the programs listed, the one most likely to have significant losses, particularly in the early years, is an exploratory or wildcat drilling program.

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) AAA rated municipal bonds maturing in 18 years B) Blue-chip stocks C) U.S. Treasury bonds with 18 years to maturity date D) U.S. Treasury STRIPS maturing in 18 years

D) STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future.

An investor wanting to purchase municipal bonds should be aware that in most instances, if she buys the bond and then later sells it for a profit, then A) interest received will be taxable, but the capital gains are exempt from taxation. B) both interest received and capital gains will be exempt from taxation. C) neither interest received nor capital gains will be exempt from taxation. D) interest received will be exempt from taxation, but not the capital gains.

D) The interest on municipal debt is largely exempt from taxation, but not the capital gains.

Your broker-dealer has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new broker-dealer. How long does your broker-dealer have to validate the positions listed on the form? A) Seven calendar days from the time the TIF is received B) Three business days C) No later than the end of business on the Friday of the week the TIF was received D) One business day

D) When transferring a customer's positions to another broker-dealer via the TIF under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer the positions to the receiving broker-dealer after validation.

Under the Securities Act of 1933, SEC registration is required for A) a commercial paper offering of $30 million maturing in 180 days. B) a private placement offering of $60 million by a brokerage firm. C) a municipal revenue note offering of $4 million. D) an offering of $25 million of a corporate bank holding company.

D) While some banks and savings and loans are exempt, issuers' corporate bank holding companies are not. Private placements, municipal securities, and commercial paper (short term) are all exempt from federal registration.

A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $11,750. B) $18,000. C) $16,450. D) $25,200.

D) $25,200. Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 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 $72,000. LO 9.d

The common stock of Momentum Growth Industries (MGI) is currently selling at 55 times earnings. Which of the following actions could MGI take that would likely increase the company's earnings per share? Reduce the salaries of C-level officers by 10%. Exercise the call feature on MGI's outstanding preferred stock. Announce a 1:4 stock split. Purchase shares of MGI common stock in the open market. A) I, III, and IV B) I and IV C) II and III D) I, II, III, and IV

D) I, II, III, and IV As is often the case, the question contains irrelevant information. Knowing the price-to-earnings ratio (P/E ratio) has nothing to do with the question. There are two primary ways to increase EPS. The most obvious is to increase the company's earnings. That is accomplished either by increasing revenue or reducing costs. Reducing officer salaries reduces the expenses. Calling in preferred stock removes the obligation for the dividend on that stock. Therefore, income available to common shareholders increases. The second is to reduce the number of outstanding shares. The math behind the EPS formula is net income divided by the total number of common shares outstanding. If the denominator (the number of shares) is reduced, the EPS increases. Sometimes a company wishing to buy back its shares will do so through a tender offer. It does that by inviting shareholders to tender (present) their shares to the company at a specified price (usually at a premium over the current market price). A reverse split, such as 1 for 4, reduces the number of outstanding shares to one quarter of what they were before the split. One of the simplest ways to reduce the number of outstanding shares is to simply buy them back in the open market. They now become treasury stock and are not included in the EPS calculation. LO 13.d

The Investment Company Act of 1940 has two types of management investment companies—the closed-end and the open-end. Which of the following is a significant difference between the two? A) The closed-end investment company's portfolio can contain common stock, preferred stock, and bonds, while the open-end is limited to common stock only. B) The closed-end investment company is generally more attractive for those investing small amounts. C) Closed-end companies will never sell below net asset value per share, while open-end companies might if there are net redemptions. D) The closed-end company generally has a one-time offer of shares, while the open-end company's offer of shares is continuous.

D) The closed-end company generally has a one-time offer of shares, while the open-end company's offer of shares is continuous. Most of the differences between closed-end and open-end companies revolve around the different method of capitalization. That is, the one-time offer of shares on the part of the closed-end company is why the shares trade in the secondary markets, often at a discount to the NAV. Because closed-end funds trade in the secondary markets, there are buying and selling commissions. That is usually a disadvantage when making small investments. Do not confuse the limited capital structure of an open-end company (only issuing common stock) with the contents of the portfolio. Open-end investment companies issue common stock and then use the capital they raise to purchase securities for their portfolio. For example, a bond fund issues common shares and then uses the money to purchase bonds, or a money market fund to buy T-bills and other money market instruments. Open-end companies can never sell below NAV, while closed-ends frequently do.

In rating a general obligation (GO) bond, all of the following factors would be considered by an analyst except A) the total outstanding debt. B) the public's attitude toward debt. C) the tax collection ratio. D) the flow of funds.

D) the flow of funds. GO bonds are backed by the full faith and credit of a municipal issuer, which is based on its ability to levy and collect taxes. Therefore, among the considerations for an analyst, total outstanding debt, the tax collection ratio, and the public's attitude toward more municipal debt are prominent. The flow of funds is one of the protective covenants associated with municipal revenue bonds. LO 6.b

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) brokers executing orders as agents in an auction market on any exchange trading floors. C) trades in NYSE-listed securities occurring on the NYSE. D) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.

D) FINRA's 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.

If an M&N 1 corporate bond issued at par with a 6% coupon is later purchased in August for 97 plus accrued interest of $16, how much taxable interest must the investor report for the year? A) $16 B) $60 C) $30 D) $14

D) $14 The purchaser of a bond pays the seller the interest that has accrued since the last interest payment date. A purchaser in August will pay the interest that has accrued since May 1. Then, on November 1, the investor will receive the entire six months of interest. We are told that the investor paid $16 in accrued interest. That is income to the seller. Then, when the November payment of $30 (6% coupon is $30 semiannually) is made, the investor must report the amount over the accrued interest paid out as income. In our question, that is $30 minus $16 = $14.

A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is A) $4,000. B) $0. C) $1,000. D) $2,000.

D) $2,000 Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SMA.

An investor purchased 100 shares of ABC common stock at $60 per share on March 2, 2019. With the stock selling at $80 per share on January 2, 2020, the investor purchased an ABC Apr 75 put for a premium of 2. On June 2, 2020, the investor sold the stock for $85 per share. As a result, the tax consequences are A) $2,500 long-term capital gain. B) $2,500 short-term capital gain. C) $2,300 long-term capital gain. D) $2,300 short-term capital gain.

D) $2,300 short-term capital gain. The purchase of the put on stock that had a holding period of less than long term (March to January is only 10 months) erases the holding period. The holding period begins again once the put expires. In this case, we have a holding period from expiration in April until June 2. That is clearly a short-term holding period. As far as the math, the cost is $62 per share ($60 cost of the stock plus $2 for the put). The sale price was $85, the gain is $23 per share, $2,300. Alternatively, the sale price of $85 created a $2,500 gain (85-60) and the put was a $200 loss. That is a net of + $2,300. Either way is fine. LO 10.i

Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 four years ago, and it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) $3,800 B) $4,200 C) $0 D) $2,800

D) $2,800 This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). The tax on this is $2,800 ($10,000 × 28%). Because the client is older than age 59½, she does not pay 10% premature distribution penalty tax. LO 9.d

On April 15, 2016, your client purchased a variable life insurance policy with a death benefit of $450,000. The November 2019 statement showed a cash value of $28,000. If the client wanted to borrow as much as possible, the insurance company would have to allow a loan of at least A) $25,200. B) $14,000. C) $28,000. D) $21,000.

D) $21,000. Once a variable life policy is in force for a minimum of three years (this one is a bit longer than that), there is a requirement to make the loan provision available. At the three-year mark, that minimum becomes 75% of the computed cash value. Seventy-five percent of cash value of $28,000 is $21,000. LO 9.e

An investor opens the following position: Write 1 CDE Oct 30 call at 3.30 Buy 1 CDE Oct 40 call at 0.10 The maximum gain is A) unlimited. B) $1,000. C) $680. D) $320.

D) $320. The maximum gain on a credit spread is the net credit received (3.30 − 0.10 = 3.20 × 100 shares = $320). LO 10.e

A $50,000 20-year 7% municipal bond with semi-annual M/S coupon payments is issued on March 1, 2020. The full price for a trade of this bond, with a 7% yield to maturity to settle on June 30, 2020, is closest to A) $51,166.67. B) $51,147.22. C) $52,313.89. D) $51,156.94.

D) $51,156.94. The full price of a bond includes the accrued interest. First, we calculate the number of days of accrued interest. Because this is a municipal bond, each month has 30 days. Accrued interest is always paid up to, but not including, the settlement date. That means 30 days each for March, April, and May (90 days). Because we do not pay accrued interest for June 30, (on settlement date, the new owner is entitled to the entire six months of interest), there are 29 more days, giving us a total of 119 days. You can set it up like this: 6/30 minus 3/01 = 3 months, 29 days = 119 days. The next step is computing the amount of accrued interest in dollars and cents. With a coupon of 7% and semi-annual payments, each payment is 3.5% of the $50,000 par value. That is $1,750 each six months. We are going to solve for 119/180 days' worth of accrued interest. With the test center calculator, multiply $1,750 times 119 and divide the product by 180. The result is accrued interest of $1,156.94. Alternatively, you could find the interest for each day by dividing the semiannual interest of $1,750 by 180 days = $9.72222 per day. Multiply that times 119 days and the product is $1,156.94. Finally, when a bond with a 7% coupon has a yield to maturity of 7%, that tells us the bond is selling at par. All we need to do now is add the accrued interest to the $50,000 par value to arrive at $51,156.94. LO 6.e

If an investor has an established margin account with a current market value of $4,400 and a debit balance of $1,750 with Regulation T at 50%, how much buying power does the investor have in the account? A) $2,200 B) $4,400 C) $2,650 D) $900

D) $900 The Regulation T requirement is 50% of the current market value of $4,400, which equals $2,200. Equity equals the current market value of $4,400 minus the debit balance of $1,750, which equals $2,650. Excess equity is calculated by subtracting the Regulation T requirement of $2,200 from the current equity of $2,650, which equals $450. Buying power is then calculated by multiplying the excess equity of $450 by 2, which equals $900.

KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year? A) $120,000 B) $1,100,000 C) $300,000 D) $900,000

D) $900,000 The corporate exclusion is 50% of dividend income; therefore, KLP must pay taxes on all $700,000 of its interest income, but only 50% (or $200,000) of its dividend income, for a total of $900,000. LO 13.g

An investor wishes to invest $5,000 into the KAPCO Balanced Fund, an open-end investment company. How many shares will the investor receive if the next computed NAV per share after receipt of the order is $41.30 and the fund has a sales charge of 4%? A) 121.065 B) 43.021 C) 116.414 D) 116.225

D) 116.225 The investor will pay the POP (public offering price) of $43.02 per share. That price is computed by dividing the NAV of $41.30 by (100% ‒ 4%). Remember, the 4% sales charge is a percentage of the offering price, not the NAV. Dividing the $5,000 investment by the POP of $43.02 results in a purchase of 116.225 shares. LO 8.d

FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is A) 10% of the gross proceeds. B) 5% of the gross proceeds. C) 2% of the gross proceeds. D) 15% of the gross proceeds.

D) 15% of the gross proceeds. If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. 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. The 5% is the FINRA markup policy and that does not apply to DPPs. LO 11.h

Class A shares of the JILCO Fund are offered to the public at net asset value per share plus a sales charge of 4.25%. If the next computed net asset value per share is $39.39, an investment of $10,000 will acquire A) 243.546 shares. B) 265.816 shares. C) 253.871 shares. D) 243.072 shares.

D) 243.072 The first step is computing the public offering price (POP). When the NAV and sales charge percentage are given, the computation is: NAV divided by (100% - sales charge %). The numbers are $39.39 ÷ 95.75% which equals $41.14 per share. Then, divide the $10,000 purchase by the POP of $41.14 to arrive at 243.072 shares. The key point to remember is that the sales charge is always a percentage of the POP, not the NAV.

The basis of a bond with a 5% nominal yield maturing in twenty years and selling at 115 is approximately A) 4.65%. B) 4.35%. C) 5.75%. D) 3.95%.

D) 3.95% A bond's basis is its yield to maturity (YTM). It is not necessary to do the YTM calculation because it could only be one choice. We can easily compute the current yield by dividing the $50 annual interest by the $1,150 current market price. That is about 4.35%. The YTM must be lower than that because it includes the eventual loss realized when the bond matures at par. There is only one selection that is lower than 4.35%. The calculation would follow our formula of: Annual interest - (premium ÷ number of years to maturity) (Current market price + par) ÷ 2) Plugging in the numbers, we have: ($50 - $7.50) divided by $1,075. That is 3.95% LO 4.eA bond's basis is its yield to maturity (YTM). It is not necessary to do the YTM calculation because it could only be one choice. We can easily compute the current yield by dividing the $50 annual interest by the $1,150 current market price. That is about 4.35%. The YTM must be lower than that because it includes the eventual loss realized when the bond matures at par. There is only one selection that is lower than 4.35%. The calculation would follow our formula of: Annual interest - (premium ÷ number of years to maturity) (Current market price + par) ÷ 2) Plugging in the numbers, we have: ($50 - $7.50) divided by $1,075. That is 3.95% LO 4.e

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered? A) Two stop orders B) A straddle order C) Two limit orders D) A spread order

D) A spread order A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less. (This is one order, not two.) LO 10.e

Debt service on "special assessment bonds" emanate from: A) User fees B) Ad valorem taxes C) Excise taxes D) Benefited property

D) Benefited property

Using yield-based options, which of the following hedging strategies offers a bond portfolio manager the greatest protection against rising long-term interest rates? A) Sell 30-year T-bond yield-based puts B) Buy 30-year T-bond yield-based puts C) Sell 30-year T-bond yield-based calls D) Buy 30-year T-bond yield-based calls

D) Buy 30-year T-bond yield-based calls In this example, the options would increase in value, as the actual yield on the 30-year Treasury bonds rose above the yield value represented by the strike price of the option. LO 10.g

The function of the Federal National Mortgage Association (FNMA) is to A) provide financing for government-assisted housing. B) guarantee the timely payment of interest and principal on FHA and VA mortgages. C) issue conventional mortgages. D) purchase FHA-insured, VA-guaranteed, and conventional mortgages.

D) purchase FHA-insured, VA-guaranteed, and conventional mortgages. The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates. LO 7.c

Which of the following establishes handles civil disputes? A) Code of Procedure B) Code of Conduct C) Uniform Practice Code D) Code of Arbitration

D) Code of Arbitration

Municipal Securities Rulemaking Board (MSRB) rules for NYSE member firms are enforced by A) the SEC. B) the NYSE. C) the MSRB. D) FINRA.

D) FINRA The board's rules are enforced by FINRA for securities firms. The MSRB has rulemaking authority but no enforcement or examination authority.

Seventy-five basis points are equal to which of the following? I) 0.75% II) 7.5% III) $7.50 IV) $75.00 A) II and IV B) I and IV C) II and III D) I and III

D) I and III There are 100 basis points in each point. One point represents 1% of a bond's value; therefore, one basis point represents 0.01%, and 75 basis points would represent 0.75%. Because each point is worth $10, 75 basis points represents $7.50. LO 6.a

An investor opens the following options position: Long 1 PKE Apr 60 put @4 and short 1 PKE Apr 55 put @2. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is $200; breakeven point is $57.00. B) Maximum gain is $200; maximum loss is $300; breakeven point is $58.00. C) Maximum gain is $200; maximum loss is $300; breakeven point is $57.00. D) Maximum gain is $300; maximum loss is $200; breakeven point is $58.00.

D) Maximum gain is $300; maximum loss is $200; breakeven point is $58.00. The first step is to identify the position. This is a debit put spread. It is a debit spread because the option purchased cost more than the one sold. The debit of $200 is the most the investor can lose. This is a bear put spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock's price to decline to the point where both options are exercised. For example, if the market price of PKE should fall below 55, the owner of the 55 put will exercise, causing the seller to purchase the stock for $5,500. The seller can then exercise the long 60 put and deliver the stock purchased at 55 for 60. That is a profit of $500 less the cost of the options (the debit of $200), or $300. The quick way to do this is to subtract the net premium (the $200 debit) from the difference in strike prices (5 points) and the result is the same $300 profit. The breakeven point follows the put-down rule. Subtract the net premium (the $2 debit) from the higher strike price, resulting in a breakeven point at $58. LO 10.h

The visible supply includes all of the following except A) general obligation bonds. B) revenue bonds. C) industrial development bonds. D) municipal notes.

D) Municipal Notes Short-term notes are not part of the visible supply, which measures the dollar amount of new issues scheduled over the coming month.

Which of the following need not comply with ERISA? A) Union pension plan B) Corporate defined benefit plan C) Corporate defined contribution plan D) Municipal defined benefit plan

D) Municipal defined benefit plan

All of the following will affect the working capital of a corporation except A) a decrease in current liabilities. B) an increase in current assets. C) declaration of a cash dividend. D) payment of a cash dividend.

D) Payment of a cash dividend Current assets decrease but liabilities are gone as well

All of the following offerings are safe harbors or exemptions from the Securities Act of 1933 EXCEPT: A) Reg A B) Reg 147 C) Reg D D) S-1

D) S-1

Which of the following make sure new shares get distributed? A) Best Efforts B) Mini Max C) All or None D) Standby

D) Standby

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

D) The type of tax that can be used to service the debt 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.

A customer writes 1 XYZ Sep 45 put at 6 and 1 XYZ Sep 35 call at 6 when XYZ is at 40. Before expiration, if XYZ is at 43, and the customer closes her positions at intrinsic value, the customer has A) a $600 gain. B) a $600 loss. C) a $200 loss. D) a $200 gain.

D) a $200 gain. We first identify the position. This is a short combination. The investor has sold a put and sold a call on the same stock, but at different strike prices. If the prices and expiration dates were the same, it would be a straddle. When the customer begins the position by selling options, the action is an opening sale. That is, the position was opened by selling an option (in this case, two options). The customer collects $1,200 in premiums for writing the options (6 + 6). The question says the positions were closed at the intrinsic value. You close an opening sale with a closing purchase. That is, the customer buys back the option(s) that were sold. In this case, the price is $200 (45 − 43) to close out the put and $800 to close out the call (43 − 35). Determining gain or loss is simply comparing the $1,200 received to the $1,000 paid and that results in a gain of $200. The T-chart looks like this: Debit ($ out) Credit ($ in) $200 (put) $600 (Sep 45 put) $800 (call) $600 (Sep 35 call) $1,000 $1,200 LO 10.c

One of the key roles of a registered representative is matching a securities recommendation to a customer's risk tolerance. All of the following statements correctly explain investment risk except A) a decrease in the NAV of a mutual fund with a substantial position in Japanese companies as a consequence of devaluation of the yen. B) a decline in a firm's share price as a result of a 15% decline in the S&P 500 Index represents market risk. C) rising inflation leads to purchasing power risk. D) a corporation's decision to buy back some of its own stock in the open market using funds borrowed through a new debt issue is an example of reinvestment rate risk.

D) a corporation's decision to buy back some of its own stock in the open market using funds borrowed through a new debt issue is an example of reinvestment rate risk. Reinvestment risk applies primarily to debt securities. It is the periodic payment of interest or the repayment of principal at a rate of return different from that earned on the original issue that is reinvestment risk. Borrowing money to repurchase the company's stock could lead to financial risk (the inability to pay back the debt). Inflation eats away at purchasing power. When the overall market suffers a decline, most stock prices follow along. That is market risk. One of the risks in foreign investing is fluctuating values of the different currencies. LO 14.a

If an indenture has a closed-end provision, this means A) a sinking or surplus fund must be established. B) additional issues have no lien on the revenue stream. C) the bonds must be called before maturity. D) additional issues will have junior liens.

D) additional issues will have junior liens. These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility. LO 6.b

A customer wanting to invest in an oil and gas limited partnership wants to know what her cost basis would be for tax purposes. While there can be a number of variables, cost basis for a limited partner (LP) is best defined as A) recourse debt minus cash contributions. B) noncash contribution plus nonrecourse debt minus recourse debt. C) cash investment made minus distributions. D) cash investment made plus recourse debt minus distributions.

D) cash investment made plus recourse debt minus distributions. Cost basis for a limited partner is defined as investment made (cash contributions) plus recourse debt (debt the LP is responsible for) minus distributions. Nonrecourse debt would only be included for real estate programs. Real estate programs are the only types where LPs can be responsible for both recourse and nonrecourse debt. LO 11.f

An investor who is bearish on the outlook for Fernweh Travel Services (FTS) sells 100 shares short at $52 per share. Three months later, the market price of FTS shares is $58. Under FINRA rules, a maintenance call will be issued when the per share price of FTS A) decreases by more than $2. B) increases by more than $17.40. C) increases by more than $9.60. D) increases by more than $2.

D) increases by more than $2. A short margin account reaches the maintenance level when the equity in the account reaches 30% of the market value of the short stock. To find that level, divide the credit balance by 130% (or 1.3). The credit balance is the sum of the sale proceeds plus the Regulation T initial margin requirement. In our question, sale proceeds are $5,200 ($100 shares times $52 per share). To that we add the 50% Regulation T requirement ($2,600) resulting in a credit balance of $7,800. Dividing that $7,800 by 1.3 = $6,000. That tells us that the highest the price of FTS shares can be is $60 per share. Anything above that will trigger the maintenance call. With the current market price of $58, anything in excess of a $2 per share increase will result in a maintenance call. Remember, when an investor sells short, losses occur as the market price rises. LO 16.d

Your FINRA member firm takes 100 GO bonds from a municipal bond dealer out-firm for one hour. This means that A) the municipal bond dealer has one hour to sell these bonds to another member at a greater price. B) the municipal bond dealer has one hour to change the quoted price. C) after one hour, your firm owns the bonds. D) your firm controls the bonds for one hour.

D) your firm controls the bonds for one hour A municipal securities dealer may quote a bond price that is firm for a certain time. This is called an out-firm with recall quote. Generally, these quotes are firm for an hour (or half hour) with a five-minute recall period. During this time, the municipal dealer cannot offer those bonds to anyone else—they are under the control of your firm.

An investor in an equipment-leasing direct participation program (DPP) using straight-line depreciation would probably not be concerned about A) legislative risk. B) the quality of the management. C) liquidity risk. D) the likelihood of recapture.

D)the likelihood of recapture. Recapture of deductions is a concern when accelerated, but not when straight-line depreciation is used. In any business, there is always concern about the quality of the management. By and large, DPPs are not liquid investments, so an investor needing a quick sale may have problems. The nature of DPPs tends to make them more sensitive to legislative risk than most other securities. LO 11.g

A member firm completes a dealer transaction, which terms describe the transaction?

DAAP (Dealers Act as Principals for Profits) Markups are done by dealers

An investor wants to open a new options account. What are the steps that need to be taken?

DATO 15 Disclosure form Account Approval, Trade (first trade*) Option Agreement within 15 days of first trade You can only offset transactions if not returned within 15 days

Which of the following is the equation for Market Value at Maintenance for a long margin account?

DR/ .75

In an Open End Mutual Fund the Board of Directors set which of the following

DREP: because Open End not Closed End

Institutional investors trade anonymously amongst themselves in ...

Dark pools

Under Code of Procedure, put the following proper sequence:

Department of Enforcement, National Adjudicatory Council, SEC, Federal Courts

What interest rate is set by the Fed?

Discount rate

Wages and alimony are considered?

Earned income

Which of the following secondary markets can be characterized as an auction driven market?

Exchanges

A New York Resident has invested in a Puerto Rico bond. How is he taxed?

Exempt from both State and Federal taxes

A customer has significant passive income and would like to find an additional DPP that would help to offset the income. What would you recommend?

Exploratory program or Low Income Housing Development (tax credits for this)

Which of the following are true of common stockholders in relation to other investors in he corporation? I. First claim on profits II. Last claim on profits III. First claim in liquidation IV. Last claim in liquidation

First claim on profits and last claim in liquidation

Who executes orders for clients of member firms?

Floor broker

Open end mutual funds always are doing business based on the next calculation of their NAV, this is known as:

Forward pricing

Where do institutions trade directly?

Fourth market

If securities are not in good deliverable form, but are accepted by the broker-dealer representing the buyer, what must the broker dealer do?

Go through the reclamation process The receiving broker-dealer would go through the process of reclamation. Once accepted, if securities are determined to be incorrect as delivered, reclamation is the correction process used. The receiving broker-dealer notifies the delivering broker-dealer (rather than the transfer agent). Rejection is the same process when the irregularity is noticed at the time of delivery (the delivery is not accepted in the first place).

Securities traded on what market are not quoted on any U.S. quotation system?

Grey Market

When a bond is callable, what is most likely to be called?

Highest coupon at the lowest callable price

Capital gains distributions are taxed depending on how long the fund has held the securities or how long the investor has held the mutual fund shares?

How long the fund has held the securities

If a broker-dealer is acting as a financial advisor to a municipality, which of the following statements is true? I. Municipal Securities Rulemaking Board (MSRB) rules prohibit the broker-dealer from acting as an underwriter for the issuer unless they meet the criteria of specific allowable exceptions. II. There are some underwriting functions that the broker-dealer, in their advisory capacity, may be allowed to participate in, such as assisting with the preparation of the official statement. III. The broker-dealer may only act in an underwriting capacity if the underwriting agreement was done as a negotiated underwriting. IV. The broker-dealer can act as both financial advisor and underwriter with no limitations.

I and III If a broker-dealer has a formal advisory relationship with an issuer, it may not generally act as underwriter for the issuer's bonds. This applies regardless of whether the underwriting is a negotiated or competitive bid underwriting. There are exceptions and some functions associated with underwriting that the MSRB rules do allow, but in those instances, the broker-dealer could only be compensated for the broker-dealer's advisory services and not for any underwriting services or related functions.

Rule 147, Safe Harbor as long as it is

Intrastate offering. Issuer has to have 80% of business within the state. 100% of purchasers have to be residents and can sell within 6 months.

If a corporation has a 70% dividend payout ratio, the undistributed earnings will

Increase retained earnings Retained earnings represent income that has not been paid out to shareholders.

The principal tax benefit of investing in an exploratory oil and gas drilling program is derived from ..?

Intangible drilling costs (IDCs) IDCs are costs that hold no salvage or ongoing value. For example, labor and geological survey.

The single largest expense to a mutual fund is the:

Investment management fee

TSA (Tax Sheltered Annuity)

Is pre-tax money

A client chooses to annuitize. What choice will generate the largest monthly payment?

Life only

What bonds are most sensitive to interest rate changes?

Longest maturity and lowest coupon

The smallest individual component of an underwriting spread is?

Management fee

In an OTC market the inside quote emanates from?

Market maker bids and Market maker asks

Which of the following is senior to the other claims in corporate liquidation? A) Mortgage Bond B) Subordinated Debenture C) Preferred Stock D) Common Stock

Mortgage bond

What would the result of a shareholder's equity be if a 10% stock dividend is paid?

No change for stock split or stock dividend

If a customer wants to avoid year-end tax statements, what would be unsuitable for them?

Mutual funds because they make annual capital gains distributions for which the owner incurs tax liability

All money market securities are issued at a discount with the exception of..

Negotiable Jumbo CD

With Rights of Accumulation, does the whole investment get a breakpoint sale or only the new purchase?

New purchase For example, there is a breakpoint at $25,000. Once that dollar amount is reached, the sales charge on all new purchases is reduced from 8% to 5%. Rights of accumulation means that we add a new purchase to the existing account value. If that total reaches or exceeds the breakpoint, the entire purchase is made with the lower sales charge. In this question, adding the $10,000 purchase to the existing $20,000 takes the customer's account past the $25,000 breakpoint. Therefore, the entire new purchase is charged 5%. So, $10,000 times 5% equals $500.

Index options settle..

Next business day

Do selling group members have liability in a municipal underwriting?

No

Is straight-line depreciation a tax preference item for AMT?

No

Is interest received on corporate bonds a tax preference item for AMT?

No Interest on corporate bonds is taxable and included in an investor's adjusted gross income (AGI), but not for the AMT. Tax-exempt interest on private activity bonds and excess intangible drilling costs in an oil and gas DPP are included as tax preferences. In addition, state and local taxes and accelerated depreciation are in the list of preference items.

What is the RMD for Roth IRAs?

No RMD

OEX is a measure of what index?

S&P 100

The VIX tracks what index?

S&P 500

The maximum sales charge on any transaction involving an open-end investment company share is 8.5% of the offering price or net asset value?

Offering price Open-end investment companies (mutual funds) are limited to a maximum sales charge of 8.5% of the offering price.

Under ACATS (Automated Customer Account Transfer Service) a broker/dealer has how many days to confirm the TIF (Transfer Instruction Form)?

One business day

Put the following in proper sequence for an order through the various departments of a brokerage firm I. Purchase and Sales Department II. Margin Department III. Order Department IV. Cashiering Department

Others People's Money Count

Progressive taxes would include which 3 types of tax?

Personal income tax, gift taxes, and estate taxes Progressive taxes are those where the rate of taxation increases as the dollars being taxed increase. Personal income tax, while not as progressive as it was before the 1986 reform, is still considered a progressive tax because the highest tax rate is levied against the highest earnings. Gift taxes and estate taxes are highly progressive, but excise taxes, such as fuel tax and transportation tax, are a fixed rate, and therefore, would not be considered progressive.

All of the following are three stages of money laundering :

Placement, Layering, Integration

When a firm purchases a block of municipal bonds in anticipation of a price increase, the firm is engaged in ...

Position trading The dealer is buying for its inventory (position trading). Although the term market maker is not generally used, most municipal bond trading take place when municipal securities dealers buy and sell out of their own accounts.

Which would be subject to AMT? A) Delaware Revenue Bond B) Treasury Bill C) Corporate debenture D) Private use revenue bond

Private use revenue bond

What is a debt instrument that pays no periodic interest?

STRIPS, Treasury receipts

What are 3 risks of investing in CMOs?

Rate risk, Extended Maturity risk, and Prepayment risk Because CMOs trade over the counter they are fairly liquid

How do you describe Rule 144A?

Sale of unregistered (restricted) foreign and domestic securities by institutions or QIBs ($100m or more in assets) Rule 144 is sale of stock by insiders

What type of tax is considered regressive?

Sales tax

If someone is looking to provide funds for their child's college education. and would like to have some sort of tax break, what would be the best choice?

Section 529 plan

A RR sells an investment non-sponsored by his employer and this is a prohibited practice known as ...

Selling away

A registered representative sells and investment not sponsored by his employer without permission. This is a prohibited practice known as:

Selling away

The largest individual component of an underwriting spread is?

Selling concession

Customer confirmations have to be sent no later than?

Settlement date

LEAPS writer's premium is taxed as a long term or short term gain?

Short-term gain. The writer's gain is short term because by opening with a sale, a holding period is never established.

Who is charged with maintaining a fair and orderly market in a particular security?

Specialist or DMM

Trading of options, not exercise, is T+?

T+1 When a long equity put option is exercised, from a settlement standpoint, it is the same as anyone selling stock. That is T+2 settlement date. The trading of options, not the exercise, is T+1. When it comes to index options, because they settle in cash, exercise settlement is T+1 rather than T+2 like equity options.

What has more risk, PAC (Planned Amortization Class) or TAC (Targeted Amortization Class)?

TAC's have more risk PAC represents early cash flows. Unlikely to refinance right away

What does a municipal security legal opinion cover?

Tax status, constitutionality, and legality of municipal debt

Unqualified opinion by a bond council means?

That there are no contingencies or problems

Which of the following documents would include information about the bond/money market security issuer's financial condition?

The Official Statement The official statement is used to disclose all material information about the issuer that an investor would need to know to make a decision regarding issue purchase.

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor

The advance/decline line The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is: A) 125,000. B) 0. C) 30,000. D) 150,000.

The affiliate who has held the restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last four weeks' average trading volume (30,000).

If a mutual fund has no redemption fee, will the investor receive the bid or ask price?

The bid price If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed.

A municipality wants to issue industrial revenue bonds to benefit a local company who employs hundreds of the municipality's residents. Regarding these bonds, which of the following is true? A) The credit rating of the bonds is dependent on the credit rating of the company, not the municipality. B) Interest is paid from revenues collected through property assessments and taxes. C) Because these bonds are used for a nonpublic purpose, the interest income will not be subject to the alternative minimum tax. D) The issuance of these bonds would require voter approval.

The debt service for IDRs is derived from the lease payments made by the leasing corporation to the issuing municipality; it is not derived from local property taxes. Therefore, the credit rating of the bonds is dependent on the creditworthiness of the leasing corporation. Because they are revenue bonds, they do not require voter approval, and because they are for nonpublic purpose, they may be subject to the AMT for some investors.

Which form in margin accounts is optional to be signed?

The loan consent form

Under the 5% markup policy, what determines the amount of markup in a principal transaction?

The lowest ask Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on the inside bid, which is the highest bid price for a particular security.

In an underwriting the difference between what an issuer receives and the investor pays is:

The spread

What does book entry mean?

There is no physical certificate

What is a similarity of CDs and Money Market Mutual funds?

They are both eligible IRA investments

What is special about bank CDs?

They are insured by FDIC

Which of the following secondary markets can be characterized as direct trading without intermediaries?

Third Market

Where are listed securities traded over the counter between broker dealers and institutions?

Third market

Who helps floor brokers with order overflow?

Two dollar broker

Are tax-exempt interest received on private purpose bonds preference items for AMT?

Yes

Does a municipal bond official statement need to be delivered to all retail buyers?

Yes

Reg A, Safe Harbor if

Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period.

In a municipal underwriting what is the largest component of the spread?

Total takedown * if it were largest INDIVIDUAL component then it would be Selling Concession

A direct Participation Program must avoid how many corporate characteristics?

Two Freely transferable interests (cant get in or out without GPs permission) and continuity of life are the easiest to avoid

A shelf registration for the issuer of an IPO would be effective for how long?

Two Years

Equity options settle in..

Two business days

What are the main two differences between a UIT and a Mutual Fund?

UITs have an expiration date UITs have no management fee since there is no management When a unit investment trust is formed, there is a pre-determined expiration date. In the case of a trust containing debt securities, the trust expires when the securities mature. In the case of an equity trust, the date is fixed. There is no management fee because there is no ongoing management of a fixed portfolio. Both UITs and mutual funds issue redeemable securities.

What is a suitable recommendation for someone that has already maximum funded their retirement program through work?

Variable annuity Always max out retirement plans and pre-tax investments available to them

Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination? I. Actual performance compared to the AIR affects the cash value of a variable life insurance policy II. Actual performance compared to the AIR affects the death benefit of a variable life insurance policy III. Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity IV. Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity

When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. There is no assumed interest rate for the cash value. That is, the insurance company makes no projections as to its growth. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice-versa. During the accumulation period, there are no assumptions; the insurance company never projects how much the money will grow. LO 9.c

According to FINRA rule 5130, all of the following are restricted from purchasing a new issue except? I. Wife of CEO of issuer II. Officer of the underwriter III. Employee of the issuer IV. Employee of the underwriter

Wife of CEO of issuer and employee of issuer are allowed Underwriters may NOT partipate

The index that most closely approximates the total stock market is:

Wilshire 5000

Is accelerated depreciation a tax preference item used for AMT?

Yes

Is depletion in excess of basis a tax preference item for AMT?

Yes

A B/D completes a trade involving a book entry security. When does it clear and transfer?

With journal entry

If a customer does not anticipate that a stock's price will change, and she wants to take an option position, she would most likely

Write a straddle The customer earns combined premiums when selling a straddle (sale of a call and put with same terms). She hopes the market price will not move, both positions will expire unexercised, and she will keep the premiums. This position has unlimited loss potential, should the underlying stock rise (because of the short call).

Are local income and property taxes preference items for AMT?

Yes

Are Treasury receipts zero-coupon bonds?

Yes, they are issued by broker-dealers

A customer has a bond portfolio. What is the best yield based hedge?

Yield based call If my bond portfolio goes down, that means interest rates drop so I should buy a call

An investment company registered under the Investment Company Act of 1940 whose specific purpose is to aid in the promotion and development of small business is

business development company

Upon assignment, the writer of an exchange listed equity call option must: A) pay for the underlying stock to buy within one business day. B) pay for the underlying stock to buy within two business days. C) deliver the underlying stock to sell within two business days. D) deliver the underlying stock to sell within one business day.

c) Assignment of an equity call option requires the assigned party to deliver the underlying stock. This is treated the same as any other sale of stock. Regular way delivery is two business days after the trade date. In the case of assignment, the trade date is the assignment date.

A registered representative (RR) at a broker-dealer mentions continuity of life as it pertains to limited partnerships (LPs). The reference can best be explained by which of the following statements? A) LPs have continuity of life, which means they will exist in perpetuity. B) Continuity of life is a characteristic of LPs because they are scheduled to end on a predetermined date. C) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. D) LPs will exist until the last partner is deceased.

c) Continuity of life is a corporate characteristic that must be avoided for a partnership to qualify as a direct participation program. The phrase refers to the fact that a corporation should exist in perpetuity. LPs, however, are all scheduled to end on a predetermined specific date.

An investor is long 300 shares of CTS stock and short 30 CTS May calls. This position can best be described as A) a long stock, short call hedge with a limited loss potential. B) a debit spread with no gain potential. C) a ratio spread with an unlimited loss potential. D) a credit spread with a limited gain potential.

c) This position is a ratio call spread because more calls were sold (30) than the long stock position covers (only 300 shares). To cover 30 calls, 3,000 shares would be needed. This strategy generates additional premium income for the investor, but also it entails unlimited risk because of the short uncovered calls.

Which of the following securities can generate phantom income? A) Treasury bills B) Treasury bonds C) TIPS bonds D) Treasury notes

c) TIPS bonds TIPS bonds adjust the principal value each six months based on the inflation rate. If the inflation rate is positive, the value increases. Those increases are reported as income each year even though the investor does not receive the appreciation until the bonds mature (or are sold).

A corporation's income statement reports net income of $10 million for the year. The company has one million shares of 4% $50 par value preferred stock and two million shares of common stock. If the corporation paid a quarterly dividend of $0.60 per share of common stock, A) the retained earnings increased by $6.8 million. B) the earnings per share was $5 per share. C) the dividend payout ratio was 60%. D) the current return on the preferred stock was 4%.

c) the dividend payout ratio was 60% The dividend payout ratio is the percentage of the net income (after preferred stock dividends) paid out to the common shareholders. The net income is $10 million. The preferred dividend is $2 per share ($50 par times 4% = $2). With one million shares, the total preferred dividend is $2 million (1 million shares at $2 per share). Because the preferred dividend must be paid before any earnings are available to common stockholders, we subtract that $2 million from the net income. That leaves $8 million in earnings available to common. There are 2 million shares receiving an annual dividend of $2.40 ($0.60 quarterly). That means $4.8 million of the $8 million available is paid, or a ratio of 60% ($4.8 million ÷ $8 million = 60%). Or, the earnings per share is $4.00 ($8 million divided by 2 million shares) and $2.40 in dividends paid out of $4.00 earnings made is 60%. The preferred stock is paying a dividend of 4% of the par value, but that does not tell us the current yield. To know the current yield, we must know the current market price of the stock and the question does not supply that value.

Fill-or-kill orders are ..

executed fully or not at all

An immediate-or-cancel order is one in which ..

partial execution is permissible and non-executed parts are deleted without entry in the order book

The placement ratio in The Bond Buyer indicated the relationship for a particular week between the number of bonds sold and

the number of bonds offered for sale in the market that week The placement ratio shows the relationship between the number of bonds placed (sold) and the total number offered for sale. The ratio can range from 0% to 100%.