Series 7 Checkpoint Review Set 2

Asset allocation refers to the spreading of portfolio funds among different asset classes with different risk and return characteristics. When allocating among asset classes, you would not include A) ETFs. B) stock. C) cash and cash equivalents. D) bonds.

A) ETFs. ETFs are a way of investing in equity (stock) or debt (bonds) securities and are not a separate asset class.

In an account opened by two individuals as joint tenants with right of survivorship, all of the following are true except A) stock certificates may be delivered in the name of either party. B) in the event of death, the other party assumes full ownership of the account. C) mail may be directed to the joint owner agreed upon by both parties to the account. D) orders may be entered by either party.

A) stock certificates may be delivered in the name of either party. In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

Regarding the use of the term direct participation programs (DPPs) when referring to tax-sheltered investments, which of the following is not a DPP? A) An equipment-leasing limited partnership B) A real estate investment trust (REIT) C) A real estate limited partnership D) An oil and gas limited partnership

B) A real estate investment trust (REIT) DPPs include any form of business that allows for the direct pass-through of tax consequences to participants. REITs do not allow for the pass-through of losses.

When market interest rates are rising, the market price of which of the following securities would probably be affected the most? A) DEF Technologies, a cybersecurity firm B) ABC Gas and Electric, a regulated public utility C) GHI Money Market mutual fund D) JKL Corporation adjustable-rate preferred stock

B) ABC Gas and Electric, a regulated public utility Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Utility stocks, with their high degree of debt leverage and liberal dividend payout ratios, are considered interest rate sensitive. Preferred stock is also subject to interest rate risk, but the adjustable-rate feature minimizes the risk because the dividend rate changes to mirror the market rate. The yield of the money market fund will change, but the combination of the short maturities and the attempt to keep the NAV fixed at $1 per share limits the price risk.

A customer is very concerned about investments that may not keep pace with inflation. He asks which securities would have the least exposure to inflation risk. Which of the following would be the best answer? A) Cash B) Common stock C) Preferred stock D) Fixed annuity

B) Common stock The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power than the other choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed-income instruments.

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 and state taxes on the entire balance. B) He pays no estate tax. C) He pays federal taxes only on $500,000. D) He pays federal and state taxes on $500,000.

B) 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 describes additional paid-in capital? A) Total of all residual claims that stockholders have against the corporation's assets B) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value C) May also be called earned surplus D) Total of all earnings since a corporation was formed, less dividends

B) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value Additional paid-in capital is the difference between the dollar amount received from the sale of stock and the stock's aggregate par value. Earned surplus is another name for retained earnings.

When opening a margin account for an individual customer, a number of documents are required. Which one of the following never requires the customer's signature? A) The credit agreement B) The margin risk disclosure document C) The loan consent agreement D) The hypothecation agreement

B) The margin risk disclosure document The margin risk disclosure document must be furnished to the margin account customer, but there is nothing for the customer to sign. A clue to that being the correct choice is that it is the only one without the word agreement. Agreements must be signed. Although the loan consent agreement is optional, if the customer wishes to permit the lending of their securities, the agreement must be signed.

Advantages of owning a real estate DPP program include all of the following except A) cash flow. B) depletion. C) depreciation. D) appreciation.

B) depletion. Depletion only applies to natural resources, such as oil or gas. Land does not get used up as do oil, gas, or coal.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) commingle the customer's securities with securities owned by the firm. B) loan out the customer's margin securities. C) lend the customer money. D) hypothecate securities in the account.

B) loan out the customer's margin securities. A signed loan consent agreement permits a firm to loan out a customer's margin securities; this is considered another way to finance a customer's debit balance.

In performing the role required on the NYSE, a designated market maker (DMM) A) functions in the capacity of a floor broker. B) may act as a broker or a dealer to facilitate trading on the floor. C) may act only as a dealer to facilitate trading on the floor. D) may act only as a broker to facilitate trading on the floor.

B) may act as a broker or a dealer to facilitate trading on the floor. DMMs facilitate trading in specific stocks on the floor of the NYSE. Their chief function is to maintain a fair and orderly market in those stocks. In fulfilling this function, they act as both brokers and dealers. They act as dealers when they execute trades for their own accounts and as brokers when they execute orders other members leave with them. Floor brokers work for member firms. They are the people who bring to the DMM the orders their firm's clients have placed.

The inside Level 1 quote on a Nasdaq-listed company is as follows: BidAsk1010.201,300 × 1,500 The market maker is obligated to fully execute all of the following customer transactions except A) sell 1,300 shares for the customer at $10. B) sell 1,500 shares for the customer at $10. C) have the customer pay $10.20 for 1,500 shares. D) have the customer pay $10.20 for 1,400 shares.

B) sell 1,500 shares for the customer at $10. This quote and size of market means the market maker stands ready to pay $10.00 for a maximum of 1,300 shares and will sell 1,500 shares at $10.20. A sale of 1,500 shares at 10 is outside the bid size of this quote.

All of the following statements regarding the short sale of a listed security are true except A) short sales may take place at the opening. B) the buyer must be advised that he is purchasing borrowed shares. C) short sales may take place at the closing. D) a short sale can be executed at any time in the trade sequence.

B) the buyer must be advised that he is purchasing borrowed shares. On an exchange floor, short sales can be effected at any time in the trade sequence. In addition, short sales may be effected at either the opening or closing. The buyer is never informed that shares being purchased represent borrowed shares.

Opening a margin account involves a number of different documents. The document describing how the interest on the margin debt is calculated is generally known as A) the hypothecation agreement. B) the credit agreement. C) the loan consent agreement. D) the risk disclosure document.

B) the credit agreement. It is the credit agreement, sometimes referred to as the margin agreement, that describes the creditor-debtor relationship. This includes the method of computing interest on the debit balance (the amount owed). The hypothecation agreement allows the broker-dealer to maintain possession of the margined securities as collateral for the loan, and the loan consent agreement allows the broker-dealer to lend out the client's margined securities. The risk disclosure document is provided to make sure the client understands the risks of margin trading.

All of the following securities would be suitable investments for a traditional IRA except A) A-rated corporate bonds. B) AAA-rated U.S. government agency bonds. C) AAA-rated municipal bonds. D) blue-chip common stocks.

C) AAA-rated municipal bonds. Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. One loses the federally tax-free income at distribution.

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Use of vacant office space in the broker-dealer's facilities B) Desks remaining after the broker-dealer redesigned its office C) Customized software designed to give clients access to asset allocation programs D) Meal expenses to attend an investment seminar sponsored by the broker-dealer

C) Customized software designed to give clients access to asset allocation programs Among the items generally in the safe harbor are those items designed to assist the firm's customers. Customized software that helps clients would be acceptable. Although seminar registration expenses are in the safe harbor, travel and transportation expenses, such as meals and lodging, are not. Rent and office furniture are specifically listed as out of the safe harbor.

From first to last, which of the following sequences reflects the priority of payments made when a limited partnership is liquidated? i. General partners ii. Limited partners iii. General creditors iv. Secured creditors A) I, IV, III, II B) IV, III, I, II C) IV, III, II, I D) I, II, III, IV

C) IV, III, II, I Creditors are paid first in a liquidation, with priority given to the secured lenders; general partners are the last to be paid.

Your customer has contributed $1,000 annually into her Roth IRA for seven years. Which of the following statements concerning her Roth IRA distributions is true? A) The distributions are taxed as ordinary income. B) She will pay ordinary income taxes on the part of the distribution that represents earnings. C) She will not be taxed on the distributions if she is over age 59½59½ and the money has been held in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for her. D) The distributions are taxed as capital gains.

C) She will not be taxed on the distributions if she is over age 59½59½ and the money has been held in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for her. Distributions from Roth IRAs made after age 59½59½ are tax free if the money was in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Contributions to Roth IRAs are made with after-tax dollars.

A structured instrument known as an asset-backed security would not be backed by A) auto loans. B) credit card debt. C) loans on marginable securities. D) student loans.

C) loans on marginable securities. One common theme uniting asset-backed securities is the contractual obligation to make payments. In the case of a margin account, there is no repayment schedule. The margin debt can exist for years with the only payment being that of interest.

All of the following are common to both DPPs and REITs except A) capital gains distributions. B) pass-through of income. C) pass-through of losses. D) centralized management.

C) pass-through of losses. Both DPPs and REITs are professionally managed pools that pass through income and capital gains distributions to participants. REITs, unlike DPPs, do not pass through losses.

Which of the following actions would increase SMA in a long margin account? A) A stock dividend received B) A decline in CMV C) A long purchase D) A long sale

D) A long sale Of these choices, an increase in SMA can only be accomplished by a sale of securities held long in the account. A purchase would decrease the SMA if it is used to make the purchase. Stock dividends have no effect on the balances in a long margin account; only the number of shares is changed. A decline in the CMV would not change the SMA.

Which of the following securities can be traded in the third market? I. A closed-end investment company II. An exchange-traded fund III. An open-end investment company IV. A unit investment trust A) II and IV B) II and III C) I and IV D) I and II

D) I and II The third market is defined as the trading of listed securities over the counter. There is no secondary market trading in open-end investment companies and unit investment trusts. Although most exchange-traded funds (ETFs) are structured as open-end companies, unless something in the question is dealing with the ETF's structure, open-end will always refer to a mutual fund.

If two customers are tenants in common in a joint account, which of the following statements are true? i. If one of the tenants dies, the survivor will automatically assume full ownership. ii. They need not make equal investments in the account. iii. They need not have equal interests in the property in the account. iv. If one of the tenants dies, the account need not be frozen. A) II and IV B) I and III C) I and IV D) II and III

D) II and III Under tenants in common, the tenants may make unequal investments in the account and may own a disproportionate interest in the property in the account. If one of the tenants dies, their assets are passed to their estate, not to the surviving joint tenant. The account must be frozen until this is carried out.

Which of the following mortgage-backed securities would provide investors with the most predictable maturity date? A) TACs B) Fannie Maes C) Ginnie Maes D) PACs

D) PACs PACs are planned amortization class CMOs and have established maturity dates. Prepayment risk is transferred to the PAC companion, or support, class bonds.

A characteristic of hedge funds that would not be found in a mutual fund is A) the ability to be purchased on margin. B) professional management. C) a diversified portfolio. D) a lock-up period.

D) a lock-up period. Hedge funds generally employ a lock-up provision. This is to ensure that capital invested by shareholders will remain with the fund long enough for the manager to implement the intended fund strategy. There is no standard lock-up period; it can differ from fund to fund. It should always be noted that during the lock-up period, the investment is essentially rendered illiquid. Hedge funds and mutual funds have professional management and diversified portfolios. Although hedge funds can use margin in portfolio transactions, they, like mutual funds, cannot be purchased on margin.

Which of the following is not a characteristic of hedge funds? A) They use leverage, short positions, and concentrated positions. B) They offer managers high fixed fees. C) They are privately organized and generally unregistered. D) They invest in private securities, real assets, derivatives, and structured products.

B) They offer managers high fixed fees. Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20%, where 2% is the fixed fee and 20% of the profits is the performance portion.

In a direct participation program (DPP) limited partnership, the general partner has A) unlimited liability and an active role. B) unlimited liability and a passive role. C) limited liability and an active role. D) limited liability and a passive role.

A) unlimited liability and an active role. In a DPP limited partnership, the general partner is the active partner managing the business who assumes unlimited liability. Limited partners who take an active role jeopardize their limited liability status.

On the order book, all of the following orders are reduced on the ex-date for a cash dividend except A) sell stop. B) buy stop. C) buy limit. D) sell stop limit.

B) buy stop. Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price. Buy stops are entered above the market price.

What might happen if a limited partner begins making business decisions for the partnership? A) There would be no effect because of the partnership democracy. B) He ascends to general partnership status as a reward for his decision-making contribution. C) He might jeopardize his limited liability status. D) He may be removed from the partnership completely.

C) He might jeopardize his limited liability status. If a limited partner has control over the partnership operation (i.e., he makes partnership decisions), he could be judged a general partner and, thus, have unlimited liability.

All of the following are reasons for entering a stop order except A) to protect unrealized gains on an existing long position. B) to protect profits on an existing short position. C) to guarantee execution at a specified price or better. D) to limit losses on an existing long position.

C) to guarantee execution at a specified price or better. A stop (loss) order is entered to protect a profit or to limit a loss. Execution at a specific price can never be guaranteed because a stop order becomes a market order when the stop price is hit. It is only a limit order (if executed) where the specified price (or better) is guaranteed.

An exemption from the 5% markup policy applies to A) transactions taking place in the OTC market. B) agency transactions where no markup or markdown is charged. C) transactions in securities accompanied by a prospectus. D) transactions taking place on a listed exchange.

C) transactions in securities accompanied by a prospectus. The 5% policy does not apply to exempt securities transactions such as municipal bond trades or new issue (primary market) transactions because the price is fixed in the prospectus. The policy does apply to nonexempt securities and transactions on an exchange and in the OTC market. It applies to transactions where the participants were acting in either an agency or principal capacity charging commissions or markup/markdown, respectively.

An investor is long 500 shares of DEFG common stock, short 200 shares of DEFG common stock, and short 300 shares of DEFG 5% preferred stock. A tender offer for DEFG common shares is announced. Under SEC rules, this investor is permitted to tender A) 0 shares. B) 500 shares. C) 800 shares. D) 300 shares.

D) 300 shares. The rules permit tendering of net long shares. That means the difference between the long and short positions. In this question, the investor is net long 300 shares: the difference between the 500 long and the 200 short. The preferred shares are not relevant because the tender is only for the common stock.

Which of the following would be of least interest to a technical analyst? A) Trading volume B) Advance/decline line C) Short interest ratio D) Price-to-earnings (P/E) ratio

D) Price-to-earnings (P/E) ratio Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer. P/E ratios are of greater interest to fundamental analysts.

If an OTC market maker provides a firm quote to another broker-dealer then refuses to buy or sell at the price quoted, the market maker is said to be A) crossing quotes. B) freeriding. C) interpositioning. D) backing away.

D) backing away. A dealer that does not honor its quote is said to be backing away. Interpositioning is the unethical act of a member firm placing a third party between itself and the best available market. Freeriding is a term used when securities are purchased and then sold without making payment for the purchase on settlement date. Crossing quotes is a term that would only appear on the exam as an incorrect choice (as it does here).

An investor acquires limited partner status in a direct participation program when A) the certificate of limited partnership is filed in its home state. B) his money is received by the general partner. C) he submits a signed copy of the subscription agreement. D) he and the general partner have both signed the subscription agreement.

D) he and the general partner have both signed the subscription agreement. The investor must sign a copy of the subscription agreement, but he is not considered a limited partner until the agreement is also signed by the general partner indicating acceptance of the limited partner.

When the inside market (best bid and best offer) for XYZ stock was 17.30-17.60, a market maker bought 100 shares from a customer at 16.90. At the time of the trade, the market maker's market was 17.25-17.70. What was the amount of the markdown? A) $0.40 B) $0.75 C) $0.65 D) $0.35

A) $0.40 Markdown is always based on the inside quote. In this case, the inside bid is 17.30 and the difference between that and the 16.90 buying price represents a $0.40 markdown.

If a contract calls for a delivery between member broker-dealers of 500 shares of stock, all of the following certificate combinations would be a good delivery conforming with the FINRA Uniform Practice Code except A) 10 certificates for 30 shares each and 4 certificates for 50 shares each. B) 5 certificates for 40 shares each and 5 certificates for 60 shares each. C) 10 certificates for 50 shares each. D) 1 certificate for 200 shares and 1 certificate for 300 shares.

A) 10 certificates for 30 shares each and 4 certificates for 50 shares each. Good delivery between member firms requires delivery of certificates of 100 shares, in multiples of 100, or the ability to put certificates of less than 100 shares into stacks of 100 shares. Note that the 10 certificates, each for 30 shares, could not be stacked in units of 100. Each of the five certificates for 40 shares can be combined with one of the five certificates for 60 shares. Clearly, 40 plus 60 equals 100, and that can be done five times. Likewise, the 10 certificates for 50 shares can be taken two at a time, giving us five pairs of 100 shares. The 200- and 300-share certficates are multiples of 100 (they end in 00), and that makes them acceptable.

Which of the following may not be a reason to reach out to the trusted contact person of an elderly client? A) A request by email regarding a joint account with instructions to sell all securities and forward a check made payable to the named parties to the account B) An emailed request to liquidate certain account holdings and transfer the sales proceeds to a third party C) An urgent request that funds be sent to an overseas bank account not previously known to be associated with the client D) An email received that cannot be verified by the registered representative as having come from the customer

A) A request by email regarding a joint account with instructions to sell all securities and forward a check made payable to the named parties to the account Scenarios that should raise a red flag are those where unusual instructions are received. For accounts with owners age 65 or older, firms must try to obtain the name of a trusted person to contact in the event of a red flag. All firms must have in place written supervisory policies and procedures for reviewing and monitoring the transmittal of funds and a method of verifying that instructions received by email came from the customer and not an unknown third party. Urgency that might be intended to circumvent or deter broker-dealer verification procedures should always be viewed with extreme caution. An email asking that a joint account be liquidated and a check forwarded to the parties named to the account would not generally be viewed as a red flag. However, if the email gave instructions to forward a check to only one party named to the account, it would be deemed unusual and not in keeping with how distributions are made from joint accounts.

Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a long-time investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her traditional IRA. How are the distributions taxed from her IRA? A) All taxable distributions from a traditional IRA are taxed as ordinary income. B) If the IRA has been owned for more than one year, the distributions are long-term capital gains. C) The distribution is taxed as either ordinary income or capital gains, depending on the source of the distribution. D) If a security is sold for more than it was purchased for, the distribution of the profit is taxed as a capital gain.

A) All taxable distributions from a traditional IRA are taxed as ordinary income. All taxable distributions from a retirement account, including IRAs, are taxed as ordinary income, not capital gains.

All sell orders must indicate whether they are long or short. In which of the following cases would the sell order be marked long? A) An investor has purchased the stock being sold but the trade has not yet settled. B) An investor owns debentures convertible into the stock to be sold but has not tendered them. C) An investor has a call option to buy the stock to be sold but has not exercised the option. D) An investor owns warrants to buy the stock to be sold but has not yet exercised them.

A) An investor has purchased the stock being sold but the trade has not yet settled. A customer is considered long a security only if she owns the stock or has entered into an unconditional contract to buy the stock and will deliver the shares; owns convertible securities, has converted them, and will deliver; or owns an option, has exercised it, and will deliver. Otherwise, the sale is marked as a short sale on the order memorandum.

Which of the following statements regarding hedge funds is correct? A) Hedge funds are usually structured as a partnership. B) Hedge funds are typically favored by inexperienced investors to hedge against losses they may experience as they gain investment savvy. C) Hedge funds are passively managed in an attempt to provide predictable returns for investors. D) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management.

A) Hedge funds are usually structured as a partnership. Hedge funds are usually structured as a partnership, with the general partner as the investment manager and the investors as limited partners. 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.

Which of the following could an analyst use to establish the rate of return on a direct participation program (DPP)? i. Present value ii. Internal rate of return iii. Yield to maturity iv. First-in, first-out A) I and II B) I and IV C) II and III D) III and IV

A) I and II Analysts use both present value and internal rate of return to establish a DPP's rate of return. Both involve assumptions based on future cash flows generated by the program.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes which of the following? i. Their name ii. Oral assurance that the customer is of legal age iii. A street address, unless the primary mailing address is a post office box located in the state of residence iv. A taxpayer identification number A) I and IV B) II and III C) I and II D) III and IV

A) I and IV Oral assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A post office box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired drivers license or passport.

A client interested in the returns offered by CMOs asks you which type has the lowest prepayment risk. What should you say? A) PACs B) TACs C) Z-tranche D) Plain vanilla

A) PACs Although there can be exceptions, in general, the planned amortization class (PAC) has the lowest prepayment risk. The Z-tranche is the most unpredictable because it is paid off only after all of the other tranches.

Which of the following is the most likely reason a corporation would choose to offer a nonqualified plan rather than a qualified one? A) There are no nondiscrimination requirements in a nonqualified plan. B) The nonqualified plan offers greater ERISA protections. C) The employee receives a larger tax deduction than with a qualified plan. D) The nonqualified plan offers the corporation greater tax benefits.

A) There are no nondiscrimination requirements in a nonqualified plan. One of the major benefits to a nonqualified plan is its flexibility. Because it does not have to meet ERISA requirements, the employer can discriminate among employees. In general, there are no immediate tax benefits to the employer. As far as the employee, the question asks about the corporation, not the employee. In any case, the employee does not receive any tax deduction. The benefit is deferral of the income.

All of the following will cause a change in SMA in a long account except A) a decrease in market value. B) a sale of stock. C) a purchase of stock. D) an increase in market value.

A) a decrease in market value. Once SMA is created in a long account, it is not reduced by a decline in market value. The SMA may still be taken out, provided it will not pull the account below the maintenance level. An increase in market value or a sale of stock increases SMA. The purchase of stock decreases available SMA.

A method of analyzing limited partnerships by identifying the sources of revenues and expenses is known as A) cash flow analysis. B) capital analysis. C) liquidity analysis. D) technical analysis.

A) cash flow analysis. Cash flow analysis compares income (revenues) to expenses.

After receiving and accepting securities from another firm, a broker-dealer discovers that the securities received were not in good deliverable form. Recourse for the broker-dealer is to A) file a reclamation. B) sell out the securities. C) cancel the trade and file a complaint. D) buy in the securities.

A) file a reclamation. After receiving the securities, the broker-dealer can file a reclamation and demand good delivery.

All of the following characteristics are advantages of a real estate investment trust (REIT) except A) liquidity. B) professional management. C) tax deferral. D) diversification.

A) liquidity. A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and over the counter, which provides liquidity. The IRS does not permit tax deferrals on REIT investments.

When investing in securities, there are many potential risks. When recommending a specific security to clients, a member firm A) must disclose the existence of a control relationship between the firm and the subject company. B) must have a reasonable belief that the recommended security will outperform the overall market. C) may follow the dictum of caveat emptor. D) may disclose the existence of a control relationship between the firm and the subject company if it is material.

A) must disclose the existence of a control relationship between the firm and the subject company. While it is not often thought of as a risk, disclosing the existence of a control relationship between the member firm and the subject security is something that must be done. There is no question that this is material. Not all recommendations are for securities that will outperform the market. What about a stock recommendation to sell short? Buyer beware (caveat emptor) has no place in this industry.

An investor in an oil and gas limited partnership program is subject to the economic consequences of all of the following except A) nonrecourse loans. B) depreciation on tangible assets. C) operating losses. D) recourse loans.

A) nonrecourse loans. Nonrecourse loans only have economic consequences for investors in real estate programs.

An individual works for a local manufacturing company. The company offers a contributory defined contribution plan. If the annual employer contribution is 10% of salary and the employee adds 3%, under ERISA rules, A) only the 3% must be immediately vested. B) all 13% must be immediately vested. C) the 7% difference between the employer and the employee contributions must be immediately vested. D) only the 10% must be immediately vested.

A) only the 3% must be immediately vested. Employee contributions are always immediately vested. ERISA provides for several methods of vesting, but none of them require immediate vesting of employer contributions.

Greater Growth Capital (GGC), a FINRA member firm, has just been acquired by Better Retirement Outcomes (BRO), a much larger FINRA member. If GGC would like to effect a bulk transfer of its customer accounts using a negative consent procedure, FINRA rules A) prohibit GGC from charging a fee to any existing GGC customers who decide to transfer their accounts to a different firm. B) require GGC to obtain affirmative written consent before transferring a customer's account to BRO. C) require that GGC send a notice to each affected customer at least 60 calendar days before it effects the bulk transfer. D) prohibit GGC from charging a fee to any existing GGC customers who elect to transfer their accounts to BRO but permit a nominal charge if the customer wishes to transfer to another member firm.

A) prohibit GGC from charging a fee to any existing GGC customers who decide to transfer their accounts to a different firm. In the case of a bulk transfer, such as when a member firm is acquired by another member, some customers may wish to opt out of the transfer. In those cases, it is prohibited for them to be charged any fees for transferring their accounts to another member firm. This is true only if the customer opts out during the allowable time period, which is 30 calendar days, not 60. The FINRA rules permit negative consent as long as the requirements are met.

An investor who purchases 20-year Aaa-rated corporate zero-coupon bonds would be least concerned with A) reinvestment risk. B) default risk. C) purchasing power risk. D) interest rate risk.

A) reinvestment risk. Zero-coupon securities have no reinvestment risk because there are no interest payments to reinvest. All fixed-income securities have purchasing power (inflation risk), especially when the maturity is as long as 20 years. The same is true for interest rate risk. In fact, zero-coupon bonds, because of their long duration, are the most sensitive to changes in interest rates. Is there default risk? Yes, even with a Aaa rating. A lot can happen in 20 years.

One concern that FINRA has with fee-based accounts is that they might lead to A) reverse churning. B) churning. C) higher commissions. D) over-trading.

A) reverse churning. Churning is the practice of over-trading an account, resulting in higher commissions. Reverse churning occurs when a client in a fee-based account pays more in fees than would be paid in a commission-based account. This is generally the case when the customer trades infrequently.

Maintaining a fair and orderly market on the NYSE trading floor is the responsibility of A) the designated market maker. B) the floor brokers. C) the order book official. D) the traders.

A) the designated market maker. The designated market maker maintains a fair and orderly market on the NYSE exchange floor. The role historically was filled by the specialist, a term that might still appear on the exam. Floor brokers represent member firms in the execution of their customer orders.

Marking-to-the-market is A) the revaluing of securities held long or short in the account based on the actual CMV of the securities. B) the revaluing of a margin account's equity based on the market price on the settlement date. C) the calculation of the difference between the maintenance margin and the Regulation T requirement. D) the calculation of the difference in value between the current market price and the Regulation T requirement.

A) the revaluing of securities held long or short in the account based on the actual CMV of the securities. Marking-to-the-market is the revaluing of an account based on the CMV of all securities positions in the account. In order to determine the necessity of additional maintenance calls or the availability of SMA, this revaluing is done at least once per business day in accounts that have margin balances.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) $40 B) $75 C) None D) $100

B) $75 Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule: investors who sell securities at a loss and repurchase them, including their equivalents, 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 ÷ 40) of KLP common stock. Hence, the investor has bought back the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed.

ZOO is trading at 50.63. Your customer, who owns 100 shares of the stock, places an order to sell ZOO at 50.25 stop limit. The tape subsequently reports the following trades: ZOO 50.63 50.75 50.13 50.17 50.27 Your customer's order could first be executed at A) 50.17. B) 50.27. C) 50.75. D) 50.13.

B) 50.27. The sell stop limit order is elected (triggered) at the first trade of 50.13; when the stock trades at or below the stop price of 50.25, the order becomes a sell limit order at 50.25. The order can be executed at that price or higher (the limit placed by the customer). The next trade reported after the trigger is reached is below the limit price. The order could be executed at the next trade of 50.25 or higher, and that is the trade at 50.27.

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

B) 800 shares at $15.25 per share. A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800 up-market quote not to let the market maker know if the customer was buying or selling and influence the quote. The market maker is obligated to honor both the bid and the offer price for 800 shares.

When evaluating a client's suitability, which of the following would be considered a nonfinancial consideration? A) Debt B) Attitude C) Net worth D) Salary

B) Attitude Nonfinancial considerations are those which cannot be quantified. The client's salary, debt, and net worth can be described numerically, but attitudes cannot.

Which of the following statements regarding limited partnerships are true? i. The maximum commission in selling partnership offerings is 5%. ii. The maximum commission in selling partnership offerings is 10%. iii. Commissions taken are deducted from the original investment to determine beginning cost basis. iv. Commissions taken are not deducted from the original investment to determine beginning cost basis. A) I and III B) II and IV C) I and IV D) II and III

B) II and IV Under FINRA rules, the maximum compensation that can be taken by sponsors selling direct participation programs is 10%. Up-front costs, such as commissions taken and accounting costs, do not reduce the beginning cost basis.

In discussing a direct participation program with your customer, she notes investment characteristics that are important to her and some that are not. For a DPP to be considered suitable for the customer, rank the following items in order of those that should be most important to those that should be least important. i. Tax write-offs ii. Liquidity and marketability iii. Potential for economic gain iv. SEC approval A) II, III, IV, I B) III, I, II, IV C) III, IV, II, I D) I, II, III, IV

B) III, I, II, IV In the eyes of the IRS, a program's economic viability should be the most important aspect of the investment for a limited partner and the first priority in the assessment of the DPP. While the IRS considers programs designed solely to generate tax benefits abusive, they do allow for some in terms of writing off passive income and allowable tax credits, so these factors would be the next concern for an investor. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority, and because there is no SEC approval of any investment, it would be of no concern.

Your firm, where you have just been hired as a registered representative, has a training program on how to detect possible exploitation of seniors, and how and to whom to report suspected exploitation. You were enrolled for the training but none of the firm's financial analysts were enrolled. Do they need to be? A) Yes. All employees should be on guard to protect seniors from exploitation. B) No. Only those dealing with the public and their supervisors need be trained. C) Yes. Analysts are in an especially good position to detect senior exploitation. D) No. Analysts are already intrinsically familiar with the signs of senior exploitation.

B) No. Only those dealing with the public and their supervisors need be trained. To receive safe harbor from legal action that might result from reporting exploitation, those persons who are in contact with the public and their supervisors must have received such training within a year of hire by the firm. This would include registered representatives and investment advisor representatives and their supervisors. Financial analysts do not typically deal with customer accounts and need not be trained in this area.

Net worth is equal to A) liabilities minus assets. B) assets minus liabilities. C) liabilities minus income. D) income minus liabilities.

B) assets minus liabilities. The balance sheet offers a snapshot of a firm's resources and obligations based on the firm's most recent reporting date. The basic balance sheet equation is assets minus liabilities equals net worth.

One of the major concerns of the regulatory bodies is the growing problem of senior exploitation. To combat this issue, at the time of an account opening, whether margin or cash, a member firm must disclose in writing that the member or an associated person is A) unable to open the account in the absence of the name and contact information for a trusted contact person. B) authorized to contact the trusted contact person provided on the new account form by the customer and to disclose information about the customer's account in addressing possible exploitation. C) unable to further update the customer record with regard to a trusted contact person without written consent from the contact person. D) required to meet the requirements with respect to opening a new account, including obtaining the contact information of a trusted person for any account, retail or institutional.

B) authorized to contact the trusted contact person provided on the new account form by the customer and to disclose information about the customer's account in addressing possible exploitation. Member firms must obtain the name and contact information for a trusted contact person who is 18 or older. This person may be contacted about the customer's account. This is required for retail but not institutional accounts. At the time of the account opening, the member firm must disclose in writing to the customer that the member or an associated person is authorized to contact the trusted contact person. Contacting is done to disclose information about the customer's account to address possible exploitation. The absence of the name and contact information for a trusted contact person does not prevent a member from opening or maintaining an account for a customer, as long as the member makes a reasonable effort to obtain this information.

Some analysts use an industrial corporation's balance sheet to arrive at what might be considered the intrinsic value per share of the enterprise. That calculation is known as A) net asset value per share. B) book value per share. C) earnings per share. D) retained earnings per share.

B) book value per share. Book value per share is calculated by subtracting the liabilities and par value of preferred stock (if any) from the tangible assets as shown on the balance sheet. Common stock prices can be above, below, or very close to the book value per share depending on the kind of industry and current economic conditions. If the company liquidated, holders of the common stock could receive something close to the book value, but that would depend on how the assets were valued. Earnings per share uses the income statement, not the balance sheet, and has nothing to do with intrinsic value. As far as the exam is concerned, net asset value per share relates solely to investment companies, not industrial corporations. Retained earnings is only part of the company's book value and will be less than the book value.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except A) profit-sharing plans. B) deferred compensation plans. C) corporate pension plans. D) 401(k) plans.

B) deferred compensation plans. Deferred compensation plans are not qualified plans and may be discriminatory. 401(k), profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

An analyst reports that a stock's price is consolidating. This means A) the stock's trendline is moving primarily in a downward direction. B) the stock's trendline is moving primarily in a horizontal direction. C) the stock's trendline is moving primarily in a upward direction. D) no distinct pattern can be observed.

B) the stock's trendline is moving primarily in a horizontal direction. In general, when the trendline of a stock's market price is moving within a very narrow range (the chart is basically a pattern of horizontal movement), the technician views that as a consolidation. Within a relatively short time after the consolidation has been verified, it is expected the price will move. What isn't determined yet is if the movement will be up (bullish) or down (bearish).

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 amount of broker-dealer sales compensation considered fair and reasonable. That limit is A) 15% of the gross proceeds. B) 2% of the gross proceeds. C) 10% of the gross proceeds. D) 5% of the gross proceeds.

C) 10% of the gross proceeds. FINRA limits the amount of the sales compensation to 10% of the gross proceeds of the offering. If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. 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.

An investment banking firm has been hired to roll up various partnerships into one master limited partnership. What is the compensation limit for this activity? A) 8.5% B) 5% C) 2% D) 10%

C) 2% Maximum compensation in a limited partnership rollup is limited to 2%. That amount must be paid to the brokerage firm, whether the partners vote for or against the proposed rollup.

A businessman owns a small, incorporated manufacturing company. Comfortable with the risks associated with the equity markets, the owner lays out an objective to save for retirement and provides a plan in which employees can contribute to save for retirement as well. Which of the following options is the best choice to suitably meet the objective? A) Traditional IRA B) Section 529 plan C) 401(k) plan D) 403(b) plan

C) 401(k) plan For a company incorporated in the private sector, a 401(k) (a defined contribution) plan will meet the objective. 403(b) plans (tax-sheltered annuities) are used in the public sector (i.e., educational institutions, tax-exempt organizations, and religious organizations) and therefore are not suitable here. IRAs are plans that individuals can set up for retirement saving, and Section 529 plans are specifically designed to allow for education saving.

When an account is owned by an individual who is 65 years old or older, or the client is 18 years old or older and a member firm believes the client has an impairment that prevents the person from defending their interests, a temporary hold is permitted on disbursements for how many days if the firm comes to reasonably believe that an attempt at exploiting the person has been made? A) 3 business days B) 30 calendar days C) 55 business days D) 5 business days

C) 55 business days FINRA Rule 2165 permits firms to place a temporary hold of 55 business days on disbursements from the accounts of individuals aged 65 or older and individuals aged 18 or older whom firms reasonably believe have an impairment that prevents them from protecting their own interests (a specified adult). This is done if the firm has a reasonable belief that financial exploitation of the specified adult has occurred or been attempted. This gives the firm time to notify a trusted contact person and begin an internal review.

Which of the following investments is most likely to have extension risk? A) A hedge fund B) A zero-coupon bond C) A CMO D) A mortgage bond

C) A CMO Extension risk is the uncertainty that a debt will be paid off ahead of schedule. This happens most frequently with mortgage-backed securities, such as CMOs. A CMO's yield and maturity are estimates based on historical data or projections of mortgage prepayments from the Public Securities Association (PSA). When that estimate is incorrect and the mortgage prepayments decline (such as in a period of rising interest rates), yields turn out to be lower than projected. Bonds do not have their maturity dates extended, so there is no extension risk.

You have been given the name of a new potential client who responded to a marketing piece sent out by your broker-dealer. Which of the following would be the most appropriate way to obtain information about the client's objectives and investment constraints? A) Monitoring the client's tweets B) An interview with the client's neighbors C) A face-to-face meeting at the client's home D) The client's LinkedIn page

C) A face-to-face meeting at the client's home There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. Privacy laws would make interviewing a client's neighbors unethical.

Which of the following accounts would a CMO Z-tranche be best suited for? A) An IRA account for a middle-aged client who is willing to defer the income B) A joint account where the owners are looking to diversify and lower their risk C) A professionally managed hedge fund specializing in real estate portfolio securities D) A custodial account set up under the Uniform Transfer to Minors Act (UTMA)

C) A professionally managed hedge fund specializing in real estate portfolio securities A zero tranche (Z-tranche) CMO is considered to be among the most volatile CMO tranches because no payments are received until all preceding tranches of the CMO are retired. Generally, CMO tranches are not suitable for smaller or unsophisticated investors, which is why customers are required to sign a suitability statement before purchasing any CMO tranche. Of the answer choices given, the best suited account would be the one that is professionally managed and already specializing in real estate investments.

Certain investments are available only to those who meet the SEC's definition of an accredited investor. Which of the following qualify? A) An individual with earnings of $200,000 in the previous year with a reasonable expectation of reaching the same income level in the current year B) An individual who has joint income with that person's spouse in excess of $200,000 in each of the previous two years and has a reasonable expectation of reaching the same income level in the current year C) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence D) An individual with net worth in excess of $1 million, inclusive of the equity in a primary residence

C) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence Those using the net worth standard to qualify as an accredited investor must exclude the equity in their primary residence. Those using the income standard must reach levels in excess of $200,000 as individuals and in excess of $300,000 when combining with the income of a spouse. Those earnings must have been achieved in the previous two years along with an expectation of similar earnings for the current year.

Liquidity ratios measure the solvency of a firm, or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A) Net income divided by average total equity B) Gross profit divided by net sales C) Current assets divided by current liabilities D) Dividends divided by earnings per share

C) Current assets divided by current liabilities Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio, which measures how much of a company's earnings are distributed to common stockholders.

If an investor expects to have a large amount of passive income over the next two years, which of the following programs listed will most likely lead to the largest amount of shelter? A) Undeveloped land purchasing B) Real estate income C) Oil and gas drilling D) Equipment leasing

C) Oil and gas drilling Passive income can only be sheltered by passive loss, so the real estate income program will only add to the income. Oil and gas drilling programs allocate the majority of investment dollars to drilling. These are intangible drilling costs (IDCs), which are 100% deductible when drilling occurs. Undeveloped land has very little in the way of losses, and equipment leasing programs usually generate income shortly after starting.

Which of the following statements regarding nonqualified deferred compensation plans is not true? A) Benefits payable to employees at retirement are taxable. B) Employees have a limited claim to plan benefits if the business fails. C) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. D) Board members are not eligible for these plans, as they are not considered employees.

C) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. A typical deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees, and therefore, are not eligible for these plans. Because these plans are rarely funded, business failure places the employee in the role of a general creditor.

The IRS allows investors to minimize tax liability when reporting sales by limiting gains or maximizing loses in anticipation of what an investor's year-end tax liability might be. Given year-end tax needs can only be anticipated when a sale occurs, which of the following reporting methods allows an investor the most flexibility? A) Average cost basis B) First in, first out (FIFO) C) Share identification D) Last in, first out (LIFO)

C) Share identification For investors, the idea is to minimize tax liability if possible by limiting gains or maximizing losses in anticipation of what one's year-end tax liability might be. The IRS allows three methods of reporting: share identification, FIFO, and average cost basis. Of the three allowable methods, share identification is the most flexible. Using this method, the investor keeps track of the cost of each share purchased and specifies which shares to sell based on anticipated year-end tax needs.

The market-wide circuit breaker (MWCB) rule uses which of the following as the pricing reference point to measure a market decline? A) The Wilshire index recalculated daily B) The DJIA recalculated quarterly C) The S&P 500 index recalculated daily D) The S&P 100 index recalculated monthly

C) The S&P 500 index recalculated daily The MWCB rule uses the S&P 500 recalculated daily as the pricing reference point to measure market declines for the purpose of triggering market circuit breakers to halt trading.

A FINRA member firm making a bulk transfer of customers' assets would most likely give notification through A) FINRA's Central Registration Depository (CRD). B) a broadly circulated publication such as the Wall Street Journal. C) a negative response letter. D) a positive response letter.

C) a negative response letter. An example of a bulk transfer is the member firm deciding to switch money market funds used for sweeps of customer credit balances. A negative response letter is one where the customer's agreement is assumed unless responding negatively to the change.

When a limited partnership interest is sold, gain or loss to the partner is determined by the difference between the sales proceeds and the A) total of deductible losses. B) original cost basis. C) adjusted cost basis. D) original investment minus any debt assumed by the general partner(s).

C) adjusted cost basis. As with any item, gain or loss is determined by comparing proceeds to cost. In the case of a limited partnership program, the cost for tax purposes is usually subject to a number of adjustments and may be higher or lower than the original investment.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except A) profit-sharing plans. B) corporate pension plans. C) deferred compensation plans. D) Keogh plans.

C) deferred compensation plans. Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer's own name. This can be done only A) if the customer has a full power of attorney over the account. B) upon the death of the other tenant. C) if the change has been authorized by a qualified and registered principal designated by the member. D) if you contact the other tenant and get their approval.

C) if the change has been authorized by a qualified and registered principal designated by the member. Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential pertinent facts and indicate her approval of the change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. One of those facts is approval of the other tenant, but that approval goes to the principal, not to you, the registered representative. Even in the case of death of the other tenant, the principal needs to see the proper documentation, such as a death certificate.

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

C) payment of a cash dividend. Working capital is defined as current assets minus current liabilities. On the declaration date, the future dividend payment is booked as a current liability (dividend payable). When the payment date comes, disbursement of the cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.

When reviewing a client's account, your supervisor notices that although each recommendation appears to be suitable based on that client's profile, there is a concern regarding the frequency of activity in the account. This is an example of A) qualitative suitability. B) reasonable-basis suitability. C) quantitative suitability. D) customer-specific suitability.

C) quantitative suitability. Quantitative suitability requires a member firm who has control over a customer account to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.

Determining a client's investment objectives is an important function of a registered representative. A customer who identifies as having a conservative investment posture would probably avoid A) growth. B) preservation of capital. C) speculation. D) income.

C) speculation. Those with a conservative outlook on investing are unlikely to be willing to engage in speculation. Preservation of capital is generally the most conservative, followed by income and growth.

When opening a new account for a 70-year-old investor, it is requested, but not mandatory, that the registered representative obtain A) a tax identification number. B) the actual date of birth. C) the name of a trusted contact person. D) the full legal name.

C) the name of a trusted contact person. FINRA's rule on preventing senior exploitation urges all members to obtain the name and contact information for a trusted contact person. This applies to any individual age 65 or older, as well as any adult 18 or older with a qualifying disability. The client can refuse to supply the information and the account may be opened.

All of the following statements about SEP IRAs are true except A) SEP IRAs are established for small-business owners and their employees. B) SEP IRAs allow employers to make contributions. C) there are no minimum earning requirements to be an eligible participant. D) the retirement account is usually set up at a bank or other financial institution.

C) there are no minimum earning requirements to be an eligible participant. Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.

Which of the following statements best describes a hedge fund? A) An investment pool that is generally unregistered and that, through the use of sophisticated market tools, offers investors returns that generally exceed those available elsewhere B) A closed-end investment company employing leverage through the use of debt and preferred stock financing C) An investment company, registered under the Investment Company Act of 1940, that charges higher than usual management fees and employs sophisticated investment techniques in an attempt to provide level returns during periods of market uncertainty D) A private and unregistered investment pool that accepts the investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets

D) A private and unregistered investment pool that accepts the investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets Hedge funds are not registered with the SEC (their managers generally are), and they are invariably sold in private offerings, usually under Regulation D of the Securities Act of 1933. Hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets are some of the primary techniques used by these funds. Although some hedge funds do outperform the market, a blanket statement cannot be made.

Which of the following terms or phrases does not apply to real estate investment trusts (REITs)? A) Dividends taxed at full ordinary income rates B) Secondary market C) Managed D) Redeemable

D) Redeemable REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends; therefore, they are taxed as ordinary income.

A customer asks your advice regarding a deferred compensation plan at work. You should state that A) if the business fails, the employee is considered a secured bondholder in terms of liquidation priority and getting paid back. B) if they sit on the board of directors and are also an employee of the company, they are not eligible for the plan. C) deferred compensation plans usually benefit younger employees because the money in the plan has more time to grow prior to retirement. D) deferred compensation plans may be somewhat risky because the employee covered by the plan becomes a general creditor if the business fails.

D) deferred compensation plans may be somewhat risky because the employee covered by the plan becomes a general creditor if the business fails. If the business fails, the employee can lose everything they put in the plan. The participant will become a general creditor of the company and will be on the same level as unsecured bondholders in the liquidation priority.

Compared to U.S. government agency-backed CMOs, CDOs have A) greater liquidity. B) generally more secure collateral. C) less credit risk. D) less prepayment risk.

D) less prepayment risk. Although there is some prepayment risk with CDOs, it is minimal when compared to CMOs. Unlike mortgages, which are frequently paid off early when homeowners move, those who move can take their cars or their credit cards with them and continue to make the payments. The same is true with refinancing. You don't see ads for people to refinance their auto loan to the extent you do with home mortgages. In general, CDOs carry greater credit risk than CMOs backed by FHA and VA loans. The nature of CDOs, with the enormous variety of collateral options available, means that the liquidity of separate offerings tends to be less than that of these CMOs. Both of these are complex securities, but the experts in the field consider CMOs to be somewhat more so. The credit quality of government-insured mortgages is more secure than that of credit card debt or automobile loans.

A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that A) he should begin to liquidate the ABC stock using the FIFO accounting method. B) owning too much ABC stock has increased credit risk to an unacceptable level. C) because ABC has performed well over a 15-year period, he should keep the stock but sell it if inside information indicates a fall in value is imminent. D) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk.

D) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk. This prospect is exposed to a significant amount of business (nonsystematic) risk, as indicated by the large investment in ABC common stock. Business risk can be reduced by diversifying the portfolio; therefore, recommending the sale of a portion of the ABC stock and using the proceeds to purchase mutual funds is suitable. There will be tax considerations, but the use of FIFO accounting will likely expose the prospect to higher capital gains taxes than other accounting methods and may not be the best approach to liquidation.

The rights and liabilities of general and limited partners are listed in A) the Uniform Limited Partnership Act. B) the partnership title. C) the certificate of partnership. D) the partnership agreement.

D) the partnership agreement. The agreement is the contract between the general and limited partners, and it contains each entity's rights and duties. The certificate of partnership is the document legally establishing the enterprise.

Limited partners in a real estate partnership have all of the following rights except A) the right to sue the general partner for violating the partnership agreement. B) the right to monitor the partnership on an ongoing basis. C) the right to receive their pro rata share of income or loss. D) the right to decide which properties the partnership purchases.

D) the right to decide which properties the partnership purchases. The limited partners have the right to inspect partnership records and the right to sue a general partner who acts outside the partnership agreement. The general partner normally sets her own compensation in the original agreement and makes all management decisions relative to the partnership's interests.

A fundamental analyst researching a stock is concerned with all of the following except A) management efficiency. B) the capitalization ratio. C) the stock's market price as a multiple of the company's earnings. D) the volume of shares traded.

D) the volume of shares traded. A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio. A technical analyst is concerned with trading volumes or market trends and prices.

Under Regulation T, when a customer purchases securities, payment must be received by the broker-dealer no later than A) the settlement date. B) one business day after the settlement date. C) one business day before the settlement date. D) two business days after the settlement date.

D) two business days after the settlement date. Regulation T requires that customer payment for a securities purchase be received no later than two business days after the settlement date.