Series 7 - exam 3 closed book

A client with $1,000,000 to invest is interested in acquiring $100,000 of bonds that mature each year over the next 10 years. This approach is referred to as: a. Dollar cost averaging b. Asset allocation c. Laddering the portfolio d. A barbell strategy

C. Laddering the portfolio The approach is referred to as the laddering of a portfolio. When the earliest bonds mature, the proceeds are then reinvested at the long side (i.e., longest maturity) of the ladder. This investor reinvests the proceeds of the bonds that mature in year one into bonds that mature in 10 years. The purpose of this strategy is to reduce the impact that changes in interest rates will have on the portfolio. Investors that utilize a barbell strategy will buy bonds at the two ends (long and short maturities) of the yield curve. This strategy seeks to capture the high-coupon interest from the long-term bonds while also retaining the ability to reinvest quickly when the short-term bonds mature. Therefore, if the investor anticipates that there will be a shift in interest rates, only a portion of the portfolio will need to be adjusted.

Which of the following information does NOT have an effect on the credit quality of an airport revenue bond? a. Tourism b. Debt per capita c. Airport traffic d. Energy costs

Debt per capita Debt per capita is used when analyzing a general obligation bond and would not be considered for a revenue issue.

Mr. Jones is a small business owner who has purchased Treasury bills and other short-term securities during times when he has excess funds available in the business. He likes the aspects of liquidity and safety. A friend has told him he can get higher rates from auction rate securities. He wants to know why you have not recommended this investment to him. Which TWO of the following explanations would you cite as your reasons? I. Auction rate securities are long-term investments II. Interest or dividend rates are reset at established intervals based on a Dutch auction III. If the auction fails, the client may not have immediate access to his funds IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the auction

I and III Although auction rate securities are usually sold as an alternative to other short-term securities, they are long-term securities. An RR must disclose to a client that, if the auction fails, the client may not have immediate access to his funds. The RR also has a duty to disclose to clients any material fact relating to the specific features of the auction rate securities and the customer's need for a liquid investment when recommending this type of product. The fact that the interest or dividend rate is reset at specified intervals is a material fact, but is not a reason to avoid recommending the investment. The same reasoning applies to the fact that the rate is set at the lowest rate that matches supply and demand. These investments may not be suitable for investors who have a need for liquidity

Which TWO of the following statements are TRUE regarding REITs? I. They may invest in both commercial and residential real estate II. They may retain a majority of their income III. Dividends paid are taxed as ordinary income IV. They may be sold only to retail investors

I and III REITs invest in many different types of residential and commercial income-producing real estate.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II. The bid price is equal to the net asset value plus the redemption fee III. The offer price is equal to the net asset value plus the sales charge IV. The offer price is equal to the net asset value minus the sales charge

I and III The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund.

On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer: I.Has engaged in a debit spread II.Has engaged in a credit spread III.Wants the spread to widen IV.Wants the spread to narrow

I and III only To determine whether the customer wants the spread to widen or narrow, it is necessary to determine whether the spread is a debit or credit spread. The premium for an option is determined by two factors: the in-the-money amount of the option (intrinsic value) and the time value. Since both options have the same strike price, the intrinsic values (in-the-money amount) are equal. Therefore, any difference in premium is the result of a difference in time value. Since the December contract has longer to go until expiration than the November contract, it has more time value. Therefore, the premium for the December contract will be larger than for the November contract. Since the customer purchased the December contract (higher premium), it is a debit spread and will profit if the spread widens.

Stagflation is best defined as a period where the economy is experiencing which TWO of the following events? I. Inflation for a long period II. Deflation for a long period III. Low unemployment IV. High unemployment

I and IV

A convertible debenture is convertible at $25. It has a nondilutive feature in its indenture. If a stock dividend is distributed, which TWO of the following statements are TRUE? I.The conversion price will be reduced II.The conversion price will be increased III.The conversion ratio will be reduced IV.The conversion ratio will be increased

I and IV A nondilutive feature means that if there is a stock split or stock dividend, the bond's conversion features must be adjusted. The bondholder would receive more shares upon conversion because the conversion ratio would be increased. The conversion price would be reduced to permit this increase in the conversion ratio.

Under the New Issue Rule, an employee of a broker-dealer is prohibited from purchasing which TWO of the following new issues? I. An initial public offering for which the employee's firm is not an underwriter II. An exchange-traded fund III. Convertible debt IV. A new issue of common stock for which the employee's broker-dealer is the managing underwriter

I and IV According to FINRA, an employee of a broker-dealer is considered a restricted person and is not permitted to purchase certain new issues. Under the rule, new issues are defined as initial public offerings (IPOs) of equity securities that are sold under a registration statement. The purchase restrictions apply regardless of whether the employee's broker-dealer is participating as an underwriter for the offering. Exemptions from the IPO definition include all debt offerings, investment company offerings (e.g., mutual funds and exchange-traded funds), and preferred stock

Which TWO of the following statements are TRUE regarding Eurodollar bonds? I. They are denominated in U.S. dollars only II. They are denominated in foreign currencies only III. They cannot be traded in the U.S. IV. They are traded in both U.S. and international markets

I and IV Eurodollar bonds are U.S. dollar-denominated bonds that are originally issued outside of the U.S. Although these bonds are issued outside of the U.S. (and may continue to trade outside of the U.S.), they may also begin to trade in U.S. markets after a seasoning (waiting) period is satisfied which last for 40 days from the date of issuance.

A securities firm is permitted to charge customers a fee for: I. Collecting dividends and/or interest II. Appraisal of securities III. Holding securities in safekeeping IV. Transfers and/or exchanges

I, II, III and IV Securities firms may charge customers for all services they provide as long as the charge is fair and reasonable.

A customer wishes to make a purchase based on his belief that interest rates will decline over the next 15 years. The recommendation of which TWO of the following securities is NOT consistent with the customer's belief? I.A 5-year noncallable bond II.A tax anticipation note (TAN) III.Floating rate notes IV.A 15-year bond with a 5-year put feature

II and III Since the customer believes interest rates will decline, he wants to lock in a high yield for the next 15 years. A TAN is a short-term security and a floating rate note's interest rate would be adjusted downward with prevailing interest rates. Neither would lock in the high return. The 5-year noncallable bond would lock in a high return without the possibility of being called prior to maturity. The 15-year bond locks in the high return and the 5-year put feature permits the investor to redeem the bond after 5 years or keep it to maturity. This decision would depend on the prevailing rates in 5 years.

Which TWO of the following statements are TRUE regarding the maintenance requirements for selling short stock that is trading at less than $5 per share? I. The maintenance requirement for shorting a stock at $2.00 per share is 100% of the market value II. The maintenance requirement for shorting a stock at $2.00 per share is $2.50 per share III. The maintenance requirement for shorting a stock at $4.00 per share is 100% of the market value IV. The maintenance requirement for shorting a stock at $4.00 per share is $2.50 per share

II and III The industry maintenance requirement, when shorting stock that is trading at less than $5.00 per share, is the greater of $2.50 per share or 100% of the market value. When shorting stock less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value.

Which TWO of the following metrics may be calculated by examining the income statement of a company? I.The debt-to-equity ratio II.The operating profit margin III.The bond coverage ratio IV.The current ratio

II and III The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.

A registered representative is sending an email to both existing individual and potential customers promoting the broker-dealer's products and services. Which TWO of the following statements are TRUE? I. This is considered correspondence II. This is considered retail communication III. This activity requires principal approval prior to use IV. This activity should be reviewed

II and III This activity is considered retail communication since there is no limit mentioned in the question as to the audience expected to be reached by the RR. Retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. If the communication is directed to 25 or less individuals, it is considered correspondence. If the retail communication makes a recommendation, or promotes a product or service, prior principal approval is required.

Which TWO of the following choices would NOT be included in a subscription agreement for a direct participation program (DPP)? I. A statement indicating the purchaser understands the risks of this investment II. The priority provisions if the partnership is liquidated III. A statement listing the amount of tax credits or deductions the investor will receive IV. A statement that attests to the investor's ability to meet the financial requirements of this investment

II and III The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he or she understands the ramifications of the investment and can meet the financial requirements of this investment. Priority provisions for liquidating a limited partnership, and the tax implications, would be found in the offering documents.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? I. ETFs may be traded in the secondary market and ETNs cannot II. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note and ETFs do not have issuer credit risk III. ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate IV. ETNs have a maturity date and ETFs do not

II and IV ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.

If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be: I. An increase in current assets II.A decrease in total liabilities III.A decrease in stockholders' equity IV. An increase in stockholders' equity

II and IV The conversion of bonds to common stock reduces the total debt of the corporation while increasing stockholders' equity (additional shares of common stock). The answer, therefore, will be a decrease in the total liabilities and an increase in stockholders' equity.

Self-regulatory organizations generally have rules that: I.Mandate commission schedules that brokerage firms must charge II.Are designed to maintain a fair and orderly market III.Mandate all brokerage firms stand ready to buy or sell securities from their own account to maintain liquidity IV.Require brokerage firms to use reasonable diligence to provide customers with best execution

II and IV only SROs have rules designed to maintain a fair and equitable market and require that firms use reasonable diligence to provide customers with best execution. They do not have set commission schedules nor do they require that all firms trade for their own account. Specialists on the exchange must provide liquidity.

With no other securities position, a customer sells short 100 shares of ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at: a. $35 b. $50 c. $45 d. $40

a. $35 An individual who sells short risks a loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss will be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale plus the premium.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is: a. $2,000 b. $3,000 c. $4,000 d. $6,000

a. 2000 This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

An investor writes an uncovered RST May 25 put for a premium of 4. The maximum loss the investor could sustain is: a. $2,100 b. $2,500 c. $2,900 d. $3,500

a. 2100 If RST Corporation's market price declines to pennies per share, the owner of the put could buy the RST stock for pennies and put it to the writer for $25 per share, or $2,500. This is the price that the writer would be required to pay for the stock. However, since the writer received $400 in premium, the maximum loss he could have will be $2,100 ($2,500 loss - $400 premium = $2,100 loss).

The Bond Buyer Municipal Bond Index is based on: a. A 40-Bond Index b. Noncallable long-term bonds c. A cross section of zero-coupon bonds d. Diversified bonds with approximately 40 years to maturity

a. 40 bond index The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.

A NYSE-listed stock closed at $72. The next day the stock is ex-dividend 60 cents. To determine if the stock increased or decreased from the close of trading, the price is based on: a. 71.40 b. 71.70 c. 72.60 d. 72

a. 71.40 The stock will be reduced by 60 cents. The stock must be reduced in price to entirely cover the dividend. Therefore, the stock will open at 71.40 (72 - .60 = 71.40). If the stock closed at 72.50 that day, it will be quoted as an increase of $1.10 (72.50 - 71.40

A market maker has displayed a firm quote of 15 - 15.50, 5 x 8 for a stock. If a broker-dealer contacts the market maker and wants to purchase 1,000 shares, how many shares is the market maker obligated to sell at 15.50? a.800 shares b.500 shares c.1,000 shares d. Whatever amount the market maker decides to sell

a. 800 shares When a market maker gives a firm quote, the market maker is obligated to buy or sell up to the number of shares at the price quoted. The number of shares that are firm is based on round lots of 100 shares, first the number for the bid and then the number for the offer. The market maker is obligated to buy 500 shares at $15.00 and obligated to sell 800 shares at $15.50. The market maker is permitted to sell 1,000 shares, but only obligated to sell 800 shares.

In August, an investor sells an uncovered listed option and receives a $1,100 premium. The following February, the customer makes a closing purchase transaction at 3. The result of the transaction is: a. A capital gain of $800 b. A capital loss of $800 c. Ordinary income of $800 d. A nontaxable event

a. A capital gain of $800 The investor made an $800 profit on the closing transaction (sale at $1,100 and purchase at $300). The profit is treated as a capital gain in the year the transaction is closed out.

Which of the following statements is TRUE regarding TRACE? a. It is a reporting system for corporate bonds b. It is a reporting system for U.S. government bonds c. It is a reporting system for stocks listed on Nasdaq d. It is a reporting system for municipal bonds

a. It is a reporting system for corporate bonds TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. RTRS is the reporting system for municipal bonds and the TRF is the reporting system for stocks listed on Nasdaq. There is no reporting system for U.S. government bonds.

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? a. It issues securities that can be redeemed to pay for college education b. It issues securities that are not backed by the U.S. government c. It purchases federally sponsored student loans d. It provides loans to educational institutions

a. It issues securities that can be redeemed to pay for college education The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.

James Hendricks wants to open a Coverdell Education IRA for his three-year-old son. Which of the following statements is TRUE? a. James may contribute up to $2,000 per year b. At least 50% of the investments in the account must be conservative c. The account becomes the property of the child upon reaching the age of majority d. Only parents or grandparents may contribute for the benefit of the minor child up to the age of majority

a. James may contribute up to $2,000 per year Anyone may contribute to a Coverdell Education IRA for a child, but the total contributions to the account are limited to $2,000 per year.

A customer buys $10,000 worth of stock in a cash account. Two business days after the transaction settles, the customer calls the broker and tells the broker he does not have sufficient funds to pay for the stock. The brokerage firm will: a. Sell him out and freeze the account according to Regulation T of the FRB b. Sell him out and, if there is no loss, there is no penalty c. Automatically give the customer an extension for two days d. Automatically give the customer an extension for five days

a. Sell him out and freeze the account according to Regulation T of the FRB According to Regulation T of the Federal Reserve Board, the brokerage firm must sell out the securities in the account and freeze the account for 90 days.

Which of the following statements is TRUE concerning periodic payment variable annuities? a. The number of a client's annuity units never changes b. The number of a client's accumulation units never changes c. They never have a beneficiary d. The monthly payout is fixed by the inflation index

a. The number of a client's annuity units never changes

A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will: a. Treat the discount as ordinary income b. Treat part of the discount as a capital gain and part as ordinary income c. Treat the discount as a capital gain d. Not have to pay tax on the amount of the discount

a. Treat the discount as ordinary income

If a municipal bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at: a. A discount b. Par value c. A premium d. A price that cannot be determined from the information given

a. a discount Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 6.35 basis. This means the bond has a yield to maturity of 6.35%. If the nominal yield (coupon rate) is 6.15%, this means that the bond is selling at a discount, below the par value ($1,000). If the yield to maturity (6.35%) is greater than the nominal yield (6.15%), the bond is selling at a discount.

An investor has recently rolled over his 401(k) into an IRA at your firm. Which of the following securities will be MOST suitable if the investor wanted diversification and a higher return? a. A municipal revenue bond b. A Treasury note c. A hybrid REIT d. An equity REIT

a. a municipal revenue bond Since this is a tax-deferred (retirement) account, the municipal security would not be suitable and, since the investor wants a higher return, the Treasury note would not be the best choice. Although either REIT may be suitable, the hybrid REIT is a better choice since the investor wants diversification. There are three types of REITs: mortgage REITs which provide funds to real estate owners in the form of lending them funds (i.e., a mortgage), equity REITs which own and operate income producing real estate (for example, apartment buildings, commercial property, shopping malls and other types of retail property, and vacation resorts), and hybrid REITs, which invest in both of these ventures. By purchasing a hybrid REIT, the investor can take advantage of buying a security that invests in actual equity ownership of real estate as well as investing in an interest-rate-sensitive security such as a mortgage REIT.

All of the following derivatives are created by an issuer of securities, EXCEPT: a. Call options b. Warrants c. Rights d. Convertible preferred stock

a. call options Call options are issued by the Options Clearing Corporation (OCC) and not by an issuer of securities. The other products are created by an issuer of securities

A customer wishes to close out a short option position by liquidating the option. The registered representative should mark the order ticket: a. Closing purchase b. Closing sale c. Opening purchase d. Opening sale

a. closing purchase The client initially had an opening sale transaction. To liquidate the short option position, the client must purchase the option contract. The registered representative should, therefore, mark the order ticket closing purchase.

A registered representative is sending an email to 20 individual investors. This is defined as a(n): a. Correspondence b. Institutional communication c. Retail communication d. Public appearance

a. correspondence Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. • Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. • Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. • Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn).

An RR has received an order to purchase a block of securities for an institutional client. Prior to executing the client's trade, the RR purchased call options on the same security. This activity is referred to as: a. Front-running b. Churning c. A wash sale d. Insider trading

a. front running Placing proprietary orders (orders for the account of the RR or broker-dealer) ahead of customer orders is a prohibited practice that is referred to as front-running. An institutional buy order has the potential of moving the market price of a security higher. Having advance knowledge of the order would allow the broker-dealer to purchase the security or a derivative for that security prior to executing this order and profit when the market reacts to the institutional order. The other choices are examples of market manipulation or prohibited activities.

Listed below are a group of mutual funds. Net Asset Value Offer Price Net Change Dreyfus 11.55 12.67 -.05 Wellington 12.70 13.85 +.07 Lenox 5.14 5.14 +.09 Sentry 13.42 14.63 -.08 Lenox fund is most likely a: a. No-load fund b. Closed-end fund c. Balanced fund d. Growth fund

a. no-load fund The Lenox fund is a no-load fund. The net asset value (bid price) and offering price (asked price) of a no-load fund are the same. There is no sales charge.

All of the following statements regarding a SEP-IRA are TRUE, EXCEPT: a.An employer that sets up a SEP must make it available to each eligible employee b.All SEP contributions are directed into Traditional IRAs c.Employees must wait five years before they are fully vested in the contributions d.The maximum annual deductible contribution is 25% of a person's compensation up to a certain dollar amount

a.An employer that sets up a SEP must make it available to each eligible employee In a SEP-IRA, employees are always immediately vested in all SEP-IRA money, which makes choice (c) the untrue statement. When an employer sets up a Simplified Employee Pension (SEP), it must be made available to all eligible employees. Only the employer makes contributions to Traditional IRAs that have been established for the employees. The maximum annual contribution is 25% of a person's compensation up to a certain dollar amount.

A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of: a. $150 b. $300 c. $420 d. $525

b. $300 Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).

In a margin account, an investor bought 1,000 shares of RST at $60 and, as a hedge, she also purchased 10 RST July 60 puts which each had a premium of 5. Based on these transactions, what is the customer's required deposit? a.$30,000 b.$35,000 c.$32,500 d.$65,000

b. $35,000 Since the $60,000 stock purchase is being made in a margin account, Regulation T requires the customer to deposit 50% of the purchase, which is $30,000 ($60,000 x 50%). However, since options cannot be purchased on margin, the contracts must be paid for in full. Therefore, the full $5,000 option premium payment is required. When the two requirements are added together the customer's required deposit is $35,000.

An individual purchased a British pound June 160 call at 0.80. If the contract size is 10,000 British pounds, what is the individual's total cost? a. $8 b. $80 c. $800 d. $8,000

b. $80 Premiums for British pound options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $0.0080), which equals $80.

An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive: a. $10,000 b. $10,200 c. $10,300 d. $10,500

b. 10,200 When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond x 10 bonds). If the investor were able to sell the bonds at the current price, she would receive $10,300 ($1,030 x 10 bonds). However, the question states that the bonds are called, which means the market price of the bond will gravitate to the call value of $10,200.

An investor purchases 1 XYZ October 40 put when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum profit the investor can have? a.$300 b.$3,700 c.$3,800 d.Unlimited

b. 3700 XYZ shares could possibly become worthless. The investor can then buy 100 shares for pennies and put (sell) it to the writer for the $40 per share strike price. This equals $4,000 ($40 x 100 shares). The investors' profit is $4,000 minus the $300 premium paid for the put, which equals $3,700. The $3,700 is the maximum profit the investor can have since the share's price cannot go lower than zero.

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks is: 1 week ago 25,000 shares 2 weeks ago 26,000 shares 3 weeks ago 27,000 shares 4 weeks ago 28,000 shares 5 weeks ago 27,000 shares 6 weeks ago 27,000 shares According to Rule 144, Mr. Smith would need to file with the SEC a notice of intent to sell which is valid for: a. Four weeks b. 90 days c. 6 months d. Whatever amount of time is necessary to complete the offering

b. 90 days notice of offering for rule 144 sale is valid for 90 days

A municipal bond pays interest on February 1 and August 1. A customer purchasing the bond on Monday, April 30 will need to pay the seller the purchase price plus accrued interest for: a.90 days b.91 days c.93 days d.96 days

b. 91 days The trade date is Monday, April 30. The bond pays interest on February 1 and August 1. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Wednesday, May 2. The following calculation illustrates the answer. February 30 days March 30 days April 30 days May 1 day 91 days

The bonds included in The Bond Buyer 20-Bond Index have an average rating of: a. Aa1 b. Aa2 c. A1 d. A2

b. Aa2 The 20-Bond Index has an average rating on S&P of AA and on Moody's of Aa2. The 11-Bond Index contains general obligation bonds with an average rating on S&P of AA+ and on Moody's of Aa1.

A mutual fund shareholder is NOT required to report which of the following events for tax purposes? a. Receiving a dividend that is subsequently reinvested in the fund at the net asset value b. Appreciation in the value of the shares c. Exchanging shares of one fund for another fund within the same family of funds d. Receiving a capital gains distribution that was not reinvested in the fund

b. Appreciation in the value of the shares Dividends and capital gains distributions are taxable to the investor regardless of whether they are reinvested in the fund. Exchanging shares for another fund within the same family of funds must also be reported on the investor's tax return since shares of one fund are being sold to buy shares in another fund. Appreciation in the value of fund shares is not taxable until the shares are sold to establish a capital gain.

Joseph Carlyle is a customer of a municipal securities firm. Based on his existing account documentation, he is clearly unsuitable for securities with a speculative credit rating. However, he has entered an order to purchase a bond that is rated BB by Standard and Poor's. His representative, Bob Thomas, has communicated to him that this transaction is not in his best interest based on the information that the firm has on file. Regarding this situation, which of the following statements is TRUE? a. Bob should process the order because a BB rating is not speculative b. Bob should process the order because MSRB rules allow the order to be filled if the representative explains to Joseph that the trade is unsuitable c. Bob should process the order because registered representative are not fiduciaries and, therefore, must always do what the customer says d. Bob should not process the order because MSRB rules prohibit the processing of a clearly unsuitable transaction

b. Bob should process the order because MSRB rules allow the order to be filled if the representative explains to Joseph that the trade is unsuitable

A person who has been granted power of attorney over a customer's account contacts the RR and indicates that she wants to start receiving the trade confirmations. For the RR, what is the BEST action to take? a. Contact the customer and receive written approval to send the confirms to the person who has power of attorney, but do not send copies to the customer b. Contact the customer and receive written approval to send the confirms to the person who has power of attorney and provide duplicate copies to the customer c. Follow the instructions that are given by the person who has power of attorney d. Follow the instructions that are given by the person who has power of attorney as long as the authorization is in writing

b. Contact the customer and receive written approval to send the confirms to the person who has power of attorney and provide duplicate copies to the customer Industry rules permit a person who has power has power of attorney (POA) over a customer's account to receive confirmations, account statements or any other communication if the following conditions are met: • The account owner provides written approval to send the communications to this person and, • Duplicate copies of any communications are sent to the account owner at another address that is designated in writing by the customer

The call feature on callable bonds is most relevant when the economy is: a. Experiencing a slowdown and the FRB is trying to stimulate growth b. Experiencing a slowdown and inflation is increasing c. Growing and the FRB is trying to slow down the economy d. Growing and inflation is stable

b. Experiencing a slowdown and inflation is increasing The call feature on callable bonds is most relevant when the general level of interest rates is declining. Rates will tend to decline when the FRB is trying to stimulate the economy by increasing the money supply. The goal is to bring down interest rates to allow the economy to grow. Rising inflation usually causes the FRB to decrease the money supply in order to drive up interest rates. If the economy is growing and inflation is stable, this is a beneficial situation and the FRB may simply leave rates unchanged.

A customer entered a market order to purchase 100 shares of XYZ Corporation. The brokerage firm confirms to the customer the purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually executed at 28.75. The customer: a. Must pay 28.25 b. Must pay 28.75 c. Can accept the 28.75 or cancel the order d. Can cancel the order

b. Must pay 28.75 The customer must pay 28.75, which was the actual purchase price, even though the brokerage firm confirmed (erroneously) to the customer that the purchase was made at 28.25.

If a customer wishes to open an account to trade options, the account must be approved: a. 15 days prior to the time an initial order is accepted b. Prior to the time an initial order is accepted c. No later than the time the confirmation is mailed to the customer for his initial transaction d. Within 15 days of the acceptance of the initial order

b. Prior to the time an initial order is accepted If a customer wishes to open an account to trade options, the account must be approved by an ROP prior to the time an initial order is accepted.

A brokerage firm's research department has issued a buy recommendation for XYZ Corporation's common stock. The report need not contain which of the following information? a. The firm was the managing underwriter in a recent public offering of the stock b. The number of shares of the stock the firm owns c. The partners of the firm who hold options to purchase the stock d. The firm makes a market trading in the stock

b. The number of shares of the stock the firm owns The report must contain all of the items listed except the number of shares of the stock the firm owns. The firm does need to disclose that it owns shares of the stock, but not the actual number.

The purchaser of a variable life insurance policy bears which of the following risks? a. The death benefit may fall to zero due to poor market performance b. The policy may have no cash value if the separate account performance is negative c. The insurance company may increase the premiums if the investment performance of the separate account is poor d. The increasing cost of doing business may force the insurance company to raise expense charges against the separate account

b. The policy may have no cash value if the separate account performance is negative The cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. Poor performance could cause the cash value to decline to zero. Although the death benefit can also increase or decrease, it may never fall below a set minimum. The premiums for variable life policies are fixed for the life of the policy. An expense guarantee clause in life insurance contracts prevents the insurance company from raising expense charges for the administration of the policy.

As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power? a. Fixed annuities b. Variable annuities c. Corporate bonds d. Mortgage-backed securities

b. Variable annuities Variable annuities, theoretically, provide the greatest protection against loss of purchasing power. The payout is based on the securities (mostly equity securities) in the separate account, which historically have increased in inflationary periods. This provides for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and do not offer protection against the loss of purchasing power in inflationary periods.

A registered representative receives an order from her customer to sell 600 shares of BWGF to be executed in her IRA account. The RR mistakenly executes the order in the wrong account. What action should be taken to correct the error? a. Cancel the transaction and reenter it in the correct account after receiving approval by the margin department b. Cancel the transaction and reenter it in the correct account after receiving approval by a registered principal c. Resend the order to the floor of the exchange d. Cancel the order, but no other action is necessary

b. cancel the transaction and reenter it in the correct account after receiving approval by a registered principal If a trade is executed in the wrong account due to an error on the part of the registered representative, the best course of action is to cancel the trade and reenter it to the correct account. This action must be approved by a registered principal or supervisor.

The theory that states that the small investor is usually wrong, buying at market peaks and selling at market bottoms, is called the: a. Dow theory b. Odd-lot theory c. Short interest theory d. Advance-decline theory

b. odd-lot theory The theory that states that the small investor is usually wrong because he is uninformed, buying at market peaks and selling at market bottoms, is called the odd-lot theory. According to this theory, the small investor can afford only to buy an odd-lot (less than 100 shares of stock). Odd-lot buying on balance (more buying than selling) is bearish and odd-lot selling on balance (more selling than buying) is bullish

Mrs. Jones is interested in selling 500 shares of her REIT. The sale will be handled in a manner similar to the: a.Redemption of an open-end fund b.Sale of a closed-end fund listed on the NYSE c.Liquidation of a real estate limited partnership d.Redemption of EE bonds

b. sale of a closed-end fund listed on NYSE There is a secondary market for REITs (real estate investment trusts). The vast majority of REITs trade on the NYSE with prices determined by supply and demand. Closed-end funds are funds that are often bought and sold on the NYSE that trade in a similar manner.

Which of the following statements about municipal revenue bonds is NOT TRUE? a.They are not subject to the debt limitations that apply to general obligation bonds b.The maturity of the bonds will equal the useful life of the facility being built c.They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities d.The interest and principal payments are derived from the funds being generated by the facility

b. the maturity of the bonds will equal the useful life of the facility being built Municipal revenue bonds do not always have maturity schedules that equal the useful life of the facility being built. Instead, the facility's useful life should significantly exceed the maturity of the bonds. Municipal revenue bonds do not have the debt limitations that apply to general obligation bonds. A debt limitation is considered the statutory or constitutional maximum debt that an issuer may legally incur. Revenue bonds can be issued by states, political subdivisions (e.g., counties and townships), interstate authorities, and intrastate authorities. Municipal revenue bond interest and principal payments are derived from the funds being generated by the facility.

Which of the following annuity settlement options would provide the longest stream of income over the lives of two individuals? a.Life annuity with a 20-year period certain b.Joint and last survivor annuity c.Unit refund life annuity d.Straight-life annuity

b.Joint and last survivor annuity The joint and last survivor settlement option would provide the longest stream of income as it guarantees payments until the last annuitant dies. The life annuity with 20-year certain would result in payments ending after 20 years even if the survivor was still alive. The unit refund life annuity will only refund the balance of what is left over after the annuitant dies. Payments cease after the annuitant dies in a straight-life annuity.

A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE? a.The director is permitted to sell the shares if the trade is reported b.The director is permitted to sell the shares only if they are held for three additional months and the trade is reported c.The director is permitted to sell the shares and no report is required d.The director is permitted to sell the shares only if the transaction will result in a loss

b.The director is permitted to sell the shares only if they are held for three additional months and the trade is reported An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding.

A customer has purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer of these 10 straddles will need to deposit: a. $1,000 b. $2,000 c. $4,000 d. $10,000

c. $4,000 When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer purchased 10 straddles and paid $400 per straddle for a total of $4,000. (10 straddles x $400 = $4,000.)

On December 16, a Mr. Smith purchased 2 listed XYZ May 70 calls and paid a $4 premium for each call when the current market price of XYZ Corporation was $69 per share. If, in May, the market price of XYZ Corporation is $67 and the calls expire, Mr. Smith loses: a. $400 b. $700 c. $800 d. $1,400

c. $800 Mr. Smith will not exercise the call options. At expiration, the market price of XYZ is $67, which is less than the exercise price. Therefore, the options expire worthless. Mr. Smith loses $800 ($400 per contract times 2), the entire amount of the premium paid.

A corporation calls for the redemption of 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock are $2.50 per share. The common stock is selling at 35.75. If all shares are converted, how many shares of common stock will be outstanding? a. 500,000 b. 2,000,000 c. 2,500,000 d. 3,000,000

c. 2,500,000.00 If all of the preferred stock were converted into common stock, there will be an additional 500,000 shares of common stock outstanding, (1/2 of 1,000,000 = 500,000.) This, added to the 2,000,000 shares outstanding, equals 2,500,000 shares of common stock.

In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. Near expiration, STC is selling at $39. The 40 call expires and the customer closes out the 30 call at its intrinsic value. The net result is a: a. $100 loss b. $100 profit c. $500 profit d. $500 loss

c. 500 profit When the market price of STC is at $39, the July 30 call has an intrinsic value of 9 points. Since the investor paid a debit of $400, this will result in a profit of $500 ($900 intrinsic value - $400 debit).

The dated date of a municipal bond is January 1, 2014. The first coupon date is August 1, 2014. The first coupon will represent how many months of interest? a. 5 months b. 6 months c. 7 months d. Cannot be determined

c. 7 months The first coupon will be paid in 7 months. This is known as an odd (in this case, long) first coupon payment. The interest will begin to accrue from the dated date but will be paid on the first coupon date.

The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The conversion ratio of the bonds is approximately: a. 75 to 1 b. 85 to 1 c. 95 to 1 d. 100 to 1

c. 95 to 1 The conversion price is given as $10.50. To find the conversion ratio, divide the par value ($1,000) of the bond by the conversion price of $10.50. This equals a conversion ratio of 95 to 1 ($1,000 divided by $10.50 equals 95).

What information would an analyst be MOST concerned with when evaluating a revenue bond? a. The population growth of the municipality b. Debt to assessed valuation c. A rate covenant d. Property taxes

c. A rate covenant An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.

Which of the following is NOT required to be filed with FINRA? a. A retail communication concerning direct participation programs b. A retail communication concerning collateralized mortgage obligations c. A retail communication that provides information on a broker-dealer d. A retail communication that provides information on variable insurance products

c. A retail communication that provides information on a broker-dealer

MSRB rules require that a municipal securities principal must approve all of the following choices, EXCEPT: a. All municipal transactions b. Municipal advertising c. An official statement sent to customers d. A new account form

c. An official statement sent to customers A municipal securities principal does not need to approve an official statement (OS). An OS is prepared by an issuer of municipal securities and issuers are not subject to MSRB rules.

A portfolio's mix of investments and two potential investors are described below. • 50% municipal debt • 30% blue-chip common stock • 10% equity mutual funds • 10% money-market funds Investor A: A 45-year-old single mom who just received a $5,000,000 inheritance. Her current salary pays her living expenses and she also contributes the maximum amount to her employer's retirement plan. She is very conservative, wants to maintain the value of her portfolio as she ages, and is concerned about the tax implications of investing her inheritance. Investor B: A 65-year-old single male who receives a significant pension as well as continuing income from the residuals in a previous business relationship. He is concerned with generating too much taxable income, but is still willing to assume some risk in his portfolio. This portfolio would be considered suitable for: a.Investor A only b.Investor B only c.Both Investor A and Investor B d.Neither Investor A nor Investor B

c. Both Investor A and Investor B

The number of times the earnings of a municipal facility exceeds the interest charges and principal payments of a revenue bond for a period is called the: a. Working capital ratio b. EBITDA ratio c. Debt service coverage ratio d. Price-earnings ratio

c. Debt service coverage ratio The number of times the earnings of a revenue bond of a municipal facility exceeds the interest charges and principal payments (debt service) for a period is the debt service coverage. Earnings before interest, tax, depreciation, and amortization (EBITDA) is a term associated with corporate bond issuers, not municipal bond issuers.

If an options brochure containing projections is sent to a prospective customer, it must: a. Contain the annualized rate of return b. Disclose the representative's trading performance for the past three years c. Have an OCC risk disclosure document with it or be sent in advance d. Contain a schedule of commissions and markups

c. Have an OCC risk disclosure document with it or be sent in advance Options retail communications containing projections that is sent to a prospective customer must be accompanied by or preceded by a risk disclosure document. An annualized rate of return may be included under certain circumstances. Trading performance, if included, must cover a one-year period. There is no requirement to include a schedule of transaction costs.

According to MSRB rules, the delivery of a mutilated certificate is considered a good delivery: a. Under no circumstances b. If the seller informs the buyer about the mutilation in writing c. If the certificate is authenticated by the issuer or transfer agent d. If the certificate is authenticated by the MSRB

c. If the certificate is authenticated by the issuer or transfer agent A mutilated certificate may be authenticated by the issuer or an agent of the issuer (e.g., a transfer agent or paying agent). If authenticated, it is considered a good delivery. A mutilated coupon may be guaranteed by any commercial bank as well as the issuer or its agent.

Your customer is bullish on U.S. equities and wants to participate in an upward movement of the S&P 500 Index. Which of the following investments would you recommend? a. Diamonds b. ADRs c. SPDRs d. VRDOs

c. SPDRs Spiders (SPDRs) is an investment that replicates the S&P 500 Index. The product is organized as a unit investment trust and is classified as an exchange-traded fund (ETF). Diamonds are an exchange-traded fund that mirrors the performance of the DJIA. ADRs are American Depositary Receipts, which may be issued as proxies for many different types of individual foreign shares. VRDOs are variable-rate demand obligations that are a type of municipal security structured for tax-free money-market and high-net-worth investors.

If a municipal bond has a basis of 4.35 and a coupon rate of 4.95%, the bond is selling at: a. A discount b. Par value c. A premium d. A price that cannot be determined from the information given

c. a premium Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 4.35 basis. This means the bond has a yield to maturity of 4.35%. If the nominal yield (coupon rate) is 4.95%, this means that the bond is selling at a premium, above the par value ($1,000). If the yield to maturity (4.35%) is less than the nominal yield (4.95%), the bond is selling at a premium.

ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a: a.Dealer b.Designated market maker c.Agent d.Underwriter

c. agent When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent).The client is charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it is acting as a dealer (principal). The client in this case is charged a markup or markdown.

Which of the following statements is not a characteristic of a 529 plan? a. Withdrawals from 529 plans used for educational purposes are not subject to federal taxation b. There are no income limits placed on contributors c. Contributions are unlimited d. Earnings in the account are tax-deferred

c. contributions are unlimited Although contribution limits are considerably higher than for a Coverdell Education Savings Account (limited to $2,000 per year), contributions to a 529 plan are not unlimited.

Use the following calendar to answer this question. February S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Stock index options will stop trading on: a. February 1 b. February 15 c. February 21 d. February 22

c. feb 21 all options stop trading on the third Friday of the month

A narrow-based index option may be used to hedge a portfolio of: a. Treasury bonds b. Money-market securities c. Oil company stocks d. Diversified blue-chip stocks

c. oil company stocks A portfolio consisting of stocks from the same industry may be protected (hedged) against adverse market movements by using narrow-based index options. A narrow-based index gives a measurement of stocks in a particular industry or sector of the economy. A broad-based index option would be used to hedge a diversified stock portfolio.

Which of the following activities does NOT take place during the cooling-off period? a. The due diligence meeting b. Issuing a red herring c. Stabilizing the issue d. Blue-Skying the issue

c. stabilizing the issue When a new stock issue is going to be offered, a registration statement must be filed with the SEC. After the filing, there is a period when the SEC reviews the information to ensure full disclosure. During the cooling-off period, a preliminary prospectus (red herring) is prepared to be used to receive indications of interest from the public. The issue must be registered in each state in which it will be sold according to state (Blue-Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is held where all concerned parties (issuer and underwriter) meet to insure that everything has been done properly. Stabilization of the issue takes place after the new security is selling in the market.

Closing spot prices for foreign currencies are disseminated daily by: a. The NYSE b. The IMM c. The FRB d. FINRA

c. the FRB The Federal Reserve Board disseminates the closing spot prices of foreign currencies daily. The NYSE only has information about exchange traded securities (e.g. common stock, convertible bonds, and preferred stock). The International Monetary Market (IMM) is a division of the Chicago Mercantile Exchange (CME). The CME is a futures exchange and only disseminates futures prices, rather than the underlying currency.

All of the following documents are needed to open a new discretionary margin account, EXCEPT a: a.New account form b.Basic customer margin agreement c.Trust agreement d.Power of attorney

c. trust agreement A new account form, a basic customer margin agreement, and a power of attorney are needed to open a new discretionary account. The basic customer margin agreement includes the hypothecation, loan consent, and credit agreements. A trust agreement is needed to open a trust account.

Many investors prefer to receive variable annuity payments under the straight-life payout option because this option: a.Is the most conservative method for receiving payments b.Allows for a beneficiary for the entire payout period c.Provides the maximum cash flow of all payout options d.Provides an equal payment each month for the investor's lifetime

c.Provides the maximum cash flow of all payout options Annuitants will receive the greatest cash flow from the straight-life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout.

A client has a margin account in which she is long and short 1,000 shares of the same security. Based on this position, if the current market value of the stock is $80 per share, the client is permitted to borrow up to: a. $4,000 b. $20,000 c. $40,000 d. $76,000

d. $76,000 If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000. Choice (c) which is $40,000 (the Reg. T requirement of $80,000) is incorrect since it fails to take into account the client's total position.

A customer sells short 400 shares and the company declares a 10% stock dividend. When the customer covers the short position, the customer will be required to deliver: a. 40 shares b. 360 shares c. 400 shares d. 440 shares

d. 440 shares When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declares a 10% stock dividend. Therefore, a customer who sold short 400 shares will be required to deliver 440 shares (400 shares x 10% = 40 additional shares) when he covers the short sale.

A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate? a. A stock with a high dividend yield and a beta of less than 1.0 b. A stock with a low dividend yield and a beta of 1.5 c. A stock with no dividend and a beta between 1.5 and 2.0 d. A stock with no dividend and a beta of greater than 2.0

d. A stock with no dividend and a beta of greater than 2.0 Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment.

Which of the following securities are NOT backed by the credit of the U.S. government? a. Treasury bills b. Treasury notes c. Government National Mortgage Association (GNMA) bonds d. Federal National Mortgage Association (FNMA) bonds .

d. FNMA bonds Treasury bills and Treasury notes are direct obligations of the U.S. government. GNMAs are guaranteed by the U.S. government. FNMA bonds are not guaranteed by the U.S. government

A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? a. The customer will not be able to diversify his assets b. The customer will not be able to switch mutual funds within each family c. The customer will not be able to receive a single account statement d. The customer will not be able to receive sales breakpoints

d. The customer will not be able to receive sales breakpoints The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.

A 4.65% New York City GO bond matures in 20 years. The bond is callable in 8 years at 103. Which of the following statements is TRUE? a. The investor has 3 years of call protection b. The issuer must pay investors an 8-point call premium to exercise the call privilege on the bonds c. The investor will receive less for the bond if it is called versus holding the bond to maturity d. The issuer may exercise the call provision anytime after the 8th year

d. The issuer may exercise the call provision anytime after the 8th year The call premium of 3 points ($30 per bond) refers to the amount above par value which the issuer must pay the owner of the bond when the bond is called. Issuers usually call outstanding bonds when interest rates decline, and they are able to issue new bonds at lower rates of interest. The bond has 8 years of call protection. The issuer would need to make an outlay of cash to call back the bonds, but would save money because of the lower rate of interest the issuer would pay on the new bonds. A call provision is exercised by an issuer and not the bondholder.

An investment in which of the following securities requires a customer to sign a statement attesting to her annual income and net worth? a. A variable annuity b. A collateralized mortgage obligation c. A variable-rate demand obligation d. A direct participation program

d. a DPP An investor purchasing a limited partnership or DPP is required to sign a subscription agreement. As part of this agreement a customer would be required to sign a statement attesting to her annual income and net worth. In order to be suitable for this type of investment, the customer must meet minimum annual income and net worth requirements. By signing this statement, the customer has acknowledged the information she disclosed is accurate. The other investments do not require this type of statement signed by the customer.

Which of the following short positions violates SEC rules? a. A customer short stock that he borrowed from the brokerage firm b. A customer short and long the same stock at the same time c. A customer borrowing stock in order to profit from a tender offer d. A customer short stock while owning bonds convertible into that stock

d. a customer short stock while owning bonds convertible into that stock A tender offer takes place when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally done for the purpose of acquiring control of the company. According to SEC rules, a customer may not tender short (borrowed) shares.

Which of the following securities would NOT be found on the Consolidated Quotation System (CQS)? a. An NYSE MKT stock b. An NYSE MKT warrant c. An NYSE-listed bond d. A non-Nasdaq stock

d. a non NASDAQ stock The Consolidated Quotation System (CQS) displays quotations on all common stock, preferred stock, warrants, and rights that are listed on the New York Stock Exchange (NYSE) or the NYSE MKT (formerly NYSE Amex), and trading in the OTC market (third market). While an NYSE MKT stock, an NYSE MKT warrant, and a NYSE-listed bond typically appear on CQS, a non-Nasdaq stock does not appear.

The purpose of a sinking fund is to redeem a corporation's: a. Common stock b. Warrants c. Rights d. Bonds

d. bonds A sinking fund is used by an issuer to set aside funds that will be used for the purpose of redeeming a corporation's bonds prior to or at maturity

All of the following information should be obtained by a registered representative when opening a new account for a customer, EXCEPT the: a. Street address b. Tax identification number c. Occupation d. Education

d. education When opening a new account for a customer, education is not required information.

A municipal bond will be accepted for delivery without a legal opinion if it is identified as: a. In default b. Registered c. Mutilated d. Ex-legal

d. ex-legal A municipal bond is expected to be delivered with a legal opinion unless the bond is identified as ex-legal at the time of the purchase.

All of the following choices are part of the Federal Farm Credit System, EXCEPT: a. Banks for Cooperatives b. Federal Intermediate Credit Banks c. Federal Land Banks d. Federal National Mortgage Association

d. federal national mortgage association The Federal Farm Credit System is composed of the Banks for Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks.

On March 9, an investor purchased 1,000 shares of ABC at $20 and then on July 20, the investor purchased an additional 1,000 shares of ABC at $12. On May 11 of the following year, the investor sold 1,000 shares of ABC at $25. For tax purposes, he must report a: a.$13,000 short-term capital gain b.$13,000 long-term capital gain c.$5,000 short-term capital gain d.$5,000 long-term capital gain

d.$5,000 long-term capital gain In this question, the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor did not identify the shares to be sold, it is the first shares that were purchased in March at $20 that were sold. Therefore, since the shares were held for more than one year, the investor will report a $5,000 long-term capital gain.