Series 7 Final 1 Missed Questions

A 25-year old single client has just started his own small business and is not covered by a retirement plan. He has $5,000 to invest and currently has a low level of income. He wishes to start saving for retirement. The BEST recommendation is a: A. Roth IRA B. SIMPLE IRA C. Traditional IRA D. Roth 401(k)

A. Anyone with earned income can open an IRA. Because this individual is in a low tax bracket, a Roth IRA contribution, which is non-deductible, makes sense (there is no real benefit from making a deductible contribution to a Traditional IRA). With $5,000 to invest, this is within the $5,500 contribution limit for 2018. Earnings build "tax-free" in a Roth, and distributions taken at retirement age are non-taxable. Also remember that high-earners cannot open a Roth IRA. In contrast, if a Traditional IRA were opened, this individual would get a tax deduction (he is not covered by another qualified plan), but it would have little value because of his low tax bracket. Earnings would build tax deferred and when distributions are taken at retirement age, they would be taxable, so the Roth is the better deal. A 401(k) is an employer-sponsored salary reduction plan under ERISA that requires major paperwork to establish. It allows a contribution of up to $18,500 in 2018, far more than the $5,000 this individual has to invest. This is not suitable for a very young single person starting a small business. A SIMPLE IRA is another qualified retirement plan that is "simpler" to set up than a 401(k), and that is only available to businesses of 100 or fewer employees. It allows for a larger deductible contribution than an IRA ($12,500 in 2018), which is more than this person needs. Also, it is still not as easy to set up as an IRA.

An analyst is reviewing the demographics of a municipality as part of a credit review for a G.O. bond issue. The analyst is reviewing: A. population trends B. assessed value trends C. collection ratio trends D. voter registration records

A. Demographics is the study of the size, distribution, and vital statistics of a population group. Since G.O. bonds are paid by tax collections, a municipal bond analyst would be interested in the makeup of the population that is the source of the tax collections.

On the same day in a margin account, a customer buys 1 ABC Jan 35 Put @ $7 and sells 1 ABC Jan 25 Put @ $4 when the market price of ABC is $34. The position will be profitable if: I ABC goes to 25 II ABC goes to 35 III the contracts are exercised IV the contracts expire A. I and III B. I and IV C. II and III D. II and IV

A. If both puts are exercised, the customer makes $700 (buy at $25; sell at $35; net of $3 paid in premiums). The contracts are exercised if the market goes down - and if ABC goes to $25 or lower, the customer will have the maximum potential gain. If both contracts expire (the market is at $35 or above), the debit of $300 is lost.

The minimum price at which an open end fund share can be purchased is: A. Net Asset Value B. Net Asset Value plus a commission C. Market Price D. Market Price plus a commission

A. Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.

Quotes for corporate bonds found on Bloomberg are: A. wholesale corporate bond prices for broker/dealers B. retail corporate bond prices for public customers C. the dollar amount of new issue corporate bonds traded over the preceding 30 days D. the dollar amount of new issue corporate bonds to be sold over the next 30 days

A. Quote providers such as Bloomberg and Reuters give dealer to dealer prices (the "wholesale" market) for corporate bonds daily.

Which statement is FALSE about a SIMPLE IRA? A. The maximum annual contribution is the same as for a Traditional IRA B. The contribution is made by the employee, who gets a salary reduction for the amount contributed C. The plan is only available to small employers D. The employer must make a matching contribution

A. SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administer than a traditional pension plan (hence the name SIMPLE). Each employee contributes up to $12,500 (in 2018) as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary (the 2% match option must be made regardless of whether the employee makes any contribution; the 3% match must be made only if the employee makes a contribution). Also note that there is no flexibility regarding the employer match - it must be made in good times and bad times by the company.

A customer places an order to buy bonds. The order reads "Buy 5M ABC 9s M '45 @ 90 Stop Limit GTC." After the order is elected, at which of the following prices may the order be executed? I 89 II 90 III 91 IV 92 A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

A. The customer places a buy stop limit order to buy 5M - or 5 $1,000 par bonds at 90% of par or better. Buy stop limit orders are placed at a price that is higher than the current market. If the market price rises to 90, the order is elected, but instead of becoming a market order to buy, it becomes an order to buy at the limit price of 90 or lower. Thus, the two possible choices where the order can be executed are 89 and 90. The choices of 91 and 92 are too expensive and exceed the limit placed by the customer.

Interest income in a custodian account is reported on the tax return of the: A. minor B. custodian C. parent(s) D. grantor

A. The social security number placed on a custodian account is the minor's. Any income in the account is taxable to the minor.

A client, age 67, owns his own home free and clear. The customer has an annual income of $25,000, mainly from social security and interest on funds held in a bank savings account. The customer has never invested and is told by his nephew that the technology company that he works for is coming out with a hot new product that will really increase the company's stock price. The BEST recommendation to be made to this client is to: A. do nothing B. only invest enough of his savings account in the technology company's stock so that his reduced income still covers his bills as they come due C. take out a mortgage on his fully paid house and use the proceeds to make the investment in the technology company and then pay off the mortgage from the profits on the investment D. liquidate the entire savings account and use the proceeds to make the technology company investment because the customer can still live on this social security

A. This customer is age 67 and has very little income and no other liquid assets. He cannot afford to lose a bunch of money and he should do nothing!

A customer in New Jersey calls a registered representative (agent) in New York and inquires about buying common stock. The customer wishes to place the order. Which statements are TRUE? I The agent must be registered in the State of New York to accept the order II The agent must be registered in the State of New Jersey to accept the order III The agent is not required to be registered in the State of New York to accept the order IV The agent is not required to be registered in the State of New Jersey to accept the order A. I and II B. III and IV C. I and IV D. II and III

A. This question gets at a fine point of State law. Under State law, there is an "unsolicited transaction exemption" that gives an exemption from State registration to any security involved in an unsolicited transaction. However, it does NOT give an exemption from registration to the agent involved in the transaction! Because the agent is resident in New York, he or she must register there. Because the agent is dealing with a customer in New Jersey, the agent must be registered in New Jersey as well!

Typically, accumulation units of variable annuities represent an investment interest in underlying: A. mutual fund shares B. life insurance policies C. direct participation programs D. pension fund investments

A. To fund variable annuity contracts, the monies paid in by contract holders are invested in a separate investment account that buys designated mutual fund shares. Thus, the separate account "accumulation units" really represent an interest in underlying mutual fund shares. The contract holder has the choice of different types of mutual fund investments that can be made by the separate account.

To open a new account for a trust, which statement is TRUE? A. The tax identification number of the trust must be obtained B. The tax identification number of the trustee must be obtained C. The tax identification of the trust beneficiary must be obtained D. There is no requirement to obtain a tax identification number when opening a trust account

A. Trusts are legal entities that are taxed under the Internal Revenue Code, thus they have their own tax identification numbers.

A registered representative has written discretionary authorization from a customer. Specific customer approval is needed for the registered representative to effect which of the following transactions in the customer's account? I Sell naked calls II Sell covered calls III Purchase a municipal bond where the broker-dealer has a control relationship with the issuer A. III only B. I and II C. II and III D. I, II, III

A. Under MSRB rules, if a control relationship exists between a brokerage firm and the security being recommended, this security cannot be purchased in discretionary accounts unless the specific authorization of the customer is obtained first. The issue here is that there can be an inherent conflict of interest when such a relationship exists. For example, a municipal control relationship might exist if the president of the broker-dealer is also a political official of the town whose bonds are being recommended. Such a broker-dealer, if it were unscrupulous, would have an incentive to "support" the price of the issue in the aftermarket, making it more likely that the municipality would use that firm for future underwritings. It could do this by making purchases of that issue in its discretionary accounts. No specific authorization is required to sell naked or covered calls in discretionary accounts. The only requirement is that discretionary trades executed be consistent with the customer's investment objective; must not be too frequent; and must not be excessively large in size.

The Bond Buyer "20 Bond" index is composed of: I General Obligation Bonds II Special Tax Bonds III Revenue Bonds IV Industrial Revenue Bonds A. I only B. I and II only C. III and IV only D. I, II, III, IV

A. The Bond Buyer 20 Bond Index consists of 20 General Obligation bonds with 20 years to maturity, all rated A or better. These are non self-supporting debt. In contrast, Choices II, III, and IV are all self-supporting debts.

All of the following callable municipal bonds are trading at a 5% basis. Which is LEAST likely to be called? A. 3 3/4% coupon rate callable at 103 in 2018 B. 4 1/2% coupon rate callable at 103 in 2018 C. 5% coupon rate callable at 100 in 2018 D. 6 3/4% coupon rate callable at 100 in 2018

A. An issuer is least likely to call bonds which have low interest rates (low financing cost to the issuer) and high call premiums (expensive for the issuer to call in these bonds).

Corporate bonds are quoted on what basis? A. Yield to maturity B. Dollar price C. Discount yield D. Nominal yield

B. Corporate bonds are usually term bonds - all bonds of an issue having the same interest rate and maturity. Term bonds are quoted on a percentage of par basis in 1/8ths, which is the same as a "dollar" quote.

Which of the following securities deliveries are "good"? I Guardian securities with an assignment performed by the legal guardian II Trust securities with an assignment performed by the Trustee III Partnership securities with an assignment performed by a partner designated in the Partnership Agreement IV Custodian securities with an assignment performed by the recipient of the gift A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV

B. Custodian account securities cannot be assigned by the minor. The minor has no legal authority. Any assignment must be made by the custodian. Guardian account securities are assigned by the legal court appointed guardian; partnership securities are assigned by a partner designated in the partnership agreement; and trust account securities must be assigned by the designated trustee.

Under FINRA rules, disputes between a registered representative and a brokerage firm are: I handled by binding arbitration II handled by litigation III appealable IV non-appealable A. I and III B. I and IV C. II and III D. II and IV

B. Disputes between registered representatives and brokerage firms are handled by binding (non-appealable) arbitration.

Customer Name: Jack and Jill Customer Ages: 62 and 57 Marital Status: Married - 39 years Dependents: None Occupations: Jack - Manufacturing Manager - Dyno-Mite Corp. Jill - Marketing Consultant - Self Employed Household Income: $140,000 Joint Income ($100,000 for Jack and $40,000 for Jill) Net Worth: $1,100,000 (excluding residence) Own Home: Yes $420,000 Value, No Mortgage Investment Objectives: Income / Tax Advantaged Risk Tolerance: Moderate Investment Time Horizon: 25 years Investment Experience: 30 years Tax Bracket: 30% Current Portfolio Composition: Cash in Bank: $30,000 Growth Fund: $50,000 Variable Annuity: $50,000 Growth Stocks: $150,000 Retirement Accounts: Jack's IRA: $100,000 invested in growth stocks Jack's 401(k): $600,000 invested in Dyno-Mite Corp. stock Jack's 529 Plan for Grandchild: $20,000 in growth mutual fund To meet the customer's investment objective of tax advantaged income, the BEST recommendation is for the customer to: A. immediately liquidate the entire Dyno-Mite position and invest the proceeds in high yield bonds B. set a minimum and maximum threshold price to liquidate as much of the Dyno-Mite stock as the customer will permit, and invest the proceeds in high yielding common and preferred stocks C. liquidate the IRA without penalty since Jack is past age 59 1/2, and use the proceeds to buy corporate income bonds D. consider early retirement, since Jack is old enough to receive Social Security as a means of supplementing income

B. Dividend income is currently taxed at the preferential rate of 15%, so investments in high yielding common and preferred stocks will meet the customer's objective of tax advantaged income. High yield bonds come with a high potential risk of default, and this customer has a "moderate" risk tolerance level. If Jack liquidates his IRA, he will have to pay regular income tax on the liquidation amount at his 30% bracket; and income bonds do not give current income (they only pay if the company has enough earnings), so Choice C is particularly bad. If Jack retires now, his income will be cut substantially since he will not have his employment income anymore - and the small annual amount that Social Security pays will not offset this loss - making Choice D really bad as well!

Which statement is TRUE regarding Regulation A? A. Offerings are limited to a maximum of 35 non-accredited investors B. Offerings are limited to a maximum size of $50,000,000 C. A Prospectus must be delivered to purchasers D. The Offering is exempt from registration with the Securities and Exchange Commission

B. Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 "tiers" to the rule. Tier 1 gives an "E-Z" registration process to offerings of no more than $20 million in a 12 month period. Tier 2 requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million. While no prospectus is required, each buyer must be given disclosure in an Offering Circular. Anyone can purchase a Regulation A offering - it is not limited solely to accredited (wealthy) investors. Customers in any state can buy - this is not being sold under an "intrastate exemption" (Rule 147) that limits purchasers to residents of 1 state.

SEC Rule 10b-5-1: A. is the "catch all" fraud rule that makes any deceptive or manipulative practice in connection with the sale of a security potentially fraudulent under the Securities Exchange Act of 1934 B. gives officers of publicly held companies a safe harbor from being charged with an insider trading violation if they establish a pre-arranged trading plan for that issuer's securities C. prohibits the purchase or sale of an issuer's securities based on material nonpublic information in breach of duty of trust owed to the issuer or shareholders of that security D. prohibits any person, in connection with a tender offer for securities, to bid for or purchase the security which is subject of the tender offer through any means other than via the offer

B. SEC Rule 10b-5-1 allows officers of publicly held companies (statutory insiders) to establish "pre-arranged trading plans" that set future transaction dates and amounts of that issuer's securities; or that specify algorithms that establish the transaction dates and amounts. As long as the officer does not deviate from the plan, the officer is given a "safe harbor" from being accused of insider trading based on those trades.

Your customer, age 68, that has an IRA account at your firm valued at $500,000, passes away. The customer leaves the account to his son, age 38. He has no need for current income as he is still working, and wishes to know his best option to minimize taxes. He expects to retire in 22 years, at which time, he will need the funds to pay for annual living expenses. You should advise the son to: A. roll the funds over into a new IRA in the son's name B. transfer the IRA funds to a beneficiary distribution account C. cash out the inherited IRA account D. disclaim the inherited IRA account

B. Since the son is the beneficiary, the most advantageous option, which is to roll over the account, is not available. Roll overs of inherited IRAs are only available to spouses. The best option is for the son to transfer the funds into a beneficiary distribution account. The tax rules are that distributions must commence immediately, and the account must be depleted either over 5 years, or over the life expectancy of the beneficiary, if this is longer (which would be the case for a male who is age 38, who would be expected to live to age 78). Tax must be paid on each annual distribution, but the minimum distribution amount would be relatively small since the customer has a life expectancy of another 40 years. Also, there would be no 10% penalty tax on each distribution, even though the son is under age 59 1/2, because the account is titled in both the decedent's name and the beneficiary's name and the account is considered to be the property of the estate of the decedent. Immediate cash out of the account would subject the entire proceeds to ordinary income tax that year - again, not meeting the customer's goal of minimizing taxes. Finally, the customer has stated that he will need the funds for retirement in 22 years, so disclaiming (giving away) the account makes no sense.

Which of the following statements is TRUE regarding quotes for municipal bonds found in Bloomberg? A. All quotes shown in Bloomberg are for round lots B. All quotes shown in Bloomberg are subject to prior sale or change in price C. All quotes shown in Bloomberg must reflect the current "inside market" at the time of entry D. All quotes shown in Bloomberg are nominal

B. The MSRB requires that all quotes that are disseminated be "bona fide." This means that, at the time that the quote was placed, the firm giving the quote is willing to trade at that price for the size quoted. However, all quotes are subject to prior sale or change in price. Bloomberg is published electronically, and lists dealer offerings of municipal bonds in the secondary market. All quotes are "firm;" nominal (approximate) quotes cannot be given unless it is clearly stated that the quote is nominal. Quotes in Bloomberg can be for any amount of bonds; it is not required that they be for round lots only. Quotes in Bloomberg do not necessarily reflect the "inside market" at that moment. Since municipal bonds are not actively traded, the concept of an "inside market" really does not exist for these securities. The MSRB's requirement is that any quote that is given be "reasonably related" to the current market, using the dealer's best judgment.

The syndicator of a limited partnership is the individual who: A. acts as general manager of partnership operations B. handles the organization of the partnership and registration of the securities C. underwrites the offering of partnership securities D. decides on the investments to be made by the partnership

B. The syndicator of a limited partnership is the person who handles the organization of the partnership and the registration of the partnership securities.

Which of the following is defined as an "accredited investor" under Regulation D? A. Non-profit organization with assets in excess of $2,000,000 B. Trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person C. Partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered D. An individual investor who buys $2,000,000 of the offering

B. There is no limit on the number of accredited investors that can purchase a private placement under Regulation D. Regarding institutional investors, any investment company, insurance company, bank, or savings and loan is accredited. A non-profit organization, trust, or institutional investor is accredited if it has at least $5,000,000 of assets and was NOT formed with the intent of buying the private placement. The idea here is that people could attempt to get around the 35 non-accredited investor limit by having these non-accredited investors contribute to a trust that would buy the issue. If the trust accumulated $5,000,000 for investment, it would be accredited. But the rule disallows this if the trust is formed for the purpose of buying the private placement! Regarding individual investors, either a minimum income ($200,000 for an individual or $300,000 for a married couple) or net worth test ($1,000,000 net worth) must be met to be accredited. There is no minimum purchase amount that makes an individual accredited.

Which statements are TRUE regarding Real Estate Investment Trusts? I Mortgage REITS can only invest in long term mortgages, but not short term loans II To be regulated under Subchapter M, 90% of Net Investment Income must be distributed to shareholders III Equity REIT income is derived from the difference between net rental income and interest paid on loans IV REIT losses can be passed through to shareholders under the "conduit" rules A. I and II B. II and III C. II, III, IV D. I, II, III, IV

B. To be regulated, REITs must distribute at least 90% of their Net Investment Income to shareholders. Equity REIT's invest in real estate and use the net rental income to service the debt used to purchase the properties. Mortgage REITs invest in both mortgages and short term construction loans, profiting from the spread between the REIT's cost of borrowing funds and its earnings on the mortgages and construction loans. REITs cannot pass losses to shareholders; they can only distribute income.

Which of the following positions would receive the greatest benefit of reduced margin requirements from portfolio margining? A. Short naked call B. Long stock/Long put C. Short stock/Short put D. Long call/Long putB

B. Portfolio margin is based on the risk of a portfolio, rather than applying a fixed margin percentage to each security position. When a stock position is hedged by an option, as is the case with a long stock/long put position, then the maximum loss on the stock position is reduced to approximately the premium paid for the put (net of any difference between the stock cost and the put strike price). Thus, portfolio margin results in a much lower margin requirement for stock positions that are hedged by options.

The dollar has appreciated against foreign currencies. The likely result is a(n): I increasing trade surplus II decreasing trade surplus III increasing trade deficit IV decreasing trade deficit A. I and III B. I and IV C. II and III D. II and IV

C. If the dollar appreciates, U.S. goods become more expensive to foreigners and foreign goods become cheaper in the U.S. Thus, we are likely to import more, reducing any trade surpluses; or increasing any trade deficits.

A customer buys 5M of 3 1/2% Treasury Bonds at 101-16. How much will the customer receive at each interest payment? A. $17.50 B. $35.00 C. $87.50 D. $175.00

C. "5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 3.5% of $5,000 face amount equals $175.00. Since interest is paid semi-annually, each payment will be for $87.50. Notice that the fact that the bond is trading at a premium is irrelevant - the interest payment is based on the stated interest rate times par value.

Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would inquire about the customer's: I Existing investment holdings II Current investment objective III Financial situation and needs IV Daily living expenses A. I only B. II and III C. I, II, III D. I, II, III, IV

C. "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status. Inquiring about the customer's daily living expenses might be a little too intrusive to ask.

On the same day when the market price of ABC stock is $59, a customer takes the following options positions: Buy 1 ABC Jan 55 Call @ $7 Sell 2 ABC Jan 60 Calls @ $4 Buy 1 ABC Jan 65 Call @ $2 This position is profitable when the market: A. moves sharply down B. moves sharply up C. is stable D. is volatile

C. A butterfly spread is a market neutral position that is created by combining a "long" spread with a "short spread." It is called a "butterfly" because the 2 "outer" long positions are the wings of the butterfly, while the 2 short positions at the same strike are the "body" of the butterfly/ The position is established with a small debit that establishes the maximum potential loss if the market moves broadly up or down. If the market stays right in the middle ($60 in this example), the gain is maximized. Here is what happens as the market moves: Market is at $55 or lower: All positions expire and the net $1 debit is lost. Market moves to $56: $1 is gained on the long 55 call, offsetting the $1 debit = breakeven. Market moves to $57: $2 is gained on the long 55 call, offset by the $1 debit = $1 profit Market moves to $58: $3 is gained on the long 55 call, offset by the $1 debit = $2 profit Market moves to $59: $4 is gained on the long 55 call, offset by the $1 debit = $3 profit Market moves to $60: $5 is gained on the long 55 call, offset by the $1 debit = $4 profit. This is the maximum potential gain. Market moves to $61: $5 is gained on the exercise of the long 55 call and one of the short 60 calls, offset by a $1 loss on the other short 60 call and the $1 debit = $3 profit Market moves to $62: $5 is gained on the exercise of the long 55 call and one of the short 60 calls, offset by a $2 loss on the other short 60 call and the $1 debit = $2 profit Market moves to $63: $5 is gained on the exercise of the long 55 call and one of the short 60 calls, offset by a $3 loss on the other short 60 call and the $1 debit = $1 profit Market moves to $64: $5 is gained on the exercise of the long 55 call and one of the short 60 calls, offset by a $4 loss on the other short 60 call and the $1 debit = $0 profit. This is the upside breakeven. Market moves to $65 or higher: All positions are exercised. $5 is gained on the exercise of the long 55 call and one of the short 60 calls, offset by a $5 loss on the exercise other short 60 call and the long 65 call. The loss is the debit of $1.

Which statement is FALSE about CMBs? A. CMBs are used to smooth out cash flow B. CMBs are sold at a discount to par C. CMBs are sold at a slightly lower yield than T-Bills D. CMBs are direct obligations of the U.S. government

C. CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. Because they are sold on an irregular basis, they sell at slightly higher yields than equivalent maturity T-Bills. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.

A 50-year old man owns a non-qualified variable annuity contract that has appreciated substantially over the years. He wishes to annuitize the account for additional income using IRS Rule 72t. How will the first payment be taxed? A. 100% taxable ordinary income B. 100% non-taxable cost basis C. Part ordinary income and part cost basis D. 10% penalty tax applied because the client is under age 59 1/2

C. Instead of taking a lump sum distribution, the owner of a variable annuity contract can "annuitize" and receive annuity payments for life. Each payment has 2 components - an earnings portion that is taxable and a return of capital portion (cost basis) that is not taxable. The non-taxable portion represents the return of the original investment that was made with "after tax" dollars. IRS Rule 72t gives a way for payments to be taken from the annuity prior to age 59 1/2 without the 10% penalty tax being applied. Rule 72t basically requires that annual payments deplete the account over that individual's expected life (the IRS has 3 approved methods for this). The rule also requires that a minimum of 5 annual "Substantially Equal Periodic Payments" (SEPPs) be taken, but that payments must continue until at least age 59 1/2.

A customer buys 100 shares of ABC stock at $25 as an initial transaction in a new margin account. The customer must deposit: A. $625 B. $1,250 C. $2,000 D. $2,500

C. Regulation T initial margin to buy stock is 50% of $2,500 = $1,250. However, since this is a new account, it must meet the minimum initial margin of $2,000 needed to open an account. Therefore, $2,000 must be deposited.

The Securities Exchange Act of 1934 regulates which of the following markets? I Primary Market II Second Market III Third Market IV Fourth Market A. I only B. II only C. II, III, IV D. I, II, III, IV

C. The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities on an exchange), second market (over-the-counter trading of securities not listed on an exchange), third market (over-the-counter trading of securities listed on an exchange floor), and fourth market (direct trading of securities between institutions on ECNs and ATSs).

The Specialist (DMM) can stop stock for: I proprietary orders II public orders III brief time periods IV that trading day A. I and III B. I and IV C. II and III D. II and IV

C. The Specialist (now renamed the DMM - Designated Market Maker) can only stop stock - guaranteeing a price for a brief time period to a floor broker - for public orders. This is a Specialist/DMM courtesy function that allows floor brokers to "shop around" for the best price, knowing that they have a guaranteed price from the Specialist/DMM in hand if they cannot locate a better deal.

Which statements are TRUE regarding Brokered CDs? I There is a penalty for early withdrawal II There is no penalty for early withdrawal III There can be a loss of principal upon an early withdrawal IV There can be no loss of principal upon an early withdrawal A. I and III B. I and IV C. II and III D. II and IV

C. There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity).

Customer Name: Jane Smith Age: 41 Marital Status: Single Dependents: 1 Child, Age 7 Occupation: Corporate Manager Household Income: $120,000 Net Worth: $150,000 (excluding residence) Own Home: Yes Investment Objectives: Saving For College; Saving for Retirement Investment Experience: 10 years Current Portfolio Composition: $140,000 Market Value 50% Money Market Fund 50% Corporate Bonds This client has just inherited $100,000 and wants to use the funds to pay for her child's college education. She also has asked whether her current portfolio meets her goal of maximizing saving for retirement. Based on this information, the best recommendation to the client is to: A. deposit the additional $100,000 to the money market fund to ensure that the funds will be available to pay for college B. open a 529 plan with the $100,000 inheritance, investing in a growth fund; and liquidate both the money market fund holding and the corporate bond holdings, using the proceeds to buy growth stocks C. open a 529 plan with the $100,000 inheritance, liquidate $50,000 of the money market fund and $50,000 of the corporate bonds, using the proceeds to buy growth stocks D. open an UGMA account with the $100,000 inheritance investing in growth stocks

C. This customer is looking to use her $100,000 inheritance to fund her kid's college education. A 529 plan is best for this, since it grows tax-deferred and distributions used to pay for college are tax free. Since the kid is only age 7, a growth fund investment is most suitable, since the child has 10-11 years before college starts. Note that a UGMA (custodian account) does not allow for tax deferral, so it is not the best choice. The customer also wants to save for retirement and she is only age 41, so she has at least 25 years to go before retiring. Her portfolio is way too conservatively invested for someone this age - it will grow at a very low rate since it is only invested in money market funds and corporate bonds. At this age, the customer should be invested 60-70% in growth stocks, with the balance in safer investments. So the best choice is to liquidate most of the money market fund and corporate bond holding, and invest the proceeds in growth stocks (Choice C). Choice C still leaves the customer with $20,000 in the money market fund (for emergencies) and she still has a small investment in corporate bonds ($20,000), but the remaining $100,000 will now be in growth stocks. This is a good mix for a 41 year old person looking to save for retirement. Also note that Choice B is not the best choice because the customer should still have a small portion of her portfolio in safer and more liquid securities (for emergencies) like a money fund.

A municipal securities firm is hosting an event in its suite at a football game in the city where the firm is headquartered. A registered representative wants to invite an individual to join him in the suite to watch the game. The individual works for the municipality, and has worked with the registered representative on previous bond underwriting deals for the municipality. The ticket to the game is worth $250. Which statement is TRUE about this? A. Giving the ticket to the game to this individual violates the MSRB $100 gift limit B. This individual can be given the ticket because it has a de minimis value under the MSRB Political Contribution rule C. This individual can be given the ticket because the firm is hosting the event and it is acceptable to invite a business client D. This individual cannot be given the ticket because it is a conflict of interest

C. This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario! The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official's campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution. The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm's policies and procedures - which is the case here because the firm is hosting the event.

Long the stock and short the call is an appropriate strategy in a: A. declining market B. rising market C. stable market D. fluctuating market

C. Whenever a customer has a stock position, and the customer wishes to generate extra income by selling an option against that position, the market sentiment is neutral. This is a covered call writer - a call writer who owns the underlying stock position. The customer sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If the customer expects the market to rise, he or she would not write the call against the stock position because the stock will be "called away" in a rising market. If the customer expects the market to fall, he or she would sell the stock or buy a put as a hedge.

Which of the following statements are TRUE regarding NASDAQ Level II? I It shows bid and ask quotes of each market maker with the quote size II Each market maker must trade at the quoted price when matched by the System III If a market maker refuses to honor a quote, this is called "backing away" IV Market makers must be registered with NASDAQ A. I only B. I and II C. III and IV D. I, II, III, IV

D. All of the statements are true about NASDAQ Level II. It shows bid and ask quotes of each market maker with the quote size. Each market maker must trade at the quoted price when matched by the System. If a market maker refuses to honor a quote, this is called "backing away," which is a prohibited practice under FINRA rules. Market makers must be registered with NASDAQ.

When recommending fee based accounts to customers, member firms should consider: I Cost of trading in the account II Anticipated level of trading activity in the account III The importance that the customer places on aligning his interests with the broker IV The customer's fee structure preferences A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

D. All of the statements are true. When recommending fee based accounts, member firms should consider, among other things, the cost of trading in the account; the anticipated level of trading activity in the account; the importance that the customer places on aligning his or her interests with the broker; and the customer's fee structure preference.

All of the following are primary purchasers of Treasury securities EXCEPT: A. Commercial banks B. Broker-dealers C. Investment companies D. Federal Reserve Board

D. Commercial banks and broker-dealers bid at Treasury auctions to buy securities for their inventories. Investment companies such as government bond mutual funds and unit investment trusts bid at auction to buy large blocks of Treasury securities directly, bypassing a dealer or broker and therefore saving commissions or markups. The Federal Reserve Board is not a primary purchaser of Treasury securities - it does not bid at Treasury auctions. However, it does trade them in the secondary market to influence the availability of credit.

A client has a portfolio of $2,000,000 that consists of $600,000 of an Energy ETF; $600,000 of a Gold/Precious Metals ETF; $600,000 of a Uranium/Oil ETF and $200,000 of short term Treasury securities. This customer's investment objective is: A. preservation of capital B. income C. safety of principal D. growth

D. Investments in commodities are made for long term capital growth, especially if inflation is expected in the future (though that is not mentioned in the question). Preservation of capital is an investment objective for someone who can't afford to lose principal, such as a retiree. Such an account would only hold the safest short term fixed income securities such as money market instruments, CDs and short term Treasury securities. Income is an investment objective for someone seeking income (duh!). Such an account would hold longer term fixed income securities (bonds and preferred), and could also hold high dividend paying blue chip stocks, augmented by covered call writing for additional income. Safety of principal is an investment objective for someone who is risk averse. Such an account should only be recommended "safe" investments like AAA rated bonds and blue chip stocks.

Registered representatives: I can trade securities on stock exchange floors II cannot trade securities on stock exchange floors III can trade securities over-the-counter IV cannot trade securities over-the-counter A. I and III B. I and IV C. II and III D. II and IV

D. Registered representatives cannot trade securities - they can enter orders on behalf of customers to be executed by traders in the market.

Which statements are TRUE regarding Roth IRAs? I Roth IRAs allow for higher annual contributions than conventional IRAs II Roth IRAs allow for the same annual contributions as conventional IRAs III An individual can contribute up to $5,500 in 2018 to both a Roth IRA and a Traditional IRA IV An individual can contribute up to $5,500 in 2018 to either a Roth IRA or a Traditional IRA A. I and III B. I and IV C. II and III D. II and IV

D. Roth IRAs, unlike Traditional IRAs, do not permit a tax deduction for the amount contributed. On the other hand, when distributions are taken, unlike a Traditional IRA, the distributions are not taxable (given that the investment has been held for at least 5 years). The maximum annual contribution to either a Traditional IRA or a Roth IRA is $5,500 in 2018 for an individual or $11,000 for a married couple.

The Securities and Exchange Commission is empowered to administrate all of the following Acts EXCEPT: A. Securities Act of 1933 B. Trust Indenture Act of 1939 C. Investment Company Act of 1940 D. Uniform Securities Act

D. The Uniform Securities Act is more commonly known as the "Blue Sky" state law, and is adopted "state by state." The SEC, a Federal agency, has no jurisdiction over activities within each state and does not administrate this Act. The SEC does administrate the Securities Act of 1933; the Securities Exchange Act of 1934; the Trust Indenture Act of 1939; and the Investment Company Act of 1940.

A customer has a long margin account that shows the following: Long Market Value: $15,000 Debit Balance: $ 5,000 If the market value declines by $5,000, the debit balance will be what percentage of the equity in the account? A. 25% B. 50% C. 75% D. 100%

D. This account originally shows: Long Market Value Debit Balance Equity $15,000 $5,000 $10,000 If the market value declines by $5,000, the account now shows: Long Market Value Debit Balance Equity $10,000 $5,000 $5,000 The debit balance of $5,000 is exactly the same as the $5,000 of equity in the account.

Which of the following actions by the Federal Reserve will increase interest rates? I Purchases of securities as directed by the FOMC II Sales of securities as directed by the FOMC III Repurchase agreements with U.S. Government dealers and banks IV Reverse repurchase agreements with U.S. Government dealers and banks A. I and III B. I and IV C. II and III D. II and IV

D. To increase interest rates, the Federal Open Market Committee must direct a tightening of the money supply. Sales of securities by the Fed drains cash from the dealers, and tightens available credit. Reverse repos by the Fed do the same thing. In a reverse repo the Fed sells government securities to the bank dealers, with an agreement to buy them back (usually the next day). For that day, the bank is drained of cash and credit availability is tightened.

Which of the following statements are TRUE about new issue municipal selling practices? I The customer must receive a copy of the Final Official Statement if one is printed II The customer must receive a copy of the Agreement Among Underwriters III If requested, the customer must receive the order priority provisions used by the manager IV The customer must receive a confirmation showing the purchase price A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV

D. Under MSRB rules, a customer buying a new issue must receive a confirmation accompanied by a copy of the final Official Statement if one has been prepared. (If one has not been prepared by the issuer, there is no requirement to provide the document) If the customer requests, the order priority provisions must also be disclosed (Pre-Sale, Group, Designated, Member). There is no requirement to send the customer a copy of the Agreement Among Underwriters.

A customer invests $30,000 in a variable annuity contract. Over the years, the contract grows to $60,000 in value. At age 65, the customer takes a $40,000 lump sum distribution from the contract. The tax consequence is: A. $40,000 non-taxable income B. $40,000 taxable income C. $10,000 taxable income; $30,000 non-taxable return of capital D. $30,000 taxable income; $10,000 non-taxable return of capital

D. Variable annuity distributions are taxed LIFO (Last In; First Out). The "Last In" dollars are the tax-deferred build up in the separate account. These come out first and are taxable. Any distribution beyond this amount is a tax free return of invested capital (there is no tax deduction for variable annuity contributions). Because $40,000 was distributed, $30,000 represents the build-up (taxable) and the remaining $10,000 is a tax-free return of capital.

When a recession is expected: I investors will increase purchases of corporate bonds II investors will increase purchases of government bonds III yields on corporate bonds will decrease IV yields on government bonds will decrease A. I and III B. I and IV C. II and III D. II and IV

D. When a recession is expected, investors sell corporate bonds (increasing their yields) and buy government bonds (decreasing their yields). Thus, the spread between corporate and government bond yields will widen.

Which statements are TRUE when comparing a full power of attorney given in a brokerage account to a limited power of attorney? I The individual given a full power of attorney can draw checks only II The individual given a full power of attorney can enter orders and draw checks III The individual given a limited power of attorney can draw checks only IV The individual given a limited power of attorney can enter orders only A. I and III B. I and IV C. II and III D. II and IV

D. A person holding a limited power of attorney in a brokerage account can enter orders but cannot draw checks. A person holding a full power of attorney can do both - but any checks must be drawn to account name - not to the name of the third party.