Series 7 - Mastery Exam II #1

Upon notification of the death of a customer, the registered representative should do all of the following EXCEPT: A note the date of death on the account B cancel all open orders in the account C freeze all security positions in the account D liquidate all security positions in the account

.The best answer is D. There is no requirement to liquidate security positions in an account where the customer is deceased. The procedure, upon learning of the death of the customer, is to: note the date of death and freeze the account; cancel all open orders in the account; and wait for instructions from the executor of the estate or the beneficiary.

Equity options contracts for a given month expire on the: A third Friday of the month at 11:59 PM Eastern Standard Time B Friday following the third Saturday of the month at 11:59 PM Eastern Standard Time C Friday before the third Wednesday of the month at 11:59 PM Eastern Standard Time D Friday following the third Wednesday of the month at 11:59 PM Eastern Standard Time

The best answer is A. Equity options contracts for that month expire on the third Friday of the month at 11:59 PM Eastern Standard Time. They can be traded until 4:00 PM ET on that day.

A customer buys 1 ABC Jan 75 Call @ $2 and buys 1 ABC Jan 75 Put @ $8 when the market price of ABC = $73. The maximum potential loss is: A $1,000 B $1,200 C $6,500 D $7,300

The best answer is A. If the market moves to $75, both contracts expire "at the money." The customer loses the $1,000 paid in premiums. This is the maximum potential loss.

Which of the following statements are TRUE regarding new issue U.S. Government and Agency securities? I U.S. Government securities are sold at auction conducted by the Federal Reserve II U.S. Government securities are sold through a selling group III Agency securities are sold at auction conducted by the Federal Reserve IV Agency securities are sold through a selling group A I and III B I and IV C II and III D II and IV

The best answer is A. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public.

A customer makes the following trades when ABC stock is at $49: Buy 1 ABC Jan 50 Put @ $ 4 Sell 1 ABC Jan 65 Put @ $11 The maximum potential gain is: A $700 B $800 C $1,100 D $1,500

The best answer is A. This is a bull put spread which is created at a $7 net credit consisting of a $4 premium paid vs $11 premium received. If the market rises, both puts will expire "out of the money" and the customer keeps the $7 credit. This is the maximum potential gain. However, if the market drops, the customer will first be exercised on the short put and must buy the stock at $65. If the market continues falling, the customer can always sell the stock at $50 by exercising the long put, resulting in a maximum 15 point loss. Since $7 was collected in premiums, the maximum net loss is $800.

A customer sells 1 OEX Jan 550 Put @ $10 when the index is at 548.25. The maximum potential gain for the customer is: A $1,000 B $53,825 C $54,000 D unlimited

The best answer is A. If the index stays at 550 or rises, the put expires and the writer will gain the 10 points in premium received for selling the contract.

A customer buys 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has dropped to $40. The minimum maintenance margin requirement is: A $10,000 B $12,000 C $15,000 D $18,000

The best answer is A. The minimum maintenance margin requirement for long stock positions is 25% of the current market value = 25% of $40,000 = $10,000. Note that minimum margins are based on the closing market value each day.

The maximum life of an index option contract is: A 4 months B 8 months C 12 months D 24 months

The best answer is A. Unlike regular stock options that have a maximum life of 8 months (though this can be tested as 9 months), index options have a maximum life of 4 months (though this may still be tested as 3 months, which used to be the maximum life). In any event, in no question will both 3 and 4 months be given as choices.

Stock options contracts: I are American style II are European style III can be issued at any time IV can be exercised at any time A I and III B I and IV C II and III D II and IV

The best answer is B. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts can only be issued based on the cycles set by the Options Clearing Corporation.

A divided syndicate is known as a(n): A Eastern Syndicate B Western Syndicate C Northern Syndicate D Southern Syndicate

The best answer is B. A divided syndicate is known as a Western syndicate. Here, each member takes a preset dollar amount of the issue and is only responsible for selling that initial amount. This contrasts to an undivided syndicate agreement, which is an Eastern account. There is no such thing as a Northern or Southern account.

A 60-year old man wishes to receive an annuity payment for himself and his beneficiary for at least 15 years. The recommended payout option is: A life annuity B life annuity - period certain C life annuity - unit refund D installments for a designated amount

The best answer is B. A life annuity-period certain will pay for one's life, however if that person dies early, the annuity will still pay for a designated period. In this case, the period certain would be 15 years. A life annuity simply pays for one's life. Once that person dies, payments cease. A unit refund annuity pays the remaining balance as a lump sum if the annuitant dies "early". The annuity option that chooses installments for a designated amount allows the annuitant to choose the monthly amount to be received. Payments continue for that amount until the account is exhausted.

Long call spreads are profitable in all of the following circumstances EXCEPT: A the spread between the premiums widens above the debit paid B the spread between the premiums narrows below the debit paid C both positions are exercised D the market rises by an amount that exceeds the debit paid

The best answer is B. Long call spreads are profitable in rising markets. To have a net profit, the market must rise above the strike price of the long call (lower strike price) by more than the debit paid. If the market continues to rise, the short call position (higher strike price) will be exercised, obligating delivery of the stock at a profit. If the positions are traded out, the closing credit must be larger than the opening debit for the position to be profitable. Thus, debit spreads are profitable only if the spread widens beyond the debit paid.

A customer buys 100 shares of ABC stock at $51 and sells 1 ABC Jan 50 Call @ $4. The maximum potential loss is: A $400 B $4,700 C $5,100 D unlimited

The best answer is B. The worst case is the stock becoming worthless. The customer loses the full value of the stock ($5,100) net of the $400 in collected premiums, for a net loss of $4,700.

In an existing margin account, a customer buys 1 ABC Jan 35 Put @ $4 when the market price of ABC is $34. The customer must deposit: A $200 B $400 C $3,400 D $3,500

The best answer is B. To buy an option, the premium must be paid in full. The premium is $4 per share x 100 shares = $400.

ABC Corporation, after many profitable years, declares a one-time special cash dividend of $10.00 per share. After the announcement, the stock is trading at $100 per share. Your customer holds 1 ABC Jan 110 Call. As of the ex date, the customer will have: A 1 ABC Jan 90 Call B 1 ABC Jan 100 Call C 1 ABC Jan 110 Call D 1 ABC Jan 120 Call

The best answer is B. While the OCC does not adjust the strike prices of listed options contracts for regular quarterly cash dividends, since they are a "known quantity" that the market prices into options premiums, "special cash dividends" are a one-time event that the market does not know about. Therefore, the OCC does adjust listed options for special cash dividends that amount to at least $12.50 per contract. Since this special cash dividend amounts to $10 per share x 100 shares = $1,000 value per contract, it will be adjusted. The new strike price will be 110 - $10 cash dividend = 100. The number of shares covered by the contract does not change.

An individual customer says the following to his broker: "Buy 100,000 shares of ABC stock whenever you think the time is best. This order is good unless I call you to cancel." Which statement is TRUE about the handling of this order? A An executed power of attorney must be obtained from the customer prior to accepting the order B The order must be executed by the close of the market on that trading day C The order can be accepted as given, and can be executed at the discretion of the brokerage firm at any time or day D This order can only be accepted if the customer places it via fax or e-mail

The best answer is B. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order

In a negotiated municipal underwriting, which of the following statements are TRUE? I The spread is disclosed II The spread is not disclosed III Each underwriter's participation must be disclosed IV There is no requirement to disclose each underwriter's participation A I and III B I and IV C II and III D II and IV

The best answer is B. In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters, nor their participation amounts.

The person who shares in selling responsibility and liability, but who does not have decision making authority in a new issue syndicate, is known as the: A managing underwriter B syndicate member C selling group member D broker's broker

The best answer is B. The managing underwriter forms the syndicate and selling group, establishes the spread and the portions of the spread to be earned by each member of the underwriting group, and manages the offering of the securities. For this work, the manager earns the management fee out of the spread. The syndicate members share in the financial liability and profit potential for selling the issue. For selling his or her allotment, the syndicate member earns the "underwriter's concession." The selling group members help the syndicate find purchasers for the issue, but take no financial liability. For this work, the selling group members earn the "selling concession."

In an existing margin account with no SMA, a customer sells short 100 shares of ABC stock at $40 and sells 1 ABC Jul 40 Put @ $4. The customer must deposit: A 0 B $1,600 C $2,000 D $2,400

The best answer is B. To short the stock, Regulation T initial margin is 50% of $4,000 = $2,000. The short stock position covers the short put, so no margin is required to sell the put. Since $400 in premiums is received in the account from selling the put, the net deposit is $2,000 - $400 = $1,600. Because this is an existing account, the customer must already be meeting the minimum maintenance requirement and thus, his deposit can be less than $2,000.

Which of the following is a settlement type for foreign currency option trading? A Spot B Regular Way C Forward D Future

The best answer is B. Trades of foreign currency options settle either cash (same day) or regular way (next business day). Do not confuse this with trades of foreign currencies. Trades of foreign currencies settle either "spot" (1 or 2 business day settlement - the more actively traded currencies settle in 1 day; less actively traded currencies settle in 2 days) or forward (a mutually agreed date in the future).

A customer sells short 200 shares of ABC at $30 in a margin account. The stock immediately falls to $20. Payment is received from the customer 6 business days after trade date. All of the following statements are true EXCEPT: A the Regulation T requirement is $3,000 B the customer may reduce the Regulation T requirement by 50% of the subsequent profit C the customer may borrow $3,000 from the account D if an extension was not requested, the account will be frozen

The best answer is B. To sell short $6,000 of stock (200 shares at $30), 50% must be deposited under Regulation T = $3,000. The account sets up as: Credits - Short Market Value = Equity Sale $6,000 - $6,000 = 0 Margin $3,000 - ______ = $3,000 $9,000 - $6,000 = $3,000 If the market value drops to $20 per share (on the 200 shares in the account), the account will show: Credits - Short Market Value = Equity $9,000 - $4,000 = $5,000 The subsequent increase in equity in the account cannot be used to reduce the margin call. However, the SMA created by the drop in price can be borrowed after the margin deposit is made. The SMA amount is computed as follows. To be at 50% margin, 50% of $4,000 market value = $2,000 of equity is needed. The account has $5,000 of equity, so the excess of $3,000 can be borrowed. If the customer paid after 5 business days from trade date ("S + 2" = 3 business days + another 2 business days to collect funds under Regulation T), and an extension was neither requested nor granted, the account would be frozen.

Which of the following positions is profitable if the market is at $50? I Long 1 ABC Jan 50 Call @ $5 II Long 1 ABC Jan 50 Put @ $5 III Short 1 ABC Jan 50 Straddle @ $5 IV Long 100 shares of ABC @ $50 / Short 1 ABC Jan $50 Call @ $5 A II only B I and II C III and IV D I, II, III, IV

The best answer is C. If the market is at $50, the long 50 call expires "at the money" and the $5 premium is lost. The long 50 put also expires "at the money" and the $5 premium is lost. A short 50 straddle consists of a short 50 call and a short 50 put. Both expire "at the money" and the $5 collected premium is gained. If the stock is at $50, the long stock / short call position is profitable because the call expires "at the money" and the customer keeps the $5 premium. There is no loss on the stock position, so the net gain is $5. Side Note: A straddle is the: -Purchase of a Call and Purchase of a Put on the same stock, with the same strike prices and expirations; OR -Sale of a Call and Sale of a Put on the same stock, with the same strike prices and expirations. A Long Straddle is a volatile market strategy; a Short Straddle is a stable market strategy.

A customer would receive protection on a short stock position from which TWO of the following? I Buy a call II Sell a call III Buy a put IV Sell a put A I and III B II and III C I and IV D II and IV

The best answer is C. In order to hedge a short stock position against an upside market move, the best choice is to buy a call. The long call option allows the holder to buy the stock at the exercise price if the market rises - protecting the short stock position from upside market risk. However, buying a call is not given as a stand alone choice. If one were to sell a put against a short stock position, then if the stock's market price rises, the put expires out the money. The premium received is a form of limited protection as the market rises. However, if the stock's price rises greatly, then the premium received is not enough to compensate for the loss on the short stock position. Buying a put would not give upside protection - if the market rises, the put expires out the money and the premium is lost, in addition to any loss on the stock position. Writing a call does not give downside protection - in a rising market, the short call would be exercised, obligating the call writer to deliver the stock at the strike price. The writer would lose on this stock position, in addition to losing on the original stock position, in a rising market.

A customer short margin account shows: 200 shares of ABC @ $60 200 shares of DEF @ $75 200 shares of XYZ @ $40 Credit = $60,000 SMA = $7,500 Reg. T = 50% What is the equity in the account? A $11,500 B $23,000 C $25,000 D $35,000

The best answer is C. The account is set up as: Credit Balance - Short Market Value = Equity Credits - Short Market Value = Equity % Credits = $60,000 Short Market Value = $35,000 Equity % = $25,000 71% The account has $25,000 of equity.

Which of the following cover a short call contract? I Long a depository receipt for the stock II Long the cash value of the stock III Long an escrow receipt for the stock IV Long the stock A IV only B I and III only C I, III, IV D I, II, III, IV

The best answer is C. A short call cannot be covered by the deposit of cash because the theoretical loss is unlimited. The only way to cover a short call is with the ownership of the stock or owning an option that allows for the purchase of the stock at a price not to exceed the strike price of the short call, good for the entire life of the short call. Being long the stock covers a short call; long an escrow receipt shows that the stock is on deposit at a bank; long a depository receipt shows that the stock is on deposit with a clearing corporation.

Call loans made by banks to broker-dealers are secured by: A cash deposits made by the broker-dealer B proprietary security positions of the broker-dealer held in the firm's trading account C customer security positions in margin accounts held by the firm D customer security positions in cash accounts held by the firm

The best answer is C. Call loans are secured by customer margin securities. Fully paid customer securities cannot be pledged for these loans - they must be segregated and placed in safekeeping. The loans are not secured by cash nor do firm securities positions collateralize these loans. Loans using firm securities as collateral (proprietary positions) must be kept separate from loans using customer securities as collateral.

A person, aged 45, has a 401(k) plan at an employer and leaves his job at the firm. The 20% withholding tax requirement upon distribution will be imposed for which of the following situations? A The entire distribution is rolled over into an Individual Retirement Account B The entire distribution is transferred directly to the new employer's qualified retirement plan C The entire distribution is taken as a check by the employee D The entire distribution amount is retained inactive in the 401K plan

The best answer is C. Distributions from qualified retirement plans, unless they are rolled over into an IRA, are taxable. To ensure that the tax will be paid, the tax code requires that 20% of the distribution amount be withheld as a credit against taxes due. No withholding tax is imposed if a trustee to trustee transfer is made - with the assets being transferred directly into another IRA or qualified retirement plan.

A customer buys 100 shares of ABC stock at $40 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential gain until the option expires is: A$200 B$500 C$700 Dunlimited

The best answer is C. If the market rises above $45 the short call will be exercised. The customer must deliver the stock that he bought at $40 for the $45 strike price, resulting in a $500 gain. Since $200 was collected in premiums, the total gain is $700. This is the maximum potential gain while both positions are in place.

On the same day in a margin account, a customer buys 1 ABC Jan 60 Put @ $2 and sells 1 ABC Jan 70 Put @ $6 when the market price of ABC is $67. The point where the customer breaks even is: A$62 B$64 C$66 D$68

The best answer is C. In a short put spread, the customer receives a credit in return for exposing himself to loss on the short put position. However, an offsetting long put position limits the maximum potential loss. To breakeven, the customer must lose the $4 credit received. This will be lost if the market falls 4 points below the 70 strike price on the short put. At $66, the short put will be exercised, requiring the customer to buy the stock at $70 (4 point loss). The long 60 put expires "out the money." Since $4 was collected in premiums, the customer breaks even. To summarize, the breakeven formula for a short put spread is: Short Put Spread Breakeven = Short Strike Price - Credit

A customer sells short 100 shares of ABC stock at $38 and buys 1 ABC Mar 40 Call @ $5. The maximum potential loss is: A$200 B$500 C$700 Dunlimited

The best answer is C. The long call limits loss on the short stock position in a rising market. The stock was sold for $38 and can be bought back at $40 by exercising the call. The loss is $2 per share on the stock position. Since $5 per share was paid in premiums, the total loss is 7 points or $700

An individual who maintains a Keogh Plan is approaching the age of 72. Which statement is TRUE? A Distributions from the plan must commence on the date that the individual reaches the age of 72 B Distributions from the plan must commence on April 1st prior to the year the individual reaches the age of 72 C Distributions from the plan must commence on April 1st following the year the individual reaches the age of 72 D Distributions are not required, but may be taken at the discretion of the individual

The best answer is C. Under the Keogh rules, any distributions from a Keogh Plan must start no later than the April 1st following the year that the individual reaches the age of 72.

Variable annuity contracts: I have the issuer bear the investment risk II have the purchaser bear the investment risk III are non-exempt securities IV are exempt securities A I and III B I and IV C II and III D II and IV

The best answer is C. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.

Which of the following are primary purchasers of Treasury securities? I Investment companies II Broker-dealers III Federal Reserve Banks IV Commercial banks A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is C. Commercial banks and broker-dealers that are primary dealers bid at Treasury auctions to buy securities for their inventories. Investment companies such as government bond mutual funds, money market 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 Banks do not bid at Treasury auctions.

A customer has an existing combined margin account that shows the following positions: Long: 4,000 ABC @ $5 Short: 4,000 XYZ @ $5 Debit Balance: $5,000 Credit Balance: $20,000 The minimum maintenance margin requirement for this account is: A $4,000 B $11,000 C $25,000 D $30,000

The best answer is C. Minimum maintenance margin in a long margin account is 25% of market value. The long market value is $20,000, so minimum maintenance is 25% of $20,000 = $5,000. For the short position, minimum maintenance is usually 30% of $20,000 = $6,000 minimum. However, in this case, the stock is too "cheap" and special minimums apply. To short a $5 stock, $5 minimum margin is required (greater of 30% or $5 per share for stocks worth $5 and up). 4,000 shares at $5 minimum = $20,000 minimum margin for the short position. The total minimum maintenance margin requirement is: 5,000 + $20,000 = $25,000.

In a competitive bid municipal bond offering, the cover is the difference between the: A lowest and highest bids B bid and "production" C winning bid and the next highest bid D winning bid and the lowest bid

The best answer is C. The "cover" is the difference between the winning bid and the next highest bid.

Which statement is TRUE? A Contributions to a 529 Plan are tax deductible while contributions to a Coverdell are not tax deductible B Contributions to a 529 Plan are not tax deductible while contributions to a Coverdell are tax deductible C Contributions to both a 529 Plan and Coverdell ESA are tax deductible D Contributions to both a 529 Plan and Coverdell ESA are not tax deductible

The best answer is D. Contributions to both Coverdell ESAs and 529 Plans are not tax deductible. Earnings build tax-deferred in both. Distributions from both, when used to pay for appropriate educational expenses, are not taxable. Coverdell ESA distributions can be used without limit to pay for all levels of education. 529 plan distributions can only be used without limit to pay for college and higher; distributions to pay for education below the college level are limited to $10,000 per year. High earning individuals cannot open a Coverdell; there is no similar restriction on a 529 Plan. Coverdell ESA contributions are limited to $2,000 per child per year; 529 Plan contribution limits are set by each state and are much higher.

In which of the following choices are both the stock and options positions on the same side of the market? I Long Call / Long Stock II Short Call / Long Stock III Long Put / Short Stock IV Short Put / Short Stock A I and II B III and IV C II and III D I and III

The best answer is D. Long calls are profitable in bull markets as are long stock positions. These are on the same side of the market (the upside). Short calls are profitable if the market drops, while long stock positions are profitable if the market rises - these are on opposite sides of the market. Long puts are profitable if the market drops and short stock positions are profitable if the market drops - these are on the same side of the market. Short puts are profitable if the market rises while short stock positions are profitable if the market falls - these are on opposite sides of the market.

A customer owns 100 shares of ABC stock in a margin account, valued at $38 per share. The customer sells 2 ABC Jul 40 Calls @ $4. The maximum potential loss is: A$800 B$7,200 C$8,000 Dunlimited

The best answer is D. One of the short calls is covered by the long stock position, while the other short call is naked. The loss potential on a short naked call is unlimited.

A customer buys an ABC May 50 Put and sells an ABC Jun 50 Put. The customer profits if: I The spread widens II The spread narrows III Both contracts expire A I only B II only C I and III D II and III

The best answer is D. The June expiration must be longer than the May expiration. The maximum life of a regular option contract is 9 months. If it is now May, then the June contract can trade (since it is 1 month later than May). However, if it is June, a May contract cannot be trading, because the following May is 11 months away. Thus, the customer is buying the near expiration (less expensive) and selling the far expiration (more expensive since there is more time left to the contract), so this must be a credit calendar spread. Credit spreads are profitable if the spread between the premiums narrows. If both contracts expire, the credit is the profit. If both contracts are exercised, the customer buys the stock at 50 and sells it at 50, still keeping the credit.

On the same day, a customer sells 1 ABC Jan 50 Call @ $5 and buys 1 ABC Jan 60 Call @ $2. Above which of the following prices will every dollar lost on the short call be exactly offset by a dollar gained on the long call? A$50 B$53 C$58 D$60

The best answer is D. The breakeven point is $53 per share. As the market rises above $53, the customer loses 1 point on the short 50 call for every $1 rise in the price of ABC stock. Once the market goes above $60, the long call will be "in the money," and a dollar will be gained on the long call for every dollar lost on the short call. Thus, above $60, there is no further loss. The maximum loss potential is 7 points or $700.

A customer buys 1 ABC Jan 35 Call @ $3.50 and 1 ABC Jan 35 Put @ $.50 when the market price of ABC is at $34.75. The maximum potential gain is: A $75 B $200 C $400 D unlimited

The best answer is D. The customer created a long straddle. Since the customer has purchased a call, the maximum potential gain is unlimited as the market rises on the long call position (since it gives the customer the right to buy the stock at a fixed price in a rising market). If the market rises, the put side of the straddle would expire "out the money" and have no further effect on the customer.

A customer sells short 100 shares of ABC at $36 and buys 1 ABC Jul 35 Call @ $3. The stock falls to $30 and the customer closes the option contract at $1 and buys the stock at the current market price. The customer has a: A$200 loss B$300 loss C$300 gain D$400 gain

The best answer is D. The customer sold the stock for $36 and bought a call, paying a premium of $3 per share, for net proceeds of $33. The customer closes the positions by purchasing the stock at $30 and selling the call contract for $1, for a net payment of $29 per share. The net profit is $33 - $29 = $4 or $400 on 100 shares.

Portfolio margining: I is suitable for unsophisticated investors II is suitable for sophisticated investors III requires a minimum account equity of $2,000 IV requires a minimum account equity of $100,000 A I and III B I and IV C II and III D II and IV

The best answer is D. The minimum equity to open a portfolio margin account for an individual customer is $100,000. This compares to the minimum equity requirement of $2,000 for a regular margin account. Portfolio margin can only be used by institutional or wealthy sophisticated individual customers. To open a portfolio margin account, the account must be qualified for naked options writing, which requires a more-detailed suitability determination showing that the customer is sophisticated and able to bear loss. Such an account requires not only branch manager approval, but also separate approval of a designated Registered Options Principal.

To open an options account, inquiry must be made as to the customer's: I Investment objective II Investment experience III Financial situation IV Financial needs A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. To open an options account, a customer must give detailed financial disclosure. The customer must be asked specifically about his or her: investment objective, investment experience, financial situation, financial needs, marital status, net worth, liquid net worth, and estimated annual income.

A customer has an existing margin account that is restricted by $400. The customer receives a $1,000 dividend on securities held in the account. The customer can immediately withdraw: A 0 B $100 C $600 D $1,000

The best answer is D. Cash dividends received from stock held in a margin account (whether the account is restricted or not) are applied against the debit and are 100% credited to SMA for 30 days. During this period, the customer can take out the dividend in full, restoring the debit to its original higher amount. After 30 days, if the customer does not take the dividend, the credit resulting from the dividend is automatically cleared from SMA and permanently reduces the debit.

In order to recommend a variable annuity to a customer, which statements are TRUE? I The customer must be informed, in general terms, of the material features of the product II The representative must believe that the customer would benefit from the product's features III The representative must believe that the variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable IV The representative must sign a statement that all required representations and determinations were completed A I and II only B III and IV only C I, II, III only D I, II, III, IV

The best answer is D. Consider this to be a learning question. All of the statements are true. In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that the: -customer has been informed, in general terms, of the material features of the product; -customer would benefit from one or more of the product's features; and -particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable. The representative must sign a statement that all required representations and determinations were completed.

A client surrenders a variable annuity contract 5 years after purchase because of poor performance. The customer invested $50,000 and redeemed it when the NAV was $40,000, however the customer only received $37,000 because a $3,000 surrender fee was imposed. The tax consequence is: A $13,000 capital loss B $13,000 deductible ordinary loss C $10,000 capital loss and $3,000 non-deductible loss D $10,000 deductible ordinary loss and $3,000 non-deductible loss

The best answer is D. If a customer surrenders a variable annuity contract early (typically due to poor performance or a pressing financial need), then the customer's cost basis is the amount invested and the sale proceeds is the amount received on redemption. Any loss is deductible as an ordinary loss, but any portion of the loss due to the surrender fee is not deductible! If a customer invested $50,000 in a variable annuity and redeemed it when the NAV was $40,000, however the customer only received $37,000 because a $3,000 surrender fee was imposed, then of the $13,000 ordinary loss, $10,000 is deductible and $3,000 is non-deductible.

A customer buys an ABC May 50 Put and sells an ABC Jun 50 Put. The customer profits if: I The spread widens II The spread narrows III Both contracts expire A I only B II only C I and III D II and III

The best answer is D. The June expiration must be longer than the May expiration. The maximum life of a regular option contract is 9 months. If it is now May, then the June contract can trade (since it is 1 month later than May). However, if it is June, a May contract cannot be trading, because the following May is 11 months away. Thus, the customer is buying the near expiration (less expensive) and selling the far expiration (more expensive since there is more time left to the contract), so this must be a credit calendar spread. Credit spreads are profitable if the spread between the premiums narrows. If both contracts expire, the credit is the profit. If both contracts are exercised, the customer buys the stock at 50 and sells it at 50, still keeping the credit.

On the same day, a customer sells 1 ABC Jan 50 Call @ $5 and buys 1 ABC Jan 60 Call @ $2. Above which of the following prices will every dollar lost on the short call be exactly offset by a dollar gained on the long call? A $50 B $53 C $58 D $60

The best answer is D. The breakeven point is $53 per share. As the market rises above $53, the customer loses 1 point on the short 50 call for every $1 rise in the price of ABC stock. Once the market goes above $60, the long call will be "in the money," and a dollar will be gained on the long call for every dollar lost on the short call. Thus, above $60, there is no further loss. The maximum loss potential is 7 points or $700.

As an initial transaction in a new margin account, a customer sells short 100 shares of ABC at $20 per share. After the customer deposits the appropriate margin, the credit balance in the account will be: A $1,000 B $2,000 C $3,000 D $4,000

The best answer is D. As an initial transaction in a new margin account, the customer sold 100 shares of ABC at 20. Regulation T requires 50% margin. 50% of $2,000 = $1,000 Regulation T requirement. However, since this is a new account, the FINRA minimum maintenance margin requirement of $2,000 must be met. Therefore, $2,000 must be deposited. This shows as a credit to the account. In addition, the short sale results in a credit of $2,000, for a combined credit of $4,000. This shows as: Credits - Short Market Value = Equity Sale $2,000 $2,000 0 Margin $2,000 ______ $2,000 Total $4,000 $2,000 $2,000

This will be question #50

This will be question #50