Series 7 Mock Exam #2

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

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

If a customer buys 100 shares of stock and writes one out-of-the-money call against her long position, the breakeven point is A) the cost of stock purchased less premium. B) the cost of stock purchased plus premium. C) the strike price less premium. D) the strike price plus premium.

A) the cost of stock purchased less premium. Explanation: When the investor owns stock and sells a call, the call is covered. Breakeven is computed by subtracting the premium from the stock's purchase price.

If a customer has a restricted margin account with special memorandum account (SMA) of $2,500, how much must he deposit to purchase $10,000 worth of stock? A) $5,000 B) $2,500 C) $10,000 D) $0

B) $2,500 Explanation: The purchase of $10,000 requires a $5,000 deposit, which can be reduced dollar for dollar by the existing SMA.

Your client writes 2 ABC Nov 220 calls at 5 and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for the client's position? A) $210 B) $215 C) $225 D) $230

B) $215 Explanation: The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5). Breakeven is the same if it is one covered call, or 1,000.

Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio? A) If specifically approved by the covered employees B) If this strategy is consistent with the objectives of the plan C) If specifically approved by the SEC D) Under no circumstances

B) If this strategy is consistent with the objectives of the plan Explanation: As covered calls are not considered to be a speculative option strategy, they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

All of the following considerations apply to the 5% markup policy except A) the cost of executing the transaction. B) the customer's ability to pay. C) the availability of the security. D) the services rendered by the broker-dealer.

B) the customer's ability to pay. Explanation: The 5% policy is a guideline for markups and commissions for exchange and over-the-counter trades. A firm cannot charge a higher commission or markup to a customer on the basis of the customer's ability to pay. Factors relevant in determining the fairness of a commission or markup include the type of security, the services rendered by the firm, and the expenses and difficulty of executing a particular trade.

An investor purchases 1,000 shares of PLEX common stock at a price of $153 per share. Shortly afterward, with PLEX selling for 149 per share, a purchase of 10 PLEX 150 puts at 4 takes place. What is the investor's breakeven point? A) $157 per share B) $113 per share C) $153 per share D) $149 per share

A) $157 per share Explanation: This investor is looking for the price to go up. The purchase price was $153 and the cost of the "insurance" (the put option) was 4. That means that the investor will not start making money until the stock rises above the cost of the stock plus the cost of the put ($153 plus $4 = $157). In a question like this, the current market price of the stock and the exercise price of the option are irrelevant. Breakeven on long stock and long put is the cost of the stock plus the cost of the put. As is always the case when computing breakeven, the number of shares and number of option contracts is meaningless−breakeven is the same price for one or one thousand.

A customer is short 100 XYZ shares at 26 and long 1 XYZ 30 call at 1. What is the maximum potential loss on the positions? A) $500 B) Unlimited C) $400 D) $2,500

A) $500 Explanation: The customer has protected his short stock position from loss by purchasing a call. If the market rises, the call is exercised, allowing the customer to buy his stock at the option strike price of 30 to cover the short position. The most the customer can lose is $400 on the stock position (the difference between the option strike price and the stock price) plus the premium paid for the option ($400 + $100 = $500).

If a customer buys 200 shares of ABC at 40 and writes 2 ABC Oct 45 calls at 2 in a cash account, the customer must deposit A) $7,600. B) $400. C) $2,000. D) $8,400.

A) $7,600. Explanation: The customer must deposit 100% of the stock purchase price ($8,000) in this cash account. However, the customer received $400 for writing the two calls at $200 each, and the calls are covered by the stock purchased. The deposit can be reduced by the premium income, which leaves a required deposit of $8,000 minus $400, or $7,600.

A mutual fund that charges 12b-1 fees may use the money to cover all of the following except: A) management fees. B) sales fees. C) promotion costs. D) printing costs.

A) management fees Explanation: 12b-1 fees may not be used to pay for the portfolio manager's fees, only for sales promotions and fees and other activities relating to the distribution of the fund's shares.

To be exempt under Rule 506(b) of Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of A) nonaccredited investors to whom the security is sold. B) agents authorized to sell the security. C) shares issued. D) broker-dealers who offer the securities.

A) nonaccredited investors to whom the security is sold. Explanation: Rule 506(b) of Regulation D provides a private placement exemption for securities that are sold to no more than 35 nonaccredited investors. There is no limit to the number of shares that can be issued or the number of accredited investors who may purchase the shares. It is Rule 506(c) that is exclusively accredited investors; a single non-accredited investor causes the exemption to be lost.

All of the following would flow through as a loss to limited partners except A) principal repayment on recourse debt. B) depletion. C) interest payments on recourse debt. D) accelerated depreciation.

A) principal repayment on recourse debt. Explanation: Principal repayments are not deductible for tax purposes. The interest is deductible.

Customer statements must be sent at least A) quarterly. B) semiannually. C) annually. D) monthly.

A) quarterly. Explanation: The SEC and FINRA require member firms to send customer account statements at least once per calendar quarter. There is an exception when the account contains penny stocks. In that case, the frequency is monthly.

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

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

If industrial development bonds are called because of condemnation, this would be covered under which of the following clauses in the bond indenture? A) Defeasance B) Refinancing C) Refunding D) Catastrophe

D) Catastrophe Explanation: Condemnation is considered a catastrophe and only applies to revenue bonds.

Which of the following debt securities does not have a fixed maturity date? A) General obligation bond B) Subordinated debenture C) Treasury STRIPS D) Collateralized mortgage obligation (CMO)

D) Collateralized mortgage obligation (CMO) Explanation: CMOs are mortgage-backed securities. Because mortgages are often paid off ahead of the scheduled maturity, the exact maturity date of a CMO is uncertain.

A customer asks his registered representative to purchase $10,000 worth of shares in any pharmaceutical company that looks promising. Which type of account allows the registered representative to act in accordance with this instruction? A) Special cash B) Margin C) Custodial D) Discretionary

D) Discretionary Explanation: If the registered representative may decide the specific security, the transaction requires discretionary authority, and therefore, must be done in a discretionary account. Determining the time or price does not require discretionary authority.

Which of the following is not under governance of the Municipal Securities Rulemaking Board (MSRB)? I. Issuers of municipal fund securities II. Broker-dealers that sell municipal fund securities III. Issuers of municipal bonds IV. Banks that sell municipal securities A) II and IV B) I and II C) II and III D) I and III

D) I and III Explanation: Issuers of municipal or municipal fund securities are exempt issuers and are not regulated or under the guidance of the MSRB or any other self-regulatory organization. **MSRB does not regulate issuers**

Progressive taxes would include I. personal income tax. II. gift taxes. III. estate taxes. IV. excise taxes. A) II, III, and IV B) I and III C) I and II D) I, II, and III

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

If an investor is bearish on the overall market, with no particular opinion on any individual stock, he will most likely I. buy index calls. II. buy index puts. III. write index calls. IV. write index puts. A) I and III B) I and IV C) II and IV D) II and III

D) II and III Explanation: Index options are useful for investors who have few opinions about individual stocks and who look at the market overall. If they are bearish, they choose short calls or long puts. Investors who are bullish on the overall market buy calls or sell puts.

Collateralized mortgage obligation (CMO) tranche A has been created to have the most predictable near-term principal pay off. A tranche set up in this way will have I. the highest reinvestment risk. II. the least reinvestment risk. III. a higher yield. IV. a lower yield. A) II and III B) I and III C) I and IV D) II and IV

D) II and IV Explanation: A CMO created to have the most predictable near-term principal pay off will have lower reinvestment risk and lower yield than other CMOs.

Which of the following order types are available to customers for use in NYSE equity markets? I. Fill or kill (FOK) II. Immediate or cancel (IOC) III. All or none (AON) IV. Order cancels other (OCO) A) I and IV B) I and III C) II and III D) II and IV

D) II and IV Explanation: IOC and OCO orders are available to customers for use in the NYSE equity markets. FOK and AON orders are no longer permitted in NYSE equity markets.

A direct participation program shows the following operating results for the year: Revenues: $3 million Operating expense: $1 million Interest expense: $200,000 Management fees: $200,000 Depreciation: $3 million The cash flow from program operations is A) $3 million. B) $1.4 million. C) $1.6 million. D) a loss of $1.4 million.

C) $1.6 million. Explanation: The cash flow for a direct participation program is the net income (or loss) plus the depreciation. In this question, there is a loss of $1.4 million. When the depreciation of $3 million is added to the negative $1.4 million, the cash flow is a positive $1.6 million. How did we get the loss of $1.4 million? The money that came in was the revenue of $3 million. From that, we subtract all of the expenses. Total operating expense of $1.2 million ($1 million plus $200,000 management fees) + Interest expense of $200,000 + Depreciation of $3 million = Total expenses: $4.4 million Net loss of $1.4 million ( 3 million revenues - 4.4 million total expenses)

One of your customers invests $20,000 in an oil and gas limited partnership program. The Schedule K-1 she receives at year-end from the partnership indicates that operating revenues and operating expenses were exactly the same. In addition, her share of the year's depletion allowance is $6,000. During the year, she received a cash distribution of $8,000. What is her basis as of year-end? A) $8,000 B) $12,000 C) $6,000 D) $16,000

C) $6,000 Explanation: She began with a basis of $20,000 (her original investment). During the year, she received a distribution of $8,000. That lowered her basis (the amount of money "at risk") to $12,000. In addition, the depletion represents a nonoperating expense that can be taken as a loss. That brings the basis down to $6,000.

What is the total amount that may be invested in a Coverdell Education Savings Account (ESA) in one year? A) The current maximum per parent B) The current maximum per family member C) The current maximum per child D) The current maximum per couple

C) The current maximum per child Explanation: An indexed maximum contribution may be invested in each child's Coverdell ESA every year. For instance, if a couple has three children, they may invest the current maximum into each of three accounts.

ABC, Inc., has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $20 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-for-1 stock split? A) The number of shares outstanding would decrease by 50%. B) The market price of the stock would double. C) The par value would decrease to $5 per share. D) The retained earnings would be decreased by $10 million.

C) The par value would decrease to $5 per share. Explanation: A stock split results in more outstanding shares at a lower par value per share. In the case of a 2-for-1 split, there are twice as many shares (2 million) and the par value is cut in half ($10 ÷ 2 = $5) The total par value of stock outstanding is unchanged ($2 million times $5 = the same $10 million in total par value). Remember, a 2:1 split is the same as changing a $10 bill for two $5 bills. Retained earnings are not affected by a stock split. Although not part of this question, the market value of the stock would be approximately $10 per share (half of the $20 per share before the split).

Based on the exhibit below, what is Company JQZ's working capital? Current Assets: Current Liabilities: Cash - 16 MM Acct Payable - 52 MM Acct Receivable - 110 MM Wages Payable - 12 MM Inventory - 70 MM Taxes Payable - 7 MM Insurance Payable - 0.5 MM Fixed Assets: Long-term Liabilities: Plant & Equip. - 292 MM 1st Mortgage bonds - 61 MM Depreciation - 64 MM Unsecured debenture - 73 MM A) $212,000,000 B) $216,500,000 C) $54,500,000 D) $124,500.000

D) $124,500.000 Explanation: To calculate the working capital, we subtract the current liabilities from the current assets. In this case, current assets total $196,000,000 and the sum of the current liabilities is $71,500,000. The difference between those two numbers is $124,500,000

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

D) $18,000. Explanation: Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $72,000.

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

D) $224 Explanation: Interest on U.S. Treasury bonds is taxable at the federal level only; $800 of interest taxed at 28% equals $224.

ALFA Enterprises pays a quarterly dividend of $0.15 and has earnings per share of $2.40. What is the dividend payout ratio? A) 14.40% B) 6.25% C) 30.00% D) 25.00%

D) 25.00% Explanation: Earnings per share are typically calculated for a year, so the annual dividend of $0.60 ($0.15 × 4) is divided by $2.40 to calculate what percentage of earnings is paid as a dividend—or rather, the dividend payout ratio (0.60 / 2.40 = 25%).

Under Subchapter M of the IRC, a REIT can avoid taxation if it receives at least ____ of its taxable income from real estate and distributes at least ____ of that income to shareholders. A) 90%, 10% B) 75%, 25% C) 50%, 90% D) 75%, 90%

D) 75%, 90% Explanation: To avoid taxation as a corporation, at least 75% of the taxable income of a real estate investment trust (REIT) must be generated from real estate and at least 90% of that income is distributed to shareholders.

An investor sold 100 shares of RAN common stock short at $50 per share. The RAN is now at $38. The investor is still bearish on the stock but would like to protect that gain. What would you recommend if this were your client? A) Enter a buy stop order at $40 B) Enter a sell stop order at $40 C) Enter a sell order at $40 D) Enter a buy stop order at $55

A) Enter a buy stop order at $40 Explanation: Buy stop orders are used as a protective tool for short sellers. In this case, if the stock should begin to rise from its current price of $38, once it reaches or exceeds $40, a buy order at the market is entered. The stock purchased is used to cover the short position, and the investor's profit is the $50 sale price minus the cost of the purchase. Buy stops are always placed above the current market. Because the investor is short, the only protective order would be a buy, not a sell (you buy protection)..

Which of the following regarding a municipal bond broker's broker are true? I. Protects customer identity II. Must disclose the identity of customers III. Has no inventory IV. Maintains an inventory A) I and III B) II and III C) II and IV D) I and IV

A) I and III Explanation: Municipal brokers' brokers generally purchase and sell securities on an anonymous basis for institutional clients. They are not in the business of making a market; therefore, they maintain no inventory.

If LMN, Inc., has filed for bankruptcy, in what order would interested parties be paid? I. Holders of secured debt II. Holders of subordinated debentures III. General creditors IV. Preferred stockholders A) I, III, II, IV. B) III, I, II, IV. C) IV, I, II, III. D) I, II, III, IV.

A) I, III, II, IV. Explanation: The liquidation order is as follows: the IRS (and other government agencies), secured debt holders, unsecured debt holders and general creditors, holders of subordinated debt, preferred stockholders, and common stockholders.

Hedge funds I. are highly regulated. II. use investment techniques suitable for most investors. III. are unregulated. IV. use investment techniques most suitable for sophisticated investors. A) III and IV B) I and IV C) II and III D) I and II

A) III and IV Explanation: Hedge funds are unregulated and have aggressively managed portfolios that employ investment techniques such as shorting positions, utilizing derivative products, and trading on margin—all generally considered suitable for sophisticated investors.

In terms of the number of issues traded, the largest secondary market for securities is the over-the-counter market (OTC). Which of the following securities cannot be traded OTC? A) Mutual funds B) Exchange traded funds C) U.S. Treasury bills D) Preferred stock listed on the NYSE

A) Mutual funds Explanation: Any security that trades in the secondary markets may be traded in the OTC market. That includes securities listed on the stock exchanges. Mutual funds (and variable annuities) are securities for which there is no secondary market trading. Shares (or units) in these securities are bought and redeemed through the issuer.

Which of the following will halt trading in listed options when there is a trading halt in the underlying stock? A) The options exchange on which the option is listed B) The Options Clearing Corporation C) The exchange on which the stock is listed D) The Securities and Exchange Commission

A) The options exchange on which the option is listed Explanation: If trading is halted in any stock on which options trade, trading in those options is also halted by the Chicago Board Options Exchange.

A customer who buys 1 CDE Oct 60 call at 4 and sells 1 CDE Dec 60 call at 6 has created A) a calendar spread. B) a long straddle. C) a price spread. D) a combination.

A) a calendar spread. Explanation: Long a call and short a call is known as a call spread. If the strike prices are the same, and the expiration months are different (Oct and Dec), it is a calendar spread. Calendar spreads are sometimes called time spreads or horizontal spreads.

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

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

An issuer decides to not offer all the registered common stock shares to the public in the IPO (Initial Public Offering). Instead, some of the shares are held back for later sale. This is an example of: A) a shelf registration. B) a staged public offering. C) a contingent registration. D) a partial registration.

A) a shelf registration Explanation: Think about it this way all the shares are registered and put on the shelf for sale. However, the issuer decides to sell only some of the shares, keeping some on the shelf for sale later in an APO (additional public offering).

If a customer who is long stock writes out-of-the-money calls against the position, and the calls subsequently expire worthless, for tax purposes, the customer has A) a short-term gain. B) a long-term gain. C) a long-term loss. D) a short-term loss.

A) a short-term gain. Explanation: If short calls expire worthless, the gain (for tax purposes) is considered a short-term capital gain.

Accrued interest for U.S. government bonds is computed on the basis of A) actual days elapsed. B) SEC accrued interest guidelines. C) 30-day months. D) 31-day months.

A) actual days elapsed. Explanation: Accrued interest for U.S. government bonds is calculated on the basis of actual days elapsed.

Your customer, a resident of New York, wants to open up a Section 529 plan for his 10-year-old son. Because his son wants to attend Notre Dame, your customer wants to start a plan sponsored by the state of Indiana. You should A) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. B) not open the plan. C) explain that the potential federal tax benefits available to residents of New York may not be available when opening out-of-state plans. D) open the plan as instructed by your customer.

A) explain that the potential state tax benefits available to residents of New York may not be available when opening an out-of-state plan. Explanation: Many states offer tax benefits to residents who open 529 plans in their home state. These benefits are generally not available when opening out-of-state plans. Federal tax benefits are available regardless of the state where the plan is opened.

An economist is comparing the yields on 20-year U.S. Treasury bonds and AAA-rated corporate bonds with the same maturity. The economist is analyzing A) the credit spread. B) the value spread. C) the duration spread. D) the risk spread.

A) the credit spread. Explanation: You should understand that the greater the risk, the higher the yield on the bond. Many analysts compare the difference between yields on bonds with the same maturity but different quality (rating) to get a sense of the market sentiment. One common measurement is the difference in yields between Treasuries and corporate bonds. This difference is called the yield or credit spread and tends to widen when economic conditions sour and narrow when they get better. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Margin requirements on exempt securities (U.S. government securities and municipal securities) are set by A) the designated examining authority (DEA). B) the Department of Enforcement (DOE). C) the Securities and Exchange Commission (SEC). D) the Federal Reserve Board (FRB).

A) the designated examining authority (DEA). Explanation: The FRB sets the initial margin requirements for nonexempt securities. The margin requirements for exempt securities, such as U.S. governments, are set by a firm's self-regulatory organization or DEA.

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

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

An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent is to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is A) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. B) suitable due to the relative safety of the investment. C) unsuitable because the return on something as conservative as a variable annuity tends to be low. D) suitable due to the death benefit features of a variable annuity.

A) unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits. Explanation: This customer has no spouse or dependents, which negates the value of the death benefit. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59½.

A client enters a buy stop order for 100 shares of XYZ at 40. Trades then occur at 38, 39, 39.90, 40.05, 40.10, and 39.78. At what price is the order triggered? A) $39.00 B) $40.05 C) $39.78 D) $40.10

B) $40.05 Explanation: The order is triggered as soon as the price gets to 40 or higher. That would be the trade at 40.05. A typical use of a buy stop order is to protect a short stock position. Because the short stock position has unlimited potential loss, the short seller can gain protection by entering a buy stop order. That order is entered at a price above the current market (the short seller is hoping the price will fall), but if the price reaches or exceeds the stop price, the stop will be triggered. At that time, a market order is entered and the client pays the next price (which could be more or less than 40). In this case, the next price is 40.10, and although not the answer to our question, that is the likely price per share paid by the client.

A customer buys 200 XYZ at 39 and writes 2 XYZ Feb 40 calls at 3. When the stock rises to 44, the customer is exercised for a gain of A) $400. B) $800. C) $1,600. D) $200.

B) $800. Explanation: The customer bought 200 shares at 39 and was forced to sell them at 40 for a $200 gain. In addition, the customer received $600 in premium income, so the overall gain is $800. Alternatively, the breakeven point for covered call writing is cost of shares purchased less premium received (39 − 3 = 36). As the customer is bullish, gain occurs above 36. However, for this customer, the stock can go no higher than 40 because she will be exercised (40 − 36 = 4 points × 200 shares = $800).

If a customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58, the maximum potential gain is: A) $1,500. B) $900. C) $600. D) $1,100.

B) $900 Explanation: The maximum gain on any credit spread is the net credit. In this case, $1,000 was received, and $100 was paid out, so the net credit is $900.

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement? A) 5 B) 10 C) 15 D) 20

B) 10 Explanation: Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.

If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares? A) 500 B) 100 C) 400 D) 300

B) 100 Explanation: The investor will receive an additional 100 shares from a 3-for-2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares. **key word: additional!**

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

B) 2% Explanation: Maximum compensation in a limited partnership roll-up is limited to 2%. That amount must be paid to the brokerage firm, whether the partners vote for or against the proposed roll-up.

ABC, with 3 million shares outstanding, reports after-tax earnings of $7.5 million. Annual cash dividends total $1 per share. The dividend payout ratio is A) 33%. B) 40%. C) 25%. D) 20%.

B) 40%. Explanation: To compute this ratio, multiply the $1 dividend by 3 million shares to get the total dividend paid of $3 million. $3 million is 40% of the $7.5 million in earnings available to common stockholders.

A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status? A) 30 B) 60 C) 90 D) 45

B) 60 Explanation: Rollovers from pension plans into IRAs must be accomplished within 60 days to retain tax-deferred status.

Municipal Securities Rulemaking Board rules prohibit dealers from entering into which of the following transactions with a mutual fund? A) Accepting orders from a fund to buy a new municipal issue B) Accepting portfolio trades from the fund as compensation for sales of the fund's shares C) Purchasing the fund's shares to fill customers' orders D) Acting as a broker's broker for a large block of bonds the fund wishes to sell

B) Accepting portfolio trades from the fund as compensation for sales of the fund's shares Explanation: This prohibited practice is known as reciprocal dealing between a broker-dealer and an investment company. The other examples are routine practices.

If your client was recently approved to trade options and writes 1 XYZ Oct 60 put but fails to return the signed option agreement within 15 days of account approval, which of the following orders could you accept? A) Buy 1 XYZ Oct 55 put B) Buy 1 XYZ Oct 60 put C) Buy 1 XYZ Jan 60 put D) Buy 1 XYZ Jan 55 put

B) Buy 1 XYZ Oct 60 put Explanation: If a customer fails to return a signed options agreement within 15 days of account approval, your firm can permit closing transactions only. While the customer may offset her existing position, she may not offset a short position in an Oct 60 put by buying an XYZ put with a different expiration month and/or a different strike price.

Which of the following risk factors would be least important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers? A) Prepayment risk B) Credit risk C) Extended payment risk D) Interest rate risk

B) Credit risk Explanation: Most CMOs offered to the public are backed by mortgages held by government-sponsored corporations like Fannie Mae, Ginnie Mae, Freddie Mac, et cetera. Credit risk would be a minimal consideration. The other risks are inherent to mortgage-backed securities.

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

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

An investor wants to maximize income using debt securities. Which of the following lists rank securities from the least suitable to the most suitable recommendation if income is the investment objective? A) Convertible bond, income bond, nonconvertible bond B) Income bond, convertible bond, nonconvertible bond C) Treasury bills, convertible bond, income bond D) Nonconvertible bond, convertible bond, income bond

B) Income bond, convertible bond, nonconvertible bond Explanation: The income (or adjustment) bond is the least suitable because it is issued by companies coming out of bankruptcy with interest payable only if the money is available. Therefore, it is not suitable given the objective. A convertible bond has a lower coupon than a nonconvertible bond because of the convertibility feature. Therefore, if seeking to maximize income, the corporate bond would be the most suitable of the three choices (from least to most: income bond, convertible bond, and nonconvertible bond).

If a high-income customer is subject to alternative minimum tax (AMT), which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Interest on a municipal bond issued to finance highway construction B) Interest on a private-purpose municipal bond C) Distributions from a corporate bond mutual fund D) Income from a municipal security issued to finance parking garages

B) Interest on a private-purpose municipal bond Explanation: If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for AMT purposes.

A municipal securities dealer informed XYZ municipal bond fund that it was the leading retailer of XYZ shares and that, in return, XYZ should employ the dealer in effecting more transactions for the fund's portfolio. Which of the following statements regarding the request is true? A) It is not permissible because municipal securities dealers are not allowed to execute trades for the portfolios they underwrite. B) It is not permissible because it violates the MSRB anti-reciprocal rule. C) It is permissible because it suggests a more reciprocal arrangement between the two parties. D) It is permissible because MSRB rules do not cover municipal bond issuers or funds.

B) It is not permissible because it violates the MSRB anti-reciprocal rule. Explanation: An investment company must select a dealer to execute its portfolio transactions based on services provided. It is a violation of the anti-reciprocal rule (Municipal Securities Rulemaking Board Rule G-31) for an investment company to choose a firm to trade its portfolio based solely on sales of units or shares of the fund.

Which of the following is an advantage of owning American depositary receipts (ADRs)? A) The investor receives preemptive rights should the issuer make an additional stock offering. B) The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency. C) The investor avoids the currency risk that characterizes many foreign investments. D) The investor has the right to vote at stockholders' meetings.

B) The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency. Explanation: ADRs permit an American investor to purchase a certificate of deposit for stock (not stock itself) in a foreign company. The advantage is that the transactions are done in dollars, but the ADR itself does not carry a vote or stock rights and subjects the owner to currency risk.

Which of the following statements regarding warrants is true? A) Warrants give the holder a perpetual interest in the issuer's stock. B) Warrants are often issued with other securities to make the offering more attractive. C) Warrants are safer than corporate bonds. D) Warrants' terms are generally shorter than rights' terms.

B) Warrants are often issued with other securities to make the offering more attractive. Explanation: Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds.

The City of Columbus issued a 20-year general obligation bond at a price of 50. An original purchaser sold the bond at 75 after holding it for 7 years. For tax purposes, that sale generated: A) a $250 capital gain. B) a $75 capital gain. C) no gain or loss. D) a $25 capital gain.

B) a $75 capital gain Explanation: The customer has realized a capital gain of $75. Original issue discount bonds must accrete the discount over the life of the bond. In this example, the amount of the discount (par value minus purchase price) is $500 ($1,000 − $500 = $500). The discount divided by the number of years to maturity determines the annual accretion added to the cost basis. In this question, the annual accretion is $25 ($500 divided by 20 = $25). The adjusted cost basis would be the original purchase price ($500) plus seven years of accretion (7 times $25 = $175) for a total of $675. Because the proceeds of the sale were $750, the customer has realized a capital gain of $75 ($750 − $675 = $75).

An investor is following the new issue municipal bond market. The primary source material is found in the Daily Bond Buyer. This publication is distributed on A) a weekly basis. B) a daily basis. C) an hourly basis. D) an as needed basis.

B) a daily basis. Explanation: This is a "Who is buried in Grant's Tomb" type of question, and there are students who do miss it. We won't say there are many questions this easy on the exam, but there are a few—please do not miss them.

Municipal securities advertisements must be approved by A) the Municipal Securities Rulemaking Board. B) a municipal securities or general securities principal. C) a financial and operations principal. D) the Securities and Exchange Commission.

B) a municipal securities or general securities principal. Explanation: Municipal security advertisements can be approved by a general or a municipal securities principal.

Démodé Classic Investments (DCI) is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation program limited partnerships. Under FINRA Rule 2210 on communications with the public, this is considered A) a retail communication and must be filed with FINRA at least 10 business days before first use or publication. B) a retail communication and must be filed with FINRA within 10 business days of first use or publication. C) correspondence and needs review, not approval, by a designated DCI principal. D) a retail communication that needs approval, but not filing, by a designated DCI principal.

B) a retail communication and must be filed with FINRA within 10 business days of first use or publication. Explanation: A direct mail communication to more than 25 existing and/or potential clients within a 30-day period is a retail communication. Unless an exception applies, a designated principal of the firm must approve all retail communications. DPPs are part of a group of securities (other common examples are investment companies and CMOs) where filing with FINRA within 10 business days of first use or publication is the rule.

One of your customers is a self-employed insurance agent specializing in long-term care insurance. She employs her eight-year-old daughter to perform certain clerical duties, such as filing and mailing. The daughter's hourly wage is competitive with industry standards. Your customer asks about her daughter's eligibility for a Roth IRA. The proper response is: A) no child under the age of majority may open any IRA. B) because the daughter has earned income, she may contribute up to 100% of that or the current limit. C) as a self-employed person, the mother would have to open a Keogh plan and then cover her daughter. D) the daughter can open the account only if her parents' income does not exceed the Roth limit.

B) because the daughter has earned income, she may contribute up to 100% of that or the current limit. Explanation: Any natural person, of any age, can open a Roth IRA as long as they meet two requirements. The first, as with any IRA, is that the person must have earned income. The second is that the income must not exceed certain limits. The daughter's hourly wage is evidence of meeting the earned income requirement. We do not know the amount of the wage, but it is highly unlikely that a competitive wage for a clerical worker, regardless of age, is going to exceed the Roth limits. This is an example of the test-taking tip of not reading anything into a question to make it more complex.

FINRA Rule 2330 deals with a member's responsibility in the sale of certain insurance company-based products. Specifically the concern is with A) fixed-index annuities. B) deferred variable annuities. C) immediate variable annuities. D) variable life insurance.

B) deferred variable annuities. Explanation: The subject of the FINRA rule is deferred variable annuities. It applies to the sale or exchange of this specific product.

A customer who has just started an IRA will be vested A) at age 70. B) immediately. C) in five years. D) in two years.

B) immediately Explanation: Investors are always vested immediately in their IRAs.

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

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

Variable-rate municipal bonds are subject to all of the following risks except: A) liquidity. B) interest rate. C) market. D) default.

B) interest rate Explanation: A variable-rate bond is one whose coupon is adjusted periodically (semiannually or annually) to reflect current interest rates. Therefore, if rates rise and force prices down, the coupon on a variable-rate bond will be adjusted upward, thereby tending to keep the bond's price at or near par. Therefore, no interest rate risk is associated with these bonds. However, if rates fall, the coupon will be adjusted downward, keeping the bond's price at or around par. Normally, a fall in rates will force prices up, but not with variable-rate bonds.

The primary asset in a tax-exempt bond fund would be A) corporate bonds. B) municipal bonds. C) short-term money market instruments. D) common stock.

B) municipal bonds. Explanation: Bond funds will distribute taxable income or dividends unless invested in municipal bonds. Although dividend distributions from a municipal bond fund are tax exempt, capital gains distributions are fully taxable.

An investor desiring a limited partnership investment with capital gains potential would most likely select one investing in: A) shopping centers. B) raw land. C) equipment leasing. D) oil and gas.

B) raw land Explanation: Historically, raw land has been a source of appreciation. Shopping centers might appreciate in value but are oriented more toward current income. Equipment leasing offers income, and the asset ultimately depreciates. Oil and gas provide income as well, and the asset ultimately depletes.

An employee of a FINRA member firm wishes to open an account at another member firm. The employee opening the account must A) obtain prior written consent from FINRA before opening the account. B) receive prior written consent from his employer. C) make written notification to the SEC before the account can be opened. D) notify FINRA, in writing, of the intent to open the account.

B) receive prior written consent from his employer. Explanation: Persons associated with one FINRA member firm may open securities accounts at other member firms, as long as prior written notice was made to, and prior written consent was received from, the employing broker-dealer before the account is opened. Neither notification nor consent is required from FINRA or the SEC.

All of the following subject an investor to unlimited risk except A)1 ABC uncovered (short) call. B) short 100 ABC, buy 1 ABC call. C) short 100 shares ABC stock. D) short 100 ABC, write 1 ABC put.

B) short 100 ABC, buy 1 ABC call. Explanation: Investors use long calls to protect short stock positions. If the market value of the stock needed to cover the short position begins to rise, the investor can exercise the long call position to buy the stock. Short stock positions, short uncovered calls, and short stock combined with short puts all subject investors to unlimited risk.

An applicant for registration as a registered representative with a FINRA member firm has been told that there is a problem on the DRP. The DRP is: A) the data reporting page. B) the Disclosure Reporting Page. C) the department of related personnel. D) the domestic relations page.

B) the Disclosure Reporting Page. Explanation: DRP stands for Disclosure Reporting Page. It is actually several pages used to answer question #14 on the Form U4. Most of the questions begin with "Have you ever . . ." and ask about disciplinary actions inside and outside of the securities industry. A yes answer to some of the questions can lead to statutory disqualification.

All of the following issue securities under the Federal Farm Credit System except A) Bank for Cooperatives. B) the Federal Home Loan Mortgage Corporation. C) the Federal Land Bank. D) the Federal Intermediate Credit Bank.

B) the Federal Home Loan Mortgage Corporation. Explanation: The Federal Home Loan Mortgage Corporation issues securities backed by residential mortgages. The Farm Credit System is made up of Federal Intermediate Credit Banks, cooperative banks, and Federal Land Banks.

For an investor who needs regular income, a GNMA pass-through certificate would be attractive because A) the income is not taxable on the state or local level. B) the investor would receive a monthly check. C) the security has the direct backing of the U.S. government. D) each check is for the same amount.

B) the investor would receive a monthly check. Explanation: GMNAs pass through the mortgage payments collected on the pool. Because home mortgages are paid monthly, distributions are made to investors monthly. The fact that GNMAs have the ultimate in security—government backing—does not represent a unique benefit for receiving regular income. Treasury bonds or notes have that backing but only pay interest semiannually. The income from a GNMA is taxable at all levels. Because the mortgage payments, which contain principal as well as interest, include mortgage prepayments, the monthly checks will vary.

An option confirmation must include all of the following except A) the number of contracts and premium. B) the positions market attitude (bullish or bearish). C) the type of option and commission. D) the strike price.

B) the positions market attitude (bullish or bearish). Explanation: An option transaction's confirmation must completely recap the essential elements of the trade, including the number of contracts traded, the description of the security traded (type of option and strike price), the price of the security traded (premium), and any commission charges. The positions market attitude (bullish or bearish) is not included on the confirmation.

If municipal securities are offered on an inverted scale, this means A) the coupon rates are higher than the yields. B) the yields on short-term maturities are higher than the yields on long-term maturities. C) the coupon rates on short-term bonds are higher than coupon rates on long-term bonds. D) the yields on long-term bonds are higher than yields on short- term bonds.

B) the yields on short-term maturities are higher than the yields on long-term maturities. Explanation: A normal scale of prices consists of lower yields on short-term maturities and higher yields on longer maturities. An inverted scale is the opposite.

A 58-year-old investor owns a single premium deferred variable annuity with a current value of $500,000. The original investment was $150,000 and the contract has a death benefit provision. If this investor wished to exchange this policy for one offered by a competing company, A) the tax-free exchange privilege applies only when the exchange is within the same insurance company. B) using a 1035 exchange would avoid any current taxation. C) the investor would be liable for ordinary income taxes on $350,000. D) the investor would be liable for ordinary income taxes plus the 10% penalty on $350,000.

B) using a 1035 exchange would avoid any current taxation. Explanation: Section 1035 of the Internal Revenue Code permits the exchange of an annuity to another annuity, whether issued by the same or a competing company, with the tax-deferral on earnings continuing. These exchanges can also be made from an insurance policy to an annuity, but not from an annuity to an insurance policy.

Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Simultaneously, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. What is the customer's cost basis in SLP? A) $101 per share B) $95 per share C) $98 per share D) $92 per share

C) $98 per share Explanation: If, on the same day, a customer buys stock and buys a put option on that stock as a hedge, the put is said to be married to the stock. For tax purposes, irrespective of what happens to the put, the cost basis of the stock is adjusted upward by the premium paid. Even if the put expires worthless, there is no capital loss on the put. Rather, the premium paid is reflected in the cost basis of the stock. Therefore the initial cost of $95 per share is now increased by the $3 premium paid resulting in a new cost basis of $98 per share.

Which of the following methods of real estate investing is a flow-through vehicle? A) Common stock in a homebuilding company B) Purchasing a condominium as a personal residence C) A real estate limited partnership (RELP) D) A real estate investment trust (REIT)

C) A real estate limited partnership (RELP) Explanation: Limited partnership vehicles provide for a flow-through of the program's income or loss. A REIT is not a DPP and does not offer flow-through of losses (although IRS rules require the REIT to pay out at least 90% of its taxable income to avoid being taxed as a corporation). Many investors play the real estate market by investing in the stock of companies that are in the real estate business. Stock is not a flow-through vehicle. Although owning a personal residence can be considered an investment (you do hope the property will appreciate), it is not a security and there is no income or loss to flow through.

The investment adviser of the GEMCO Special Situations Fund would find which of the following companies least attractive for the fund's portfolio? A) GHI Technologies, whose new microchip devices have caught the attention of the largest manufacturer in the field B) DEF Pharmaceuticals, whose application for approval of a new disease-fighting drug will likely be approved by the FDA C) ABC Corporation, whose shareholders have just reelected the current board of directors D) JKL Transportation Services, a company preparing to report a profit for the first time in four years

C) ABC Corporation, whose shareholders have just reelected the current board of directors Explanation: A special situations fund looks for special situations. Those are defined as management changes, turnaround situations (loss to profit), or new developments. A company reelecting the existing board of directors is not sending a message of something special going on.

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

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

In what order, from first to last, would a syndicate member allocate orders for a new municipal bond issue? I. Presale orders II. Designated orders III. Member orders IV. Group net orders A) III, II, I, IV B) IV, II, I, III C) I, IV, II, III D) III, I, II, IV

C) I, IV, II, III Explanation: The standard order priority for municipal bond issue allocation as stated within the syndicate letter is as follows: presale, group, designated, and member. Orders that benefit all syndicate members have the highest priority.

If a customer is in a low federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A) City of Milwaukee general obligation bond B) Zero coupon bond C) Investment-grade corporate bond D) U.S. government bond

C) Investment-grade corporate bond Explanation: If an investor is in a low-tax bracket, any benefit from receiving tax-free municipal bond interest is diminished, making municipal bonds a less suitable investment. Zero-coupon bonds pay no interest until maturity, and therefore, are not suitable for someone seeking current income. To maximize income, the best recommendation of the choices listed is the corporate bond, which offers a higher yield than a government bond with a similar maturity.

A firm must provide a risk disclosure document to a customer before opening which of the following accounts? A) Partnership B) Custodial C) Margin D) Transfer on death

C) Margin Explanation: All customers opening margin accounts must receive a risk disclosure document describing the risks associated with trading on margin (e.g., that a customer could lose more than the initial investment, or that the firm could sell out securities in the account to meet a maintenance call without providing prior notice to the customer). This document must also be provided to customers on an annual basis.

A new municipal bond issue had a dated date of January 1, 2018. The first coupon was due on August 1, 2018. The customer bought for settlement on September 1, 2018. How many months of accrued interest must he pay at settlement? A) Seven months B) Six months C) One month D) Eight months

C) One month Explanation: On a new bond issue, the issuer sets the dated date. That is the date from which interest first begins to accrue. It is not unusual for the first interest payment date to be more than six months from the dated date. That is known as a long coupon (longer than six months). Therefore, on August 1, 2018, seven months of interest was paid (January through the end of July). The customer did not purchase the bond until late August and owes interest only from the August 1, 2018, coupon payment date up to, but not including, the September 1 settlement date (one month).

An investor owns a convertible debenture with a conversion price of $10. If a 10% stock dividend is paid on the company's common stock, which of the following is true? A) The investor will receive 10 shares of the common stock. B) The conversion price will be adjusted to $11.00. C) The conversion price will be adjusted to $9.09. D) The investor will receive 1 share of the common stock.

C) The conversion price will be adjusted to $9.09. Explanation: You can assume that any convertible security on the exam will have an anti-dilutive provision. That means that a stock dividend or stock split will not cause the investor's conversion privilege to be diminished. With a conversion price of $10, the investor was able to convert into 100 shares ($1,000 divided by $10). After the 10% stock dividend, the investor must be able to convert into 10% more shares (110 shares). To get 110 shares from a $1,000 principal, the price must be reduced. The computation is $1,000 divided by 110. That equals $9.09 per share.

Convertible debentures offer which of the following benefits to investors? A) A higher coupon rate than comparable non-convertible debt B) Highest priority in the event of dissolution C) The upside potential of a common stockholder with less downside risk D) Forced conversion when the underlying stock price increases

C) The upside potential of a common stockholder with less downside risk Explanation: If the price of the underlying stock increases, the holder of the debenture can exercise the conversion privilege and capture that growth. Unlike the stock, as a debt security, the regular periodic interest payments tend to provide a floor below which the price of the debenture will not fall. In exchange for this benefit, the coupon rate is lower than a comparable non-convertible security. Many of these convertibles have a call feature. If the price of the stock rises, the issuer may decide to call it in and the investor's best option is to convert. This is known as forced conversion and forces the investor in a debt security to own an equity security. Debentures have a lower priority in dissolution than secured bonds.

An arrangement in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor is known as A) a power-of-attorney account. B) a nonapproval account. C) a discretionary account. D) a stop-loss account.

C) a discretionary account. Explanation: Discretionary accounts are arrangements in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor.

A customer, concerned about a possible pull-back in XYZ stock, instructs her broker to "Sell my XYZ stock if it falls to 40, but I don't want less than 39.75 for my shares." The broker should enter A) a market order to sell. B) a sell limit order. C) a sell stop limit order. D) a sell stop order.

C) a sell stop limit order. Explanation: A sell stop limit order would be appropriate (sell 100 XYZ 40 stop 39.75). Once the price of XYZ trades at or through (below) 40, the order is elected and becomes a limit order to sell at 39.75 or better (higher).

Correspondence—one of the three categories of communication with the public—is defined as: A) electronic communication only that has been made available to 25 or fewer retail investors within the past six months. B) communication that is targeted only at individuals who currently maintain accounts with the broker-dealer. C) any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period. D) written communications only that has been made available to 25 or fewer retail investors within the past six months.

C) any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period. Explanation: Correspondence can be written or electronic and targeted at either a broker-dealer's account holders or nonaccount holders. The criteria that makes communication a correspondence is that it is distributed to 25 or fewer retail customers within any 30-calendar-day period.

An investment adviser who switches among investment classes based upon anticipated market changes is using a technique known as A) indexing. B) value investing. C) asset allocation. D) dollar cost averaging.

C) asset allocation. Explanation: A money management strategy that switches among asset classes based upon anticipated market moves is asset allocation. Indexing is a passive strategy that makes no attempt to anticipate market moves. An index strategy reflects an underlying index, with the adviser keeping securities in the portfolio in proportion to their weight in the underlying index. Value investing seeks to actively invest in securities that are selling at a discount to their book value and out of favor with the market. Dollar cost averaging is a method of acquiring shares at a lower average cost over time and is not an investment style.

A customer has sold short 100 GM at 70. GM is selling for 81. The customer had previously placed a good-til canceled buy stop order at 83. GM announces a stock split and an increase in the dividend. The stock starts to move up and the customer decides to cover the short sale at a loss and instructs his broker to buy 100 shares of GM at the market. The registered representative will A) sell 100 GM at 83. B) sell 100 GM at the market. C) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop good til canceled. D) buy 100 GM at the market.

C) buy 100 GM at the market and cancel the order to buy 100 GM at 83 stop good til canceled. Explanation: It is incumbent upon the registered representative to cancel the old order.

Growth companies tend to have all of the following characteristics except: A) a high earnings retention ratio. B) potential investment return from capital gains rather than income. C) low price-to-earnings (P/E) ratios. D) low dividend payout ratios.

C) low price-to-earnings (P/E) ratios. Explanation: Growth companies have high P/E ratios and a low dividend payout ratio because they retain most, if not all, of their earnings. Investors anticipating fast growth bid up prices, so P/E ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income.

Stock prices in the over-the-counter (OTC) market are determined by A) open outcry for the securities at a central marketplace. B) the 5% markup policy. C) negotiation between buyers and sellers. D) buyers and sellers bidding directly against each other in a double auction market.

C) negotiation between buyers and sellers. Explanation: The OTC market is a negotiated market (not an auction market as is the case with an exchange) in which dealers negotiate stock trades with each other.

The dated date on a municipal bond issue is A) the date on which the bonds are delivered to the buyer. B) the trade date. C) the date on which the bonds begin accruing interest. D) the settlement date.

C) the date on which the bonds begin accruing interest. Explanation: The dated date is the date on which newly issued bonds begin to accrue interest.

All of the following must be considered by an investment adviser representative before recommending a municipal general obligation (GO) bond to a customer except: A) the customer's state of residence. B) the municipal security's rating. C) the municipality's coverage ratio. D) the customer's tax status.

C) the municipality's coverage ratio. Explanation: The coverage ratio is specific to revenue bonds only and tells how many times annual revenue from that issue will cover the debt service of the issue. It is not a factor of suitability to be considered when recommending a GO bond, but more of a factor to consider when comparing two municipal revenue bonds. The customer's state of residence and tax status are essential when determining suitability for a municipal security. The security's rating is also important because it measures the overall safety and quality of the bond.

When opening a new account for an individual investor, FINRA asks its member to make a reasonable effort to obtain certain information about the account. Included information would be all of the following except: A) the occupation of the customer and name and address of the employer. B) the customer's tax identification or Social Security number. C) the name(s) of the customer's dependents. D) whether the customer is an associated person of another member.

C) the name(s) of the customer's dependents. Explanation: Nowhere in the FINRA rules on account opening does it require or suggest obtaining personal information about family members. That information becomes important when we look at the suitability rules. Please note that the tax ID or Social Security number is required under the customer identification program (CIP), but not FINRA

When a bond is selling at a discount A) the yield to maturity will always be lower than the current yield. B) the yield to call will always be lower than the yield to maturity. C) the nominal yield will always be lower than the current yield. D) the current yield will always be higher than the yield to call.

C) the nominal yield will always be lower than the current yield. Explanation: When a bond is selling at a discount, all of the yields are higher than the nominal (coupon) yield. The sequence in ascending order of yield is NY, CY, YTM, YTC.

In a restricted margin account, if a customer fails to pay for a new purchase, the broker-dealer must sell out stock with a value of A) the margin call. B) stock cannot be purchased if the account is restricted. C) twice the margin call. D) three times the margin call.

C) twice the margin call. Explanation: Twice the value must be sold out of the account to meet a Regulation T margin call. Cash buys stock in a margin account at a 2:1 ratio; therefore, stock will cover a cash debt at the rate of $2 of stock market value to $1 of cash debt.

If a customer does not anticipate that a stock's price will change, and she wants to take an option position, she would most likely A) buy a call. B) buy a put. C) write a straddle. D) buy a straddle.

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

When a registered representative opens an options account for a new client, in which order must the following actions take place? I. Obtain approval from the branch manager II. Obtain essential facts from the customer III. Obtain a signed options agreement IV. Enter the initial order A) I, II, IV, III B) I, II, III, IV C) II, I, III, IV D) II, I, IV, III

D) II, I, IV, III Explanation: The steps in opening a new options account occur in the following order: obtain essential facts about the customer, have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 days. What about delivery of the options disclosure document (ODD)? That isn't included in the choices here. It must be delivered at or prior to the time the account is approved for options trading. That would mean before or simultaneously with choice I.

Which of the following oil and gas programs would be least risky? A) Exploratory B) Raw land C) Developmental D) Income

D) Income Explanation: For oil and gas programs, ranking from least risk to most would be as follows: income, developmental, and exploratory. Raw land is a type of real estate program.

KLP common stock has been trading at or near $25 per share all day. Your client would like to buy 500 shares of KLP at 25, but he is willing to accept fewer shares at that price. Which of the following orders fulfills his intentions? A) Limit order to buy 500 shares of KLP at 25 AON (all-or-none) B) Market order to buy 500 shares of KLP C) Limit order to buy 500 shares of KLP at 25 FOK (fill-or-kill) D) Limit order to buy 500 shares of KLP at 25 IOC (immediate-or-cancel)

D) Limit order to buy 500 shares of KLP at 25 IOC (immediate-or-cancel) Explanation: Partial execution is permissible on an IOC order.

When a registered representative recommends a municipal bond purchase to a customer, which of the following would be of least consideration regarding suitability? A) The customer's tax bracket B) The bond's rating C) The customer's state of residence D) The intended use of funds raised by the issue

D) The intended use of funds raised by the issue Explanation: The customer's state of residence and tax bracket are important because these factors help establish the tax benefits offered by the municipal bond. The bond's rating is important in evaluating the credit risk assumed by the investor. While the intended use of the funds may be of interest to the customer, it would be of little consideration when making a purchase recommendation.

A customer, currently finding the income offered from a money market fund quite low, asks if there might be any debt instruments providing income that could be expected to at least keep pace with inflation, as well as offer some tax relief. What suitable recommendation could be made that meets the investor's investment objectives? A) U.S. Treasury bills B) GNMAs C) ADRs D) Treasury Inflation Protection Securities (TIPS)

D) Treasury Inflation Protection Securities (TIPS) Explanation: Provide income, keep pace with inflation, and offer tax relief are the three criteria. TIPS are specifically designed to provide income that keeps pace with inflation. In addition, the interest is tax exempt at the state and local level, providing some tax relief. None of the remaining choices meet all three.

If a customer buys a municipal bond at 110, maturing in eight years, but sells the bond six years later at 103½, the customer will have A) a $10 per bond loss. B) a $65 per bond loss. C) a $35 per bond gain. D) a $10 per bond gain.

D) a $10 per bond gain. Explanation: Municipal bonds that are purchased at a premium must be amortized. This bond has a premium of $100, which over eight years, amounts to $12.50 per year. The cost basis of the bond at the time of the sale is $1,100 − (6 × $12.50), or $1,025. If the bond is sold for $1,035, the customer has a gain of $10 per bond.

If a customer buys 1 XYZ Jan 40 call and 1 XYZ Jan 40 put, paying total premiums of $650, and XYZ becomes worthless, the result is A) a loss of $650. B) a loss of $3,350. C) a gain of $650. D) a gain of $3,350.

D) a gain of $3,350. Explanation: This is a long straddle in which breakeven points are established by adding and subtracting the combined premiums (6½ points) from strike (breakeven points are 46½ and 33½). The customer makes money if the stock moves above 46½ or below 33½. As the stock becomes worthless, the customer earns a 33½ point gain on 100 shares, or $3,350.

When an institution wishes to take a large position in a municipal bond issue but does not want its activities to be well known, it will generally make use of A) social media to find the bonds. B) EMMA. C) the bond buyers visible supply. D) a municipal securities broker's broker.

D) a municipal securities broker's broker. Explanation: The role of a municipal securities broker's broker is to act as a confidential conduit between municipal dealers with bonds to sell and potential buyers. Anonymity is preserved.

When a customer of a broker-dealer dies, all of the following documents may be required to release the decedent's assets except: A) an inheritance tax waiver. B) an affidavit of domicile. C) a certified copy of the death certificate. D) a power of attorney.

D) a power of attorney Explanation: The power of attorney is the only document not required. If the decedent had executed a power of attorney, it would have become invalid upon death. An affidavit of domicile and an inheritance tax waiver may be required. A certified copy of the death certificate is always required.

One of your customers has recently celebrated a 58th birthday. The investor began a regular investment program into shares of the KAPCO Growth Fund over twenty years ago. The account is showing a substantial gain. Because retirement is getting closer, you suggest using the exchange privilege offered by the KAPCO fund group. Your recommendation is to place half of the holdings into the KAPCO Balanced Fund. Following this recommendation would result in A) a taxable transaction for those shares exchanged plus a 10% tax penalty for early withdrawal. B) tax deferral of any gains because the investor has not received any proceeds. C) tax deferral of any gains because the money is still in the KAPCO fund group. D) a taxable transaction for those shares exchanged.

D) a taxable transaction for those shares exchanged. Explanation: The exchange or conversion privilege allows the investor to exchange shares of one fund in a family of funds for another at net asset value. The benefit is the saving of sales charge. The IRS treats this exchange as the sale of one security and the purchase of another. Therefore, any gains will be subject to tax. There is no 10% tax penalty. That applies only when there has been deferral of earnings, such as in an IRA.

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

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

One of the differences between a traditional IRA and a Roth IRA is: A) traditional IRAs offer tax-deferred growth while a Roth does not. B) both allow for tax-free withdrawals in retirement. C) traditional IRAs have higher annual contribution levels. D) deductible contributions are possible with a traditional IRA, but not with a Roth IRA.

D) deductible contributions are possible with a traditional IRA, but not with a Roth IRA. Explanation: There are two key differences between a traditional IRA and a Roth IRA. One of those is that the traditional IRA allows for tax-deductible contributions (with certain restrictions), while the Roth IRA does not. Both offer tax-deferred growth and the same annual contribution limits. Remember, though, that although the maximum dollar limit is the same, those holding both types cannot exceed the single IRA limit. The other key difference is that only the Roth IRA allows for tax-free withdrawals when meeting the specific requirements. All deductible contributions to a traditional IRA, as well as all deferred earnings, are taxable at withdrawal.

One of the key requirements in offering a DPP to a customer is that the program must be suitable. FINRA has some specific suitability requirements for DPPs. Among those is the investor A) does not own a DPP that will compete with the program being offered. B) has sufficient experience in the type of business the program is undertaking. C) has sufficient net worth to be deemed an accredited investor. D) has a net worth sufficient to sustain the risks of the DPP, including loss of investment.

D) has a net worth sufficient to sustain the risks of the DPP, including loss of investment. Explanation: FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. Among those is the need for the investor to have a net worth sufficient to sustain the risks of the DPP, including loss of the investment. Although many DPPs, but not all, are limited to accredited investors, that is not a FINRA suitability standard; that is an SEC requirement. It is the general partner who cannot be in a business that competes with the DPP.

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

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

Regulation SHO prohibits: A) short selling in cash accounts. B) unsuitable short selling. C) short sales on an uptick. D) naked short selling.

D) naked short selling Explanation: Regulation SHO mandates a locate requirement with regard to short sales. Before entering a short sale order, members are required to locate the security to be ensured that delivery can be made on settlement date. The locate requirement applies to short sales in all equity securities. Failure to positively locate the stock before making the short sale is the prohibited practice of naked short selling. Although one can sell short only in a margin account, the prohibition against doing so in a cash account is part of Regulation T, not SHO. Short selling, just as with any activity in customer's accounts, must be suitable. That is part of the suitability requirements, not Regulation SHO. Short sales can be made on any tick: up, down, or the same.

A municipal issuer publishes an official notice of sale to indicate that the offering will be made A) for none of these. B) through a private placement. C) on a negotiated basis. D) on a competitive basis.

D) on a competitive basis. Explanation: An official notice of sale is the issuer's method of inviting competitive bids on a new issue. It sets forth all of the information about the issue that a dealer would need to make a bid, including the size of the offering; the maturity dates; and the date, time, and place of the sale.

Rule 144A regulates A) companies traded on the Nasdaq Global Select Market. B) the sale of restricted stock by control persons. C) personal trading by research analysts. D) the sale of restricted stock to institutional investors.

D) the sale of restricted stock to institutional investors. Explanation: Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers.

A client places a sell stop order good for the day only. Under NYSE rules, you must A) partially write an order ticket and complete only upon execution. B) write an order ticket only if the order is executed. C) partially write an order ticket and complete the ticket before market close. D) write an order ticket upon receipt of the order.

D) write an order ticket upon receipt of the order. Explanation: Order tickets must be written and time stamped upon receipt of the order.

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

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