Series 7 Prac exam

Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners not be required? A) A C corporation B) An S corporation C) An LLC D) A sole proprietorship

A Explanation A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners. Can you imagine a well-known publicly traded corporation with several million shareholders opening an account where the registered representative would have to obtain suitability information on all of them? Even when it is a small business, because the C corporation is its own taxable entity, the suitability requirements are not as critical as with the pass-through businesses (partnerships, LLCs, and S corporations). Of course, the sole proprietorship is the individual, so that is where the suitability is focused.

A customer buys a 6% Treasury bond, maturing in 10 years, at a price of 91.07. The yield to maturity is A) greater than nominal yield. B) less than current yield. C) same as current yield. D) less than nominal yield.

A Explanation A bond whose price is below par or at a discount has a higher yield to maturity than current yield, which in turn is higher than the nominal yield.

Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker-dealer charges the client interest on the monies borrowed in the amount of $133. At the end of the month, the value of the stock drops to $36,000. The month-end statement for this client will show a debit balance of A) $20,133. B) $15,867. C) $18,867. D) $16,133.

A Explanation A decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.

Which of the following may not lead to an industrial development bond being called? A) The municipality is approaching a statutory debt limit. B) Funds are available in the surplus account to call the bond. C) Interest rates are falling. D) The facility is destroyed by a storm.

A Explanation An issuer of industrial development revenue bonds is likely to call bonds to reduce interest costs when interest rates are falling, discontinue interest payments if the facility is destroyed by a natural disaster, or reduce debt if funds are available in a surplus account. Industrial development revenue bonds are not affected by the issuer's statutory debt limits, as they affect the issuance of general obligation bonds only.

Collateralized mortgage obligations (CMOs) are a type of asset-backed security. What type of securities are frequently the assets behind a CMO? A) Ginnie Mae, Fannie Mae, and Freddie Mac products B) Stocks and bonds C) Real estate D) Mutual funds

A Explanation CMOs usually bundle Ginnie Mae, Fannie Mae, and Freddie Mac products into a single product that passes through monthly payments from these investments to investors. They have been highly rated historically and are good income producers. REITs are created with real estate. Mutual funds and ETFs buy stocks and bonds.

A direct participation program (DPP), organized as a limited partnership, must avoid at least two characteristics of a corporation. Which two characteristics are easiest to avoid? A) Continuity of life and freely transferable interests B) Centralized management and continuity of life C) Freely transferable interests and centralized management D) Continuity of life and centralized management

A Explanation Continuity of life and freely transferable interests are the easiest to avoid. The limited partnership is formed to exist for a limited time, and general partner (GP) must approve any transfer of interests. Centralized management is the hardest characteristics to avoid because management of the program is the responsibility of the general partner (GP), so management is centralized.

Credit risk involves A) the possibility of issuer default. B) the danger of not being able to sell the investment at a fair market price. C) fluctuations in overall interest rates. D) inflationary risks.

A Explanation Credit risk is the danger of losing all or part of the invested principal as the result of the issuer's failure.

An experienced investor wants to allocate 10% of an existing portfolio to real estate but does not want to maintain properties, be a landlord, or wait if cash is needed. Which of the following choices would be suitable, given the investor's objectives? A) Purchase shares of an equity REIT B) Purchase property and assign a management company C) Purchase shares of mortgage companies D) Purchase shares of a mortgage REIT

A Explanation Equity real estate investment trusts (REITs) are a way to invest in real estate without having to own or manage properties. REITs trade on exchanges and over the counter; therefore, they are liquid investments. Both of these characteristics meet the investor's objective and make equity REITs the most suitable recommendation of those offered here.

When recommending the purchase of a DPP to a client, as with all other investments, the recommendation must be suitable. FINRA adds some extras requirements in the case of DPPs. Among those is the requirement that the investor is A) in a position to take full advantage of any tax benefits generated by the DPP. B) able to emotionally handle the ups and downs of the market. C) an accredited investor. D) in need of a liquid investment.

A Explanation FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. Among those is the ability of the investor to make use of any potential tax benefits. Although DPPs are frequently sold as private placements, even then not all of the investors have to be accredited. DPPs are considered illiquid investments, and without a secondary market, there are no "roller coaster" ups and downs.

Which of the following would protect a short May 50 put? A) Long Jun 55 put B) Long Jun 45 put C) Long Apr 45 put D) Long Apr 55 put

A Explanation For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration. This ensures the investor may sell the stock without financial loss if the short put is exercised, and she is forced to buy.

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 private-purpose municipal bond B) Interest on a municipal bond issued to finance highway construction C) Distributions from a corporate bond mutual fund D) Income from a municipal security issued to finance parking garages

A 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.

Gerry Logan has been managing his own securities portfolio for the past 15 years. His returns have been about the same as the S&P 500, and as he gets older, he does not want to have to spend the time and effort to keep up the performance. Logan is currently 55 years old and has sufficient discretionary income and savings that enable him to take moderate risks. He is of the belief that his own experience proves that you can't beat the market. Which of the following would you suggest for him? A) 50% into an S&P 500 index fund (or ETF), 30% into an international index fund and 20% into an investment-grade bond fund B) 50% into an S&P 500 index fund (or ETF), 50% into a money market mutual fund C) 100% into an S&P 500 index fund (or ETF) D) 50% into an S&P 500 index fund (or ETF), 50% into an investment-grade bond fund

A Explanation Index funds (or ETFs) are appropriate investment vehicles for investors who believe that active management does not produce returns above the cost. Investing in the S&P 500 would give him returns comparable to what he has enjoyed in the past. However, in recognition of his advancing age, it would appear prudent to diversify by placing some of the money into the international sphere and a portion into the safety of high-grade debt securities.

An investor who purchased 100 shares of PERD common stock on June 30, 2020, would receive long-term capital gain treatment if the stock is sold at a profit starting A) July 1, 2021. B) December 31, 2021. C) June 30, 2021. D) June 31, 2021.

A Explanation Investors must own a security for more than 12 months before it becomes long term for tax purposes. The first day after June 30, 2020, is July 1, 2020. Twelve months later is July 1, 2021. Remember, there is no June 31.

Which of the following statements regarding Ginnie Maes are true? They are quoted in 1/8ths. They are quoted in 1/32nds. They are traded with an accrued interest computed on an actual-day basis. They are traded with an accrued interest computed on a 30/360 basis. A) II and IV B) II and III C) I and III D) I and IV

A Explanation Like governments, Ginnie Maes are quoted in 1/32nds, but, like corporates, Ginnie Maes compute accrued interest on a 30/360-day basis.

Three family members each hold sizable call option positions with the same underlying equity security in their individual accounts. Over the course of three days (Monday through Wednesday), each of the customers calls your broker-dealer and gives instructions to exercise all of their call options in that security. You recognize this as a potential violation of A) Options Clearing Corporation (OCC) exercise limit rules. B) the Uniform Practice Code. C) the Code of Procedure. D) front running rules.

A Explanation OCC exercise rules limit the maximum number of contracts in the same underlying security that can be exercised within a five-business-day period. Three customers—all related and all giving instructions to exercise their long calls in the same underlying security within three business days—should, at a minimum, raise the question of whether or not they are acting in concert to circumvent the OCC exercise limit rules.

A 38-year-old investor places $25,000 into a 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) $11,750. B) $25,200. C) $16,450. D) $18,000.

A Explanation Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 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 $47,000.

The mutual fund industry is highly regulated. One of the areas regulated is that of making disclosures. An example of that is that mutual funds must provide reports to their shareholders on A) a biannual basis. B) a biennial basis. C) a quarterly basis. D) an annual basis.

A Explanation The Investment Company Act of 1940 requires that mutual funds provide their shareholders with reports twice per year (biannually). One of the reports is the annual report with audited financial statements (also filed with the SEC), and the other is the semiannual report. Biennial reporting would be every two years.

All of the following Municipal Securities Rulemaking Board (MSRB) Rules of Uniform Practice requirements may be altered by mutual agreement between dealers except A) the content of confirmations. B) the terms of delivery. C) the payment of shipping expenses. D) the price and time of delivery.

A Explanation The MSRB regulates the contents of confirmations to standardize information. There must be an original record of the agreement, even though dealers may mutually agree to change the terms.

The holder of a foreign currency call option has the right to A) buy the specified foreign currency for a fixed U.S. dollar amount. B) sell the specified foreign currency for a fixed U.S. dollar amount. C) buy U.S. dollars for a fixed amount of the specified foreign currency. D) sell U.S. dollars for a fixed amount of the specified foreign currency.

A Explanation The holder of a call option has the right to buy the underlying asset. The asset in the case of foreign currency options is the specified foreign currency. Therefore, a foreign currency call option gives the holder the right to buy the specified foreign currency at the strike price. That strike price is expressed in U.S. dollars. For example, one BP 1.30 call option gives the holder the right to buy 10,000 British pounds at a price of $1.30 per pound, or $13,000.

Which of the following investments is most suitable for an investor seeking monthly income? A) Money market mutual fund B) Growth stock C) Mutual fund investing in small-cap issues D) Zero-coupon bond

A Explanation The money market mutual fund is the most suitable investment for an investor seeking monthly income. The other securities offer higher long-term growth potential, but they are not designed to provide monthly income.

All of the following statements about variable annuities are true except A) a minimum rate of return is guaranteed. B) the number of annuity units becomes fixed when the contract is annuitized. C) such an annuity is designed to combat inflation risk. D) the rate of return is determined by the underlying portfolio's value.

A Explanation The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates.

Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 four years ago, and it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) $2,800 B) $0 C) $4,200 D) $3,800

A Explanation This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). The tax on this is $2,800 ($10,000 × 28%). Because the client is older than age 59½, she does not pay 10% premature distribution penalty tax.

Which of the following statements regarding Treasury bills are true? They are sold in minimum denominations of $10,000. They are offered with maturities ranging up to 52 weeks. Their interest is exempt from taxation at the state level. They are callable by the U.S. Treasury at any time before maturity. A) II and III B) I and II C) II and IV D) I and III

A Explanation Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. T-bills are regularly offered with maturities from four weeks to as long as 52 weeks from issuance and are issued at a discount. Interest on Treasury bills is taxable at the federal level only.

At 3:55 pm ET, a registered representative receives a market order from an officer of XYZ to buy 75,000 shares of XYZ for the company's account. The registered representative must A) advise the officer that a safe harbor under SEC Rule 10b-18 no longer exists before placing the order. B) place the order without taking any further action. C) refuse the order. D) advise the officer that a safe harbor under SEC Rule 10b-18 no longer exists before refusing the order.

A Explanation Under SEC 10b-18, an issuer purchasing its own securities cannot affect the opening or closing of the security. A safe harbor is available if the issuer is not involved in the first transaction of the day or in any transaction in the last 30 minutes of trading (10 minutes if the security is actively traded). If the issuer were to purchase its own securities during the last 30 minutes of trading, it may be forced to justify that its purchase did not affect the closing price. If a registered representative receives an order from an issuer at 3:55 pm ET, he must advise the issuer that a safe harbor is not available. The representative may then place the order.

A registered representative notices that a fund he has been recommending to a recalcitrant customer has just declared a $1 per share dividend. Recognizing this as a great opportunity, he calls the client and explains that if a purchase is made within the next week, at the end of the month, the investor will receive a cash dividend of $1 for each share purchased. With a current public offering price of approximately $20 per share, that is a return on investment of 5% in a matter of a couple of weeks. This registered representative is A) guilty of violating the practice of selling dividends. B) properly showing the return as a percentage of the offering price. C) guilty of guaranteeing a dividend. D) offering the client a wonderful opportunity.

A Explanation What the registered representative has not explained is that, upon payment of the dividend, the net asset value of each share will drop by $1.00. That is why the practice of selling dividends is prohibited. There is no problem with stating the dividend of $1 will be paid; that is not guaranteeing anything because the dividend has already been declared. Rate of return on a mutual fund should always be shown as a percentage of the offering price, but that "good deed" does not count when performing a misleading activity

Which of the following options transactions settles T+2? A) Exercise of a long equity put option B) Opening purchase of a long equity put option C) Exercise of long index option D) Closing sale of a long equity put option

A Explanation When a long equity put option is exercised, from a settlement standpoint, it is the same as anyone selling stock. That is T+2 settlement date. The trading of options, not the exercise, is T+1. When it comes to index options, because they settle in cash, exercise settlement is T+1 rather than T+2 like equity options.

DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be A) lower than $50. B) $50. C) the stock's current market price. D) higher than $50.

A Explanation With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This means the bondholder must be able to convert it to more shares, which requires a lower conversion price.

The writer of an IRX yield-based option, if exercised, must A) deliver cash. B) receive T-notes. C) deliver T-bills. D) receive cash.

A Explanation Yield-based options settle in cash if the option is exercised. The writer must deliver the in-the-money amount in cash.

Which of the following provisions of a new corporate debt issue would be least attractive to a potential investor? A) A low call price B) Significant collateral C) A high nominal yield D) A sinking fund

A The lower the call price, the more attractive it is for the issuer, not the investor. A sinking fund is like the escrow account on a home mortgage. Money is being put aside to make sure that when it is due, it is there. Obviously the investor would prefer a higher coupon (nominal) yield than a lower one and collateral always adds to the security of the debt.

According to FINRA rules, duplicate confirmations of transactions must be sent to an account owner's employer—if requested to do so by the employer—whenever establishing a margin account for a bank officer. an employee of another broker-dealer. an independent insurance agent. an officer of another broker-dealer. A) III and IV B) II and IV C) I and II D) I and III

B Explanation According to FINRA rules, when an employee of a member firm opens an account with another member broker-dealer, duplicate confirmations and account statements must be sent to the employer by the broker-dealer establishing the account when the employer requests it to do so. An officer of a broker-dealer is considered an employee.

One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed? $41.91 $42.27 $42.40 $42.75 A) I and II B) II and IV C) III and IV D) I and III

B Explanation As a sell stop order with a limit of $42.15, no order may be executed below the limit price of $42.15. This order will be triggered at the price of $42.40. The only remaining prices that will meet the limit requirement after it is triggered are $42.27 and $42.75. Remember, it takes two trades for any stop order: one to trigger the order, the other for execution.

You have two customers who are a couple. Each person has an individual account. They also have a JTWROS account in both names. One of the customers asks you to transfer funds from the other person's individual account in order to meet a margin call in the requesting customer's margin account. To do this. A) you need the authorization of both parties on the account and approval of a designated principal. B) you need the authorization of both customers. C) you need the approval of a designated principal. D) because they are both signatories on the joint account, you need the authorization of this customer only.

B Explanation Because the customer asking for the transfer is not a signatory on the other customer's individual account, you need the authorization of both of them. As long as both consent, there is no need for authorization by a principal. However, in the real world, your firm may want to look at transfers of this type. Just remember, we are teaching the test world.

The spread in a municipal competitive bid is A) the difference between the takedown price and reoffering price. B) the difference between the bid and production (the price at which the bonds are reoffered to the public). C) the excess of the dollar bid over par. D) the difference between the stated yield and reoffering price.

B Explanation Bid refers to the winning bid and is the price the syndicate pays to buy the bonds from the issuer. The term production is a sales term and refers to the price at which the bonds are reoffered to the public. The difference between the two is the spread.

Once a variable annuity has been annuitized A) each annuity unit's value is fixed, but the number of annuity units varies with time. B) each annuity unit's value varies with time, but the number of annuity units is fixed. C) each annuity unit's value and the number of annuity units vary with time. D) the number of annuity units is fixed, and their value remains fixed.

B Explanation During the payout period, payments are based on a fixed number of annuity units established when the contract was annuitized. The value of an annuity unit varies from month to month according to the performance of the separate account, in comparison to the assumed interest rate.

A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account? A) The market value will increase. B) The equity will remain the same. C) The equity will increase. D) The debit balance will be reduced.

B Explanation Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.

Although there are general suitability rules that always apply, FINRA's Rule 2330 on variable annuity suitability specifies that, to be considered suitable, there is a reasonable basis to believe that the customer has been informed—in general terms—of various features of A) deferred annuities of all types. B) deferred variable annuities. C) single premium variable annuities. D) immediate variable annuities.

B Explanation FINRA's primary suitability concern is with deferred variable annuities. That does not mean there are no requirements for being careful with the others, it is just that most of the violations have involved the deferred VA.

Which of the following order types is permitted in Nasdaq markets but not in NYSE equity markets? A) Limit B) Fill-or-kill (FOK) C) Immediate-or-cancel (IOC) D) Market

B Explanation FOK and all-or-none orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq.

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

B 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.

If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $600 in stocks B) $600 cash C) $325 cash D) $381 in securities

B Explanation Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised.

Leveraged index funds can be exchange-traded funds (ETFs). can never be exchange-traded funds. can be inverse or reverse funds. can never be inverse or reverse funds. A) II and III B) I and III C) I and IV D) II and IV

B Explanation Leveraged funds—those attempting to deliver a multiple (e.g., 2X or 3X) of the returns delivered by the index they track—can be ETFs, as well as inverse (reverse) funds. Inverse funds attempt to deliver returns the opposite of those realized by the index they track.

All of the following information must be disclosed on a municipal bond confirmation of sale except A) the source of revenue backing a municipal revenue bond. B) the dated date on a municipal bond that has been outstanding for two years. C) in-whole call dates. D) the name of the guaranteeing corporation in an industrial development revenue bond issue.

B Explanation On the dated date, new issue interest starts to accrue. Once the issue makes its first interest payment to bond holders, the dated date is no longer used to compute accrued interest because there is a prior interest payment date.

One of your clients saw an investment for a new offering. The fine print stated that this was available solely to accredited investors. You would explain that this is a private placement being offered under the exemption provided in SEC Rule A) 144. B) 506(c). C) 147. D) 506(b).

B Explanation Regulation D of the Securities Act of 1933 deals with private placements. There are two options. Rule 506 (c) permits advertising, but only if 100% of the investors are accredited investors. Rule 506(b) does not permit advertising, but it does allow up to 35 nonaccredited investors. Rule 144 covers the sale of restricted or control stock, and Rule 147 is the intrastate exemption. Neither of them makes any mention of accredited investors.

Under Regulation T, action by the broker-dealer is not required when A) the total amount of the transaction does not exceed $1,000. B) the amount due does not exceed $1,000. C) the amount due does not exceed $200. D) the amount due does not exceed $100.

B Explanation Regulation T permits a broker-dealer to disregard any amounts due less than $1,000.

Reinvestment risk is the chance that, after purchasing a bond, interest rates A) become volatile. B) fall. C) remain stable. D) rise.

B Explanation Reinvestment risk is the danger that after purchasing a bond, interest rates will fall. This means that the fixed interest payments received over the remaining life of the bond will be reinvested at lower rates. The good news is that the price of the bond has probably risen due to falling rates.

Which of the following investments is likely to have the least reinvestment risk to interest? A) U.S Treasury bonds B) Zero-coupon bonds C) Double-barreled bonds D) High-yield bonds

B Explanation Reinvestment risk to interest is the uncertainty that periodic payments from an investment, such as bond interest, can be reinvested at the same rate as investment is currently paying without increasing the risk. Because the zero-coupon bond makes no periodic interest payments, there is nothing to reinvest. It makes no difference how high the coupon yield is or how secure the interest payments are, the investor never knows what current market interest rates will be when the semiannual checks arrive.

A C corporation's income statement renders the following information: pretax income: $2,000,000; dividends from preferred stock issued by other corporations: $100,000; interest paid on outstanding debentures: $200,000. This corporation has taxable income of A) $2,100,000. B) $2,050,000. C) $1,850,000. D) $1,900,000.

B Explanation Remember the 50% dividend exclusion available to C corporations. All of the $2 million of pretax income is taxable along with half of the $100,000 in dividends. The interest is included (as the exam often does) as an extra number to confuse. Pretax income is always after all expenses including interest.

A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences? A) Any tax due is deferred. B) The entire $10,000 is taxable as ordinary income. C) Two-thirds of the withdrawal is taxable as ordinary income. D) There is no tax, as the withdrawal is considered return of capital.

B Explanation The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or last-in, first-out). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be an additional tax penalty of 10%.

The 5% markup policy applies to which of the following? Exempt transactions Agency transactions Principal secondary market trades New issues A) I and III B) II and III C) III and IV D) I and II

B Explanation The 5% markup policy applies to all secondary market transactions. It does not apply to exempt transactions, transactions requiring the delivery of a prospectus, or issues sold at a fixed offering price.

A customer of your broker-dealer is bullish on U.S. equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general? A) American depositary receipts (ADRs) B) Standard & Poor's depository receipts (SPDRs) C) Real estate investment trusts (REITs) D) Variable rate demand obligations (VRDOs)

B Explanation The SPDR is an index fund designed to replicate and track the performance of the S&P 500, a broad-based equity index.

The Securities Act of 1933 requires securities issued by all of the following to register and be subject to prospectus provisions except A) investment companies. B) the U.S. government. C) foreign governments with which the United States maintains diplomatic relations. D) corporations involved in interstate commerce.

B Explanation The Securities Act of 1933 does not require U.S. government securities to be issued by prospectus. The act covers the issuance of securities by companies engaged in interstate commerce. Investment company shares must be sold by prospectus. The exemption for securities issued by foreign governments is found in the Uniform Securities Act, not federal law.

As a registered representative, you recommend the purchase of the ABC Fund family corporate bond mutual fund to a customer whose objective is current income. The customer agrees to the purchase and you enter the order. What type of securities has the investor purchased? A) Corporate bonds B) Common stock C) Preferred stock D) Government bonds

B Explanation The customer has purchased common stock in the mutual fund because that is the only security an open-end management investment company (mutual fund) can issue. Using the customer's invested funds, the fund manager purchases securities for the fund portfolio that will meet the fund's investment objectives. For a corporate bond fund, the principal purchases for the portfolio would be corporate bonds. Likewise, if the fund were the ABC Preferred Stock Fund, the investment manager would purchase preferred stocks. Please do not confuse how a mutual fund raises capital for the manager to invest (it issues common stock shares in the fund) with what the manager invests in with that money.

A customer sells short 100 shares of XYZ at 58 and buys 1 XYZ Jan 60 call for 3. If the stock price falls to $52, the customer buys back the stock and closes the option at 1 for A) a loss of $400. B) a gain of $400. C) a gain of $300. D) a loss of $300.

B Explanation The customer made $600 on the short stock position ($58 to $52) and lost $200 on the call (bought for 3, sold at 1). Overall, the gain is $400.

An investor opens the following positions: Buy 100 shares of SSG @48; write 1 SSG Dec 50 call @3¾. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $575; maximum loss is $4,425; breakeven point is $51.75. B) Maximum gain is $575; maximum loss is $4,425; breakeven point is $44.25. C) Maximum gain is $4,425; maximum loss is $575; breakeven point is $44.25. D) Maximum gain is $4,425; maximum loss is $575; breakeven point is $51.75.

B Explanation The first step is to identify the position. This is long stock with a short call (i.e., a covered call position). Breakeven is the customer's net cost. The price of the stock ($48) minus the premium ($3.75) received equals the $44.25 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the SSG stock. The premium income plus the excess of the strike price over the purchase price of the stock is the most this client can make. If the stock's price should rise well above the strike price of $50 per share, the short call will be exercised and the customer will deliver the stock purchased at $48 and receive $50. Regardless of how high the stock price rises, this customer can never make more than the $2 difference plus the 3¾ premium ($5.75 × 100 shares). If the stock's price should decline, the call will expire unexercised. That 3¾-point premium protects the long stock, but only for those 3¾ points. Once the market price falls below $44.25 (the breakeven point), it is all a loss for the customer down to a maximum $4,425 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.

A document that allows an investor in Class A shares of a mutual fund to receive a breakpoint on an initial purchase without investing the required breakpoint amount is A) the new account form. B) a letter of intent. C) the rights of accumulation form. D) the breakpoint sale memorandum.

B Explanation The letter of intent (LOI) is a document available to mutual fund investors that allows them to receive breakpoints (discounted sales charges) on the initial and subsequent deposits over a 13-month period. Investors can backdate an LOI up to 90 days to pick up previously invested monies. If backdated, the 13 months begins from that date. There is no rights of accumulation form. Rights of accumulation allow future deposits to receive sales charge discounts when the investment total grows into higher breakpoint levels. A difference between the LOI and rights of accumulation is that the LOI allows for the reduced sales charge starting with the initial payment and rights of accumulation do not apply until the account reaches the breakpoint. The new account form is the opening document of an account and does not provide these benefits. A breakpoint sale is the unethical procedure of selling Class A shares in an amount just below a breakpoint. This usually results in a higher commission to the registered representative and greater cost to the investor.

A customer wishes to redeem 1,000 shares of a mutual fund. The net assets value (NAV) and public offering price are $10, and a redemption fee of 0.5% will be charged. How much will the customer pay in redemption fees? A) $9,500 B) $50 C) $500 D) $9,950

B Explanation The question did not ask how much he would receive upon redemption, but how much he would pay in redemption fees. Mutual fund shares are redeemed at the NAV (bid): 1,000 shares times $10 each equal $10,000. $10,000 × 0.005 (0.5% redemption fee) = $50.

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) EMMA. B) a municipal securities broker's broker. C) the bond buyers visible supply. D) social media to find the bonds.

B 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.

One of your customers had a sideline business that was just sold for $100,000. The customer is 47 and wants to put that money into an investment that can be left alone for the next 20 years until expected retirement. Which of the following is likely the most suitable choice for this customer? A) A small-cap growth fund with reinvestment of distributions B) A target date fund with a date 20 years from today C) A portfolio that is 70/30 equities today gradually rebalancing to 50/50 at retirement age D) An investment grade bond fund with an average duration of 20 years

B Explanation This is exactly what target date funds are designed for. As the investor gets closer to the target retirement age, the portfolio managers shift the concentration from equities to fixed income. Why doesn't the 70/30 shifting to 50/50 portfolio work here? Because the question states that the customer wants a "hands off" approach, something the target date fund does automatically. The small-cap growth fund might be too aggressive and a bond fund is not aggressive enough when the time horizon is 20 years.

While looking at a chart for QRS common stock, a technical trader wants to have an order in position in the event that QRS moves higher and breaks out on the chart. A buy stop order would be placed A) just above the support level. B) just above the resistance level. C) just below the support level. D) just below the resistance level.

B Explanation To take advantage of a stock moving higher and breaking out on a chart, a technical trader would place a buy stop order just above the resistance level. Technical traders believe that if a stock breaks the resistance level, it will move to and trade within a higher price range. Using a buy stop order placed just above the resistance level ensures that the purchase is not made until the stock has broken through the resistance.

Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Absent any instructions to the contrary, for tax purposes, the client will report a short-term capital A) gain of $800. B) gain of $400. C) loss of $200. D) gain of $300.

B Explanation Unless the client gives specific instructions, the IRS will always use the FIFO method of determining the shares sold. In this case, it would be the 100 purchased in February at $50 and the 100 purchased in April at $52. That is a $300 profit on the February purchase and a $100 profit on the April one. That totals $400. Because all transactions are in the same year, any gain (or loss) is short term.

A customer bought a bond that yields 6.5% with a 5% coupon. If the bond matures at this point, the customer will receive A) $1,000 plus a call premium. B) $1,025. C) $1,050. D) $1,065.

B Explanation Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.

Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination? Actual performance compared to the AIR affects the cash value of a variable life insurance policy Actual performance compared to the AIR affects the death benefit of a variable life insurance policy Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity A) I and IV B) II and IV C) I and III D) II and III

B Explanation When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. There is no assumed interest rate for the cash value. That is, the insurance company makes no projections as to its growth. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice-versa. During the accumulation period, there are no assumptions; the insurance company never projects how much the money will grow.

An investor with no other positions sells 4 DWQ Jun 45 calls at 4. The calls are exercised when the stock is trading at 47.25. What is the investor's profit or loss? A) $175 profit B) $700 profit C) $700 loss D) $175 loss

B Explanation When the calls were exercised, the investor had the obligation to sell the stock to the owner of the call at 45. Because the investor had no other positions, we know that to fulfill the obligation to sell, they will first need to purchase the stock in the open market for 47.25. 4 was received when the call was sold, and 45 was received when the stock was sold to the owner of the call. Therefore, a total of 49 was received. 47.25 had to be paid to purchase the stock in the open market. Therefore, 47.25 paid and 49 received equals 1.75 point profit ($175) per contract. $175 × 4 contracts = $700 total profit.

Customers will have a potentially unlimited loss if they are A) long 1 ABC Jan 50 put and long 100 shares of ABC stock. B) short 1 ABC Jan 50 call and short one ABC Jan 50 put. C) short 1 ABC Jan 50 put and long 100 shares of ABC stock. D) long 100 shares of ABC stock and short 1 ABC 50 call.

B Explanation When trading options, there is one way in which to have a potentially unlimited loss. That is the uncovered (naked) call. When a call option is written without a corresponding long position in the underlying, the writer loses when the price goes up. Because there is theoretically no limit as to how high a stock's price can go, the potential loss is unlimited. In this short straddle position, it is the short call that creates this possibility. With a short put, the lowest a stock's price can go is to zero. With a 50 put, that is a maximum loss of $50 less the premium received. The maximum loss on any long position, stock or option, is what the investor paid for it.

A customer creates a long straddle by buying 5 ABC Nov 50 calls and 5 ABC Nov 50 puts, paying premiums of $3,750. If ABC is at 56.50 at expiration, the customer has A) a loss of $1,000. B) a loss of $500. C) a gain of $1,000. D) a gain of $500.

B Explanation While the puts would expire, the customer may close out the calls by selling them at 6.50 (56.50 − 50) for $3,250 (6.50 × 5 × $100). The result is a loss of $500 ($3,750 − $3,250).

An investor purchases a U.S. Treasury bond put option. The option is in the money on the last trading day and the investor exercises the put. Which of the following statements is correct? A) The investor will sell the option for its intrinsic value. B) On the settlement date, the investor will receive cash in the amount of the intrinsic value. C) On the settlement date, the investor will deliver the bonds and receive cash in the amount of the intrinsic value. D) On the settlement date, the investor will pay cash in the amount of the intrinsic value.

B Explanation Yield-based options settle in cash. The settlement amount is the intrinsic value. When an investor holding a put option exercises, the debt security is, in essence, being sold to (put to) the writer of the option. Instead of physical delivery of the bonds, settlement is made in cash. It is quite possible the investor will simply sell the option for its intrinsic value. That isn't the correct answer to this question because you are told the investor exercises the put.

The working capital is A) dividing the current liabilities by the current assets. B) subtracting the current liabilities from the current assets. C) dividing the current assets by the current liabilities. D) multiplying the current assets times the current liabilities.

B subtracting the current assets. from the current liabilities

All of the following statements regarding 529 plans are true except A) anyone can make a contribution on behalf of a beneficiary. B) earnings accumulate tax free if the money is used for qualified educational purposes. C) contributions are made with pretax dollars at the federal level. D) a beneficiary of a 529 plan may also be the beneficiary of a Coverdell Education Savings Account.

C Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.

Moody's Investment-Grade (MIG) rating would be applicable to A) a New York state general obligation bond. B) a New York state revenue bond. C) a New York state revenue anticipation note. D) a New York state university bond.

C Explanation A MIG rating is provided for short-term municipal debt commonly referred to as notes (revenue anticipation notes).

All of the following are characteristics of both oil and gas, as well as real estate limited partnerships, except A) limited liability. B) deferral of benefits. C) depletion. D) depreciation.

C Explanation A depletion allowance makes up for the using up of a natural resource. Real estate limited partnerships do not have depletion allowances. Both real estate and oil and gas partnerships offer limited liability, depreciation allowances, and deferred receipt of income and capital gains.

A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30, respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter? A) Buy 100 ABC 20.50 stop B) Buy 100 ABC 30.25 stop C) Sell 100 ABC 19.50 stop D) Sell 100 ABC 29.75 stop

C Explanation An analyst who expects a stock to fall through support is anticipating that the stock will decline. He can take advantage of this trend by establishing a short position at the top of the decline. He will enter a sell stop order just below the support price.

When XYZ stock trades at 40, and an XYZ Oct 35 call trades at 5, which of the following is true? A) The option's time value equals its intrinsic value. B) The option is at the money. C) The time value is zero. D) The option is out of the money.

C Explanation An option's premium consists of time value and intrinsic value. In this situation, the call is in the money by 5 (intrinsic value is 5), because the market value of 40 exceeds the strike price of 35 by 5. If the total premium is 5, and the intrinsic value is 5, the time value must be zero. The option is at parity, which means the premium equals the intrinsic value. Remember P - I = T (Premium minus intrinsic value equals the time value).

John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability? A) The entire amount is taxed as ordinary income because it is not life insurance. B) None because it is the proceeds from a life insurance company C) It is the proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. D) It is the ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59½ years old.

C Explanation Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment.

An investor believes that ICBS, a Nasdaq security, is overpriced at 40. She can sell ICBS short in the over-the-counter (OTC) market under which of the following circumstances? A) Only if she has an outstanding long position B) Only at a price higher than the current inside bid C) With no restrictions D) Under no circumstances

C Explanation As on exchanges, short sales on the Nasdaq Stock Market can occur at any time in the trade sequence.

Which of the following debt instruments generally present the least amount of default risk? A) Municipal revenue bonds B) Convertible senior debentures C) Municipal general obligation bonds D) High-yield corporate bonds

C Explanation Because the full taxing power of the municipality backs a general obligation municipal bond, it will exhibit the least amount of default risk. A corporate debenture is an unsecured bond with a greater degree of risk, as is a junk or high-yield corporate bond.

A customer's confirmation for a municipal bond callable at par and quoted higher than the nominal yield would show A) yield to call (YTC). B) current yield. C) yield to maturity (YTM). D) coupon yield.

C Explanation Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.

On Wednesday, April 22, 2020, your customer purchased a block of City Y 4% Recreation Authority term revenue bonds quoted at 22. The bond's stated interest payment dates are J/J 1. After receiving the confirmation, the customer called you and asked why there was no additional cost for accrued interest. The most likely reason for that is A) the trade settled on an interest payment date. B) the accrued interest is paid by the seller. C) the bonds are trading flat. D) there was a mistake on the confirmation and it will be rectified shortly.

C Explanation Bonds trading without accrued interest are trading flat. Every bond trades flat twice a year: when the bond settles on an interest payment date. However, that is not the case here because this trade would settle on April 24 and interest payment dates are January and July 1. The price is a hint. A 4% bond selling at 22% of par indicates that this bond is likely in default of interest and that is why it is trading flat.

Which of the following risks would least impact collateralized mortgage obligation (CMO) investors? A) Prepayment risk B) Rate risk C) Liquidity risk D) Extended maturity risk

C Explanation CMO investors are always subject to rate risk, which includes maturity and prepayment risk. Because CMOs trade over the counter, they are fairly liquid, allowing investors to purchase or sell them easily at fair market value.

If a customer believes the Swiss franc will depreciate against the U.S. dollar, which of the following option strategies may best take advantage of the expected depreciation? A) Credit put spread B) Uncovered put writing C) Uncovered call writing D) Debit call spread

C Explanation Call writing is bearish, while credit put spreads, debit call spreads, and uncovered put writing are bullish.

An investor had a $20,000 capital loss, a $15,000 capital gain, and $50,000 in income for the year. How much of the income is taxable? A) $30,000 B) $50,000 C) $47,000 D) $20,000

C Explanation Capital losses may be used to reduce taxable income. The first step is to net the gains and the losses. This investor has a net loss of $5,000. Of that net loss, a maximum of $3,000 can be written off against the income for the year. That reduces the investor's taxable income to $47,000. The unused $2,000 of the net loss is carried forward to subsequent tax years until utilized.

In which of the following markets would an investor expect to find closed-end investment company shares traded? A market maintained by the investment company itself The over-the-counter market The commodities market The exchanges A) III and IV B) I and III C) II and IV D) I and II

C Explanation Closed-end company shares are like ordinary stock. Once issued, they trade on exchanges or in the over-the-counter market.

Covered call writing normally occurs in A) a falling market. B) a rising market. C) a stable market. D) a volatile market.

C Explanation Covered call writing normally occurs in a stable market. In a rising market, writing calls against a long stock position limits upside potential. In a falling market, the calls only provide downside protection to the extent of the premium received.

Under what circumstances will a dilution of equity occur? A) Issue of mortgage bonds to replace debentures B) Stock dividend C) The conversion of convertible bonds into common stocks D) Stock split

C Explanation Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued, and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders.

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

C Explanation Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.

In most cases, FINRA's recordkeeping requirements follow SEC Rule 17a-4. One notable exception is records of written customer complaints where A) FINRA requires three years and the SEC two years. B) FINRA requires four years and the SEC six years. C) FINRA requires four years and the SEC three years. D) FINRA requires six years and the SEC three years.

C Explanation FINRA, as a self-regulatory organization, can make rules more but never less stringent than the federal law. This is one of the few examples.

A corporation plans to issue stock to the public at $10 per share. If the manager's fee is $0.10 per share, the underwriting fee is $0.25 per share, the concession is $0.45 per share, and the reallowance is $0.20 per share, the spread is A) $0.90. B) $0.70. C) $0.80. D) $1.00.

C Explanation In a corporate offering, the spread has three components: the manager's fee, the underwriting fee, and the concession. The math here is $0.10 plus $0.25 plus $0.45 = $0.80. The reallowance is not a separate item; rather, it is part of the $0.45 concession and represents a give-up if a member of the selling group sells to a FINRA member firm that is not a member of the selling group.

Using yield-based options, which of the following hedging strategies offers a bond portfolio manager the greatest protection against rising long-term interest rates? A) Sell 30-year T-bond yield-based calls B) Buy 30-year T-bond yield-based puts C) Buy 30-year T-bond yield-based calls D) Sell 30-year T-bond yield-based puts

C Explanation In this example, the options would increase in value, as the actual yield on the 30-year Treasury bonds rose above the yield value represented by the strike price of the option.

Which of the following statements regarding Sallie Mae debentures are true? A) Interest is paid monthly. B) They are backed by the taxing power of the U.S. government. C) Interest is tax exempt at the state and local levels. D) Sallie Mae securities finance building public schools across the country.

C Explanation Interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. As a general rule, debentures pay interest every six months. Sallie Mae is not backed by the taxing power of the U.S. government, and money is used for student loans for higher education.

Investment clubs can take advantage of breakpoints on mutual fund purchases. cannot take advantage of breakpoints on mutual fund purchases. are permitted to purchase new equity issues at the public offering price (POP). are not permitted to purchase new equity issues at the POP. A) I and IV B) I and III C) II and III D) II and IV

C Explanation Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore, are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases.

A customer purchases a municipal bond in the secondary market with a settlement date of August 1. If the next interest payment is September 1, which of the following statements regarding interest on this bond are true? The bond pays interest on March 1 and September 1 each year. The seller must pay accrued interest no later than settlement day. Accrued interest on this bond is computed using actual days elapsed. On September 1, the buyer will receive from the issuer interest for the period March 1 through August 31. A) II and IV B) I and III C) I and IV D) II and III

C Explanation Municipal bond accrued interest is calculated using a 30-day month and a 360-day year, with interest paid every six months. On settlement day, August 1, the buyer will pay the seller five months accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive payment for the full semiannual interest directly from the issuer.

New Housing Authority (NHA) bonds are a relatively safe investment because A) banks buy these bonds. B) they are backed by the full faith and credit of the issuing municipalities. C) the U.S. government guarantees a contribution to secure the bonds. D) rental income provides a hedge against inflation.

C Explanation NHAs are considered safe because, in addition to the backing of rental income, they are secured by a subsidy from an agency of the U.S. government. Thus, they are rated AAA

ABC has the following recorded on its balance sheet: Current assets$50,000Fixed assets$100,000Notes payable$40,000Accounts payable$25,000 Based on this information, ABC's net worth is A) $35,000. B) $110,000. C) $85,000. D) -$35,000.

C Explanation Net worth is assets - liabilities. There are two assets; the current and the fixed. There are two liabilities; the notes and accounts payable. Therefore, ABC's net worth is $150,000 - $65,000 = $85,000.

A performance-based management fee is normally associated with which of the following pooled investments? A) A balanced fund B) An asset allocation fund C) A hedge fund D) A unit investment trust

C Explanation One of the distinct characteristics of a hedge fund is the fee structure. A typical offering will describe the fee as "2 & 20." This means that the base fee is 2% of assets, with a bonus of 20% of the profits once the return reaches a specific range. It is unlikely that you will see this feature on your exam anywhere other than with hedge funds. It creates a strong incentive for the fund's manager to implement strategies that may produce high returns but carries with it a higher risk for the investors. There are no management fees with UITs and mutual fund fees are almost always below 1% (most significantly less that that).

Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority except A) the debt service reserve fund. B) the operations and maintenance. C) the optional call provisions. D) the debt service.

C Explanation Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds.

For a regular standardized option, any gain on the sale of the contract is A) deferred until the underlying asset is sold. B) a short-term or long-term capital gain depending on the holding period. C) a short-term capital gain. D) a long-term capital gain.

C Explanation Regular standardized options have a maximum expiration of 9 months, so a gain on these types of contracts can only be short term for tax purposes. It is only the LEAPS options where it is possible to hold a long option position for more than 12 months. That is the only case where a long option can realize long-term treatment. The question is dealing solely with the options contract, not the underlying security.

An institutional investor is seeking a quote on $2 million of term bonds issued by the City Water Authority. These are the 3s of 2050 and would be quoted A) using the dealer's bid price. B) by yield to maturity. C) in dollars as a percentage of par. D) by current yield.

C Explanation Term bonds are often called dollar bonds because they are quoted in a dollar price. That price is a percentage of par. Serial bonds are quoted on their basis (yield to maturity). A purchaser is going to be quoted based on the dealer's ask price (the bid price is when the customer is selling). The 3s of 2050 means that the coupon is 3% and the maturity date is 2050.

Issued and outstanding stock is the authorized stock of a corporation that has been purchased by investors. The remaining authorized but unissued stock may be used for all of the following except A) raising capital at a later date. B) exchanging stock with stockholders in a conversion. C) sending to the IRS for payment of federal income taxes. D) paying stock dividends to stockholders.

C Explanation The IRS does not want a corporation's authorized but unissued stock to pay federal income taxes. The IRS treats a corporation as an entity like an individual taxpayer and wants money, not stock. This unissued stock can be issued to raise future capital, used to pay stock dividends, and to exchange for convertible preferred stock and convertible bonds upon conversion.

One of your clients maintains a traditional IRA with your firm. The individual was born July 20, 1949. This individual's initial required minimum distribution (RMD) from the IRA must be made no later than A) December 31, 2022. B) December 31, 2021. C) April 1, 2022. D) April 1, 2021.

C Explanation The SECURE Act requires any individual born after June 30, 1949, to begin taking RMDs not later than April 1 of the year after turning 72. This client will turn 72 on July 20, 2021, and the next April 1 is in 2022.

Under the USA PATRIOT Act of 2001, member firms must maintain records of reports of currency transactions involving more than $10,000 for A) 3 years. B) 6 years. C) 5 years. D) 1 year.

C Explanation The USA PATRIOT Act of 2001 requires that all currency transactions involving more than $10,000 be reported on a Form 112 Currency Transaction Report and that these forms be maintained for 5 years.

One of your customers has established a long position in ABC Jan 50 calls. Which of the following details would not be on the confirmation of the trade? A) The exercise price and expiration month B) The name of the underlying security C) The aggregate exercise price D) The premium

C Explanation The aggregate exercise price is what it would cost the investor to exercise the option. In this case, it would be the $50 exercise price multiplied by the number of shares in the contract (100). The confirmation does not include that $5,000 number; it isn't necessary.

Fundamental analysts rely heavily on information found in a corporation's financial statements. One of the most often used calculations is that of the current ratio. The analyst calculates the current ratio by A) dividing the current liabilities by the current assets. B) subtracting the current liabilities from the current assets. C) dividing the current assets by the current liabilities. D) multiplying the current assets times the current liabilities.

C Explanation The current ratio is the currents assets of a company divided by its current liabilities. It is one measurement of the liquidity of a business. A related liquidity measurement is the working capital. The working capital is the current assets minus the current liabilities.

The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Acme decides to call in $5 million of the debentures. This will result in all of the following except A) a decrease to net worth. B) a decrease to working capital. C) a decrease to current liabilities. D) a decrease to long-term debt.

C Explanation The key fact is that the call price is 102, a premium over the par value. That means for each $1,000 of long-term debt taken off the books, Acme has to spend $1,020. This has no effect on the current liabilities. However, the current assets (cash) decrease leading to a decrease in working capital, as well as net worth. When $5 million of debt is called in, the remaining long-term debt is reduced to $15 million.

An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the net asset value (NAV) was $11.08. If the current public offering price is $12.50, and the NAV is $11.80, the investor receives A) $3,600. B) $3,324. C) $3,540. D) $3,750.

C Explanation The key to this question is recognizing that the Ace Fund is a mutual fund rather than a closed-end fund. There are two clues. The first is the third word in the question, redeems. It is the open-end investment company (mutual fund) that redeems shares; there is no redemption with closed-end funds. The second clue is that the public offering price is stated. Only new issues have a POP. As a mutual fund, shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).

A variable annuity's separate account is: used for the investment of funds paid by contract holders. used to escrow late or otherwise delinquent premium payments. required to be located off of the company's premises. regulated under both securities and insurance laws. A) II and III B) II and IV C) I and IV D) I and III

C Explanation The separate account is used for both variable life insurance and variable annuity investments. The nature of the securities invested in—bonds and growth stocks—makes it necessary that sales representatives and their principals be licensed in securities as well as insurance.

Which of the following would not be found within the protective covenants for a municipal revenue bond issue? A) Flow of funds B) Additional bonds test C) The issue's rating D) Catastrophe clause

C Explanation There are different sources for bond ratings, but they would not be found within the revenue issue's protective covenants. The municipality agrees to abide by the covenants, and a trustee appointed in the bond indenture supervises the issuer's compliance with them. Some common covenants include rate or fee (promise to maintain user fees high enough to pay expense and debt service) maintenance, insurance, additional bonds test, sinking fund, catastrophe, flow of funds, books and records, and call or put features.

Gifts exceeding $100 may be given by a registered representative to A) a registered representative of another member firm. B) a customer of the representative. C) the registered representative's unregistered sales assistant. D) a treasurer for an issuer of municipal securities.

C Explanation There are no restrictions on giving gifts to colleagues employed by the same firm—registered or not. Registration would be required to split commissions, but not for making a gift.

If a customer buys 1 ABC Jan 60 put at 6 and writes 1 ABC Jan 75 put at 13, the maximum loss is A) $900. B) $700. C) $800. D) $1,500.

C Explanation This is a credit spread. (More premium was received than was paid.) The maximum gain to a seller is the premium received (net credit of 7). In a spread, the maximum gain plus the maximum loss equals the difference in strike prices (75 − 60 = 15). Therefore, 15 minus the maximum gain of 7 equals the maximum loss of 8 multiplied by $100, or $800.

All of the following are true except A) corporate bonds are quoted in 1/8ths and as a percentage of par. B) income bonds are required to pay interest only if it is earned. C) Treasury bills are quoted in 1/8ths and as a percentage of par. D) U.S. Treasury bonds are quoted in 32nds and as a percentage of par.

C Explanation U.S. Treasury bills are issued at a discount and are quoted on an annualized return on a discount basis, the return based on the actual amount paid.

If a writer of an XYZ equity call option is assigned, which of the following should be delivered to the Options Clearing Corporation? A) Any listed security of comparable value to XYZ B) Rights or warrants exercisable to purchase the underlying XYZ security C) The underlying XYZ security D) Cash equal to the market value of the underlying XYZ security

C Explanation When a call is exercised, that specific security must be delivered by the assigned writer. The option contract does not allow for exercise settlement in cash, securities of equivalent value, or securities exercisable to purchase the underlying securities such as rights or warrants.

If interest rates are dropping, an investor with a maturing bond will be most concerned with A) legislative risk. B) credit risk. C) reinvestment risk. D) currency risk.

C Explanation When interest rates decrease, investors with maturing bonds will have to accept lesser yields to replace their investments. This is often referred to as a form of reinvestment risk.

The visible supply has been increasing steadily over the past 30 days. This is an indication that A) fewer new issues will be offered in the next 30 days. B) prices are likely to rise. C) yields are likely to rise. D) yields are likely to fall.

C Explanation When the visible supply increases, it tells us that the number of bond issues coming to market is increasing. Greater supply puts downward pressure on prices. As bond prices fall, yields increase.

A registered primary offering of common stock differs from a registered secondary offering of common stock in that A) the primary offering must be registered with the SEC, while the secondary offering is already registered. B) the proceeds of the primary offering are received by the issuing company, while the proceeds of the secondary offering are received by the underwriting syndicate. C) only the primary offering is sold by prospectus. D) the proceeds of the primary offering are received by the issuing company, while the issuer receives none of the funds from a secondary offering.

D A primary offering is always the sale of new shares. Therefore, the proceeds of the offering always go to the issuer. In the case of a registered secondary, the seller is generally a large stockholder, such as an institution or perhaps a founder of the company. That means the proceeds go to that seller. As registered issues, sales of both require a prospectus.

A municipal bond dealer is making a bona fide quote. Which of the following statements regarding such a quote is true? A) The quote cannot represent an offer to sell bonds that the dealer does not currently own. B) The quote need not be one that the dealer is prepared to act upon (buy or sell). C) The quote may not take into consideration any anticipated market movement. D) The quote must have a reasonable relationship to fair market value.

D Explanation A bona fide quote must have a reasonable relationship to fair market value and can be made in consideration of any anticipated market movement. A bona fide quote is one the dealer is prepared to buy or sell on, as opposed to a workable, nominal, or subject quote. On the offer side of a bona fide quote, a dealer may make an offer to sell bonds that it does not hold in its own inventory, but it must know where to obtain the bonds if they are needed to complete the transaction.

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

D 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.

Which of the following statements regarding a municipal variable-rate demand obligation are true? Interest payments are tied to the movements of another specified interest rate. Interest payments are tied to the movements of an underlying stock or index. The coupon rate stays the same for the life of the demand obligation, and the price fluctuates. The coupon rate of the bond changes, and the price remains stable. A) I and III B) II and III C) II and IV D) I and IV

D Explanation A municipal variable rate demand obligation has interest payments tied to the movements of a specified interest rate. Because the coupon rate of the bond changes with the market, the price of the demand obligation tends to remain stable.

Which of the following statements regarding red herrings are true? They may be used to obtain indications of interest. They may be sent out with sales literature. They contain the final offering price. Their use ends when the offering becomes effective. A) I and III B) II and III C) II and IV D) I and IV

D Explanation A preliminary prospectus, or red herring, is used only during the cooling-off period. The red herring does not contain the final price; offerings are priced immediately before the effective date.

Which of the following positions would create the most risk for an investor? A) Buy 100 shares of SSS and buy 1 SSS put B) Buy 100 shares of SSS and sell 1 SSS call C) Sell short 100 shares of SSS and buy 1 SSS call D) Sell short 100 shares of SSS and sell 1 SSS put

D Explanation A short sale of SSS stock has unlimited loss potential. Selling a put obligates the customer to buy the stock at the strike price in return for premium. A short sale, coupled with a sale of a put, is equivalent to selling an uncovered call and creates the most risk.

Advertising relating to municipal securities must be approved by which of the following? A) The Securities and Exchange Commission (SEC) B) The Municipal Securities Rulemaking Board (MSRB) C) A designated supervisory analyst D) A general securities principal or municipal securities principal

D Explanation According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.

An inherent risk associated with auction rate securities (ARS) is the potential to have A) a reset rate. B) a clearing rate. C) a Dutch auction. D) a failed auction.

D Explanation An inherent risk associated with ARS is the potential for a failed auction. These can occur due to a lack of demand, resulting in no bids being submitted when it is time to reset the rate. ARS use a Dutch auction method to reset the clearing rate paid in the upcoming period.

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) Exchange traded funds B) Preferred stock listed on the NYSE C) U.S. Treasury bills D) Mutual funds

D 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.

A 38-year-old investor places $25,000 into a single premium qualified deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $50,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $11,750. B) $12.500. C) $16,450. D) $17,500.

D Explanation Because this is a qualified annuity, the entire withdrawal is taxable. In this case, it is all $50,000. That $50,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $50,000.

A certificate in the name of Smith & Company may be signed A) Smith & Company. B) Smith & Company, a.k.a. SmithCo. C) Smith & Company or Smith & Co. D) Smith & Company, Smith & Co., or Smith and Company.

D Explanation Corporate signers are the exception to the general rule that endorsement of a certificate must match exactly the name on the front. The word and may be substituted with an ampersand (&) and the word company may be abbreviated.

A customer seeks a significant long-term investment in the Ajax Fund, a growth-oriented mutual fund. To take advantage of breakpoints applicable to large investments, the customer should purchase A) Class B shares. B) Class D shares. C) Class C shares. D) Class A shares.

D Explanation For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. A substantial purchase can often reduce the sales charge to zero. Class B and Class C shares are sold with annual 12b-1 fees, as well as a contingent-deferred sales charge. Class D shares are sold with a level sales load plus a redemption fee.

Pursuant to Regulation T, cash dividends received in a customer's margin account A) cannot be removed. B) must be removed within 30 days of receipt. C) can only be withdrawn if the account is not restricted. D) can be withdrawn anytime within the first 30 days of receipt.

D Explanation If a customer wishes to withdraw cash dividends, the customer must do so within 30 days of receipt. Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account. As the debit balance falls, equity in the account goes up dollar for dollar.

A customer buys XYZ stock at $60 per share. The stock is currently trading at a 10:1 price-to-earnings (P/E) ratio. The firm declares a 3:1 stock split. What will the P/E ratio be after the split if earnings remain unchanged? A) 12:1 B) 5:1 C) 3:1 D) 10:1

D Explanation If earnings remain unchanged, the P/E ratio remains the same: 10:1. Earnings are currently $6 per share ($60 / 10). After a 3:1 split, each share will be valued at $20. If earnings are unchanged, the same $6 of earnings is now applicable to three shares, or $2 per share. Price divided by earnings equals P/E ratio ($20 / $2 = 10:1 P/E ratio).

While watching the financial news on TV, you hear an internationally recognized economist say that she expects a significant devaluation of the U.S. dollar. If she is correct, what would be the likely effect on foreign trade? The price of foreign goods would decrease, leading to an increase in imports. The price of foreign goods would increase, leading to a decrease in imports. The price of U.S.-made goods would decrease, leading to an increase in exports. The price of U.S.-made goods would increase, leading to a decrease in exports. A) II and IV only B) I and III only C) I and IV only D) II and III only

D Explanation If the dollar is devalued, it becomes less valuable in foreign countries. That means that more dollars are required to purchase the same amount of foreign goods. The increased cost of those foreign goods will reduce imports of them. On the other side, because the foreign currency now goes further in the United States, goods made here become cheaper to buy, so exports will increase.

If a customer sold 1,000 shares of XYZ at a loss, a wash sale will result within 30 days of the date of sale if your customer A) writes 10 XYZ at-the-money puts. B) writes 10 XYZ at-the-money calls. C) buys 10 XYZ at-the-money puts. D) buys 10 XYZ at-the-money calls.

D Explanation If, within 30 days of the date of sale, the customer buys back the security or the right to buy it back (a call option), the loss is disallowed. It will also be disallowed if, within 30 days, the customer writes deep in-the-money puts on the security sold. A deep in-the-money put will likely be exercised, forcing the customer to buy stock.

What is the size of one LEAPS contract? A) More than 1,000 shares B) 1,000 shares C) No standard LEAPS contract size D) 100 shares

D Explanation Like a standard options contract, the size of a LEAPs contract is 100 shares

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

D Explanation Municipal Securities Rulemaking Board rules require that, when a call date has been fixed by a prerefunding, the yield to call so fixed must be reflected on the confirmation statement. 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 old maturity on the bond has no further significance.

Which of the following terms does not apply to municipal unit investment trusts (UITs)? A) Registered B) Redeemable C) Regulated D) Managed

D Explanation Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded, so the portfolio is not managed, but rather, overseen by a trustee.

If DMF Corporation issues $10 million of convertible debentures at par, all of the following balance sheet items will be affected immediately except A) the working capital. B) the liabilities. C) the assets. D) the net worth.

D Explanation Net worth (equity in the company) remains unchanged. Assets and liabilities both increase, as does the working capital.

Underwriters and selling group members violate rules regarding sales of new equity issues to restricted persons when they do which of the following? Sell a new issue to one of their own customers Sell blocks of the new issue to accounts of partners or officers of the member firm Sell to member firms that deal only in investment company products Sell to brokers and dealers outside the selling group who position the securities for later resale at higher prices A) I and III B) I and IV C) II and III D) II and IV

D Explanation Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules.

A TIPS bond has a coupon of 3%. Over a two-year period, the annual inflation rate has been 4.5%. At the end of that time, the principal value of the TIPS would be A) $1,061.36. B) $1,090.00. C) $1,060.00. D) $1,093.08.

D Explanation TIPS bonds have the special feature of adjusting the principal value every six months by the inflation rate. With an annual rate of 4.5%, the adjustment is 2.25% semiannually. There are two ways to solve this. One is to take the calculator given to you at the test center and multiply $1,000 × 102.25%. Take the result and multiply that times 102.25%. Do that two more times (there are four adjustments in two years), and the ending number will be 1,093.08. A faster way is to take the simple interest of 4.5% per year. That is $45 per year or $90 for the two years. Add that to the original principal to get $1,090. That is not the correct answer, but the next highest number in the answer choices is.

The function of the Federal National Mortgage Association (FNMA) is to A) guarantee the timely payment of interest and principal on FHA and VA mortgages. B) issue conventional mortgages. C) provide financing for government-assisted housing. D) purchase FHA-insured, VA-guaranteed, and conventional mortgages.

D Explanation The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.

To calculate a capital gain or loss on the sale of an original issue discount municipal bond, the discount must be A) depleted. B) amortized. C) depreciated. D) accreted.

D Explanation The IRS term for adjusting the cost basis of a discount bond upward is accretion. Amortization is the means of adjusting a premium bond's cost basis

A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in A) high-yield municipal bonds rated BB. B) Michigan Upper Peninsula revenue bonds rated AA. C) Delaware Wetlands Developments municipal bonds rated AA. D) New Jersey Turnpike revenue bonds rated AA.

D Explanation The Michigan revenue bonds, the subinvestment-grade municipal bonds, and the Delaware municipal bonds have possible state disadvantages or are less than investment grade.

If an investor buys 1 DWQ Apr 70 call at 5, giving him the right to buy 100 shares of DWQ at $70 per share, which aspect of the transaction is not set or standardized by the Options Clearing Corporation (OCC)? A) Exercise price of 70 B) Expiration date in April C) Contract size of 100 shares D) Premium of 5

D Explanation The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market.

Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? A) Treasury bill B) Treasury bond C) Corporate A-rated zero-coupon bond D) Treasury STRIPS

D Explanation The Treasury STRIPS is long-term, no-interim income security and has a locked-in yield because it is purchased at a discount from par. The Treasury bill is short term, the Treasury bond provides semiannual interest, and the corporate zero is riskier than the STRIPS.

If a customer has a margin account with a long market value of $140,000 and a debit balance of $60,000, what is the buying power in the account? A) $5,000 B) $0 C) $10,000 D) $20,000

D Explanation The buying power of a margin account is twice the amount of SMA. This account has equity of $80,000, and the Regulation T requirement is $70,000. Therefore, the excess equity is $10,000 or SMA purchasing power equal to $20,000.

At the birth of a grandchild, your customers, the child's grandparents, purchased 1,000 shares of XYZ stock at $10 per share in their JTWROS account. The child is now an adult and the grandparents gift all the shares to their grandchild when the stock price is $50 per share. If the donee sold all the shares at $55 per share, the tax consequences would be a capital gain of A) $55,000. B) $5,000. C) $50,000. D) $45,000.

D Explanation The capital gain would be $45,000 ($55,000 - $10,000). If a gift is made of securities, the donee must use the original cost basis of the donor to calculate the gain or loss on a sale. In this case, the original cost basis for the grandparents was $10,000. The difference between that and the proceeds of $55,000 is a capital gain of $45,000. If the shares were inherited from the grandparents, the grandchild would have received the stock at a stepped-up cost basis, the price of the stock on the decedent's death. Using our numbers, that would be a capital gain of $5,000, the difference between the stepped-up basis of $50,000 and the proceeds of $55,000.

All of the following would be considered when evaluating a municipal revenue bond's creditworthiness except A) competing facilities. B) coverage ratio. C) management expense. D) collection ratio.

D Explanation The collection ratio shows the percentage of property taxes that are collected. This would be relevant in evaluating general obligation bonds, which are backed by the taxing authority of the issuer. Revenue bonds, however, are backed by user fees, not taxes.

A customer buys 200 ABC at 76 and simultaneously writes 2 ABC Mar 80 calls at 2. If the stock rises to 83, and the customer is assigned on the short calls, the customer has a gain of A) $1,400. B) $1,800. C) $800. D) $1,200.

D Explanation The customer bought 200 shares at 76 and was forced to sell those shares at 80 for a gain of $800. In addition, the customer received $400 for writing the calls, so the overall gain is $1,200. The price of 83 is irrelevant. It only explains why the customer was exercised (the 80 calls are in the money). Breakeven for covered call writing is the cost of stock (76) less premiums (2). The breakeven point is 74, and the customer sold at 80 (6 points × 200 shares = $1,200).

All the following statements are false about the process of awarding an underwriting to a syndicate except A) in a competitive bid situation, the contract is award to the syndicate bid that reflects the highest net interest cost to the issuer. B) a competitive bid underwriting is the standard for corporate offerings. C) a negotiated underwriting is the standard in a general obligation municipal underwriting. D) a competitive bid underwriting is the standard for general obligation municipal underwritings.

D Explanation The double negative in the question tells us we are looking for the true statement. A competitive bid underwriting is the standard for general obligation municipal bond underwritings. In many cases, state law requires competitive bidding. On the other hand, negotiated underwritings seem to dominate municipal revenue bonds. Negotiated is also the primary method for corporate issues. The award in a competitive bid is to the syndicate submitting a bid representing the lowest net interest cost (NIC). In some underwritings, it is the lowest true interest cost (TIC). TIC accounts for the time value of money.

Your mutual fund has sent you a Form 1099, listing some long-term capital gains on which you must pay taxes. You are concerned that the 1099 is in error because you have owned your shares for only four months. Which of the following statements is true? A) The gain need not be reported because you have instructed the company to reinvest your dividends and capital gains, thus deferring your tax liability. B) The gain need not be reported because you have not redeemed your shares, and therefore, have not realized any gain. C) The 1099 is incorrect because you have held your shares for less than one year, which indicates a short-term gain. D) The 1099 is correct because in this case, the holding period to be considered is that of the investment company, not yours.

D Explanation The investment company designated the gains as long term because the company held the securities for more than a year before selling them. The holding period on your shares is relevant only if you redeem your shares for a gain.

A customer wishes to buy 1 XYZ Jan 40 call and write 1 XYZ Jan 45 call. At the time the order is placed, the options are trading as follows: Jan. 40 calls - 4.30 bid, 4.35 ask Jan. 45 calls - 2.25 bid, 2.30 ask If the transaction is effected at the market, the spread will be established at A) a 1.50 debit. B) a 1.85 debit. C) a 1.75 debit. D) a 2.10 debit.

D Explanation The investor establishes a debit spread by purchasing the 40 call at the ask price of 4.35 and selling the 45 call at the bid price of 2.25. The difference is 2.10.

An investor who believes the U.S. dollar will strengthen against the Canadian dollar should profit from which of the following strategies? Buying puts on the Canadian dollar Writing puts on the Canadian dollar Writing a straddle on the Canadian dollar Establishing a call credit spread on the Canadian dollar A) I and III B) III and IV C) II and IV D) I and IV

D Explanation The investor who is bearish on the Canadian dollar should buy puts, write calls, and call spreads. Short straddles pay off when the market does not move either way.

Responding to the student loan crisis, the SECURE Act now permits qualified withdrawals from Section 529 plans to include payments of A) student loan interest up to a maximum of $10,000 per year. B) student loan principal up to an annual maximum of $10,000 per child. C) student loan interest up to a maximum of $10,000 per family. D) student loan interest up to a lifetime maximum of $10,000 per child.

D Explanation The lifetime limit is $10,000 of interest or principal per child. If the child who is the beneficiary of the plan does not use all the money by graduation, the remaining funds can be used to pay the interest or principal (subject to the standard limits) for other siblings.

The minimum maintenance requirement on short stock selling above $5 is A) 50% of the market value or $5 per share, whichever is greater. B) 25% of the market value or $5 per share, whichever is greater. C) the same as the initial margin requirement. D) 30% of the market value or $5 per share, whichever is greater.

D Explanation The minimum maintenance in a short account is 30% of the market value or $5 per share (whichever is greater) for stocks trading above $5. For stocks trading below $5, the minimum maintenance is $2.50 per share or 100% of market value (whichever is greater).

Seventy-five basis points are equal to which of the following? 0.75% 7.5% $7.50 $75.00 A) I and IV B) II and III C) II and IV D) I and III

D Explanation There are 100 basis points in each point. One point represents 1% of a bond's value; therefore, one basis point represents 0.01%, and 75 basis points would represent 0.75%. Because each point is worth $10, 75 basis points represents $7.50.

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) an hourly basis. B) an as needed basis. C) a weekly basis. D) a daily basis.

D 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.

A client writes 1 Jan 60 put and buys 1 Jan 50 put. This is A) a debit bear spread; the investor breaks even at a price greater than 60. B) a credit bull spread; the investor breaks even at a price less than 50. C) a debit bear spread; the investor wants the price fall below 50. D) a credit bull spread; the investor wants the price to stay above 60.

D Explanation This is a put credit spread, and bulls sell puts. The 60 put is worth more because it has a higher strike price. Long the lower put is bullish; short the lower put is bearish.

A customer wishes to purchase 100 shares of ABC for $35 but does not wish to be charged a commission. To accommodate this request, the member firm purchases the shares for the customer in its proprietary trading account and sells the shares to the customer with a markup. This trade is A) a cross transaction. B) an agency transaction. C) a proceeds transaction. D) a principal transaction.

D Explanation This is an example of a riskless principal trade. The member firm that bought the shares already knows who it will sell to and did not incur inventory risk. While this may seem like an agency trade, the firm is still selling from its own inventory, making it a principal transaction.

With XYZ trading at $47.50, your customer writes 1 XYZ Jan 50 put and simultaneously writes 1 XYZ Jan 45 call, receiving $600 in combined premiums. Your customer's market attitude is A) speculative. B) bullish. C) bearish. D) neutral.

D Explanation This position is a short combination where both contracts are in the money. Breakeven points are 51 and 44. Above or below these points, the customer will lose money.

A registered representative's compensation consists of trailer commissions. The most likely reason for this is A) some of the representative's customers own stock in trucking companies. B) the registered representative has entered into a deferred compensation package with the firm. C) the registered representative is sharing the account with another representative. D) some of the representative's customers own mutual funds with 12b-1 charges.

D Explanation Trailer commissions are a feature when you have customers owning mutual funds with 12b-1 charges. In most cases, those charges are levied every year and, over time, can add up to considerable compensation to the representative.

An investor opens a long position in one XYZ Nov 140 call @7. Disregarding any commissions, if the option is exercised, on settlement date, the investor A) receives $700. B) receives $14,000. C) must pay $700. D) must pay $14,000.

D Explanation When an investor takes a long position in an option, it means the investor has purchased the option. If that option is a call (as is the case in our question), the holder (the owner) has the right to exercise the call option and purchase the stock at the exercise (strike) price. In our question, that strike price is $140 per share. If the holder decides to exercise the option, the exercise (strike) price is paid on the settlement date. Buying 100 shares at a price of $140 per share requires payment of $14,000.

If a customer gives his broker-dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is A) a stop order. B) a sell limit order. C) a buy limit order. D) a stop limit order.

D Explanation When an order is entered this way, the client has specified that it should not be triggered until the stock is at or below 69, a stop order. Because the client will not accept an execution below 69, it is a stop limit order.

Institutional managers are moving to increase their cash position. This action would be viewed as A) neutral bull. B) bullish. C) neutral. D) bearish.

D Explanation When investment managers liquidate securities to increase their cash positions, stock prices are likely to fall.

A customer places an order to buy 300 DWQ at 140 stop, but not over 140.25. This is A) a buy limit order. B) a buy stop order. C) a market not-held order. D) a buy stop limit order. If the stock rises to the stop price of $_____, the order is elected and then becomes a buy limit order at $_______, meaning an order to buy at $______ or lower.

D The customer has entered a stop limit order. If the stock rises to the stop price of $140, the order is elected and then becomes a buy limit order at 140.25, meaning an order to buy at 140.25 or lower.

The first step in transferring a customer's asset from one member firm to another is the submission of A) the Form D. B) the Form 112. C) the Form 144. D) the Form TIF.

D The receiving member sends the transfer initiation form (TIF) to ACATS, and that starts the account transfer process. Form 112 is the currency transaction reporting form used when more than $10,000 in currency is deposited. The Form 144 is used by control persons and also used by those with restricted stock. Form D is used to report sales of a private placement under Regulation D of the Securities Act of 1933.

In a competitive offering of municipal bonds, the issue is usually awarded to the syndicate that offers to sell the bonds A) in the shortest possible time. B) with the smallest spread. C) at the highest price. D) with the lowest net interest cost to the issuer.

D xplanation In a competitive underwriting for municipal bonds, competing syndicates submit bids to the issuer. The issuer (or representative) examines the bids to determine which bid provides the issuer with the lowest net interest cost.