Series 7 Prac Exam (Number 7)

In the assessment of a company's stock, a technical analyst takes into consideration all of the following except A) earnings. B) market price. C) price momentum. D) volume.

A Explanation A market technician (technical analyst) deals primarily with the timing of activity and market trends, while a fundamental analyst centers on a particular industry or company within an industry and its relative health and market potential.

If an investor were to purchase a bond in the secondary market several years after the public offering, which of the following would factor in calculating the total dollar amount paid for the bond? Settlement date Dated date Coupon Scale A) I and III B) II and IV C) II and III D) I and IV

A Explanation Accrued interest is part of a bond transaction's total dollar amount. To calculate the accrued interest, you must know the settlement date. The dated date is only relevant for the first interest payment, so it would not apply to this trade.

One of the benefits of adding a sinking fund provision to a municipal bond issue is that the bond will generally A) receive a higher rating. B) carry a higher coupon. C) have a longer maturity. D) receive more favorable tax treatment.

A Explanation Adding a sinking fund provision to a bond issue invariably results in a higher rating for the security. The fact that money is put aside to repay the principal on a regular basis offers greater safety. A higher rating results in a lower coupon, not a higher one. After all, the higher the rating, the lower the risk, and that means the issuer is able to borrow at a lower cost. Although the sinking fund itself does not change the maturity date, having a sinking fund enables the issuer to use partial calls to redeem the bond ahead of the final maturity date. A sinking fund has nothing to do with tax treatment.

An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by A) holding the securities until they mature. B) increasing the duration. C) limiting purchases to investment-grade debt. D) purchasing a bond fund rather than individual bonds.

A Explanation As we know, when interest rates go up, bond prices go down. Therefore, bondholders are at risk to their principal when interest rates change. However, there is no interest rate risk to the principal if the bond is held to maturity. Regardless of the current market interest rates, the bond pays off at par value. The risk is highest as the duration lengthens. Because bond funds do not have a maturity date, they cannot avoid this risk. The rating (quality) is irrelevant; even Treasury bonds are affected by changes in interest rates.

Which of the following is not a requirement to be included on a customer confirmation by the Municipal Securities Rulemaking Board (MSRB)? A) The accrued interest on a when issued security B) Whether the trade was made as an agency transaction C) Whether the sale was made from the dealer's inventory D) The amount of the dealer's markup or markdown

A Explanation Because the settlement date on a when issued security is unknown, it is impossible to compute the accrued interest. MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade must be disclosed. The commission on an agency trade must be disclosed.

The capital asset pricing model (CAPM) assumes A) investors are averse to risk and expect to be rewarded for taking risk. B) that those who participate in smaller transactions are generally wrong regarding timing purchases and sales. C) that no type of risk can be diversified away. D) that prices are influenced by supply and demand only.

A Explanation CAPM takes into account unsystematic risk—the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it, and therefore, the pricing of an asset must reflect that.

Income from which of the following is not partially exempt to a corporate investor? A) Convertible bonds B) Preferred stock C) Preferred stock mutual funds D) Common stock

A Explanation Fifty percent of dividend income received from investments in common stock and preferred stock is excluded from taxation for a corporate investor. This exclusion applies to dividends from mutual funds where all of the portfolio securities are preferred or common stock.

Which of the following analyze corporate financial statements and trends in sales and income? A) Fundamentalists B) Chartists C) Technicians D) Market timers

A Explanation Fundamental analysts obtain information from corporate financial statements as well as other relevant sources. Technical analysts review market charts, while fundamental analysts are concerned with the earnings ability of corporations derived from corporate financial statements.

A municipality that has issued grant anticipation notes (GANs) (short-term municipal notes) does so in expectation that the debt service will be paid by the receipt of funds attained A) via grants from the federal government. B) through the issue of long-term bonds. C) from future tax revenue. D) from both tax and other anticipated revenue.

A Explanation GANs are short-term municipal notes issued in anticipation of funds via grants that the municipality is expecting from the federal government.

Which of the following best describes a growth investment? A) The value of the investment increases over time. B) Investment appreciation is tax deferred. C) Only interest and dividends are reinvested. D) Both principal and accumulating interest and dividends increase over time.

A Explanation Growth refers to an increase in an investment's value over time. Interest and dividends are income

The alternative minimum tax (AMT) is designed to present an alternative tax computation that disallows deductions for certain tax preference items and includes certain nontaxable income. Which of the following is not a tax preference item? A) Interest received on corporate bonds B) Local income and property taxes C) Tax-exempt interest received on private purpose bonds D) Certain costs associated with an oil and gas drilling program

A Explanation Interest on corporate bonds is taxable and included in an investor's adjusted gross income (AGI), but not for the AMT. Tax-exempt interest on private activity bonds and excess intangible drilling costs in an oil and gas DPP are included as tax preferences. In addition, state and local taxes and accelerated depreciation are in the list of preference items.

Which of the following is not a characteristic of a money market fund? A) High beta B) Stable net asset value (NAV) C) Offered without a sales load D) Portfolio of short-term debt instruments

A Explanation Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas.

An investor purchases an original issue discount municipal bond on the offering at 80. The bond matures in 25 years. Eight years later, the investor sells the bond for 84. The tax consequence of this transaction is A) long-term capital loss of $24. B) long-term capital gain of $40. C) ordinary loss of $24. D) tax-free income of $24 and long-term capital gain of $40.

A Explanation The 20 point ($200) discount accretes over the 25-year life of the bond. That makes the annual accretion $8 per year ($200 divided by 25 years). After 8 years, there has been $64 of accretion ($8 times 8 years). That means the cost basis of the bond is $864. The sale at $840 represents a loss of $24 and has a long-term holding period.

Which of the following statements regarding the Bond Buyer 20 bond index are true? It includes only GO bonds. It includes both GO bonds and revenue bonds. It is computed weekly. It is computed monthly. A) I and III B) I and IV C) II and III D) II and IV

A Explanation The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week.

A customer buys a 20-year, 7% bond on a 7.35 basis. The bond is callable in six years at 103, in eight years at 102, in 10 years at 101, and at par beginning in the 12th year. The customer's confirmation will show yield to A) the 20-year maturity. B) the 6-year call. C) the 10-year call. D) the 12-year put.

A Explanation The confirmation of a bond trade must disclose the lower of yield to call or yield to maturity. This bond is being bought at a discount because the basis is higher than the coupon. Because the yield to maturity on a discount bond is lower than the yield to call, this is the yield that will be shown on the confirmation.

When does pension payment liability affect the credit rating of a municipality? A) When funds needed to make payments exceed funds available B) When funds are invested presently to meet future pension needs C) Never D) When the return on funds invested to meet future needs exceeds anticipated payments

A Explanation The credit rating for a municipality's debt would be adversely affected if funds needed to make payments exceeded funds available. This is an unfunded pension liability and can result if monies set aside to make future payments are not enough or if poor investment decisions deplete the funds.

A stock pays a $0.50 quarterly dividend. The company had earnings per share last year of $10. The company's dividend retention ratio is A) 80%. B) 10%. C) 5%. D) 20%.

A Explanation The dividend retention ratio is the reciprocal of the dividend payout ratio. If the company pays a $2 dividend on earnings of $10, it pays out 20% of the earnings available to common shareholders in the form of the dividend. That means it retains 80% of the available monies.

A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has A) a $50 capital gain. B) a $50 capital loss. C) a $100 capital gain. D) a $100 capital loss.

A Explanation The premium on the municipal bonds must be amortized. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year. Even though there are five bonds in the question, here's the math on one bond and then we'll multiply by five to get the total amount. The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year. $40/20=$2. It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year x 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 - $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50.

The working capital of a corporation includes all of the following except A) convertible bonds. B) marketable securities of other companies. C) accounts receivable. D) cash.

A Explanation The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.

A customer buys $10,000 worth of new issue municipal bonds at a price of 104, and the bonds have 10 years to maturity. Four years after purchasing the bonds, she sells them at 99. What is the tax loss on these bonds? A) 340 B) 500 C) 160 D) 400

A Explanation To arrive at adjusted cost basis, the premium on a new issue municipal bond must be amortized (subtract). To amortize the premium annually, divide the premium amount (in this case, $400 on the total purchase of 10 bonds) by the number of years until maturity (10). Thus, the customer writes down the initial cost by $40 per year. After four years, the bonds purchased at a cost of $10,400 will be written down to $10,240 (4 years × $40 per year = $160). If the bonds are sold for $9,900, the tax loss is $340 ($10,240 − $9,900 = $340).

SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is the equity of SSS Corporation's shareholders? A) $410,000 B) $1,150,000 C) $980,000 D) $170,000

A Explanation Total assets minus total liabilities equals shareholders' equity ($780,000 - $370,000 = $410,000).

Each of the following securities trade and interest except A) zero coupon bonds. B) negotiable CDs. C) municipal revenue bonds. D) Treasury bonds.

A Explanation Trading and interest means trading with accrued interest. Debt instruments that pay interest periodically (e.g., municipal bonds or Treasury bonds) trade with accrued interest.

When a municipal bond has a net revenue pledge, what is the first item that gets paid from the revenue received? A) The operations and maintenance fund. B) The debt service account C) The surplus fund D) The debt service reserve account

A Explanation Under a net revenue pledge, operations and maintenance expenses are paid before all debt service. Payments are made in the following order: operating and maintenance expenses, debt service, debt service reserve, and surplus.

A customer buys a municipal bond regular way on Tuesday, December 23. The transaction will settle on the following A) Friday. B) Monday. C) Thursday. D) Tuesday.

A Explanation Municipal bonds, like corporate bonds, settle two business days after the trade date. December 25 (Christmas) is not a business day.

Which of the following is not a money market instrument? A) A commercial paper issued by a finance corporation of a major automobile manufacturer B) A newly issued Treasury notes issued to meet a specific government funding requirement C) A municipal construction loan note D) A Federal Farm Credit Bank note maturing in one year

B Explanation A newly issued Treasury note would have a maturity of at least two years and would not be considered a money market instrument at issue. When the note is within one year of maturity, it is considered a money market instrument.

A town's ad valorem tax rate is 20 mills on 60% of the assessed value. Your client owns a property with a market value of $500,000, and the town has assessed it at $400,000. The taxes due on this property are A) $8,000. B) $4,800. C) $800. D) $480.

B Explanation Ad valorem tax rates are based on mills with one mill being equal to $0.001 (1/10th of a cent).The amount of taxes to be paid on the property is determined by multiplying the millage rate—in this case 2 cents (20 mills at $0.001 = $0.02) times the taxable assessed property value. Note that this town is only taxing on 60% of the assessed value. That would be 60% of the $400,000 assessed value, or $240,000. Therefore, the tax is $0.02 times $240,000. The market value is irrelevant. For those who have difficulty determining where the decimal point goes, on any question like this, drop the last three 000s from the assessed value and multiply by the millage rate. In this question, that would be $240 times 20 and that equals the correct answer of $4,800.

An investor who is 50 years old would like to save for a child's college education, which begins in 10 years. The investor is willing to take a moderate amount of risk. Which of the following would be the least appropriate recommendation? A) Open a Coverdell Education Savings Account B) Fund an existing IRA with a municipal bond fund C) Buy an BBB zero-coupon bond that matures in 10 years D) Fund a variable annuity and use equity-based subaccounts

B Explanation Although investing within an IRA in anticipation of needing the money after age 59½ is a pretty good idea, municipal bonds, which provide federally tax-free income, are not appropriate for retirement accounts. The federally tax-free interest income will be fully taxable upon withdrawal. In addition, municipal bonds are low risk, not moderate risk, as indicated in the question.

A technical analyst would consider which of the following indicators to be bullish? A) A stock reaching its resistance level B) An increase to the short interest C) A head and shoulders top formation D) A stock trading below its 50-day moving average

B Explanation Although it seems counterintuitive, as the number of outstanding shares sold short increases, technical analysts consider that to be a bullish sign. One day, those short positions will have to be covered and that high demand for the stock will push the price up. When a stock reaches its resistance level, it is going to make a retreat (bearish). It is only when there is a breakout above the resistance that the feeling is bullish. A head and shoulders top indicates that the market has reached a top. Which direction does one go from the top? Down (bearish). Trading below a moving average is a bearish indicator.

A municipal bond subject to a refunding call must be quoted at yield to call in which of the following instances? A) A bond at a discount callable at par B) A bond at a premium callable at par C) A bond at par callable at a premium D) A bond at par callable at par

B Explanation An investor's yield would be less on a premium bond if called at par rather than if allowed to mature. Thus, a registered representative must quote the lower potential yield scenario (in this case, yield to call).

Which of the following secures an industrial revenue bond (IDR)? A) Trustee guarantees B) Corporate net lease payments C) Municipal taxes D) State taxes

B Explanation Corporate net leases back up IDRs, which means the credit of the bond is as good as the credit of the corporation that signs the net lease.

The result of declining inflation on outstanding bonds would be A) lower prices and lower yields. B) higher prices and lower yields. C) lower prices and higher yields. D) higher prices and higher yields.

B Explanation Declining inflation means declining interest rates. If interest rates decline, bond prices rise.

One of your customers notices that the short interest on the NYSE is high. When she asks you for an interpretation, you should tell her that this signals A) a period of volatility in the market. B) a bullish market. C) a bearish market. D) a period of stability in the market.

B Explanation Even though short interest represents the number of shares sold short, many investors consider it a bullish indicator when this number is high. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks.

If an investor sells 1 TCB Jan 50 put at 7 on July 15, 2019, and the put expires unexercised, what are the tax consequences? A) $700 ordinary income reportable for tax year 2019 B) $700 short-term capital gain reportable for tax year 2020 C) $700 short-term capital gain reportable for tax year 2019 D) $700 ordinary income reportable for tax year 2020

B Explanation For tax purposes, any premiums earned are recognized at the expiration date. In this case, the January contract sold in July 2019 will expire in January 2020. Options writers always have short-term gains or losses.

You have a high-income client who wishes to maximize his after-tax interest income. Which of the following investments might not meet your client's objective? A) AA-rated revenue bond B) AA-rated industrial development bond C) AA-rated municipal note D) AA-rated general obligation bond

B Explanation Industrial development bonds are private-purpose bonds, and the interest income could subject the holder to the alternative minimum tax. Thus, the interest income may not be completely tax free.

An investor in the 28% income tax bracket is considering purchasing either a 4% municipal bond or a 5% corporate bond. Which of the following statements regarding the two bonds' after-tax yields is true? A) The two bonds' yields are equivalent. B) The municipal bond's yield is higher than the corporate bond's yield. C) The corporate bond's yield is higher than the municipal bond's yield. D) The yield difference cannot be determined.

B Explanation Investors should invest in municipal bonds if the return after taxes is higher than comparable taxable bonds. To compare the two bonds, use the tax-free equivalent yield formula: (taxable yield) × (100% - tax bracket) = (tax-free equivalent yield). In this case, 5% × (100% - 28%) = 5% × 0.72 = 3.6%. Because the municipal bond yields 4% tax free, the investor should buy it; after taxes have been paid, the corporate bond yields only 3.6%.

TANs, RANs, GANs, and BANs are issued by municipalities seeking A) bond insurance. B) short-term financing. C) financing for low-cost housing. D) special tax assessments for general obligation bonds.

B Explanation Municipal short-term notes (tax anticipation notes, revenue anticipation notes, grant anticipation notes, and bond anticipation notes) are used as interim financing until a permanent long-term issue is floated or until tax receipts increase or revenue flows in.

JJQQ trades in the Nasdaq Stock Market and has announced a tender offer for 10% of the outstanding shares of the company. The tendering price will be set at a 10% premium to the stock's closing price as of Friday, September 1, the cutoff date to tender shares. Investors performing all of these actions would be able to take advantage of the tender offer unless they A) purchased the JJQQ stock on Thursday, August 31, for regular way settlement. B) bought call options for regular way settlement on Wednesday, August 30. C) bought JJQQ common stock for cash settlement on September 1. D) tendered JJQQ convertible bonds on Friday, September 1.

B Explanation Participation in a tender offer (an offer to buy your shares) requires that investors must have engaged in an irrevocable action to acquire the common stock by the time of the cutoff for the tender offer. In this question, that date is September 1. The purchase of JJQQ call options provides the right, but not the obligation, to purchase the stock. In order to participate in the tender offer, the holder of a call option would have to have exercised the option by the cutoff date of the tender offer. The action does not require that the customer's transaction (to acquire the stock or the option) has settled by the tender cutoff date. Similarly, an investor who tendered a convertible bond has also engaged in an action to acquire the JJQQ common stock

If ALFA Securities, a broker-dealer, is a position-trading firm, which of the following statements is true? A) It is acting as a broker for customers. B) It is trading for its own account. C) It is violating NYSE rules. D) It is underwriting securities in the primary market.

B Explanation Position trading is simply trading as principal, or dealer, for a firm's own account. This is the typical case with a market maker. The opposite role is that of a broker, or an agent, purchasing or selling securities in the secondary market for customers.

A couple's home has an assessed value of $40,000 and a market value of $100,000. What will the tax be if a rate of 5 mills is used? A) $2,000 B) $200 C) $500 D) $5,000

B Explanation Real property tax is based on the assessed value assigned to the property by the municipality's tax assessor (in this case, $40,000). Property tax rates use the mill as a base unit. One mill equals $1 of tax per year for each $1,000 of assessed value. Five mills would equal $5 for each $1,000 of assessed value. Because there are 40 thousands, 40 × $5 equals $200 in annual tax. A shortcut method is as follows: take the assessed value, remove the last three 0s, and multiply by the number of mills of tax ($40 × 5 mills = $200).

If the assets of a company did not change, but stockholders' equity declined, it follows that A) capital surplus decreased. B) liabilities increased. C) retained earnings increased. D) liabilities declined.

B Explanation Stockholders' equity is assets minus liabilities. If assets stay the same, then an increase in liabilities will cause a decline in equity.

Which of the following records is to be kept for the life of the firm? A) The general ledger B) Minutes of the directors' meetings C) Customer new account form D) Daily journals

B Explanation The stock certificate book, articles of incorporation or partnership agreement, and minutes of the directors' meetings are to be kept on file and accessible for the life of the firm.

What is the breakeven point on the following position? Buy 1 CDE Apr 30 put at 3.10 Write 1 CDE Apr 35 put at 5.85 A) $33.10 B) $32.25 C) $32.75 D) $30.10

B Explanation This is a put spread established at a credit of 2.75. To find the breakeven point on a put spread, subtract the net premium from the higher strike price (in this case, 35 − 2.75 = 32.25).

An inverted head and shoulders formation would mean which of the following to a chartist? A) A bear market B) A reversal of a downtrend C) A bull market D) A reversal of an uptrend

B Explanation To chartists, head and shoulders formations indicate the reversal of market trends. An inverted formation would forecast the reversal of a downtrend. A head and shoulder's top formation would forecast the reversal of an uptrend.

A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that is currently yielding 8.7% to maturity. She is considering buying tax-exempt securities. What is the comparable yield for a municipal bond? A) 1.250% B) 6.480% C) 6.264% D) 1.208%

B Explanation When comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 9.0% times 0.72 equals 6.480%. Remember to use the coupon rate, not the yield to maturity. After all, the investor is receiving $90 per year in taxable interest on each bond. In this case, a tax-exempt bond yielding more than 6.480% will provide a higher after-tax return.

All of the following statements regarding municipal bond official statements are true except A) a municipal securities broker-dealer may satisfy the delivery requirements by providing a notice advising the customer how to obtain the official statement from Electronic Municipal Market Access (EMMA). B) a retail customer must receive an official statement no later than the settlement date. C) an official statement must be delivered only upon request of a retail customer. D) all retail purchasers of a new municipal bond issue must receive a final official statement.

C Explanation A final official statement must be delivered to retail buyers of a new issue on or before the settlement date. With today's technology, most investors receive their official statement through EMMA.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) $40 B) None C) $75 D) $100

C Explanation Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. Hence, the investor has "bought back" the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. Look at this question as if it said, "On September 15, he purchased 25 shares of KLP stock." That washes out $25 of the loss, but the rest is okay.

An investor purchased a municipal bond at par to yield 5.5% to maturity. If, two years later, she sold the bond at a price equivalent to a 5% yield to maturity, the investor incurred A) no taxable result at this time. B) a capital loss. C) a capital gain. D) taxable interest income.

C Explanation Because the investor sold the bond at a price that will yield less than the yield when she purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor profited by that difference. Remember, the higher the price, the lower the yield.

When the issuer of an insured municipal bond defaults, what does the insurance company do? A) Both principal and remaining interest payments are paid immediately to the bondholder. B) Only the principal is returned with the bondholder losing the interest. C) Both principal and interest are returned over the remaining term of the bond. D) Principal is returned immediately, and the interest is paid out based upon the normal schedule.

C Explanation Both interest and principal are paid as scheduled over time through the life of the bond. The idea is that the bondholder should not see a problem. The insurer will just take up the liability and run with it without missing a beat.

Which of the following risks would benefit most from portfolio diversification? A) Purchasing power risk B) Market risk C) Default risk D) Interest rate risk

C Explanation Diversification works best with nonsystematic (unsystematic) risks. Default risk, the possibility of losing money when a specific company cannot pay off its debts, is a common case where spreading the risk around (diversifying) reduces risk. The other choices are all systematic risk, and diversification is not very useful for them.

When a securities professional refers to a bond as a full faith and credit issue, it is A) a revenue bond. B) a general obligation bond. C) a moral obligation bond. D) a special tax bond.

C Explanation General obligation bonds are payable from general funds, including taxes, and are often referred to as backed by the "full faith and credit" of the governmental entity.

A customer purchases an XYZ municipal bond at 108. It is scheduled to mature in 16 years. After owning the bond for 10 years, she sells the bond at 102. What capital gain or loss must she report for tax purposes at the time of the sale? A) $10 gain B) $20 gain C) $10 loss D) $60 loss

C Explanation If a municipal bond is purchased at a premium, the premium must be amortized over the time until maturity. An $80 premium on a 16-year municipal bond indicates that $5 will be amortized each year ($80 / 16 = $5). Ten years at $5 per year is $50 of amortization. Therefore, after 10 years, the tax basis would be $1,080 minus $50, or $1,030 (103). Because the sale was for 102 ($1,020), the customer has a $10 loss on one bond.

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

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

An official statement has a dated date of March 1, but the first interest payment is October 15. This most likely reflects A) a misprint in the official statement. B) a when-issued transaction. C) a long coupon. D) a normal payment cycle on the bond of 7.5 months.

C Explanation In many cases, the dated date of a new issue, (the first date from which interest begins to accrue), is not the same as one of the semiannual interest payment dates. In this question, those semiannual dates are April and October 15. With a dated date of March 1, the first interest payment will not be made until October 15. That is a period of 7½ months and is why it is a long coupon (longer than 6 months).

When recommending industrial development revenue bonds, registered representatives would be remiss if they did not discuss A) the speculative nature of the bonds. B) the guarantees offered by the issuing municipality. C) the tax bracket of the individual and the alternative minimum tax. D) the potential for taxable capital gains.

C Explanation Industrial development revenue bonds (IDRs) are municipal bonds generally backed by a lease or similar obligation entered into by a corporation. That is the backing and defines the risk level. The IRS defines interest received from industrial development revenue bonds (IDRs) as a tax preference item. As such, the income received might be subject to taxation under the alternative minimum tax. This tax usually applies to individuals who are in the higher tax brackets and would be an important determinant when evaluating the suitability of the investment.

An individual with $100,000 to invest will require these funds in six months for the purchase of a house. In which of the following circumstances did the registered representative act correctly? A) The registered representative convinced the client to purchase a $100,000 lump sum fixed annuity on the basis of its backing by an insurance company. B) The registered representative convinced the client to invest in a REIT as a hedge against the rise of real estate values until the client purchases the house. C) The registered representative convinced the client to invest in a Treasury bill on the basis of its safety. D) The registered representative convinced the client to invest in an IPO on the basis of its high-growth prospects.

C Explanation Investment in a Treasury bill is the only suitable investment among the choices listed. Purchase of annuities and a REIT are long-term investments not suitable to an individual who wants to invest funds on a short-term basis. Although an IPO may be liquid, it is not suitable for short-term funds earmarked for the purchase of a house because there is too much risk to the principal.

The term municipal fund security refers to A) an advance refunded municipal bond. B) a mutual fund whose portfolio is exclusively municipal bonds. C) a Section 529 savings plan. D) a municipal bond with a sinking fund.

C Explanation Section 529 plans, used primary for saving for college, are legally considered municipal fund securities.

A portfolio manager using index options is trying to reduce which of the following types of risks? A) Purchasing power B) Credit C) Systematic D) Interest

C Explanation Systematic risk refers to the impact the overall market has on an equity portfolio's value. Index options help insure portfolios against systematic risk. The purchase of index puts to protect a portfolio is called portfolio insurance.

All of the following municipal securities are quoted on a yield basis except A) secured bonds. B) serial bonds. C) term bonds. D) tax anticipation notes.

C Explanation Term bonds, or dollar bonds, are quoted like corporate bonds as a percentage of par. All other municipals are quoted in basis.

The Bond Buyer's 20-Bond Index reflects A) the average yield of 20 high-quality revenue bonds. B) the average maturity of 20 high-quality municipal bonds. C) the average yield of 20 high-quality general obligation bonds. D) the average yield of 20 high-quality municipal bonds.

C Explanation The Bond Buyer 20-Bond Index is defined as the average yield of 20 general obligation bonds having a rating of A or better and a maturity of 20 years. Bonds that have a rating of AAA and AA are included in the 11-Bond Index. Revenue bond yields are reported in the Revdex 25. Although all but the Revdex include bonds with a 20-year maturity (Revdex is 30 years), it is the yields that are reported, not the average maturities.

The parent of a customer originally paid $50 per share for a stock. When the parent died, the stock was inherited by a customer of yours. The price at the time of death was $60 per share. Your customer now sells the stock at $62. What is your customer's cost basis in the stock? A) $50 B) $55 C) $60 D) $62

C Explanation The IRS allows a step-up in basis for inherited stock. The customer's cost basis is the fair market value of the stock on the date that the decedent died.

A moral obligation bond is one where A) the bondholders are empowered, but not obligated to appropriate funds to prevent the bond from going into default. B) the U.S. government is empowered, but not obligated to appropriate funds to prevent the bond from going into default. C) the governing legislature is empowered, but not obligated to appropriate funds to prevent the bond from going into default. D) the board of directors of the entity is empowered, but not obligated to appropriate funds to prevent the bond from going into default.

C Explanation The MSRB defines a moral obligation bond as: "A bond that, in addition to its primary source of security, is also secured by non-binding covenant that any amount necessary to make up any deficiency in debt service will be included in the budget recommendation made to the governing body, which may appropriate funds to make up the shortfall. The governing body, however, is not legally obligated to make such an appropriation."

KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year? A) $120,000 B) $1,100,000 C) $900,000 D) $300,000

C Explanation The corporate exclusion is 50% of dividend income; therefore, KLP must pay taxes on all $700,000 of its interest income, but only 50% (or $200,000) of its dividend income, for a total of $900,000.

A mutual fund invested in bonds with medium-length maturities. As the bonds matured, the fund reinvested the proceeds and purchased long-term bonds with maturities of up to 20 years. What might have happened to the fund if the reinvestment had occurred during a period when interest rates were rising? Decrease in yield Decrease in income Increase in yield Increase in income A) I and II B) II and III C) III and IV D) I and IV

C Explanation The longer a bond's maturity, the greater the risk to the investor. As a result, long-term bonds generally pay higher interest rates than medium- or short-term bonds. If a fund replaces medium-term bonds with long-term bonds, the bonds would pay higher interest rates, and thus generate more income. Additionally, as interest rates increase, so do yields.

If a municipal bond has a call provision, this will tend to A) place a floor on how low the price will decline. B) make the bond more attractive to investors because most bonds are called at a premium. C) make the bond less attractive to investors because a call would terminate the interest payments. D) have no effect on the price.

C Explanation The possibility of a call is unattractive to the investor. In most cases, bonds are called when their interest rate is above the current market rate. This means the investor must give up that higher yielding security. It is attractive to the issuer because with a call, the bonds are bought back at par or a small premium, and interest payments end.

Buying stocks with high price-to-earnings (P/E) ratios normally reflects which of the following investment styles? A) Special situations B) Value C) Growth D) Turnaround

C Explanation The purchase of stocks with high P/E ratios represents a growth investment style. Growth-oriented investors will pay for high P/E ratios. Value investment style is associated with the purchase of low P/E stocks or stocks trading below their intrinsic value.

A corporation buys back its stock on the open market for all of the following reasons except A) to use it for future acquisitions. B) it increase earnings per share. C) it reduce interest charges. D) to use it for stock options.

C Explanation The repurchase of common stock does not reduce interest payments; however, it does reduce total dividends paid.

If a municipal bond maturing in 10 years is bought for 110, its cost basis at the end of the sixth year is A) 100. B) 101½. C) 104. D) 106.

C Explanation To establish the new cost basis, determine the amount of the premium to be amortized yearly. For this bond, the $100 premium is amortized over 10 years: $100 divided by 10 equals $10. Then, multiply the annual amortization amount by the number of years the bond is held ($10 × 6 = $60). Finally, subtract the amount of the amortized premium from the original cost of the bond ($1,100 − $60 = $1,040, or 104).

Under SEC rules, firms must do all of the following except A) provide a customer with an updated customer account record within 30 days of a change in investment objectives. B) create a record for each written agreement entered into with a client. C) update customer account records within 36 months of a change in investment objectives. D) create a record containing the dated signature of each customer granting discretionary authority.

C Explanation Under SEC rules, firms must provide a customer an updated account record reflecting any change in investment objectives within 30 days of the change. Firms must create a record for each written agreement entered into with a client and a record containing the dated signature of each customer granting discretionary authority.

A new customer has given you written authorization to transfer the holdings in her account at another broker-dealer to her new account at your broker-dealer. Under the Uniform Practice Code, using the automated customer account transfer system form, the carrying broker-dealer would have how many days to validate the positions and how many days to complete the transfer after validation? One business day to validate Two business days to validate Two business days to transfer after validation Three business days to transfer after validation A) I and III B) II and III C) I and IV D) II and IV

C Explanation Under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer to the receiving broker-dealer after validation.

Which of the following choices best describes the formula to determine earnings per share? A) Retained earnings divided by the number of shares of common issued and outstanding B) (Net income − preferred dividends) divided by the number of shares of common authorized C) [EBIT − (interest + taxes)] − preferred dividends] divided by the number of shares of common outstanding D) (Net income + preferred dividends) divided by (the number of shares of common issued − the number of shares of treasury stock)

C Explanation We calculate earnings per share (EPS) by subtracting any preferred dividends from the net income and dividing that by the number of shares of common stock outstanding. EBIT represents earnings before interest and taxes. By subtracting interest expenses and taxes, the company's net income is determined. It is the outstanding shares that are used, not the authorized. Although the issued minus the treasury stock equals the outstanding shares, the preferred dividend is subtracted from the net income, not added to it.

Under Municipal Securities Rulemaking Board rules, which of the following would indicate a control relationship between a municipal dealer and an issuer? A) The dealer was an underwriter of the municipality's last issue B) The dealer is engaged as an underwriter for the issuer C) The principal of the dealer lives within the municipality D) Officer represents both an issuer and municipal securities dealer in a meeting

D Explanation A control relationship exists if someone represents both an issuer and municipal securities dealer.

If your customer is pursuing an aggressive stock-buying strategy, which of the following is most suitable for him? A) DEF stock with a beta coefficient of 0.93 B) Convertible bonds of a mid-cap company C) ABC stock with a beta coefficient of 1.0 D) GHI stock with a beta coefficient of 1.20

D Explanation Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta, the greater the risk. Such risk taking is appropriate for investors who seek aggressive stock-buying strategies and have both the financial ability and temperament to withstand market downturns.

Jennifer bought 500 shares of Wolfe Industries common stock on October 1, 2019, at $50 per share. On October 24, 2019, she sold all the stock at $40 per share. On November 12, 2019, she buys 200 shares of Wolfe Industries common stock at $42. How much of a loss will Jennifer be able to claim for 2019? A) $0.00 B) $5,000 C) $2,000 D) $3,000

D Explanation By repurchasing 200 shares of Wolfe Industries common stock less than 30 days after the sale at a loss, Jennifer has run afoul of the wash sale rule. Because she only purchased 200 rather than the full 500 she sold, those are the only shares affected by the rule. Therefore, of the $5,000 total loss (500 shares × $10 per share as the stock fell from $50 to $40), $2,000 (200 shares × $10) is "washed" but the other $3,000 is allowable.

You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation in late August. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $43 Feb 8 100 shares @ $39 May 11, 200 shares @$48 The client needs about $4,000 and the CDL is currently selling for $44 per share on July 31. From a tax standpoint, you should probably recommend that the client A) sell half of the shares purchased on January 4, and half of the shares bought on February 8. B) sell all of the shares purchased on January 4. C) sell all of the shares purchased on February 8. D) sell 100 of the shares purchased on May 11.

D Explanation By using the share identification basis and selling the shares purchased in May at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates (all transactions are less than a 12-month holding period). Don't get hung up on the fact that the investor will receive $400 more than needed (100 shares @ $44 = $4,400); the question is looking for tax considerations.

An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following except A) the holder of the COP participates in lease or loan payments from a specific piece of equipment or facility purchased or built by the municipality. B) the holder of a COP could foreclose on the asset generating the revenue in the case of default. C) they are a form of municipal revenue bond. D) they would require voter approval before a municipality could issue them.

D Explanation COPs are considered revenue issues and, therefore, do not require voter approval. They are a form of lease revenue bond that allow the holders of the certificates to participate in some revenue stream (lease or loan payments) associated with land, equipment, or facilities purchased or built by the municipality. They are unique in that in the case of default, the holders of the COPs could foreclose on the asset associated with the certificate.

According to the Dow theory, reversal of a primary bullish trend must be confirmed by A) five consecutive days of upward price trends. B) the duration of the secondary movements. C) the advance/decline line. D) the Dow Jones Industrial Average and Transportation Average.

D Explanation Charted price trends can be deceptive, so a trend must be confirmed by the Dow Jones Industrial Average and Transportation Average.

A Form 112 must be filed whenever a customer A) has dividends or interest in excess of $10,000 credited to the customer's account. B) deposits a check into the account in an amount exceeding $10,000. C) purchases or sells a security where the value exceeds $10,000. D) engages in a transaction involving more than $10,000 in currency.

D Explanation Form 112 is the currency transaction report. It is filed when currency, is deposited, withdrawn, or transferred in an amount exceeding $10,000 in a single day. Currency includes cash, postal money orders, and traveler's checks.

The Interstate Bridge Authority has an outstanding revenue bond. For the most recent operating period, the Authority has net revenue of $36 million, operations and maintenance expenses of $16 million, debt service requirements of $18 million, and surplus funds of $2 million. The debt service coverage ratio for the Interstate Bridge Authority's revenue bond is A) 2.25:1. B) 1:1. C) 1:11:1. D) 2:1.

D Explanation In the absence of a described revenue pledge (net or gross), the net revenue pledge should be used. This means that the debt is serviced after the expenses for operations and maintenance have been satisfied. The net revenue of the project is revenues after subtracting those expenses. In this question, that is the $36 million figure given. The debt service coverage ratio is determined by dividing the net revenue by the debt service requirement. In this question, the debt service coverage ratio would be 2:1 ($36 million divided by $18 million = 2). If you subtracted the $16 million of expenses because you did not notice that we gave you the net revenue, your ratio was 20 divided by 18 = 1.11 to 1. If you added the surplus (not an expense), your ratio was 18 divided by 18 = 1:1. It is not uncommon to have information in a question that is not needed to arrive at the solution.

Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction? A) Highest bid B) Highest ask C) Lowest bid D) Lowest ask

D Explanation Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on the inside bid, which is the highest bid price for a particular security.

Which of the following statements regarding municipal securities quotations are true? A quotation can be an indication of interest. A quotation cannot be an indication of interest. A quotation can be a one-sided request for a bid or offer (bids wanted and offers wanted). A quotation cannot be a one-sided request for a bid or offer (bids wanted and offers wanted). A) II and III B) I and IV C) II and IV D) I and III

D Explanation Municipal Securities Rulemaking Board rules pertaining to quotations cover all bona fide bids and offers, including one-sided requests for bids wanted and offers wanted, which are considered indications of interest.

An investor engages in a wash sale when he repurchases the same security or purchases a substantially identical security of the issuer within 30-days of a sale resulting in a loss. If an issuer's common stock were sold at a loss, all of the following would be considered substantially identical except A) convertible bonds. B) call options. C) warrants. D) preferred stock.

D Explanation Preferred stock is not substantially identical because it cannot be converted or exchanged into the common shares that were sold. All the other securities could be converted or exchanged into the common stock sold. That makes them considered substantially identical. Please note: Preferred stock is not convertible unless something in the question says it is.

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

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

FINRA rules require broker-dealers to conduct anti-money laundering training A) quarterly. B) biannually. C) annually. D) on an ongoing basis.

D Explanation Rather than set a fixed schedule, FINRA rules require that anti-money laundering training be conducted on an ongoing basis.

Which of the following events is of the greatest importance to a technical analyst? A) The company announced the resignation of its chief financial officer. B) Standard & Poor's raised the credit rating of the issuer. C) The issuer's current book value increased. D) The stock's price recently penetrated its resistance level.

D Explanation Technical analysts focus on market price patterns. Typically, a technical analyst becomes bullish when a stock's price exceeds its resistance level (it penetrates its former ceiling price). Book values, credit ratings, and the resignation of a company's senior officer are of interest to fundamental analysts.

Which of the following regarding the Bond Buyer Revenue Bond Index (Revdex) are true? It includes 30-year bonds. It includes 20 bonds. It is compiled weekly. It is compiled monthly. A) I and IV B) II and IV C) II and III D) I and III

D Explanation The Bond Buyer Revdex is computed weekly just like The Bond Buyer's general obligation (GO) index. Revdex consists of 25 revenue bonds with 30-year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity.

A customer purchased 100 shares of SNP at $38. At the time of purchase, the price-to-earnings (P/E) ratio was 12. What, approximately, are the earnings per share (EPS) of SNP? A) $12.00 B) $1.20 C) $3.80 D) $3.16

D Explanation The P/E ratio is a comparison of the day's closing market price of the common stock to the reported earnings per share of the company. In this question, we are told that the market price is a multiple of 12 times the earnings. Computing the earnings per share is simply dividing the price by the multiple. $38 (CMV) / 12 (P/E ratio) = $3.16 approximate EPS.

The FINRA 5% policy deals with markups, markdowns, and commissions. When acting as a dealer, what prices are used to compute the member firm's markup or markdown? A) The lowest bid and highest ask for all market makers B) The highest bid and highest ask for all market makers C) The lowest bid and lowest ask for all market makers D) The highest bid and lowest ask for all market makers

D Explanation The basis of the fairness of markups and markdowns under the 5% markup policy is the highest bid and the lowest ask shown for all market makers making a market for that security. This is the inside quote or inside market price because it shows the narrowest spread. Comparing the inside market to the price charged (or paid) to the retail customer determines the actual percentage. Depending on the circumstances, it may be 5%, more than 5%, or less than 5%.

When referring to the U.S. stock market, which of the following statements regarding its beta is not true? A) It is, by definition, equal to 1. B) It serves as a benchmark for measuring the relative volatility of a stock or portfolio against the movement of the market itself. C) It shows that if a stock's beta is 1.2, and the market moves by 5%, the stock would move by 6%. D) It provides a measurement of a range that the market may move in any given day.

D Explanation The beta is a benchmark and does not indicate anything about market movement as a whole. It only measures the movement of a particular security or portfolio, as compared to the movement of the entire market.

An investor purchased 100 shares of RIK common stock at $150 per share on June 17, 2019. On July 11, 2020, with the RIK selling at $180, the investor hedges by purchasing one RIK Oct 165 put at 2.50. Immediately prior to the expiration date, RIK is selling for $145 per share and the put option is exercised using the long stock for delivery. This would result in A) a short-term capital gain of $1,250. B) a long-term capital gain of $1,500 and a short-term capital loss of $250. C) a long-term capital gain of $1,500. D) a long-term capital gain of $1,250..

D Explanation The investor purchased a protective put against a long position that had a long-term holding period (almost 13 months). That means that the holding period of the stock is not affected by the purchase of the put. Therefore, this investor's gain will be long term. The gain is the difference between the cost and the proceeds. When exercising a put, the cost of the stock is the investor's cost basis. The exercise price minus the option premium paid is the sale price. In our question, the cost is the $150 initial purchase price ($15,000 total). The sale price is the 165 strike minus the $2.50 premium, or $162.50 per share ($16,250). That results in a long-term capital gain of $1,250

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

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

If an order is executed for a customer and the registered representative later notices that she entered the wrong account number on the order ticket, what action must she take? A) Transfer the stock into the correct account B) Transfer the stock into her own account and pay for the purchase C) Contact that account's owner and ask if he wants to buy the stock D) Inform a principal, who will take or direct any action needed to correct the error

D Explanation The representative should report the mistake and not take any action to remedy the mistake without the approval of a principal.

A qualified legal opinion issued for a municipal bond underwriting means that A) the revenue bond issue has certain debt limitations. B) the bond counsel is considered competent. C) the bond attorney is qualified to express her opinion on the bond. D) the legal opinion is qualified with restrictions and conditions.

D Explanation The word qualified describes the legal opinion, not the attorney (or bond counsel) who issued it. A qualified legal opinion is one in which the bond counsel expresses reservations about conditions that may affect the bond's status. An unqualified legal opinion is rendered without restriction or condition.

An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $44 per share. B) $38 per share. C) $41 per share. D) $47 per share.

D Explanation This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.

If a municipal bond rated BBB is prerefunded, all of the following statements are true except A) funds required to meet debt servicing have been set aside in escrow. B) the rating of the issue will increase. C) the issue is now backed by U.S. government securities. D) the marketability of the issue will decrease.

D Explanation When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities.