Series 7 Practice Exam 7 Q&A

An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is:

$1,500.00 Explanation: British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00.

The minimum denomination for negotiable certificates of deposit is:

$100,000 Explanation: The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.

ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC?

$11.80 Explanation: Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is:

$2,000 Explanation: This is a debit spread since the investor is paying more (4) for the purchased call than he receives (2) for the call that was written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. This is the more valuable option contract and, therefore, defines the investment strategy. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. What is the minimum equity requirement for the short position?

$2,100 Explanation: The SRO minimum maintenance requirement for a short position is 30% of the market value. The market value is $7,000, and 30% of $7,000 equals $2,100.

A customer sold short 1,000 shares of XYZ Corporation that is presently selling at $2 per share. Industry rules require a minimum maintenance margin of:

$2.50 per share Explanation: When a stock that has been sold short has a market value of less than $5, industry rules require a minimum maintenance margin of $2.50 per share or 100% of the value of the securities, whichever is greater. In this example, $2.50 per share is greater and the customer would have to deposit $2,500 in the account to meet the requirement.

An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25, pays a 5% annual dividend, is callable at $110, and is trading at a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, what would be the cost basis per share for the newly acquired common stock?

$26.50 Explanation: To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). To calculate this, the par value of the preferred stock ($100) is divided by the conversion price ($25). As a result, four shares of common stock are received upon conversion. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4). $106 ÷ 4 = $26.50. Any future gains or losses on the sale of the common stock are based on this price.

A customer owns 20 ABC Corporation October 30 calls in a margin account. The customer exercises the calls and on the same day sells the stock at $32. The customer will need to deposit what amount in the account?

$30,000 Explanation: If a client exercises an option in a margin account, he is required to meet the Reg T deposit on the underlying shares. The client owns 20 ABC Corporation October 30 calls and if he exercises the contract he purchases $60,000 worth of stock. (100 shares per contract x 20 contracts = 2,000 shares. 2,000 shares x 30 strike price equals $60,000.) Under Reg T, the client must meet the deposit requirement of 50% ($30,000) on this purchase. This requirement must be met even if the shares are sold the same day the contract is exercised.

A customer purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share.The buyer of these 10 straddles will need to deposit:

$4,000 Explanation: When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer has purchased 10 straddles and paid $400 per straddle for a total of $4,000 (10 straddles x $400 = $4,000).

A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account. Only the MFP signs the check. According to the MSRB political contribution rules, the contribution would be viewed as a:

$400 contribution from the MFP Explanation: If the MFP is the only party who signs the check, the entire amount of the contribution is allocated to the MFP. In this case, the underwriting ban would be triggered since the amount exceeds $250. When both the MFP and her spouse sign the contribution check, the contribution is viewed as being split equally between the contributors. There is no limit if the spouse writes a check from his personal account, rather than the joint checking account.

An investor makes an opening sale of 10 option contracts when the bid price was $7.00 and the offer price was $7.10. Later in the day, the investor makes a closing purchase of 10 contracts when the bid price was $6.50 and the offer price was $6.55. Assuming both trades were market orders, what is the investor's gain or loss on these transactions?

$450 capital gain Explanation: An investor who places a market order will normally buy at the offer and sell at the bid. In this case, the investor sold 10 contracts at the bid price of $7.00, for sales proceeds of $7,000 (10 contracts x $700 per contract). To close out the position, the investor bought 10 contracts at the offer price of $6.55, for a total cost of $6,550 ($655 x 10 contracts). The $450 capital gain is based on the difference between the cost basis and sales proceeds

An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share?

$47.83 Explanation: A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).

A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock?

$48.00 Explanation: If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant.

An individual purchased a British pound June 160 call at 0.80. If the contract size is 10,000 British pounds, what is the individual's total cost?

$80 Explanation: Premiums for British pound options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $0.0080), which equals $80.

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is:

18.50 Explanation: After the order was activated by the round-lot sale of 18.25 (which is at or lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and is the execution price.

The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is:

4.26% Explanation: The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within:

7 days Explanation: Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

A municipal bond trader who is looking for assistance in buying or selling a specific municipal bond issue in the secondary market will MOST likely use:

A broker's broker Explanation: A broker's broker is a primary source for a quote in the secondary market and assists the trader in finding the best price on a specific issue. The Bond Buyer and The Wall Street Journal are publications and do not provide quotes or pricing information on specific municipal bonds traded in the secondary market. The OTC Pink Market provides quotes for securities not listed on the NYSE or Nasdaq.

When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to:

A chart showing a recent history of the market price of the stock Explanation: The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing).

In which of the following retirement plans is an actuarial calculation used to determine the employer's contribution?

A defined benefit plan Explanation: A defined benefit plan promises to pay the employee a specified amount of money each year once the employee retires. This benefit payment is usually based on age, years of service, and salary history. Actuarial calculations are used to determine the amount of money that an employer must deposit each year in the plan to provide for the retirement benefit specified by the plan.

Which of the following calculations describes the payout on a variable annuity? a. A fixed number of annuity units multiplied by a fixed dollar amount b. A fixed number of annuity units multiplied by a variable dollar amount c. A variable number of annuity units multiplied by a fixed dollar amount d. A variable number of annuity units multiplied by a variable dollar amount

A fixed number of annuity units multiplied by a variable dollar amount Explanation: When a variable annuity is annuitized, the annuitant will be assigned a fixed number of annuity units based on several factors, including the value of the investment, assumed interest rate, age and gender of the annuitant, and payout option chosen. This fixed number of annuity units is then multiplied by the net asset value of the separate account at each payout period to determine the dollar amount the annuitant will receive each pay period

Which of the following stocks would most likely be considered a defensive stock? a. An aerospace stock b. A utility stock c. An airline stock d. An automobile stock

A utility stock Explanation: Utility, food, beer, candy, pharmaceutical, tobacco, and soft drink stocks would be considered defensive stocks. They offer the investor a greater amount of safety because in periods of recession and adverse economic conditions these companies are the last to be affected.

A client wants all trade confirmations sent to his investment adviser. This will require:

A written letter from the client

According to Regulation T, when purchasing an option contract the transaction must be paid for within:

According to Regulation T, when purchasing an option contract the transaction must be paid for within: Explanation: According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase.

The 5% Markup Policy applies when a member firm:

Acts as a dealer in a transaction with a customer Explanation: A broker is an agent who acts for someone else and receives a commission when a trade is executed. A dealer is a principal who acts for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% Markup Policy, which is a guide broker-dealers must follow. The 5% Markup Policy covers all transactions except municipal bonds and those requiring a prospectus (i.e., the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter, the firm would be involved in a new issue and, if acting as a sponsor would be involved in the sale of a mutual fund. Since these transactions require a prospectus, they would not be covered by the 5% Markup Policy.

An accumulation unit in a variable annuity contract is:

An accounting measure used to determine the contract owner's interest in the separate account Explanation: An accumulation unit in a variable annuity contract is an accounting measure used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts, with differing objectives and portfolios.

Which of the following direct participation programs is associated with low costs to obtain the property and high up-front costs?

An exploratory oil and gas program Explanation: A wildcatting program, also called an exploratory program, searches for oil in unproven areas. This results in a lower cost of acquiring the land or mineral rights. In order to extract oil and gas, the program will incur significant start-up or up-front costs. A developmental program drills for oil in proven, surveyed sites and the cost for the land is more expensive. An income oil and gas program acquires interests in already-producing properties. These sites are acquired from oil and gas operators who have completed the drilling and prefer to sell the reserves rather than hold the property for the life of the production. These programs would have higher mineral rights costs and lower up-front costs.

Reports have been released discussing the instability of the Japanese economy. Imports from the U.S. have been decreasing. The rate of inflation in the U.S. has dropped and the U.S. GDP has increased. Given this information, what investment strategy is most appropriate?

Buy Japanese yen puts Explanation: Given this information, it appears the value of the Japanese yen is decreasing and the value of the U.S. dollar is strengthening. Since options on the U.S. dollar are not available, the only viable choice is to purchase Japanese yen puts.

Which of the following securities is an example of a collateralized time draft?

Bankers' acceptances Explanation: A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank.

If a customer wants to purchase securities in an account that has been frozen, when must he deposit the required cash in the account?

Before the purchase transaction is made Explanation: A frozen account requires the full amount of money to be deposited in the account before the order is accepted. If the client wants to sell securities in a frozen account, the securities must be in the account before the sale is made.

If an auction for auction rate securities were to fail, the holder would:

Continue to hold the securities and the interest rate would be set to the maximum rate Explanation: A failed auction occurs when there are not enough bids to cover the amount of auction rate securities being sold. In this situation, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the program documents. This rate is normally higher than the rate that would have cleared a successful auction.

Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on:

December 1 Explanation: The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on the record date, which is given in this example as December 1.

From the issuer's perspective, when comparing term bonds and serial bonds, serial bonds have:

Declining interest payments and declining principal amounts Explanation: Serial bonds have different maturity dates with lesser amounts of debt outstanding as time goes by. The bonds have declining interest payments and principal amounts. Term bonds, by comparison, mature at the same time and have stable interest payments with the principal paid on one maturity date.

During a deflationary period, interest rates:

Decrease, causing bond prices to rise Explanation: A deflationary period is characterized by a sluggish economy where goods and services decline in value. Interest rates tend to trend downward, causing bond prices to rise.

An investor wishes to establish a tax loss but still wants to own the same security. The customer sells the security and repurchases it two weeks later. The tax loss is:

Disallowed Explanation: The tax loss is disallowed. The customer must wait more than 30 days before repurchasing the same security or any security convertible into the security (a right, option, warrant, or convertible bond). The customer repurchased the same security two weeks later. This is considered a wash sale for tax purposes by the IRS and the loss is disallowed.

Total operating costs divided by average net assets is the formula used to find the expense ratio of a(n):

Equity mutual fund Explanation: The expense ratio of any mutual fund is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio. Thus, a fund with $500 million in average net assets and total expenses of $5 million will have an expense ratio of 1% ($5 million divided by $500 million equals .01 or 1%). Expense ratios typically range between .20% and 2.0% of a fund's average net assets and must be disclosed in the fund's prospectus. The formula is: Expense Ratio = Total Expenses / Average Net Assets

Use the following calendar to answer this question. February S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Stock index options will stop trading on:

February 21 Explanation: All options stop trading on the third Friday of the month which is February 21.

The payout on a variable annuity is based on a:

Fixed number of annuity units with a fluctuating value per unit Explanation: When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing the units.

A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity may sell the stock:

Freely under Rule 144 Explanation: The charity may sell the stock freely (immediately) since the required holding period for restricted stock has already been met by the director. Since the charity is a not affiliated with the issuer (a nonaffiliated person), it is not subject to the volume restrictions. However, the stock is still restricted (unregistered) and must be sold under Rule 144. Rule 144A, not Rule 144, requires the purchaser to be a qualified institutional buyer.

An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers:

Geographical diversification Explanation: The portfolio offers the investor geographical diversification because the issues are from different municipalities throughout the country.

A municipal bond issue with an inverted yield scale has:

Higher yields on the shorter maturities than on the longer maturities Explanation: A municipal bond issue with an inverted yield scale will have higher yields on the shorter maturities and lower yields on the longer maturities.

When a stock sells ex-rights, which of the following orders on a designated market maker's book will be reduced? I. Buy limit order II. Sell stop order III. Buy stop order IV. Sell limit order

I and II only Explanation: When a stock sells ex-rights (similar to ex-dividend), the designated market maker will reduce those orders on his book that were entered below the market. A buy limit order and a sell stop order will be reduced by the amount the stock sells ex-rights since these orders are entered below the market.

Which TWO of the following choices are characteristics of GNMA pass-through certificates? I. Interest and principal payments are received monthly II. The investor will receive her principal back at maturity III. Timely payment of interest and principal is guaranteed by the U.S. government IV. Interest is subject to federal tax but exempt from state and local tax

I and III Explanation: GNMA pass-through certificates are guaranteed by the U.S. government. Interest and principal payments are received monthly and, therefore, the investor will receive principal payments before, not at maturity. The interest is subject to federal, state, and local taxes.

A municipal dealer purchased $100,000 face value of 6.00% bonds at a 6.00 basis. If the dealer reoffered the bonds, which TWO of the following choices will be considered reasonable? I. 101 II. 108 III. 5.80 basis IV. 4.00 basis

I and III Explanation: The dealer purchased the bonds at par (6% coupon at a 6.00 basis). When reoffering the bonds, the dealer's markup should be reasonable. A one-point markup (101) is considered reasonable, whereas an eight-point markup (108) is not. An offering of 5.80 represents a reduction in yield of 20 basis points and is considered reasonable. A reduction in yield of 200 basis points (6.00 basis minus 4.00 basis reoffering) is excessive.

Which TWO of the following statements are TRUE concerning the tax consequences of investing in a limited partnership or direct participation program (DPP)? I. Tax credits will reduce a customer's taxes directly II. Tax deductions will reduce a customer's taxes directly III. Tax credits will reduce a customer's taxable income IV. Tax deductions will reduce a customer's taxable income

I and IV Explanation: A tax credit will reduce the amount of taxes owed by a customer directly. A tax deduction reduces the customer's taxable income. A tax credit is more beneficial and may be found in a DPP, which specialized in low income housing. An example of a tax deduction is depreciation and depletion.

An investor has been saving for her child's college education using a 529 plan. If her child will be attending college in a few years, which TWO of the following actions are MOST suitable? I. Moving money from equity and bond investments to money-market funds II. Moving money from money-market funds to equity funds III. Moving money from bond funds to equity funds IV. Moving money from equity funds to bond funds

I and IV Explanation: As a child approaches college age, a suitable investment strategy is to move from growth-oriented securities, such as equities, to income-oriented securities, such as bonds, and money-market funds. Once a child begins to attend college, most of the funds should be invested in money-market funds or other types of short-term investments that are liquid with very little risk of capital.

The federal funds rate may be described as: I. A money-market rate II. A long-term rate III. The most stable rate IV. The most volatile rate

I and IV Explanation: Federal funds are excess reserves that one bank loans to another (usually overnight) when the borrowing bank must make up a deficit reserve position. The rate of interest charged is called the federal funds rate. The federal funds rate fluctuates daily, making it the most volatile money-market (short-term) rate.

Structured products may: I. Offer returns linked to equity securities II. Not offer returns linked to commodities III. Not offer returns linked to interest rates IV. Be formulated to provide principal protection

I and IV Explanation: Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II The bid price is equal to the net asset value minus the redemption fee III. The offer price is equal to the net asset value plus a commission IV. The offer price is equal to the net asset value plus the sales charge

I and IV Explanation: The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund. The term commission is not used in the mutual fund industry as the term sales charge or sales load is used, and is built into the price the customer pays for the fund.

When considering the credit strength of a municipal issuer, which TWO of the following choices are the MOST important? I. The condition of the local economy II. The current financial status of the U.S. economy III. Money supply figures IV. The general capability of the fiscal officers of the municipality

I and IV Explanation: The state of the local economy is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt, and this must be understood in the analysis. The current financial status of the U.S. economy is not as important as the local economy in determining the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board, are irrelevant with regard to the credit strength of a municipality.

A broker-dealer is acting as a principal in which of the following scenarios? I. Selling bonds from inventory to an individual II. Selling bonds from inventory to another broker-dealer III. Buying bonds from another broker-dealer for inventory IV. Buying 500 bonds to fill an insurance company's order for 250 bonds

I, II, III, and IV Explanation: A broker-dealer is acting as a principal when buying for or selling from inventory. In choice (IV), the broker-dealer is buying 500 bonds to fill an order for 250 bonds. The remaining 250 bonds will be for inventory.

A customer has realized a capital gain from the sale of a municipal bond. To reduce the customer's tax liability, the capital gain can be offset against a capital loss from which of the following investments? I. A general obligation bond II. An equity security III. A corporate bond IV. A real estate investment trust

I, II, III, and IV Explanation: Since all of the investments are considered capital assets, a capital loss in any of these can offset a capital gain from the sale of a municipal bond. Capital assets include stocks, bonds, options, municipal securities, real estate, and interests or shares in partnerships.

Duties of the ROP include: I. Reviewing selected customer accounts II. Establishing option training programs for registered representatives and ROPs III. Reviewing retail communications

I, II, and III

Which of the following choices may write calls covered by XYZ stock? I. The president of XYZ Corporation II. The trustee of XYZ Corporation's pension fund III. XYZ Corporation IV. ABC Corporation

I, II, and IV only Explanation: Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock.

A securities market is considered efficient if which TWO of the following conditions are present? I. Large differences between the bid and offer prices II. Small differences between the bid and offer prices III. A large number of transactions IV. A small number of transactions

II and III Explanation: An efficient secondary market for securities will exist if a large number of buyers and sellers are willing to pay similar prices. This will help to keep the difference between the quoted prices (the spread) small and will attract a large number of buyers or sellers willing to execute transactions

Which TWO of the following choices are types of securities issued by the Federal Home Loan Bank? I. Discount notes with maturities between 2 and 10 years II. Discount notes with maturities of less than 1 year III. Consolidated bonds with maturities of up to 30 years IV. Consolidated bonds with maturities ranging from 20 to 40 years

II and III Explanation: The Federal Home Loan Bank issues two types of securities to raise capital, discount notes with maturities of less than 1 year, and consolidated bonds with maturities of up to 30 years. These funds are used to lend funds to FHLB member banks that, in turn, lend these funds to their customers.

Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company? I. There is a limit on the amount of registered stock the director may purchase II. There is no limit on the amount of registered stock the director may purchase III. There is a limit on the amount of unregistered stock the director may sell IV. There is no limit on the amount of unregistered stock the director may sell

II and III Explanation: Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for six months before she may dispose of it. Control stock is registered stock that is acquired by an affiliate (control) person, such as an officer or director, in the secondary market. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock.

Which TWO of the following statements are TRUE concerning revenue bonds? I. Revenue bonds may be issued only with voter approval II. Revenue bonds may be issued even though local debt limits have been reached III. Revenue bonds usually pay higher interest than general obligation bonds IV. Revenue bonds are not exempt from federal income taxes

II and III Explanation: Revenue bonds may be issued without voter approval and may be issued even though a local debt limit has been reached. They are backed by the revenue derived from a project and not the taxing power of a municipality. They usually pay higher rates of interest than general obligation bonds since they have no taxing power as do general obligation bonds. The interest from both GO and revenue bonds is exempt from federal income taxes.

An individual who owns STC stock could provide protection against a decrease in market value by: I. Buying calls II. Buying puts III. Selling calls IV. Selling puts

II and III only Explanation: In order to protect against a decline in market value, an investor could buy puts or sell calls. If the market price were to fall, the price of the puts purchased would rise and an investor could realize a profit by exercising the puts or selling the puts at the higher premium. The price of the calls would fall and the calls would most likely expire, enabling the seller to keep the premium received

A customer's account does not require approval to trade penny stocks if the: I. Trade is recommended II. Trade is not recommended III. Account is established IV. Account is new

II and III only Explanation: The approval of an account to trade penny stocks is not required if the account has been in existence for more than one year or if all transactions in penny stocks are nonrecommended.

Which TWO of the following statements are TRUE concerning long-term (brokered) CDs? I. They are considered highly liquid II. Investors may be subject to interest-rate risk III. The total amount of the investment will be FDIC-insured IV. They may be callable

II and IV Explanation: Long-term brokered CDs are not considered highly liquid since there is no active secondary market. Like most fixed-income securities they are subject to interest-rate risk. In addition, they may be callable and have other features such as floating rates. FDIC insurance may not apply to long-term CDs sold by broker-dealers if the face amount exceeds $250,000.

The State of North Carolina is offering $50,000,000 of 5 1/2% sewer improvement bonds. Which TWO of the following choices apply to the bonds? I. They are subject to the margin requirements of Regulation T II. They are subject to the antifraud provisions of the Securities Act of 1933 III. They are subject to the Trust Indenture Act of 1939 IV. They are exempt from the registration requirements of the Securities Act of 1933

II and IV Explanation: Municipal bonds are exempt from the registration provisions of the '33 Act, but are subject to the antifraud provisions. They are also exempt from Regulation T and the Trust Indenture Act of 1939.

In which TWO of the following situations is a customer NOT considered covered when writing a put option? I. The customer has cash equal to the exercise value of the contract II. The customer is long a call option III. The customer is short the underlying security IV. The customer is long the underlying security

II and IV Explanation: To write a covered put option in a cash account, the customer must have cash in the account equal to the total exercise value of the contract. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account. Since the question did not specify the type of account, both choices (I) and (III) allow the customer to be considered covered.

Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I. Current yield II. Nominal yield III. Yield to maturity IV. Yield to call

II, I, III, IV Explanation: A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par.

In terms of the number of stocks in each category, rank the components of the Dow Jones Composite Index from greatest to least. I. Utilities II. Industrials III. Transportation

II, III, I Explanation: The Dow Composite is comprised of 30 industrial stocks, 20 transportation stocks, and 15 utility stocks.

When computing the dollar price of a municipal bond sold on a yield basis, which of the following call features will be used? I. Sinking fund call II. Catastrophe call III. In-whole call

III only Explanation: When pricing a bond, only a call feature that allows the issuer to call the entire issue is used.

Repurchase agreements (repos) and reverse repos would MOST likely be used by:

Institutions that have a need to borrow on a short-term basis, or have money to lend on a short-term basis Explanation: In a repurchase agreement, a firm sells securities to another firm and agrees to repurchase them at a specific time and a specific price, which produces an agreed-upon rate of return. In effect, one firm is borrowing money from the other with securities as collateral.

What is the intrinsic value and the time value of the call premium if ABC is trading at 43 and the ABC April 40 call is trading at 4.50?

Intrinsic value is 3 and the time value is 1.50 Explanation: The call is in-the-money (has intrinsic value) since the market price is above the strike price. The in-the-money amount of 3 points is intrinsic value, and the balance of the premium is time value (1.50).

A registered representative employed by the research department of a member firm is NOT permitted to be supervised by which department of a broker-dealer?

Investment banking Explanation: Current regulations require a member firm's research department to be separate from its investment banking department to avoid conflicts of interest. An RR employed by the research department is not allowed to be supervised by the investment banking department. The rules do not specify which area of a broker-dealer must supervise an RR working in research, but they do state which department is not permitted to supervise.

According to SRO rules, an e-mail message complaining about excessive commissions sent to an RR's personal electronic device:

Is a complaint and must be maintained by the broker-dealer Explanation: Records of customer complaints must be maintained according to SRO record-keeping rules. Complaints may be delivered in any written format, including letters, e-mail, IMs, and text messages. There is no requirement to follow up an electronic communication with a paper document or to send the complaint to the appropriate SRO.

Regulation FD applies to:

Issuers of securities Explanation: Regulation FD applies to issuers of securities. Regulation FD requires that material, nonpublic information disclosed to analysts or other investors be made public. If the disclosure is intentional, the information must be simultaneously disclosed to the public. If the disclosure is unintentional, the public disclosure must be made within 24 hours. Form 8-K, filed with the SEC, is one method of meeting the public disclosure requirement.

Which of the following statements is TRUE regarding TRACE? a. It is a reporting system for corporate bonds b. It is a reporting system for U.S. government bonds c. It is a reporting system for stocks listed on Nasdaq d. It is a reporting system for municipal bonds

It is a reporting system for corporate bonds Explanation: TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. RTRS is the reporting system for municipal bonds and the TRF is the reporting system for stocks listed on Nasdaq. There is no reporting system for U.S. government bonds.

How would preferred stock most likely be affected by an increase in interest rates?

Its market value would decrease Explanation: Since preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as bonds. If interest rates rise, the value of existing bonds and preferred stock will fall. If interest rates fall, the value of existing bonds and preferred stock will rise.

Rule 145 applies to a(n):

Merger or acquisition Explanation: Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

A project financed through revenue bonds is experiencing difficulty in that revenues are not sufficient to meet debt service payments. If, through legislative approval, the state pays interest and principal in a timely manner, the issue is most likely:

Moral obligation bonds Explanation: Moral obligation bonds are municipal revenue bonds that are payable by the state if revenues from the project do not satisfy debt service payments. However, in order for the state to service the debt, approval of the state legislature is required. Double-barreled bonds are issued as general obligations backed by the full faith and credit of the issuing municipality.

Knowing a client's tax bracket is particularly useful when evaluating the suitability of which type of investment?

Municipal bonds Explanation: Knowing a client's tax bracket is particularly useful when evaluating the suitability of municipal bonds. The interest on municipal bonds is typically tax-exempt, which is less of an advantage if the client is in a low tax bracket.

Promotional material made available to the public may compare collateralized mortgage obligations (CMOs) to:

No other investment product Explanation: Any type of promotional communication made available to customers may not compare CMOs to any other security. This is due to the uniqueness of this product.

When must a customer sign an agreement to abide by the rules of the exchanges and the rules of the Options Clearing Corporation with regard to position limits?

Not later than 15 days following the approval of the account Explanation: The investor must sign an agreement to abide by the position limit rules of the exchanges and of the Options Clearing Corporation no later than 15 days following the approval of the account.

All of the following can be bought on margin, EXCEPT: Common stocks listed on an exchange Preferred stocks listed on an exchange Stocks on Nasdaq Options with nine months or less to expiration

Options with nine months or less to expiration Explanation: Options expiring in nine months or less may not be bought on margin. They do not have loan value and, therefore, must be paid in full. However, credit may be extended to purchase LEAPS with more than nine months to expiration.

A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT to: a. Refund a mass transportation bond b. Raise capital to expand its school system c. Make a primary offering to establish a public sewer system d. Raise additional capital for a government housing project

Refund a mass transportation bond Explanation: A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for refundings, working capital, and private activity bonds.

Your customer is bullish on U.S. equities and wants to participate in an upward movement of the S&P 500 Index. Which of the following investments would you recommend? a. Diamonds b. ADRs c. SPDRs d. VRDOs

SPDRs Explanation: Spiders (SPDRs) is an investment that replicates the S&P 500 Index. The product is organized as a unit investment trust and is classified as an exchange-traded fund (ETF). Diamonds are an exchange-traded fund that mirrors the performance of the DJIA. ADRs are American Depositary Receipts, which may be issued as proxies for many different types of individual foreign shares. VRDOs are variable-rate demand obligations that are a type of municipal security structured for tax-free money-market and high-net-worth investors.

The Taft Food Company intends to distribute shares of its grocery business to existing stockholders. The shares of this company will be traded separately from Taft. This is an example of a(n):

Spinoff Explanation: Spinoff transactions occur when a company is seeking to divest a division. In a spinoff, each shareholder of the parent retains her original shares, but is also given shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers in the hopes that the combined valuation assigned by the market to the two (now) separate companies will be greater than that of the single combined entity. A stock dividend is a situation where each shareholder is given additional shares of the existing company. When a company with no shares currently trading publicly begins trading in the public market, it is an initial public offering (IPO). In a reverse merger, a private company buys a public company with the acquirer's shareholders swapping their shares for a majority stake in the publicly traded shell corporation. This technique allows a private company to obtain publicly listed status quickly, and to avoid much of the regulatory expense incurred with an IPO.

A customer believes a stock will have a wide fluctuation in price over a short period. If he wants to engage in an option strategy that will be profitable from a sharp movement either on the upside or downside, he will buy a:

Straddle Explanation: The customer will buy a straddle, which is the simultaneous purchase of a put and a call with the same expiration dates and the same strike prices. If the market moved up sharply, the call could be exercised and if it moved down sharply, the put could be exercised, resulting in a profit.

Industrial development revenue bonds are backed by:

The corporate guarantor Explanation: The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds.

A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? a. The customer will not be able to diversify his assets b. The customer will not be able to switch mutual funds within each family c. The customer will not be able to receive a single account statement d. The customer will not be able to receive sales breakpoints

The customer will not be able to receive sales breakpoints Explanation: The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.

The Founders Income Fund has declared a dividend payable to stockholders of record Friday, May 29. This mutual fund would typically sell ex-dividend on:

The date set by the fund or its principal underwriter (sponsor) Explanation: Mutual funds sell ex-dividend whenever the fund or its principal underwriter (sponsor) determines. The ex-dividend date for a mutual fund is usually the same day as the record date.

An individual who is considering an investment in a DPP should be most concerned with:

The economic viability of the programs Explanation: The most important factor for any DPP is whether it is a good investment. The tax-related aspects are only of benefit if the program is economically sound.

A floor broker goes to a trading post to execute an order. When told of the floor broker's order, the designated market maker replies, "you're stopped at 21." This means:

The floor broker is guaranteed a price of 21 Explanation: When a designated market maker stops stock, the price is guaranteed. Stopping stock may be done only for a public order.

A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security. Which of the following statements is TRUE? a. The shares must be placed in the RR's error account b. The shares must be placed in the broker-dealer's error account c. The RR must contact the client and cancel the original transaction d. The firm is required to report the error to the market in which the order was executed

The shares must be placed in the broker-dealer's error account Explanation: All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original transaction immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed.

Equity options will expire on:

The third Friday of the expiration month, at 11:59 p.m. Eastern Time Explanation: Beginning February 1, 2015, the expiration date for equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

An RR sees that a CMO is yielding 5.95% while the comparable Treasury is yielding 5.10%. This means that:

The yield pick-up on the CMO is 85 basis points Explanation: If the yield on a CMO is 85 basis points higher (5.95 - 5.10) than a comparably maturing Treasury security, the CMO provides a yield pick-up or higher yield of 85 basis points.

A municipality issues a bond backed by revenue from a project. If the municipality also has bonds outstanding that have the same claim against revenue, which of the following statements is TRUE? a. This is a double-barreled bond b. This is a parity bond c. This type of bond requires voter approval d. This type of bond would be taxable if the investor was subject to the alternative minimum tax

This is a parity bond Explanation: This is an example of a parity bond where two or more issues of revenue bonds have the same claim against revenue or are backed by the same pledged revenues. A double-barreled bond is backed by a source of revenue and the full faith and credit of an issuer that has taxing power, i.e., a general obligation (GO) bond issuer. General obligation bonds, not revenue bonds, require voter approval. Only the interest received from certain municipal private activity bonds is taxable if an investor is subject to the alternative minimum tax.

When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are:

Treasury bonds Explanation: Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.

When purchasing a straddle, an investor's maximum profit is:

Unlimited Explanation: A long straddle consists of purchasing both a call and put with the same expiration and strike price. Since it involves purchasing a call, there is an unlimited profit potential

The turnover that a dollar experiences over a given period is known as the:

Velocity of money Explanation: The velocity of money represents the number of times that a dollar is spent over a given period. It is a measure of business activity in the marketplace. The multiplier effect, created by the reserve requirements placed on members of the Federal Reserve System, refers to the fact that small changes in bank deposits result in large changes in the money supply.

The 30-Day Visible Supply of municipal securities refers to new municipal bonds that:

Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds Explanation: The 30-Day Visible Supply of municipal securities refers to the face amount of new municipal bonds that will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds. It is an indication of expected supply in the new issue market and is published each day in The Bond Buyer.

Municipal bearer bonds that are in default of interest, trade:

With unpaid coupons attached Explanation: Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments.

Your client owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to:

Write covered calls Explanation: The most conservative strategy for the investor to achieve her objective is to write covered calls. The call premium received will increase the yield on her portfolio of stocks because it will add to the income generated by the dividends received from the stock.

A 28-year-old single investor has funds saved at a bank. He contacts an RR and wants to begin allocating funds to a retirement account. Which of the following choices is the most appropriate asset allocation? a. 80% stocks, 20% bonds b. 60% stocks, 40% bonds c. 50% stocks, 50% bonds d. 30% stocks, 70% bonds

a. 80% stocks, 20% bonds Explanation: Long-term, risk-tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Over long periods, stocks usually keep pace or offer higher returns as measured against inflation. Inflationary risk is also referred to as purchasing-power risk. Since the investor is many years from retirement, a large percentage of his portfolio should be allocated to stocks

Which of the following stocks would NOT be considered defensive? a. A construction company b. A tobacco company c. A food distributor d. A clothing manufacturer

a. A construction company Explanation: A defensive stock is the stock of a company that is not drastically affected by a downturn in the economy. Those companies involved in the necessary areas of life are considered defensive. In addition to the choices given-- tobacco, food, and clothing-- soft drink and candy companies are examples of defensive stocks. Construction, mining, steel, and heavy equipment manufacturing companies are dramatically affected by an economic downturn.

Which choice BEST describes The Bond Buyer's Revenue Bond Index? a. Average yield on a list of bonds with 30-year maturities b. Average yield on a list of 11 bonds c. Average yield on a list of 20 bonds d. Average yield on a list of new revenue issues

a. Average yield on a list of bonds with 30-year maturities Explanation: The Bond Buyer publishes different indexes. They include: 1. The 20-Bond Index -- The average yield to maturity on a particular day of 20 specific GO bonds with 20-year maturities 2. The 11-Bond Index -- The average yield to maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index 3. The Revenue Bond Index (Revdex) -- The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities

Which of the following option positions is an example of a spread? a. Buy an XYZ June 60 call and sell an XYZ June 65 call b. Buy an XYZ June 60 call and buy an XYZ June 60 put c. Buy an XYZ June 60 call and buy an XYZ June 65 put d. Sell an XYZ June 60 call and sell an XYZ June 60 put

a. Buy an XYZ June 60 call and sell an XYZ June 65 call Explanation: A spread is defined as the simultaneous sale and purchase of two options of the same class (same stock and same type of option), but it will have different strike prices and/or expirations. A long straddle is defined as the simultaneous purchase of two options that have the same expiration and strike price, but consist of one call and one put. A short straddle is defined as the simultaneous sale of two options that have the same expiration and strike price, but consist of one call and one put. Choice (b) is a long straddle and choice (d) is a short straddle. A combination is similar to a straddle, however, the strike prices and/or expirations must be different. Choice (c) is a long combination.

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? a. It issues securities that can be redeemed to pay for college education b. It issues securities that are not backed by the U.S. government c. It purchases federally sponsored student loans d. It provides loans to educational institutions

a. It issues securities that can be redeemed to pay for college education Explanation: The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.

Which of the following is considered a leading economic indicator? a. New orders for consumer goods and materials b. The index of industrial production c. The average prime rate charged by banks d. The average duration of unemployment

a. New orders for consumer goods and materials Explanation: Economic indicators are classified as leading, coincident, or lagging. Leading indicators precede the change in the economy as a whole. Coincident indicators change with the economy as a whole, and lagging indicators change after the economy as a whole. New orders for consumer goods and materials (also referred to as new orders for durable goods) are a leading economic indicator, and industrial production is a coincident indicator. The average prime rate charged by banks and the average duration of unemployment are lagging indicators.

Which of the following statements is NOT TRUE regarding a firm's anti-money laundering program? a. The program must comply with a blueprint or template supplied by the SEC b. The program requires an ongoing employee training program c. The program must provide for annual testing of the system d. The firm must designate a specific individual responsible for implementing the firm's anti-money laundering program and must identify the person to FINRA

a. The program must comply with a blueprint or template supplied by the SEC Explanation: There is no anti-money laundering blueprint or template supplied by either the SEC or FINRA to broker-dealers. However, any program implemented by the broker-dealer must be designed to comply with the provisions of the Bank Secrecy Act (BSA) and must provide for annual testing of the systems as well as ongoing employee training. Broker-dealers must appoint a compliance person to oversee anti-money laundering regulation compliance, and must identify that person to FINRA.

A mother wants to set up an investment account to provide funding for her child to attend private elementary and secondary schools. Which of the following choices is most suitable? a. A custodial account b. A Coverdell ESA c. A 529 education plan d. A prepaid tuition plan

b. A Coverdell ESA Explanation: An advantage of ESAs (Education Savings Accounts) is the ability to make tax-free withdrawals to pay for private elementary, high school, and postsecondary school expenses. State-sponsored 529 plans allow tax-advantaged withdrawals only for postsecondary school (usually college) expenses.

An advertisement for municipal securities states the following: "15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details." According to MSRB rules, this advertisement should also state that: a. The tax-free return is actually greater than 12% if the bond is held to maturity b. A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% c. The tax-free return is actually less than 10% if the bond is held to maturity d. A principal approved the advertisement

b. A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% Explanation: According to MSRB rules, the advertisement must state that a portion of the yield to maturity for a discount bond may be subject to taxation and, therefore, does not represent a fully tax-free yield. In this question, the bond is being offered at a discount because the yield to maturity (12%) is greater than the nominal yield (coupon rate 10%). At maturity, the discount would be subject to taxation as ordinary income, causing the net yield to be between 10% and 12%.

Junius Arbor purchased stock in 2002 for $24,000. In April 20XX, Mr. Arbor passed away. His estate valued the stock at $82,000. The stock was willed in equal amounts to his daughter Cathy and his son Bob. Cathy sold her stock on September 2, 20XX for $48,000. Bob sold his stock on May 8, 20XX for $56,000. Which of the following statements is TRUE? a. Cathy has a short-term gain of $7,000 and Bob has a short-term gain of $15,000 b. Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 c. Cathy has a short-term gain of $36,000 and Bob has a short-term gain of $44,000 d. Cathy has a long-term gain of $36,000 and Bob has a long-term gain of $44,000

b. Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 Explanation: In the case of inherited securities, the value of the securities is determined at the time of death. The heirs are always considered to have long-term holding periods. The capital gains or losses for Bob and Cathy are found as follows: The securities at the time of death were valued at $82,000. Bob and Cathy were willed equal amounts of $41,000 each, establishing a cost basis for both of $41,000. To determine the gain, compare the cost basis to the sales proceeds. Cathy sold her stock for $48,000, creating a $7,000 gain, while Bob sold his stock for $56,000, creating a $15,000 gain.

Which of the following choices is NOT considered a tax-preference item when calculating the alternative minimum tax (AMT)? a. Accelerated depreciation in excess of straight-line depreciation b. Straight-line depreciation c. Excess intangible drilling costs d. Excess mining, exploration, and development costs

b. Straight-line depreciation Explanation: Under AMT rules, taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due are the greater of the two calculations. Tax-preference items are used in calculating the alternative minimum tax. Straight-line depreciation is not a tax-preference item.

Which of the following statements is TRUE regarding the purchaser of a call option? a. The purchaser has an obligation to sell stock if exercised b. The purchaser limits the amount of money he could lose if the underlying stock declines c. The purchaser benefits if the underlying stock declines d. The only way to profit is to exercise the option

b. The purchaser limits the amount of money he could lose if the underlying stock declines Explanation: The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value, and exercises the call only if the stock is above the strike price. The investor can profit by either exercising or liquidating the call. A purchaser of a call option has the right to buy stock, not an obligation to sell stock.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are suitable for the same investors as exchange-traded REITs

b. They are required to distribute the same percentage of taxable income as exchange-traded REITs Explanation: Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Which of the following statements is NOT TRUE regarding the similarities between variable annuities and mutual funds? a. Mutual funds and variable annuities are regulated under the Investment Company Act of 1940 b. Variable annuity companies will retain any dividends paid, but the owner of the variable annuity must pay taxes on the dividends each year c. Both mutual funds and variable annuities are considered securities d. The payout of both mutual funds and variable annuities will depend on the performance of the securities owned in the portfolio

b. Variable annuity companies will retain any dividends paid, but the owner of the variable annuity must pay taxes on the dividends each year Explanation: All of the statements listed are true regarding variable annuities and mutual funds except variable annuity companies will retain any dividends paid but the owner of the variable annuity must pay taxes on the dividends each year. This statement is not true, since an owner of a variable annuity has the income tax deferred. An owner of a mutual fund will have to pay taxes on dividends received that year.

One of your clients, Kona Okemo, has a long-term objective of capital appreciation. Which of the following investment strategies will MOST closely achieve this goal? a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund b. 50% in an ETF that follows the S&P 500 and 50% in a diversified bond fund c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund d. 20% in an oil and gas fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund

c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund Explanation: The investor is seeking long-term capital appreciation (also referred to as capital growth). The best answer is based on the asset allocation mix. An investor seeking capital appreciation would want a large percentage of his assets invested in equities. Choice (c) has a mix of 80% equities and 20% fixed-income. The largest percentage of the other choices is choice (d) with 60% equities and 40% in fixed-income.

A woman will be retiring in 2030. She is interested in income and having her principal available at retirement. Which of the following municipal bonds would you recommend? a. A highly rated GO bond maturing in 2025 b. A highly rated GO bond maturing in 2034, which is callable in 2023 at 105 c. A highly rated revenue bond maturing in 2030 d. A non-investment-grade revenue bond maturing in 2030

c. A highly rated revenue bond maturing in 2030 Explanation: Since the woman wants her principal available at retirement, a bond maturing in 2030 (the year of her retirement) would be the best choice. Since the revenue bond is highly rated, there is a higher probability the issuer will be able to pay off the principal at maturity compared to the non-investment-grade revenue bond.

Which of the following persons may contribute to a 457 plan? a. A computer programmer employed by IBM b. A federal government employee c. A local government employee d. A self-employed IT consultant

c. A local government employee Explanation: A Section 457 plan is a type of retirement plan used by many public sector workers (state and local, not federal). These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers

A client invested $35,000 in a mutual fund and receives a lower sales charge by signing a letter of intent based on a purchase level of $50,000. If, one year later, she has not contributed additional funds, which of the following choices is the BEST course of action for the RR handling the account? a. Ask the client to sign a new letter of intent for $15,000 b. Allow the client a 90-day extension from the date of the original letter of intent c. Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed d. Contact the client and disclose that she is obligated to deposit $15,000

c. Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed Explanation: A letter of intent (LOI) enables an investor to qualify for a reduced sales charge based on the breakpoint schedule of a mutual fund, without initially depositing the entire amount required. The LOI states the investor's intention to deposit the required money within 13 months of the inception of the letter. It may not be renewed for another 13 months. The letter of intent may be backdated for up to 90 days, but may not be extended for 90 days. Letters of intent are not binding on the investor. The investor is not obligated to contribute the additional $15,000. Investors who fail to make the additional investments are charged the amount that would equal the higher sales charge that applied to the original purchase. The fund insures that it will be able to recover the additional sales charge by withholding sufficient shares in escrow for this purpose.

Under MSRB rules, which of the following documents do NOT need to be retained for a specific period? a. Customer confirmations b. Written customer complaints c. Issuers' official statements d. Customer related correspondence

c. Issuers' official statements Explanation: Copies of official statements need not be retained since the MSRB does not have the authority to regulate issuers and, therefore, may not require the preparation of an official statement.

Which of the following statements concerning a tax-qualified annuity is TRUE? a. It has a zero cost basis and grows tax-free b. It is not subject to contribution limits c. It has a zero cost basis and grows tax-deferred d. It may be subject to tax-free distributions, if qualified

c. It has a zero cost basis and grows tax-deferred Explanation: Tax-qualified annuities are employer-sponsored plans that are available to certain nonprofit organizations, public school, and/or state/city university/college employees. These annuities, sometimes referred to as TSAs may be placed into a 403(b) or a 501(c)(3) plan. Since these plans are funded on a pretax basis, contributions are deducted from an individual's taxable income. An investor's cost basis is considered to be zero since none of the contributions have been recognized for tax purposes. Income grows tax-deferred not tax-free. Upon distribution, every dollar is taxable as unearned ordinary income. Tax-free growth means that none of the distributions will be subject to taxation. This is not the case with these types of plans.

Upon written request, duplicate account statements would be required in all of the following circumstances, EXCEPT: a. The customer works in the operations area of a broker-dealer b. The customer works on the trading desk of a broker-dealer c. The customer is a senior executive of an investment advisory firm d. The customer is a principal of a broker-dealer

c. The customer is a senior executive of an investment advisory firm Explanation: Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens an account at another member, investment adviser, bank, or other financial institution. The rule applies to any person employed by a member firm (broker-dealer). There is no requirement to send duplicate statements if the customer is an employee at a bank, investment adviser, or other financial institution.

In a Rule 144A transaction, which of the following statements is NOT TRUE? a, The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB) b. The buyer must be able to establish its credentials as a QIB, through relevant documentation c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) d. If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB

c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers Explanation: The SEC has provided several examples of documents that can be relied on by the seller when establishing its belief that a purchaser is a qualified institutional buyer. Audited financial statements and a certification from the issuer are common methods of demonstrating that the purchaser is a QIB.

When buying listed put options versus selling the underlying stock short, which of the following choices is NOT an advantage? a. Buying a put would require a smaller capital commitment b. Buying a put has a smaller dollar loss potential than selling the stock short c. The put has a time value beyond an intrinsic value that gradually dissipates d. Buying a put is not subject to Regulation SHO

c. The put has a time value beyond an intrinsic value that gradually dissipates Explanation: Choice (c) is a correct statement, but it is not an advantage for the buyer of a put. An options premium may consist of intrinsic value and/or time value. The portion of the premium represented as time value declines over time. For example, if an XYZ July 50 put is purchased for $5 when the market price is $47, the intrinsic value (in-the-money value) is $3 and the time value is $2. As the put nears expiration, the time value gradually dissipates, which is a disadvantage to the buyer. All of the other statements are advantages of buying a put as opposed to selling short. The premium of a put is substantially less than the Regulation T margin requirement for a short sale. In a put purchase, the potential loss is limited to the premium, while the potential loss on a short sale of stock is unlimited. The purchase of puts is not subject to the borrowing requirements of Regulation SHO, whereas short sales of equities are.

In a custodian account, which of the following choices would determine when a minor takes control of the account? a. FINRA b. The Internal Revenue Service c. The state in which the minor is a resident d. The state in which the account is held by the broker-dealer

c. The state in which the minor is a resident Explanation: In a custodian account, the minor would take control of the account when the child reaches the age of majority. This is determined by the state in which the minor is a resident. This is part of the Uniform Transfers to Minors Act (UTMA). Where the account is being held is not relevant.

A woman with a low income has saved $5,000 to invest for her young son's college education. Which of the following investments would be the MOST appropriate? a. T-bills b. Municipal bonds c. Zero-coupon bonds d. A real estate limited partnership

c. Zero-coupon bonds Explanation: Since the woman has a low income, municipal bonds and limited partnerships would not be of benefit. Since the son is young, a long-term investment would be most appropriate.

Under the Know-Your-Customer Rule, when a registered representative opens a new account for a customer, the registered representative should determine all of the following information, EXCEPT the customer's: a. Financial condition and needs b. Objectives c. Ability to assume risk d. Education level

d. Education level

Which of the following expenditures is a violation under industry rules concerning gifts and gratuities? a. Taking a client to a dinner valued at $80 per person b. Attending a concert with your client valued at $105 per ticket c. Giving a $300 wedding gift to your brother who is employed at a member firm d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket

d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket Explanation: Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate business travel. In order for the activity to be considered an expense, the RR must attend the event, not give the tickets to another person or persons. The value of two tickets ($130) exceeds the $100 limit. An exemption is provided if the gift is given to another family member for an event related to a family relationship (e.g., a wedding).

Mr. Jones earns $40,000 per year and has contributed to his Individual Retirement Account (IRA) for each of the past two years. The company he works for has recently instituted a pension plan. Since he is now covered by a corporate pension plan, which of the following statements is TRUE regarding his IRA? a. He must liquidate the IRA by taking a lump-sum distribution b. He may keep the IRA but additional contributions are prohibited c. He may keep the IRA and may make a tax-deductible contribution of up to $18,000 this year d. He may keep the IRA and may make a tax-deductible contribution of up to $5,500 this year

d. He may keep the IRA and may make a tax-deductible contribution of up to $5,500 this year Explanation: An individual who is covered by a corporate pension plan may continue to make pretax contributions of up to $5,500 to an IRA providing the individual's income does not exceed specified levels.

A customer has a discretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place an order to buy the security b. Purchase a small amount of the stock and contact the customer no later than the same business day c. Purchase a small amount of the stock and have the customer provide a written authorization form no later than the same business day d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal

d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal Explanation: This is a discretionary account and, therefore, shares may be purchased without additional written customer consent. A principal or supervisor of the broker-dealer is required to approve promptly in writing each discretionary order. There is no requirement to notify the customer on the same business day. The customer will, however, receive a confirmation of the trade.

Which of the following indexes is the broadest equity market indicator? a. The Nasdaq Composite Index b. The Major Market Index c. The NYSE Index d. The Wilshire Index

d. The Wilshire Index Explanation: The Wilshire 5000 Equity Index consists of more than 7,000 stocks that trade on the New York Stock Exchange and Nasdaq. The Index is referred to as the Wilshire 5,000 because, when created, it contained approximately 5,000 stocks. The Wilshire Index is considered the broadest of all indexes and averages.

Which item need NOT appear on a customer confirmation for a municipal bond transaction? a. Existence of call features b. Whether the interest paid on the bonds is subject to the alternative minimum tax c. Whether the bonds are insured d. The name of the bond counsel

d. The name of the bond counsel Explanation: MSRB rules do not require that the name of the bond counsel be disclosed on a confirmation. The existence of call features, bond insurance, the applicability of the alternative minimum tax, or any special relationships between the issuer and the broker-dealer (such as financial advisory and control relationships) are among the numerous disclosures that must be made to customers on a confirmation.

Which of the following choices is a violation of federal laws with regard to tender offers? a. The tender of stock from a cash account b. The tender of stock from a long margin account c. The tender of a minor's stock from a custodian account d. The tender of stock in a short margin account that has been borrowed by a customer

d. The tender of stock in a short margin account that has been borrowed by a customer Explanation: It is a violation of federal law for anyone to tender the stock that a customer borrowed in a short margin account. The stock has been temporarily borrowed and does not belong to the customer and may not be tendered.