Series 7 Practice Exam

A customer's confirmation of a municipal securities transaction must include A) the lowest potential yield the customer may receive and information regarding the catastrophic call provision. B) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. C) the highest potential yield the customer may receive and the amount of markup or markdown in a principal transaction. D) the highest potential yield the customer may receive and information regarding the catastrophic call provision.

Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 6.h

The manager of an equity fund wishes to hedge the fund's portfolio against a possible market decline. Of the strategies listed, to provide the best protection, the manager would buy A) broad-based index calls. B) broad-based index puts. C) narrow-based index puts. D) narrow-based index calls.

The best way to hedge a long position is to buy puts. In this case, the broad-based index would be a better match for the stock portfolio than a narrow-based index. LO 10.g

An investor wishes to save for her retirement. She arranges to have $250 per month withdrawn from her account to be invested into a commodity fund. This type of savings plan is called A) dollar cost averaging (DCA). B) a constant ratio plan. C) a monthly investment plan (MIP). D) a constant dollar plan.

This is the classic DCA. You have to go back to the 1970s to know the old NYSE MIP. LO 8.e

A corporation has issued debt securities backed by the securities of other companies that it holds in its corporate investment portfolio. These debt securities are known as A) collateral trust bonds. B) subordinated debentures. C) mortgage bonds. D) equipment trust certificates.

a A corporation issuing debt securities secured by a pledge of another company's securities it holds is issuing collateral trust bonds. LO 5.a

A customer who is long 500 shares of XYZ writes 7 calls against the position. This is an example of A) a ratio write. B) a long straddle. C) portfolio insurance. D) a vertical spread.

a A ratio write is used to describe the position when more call options are written than there are shares of stock available to cover the call. In this case, the customer has 5 covered and 2 uncovered calls. It should also be recognized that the two uncovered calls represent an unlimited maximum loss potential. LO 10.d

Which of the following is not a characteristic associated with auction rate securities (ARS)? A) Are backed by the full faith and credit of the U.S. federal government B) Use a Dutch auction method to establish a new clearing rate C) Have the risk of failed auctions D) Are long-term securities that reset the rate paid at predetermined short-term intervals

a ARS are long-term securities, typically issued by municipalities that are tied to short-term interest rates. A Dutch auction method is used to reset a new rate, known as the clearing rate, at predetermined short-term intervals. Failed auctions—ones where no bids are received to reset the rates—are an inherent risk with ARS. LO 6.b

Because of their unlimited potential loss, short positions A) are marked to the market at the close of each day. B) can only be taken by those who are accredited investors. C) require a higher initial margin deposit. D) must be approved by a designated principal before execution.

a Although most securities positions are marked to the marked on a daily basis, it is more important that this be done with short positions because of how quickly they can reach the maintenance margin level. The initial margin is the same as long purchases, and the term accredited investors applies principally to private placements. Short sales, just as with any transaction, must approved by a principal, but not in advance. LO 16.c

All of the following are accurate statements regarding communications filing requirements with FINRA except A) there are no requirements to file any sales or advertising piece with FINRA. B) correspondence pieces are not subject to filing with FINRA. C) pieces intended for institutional customers need not be filed with FINRA. D) retail communications can be subject to filing with FINRA.

a Any sales or advertising piece distributed by a member broker-dealer will be viewed as either retail, correspondence, or institutional depending on who and how many recipients there will be. While retail communications can be subject to FINRA filing requirements, correspondence and institutional communications are not. LO 19.c

One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed? A) The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. B) The earnings will be taxed as capital gains and will be withdrawn first using LIFO. C) There is a combination of ordinary income and return of principal based on the exclusion allowance. D) A portion of each payment will be taxed as ordinary income with the balance considered a return of principal.

a Because this is a nonqualified annuity, there are no contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment. LO 9.d

A broker-dealer that is a financial advisor to a municipal issuer A) cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. B) can act as an underwriter of the issuer's bonds in a competitive bid underwriting only if they want to receive compensation for both services. C) can act as an underwriter of the issuer's bonds in a negotiated underwriting or competitive bid underwriting and receive compensation for both services. D) can act as an underwriter of the issuer's bonds in a negotiated underwriting only if they want to receive compensation for both services.

a Broker-dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by MSRB Rule G-23 to also act as underwriters for the same issue regardless of whether the underwriting process has been done by competitive bid or was negotiated. In the event that an exception is allowed, or the broker-dealer performs an advisory function specifically associated with the underwriting, the broker-dealer would be limited to accepting fees for the advisory service only and not be allowed to accept fees for any underwriting services. LO 6.h

A registered representative (RR) at a broker-dealer mentions continuity of life as it pertains to limited partnerships (LPs). The reference can best be explained by which of the following statements? A) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. B) Continuity of life is a characteristic of LPs because they are scheduled to end on a predetermined date. C) LPs will exist until the last partner is deceased. D) LPs have continuity of life, which means they will exist in perpetuity.

a Continuity of life is a corporate characteristic that must be avoided for a partnership to qualify as a direct participation program. The phrase refers to the fact that a corporation should exist in perpetuity. LPs, however, are all scheduled to end on a predetermined specific date. LO 11.c

The possibility of losing all or part of a person's invested principal in a debt security because of the issuer's failure best describes A) credit risk. B) market risk. C) business risk. D) inflation risk.

a Credit risk, also called default risk, involves the danger of losing all or part of one's invested principal through an issuer's failure. Although credit risk is most often associated with debt securities, when a company cannot pay its debt, the equity securities can wind up worthless. This is the risk taken by investors buying stock in highly leveraged companies. The higher the rating, the lower the credit risk. LO 14.a

Your client, age 52, is considering taking distributions from her qualified retirement plan. A portion of her contributions were made with after-tax dollars. Which of these is correct? A) Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions. B) Distributions of earnings are tax free, but a 10% penalty will be applied to the distributions. C) Distributions of cost basis is 100% taxable, and a 10% penalty will be applied to the distributions. D) Distributions of earnings are tax free, and there will not be a penalty applied to the distributions.

a For qualified plans, distributions of earnings are tax deferred until taken. When taken, those earnings are 100% taxable. Unless meeting one of the exceptions (e.g., death, disability), distributions taken before age 59½ will have a 10% penalty applied. When there is a cost basis (after-tax contributions), that portion is always returned tax and penalty free. LO 1.g

You use fundamental analysis to help make investment decisions. For this type of analysis, you would not be interested in A) trading volume and price patterns. B) current business conditions. C) corporate financial statements. D) positioning of a company within its industry.

a Fundamental analysis looks at the company itself or the economy, whereas technical analysis looks at trading patterns. The words charts, price, and volume are usually indicators that the analysis is technical. LO 13.e

A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should A) buy yen calls. B) buy yen puts. C) sell yen puts. D) sell yen calls.

a If the dollar was to weaken against the yen, then the yen would increase in value. If one wished to gain as the result of an asset's increased value, the appropriate option strategy is the purchase of a call. As a general rule, to hedge, importers buy calls on the foreign currency, whereas exporters buy puts. LO 10.g

A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be A) no tax is due. B) ordinary income on the $5,000 difference between the purchase price and the current value. C) ordinary income on the $5,000 difference between the purchase price and the current value plus a penalty of 10% because the investor is only 55 years old. D) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old.

a Investors in variable annuities are only taxed on the earnings of the account. This account lost money—there were no earnings to be taxed. LO 9.d

A municipal securities advertising piece intended to be distributed to retail customers must be approved by A) a municipal securities principal or a general securities principal. B) a municipal securities principal and the MSRB. C) a branch manager and the MSRB. D) a general securities principal or a branch manager.

a Municipal securities advertising intended to be distributed to retail customers must be approved by a municipal securities principal (Series 53) or a general securities principal (Series 24). LO 6.h

You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. B) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put. C) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call. D) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call.

a Of the choices given, the correct answer is the credit put spread. Credit put spreads are bullish. Anytime the long option in a spread has a lower strike price than the short position, the spread is known as a bullish spread. We refer to that strategy as buy low, sell high (BLSH). LO 10.e

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) U.S. Treasury STRIPS maturing in 18 years B) AAA rated municipal bonds maturing in 18 years C) U.S. Treasury bonds with 18 years to maturity date D) Blue-chip stocks

a STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future. LO 7.a

Which of the following statements regarding the sale of restricted stock under Rule 144 is true? A) Nonaffiliates are not subject to volume restrictions on stock held for more than six months. B) Affiliates are not subject to volume restrictions on stock held for more than six months. C) Affiliates are never subject to holding periods or volume restrictions. D) Form 144 must be filed with the SEC within 10 days of the date of sale.

a Sellers of restricted stock who are not defined as affiliated persons may sell freely after meeting a six-month holding period. Affiliates may also sell after meeting the six-month holding period but are subject to volume restrictions as mandated in Rule 144. Form 144 must be filed no later than concurrent with the sale. LO 20.f

Having been a customer of a broker-dealer for over 10 years, currently holding equity positions and cash in his account, Daryl Smith wants to purchase 1,000 shares of a penny stock. Smith is A) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement. B) exempt from the disclosure requirement but must receive a suitability statement. C) exempt from both the requirement to receive a suitability statement and the disclosure requirement. D) required to receive both the suitability statement and the disclosure.

a Smith meets the criteria for an established customer under the penny stock rules. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements. LO 3.j

One of your customers is speaking to you about spread strategies for equity options and makes several statements about spreads. Which of her statements is false? A) "With a time or horizontal spread, both options expire at the same time, which means the position expires completely." B) "With spreads, I always know exactly how much I can lose or gain once the position is established." C) "If a position, whether long or short, begins to move against me, I can always close it out in the market." D) "No spread can ever have an unlimited maximum loss potential."

a Spreads have a defined maximum gain and loss, and neither can ever be unlimited. Spreads like single option positions can be closed in the market before expiration. Time or horizontal spreads have contracts that expire in different months, not the same time. LO 10.h

Regarding risk, traders in broad index options are most exposed to A) systematic risk. B) nonsystematic risk. C) financial risk. D) purchasing power risk.

a Systematic risk is sometimes referred to as market risk. Because an index tracks the market, or a segment of the market, index options expose traders to systematic or market risk more than other risks. LO 14.a

XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative (RR) should know that A) the exercise price is generally lower than the current market price at issuance. B) XYZ will issue 1 million rights. C) the value of the right will generally increase after the ex-date. D) a shareholder will generally have two to three weeks to exercise the rights.

a The exercise price is generally below the current market price at issuance. None of the other choices are true because the value of the right drops on the ex-rights date. Each existing share receives 1 right, so in this case, XYZ will issue 5 million rights. An investor must exercise the rights within 30-45 days of issuance; otherwise, they will expire. LO 3.f

During the onboarding process of a personal securities account for a 65-year-old investor, the registered representative (RR) attempts to obtain the name of a trusted contact person who will be notified if the firm suspects exploitation. However, the investor looking to open the account declines to provide a contact name and information of a trusted adult. What is the best course of action? A) Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person. B) Open the account, but place a dollar limit on disbursements from the account. C) Open the account, and inform the investor that disbursements from the account must be made on the extended disbursement form providing a detailed explanation of the disbursement. D) The firm cannot open an account of someone age 65 or older without the name of a trusted contact person.

a The firm is required to make a reasonable attempt to obtain the name and contact information of a trusted person. In the event the customer chooses not to provide it, the account may be opened without restriction. LO 14.c

Your customer contacts you proposing to invest a large sum of money in five different mutual fund families using Class A shares. Which of the following is correct and important to disclose to your customer regarding suitability and her proposal? A) Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families. B) She will not be able to achieve diversification this way. C) She will not be able to switch between different funds within each family. D) She should consider Class B shares only if investing a large sum to avoid paying the sales charge up front.

a The larger the investment amount, the greater the breakpoint sales charge discount on Class A shares would likely be at a single fund company. While Class A shares are appropriate for larger investments because of breakpoint discounts, Class B (back-end load) shares, which offer no breakpoint discounts, are not. Therefore, the most important disclosure would be to explain that the advantage of breakpoint discounts on Class A shares could be lessened or lost if the investment is divided among so many different fund families. Diversification can occur within one fund family or across many, and moving funds from one fund to another within a single fund family is still possible. LO 8.d

An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend? A) $100 B) $200 C) $50 D) $400

a The total value of the initial position is unchanged, remaining at $40,000 (200 times $200). After the stock dividend, the investor owns 400 shares (200 times 100% = 200 + 200 = 400). Therefore, the adjusted cost basis is $100.00 per share ($40,000 divided by 400 = $100). Perhaps you recognized that a 100% stock dividend has the same effect as a 2:1 split. That is, the stock's cost basis is cut in half. It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same. LO 3.b

Your customer, age 46, has been investing money in a variable annuity for several years. He plans to stop the deposits to meet current financial obligations, but he does not intend to withdraw any of the funds already invested until retirement, which is still several years away. Until the withdrawals are made, the client will be holding A) accumulation units. B) deferred units. C) accumulation shares. D) annuity units.

a Until the customer withdraws funds or annuitizes, the annuity is still in the deferral stage, and the customer is holding accumulation units. LO 9.c

An immediate dilution to earnings per share (EPS) would be least likely to occur from A) refunding a bond at par. B) a 2:1 stock split. C) conversion of debentures. D) a 10% stock dividend.

a When a bond is refunded at par, the cash used is equal to the reduction in the liability resulting in no immediate corporate EPS (the number of shares remains the same). A stock split, a stock dividend, and conversion of a debenture increase the number of shares outstanding. Because the earnings haven't changed and there are more shares, the EPS is lower (diluted). LO 13.d

One of your customers asks you to interpret her observation that the short interest in a stock she owns has been rapidly increasing over the past four months. Aligning with the short interest theory, you would tell her that this is A) a bullish indicator. B) a bearish indicator. C) an indication of predictable stability in the stock. D) an indication of predictable volatility in the stock.

a While short interest in a stock represents the number of shares sold short, the short interest theory considers rising short interest a bullish indicator. 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. LO 13.e

Under the Securities Act of 1933, SEC registration is required for A) an offering of $25 million of a corporate bank holding company. B) a private placement offering of $60 million by a brokerage firm. C) a commercial paper offering of $30 million maturing in 180 days. D) a municipal revenue note offering of $4 million.

a While some banks and savings and loans are exempt, issuers' corporate bank holding companies are not. Private placements, municipal securities, and commercial paper (short term) are all exempt from federal registration. LO 20.c

Which of the following statements regarding convertible debentures is true? A) The issuer pays a higher rate of interest, compared with a comparable nonconvertible debenture. B) When compared with similar nonconvertible debentures, convertible debentures are issued with a lower coupon rate. C) The issuer has the right to convert the debentures during the time period specified in the indenture. D) The debenture holders receive a variable rate of interest.

b A conversion feature is a benefit to the debtholder. It allows the debtholder a choice to either continue holding the debt represented by the debenture or to convert it into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win/win situation. The win for the debtholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the debenture purchaser, that purchaser is willing to accept a lower interest rate on the debt (as compared to a nonconvertible debenture) and therefore giving the issuer a lower cost of capital. It is the debtholder, not the issuer who determines when and if to convert. LO 2.j

A group of underwriters has agreed to engage in a mini-max underwriting for a new issue of equity securities with the issuer of those securities. Which of the following best describes this underwriting agreement? A) A mini-max agreement is a firm underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. B) A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. C) A mini-max agreement is a firm underwriting setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a minimum dollar amount of securities the issuer is willing to sell. D) A mini-max agreement is a best efforts underwriting, setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.

b A mini-max agreement is a type of best efforts underwriting agreement. In a best efforts agreement, the underwriters are not purchasing unsold shares from the issuer. There are two components to a mini-max agreement. The first sets a floor, or minimum, amount the issuer needs to raise to move forward with the underwriting, and the other sets a ceiling, or maximum, dollar amount of securities the issuer is willing to sell. LO 20.b

The OCC must receive exercise instructions for equity options no later than A) 4:00 pm ET on the third Friday of the expiration month. B) 5:30 pm ET on the third Friday of the expiration month. C) 11:59 pm ET on the Saturday before the third Friday of the expiration month. D) 4:10 pm ET on the third Friday of the expiration month.

b Although trading stops at 4:00 pm ET on the third Friday of the expiration month, the final exercise deadline is 5:30 pm ET (4:30 pm CT) that same day. LO 10.j

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Use of vacant office space in the broker-dealer's facilities B) Customized software designed to give clients access to asset allocation programs C) Meal expenses to attend an investment seminar sponsored by the broker-dealer D) Desks remaining after the broker-dealer redesigned its office

b Among the items generally in the safe harbor are those items designed to assist the firm's customers. Customized software that helps clients would be acceptable. Although seminar registration expenses are in the safe harbor, travel and transportation expenses (such as meals and lodging) are not. Rent and office furniture are specifically listed as out of the safe harbor. LO 14.d

Trade confirmations must show yield to call on which of the following callable bonds? A) 6½%, 7% basis, maturing 2040 B) 5½%, 5% basis, maturing 2040 C) 5½%, 5½% basis, maturing 2040 D) 6½%, at par, callable 2028, maturing 2059

b Bond confirmations must disclose the lower of the yield to maturity (YTM) or yield to call (YTC). On a bond selling at a premium, the YTC is the lower of the two. The terminology here shows the coupon, the basis (YTM), and the maturity date (and, in one case, the call date). The 5½% bond with a 5% basis is the only bond trading at a premium. We know that because the YTM (or basis) is lower than the coupon. Even though the 6½% bond maturing in 2059 is callable relatively soon, because the bond was purchased at par, CY, YTM, and YTC are all equal to the coupon (nominal) rate, so the investor won't suffer a loss of principal with an early call. LO 6.h

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) net value of fixed assets B) cash flow from operations C) cash flow from investments D) earnings per share

b Cash flow from operations is computed by adding the year's depreciation deduction to the net income. LO 7.d

One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on A) an after-tax basis, and those contributions will be deductible on his tax return. B) an after-tax basis, and those contributions are not deductible on his tax return. C) a pretax basis, and those contributions are not deductible on his tax return. D) a pretax basis, and those contributions are deductible on his tax return.

b Contributions to an ESPP are payroll deductions. Though the contribution percentage is calculated on one's pretax salary, they are taken after tax. Contributions to ESPPs are not deductible on one's tax return. LO 1.h

An investor contributes $200,000 in cash to an oil and gas partnership. The partnership has entered into a nonrecourse loan for $500,000. The customer's cost basis in the program is A) $500,000. B) $200,000. C) $300,000. D) $700,000.

b Cost basis in all direct participation programs (DPPs), other than real estate, consists of actual investment plus any recourse financing. Because this note is nonrecourse, it is not included in the customer's cost basis. LO 11.f

For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on A) the cost of moving the natural resource to refiners and distributors. B) the amount of the natural resource sold. C) the condition or grade of the natural resource. D) the amount of the natural resource extracted.

b Depletion allowances may be taken only once the oil or gas is sold and is based on the amount sold (depleted). LO 11.f

A registered representative (RR) is explaining characteristics of equity-linked notes (ELNs) and exchange-traded funds (ETFs) to a new client. All of the following statements are true except A) ETFs can hold assets like stocks, bonds, or commodities, or can track an index. B) ELNs are equity instruments. C) ELNs can be traded OTC or on a listed exchange. D) ETFs trade on listed exchanges much like stocks.

b ELNs are debt instruments. Their final payment at maturity is based on the performance of a single stock, a basket of stocks, or an equity index. These notes can be traded OTC or on listed exchanges. ETFs trade on listed exchanges and have many of the same trading characteristics as stocks. Their portfolios can hold assets such as equity securities, debt securities, or commodities, and many ETF portfolios are structured to track the performance of a specific index. LO 4.g

A customer is trying to understand any differences between a rollover and a trustee-to-trustee transfer as they relate to his qualified retirement plans. An accurate explanation would be that A) a rollover can occur as often as one wishes, but a trustee-to-trustee transfer can occur only once every 12-month period. B) a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes. C) both rollovers and trustee-to-trustee transfers can occur only once every 12-month period. D) both rollovers and trustee-to-trustee transfers can occur as often as one wishes.

b For qualified retirement plans, a rollover is permitted only once in every 12-month period, while a trustee-to-trustee direct transfer can occur as often as one wishes. LO 1.g

You are listening to another registered representative (RR) speak about Rule 147 offerings and recognize that one of his statements is incorrect. Which of these is not correct? A) Stock sold under Rule 147 is sold in an exempt transaction. B) Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident. C) Under one Rule 147 provision that can be met, an issuer must derive 80% or more of its revenue from the state in which its principal office is located. D) Rule 147 applies to intrastate stock offerings.

b Holders of shares issued under Rule 147, the intrastate offering exemption, cannot resell their shares to nonresidents of the state for a period of six months from the date of purchase. LO 20.e

An investor is long stock at 80. The current market price of the stock is 93, and it is anticipated the stock will continue to rise. If the investor would like to generate income, but limit how much can be made if the stock continues to rise, which of the following contracts would do that? A) Buy a 95 call B) Sell a 95 call C) Buy a 90 put D) Sell a 90 put

b If the investor sells a 95 call, and collects the premium, income would be generated. However, if the price continues to rise, the call will be exercised, obligating the investor to sell the stock (at a profit). LO 10.d

An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above A) $9,000. B) $10,000. C) $11,000. D) $13,000.

b Minimum maintenance rules require a minimum maintenance of 30% for a short margin account. The maintenance level is determined by dividing the credit balance by 1.3 ($13,000 ÷ 1.3 = $10,000). LO 16.d

A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They are all auctioned on a monthly basis. B) They are quoted with a bid higher than the ask. C) They have a maximum maturity of 365 days. D) They are generally callable after the first 6 months.

b T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly. LO 7.a

Which of the following does the capital asset pricing model (CAPM) assume? A) Investors are comfortable with risk and believe that diversification can be used to reduce risk. B) Investors are averse to risk and believe that diversification can be used to reduce risk. C) Investors are comfortable with risk because they do not believe that it can be diversified away. D) Investors are averse to risk and believe that no type of risk can be diversified away.

b The CAPM takes into account systematic 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. Therefore, the pricing of an asset must reflect that. LO 13.b

A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments? A) FINRA B) PSA C) DEA D) Bond Buyer

b The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs. LO 12.d

An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is A) 150,000. B) 125,000. C) 0. D) 30,000.

b The affiliate who has held the restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last four weeks' average trading volume (30,000). LO 20.f

An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24, and the investor immediately sells the stock in the market, what is the investor's profit or loss? A) $150 loss B) $50 profit C) $150 profit D) $50 loss

b The investor has the obligation to buy the stock at the strike price of 25. The stock is currently worth 24, which is a loss of 1. The investor's premium of 1.50 minus the loss of 1 leaves a net profit of 0.50 (0.50 × 100 = $50). LO 10.h

An investor writes 1 XYZ 180 call at 6.65. If the investor makes a closing purchase at the call's intrinsic value when the stock is at $184.75, he realizes a gain of A) $147.50. B) $190.00. C) $265.25. D) $180.00.

b The investor received a premium of $665. The position was closed with a purchase at intrinsic value: $475. The net profit is the difference, or $190. LO 10.c

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background B) contain information that doesn't have a place in the main body of the financial statements C) contain a detailed history of the enterprise and its products or services D) serve as a bibliography indicating where additional information may be obtained

b There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are: method of accounting used, collateral securing debt, pension liabilities, and many others. Footnotes are an integral part of the financial statements and are usually found with this notation, "The accompanying footnotes to the financial statements are an integral part of these statements." LO 7.a

A broker-dealer wants to reference its membership with FINRA on its website. Regarding the reference, all of the following are true except A) if the FINRA reference is made, a hyperlink to FINRA's website must be in close proximity to the reference. B) the FINRA reference is intended to demonstrate that the broker-dealer has the approval of FINRA in all of its business dealings. C) there is no requirement that any FINRA member broker-dealer shall reference FINRA by name or logo on its website. D) if the FINRA reference is made, a hyperlink to FINRA's website is mandated by FINRA.

b There is no requirement to list or mention FINRA membership or any other self-regulatory organization (SRO) membership on a broker-dealer website. If, however, a broker-dealer chooses to have the FINRA name or logo on its website, it should never be displayed in such a way as to imply—or mean to imply—approval of FINRA. If FINRA or its logo is used, a hyperlink to the FINRA website is required, and it must be placed in close proximity to the reference. LO 19.d

Your customer has established the following spread: Long 1 ABC Jan 60 call at 5 Short 1 ABC Jan 70 call at 2 The customer will realize a gain at expiration if the spread

b This is a bull call spread (established at a net debit), so the customer wants the spread to widen and the stock price to rise above the breakeven, which is 63. LO 10.h

In what is commonly known as a proceeds transaction, one of your clients is using the proceeds from the liquidation of one stock to purchase another stock. In compliance with the 5% markup policy for these transactions, the markup will be computed based on A) the compensation to the dealer for each side of the transaction separately. B) a combination of both the buy side and the sell side compensation to the dealer. C) the markdown or compensation to the dealer on the sale side of the transaction. D) the markup or compensation to the dealer on the buy side of the transaction.

b This is known as a proceeds transaction, which is the sale of one position, and the purchase of another with the proceeds of the sale. The 5% markup policy is applicable to proceeds transactions. In compliance with the policy, the markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side, and applying the total to the inside market on the buy side. LO 13.g

A customer asks if there are any debt instruments providing income that might at least keep pace with inflation and offer some tax advantages. What suitable recommendation could be made that would meet the customer's criteria? A) ADRs B) TIPS C) U.S. T-bills D) GNMAs

b Treasury Inflation Protection Securities (TIPS) are debt instruments specifically designed to provide income that keeps pace with inflation. Issued by the U.S. Treasury, the interest is tax exempt at the state and local level. Neither GNMAs nor Treasury bills (T-bills) meet all of these criteria, and American depositary receipts (ADRs) are not debt instruments. LO 1.b LO 7.a

An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct? A) Only the 3% employer contribution is immediately vested. B) Only the 7% contributed by the employee is immediately vested. C) Only the 3% employee contribution being matched by the employer is immediately vested. D) Only the 4% employee contribution in excess of the employer's match is immediately vested.

b Under ERISA rules, any contribution by an employee is immediately vested. It is only employer contributions that may subject to a vesting schedule. LO 1.i

The Jefferson County Water Works revenue bond is being underwritten by a syndicate led by ABC Securities, Inc. The bond has serial maturities going out up to 25 years with a balloon at 30. The coupons range from 3.2% to 4.1%, and all the bonds are offered at par. The terms of the syndicate agreement call for a total takedown of ¾ of a point with a selling concession of ½ point. A syndicate member who sells 500 of the bonds will earn A) $2,500. B) $3,750. C) $6,250. D) $7,500.

b When a member of the syndicate sells a bond it is entitled to the total takedown—in this case, ¾ of a point ($7.50) per bond. The computation is 500 bonds sold × $7.50 per bond = $3,750 underwriting profit. Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead. Did you notice how much extraneous information is in this question? LO 20.b

Your broker-dealer has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new broker-dealer. How long does your broker-dealer have to validate the positions listed on the form? A) No later than the end of business on the Friday of the week the TIF was received B) One business day C) Seven calendar days from the time the TIF is received D) Three business days

b When transferring a customer's positions to another broker-dealer via the TIF under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer the positions to the receiving broker-dealer after validation. LO 15.d

A technical trader tells you that while looking at a chart, he sees a primary trend of higher highs and higher lows. What would this be an indication of, and according to what theory? A) Bullish market according to the odd-lot theory B) Stagnant market according to the trendline theory C) Bullish market according to the Dow theory D) Bearish market according to the short interest theory

c According to the Dow theory, the primary trend in a bull market is a series of higher highs and higher lows. Conversely, in a bear market, the primary trend is a series of lower highs and lower lows. LO 13.e

All of the following statements regarding municipal advertising are true except A) it must not be misleading. B) it must be approved by a principal. C) copies must be sent to the Municipal Securities Rulemaking Board (MSRB). D) copies must be kept for four years.

c All municipal advertising must be approved, in writing, by an appropriate principal before the first use and kept on file for four years. It need not be filed with the MSRB because the MSRB has no enforcement authority. LO 19.c

An associate of a broker-dealer engaged in municipal securities activities such as soliciting municipal bond business but is not involved in retail sales A) is required to be employed by the MSRB. B) is required to be an elected official of a municipality. C) is known as a municipal finance professional (MFP). D) may sell municipal bonds to professional bond traders only.

c An MFP is an associate of a broker-dealer engaged in municipal securities representative activities, other than retail sales. Those activities can include the solicitation of municipal bond business. Though someone employed by a broker-dealer is not prohibited from being an elected official of a municipality, there is no requirement that an MFP must be. Being employed by a broker-dealer dealing in municipal bonds and the MSRB simultaneously would be prohibited as a conflict of interest. LO 6.h

To achieve its goals, an inverse ETF uses A) arbitrage. B) preemptive rights. C) derivatives and debt. D) short selling.

c An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to the advantage of temporary imbalances between the ETF's net asset value and market price. LO 8.h

A registered representative (RR) correctly explains to a new customer who wants to learn about the tax and risk characteristics of collateralized mortgage obligations (CMOs) that the securities are A) tax exempt in the states where the mortgages originated from and they subject holders to prepayment risk. B) tax exempt at the federal level and do not have fixed maturity dates. C) taxable at all levels and subject the holders to prepayment risk. D) taxable only in the state where the mortgages originated from and are backed by the federal government.

c CMOs are taxable at all levels. One of the primary risks of CMOs is prepayment of principal because they are backed by mortgage paper. If interest rates fall, mortgage holders will refinance paying off existing mortgages earlier than expected. LO 12.c

Which of the following statements regarding hedge funds is correct? A) Hedge funds are passively managed in an attempt to provide predictable returns for investors. B) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management. C) Hedge funds are usually structured as a partnership. D) Hedge funds are typically registered with the SEC as open-end investment companies.

c Hedge funds are usually structured as a partnership with the general partner as investment manager and the investors as limited partners. In general, hedge funds are exempt from registration with the SEC. Hedge funds are actively and aggressively managed, seeking superior returns—and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management. LO 12.a

A website maintained by a fund company shows that one of the company's mutual funds currently has a NAV of $9.50 and a public offering price (POP) of $10 per share. Your client sees this information and enters an order to make a $10,000 purchase. He asks you to calculate the number of shares he will be able to buy with today's investment. You would respond that A) based on the 5% sales charge, he will be receiving exactly 950 shares into his account immediately. B) based on the $9.50 NAV, he will be receiving exactly 1,052.63 shares into his account at the end of the day. C) it cannot be determined until after the order is processed by the fund at the next calculated (forward) price. D) based on the $10 POP, he will be receiving exactly 1,000 shares into his account immediately.

c Mutual funds use forward pricing, so the purchase or redemption price is never known until after the order is processed. This order will be executed at the next calculated POP. LO 8.c

You overhear the phone conversation of another registered representative discussing the purchase of exchange-traded fund (ETF) shares as opposed to mutual fund shares with a customer. The registered representative makes several statements, but one of them is incorrect. Which of the following is false? A) "I know that you like to sell short sometimes, which you can do with ETF shares." B) "Remember that you can't buy mutual fund shares on margin, but you can for ETF shares." C) "Just like mutual funds, ETFs use forward pricing, so when you place an order, it will be executed at the next calculated NAV for the fund." D) "Unless an ETF makes a capital gains distribution, you don't have to be concerned with tax consequences until you sell your shares."

c One of the advantages of ETF shares is that they can be purchased throughout the trading day, like all exchange-traded products. Mutual funds, on the other hand, use forward pricing, which must be done at least once per business day. ETF shares can be purchased on margin and sold short, and there are no tax consequences until the shares are sold unless the ETF makes a capital gain distribution (rare, but allowable). LO 8.h

Your 66-year-old customer invested $35,000 in a nonqualified variable annuity. It now has a value of $55,000, and your customer wishes to make a random withdrawal of $30,000. What is the tax liability that results if the customer is in the 28% tax bracket? A) $2,800 B) $7,600 C) $5,600 D) $8,400

c Partial or random liquidations of a variable annuity are taxed on a last-in, first-out (LIFO) basis, which means that the last dollars into the account, the earnings, are withdrawn first. Of the $30,000 withdrawn, $20,000 represents deferred earnings or income that is now taxable at the 28% rate (0.28 × $20,000 = $5,600). No penalty applies because the investor is older than age 59½. LO 9.d

The Achieving a Better Life Experience (ABLE) Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age A) 18. B) 21. C) 26. D) 50½.

c The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age 26. LO 6.g

The following information has been reported for ABC stock: Annual dividend = $2 PE ratio = 20 Closing price = $100 What is the dividend payout ratio? A) 20% B) 2% C) 40% D) 30%

c The dividend payout ratio is computed by dividing the dividend by the earnings per share ($2 ÷ $5 = 0.4, or 40%). LO 13.d

Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) they generally pay a higher interest rate than nonconvertible debentures. B) the conversion feature protects against an early call. C) although they trade in line with the issuer's common stock, they are less volatile than the common shares. D) it is generally best to convert when the common stock is selling below its parity price.

c The lower volatility of a convertible debenture stems from the fact that it has fixed interest payments and will be redeemed at maturity as any other bond or debenture would. No such guarantees apply to common stock. LO 1.b LO 5.c

An investor is long 300 shares of CTS stock and short 30 CTS May calls. This position can best be described as A) a credit spread with a limited gain potential. B) a debit spread with no gain potential. C) a ratio spread with an unlimited loss potential. D) a long stock, short call hedge with a limited loss potential.

c This position is a ratio call spread because more calls were sold (30) than the long stock position covers (only 300 shares). To cover 30 calls, 3,000 shares would be needed. This strategy generates additional premium income for the investor, but also it entails unlimited risk because of the short uncovered calls. LO 10.e

The IRS has determined that the NYNY real estate existing property limited partnership is abusive. The most likely reason would be because A) no net profit was generated after losses were taken. B) all of the assets were found to be rental properties. C) there was no viable profit motive. D) each partner received enough in losses to shelter all income.

c To qualify as a limited partnership direct participation program (DPP), above all else, there must be a viable chance to make a profit. Any DPP established without a profit motive or with the intention of only generating tax losses for investors may be determined abusive by the IRS subjecting the partners to penalties including prosecution for fraud. LO 11.g

A customer of your broker-dealer wants to grant his registered representative the right to make investment decisions for his account. This would be done by A) providing FINRA with the prescribed discretionary authorization form before the first discretionary trade. B) authorizing the registered representative to determine the price or time of the trade once the client has entered the order. C) providing the registered representative with the prescribed discretionary authorization form not later than settlement date of the first discretionary trade. D) providing the registered representative with the prescribed discretionary authorization form before the first discretionary trade.

d A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney. The limited power of attorney is the document that grants the registered representative the authorization to trade, and it is sometimes known as the trading authorization. LO 2.g

An hour ago, you entered a sell limit order for your customer in XYZ stock. Looking at a current quote, you could expect the order to have been executed if A) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is below the sell limit price. B) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is below the sell limit price. C) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is above the sell limit price. D) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price.

d A sell limit order sets the minimum price an investor will accept. The order should have been executed if the current bid price is higher than the sell limit or the last reported price in the stock is higher than the sell limit. LO 16.a

Your customer, who lives in State A, is in the highest federal and state income tax bracket. She is considering purchasing some State B municipal bonds with an Aa rating for her portfolio. You correctly explain that municipal bonds generally pay A) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their capital gains. B) higher interest rates than corporate issuers of the same quality and maturity, but this is offset by the more favorable tax treatment of the interest. C) lower interest rates than corporate issuers of the same quality and maturity because the interest is tax free on a state, local, and federal level. D) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their interest.

d As a result of the tax-advantaged status of municipal bond interest (tax free on the federal basis; sometimes tax free on the state and local basis), municipalities generally pay lower interest rates than corporate issuers when the bonds are of similar quality and maturity. The interest on State B bonds will not be free of taxation on the state and local level in State A—the exemption only applies to residents of State B. Because the interest is tax free, these bonds are more suitable for those in higher tax brackets. LO 6.f

Upon assignment, the writer of an exchange listed equity call option must A) deliver the underlying stock to sell within one business day. B) pay for the underlying stock to buy within one business day. C) pay for the underlying stock to buy within two business days. D) deliver the underlying stock to sell within two business days.

d Assignment of an equity call option requires the assigned party to deliver the underlying stock. This is treated the same as any other sale of stock. Regular way delivery is two business days after the trade date. In the case of assignment, the trade date is the assignment date. LO 10.b

A registered representative (RR) is recommending to his client a newly issued debt security backed by the U.S. government with a maturity of seven years. This security is most likely A) a Treasury bond. B) a GNMA pass-through security. C) a guaranteed note. D) a Treasury note.

d Backed by the U.S. government, Treasury notes are intermediate-term bonds maturing in 2-10 years. T-bonds have longer maturities, and maturities on GNMA pass-through securities generally run 15 or 30 years. When the term guaranteed is used as an adjective, it refers to a security whose principal and interest, or dividends if equity, is guaranteed by someone other than the issuer. It is not used in reference to Treasury issues because the issuer is the guarantor. LO 7.c

XYZ County Sewer Revenue 6.5% municipal bonds mature in 20 years. If they are currently offered at 92, they have a yield to maturity of approximately A) 6.23%. B) 6.50%. C) 5.96%. D) 7.19%.

d Because this bond has a nominal yield of 6.5% and is selling at a discount (92), the yield to maturity has to be greater than 6.5%. Remember: price down, yield up. LO 6.e

An investor has purchased American depositary receipts (ADRs) to achieve portfolio diversification. Holding the ADRs in a portfolio entitles the investor to dividends paid in A) the foreign currency and the ability to trade ADRs on U.S. securities markets. B) U.S. dollars and the ability to trade ADRs on foreign markets. C) the foreign currency and the ability to trade ADRs on foreign markets. D) U.S. dollars and the ability to trade ADRs on U.S. securities markets.

d Dividends on ADRs are declared in the foreign currency, and are paid to investors in U.S. dollars. This is why ADR investors bear currency risk. ADRs trade on U.S. markets, either on an exchange or OTC. LO 3.g

A registered representative is the subject of a disciplinary action that results in a fine and a 60-day suspension of registration. During the 60-day suspension period, the registered representative may A) only perform clerical or administrative functions for the member. B) be paid for business that they refer to other registered representatives while serving the suspension. C) only perform investment advisory services. D) be paid for business generated before the suspension date.

d During a period of suspension of registration, the individual may not perform any duties for the broker-dealer, whether they require registration or not. They may not be paid for business referred to other registered personnel, but they may receive commissions for business placed before the date of the suspension. LO 18.d

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A) brokers acting as agents in all order execution scenarios. B) brokers executing orders as agents in an auction market on any exchange trading floors. C) trades in NYSE-listed securities occurring on the NYSE. D) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.

d FINRA's TRF is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent. LO 17.b

A customer opens a new margin account and immediately purchases 200 shares of XYZ stock, which is trading at $9 per share. The customer must deposit A) $900. B) $2,000. C) $450. D) $1,800.

d If the first trade in a long margin account is less than $2,000, the customer must deposit 100% of the purchase price. LO 16.d

Which of the following is an interest-bearing instrument? A) Zero-coupon bond B) Commercial paper C) Treasury bill D) Jumbo CD

d Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing. LO 4.c

A customer wishing to open a numbered account must be informed that A) he must supply proof of U.S. citizenship and reside permanently in the United States. B) the account may only be opened with prior permission from the SEC. C) numbered accounts are restricted to cash accounts. D) he must supply a written statement attesting to his ownership of the account.

d Numbered—or symbol—accounts require that a written statement, which is signed by the client and acknowledges ownership, be kept on file. LO 2.g

Investors who are subject to AMT must have which of the following preference items added to adjusted gross income to calculate their tax liability? A) Interest on a municipal bond issued to finance highway construction B) Distributions from a corporate bond mutual fund C) Income from a municipal security issued to finance parking garages D) Interest on a private purpose municipal bond

d On the exam, whenever you see a private purpose municipal bond, the interest on the bond is a tax preference item for the purpose of the alternative minimum tax. LO 6.f

ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced? A) Buy 100 ABC at 50 stop. B) Sell 100 ABC at 50. C) Buy 100 ABC at the market. D) Sell 100 ABC at 45 stop.

d Orders that are entered below current market value would be reduced unless do not reduce (DNR) instructions are received. Those orders are buy limits, sell stops (BLiSS) orders. These orders are reduced by the amount of the dividend on the ex-dividend date for a cash dividend distribution. LO 16.a

A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income? A) An oil and gas income program B) An equipment leasing program C) A government-assisted housing program D) An oil and gas exploratory program

d Passive income may be offset by passive losses. Of the programs listed, the one most likely to have significant losses, particularly in the early years, is an exploratory or wildcat drilling program. LO 11.f

With respect to elective deferrals, a 403(b) plan must meet the requirements of the universal availability rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer's employees must be given the opportunity to participate. Certain employees may be excluded, including A) any substitute teacher. B) individuals not contributing to an IRA. C) employees who normally work less than 1,200 hours per year. D) employees who normally work less than 20 hours per week.

d The IRS considers 20 hours per week to be equivalent to 1,000 hours per year (where mandatory eligibility begins). Working less than that allows the employer to exclude the employee from participation. Although most substitute teachers are likely to fall short of the 1,000 hours per year, any who meet that requirement must be given eligibility. Contributing to an IRA has nothing to do with plan eligibility. LO 1.i

Under the Investment Company Act of 1940, the term investment company would include A) a variable annuity and a closed-end management company. B) a holding company and a management company. C) a unit investment trust and a holding company. D) a unit investment trust and a management company.

d The Investment Company Act of 1940 categorizes investment companies as either face amount certificate companies, unit investment trusts, or management companies (open or closed end). The separate account of a variable annuity is characterized as an investment company, but the actual annuity is not. LO 8.a

A customer has $10,000 of capital losses and $2,000 of capital gains in her portfolio this year. The tax consequences would be A) a $3,000 loss deduction with no loss carried forward. B) a $8,000 loss deduction in the current year. C) a $10,000 loss deduction in the current year. D) a $3,000 loss deduction with a $5,000 loss carried forward.

d The customer's net tax consequence is a loss of $8,000. Each year, individuals are permitted to deduct $3,000 in losses from their income, and any excess may be carried over to the following year. In this case, after the $3,000 deduction, the excess carried over to the following year would be $5,000. LO 3.i

Which items would change if a company buys equipment for cash? The working capital The total assets The total liabilities The shareholders' equity A) I and II B) II and IV C) IV only D) I only

d The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity. LO 13.d

One of your customers is exploring the possibility of investing in a limited partnership (LP). To start the conversation, you think it would be wise to caution about what is generally considered to be one of the biggest disadvantages, which is A) the flow-through of income. Therefore, investors owning units in the limited partnership may not be able to locate buyers. B) the flow-through of certain expenses and losses. C) having an investment managed by general partners. D) lack of liquidity.

d The greatest disadvantage to LPs is their lack of liquidity. The secondary market for LP interests is extremely small. Therefore, investors owning units in the limited partnership may not be able to locate buyers. The flow-through of income, losses, and expenses are considered advantages as the income can be sheltered by the expenses and losses. Having the investment managed by others is also considered an advantage, relieving the LPs from day-to-day operations and liability. LO 11.c

While looking at a report of trades that had been executed for your customers in the secondary market, you would not see included A) American depositary receipts (ADRs). B) municipal bonds. C) agency securities. D) mutual fund shares.

d There is no secondary trading market for mutual funds. All purchases and redemptions are done through the issuer or underwriter. All shares sold are newly issued shares (primary market). LO 8.c

The item that is not true when you read a bond quote of 6.5s of 29 at 99 is A) the bond is trading at a 1-point discount. B) if traded at this price, the yield to maturity rather than the yield to call would be shown on the confirmation. C) the bond matures in 2029. D) if the price quote was changed to a basis quote, the yield would be less than 6.5%.

d This bond is trading at a discount of 1 point ($10); therefore, a basis quote, which is the bond's yield to maturity, will be greater than the 6.5% coupon, not less than 6.5%. YTC is only shown when it produces the lowest yield. That would never be the case with a bond traded at a discount. LO 6.a

With the underlying stock at $37, an ABC Jan 35 call is trading at $2. All of the following statements regarding the option are true except A) it is trading at breakeven. B) it is at parity. C) it is in the money. D) it has time value.

d This option is at parity or breakeven, which occurs when the premium equals the in-the-money amount. An option trading at parity has no time value. When an option has no time value remaining, it is very near or at the moment of expiration. LO 10.c

In describing warrants to an investor who has just received them, you could characterize them in all of the following ways except A) they can be sold in the secondary market instead of being exercised. B) they do not represent ownership, so they do not offer voting rights to the holder. C) they are issued by the same corporation that issued the debt instrument they are attached to. D) they are short-term securities with a strike price less than the current market value of the stock.

d Warrants are corporate issues typically attached to debt offerings as a sweetener. They generally have a life of two to five years and are therefore considered long-term, giving the holder the right to purchase shares in the future at a price that is usually higher than the price of the shares when the warrants were first issued. Warrant holders have no voting rights. LO 3.f

XYZ Corporation declares a 4-for-3 stock split. An investor long 600 shares will receive how many additional shares? A) 800 shares B) 100 shares C) 300 shares D) 200 shares

d With a 4-for-3 split, the investor will receive additional shares equal to one-third of the current holdings. For every three shares held, an investor receives a fourth share. The investor will now have 800 shares, but the question is only asking about the additional shares, not the total. LO 3.b

To meet the initial Regulation T call in a margin account, a customer could deposit A) 50% of the call in cash. B) 50% of the call in fully paid-for marginable securities. C) 100% of the call in fully paid-for marginable securities. D) 200% of the call in fully paid-for marginable securities.

d With a loan value of 50%, delivering fully paid-for marginable securities in an amount twice the required cash call enables the brokerage firm to lend the client cash sufficient to meet the required call. LO 16.d

Your client asks you to explain a not-held order. You could correctly explain that a not-held order A) can only be done in a discretionary account. B) can be filled only on the last trade of the day. C) must be executed immediately and in its entirety. D) gives time or price discretion to the floor broker.

d With a not-held order, the customer gives the firm's time or price broker the discretion as to time or price. Remember, however, that time and price alone do not require the order to be done in a discretionary account. LO 16.a