Series 7 QBank Review Set 7

A municipal firm acts in an agency capacity to execute a purchase order for a customer. All of the following are required to be on the customer's confirmation of purchase except A) the identity of the contra broker. B) the settlement date. C) a description of the securities. D) the capacity of the broker-dealer.

A the identity of the contra broker. The identity of the contra party (the other side of the trade) is not necessary, as long as it is stated that the name is available upon request.

On March 1, 2023, an individual, age 40, wants to open and fund a Roth IRA at the maximum permitted level. She earns less than the adjusted gross income level, which would limit her contribution. What is the maximum amount she may place in a new Roth IRA? A) $12,500 B) $6,000 C) $6,500 D) $13,000

A) $12,500 Based on her age (less than 50), her maximum contribution would be $12,500, specified as $6,000 for 2022 and $6,500 for 2023. Because she is opening the account on March 1, she would be permitted to make contributions for the prior tax year (up until the April 15 tax filing deadline), as well as for the current tax year.

Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond? A) 2:1 B) 3:1 C) 7.5:1 D) 1:1

A) 2:1 Generally, a sound debt service (interest and principal) coverage ratio for municipal revenue bonds is 2:1. In other words, $2 of revenue is collected for every $1 of debt service.

If a business owner's goal is to establish an entity that features ease in raising capital and limits personal liability, which of these entities is the most appropriate? A) A limited liability company (LLC) B) A general partnership C) A sole proprietorship D) An S form of corporation

A) A limited liability company (LLC) If a business owner's goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien. The sole proprietorship and general partnership carry unlimited personal liability.

Which of the following terms is used in connection with a municipal securities underwriting? A) Agreement among underwriters B) In registration C) Cooling-off period D) Effective date

A) Agreement among underwriters The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. Cooling-off period, registration period, and effective date are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements.

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) First in, first out (FIFO) B) Identified shares C) Wash sale rules D) Last in, first out (LIFO)

A) First in, first out (FIFO) When a customer does not choose a method, the IRS uses FIFO. This will likely result redeeming shares with the lowest cost basis first, which creates a greater taxable gain.

Regulations regarding how contributions are made to tax-qualified plans relate to which of the following ERISA requirements? A) Funding policy B) Reporting and disclosure C) Nondiscrimination D) Vesting

A) Funding policy The funding policy covers how an employer contributes to, or funds, a retirement plan.

Which of the following types of mutual funds has capital appreciation as its investment objective? A) Specialized B) Municipal bond C) Income D) Balanced

A) Specialized An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.

Which of the following investment company portfolios is supervised rather than managed? A) Unit investment trust B) Regulated open-end fund C) Real estate investment trust D) Closed-end bond fund

A) Unit investment trust A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A real estate investment trust is not considered an investment company.

The term wildcatting refers to A) drilling for oil or gas where none has occurred previously. B) small-cap mutual fund diversification. C) limiting your investment portfolio to initial public offerings. D) buying new-construction real estate for speculative appreciation value.

A) drilling for oil or gas where none has occurred previously. In an oil and gas drilling program, the term wildcatting is used to describe the most speculative type of program, which is drilling where none has occurred before (i.e., in an unproven location). This is the riskiest of the oil and gas programs.

Individuals with diversified stock holdings in their portfolios write covered calls to A) increase their rate of return on the stocks held in their portfolio. B) increase the number of shares they own. C) lock in profits. D) benefit from share price increases.

A) increase their rate of return on the stocks held in their portfolio. Covered call writing is frequently used by persons who own the underlying stock to increase the rate of return. If the options expire unexercised, the writer keeps the premium, which provides additional portfolio income.

One of the benefits of using arbitration to settle disputes between member firms is that it A) is relatively inexpensive. B) gives more time to prepare arguments. C) does not allow for arguments from parties outside the industry. D) is not binding on both parties.

A) is relatively inexpensive. Arbitration is a method for settling disputes between member firms that is less costly than litigation. In addition, all decisions are final and binding on all parties.

If a customer wants to open an account in the name of her adult son and wants the account to be approved for uncovered option writing, her request should be refused because A) opening an account for a third party is prohibited without the consent of that party. B) discretionary authorization may not be granted with respect to writing uncovered options. C) uncovered options can only be written in margin accounts. D) writing uncovered options is not suitable for minors.

A) opening an account for a third party is prohibited without the consent of that party. An adult cannot open an account and name another adult as the beneficial owner unless approval is granted by that adult. The type of option trades and the third party's investment experience are not relevant. Furthermore, the child is an adult, not a minor, and we have no suitability information.

A) paying the preferred shareholders a dividend of $0.75 per share. B) paying the preferred shareholders a dividend of $4.50 per share. C) an affirmative vote of the common shareholders. D) paying the preferred shareholders a dividend of $3.75 per share.

A) paying the preferred shareholders a dividend of $0.75 per share. A corporation cannot pay a dividend to its common shareholders without satisfying the dividend requirements of any outstanding preferred stock. NMC has a 6% $50 par preferred. The annual dividend requirement (if declared) is $3 per share. That is $0.75 per quarter. On the exam, all dividends are paid quarterly unless stated otherwise. Once that dividend is paid to the preferred, the declared dividend can be paid to the common. But, the question tells us that NMC has not paid preferred dividends for more than one year (five quarters). What about those skipped dividends? This preferred stock is callable, not cumulative. Be careful to read the question. Shareholders do not vote on cash dividend payments. That decision is made by the company's board of directors.

When investing in a RELP (real estate limited partnership), it is generally agreed that the highest risk is a RELP consisting of A) raw land. B) existing residential apartments. C) historic structures. D) new construction.

A) raw land. Because there is no income and the potential of a long wait, most consider raw land to be the riskiest of the real estate limited partnership programs.

A) $10 million @ 6% due in 20 years, callable at par B) $15 million @ 8% due in 10 years, callable at 101 C) $25 million @ 5% due in 5 years, callable at 104 D) $30 million @ 12% due in 15 years, non-callable

B) $15 million @ 8% due in 10 years, callable at 101 Any savings in interest payments would be more than offset by the price the company would have to pay to buy the bond in the open market. The next highest interest rate is 8% and that bond will cost us a slight premium of $10 per bond to call. Although the 6% bond is callable at par, the company would be far better off removing an 8% debt than one at 6%. In fact, the 1 point call premium is saved after the first semiannual interest payment. A partial call, calling in $10 million of the 8% bond, should be the recommendation.

A) $10 million @ 6% due in 20 years, callable at par B) $15 million @ 8% due in 10 years, callable at 101 C) $25 million @ 5% due in 5 years, callable at 104 D) $30 million @ 12% due in 15 years, non-callable

B) $15 million @ 8% due in 10 years, callable at 101 Anytime we have extra cash, it can make sense to pay off debt. Corporations feel the same way. When it comes to deciding which debt to repay, the wisest move is to pay down the debt with the highest interest cost. In this case, that would be the 12% bond. However, that bond is non-callable. Based on the inverse relationship between interest rates and bond prices, the 12% bond is going to be selling at a higher price than any of the others.

You have just received a statement of claim from the director of arbitration. One of your customers is claiming that your failure to follow his instructions led to a loss of $36,000. Under FINRA rules, you must respond within A) 60 days. B) 45 days. C) the business day the claim was received. D) 24 business hours.

B) 45 days. Under the Code of Arbitration Procedure, a respondent has 45 days to respond to both the director and the claimant.

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

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

C) the employing member firm must be notified, in writing, of the intent to open the account. D) the employee must receive prior written permission from the employing member firm.

B) FINRA must receive duplicate statements and confirmations for each transaction. Under FINRA rules, the employing member must be notified, in writing, of the prospective account and must give prior written approval before the account can be opened. It must be provided with duplicate statements and confirmations only if it makes a written request. There is no requirement that FINRA be either notified or provided with duplicate statements and confirmations.

Which of the following statements regarding a bond trading flat is not true? A) It may have interest in arrears. B) It may be traded with accrued interest. C) It may be an income bond. D) It may be a bond in default.

B) It may be traded with accrued interest. A municipal or corporate bond trading flat is trading without accrued interest. The bond may be an income bond, which normally pays no interest, or it may be a bond currently paying no interest because it is in default.

Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk? A) Companion B) PACs C) Z-tranche D) TACs

B) PACs PACs have targeted maturity dates. They are retired first, and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) because changes in prepayments are transferred to companion tranches, also called support tranches.

C) The number of contracts owned will increase by 10%, and the strike price is reduced. D) The number of contracts owned will increase by 10%, and the strike price stays the same.

B) The number of contracts owned will stay the same, and the strike price will be reduced. When adjusting options contracts for stock dividends and fractional splits, the number of contracts held will not change. The number of shares covered by each contract is increased (100 shares × 110%) so that in this example each adjusted contract now represents 110 shares. The effective exercise price is adjusted so that the position value remains the same before and after the adjustment. The original contract controls $4,000 of stock (100 shares × $40 strike price). Therefore the new strike price will be reduced. Here is the new contract: 1 ABC July 36.36 call (110 shares per contract). This contract controls $4,000 of stock.

Which of the following statements best describes the effect of reinvesting mutual fund distributions? A) Capital gains that are reinvested have tax-deferred status. B) The reinvestment of capital gains and dividends results in a higher cost basis. C) Dividends from investment income that are reinvested have tax-deferred status. D) The reinvestment of capital gains and dividends has no effect on cost basis.

B) The reinvestment of capital gains and dividends results in a higher cost basis. Because reinvested distributions are taxed in the year received, the investor's cost basis is increased by the amount of the distribution. This is to prevent those distributions from being taxed twice. They are taxed once as the dividend or capital gain and then, if not added to the cost basis, would be taxed a second time when the shares are sold. Reinvestment of these distributions does not avoid or defer current taxation. This is not the same as receiving a stock dividend where the taxes are deferred until those shares are sold.

Which of the following statements regarding TRACE is correct? A) TRACE-eligible securities include corporate bonds but exclude U.S. government and agency securities. B) To ensure proper audit trail requirements, trades are reported by both sides of the transaction. C) Municipal securities that are TRACE-eligible must report within 15 minutes of execution. D) The participant representing the selling side of the transaction reports within 5 minutes of trade execution.

B) To ensure proper audit trail requirements, trades are reported by both sides of the transaction. The Trade Reporting and Compliance Engine (TRACE) requires both the reporting party as buyer and the reporting party as seller to enter the trade information into the system. This is done to ensure that a proper audit trail is established for the entry. TRACE-eligible securities include corporate bonds, treasury securities and CMOs, but do not include municipal securities. During market hours, trades are reported within 15 minutes of execution.

An instrument that illustrates the transfer of title to any dividend, interest, or right that pertains to securities that are contracted for is called A) a power of attorney. B) a due bill. C) a right. D) a warrant.

B) a due bill. A due bill is an assignment of a forthcoming distribution from the seller to the new owner.

After a company splits its stock 2 for 1, an investor who owns 100 shares receives A) notice that the investor's 100-share certificate now represents 200 shares. B) another certificate for 100 shares. C) another certificate for 200 shares. D) notice to send in the current certificate to be replaced by a new certificate for 200 shares.

B) another certificate for 100 shares. After a 2-for-1 split, the transfer agent will send the investor another certificate for 100 shares. The investor is not required to return the existing stock certificate.

The market attitude of a customer who establishes a debit put spread is A) neutral. B) bearish. C) bullish. D) speculative.

B) bearish. In a put spread, a customer is buying one put and selling another with different strike prices and/or expirations. In any spread, one of the options is dominant. In a long put spread, the long put position is dominant because it has the higher premium. Buying puts is bearish.

A customer establishes the following positions: Long 1 ABC Jun 25 call at 2 Long 1 ABC Jun 25 put at 2 At expiration, the position is profitable if the stock price is A) above 25 or below 25. B) below 21 or above 29. C) above 21 or below 29. D) greater than 21.

B) below 21 or above 29.

If a chart indicates that both the Dow Jones Industrial Average and the advance/decline line have been increasing since January, and the advance/decline line continues to rise, the market should A) turn down sharply. B) continue to rise. C) not change. D) turn down moderately.

B) continue to rise. A rising advance/decline line indicates that more stocks are rising in price than falling. A rising advance/decline line is a bullish indicator.

Each of the following is affected by the sale of securities in a restricted margin account except A) SMA. B) equity. C) market value. D) debit balance.

B) equity. When securities in a margin account are sold, the market value in the account will decline, the debit balance will be reduced by the cash proceeds, and SMA will increase by 50% of the sale. Equity in the account will not be affected unless the customer decides to withdraw some of the proceeds through the use of SMA.

Prime brokerage accounts are most often used by A) broker-dealers. B) institutions. C) investment advisers. D) investment bankers.

B) institutions. Although any of these could use prime brokerage accounts, their primary users are institutional investors.

A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as A) exempt from taxes. B) part earnings and part cost basis. C) earnings only and taxable. D) all return of cost basis and nontaxable.

B) part earnings and part cost basis. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free.

The 5% markup policy applies to A) new issues. B) principal over-the-counter (OTC) trades. C) mutual funds. D) all of these.

B) principal over-the-counter (OTC) trades. The 5% markup policy applies to agency and principal nonexempt securities and transactions, both exchange and OTC traded. It does not apply to prospectus offerings (mutual funds and new issues).

A) used the LIFO method. B) sold the shares purchased in June at $55 and the shares purchased in April at $52. C) used the average cost basis. D) used the FIFO method.

B) sold the shares purchased in June at $55 and the shares purchased in April at $52. By using the identified cost method, the investor would sell the highest cost purchases. This would result in the lowest taxable gain (or perhaps even a loss). Average cost is only available for mutual funds.

All of the following are expenses to the operation of mutual funds except A) the custodian bank's charges. B) the compensation paid to the underwriter or distributor. C) the fees paid to the fund's investment adviser. D) the legal costs of SEC filings.

B) the compensation paid to the underwriter or distributor. The underwriters receive their compensation from the sales charges. Investors pay those charges rather than the fund itself.

Keeping an orderly trading market on the floor of the New York Stock Exchange (NYSE) is the responsibility of A) the designated floor broker (DFB). B) the designated market maker (DMM). C) the NYSE. D) the primary market maker (PMM).

B) the designated market maker (DMM). The designated market maker has the responsibility of keeping an orderly market on the floor of the NYSE. Sometimes the DMM acts as an agent and other times as a principal.

The bond placement ratio, as shown in The Bond Buyer, is computed by taking A) the number of new issues unsold divided by the number of new issues offered. B) the dollar value of new issues sold divided by the dollar amount of the new issues available. C) the dollar amount of new issues sold divided by the dollar amount of new issues placed. D) the number of new issues divided by the 30-day visible supply.

B) the dollar value of new issues sold divided by the dollar amount of the new issues available. The bond placement ratio is the percentage of new municipal bonds offered last week that were sold last week. Although not a term you'll see on the exam, think of this as the success ratio. It reports how well the underwriters did in moving the week's new issues. For example, if $1 billion of bonds were offered during the week, and $700 million were placed (sold), that is a 70% placement ratio.

In a municipal underwriting, the interest cost calculation discounts future interest payments to arrive at present value. This interest cost calculation method is A) the relative interest cost. B) the true interest cost. C) the simple interest cost. D) the net interest cost.

B) the true interest cost. When an issuer discounts future interest payments to arrive at present value, the interest cost method being used is the true interest cost. This method takes into consideration the time value of money.

C) the holder of the COP participates in lease or loan payments from a specific piece of equipment or facility purchased or built by the municipality. D) the holder of a COP could foreclose on the asset generating the revenue in the case of default.

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

An investor interested in acquiring a convertible bond as part of her investment portfolio would A) be interested in tax advantages available to convertible debt securities. B) want the safety of a fixed-income investment along with potential capital appreciation. C) seek to minimize changes in the bond price during periods of steady interest rates. D) want the assurance of a guaranteed dividend on the underlying common stock.

B) want the safety of a fixed-income investment along with potential capital appreciation. An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities.

The terms of the syndicate agreement call for a total takedown of seven-eighths of a point with a selling concession of five-eighths of a point. A selling group member who sells 250 of the bonds will earn A) $1,450.00. B) $625.00 C) $1,562.50. D) $2,187.50.

C) $1,562.50. When a member of the selling group sells a security, it is entitled to the selling concession. That is five-eighths of a point or $6.25 per bond. The computation is as follows: 250 bonds sold $6.25 per bond = $1,562.50 in commissions. Remember that the total takedown of seven-eighths ($8.75) would only go to those who are members of the syndicate and make the sale. Did you notice how much extraneous information is in this question?

ADJ Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. How many shares of common stock are currently outstanding? A) 6 million shares B) 9 million shares C) 4 million shares D) 5 million shares

C) 4 million shares Shares outstanding are those that are in the hands of the public. To determine the number of outstanding shares, take the number issued minus the number in the treasury. In this question, that is 5 million minus 1 million equals 4 million. If, at a later time, ADJ should decide to issue some of the authorized but unissued shares, the number of outstanding shares will obviously increase. The same would happen if the company sold some of the treasury stock in the open market or used it to pay stock dividends to current shareholders.

Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will not affect NAV? A) The fund paying dividends to its shareholders B) The fund receiving cash dividends on the securities in its portfolio C) Fund shares being redeemed by the fund upon the request of shareholders D) The value of the fund portfolio's securities fluctuating

C) Fund shares being redeemed by the fund upon the request of shareholders Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. Although share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.

Which of the following orders would be executed in a rising market? i. Buy stops ii. Buy limits iii. Sell limits iv. Sell stops A) II and III B) I and IV C) I and III D) I and IV

C) I and III Buy limits and sell stops are entered below the current market and would be executed if the market were falling. Sell limits and buy stops are entered above the current market and would be executed if the market were rising.

A) I and III B) II and IV C) I and IV D) II and III

C) I and IV If a covered call writer is exercised, cost basis (for tax purposes) is the cost of stock purchased. Sales proceeds are adjusted (strike price plus premium) to reflect the premium received.

A) I and IV B)II and III C) II and IV D) I and III

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

C) When a registered representative leaves a firm, the representative and firm must file a Form U5 within 30 days. D) Form U4 must be amended within 10 days of learning of a statutory disqualifying event.

C) When a registered representative leaves a firm, the representative and firm must file a Form U5 within 30 days. The firm, not the representative, must file Form U5 within 30 days. Any changes to Form U4 must be made promptly. Form U4 must be amended within 10 days of learning of a statutory disqualifying event. For all other types of amendments, Form U4 must be updated no later than 30 days after learning of facts or circumstances that prompt an update. The records (including fingerprint cards and application forms) of an associated person who has terminated employment must be kept for three years.

Regarding the sale of a new issue, a customer becomes a restricted person if he is A) the grandfather of an associated person of a member firm. B) a salesperson who works for a supplier of the issuing corporation. C) a salesperson who works for the issuing firm's underwriter. D) a private investigator collecting information on one of the issuing firm's officers.

C) a salesperson who works for the issuing firm's underwriter. Restricted persons include FINRA member firms and their associated persons, plus immediate family members.

All of the following are oil and gas program sharing arrangements except A) disproportionate sharing. B) reversionary working interest. C) all-or-none underwriting arrangement. D) functional allocation.

C) all-or-none underwriting arrangement. Functional allocation, disproportionate sharing, and reversionary working interest are all types of oil and gas sharing arrangements. All or none is a type of best efforts underwriting agreement.

A) it is past the statute of limitations of three years from the discovery of the event. B) it is barely within the statute of limitations of four years from the discovery of the event. C) it is past the statute of limitations of six years from the date of the event. D) a claim may be made only if the customer signed a pre-dispute arbitration agreement.

C) it is past the statute of limitations of six years from the date of the event. Under the Code of Arbitration Procedure, no claim is eligible for submission to arbitration if six years or more have elapsed from the time of the event giving rise to the claim. The pre-dispute agreement protects the member firm in that the customer's only remedy is arbitration. If not signed, the customer has the choice of arbitration or the courts.

A) it is under the de minimus $250,000 for arbitration and must be disputed by mediation. B) it is past the time limitation of three years from the discovery of the event. C) it is past the time limitation of six years from the date of the event. D) a claim may be made only if the customer signed a pre-dispute arbitration agreement.

C) it is past the time limitation of six years from the date of the event. Under the Code of Arbitration Procedure, no claim is eligible for submission to arbitration if six years or more have elapsed from the time of the event giving rise to the claim.

All of the following about a good faith deposit on a municipal bond underwriting are correct except A) it is returned to the unsuccessful bidders. B) it is applied against winning bidder's payment for the issue. C) it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds. D) it is lost if the syndicate fails to carry out the provisions of the underwriting agreement.

C) it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the bonds. In a municipal bond underwriting, the good faith deposit is submitted by a potential syndicate as earnest money. If the syndicate is not awarded the issue, the check is returned. If the syndicate is awarded the issue, the money is applied against the payment. However, if the syndicate fails to carry out the provisions of the underwriting, the money is retained by the issuer. If you have ever bought or sold a house, this is comparable to the earnest money deposit turned in by the buyer with the offer.

During a period of sustained low interest rates, many investors, particularly institutions, look to increase their return through alternative debt investments. Examples of those would include all of the following except A) private placement debt. B) equity-linked notes. C) leveraged ETFs. D) exchange-traded notes.

C) leveraged ETFs. Although leveraged ETFs (exchange-traded funds) are certainly an alternative investment, they represent an equity investment rather than debt. Despite the misleading name, equity-linked notes are, in fact, debt instruments.

All of the following would be included in a penny stock risk disclosure statement except A) the risks of investing in penny stock. B) investors' legal rights. C) the broker-dealer's statement of guarantee. D) the definition of penny stock.

C) the broker-dealer's statement of guarantee. Penny stock disclosure statements must be furnished to all buyers of unlisted, non-Nasdaq stocks of less than $5 per share. The disclosure must include the risks of penny stock investing, the rights of the investors, and the responsibilities of the broker-dealer to the investor. There would be no statements—either implied or expressly written—regarding guarantees.

One of your clients frequently enters unsolicited orders to purchase penny stocks. This means A) as an unsolicited order, the client is exempt from the compensation disclosure requirements. B) the client must sign and return the penny stock suitability statement. C) the client receives monthly statements. D) the client must be given a copy of the risk disclosure document prior to each trade.

C) the client receives monthly statements. Once a client's account contains penny stocks, monthly account statements are required. The penny stock suitability statement is not required when the order is unsolicited. That statement is required only when a penny stock purchase is due to a recommendation. The risk disclosure document is required before the first trade only. Even when the order is unsolicited, the compensation earned by the member firm and the registered representative must be disclosed.

If the customers of a selling group member sell into a penalty stabilizing bid, the selling group member must pay back to the underwriter A) the give up. B) the spread. C) the concession. D) the reallowance.

C) the concession. If selling group members liquidate into the stabilizing bid, they may be required to return the concession they were originally paid.

If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is A) the original cost of the stock adjusted for any estate taxes paid. B) the market value at date of distribution to the customer. C) the market value at date of death. D) the original cost of the stock.

C) the market value at date of death. When securities are inherited, the heir receives a cost basis calculated as of the deceased party's date of death.

C) the point at which the program begins to generate taxable income instead of losses, which generally occurs in later years. D) the point at which the program begins to generate taxable income instead of losses, which generally occurs quickly if not in the very first year.

C) the point at which the program begins to generate taxable income instead of losses, which generally occurs in later years. The crossover point is the point at which the program begins to generate taxable income instead of losses. This generally occurs in later years when income increases and deductions decrease. Most partnerships are scheduled to end at or near to the crossover point because of the diminished tax advantages.

All of the following events will affect the net asset value (NAV) per share of a mutual fund except A) the fund receives cash dividends on the securities in its portfolio. B) changes in the market value of the fund's portfolio of securities. C) wholesale redemption of fund shares. D) the fund pays dividends to its shareholders.

C) wholesale redemption of fund shares. Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. While share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.

A customer has a $10,000 debit balance. What is the maximum value of her securities that the broker-dealer can hypothecate? A) $2,500 B) $10,000 C) $5,000 D) $14,000

D) $14,000 The broker-dealer can hypothecate 140% of the customer's outstanding balance.

If a customer went long 10 Swiss franc puts (10,000 SF per contract) for a premium of 5.25 each, how much can the client lose on the total position of 10 contracts? A) $525.00 B) $781.25 C) $1,250.00 D) $5,250.00

D) $5,250.00 When long an option contract, the maximum loss is the amount paid. Because the premium is in cents, multiply the figures to determine the total dollar amount ($0.0525 × 10,000 × 10 contracts = $5,250).

D) CDOs always represent pools of assets that individually are very liquid, and that is why the CDOs themselves are very liquid.

D) CDOs always represent pools of assets that individually are very liquid, and that is why the CDOs themselves are very liquid. In most cases, the assets comprising the CDO portfolio are small and individually not very liquid. Generally, individual investors would not have an opportunity to purchase these assets separately. Repackaging the assets, however, facilitates them being sold to individual investors in the secondary markets.

A municipal dollar bond is quoted at 98¼ to 98¾. The municipal dealer's spread is equal to i. $5.00 ii. $50.00 iii.5 basis points iv. 50 basis points A) I and III B) II and IV C) II and III D) I and IV

D) I and IV The spread is half a point. In each point, which is worth $10, there are 100 basis points. Therefore, half a point is worth $5 and represents 50 basis points.

Which of the following statements regarding Treasury receipts are true? i. Interest is paid annually. ii. Interest is paid at maturity. iii. Interest is taxed annually. iv. Interest is taxed at maturity. A) I and IV B) I and III C) II and IV D) II and III

D) II and III Treasury receipts are zero-coupon bonds issued by broker-dealers. Zero-coupon bonds pay all of their interest at maturity. They are issued at a discount and redeemed at par, and the difference represents the interest earned. For zeroes with a maturity of more than one year, the interest (or discount) must be accreted each year and is taxable that year as income. This is called imputed interest.

When a company issues additional preferred stock and bonds, which of the following will be the net result? A) Leverage is not affected because one issue is equity, the other is debt, and the net effect on leverage is zero. B) It is impossible to tell without the specific amounts of equity and debt issued. C) Leverage is decreased. D) Leverage is increased.

D) Leverage is increased. Leverage is the use of investors' money at a fixed cost to benefit the common shareholders. Both preferred stock and bonds are fixed-rate issues. Therefore, issuing more preferred stock or bonds increases the leverage of the common stockholders.

When determining whether a tax swap of municipal bonds will result in a wash sale, which of the following is not considered? A) Issuer B) Maturity C) Coupon D) Principal amount

D) Principal amount In judging whether bonds purchased are substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate. If at least two of the three are different, a wash sale will generally not result.

C) contributions to the Roth 401(k) are made with pre-tax funds while those to the Roth IRA are from post-tax funds. D) RMDs from the Roth 401(k) must begin at age 73 while there are no RMDs from the Roth IRA.

D) RMDs from the Roth 401(k) must begin at age 73 while there are no RMDs from the Roth IRA. It is only the Roth IRA where the participant never has RMDs. In both cases, contributions are with after-tax money and withdrawals are tax-free. Both have the catch-up provision, and it is $7,500 (for 2023) in the Roth 401(k) and $1,000 in the Roth IRA.

Which term describes the following position? i. Write 1 DOH Jan 30 call ii. Write 1 DOH Jan 40 put A) Diagonal spread B) Short straddle C) Price spread D) Short combination

D) Short combination A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security.

Which of the following regarding yield-based (interest rate) debt options is true? A) Their strike prices reflect dollar amounts. B) Debt securities are delivered to the contract owner when exercised. C) Calls are purchased by those who believe prices of debt securities are rising. D) They are European-style exercise.

D) They are European-style exercise. Yield-based debt options are European-style contracts, meaning that they can only be exercised on the last day of trading. All yield-based contracts, when exercised, are settled in cash. There is no delivery of debt instruments when these contracts are exercised. All strike prices reflect yield. (35 strike price represents 3.5% yield.) Yield-based options are a bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).

In compliance with the Securities Act of 1933, a prospectus is always required when selling interests in A) a closed-end investment company. B) U.S. Treasury securities. C) municipal bonds. D) a unit investment trust.

D) a unit investment trust. A unit investment trust has a one-time offering of its securities. After that, there is no public secondary market trading (the sponsor may engage in secondary trading solely to redeem units). Therefore, as a public offering of a new security, a prospectus is required when attempting to make a sale. Closed-end funds only require a prospectus on their initial offering. Once that is completed, all transactions are in the secondary market and no prospectus is used. Both municipal bonds and Treasury securities are exempt from the prospectus requirements of the Securities Act (although municipal bonds generally need an official statement).

A customer buys a newly issued municipal zero-coupon original issue discount bond for 85. If the bond is held until maturity, the tax consequence A) is $150 loss. B) cannot be calculated from the information given. C) is $150 gain. D) is $0.

D) is $0. Municipal original issue discount bonds must be accreted. At maturity, the entire discount will be accreted, and the cost basis will be equal to the par value. No gain or loss will occur at maturity.

Under Options Clearing Corporation (OCC) rules regarding options communications with the public, if an educational piece making no projected performance figures or recommendations is distributed to customers, it A) need not be approved by a registered options principal (ROP). B) can only be distributed to retail customers. C) can only be distributed to institutional customers. D) need not be preceded by an options disclosure document (ODD).

D) need not be preceded by an options disclosure document (ODD). OCC communications rules do not distinguish between retail and institutional customers. Therefore, their communications rules apply to all customers. All communications pieces must be approved by an ROP. If the educational piece makes no recommendations or performance projections, it need not be preceded by an ODD, but it must be accompanied by a notice containing a name and address where the ODD can be obtained.

An issuer of a bond will apply to the rating services for a rating for the purpose of A) reducing the bond's duration. B) reducing interest rate risk. C) reducing liquidity risk. D) reducing credit risk.

D) reducing credit risk. What does the bond rating measure? It is a measurement of the credit risk. The higher the rating, the lower the credit risk and the reverse. With lower credit risk, the issuer will be able to borrow at a lower interest cost. Does the rating have an effect on the bond's liquidity? Possibly, but as is so often on the exam, you must select the answer that best fits the question.

A couple opens a joint account with your firm. It is registered as JTWROS. If one of the couple passes away, FINRA rules require that account records be kept for a minimum of A) six years after the death of the initial person. B) three years after the death of the initial person. C) three years after the surviving person closes the account or passes away. D) six years after the surviving person closes the account or passes away.

D) six years after the surviving person closes the account or passes away. FINRA and MSRB rules require that customer account records be kept for at least six years after the account is closed. Because the assets in a JTWROS account remain intact after the death of a co-owner, the recordkeeping requirements extend until the account is finally closed. Even though, technically, the account is retitled in the name(s) of the surviving owner(s), the information from the original account is kept for that entire period.

When a limited partnership terminates, a limited partner's gain or loss is determined by comparing A) the total losses to the total income. B) the final proceeds to the original cost basis. C) the passive income to the passive losses. D) the final proceeds to the adjusted cost basis.

D) the final proceeds to the adjusted cost basis. Just as with the sale or liquidation of any asset, a gain or loss is determined by comparing the proceeds to the cost. In the case of a DPP, it is the adjusted cost basis that is used.

When an investor in a mutual fund elects to reinvest dividends into additional shares, the price paid is A) the public offering price POP) without a sales charge. B) the public offering price (POP) plus a sales charge. C) the net asset value per share (NAV) plus a sales charge. D) the net asset value per share (NAV).

D) the net asset value per share (NAV). For test purposes, all reinvestments of mutual fund dividends (and capital gains distributions) are at the NAV with no sales charge.

A) the process was eligible for simplified arbitration. B) the arbitration panel's decision would have been reached within 30 days of the hearing. C) either party to an arbitration case may insist on a full formal hearing. D) the process was not eligible for simplified arbitration.

D) the process was not eligible for simplified arbitration. Any small claim dispute involving a dollar amount of $50,000 or less is eligible for simplified arbitration. Both parties must agree to this procedure, or a formal hearing is required. Simplified arbitration rules require that a one-person panel would render a binding decision within 30 business days. Customers have the right to request a written explanation of why a claim was granted or denied, but the request for a written explanation must be made before the arbitration panel holds its first meeting.

A registered representative is convicted of misdemeanor DUI; therefore, A) this must be updated on the Form U4 within 30 days. B) the employing broker-dealer is likely to suspend the registered representative. C) this must be updated on the Form U4 within 10 days. D) updating of the Form U4 is not required.

D) updating of the Form U4 is not required. When the conviction is for a misdemeanor, only if it involves a financial matter is it considered a material event requiring an update to the Form U4. If this were a reportable offense, the updating would have to be done within 30 days. It would be highly unusual for a firm to discipline an associated person for this infraction. Even then, regulators are the ones who suspend a registration, not the member firm.

A customer, long 100 shares of ABC at 73, writes 1 ABC Apr 75 call at 2 to generate additional income. ABC stock subsequently moves higher, at which time, the customer is exercised. For tax purposes, which of the following statements are true? Cost basis is $73 per share Cost basis is $71 per share Sales proceeds are $75 per share Sales proceeds are $77 per share

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A retail customer of a FINRA member firm with a predispute arbitration agreement in place is seeking an action of $49,000 against the member firm. An award was made to the customer for $20,000. All of the following statements concerning this situation are true except

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A syndicate led by Monticello Securities, Inc., a FINRA member firm, is underwriting the Jefferson City Municipal Airport revenue bond. The bond has serial maturities going out up to 25 years with a balloon at 30. The coupons range from 2.9% to 3.7% with the offering price of all the bonds at par.

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A) the point at which the program begins to generate losses instead of taxable income, which generally does not occur until near the time the partnership is expected to be dissolved. B) the point at which the program begins to generate losses instead of taxable income, which generally occurs in later years.

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An employee of a firm registers to open an account at another member firm. Under FINRA rules, all of the following statements are true except A) the employing member firm must receive duplicate statements and confirmations if requested in writing. B) FINRA must receive duplicate statements and confirmations for each transaction.

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An investor closed a brokerage account with a FINRA member firm on June 30, 2018. Almost four years later, on July 5, 2022, the same investor had a financial plan developed by a registered representative of a different member firm.

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An investor closed a brokerage account with a FINRA member firm on May 12, 2017. Almost four years later, on May 5, 2021, the same investor has a financial plan developed by a registered representative of a different member firm.

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An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following except A) they are a form of municipal revenue bond. B) they would require voter approval before a municipality could issue them.

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An investor is interested in a limited partnership and asks his registered representative to explain the crossover point referred to in discussions about the tax consequences of the program. The best definition would be

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DERF Corporation has a significant amount of cash on hand. The chief financial officer (CFO) has suggested to the chief executive officer (CEO) that it might be wise to use some of that cash to reduce the company's outstanding debt by $10 million. There are four bond issues outstanding, and your broker-dealer is approached for advice on determining which issue to repay. Which of these four issues would the firm most likely recommend?

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For recordkeeping purposes, which of these statements is not true? A) Records (including fingerprint cards and application forms) of an associated person who has terminated his employment must be kept for three years. B) Form U4 must be updated no later than 30 days after learning of facts or circumstances that prompt an update.

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Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compared to an assumed interest rate (AIR). Which of the following statements reflects that determination?

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Nickelplate Manufacturing Corporation (NMC) is capitalized with 1 million shares of a 6% $50 par callable preferred stock and 10 million shares of $1 par common stock. NMC has not paid any dividends at all for the past five quarters. The current quarter's earnings are excellent and the company would like to pay a dividend to its common shareholders. Doing so would require

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One important respect in which the Roth 401(k) differs from the Roth IRA is that A) it is only the Roth IRA that provides for catch-up contributions for those age 50 and older. B) withdrawals from a Roth 401(k) are subject to tax on the earnings whereas all qualified withdrawals from a Roth IRA are tax-free.

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Two registered representatives are discussing a collateralized debt obligation (CDO) backed by cash flow from credit card payments. Which of their statements during the discussion is not true? A) CDOs are not considered suitable for all customers. B) A customer would have to choose a tranche that has the right risk characteristics for him, in terms of suitability. C) CDOs are securitized products where pooling or repackaging of individual loans has occurred.

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What would be the impact of a 10% stock dividend on the exdate for a retail investor that owns an option contract the following option contract? 1 ABC July 40 call A) The number of contracts owned will stay the same, and the strike price increases. B) The number of contracts owned will stay the same, and the strike price will be reduced.

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While examining old accounts, the new representative discovered a transaction in which the individual handling the account and the member itself, were negligent resulting in a loss of over $200,000 to the customer. That transaction occurred on May 26, 2016. If the investor wished to make an arbitration claim,

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While examining the old accounts, the representative discovers a transaction where the individual handling the account, as well as the member itself, were negligent resulting in a loss of over $100,000 to the customer. That transaction occurred on April 30, 2015. If the investor wished to make an arbitration claim,

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Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Tax consequences would be minimized if the investor

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i. Actual performance compared to the AIR affects the cash value of a variable life insurance policy ii. Actual performance compared to the AIR affects the death benefit of a variable life insurance policy iii. Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity iv. Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity

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(con't) customer establishes the following positions: Long 1 ABC Jun 25 call at 2 Long 1 ABC Jun 25 put at 2 At expiration, the position is profitable if the stock price is A) above 25 or below 25. B) below 21 or above 29. C) above 21 or below 29. D) greater than 21.

The investor purchased a long straddle (both a call and put with the same strike prices and expiration months). While straddle investors are uncertain about the direction of the market, long straddles require substantial price movement (volatility) for profit because the two premiums paid must be recovered. In this example, the breakeven of the call is found by adding the total premiums of four to the call strike price of 25 (25 + 4 = 29). The breakeven of the put is found by subtracting the total premiums of four from the put strike price of 25 (25 − 4 = 21). The market must either move up by four (total premiums paid) or down by four to be at breakeven. For profit, the market must be above or below the breakeven points.