Series 7 Simulate Test 2 Review

Which of the following callable municipal bonds trading on a 7% basis is most likely to be called?

7.5% coupon, callable at 100 in 2030. An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first.

An investor wants to invest $200,000 in the banking industry sector. The investor would like to utilize leverage and do this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing unrealized capital gains liabilities. You would suggest which of the following as suitable given the investor's criteria?

A bank sector exchange traded fund (ETF) The investor's criteria eliminate mutual funds as being suitable. Mutual funds make annual capital gains distributions for which the owner incurs a tax liability and mutual funds cannot be purchased on margin. Conversely, an ETF will rarely make a capital gains distribution and because they trade like all exchange traded products they can be purchased on margin making them more suitable for this investor. Buying only a few select bank stocks is not a good representation of the entire sector.

If at expiration for XYZ options, XYZ stock closes at 40.15 which of the following open option positions will automatically be exercised by the OCC?

A customer long 1 XYZ 40 call. At expiration, the OCC will automatically exercise open option positions if those positions are in-the-money by .01 or more. In this case, the customer's long 40 call position is in-the-money by .15. The member firm 45 call and the 40 puts are out-of-the-money.

Which of the following positions has an unlimited dollar risk?

An investor faces unlimited dollar risk when short stock, short a naked call, or when a short stock position is combined with a short put. In this position, the unlimited risk of the stock is only protected on the upside by the premium received.

Application for registration as a municipal securities registered representative must be accompanied by all of the following personal information EXCEPT:

Bank references The request for registration must include the applicant's employment record for the past 10 years and residences over the past 5 years, among other information. Bank references are not required.

DWQ declares a quarterly cash dividend of $.20. After the ex-dividend date, what will be the exercise price of a listed DWQ May 25 call option?

Because a listed option is not adjusted for a cash dividend, the exercise price of a DWQ May 25 call option remains the same: $25.

Which of the following debt securities does NOT have a fixed maturity date?

Collateralized mortgage obligations (CMOs) are mortgage-backed securities. Because mortgages are often paid off ahead of the scheduled maturity, the exact maturity date of a CMO is uncertain.

Which of the following are qualified plans? Payroll deduction. Deferred compensation. Defined benefit. Defined contribution.

Defined benefit and defined contribution plans are funded with pretax contributions and are thus qualified plans. Payroll deduction and deferred compensation plans are funded with after-tax contributions and are thus nonqualified plans. SO for retirement plans: qualified plans are funded with pre-tax money and non-qualified plans are funded with post-tax

All of the following are characteristics of both oil and gas, and real estate limited partnerships, EXCEPT:

Depletion

All of the following are characteristics associated with equity-linked notes (ELNs) EXCEPT:

ELNS are debt instruments NOT equities Despite their name, equity-linked notes (ELNs) are debt instruments, not equity instruments. They have a partial fixed return as well as a final payment linked to the performance of a single stock or equity index. Some are exchange traded while others trade OTC. FINRA who considers ELNs to be nonconventional structured investments has expressed concerns that investors might not fully understand ELNs or the risks associated with them.

Which of the following is TRUE concerning a 5:4 stock split?

Each shareholder's proportionate equity will be unchanged.

To create a credit calendar spread, an investor should buy the near expiration. buy the distant expiration. sell the near expiration. sell the distant expiration.

I and IV A credit calendar spread occurs when premium received exceeds the amount paid out. An investor creates a credit spread by selling the distant expiration and buying the near expiration. The distant expiration has more time value, and therefore, a higher premium.

A client writes 1 Apr 30 call and buys 1 Apr 40 call. This is a: bull spread. bear spread. debit spread. credit spread.

II and IV This is a call credit spread, and bears sell calls. The 30 call is worth more because it has a lower strike price. Long the lower is bullish; short the lower is bearish.

Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk?

Preferred stock fund Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

Which of the following disclosures regarding a CMO is accurate?

Rate of return may vary as a result of early prepayment. Prepayment risk is one of the major risks associated with CMOs and must be disclosed to prospective investors. Tranches are structured to have different degrees and characteristics of risk such as prepayment and extension risk and therefore they may not be suitable for smaller or unsophisticated investors. There is no guarantee of principal repayment.

Which of the following increases SMA?

Receipt of a cash dividend. Cash dividends are credited to SMA dollar for dollar.

The Bond Buyer's Revenue Index is which of the following?

The Bond Buyer's Revenue Index is an average yield of 25 revenue bonds with 30 years to maturity.

A customer purchases five 6-1/4% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date?

While minimum purchase denominations can be less, always use par value ($1,000) for these calculations. A 6-1/4% bond pays $62.50 annually (6-1/4% × $1,000 = $62.50). Therefore, a customer purchasing 5 bonds receives $312.50 each year. As Treasury notes pay semiannually, each interest payment equals $156.25.

A customer wishes to close a short option position. The order ticket must be marked as:

a closing purchase. The investor opened with a sale, so the position must close with a purchase.

A general partner is considered to have a conflict of interest with the business of a limited partnership if he:

borrows money from the business. The general partner manages the business and acts as agent for the business. The general partner may loan money to the partnership at a reasonable rate of interest, but may not borrow from the partnership.

An investor in an equipment leasing DPP using straight-line depreciation would probably not be concerned about

the likelihood of recapture

If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes?

$0 Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.

If a customer purchases $10,000 worth of stock in a cash account on Monday, May 15, under Regulation T how much must the customer deposit, and when must the deposit be made?

$10,000 no later than Friday, May 19 Under Regulation T, payment in a cash account must be made in full within 4 business days (regular way settlement plus two additional business days) of the trade date.

A customer wants to buy $12,000 worth of stock using other marginable securities owned as collateral for the purchase. With Regulation T at 50%, what must the current market value (CMV) of the securities deposited be?

$12,000 Stock buys stock dollar for dollar. With $12,000 worth of fully paid marginable securities, the customer can borrow $6,000 against them. The $6,000 can be the 50% initial requirement for the additional $12,000 purchase.

A customer writes 1 XYZ Sept 45 put at 6 and 1 XYZ Sept 35 call at 6 when XYZ is at 40. Prior to expiration, if XYZ is at 43 and the customer closes his positions at intrinsic value, the customer has a:

$200 gain The customer collects $1,200 in premiums for writing the options (6 + 6), but later pays $200 (45 − 43) to close out the put, and $800 to close out the call (43 − 35). In this case, $1,200 received minus $1,000 paid leaves a gain of $200. KEY HERE IS TO ADD THE PREMIUMS FIRST. Then, subtract the differences from the individual premiums and the value for the closing position

SSS Corporation's total assets amount to $780,000 of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is SSS Corporation's shareholders' equity?

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

A dealer that quotes a concession of ½ to another dealer means:

$5 per $1,000 of par.

Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?

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

If a customer writes 1 ABC Nov 60 put at 3.50, and the put is exercised when ABC is 57.50, the customer' s cost basis in ABC stock is:

56.5 At exercise, the premium of the contract affects the cost basis of the stock acquired. Because the premium of 3.50 was received when the put was written, the cost basis of the stock will be $60 per share less the premium, or 56.50. SO cost basis is based on the original number (60) minus the premium that seller received initially when selling the option

An investor purchased a municipal bond at par to yield 5.5% to maturity. If, two years later, he sold the bond at a price equivalent to a 5% yield to maturity, the investor incurred:

A capital gain Because the investor sold the bond at a price that will yield less than the yield when he purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor incurred a capital gain-lower yield, higher price.

A municipal bond is offered at a discount. It has a 30-year maturity and is callable in 20 years at par. It is callable in 5 years at a premium and is puttable in 10 years at par. Which of the following yields would be quoted on this basis?

Bonds that sell at a discount are always quoted as yield-to-maturity. This is the lowest possible net yield that the investor would make by holding the bonds until the issuer redeems them.

Which of the following is typically the largest component of a corporate underwriting spread?

Concession The concession tends to be the largest component of a corporate underwriting spread; the manager's fee is generally the smallest component.

The dividend payout ratio of common stock is found by dividing the annual dividend per share by:

Earnings per share The key to the question is ratio, which in this case is the relationship between dividends per share and their source of earnings per share.

A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account?

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

Your broker/dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is

Filing with FINRA is required at least 10 business days prior to first use or publication for retail communications having to do with options.

Which of the following would NOT be covered under the anti-fraud provisions of the Securities Exchange Act of 1934?

Fixed annuities

A customer buys 100 DEF at 70, but several months later, the stock is trading at 82.85. The customer, concerned about a possible pullback, buys 1 DEF Aug 80 put at 1.50. If the stock subsequently falls to 77.25 and the customer sells his stock by exercising the put, the result is:

Gain of $850 The customer bought 100 shares at 70 and sold them at 80 by exercising the put for a gain of $1,000. However, it cost $150 to buy the put so the customer's gain is $850. In other words, breakeven for long stock-long put is the cost of stock purchased (70) plus the premium paid (1.50). Breakeven is 71.50 and the customer sold stock at 80 (80 − 71.50 = 8.50-point gain).

If the dollar price of a municipal bond is 101 and, at that price, the basis is 6.10, the nominal yield is:

Greater than 6.1% Basis is a common synonym for yield to maturity, especially for municipal bonds. For any bonds trading at a premium, the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are: yield to call, yield to maturity, current yield, and nominal yield.

A working interest in an oil and gas partnership entitles the holder to: a portion of the revenue. responsibility for part of the expense of extraction. royalty interest in the revenue. royalty interest in revenue after deducting certain expenses.

I and II A working interest is a right to revenues from production, but it also carries the responsibility for extraction costs. A royalty interest carries no responsibility for extraction costs.

In a municipal underwriting, the scale is used by the syndicate to determine the bid on a new issue. a list of the yield or prices at which the bonds will be offered to the public. used by the syndicate to determine the allocation priority of orders. only used when underwriting term bonds.

I and II The scale, or reoffering scale, represents the prices and/or yields at which new issue securities are offered for sale to the public by the underwriter. The syndicate uses this scale to determine its bid on the issue.

If an investment representative gave her retail customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are TRUE? She should not have distributed sales literature without the prospectus. It was okay to distribute the sales literature and send the prospectus later to those who were interested. She should not have recommended a specific variable annuity without having the prospectus available. Because she only answered questions about the investment, she was not required to provide a prospectus.

I and III A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers.

Regarding the taxation of dividends received from corporate securities, which of the following are TRUE? Nonqualified dividends are taxed at the rate the investor's ordinary income will be taxed. Nonqualified dividends are not taxed. Qualified dividends are taxed at a maximum rate specified by the IRS and will depend on the investor's income tax bracket. Qualified dividends are taxed at the rate the investor's ordinary income will be taxed.

I and III For income tax purposes, corporate dividends are divided into 2 categories; qualified and non-qualified. We don't expect you'll be tested on what makes a dividend qualified or not, but you will need to know the difference in taxation. Qualified dividends are taxed at the same rate as long-term capital gains, a rate significantly lower than the ordinary income tax rate levied against non-qualified dividends. That lower rate ranges from 0% to as high as 20% with an even higher effective rate for those with an extraordinarily high income. For most investors the rate is 15% and that is the number you should use in any computations. With ordinary income tax rates on non-qualified dividends as high (currently) as 37%, there is a real benefit for most investors to receive qualified dividends.

Which of the following are TRUE of a municipal bond broker's broker? Protects customer identity. Must disclose the identity of customers. Has no inventory. Maintains an inventory.

I and III Municipal brokers' brokers generally purchase and sell securities on an anonymous basis for institutional clients. They are not in the business of making a market; therefore, they maintain no inventory.

A municipal bond in default is in good delivery form if past-due and current coupons are attached the bond is insured subsequently due coupons are attached the issuer files a default guarantee letter with the MSRB

I and III To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: past due, currently due, and subsequently due. Insurance or letters of guarantee do not constitute good delivery.

Which of the following covers a short call? Long stock Short stock Long put Stock rights

I and IV Covering a short call requires taking action to eliminate the risk of being exercised. If the customer owns the stock or has the right to acquire it, the customer is covered. Stock rights (preemptive rights) give the holder the right to purchase the stock. Short stock and long puts both have the same market attitude as a short call (bearish) and therefore would not cover the risk associated with a short call.

If a customer buys a new issue municipal bond at a discount in the primary market, which of the following statements are TRUE? The discount must be accreted. The discount may not be accreted. At maturity, there is a capital gain. At maturity, there is no capital gain.

I and IV If a new issue municipal bond is bought at a discount in the primary market, the discount must be accreted. The accretion is considered interest income, and therefore is not taxable.

With regard to position limits, what is the bullish, or "buy" side of the market? Long calls. Short calls. Long puts. Short puts.

I and IV Long calls give the holder the right to purchase stock, while short puts obligate the writer to buy stock, and both are bullish strategies.

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

I and IV Municipal bond accrued interest is calculated using a 30-day month and a 360-day year, with interest paid every 6 months. On settlement day, August 1, the buyer will pay the seller 5 months accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive payment for the full semiannual interest directly from the issuer.

A customer has entered an option order with your broker/dealer. At which of the following locations could such an order be executed? NYSE/AMEX CBOE Nasdaq OMX PHLX None of the listed choices

I, II and III Options orders can be executed on the NYSE/AMEX, the CBOE, and the Nasdaq OMX PHLX, which offers a hybrid of electronic and on-floor execution availability.

Under Regulation T, payment in a cash account must be made in full within 4 business days (regular way settlement plus two additional business days) of the trade date.

I, III, II, IV. The liquidation order is as follows: wages, taxes, secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.

A customer, long 100 shares of QRS at 62.50, writes 1 QRS Sep 65 call at 1.50. If the call is exercised, which two statements are TRUE? The gain is $250. The gain is $400. For tax purposes, cost basis per share is 62.50. For tax purposes, cost basis per share is 61.

II and III The customer has paid 62.50 for the stock and has received 1.50 for the call. If the Sep 65 call is exercised the customer will receive 65 for the sale of the stock. After exercise, total received is 66.50 (1.50 + 65). 66.50 received minus 62.50 paid equal's 4 points profit ($400). If a covered call writer is exercised, the cost basis for tax purposes is the purchase price of the stock. Sales proceeds for tax purposes are 66.50 per share (strike price plus premium).

Which of the following are defined as penny stocks? Nasdaq stock trading at $4 per share. Bulletin Board stock trading at $4 per share. Listed stock trading at $4 per share. "OTC Pink" stock trading at $4 per share.

II and IV A penny stock is a non-Nasdaq (Bulletin Board or "OTC Pink") stock trading under $5 per share. If a stock is listed on an exchange or is on Nasdaq, it is not a penny stock regardless of price.

Which of the following trade actively in the secondary market? Open-end funds. Closed-end funds. Unit investment trusts. REITs.

II and IV Closed-end funds and REITs trade actively in the secondary market. Open-end funds and unit investment trusts do not trade in the secondary market; instead, shares are redeemed by the issuer.

Trading in foreign currency options would most likely be an appropriate hedging tool for individual investors who want to hedge the risk on specific US exchange listed stocks a multinational corporation someone traveling on vacation for two weeks abroad a firm in the import and export business

II and IV Generally, any time the potential need to deliver a foreign currency or accept payment of a foreign currency can be anticipated, currency options are a useful hedge. While this could apply to individuals, it is most likely applicable to, and appropriate for, business entities doing business abroad.

Which of the following statements regarding communications with the public are CORRECT Correspondence does not include email. Prior principal approval is required for all correspondence. Correspondence can include communications sent to existing customers. Correspondence can include communications sent to prospective customers.

III and IV Correspondence includes both written and electronic forms of communications, such as email, and includes communications sent to existing or prospective retail customers. It must be supervised and reviewed by a principal but does not require prior principal approval.

If a customer purchases stock in an existing margin account and fails to make payment within the time period specified under Regulation T, the broker/dealer carrying the account can take all of the following actions EXCEPT:

If a customer does not meet a Fed call, the firm can use existing SMA to meet the call, request an extension of time from its designated examining authority, or liquidate the unpaid portion. The firm would not close out the account. SO CAN NOT close a customer's account for not fulfilling margin requirements.

Which of the following statements are TRUE regarding Sallie Mae debentures?

Interest is tax-exempt at the state and local levels

Last week one of your customers placed a GTC order to sell 200 shares of ABC with an 18 stop when the stock was trading at 18.85. It is now the ex-date for a $.55 dividend and the order has not yet been executed. What has happened to your customer's stop order?

It is reduced to 17.45 Unless the customer has given DNR, (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend.

Which of the following best describes an intangible drilling cost?

Labor, fuel, or drilling rig rental. Intangible drilling costs are the noncapital costs of putting in a well. They are currently deductible expenses, like fuel, wages, and rent. An intangible drilling cost is one which, after expenditure, has no salvage value.

The price of which of the following will fluctuate most with a change in interest rates?

Long-term bonds

If a customer submits a redemption order to her broker/dealer after the close of the New York Stock Exchange, she will receive a price based on the net asset value computed:

Orders to redeem shares are executed at the next computed price.

Which of the following positions would create the most risk for an investor?

Sell short 100 shares of SSS and sell 1 SSS put. A short sale of SSS stock has unlimited loss potential. Selling a put obligates the customer to buy the stock at the strike price in return for premium. A short sale coupled with a sale of a put is equivalent to selling an uncovered call and creates the most risk.

A customer who is long 1 XYZ Sep 50 call could create a spread by combining it with which of the following positions?

Short 1 XYZ Sep 60 call. A spread involves two simultaneous positions in related options of the same type-one long and the other short of the same underlying security.

All of the following are objectives in a DPP EXCEPT:

Short term capital gains DPPs are used to defer present income into the future and take advantage of time. In doing so, any gains will be taxed at favorable long-term rates. The expected losses in the early years may be taken as deductions against passive income from other sources. SO long term capital gains, deductions against passive income and deferment of taxes are all objectives of DPPs`

Your customer is interested in up-to-the-minute price information and transparency of municipal securities transactions. This information is available through third-party data vendors with pricing information captured by:

The MSRBs Real Time Transaction Reporting System (RTRS) makes pricing information for eligible municipal bond trades available to the marketplace through third-party data vendors within 15 minutes of a trade.

An arbitration proceeding involving a customer in an amount over $100,000 has been agreed to. In such an arbitration dispute, which of the following is TRUE?

The customer can request that all three of the arbitrators selected be from the public sector. In disputes involving a customer for amounts greater than $100,000 three arbitrators will be used unless both parties agree to one. In the case where three arbitrators are used, the customer can request that all three arbitrators be selected from the public sector.

A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect?

The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund.

An investor with no other positions buys 1 DWQ May 75 call at 6.50. If the investor exercises the call when the stock is trading at 77 and immediately sells the stock in the market, what is the investor's profit or loss?

The investor exercised the right to buy the stock for 75 and can sell the stock in the market for 77, for a gain of 2. The investor paid a premium of 6.50 minus the gain of 2, which gives the investor a loss of 4.50 (4.50 × 100 = $450).

A municipality is seeking an underwriter for a bond offering. What is the common step taken in order to engage the services of an underwriter?

The municipality will place an official notice of sale in the Bond Buyer and accept bids from underwriters interested in the offering. Municipalities seek the best deal for those that live in the municipality and therefore will place an official notice of sale in the Bond Buyer to attract an underwriter that submits a bid for the offering.

An investor writes 1 IBS 280 put for 16.60. The position is closed and the put is bought for its intrinsic value when IBS is trading at 265.25. The investor realizes a:

The opening sale of the IBS put was made for 16.60, and the closing purchase was made for the intrinsic value of 14.75. The put's intrinsic value is determined by how far the stock's market price is below the strike price. (In this case, 280 minus 265.25.) 16.60 − 14.75 = 1.85 × 100 shares = $185.00. The investor profits because the sale's proceeds exceed the purchase price.

When referring to a stock, the term "spread" refers to the:

The term "spread" refers to the difference between the bid and asked prices.

If a writer of an XYZ equity call option is assigned, which of the following should be delivered to the OCC?

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

A client writes 1 Dec. 45 put and buys 1 Dec. 60 put. This is a

This is a debit bear spread, and bears buy puts. The 60 put is worth more than the 45 put because it has a higher strike price.

Under NYSE rules, a not-held order:

Under NYSE rules, a not-held order where a customer gives you authority over the price or timing of the order is good for that day only.

Which of the following investment company portfolios is supervised rather than managed?

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 REIT is not considered to be an investment company.

Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client?

Variable Annuities Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.

If an agent is assigned to an account previously handled by an agent who has since left the firm, which of the following actions should the agent take first?

Verify the account information The agent must verify and update client information before recommending trades. Without knowledge of the client's needs and financial profile, the agent cannot make suitable recommendations. Need to verify the account info before having the trade authorization paperwork signed.

Regarding rules addressing acting in concert, each of the following must observe position and exercise limits EXCEPT:

a registered representative accepting unsolicited orders to exercise options. An individual investor or a group of investors acting in concert must observe position and exercise limits. These limits apply to an individual adviser acting for a group of discretionary accounts and to an individual who has accounts with several firms. Acting in concert does not apply to a registered representative (RR) simply accepting exercise order instructions from customers.

When a member firm sells municipal bonds to a customer out of its inventory, it must:

indicate the amount of markup on the customer's confirmation. Under the MSRB Rule G-30, the amount of markup charged by a dealer must take into consideration a number of relevant factors, including the total dollar amount of the transaction. In a principal transaction (out of its inventory) the markup must be disclosed on a confirmation and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities.

If an investor watches the latest T-bill auction fall to 4.71% from 4.82%, the best interpretation is that:

investors who purchased bills at this auction paid more for them than purchasers last week.

In determining a violation of position limits, short calls are aggregated with:

long puts Position limits are measured by the number of contracts on the same side of the market. Long calls and short puts are on the bull side; short calls and long puts are on the bear side.

To be exempt under Regulation D of the Securities Act of 1933, the sale of securities must be limited with respect to the number of:

nonaccredited investors to whom the security is sold.

The requirements of ERISA apply to pension plans established by:

private sector organizations only. ERISA was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities, such as city and state governments.

Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11-1/4% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include:

the issue may be junior-in-lien to another security issue. The word "subordinated" is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral as the bonds are identified as debentures, and having to convert to common stock is not a threat because she is the one that will, if she desires, exercise the conversion privilege.

The doctrine of reciprocal immunity most accurately describes:

the view that neither the states nor the federal government may tax income received from securities issued by the other. The principle that neither the states nor the federal government may tax income received from securities issued by the other is known as the doctrine of reciprocal immunity. States may, however, tax the interest on debt securities of other states. This doctrine provides the original basis for the federal income tax exemption on interest paid on municipal debt securities.

All of the following are characteristics of Section 8 bonds EXCEPT:

they are a type of GO bond. Section 8 bonds are municipal revenue bonds backed by the U.S. government issued to help finance low and moderate income public housing. They are also known as Public, (PHA) or New, (NHA) housing authority bonds. SO PHAs and NHAs are NOT GO bonds

All of the following statements concerning IRA contributions are true EXCEPT:

you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis.