Series 7: Suitability Exam
An investor has sold an ABC July 50 put for 7.5 and purchased an ABC July 40 put for 3.5, while ABC is trading at 46. The breakeven point for this strategy is
46 This is an example of a credit spread, with the breakeven point being the higher strike price minus the net premium.
stop limit order
A stop order that specifies an execution at a particular price point
An investor is short a June 100 call and long a June 90 call. The positions were established simultaneously when the spread was 3 points. The spread is now 5.5 points.
Closing out both positions at this time would result in a short-term capital gain. The investor has created a bull call debit spread, as they are buying the call option with the lower strike price. The position is beneficial when the spread between the premiums gets wider, as is the case in this example. Remember that investors always want a debit spread to widen.
Issuers stand to benefit from
a call feature as interest rates are declining.
An investor who owns stock and a put and is also short a call has created
a collar
FINRA customer-specific suitability standards do not apply to recommendations made to various institutional customers, such as
banks, investment advisors, and insurance companies.
An investor may purchase call options on the....... if they believe that there will be significant volatility in the markets.
VIX The underlying asset for the VIX is S & P 500 index options.
Realized capital gains only occur when a position has been
liquidated
Bonds are more likely to be called when
interest rates are falling.
Call protection available on a bond would be most valuable to an investor when
interest rates are falling.
A recommendation to a 75-year-old grandparent to purchase a 30-year zero coupon bond
is inappropriate given the age of the client.
A registered representative would like to participate in a Q & A session that will be hosted on one of the firm's social media platforms. The individual's participation in this event
is not required to be approved by a principal of the firm, as the event would qualify as a public appearance.
Your client placed an order for 100 shares of ABC, but 1,000 shares were purchased, and the client calls you the next day and asks for your help. You should
notify your supervisor and inform the client that the error will be corrected.
A private placement memorandum (PPM) is the disclosure document that must be provided to
non-accredited investors in a Regulation D offering
A registered representative advising a client subject to the alternative minimum tax (AMT) on potential investments would be likely to suggest a(n)
public purpose municipal bond.
A synthetic long stock position may be created through the
purchase of a call option and simultaneously selling put options on the same underlying security.
Abby owns 300 shares of YYY, a restricted security, as indicated by the legend that is affixed to the certificates. In order for Abby to sell her shares using Rule 144,
she must first have the restrictive legend removed by the transfer agent.
The bond counsel for the issuer is the party responsible for validating the
tax-exempt status of the bonds, and well as the issuer's legal ability to assume the debt.
Underwriting compensation for a new direct participation program must be
ten percent or less of the gross proceeds of the offering.
Victor owns 300 preemptive rights to purchase ABC stock. The rights expire in 45 days. In the event of a 3:1 stock split prior to the expiration of the rights,
the value of the preemptive rights would not change.
Gifts between spouses are
unlimited and are not subject to gift taxes.
credit spread
with the breakeven point being the higher strike price minus the net premium.
short straddle
with the breakeven points being the strike price plus & minus the combined premium.
Jim is currently short 100 ABC and also short a put option on ABC. You would describe Jim's current positions as
A) very risky. Jim has sold a covered put, by virtue of the short stock position. It is a very risky position, however, as there can be significant losses if the stock were to rise substantially. The put option would expire, enabling Jim to retain the premium, but Jim would still have the open short position that will eventually need to be closed.
options positions is out-of-the-money when ABC is trading at 42?
Short Oct 40 put The determination of whether an option contract is in or out of the money is based on the relationship of the strike price of the option to the market value of the underlying stock. Call options are in the money when the market price of the stock is greater than the strike price of call option. It is the exact opposite for put options.
Eva anticipates that markets will remain relatively quiet over the next several weeks. She recently wrote an XYZ May 40 put. What additional position would you advise Eva to place to enable her to increase the income flow to her portfolio?
Short XYZ May 40 Call Eva may want to sell an XYZ May 40 call, thereby creating a straddle, allowing her to maximize the income stream to her account.
An investor has sold 200 shares of ABC for a loss and repurchased 100 shares of the same stock 15 days later.
The investor may not use the loss generated from the sale of 100 shares. When the wash sale rule has been violated, only the number of shares that violated the rule cannot be used by the investor. In this case, a total of 100 shares are the subject of the rule violation. THINK OF THE REPURCHASE
Interest rates have risen since an investor purchased a 15-year municipal bond. Which of the following is a likely scenario now?
The investor will likely exercise a put feature on the bond in order to seek higher returns in other investments. If interest rates have risen after an investor purchases a bond, the price of the bond will fall. A put feature allows the investor to sell the bond back to the issuer (at par) and subsequently invest those funds into a higher yielding instrument.
An investor purchased 200 shares of XYZ at 18 on March 8 and during the next few weeks has seen steady gains in the stock, plus others in the sector. As of April 1, XYZ is sitting at 27
The investor would realize a short-term capital gain if she liquidated her position on April 1. It is important to recognize that an investor can have either a realized or unrealized capital gain. Realized capital gains only occur when a position has been liquidated; otherwise, any gains would be considered unrealized and are not yet taxable.
One of your clients is concerned that the ever-increasing cost of living will prevent them from being able to pay their bills and cover other obligations in the future. What investment alternative would you recommend to this client?
Treasury inflation protected security When inflation is a concern, thought should be given to an investment that will respond to changes in economic condition. A treasury inflation protected security will adjust its face value based on specified changes in the inflation rate. Fixed income securities are generally not appropriate investments during inflationary periods.
RST is expected to trade in a fairly narrow range over the next several weeks, while the market is watching how developments in the sector will impact the stock price. What investment strategy would you suggest to a client watching this stock?
Write a straddle
Two sisters have opened a joint account, 'tenants-in common', at a broker-dealer. Subsequently, one of the sisters passes away. May her husband recover her funds?
Yes, if he files the proper paperwork to recover his wife's portion of the account. The spouse of a now deceased individual who was a named owner of a brokerage account may recover her ownership interest once all the necessary papers have been filed with the appropriate parties.
Fred has placed an order to buy 100 shares of LEG at 33. The current quote for LEG is 31.75-32.15. Fred's order will
be filled at 32.15. This is an example of 'marketable limit order'. Since Fred's desired price is higher than the market offer, Fred would receive the best offer in the market, which is now 32.15.
An investor who owns 200 shares of ABC stock, is long 2 ABC put options, and also holds a short position in 2 ABC call options has created a
collar position for downside protection plus income. The objective of the trade is to provide downside protection for the stock via the long put as well as bringing some income into the account via the short call.
A trading strategy that will generate income during a bearish market is a
covered call example: Kelsey owns 100 shares of two different stocks and believes that stock prices will be trending lower over the next few months and would like to deploy a trading strategy that will generate income for her.
It is necessary to have a margin account if an investor will be
effecting short sales in corporate securities. margin = short
Wednesday March 24 is the record date for the next cash dividend of the GHI corporation. An investor who purchased the shares in January and sells them in a regular way trade on March 23 is
entitled to and will receive the dividend. March 23 is the "ex-dividend" date, which is one business day prior to the record date. For regular way trades that occur on the 'ex-dividend' date or later, the dividend will be paid to the seller of the shares, as the seller will remain the holder of record on the record date. This is based on the standard settlement process for corporate securities transactions, which uses a "T +2" timeline.
Howard has provided his broker-dealer with information to open a new option account and is awaiting clearance to place his first trade. Howard may execute a trade in his account
following the approval of the account by a registered options principal (ROP).
While ABC is trading at 27, an investor sells I ABC May 30 call @ 1.2 and buys 1 ABC May 25 call @ 3.2. Two weeks later ABC is trading at 32, and the investor closes the position at its intrinsic value. The investor realizes a
gain of $300. The best way to solve for these types of problems is to identify the change in the spread. This is a debit spread, which the investor hopes will widen. In this case the spread between the premiums expanded from 2 points at the entry point of the trade to 5 points at the point of exit. As a result, the client was able to realize a $300 gain.
The Direct Registration System enables a shareholder to
have their stock held with the issuer's transfer agent in book-entry form.
An unqualified legal opinion would tell investors that
here are currently no legal matters or other concerns that may call into question the legitimacy of the offering.
An issuer is most likely to call a bond carrying a
high interest rate with a call premium as low as possible, with their goal being no call premium at all.
A client phones her registered representative and requests that all correspondence concerning her account be sent to her sister, since she will be travelling for the next month. This request may be honored
if the request is made in writing and the firm makes the appropriate notation on its books. This may be accomplished as long as the request is made in writing, and the appropriate notation is made on the firm's books.
An investor sold an ABC June 70 straddle for $8. At expiration in June, ABC is trading at $80. This investor will have a
loss of $200. Straddles have two breakeven points, the strike price plus the combined premiums and the strike price minus the combined premiums. Therefore, the breakeven points for this position are $62 & $78. If the stock is trading at $80 at expiration, the investor will experience a loss of $200, as the stock is 2 points higher than the breakeven point, which represents a loss to the seller of the straddle.
ABC Corp. will issue a $100 million debenture in the next two weeks. The bond
must be issued with a trust indenture.
A broker-dealer is preparing a private placement memorandum for an upcoming offering. The intended audience for this item will be
non-accredited investors.
a qualified legal opinion would tell investors that there are
pending legal matters that investors may want to consider when buying these bonds.
Frank placed a trade yesterday to purchase 600 shares of ABC and subsequently received a confirmation that he purchased 600 shares of ABD. Noticing the error, Frank called his firm to report the mistake. The firm will most likely
purchase the ABD for their admin account and place the appropriate shares in Frank's account. When an error is made in a client account, the firm will take appropriate steps to correct their mistake.
A synthetic long stock position is created by
purchasing call options and selling put options on the same underlying security. The objective of the position is to mirror the risk / reward of the underlying stock without purchasing the shares outright. example: Jim purchased five call options on XYZ and also wrote five put options on the same stock
A synthetic long stock position may be created by
purchasing calls and writing puts on the same underlying security.
An individual owning shares of different stocks in the same or similar sectors could benefit by
purchasing index put options specific to the sector of their equity holdings. These options would be used to hedge their stock holdings.
A long stock position may be protected with
puts, which give the investor the right to sell shares at the strike price of the puts. example: Sam is long 500 shares of XYZ and is asking for your recommendation on how he might protect his position in the event of a significant downturn. You might advise Sam to A) purchase 5 puts
The determination of whether an option contract is in or out of the money is based on the
relationship of the strike price of the option to the market value of the underlying stock
An order that is intended to be triggered at a particular price and executed at the next price is a
stop order.
You receive an email from a client who recently purchased a security based on a recommendation you made and is very dissatisfied with its recent performance. If he were to sell that investment today he would lose a significant amount of money, which is not an option for him at this time. You would respond by saying
that you understand how he feels, and he should hold on for now, as you are very optimistic, based on the firm's analysis, about the long-term prospects of this security. The primary goal in this situation would be to acknowledge the client's concerns and to emphasize your views that you believe the client will do well with this investment.
You are the registered representative to married couple Paul and Jane, who have their own individual accounts with you as well as an account established under the JTWROS option. If Paul wanted to make a cash gift this year to Jane, you would inform him that
there is no limit on cash gifts to your spouse, and gift taxes will not be applicable.
A client of yours notifies you that she has recently won a substantial lottery prize and now wants to start trading options. Your most likely response to her would be
to ask her if her investment objectives have changed.
An issuer of a new municipal bond may want to assure investors that there no legal issues surrounding the offering of the debt, and would convey this information through a(n)
unqualified legal opinion.
An investor sold ABC stock for a loss two weeks ago and today has purchased a convertible bond on ABC. The purchase of the bond
will likely trigger the wash sale rule and prevent the investor from using the loss for tax purpose.
In the event of a stock split, the value of the preemptive rights
would not change, since the value of the overall position will remain unchanged.
An insurance company maintains an account at a broker-dealer. Recommendations made by the registered representative handling this account
need not adhere to FINRA customer- specific suitability standards.
When the wash sale rule has been violated
only the number of shares that violated the rule cannot be used by the investor.
Underwriting compensation for a direct participation program is limited to
10% of the gross proceeds of the offering.
The Options Agreement must be signed and returned to the broker-dealer within
15 days of the approval of the account.
John purchased 250 shares of ABC at $18 per share three years ago. John later became ill and passed away, and his shares were inherited by his nephew Steve. The shares were trading at 17.25 at the time of John's death. What is the cost basis of the shares that Steve inherits?
17.25 When securities are inherited, the cost basis is the market value at the time of death of the original owner, in this case $17.25
An investor has written a ZZZ Jan 30 put @ 1.75 and a ZZZ Jan 30 call @ 1.25. ZZZ has a 30- day trading range of 28.75 32.55. The breakeven points for this strategy are
27 & 33. This is an example of a short straddle, with the breakeven points being the strike price plus & minus the combined premium.
You have a 30-year-old client, MBA, unmarried, interested in stocks, willing to take risk based on mid six figure income and significant savings. Which of the following portfolio allocations would you recommend?
60% equities, 25% equity REITs, 15%, municipal bonds For this client, a portfolio skewed toward equities would be appropriate. The addition of municipal bonds would provide some tax-free income, which may be beneficial given the client's income level.
An investor has purchased an XYZ Oct 70 call @ 9 and sold an XYZ Oct 80 call @ 5, while XYZ is trading at 72. The breakeven point for this strategy is
74 debit spread
A registered representative is reviewing the current portfolio of a money market fund. Which of the following securities will the representative not encounter during her review of the portfolio?
A Treasury note
A stockholder may hold her shares in electronic book-entry form with the transfer agent of an issuer through the facility of the
Direct Registration System (DRS)
Shareholders of ABC now have the choice of holding their shares in electronic form on the books of the transfer agent. The mechanism that allows for this is the
Direct Registration System (DRS).
Your client will be making a down payment on a new home in the next few months. Which of these investment alternatives would be least appropriate for them today?
Exchange traded note The least liquid of these options is the exchange traded note. This is an unsecured debt instrument of an investment bank with returns tied to an underlying benchmark. These products may not be easily converted to cash as needed.
A client expresses to you that various factors in the economy may cause more short-term widespread volatility than would otherwise be the case. What investment strategy would you suggest for this client?
Long calls on the VIX
stop orders
Orders that are triggered at a given price point and then executed at the very next price
A registered representative has a client who is subject to the alternative minimum tax (AMT). The registered representative is drafting a model portfolio for the client to review. Which of the following assets would least likely be included in this portfolio?
Private activity municipal bonds
The cost basis of an investment would be impacted by
The amortization of the premium of a municipal bond
A client who is a resident of New Jersey is subject to the alternative minimum tax (AMT). Which of the following securities will offer the greatest benefit to this client?
U. S. Territory bond The interest income from the bond issued by a US territory will provide interest income that is exempt from taxation at the federal, state, and local level. These types of bonds are known as "triple-tax free" bonds.
Corporate bond issuances of greater than $50 million must be issued with
a trust indenture.
following item that would appear in the notice of sale
bidding details
The tax-exempt status of a new municipal bond is conferred by the issuer's
bond counsel.
The wash sale rule provides that if an investor
closes a position for a loss, and within the ensuing 30 days makes a purchase of the same, or substantially similar security, the loss on the closing position will be disallowed for tax purposes.
An investor seeking to increase the equity weighting of his portfolio might consider all of the following items except
collateralized mortgage obligation (CMO).
current ratio
current assets divided by its current liabilities
The amortization of the premium of a municipal bond
downwards towards par this is known as amortization
Call protection is most valuable to an investor in a
falling interest rate environment.
A recommendation to purchase a narrow- based stock index put option would be most appropriate to an
individual who owns 100 shares of five different software companies.
The Notice of Sale is used by a municipality in a competitive offering to
invite prospective underwriters to submit bids to the issuer. The deal is awarded to the firm that submits the lowest bid to the issuer.
A client wishes to place an order to sell an ABC May 60 call and buy an ABC May 50 call, for a net price of 4. This order
must be entered as one trade at a limit price. This is a limit order for an option spread, with a limit price of $4 indicated. These types of orders must be entered as a single trade (not as two separate orders) at the limit price indicated.
types of unscripted events are considered by FINRA to be "public appearances" and do not require
principal approval.
An option account must be approved by........before any trades may be placed.
registered options principal (ROP)
An investor who expects a neutral market to dominate for the foreseeable future should consider
selling (or writing) a straddle With no major market activity expected, options contracts are likely to expire, providing an investor with opportunity for gains.
debit spread
the breakeven point being the lower strike price plus the net premium.
When securities are inherited (upon death of owner)
the cost basis is the market value at the time of death of the original owner
A corporate bond is callable beginning 3 years post issue date. With respect to any call premium on this bond,
the issuer would prefer to offer the lowest call premium possible.
Call options are in the money when
the market price of the stock is greater than the strike price of call option.
put options are in the money when
the market price of the stock is less than the strike price of the put option
In the event an error is made in executing a client order, it is the responsibility of
the registered representative to notify their supervisor immediately of the situation.
When using Rule 144 to sell restricted stock
the restrictive legend on the shares must first be removed by a transfer agent.
Straddles have two breakeven points
the strike price plus the combined premiums and the strike price minus the combined premiums
When an unexpected positive financial event occurs, it is always prudent to discuss
this with your client and to determine if there has been any change in her overall investment goals.
