Series 7 TO CheckPoint #3
During a discussion with a client to determine investment objectives, a client indicates a strong desire to preserve capital. The client also would like to see some current income from their investments. Which portfolio recommendation would BEST suit this customer's stated investment objectives? (A)The RR recommends a portfolio comprised of an equal mix of junk bonds, highly-rated municipal bonds, and 30-year corporate bonds.(B)The RR recommends a portfolio comprised of money market funds, short-term debt instruments issued by the Treasury and federal agencies, and T-Bills. (C)The RR recommends a portfolio comprised of equity securities such as common and preferred stock, as well as a mutual fund focused on large-cap growth stocks. (D)The RR recommends a portfolio comprised of an international mutual fund, investments in real estate investment trusts, and individual securities issued by foreign corporations.
(B)The RR recommends a portfolio comprised of money market funds, short-term debt instruments issued by the Treasury and federal agencies, and T-Bills.
If an investor is seeking capital gains and income from their investments, what type of investment would BEST suit these objectives? (A)The purchase of a block of growth stock (B)The deposit of funds into a money market account (C)The purchase of a mutual fund heavily invested in equity securities.(D)The purchase of STRIPs on U.S. Treasury Securities
(C)The purchase of a mutual fund heavily invested in equity securities.
All of the following factors would be relevant when investing in a Real Estate Limited Partnership EXCEPT A: other real estate investment trusts owned by potential customers B: potential changes in tax law C: qualifications of General Partners D: anticipated changes in interest rates
(Could not find answer) C: qualifications of General Partners
Interest paid on Freddie Mac Securities has which of the following characteristics? (A)Interest payments are paid at maturity. (B)Interest is exempt from federal taxation. (C)Interest is exempt from state taxation. (D)Interest is paid monthly.
(D)Interest is paid monthly.
Which of the following is NOT a consideration for bond counsel when researching the authority of a municipality to issue a municipal security? (A)Local statutes (B)Judicial opinions (C)The state constitution (D)The current economic conditions
(D)The current economic conditions
Which of the following would be the least relevant factor in determining if a municipal bond is suitable for a customer whose investment objectives are after-tax income, liquidity, and marketability? A. Age of the customer B. Tax bracket of the the customer C. The maturity of the bond D. The rating of the bond
A. Age of the customer Exp: In determining the suitability of a municipal bond for a particular investor, the tax bracket of the investor, the maturity, and the rating would be relevant not age. Tax bracket is most important, the higher the tax bracket, the greater the value of tax exempt interest payments from the muni bonds
An RR has identified four investment options for a customer, who is a senior. Which investment option would be considered the most appropriate? A: US Government bonds B: deferred variable annuity C: US savings bonds D: zero-coupon bonds offered at a deep discount
A: US Government bonds U.S. Government bonds because the bonds pay interest semi-annually and are low risk
All of the following are TRUE about federal tax rules EXCEPT A: a gift between spouses is taxable B: the donor is liable for the gift tax C: long-term capital gains is taxed lower than short term capital gains D: a donor may give up to $16,000 per year (2022) to as many donees as the donor chooses without incurring any gift tax liability
A: a gift between spouses is taxable The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts. -Gifts that are not more than the annual exclusion for the calendar year. -Tuition or medical expenses you pay for someone (the educational and medical exclusions). -Gifts to your spouse. -Gifts to a political organization for its use. In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.
Which of the following would be considered an inappropriate investment in an IRA account? A: bonds of a municipality that carry a AAA-rating B: bonds of a corporation that carry an A-rating C: common stocks of blue-chip companies D: mutual funds focused on growth
A: bonds of a municipality that carry a AAA-rating
The legal opinion about a municipal bond issue attests to the A: tax status of the municipal bond issue B: blue sky status C: credit rating assigned to the issue D: ability of the issuer to service the debt
A: tax status of the municipal bond issue
On the annual IRS Form 1099-B issued by broker-dealers to the IRS and its customers, all of the following information on securities sales transactions must be reported EXCEPT : A: the applicable taxable gains or loss using the LIFO method B: gross sales proceeds C: cost basis of a security purchases D: the holding periods
A: the applicable taxable gains or loss using the LIFO method
Which of the following would be most important for an RR when determining a suitable recommendation for a client? A: the customer's investment goals and risk tolerance B: how many siblings the customer has C: information the RR has learned about the customer from the person who referred the customer to the RR D: whether or not the customer is married and has a college education
A: the customer's investment goals and risk tolerance EXPLANATION To determine the suitability of a particular investment for a particular customer, the registered representative MUST consider the customer's investment objectives, financial condition, risk tolerance, and personal situation which usually includes marital status. The RR does not have to consider the customer's education, which eliminates that option as the correct answer, whether the customer has siblings or information obtained from independent sources, such as the person who made the referral.
Just after the construction of a bridge, financed by a revenue bond, massive flooding causes part of the bridge to collapse. The remaining portion of the bridge is condemned and the municipality calls the revenue bonds. What type of call is this? A: this would be an extraordinary call B: this would be a refunding call C: this would be a sinking fund call D: this would be a defeasance call
A: this would be an extraordinary call The type of call used in such a situation would be a catastrophic or extraordinary call.
In analyzing a GO bond, which of the following factors would be most important? A: a feasibility study B: protective covenants C: budgetary practices D: existing competitive facilities
Answer: Budgetary practices Explanation: A G.O. bond is a general obligation bond. It is repaid from general tax revenues and expenditures for a specific time period. Budgetary practices would be relevant in analyzing a G.O. bond. The other three factors would be relevant in analyzing a revenue bond.
Which of the following items would a corporation be allowed to use as deductions for federal tax purposes? I. Dividends paid on Real Estate Investment Trusts owned by the corporation II. Capital gains distributions paid by mutual funds owned by the corporation III. Dividends received by the corporation from other corporations common stock owned by the corporation IV. Dividends received by the corporation from other corporations preferred stock owned by the corporation A: I & II only B: III & IV only C: II, III, & IV D: I, II, III, IV
B. III & IV only Under Federal tax law corporations that own securities issued by other corporations (common and preferred stock) are allowed to deduct 50% of the dividend income received from ownership of those securities. REITs and capital gains DO NOT qualify for the deduction.
A municipal securities dealer is prohibited under MSRB rules from giving business related gratuities to any one donee in excess of what amount per year? A: 25 B: 100 C: 500 D: 1,000
B: 100 MSRB Rules concerning gifts & gratuities prohibit municipal securities dealers from giving anything of service or value in excess of $100 per person per year. legitimate business function recognized by the IRS & therefore would not be regulated under the gift & gratuity rules.
An analyst is evaluating a general obligation municipal bond. All of the following situations would be considered to have a negative affect on the bond EXCEPT? A: the issuance of long-term debt to satisfy current debt service on outstanding debt B: A stable level of outstanding debt when property values are appreciating C: a diminishing tax base D: unfunded pension liabilities are increasing
B: A stable level of outstanding debt when property values are appreciating Explanation: All of the choices listed would be negative except for the stable level of outstanding debt while property values appreciated. In this situation, the incoming taxes from property values are increasing while the debt level is remaining stable. If anything, this would increase the credit rating of the municipality.
Which of the following is a government entity that does NOT issue agency securities traded in the secondary market? A: Ginnie Mae (GNMA) B: The Federal Reserve C: The Federal Home Loan Banks D: The Federal Farm Credit Banks
B: The Federal Reserve Federal Reserve Banks do not issue securities. U.S. Government securities are issued by the U.S. Treasury. The Federal Reserve cannot issue or carry its own debt.
Which of the following oil and gas direct participation programs would NOT involve drilling? A: balanced program B: income program C: exploratory program D: developmental program
B: income program In an income program, the partnership is buying producing oil and gas wells. There are no drilling costs involved in these programs.
Which of the following would NOT be a reason for a municipality to issue revenue bonds versus general obligation bonds? A: current legislation at the state level requires the self-sufficiency of projects of this nature B: statutory debt limitations are usually enforced on revenue bonds C: user fees are expected to support the project once completed D: only certain members of the community will use the project
B: statutory debt limitations are usually enforced on revenue bonds Explanation: Revenue bonds are NOT subject to statutory debt limits. All other choices are correct with regard to Revenue bonds
One of the analysts at your firm likes to focus their analysis on comparing the total amount of securities that are appreciating in market value to the total amount of securities that are depreciating in market value. What method is this analyst using? A: the analyst is using the upward volume to downward volume theory B: the analyst is using the advance decline theory C: the analyst is using the Dow Jones industrial averaging technique D: the analyst is using the equity consumer indexing technique
B: the analyst is using the advance decline theory The advance/decline index is a market breadth indicator that represents the cumulative difference between the number of advancing and declining stocks within a given index. A rising A/D index value suggests that the market is gaining momentum, whereas a falling value suggests that the market may be losing momentum.
Which of the following describes the type of fund used by a municipality in the case that a redemption must occur due to a mandatory call? A: the municipality would use the reserve fund B: the municipality would use the sinking fund C: the municipality would use the replacement fund D: the municipality would use the general fund
B: the municipality would use the sinking fund
What is the typical make-up of a balance sheet? A: the overall values of outstanding bonds plus outstanding stocks is equal to the total assets of the company (bonds + stocks = total assets) B: the total liabilities plus the company's net worth equals the total assets of the company (liabilities + net worth = total assets) C: the capitalization less its liabilities set equal to the assets of the company (capitalization - liabilities = assets) D: the current liabilities added to the fixed liabilities of the company set equal to the assets of the company (fixed liabilities + current liabilities = assets)
B: the total liabilities plus the company's net worth equals the total assets of the company (liabilities + net worth = total assets) A company's balance sheet is comprised of assets, liabilities, and equity.
A stock's or a portfolio's beta measures A: liquidity compared to the market as a whole B: volatility compared to the market as a whole C: safety compared to the market as a whole D: specific inherent value of a stock or portfolio
B: volatility compared to the market as a whole Beta is a measure of the volatility - or systematic risk - of a security or portfolio compared to the market as a whole.
The "beta" of a particular fund is a measure of the A: fund's return that exceeds the current Treasury Bill rate B: volatility of the fund in relation to a designated benchmark index such as the DJIA or the S&P 500 C: fund's current performance compared to its past performance D: risk of default by debt securities in the fund portfolio
B: volatility of the fund in relation to a designated benchmark index such as the DJIA or the S&P 500 The beta of a bond represents how the bond's returns relate to the returns of the financial market in general.
Which of the following would be the basis of the calculation of earnings per share when reported on a fully diluted basis? A: In this situation, the EPS calculation will be based on the number of shares outstanding B: In this situation, the EPS calculation will be based on the number of outstanding common shares minuns shares that were issued throughout the year C: In this situation, the EPS calculation will be based on the number of outstanding common shares with additions for dilutions due to convertibles, including bonds, preferred stocks, and warrants D: In this situation, the EPS calculation will be based on the cost of operations along with other expenses
C: In this situation, the EPS calculation will be based on the number of outstanding common shares with additions for dilutions due to convertibles, including bonds, preferred stocks, and warrants
What is covered by the federal gov'ts guarantee of pass-through Ginnie Mae [GNMA] securities? A: The federal gov'ts guarantees applies to both the timely payments of interest & the timely repayments of principal on the securities. B: The federal gov'ts guarantees applies only to the timely payment of interest on the securities. C: The federal gov'ts guarantees applies only to the timely repayment of principal on the securities. D: The federal gov't does not guarantee any GNMA securities.
C: The federal gov'ts guarantees applies only to the timely repayment of principal on the securities. Explanation: GNMA pass-through securities are guaranteed as to the timely payment of principal and interest even if the underlying mortgages are not being paid on time.
Which of the following securities issued by the Federal Government does not have reinvestment risk? A: T-Bonds B: T-Notes C: Treasury Stock D: T-Bills
C: Treasury Stock
Which of the following would have an inventory of municipal security secondary market positions? A: the broker's broker for a firm B: the sales representative at the retail level C: a trader of municipal securities D: the managing underwriter
C: a trader of municipal securities
The effect of the FIFO accounting method on inventory valuations during a period of sharply rising prices is: A: reduce profits B: reduce tax liability C: increase the value of the inventory account D: increase the cost of goods sold
C: increase the value of the inventory account
Several years ago and just prior to retirement, Mr. Smith purchased 500 shares of ABC. At the time of purchase, ABC was trading at $45 per share. The price increased over the past few years and was at $60 per share when the RR for Mr. Smith's account learned that Mr. Smith had passed away in an automobile accident. Mr. Smith's will indicated that the shares should be handed over to Mr. Smith's adult daughter, Jane. This took place promptly after Mr. Smith's death and Jane decided to sell the shares several months later when the price had appreciated again to $65 per share. For taxation purposes, what is Jane's cost basis on these shares? A: since Jane did not pay for the shares, there is no cost basis for her at the time of the sale B: jane's cost basis woul dbe the same as her father's $45 per share C: jane's cost basis would be the price at the date of death of her father, $60 per share D: jane's cost basis would be the price at the time of sale, $65
C: jane's cost basis would be the price at the date of death of her father, $60 per share When shares of stock are inherited through a will, the cost basis to the beneficiary is the price at which the shares were transferred from the deceased. In this case, the shares were transferred at $60 per share, leaving Jane's cost basis at that price.
A net revenue pledge provision in a municipal revenue bond issue typically provides for revenue to be allocated first to which of the following? A: debt service B: sinking fund C: operations and maintenance D: reserve funds
C: operations and maintenance Net revenue pledge requires the issuer of a municipal bond to use generated revenues to service debt costs after satisfying operational expenses.
Shareholders equity on the balance sheet of a particular company includes all of the following except: A: common stock B: Preferred stock C: paid in capital D: outstanding bonds
C: paid in capital
Which of the following would NOT be considered to be advertisements under MSRB rules and regulations? A: market letters B: a summary of an official statement C: preliminary official statements D: research reports
C: preliminary official statements Preliminary Official Statements and final Official statements are disclosure documents and are not considered to advertisements. Summaries of these documents would be considered to be ad's.
Which of the following is TRUE about a municipal bond registered in the name of the owner? A: it can be traded by delivery only without endorsement B: principal is paid to the holders upon request C: principal is sent to the owner at maturity D: the owner is protected from market loss
C: principal is sent to the owner at maturity
Which of the following is a factor that need NOT be known when computing a municipal bond's accreted value? A: the date on which the bond was purchased B: the date of the bond's maturity C: the current price of the bond on the open market D: the price at which the bond was purchased
C: the current price of the bond on the open market To find the accreted value of a municipal bond, you would have to know the purchase price and date, and the date of the bond's maturity. This gives you the information necessary to see what the accreted value of the bond is up until this point. The current market value of the bond would be irrelevant when computing the accreted value.
Which of the following features is offered to both investors of corporations and of limited partnerships? A: limitation of liability B: high level of market liquidity C: the flow through status of profits and losses D: free transferability of beneficial interest
C: the flow through status of profits and losses
A municipal bond indenture is usually a contract between: A: the members of the underwriting syndicate B: the issuer and the law firm providing the legal opinion C: the issuer and the trustee on behalf of the lenders D: the issuer and the underwriter
C: the issuer and the trustee on behalf of the lenders
A municipal finance professional made a $200 contribution to a candidate for Comptroller of his town. The candidate lost the election. According to MSRB rules, which of the following is TRUE? A: The member firm cannot underwrite an offering for that municipality for at least three years pending FINRA review B: There are no restrictions as the contribution was made to a candidate not to an elected official C: The MFP's member firms is prohibited from underwriting any issue for that municipality for two years D: No violation has occurred and the member firm can underwrite an offering for that municipality
D. No violation has occurred and the member frim can underwrite an offering for that municipality Exp: Contributions cannot exceed $250; no violation has occurred.
One of the registered reps at your firm has recently done some research on US Treasury securities and wishes to mass mail his findings to all of his clients. Of the following statements, which is BEST suited for such a mailing? A: "Due to unusually high rates, investors should buy now to lock in profits." B: "US Treasury securities have zero risk with relation to principal and interest." C: "All purchases of Treasury Securities are commission-free." D: "The coupon rates, pricing, and yields shown are subject to change and can be affected by market conditions."
D: "The coupon rates, pricing, and yields shown are subject to change and can be affected by market conditions." (could not find online)
All of the following statement are FALSE with regards to FHLMC Securities [Federal Home Loan Mortgage Corporations] EXCEPT: A: FHLMC Securities are often referred to as Sallie Maes. B: FHLMC Securities are fully guaranteed by the U.S. Gov't. C: FHLMC Securities provide tax-free interest to investors. D: FHLMC Securities are only issued in book-entry form.
D: FHLMC Securities are only issued in book-entry form. Explanation:Of the choices offered the only one that is TRUE with regard to FHLMC Securities is that they are issued in book-entry form. They are NOT guaranteed by the Federal Government, interest income is fully taxable, and they are not commonly referred to as Sallie Maes (FHLMC = Freddie Macs).
All of the following are generally considered to be advantages of US Treasury bonds EXCEPT A: the availability of a wide range of maturities B: An active secondary market C: high loan value D: interest income that is exempt from federal, state, and local taxes
D: Interest income that is exempt from federal, state, and local taxes. U.S. Government bonds are exempt from state and local taxes, but not federal taxes
Treasury STRIPS have all of the following characteristics EXCEPT: A: They are sold at a discount B: Their price is volatile C: They lock in a rate for a predetermined period D: The accrued interest is taxable at maturity
D: The accrued interest is taxable at maturity Even through STRIPS and other zero-coupon bonds pay no interest, the investor is still liable for taxes on the annual gains in the value of the bonds. The investor must pay taxes on gains that have not been received. It's called "phantom" income.
Your firm is performing an analysis on a municipality's total debt. Of the following types of debt, which would be overlapping? A: the debt on a direct obligation bond B the debt of the state in which the municipality is located C: The debt on a special assessment bond D: The debt of the local school district
D: The debt of the local school district Overlapping debt is debt that is shared by more than one municipality. One of the most common types of overlapping debt is that of a school district, which may include several municipalities (one school district for two or more towns). Overlapping debt will not occur at the state level.
When analyzing a General Obligation bond issued by a municipality, which of the following would be the LEAST important? A: tax collection record of the municipality B: debt to value ratio C: debt service coverage D: direct and overlapping debt per capita
D: direct and overlapping debt per capita (could not find)
A client is interested in becoming a limited partner of a DPP (direct participation program). He signs a subscription agreement for the DPP. This would indicate all of the following EXCEPT A: he has provided verification in relation to his net worth B: he has agreed to provide the general partner of the DPP with a power of attorney in relation to matters of the DPP C: he has indicated agreement in relation to subscription to the DPP offering D: he has become a limited partner and received approval as such
D: he has become a limited partner and received approval as such
In a serial municipal bond issue, the yields and other vital data by maturity date are referred to as: A: yield to maturity B: redemption C: coupons D: scale
D: scale A serial bond issue is one with staggered maturities. Each bond certificate in the series has an indicated redemption date. A "scale" provides vital data for each redemption date including yields, the coupon rate, and the number of bonds.
Which of the following is an index which is comprised of 30 blue-chip stocks that are actively traded? A: the Wilshire index B: the standard & poor's index C: the dow jones composite average D: the dow jones industrial average
D: the dow jones industrial average What Is the Dow Jones Industrial Average (DJIA)? The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq.
The secondary market price of a municipal bond would be least likely affected by which of the following? A: changes in tax law B: market conditions C: an upgrade in the credit rating of the issuer D: the election of new municipal leaders
D: the election of new municipal leaders (couldn't find answer online)
A US taxpayer receives dividends from a company domiciled in a foreign country. Foreign country taxes are withheld from the dividends. All of the following are TRUE regarding the foreign dividends received by the US taxpayer EXCEPT: A: such dividends paid to customers are fully taxable B: the customer can utilize a tax credit against US taxes due C: an itemized deduction can be used by the customer D: the taxes withheld are added to the gross income of the customer
D: the taxes withheld are added to the gross income of the customer Typically your foreign dividends will be clipped for an income tax withheld in the issuer's home country. The going rate is 15%, although there are variations up and down from that point. The good news is that you can get much of that money back—on occasion, all of it—when you file your U.S. return
The negotiated underwriting of municipal securities usually involves all of the following EXCEPT: [A]a bid form [B]a legal opinion [C]an underwriters agreement [D]a bond purchase contract
[A]a bid form The bid form is used in a competitive bid underwriting rather than a negotiated underwriting. General obligation (G.O.) bonds are usually awarded by competitive bid. Revenue bonds are usually negotiated.
An investor sells short 100 shares of ABC common stock at 50 on June 5th. On December 10th of the same year, the investor buys 100 shares of ABC common stock at 40 and delivers the stock to cover the short sale. The federal income tax treatment of this transaction is: [A] A long-term capital gain [B] A short-term capital gain [C] A long-term capital loss [D] A short-term capital loss
[B] A short-term capital gain A short-term capital gain is where the asset is held for 12 months or less. Short-term capital gains are taxed at the investor's ordinary income tax rate. In this case, it is a short-term gain because the first position put on by the customer is a "short" position and you CANNOT accumulate a holding period on a short position, even if the investor had a short position for more than one year. The holding period here is short-term because the investor was only "Long" the stock for 1 day.
You are talking to a client who is making a few changes to their account information. The client recently retired. The client has a need for taxable monthly income from investments and would like to keep their investments conservative in nature. Which of the following investments would NOT be appropriate for this client? [A] The client could invest in the bonds of several conservative Blue Chip companies. [B] The client could invest in several leveraged, closed-end funds made up entirely of bonds. [C] The client could invest in the preferred stocks of several conservative Blue Chip companies. [D] The client could invest in CDs (Certificates of Deposit).
[B] The client could invest in several leveraged, closed-end funds made up entirely of bonds. Of the choices offered, the least appropriate would be "B", the leveraged bond fund because it would carry the greatest risk. All of the other choices would be appropriate for a conservative retired person. For the CD, we could own 12 CD's and have 1 CD maturing every month or something like that. For a bond, we could have one bond paying interest in Jan/July, and one bond paying interest in Feb/Aug, and one bond paying interest in March/Sept, etc.
A serial bond issue is coming to market. Where should one expect to find the yields listed in relation to maturity? [A] The coupon rates [B] The scale of the bond issue [C] The credit rating [D] The notice of sale
[B] The scale of the bond issue "Scale" as applied to serial bonds with staggered maturities means vital data for each of the scheduled maturities including the number of bonds, the maturity dates, the coupon rate, the offering price and the yields.
MSRB rules state that the MOST a person may give in any given year to one person is? [A]A gift or gratuity of $50 [B]A gift or gratuity of $100 [C]A gift or gratuity of $150 [D]A gift or gratuity of $500
[B]A gift or gratuity of $100
All of the following statements pertaining to U.S. Government Agency Issues are FALSE EXCEPT? [A]All are listed and traded on the NYSE exclusively. [B]They generally are offered with higher yields than U.S. Treasury securities. [C]They are backed by the full faith and credit of the US Government D: all pay interest monthly to investors
[B]They generally are offered with higher yields than U.S. Treasury securities.
All of the following are important factors used in assessing an investor's risk tolerance EXCEPT the customer's [A]current income level [B]level of education attained [C]investment time horizon [D]investment objectives
[B]level of education attained EXPLANATION The investor's level of education would be the least important of the choices listed and typically does not play a role in assessing the customer's risk tolerance. The customer's financial needs, past experiences, investment objectives, and time horizon are all important.
Which of the following asset allocations is the MOST appropriate recommendation for a single, 25 year old investor with a high tolerance for risk, no need for current income and who is investing for retirement at age 65? [A] 0% common stock, 100% bonds [B] 50% common stock, 50% bonds [C] 100% common stock, 0% bonds [D] 100% in money market funds
[C] 100% common stock, 0% bonds Common stock has the highest potential for appreciation over the long term.
When compared to other types of securities, small cap companies often will have a higher level of which of the following? [A] Small cap companies often will have a greater amount of timing risk to investors. [B] Small cap companies often will have a higher level of risk associated with inflation. [C] Small cap companies often will have a higher level of liquidity risk to investors. [D] Small cap companies often will have a higher level of risk associated with changes in interest rates.
[C] Small cap companies often will have a higher level of liquidity risk to investors.By nature and even by name, small cap companies (small capitalization companies) have a relatively low amount of capitalization. This would mean that relative to other companies, a small cap company will have fewer shares trading on the open market. This can lead to concerns with liquidity if an investor wants to buy or sell and there is not currently a market for the small cap security.
One of your clients calls and is unhappy about the transaction costs in their account over the course of the last year. You go over their statements and activity for the year and discuss solutions with the customer. The customer expresses their feelings that movements in the market are rational and tied to various factors, but that predicting future movements is, for the most part, futile. What investment strategy would be BEST for this client with this information in mind? [A] The RR should suggest that the client use a combination of tactical and strategic asset allocations. [B] The RR should suggest that the client try to time the market, taking advantage of gains and losses in individual securities. [C] The RR should suggest that the client use a buy and hold strategy.[D] The RR should suggest that the client engage in day trading to take advantage of daily fluctuations in the markets.
[C] The RR should suggest that the client use a buy and hold strategy.[D] The RR should suggest that the client engage in day trading to take advantage of daily fluctuations in the markets.
A registered representative has thoroughly researched a wide variety of sector funds and has found one that he believes has a very high potential for growth. The RR may recommend the fund to [A] customers whose primary investment objective is safety of principal. [B] any high net worth customers. [C] customers with experience in sector fund investments. [D] customers whose primary investment objective is diversification.
[C] customers with experience in sector fund investments.
All of the following are considered assets EXCEPT a [A] closed-end fund [B] negotiable certificate of deposit [C] line of credit that has yet to be used [D] convertible bond
[C] line of credit that has yet to be used A line of credit is not a legal commitment by the bank to make a loan to a customer. It is only a moral commitment. Therefore, it is not something owned by the customer like other assets. The other choices all have commercial value as assets.
One of your clients is a recently retired individual who relies heavily upon the current return on his fixed income portfolio for living expenses, vacations, and other expenditures. Which of the following investments is LEAST suitable for this individual? A: US Treasury bonds with varying maturities through the end of the client's time horizon B: Non-callable, non-convertible bonds issued by a blue chip company with maturities ranging to the end of the client's time horizon C: Callable, non-convertible bonds, issued by a blue-chip company with maturities ranging to the end of the client's time horizon, but call dates as early as this year D: A balanced portfolio of non-callable, convertible bonds issued by blue-chip companies with maturities to the end of the client's time horizon and preferred stocks from the same issuers.
[C]Callable, non-convertible bonds issued by a blue-chip company with maturities ranging to the end of the client's time horizon, but call dates as early as this year. EXPLANATION Due to the client's reliance on the current return of their portfolio, the LEAST suitable choice would be the callable, non-convertible bonds with call dates as early as this year. Each of the other selections would provide stable income through the end of the client's time horizon.
Regulations apply to certain securities with regards to the Alternative Minimum Tax (AMT), and some are considered tax-preferenced items, while other securities would not be subject to AMT. With regards to the following issues of municipal securities, which would NOT be subject to AMT? [A]Revenue bonds associated with housing within a municipality [B]Revenue bonds associated with industrial development within a municipality [C]General obligation bonds issued by a school district [D]General obligation bonds issued to finance an industrial complex within a municipality
[C]General obligation bonds issued by a school district EXPLANATION Bonds issued for "Private" purposes are items which could be used as preferenced items when computing Alternative Minimum Tax, but bonds issued for "public" purposes such as schools would not fall into this category. In this question, there are three examples of private use municipal bonds for either housing or industrial purposes. The school bonds would be tax-free and not subject to AMT.
A client lists their primary investment objective as liquidity. An RR believes that investments in municipal securities are best suited for this client. With the primary investment objective of the client in mind, which of the following would be the MOST attractive feature in relation to recommendations of municipal securities by the RR to this client? [A]The market price of a particular municipal security exceeds the par value of the security by a sizeable amount. [B]The market price of a particular municipal security is well below the par value of the security. [C]The security has a maturity that takes place within the next year.[D]The security has a call premium that currently exceeds the market price.
[C]The security has a maturity that takes place within the next year EXPLANATION When an investor is primarily concerned with liquidity, the primary consideration would be the maturities of securities held within the portfolio. Short-term maturities are generally more liquid, so here, the muni bonds with the maturities within the next year would be most attractive to this investor. Correct Answer
A customer is investing for his child's education. He is seeking reasonable income and growth of capital. His investment objective is best described as seeking which of the following? [A] Capital gains only [B] Speculative profits [C] Maximum current income [D] Total return (growth plus income)
[D] Total return (growth plus income) Since we are looking for an overall increase in value (both income and appreciation), we would consider the total return of the investment.
Susan Jones has the following municipal bonds in her portfolio. $20,000 AAA Sacramento Muni Asst 8% due 7/11 $30,000 AA Los Angeles, Ca GO 4.5% due 7/01/15 $50,000 A-1 CA State GO 5.24% due 09/01/16 $50,000 A-1 CA State Pwr Rev 5.9% due 07/15/17 $10,000 A CA State Fin. Auth (univ) 3.80% due 08/15/25 These bonds have satisfied the requirement of diversification in all of the following ways EXCEPT? [A] final maturity dates [B] the purpose for which the bonds were issued [C] the quality of the bonds [D] the issuer of the bonds
[D] the issuer of the bonds Diversification would have been satisfied in all choices offered except for diversification of issuers. All these bonds have been issued within the State of California.
Which of the following instruments/asset classes would generally be considered to be the least liquid? [A]Over the counter stock [B]Listed stock [C]General obligation municipal bonds [D]Direct participation program units
[D]Direct participation program units Direct participation program (i.e., Limited partnership) units can be difficult to sell because there is not an active secondary market for limited partnerships and because the limited partners (the investors) generally need the approval of the general partners before they can sell their units.
An investor owns 300 shares of ABC stock acquired as follows: Year 1 Purchased 100 shares at $23 per share Year 2 Purchased 100 shares at $29 per share Year 3 Purchased 100 shares at $20 per share Year 4 No activity The investor decides to sell 100 shares in year 5 at $35 per share. In order to REDUCE liabilities associated with taxes on this sale, which of the following is the cost basis that the customer should use? [A]Last In, First Out (LIFO) [B]First In, First Out (FIFO) [C]A computation of the average cost of shares held [D]Identifying the shares that the customer intends to sell
[D]Identifying the shares that the customer intends to sell EXPLANATION Using identified shares, the taxpayer can identify the 100 shares bought in Year 2 at $29 per share as the shares the taxpayer sold. Therefore, the capital gain ($35 - $29 = $6 per share) is minimized.
An investor sells a security at a loss and buys substantially the same security within a 30 day period. For federal income tax purposes, the loss is: [A]allowed if the security was held for more than one year [B]allowed regardless of how long the security was held [C]allowed but only if there are taxable gains [D]disallowed as a loss but can be carried over and added to the cost basis of the new position
[D]disallowed as a loss but can be carried over and added to the cost basis of the new position An investor sells a security at a loss and buys substantially the same security within a 30 day period. For federal income tax purposes, the loss is:
A municipal bond has a provision for redeeming a certain number of bonds at par in ten semi-annual installments. This type of call feature is best described as: A: an installment call B: an optional call C: a sinking call D: a catastrophic call
C: a sinking call
A technical analyst/chartist would interpret an inverted head-and-shoulder formation as A: neutral B: bearish C: the reversal of an upward trend D: the reversal of a downward trend
D: the reversal of a downward trend
A client wishes to diversify her portfolio of municipal bonds by quality. In order to perform this task, the RR's BEST approach would be to analyze what? [A] Each bond's credit rating [B] Each issuer's location [C] The intended use of each bond's proceeds [D] The type of bond being issued by the municipality
[A] Each bond's credit rating Diversification by quality refers to credit quality. Bond credit rating agencies rate the credit (default risk) of municipal bonds.
An investor has $20,000 of capital gains and $25,000 of capital losses in a particular tax year. What is the maximum that the investor can deduct on the current year's tax return? A: $3,000 B: $5,000 C: $20,000 D: $25,000
[A]$3,000 EXPLANATION Capital losses may first be used to offset capital gain. If a taxpayer has a net capital loss, the taxpayer may deduct up to $3,000 per year and any remaining loss may be carried forward to future tax years.
A customer wants to execute a transaction in his account which the registered representative considers an inappropriate investment, considering the customer's financial situation and needs. The registered representative: [A]Is required to check with his supervisor before entering the order.[B]May execute the trade only after receiving written approval from his supervisor. [C]Must refuse to enter the order. [D]May enter the order with the appropriate written notation on the order ticket that it was unsolicited.
[D]May enter the order with the appropriate written notation on the order ticket that it was unsolicited. EXPLANATION The registered representative can enter the order on behalf of the customer, but he should mark the order unsolicited. He should also discuss why he thinks the transaction might be unsuitable with the client.
