Chapter 9-12 mastery test

10. A broker dealer's obligation to understand the complexity and risks of an investment strategy before determining whether it is suitable for at least some investors is known as the?

Reasonable basis suitability obligation = at least some investors, customer specific suitability = one investor, quantitative suitability obligation = recommended transactions are not excessive

42. When opening account to buy options which of the following signatures is needed on the options new account form?

Registered options principal signature

34. A trust that comes into effect upon the death of the trustor is called a?

Testamentary trust = A testamentary trust is initiated upon the person's death according to the terms of a will

21. Which of the following is not part of a typical margin agreement?

The long/short form = in a margin agreement: credit agreement, hypothecation agreement, loan consent form

12. An option seller wants?

The option to expire worthless = an option can be exercised, traded, or left to expire. An option seller would prefer to see the option out of the money where it would be left to expire worthless

15. A customer sends an email to his registered representative with an order to buy 500 shares of ABCD in the market. Which statement is true about accepting this order from the customer?

The order cannot be accepted because the firm cannot verify that it was the customer who actually sent the order

4. A 35 year old individual earning $60,000 in 2024 makes an annual contribution of $2000 to its Traditional IRA which statement is true?

The person can contribute a maximum of $5000 to a Roth IRA= total of $7000 if older than 59 1/2 they can do an additional 1000

2. A customer sells short 100 shares of PDQ at $61.00 and buys one PDQ Jul 60 call @ $3. The break even point occurs when?

The stock falls by the premium paid = short stock = bear, uses a long call hedge, premium is the cost of insurance. To break even because it is short it moves the direction down. This means break even occurs at the short sale price - premium paid

3. John shorts 3 ABC Apr 50 calls at 3.50. He has no other positions in the stock. The stock is trading at 51. Which of the following is true?

The time value of the position is 2.50 = 50-51 = 1 then 1- 3.50 = 2.50

27. A customer wishes to give a gift of securities to her nephew under the uniform transfers to minors act UTMA which statement is true?

The transfer age is set by the custodian up to the maximum age permitted by the state

31. Luke writes 6 SIN Oct 30 calls @ 4. He is assigned the options when SIN shares are trading for $36. If he had no position in SIN before the options were exercised what is his net profit or loss?

$1200 loss = 30 - 36 = 6. 36 x 100 shares is 3600 loss. 4 is premium and 6 stocks so 60 x 40 = 2400 premium. write = sell so sell a call means he gets the premium so 2400 gain - 3600 loss = 1200 loss Feedback A call option gives the holder the right to buy the underlying securities from the option seller at the option's strike price. In this case, the holder exercised her right to buy the stock from Luke. Since Luke did not own any shares of SINE, he had to buy the shares at their market price of $36/share. He then received $30/share from the option holder when he sold the shares to her. This means Luke incurs a loss of $3,600 on his purchase and sale of SINE shares (S6/share loss x 6 contracts x 100 shares per contract= $3,600 loss). When he shorted the contracts, Luke received 52,400 in premiums from the option buyer (S4/share x 6 contracts x 100 shares per contract = $2,400). Adding his 52,400 premium received to the 53,600 loss he incurred from his purchase and sale of SINE shares results in a loss of $1,200 from his options transaction.

7. A customer sells short 100 shares of ABC at $15.00 as an initial transaction in a new margin account the customer must deposit?

$2000 = minimum is $2000 on a sell short

24. A customer sells short 100 shares of ABC stock at $50. As an initial transaction in a margin account. At the end of the day the stock has fallen to a price of $40 per share the customer must deposit?

$2500 = stock at $50 x 100 par = $5000, 50% of $5000 = $2500 minimum is an initial transaction in a margin account. Either 2000 minimum or 50%

25. An ABLE account must be established before the beneficiary reaches the age of?

26

5. Sally purchases 3 ABC Apr 30 call at 2.50. The stock is currently trading at 31. What is her break even point?

32.5 = on long calls and investor break even point is the strike price + premium paid = 30 + 2.50 = 32.5

39. Sally smart would like to roll over funds from one 529 plan to another. Once she withdraws the funds how many days does she have to deposit them in a new account if she wants to avoid tax consequences?

60 days = a rollover from from a 529 plan to another 529 plan can be done without any tax consequences if the funds are deposited into a new account within 60 days of the withdrawal of the old plan

37. Which of the following would likely be an inappropriate candidate for a deferred variable annuity?

60 year old who thinks she may want to open a business in the next 3-5 years = annuities typically have high surrender charges spread over a number of years and investor who may need their money within a few years like 3-5 should consider different options

11. A purchase of a put is a?

Bear strategy = the buyer of a put has the right to sell stock at a fixed price in a falling market the buyer has ever increasing gain potential as the market falls so this is a bear market strategy

43. A customer sells short 100 shares of ABC at $50 and sells 1 ABC Jan 50 put @ $5 this strategy is?

Bearish/neutral = sells short shares is bearish because sells put also it is neutral Feedback If the market remains stable, the put expires "at the money' and the customer eams the S500 premium. The stock which was sold at S50 can be bought for $50, so there is no further effect on the customer. If the market falls, the short put is exercised and the customer must buy the stock at 550. Since he or she sold the stock at 550, there is no further effect on the customer. The customer does eam the $500 of premiums from the sale of the put. The, this strategy is profitable when the market is flat or falling - a bearish/neutral strategy. If the market rises, the short put expires "out the money." The customer must cover the short sale at 550 by purchasing the stock in the market. The customer's loss potential is unlimited on this short stock position.

29. Which one of the following orders require specific customer authorization?

Buy 100 shares of any computer stock priced at under $40 = Specific customer authorization is needed as a power of attorney when the choice of the security is left to the registered representative. If the customer specifies the size and security no power attorney is needed

48. Who sets the initial margin requirement to buy equity securities?

FRB = Federal Reserve board under regulation T sets initial margin requirements

35. Which of these actions would a firm need to take if one of its customers made three cash deposits in one week each on a different day of $9,900 - $10,000?

File a suspicious activity report = SAR = UAR

14. John is a US investor who believes that the best opportunities to make money lie overseas. He is comfortable with volatility and he believes that currency hedging is overrated and expensive. For an unhedged investors: as John which of the following is the best scenario?

Foreign investment value arises and U.S. dollar depreciates = if the dollar weakens against foreign countries returns c foreign currency will be higher to the US investor = he wants the foreign currency to rise the US currency to go down

46. Barring an extension request under regulation T payment for a security transaction must be received no later then?

Four business days after trade= without an extension request it is S + 2. This means T + 2 + S + 2 = 4

6. A customer buys 100 shares of ABC stock at $58 and once to hedge the position the customer should?

Go long a put = to hedge a long stock position against a downward market move the best choice would be to long a put protecting from downside market risk

19. Drew holds 500 shares of ABC and would like to protect his investment by using options. Which of the following would provide the best protection?

Purchasing 5 ABC put options = investor who is long a security can gain protection from a downward turn by either buying puts or selling calls a sell call can give income but a buy put will give hedging so purchasing put is the best option

17. When comparing fixed annuities to variable annuities which statement is true?

A fixed annuity account grows at a Guaranteed Rate = fix periodic payment for life paid into a separate account

8. Purchasing put options on the S&P 500 could protect against which of the following?

A sharp decline in the stock market

16. A Social Security number or tax identification number is needed to open a securities account for?

All of the above = a US individual only, both US and foreign individuals only, us individuals and corporations only

47. Which statement is true about non contributory defined benefit retirement plans?

Annual benefit payments are fixed. Feedback In a "defined benefit" retirement plan, contribution amounts vary based upon the age of the person covered under the plan. Larger contributions are ma for older plan participants nearing retirement than for younger plan participants who have many years left until retirement. Once benefit payments start, the amount of the benefit is fixed - since the plan funded a "defined" benefit. Benefit payments are fully taxable at ordinar income rates. The other type of plan is a "defined contribution." In this type, the contribution amount is fixed. The benefit payment depends on the investment results the fixed contributions made, and hence can vary.

41. Under FINRA rules if a member suspects that a senior citizen is being financially exploited?

Any hold placed on the account, if supported by the members review of the situation, can be extended for another 10 business days

22. An elderly customer has a discretionary account with your firm. The power of attorney signed by the customer for the account is durable. If the customer becomes mentally incapacitated the registered representative handling the account?

Can continue to execute discretionary trades for that customer = durable power of attorney even if mentally incapacitated can still make trades

50. What will change the cash value of a variable life policy?

Changes in market value = variable means changes with market

36. All the following statements are true regarding a customary account with a full power third party trading authorization except?

Checks drawn on the account can be made out to the customer or the third party = full power example an account that has a power of attorney a check can be made out to either to the principal or the power of attorney

45. Where would you find the names of the persons authorized to trade a corporate account?

Corporate resolution

32. A customer buys 100 shares of ABC stock at $40 and sells one ABC Jan 45 call @ $2 on the same day in a cash account. the client is a?

Covered call writer = buying a stock and selling a call is referred to as covered call writing the investor is bullish due to the long stock position

33. Irving investor opens an account with a new broker, Don. Irving explains that he would like to make $1,000,000 over the next 10 years. This information is related to what part of Don's suitability analysis of Irving?

Customer specific suitability obligation = customer specific means one person

20. A nephew has been given a durable power of attorney over his uncle's brokerage account upon the death of the uncle the power of attorney?

Is terminated

44. Two brothers wish to open an account at a broker dealer one brother will contribute $100,000 for a 25% interest and the other brother will contribute $300,000 for a 75% interest. They have stated that if one should die then that person's share will go to a designated beneficiary what kind of account should be opened?

Joint account with tenants in common = it is not partnership because it is not business, it is not joint account with rights of survivorship this is only if married

13. LGIPs marketed by broker dealers are investment vehicles offered to?

Local government entities in that state

49. A customer buys 1 ABC Oct 65 put at $7 when the market price of ABC is 62. ABC stock rises to $70.00 and stays there through October the customer?

Loses $700 = if the market rises $70 the put expires out of the money. 7$ premium x 100 shares = $700 premium is the

9. European style options can be exercised?

On the expiration date

38. All the following are standardized for listed option contracts except?

Premium = strike price, contract size, expiration are all standard amounts. A premium is different for each type of stock

30. In order to fulfill obligations of regulation SP broker dealers investment advisors and investment companies must do all the following except?

Provide customers with a toll free telephone number to call with nonpublic personal information

1. If an associate person opens an account at another member firm that firm must?

Provide duplicate account statements to the employer on request

26. If a customer account is frozen?

Purchases require cash on the trade date for 90 days

23. All the following information must be disclosed to a client on form CRS when opening a new account at a broker dealer except?

The type of information collected by the firm abouts the customer and how it is used Regulation BI went into effect in mid-2020. It requires that customers receive a 2-page document at account opening called Form CRS - Customer Relationship Summary. Form CRS details: Whether the firm is acting as a broker-dealer in the relationship. where it can charge commissions: or if the firm is acting as an investment adviser in the relationship, where is can only charge fixed fees: That the firm must adhere to a suitability standard when making recommendations as a broker-dealer: and that the firm must adhere to a tougher fiduciary standard when acting as an investment adviser: The fees and costs that the customer will pay: Any conflicts of interest that the firm may have in providing its services to the client; and Whether the firm or its associated persons has had any reportable disciplinary events. Regulation SP (Statement of Privacy) covers the confidentiality of customer information and how the firm may use it. It also gives the customer the right to "opt out and deny the right of the firm to use any of his or her personal information (e.g., for marketing purposes).

18. Which of the following statements is true about annuities?

Upon death of the policyholder during accumulation the greater of payments made to the annuity or value of the annuity at death would be void to the beneficiary Feedback An important benefit of annuities, despite the fact that they are not life insurance products, is that they pay a death benefit. Even if the account owner dies during accumulation, the beneficiary would receive either the value of the annuity at the time of death OR the amount of payments made into the annuity - whichever is greater. For tax reporting purposes, the value of the annuity would be included in the estate of the deceased and the beneficiary would be required to pay income taxes on the earnings.

40. Any changes in value of a variable ancity accumulation unit are directl related to changes in the ?

Value of the securities funding the separuenced by chane the separate account an investment funds a variable annuity accumulation unit values are directly influenced by changes in the value of securities in the separate account

28. John shorts 3 ABC Apr 50 calls at 3.50. He has no other positions in the stock stock is trading at 51 which of the following is true?

price is above the strike price 51 - 50 = 1 The options are in the money by $1 = for both long and short positions call options are in the money when the market