Mock Exam 2
Which of the following positions exposes a customer to unlimited risk? A) All of these B) Short 200 shares of XYZ C) Short 2 XYZ uncovered calls D) Short 200 shares of XYZ and short 2 XYZ puts
A) All of these All of the positions expose the client to unlimited risk because a loss will occur if the stock price rises.
A project that was funded with a revenue issue has been condemned by the state under an eminent domain proceeding. The outstanding bonds would be subject to which of the following call provisions? A) Catastrophe call B) Defeasance call C) Prerefunding call D) Refunding call
A) Catastrophe call If a revenue project was condemned under eminent domain, the bonds would be subject to a catastrophe call.
In safety of principal, general obligation municipal bonds are considered second only to A) U.S. government and agency bonds. B) common stock. C) AAA-rated corporate bonds. D) preferred stock.
A) U.S. government and agency bonds. Municipal securities are considered second in safety of principal to only U.S. government and agency issues.
Which of the following capital structures would be considered the most highly leveraged? A) Common stock only B) A large value of bonds and a small value of common stock C) Equal values of common stock and bonds D) A large value of common stock and a small value of bonds
B) A large value of bonds and a small value of common stock Leverage is using other people's money to enhance equity value. In this case, borrowing at a fixed rate of payment enhances cash flow, giving the company extra money to invest in its operations. Just as individuals, a company has to be careful not to borrow more than it can afford.
When comparing the performance of several portfolios, which would you be most likely to recommend to your clients? A) The one with the lowest alpha B) The one with the highest alpha C) The one with the highest beta D) The one with the lowest beta
B) The one with the highest alpha Alpha is a performance measure, while beta is a measure of a stock's volatility relative to the overall market. When a portfolio has a positive alpha, the manager has created excess returns. That is, the performance was better than would have been expected for the risk taken.
For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as A) an all-or-none commitment. B) a firm commitment. C) a best efforts underwriting commitment. D) a standby underwriting commitment.
B) a firm commitment. For new municipal bond issues, underwriters must submit bids for the entire bond offering—a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities, and an all-or-none commitment is a type of best efforts commitment.
A planned amortization class (PAC) collateralized mortgage obligation (CMO) offers A) protection from prepayment risk only. B) protection from both prepayment and extension risk. C) less protection than a targeted amortization class. D) protection from extension risk only.
B) protection from both prepayment and extension risk. A PAC offers protection from both prepayment and extension risk. This protection is greater than that offered by a targeted amortization class CMO, which protects against prepayment risk only.
An investor with no current holdings wants to invest $110,000 in the stock of a company she feels looks sound with good upside potential. A history of small dividend distributions is another reason she likes it. This scenario should prompt a discussion of which of the following first? A) Tax consequences regarding dividends B) Interest rate risk C) Lack of diversification D) Reinvestment risk
C) Lack of diversification Currently with no other holdings, a single stock investment with a substantial sum would not be deemed suitable. While there may be a number of suitability issues to discuss, including tax consequences regarding dividends, lack of diversification would be an obvious starting point.
Variable annuities generally include an assumed interest rate. This is A) the annual rate at which annuity payments will increase. B) the rate used to illustrate the future growth prospects of the contract. C) the annual rate of return required to maintain the level of annuity payments. D) the annual dividend rate that will be paid to contract holders.
C) The annual rate of return required to maintain the level of annuity payments. The assumed interest rate (AIR) is the rate the insurance company assumes the separate account will earn during the payout period. If the assumption is wrong, the monthly payments will be adjusted accordingly. If the separate account earns more than the AIR, the next month's payment is increased. If the separate account earns less than the AIR, the next month's payment is reduced. If the account earns the assumed rate, monthly payments will not change.
A 27-year-old client is in the lowest tax bracket and seeks an aggressive long-term growth investment. If his investment adviser representative recommends a high-rated general obligation municipal bond, the investment adviser representative (IAR) has A) committed no violation because municipal bonds are well suited for the market's volatility. B) made an unsuitable recommendation because a municipal revenue bond would have been more appropriate. C) made an unsuitable recommendation based on the client's needs and objectives. D) recommended a suitable investment because general obligations are good long-term investments.
C) made an unsuitable recommendation based on the client's needs and objectives In recommending a conservative, tax-exempt investment to this customer, the IAR has failed to make a suitable recommendation given the client's objectives. Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential.
All of the following would flow through as a loss to limited partners except A) accelerated depreciation. B) interest payments on recourse debt. C) principal repayment on recourse debt. D) depletion.
C) principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible
The amount paid into a defined contribution plan is set by A) the employer's profits. B) the employee's age. C) the trust agreement. D) the ERISA-defined contribution requirements.
C) the trust agreement. A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.
All of the following statements regarding the 5% markup policy are true except A) the type of security is a factor to consider. B) the markup policy does not apply to securities sold at a specific price and with a prospectus. C) a riskless transaction is not generally covered by the 5% markup policy. D) a transaction in common stock customarily has a higher percentage markup than a bond transaction of the same size.
C)a riskless transaction is not generally covered by the 5% markup policy. Riskless transactions are covered by the 5% markup policy.
A front-end sales load is defined as A) the concessions allowed on the purchase or sale of securities. B) the fee paid to the investment adviser. C) the commissions paid on the purchase or sale of securities. D) the difference between the public offering price and the net asset value of a mutual fund share
D) the difference between the public offering price and the net asset value of a mutual fund share. A sales load is the difference between the public offering price and the net asset value per share of the fund
A customer has a margin account that shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has special memorandum account of $5,000. The long market value at maintenance is A) $95,000. B) $150,000. C) $115,000. D) $120,000.
D) $120,000. Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by 0.75 ($90,000 / 0.75 = $120,000). If the market value were to fall to $120,000, the account would look like this: $120,000 − $90,000 = $30,000 (25%) (MV − DB = EQ).
A client enters a buy stop order for 100 shares of XYZ at 40. Trades then occur at 38, 39, 39.90, 40.05, 40.10, and 39.78. What is the likely price the client paid for the stock? A) $40.05 B) $39.00 C) $39.78 D) $40.10
D) $40.10 The order is triggered as soon as the price gets to 40 or higher. That would be the trade at 40.05. A typical use of a buy stop order is protecting a short stock position. Because the short stock position has unlimited potential loss, the short seller can gain protection by entering a buy stop order. That order is entered at a price above the current market (the short seller is hoping the price will fall), but if the price rises, the stop will be triggered. At that time, a market order is entered and the client pays the next price (which could be more or less than 40). In this case, the next price is 40.10 and that is the likely price per share paid by the client
Disregarding commissions, and investor purchasing $10,000 face amount of Treasury notes at a price of 98.12 would expect to pay A) $981.20. B) $983.75. C) $9,812.00. D) $9,837.50
D) $9,837.50 Please note that the purchase is not for $1,000, but for $10,000. Treasury notes (and bonds) are quoted in 32nds. This quote of 98.12 is 98 12/32 or 98 3/8% of $10,000.
Which of the following would be of least concern to a registered representative recommending a municipal security to a customer? A) Municipal security's rating B) Customer's state of residence C) Customer's tax status D) Availability of the security
D) Availability of the security The customer's state of residence and tax status are essential when determining suitability of a municipal security. The security's rating is also important because it measures the bond's safety and quality and should align with the customer's risk tolerance. While the availability may pose a challenge for the broker-dealer and could potentially add to the cost of the transaction, it would be of the least concern regarding suitability unless the cost was in some way prohibitive.
A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in A) Michigan Upper Peninsula revenue bonds rated AA. B) Delaware Wetlands Developments municipal bonds rated AA. C) high-yield municipal bonds rated BB. D) New Jersey Turnpike revenue bonds rated AA
D) New Jersey Turnpike revenue bonds rated AA. The Michigan revenue bonds, the subinvestment-grade municipal bonds, and the Delaware municipal bonds have possible state disadvantages or are less than investment grade.
Which of the following increases the special memorandum account (SMA)? A) Decline in market value of long positions B) Withdrawal of margin securities C) Purchase of margin securities D) Receipt of a cash dividend
D) Receipt of a cash dividend Cash dividends are credited to SMA dollar for dollar.
Which of the following orders on the order book will not be filled if the stock rises? A) Sell limit B) Buy stop limit C) Buy stop D) Sell stop
D) Sell stop Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits.
A firm underwriting of a municipal bond issue usually has a number of different broker-dealers involved. Those who earn a commission on each sale they make are performing in the role of A) a selling syndicate member. B) a registered representative. C) the syndicate manager. D) a selling group member
D) a selling group member. Selling syndicate members use selling group members to expand their reach. These selling group members receive a selling concession (a commission) on each sale they make. They have no financial commitment and return any unsold bonds to the syndicate member. Although registered representatives will typically earn a commission on the bonds they sell, the question asks about the broker-dealers involved in the underwriting. Be sure to answer the specific question asked.
A representative wishes to execute an order for a customer's discretionary account. The municipal dealer has a control relationship with the issuer of the security to be purchased. Under Municipal Securities Rulemaking Board rules, the representative A) may not execute the order. B) must wait until the firm terminates the control relationship. C) may refer the customer to a firm that has no control relationship. D) must have specific authorization from the customer.
D) must have specific authorization from the customer Even in a discretionary account, a registered representative may not exercise discretion when a control relationship exists between the issuer and the dealer without first receiving the customer's permission.
Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority except A) the debt service. B) the debt service reserve fund. C) the operations and maintenance. D) the optional call provisions.
D) the optional call provisions. Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds.
An account initially approved only for covered call writing must be reapproved for which of the following? I. Ratio writing II. Spreads III. Naked option writing Iv. Straddles
I, II, III, and IV An options account only approved for covered call writing must be reapproved in writing for any other option-related activity.
A customer has realized a capital gain from the sale of a municipal bond. To reduce her tax liability, the capital gain can be offset against a capital loss in which of the following investments? I. General obligations II. Equity securities III. Corporate bonds IV. Collateralized mortgage obligation
I, II, III, and IV Any capital loss will offset a capital gain.
Which of the following covers a short call? I. Long stock II. Short stock III. Long put IV. Stock rights
I. Long stock IV. Stock rights 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.
Which of the following statements regarding corporate debentures are true? I. They are certificates of indebtedness. II. They give the bondholder ownership in the corporation. III. They are unsecured bonds issued to finance capital expenditures or raise working capital. IV. They are the most senior security a corporation can issue.
I. They are certificates of indebtedness. III. They are unsecured bonds issued to finance capital expenditures or raise working capital Debentures are debt securities that represent unsecured loans of the issuer. They are senior to common and preferred stock in claims against an issuer. They are issued to finance capital expenditures or raise working capital.
A working interest in an oil and gas partnership entitles the holder to I. a portion of the revenue. II. responsibility for part of the expense of extraction. III. royalty interest in the revenue. IV. royalty interest in revenue after deducting certain expenses.
I. a portion of the revenue. II. responsibility for part of the expense of extraction. 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.
Investors placing zero-coupon bonds in their portfolios are most likely to be looking to provide I. accumulation of capital. II. current income. III. protection against reinvestment risk. IV. tax deferral.
I. accumulation of capital. III. protection against reinvestment risk. Zero-coupon bonds are always purchased at a discount because they pay no interest. At maturity, the bondholders receive the maturity value. That represents the initial investment plus interest. Therefore, the investors are receiving more capital than invested (capital accumulation). Zero-coupon securities avoid reinvestment risk because there are no periodic interest payments to be reinvested. When you purchase one of these securities, the quoted yield to maturity is exactly what you will earn if you hold it to the end. With no interest payments, there is no current income. There is no tax deferral with a zero. In fact, unless it is a zero coupon municipal bond, there is phantom income; income not currently received but currently taxable.
If a customer buys 1 OEX Feb 350 call at 5 and sells 1 OEX Feb 335 call at 16 when the underlying index is at 344, she will profit if I. the spread narrows. II. the spread widens. III. the underlying index does not change. IV. the underlying index rises in value.
I. the spread narrows. III. the spread narrows. This is a credit spread because the investor received more premium than was paid. Sellers profit if both contracts expire or the spread narrows. The breakeven point is 346 (335 + 11, the net premium), and because the spread is bearish, the customer profits if the index is below 346.
Amortization of a municipal bond premium does which of the following? I. Increases cost basis II. Decreases cost basis III. Increases reported interest income IV. Decreases reported interest income
II. Decreases cost basis IV. Decreases reported interest income Tax law requires municipal bond premiums to be amortized. The effect of amortization is to decrease reported interest income and cost basis. If held to maturity, the cost basis will have been amortized down to par. Therefore, at maturity, there is no reported capital loss.
If your client's real estate limited partnership goes bankrupt, which of the following are paid before your client? I. Fellow limited partners II. The bank that holds the mortgage on the property III. The bank that holds the unsecured loans on the property IV. The general partner
II. The bank that holds the mortgage on the property III. The bank that holds the unsecured loans on the property Creditors, both secured and unsecured, have priority over partners. Your client's fellow limited partners are paid at the same time as your client, and the general partner receives his money last.
Rank the following from safest to most risky. I. AAA-rated corporate bonds II. Blue-chip stocks III. U.S. government securities IV. Tech stocks
III, I, II, IV It should be obvious that U.S. government securities would be first and tech stocks last. As for options II and III, stocks will fluctuate more in price than highly rated corporate bonds
A client of your member firm dies. In correct order, you should I. freeze the account. II. accept orders from the executor. III. obtain the death certificate and other legal documents. IV. cancel all open orders
IV, I, III, II Upon the death of a client, all open orders must be canceled. The account is then frozen until proper legal documentation is received. Once that has occurred, the executor may begin conducting activity in the account
Which of the following positions meets the IRS definition of a married put? A) Buy 100 shares of ABC at $50 per share and simultaneously buy one ABC 50 put B) Buy one ABC 50 put and sell one ABC 55 put C) Buy one ABC 50 call and buy one ABC 50 put D) Buy 100 shares of ABC at $50 per share and simultaneously sell one ABC 50 pu
A) Buy 100 shares of ABC at $50 per share and simultaneously buy one ABC 50 put A married put is a specific type of protective put. Anytime a put option is purchased while the investor is long the underlying stock, it is considered a protective put because it is a hedge against a move to the downside. When the put and stock are bought at the same time, the strategy is known as a married put and has a special tax benefit. Normally, purchasing a put option on stock held less than the long-term holding period causes the existing holding period on the stock to be erased. In the case of the married put, the holding period of the stock is not affected.
Which of the following is a required disclosure on the Form U4? A) Employment history for the previous 10 years B) Residency for the previous 10 years C) Residency for the previous 3 years D) Employment history for the previous 3 years
A) Employment history for the previous 10 years Form U4 requires an applicant to provide a 5-year residency history and a 10-year employment history. With regard to the employment history, the member firm must verify the previous 3 years.
For which of the following would the net revenue-to-debt service ratio be applicable? A) Hospital bonds B) General obligation bonds C) School bonds D) Tax anticipation notes Explanation This is the coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built with the proceeds of revenue bond issues.
A) Hospital bonds This is the coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built with the proceeds of revenue bond issues.
An investor wants to maximize income using debt securities. Which of the following lists rank securities from the least suitable to the most suitable recommendation if income is the investment objective? A) Income bond, convertible bond, nonconvertible bond B) Convertible bond, income bond, nonconvertible bond C) Treasury bills, convertible bond, income bond D) Nonconvertible bond, convertible bond, income bond
A) Income bond, convertible bond, nonconvertible bond The income (or adjustment) bond is the least suitable because it is issued by companies coming out of bankruptcy with interest payable only if the money is available. Therefore, it is not suitable given the objective. A convertible bond has a lower coupon than a nonconvertible bond because of the convertibility feature. Therefore, if seeking to maximize income, the corporate bond would be the most suitable of the three choices (from least to most: income bond, convertible bond, and nonconvertible bond)
All of the following issue mortgage-backed securities except A) Sallie Mae. B) Ginnie Mae. C) Fannie Mae. D) Freddie Mac.
A) Sallie Mae. Sallie Mae is the name for the Student Loan Marketing Association, which does not issue mortgage-backed securities. Ginnie Mae, Fannie Mae, and Freddie Mac do issue mortgage-backed securities.
The computation for accrued interest on corporate and municipal debt obligations is based on A) a 30-day month and a 360-day year. B) a 30-day month and an actual-day year. C) an actual-day month and a 360-day year. D) an actual-day month and an actual-day year.
A) a 30-day month and a 360-day year Accrued interest on corporate and municipal bonds is computed on a 30-day month and a 360-day year.
Your client purchases 100 shares of XYZ common stock at $50 and sells two XYZ Oct 55 calls for a premium of $2 each. This investor's maximum potential loss is A) unlimited. B) $4,600. C) $4,800. D) $600.
A) unlimited. This is a ratio write. The client is writing more calls than he has stock to cover. The first call is covered by the 100 shares of stock owned, but the second call is uncovered, or naked. A short naked call has unlimited loss exposure.
A client enters a buy stop order for 100 shares of XYZ at 40. Trades then occur at 38, 39, 39.90, 40.05, 40.10, and 39.78. At what price is the order triggered? A) $40.10 B) $40.05 C) $39.78 D) $39.00
B) $40.05 The order is triggered as soon as the price gets to 40 or higher. That would be the trade at 40.05. A typical use of a buy stop order is to protect a short stock position. Because the short stock position has unlimited potential loss, the short seller can gain protection by entering a buy stop order. That order is entered at a price above the current market (the short seller is hoping the price will fall), but if the price reaches or exceeds the stop price, the stop will be triggered. At that time, a market order is entered and the client pays the next price (which could be more or less than 40). In this case, the next price is 40.10, and although not the answer to our question, that is the likely price per share paid by the client.
ABC Corporation has issued a convertible preferred stock with a par value of $100. The stock is convertible at $40. The current market price of the stock is $80. It would be correct to state that the conversion ratio is A) 4:5. B) 2.5:1. C) 2:1. D) 4:10
B) 2.5:1. When a $100 par preferred has a conversion price of $40, the stockholder can convert into 2.5 shares. That is a 2.5:1 ratio. The current market price of the stock is only relevant if the question asks about the parity price (which is $32).
After selling ABC short at 70, a customer holds the position as ABC gradually falls to $53 per share. Which of the following strategies would best protect her gain? A) Write 55 calls B) Buy 55 calls C) Buy 55 puts D) Write 55 puts
B) Buy 55 calls If the investor buys the 55 calls, she has the right to purchase the stock at $55 per share. If exercised, the investor has a 15-point gain, less the premium paid.
The term churning refers to A) repeatedly purchasing stock to keep the price up. B) entering more transactions than necessary, solely for the purpose of generating commissions. C) purchasing calls on a particular stock for your own account before entering a large customer order for the stock. D) repeatedly selling a stock short to prevent a price rise.
B)entering more transactions than necessary, solely for the purpose of generating commissions Unnecessary transactions entered into for the purpose of generating commissions constitute churning. A charge of churning can result from both an excessive number and the excessive size of transactions.
Elisha purchased 100 shares of RMBN common stock on June 6, 2019, at $60 per share. On February 11, 2020, RMBN paid shareholders a 20% stock dividend. Elisha sells the shares received as the stock dividend on December 5, 2020, at $55 per share. What are the tax consequences of this trade? A) $100 short-term capital gain B) $100 long-term capital loss C) $100 long-term capital gain D) $100 short-term capital loss
C) $100 long-term capital gain When a stock dividend is paid, the cost basis of the shares is adjusted. In this case, Elisha now owns 120 shares and the total cost is still the original $6,000. That makes the adjusted cost basis per share $50 ($6,000 ÷ 120). With the new cost basis of $50 per share, when the sale of those 20 shares takes place at $55 per share, the result is a gain of $100 ($5 per share profit times 20 shares. Alternatively, $1,100 total proceeds [20 shares x $55 per shares] minus $1,000 cost basis [20 shares x $50 per share adjusted cost per share)). Even though these shares were acquired less than 12 months before the sale, their holding period is based on the original purchase date and that is clearly more than 12 months before the sale. That is why it is long term.
Which of the following securities cannot be purchased in the third market? A) Shares of preferred stock B) Closed-end investment company shares C) Open-end investment company shares D) Shares of common stock
C) Open-end investment company shares The third market is defined as the trade of exchange-listed stocks OTC. Because mutual funds are never listed on the exchanges, this would not apply to their shares. In addition, the third market represents secondary market trading and there is no secondary market for mutual funds. Please note: Most exchange-traded funds are structured as open-end investment companies, and they, obviously, trade on exchanges. On the exam, any questions about open-end investment companies will be exclusively dealing with mutual funds unless some mention is made of ETFs.
All of the following are characteristics of both oil and gas, as well as real estate limited partnerships, except A) deferral of benefits. B) depreciation. C) limited liability. D) depletion.
D) depletion. A depletion allowance makes up for the using up of a natural resource. Real estate limited partnerships do not have depletion allowances. Both real estate and oil and gas partnerships offer limited liability, depreciation allowances, and deferred receipt of income and capital gains.
All of the following statements regarding a transfer on death (TOD) account are correct except A) probate is avoided. B) the owner of the account may change beneficiaries at will. C) only those assets held at the broker-dealer are transferred. D) estate taxes are reduced.
D) estate taxes are reduced. A TOD account avoids probate but not estate taxes. The owner of the account may change beneficiaries and their percentages as she wishes. The TOD account is an account at a specific broker-dealer and only relates to the assets in that account.
Which of the following taxes are considered sources of debt service for special tax bonds? I. Ad valorem tax II. License taxes paid by businesses III. Special liquor and tobacco taxes IV. Real estate taxes
II. License taxes paid by businesses III. Special liquor and tobacco taxes As described by the Municipal Securities Rulemaking Board, a special tax bond is "a bond secured by revenues derived from one or more designated taxes, other than ad valorem taxes." For example, bonds for a particular purpose might be supported by sales, cigarette, fuel, or business license taxes. General obligation bonds are backed by the full faith and credit (taxing power) of the issuer for payment of principal and interest. Their main source of debt service funding is ad valorem (real estate) taxes.
If an investor buys 1 DWQ Apr 70 call at 5, giving him the right to buy 100 shares of DWQ at $70 per share, which aspect of the transaction is not set or standardized by the Options Clearing Corporation (OCC)? A) Exercise price of 70 B) Premium of 5 C) Contract size of 100 shares D) Expiration date in April
B) Premium of 5 The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market.
A new margin customer buys $12,000 CMV of ABC and sells short $10,000 CMV of XYZ. With Regulation T at 50%, what is the amount of his initial call? A) $6,000 B) $5,000 C) $11,000 D) $1,000
C) $11,000 In a mixed-margin account, the investor should figure the transactions as separate. The investor needs $6,000 for his purchase and $5,000 for his short sale.
If an investor opens a new margin account and buys 200 shares of DWQ at 50, with Regulation T at 50%, what is the investor's initial margin requirement? A) $3,000 B) $10,000 C) $5,000 D) $2,500
C) $5,000 The initial margin requirement is calculated by multiplying the market value of $10,000 by the Regulation T requirement of 50%, which equals $5,000.
If the owner of a variable annuity dies during the accumulation period, any death benefit will A) be returned to the separate account. B) be paid to any legal heirs as recognized by the annuitant's state of domicile. C) be paid to the issuing company to complete the plan. D) be paid to a designated beneficiary.
D) be paid to a designated beneficiary. The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased.
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is not one of those three? A) Quantitative suitability B) Reasonable-basis suitability C) Qualitative-basis suitability D) Customer-specific suitability
C) Qualitative-basis suitability The rule does not refer to qualitative-basis suitability. It does say that a recommendation may be suitable if at least some investors would benefit from it (reasonable-basis suitability). The recommendation should also take the specific customer's profile into consideration (customer-specific suitability). Finally, although a specific recommendation may be suitable, when looking at the quantity of trading, there could be a churning violation (quantitative suitability).
Which of the following securities can generate phantom income? A) Treasury bonds B) Treasury notes C) Treasury bills D) TIPS bonds
D) TIPS bonds TIPS bonds adjust the principal value each six months based on the inflation rate. If the inflation rate is positive, the value increases. Those increases are reported as income each year even though the investor does not receive the appreciation until the bonds mature (or are sold).
It is generally understood that the least complicated employer-sponsored retirement plan is the Savings Incentive Match Plan for Employees (SIMPLE). These plans tend to have certain restrictions. Among them are the restriction that A) employer matching contributions are made with after-tax funds. B) there must be fewer than 100 employees who earned at least $5,000 during the preceding calendar year. C) the catch-up provision for those 50 and older is limited to $1,000. D) the business cannot have another retirement plan in place.
D) the business cannot have another retirement plan in place. To institute a SIMPLE plan, the business cannot have any other retirement plan in place. The limit is 100 or fewer, not fewer than 100. The catch-up provision is $3,000, and both employee and employer contributions are made with pre-tax funds.
A registered representative (RR) recommends a variable annuity (VA) with an income rider to a client. The client's investment objectives, tax bracket, investment experience, and risk tolerance all align well with a VA recommendation. The client agrees to purchase the contract and informs the RR that he will be cashing out a VA he purchased two years ago to fund the new contract and will forward the check as soon as he receives it. Based on this information, the RR should A) reevaluate whether the recommendation for the VA contract is still suitable based on the client's proposed funding of the investment. B) contact the issuer of the client's existing VA contract to facilitate the client's surrender of the contract. C) suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the contract purchase. D) complete all paper work to purchase the annuity contract and obtain the client's signature immediately
A) reevaluate whether the recommendation for the VA contract is still suitable based on the client's proposed funding of the investment. Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short time, is not suitable. These contracts come with high surrender charges. Suggesting that loans or drawing equity from a home to fund VA contracts have also been targeted as abusive sales practices. Of the answer choices given, the best would be to reevaluate the recommendation based on the new information tendered by the client.
All of the following statements about SEP IRAs are true except A) there are no minimum earning requirements to be an eligible participant. B) the retirement account is usually set up at a bank or other financial institution. C) SEP IRAs allow employers to make contributions. D) SEP IRAs are established for small-business owners and their employees.
A) there are no minimum earning requirements to be an eligible participant. Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.
The holder of a foreign currency call option has the right to A) sell the specified foreign currency for a fixed U.S. dollar amount. B) buy the specified foreign currency for a fixed U.S. dollar amount. C) buy U.S. dollars for a fixed amount of the specified foreign currency. D) sell U.S. dollars for a fixed amount of the specified foreign currenc
B) buy the specified foreign currency for a fixed U.S. dollar amount. The holder of a call option has the right to buy the underlying asset. The asset in the case of foreign currency options is the specified foreign currency. Therefore, a foreign currency call option gives the holder the right to buy the specified foreign currency at the strike price. That strike price is expressed in U.S. dollars. For example, one BP 1.30 call option gives the holder the right to buy 10,000 British pounds at a price of $1.30 per pound, or $13,000
All of the following are covered by FDIC insurance except A) bank savings accounts. B) money market mutual funds. C) negotiable CDs. D) money market deposit account
B) money market mutual funds. One of the most important disclosures registered representatives must make to their clients is that a money market mutual fund is not the same as a money market account at a bank. The bank account is insured by the FDIC (up to the stated limits), while the mutual fund has no insurance. Negotiable CDs (the money market instrument) are bank issues insured by the FDIC up to the stated limit, as are bank savings accounts
Without an exemption, member firms are required to provide purchasers of penny stocks each of the following except A) a risk disclosure document. B) quarterly statements. C) current inside bid and ask quotation. D) compensation to be earned by both the member firm and the associated person.
B) quarterly statements. If an exemption is not available, purchasers of penny stocks must receive the risk disclosure document, current inside bid and ask quotation, information on the compensation to be received by both the representative and the member in connection with the transaction, and monthly, not quarterly, statements.
It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. Under SEC rules, if the terms of the offer are changed, the revised offer must remain open for at least A) 20 business days from the commencement and 10 business days from the date the terms are changed. B) 10 business days from the commencement and 20 business days from the date the terms are changed. C) 10 business days from the commencement and 10 business days from the date the terms are changed. D) 20 business days from the commencement and 20 business days from the date the terms are changed.
A) 20 business days from the commencement and 10 business days from the date the terms are changed. The rule is that the offer must remain open for at least 20 business days from the time the tender offer begins, and if there should be a change to the terms of the offer, if must be held open for 10 business days from the change. This is more a principal level question and unlikely to be on your exam, but we want to be sure you are exposed to the information.
What is a possible benefit of purchasing shares of a closed-end investment company in the secondary market? A) Shares are frequently trading at a discount to the NAV. B) Redemption takes place on the day of the sale. C) Dividends are paid in cash rather than additional shares. D) Shares may be purchased and sold without any sales or redemption charge.
A) Shares are frequently trading at a discount to the NAV. Closed-end funds compute their NAV, just as do open-end funds. However, by trading in the secondary markets, prices of closed-end funds are determined by the supply and demand for their shares. This can result in a fund selling for less than the value of its assets. We say the fund is trading at a discount to the NAV and, just like anytime we can buy something at a discount, we might be getting a better deal. Of course, this can work the other way if the fund shares were purchased at a premium or NAV and now are sold at a discount. Although there are no sales loads or redemption fees, there are brokerage commissions to pay just like with the purchase of any security in the secondary markets. Most would agree that the ability to reinvest your dividends in additional shares is a bigger benefit than taking the cash. Those additional shares create a compounding effect over time. Closed-end funds do not redeem their shares. When an investor sells the shares, they settle the same T+2 as other securities.
Which of the following does not participate in the syndicate (joint account) for a municipal underwriting? A) The issuing municipality B) A bank dealing in municipal securities C) A financial advisor acting as a municipal securities dealer D) A municipal broker-dealer
A) The issuing municipality A syndicate or joint account helps spread the risk of underwriting an issue among a number of underwriters—n this case, banks and broker-dealers who deal in municipal securities. The issuing municipality would not be a member of the syndicate (joint account) formed for the purpose of selling their municipal securities to the public.
One of the computations in a margin account is that of the SMA. Which of the following actions would cause the SMA to increase? A) The market value of short securities decreasing B) The market value of long securities decreasing C) The withdrawal of cash from a short margin account D) The purchase of securities in a long account
A) The market value of short securities decreasing Excess equity creates SMA in the account. Excess equity is created when the stock in a margin account moves in a favorable direction. In the case of a short margin account, the equity goes up as the market value of the securities goes down. In the case of a long account, a decline in the market value causes the equity to decrease. The purchase of securities in a long account may decrease SMA if SMA is used to meet the margin call. If not, SMA remains the same; it does not increase. Withdrawing cash will cause the SMA to go down if the funds are withdrawn from the SMA. Otherwise, the SMA remains the same; it does not increase.
A municipality is seeking an underwriter for a bond offering. What is the common step taken to engage the services of an underwriter? A) The municipality will place an official notice of sale in The Bond Buyer and accept bids from underwriters interested in the offering. B) The municipality will set up appointments with various underwriters directly and interview them for the position. C) The municipality will generally use an underwriter that they have used in the past and who was successful underwriting previous issues. D) The municipality will place a preliminary official statement in The Bond Buyer to identify underwriters that are interested in the offering.
A) 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.
The price paid for a listed REIT is most similar to the pricing of A) a closed-end investment management company. B) a real estate limited partnership. C) a collateralized mortgage obligation. D) an open-end investment management company.
A) a closed-end investment management company. Pricing of a listed REIT (real estate investment trust) is based on supply and demand. In this respect, they trade similarly to a closed-end investment management company. Open-end investment management companies are mutual funds and their pricing is based on the net asset value as computed daily. On the exam, unless stated otherwise, all real estate limited partnership offerings are offered through private placements. This means that they are not publicly traded and have limited liquidity.
An investor looking for an open-end investment company with an objective of providing capital appreciation for its shareholders would most likely choose A) a growth fund. B) an income fund. C) a bond fund. D) a venture capital fund.
A) a growth fund. Growth funds have the goal of producing capital appreciation (growth); that is why they are named as such. This is a case where you "don't look a gift horse in the mouth." Don't venture capital funds also seek growth? Yes, they do, but they are not open-end investment companies.
If a 42-year-old customer has been depositing money in a variable annuity for five years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding A) accumulation units. B) accumulation shares. C) mutual fund units. D) annuity units.
A) accumulation units. The customer, in the accumulation stage of the annuity, is holding accumulation units. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract.
A transaction that will create or increase a long position in an option contract is A) an opening purchase transaction. B) a covered writing transaction. C) an opening writing transaction. D) a closing purchase transaction.
A) an opening purchase transaction. One takes a long position by buying an option. Creating or increasing the position is opening not closing. A closing purchase transaction eliminates the position. An open writing transaction creates or increases a short, not long, position.
A client, who is a manager of a large pension plan, has recently changed the plan's portfolio weighting from 80% equities and 20% fixed income to 40% equities, 40% short-term Treasury debt, and 20% cash and cash equivalents. More than likely, this is an indication that the client's outlook concerning the market is A) bearish. B) neutral. C) bullish. D) unknown.
A) bearish. Because the client has reallocated the portfolio into highly conservative assets, one would think the manager is expecting a bear market. This new allocation is an attempt to protect against incurring losses from the anticipated market decline.
In performing their natural job functions, all of the following may act in a principal capacity in a transaction with customers except A) branch managers of FINRA member firms. B) broker-dealers. C) OTC market makers. D) designated market makers (DMM) on the NYSE.
A) branch managers of FINRA member firms When acting as a principal in a transaction, you are buying for or selling from inventory. Although branch managers of member firms are generally required to be registered as principals, that is different from acting in a principal capacity in a transaction. DMMs facilitate trading on the floor of the NYSE. Doing that sometimes requires them to buy or sell as principals. OTC market makers, by definition, act as principals. The term broker-dealer means that the firm can act either as a broker or a dealer. There are a number of words used in this exam than can have multiple meanings. Principal is one of those.
A customer must present a signed representation letter stating that he is not a restricted purchaser before buying a new issue of A) common stock. B) corporate bonds. C) municipal bonds. D) U.S. government bonds.
A) common stock. New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Before buying an IPO, a customer must present a representation letter stating he is not a restricted person.
Investing in ADRs presents certain risks that do not apply to investing in domestic stocks. One specific risk that applies only to ADRs is A) currency risk. B) business risk. C) market risk. D) financial risk.
A) currency risk. Because the ultimate value of the ADR is based on the underlying stock's value in its local currency, ADRs have currency risk. Both have market risk. You may not know business or financial risk, but you should know that currency risk is part of investing in ADRs.
A risk faced by investors in most CMOs that is not found in corporate bonds is A) extension risk. B) purchasing power risk. C) interest rate risk. D) default risk
A) extension risk. With mortgage-backed securities, there is an assumption that some of the mortgages will be paid off early. When interest rates are rising, there are fewer prepayments than assumed (no one is going to refinance their mortgage at a higher rate). This delayed repayment of principal is known as extension risk. Corporate bonds are expected to pay back the principal at maturity date, not earlier. All debt securities have the other risks to some degree or another.
When examining the portfolio of a municipal bond client, you notice that every bond is Aaa or Aa rated. In addition, each bond matures at about the same time and the coupon rates do not vary by more than 50 basis points. You also notice that over 10 different states are represented by the issuers with no state being represented more than twice. It would appear that this client has used A) geographical diversification. B) duration diversification. C) quality diversification. D) interest rate diversification.
A) geographical diversification Diversification is a proven way of mitigating certain risks. A popular method in the municipal bond industry is to diversify by purchasing bonds issued in different parts of the country. There are other forms of diversification, but none of those are employed by this client. The coupon rates are all about the same. The quality is all about the same, as are the maturities (duration).
A registered representative's recommendations to a customer A) must match the customer's risk tolerance and investment objectives. B) are not covered by FINRA rules. C) must be approved in advance by a principal. D) must be reviewed by a principal whether or not they result in a trade.
A) must match the customer's risk tolerance and investment objectives. Recommendations made to a customer must be suitable for that customer. Individual recommendations do not require advance approval or review by a principal, though the resulting trade, if one occurs, must be reviewed by a principal.
If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is A) oversold. B) becoming volatile. C) unstable. D) overbought.
A) oversold. The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom
The official statement for a new revenue bond indicates that the flow of funds is based on a net revenue pledge. This means the first payments go to A) pay current operating and maintenance expenses. B) pay the interest and principal maturing in the current year. C) renewal and replacement fund. D) the debt service reserve fund.
A) pay current operating and maintenance expenses. When the flow of funds is described as a net revenue pledge, it means the operating and maintenance expenses are paid first. Following that is the debt service (interest and this year's principal). In a gross revenue pledge, the order is reversed.
An investor wants to invest $200,000 in the banking industry sector. The investor would like to use leverage and make this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing capital gains liabilities. You would suggest which of the following as suitable, given the investor's criteria? A) Stocks in the three largest U.S. banks B) A bank sector exchange-traded fund (ETF) C) A bank sector mutual fund D) A money market fund holding short-term bank notes
B) A bank sector exchange-traded fund (ETF) The investor's criteria eliminates mutual funds as 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.
The price of which of the following will fluctuate most with fluctuating interest rates? A) Short-term bonds B) Long-term bonds C) Common stock D) Money market instruments
B) Long-term bonds Long-term debt prices will fluctuate more than short-term debt prices as interest rates rise and fall. When buying a debt instrument, a person is really buying the interest payments and final principal payment. Money has a time value: the longer it takes to receive the money, the less it is worth today.
Which of the following statements regarding nonqualified deferred compensation plans is not true? A) Board members are not eligible for these plans, as they are not considered employees. B) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. C) Employees have a limited claim to plan benefits if the business fails. D) Benefits payable to employees at retirement are taxable.
B) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. A typical deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees, and therefore, are not eligible for these plans. Because these plans are rarely funded, business failure places the employee in the role of a general creditor.
If a municipal bond rated BBB is prerefunded, all of the following statements are true except A) funds required to meet debt servicing have been set aside in escrow. B) the marketability of the issue will decrease. C) the issue is now backed by U.S. government securities. D) the rating of the issue will increase.
B) the marketability of the issue will decrease. When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities.
Which of the following would not be found in a municipal revenue bond resolution? A) Terms of the rate covenant B) Underwriting agreement C) Reporting requirements regarding revenues collected D) Conditions of the maintenance covenant
B)Underwriting agreement The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant. The underwriting agreement is between the municipality and underwriters, and it spells out the terms agreed to for the underwriting of a new issue.
An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend? A) $200 B) $50 C) $100 D) $400
C) $100 The total value of the initial position is unchanged, remaining at $40,000 (200 times $200). After the stock dividend, the investor owns 400 shares (200 times 100% = 200 + 200 = 400). Therefore, the adjusted cost basis is $100.00 per share ($40,000 divided by 400 = $100). Perhaps you recognized that a 100% stock dividend has the same effect as a 2:1 split. That is, the stock's cost basis is cut in half. It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same.
Jennifer bought 500 shares of Wolfe Industries common stock on October 1, 2019, at $50 per share. On October 24, 2019, she sold all the stock at $40 per share. On November 12, 2019, she buys 200 shares of Wolfe Industries common stock at $42. How much of a loss will Jennifer be able to claim for 2019? A) $0.00 B) $2,000 C) $3,000 D) $5,000
C) $3,000 By repurchasing 200 shares of Wolfe Industries common stock less than 30 days after the sale at a loss, Jennifer has run afoul of the wash sale rule. Because she only purchased 200 rather than the full 500 she sold, those are the only shares affected by the rule. Therefore, of the $5,000 total loss (500 shares × $10 per share as the stock fell from $50 to $40), $2,000 (200 shares × $10) is "washed" but the other $3,000 is allowable
Four years ago, you declared a net capital loss of $23,000 on your tax return. You have had no further capital gains or losses since then. For that year and the next two, you took the maximum allowable income deduction. How much may you deduct from your income this year, and how much loss will you have to carry forward? A) $3,000/$12,000. B) $2,000/$12,000. C) $3,000/$11,000. D) $2,000/$11,000.
C) $3,000/$11,000. The maximum allowable deduction against income is $3,000. You will have taken four such deductions against $23,000, which leaves you with $11,000 to carry forward ($23,000 - $12,000).
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? A) $450 profit B) $350 loss C) $450 loss D) $350 profit
C) $450 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).
One of your customers takes a short position in 300 shares of LOP common stock. The sale price is $70 per share. One month later, with the stock selling at $73 per share, the investor purchases 3 LOP Sep 75 calls at a premium of 3.25. What is the investor's breakeven point? A) $69.75 per share B) $60.25 per share C) $66.75 per share D) $71.75 per share
C) $66.75 per share This customer is looking for the price of the stock to decline. The proceeds of the sale were $70 per share and the cost of the "insurance" (the call option) was 3.25. That means that the customer will not start making money until the stock falls below proceeds minus cost or 66.75. In a question like this, the current market price of the stock and the strike price of the option are irrelevant. Breakeven on short stock and a long call position is the proceeds minus the premium. As is always the case when computing breakeven, the number of shares and number of option contracts is meaninglessbreakeven is the same price for one or one thousand.
An investor opens the following options position: Long 1 PKE Apr 60 put @4 and short 1 PKE Apr 55 put @2. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $200; maximum loss is $300; breakeven point is $57.00. B) Maximum gain is $200; maximum loss is $300; breakeven point is $58.00. C) Maximum gain is $300; maximum loss is $200; breakeven point is $58.00. D) Maximum gain is $300; maximum loss is $200; breakeven point is $57.00.
C) Maximum gain is $300; maximum loss is $200; breakeven point is $58.00 The first step is to identify the position. This is a debit put spread. It is a debit spread because the option purchased cost more than the one sold. The debit of $200 is the most the investor can lose. This is a bear put spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock's price to decline to the point where both options are exercised. For example, if the market price of PKE should fall below 55, the owner of the 55 put will exercise, causing the seller to purchase the stock for $5,500. The seller can then exercise the long 60 put and deliver the stock purchased at 55 for 60. That is a profit of $500 less the cost of the options (the debit of $200), or $300. The quick way to do this is to subtract the net premium (the $200 debit) from the difference in strike prices (5 points) and the result is the same $300 profit. The breakeven point follows the put-down rule. Subtract the net premium (the $2 debit) from the higher strike price, resulting in a breakeven point at $58.
A registered representative is preparing a PowerPoint slide presentation, to be delivered in a live seminar, for a group of invited institutional clients. To use the slides, they may have to be A) approved by FINRA in writing. B) submitted to both FINRA and the SEC for preuse approval. C) reviewed by a principal of the broker-dealer. D) submitted to the SEC for review and approval.
C) reviewed by a principal of the broker-dealer. Communications material that is intended for use with institutional customers only need be supervised and reviewed by a principal of the member firm. Alternatively, if the member's procedures do not require review of institutional communications, they must include a provision for the education and training of associated persons so that they will understand the firm's requirements. Though FINRA can request spot checks of any material used to communicate with the public, submission of institutional communications to FINRA or the SEC for review or approval is not required.
If a limited partner in a real estate direct participation program becomes involved in the management of the office building acquired by the partnership, which of the following is true? A) This is allowed, but only with a majority vote of the other limited partners and written approval of the sponsor. B) The limited partner's participation is disallowed and the program continues as before, but the remaining partners are required to prorate the remaining unit. C) There are no adverse consequences if, in performing management functions, the limited partner's expertise benefits the program. D) That limited partner's limited liability is jeopardize
D) That limited partner's limited liability is jeopardized. While the limited partners usually have limited liability, that benefit can be lost if a limited partner engages in certain activities, including the day-to-day management of the property, representing himself as a general partner, and financial control of the partnership.
Which of the following observations may a registered representative make when giving a sales presentation based on performance statements and charts? A) The portfolio's broad diversification will ensure the continuation of the 6% yield. B) The fund has consistently outperformed the market and should continue to do so. C) Yield over the past five years has fluctuated between 6% and 8%, indicating it will continue at 6% or better. D) The fund has had a positive performance in the past few years.
D) The fund has had a positive performance in the past few years. Predictions are strictly prohibited, and conjecture about future trends or occurrences must be labeled as such.
When recommending the purchase of a DPP to a client, as with all other investments, the recommendation must be suitable. FINRA adds some extras requirements in the case of DPPs. Among those is the requirement that the investor is A) in need of a liquid investment. B) able to emotionally handle the ups and downs of the market. C) in a position to take full advantage of any tax benefits generated by the DPP. D) an accredited investor.
D) an accredited investor. FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. Among those is the ability of the investor to make use of any potential tax benefits. Although DPPs are frequently sold as private placements, even then not all of the investors have to be accredited. DPPs are considered illiquid investments, and without a secondary market, there are no "roller coaster" ups and downs.
With bonds subject to a gross revenue pledge, the first priority will be to pay A) operation and maintenance. B) the first lien on the property. C) the sinking or surplus fund. D) bond interest and principal.
D) bond interest and principal. Bonds subject to a gross revenue pledge (gross lien revenue bonds) are backed by the gross revenues of the facility (meaning revenues before expenses). In this case, the first money disbursed is for payment of interest and principal. However, most revenue bonds only pledge net revenues to pay off revenue bonds. In the more common net revenue pledge, the first priority is operation and maintenance; the second priority is interest and principal.
Which of the following responsibilities did the Municipal Securities Rulemaking Board (MSRB) receive through the Securities Acts Amendments of 1975? I. Regulation of municipal issuers II. Establishment of recordkeeping requirements for municipal broker-dealers III. Enforcement of any municipal regulations it adopts IV. Creation of regulations for participants in the municipal securities secondary market
II. Establishment of recordkeeping requirements for municipal broker-dealers IV. Creation of regulations for participants in the municipal securities secondary market The MSRB creates rules for municipal trading and issues interpretations of its rules. It does not regulate issuers or have any enforcement capability. For broker-dealers, MSRB rules are enforced by FINRA.
Which of the following accurately depicts communications with the public designated as correspondence? I. Review by a principal must occur before use. II. Review by a principal can occur either before or after use, in accordance with the firm's written procedures. III. Filing with FINRA is required. IV. Filing with FINRA is not required
II. Review by a principal can occur either before or after use, in accordance with the firm's written procedures. IV. Filing with FINRA is not required Correspondence review by a principal can occur either before or after use, in accordance with the firm's written procedures. Filing of correspondence with FINRA is not required.
In March, a customer sells 1 ABC Oct 50 put for 3 and buys 1 ABC Oct 60 put for 11. The customer will experience a pretax profit from these positions if I. the difference between the premiums narrows to less than $8. II. the difference between the premiums widens to more than $8. III. both puts are exercised at the same time. IV. both puts expire unexercised.
II. the difference between the premiums widens to more than $8. III. both puts are exercised at the same time. This debit spread becomes profitable if the spread widens between the premiums. Credit spreads are profitable if the spread narrows between the premiums. If both puts are exercised, the spread is profitable. If the short 50 put is exercised, the customer buys the stock and sells it for 60 by exercising the long 60 put ($1,000 profit − $800 premiums = net $200 profit).
