Other Series 7 and Questions I got Wrong
A FINRA member firm must retain customer complaints
4 years, the first 2 years in an easy accessible location
Capital gains distributed by a mutual fund to shareholders are reported and taxable for the year
Earned (accrued) Capital gains can be distributed to shareholders by a mutual fund no more than once per year and are reported and taxable for the year earned (accrued).
ABC Corp. will issue a $100 million debenture in the next two weeks. The bond
Must be issued with a trust indenture. Corporate bond issuances of greater than $50 million must be issued with a trust indenture.
What percentage of a fund's investment must be in the assets suggested by its name?
80.0%.
Electronic Municipal Market Access
-Trade data and disclosures for retail investors
Upon receiving transfer instructions, a broker-dealer has
1 business day to verify the account and additional 3 business days to transfer and ship the securities to the new broker dealer
What is the priority order of a gross revenue pledge?
1. Debt service 2. Operations and maintenance Net revenue is more common.
What is more important to the analysis of a municipal revenue bond?
1. Feasibility studies 2. Debt service coverage ratio 3. Projected operating revenues
A T note is quoted 98.16-98.20. What is the spread?
4/32 = 0.125 x 10 = $1.25
A corporate bond pays interest on a J/J 15 schedule. An investor purchasing these bonds on Friday, April 17, would pay accrued interest for
96 days. Accrued interest on a corporate (or municipal) bond is based on each month containing 30 days. As with all bonds, the accrued interest is paid up to, but not including the settlement date. A trade made on Friday settles the following Tuesday (T+2), April 21. That means 3 months at 30 days each (90 days) plus 6 additional days (we don't count the settlement date) for a total of 96 days. One way to set this up is: 4/21 - 1/15 = 3 months and 6 days = 90 + 6.
A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has
A $50 capital gain. The premium on the municipal bonds must be amortized. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year. Even though there are five bonds in the question, here's the math on one bond and then we'll multiply by five to get the total amount. The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year. $40/20=$2. It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year x 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 - $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50.
A tool used by investment banking firms to combine several unsuccessful limited partnership programs into one new entity is
A DPP rollup. A DPP rollup is a transaction involving the combination or reorganization of one or more limited partnerships into securities of a successor entity. In general, this involves DPPs that have not been successful. The attraction to investors is the possibility of turning an illiquid DPP into a security with greater liquidity.
Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in
A JWTROS account with the SS # of the designated person used.
The standard for GO municipal bond underwritings
A competitive bid
Upon the execution of the subscription agreement, an individual will be
Accepted as a limited partner in a limited partnership
According to MSRB rules, all of the following are required customer account information EXCEPT the
Age and birth date. FINRA need these, MSRB don't
The 5% policy
Applies to trades in both listed and unlisted securities, across a wide spread of investment products. It is a guideline, not a hard and fast rule. In general, the percentage of mark-up will increase as the price of the security decreases. Stated another way, the percentage of mark-up decreases as the price of the security increases.
A broker-dealer will be sponsoring a virtual "town hall" and one of its registered representatives will be delivering comments that will be based on a periodical that will be distributed to some of the firm's invited clients. This periodical must be
Approved by a principal of the firm in advance if it is distributed to more than 25 retail investors within a 30- day period.
During the course of one year, a husband and wife have exchanged cash gifts with each other, in excess of the federal gifting limit. These gifts
Are exempt from the gift tax imposed by IRS rules
An investor opens a short position in one XYZ Nov 140 put @7. Disregarding any commissions, if the option is exercised, on settlement date, the investor
Must pay $14,000
Municipal serial bonds are quoted
On yield to maturity basis
State governments receive the least amount of revenue from
Property taxes and ad valorem taxes. Cities get the most funding from property taxes.
12b-1 fees may be used to apply for...
Sales promotions and other activities relating to the distribution of the fund's shares.
The 5% policy applies to ...
Secondary market transactions
Best form of business when raising significant amount of capital?
C Corporation.
Corporations issue equity securities. One category of equity is preferred stock. A number of different adjectives can apply to preferred stock issues. What preferred stock issues would likely offer the greatest protection against interest rate risk?
Convertible Owners of convertible preferred stock have the ability to convert the preferred into common stock. This offers growth potential not otherwise available to a preferred stockholder. This feature causes the stock's price to track that of the common. That results in convertible preferred stock having less interest rate risk than the others do.
Firm XYZ publishes an advertisement that is sent to 10 institutional clients and 15 retail investors. This advertisement is classified as
Correspondence. By definition, if an advertisement goes to at least one retail customer, it cannot be classified as an institutional customer. Because this communication was sent to no more than 25 retail investors it is considered a correspondence.
An individual can open an IRA at a bank, keeping the funds in CDs, or at a broker-dealer, with the funds invested in securities. An IRA held at any financial institution is
Covered by FDIC if held at at a bank, and by SIPC if held at a broker-dealer
Wednesday March 24 is the record date for the next cash dividend of the GHI corporation. An investor who purchased the shares in January and sells them in a regular way trade on March 23 is
Entitled to and will receive the dividend. March 23 is the "ex-dividend" date, which is one business day prior to the record date. For regular way trades that occur on the 'ex-dividend' date or later, the dividend will be paid to the seller of the shares, as the seller will remain the holder of record on the record date. This is based on the standard settlement process for corporate securities transactions, which uses a "T +2" timeline.
Immediate or cancel orders are
Executed in part or full and must be executed in one attempt.
What action could a corporation take that would result in the forced conversion of an outstanding convertible debt security?
Exercise the call feature when the debt security's conversion value exceeds the call price
When interest rates rise, holders of MBS face what risk?
Extension risk because nobody is prepaying
In most cases, FINRA's recordkeeping requirements follow SEC Rule 17a-4. One notable exception is records of written customer complaints where
FINRA requires four years and the SEC three years.
The interest that municipal securities pay is
Federally tax exempt
A customer tells a broker to buy 1,500 shares of XYZ at 33.62 immediately or else to cancel the whole order. This is a(n)
Fill or kill
Bond equivalent yield
It is the annual percentage yield for a bond which does not make annual payments.
John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability?
It is the proceeds minus John's cost basis as ordinary income at Sue's tax rate
An investor who purchased 100 shares of PERD common stock on June 30, 2020, would receive long-term capital gain treatment if the stock is sold at a profit starting
July 1, 2021.
As compared to agency CMOs, private label CMOs will generally have
Lower credit quality and higher yields
What municipal bonds are quoted as a percentage of par
Term bonds, or dollar bonds. All others are quoted in basis.
Which of the following best describes how a syndicate determines the amount to bid for a new municipal issue?
The average reoffering price minus the spread
Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account? Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account?
The custodian can exercise or sell the rights as he deems prudent. One thing that is never considered prudent is to let the rights expire. Even if the custodian does not believe adding more of the stock to the account is proper, there is a value to the rights, and the best interest of the minor is served by turning those rights into cash. Custodians in these accounts are able to sell or exercise the right, regardless of any relationship existing between them and the donor.
What is included in an underwriting bid for a municipal GO bond issue?
The dollar amount and the coupon rate.
Dividends from American depositary receipts (ADRs) held by U.S. investors are declared in
The foreign currency but paid in U.S. dollars Although the dividends paid by ADRs held by U.S. investors are declared in the foreign currency, they are paid in U.S. dollars. This is one reason currency risk is a factor for ADR holders.
Which of the following will halt trading in listed options when there is a trading halt in the underlying stock?
The options exchange on which the option is listed
Covered put writing
When an investor sells a put on a stock he has sold short
A member firm may commingle the securities of two or more customers
With the customer's written permission
The term municipal fund security refers to
a Section 529 Savings Plan
One of your customers purchased 1,000 shares of PKZ stock on the day preceding the ex-dividend date. Her account instructions are to have all purchases registered in her name. Several weeks after the payable date, she contacts you with the news that she did not receive the dividend from the issuer. The proper procedure is
to have your broker-dealer send a due bill to the firm representing the seller.
A 1035 variable annuity exchange is an engagement in a new contract using the proceeds of a former contract and should be considered if the
transaction is deemed suitable for the client.
For a new issue municipal syndicate account, settlement of the account must occur
within 30 calendar days after the issuer delivers the securities to the syndicate.
Yield quotes on collateralized mortgage obligations (CMOs) are based on
The tranche's expected life.
Kelsey's stock portfolio has a beta of .5. Kelsey's portfolio should
Outperform a bear market
What's a bonafide quote?
A quote that has a reasonable relationship to fair market value and can be made in consideration of any anticipated market movement.
Issuers of municipal securities are exempt from registration requirements under the Securities Act of 1933, but there is a full and fair disclosure document that is identified as
An official statement
What type of municipal issue pays federally taxable income but provides holders with a federal tax credit for the taxes paid?
Build America Bonds (BABs). Suitable for many investors, not just high tax.
A customer buys a newly issued municipal zero-coupon original issue discount bond for 85. If the bond is held until maturity, the tax consequence
$0. Municipal original issue discount bonds must be accreted. At maturity, the entire discount will be accreted, and the cost basis will be equal to the par value. No gain or loss will occur at maturity.
Automatic exercise will occur for equity options at expiration that are in the money by at least
$0.01
If a customer has a long margin account with a market value of $12,000, a debit balance of $8,000, and special memorandum account (SMA) of $2,000, how much can the customer withdraw from the account?
$1,000 SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000),0 and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.
A customer receives a cash dividend of $1,000 in his margin account. How much of the dividend will be credited to the special memorandum account (SMA)?
$1,000. Cash dividends and interest are considered nonrequired deposits to a margin account and are credited in full to SMA. Once credited to SMA, 100% of the deposit could be withdrawn unless doing so would create a margin call.
Long XYZ May 50 call, short 2 XYZ May 60 calls, Long XYZ May 70 call.
$18.50. The actual price paid for the shares.
A Treasury bond is quoted 101.12 - 101.20. If a client asks her RR what the spread is, the RR would respond by saying
$2.50. Treasury bonds are quoted in 32nds. 8/32nds is equal to ¼ of a point, and one point is equal to $10, so the spread here is 2.50.
Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker-dealer charges the client interest on the monies borrowed in the amount of $133. At the end of the month, the value of the stock drops to $36,000. The month-end statement for this client will show a debit balance of
$20,133 A decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.
In early September, a customer buys 100 shares of MCS stock for $83 per share and simultaneously writes 1 MCS Mar 90 call for $4 per share. The customer will break even when MCS stock is at
$79. This is a covered call writer. If the stock rises above $90, the writer will be exercised and will make $700 on the stock (buy at $83, deliver at $90) and keep the $400 received in premiums. If the stock declines, the call expires unexercised. The writer can lose $400 on the stock (the premiums earned) and still break even. This occurs at $79 ($83 − $4). Breakeven is the cost of stock purchased minus premiums.
A municipal A & O bond is issued on October 1, 2010, with a 10-year stated maturity. If a trade in this bond settles on April 1, 2020, how many days' worth of accrued interest will be added to the price of the bond?
0. Interest on a municipal bond begins to accrue on the previous payment date and ends the day before settlement date. Always assume a bond pays interest on the first of the month unless told differently. In this case, interest is payable on April 1 and October 1 each year. Whenever a bond trade settles on a payment date, it trades flat (without accrued interest).
Where can you execute an options order?
1. NYSE 2. CBOE 3. Nasdaq PHLX
When a municipality is allocating funds from a revenue-producing facility under a net revenue pledge, what is the priority order?
1. Pay operations and maintenance 2. Debt service following
For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 72, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as
1. Required beginning date (RBD) 2. Required minimum distribution (RMD)
What can soft dollars be used to pay for?
1. Research 2. Software 3. Services for the benefits of the client 4. Seminar registration fees
Restricted persons include
1. Spouses 2. Parents 3. Children 4. In-laws 5. Supported persons NOT aunt/uncles/grandparents.
A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request?
10 business days. Upon receiving a customer request for a copy of the signed predispute arbitration agreement, the member firm has 10 business days to supply it.
According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities?
100% To be considered a diversified investment company, 75% of the fund's assets must be diversified, such that the mutual fund owns no more than 10% of a target company's voting securities. Additionally, within that 75% of assets, no diversified investment company may invest more than 5% of its portfolio in a single company's securities. However, there are no restrictions on the other 25%. That can all be in one stock, making 30% of the fund's assets in one company. Those assets can theoretically buy all of the outstanding voting shares of a company and control 100%.
Payments received by the owner of a 403(b) plan are
100% taxable. When tax sheltered annuity funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.
Listed options expire at
11:59 pm ET on the third Friday of the expiration month.
If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold for
15 business days
An investor owns $100,000 of convertible bonds with a conversion price of $50. By depositing these bonds into her account, how many covered calls could she write?
20. A covered call means that the seller of the options has 100 shares of stock to cover each call. These bonds are convertible into 20 shares for each $1,000, making a total of 2,000 shares. At 100 shares per contract, that's enough stock to cover 20 calls.
The Interstate Bridge Authority has an outstanding revenue bond. For the most recent operating period, the Authority has net revenue of $36 million, operations and maintenance expenses of $16 million, debt service requirements of $18 million, and surplus funds of $2 million. The debt service coverage ratio for the Interstate Bridge Authority's revenue bond is
2:1 In the absence of a described revenue pledge (net or gross), the net revenue pledge should be used. This means that the debt is serviced after the expenses for operations and maintenance have been satisfied. The net revenue of the project is revenues after subtracting those expenses. In this question, that is the $36 million figure given. The debt service coverage ratio is determined by dividing the net revenue by the debt service requirement. In this question, the debt service coverage ratio would be 2:1 ($36 million divided by $18 million = 2). If you subtracted the $16 million of expenses because you did not notice that we gave you the net revenue, your ratio was 20 divided by 18 = 1.11 to 1. If you added the surplus (not an expense), your ratio was 18 divided by 18 = 1:1. It is not uncommon to have information in a question that is not needed to arrive at the solution.
Customer account records (such as the new account form) must be maintained for not less than
6 ears commencing from the date the account is closed
Records prepared by a broker-dealer that do not have a defined period for recordkeeping
6 years
Butterfly spread
A butterfly spread is an options strategy composed of four individual options contracts; they all have the same expiration month and there are three different strike prices. Ex: Long XYZ May 50 call, short 2 XYZ May 60 calls, Long XYZ May 70 call.
Which of the following would be the usual use of a stop order? I. To protect the profit on a long position II. To prevent loss on a short position III. To buy at a specific price only IV. To guarantee execution at or near the close
A buy stop could be used to protect an investor who is short, and a sell stop could be used to protect an investor who is long. Stop orders never guarantee execution price.
In an effort to raise additional capital, which type of registered investment company may issue debt securities?
A closed end company. The capital structure of closed-end investment companies differs from other investment companies. Closed-end investment companies may issue debt securities, as well as preferred stock. Open-end companies and UITs can purchase debt securities for their portfolios but can only issue one class of equity.
A due bill
A due bill is an assignment of a forthcoming distribution from the seller to the new owner.
One of your clients is an active investor using a tactical asset allocation strategy. As such, the client engages in numerous transactions every month. With each transaction, the client pays a separate transaction fee. Your firm has just begun offering an account to its clients whereby the client can pay one flat fee to cover all the trades in that account. You immediately bring this news to the client and suggest making the change. What type of account is this?
A fee-based account.
A person legally responsible for the handling of the financial assets of another, such as an executor or guardian, is usually called
A fiduciary
A sharing arrangement in which only deductible costs are apportioned to the investor, with the sponsor bearing all capitalized costs is called
A functional allocation
Who approves advertising related to municipal securities?
A general securities or municipal securities principal.
In a client's margin account, a dividend of $150 was credited, while during the same period an interest charge of $85 was applied. The effect of these actions is
A reduction of $65 to the debit balance.
For a regular standardized option, any gain on the sale of the contract is
A short-term capital gain
When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include
A tabular comparison of the nature and amount of the fees charged by each fund.
An investment company registered under the Investment Company Act of 1940 that allows shareholders to sell their shares back to the company at the net asset value per share only at certain specified times is
An interval fund
SEC Regulation FD is best described as a rule requiring disclosure by
An issuer of securities
Marsha has established a vertical spread using option contracts on ABC Inc. Marsha will breakeven when the market price of ABC is
Above the lower strike price. The breakeven point on a vertical spread will occur between the two strike prices, not necessarily at the midway point. It is correct to say that the breakeven point will be above the lower strike price, or below the higher strike price.
A customer has written a letter of complaint to the dealer. Upon receipt of the complaint, a municipal securities dealer must first
Accept the complaint and record the action taken. Upon receipt of a customer complaint, the municipal securities dealer must accept the complaint, record the action taken, put it in a complaint file, and respond. Responses also become part of the complaint file.
A variable annuity contact held by an investor is set to annuitize in the next 30 days. When this occurs,
Accumulation units will be converted into a *fixed number* of annuity units.
MBS interest payments are taxable at what level?
All levels.
Various tax preference items are added back to adjusted gross income when considering
Alternative minimum tax
What customer accounts requires the sending of monthly customer statements?
An account containing penny stocks. All others are typically quarterly.
A mutual fund can use the term, "no-load" as long as
Any 12b-1 charge does not exceed .25%
Nonpublic arbitrators
Any person who have worked in the financial industry for any duration during their career
The "XYZ tax-exempt bond fund" will have a portfolio where
At least 80% of the assets in the fund are tax-free municipal bonds.
The OCC Options disclosure document must be received by a customer
At or prior to account approval
A customer of the firm has recently become married and now wishes to change the name on the account. This change will be accomplished when
Authorized by the registered principal
If shares are held for at least 61 of the 121 day surrounding ex-dividend date, then any dividends received would...
Be taxable at a preferred rate
A registered representative noticed that a stock was approaching its resistance line. This is generally considered
Bearish. When a stock is rising in price toward its resistance level, generally sellers will enter the market and prevent it from breaking through. This would therefore be a bearish indicator—that the stock has reached the highest price it will go. While breakouts can occur, they are considered significant events.
In order for an investor to be eligible to receive a previously declared cash dividend, the stock must be purchased`
Before the ex-dividend date
ABC Corporation is planning an offering of $10 million of common stock. When would it be prohibited for the company to place a tombstone ad?
Before the registration statement is filed with the SEC
The type of investment company that is exchange traded and invests in small and mid-sized companies, pays out 90% of its taxable income to investors and pays dividends to investors on a monthly or quarterly basis is a(n)
Business development company
A U.S. manufacturing company is exporting goods to a Canadian retailer. The company will receive Canadian Dollars (CAD) as payment. How would the U.S. company hedge?
Buy CAD puts. This U.S. company should buy puts on the Canadian Dollar. They want to lock in a sale price for the currency that they will own.
When a bond changes ownership accrued interest is paid by the
Buyer to the seller
A client looking to invest in a mortgage-backed instrument and mitigate prepayment risk may wish to consider a(n)
CMO
Ratings or guarantees of variable annuity and variable life products are typically based on the
Claims paying ability of the issuing insurance company
An investor purchased $10,000 of the Class B shares of the ABC Growth Fund. Sixty days later, the investor received an inheritance of $40,000. The investor contacts you and asks about the possibility of backdating a letter of intent to add the original purchase to this new money and reach the breakpoint at $50.000. You would reply that
Class B shares do not have breakpoints because they do not have a front-end load
When the par value of preferred stock is divided by the conversion security, the result is the...
Conversion ratio
GNMA
GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities.
How do bonds get prioritized in a muni distribution?
Pro-golfers don't miss... 1. Pre-sale 2. Group 3. Designated 4. Member
Most levered and inverse fund reset how often?
Daily.
a 6.0% J&D 15 muni bond is trading on Monday, Mar 2. How much interest is accrued on this?
Dec = 16 days Jan = 30 days Feb = 30 days Mar = 3 days (because of T+2 settlement) so 79 days total. or 79 days/360 days = 22% of the $60 annual interest = $13.7
The DRS is a system for
Direct registration of securities
Cash dividends are credited to SMA...
Dollar for dollar
The bond placement ratio, as shown in The Bond Buyer, is computed by taking
Dollar value of new issues sold / The dollar value of the new issues offered. The bond placement ratio is the percentage of new municipal bonds offered last week that were sold last week. Although not a term you'll see on the exam, think of this as the success ratio. It reports how well the underwriters did in moving the week's new issues. For example, if $1 billion of bonds were offered during the week, and $700 million were placed (sold), that is a 70% placement ratio.
A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 50% of income earned on investments in
Domestic corporate common and preferred stock
If one wanted information on municipal fund securities, it would be found on
EMMA EMMA, the electronic municipal market access, carries information about municipal fund securities (Section 529 plans). Why not RTRS? That is the Real Time Reporting System and it provides real time trading information. Section 529 plans do not trade in the secondary markets.
Broker-dealer X is preparing a retail communication consisting of a comparison of two different mutual funds illustrating their differing performance rankings over a six-month period. This ranking data has been created by an affiliate of the broker-dealer. This information must be
Filed with FINRA at least 10 business days prior to first use. Retail communication concerning investment companies that include or incorporate performance rankings or comparisons where the data is created by the investment company itself or one of its underwriters or affiliates must be filed with FINRA at least 10 business days prior to first use.
One of the effects of Regulation BI is to place a limitation on the use of the descriptive term
Financial advisor
If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax (AMT), which of the following securities should an agent recommend?
General obligation (GO) bond. Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A GO bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.
In order to form a limited partnership, the tax ID and signature is required from who?
General partners
Recent years have shown an enormous growth in the sales of exchange-traded funds (ETFs). Some of the benefits of using ETFs in your clients' portfolio would include
Greater tax efficiency than most comparable mutual funds.
In a new municipal bond offering, which of the following orders is placed after the bid is awarded and credits the entire syndicate with the takedown?
Group. A presale order is entered before the bid is awarded. If the syndicate wins the bid, the takedown is credited to all syndicate members. A group order is entered after the bid is awarded and the takedown is credited to all syndicate members. A designated order, entered after the bid is awarded, credits some, but not all, syndicate members with the takedown. A member order, entered after the bid is awarded, credits only the syndicate member entering the order with the takedown.
Surrender charges paid by investors who own variable annuities tend to be
Highest when the contract is initially purchased
Regulation BI contains four key component obligations. Which two of them apply to registered representatives? I. Disclosure Obligation II. Care Obligation III. Conflict of Interest Obligation IV. Compliance Obligation
I and II.
The function of a broker's broker in the municipal bond business is to do which of the following? I. Help sell municipal bonds that a syndicate has been unable to sell II. Protect the identity of the firm on whose behalf the broker's broker is acting III. Help prepare bids for an underwriting syndicate IV. Serve as a wholesaler, offering bonds at a discount from the current bid and offer
I and II. A broker's broker helps sell the bonds a syndicate has left and does not disclose the identity of the firm on whose behalf it is acting. Brokers' brokers do not charge fees for quoting a security, do not maintain inventory, and act solely as agents earning a commission for their services.
Which of the following factors is considered when determining whether underwriting compensation is fair and reasonable? I. The size of the offering II. The type of underwriting commitment III. The market conditions IV. The profitability of the underwriter
I and II. Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter's relationship to the issuer, and any form of potential conflicts of interest.
Which of the following system characteristics can be associated with the Trade Reporting and Compliance Engine (TRACE)? I. Both sides of the transaction must report. II. Only the buyer must report. III. Money market securities are excluded from the reporting system. IV. It is an execution and trade reporting system.
I and III. TRACE requires that both sides of the transaction report corporate bond trades that occur in the over-the-counter (OTC) secondary market. Money market securities are one of the specific exclusions from the trade reporting system. Trace is not an execution system.
If a client has a margin account with $23,000 in securities and a debit of $12,000, and Regulation T is 50%, which of the following statements are true? I. The account is restricted. II. The client will receive a margin call for $500. III. The client may withdraw securities if she deposits 50% of the market value of the securities withdrawn. IV. The account has excess equity of $5,250.
I and III. The account is restricted by $500 because the equity of $11,000 is less than the Regulation T requirement of 50% ($11,500). However, the client will not receive a margin call for the $500 because Regulation T applies only to the initial purchase. Because the account is restricted, any withdrawal of securities requires a cash deposit of 50% or a deposit of securities with a loan value of 50% of the value of the securities withdrawn. The account is $5,250 above the required minimum maintenance margin, but this amount is not considered excess equity.
Which of the following transactions in the same security will affect the holding period of a security held for 12 months or less? I. Buy a put II. Buy a call III. Sell short IV. Sell a put
I and III. The holding period of a capital asset is based on the amount of time the asset is held at risk. When there is no longer the possibility of a loss, there is no longer any risk. Buying a put or selling short effectively removes the risk from a transaction and destroys any short-term holding period. The short-term holding period will not become a long-term holding period for tax purposes, as long as the offsetting position (put or short) is maintained.
Which of the following order types are available to customers for use in NYSE equity markets? I. Fill or kill (FOK) II. Immediate or cancel (IOC) III. All or none (AON) IV. Order cancels other (OCO)
II and IV. FOK and AON orders are no longer permitted in NYSE equity markets.
An initial Regulation T margin call may be met by depositing I. Cash equal to the call. II. listed marginable securities with a loan value equal to the call. III. listed stock with a market value equal to the call. IV. Cash equal to 50% of the call.
I or II. An investor may meet a Regulation T margin call either by depositing cash or by sending in securities equal to the loan value of the call. With Regulation T at 50%, the investor would have to deposit securities with a value equal to twice the amount of the call.
In the time before a registration statement becomes effective, which of the following statement is (are) true? I. No sales may be solicited II. Sales literature may not be used III. Unsolicited inquiries may be answered
I, II and III
The Code of Arbitration Procedure would be mandatory to settle disputes between which of these? I. A member and a registered clearing corporation II. A member and one of its associated persons III. An associated person with a statutory discrimination claim against a member IV. A member and a client who has signed a predispute arbitration clause
I, II and IV. Disputes between anyone in the industry, including registered clearing corporations, must go to arbitration, with the exception of statutory discrimination claims, which are claims alleging sexual harassment or discrimination on the basis of, among other things, age, sex, or ethnicity. Such claims may be taken to court instead of arbitration. When a client has signed a predispute arbitration agreement, arbitration is mandatory.
Which of the following orders are not placed on the order display book? I. Buy stop limit II. Buy stop III. Market IV. Not held
III and IV. Market orders are executed immediately and are not placed on the order book. Not-held orders are not presented to the order book.
New issues of municipal securities are available in which of the following forms? I Bearer II Book entry III Registered IV Registered as to principal only
II and III Although municipal bonds used to be issued in bearer form, this is no longer permitted. The same is true of bonds registered as to principal only. Newly issued bonds can either be fully registered or book entry, which is a certificateless form of ownership. Do not confuse this with the good delivery rules. Because there are still some old municipal bonds issued before the law prohibited them, anyone selling them is permitted to deliver them as long as all of the other good delivery requirements are met. This question deals with new issues, and they cannot be in bearer or registered as to principal only (with the interest being paid by detachable coupons).
A municipal securities dealer buys $500,000 of 6% bonds at par and immediately reoffers the bonds. Under MSRB rules, which two of the following would most likely be considered bona fide quotes? I. 4.10 net II. 5.8 less 1/2 III. 101 IV. 108
II and III. Bona fide quotes must be reasonable compared to the coupon rate and the offering price, therefore 5.8 less 1/2 and 101 would be appropriate quotes. `
With which of the following must variable annuities be registered? I. State banking commission II. State insurance commission III. SEC IV. FINRA
II and III. Variable annuities must be registered with both the state insurance commission and the SEC as they are sold by insurance companies but are nonetheless a security.
The taxing power of an issuer of a limited-tax bond is limited to a specified I. minimum rate. II. maximum rate. III. tax source. IV. method of taxation.
II and III. A limited-tax bond can refer to either the maximum tax rate that the municipality can charge its constituents or the sources from which the municipality can draw revenues to redeem the debt.
Which of the following statements regarding U.S. government agency obligations are true? I They are direct obligations of the U.S. government. II. They generally have higher yields than direct U.S. obligations. III. The Federal National Mortgage Association (FNMA) is a publicly traded corporation. IV. Securities issued by the Government National Mortgage Association (GNMA) trade on the NYSE floor
II and III. U.S. government agency debt is an obligation of the issuing agency. This obligation causes agency debt to trade at slightly higher yields that reflect this greater risk. FNMA securities and GNMA pass-through certificates trade over the counter. GNMA is the only agency whose securities are direct U.S. government obligations.
If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true? I. The corporation will be subject to currency risk. II. The corporation will not be subject to currency risk. III. The issue must be filed with the SEC. IV. The issue need not be filed with the SEC.
II and IV. Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the United States, the issue is not registered with the SEC.
Which of the following order types are available to customers for use in NYSE equity markets? 1. Fill or kill (FOK) 2. Immediate or cancel (IOC) 3. All or none (AON) 4. Order cancels other (OCO)
II and IV. IOC and OCO orders are available to customers to use in the NYSE equity markets.
A customer requests that his broker-dealer hold his fully paid for stock. Which of the following are required? I. A written stock power from the customer II. Full power of attorney from the customer to the broker-dealer III. The securities must be segregated from those of the firm and other customers IV. The customer must be informed that the securities may be withdrawn by him at any time
III and IV. The broker-dealer must segregate the customer's fully paid for securities and inform the customer that the securities can be withdrawn at any time.
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.
III, IV, I, II
Which agency has the ultimate authority for determining the amount of the discount on original issue discount municipal bonds?
IRS
The money contributed to a SEP vests
Immediately
If new munis are sold on a when-issued basis, which of the following would be included on the trade confirmation?
Interest rate
A registered representative making recommendations for investment strategies on behalf of a trust would be most concerned with the
Investment objectives of the beneficiaries of the trust.
Total equity in a margin account is
LMV + credit - debit - SMV
a term used to describe payments made by broker-dealers to investment advisers in return for research and other eligible services. The difference between soft dollars and hard dollars (cash) is that instead of paying a broker-dealer with cash, the fund will pay with brokerage business. Soft dollars may be used to pay for research, software, services for the benefit of clients, and seminar registration fees. Not permitted by the SEC are computer hardware, office equipment, and reimbursement of travel expenses to attend seminars.
Leverage is increased
What two options lets you buy stocks below current market value?
Long call and short put.
Eastern Undivided Account
Members are liable for unsold securities according to their participation percentage - regardless of which firm's fault it was.
In a custodial account, taxes are the responsibilities of the
Minor.
Double Barrell Bond
Municipal bond backed by revenue and state taxes.
The municipality's share of debt issued by authorities that draw revenues from the same sources as the municipality is known as
Overlapping debt Overlapping debt occurs when two or more issuers are taxing the same property to service their respective debt. For example, the City of Charlotte is in Mecklenburg County. Both the city and county issued general obligation (GO) bonds. The property taxes paid by the residents of both jurisdictions (the city and the county) will repay both bonds.
An investor seeking a high degree of cash flow predictability while being willing to accept relatively lower yields would be most likely to purchase a
PAC tranche The Planned Amortization Class (PAC) is a type of CMO structure that provides a high degree of cash-flow certainty, as compared to other CMO structures. In return for these steadier cash flows, investors typically agree to accept a lower return.
Nickelplate Manufacturing Corporation (NMC) is capitalized with 1 million shares of a 6% $50 par callable, cumulative preferred stock and 10 million shares of $1 par common stock. NMC has not paid any dividends at all for the past five quarters. The current quarter's earnings are excellent and the company would like to pay a dividend to its common shareholders. Doing so would require
Paying the preferred shareholders a dividend of $4.50 per share. This is calculated by the 6.0% yield = $3.00 per year or $0.75 a quarter. 5 quarters are owed plus the new quarter declared, so 6 quarters at $0.75 = $4.50.
For tax-reporting purposes, qualified dividends are considered to be what type of income?
Portfolio
When interest rates fall, holders of MBS face what risk?
Pre-payment
The 5% markup policy applies to
Principal OTC trades
A registered representative advising a client subject to the alternative minimum tax (AMT) on potential investments would be likely to suggest a(n)
Public purpose municipal bond. An investor who is subject to the alternative minimum tax (AMT) would want to avoid securities whose interest income is subject to this tax. The interest income generated from a public purpose municipal bond is not subject to the AMT, and thus would be more appropriate for this client.
Who generally requires surplus funds?
Revenue bonds
Your investor decides that she would like to open an options account. Which of the following is your responsibility as her registered representative?
Review with the client the risks involved when trading options and determine what type of options trading are appropriate for this client before the first options trade
US Government ZCB?
STRIPS
New Housing Authority Bond
Safest Muni. Backed by the New Housing Authority / Section 8 Bonds
What is a break point sale?
Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.
Interest accrues to the seller up to but excluding the...
Settlement date
A new customer has been approved for all levels of options trading and has signed the options disclosure document. Even though approved for all levels of options trades, she notes that she will not be employing, and the registered representative (RR) should not recommend, any strategies with unlimited maximum loss potential. Given this criteria, an RR could suitably recommend
Short or long spreads
Which of the following covers a customer who sold 1 Jul 50 put at 4?
Short the underlying stock. For an investor to cover a short put, the investor must either be short the stock or be long a put option that is in the money first (has a higher strike price).
TANs, RANs, GANs, and BANs are issued by municipalities seeking
Short-term financing Municipal short-term notes (tax anticipation notes, revenue anticipation notes, grant anticipation notes, and bond anticipation notes) are used as interim financing until a permanent long-term issue is floated or until tax receipts increase or revenue flows in.
A issuer may facilitate a bond's redemption by establishing what of the bond's trustee?
Sinking fund. These make bonds more marketable, and are generally used by lower-rated issuers
A certificate in the name of Smith & Company may be signed
Smith & Company, Smith & Co., or Smith and Company.`
What are soft dollars?
Soft dollars describes payments made by broker dealers to investment advisers in return for research and other eligible services. The difference between soft and hard dollars is that instead of paying with cash, the fund will pay with brokerage business.
Depletion allowances in oil and gas programs are based on the amount of oil
Sold Depletion allowances are allowed to compensate for a mineral resource, which is considered accomplished when it is sold.
A registered representative's compensation consists of trailer commissions. The most likely reason for this is
Some of the representative's customers own mutual funds with 12b-1 charges. Trailer commissions are a feature when you have customers owning mutual funds with 12b-1 charges. In most cases, those charges are levied every year and, over time, can add up to considerable compensation to the representative.
An order that is intended to be triggered at a particular price and executed at the next price is a
Stop order Orders that are triggered at a given price point and then executed at the very next price are stop orders. A stop order that specifies an execution at a particular price point is a stop limit order.
Jim purchased five call options on XYZ and also wrote five put options on the same stock. Jim has created a
Synthetic long stock position
According to the Capital Asset Pricing Model, the expected return of a security must equal the rate on a
T-bill plus a risk premium
US Government Inflation Protected Bond
TIPS
What security generates phantom income?
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).
Which of the following is the FINRA-approved trade reporting system for corporate bonds trading in the over-the-counter (OTC) secondary market?
TRACE TRACE (Trade Reporting and Compliance Engine) is the FINRA-approved trade reporting system for corporate bonds trading in the OTC secondary market. TRACE's purpose is to add market transparency by disseminating trade details immediately to the investing public.
Peyton has been a client of Turing Technical Analytics (TTA), a FINRA member broker-dealer, for 10 years. Peyton has decided that it is time to move the account to a new firm, Enigma Mathematical Portfolio Modeling, (EMPM). Which of the following statements accurately reflects the requirements when using the ACATS system?
TTA has one business day to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). ACATS requires the carrying firm (TTA) to validate or take exception to the securities listed on the TIF within one business day. If all is in order, the transfer must be completed within three business days. The receiving firm, EMPM, is responsible for sending the signed TIF to ACATS.
Notice of Sale
The Notice of Sale is used by a municipality in a competitive offering to invite prospective underwriters to submit bids to the issuer. The deal is awarded to the firm that submits the lowest bid to the issuer.
The OTC market is a _____ market, the exchanges are _____ market
The OTC market is a negotiated market. The exchanges are auction markets.
Which of the following best describes the disciplinary actions a self-regulatory organization (SRO) such as FINRA or an exchange can impose upon a registered representative who has violated its rules?
The SRO has authority to censure, fine or expel the RR.
When a non-spouse inherits an IRA, what can they do?
The Secure Act, which went into effect on 1/1/2020 requires non-spouse beneficiaries to distribute all plan assets from an inherited IRA by the end of the 10th year following the year of death.
New Housing Authority (NHA) bonds are a relatively safe investment because
The U.S. government guarantees a contribution to secure the bonds
Which of the following occurs in a partnership account if one partner dies?
The account is frozen until a new or amended partnership agreement is received.
When a person is calculating cost basis for a nonqualified variable annuity, the person is using
The after-tax dollars contributed. For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed.
The Bond Buyer's 20-Bond Index reflects
The average yield of 20 high-quality general obligation bonds.
The underwriting of most corporate issues is done on a negotiated basis. The investment banker who negotiates with the issuer on a firm commitment underwriting is known as
The syndicate manager When a syndicate is formed, it is the responsibility of the syndicate manager to negotiate with the issuer and keep the syndicate records of the underwriting. You might also see this position referred to as the managing underwriter or the lead underwriter.
A client has a restricted margin account. To place additional trades in this account,
The client would need to satisfy the appropriate margin requirement for any trades.
An investor owns a convertible debenture with a conversion price of $10. If a 10% stock dividend is paid on the company's common stock, what happens?
The conversion price will be adjusted to $9.09. You can assume that any convertible security on the exam will have an anti-dilutive provision. That means that a stock dividend or stock split will not cause the investor's conversion privilege to be diminished. With a conversion price of $10, the investor was able to convert into 100 shares ($1,000 divided by $10). After the 10% stock dividend, the investor must be able to convert into 10% more shares (110 shares). To get 110 shares from a $1,000 principal, the price must be reduced. The computation is $1,000 divided by 110. That equals $9.09 per share.
A customer has contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences?
The entire $10,000 is taxable as ordinary income. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or last-in, first-out). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be an additional tax penalty of 10%.
A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account?
The equity will remain the same Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.
The FINRA 5% policy deals with markups, markdowns, and commissions. When acting as a dealer, what prices are used to compute the member firm's markup or markdown?
The highest bid and the lowest ask for all market makers
The customer relationship summary (Form CRS) is an integral part of Regulation Best Interest. For an existing cash account customer who received the initial Form CRS in early July 2020, a new Form CRS must be delivered no later than
The opening of a new account.
A customer has his broker enter an order to buy GHI stock at the opening. Though transmitted promptly, the order does not reach GHI's trading post in time to be filled at the opening. How is the order handled?
The order is cancelled.
Which of the following is limited in the case of a limited tax municipal bond?
The type of tax that can be used to service the debt. A general obligation (GO) bond may be backed by a specific tax. For example, a limited tax GO may be serviced only from sales tax revenue, not income tax revenue. As the source of debt service is limited (it is not backed by the full taxing authority of the issuer), these bonds are sold with higher yields than conventional GOs.
A customer received warrants when investing in an issuer's recent bond offering. The breakeven point for the warrant is reached when
The underlying stock's market value is equal to the exercise price, plus the warrant's cost.
Which of the following statements is most accurate regarding Treasury bills?
Their interest income is subject to federal income taxes only.
One of your retail clients would like to know if hedge funds are suitable for him. How should you respond?
These investments are generally inappropriate for retail investors
Most mutual funds operate as regulated investment companies. This means that
They qualify for special tax treatment under Subchapter M of the IRS. Triple taxation of investment income can be avoided if the mutual fund qualifies under Subchapter M of the IRC. To avoid taxation under Subchapter M, a fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount. This rule applies to management companies (open-end and closed-end) and UITs. That means ETFs are also included. Although not investment companies registered under the Investment Company Act of 1940, REITs can also take advantage of Subchapter M's tax benefits.
XYZ Corporation has outstanding a 7% convertible bond currently trading at 102. The bond, which has a conversion price of $50, was issued with an antidilution covenant. If XYZ declares a 10% stock dividend, the new conversion price, as of the ex-date, will be
To compute a new conversion price, divide the current conversion price by 100% plus the percent increase in shares. $50 / 110% = $45.45.
In its notice of sale in The Bond Buyer, an issuer states that it will take into consideration the timing of interest payments when evaluating bids. The issuer will be using which of the following methods in its bid selection?
True interest cost The true interest cost (TIC) method takes into consideration the time value of money. The issuer discounts future interest payments to arrive at a present value.
SEC rules require that customers be given a copy of the risk disclosure document before their first transaction in a penny stock. The member firm must receive a signed and dated acknowledgment from the customer that the document has been received. In addition to obtaining the client's signature, the SEC requires the firm to wait at least
Two business days after sending the statement before executing the first trade
A customer buys a municipal bond in the secondary market at 96 that has four years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are
Two points of ordinary income and one point of capital gain. When a municipal bond is purchased in the secondary market at a discount, the annual accretion is taxed as ordinary income. The annual accretion is one point per year (four points divided by four years to maturity). Therefore, when the bond is sold two years later, its cost basis is 98. If the bond is sold at 99, there is a long-term capital gain of one point per bond. Also, there is ordinary income taxation on the accretion of two points.
If three individuals have a tenants in common account with your firm, and one individual dies, what happens?
Two survivors continue as cotenants with the descendant's estate.
Underwriting compensation for a new direct participation program must be
Underwriting compensation for a direct participation program is limited to 10% of the gross proceeds of the offering.
XYZ Corporation has set Friday, January 23, as the record date for its next quarterly dividend distribution. To receive the dividend, a customer, long 1 XYZ Feb 40 call, must issue exercise instructions on or before
Wednesday, January 21 Dividends are paid to investors who are owners of record as of the close of business on the record date. When a call option is exercised, money and stock are exchanged (settlement) on the second business day after notice is given to the Options Clearing Corporation. Therefore, an investor who wishes to receive a dividend must exercise a call no later than the second business day before the record date (i.e., the day before the ex-date). This is no different from anyone else purchasing stock before the ex-date.
If ten firms form a syndicate to distribution $10,000,000 of new bonds. UW A Commits to distribution $2,000,000 but only sells $1,600,000. How much are they liable for under Western and Eastern Accounts?
Western, all of it $400,000 Eastern, only 20% of the unsold amount so $80,000
A deferred compensation plan would be most suitable for
an employer with a few highly paid employees who are near retirement age and want to reduce current taxes.
Surrender charges when exiting a variable annuity
are usually waived by the insurance company once the investor has remained in the contract for at least five years.
A registered representative would like to participate in a Q & A session that will be hosted on one of the firm's social media platforms. The individual's participation in this event
is not required to be approved by a principal of the firm, as the event would qualify as a public appearance.
The business communications that a registered representative places on a social media site that he also uses for personal communications
is subject to firm monitoring and recordkeeping procedures.
A client wishes to place an order to sell an ABC May 60 call and buy an ABC May 50 call, for a net price of 4. This order
must be entered as one trade at a limit price.
Funds for Life (FFL) is an SEC registered broker-dealer. The only securities business done by the firm is the sale of redeemable investment company securities. If FFL should go into bankruptcy proceedings, SIPC would
not offer protection to any of the customers. SIPC, the Securities Investor Protection Corporation, is a nonprofit membership organization. SIPC members pay assessments into a general insurance fund that is used to meet customer claims in the event of a broker-dealer's bankruptcy. All registered brokers or dealers, by law, automatically become SIPC members, except for those persons whose business as a broker or dealer consists exclusively of the distribution of shares of registered open-end investment companies or unit investment trusts (redeemable securities). Therefore, FFL would not be a member of SIPC, and its customers would not have SIPC protection. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
The function of the Federal National Mortgage Association (FNMA) is to
purchase FHA-insured, VA-guaranteed, and conventional mortgages.
In a customer's margin account, a broker-dealer must segregate
the excess securities above 140% of the accounts debit balance.
When securities are inherited, the cost basis is
the market value at the time of death
One of your customers owns a variable annuity. When asking about how the performance of the separate account is measured, you would respond that
the separate account performance depends on the performance of the selected subaccounts.
Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?
2:1
A customer's restricted margin account shows the following: LMV $30,000 DB $16,000 SMA $0 If the customer sells $2,000 of securities, how much could be withdrawn from the account?
$1,000. In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to the special memorandum account (SMA). Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.
In an existing margin account with special memorandum account (SMA) of $2,000, if a customer wishes to buy 300 shares of ABC at $20 per share, how much must the customer deposit?
$1,000. The customer wishes to purchase $6,000 worth of stock, and the Regulation T requirement is $3,000. The SMA has buying power of 2:1 when Regulation T is 50%, so $2,000 of SMA will purchase $4,000 of stock. Of the remaining $2,000 balance, the broker will lend 50%, so the customer must deposit $1,000.
A muni bond round lot has a face amount of
$100,000
How much would the special memorandum account (SMA) price increase if a customer bought $22,000 worth of marginable stock in the existing margin account and fully paid for the transaction?
$11,000. Assuming the customer paid for the securities in full, he would generate $11,000 in SMA. Because the customer needs to pay only half of the securities' value ($11,000), the additional cash paid ($11,000) would be considered a nonrequired cash deposit and be credited to SMA. Another way to view the transaction is the customer has fully paid securities with a loan value of 50%, or $11,000.
On March 1, an individual, age 40, wants to open and fund a Roth IRA at the maximum permitted level. She earns less than the adjusted gross income level that would limit her contribution. What is the maximum amount that she may place in a new Roth IRA?
$12,000. Based on her age (less than 50), her maximum contribution would be $12,000, specified as $6,000 for two separate years of contributions. Because she is opening the account on March 1, she would be permitted to make contributions for the prior tax year (up until the April 15 tax filing deadline), as well as for the current tax year.
A teacher has a 403(b) plan, and the school system he works for has deposited $10,000 into his plan over a 12-year period. At retirement, if the teacher withdraws the total value of $16,000, on what amount does he pay tax?
$16,000 A 403(b) plan is a qualified retirement plan; contributions to the plan are made before taxes, and the growth of the contract is tax deferred. Any distribution from a 403(b) plan is fully taxable to the participant at the ordinary income tax rate.
If a customer subscribes to a $20,000 public limited partnership interest, which of the following is the maximum underwriting compensation that may be charged?
$2,000. The FINRA rules for limited partnership offerings limit underwriting compensation to 10% of the total money raised. (Ten percent of $20,000 is $2,000.)
An investor purchased 100 shares of ABC common stock at $60 per share on March 2, 2019. At the same time, an ABC Oct 55 put was purchased at $2. On June 2, 2020, the investor sold the stock for $85 per share. As a result, the tax consequences ar
$2,300 long-term capital gain
An investor purchased 100 shares of ABC common stock at $60 per share on March 2, 2019. With the stock selling at $80 per share on January 2, 2020, the investor purchased an ABC Apr 75 put for a premium of 2. On June 2, 2020, the investor sold the stock for $85 per share. As a result, the tax consequences are
$2,300 short-term capital gain The purchase of the put on stock that had a holding period of less than long term (March to January is only 10 months) erases the holding period. The holding period begins again once the put expires. In this case, we have a holding period from expiration in April until June 2. That is clearly a short-term holding period. As far as the math, the cost is $62 per share ($60 cost of the stock plus $2 for the put). The sale price was $85, the gain is $23 per share, $2,300. Alternatively, the sale price of $85 created a $2,500 gain (85-60) and the put was a $200 loss. That is a net of + $2,300. Either way is fine.
With an initial margin requirement at 50%, a customer purchased 100 shares of ABC Corp. at $100 per share and deposited $5,000. ABC Corp. then increases in value to $150 per share. What is the excess equity in the account?
$2,500 When the LMV increases to $15,000, Reg T required equity is 50% x $15,000 = $7,500. The equity balance is $10,000, so excess equity = $10,000 - $7,500 = $2,500. This also creates SMA of $2,500 as SMA equals the greater of excess equity or the last SMA balance.
An investor has a short margin account. The current market value of the stock is $1.50 per share, and the investor owns 1,000 shares. Compliance with SRO minimum maintenance requirements is met with account equity of
$2,500. For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500 (1,000 shares @$2.50) is greater than 100% of $1,500.
A corporation is having a rights offering. The terms of the offering require four rights plus $40 to purchase one share. With the stock's current market price at $50 per share, the theoretical value of one right before the ex-rights date is
$2.00. Because the question is asking about the value before ex-rights, it means we use the cum-rights (with rights) formula. That is, the (market price minus the subscription price) divided by the (number of rights it takes to buy one share plus one). Plugging in the numbers gives us ($50 - $40) ÷ (4+1) = $10 ÷ 5 = $2.00
A corporation has $12 million net income after taxes, 5 million common shares outstanding, and $10 million of 6% preferred stock ($100 par). What is the corporation's earnings per share (EPS)?
$2.28. 100,000 preferred shares and the 6% dividend is $600,000 so NI goes from 12 --> 11.4. 11.4 / 5mm common shares = $2.28
On April 15, 2016, your client purchased a variable life insurance policy with a death benefit of $450,000. The November 2019 statement showed a cash value of $28,000. If the client wanted to borrow as much as possible, the insurance company would have to allow a loan of at least
$21,000 Once a variable life policy is in force for a minimum of three years (this one is a bit longer than that), there is a requirement to make the loan provision available. At the three-year mark, that minimum becomes 75% of the computed cash value. Seventy-five percent of cash value of $28,000 is $21,000.
A 38-year-old investor places $25,000 into a qualified single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is
$25,200. Because this is a qualified annuity, the entire withdrawal is taxable. The surrender value of $72,000 has a cost basis of $0.00. That $72,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $72,000.
Paying a premium of $10 per bond, Tracey bought 10 municipal bonds with 20 years to maturity. Ten years later, she sold the bonds for 103. For tax purposes, she has
$250. The cost per bond is $1,010. The amortization amount each year is 10/20 years, which equals $0.50 per year. $0.50 per year × 10 years = $5 per bond. After 10 years, the adjusted cost basis is $1,005 per bond. She sells the bonds for $1,030 per bond. $1,030 − $1,005 = $25 per bond 25 × 10 = $250 gain.
A customer has a short account with $25,000 short market value, $37,000 credit balance and SMA of $500. What is the maximum short market value for this account before the customer will incur a maintenance call?
$28,462 Maximum SMV before a maintenance hall in a short-market account = CR balance/1.3 = $37,000/1.3 = $28,462
A margin account contains 500 shares of XYZ at $40 per share and 300 shares of ABC at $90 per share. The debit balance is $21,500 and the special memorandum account (SMA) balance is $2,000. If XYZ increases to $50 per share and ABC remains unchanged, the equity in the account would be
$30,500 New market value of $50,200 - $21,500 debit balance = $30,500 equity balance. SMA is not equity.
The city of Austin (population 10,000) has just issued $1 million in general obligation bonds and already has an outstanding GO debt of $2 million. The city is located in a municipal county with $1,500,000 in debt outstanding, most of which is funded from ad valorem taxes. Austin makes up 70% of the county. What is the net direct debt per capita of Austin?
$300. Net direct debt = Total debt - self-supporting debt - sinking fund accumulations. Total debt = $3,000,000. There are no sinking fund accumulations or self-supporting debt. Net direct debt per capita = $3,000,000/10,000 = $300.
Fred has placed an order to buy 100 shares of LEG at 33. The current quote for LEG is 31.75-32.15. Fred's order will
$32.15 This is an example of 'marketable limit order'. Since Fred's desired price is higher than the market offer, Fred would receive the best offer in the market, which is now 32.15.
The Class A shares of the GEMCO Balanced Fund carry a sales charge of 4.5%. If the next computed net asset value per share is $32.74, purchase orders will be filled at a price of
$34.28 per share. Mutual funds sell at the public offering price (POP). That POP includes the sales charge—in this case, 4.5%. The sales charge is a percentage of the POP, not the NAV. The computation is the NAV divided by (100% - the sales charge). In our question, that is $32.74 ÷ 0.955, or $34.28 per share.
A client's margin account has $650,000 across 3 different securities positions, a debit balance of $275,000, and an SMA balance of $125,000. In the event of the bankruptcy of the broker-dealer, SIPC will cover this client for
$375,000. In a margin account, SIPC will cover the net equity in the account. In this example, we subtract the debit balance of $275,000 from the market value of $650,000, to arrive at the net equity position of $375,000. SMA is not covered by SIPC.
An investor has the following tax picture in 2018: Tax loss carryover from 2017: $9,000 Capital gains realized in 2018: $15,000 Capital losses realized in 2018: $2,000 What is the investor's reportable gain or loss for 2018?
$4,000 net capital gains. In determining an investor's capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other. In this situation, the prior year's loss carryover of $9,000 is added to the current year's loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000, for a net capital gain of $4,000.
A customer has a short margin account. In it, there is one stock currently trading at $14 per share. The minimum maintenance requirement for this account is
$5 per share. When it comes to short margin, for stock trading at $5 per share and above, the minimum requirement is the greater of $5 per share or 30% of the short market value. $5 is more than 30% of $14 ($4.20).
If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of
$5,000. Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).
With an initial margin requirement at 50%, a customer purchased 100 shares of ABC Corp. at $100 per share and deposited $5,000. ABC Corp. then increases in value to $150 per share. How much more ABC Corp. can the customer purchase without depositing additional cash?
$5,000. The customer can use SMA to purchase securities with a buying power of 2 to 1, or he can borrow the full value of SMA in cash. Therefore, the customer can purchase up to $5,000 in securities using the SMA balance of $2,500 without having to deposit additional cash.
In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is
$5,600 The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600).
When a bond is referred to by a yield percentage, it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% bond currently trading with a 6.5% YTM is correct.
$65,000 The $20,000 purchase price of the unit is basis. Because this is a RELP, nonrecourse debt increases basis. That addition of $50,000 increases the basis to $70,000. Distributions reduce basis, and there was one of $5,000 bringing the basis down to $65,000. Remember, it is only real estate where nonrecourse debt increases basis. Recourse debt increases basis in any DPP.
In a new margin account, if a customer buys 300 XYZ at 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the Regulation T margin requirement is
$7,200. The Regulation T requirement for purchasing $14,400 (300 × 48) of stock is 50%, or $7,200. The Regulation T requirement for writing covered calls is zero. Therefore, the Regulation T requirement for establishing both of these positions is $7,200. Note that this question asks for the Regulation T requirement, not the deposit that must be made. The margin call (deposit) would be $6,900 because the requirement is reduced by the $300 premiums already received into the account for the calls. After depositing $6,900, the customer will have $7,200 in the account, which meets the requirement.
An investor purchases $15,000 worth of stock in a margin account, depositing the Regulation T requirement. If the account is charged with interest amounting to $100, and no other activity has occurred in the account, the new debit balance is
$7,600 Because the Regulation T requirement is 50%, the investor deposits $7,500 and is loaned $7,500 (debit balance) for the $15,000 purchase. If the account is charged with $100 interest expense, the new debit balance is $7,600.
On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?
$75 Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. Hence, the investor has "bought back" the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. Look at this question as if it said, "On September 15, he purchased 25 shares of KLP stock." That washes out $25 of the loss, but the rest is okay.
An investor has an established margin account with a short market value (SMV) of $4,000 and a credit balance of $6,750, with Regulation T at 50%. How much excess equity does the investor have in the account?
$750. The Regulation T requirement and equity must be calculated before excess equity can be determined. The Regulation T requirement is 50% of the SMV of $4,000 ($2,000). Equity is calculated by subtracting the SMV of $4,000 from the credit balance of $6,750 ($2,750). Excess equity is calculated by subtracting the Regulation T requirement of $2,000 from the equity of $2,750 ($750).
A margin account is showing the following: LMV=30,000; Debit Bal=12,000; Credit Bal=62,000; SMV=38,000. What is the SMA for this account?
$8,000. Equity balance of short: $62,000 credit - $38,000 SMV = $24,000. Regulation T of this is $19,000 (50.0% of SMV). This results in $5,000 of SMA for short account from $24,000 equity - $19,000 reg T amount. Equity balance of long account is $18,000 ($30,000 LMV - $12,000 debit). Regulation T is $15,000 (50.0% of LMV). $18,000 - $15,000 SMA for long account is $3,000.
Achieving a Better Life Experience (ABLE) accounts are tax-advantaged savings accounts for individuals with disabilities and their families. The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age
26. One need not be under the age of 26 to be eligible to establish an ABLE account. One could be over the age of 26, but as long as the onset of the disability occurred before age 26, the person is eligible to establish an ABLE account.
Morgan Pierce has recently opened a new margin account. The initial purchase was for 100 shares of KAPCO common stock at $120 per share. A week later, KAPCO stock is trading at $90 and Pierce is concerned about receiving a call for additional funds. You respond that a margin maintenance call would be issued once the price of the KAPCO shares falls below
$80 per share. The purchase of $12,000 of stock on margin results in a debit balance (DR) of $6,000. Computing the point to which an account's value can decline before reaching the minimum maintenance level is done by dividing the debit balance by 0.75. $6,000 divided by 0.75 = $8,000. With 100 shares, that is $80 per share.
A customer sells short 500 XYZ at $80 per share in a margin account. Before regular way settlement, if the stock falls to $60 per share, the minimum maintenance margin requirement is
$9,000 Minimum in a short margin account is 30% of the current market value, which is $30,000 (500 shares × 60); 30% of $30,000 is $9,000.
If an investor has an established margin account with a current market value of $4,400 and a debit balance of $1,750 with Regulation T at 50%, how much buying power does the investor have in the account?
$900. The Regulation T requirement is 50% of the current market value of $4,400, which equals $2,200. Equity equals the current market value of $4,400 minus the debit balance of $1,750, which equals $2,650. Excess equity is calculated by subtracting the Regulation T requirement of $2,200 from the current equity of $2,650, which equals $450. Buying power is then calculated by multiplying the excess equity of $450 by 2, which equals $900.
If a municipal bond is issued at par and later purchased for 97 plus accrued interest of $32, what is the purchaser's cost basis?
$970. The purchase price of 97 ($970) represents the cost basis of the bond. The accrued interest paid by the buyer has no impact on the cost basis and represents the amount of interest that the seller is due, based on the holding period of the bond from its last interest payment date. The buyer will receive the full six-month interest payment the next time the coupon is paid.
A corporation wishes to raise additional capital by making use of a rights offering. One of your clients owns 200 shares of the issuing corporation's common stock and 100 shares of its preferred stock. The terms of the offering state that four rights will be necessary to purchase one new share at the subscription price of $20. The current market price of the stock is $24 per share. How many rights will your client receive?
200. No matter how many new shares are being offered and how many rights it takes to buy each new share, on your exam, shareholders will always receive one right for each share of common stock they own. With this client owning 200 shares, that is 200 rights. There are never rights with preferred stock.
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the previous two years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?
24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There is $16 due in back dividends, in addition to $8 this year, for a total of $24.
Taylor opened a margin account with your firm today. She requested a quote for IBDH Inc., a Nasdaq stock and was told "14.25 14.45". She then placed an order before the close to sell short 100 shares and the trade was verbally confirmed. When Taylor satisfies her margin requirement on this trade, her credit balance will stand at
3,425 The credit balance in a short margin account is the short sale proceeds plus the margin deposit made by the client. As the value of the short sale is less than $2,000 and this is the first trade Taylor is affecting in her account, Taylor must deposit $2,000. The credit balance will now stand at $3,425. Important to note here that the sale will be affected at the bid price in the market. This applies whether Taylor is selling long or selling short.
An investor has a diversified portfolio of common stock with a market value of $1.7 million and a beta of 1.20. If the OEX (S&P 100) is currently quoted at 680, to protect the portfolio against a decline in value, the investor's best strategy is to buy
30 puts Buying puts is the most effective strategy to hedge the risk of decline in a stock portfolio's market value. To determine the number of option contracts necessary to hedge, divide the portfolio value ($1.7 million) by the market value of the index (68,000). Multiply the result (25) by the beta of 1.20. The result is 30 contracts.
An affiliate or insider holding unregistered shares can sell under Rule 144
4 times a year. Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days, which would allow for as many as four filings per year.
A customer complaint has been resolved. A record of the complaint must be maintained in the files of the broker-dealer for
4 years
Nickelplate Manufacturing Corporation (NMC) is capitalized with 1 million shares of a 6% $50 par callable preferred stock and 10 million shares of $1 par common stock. With the preferred stock currently selling at $75 per share and the common stock at $60 per share, the current yield of the preferred stock is closest to
4.0% Current yield on any security, stock or bond, is the annual income (dividend on stock, interest on bond) divided by the current market price per share (or per bond). The math in this question is the dividend of $3 (a 6% $50 par preferred stock is paying an annual dividend of 6% of $50, or $3 per share) divided by the current market price of the preferred stock ($75). The quotient is .04 or 4%. What about the common stock? All of that information is just to distract you. We cannot compute the current yield of the common stock because we do not have any information about its dividend.
A 4% municipal bond maturing in 2040 has a current yield of 4.4% with a yield to maturity of 4.7%. What is the basis of this bond?
4.7% Basis is interchangeable for YTM.
The ELLA Distributing Company issued a bond with a nominal yield of 5%. The bond matures in 12 years and is currently trading at 94. The bond's yield to maturity is closest to
5.67% The first point to notice is that the bond is trading at a discount. When bonds trade at a discount, our yield chart and example tells us that the yields, in ascending order, are nominal yield, current yield, yield to maturity, and yield to call. That last one is of no relevance to this question because a call feature is not mentioned anywhere. Therefore, we know that the yield to maturity must be greater than the nominal (coupon) yield of 5%. There are only two choices that are, so if you are running out of time or do not remember how to do this, at least you have a 50% chance. However, 50% doesn't pass the exam, so let's make that 100%. The yield to maturity computation is tricky, but current yield is not. It is simply the coupon divided by the current market price. In our question, that is 5% divided by 94 equals 5.32% (or $50 divided by $940). We know the yield to maturity for a bond selling at a discount is higher than its current yield. That means the correct answer must be greater than 5.32%.
BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM?
50.0% When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, 50% of the remaining dividends received are taxable.
A customer purchases a 6% municipal bond in the secondary market on a 7% basis. The effective after-tax yield is
6% to 7% Because the interest on a municipal bond is tax-free on the federal level, the effective after-tax yield is generally the same as the coupon. That is, a bond paying 6% interest, with none of it taxable, will have an after-tax yield of 6%. This question deals with an exception. This bond is purchased in the secondary market on a 7% basis or yield to maturity (YTM). Whenever the YTM is higher than the coupon, the bond is priced at a discount from par. That means the investor is going to receive the difference between the discounted purchase price and the par value when the bond matures. When the bond is purchased in the secondary markets, that difference is amortized over the remaining life of the bond and is taxed each year as ordinary (taxable) income. Therefore with the annual amortization of the discount (that annual profit per se) being taxable, the effective after-tax return will be higher than the 6% coupon, but not equal to the 7% yield to maturity.
An investor has purchased an XYZ Oct 70 call @ 9 and sold an XYZ Oct 80 call @ 5, while XYZ is trading at 72. The breakeven point for this strategy is
74. This is an example of a debit spread, with the breakeven point being the lower strike price plus the net premium.
An investor is following the new issue municipal bond market. The primary source material is found in the Daily Bond Buyer. This publication is distributed on
A daily basis
An inherent risk associated with auction rate securities (ARS) is the potential to have
A failed auction. An inherent risk associated with ARS is the potential for a failed auction. These can occur due to a lack of demand, resulting in no bids being submitted when it is time to reset the rate. ARS use a Dutch auction method to reset the clearing rate paid in the upcoming period.
Good faith deposit
A good faith deposit is required when the syndicate places a bid on a competitive offering. It is generally 1% - 2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is return by the issuer to the syndicate manager.
Which of the following best describes a special tax bond?
A highway renovation bond backed by a fuel tax
A broker-dealer informs a customer that her order was not executed because of stock ahead. The order was most likely
A limit order When there are a number of limit orders entered at the same price, they are filled in the order in which they have been received. It is possible that those orders received later could not be executed because the execution of the earlier orders has caused the market price to move away from the limit price. Market orders are always executed at the best price in the market (even though that might be far away from what the investor expected). If the investor wants immediate execution—turn in a market order. If the client wants a specific price—turn in a limit order but give the warning that it might never be executed.
If a credit spread widens...
A loss will be realized.
What is the primary market for municipal securities?
A notice of sale
On Monday, John bought and sold 1,000 shares each of MEDX and CETN stock. On Wednesday, he purchased an additional 500 shares of CETN and 1,600 shares of KRS, which he closed in two trades of 800 shares each, later that day. On Friday, John executed a trade to purchase 2,000 shares of BUV and sell 300 shares of the CETN he purchased on Wednesday. Under FINRA rules, John meets the definition of
A pattern day trader
A registered representative prepares a summary of the preliminary prospectus, which contains no unverified claims or statements. The registered representative can send the summary to customers
Neither a preliminary prospectus nor a final prospectus can ever be modified, annotated, or summarized in any way.
Démodé Classic Investments (DCI) is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation program limited partnerships. Under FINRA Rule 2210 on communications with the public, this is considered
A retail communication and must be filed with FINRA within 10 business days of first use of publication. A direct mail communication to more than 25 existing and/or potential clients within a 30-day period is a retail communication. Unless an exception applies, a designated principal of the firm must approve all retail communications. DPPs are part of a group of securities (other common examples are investment companies and CMOs) where filing with FINRA within 10 business days of first use or publication is the rule.
A taxpayer's most advantageous tax benefit is
A tax credit. A tax credit reduces a person's tax liability dollar for dollar. Deductions, depreciation, and depletion reduce taxable income.
Your client Jerry is looking for tax-deferred earnings and growth, as well as generous investment options with a built-in death benefit. You should direct Jerry to
A variable annuity
An investor sells one DEF Nov 65 put for 4 and buys one DEF Nov 70 put for 8. This position is known as
A vertical spread. A spread is the simultaneous purchase of one option and sale of another option of the same class. A call spread is a long call and a short call. A put spread is a long put and a short put. A price spread or vertical spread is one that has different strike prices but the same expiration date. In this question, we have a long put and as short put, both expiring in November but with different strike prices. This is a bear spread because the long option is the one with the higher strike price. A spread is bullish when the option purchased (long) has the lower strike price and the one sold (short) has the higher strike price. We remember that with the letters BLSH (buy low, sell high).
Wrap-fee account
A wrap-fee account is one where a fee, usually based on assets under management, is charged to a customer to cover various services provided by a firm.
Prior to purchasing a new municipal offering, a client is inquiring as to the best resource available to help evaluate the credit quality of the issuer. The RR should direct this client to the
Official statement
What is less liquid or more illiquid real estate investment trust vs. real estate limited partnership?
Real estate limited partnership
A type of investment company product that is typically organized as a closed-end fund but does not trade on a national exchange and offers investors access to alternative investments that are usually only available to institutional investors is a(n)
An interval fund
According to investment company rules, open-end investment companies may not distribute long-term capital gains to their shareholders more frequently than
Annually
A registered representative might recommend a bond ladder to a client who is
Attempting to minimize the impact of interest rate risk on his portfolio A bond ladder is appropriate for someone looking to minimize interest rate risk and increase liquidity in their portfolio. The scenario involves purchasing bonds with different maturity dates, so that each bond matures at a different time (perhaps every year). Typically, the maturities are evenly spaced so that the bonds are maturing at regular intervals, and the proceeds are being reinvested at regular intervals. The more liquidity an investor needs, the tighter the maturity structure of the portfolio should be. Textbook Reference:
One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock?
Average cost basis. The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification. FIFO is the default method used by the IRS if an investor fails to choose. Share identification can frequently result in a lower tax bill, especially if the security was purchased at different intervals at varying prices.
An investor interested in muni bonds but subject to the alternative minimum tax should receive a recommendation to
Hold public purpose muni bonds and not private activity bonds. This is because private bonds are most likely to lose their tax free interest subject to AMT.
If a Japanese exporter wants to hedge a recent sale of stereo equipment to a U.S. buyer, and the exporter will be paid in U.S. dollars upon delivery of the goods, the best hedge would be to
Buy Japanese yen calls The Japanese exporter will be paid in U.S. dollars upon delivery of the equipment. He would be adversely affected if the dollar dropped in value in relation to the yen. To protect his position, he should buy calls on his own currency—the yen. Then if the yen appreciates, his loss on the dollar is offset by his gain on the calls. Exporters buy puts on foreign currency to hedge, but there are no options on the U.S. dollar. The next best strategy is to buy calls on the home currency.
An investor anticipating that the Federal Reserve Board is likely to increase its target fed funds rate would likely take which of the following actions?
Buy U.S. listed EUR put options. When U.S. interest rates rise, the U.S. Dollar is likely to strengthen as investors chase the higher returns offered by U.S. Dollar-denominated investments. As a result, foreign currencies would be expected to weaken against the U.S. Dollar. In the U.S., USD options do not exist, so the only viable choice on this question is to buy EUR puts.
Amy has a $200,000 equity portfolio. What would you suggest as an appropriate way to hedge her portfolio?
Buy an inverse ETF
IBM sold computers to a Soho retailer and agreed to accept payment of 10 million British pounds in 65 days. In which of the following ways could the company protect the payment against adverse foreign currency fluctuations?
Buy pound puts If the company wants to protect its investment, it has to protect against the payment going down in value relative to the cost. To protect against the value of the payment going down in relation to the cost, the company would buy puts on the payment currency. To offset the cost of the puts, the company will also sell calls. The calls will be covered by the ownership of the actual currency. Remember the acronym EPIC: Exporters buy Puts and Importers buy Calls.
If an American exporter will be paid 25 million Japanese yen when her goods arrive in 45 days, her best hedge is to
Buy yen puts Exporters buy puts to hedge; importers buy calls on the foreign currency to hedge.
Broker-dealer K is publishing a research report which includes ratings of the 10 companies it is currently covering. This report must also include
The percentage of all securities placed into a particular rating category.
In order for a person associated with a FINRA member firm to open a securities account at a different FINRA member firm,
The person must receive written consent from their employer prior to opening such account.
The receipt of accrued interest will result in what?
Interest income increases
Dennis owns $100,000 par value Treasury Bills. When these securities mature, Dennis will have
Interest income taxable at the federal level only.
Tim has expressed concerns to you regarding issuer credit quality, liquidity, and interest rate fluctuations. In attempting to address Tim's concerns, you might suggest that he Correct Answer:
Consider creating a bond ladder. Tim's concerns can be addressed by creating a bond ladder. A laddered portfolio is one containing a group of bonds having different maturity dates, thereby providing a continuous stream of funds from maturing bonds. The cash received from these maturing bonds can then be reinvested in a new bond on the back end of the ladder, at the current interest rate level. This structure also alleviates Tim's concerns regarding credit risk, as only a portion of the overall portfolio is exposed to the risk of default of an issuer.
The price of DFEC common stock is $32 per share. Your customer owns one DFEC Sep 35 put purchased for a premium of 4. The option
Is 3 points in the money. Ignore the premium.
Regarding premiums, they are
Fixed in a variable life contract and flexible in a universal variable life contract.
The dividend rate on cumulative preferred stock is...
Fixed. It is never more than the stated rate. The cumulative feature simply means that if there are skipped dividend payments, those must be made up before dividends may be paid on common stock.
When purchasing a variable annuity, an investor asks if there is a way to receive a guaranteed minimum investment benefit regardless of market conditions. You should reply
For an additional payment, a GMIB option can be added to the annuity contract.
12b-1 fees may not be used to pay...
For the portfolio manager's fees .
One of the distinguishing differences between variable annuities and mutual funds is that variable annuities
Have a separate account.
Your client Paul is considering purchasing a variable annuity through his company's 401(K) plan and seeks your advice. You should tell Paul that
He might consider purchasing the variable annuity in a regular brokerage account. It would generally not be advisable to purchase a variable annuity in a 401(K) plan, as there will be no additional tax benefits realized. The annuity should be purchased outside of a tax -deferred account, to gain the tax benefits offered by the variable annuity.
When stock held in a margin account appreciates, which of the following increase(s)? I. Current market value II. Debit balance III. Equity
I and III only. When stock held in a margin account appreciates in value, the current market value in the account increases as the market value reflects the value of the stock. Additionally, the equity, or ownership in the account increases. The debit balance represents the total loan from the broker dealer and only changes by customer action. A change in the value of securities in the account does not change the debit balance.
Which of the following statements regarding joint accounts registered as tenants in common (TIC) are true? I. Each party specifies a percentage of interest in the account. II. Each party has an equal interest in the account. III. The interest of a deceased tenant passes to the estate of the decedent. IV. The interest of a deceased tenant passes to the cotenant.
I and III.
If a Spouse 1 owns 9% of the common shares of XYZ, and Spouse 2 owns 2% and wishes to sell his shares, he I. is considered an affiliate. II. is not considered an affiliate. III. must file a Form 144 to sell. IV. does not have to file a Form 144 to sell
I and III. If spouses (either individually or jointly) own a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. For exam purposes, spouses are assumed to live in the same home unless the question states otherwise.
The indenture of a revenue issue would ordinarily include which of the following covenants? I. Adequate insurance on the property II. An increase in property taxes if necessary to service the debt III. Proper maintenance of the property IV. Statutory debt limits
I and III. The insurance covenants and the maintenance covenant would both be found in the trust indenture of a revenue bond. GO bonds are backed by taxes and have statutory debt limits, not revenue bonds.
A client wants to sell $10,000 worth of Barnett Banks and use those funds to buy $10,000 worth of Bay Banks. Assuming that your firm acts as a dealer in both transactions, which of the following statements is(are) true? I. This set of trades is called a proceeds transaction. II. Your firm must consider each transaction separately in determining a fair markup. III. Your firm must consider the markdown on the liquidated securities in determining a fair markup on the securities purchased. IV. Your firm has acted illegally: it must act as a broker in one of the transactions only.
I and III. A proceeds transaction is one where a client closes a position in one security in order to immediately open a position in another security. In a proceeds transaction markups and markdowns cannot exceed the FINRA 5% policy.
Holding no other positions in his account, Jeff sold short 500 shares of XXX at 39 and on the same day wrote 1 XXX May 40 put for 4. While maintaining both of these positions, Jeff
Is exposed to unlimited risk
If a registered representative gave her retail customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are true? I. She should not have distributed sales literature without the prospectus. II. It was okay to distribute the sales literature and send the prospectus later to those who were interested. III. She should not have recommended a specific variable annuity without having the prospectus available. IV. Because she only answered questions about the investment, she was not required to provide a prospectus.
I and III. A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers.
A 2-for-1 split does which of the following? I Increases the number of outstanding shares II Decreases the number of outstanding shares III Decreases par value per share IV Decreases retained earnings
I and III. After a 2 for 1 stock split, the number of o/s shares doubles, and the par value per share decreased by half. RE are not affected.
Which of the following statements regarding municipal securities quotations are true? I. A quotation can be an indication of interest. II. A quotation cannot be an indication of interest. III. A quotation can be a one-sided request for a bid or offer (bids wanted and offers wanted). IV. A quotation cannot be a one-sided request for a bid or offer (bids wanted and offers wanted).
I and III. Municipal Securities Rulemaking Board rules pertaining to quotations cover all bona fide bids and offers, including one-sided requests for bids wanted and offers wanted, which are considered indications of interest.
Which of the following are spreads? I. Long 1 FLB May 40 call, short 1 FLB May 50 call II. Long 1 FLB May 40 call, long 1 FLB May 50 call III. Long 1 FLB Aug 40 call, short 1 FLB May 40 call IV. Long 1 FLB Aug 40 call, short 1 FLB Aug 50 put
I and III. Options I and III fit the definition of a call spread because each includes one long and one short option of the same type with different strike prices (I, a price spread) or different expiration dates (III, a time spread). Option II involves options of the same type, but both are long. Option IV involves options of different types.
A registered representative mentions a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct? I. Six percent is the bond's coupon. II. Six percent is the bond's current yield. III. Six-and-a-half percent% is the bond's yield to maturity. IV. Six-and-a-half percent% is the bond's current yield.
I and III. When a bond is referred to by a yield percentage, it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% bond currently trading with a 6.5% YTM is correct.
One of your customers does not want the risk of taking physical possession of their stock certificates. As the same time, the customer does not want them in street name. Which of the following two options would work for your customer? I. Give the broker-dealer transfer and hold instructions II. Give the broker-dealer transfer and ship instructions III. Offer the client certificate loss insurance IV. Use the direct registration system
I and IV. One option is to have the securities registered into the customer's name but have the broker-dealer hold them in safekeeping. Some firms make a charge for custody, but often waive it for larger accounts. Another option is the Direct Registration System (DRS), where the ownership is recorded electronically (book-entry) in the name of the investor on the issuer's records. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
If a broker-dealer is acting as a financial advisor to a municipality, which of the following statements is true? I. Municipal Securities Rulemaking Board (MSRB) rules prohibit the broker-dealer from acting as an underwriter for the issuer unless they meet the criteria of specific allowable exceptions. II. The broker-dealer can act as both financial advisor and underwriter with no limitations. III. The broker-dealer may only act in an underwriting capacity if the underwriting agreement was done as a negotiated underwriting. IV. There are some underwriting functions that the broker-dealer, in their advisory capacity, may be allowed to participate in, such as assisting with the preparation of the official statement.
I and IV. If a broker-dealer has a formal advisory relationship with an issuer, it may not generally act as underwriter for the issuer's bonds. This applies regardless of whether the underwriting is a negotiated or competitive bid underwriting. There are exceptions and some functions associated with underwriting that the MSRB rules do allow, but in those instances, the broker-dealer could only be compensated for the broker-dealer's advisory services and not for any underwriting services or related functions.
Which of the following statements regarding a Regulation T extension are true? I. It is granted by a self-regulatory organization. II. It is granted by the transfer agent. III. An extension is automatically granted once the extension request is made. IV. Extensions are not automatically granted and may be denied.
I and IV. In certain cases where the customer cannot make payment by the fourth business day following the trade date, the broker-dealer can request an extension from the self-regulatory organization (SRO) that is its designated examining authority (DEA), usually FINRA. Extensions are not automatic, may be denied, and are granted at the discretion of the SRO.
Which of the following regarding a municipal bond broker's broker are true? I. Protects customer identity II. Must disclose the identity of customers III. Has no inventory IV. Maintains an inventory
I and IV. Municipal brokers' brokers generally purchase and sell securities on an anonymous basis for institutional clients. They are not in the business of making a market; therefore, they maintain no inventory.
Which of the following statements regarding negotiable certificates of deposit (CDs) are true? I. The issuing bank guarantees them. II. They are callable. III. Minimum denominations are $1,000. IV. They can be traded in the secondary market.
I and IV. Negotiable CDs are issued primarily by banks and backed by the issuing bank. The minimum denomination is $100,000. These are sometimes referred to as jumbo CDs.
If a customer writes 1 ABC Jan 35 call at 13.50 and 1 ABC Jan 55 put at 12.50 when ABC is trading at 45, excluding commissions, this position will be profitable if ABC is I. above $29. II. below $29. III. above $61. IV. below $61.
I and IV. This is a short in-the-money combination. To compute the breakeven points, add the combined premiums (26) to the strike price of the call and subtract the combined premiums from the strike price of the put. The breakeven points are 61 (35 + 26) and 29 (55 − 26). With a short combination like a short straddle, the customer makes money if the stock stays inside the breakeven points.
A client chooses to leave a dividend payment in a margin account; as a result, the I. equity increases. II. equity decreases. III. debit balance increases. IV. debit balance decreases.
I and IV. When a dividend payment is made to an investor's margin account, that dividend payment is the investor's own cash, so equity will increase, and the debit balance will decrease.
An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true? I. He must file Form 144 to sell the shares. II. He does not have to file Form 144 to sell the shares. III. He is considered an affiliated person. IV. He is not considered an affiliated person.
II and IV. He is not a control person because < 10%. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.
A customer, without giving written authorization, may permit a registered representative to exercise his discretion as to I. the security. II. the price at which to enter the order. III. the amount of shares. IV. when to enter the order
II and IV. Registered reps may choose the price or timing of an order without having discretionary authority.
A portfolio consists of 50% ABC investment grade bond mutual fund, 30% DEF zero-coupon bond fund, and 20% XYZ growth and income fund. The biggest risk associated with this portfolio is
Interest rate risk. This portfolio is 80% debt, and therefore, would be most susceptible to interest rate risk. Because the bonds are held in funds, there are many bonds and any individual bond default (credit risk) would make up only a small portion of the overall portfolio. This portfolio does have purchasing power risk, but the zero-coupon bonds are most susceptible to interest rate risk. The zeros also reduce the overall reinvestment risk of the portfolio.
In a variable life contract, the minimum death benefit
Is guaranteed and will not change
Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination? I. Actual performance compared to the AIR affects the cash value of a variable life insurance policy II. Actual performance compared to the AIR affects the death benefit of a variable life insurance policy III. Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity IV. Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity
II and IV. When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. There is no assumed interest rate for the cash value. That is, the insurance company makes no projections as to its growth. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice-versa. During the accumulation period, there are no assumptions; the insurance company never projects how much the money will grow.
When a registered representative opens an options account for a new client, in which order must the following actions take place? I. Obtain approval from the branch manager II. Obtain essential facts from the customer III. Obtain a signed options agreement IV. Enter the initial order
II, I, V, III The steps in opening a new options account occur in the following order: obtain essential facts about the customer, have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 days. What about delivery of the options disclosure document (ODD)? That isn't included in the choices here. It must be delivered at or prior to the time the account is approved for options trading. That would mean before or simultaneously with choice I.
An investor wishes to purchase a new issue municipal bond. Which of the following terms describe the form of the bond? I. Bearer II. Registered as to principal only III. Fully registered IV. Book entry
III and IV. All new municipal bonds are issued either in fully registered or book entry form.
Which of the following statements regarding an official statement are true? I. It is required by the SEC for all new issues. II. It is required by the Municipal Securities Rulemaking Board (MSRB) for all new issues. III. It must be delivered to purchasers at or before settlement. IV. It is generally used by underwriters to help sell the issue.
III and IV. An official statement is a document similar to a prospectus and is furnished, in most cases, to buyers of new issue municipal bonds. SEC rules require that an official statement be prepared for most—but not all—new municipal issues. The MSRB has no such requirement, as it does not regulate issuers.
A power of attorney is not required for a registered representative to choose which of the following order instructions? I. Security to be bought or sold I. Number of shares to be bought or sold III. Time of execution IV. Price of execution
III and IV. If a RR choses price or timing of an order only, that order is not a discretionary order.
Amy has received an order from her client Joe to purchase an ABC Inc. 2.5% bond due in 2026. When Amy goes to place the trade, she finds that this particular bond is no longer available, but XYZ corp. 2.5s due 2026 are available. Amy may place this trade for Joe
If she has discretionary authority from Joe.
An order designated fill-or-kill (FOK) means that the order must be executed
Immediately and in its entirety
Under Rule 144A, unregistered securities can be resold to qualified institutional buyers
Immediately. QIBs do whatever tf they want (>$100M)
A client interested in capital preservation would be least likely to purchase a(n)
Income bond An investor with a goal of capital preservation would not be interested in purchasing an Income Bond. These bonds are issued by companies experiencing challenging financial conditions; these funds may be needed to avoid bankruptcy or to otherwise stay in business.
When a member firm sells municipal bonds to a customer out of its inventory, it must
Indicate the amount of markup on the customer's confirmation.
An investor holding an equity linked CD is least concerned with what?
Inflation risk.
Which of the following can you find on the Level 1 service of Nasdaq?
Inside bids and offers.
Revenue Bond
Interest and principal are paid from receipts from municipal facilities. A revenue bond may refer to a trust indenture that protects bondholders.
An open-end investment company that does not distribute at least 90% of its net income
Is liable for federal taxes on its net income Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation.
A broker-dealer holds positions in several municipal bonds, including a few private activity bonds. It would likely recommend a private activity bond to a client who
Is not subject to AMT. Private activity bonds are best suited for investors who are not subject to the alternative minimum tax (AMT), as the interest income generated by these types of bonds is subject to the AMT. Investors who are subject to the AMT should purchase public purpose municipal bonds.
If a customer is long ABC Sep 30 calls, and the stock becomes subject to a trading halt on the floor of the NYSE, the customer is permitted to
Issue exercise instructions
An investor purchased a corporate bond with a 6% coupon at a net price of 101. The bond had accrued interest for 45 days. What shows up on purchaser's confirmation?
It will appear as $1,017.50. Accrued interest is added to the bond. 6..0% coupon is $30 semiannually, or $7.50 for 45/180 days in a 6 month period. Add that to the $1,010.
Your client owns a variable annuity contract with an annual interest rate (AIR) of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would her April payment compare to her March payment?
It will be higher. If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment.
Jim owns 1,000 shares of the XYZ mutual fund. This year Jim received $150 dividends and $200 in capital gains and elected to reinvest these distributions back into the fund. Which of the following statements is true?
Jim's cost basis in this fund will increase, due to the reinvested distributions
Ken has sold 1 EUR May 145 call and purchased 1 EUR May 135 call. What is this?
Ken has executed a debit spread and is bullish on the EUR.
An investor has purchased ten bonds that will mature one year after the next. As one bond matures, the proceeds are reinvested in a ten-year bond. This is an example of a
Laddered portfolio. This is an example of a laddered bond portfolio. This strategy is often employed to minimize interest-rate risk and to increase liquidity. If interest rates rise, you are able to reinvest the proceeds from the maturing bonds into higher yielding bonds. If interest rates fall, there is protection against reinvestment risk from the longer-maturity bonds at the top of the ladder. These bonds will also appreciate in market value.
For individual public investors, dark pools of liquidity
Less then transparency of the overall market as volume, quote and price information, and market participation identity is unknown.
A customer sells $5,000 worth of a security in a cash account and on the same day purchases $8,000 worth of a different security in the same account. At the close of the fourth business day following these transactions, no payment has been received from the customer and no extension has been obtained. Assuming no change in market value, the firm must
Liquidate $3,000 of securities and freeze the account for 90 days. When an investor buys and sells different securities in the same account on the same day, the two transactions can be netted against each other to determine whether money is due to the client or the client owes money to the firm. In this question the client owes the firm $3,000 (an $8,000 purchase netted against a $5,000 sale). According to Regulation T, the investor has two additional business days after settlement (four days total) to pay the amount owed. Because he has failed to do so and no extension has been obtained, the unpaid-for portion of the trade, which is $3,000, will be liquidated and, according to Regulation T, the account will be frozen for 90 days
What is an example of a collar?
Long stock, long puts, short out of the money calls on the same security A collar is commonly used to protect profits earned from a long stock position. It is established by going long the stock, long a put, and going short a call. Both options are usually out-of-the-money when the position is opened.
An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing
Long-term bonds when interest rates are high If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance of gain.
Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction?
Lowest ask. Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on t he inside bid, which is the highest bid price for a particular security.
Which of the following best describes the advantages of an oil and gas income program, as compared to other types of oil and gas programs?
Lowest risk of capital. Oil and gas income programs own producing wells and pass through their depletion allowances. There is little risk compared to other programs such as exploration.
A corporation has $25 million of 5% bonds outstanding. The bonds are callable at 102. Current market interest rates are 6%. If the company would like to retire $10 million of the debt, it might be smart to
Make a tender offer t o purchase $10mm face amount of the bonds. When current market interest rates are 6%, bonds with a 5% coupon are selling at a discount. That means the company could make a public offer to buy the bonds back at a price somewhat below par value. In simple terms, they could retire $10 million of debt for less than $10 million. It would make no sense to call the bonds at 102 ($1,020) when they can be purchased for less than $1,000 each in the open market. Issuing new bonds to retire old ones, a practice known as refunding, is done when interest rates have fallen. In this question, interest rates have gone up making that plan incorrect. A company cannot issue treasury stock. Issued and outstanding stock becomes treasury stock when it is reacquired by the issuer.
In an IRA, a 6% penalty will be levied if the account owner
Makes an excess contribution
A life-cycle fund would best be characterized as one which
Makes automatic adjustments to its portfolio as an investor approaches retirement.
Sell order tickets must be
Marked as either long or short
If a registered rep volunteers advice to her clients about how to vote in a proxy contest, she
May have to file under SEC proxy contest rules as a participant.
The bid for WXYZ is 5.27 and the ask is 5.31. Jim wants to place an order to buy WXYZ at 5.275. This order
May not be accepted
A registered representative is reading an article in a popular magazine about the advantages of tax deferral in retirement planning. There is a note that reprints of the article are available. In order to send these reprints to existing and prospective customers,
Member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors. This is an example of an independently prepared reprint. It is a form of retail communications and can be used only if the preparer is independent of the member firm. In most cases, these are used "untouched." However, if there are factual errors or statements contrary to FINRA standards, they must be fixed. Preapproval by a principal is required and there is no filing necessary with FINRA. If the publisher is independent but received money from an issuer or underwriter for authoring the article, it may not be used.
Ben purchased an XXX index option on Wednesday May 4 and submitted an exercise notice on Friday May 20. The exercise settlement date for this transaction is
Monday, May 23 When an index option is exercised, the exercise settlement date is the following business day. This is a different timeline for when an equity option is exercised, in which case the exercise settlement date is two business days later.
What is an oil and gas blind pool offering?
Money is raised without a specific property being stated, and the general partner selects the investments
Which of the following securities is typically sold with the legal opinion attached?
Municipal Bonds. Legal opinions are exclusive to municipal securities
Competitive Bid
Municipality puts out an invitation to all investment banks to invite bids from banks; the municipality will put out a "Notice of Sale" that describes what is in the invitation The syndicates then bid The municipality will chose the lowest cost syndicate bid The UW then distributes the bonds base don PGDM
Two institutions effected a 100,000- share trade in XYZ, a NYSE listed security, at 11:15 am ET. This trade
Must be reported to the Consolidated Tape within ten seconds of execution.
Mr. Jones buys 200 shares of ABC at 34.50. Later the same day his broker tells him that the report he received was in error and, in fact, the shares were bought for 34.75. Mr. Jones
Must pay $34.75 per share. When a registered rep quotes a client the incorrect price at which a transaction is made, the client is still responsible for the actual price where the trade was executed.
If a member firm wishes to have a clearly erroneous trade reviewed, it must notify
Nasdaq Market Operations. To have a clearly erroneous trade reviewed, a member must notify Nasdaq Market Operations within 30 minutes of the trade. The NAC is where appeals of disciplinary hearings are made.
An insurance company maintains an account at a broker-dealer. Recommendations made by the registered representative handling this account
Need not adhere to FINRA customer specific suitability standards. FINRA customer-specific suitability standards do not apply to recommendations made to various institutional customers, such as banks, investment advisors, and insurance companies.
Stock prices in the over-the-counter (OTC) market are determined by
Negotiation
Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at...
Net asset value.
SEC rules require that open-end management companies distribute dividends to their investors from the firm's
Net investment income
The Bond Buyer
New issue that describes the 30-day visible supply, placement ratios and Muni prices indexes New issues
A customer purchases $100,000 of original issue discount municipal bonds. How will this trade be considered for tax purposes when the bonds mature?
No capital gain. Original issue discount profit at maturity is treated as part of the tax-free interest on a municipal bond. However, for a municipal bond bought at a discount in the secondary market, the discount is considered ordinary income subject to tax.
Western Account
No shared liability Each member is liable only for the amount of its participation ..Western front on your own
An investor purchased 100 shares of Wilmont Auto Supply Holdings (WASH) on June 1, 2018, at $55 per share. On July 5, 2019, WASH is trading at $40 per share and the investor sells at the market price. On August 1, 2019, the investor purchases a WASH Jan 40 call @4. If there are no other transactions during 2019, the investor's tax consequences are
No taxable loss for 201 because of the wash sale rule.
Is the final reoffering scale in the municipal syndicate account?
No, because they syndicate has yet won the deal.
Broker-dealer M is serving as a financial advisor to County P. May it serve as an underwriter for the bonds of County P at this time?
No, serving in both roles simultaneously is prohibited by MSRB rules.
A broker-dealer is preparing a private placement memorandum for an upcoming offering. The intended audience for this item will be
Non-accredited investors
Do holders of GNMA issued MBS have credit risk?
Nope
J.B. Collingsworth is the CEO and largest single shareholder in Collingsworth Industries, Inc. (CII). Three years ago, J.B. purchased 15,000 shares of CII in the secondary market. J.B. has decided to purchase a vacation home and is going to use the proceeds from a sale of 5,000 of those 15,000 shares as a down payment for the home. With CII selling at $8 per share, does he need to file a 144?
Nope it is not necessary for J.B. to file. As a control person, J.B. must comply with Rule 144 when selling shares of CII. Rule 144 has a de minimis exception when 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. In this case, the 5,000 shares at $8 per share is $40,000, so J.B. is within the limits. Form D is used by the issuer of a private placement. Although it is true that no additional filing is required, the reason has nothing to do with the holding period. Having purchased these shares in the secondary market, J.B. could have sold them the next day if desired.
Advertisements for the Abstemious Balanced Fund (ABF) describe the investment as a no-load fund. In order to make this claim, the fund must
Not have a conditional deferred sales charge When a fund promotes itself as a no-load fund, not only must there be no front-end load, there cannot be a back-end load (CDSC) either. The 12b-1 charge maximum is 0.25%. The concept of breakpoints applies solely to Class A shares (front-end load).
Upon arriving for work on Monday morning, you hear a voicemail message left by Peter, one of your clients, over the weekend. The message asks that at the open on Monday, you sell his 2,500 shares of ABC Industries. He asks that you phone him upon completion of the order. You should
Notify Peter that you are unable to complete this order based on the instructions he left for you. Your clients are usually told never to leave trading instructions or other time sensitive information in a voice message, as their instructions will not be honored.
A registered representative (RR) is meeting with an elderly client who appears confused about the information being discussed. In this situation the RR would most likely
Notify a supervisor of this concern
While preparing an order memorandum, Mary placed the wrong account number on the form. No transaction was executed. What should Mary do?
Notify her supervisors before making any changes.
Which of the following entities guarantees a listed yield-based option?
OCC. The OCC guarantees the performance of listed option contracts.
The placement ratio in The Bond Buyer indicates the relationship for a particular week between the number of bonds sold and the number of bonds
Offered for sale in the market that week
If a 5% stock dividend is declared, the owner of 1 XYZ Jul 30 call owns
One contract for 105 shares with an effective exercise price of $28.57. When a company pays a stock dividend or effects a fractional stock split, the underlying option is adjusted by increasing the number of shares the contract covers (5% × 100 shares = 5 additional shares). The number of contracts owned remains the same, and the effective exercise price is adjusted so that the position value before and after the adjustment remains the same ($3,000 / 105 = $28.57).
What is the definition of a spread?
One long and one short of each option of the same type with different strike prices or a different expiration dates.
Among the differences between a real estate investment trust (REIT) and a real estate limited partnership investment (a DPP) is that
Only the DPP is a flow-through vehicle
If a customer wishes to open a cash account, who must sign the new account form?
Only the principal is required to open a cash account.
An investor purchases $10,000 worth of Treasury bills on November 27 and holds them until they mature on March 30 of the following year. For purposes of taxation, the interest from those Treasury bills is treated as
Ordinary income subject to federal income tax. Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation.
A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client?
Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a last-in, first-out basis, with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Because the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred.
A 3% bond with 20 years to maturity is being issued by a syndicate with a reoffering yield of 4%. What is the term used to describe this bond?
Original issue discount.
Tranche A of a CMO offering has an average life of 2.5 years, Tranche B has an average life of 6 years, while Tranche C has an average life of 11 years. This type of CMO structure is characterized as
Plain vanilla The CMO structure that contains tranches that pay off in a defined sequence is known as a "plain vanilla" offering. Each tranche receives regular interest payments, while principal payments received are made to the first tranche only. As this first tranche is retired, principal payments are then applied to the second tranche until it is retired. This process continues until the last tranche is retired.
A registered representative has a client who is subject to the alternative minimum tax (AMT). The registered representative is drafting a model portfolio for the client to review. What assets would least likely be included in this portfolio?
Private activity bonds. An individual subject to the alternative minimum tax (AMT) would not want to purchase a private activity municipal bond, as the interest income generated by these types of bonds is subject to the AMT. The same is true of an industrial development revenue bond.
Who issues private label CMOs?
Private label CMOs are issued by investment banks and other financial institutions. Agency CMO's are directly issued by the Government National Mortgage Association (GNMA, Ginny Mae), Federal National Mortgage Association (FNMA, Fannie Mae), or Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac).
Investors who are subject to the AMT should purchase what?
Public purpose municipal bonds
Claire expects a stock she is watching to trade up and down for the next few months. Claire may be able to benefit from this activity by
Purchasing a straddle.
CBA, a British manufacturer, has sold one million units of a software program to ABC, a US retailer. CBA was paid in US dollars. CBA can hedge against an adverse currency movement by
Purchasing calls on the British pound. A foreign exporter who receives US dollars as payment would purchase call options on their native currency. If the US dollar weakens, their native currency would strengthen, and calls on that currency would appreciate in value.
A client's account shows no activity other than some dividends received. Based on this information, statements must be sent
Quarterly
FINRA Rule 2231 describes the required frequency of customer account statements. In those cases where there is a highly active customer account, statements must be sent
Quarterly
A muni bond trade is reported to / how soon?
RTRS Real time reporting system within 15 minutes
Regulation NMS is intended to assure that investors
Receive the best price executions for their orders by encouraging market competition This is the primary objective of Regulation NMS. NMS means National Market System. It was established in 2005 to foster competition among markets and among individual client orders.
SEC Regulation Best Interest (BI) focuses on
Recommendations to customers Regulation BI became effective on June 30, 2020, and states, "When making such a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer's interests." **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
A maximum of $3,000 of net capital losses may be used by an investor each year to
Reduce ordinary income.
Planned amortization class (PAC) collateralized mortgage obligation were designed to provide which of the following benefits, compared to plain vanilla tranches?
Reduce prepayment risk for tranche holders
Following issuance, the least amount of after-market activity would likely be observed with a
Regulation D offering. A private placement, or Regulation D offering, would likely have the least amount of after-market trading activity, when compared to public offerings.
Disclosure to customers of control relationships is required in
Remember APP 1. Agency transactions 2. Principal Transactions 3. Primary transactions
Real-time commentary posted to a broker-dealer social media page by a registered representative must be
Retained in firm files for 3 years and are subject to ongoing review by the firm.
A client opened a new options account today. Which of the following actions must the client take within 15 days of account approval?
Return a signed copy of the Option Agreement to the firm.
Steve has written 20 JKL June 25 puts. To complete the combination, Steve should also
Sell 20 JKL July 25 calls To create a combination you sell both puts and calls on the same security. Options of a different series must be used, thus either the strike price and/ or expiration month of the two contracts must be different.
Mr. Smith sells an XYZ Mar 35 call. To establish a straddle, he would
Sell an XYZ Mar 35 put To establish a straddle a customer simultaneously buys or sells two options of different classes with the same series. Therefore, to establish a short straddle, Mr. Smith also needs to sell 1 XYZ Mar 35 put.
At 2:15 pm ET, a customer gives his registered representative a market order to buy 100 shares of ABC at the close. What should the registered representative do with the order?
Send the order to the floor immediately
A newly issued municipal bond pays interest on March 1 and September 1. If the bond has a dated date of August 1, 2019, the bondholder's first interest payment (payable on March 1, 2020) would include interest for a period of
Seven months. From the dated date of August 1, 2019, to the first payment date of March 1, 2020, is seven months.
What is a possible benefit of purchasing shares of a closed-end investment company in the secondary market?
Shares are frequently trading at NAV
Abby owns 300 shares of YYY, a restricted security, as indicated by the legend that is affixed to the certificates. In order for Abby to sell her shares using Rule 144,
She must first have the restrictive legend removed by the transfer agent.
An investor has sold an ABC April 55 Put and an April 60 Call. The investor has executed a
Short combination A short combination involves the sale of both a put and call where either the strike prices or expiration months are different. If both the strike prices and expiration months are the same, it would be a short straddle.
Which term describes the following position? Write 1 DOH Jan 30 call Write 1 DOH Jan 40 put
Short combination. A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security.
An investor purchases an original issue discount general obligation municipal bond (OID) on the offering and holds it to maturity. The IRS treats the accretion of the discount as
Tax free interest income The discount on an OID municipal bond is considered the bond's interest. Because interest on a GO municipal bond is tax free, when that interest is ultimately paid at maturity date, the tax treatment is the same as if interest was paid semiannually. There is a more complicated situation when the OID bond is purchased in the secondary market or when regular municipal bonds are purchased at discount in the market.
One of your clients wants to withdraw $30,000 from his traditional IRA. The client is 35 years old and needs the cash for a medical emergency. You should advise your client
That they may be able to do this penalty free but should verify with their tax adviser.
You receive an email from a client who recently purchased a security based on a recommendation you made and is very dissatisfied with its recent performance. If he were to sell that investment today he would lose a significant amount of money, which is not an option for him at this time. You would respond by saying
That you understand how he feels, and he should hold on for now, as you are very optimistic, based on the firm's analysis, about the long-term prospects of this security. The primary goal in this situation would be to acknowledge the client's concerns and to emphasize your views that you believe the client will do well with this investment.
FINRA Rule 2330
The FINRA rule applies to purchase and sales of deferred variable annuities and initial allocations to the separate account. It does not apply to fixed annuities or variable life insurance. Because it only deals with the purchase or sale or initial allocations, a client with a deferred variable annuity wishing to change the separate account allocation does not come under the rule.
What are the tax consequences an investor incurs when exercising the conversion privilege within a family of funds?
The investor treats the exchange as a sale and new purchase When exchanging one fund for another in the same fund family, the exchange is done at NAV. This avoids any sales charges. The IRS considers this as the sale of the old fund (capital gain or loss applies) and the purchase of the new fund. That begins a new cost basis and holding period. The Section 1035 exchange allowing investors to move from one investment to another without current tax consequences is applicable only to insurance products.
ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should
The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds.
If a limited partner in a real estate direct participation program becomes involved in the management of the office building acquired by the partnership, what happens?
The limited partner's ability 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.
Sagacious Publishing Company (SPC) has issued a $25 par 4% preferred stock. If current market interest rates should rise, it is probable that
The market price of the stock will decline. Because preferred stock is a fixed-income investment, its market price moves inversely to changes in interest rates. As interest rates in the market go up, the price of preferred stock goes down. The dividend rate and par value of a preferred stock is fixed at issuance and do not change. It is rare to find a preferred stock with voting powers. Even then, they would never be voting on changing the dividend rate on a preferred stock. That is one of the benefits of adjustable-rate preferred stock. Because the dividend rate adjusts in response to changes in the market interest rate, the price generally remains relatively stable. How do we know this is not adjustable-rate preferred? Because the question would have to state that fact.
One of the computations in a margin account is that of the SMA. What causes SMA to increase?
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.
The Investment Company Act of 1940 describes several different classifications of investment companies. Two of those are the unit investment trust (UIT) and the open-end management investment company. In general, when referring to an open-end company, the subject is a mutual fund. One respect in which a unit investment trust (UIT) differs from a mutual fund is that
The portfolio is unmanaged. The most significant distinguishing characteristic of a UIT compared with other investment companies is the lack of ongoing portfolio management. Once the initial portfolio is assembled, it remains fixed until the termination date. As with other investment companies, the minimum initial capitalization is $100,000. UITs, just as mutual funds, offer redeemable securities, and both types of investment companies compute their NAV.
A customer holding 450 shares of XYZ common stock in registered form turns in a sell order on Monday for regular way delivery. Who has the initial responsibility to ensure that the security is in good deliverable form?
The registered rep. Although the final arbiter of deciding the good delivery status of certificates is that of the transfer agent, it is the registered representative's responsibility to communicate the requirements to the customer. Those include a reasonable expectation that the certificates will be delivered on time and in the proper form.
Whether funds should be allocated to support the debt service on a moral obligation bond in default is usually determined by
The state legislature. Legislation authorizing the issuance of moral obligation securities usually grants the state legislature the authority to apportion money to support debt service payments on such securities but does not legally require the legislature to do so. This is called legislative apportionment.
An investor purchases 1,000 shares of a stock in a Regulation D private placement. The investor is not deemed an affiliate of the issuer. If the investor wishes to sell,
The stock must be held for a minimum of six months.
Your client Jim has received a dividend from his real estate investment trust. He asks you if this dividend is treated the same way as the dividend he receives from his XYZ common stock, which he has owned for several years. You should tell Jim thatBen purchased an XXX index option on Wednesday May 4 and submitted an exercise notice on Friday May 20. The exercise settlement date for this transaction is
The tax rate that applies to his XYZ common stock investment does not apply to his REIT.
Typically, general obligation bonds are not sold short because
Thin markets may make it difficult to cover a short municipal position.
When you see equipment trust certificate
Think transportation companies such as airlines or railroads
ELNs
Unsecured debt based on credit risk of issuer. They can trade on exchanges as ETNs but with still low liquidity. Help investors avoid losses by offering downside protections, but consider suitability.
A registered representative is convicted of misdemeanor DUI; therefore,
Updating of the Form U4 is not required.
A bond convertible at $50 is selling at 105% of parity, while the common stock has a current market value of $45. What is the market value of the bond?
When a bond is convertible at $50, it means the holder can exchange each $1,000 par value bond for the company's common stock at a rate of $50 per share. Dividing $1,000 (always use the par value, not the market value) by $50 results in a conversion rate of 20 shares per bond. With the bond convertible into 20 shares and the market price of each share currently $45, the parity price, the price at which the value of the stock and the bond are the same, is $900, (20 x $45). The question tells us that the bond is selling for 105% of the parity price. That would be $900 x 105% = $945. An alternative method is to recognize that the stock is selling for 10% below its conversion price ($45 is $5 less than $50 and $5 ÷ $50 = 10%). That means the parity price of the bond must be 10% below the par value, or $900 (which is 10% less than $1,000). Once you have the $900, multiply by 105% to arrive at the correct answer of $945.
In a restricted margin account, a sale of $5,000 of stock will create
When securities are sold in a restricted margin account, half the proceeds go to reduce the debit and the other half are journaled into SMA. Therefore, a $5,000 sale will generate SMA of 50% of the sale, or $2,500. Buying power is the SMA × 2, or $5,000.
Regulation T requires payment from a customer in a margin account
Within 4 business days
One of the factors used to determine whether a 1035 exchange may be appropriate for an investor is the timing of any previous such exchanges. It is typically considered inappropriate for an investor to effect a 1035 exchange when a prior such transaction was conducted
Within the past 36 months. Industry rules indicate that investors should not effect 1035 exchanges more than once every 36 months. There are usually fees associated with this transaction, including surrender fees which can be substantial.
An attorney friend of a registered representative offers to introduce one of her legal clients to the RR for participation in an upcoming equity offering the RR's firm will be engaged in. The attorney is requesting a fee to introduce her client, as well as a portion of the commission that the RR would earn if the deal is successful. Payment of fees to the attorney
Would be acceptable provided they are not transaction- based if the attorney is not a FINRA registered individual. Payments of finders' fees to parties who are not FINRA registered is acceptable if made in the form of a flat or hourly cash fee, and not tied to the success of the deal
A third party has made a post on an interactive website maintained by a FINRA member firm. This post
Would be subject to FINRA communication rules only if the firm were to endorse or share the post.
A customer's confirmation for a municipal bond callable at par and quoted higher than the nominal yield would show
YTC Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.
A registered representative has a client who is a CPA, and this client is offering, for a fee, to direct some of her accounting clients to the registered representative for potential participation in an upcoming IPO the firm will be a managing underwriter on. May the broker-dealer compensate the CPA for these leads?
Yes, but any compensation must be in the form of cash (not securities), and it should only be a flat or hourly fee, and not tied to the success of any deals. These types of compensation arrangements are known as "finders fees", and are permitted, even if the individual (the CPA in this case) is not FINRA registered. Any fees paid should be in cash only, and represent a flat or hourly fee, and not tied to the success of any deals or transactions. If the individual is FINRA registered, the fees may be commission based.
Can muni bonds be delivered without the legal opinion?
Yes, just must be marked ex-legal
May a registered representative hold a second job while working full time for a FINRA member firm?
Yes, this would be acceptable, provided the RR provides advance written notice to their firm. *Consent is not required*
Treasury STRIPS and Treasury receipts are quoted based on
Yield to maturity
Whats the Bond Buyer's revenue index?
Yields of municipal revenue bonds with 30 years to maturity.
If a new client wishes to open an account at your firm using a number instead of their legal name,
You may accept the request and inform them that a written statement of ownership is required.
Special tax bonds are
backed by sales, excise taxes, or both. A special tax bond is backed by one or more designated taxes (sales, cigarette, fuel, alcohol, etc.) other than ad valorem taxes. The designated tax need not be directly related to the project purpose. These bonds are not considered self-supporting debt.
