Practice Exam #5 things I need to study

1) NASDAQ Market makers place their quotes on the ____________________; 2) NYSE listed issues from DMMs and third market makers display their quotes on the _____________________

1) NASDAQ System 2) CQS (Consolidated Quotation Systems(.

When does a "control relationship exist"? (In regarding to municipal bonds)

A control relationship exists when someone at a municipal firm is in a position of influence over the issuer of the securities.

Which of the following constitutes a municipal control relationship that must be disclosed to customers? A) The President of the municipal broker/dealer is the Treasurer of the municipality whose bonds are being recommended B) The municipal broker-dealer has its headquarters in the municipality whose bonds are being recommended C) The municipal broker-dealer has won every competitive bid for the municipality's securities over the past 3 years D) The municipal broker-dealer always makes a market in the municipality's securities that are being recommended

A) The President of the municipal broker/dealer is the treasurer of the municipality whose bonds are being recommended

All of the following statements are true regarding Eurodollar bonds EXCEPT Eurodollar: A) bond payments are subject to U.S withholding taxes B) bonds are issued outside the United States C) bonds are issued in bearer form D) bonds pay interest and repay principal in US Dollars

A) bond payments are subject to US withholding taxes Eurodollar bond issues are issued in bearer form and are sold overseas (in Europe), but pay in US Dollars. They are not issued in the US and are not subject to US withholding taxes

A written financial statement is required from a customer who wishes to: A) purchase a direct participation program interest B) purchase shares of a real estate investment trust C) purchase shares of a high yield bond fund D) open a margin account

A) purchase a direct participation program interest under FINRA Conduct Rules, a registered representative must obtain detailed financial disclosure from any customer that wishes to purchase a direct participation program interest, in order to determine that such a "tax sheltered" investment is suitable for the customer.

A balloon maturity could refer to: A) A bond issue that pays a single interest payment and has only one maturity date B) A serial bond issue that has one maturity which contains a disproportionately large amount of the principal C) A bond issue that contains multiple maturity dates, on each of which the same number of bonds will mature D) A bond that has an escrow account of funds set aside to pay the principle, which can only be paid at maturity

B) A serial bond issue that has one maturity which contains a disproportionately large amount of principal

A decision is reached by the Hearing Panel under the Code of Procedure. Which statement is TRUE? A) The decision is binding and non-appelable B) An appeal may be filed with the National Adjudicatory council C) An appeal may be filed with the SEC D) An appeal may be filed in Federal Court

B) An appeal may be filed with the National Adjudicatory Council

A mother, aged 60, wishes to withdraw monies from her variable annuity to pay for her son's college education. Which statement is TRUE regarding the taxation of the withdrawal? A. The withdrawal is 100% taxable and is also subject to a 10% penalty tax B. Any amount withdrawn above the cost basis is taxable C. Any amount withdrawn above the cost basis is taxable, and is subject to a 10% penalty tax D. The withdrawal is not subject to tax

B) Any amount withdrawn above the cost basis is taxable. The mother is ABOVE the age of 59 1/2 meaning that there is no penalty tax, but with variable annuities all earnings are taxed.

Which of the following industries is NOT considered to be defensive? A) Pharmaceuticals B) Building materials C) Food Products D) Electric power

B) Building materials Building is a highly cyclical industry and is greatly affected by the business cycle. Pharmaceuticals, food products, and electricity are all defensive industries that are largely unaffected by the economic cycle.

ERISA regulations apply to all of the following except: A) beneficiary designation and participation agreements B) deferred compensation plans C) Vesting Requirements D) 401k plans

B) Deferred compensation plans ERISA requirements apply to tax-qualified retirement plans. Deferred compensation plans are not tax-qualified, and so they do not need to comply with ERISA. ERISA only regulates retirment plans in the private sector (no non profits or churches or government retirement plans).

Which of the following is true of a forced conversion for convertible bond investors? A) It represents a potential benefit to those wishing to profit from a rise in the issuing company's common stock B) It often caps the profits that can be made on the bond C) The conversion price is usually below the market price of the common stock at the time that the bonds are issued D) It typically occurs when the price of the company's common stock drops

B) It often caps the profits that can be made on the bond.

If an annuitant dies during his annuity's accumulation period, a beneficiary will receive which of the following? A) only money contributed to the annuity B) Money contributed to the account plus any earnings to date C) A fixed benefit that is stipulated in the annuity contract D) A designated percentage of contributions and earnings to date that is stipulated in the annuity contract

B) Money contributed to the account plus any accrued earnings to date

Upon customer request, a dealer in a competitive municipal syndicate must disclose: A) the spread taken by the underwriters B) order priority provisions C) names of syndicate members D) Name(s) of the person(s) from whom orders have already received

B) Order priority provisions MSRB rules require that is a customer requests, the dealer must disclose the order priority provisions on a new issue.

An investor has a long-term investment time horizon, no liquidity needs and is very risk averse. Your main concern when making a recommendation to this client is: A) Preservation of capital B) Safety of principal C) Continuing income D) adequate yield

B) Safety of principal Preservation of capital is a concern for clients who have no buffer if investment values decline. Safety of principal is where the they are risk adverse but have a buffer if an investment declines in value

A seller who has field Form 144 can sell 1% of the outstanding shares or the weekly average of the last 4 week's trading volume. This amount may be sold: A) 1 time a year B) 2 times a year C) 4 times a year D) 12 times a year

C) 4 times a year. Rule 144 allows the sale of 1% of the issuers outstanding shares or the weekly average of the preceding 4 weeks trading volume (whichever is greater). This amount can be sold every 90 days (ever 3 months), so a sale can occur 4 times per year.

Which of the following would be considered a double-barreled bond? A) A toll-bridge bond B) A school bond backed by ad valorem taxes C) A hospital bond backed by the hospital revenues and the full faith and credit of the user D) Non of these choices would be considered a double-barreled bond

C) A hospital bond backed by the hospital revenues and the full faith and credit of the user

When comparing a Variable Rate Demand Obligation (VRDO) to an Auction Rate Security (ARS), which statement is FALSE? A) Both are long-term bonds that have interest rates reset weekly or monthly B) Both are issued by corporations or municipalities C) Both can be put back to the issuer at par at the reset date D) Both have minimal market risk

C) Both can be put back to the issuer at par at the reset date. Auction variable rate securities however do have marketability risk.

A mutual fund that wishes to change its investment objective: A) is not permitted to do so under the provisions of the Investment Company Act of 1940 B) Can do so only with majority vote of the Board of Directors of the fund C) can do so only with majority vote of the independent members of the Board of Directors of the fund D) can do so only with majority vote of the shareholders of the fund

C) Can do so only with majority vote of the shareholders of the fund If a fund wishes to change its investment objective, this action requires majority vote of the shareholders of the fund

Speculators in foreign currencies would be subject to all of the following risks EXCEPT: A) political risk B) market risk C) interest rate risk D) exchange rate risk

C) Interest rate risk ONLY AFFECTS fixed income securities.

Before purchasing penny stocks for a client, a broker-dealer must do each of the following except: A) Receive a copy of the suitability report that is signed by the customer B) Write a report on why a customer should purchase penny stocks C) Sign a waiver that removes all responsibility for failed investments from the broker-dealer D) Receive written acknowledgment that the customer has been given the risk disclosure document

C) Sign a waiver that removes all responsibility for failed investments from the broker-dealer. Before a penny stock transaction a broker-dealer must first give the customer a copy of the Risk Disclosure Document and then receive the customers written acknowledgement that they have been given the document.

A customer dies. Which wouldn't you need from a relative who will be serving as trustee of the estate? A) Death certificate B) Inheritance tax waiver C) Stock power of attorney signed by the client D) Testamentary letter

C) Stock power of attorney signed by the client. All powers of attorney are rendered null and void at the time of a client's death. A copy wouldn't be necessary

A client surrenders a variable annuity contract 5 years after purchase because of poor performance. The customer invested $50,000 and redeemed it when the NAV was $40,000, however, the customer only received $37,000 because a $3,000 surrender fee was imposed. The tax consequence is: A) $13,000 capital loss B) $13,000 deductible ordinary loss C) $10,000 capital loss and $3,000 non-deductible loss D) $10,000 deductible ordinary loss and $3,000 non-deductible loss

D) $10,000 deductible ordinary loss and $3,000 non-deductible loss If you surrender your variable annuity is a deductible ordinary loss

Quotes found in the ADF are primarily bids and offers from: A. NASDAQ market markers B. Third market makers C. ECNs D. Designated market makers

ECNs The "ADF" (Alternate Display Facility) was established under an SEC rule in 2002 as a place for ECNs that did not wish to place their quotes in the NASDAQ System because these ECNs felt that NASDAQ's order processing algorithm's favored NASDAQ Market makers over ECNs

Tax Equivalent Yield

Municipal Rate / (100% - Tax Bracket) Tax rate = sum federal + state taxes (if either or is applicable)

What is the key difference between a Variable Rate Demand Obligation (VDRO) and an Auction Rate Security (ARS)?

VRDOs can be put back with the issuer at the reset date. ARS's can only sell the security at the auction to another buyer, there is no embedded put option.

Working capital equation

current assets - current liabilities