Practice Exam #7
Under Municipal Securities Rulemaking Board (MSRB) rules regarding municipal securities, a control relationship exists when? 1. officers or employees of a broker-dealer hold positions of authority over the municipal issuer. 2. officials of the municipal issuer hold policymaking positions at the broker-dealer. 3. the municipal issuer is a public finance client of the broker-dealer. 4. an employee of the broker-dealer lives in the issuer's municipality.
1 & 2
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 A) $2.00. B) $0.20. C) $0.25. D) $2.50.
A
The term tranche is associated with which of the following investments? A) CMO B) GNMA C) SLMA D) FNMA
A
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $50,000 B) $0 C) $100,000 D) $90,000
B *Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $25,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $6,250. B) $17,500. C) $0.00 D) $8,750
D
Listed options expire at A) 3:00 pm ET on the third Saturday of the expiration month. B) 4:30 pm ET on the Saturday immediately following the third Friday of the expiration month. C) 4:00 pm ET on the third Friday of the expiration month. D) 11:59 pm ET on the third Friday of the expiration month.
D
Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond? A) 1:1 B) 7.5:1 C) 2:1 D) 3:1
c- 2:1
Which of the following transactions must occur in a margin account? 1. Short sale of stock 2. Purchase of stock to cover a short position 3. Long purchase of stock 4. Long sale of stock
1 & 2
Which of the following statements regarding a Rule 144 sale of restricted stock are true? 1. Stock sold through a 144 sale is considered registered stock after the sale. 2. After holding the stock for six months, nonaffiliates may sell unrestricted. 3. After holding the stock for six months, there are no volume restrictions for affiliates. 4. Form 144 must be filed with the SEC at least 10 business days before a 144 sale made by an affiliate.
1 & 2 *- Rule 144: does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.- Stock sold through a 144 sale is considered registered stock after the sale. When required to be filed by affiliates or insiders, Form 144 must be filed with the SEC on or before the date of sale. After holding the stock fully paid for 6 months, nonaffiliates may sell unrestricted but affiliates are subject to the volume restrictions of Rule 144.- Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days.
An investor in a limited partnership generating passive losses can offset these against? 1. passive income from other partnerships. 2. rental income from direct investments in real estate. 3. dividends received from listed securities. 4. capital gains from the sale of unlisted securities.
1 & 2 *Passive losses can be deducted from passive income and income from certain real estate investments; it cannot be deducted from active or portfolio (investment) income.
Investors placing zero-coupon bonds in their portfolios are most likely to be looking to provide? 1. accumulation of capital. 2. current income. 3. protection against reinvestment risk. 4. tax deferral.
1 & 3 *Zero-coupon bonds are always purchased at a discount because they pay no interest. At maturity, the bondholders receive the maturity value. That represents the initial investment plus interest. Therefore, the investors are receiving more capital than invested (capital accumulation). Zero-coupon securities avoid reinvestment risk because there are no periodic interest payments to be reinvested. When you purchase one of these securities, the quoted yield to maturity is exactly what you will earn if you hold it to the end. With no interest payments, there is no current income. There is no tax deferral with a zero. In fact, unless it is a zero coupon municipal bond, there is phantom income; income not currently received but currently taxable.
Which of the following statements regarding straddles are true? 1. An investor who expects no change in a stock's price and wishes to generate income sells a straddle. 2. An investor who expects no change in a stock's price buys a straddle. 3. An investor who expects a substantial decline in a stock's price sells a straddle. 4. An investor who expects substantial fluctuations in a stock's price and is unsure as to direction buys a straddle.
1 & 4
A variable annuity's separate account is: 1. used for the investment of funds paid by contract holders. 2. used to escrow late or otherwise delinquent premium payments. 3. required to be located off of the company's premises. 4. regulated under both securities and insurance laws.
1 & 4 *The separate account is used for both variable life insurance and variable annuity investments. The nature of the securities invested in-bonds and growth stocks-makes it necessary that sales representatives and their principals be licensed in securities as well as insurance.
If a customer buys $10,000 worth of stock in a cash account, then sells the shares for $12,000 without first paying for the buy side, and then requests the $2,000 profit, which of the following statements are true? 1. The $2,000 profit cannot be sent to the customer until she pays for the buy side in full. 2. The $2,000 can be sent to the customer, but the account will be frozen for 90 days. 3. If the customer pays for the buy side in full on or before the fourth business day following trade date, status as a frozen account is lifted. 4. Both trades must be switched to the customer's margin account, where buying and selling in this manner are acceptable practices.
2 & 3
While watching the financial news on TV, you hear an internationally recognized economist say that she expects a significant devaluation of the U.S. dollar. If she is correct, what would be the likely effect on foreign trade? 1. The price of foreign goods would decrease, leading to an increase in imports. 2. The price of foreign goods would increase, leading to a decrease in imports. 3. The price of U.S.-made goods would decrease, leading to an increase in exports. 4. The price of U.S.-made goods would increase, leading to a decrease in exports.
2 & 3
A customer, long 100 shares of QRS at 62.50, writes 1 QRS Sep 65 call at 1.50. If the call is exercised, which two statements are true? 1. The gain is $250. 2. The gain is $400. 3. For tax purposes, cost basis per share is $62.50. 4. For tax purposes, cost basis per share is $61.
2 & 3 *The customer has paid 62.50 for the stock and has received 1.50 for the call. If the Sep 65 call is exercised the customer will receive 65 for the sale of the stock. After exercise, total received is 66.50 (1.50 + 65). 66.50 received minus 62.50 paid equal's 4 points profit ($400). If a covered call writer is exercised, the cost basis for tax purposes is the purchase price of the stock. Sales proceeds for tax purposes are 66.50 per share (strike price plus premium).
Amortization of a municipal bond premium does which of the following? 1. Increases cost basis 2. Decreases cost basis 3. Increases reported interest income 4. Decreases reported interest income
2 & 4 *Tax law requires municipal bond premiums to be amortized. The effect of amortization is to decrease reported interest income and cost basis. If held to maturity, the cost basis will have been amortized down to par. Therefore, at maturity, there is no reported capital loss.
Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is not allowable under the safe harbor provisions of Section 28(e)? A) Reimbursement for meal expenses incurred while attending an investment seminar B) Registration fees to attend an investment seminar C) Research reports D) Financial planning software
A
A couple's home has an assessed value of $40,000 and a market value of $100,000. What will the tax be if a rate of 5 mills is used? A) $200 B) $5,000 C) $2,000 D) $500
A
A customer of a registered representative is considering a hedge fund investment and asks what the lock-up period means? The registered representative correctly explains that it is A) a time when liquidation of fund shares is prohibited by the fund, meaning there is an element of illiquidity to be considered. B) a time when the fund manager will not make any changes (purchases or sales) within the hedge fund portfolio. C) the minimum length of time the hedge fund portfolio manager intends to hold any single investment within the portfolio. D) the length of time required to have the hedge fund registered with the SEC, during which time, the fund may not sell any shares.
A
A customer wanting to invest in an oil and gas limited partnership wants to know what her cost basis would be for tax purposes. While there can be a number of variables, cost basis for a limited partner (LP) is best defined as A) cash investment made plus recourse debt minus distributions. B) noncash contribution plus nonrecourse debt minus recourse debt. C) cash investment made minus distributions. D) recourse debt minus cash contributions.
A
A margin account may not be used A) for retirement accounts. B) to purchase corporate bonds. C) to purchase listed stocks. D) when opening a fee-based account.
A
All of the following appear on a corporation's balance sheet as fixed assets except A) inventory. B) furniture. C) real estate. D) computer equipment.
A
All of the following corporate transactions are nontaxable to investors except A) cash dividends. B) reverse stock splits. C) stock dividends. D) stock splits.
A
All of the following documentation is necessary for a publicly subscribed limited partnership except A) a cash flow analysis. B) a partnership agreement. C) a subscription agreement. D) a certificate of limited partnership.
A
All of the following events will affect the net asset value (NAV) per share of a mutual fund except A) wholesale redemption of fund shares. B) the fund pays dividends to its shareholders. C) the fund receives cash dividends on the securities in its portfolio. D) changes in the market value of the fund's portfolio of securities.
A
An index option differs from an equity option in that A) the exercise settlement is in cash. B) they use European-style exercise. C) premiums tend to be somewhat higher. D) trading ends earlier in the day.
A
An individual owns Class A shares of the KAPCO Growth Fund with a total value at the current offering price of $20,000. KAPCO has a sales charge of 8% that reduces to 5% at $25,000. If the fund offers a right of accumulation, the sales charge on an additional investment of $10,000 will be A) $500. B) $800. C) $400. D) $250.
A
Each of the following is true about stop orders except A) they are the same as limit orders. B) they can limit a loss in a declining stock. C) they become market orders when there is a trade at, or the market passes through, a specific price. D) they can accelerate the advance or decline of a stock's price if executed.
A
The IRS will generally consider a direct participation program to be an abusive tax shelter unless the program can show a profit motive. A popular method of measuring the economic viability of a DPP is A) cash flow analysis. B) the ratio of gains to losses. C) income to debt analysis. D) passive loss analysis.
A
The practice of dollar cost averaging requires the investor to A) buy a security in a falling market and buy it in a rising market. B) sell a security in a falling market and buy it in a rising market. C) sell a security in a falling market and sell it in a rising market. D) buy a security in a falling market and sell it in a rising market.
A
To avoid tax and a penalty, an IRA may be rolled over A) no more than once every 12 months within 60 days of the distribution. B) every five years by the end of the calendar year. C) every three years within 90 days. D) each quarter by the end of the calendar quarter.
A
Whether funds should be allocated to support the debt service on a moral obligation bond in default is usually determined by A) the state legislature. B) the courts. C) the trustee. D) the state governor.
A
Which of the following agency securities has the strongest backing of timely payment of principal and interest? A) GNMAs B) FNMA C) FHLMCs D) Treasury notes
A
Which of the following debt instruments is unsecured? A) AAA/AAA-rated debentures B) Equipment trust certificates C) Junior lien mortgage bonds D) Collateral trust certificates
A
Which risk is generally lower when holding a municipal bond ETF instead of individual municipal bonds? A) Liquidity risk B) Inflation risk C) Interest rate risk D) Purchasing power risk
A
A bond investor who is looking for capital gains should invest in bonds when interest rates are A) high and expected to decline. B) high and expected to rise. C) low and expected to rise. D) low and expected to decline.
A *A decline in interest rates causes prices to rise. An investor seeking capital gains would want to buy when interest rates are high and sell when they are low and prices have been driven up.
Which of the following is not true in jurisdictions that recognize the marital property designation known as community property? A) Community property applies to property that was owned individually before the marriage and is now joint property once the marriage has occurred. B) Community property laws do not apply to gifts. C) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death. D) Community property laws do not apply to inheritances.
A *Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property and laws in states that recognize community property ownership differs from jurisdiction to jurisdiction.
All of the following would be considered a proper way for a client to file a complaint with a FINRA member firm except A) telephone. B) text. C) instant message. D) telegram.
A *Complaints must be filed in writing. Telephone generically means an oral conversation (i.e., a telephone call). If that phone is used to send an email, text, or instant message, that is considered in writing.
A registered representative has been doing some research on his own. He would like to share the information with some of his clients and sends an email to 15 of them. He also has some prospects he's been working on and sends the email to 12 of them during the same week. Under the FINRA rule on communications with the public, this would be considered A) retail communication. B) an electronic communication. C) correspondence. D) exempt from the principal approval requirements.
A *FINRA defines a retail communication as "any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period." It is important to understand that retail investors includes current and prospective customers. Because this report will be sent to 27 within the 30-calendar-day period, it fits the definition. Like virtually all retail communications, principal approval is necessary before it is used. Is this an electronic communication? Yes it is, but the exam will want the more specific response—retail communication.
Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date? A) 600 shares at $45.45 B) 660 shares at $46.50 C) 600 shares at $50 D) 660 shares at $46.37
A *In this example, adjust only the share price: $50 ÷ (1 + .10) = $45.45. The number of shares in the order is not adjusted unless the shares can be increased by a full round lot (100 shares).
A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be A) taxed as ordinary income. B) tax free. C) taxed as a capital gain if the underlying mortgage is prepaid. D) treated partly as ordinary income and partly as a tax-free return of principal.
A *Interest-only payments made by CMOs are taxed as ordinary income.
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 A) $21,000. B) $25,200. C) $28,000. D) $14,000.
A *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.
Which of the following carries the least amount of market risk? A) Savings accounts B) Treasury bonds C) Common stock D) Treasury bills
A *Savings accounts carry no market risk, which, by definition, is the risk that an investor will experience losses due to day-to-day fluctuations in the prices of securities bought and sold in the market.
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? A) Average cost basis B) Dollar cost averaging C) Share identification D) FIFO
A *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.
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 A) $7,200. B) $7,500. C) $7,350. D) $6,900.
A *The Regulation T requirement for purchasing $14,400 (300 × 48) of stock is 50%; $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.
Many options traders give attention to the VIX. The VIX A) rises when put buying on the SPX (the S&P 500) increases. B) rises when call buying on the SPX (the S&P 500) increases. C) was created by the Options Clearing Corporation (OCC). D) tends to rise during periods of high investor confidence.
A *The VIX rises as a result of increased demand for puts but also swells because the put options' demand increase will cause the implied volatility to rise.
A customer sells short 100 shares of XYZ Corporation at $78 per share. The support and resistance levels for XYZ are at $70 and $80, respectively. If he wishes to protect his position, which of the following is the best place to put in a buy stop order? A) $80.10 B) $78.10 C) $70.10 D) $69.85
A *The client will want to place a buy stop a little above the resistance level to protect himself against an upside breakout. Entering a buy stop order too close to the purchase price (78.10) would not afford the client an opportunity for gain.
An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs A) a capital gain. B) a capital loss. C) tax-free income. D) no taxable result at this time.
A *Yields fall as bond prices rise. Because the bond is trading at a higher price than when it was purchased, its yield to maturity has dropped from 5.5% to 5%. The consequence of the sale is a capital gain, because the investor sold the bond that was purchased for par at a premium.
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, which of the following is true? A) The conversion price will be adjusted to $9.09. B) The conversion price will be adjusted to $11.00. C) The investor will receive 10 shares of the common stock. D) The investor will receive 1 share of the common stock.
A *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 client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal, and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why? A) The municipal bond because its equivalent taxable yield is 6.6%. B) The municipal bond because its equivalent taxable yield is 6.3%. C) The corporate bond because the after-tax yield is 6.25%. D) The corporate bond because the after-tax yield is 4.5%.
A If we compute the tax equivalent yield of the muni, we see that it is 6.6%, which is a higher return than the 6.25% on the corporate bond. The formula to get this starts by taking the investor's tax bracket and subtracting that from 100%. 100% − 28% = 72%. We then divide the muni coupon of 4.75% by the 72% and the result rounds off to 6.6%.
An investor establishes the following positions: Long 1 XYZ Apr 45 call at 3.50 Long 1 XYZ Apr 45 put at 2.75 The investor's strategy will realize a gain if XYZ trades above A) $48.50. B) $47.75. C) $51.25. D) $45.00
C
If a customer buys 1 OXY Oct 50 call at 3, and the holder exercises the option when the stock is trading at 60, what is the cost basis of the 100 shares? A) $6,300 B) $5,000 C) $5,300 D) $6,000
C
Payments received by the owner of a 403(b) plan are A) taxable only to extent of earnings. B) taxable only to extent of the owner's cost basis. C) 100% taxable. D) not taxable.
C
Expressed as a percentage of par, one basis point equals A) one-one hundredth of 1%. B) one-tenth of 1%. C) one-one thousandth of 1%. D) 10%.
A- one-one hundredth of 1%.
A customer has a margin account with a market value of $20,000, a debit balance of $12,000, no special memorandum account (SMA), and Regulation T at 50%. If the customer sells $2,000 worth of stock, the amount released to SMA is A) $300. B) $1,000. C) $400. D) $500.
B
A municipal revenue issue's flow of funds statement is contained in A) the agreement among underwriters. B) the bond contract. C) the legal opinion. D) the notice of sale.
B
A registered representative is preparing a PowerPoint slide presentation, to be delivered in a live seminar, for a group of invited institutional clients. To use the slides, they may have to be A) submitted to the SEC for review and approval. B) reviewed by a principal of the broker-dealer. C) submitted to both FINRA and the SEC for preuse approval. D) approved by FINRA in writing.
B
All of the following are characteristics of 529 plans except A) the assets can be transferred to a family member if not used by the original beneficiary. B) donor income limits apply. C) an official statement (OS) must be provided to any prospective purchaser. D) there is no age limit on the beneficiary.
B
Dale Johnston has been a registered representative with Consolidated Investment Services (CIS) for over 20 years. Taylor Kahn has been Johnston's client for most of that time. Kahn recently reached full retirement age for Social Security and has begun using those funds for investment. Johnston's practice is to speak with clients on a quarterly basis, unless something merits a special call. It seems to Johnston that on the last call, Kahn seemed a bit confused over the strategy being used with the Social Security funds. A second call seemed to verify that Kahn was still a bit fuzzy. This morning, a phone call came in from Kahn's son asking Johnston to sell one of the holdings and forward the proceeds to his bank. Kahn's son does have a full power of attorney over the account but has never given instructions to have money sent to him before. What is the most appropriate action for Johnston to take? A) Place the trade after receiving approval from your supervising principal B) Place a temporary hold on the withdrawal C) Freeze the account D) Refuse to complete the trade
B
Many investors, especially institutions, diversify their fixed-income portfolios by purchasing bonds issued outside of the United States. When a French corporation issues a bond denominated in Swiss francs, it is known as A) sovereign debt. B) a eurobond. C) a Eurodollar bond. D) a Eurofranc bond.
B
Prime brokerage accounts are most often used by A) broker-dealers. B) Institutions. C) investment advisers. D) investment bankers.
B
Several years ago, one of your customers bought an original issue discount (OID) municipal bond at $960. The bond has now matured. For federal income tax purposes, the discount is A) taxed at maturity as ordinary income. B) tax free. C) taxed as a long-term capital gain. D) taxed each year as ordinary income.
B
Which of the following best describes alpha for an investor's portfolio? A) It is a measure of each portfolio asset's risk to arrive at the risk associated with the entire portfolio. B) It is a measure of performance that adjusts for risk, relative to a known benchmark. C) It is the prediction of performance aligning with the risk of a known benchmark. D) It is a measure of risk that adjusts in accordance with the performance of a known benchmark.
B
Which of the following is least likely to be part of an equipment leasing partnership? A) Aircraft B) Oil well casing and piping C) Computers D) Railroad cars
B
Your 30-year-old client has $100,000 to invest and is willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in six months. Which of the following asset allocation strategies would best suit her situation? A) 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund B) 70% large-cap stock fund, 20% balanced fund, 10% money market fund C) 50% government bond fund, 50% large-cap fund D) 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund
B
If you were reading sales literature about a mutual fund that claimed its objective is to be a single source investment for most equity investors, it would most likely be describing A) a target date fund. B) a blend/core fund. C) a growth/income fund. D) a specialized fund.
B *A blend fund (or blended fund) is a type of equity mutual fund that includes a mix of both value and growth stocks.
If an investor interested primarily in speculation does not expect the price of DWQ stock to change, she will A) write a straddle and short the stock. B) write an uncovered straddle. C) buy a straddle. D) write a straddle and buy stock.
B *AN investor who expects prices to remain stable writes an uncovered straddle (short straddle). In selling the put and call at the same terms, the writer collects double premiums. Both expire if the price remains stable, but if the price moves, one side loses money. Short straddles carry unlimited loss potential because of the uncovered call.
When a major decline occurs within a few minutes of the close, trading is halted on all markets for the remainder of the trading day. Under the market-wide circuit breaker (MWCB) rules, market-on-close (MOC) orders pending at the time trading is halted A) should be held for execution on the following trading day. B) must be canceled. C) should be held for execution on the following trading day unless canceled by the customer. D) are converted to market orders and executed at the opening on the following trading day.
B *During shorter marketwide trading halts that will allow trading to resume on that trading day, pending and new customer orders should be forwarded to the appropriate market for execution upon the resumption of trading. If a halt closes the market for the remainder of the trading day, pending orders and new orders received during the halt should be treated as-good-till canceled and held for execution at reopening on the following day. Market-on-close orders pending at the time trading is halted should be canceled. MOC orders received after trading is halted should be declined.
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 A) a short-term gain. B) ordinary income subject to federal income tax. C) partially ordinary income and partially capital gain. D) tax-free income.
B *Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation.
Tamika is a registered representative with Financial Engineers, LLC, a FINRA member broker-dealer. The firm uses an investment policy statement (IPS) to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat seven months from now. When using the IPS, this would be considered A) an investment objective. B) an investment constraint. C) a long-term goal. D) a financial objective.
B *Investment constraints are obstacles or restrictions that must be met in order to meet goals. In this case, we are dealing with a liquidity constraint—in seven months, cash will be necessary to make the purchase.
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? A) 75 B) 200 C) 50 D) 300
B *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.
Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within A) 20 business days of the announcement. B) 10 business days of the announcement. C) 5 business days of the announcement. D) 15 business days of the announcement
B *Once a tender offer is announced, the target company, within ten business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.
One of the features of variable insurance products is the ability to withdraw money from the policies. Which of the following statements is correct? A) Withdrawals from both are taxed on a LIFO basis. B) Withdrawals from variable annuities are taxed on a LIFO basis, while those from variable life are taxed on a FIFO basis. C) Withdrawals from variable annuities are taxed on a FIFO basis, while those from variable life are taxed on a LIFO basis. D) Withdrawals from both are taxed on a FIFO basis.
B *One advantage to withdrawing cash value from a variable life insurance policy is that it receives FIFO treatment. That means there is no tax until the withdrawal reaches the cost basis (premiums paid) of the policy. With annuities, the taxation is LIFO. Therefore, the first money withdrawn is taxable. In addition, if the policyowner is not yet 59, the 10% penalty applies. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority except A) the operations and maintenance. B) the optional call provisions. C) the debt service. D) the debt service reserve fund.
B *Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds.
The breakeven point for covered call writers is A) cost of stock plus premiums. B) cost of stock less premiums. C) strike price plus premiums. D) strike price less premiums.
B *The breakeven point for an investor who owns the underlying stock and writes a call is the cost of that stock less the premium received from the sale of the call.
A schoolteacher has a 403(b) tax-qualified deferred retirement plan into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income? A) $120,000 B) $220,000 C) $0 D) $100,000
B *The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.
Under NYSE rules, a not-held order A) is good til canceled. B) is good for the day only. C) requires discretionary authority from the customer. D) is a limit order.
B *Under NYSE rules, a not-held order where a customer gives you authority over the price or timing of the order is good for that day only.
Which of the following would protect a short May 50 put? A) Long Apr 45 put B) Long Jun 55 put C) Long Apr 55 put D) Long Jun 45 put
B For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration. This ensures the investor may sell the stock without financial loss if the short put is exercised, and she is forced to buy.
A customer expresses the need to invest a fixed-dollar sum now that will return a fixed-dollar sum in 10 years. He mentions several investments. Of those listed, which would not be a suitable recommendation for his objective? A) A zero-coupon bond maturing in 10 years B) Treasury Inflation Protection Securities (TIPS) C) Collateralized mortgage obligations (CMOs) D) A high-yield corporate bond maturing in 10 years
C
An investor buys 1 XYZ Nov 50 call at 8 and sells 1 XYZ Nov 60 call at 3.50. At what stock price will the investor break even? A) $63.50 B) $60.00 C) $54.50 D) $50.00
C
The diversification and professional management offered by many investment companies tends to lower the investor's risk. That does not mean elimination of risk. Of the following, it is likely the greatest risk would be investing in A) an broad market index fund. B) a high-yield bond mutual fund. C) a 2x ETF. D) an equity UIT.
C
Which of the following records is to be kept for the life of the firm? A) The general ledger B) Daily journals C) Minutes of the directors' meetings D) Customer new account form
C
Long-term securities issued by municipalities that use a Dutch auction method to reset short-term interest rates known as clearing rates are A) American depositary receipts (ADRs). B) collateralized mortgage obligations (CMOs). C) auction rate securities (ARS). D) real estate investment trusts (REITs).
C *. Auction Rate Securities (ARSs) are long term securities issued by municipalities that use a Dutch auction to reset interest rates at short term intervals.
Because money market instruments are designed to meet the short-term cash needs of issuing institutions, which of the following is not a money market instrument? A) Municipal construction loan note B) Federal Farm Credit Bank note maturing in one year or less C) Newly issued Treasury notes issued to meet a specific government funding requirement D) Commercial paper issued by the finance corporation of a major automobile manufacturer
C *A newly issued Treasury note would have a maturity of 2 to 10 years and would not be considered a money market instrument. A Federal Farm Credit Bank note maturing in one year or less is a money market instrument, as is commercial paper issued by the finance corporation of a major automobile manufacturer with a maturity of less than one year. Municipal construction loans issued to provide short-term financing for a construction project are money market securities.
Although the Federal Reserve Board (FRB) and FINRA have rules that set margin requirements, member firms may A) follow requirements that are less stringent. B) choose to have no minimum maintenance requirements. C) increase these requirements through in-house rules. D) increase or decrease these requirements through in-house rules.
C *Firms may set their own margin requirements at more stringent levels than the FRB and FINRA rules. However, a firm may never go below the FRB and FINRA margin requirements.
One of your customers has asked you about trading penny stocks. After discussing the risks, the customer decides to go ahead. The firm sends the individual a copy of the special penny stock risk disclosure document. The firm needs the customer's signed and dated acknowledgment of receipt of the document. Trading in penny stocks may not begin in that account until A) the day the signed acknowledgment has been received. B) at least two business days after receiving the statement. C) at least two business days after sending the statement. D) at least $25,000 in equity is in the account.
C *It is SEC Rule 15g-2 that requires the firm to wait at least two business days after sending the risk disclosure document before executing the first penny stock trade for a new customer. The $25,000 is the minimum equity in a pattern day trading account.
A stock or bond power represents which of the following? A) Appreciation potential in a stock with a high EPS B) Limited power of attorney to vote a stock if no contest exists C) Limited power of assignment and substitution D) Power to accept dividends and interest
C *Limited power of assignment and substitutionStock powers are substitute forms for signatures on the back of actual certificates. A person can sign this separate document to satisfy transfer rules.
You are having a discussion with one of your clients regarding suitable investments. The client is in a high-income tax bracket and has a high net worth as well. During the conversation, your client mentions several investments that she is thinking about that might be beneficial to her now. Of those listed, which would be the best recommendation? A) A real estate investment trust (REIT) B) Noninvestment-grade corporate bonds C) Municipal bonds D) A corporate blue-chip balanced mutual fund
C *Of the choices listed only municipal bonds offer a tax consequence suitable for high income, high net worth investors in the form of tax-free interest payments. Corporate bond interest, mutual fund dividends and income earned from REITs are all taxable
An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year? A) $5,000 B) $0 C) $3,000 D) $2,500
C *Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.
All the following retail communications must be prefiled with FINRA except A) retail communications concerning the member firm's opening for business last month. B) retail communications concerning investment companies with custom ratings. C) retail communications concerning public DPPs. D) retail communications concerning options without previously providing an ODD.
C *Retail communications concerning public DPPs do not need to be prefiled. Retail communications for all new member firms, concerning investment companies with custom ratings or options without previously providing an ODD must be prefiled with FINRA. New member firms, defined as being in their first year of business, must file retail communications with FINRA 10 business days in advance of use.
A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in A) high-yield municipal bonds rated BB. B) Delaware Wetlands Developments municipal bonds rated AA. C) New Jersey Turnpike revenue bonds rated AA. D) Michigan Upper Peninsula revenue bonds rated AA.
C *The Michigan revenue bonds, the sub-investment grade municipal bonds, and the Delaware municipal bonds have possible state disadvantages or are less than investment grade.
Members of a syndicate receive notice of their share of the offering through A) the due diligence meeting. B) the prospectus. C) the syndicate letter. D) the official statement.
C *The syndicate letter is sent by a municipal dealer to prospective members, inviting them to join the syndicate and setting forth the conditions of the syndicate. Such conditions include who the manager will be, the percentage participation (each member's share), and the amount of good faith deposit required.
According to investment company rules, open-end investment companies may not distribute long-term capital gains to their shareholders more frequently than A) quarterly. B) monthly. C) annually. D) semiannually.
C *Under the Act of 1940, investment companies may not distribute long-term capital gains more frequently than once per year.
An investor sells short 100 shares at 50 and sells a 50 put at 5. If the put is exercised when the stock is trading at 45, the investor realizes A) a gain of $1,000. B) a gain of $1,500. C) a gain of $500. D) neither a gain nor a loss.
C *When the short put is exercised, the investor buys stock at $50 that she can use to cover the $50 short sale. The investor realizes no gain or loss on the stock, but she collected $500 in premiums, for a gain of $500.
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 A) establish a long straddle. B) establish a long call spread. C) issue exercise instructions. D) enter a closing sale.
C *if a security is subject to a trading halt. options on that security stops trading as well
A customer buys a 6% Treasury bond, maturing in 10 years, at a price of 91.07. The yield to maturity is A) less than current yield. B) less than nominal yield. C) same as current yield. D) greater than nominal yield.
D
A shareholder invested in a mutual fund and has signed a letter of intent to invest $25,000. Her original investment was $13,000, and her current account value is $17,000. For her to complete the letter, she must deposit A) $8,000. B) $13,000. C) $27,000. D) $12,000.
D
All of the following are examples of short-term municipal obligations except A) tax and revenue anticipation note (TRAN). B) bond anticipation notes (BAN). C) tax anticipation note (TAN). D) state and local government securities (SLGS).
D
An investor in the 28% income tax bracket is considering purchasing either a 4% municipal bond or a 5% corporate bond. Which of the following statements regarding the two bonds' after-tax yields is true? A) The two bonds' yields are equivalent. B) The corporate bond's yield is higher than the municipal bond's yield. C) The yield difference cannot be determined. D) The municipal bond's yield is higher than the corporate bond's yield.
D
An investor sells an uncovered GHI Aug 120 call for 5½ points. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain = $550; maximum loss is unlimited; breakeven point = $114.50. B) Maximum gain is unlimited; maximum loss = $550; breakeven point = $125.50. C) Maximum gain = $550; maximum loss = $114.50; breakeven point = $125.50. D) Maximum gain = $550; maximum loss is unlimited; breakeven point = $125.50.
D
An investor with no other positions buys 1 CDE May 65 put at 3.50. If the investor buys the stock at 63.50 and exercises the put, what is the investor's profit or loss? A) $350 profit B) $350 loss C) $200 profit D) $200 loss
D
Corporate bonds that are guaranteed are A) required to maintain a self-liquidating sinking or surplus fund. B) insured by Assured Guaranty Corporation. C) guaranteed as to payment of principal and interest by the U.S. government. D) guaranteed as to payment of principal and interest by another corporation.
D
In a discretionary account where the investment objective is preservation of capital with moderate income, all of the following practices are unsuitable except A) marking the investment objective on the new account form as high risk. B) marking order tickets solicited or unsolicited when discretion is used. C) frequent and profitable short-term trading in volatile stocks. D) maintaining a fixed asset allocation mix, which includes some underperforming sectors.
D
New issues of municipal bonds are exempt from all of the following except A) Securities and Futures Authority (SFA) requirements. B) Securities Act of 1933 registration requirements. C) U.S. state registration requirements. D) Securities Exchange Act of 1934 antifraud provisions.
D
One of the most important roles played by registered representatives is making suitable recommendations to their customers. Doing that requires gathering as much information about the customers as possible. Which of the following factors would likely be the least important when dealing with a couple in their late twenties with two children? A) Education goals for the children B) Current employment stability C) Values D) Expected retirement age
D
When determining position limits for listed options contracts and LEAPS contracts on the same side of the market, which of the following statements is true? A) The contracts are added to increase the position limits. B) The contracts do not have position limits. C) The contracts are considered separately. D) The contracts must be aggregated.
D
Which of the following statements about the underwriting manager of a syndicate is true? A) Syndicate managers are exempt from FINRA membership. B) There is a unitary syndicate manager. C) The other syndicate members elect the manager. D) An underwriting syndicate may have more than one manager.
D
While reviewing a new customer's investment profile, you determine that the customer is willing to tolerate a high degree of risk and does not anticipate utilizing the invested funds for at least 15 years. What would be a suitable recommendation regarding asset allocation for the customer's portfolio, given the customer's risk tolerance and time horizon criteria? A) 65% debt and 35% equities B) 45% debt, 45% equities, and 10% money market instruments C) 25% debt, 25% equities, 25% money market instruments, and 25% real estate D) 70% equities, 20% debt, and 10% money market instruments
D
Working capital is A) current assets minus inventory. B) only the cash and equivalents. C) total assets minus total liabilities. D) current assets minus current liabilities.
D
Your customer wishes to purchase shares of an IPO. During the cooling- off period, the customer can A) enter an order to sell the new issue short upon the effective date. B) pay in advance for shares to be purchased when the cooling-off period ends. C) purchase shares in limited amounts. D) indicate an interest in the offering.
D
QED Corporation, whose common stock is currently selling for $90 per share, is having a rights offering. The terms of the offering require seven rights plus $83 to subscribe to one share of stock. Compute the theoretical value of a right on the ex-rights date. A) $0.875 B) $1.125 C) $7.00 D) $1.00
D *90-83/7== $1.00
All of the following statements regarding a limited partnership subscription agreement are true except A) the investor's registered representative must verify that the investor has provided accurate information. B) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable. C) the investor's signature indicates that she has read the offering document. D) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs.
D *A limited partner's signature on the subscription agreement grants the general partner power of attorney to conduct the partnership's affairs. The subscription agreement for a limited partnership is deemed accepted when the general partner signs the subscription agreement.
In an existing margin account with no SMA, if a customer buys 300 ABC at 40 and simultaneously buys 3 ABC OCT 40 puts at 2.50, the customer must deposit A) $5,250. B) $6,100. C) $6,375. D) $6,750.
D *Buying 300 shares at 40 ($12,000) requires a deposit of $6,000. In addition, the customer is purchasing 3 puts with a total premium of $750 (3 × 2½). Most options have no loan value and must be paid in full. Adding $6,000 and $750 results in a deposit of $6,750.
An investor places $100,000 into an oil and gas limited partnership program. To comply with FINRA rules, what is the minimum amount of the investment that must be received by the business? A) $95,000 B) $90,000 C) $98,000 D) $85,000
D *Each of these choices uses a percentage that has some logic. Under FINRA Rule 2310, the maximum in total offering expenses is 15%. Therefore, at least 85%, or $85,000, must actually be put to work in the program. There is a maximum compensation of 10% to the member firm selling the program, and that is the largest part of the 15% total. The 5% policy does not apply to DPPs, and if this question were about a DPP roll-up, then there is 2% maximum to the member if recommending the client vote in favor of the roll-up.
A customer of a member firm has just invested $100,000 into an equipment leasing DPP. Under FINRA rules, the maximum compensation allowable to the firm is A) $5,000. B) $15,000. C) $2,000. D) $10,000.
D *FINRA Rule 2310 limits compensation on the sale of a DPP to 10% of the offering price. That is the largest component of the offering expenses. Those are limited to 15% of the offering. DPPs are not covered by the 5% policy. If this question was about a DPP roll-up, then there is 2% maximum to the member if recommending the client vote in favor of the roll-up.
The primary tax benefit of an income oil and gas program is A) depreciation. B) intangible drilling costs. C) tangible drilling costs. D) depletion.
D *In an income program, the partnership is buying producing oil and gas wells. There are no drilling costs involved in these programs. While there may be a small amount of depreciation as a tax benefit, the primary benefit is depletion which is taken once the oil and gas have been sold.
The child of one of your recently deceased clients comes to your office with several properly signed stock certificates inherited from a parent. The child does not have an account and wishes to sell the securities. An account is opened for the purpose of the liquidation. Regulation S-P would refer to this child as A) a covered person. B) a customer. C) a beneficiary. D) a consumer.
D *Regulation S-P makes a distinction between consumers and customers. That is important because it makes a difference when it comes to annual reporting. A consumer is basically a "one-shot" client, as in this case. After the liquidation, this account will be closed and you probably won't ever hear from the child again. A customer has an ongoing relationship and requires annual privacy notices—the consumer does not.
Which of the following entities guarantees a listed yield-based option? A) U.S. government B) Federal Reserve Board (FRB) C) Broker-dealer D) Options Clearing Corporation (OCC)
D *The Options Clearing Corporation (OCC) guarantees the performance of listed option contracts.
Which of the following terms is used in connection with a municipal securities underwriting? A) Effective date B) In registration C) Cooling-off period D) Agreement among underwriters
D *The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. "Cooling-off period", "registration period", and "effective date" are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements.
All of the following information is included in a municipal bond resolution except A) restrictive covenants that are binding on the issuer. B) any call provisions that allow the issuer to redeem the bonds before their scheduled maturity. C) an authorization to sell the securities. D) compensation paid to the underwriters.
D *The bond resolution is the document in which the issuer authorizes the issuance of municipal securities. Among other things, the resolution describes the characteristics of the proposed issue and the issuer's duties to the bondholders. Compensation paid to the underwriters would be found in the official statement.
If an order is executed for a customer and the registered representative later notices that she entered the wrong account number on the order ticket, what action must she take? A) Transfer the stock into the correct account B) Transfer the stock into her own account and pay for the purchase C) Contact that account's owner and ask if he wants to buy the stock D) Inform a principal, who will take or direct any action needed to correct the error
D *The representative should report the mistake and not take any action to remedy the mistake without the approval of a principal.
Which of the following will not affect special memorandum account (SMA)? A) A cash dividend on stock held long in the account B) A deposit of cash into the account by the customer C) A long sale at a profit D) A stock dividend on stock held long in the account
D *The value of the stock dividend received will be offset by the decline in CMV of the long position on which the dividend is paid. The account's long CMV will not change; it will just be represented by more shares. There will be no change in the overall CMV, debit balance, or equity, and therefore no change in SMA. On the other hand, a cash dividend means that new money is coming into the account, which will reduce the debit balance and be credited to SMA so the customer may withdraw the dividend, if desired.
All of the following are true of stockholders' equity except A) that it is reflected in the book value of the stock. B) that it is also called net worth. C) that it consists of stock issued, capital surplus, and retained earnings. D) that it is carried as an asset on the balance sheet.
D *that it is carried as an asset on the balance sheet.
Fundamental analysts rely heavily on information found in a corporation's financial statements. One of the most often used calculations is that of the current ratio. The analyst calculates the current ratio by A) multiplying the current assets times the current liabilities. B) dividing the current liabilities by the current assets. C) subtracting the current liabilities from the current assets. D) dividing the current assets by the current liabilities.
D *Current Ratio=Current assets // Current liabilities
