Practice Exam
DERF Corporation has a significant amount of cash on hand. The chief financial officer (CFO) has suggested to the chief executive officer (CEO) that it might be wise to use some of that cash to reduce the company's outstanding debt by $10 million. There are four bond issues outstanding, and your broker-dealer is approached for advice on determining which issue to repay. Which of these four issues would the firm most likely recommend? A) $15 million @8% due in 10 years, callable at 101 B) $25 million @5% due in 5 years, callable at 104 C) $30 million @12% due in 15 years, non-callable D) $10 million @6% due in 20 years, callable at par
A) $15 million @8% due in 10 years, callable at 101 Anytime we have extra cash, it can make sense to pay off debt. Corporations feel the same way. When it comes to deciding which debt to repay, the wisest move is to pay down the debt with the highest interest cost. In this case, that would be the 12% bond. However, that bond is non-callable. Based on the inverse relationship between interest rates and bond prices, the 12% bond is going to be selling at a higher price than any of the others. Any savings in interest payments would be more than offset by the price the company would have to pay to buy the bond in the open market. The next highest interest rate is 8% and that bond will cost us a slight premium of $10 per bond to call. Although the 6% bond is callable at par, the company would be far better off removing an 8% debt than one at 6%. In fact, the 1 point call premium is saved after the first semiannual interest payment. A partial call, calling in $10 million of the 8% bond, should be the recommendation.
When a broker-dealer is not acting for its own account but is making securities transactions for the accounts of others, the firm is acting as a(n): A) Broker B) Principal C) Underwriter D) Dealer
A) Broker When a broker-dealer is making securities transactions for the accounts of others, the broker-dealer or brokerage firm is acting as a broker (agent). When the firm is selling from its own inventory, it is acting as a principal (dealer).
If MCS is trading at 43 and the MCS Apr 40 call is trading at 4.50, what is the intrinsic value and the time value of the call premium? A) Intrinsic value 3, time value 1.50 B) Intrinsic value 1.50, time value 3 C) Intrinsic value 4.50, time value 0 D) Intrinsic value 3, time value 4.50
A) Intrinsic value 3, time value 1.50 The option is in the money by three points (the strike price on the call is 40 and the market price is 43). Because the actual premium is 4.50, the balance of 1.50 represents time value. Remember P - I = T (Premium minus intrinsic value equals the time value).
A customer should receive a current option disclosure document before or at the date of A) account approval. B) the first account statement. C) the first trade. D) settlement.
A) account approval. The customer must receive a current disclosure document at or before the time their account receives approval for option trading.
Your customer opens a Coverdell ESA for his niece. To meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) taxable to the niece, the beneficiary of the plan. B) nontaxable to either party. C) taxable to the uncle, the donor to the plan. D) automatically reinvested back into the plan.
A) taxable to the niece, the beneficiary of the plan. Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.
Customers who want to transfer their securities account from one broker-dealer to another fill out a form provided by the: A) Carrying broker-dealer B) Receiving broker-dealer C) Automated Customer Account Transfer Service (ACATS) D) Depository Trust Corporation (DTC)
B) Receiving broker-dealer In order to transfer the accounts, the customer would need to complete a Transfer Initiation Form (TIF) with the receiving (new) broker-dealer who would send it to the carrying (former) broker-dealer for validation and transfer. The account is transferred using ACATS.
Which of the following securities trade without accrued interest? A) Municipal bonds B) Treasury bills C) Debentures D) Convertible bonds
B) Treasury bills Treasury bills do not trade with accrued interest. They are issued at a discount and mature at par.
As a retirement vehicle, which of the following would probably provide the greatest protection of purchasing power? A) Fixed annuities B) Variable annuities C) Corporate bonds D) Series HH bonds
B) Variable annuities Variable annuities would theoretically provide the greatest protection against loss of purchasing power because the payout is based on common stock, which historically has increased in inflationary periods, and would provide for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and there would be minimal protection against the loss of purchasing power in inflationary periods.
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 A) a change to the beneficiary of an existing Roth IRA. B) the opening of a new margin account. C) the temporary withholding of a disbursement from the account under Rule 2165. D) a change to the customer's investment objectives.
B) the opening of a new margin account. Existing customers received their initial Form CRS no later than July 30, 2020. They must also be sent a revised copy at or before the opening of a new account that is different from the retail investor's existing account. An example of this would be the opening of a margin account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? A) $9,000 B) $5,280 C) $6,000 D) $15,000
C) $6,000 As is often the case, there is information in the question that is irrelevant. In this case it is the statement about rights of accumulation. The question is about the letter of intent (LOI) signed by the investor in the fund. To meet the terms of the agreement, the shareholder must invest the full $15,000. With $9,000 already invested, an additional $6,000 must be invested to fulfill the terms of the LOI. Reinvested dividends and changes in the net asset value do not count toward a breakpoint during the period of a letter of intent but do count under rights of accumulation after the letter has been completed.
A customer buys an EK October 50 call paying a $4 premium and an EK October 50 put for a $4 premium. The price of EK increases to $66 per share. The put option expires unexercised but the customer closes out the call option at its intrinsic value. The customer has a net: A) $700 profit B0 $700 loss C) $800 profit D) $800 loss
C) $800 profit The customer paid $800 in premiums ($400 for the call and $400 for the put). The call is liquidated for its intrinsic value of $1,600 (the in-the-money amount). After deducting the $800 paid in premiums from the $1,600 proceeds, the customer has a net $800 profit.
According to Regulation T, when purchasing an option contract the transaction must be paid for within: A) 1 business day B) 3 business days C) 4 business days D) 7 business days
C) 4 business days According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is two business days, payment is required within four business days from the trade date. Although option transactions settle next day, the customer has four business days to pay for a purchase.
A municipal bond backed by an insurance company has gone into default. The insurance carrier will provide: A) Immediate payment of interest and principal B) Principal payment at maturity only C) Timely payment of principal and interest D) Accelerated principal only
C) Timely payment of principal and interest Municipal bond insurance guarantees the timely payment of principal and interest. If a municipal bond has 10 years to maturity, the insurance company is obligated to make 20 interest payments as they come due and a lump sum at maturity.
A syndicate member in a municipal underwriting wishes to place an order with the manager for its own portfolio. Under Municipal Securities Rulemaking Board rules, an order for a related portfolio must be A) entered as a presale order. B) entered as a group order. C) disclosed to the manager. D) entered as a designated order.
C) disclosed to the manager. Disclosure is necessary to allocate orders. An order for a related portfolio will be accorded member status—the lowest priority.
An individual owns an ARF corporation 8% convertible debenture. The debenture is convertible at 20 and is currently selling in the market at 97 1/2. If ARF common stock is trading in the market at 18, at what price should the debenture sell to be at a 10% premium to parity with the common? A) $900.00 B) $965.25 C) $975.50 D) $990.00
D) $990.00 Since the conversion price is $20 per share, the debenture can be converted into 50 shares ($1,000 par divided by $20 per share). If converted, the stock will have a total value of $900 (50 shares x $18 per share market price). To be at a 10% premium to parity, the debenture should be trading at $990 ($900 parity plus 10% of $900).
A member firm is required to send duplicate account statements to FINRA: A) Under no circumstances B) If the customer is an insider of a publicly traded company C) If the customer is a principal of a member firm D) If the customer is an employee of FINRA
D) If the customer is an employee of FINRA A member firm is required to send duplicate account statements to FINRA when a customer of the firm is an employee of FINRA. The member firm would need written instructions from the employee of FINRA when opening an account in order to send the duplicate account statements.
FINRA Rule 2210, communications with the public, has a number of filing requirements. Some communications are prefiled, others are postfiled, and some are excluded from filing with FINRA. Included in the list of exclusions would be retail communications A) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. B) that do no more than identify and recommend a specific registered investment company or family of registered investment companies. C) dealing with specific index funds that previously have been filed with FINRA and that are to be used, with the only change being a recommendation of index exchange-traded funds from the same sponsoring organization. D) that do not make any financial or investment recommendation, but only promote a service offered by the member.
A) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. A communication limited to identifying the member's exchange or market-maker symbol is excluded from the FINRA filing requirements. A communication that identifies and recommends a specific investment company or companies must be filed. When previously filed material is used, no filing is necessary as long as there is no material change. However, changing from recommending specific funds to specific ETFs is a material change and would require filing. A retail communication promoting a service offered by a member firm is a communication that would likely need filing with FINRA.
All of the following are characteristics of Section 8 bonds except A) they are a type of general obligation bond. B) they are used to finance subsidized housing. C) they are backed by the U.S. government. D) they are also known as Public Housing Authority (PHA) and New Housing Authority (NHA) bonds.
A) they are a type of general obligation bond. Section 8 bonds are municipal revenue bonds backed by the U.S. government to help finance low- and moderate-income public housing. They are also known as PHA or NHA bonds.
A buy stop order may be used for all of the following except A) to protect a profit in a long position. B) to acquire a long position as a stock breaks through resistance. C) to protect against loss in a short position. D) to protect a profit in a short position.
A) to protect a profit in a long position. Buying can only protect short positions, not long positions.
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? A) $0 B) $1,000 C) $2,000 D) $15,000
B) $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.
A customer's margin account has a market value of $40,000 and a debit balance of $10,000. What value of securities may the broker-dealer rehypothecate? A) $10,000 B) $14,000 C) $26,000 D) $40,000
B) $14,000 A broker-dealer may use a customer's securities valued at 140% of the debit balance as collateral for the customer's loan at a bank. Therefore, the amount is $14,000 ($10,000 debit balance x 140%).
A customer establishes the following positions: Buy 100 JMB at 28 Buy 1 JMB Dec 25 put at 2 What is the maximum potential loss? A) $200 B) $500 C) $3,000 D) $2,800
B) $500 The investor loses money on the long stock position when the market value falls. With the purchase of the put, the investor can sell the stock for no less than the strike price, but also loses the premium. In this example, the investor loses a maximum of $3 on the stock (28 − 25) plus the premium of $2, for a total loss of $500 on 100 shares.
Which of the following call features would be LEAST desirable for an investor on a 20-year municipal bond selling at a premium? A) A 5-year premium call B) A 5-year par call C) A 15-year premium call D) A 15-year par call
B) A 5-year par call A premium bond will have the lowest yield (be affected most) if it is callable in the shortest time, 5 years, and at the lowest price, par.
Which of the following customer accounts requires the sending of monthly customer statements? A) An options account B) An account containing penny stocks C) A margin account D) A discretionary account
B) An account containing penny stocks It is the account containing penny stocks where the customer must receive a monthly statement. In all other cases, the required frequency is not less than quarterly.
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) Collateralized mortgage obligations (CMOs) C) A high-yield corporate bond maturing in 10 years D) Treasury Inflation Protection Securities (TIPS)
B) Collateralized mortgage obligations (CMOs) Due to the interest rate sensitivity of mortgage-backed securities and the possibility of high prepayment risk (receiving the invested funds back earlier than anticipated), CMOs would not be suitable. TIPS, designed to protect against inflation, and the high-yield corporate bond, if held to maturity, could each meet the objective. Zero-coupon bonds are specifically designed to meet the objective of investing a fixed sum now and realizing a fixed sum later, and in this regard, would be the most suitable of those listed.
An investor, age 36, has a net worth of $650,000, with an annual income of $65,000. Wanting to add to an existing portfolio, the investor is not concerned about generating more income, as that seems to be adequate already. However, the investor does note that keeping taxes to a minimum is an objective. Which of the following funds would be the most suitable, given the investor's objectives? A) Fund Z: invests in preferred shares; turnover ratio of 50% B) Fund X: invests in companies with long-term growth potential; turnover ratio of 25% C) Fund Y: invests in companies that have capital appreciation potential; turnover ratio of 100% D) Fund W: invests in utility companies; turnover ratio of 25%
B) Fund X: invests in companies with long-term growth potential; turnover ratio of 25% This investor is not concerned about income. This would eliminate the utility and preferred share funds (Fund Z and Fund W). Of the remaining two funds, Fund X and Fund Y both have the same general objective, but the one with the lower turnover ratio would generate less tax liability. The portfolio turnover ratio reflects a fund's holding period of securities being bought and sold by the fund manager. If a fund has a turnover ratio of 100%, the entire portfolio is likely to turn over in a year, and capital gains distributions are likely to be short term and subject to the maximum tax rate. That increases the tax liability, and therefore, is not the best option. By contrast, a 25% turnover ratio means the average holding period of the securities in the portfolio is four years. This would mean that any capital gains distributions are more likely to be long term and subject to a lower tax rate.
In what order, from first to last, would a syndicate member allocate orders for a new municipal bond issue? Presale orders Designated orders Member orders Group net orders A) III, I, II, IV B) I, IV, II, III C) IV, II, I, III D) III, II, I, IV
B) I, IV, II, III The standard order priority for municipal bond issue allocation as stated within the syndicate letter is as follows: presale, group, designated, and member. Orders that benefit all syndicate members have the highest priority.
If an investor buys 300 shares of FLB, and one month, later buys 1 FLB Jul 50 put, how does this affect the holding period on his stock? A) It has no impact on the holding period for any of the shares owned by the investor. B) It erases the holding period on 100 shares. C) It erases the holding period on 300 shares. D) It ends the holding period on the put.
B) It erases the holding period on 100 shares. Because the stock has not been held more than 12 months, the put purchase erases the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns one put, this erases the holding period on 100 shares owned. The other 200 shares are unaffected.
An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions? A) At age 59½ B) Never with a nonqualified annuity C) At age 72 or when no longer working, whichever is later D) At age 72
B) Never with a nonqualified annuity On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.
An investor wants to trade exchange-traded funds (ETFs) in her brokerage account. Which of the following statements is TRUE concerning purchasing and selling short ETF shares? A) Short sales may be executed in a cash or margin account. B) Purchases may be executed in a cash or margin account. C) Short sales may be executed only in a cash account. D) Leveraged ETFs may be purchased only in a margin account.
B) Purchases may be executed in a cash or margin account. ETFs may be purchased in a cash or margin account. This applies to long positions in regular ETFs, inverse ETFs, or leveraged ETFs. If an investor sells short an ETF, this transaction must be executed in a margin account similar to selling short any equity security. (25107)
On the morning of the ex-date for a cash dividend, which of the following orders on the order book will not be reduced? A) Sell stop limit B) Sell limit C) Sell stop D) Buy limit
B) Sell limit It is sell limit and buy stop orders that are placed above the market and are not reduced. Orders entered below the prevailing market [unless marked DNR (do not reduce)] are reduced on the morning of the ex-date by the amount of the cash dividend. Those orders are buy limits and sell stops, including sell stop limits.
A branch office has recently hired a group of RRs from another member firm. Some of the clients have mutual funds and annuities that are proprietary products of the carrying firm. If the client chooses to liquidate these assets, who has the responsibility to notify the clients of any surrender fees? A) The receiving broker-dealer B) The carrying broker-dealer C) The mutual fund company D) The principal located at the branch office
B) The carrying broker-dealer Firm-specific or proprietary products, such as mutual funds or annuities, are considered nontransferable assets. When a customer changes broker-dealers, the account is transferred to a new broker-dealer (the receiving firm), and the client may choose to liquidate these assets. Since the asset is a proprietary product, the carrying firm (the former broker-dealer) is required to notify the client of any fees (surrender charges) that may result if the client liquidates the assets.
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 variable annuities are taxed on a FIFO basis, while those from variable life 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 both are taxed on a FIFO basis. D) 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. 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.
A direct participation program (DPP) would not be structured as A) a limited partnership. B) a C corporation C) an LLC D) an S corporation
B) a C corporation Although most DPPs are structured as limited partnerships, they may also use the other business forms allowing flow-through of income and losses (s corporations and LLCs). Because the C corporation is a taxable entity, it is not used as the structure for a DPP.
During a trading halt, an investor can A) execute a limit order. B) cancel an order placed before the halt. C) close an existing position. D) execute a market order.
B) cancel an order placed before the halt. If trading is halted in a security, investors cannot buy or sell the security. An open order can be canceled during a trading halt.
One of your customers passed away recently. The customer had an IRA with you and had his sister listed as the beneficiary. Other assets included the home and furnishings and a brokerage account at another firm. The titling on that brokerage account was the customer and his son, JTWROS. The customer's will specified that 100% of his assets should pass to his daughter. Based on this information, the estate settlement will have A) the daughter getting the home and furnishings and the IRA, with the son getting the brokerage account. B) the daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA. C) the daughter receiving everything as stated in the will. D) the daughter getting the home and furnishings and the brokerage account, with the sister getting the IRA.
B) the daughter getting the home and furnishings, the son the brokerage account, and the sister the IRA. A will can designate the disposition of an estate's assets only to the extent that they are not previously assigned. A JTWROS account specifies that the assets go to the survivor and that overrules any will. An IRA (or any qualified retirement plan) always has a designated beneficiary and that supersedes any will. Anything other than the assets in the JTWROS account or the IRA will go to the daughter.
A margin account customer buys 100 shares of HEX at $70 and writes a HEX Oct 70 call for a premium of 8. What must he deposit? (Regulation T is 50%.) A) $2,700 B) $4,500 C) $2,000 D) $3,700
A) $2,700 The normal call would be 50% of $7,000, or $3,500. In this example, subtract the premium of $800 that the customer received. (Remember, in a covered call situation, no margin is required for the call.)
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales. A) $2.50 per bond for a total of $50,000 B) $2.50 per bond for a total of $100,000 C) $4.00 per bond for a total of $80,000 D) $4.00 per bond for a total of $160,000
A) $2.50 per bond for a total of $50,000 The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).
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? A) $970 B) $1,002 C) $938 D) $1,000
A) $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.
An investor buys a 4.5% municipal bond at 103 1/4. The bond has a yield-to-maturity of 3 3/4%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: A) 0 B) $25 C) $50 D) $100
A) 0 The IRS requires that a premium paid for a municipal bond be amortized (written-off) over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.
A customer entered an order to sell short 100 shares of ABC. The stock closed on Friday at $48. The stock will trade ex-dividend $0.50 on Monday. At what price can the order be executed at the opening? A) Any price B) $47.51 C) $47.50 D) $47.49
A) Any price The stock's price is adjusted for the dividend at its opening the next morning. The adjustment in the stock does not limit where the short sale can be executed. The former requirement for short sales on an exchange floor (or Nasdaq) to be made on a plus or zero-plus tick was eliminated in 2008. Therefore, a customer short sale can be executed at any time in the trade sequence.
A tax payment is required for which of the following events? A) Cash dividend B) Unrealized gain C) Stock dividend D) Return of capital
A) Cash dividend Cash dividends are taxable in the year in which they are received. However, any tax implication for a stock dividend is delayed until the additional shares are subsequently sold. Taxes are paid on realized gains, but unrealized capital gains or losses (paper profits or losses) have no impact on an investor's tax situation. Return of capital occurs when an investor receives a portion of her original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.
A prospectus for a variable annuity contract I. must provide full and fair disclosure. II. is required by the Securities Act of 1933. III. must be filed with FINRA. IV. must precede every sales presentation. A) I and II B) III and IV C) I and III D) II and IV
A) I and II A variable annuity is a security and must be registered with the SEC, not FINRA. As part of the registration requirements, a prospectus must be filed and distributed to prospective investors. The time of distribution of the prospectus can be before the sales presentation or at the same time as the presentation. It is incorrect to state that it must precede every sales presentation.
If a Kingdom of Sweden Eurobond is purchased by a U.S. citizen, which of the following statements is TRUE? A) Interest is subject to income taxes and gains are subject to capital gains treatment. B) Interest is subject to income taxes and gains are exempt from capital gains treatment. C) Interest is exempt from income taxes and gains are subject to capital gains treatment. D) Interest is exempt from income taxes and gains are exempt from capital gains treatment.
A) Interest is subject to income taxes and gains are subject to capital gains treatment. Bonds issued outside of the country of the issuer (Eurobonds) are subject to full taxation in the U.S. if they're purchased by a U.S. taxpayer. However, if foreign taxes are withheld on the interest, they may be claimed as a credit or deduction against a taxpayer's U.S. tax liability. (25108)
A municipal dealer gives another dealer a firm quote of par for a block of municipal bonds. The dealer that gave the quote: A) Must do the trade at par B) Must give the other dealer ten minutes to accept the quote C) Has given a nominal quote to the other dealer D) Has given a subject quote
A) Must do the trade at par The dealer that gave the firm quote must do the trade at par.
A variable annuity application sent by a FINRA member does not include a principal's approval. The insurance company: A) Must reject the application B) Can process the application C) Must notify FINRA before processing D) Can only process the application after contacting the client
A) Must reject the application Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company. If a principal does not approve the application, it must be rejected.
Section 1035 of the Internal Revenue Code: A) Permits the tax-free exchange of one annuity contract for another B) Forbids the tax-free exchange of an insurance policy for a new life insurance policy C) Forbids the tax-free exchange of an insurance policy for a new annuity contract D0 Permits the tax-free exchange of an annuity contract for a life insurance policy
A) Permits the tax-free exchange of one annuity contract for another 1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences.
A client creates an opening sale in a LEAP and closes out the position 15 months later by buying back the option. The tax consequence is a: A) Short-term gain or loss B) Long-term gain or loss C) Passive gain or loss D) Gain or loss that may not offset other trading positions or ordinary income
A) Short-term gain or loss A LEAP is a long-term option that can have an expiration of up to 39 months. The client held the position for more than one year, but any gain or loss on a short position is treated as short-term. The IRS does not recognize a holding period on a short sale of a stock or an opening sale of an option. If the client created an opening purchase by buying a LEAP and held the position for 15 months before closing it out, the resulting gain or loss would be long-term.
Which method of calculating taxes on an investment typically offers an investor the lowest amount of tax on a capital gain when shares of stock are sold? A) Specific identification B) First in, first out (FIFO) C) Last in, first out (LIFO) D) Average cost
A) Specific identification The IRS only recognizes two methods for calculating gains or losses on stock transactions—FIFO and specific identification (versus the purchase of). Many brokerage firms may allow alternative methods, such as LIFO, which is a variation of specific identification. Average cost may only be used for sales of mutual fund shares. Although LIFO could offer a lower gain if the price of a security was rising, that gain may be considered short-term and taxed at a higher rate. Therefore, the specific identification method is the best choice for an investor who's seeking the lowest amount of tax.
If an issuer is seeking an exemption from the registration provisions of the Securities Act of 1933 under Regulation D (the private placement exemption), which of the following statements is TRUE? A) The purchasers must sign an investment letter attesting to the fact that resales of the securities are restricted. B) The size of the offering must be limited. C) The number of accredited buyers is limited. D) The issuer must file a registration statement with the SEC.
A) The purchasers must sign an investment letter attesting to the fact that resales of the securities are restricted. According to the Regulation D (the private placement exemption), certain conditions must be met for the securities to be exempt from the registration provisions of the Securities Act of 1933. The issuer must provide the buyer with detailed financial information despite the fact this offering document is not required to be filed with the SEC. In a private placement, the number of non-accredited buyers must be limited to 35 and the offering must be directly negotiated between the issuer and the buyers or their purchaser representative. Also, the buyers must sign an investment letter which states that the purchase is being made for investment purposes and not for a short-term resale. Under Regulation D Rule 506, there's no maximum size for the offering. (25105)
On January 1, an investor buys 1 FLB Apr 50 call at 4 and 1 FLB Apr 50 put at 2.50. If both options expire unexercised, what are the tax consequences for the investor? A) $400 gain on the call, $250 gain on the put B) $150 net capital gain C) $400 loss on the call, $250 loss on the put D) $150 net capital loss
C) $400 loss on the call, $250 loss on the put In a straddle, the options are treated separately for tax purposes. The investor has a $400 capital loss on the call and a $250 capital loss on the put. Both are short-term losses.
A customer is concerned about an investment in his portfolio. He will be traveling for the day and wants his registered rep to sell 500 shares of the stock whenever the rep feels the time is right. Which of the following is true regarding these instructions? A) The registered rep can determine the time to sell the shares. B) The registered rep must have written discretionary authority in order to decide the time to sell. C) The registered rep can determine the time to sell, but a principal must approve the transaction prior to execution. D) The registered rep must have written permission from the customer before making the decision.
A) The registered rep can determine the time to sell the shares. Once verbal authorization is received from a customer, an RR may select the price and/or time of execution if the customer has specified (1) whether to buy or sell, (2) the specific security, and (3) the amount to be bought or sold. Without these three details, written discretionary authority is required. However this only applies to transactions on one day. In order to initiate transactions for more than one day the registered representative would have to have written discretionary authority.
Which of the following is not an advantage of purchasing American depositary receipts (ADRs)? A) They eliminate exchange rate risk B)Transactions are done on an organized exchange in the U.S. C) They allow U.S. investors to buy foreign country stock denominated in dollars. D)Foreign taxes withheld can be claimed as a credit to offset income taxes on dividends received.
A) They eliminate exchange rate risk ADRs are priced in U.S. dollars and therefore have exchange rate risk. That is, if the value of the currency in the home country of the company underlying the ADR should decline in relationship to the U.S. dollar, the investor could actually lose money even if the stock's price rises. For example, the foreign company's stock is selling for $50 per share Canadian. At the time of purchase, the Canadian dollar is worth $0.80 U.S. That would make the ADR value approximately $40 per share U.S. If the client decides to sell that ADR when the company stock is selling for $52 per share on its domestic exchange, but the Canadian dollar is now worth $0.70 U.S., the ADR's value will be approximately $36.40. Therefore, we've seen the price of the stock go up while the value of the ADR to the U.S. investor has declined.
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. An owner of Foremost Corporation who sold the stock on November 30 for regular-way settlement: A) Would be entitled to receive the dividend B) Would not be entitled to receive the dividend C) Would be entitled to receive the dividend only if the stock was delivered before the ex-dividend date D) None of the above
A) Would be entitled to receive the dividend The record date is given as December 1. The ex-dividend date is on the first business day preceding the record date. Therefore, anyone who owned Foremost Corporation and sold it on November 30 for regular-way settlement, is entitled to receive the dividend because the stock is selling ex-dividend (without the dividend) and the buyer is not entitled to the dividend.
A customer is short 10 ABC Dec 50 calls at 2.50 and short 10 ABC Dec 50 puts at 3.50. Before expiration, ABC declines to 40.50, and the customer is assigned on his put position while his short calls expire worthless. A month later, he liquidates his long position at 45 for A) a gain of $1,000. B) a loss of $1,500. C) a loss of $7,500. D) a gain of $7,500.
A) a gain of $1,000. The customer opens two short positions of 10 contracts each. Going short an option contract means selling the option. Therefore, his account is credited with premiums of $2,500 ($250 times 10) for the calls and $3,500 ($350 times 10) for the puts. That is a total credit of $6,000. The calls expire worthless, but the short puts are exercised. When a put is exercised, the seller of the contract is obligated to purchase the stock at the exercise (strike) price. This results in a cost (debit) of $50,000 ($5,000 per contract times 10 contracts). The investor now owns 1,000 shares and then sells them at $45 per share or $45,000, a credit to the account. The net result is the investor paid out $50,000 to buy the stock put to him and received $45,000 from the sale of the stock plus the $6,000 in premiums. That is $51,000 in total credits versus $50,000 in debits for a profit (gain) of $1,000.
An investor wanting to know about the tax consequences of a direct participation program should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated except A) crops. B) oil. C) gas. D) buildings.
A) crops. Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered renewable assets.
A doctor receives an inheritance of $250,000. She is concerned how this may affect her tax situation. The doctor inquires about where she should park the money while she obtains professional tax advice. Which of the following recommendations is the MOST appropriate? A) short-term municipal bond fund B) A money-market account C) A municipal money-market mutual fund D) A U.S. government inflation-protected bond fund
C) A municipal money-market mutual fund Whenever a person is looking to park her cash, the most viable option is some form of money-market account. Parking implies a very short-term time horizon (perhaps as little as a few weeks), so the short-term municipal bond fund and the U.S. government inflation-protected bond fund are poor selections. In both cases, those choices involve a fund that purchases bonds and, therefore, is subject to principal fluctuation. This would not suit her needs. However, this question also has an extra dimension to it. The person in this question is a doctor, which implies a high income level. Furthermore, she is inheriting a large sum of money and expressly states she is worried about taxes. These are trigger phrases, which means you should be looking for something that provides some tax relief. In this case, the municipal money-market mutual fund is the BEST answer. It provides both the safety of principal and tax relief the doctor needs. The tax relief comes from the short-term municipal (federally tax-free) securities in the account. The money-market account, only offers principal safety.
What information would an analyst be MOST concerned with when evaluating a revenue bond? A) The population growth of the municipality B) Debt to assessed valuation C) A rate covenant D) Property taxes
C) A rate covenant An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.
Which of the following choices BEST describes the Bond Buyer's Municipal Bond Index? A) An indication of the average yield on 25 general obligation bonds with 30-year maturities B) An indication of the average yield on 20 selected municipal revenue bonds with 20-year maturities C) An estimate of the prices of 40 long-term municipal bonds D) An indication of the average yield on 11 selected municipal revenue bonds with 20-year maturities
C) An estimate of the prices of 40 long-term municipal bonds The Bond Buyer Municipal Bond Index provides an estimate of the prices of 40 recently issued, long-term general obligation and revenue bonds. Three other Bond Buyer indices provide an indication of the average yield on selected municipal bonds. The 25 Revenue Bond Index shows average yield on 25 revenue bonds with 30-year maturities, the 20 Bond Index shows average yield on 20 general obligation bonds with 20-year maturities, and the 11 Bond Index shows average yield on 11 general obligation bonds with 20-year maturities. These three choices each incorrectly described these other three Bond Buyer indices, which leaves the remaining choice as the correct answer.
A technical analyst would find which of the following to be a bullish indicator? A) More odd-lot purchases than sales B) A head and shoulders top C) An increase in the short interest D) More declines than advances
C) An increase in the short interest As the short interest increases, it is a bullish signal to technicians. Those short sales are going to have to be covered one day and that buying pressure is bullish on the stock. A head and shoulders top is bearish - it signifies that the market has reached a top. Odd-lot purchasers (the little guy) are always buying and selling at the wrong time. When they are buying more than selling, it is a sign that the market price of the stock is soon going to fall. When the advances outnumber the decliners, it is bullish. When it is reversed, as in the answer choice, it is bearish.
Assuming ABC is subject to a 60,000-contract position limit, which of the following customer accounts are in violation of the exchange's position limits? I. Long 35,000 ABC Jan calls, long 30,000 ABC Jan 08 LEAPS calls II. Long 35,000 ABC Mar calls, long 30,000 ABC Mar puts III. Long 35,000 ABC Mar calls, short 30,000 ABC Jan 08 LEAPS calls IV. Long 35,000 ABC Mar calls, short 30,000 ABC Mar puts A) III and IV B) I and II C) I and IV D) II and IV
C) I and IV When aggregating contracts to determine if the position limit has been exceeded, we add together all positions in that security on the same side of the market. That is, we look at contracts that are hoping for a move to the upside and combine them, or we look for contracts that are hoping for a move to the downside and combine them. Long calls and short puts benefit from a move to the upside. The reverse is true of long puts and short calls. Let's look at the choices: I. Both positions are long calls so they are combined. 35,000 + 30,000 = 65,000. This is above the 60,000 limit. II. Long calls and long puts are on opposite sides of the market ("call up and put down"), so they are not combined and we haven't exceeded the 60,000 limit. III. Long calls and short calls are opposite positions (long call is bullish, short call is bearish), so they're not combined and there is no violation. IV. Long calls and short puts both benefit if the market is bullish, so they are combined and that total of 65,000 exceeds the position limit. Don't be mislead by the fact that some of the positions are LEAPS (options with expirations much longer than the normal 9 months). The position limits are not based on expiration dates or strike prices. The limit is based solely on the number of contracts with the same market sentiment.
Which of the following would be considered in analyzing the credit worthiness of a revenue bond issuer? I. Per capita debt II. Debt service coverage III. Management IV. Debt to assessed valuation A) III and IV B) I and IV C) II and III D) I and II
C) II and III Revenue bonds are paid out of revenues from a particular project or facility, not from tax revenue. Therefore, debt service coverage and the personnel in charge of managing the facility are important. Overall debt of the issuer would be important in analyzing a general obligation bond backed by the issuer's full faith and credit.
An investor enters a day order to buy 200 shares of GGZ at 63. Three hours later, with GGZ trading above that price, he calls his registered representative wanting to change the order to a good-til-canceled order. The registered representative should I. immediately cancel the existing order. II. leave the existing order on the order book. III. immediately enter a new limit order to buy 200 shares of GGZ at 63 good til canceled (GTC). IV. enter a new limit order to buy 200 shares of GGZ at 63 GTC before the next day's opening if the day order was unexecuted. A) I and III B) II and III C) II and IV D) I and IV
C) II and IV The representative should not cancel the existing order because it would lose priority on the order book. However, the representative should not enter a good-til-canceled order that day because it could be filled twice. Instead, the representative should let the order stay for the day, when it would be canceled automatically if not executed. Then, the representative could enter a good-til-canceled order the next morning.
To open an account and determine suitability for a new client who would like to invest in an exploratory drilling oil and gas direct participation program, the RR must obtain all the following information, EXCEPT the customer's: A) Address B) Social Security or Tax ID number C) Number of dependents D) Net worth
C) Number of dependents When opening a new account, the RR should obtain the customer's address and Social Security or Tax ID number, among other items. To determine suitability, the RR would obtain the customer's income and net worth.
For tax-reporting purposes, qualified dividends are considered to be what type of income? A) Passive B) Phantom C) Portfolio D) Earned
C) Portfolio Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities.
In a custodial account, who's responsible for paying taxes? A) The minor when she reaches the age of majority B) The minor's parent or legal guardian C) The minor D) The custodian
C) The minor Custodial accounts are established for minors, but don't offer any tax-deferral. Instead, minors are responsible for paying taxes in the year in which the investment income is earned.
A mutual fund portfolio consists entirely of stocks of companies with either new products just released in the marketplace or companies holding patents pending. This mutual fund is best described as A) a combination fund. B) a Dow theory fund. C) a special situation fund. D) an index fund.
C) a special situation fund. Special situation funds buy securities of companies that are considered to be in a position to benefit from special nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations.
If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following except A) variable-rate bonds. B) nonconvertible bonds. C) adjustment bonds. D) convertible bonds.
C) adjustment bonds. Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for income (adjustment) bonds. Income—or adjustment bonds—require interest to be paid only if declared by the board of directors.
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) a financial objective. C) an investment constraint. D) a long-term goal.
C) an investment constraint. 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 technical analyst is least concerned with A) trading volume. B) open short positions. C) declaration of increased dividends. D) new highs and lows.
C) declaration of increased dividends. A technical analyst is interested in statistics about market or price performance, not the fundamental factors, the market, or the company's dividend policy. Technical analysts are interested in trading volume as a market statistic, new highs and lows, and open short positions, which could indicate future buying potential in the security.
In general, FINRA rules prohibit member firms from improper use of customer funds. One example is intentionally holding up an account transfer. Another is holding on to funds that belong to the customer. One of the features of FINRA Rule 2165 dealing with senior exploitation is the ability of a member firm to place a temporary hold on disbursements from the account of a specified adult. This serves as a safe harbor for funds held in the manner described above. A member relying on this rule must A) segregate customer funds from those of the firm to avoid commingling of assets. B) place temporary holds on disbursements of funds or securities from the accounts of specified adults whenever there is suspected exploitation. C) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule. D) report all temporary holds to FINRA within 15 days of the end of the month in which the hold took place.
C) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule. In FINRA's eyes, this is all about making sure that associated persons of the firm are adequately (and frequently) trained. Although customer and firm assets must be segregated, that is not part of the senior exploitation rule. The rule permits, but does not require, that these holds be placed on disbursements from the affected accounts−it is voluntary. There is no reporting of this activity, but detailed reports must be made and retained, containing the relevant information leading to the decision to enforce the hold.
The term wildcatting refers to A) buying new-construction real estate for speculative appreciation value. B) limiting your investment portfolio to initial public offerings. C) drilling for oil or gas where none has occurred previously. D) small-cap mutual fund diversification.
C) drilling for oil or gas where none has occurred previously. In an oil and gas drilling program, the term wildcatting is used to describe the most speculative type of program, which is drilling where none has occurred before (i.e., in an unproven location). This is the riskiest of the oil and gas programs.
One of your clients has a profit in STV common stock. The purchase price was $40 per share and is now $60 per share. The client is looking to take the profit and feels the stock still has a bit more growth. The client's strategy is to enter a sell limit order at $62. It is critical that the client understand that A) entering this order erases the holding period of the stock. B) the order becomes a market order when the price of $62 is reached. C) if the stock never reaches $62, the order will never be executed. D) the sell limit order should be entered below the current market price.
C) if the stock never reaches $62, the order will never be executed. One of the risks with a limit order, buy or sell, is that the stock may never reach the price limit. In that case, the order is never executed. For this client, if the stock climbs to $61.99 and then plunges, the client has lost out on much or maybe all of the profit. Because the order can never be executed below the price limit, it never becomes a market order. It is purchasing a put option on stock held less than 12 months and one day where the holding period is erased.
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 A) receives $14,000. B) receives $700. C) must pay $14,000. D) must pay $700.
C) must pay $14,000. When an investor takes a short position in an option, it means the investor has sold, or written the option. In the case of a put option, the investor is obligated to accept 100 shares at the strike price if the holder of the option chooses to exercise. In this case, that would mean paying $140 per share for 100 shares, or $14,000 on the settlement date.
A charge of churning would likely be brought against a registered representative who was found to have disregarded the FINRA rule on A) investment goal suitability. B) reasonable-basis suitability. C) quantitative suitability. D) customer-specific suitability.
C) quantitative suitability. FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. One of those obligations is quantitative suitability. Churning is generally defined as excessive trading in a customer's account. The registered representative, having control over a customer account, has to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.
A participating preferred stock A) participates in voting along with the common shareholders. B) must be paid any dividend arrearage before dividends may be paid on the common stock. C) receives both a fixed dividend plus a share of the common dividend. D) has a senior claim in liquidation over holders of debentures.
C) receives both a fixed dividend plus a share of the common dividend. In addition to the stated fixed dividend, participating preferred stock is eligible to receive a percentage of the common dividend. The participation has nothing to do with voting. Any preferred stock, although senior to common, has a junior claim to any debt security. It is the cumulative preferred where there is the obligation to clear up the arrearage before paying dividends on the common stock.
When a FINRA member firm has been designated as a "taping" firm, it is required to A) provide last sale and quote information to the ticker tape promptly after the close of the day's trading. B) institute a program of taping all conversations between registered representatives and their supervisors. C) retain copies of all mandated recordings for a period of three years from the date the tape was created. D) retain copies of all mandated recordings for a period of six years from the date the tape was created.
C) retain copies of all mandated recordings for a period of three years from the date the tape was created. FINRA Rule 3170 (Tape Recording of Registered Persons by Certain Firms)—commonly referred to as the taping rule—requires certain firms to install taping systems to record all telephone conversations between their registered persons and existing and potential customers, review those recordings, and file reports with FINRA. All tape recordings made pursuant to the requirements of the rule are to be retained for a period of not less than three years from the date the tape was created, the first two years in an easily accessible place. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
A fundamental analyst would be interested in all of the following except A) debt-to-equity ratios. B) working capital. C) reversals. D) corporate regulatory filings.
C) reversals. Reversals interest technical analysts, who look at fluctuations in the market, not fundamental economic values.
Investor information about the financial condition of a municipal issuer is most likely found in A) the official notice of sale. B) The Bond Buyer. C) the official statement. D) the legal opinion.
C) the official statement. The official statement, which is the disclosure document used in new municipal offerings, will describe the issue's financial condition in detail.
All of the following are suitability considerations when a registered representative recommends a municipal bond purchase to a customer except A) the issuer's debt rating. B) the customer's tax bracket. C) whether or not the bond is in the broker-dealer's inventory to sell. D) the customer's state of residence being the same as the location of the issuer.
C) whether or not the bond is in the broker-dealer's inventory to sell. The customer's state of residence and tax bracket are important because these factors help establish the tax benefits offered by the municipal bond. The issuer's debt rating is important in evaluating the credit risk assumed by the investor. The bond's availability in the dealer's inventory is not a suitability factor.
A client invests $100,000 in a tax shelter as a limited partner, giving him a 10% interest in the program. However, the general partners cannot meet the program's expenses. A mortgage balance of $3 million remains, and the property of the program is liquidated for $1 million. How much does the investor get back from his original investment? A) $10,000 B) $33,000 C) $100,000 D) $0
D) $0 The limited partner will not receive any return of his investment. In a failed program, the partnership's creditors are paid first with any sale proceeds—before the limited partners receive any money. Because the limited partners had not signed a recourse agreement, even though the partnership still owes $2 million on the mortgage, the limited partners are not liable for any money beyond their original investments.
Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year? A) $4,500 B) $5,500 C) None D) $2,500
D) $2,500 He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward.
An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $41 per share. B) $38 per share. C) $44 per share. D) $47 per share.
D) $47 per share. This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.
Which of the following items is NOT approved by a municipal securities principal? A) A research report sent to a customer regarding municipal securities B) Each account engaging in municipal securities transactions C) All advertising relating to municipal securities D) All orders to buy municipal bond funds
D) All orders to buy municipal bond funds A municipal securities principal must promptly approve (i.e., initial) all transactions for municipal securities, except municipal bond funds because they are not defined as municipal securities. Municipal bond funds require approval by a different category of principal. A municipal securities principal is also required to approve municipal advertising and the opening of each customer account related to municipal securities. Research reports are considered advertising.
An investor owns 600,000 shares of a company's stock. If there are 3,000,000 outstanding shares, the investor will be considered: A) An insider only if the investor is an officer or director B) An insider and not permitted to sell any shares C) An insider and not permitted to purchase any additional shares D) An insider
D) An insider According to the Securities Exchange Act of 1934, any person who is an officer or director, or who owns more than 10% of a company's outstanding stock, is considered an insider. The investor owns 20% of the outstanding shares (600,000 divided by 3,000,000) and is, therefore, considered an insider.
Which of the following choices would NOT be subject to the holding period restriction under Rule 144? A) Restricted stock acquired under an investment letter B) Restricted stock acquired under a stock option plan C) Control stock acquired under a private placement D) Control stock acquired through an open-market purchase
D) Control stock acquired through an open-market purchase There is a required holding period of six months for all restricted stock. Restricted stock is unregistered stock that was acquired as a result of a private placement. There is no required holding period for control stock. However, if an affiliate (control person) acquires stock as a result of a private placement, this stock would be considered restricted stock rather than control stock and would be subject to the holding period. Control stock acquired as a result of an open-market purchase is exempt from the holding period.
A margin account is restricted by $5,000. Which of the following actions may the customer take to bring the account to the Regulation T requirement? A) Deposit $5,000 of fully paid marginable stock. B) Withdraw $5,000 of SMA. C) Deposit $2,500 cash. D) Deposit $10,000 of fully paid marginable stock.
D) Deposit $10,000 of fully paid marginable stock. As we teach in the course, KISS (Keep It Series 7 Simple). Saying the account is restricted is just to make it seem more difficult. The question asks how to get the account off restriction? The customer needs $5,000 in cash to do so. However, there is no answer of $5,000. But there is another way to get money—deposit fully paid marginable securities. How much? The deposit should be 200% or twice the amount of cash needed. That would be $5,000 × 2, or $10,000.
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). A) II and III B) I and IV C) II and IV D) I and III
D) 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.
Collateralized mortgage obligation (CMO) tranche A has been created to have the most predictable near-term principal pay off. A tranche set up in this way will have I. the highest reinvestment risk. II. the least reinvestment risk. III. a higher yield. IV. a lower yield. A) I and III B) I and IV C) II and III D) II and IV
D) II and IV A CMO created to have the most predictable near-term principal pay off will have lower reinvestment risk and lower yield than other CMOs.
Which of the following are part of the depreciable basis of a limited partner in a real estate direct participation program? I. Land II. Buildings III. Supplies used for cleaning and maintenance IV. Air conditioning equipment A) I and III B) I and IV C) II and III D) II and IV
D) II and IV Only fixed plant (buildings) and equipment can be depreciated. Land, as well as any up-front costs charged to the limited partners, cannot be depreciated. Those nondepreciable costs, however, are part of the limited partner's beginning basis but not part of the depreciable basis.
A municipal securities dealer informed XYZ municipal bond fund that it was the leading retailer of XYZ shares and that, in return, XYZ should employ the dealer in effecting more transactions for the fund's portfolio. Which of the following statements regarding the request is true? A) It is not permissible because municipal securities dealers are not allowed to execute trades for the portfolios they underwrite. B) It is permissible because it suggests a more reciprocal arrangement between the two parties. C) It is permissible because MSRB rules do not cover municipal bond issuers or funds. D) It is not permissible because it violates the MSRB anti-reciprocal rule.
D) It is not permissible because it violates the MSRB anti-reciprocal rule. An investment company must select a dealer to execute its portfolio transactions based on services provided. It is a violation of the anti-reciprocal rule (Municipal Securities Rulemaking Board Rule G-31) for an investment company to choose a firm to trade its portfolio based solely on sales of units or shares of the fund.
An investor opens the following options position: Long 1 KAP Jul 50 call @ 4½ and short 1 KAP Jul 45 call @8¼. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain = $375; maximum loss = $125; breakeven point = $46.25. B) Maximum gain = $125; maximum loss = $375; breakeven point = $46.25. C) Maximum gain = $125; maximum loss = $375; breakeven point = $48.75. D) Maximum gain = $375; maximum loss = $125; breakeven point = $48.75.
D) Maximum gain = $375; maximum loss = $125; breakeven point = $48.75. The first step is to identify the position. This is a credit call spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $375 is the most the investor can make. This is a bear call spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock's price to decline to the point where neither option is expired. That way, the investor keeps the net credit. If the market does not cooperate and the stock rises above $50 per share, the 45 call will be exercised and the investor will be required to sell the stock for $4,500. However, the stock needed for delivery can be obtained by exercising the long position for $5,000. This results in a loss of $500. When the $375 credit received is taken into consideration, the loss of $500 is reduced by the $375 premium, resulting in a maximum loss of $125. The quick way to do this is to subtract the net premium (the $375 credit) from the difference in strike prices (5 points) and the result is the same $125 loss. Breakeven follows the call-up rule; add the net credit to the lower strike price and that is $3.75 + $45 = $48.75.
A customer owns 1,000 shares of LRR preferred stock and the company is in the process of conducting a rights offering for its common stock. Under the terms of the rights offering, two rights are required to buy one new share and the subscription price is $25 (the stock's current market price is $26.50). This customer would be entitled to which of the following? A) 1,000 shares if the customer pays B) $25 per share 500 shares if the customer pays $25 per share C) 500 shares if the customer pays $26.50 per share D) No additional shares
D) No additional shares As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to the offering. Instead, rights offerings are made available to common stockholders.
State governments receive the LEAST amount of revenues from: A) Sales taxes B) Gasoline taxes C) Excise taxes D) Property taxes
D) Property taxes State governments receive the least amount of revenues from property taxes. States raise money primarily from income taxes, sales taxes, excise taxes, and license fees. Very little is raised from property taxes. Local municipalities raise most of their funds from property taxes (real estate taxes).
Which of the following CMOs has the MOST prepayment risk? A) Sequential pay tranches B) Accrual or Z tranches C) Planned amortization class (PAC) tranches D) Support or companion tranches
D) Support or companion tranches The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields.
When opening an account for a person who is age 65 or older, which of the following is TRUE? A) The account owner must provide information on a qualified guardian. B) The account owner must provide information on a trusted contact person. C) The RR is required to request information concerning the executor of the person's estate. D) The RR is required to request the trusted contact person's name and contact information.
D) The RR is required to request the trusted contact person's name and contact information. Although not required, a member firm should make a reasonable effort to obtain the name and contact information (e.g., mailing address, phone number, and email address) for the account owner's trusted contact person. Ideally, this information is obtained when the account is opened or updated. Acquiring this information should be included with all of the other customer-related information being obtained.
Which of the following statements is NOT TRUE for a bond trading at a premium? A) The bond will trade with the current yield lower than the nominal yield. B) The bond will trade at a basis below its coupon rate. C) The bond will have a current yield that is higher than the yield basis. D) The basis and coupon will be identical.
D) The basis and coupon will be identical. Basis is a different way of saying yield to maturity. In the case of a bond trading at a premium, the nominal yield (coupon) will be higher than the current yield and the yield to maturity (basis). Additionally, the current yield will be larger than the yield to maturity.
A corporation may choose to pay its shareholders with cash dividends or stock dividends. Which of the following statements concerning the tax status of these events is the MOST accurate? A) The cash and/or stock dividends are taxable in the year in which they're received. B) The cash dividends are taxable in the year in which they're received, while the stock dividends are tax-free. C) Both cash and stock dividends are received tax-free. D) The cash dividends are taxable in the year in which they're received, while the stock dividends are subject to taxation when the stock is subsequently sold.
D) The cash dividends are taxable in the year in which they're received, while the stock dividends are subject to taxation when the stock is subsequently sold. Only cash dividends are taxable at the time of distribution. The payment of a stock dividend simply increases the number of shares held by each shareholder; however, the shareholders must adjust their cost basis per share. For example, a client owns 100 shares that she bought at $80 ($8,000 total investment) and the issuer pays a 10% stock dividend. After the distribution, she now owns 110 shares with a cost basis of $72.73 per share. Her adjusted cost basis per share is calculated by spreading her $8,000 investment over her 110 shares ($8,000 ÷ 110 shares = $72.73). With a stock dividend, the taxable event is delayed until the stock is subsequently sold.
In a margin account, which of the following would be affected by a stock dividend? A) The debit balance in the account B) The total portfolio market value of the account C) The available special memorandum account (SMA) balance in the account D) The number of shares held in the account
D) The number of shares held in the account Stock dividends merely give an investor more shares of stock valued at less per share. The total value of the position does not change. Therefore, the balances in the account remain unchanged as well.
With bonds subject to a gross revenue pledge, the first priority will be to pay A) the first lien on the property. B) operation and maintenance. C) the sinking or surplus fund. D) bond interest and principal.
D) bond interest and principal. Bonds subject to a gross revenue pledge (gross lien revenue bonds) are backed by the gross revenues of the facility (meaning revenues before expenses). In this case, the first money disbursed is for payment of interest and principal. However, most revenue bonds only pledge net revenues to pay off revenue bonds. In the more common net revenue pledge, the first priority is operation and maintenance; the second priority is interest and principal.
