Practice test 1
If a customer subscribes to a $20,000 public limited partnership interest, which of the following is the maximum underwriting compensation that may be charged?
$2,000 Ex: The FINRA rules for limited partnership offerings limit underwriting compensation to 10% of the total money raised. (Ten percent of $20,000 is $2,000.)
A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer gifts the securities to his son. Which of the following statements are true?
- For gift-tax purposes, the value of the gift is $7,000. - The son's cost basis on the stock is $3,000. Ex: When making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.
Which of the following could an analyst use to establish the rate of return on a direct participation program (DPP)?
- Present value - Internal rate of return
Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will affect NAV?
- The fund paying dividends to its shareholders - The fund receiving cash dividends on the securities in its portfolio - The value of the fund portfolio's securities fluctuating
A customer requests that his broker-dealer hold his fully paid for stock. Which of the following are required?
- The securities must be segregated from those of the firm and other customers - The customer must be informed that the securities may be withdrawn by him at any time Ex: The broker-dealer must segregate the customer's fully paid for securities and inform the customer that the securities can be withdrawn at any time.
All of the following are liquidity measures
- current assets divided by current liabilities. - current assets minus inventory divided by current liabilities. - annual dividends per share divided by earnings per share.
The net asset value (NAV) of an international bond fund can be expected to increase if
- interest rates fall abroad. - the U.S. dollar weakens. Ex: If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. If the U.S. dollar weakens, the value of other currencies will rise. This would also increase the NAV for a portfolio of international bonds.
The Trade Reporting and Compliance Engine (TRACE)
- requires that both sides of a transaction report the trade. - is a reporting system for corporate bonds trading in the over-the-counter (OTC) market.
Subscription Agreement
All investors interested in becoming LPs (passive investors) must complete a subscription agreement. The agreement appoints one or more GPs to act on behalf of the investors and is only effective when the GPs sign it. Along with the subscriber's money, the subscription agreement must include
What is the latest date that an IRA participant may make an IRA deposit for the current year?
April 15 of the following year
Recourse Loan
Change cost basis
The syndicate manager in a firm commitment underwriting takes which of the following actions in a divided municipal syndicate account that does not sell out?
Confirms the bonds to the member that did not sell its share Ex: Because this offer is a divided, or Western, syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory.
partnership agreement
Each partner receives a copy of this agreement. It describes the roles of the GPs and LPs and guidelines for the partnership's operation.
A customer who has contributed to an IRA and an employer matching 401(k) plan continuously for many years, wants to purchase an annuity contract to add additional monthly income once retired. Given that all of the current retirement investments are subject to market risk, the customer wants these new funds to have no market risk exposure. One of the following options would achieve that objective, but a suitability discussion regarding its risk should also occur. Which option is it?
Fixed-annuity contract with a discussion regarding purchasing power risk Ex: A VA with its investments in the separate account subject to market risk would not align with the customer's objective. Therefore, only a fixed annuity could be considered as suitable. However, a discussion should occur regarding the risks that are associated with a fixed annuity: purchasing power risk. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation.
Which of the following best describes an intangible drilling cost?
Labor, fuel, or drilling rig rental Ex: Intangible drilling costs are the noncapital costs of putting in a well. They are currently deductible expenses such as fuel, wages, and rent. An intangible drilling cost is one that, after expenditure, has no salvage value.
A municipal securities principal must approve all of the following except A) the opening of new customer accounts. B) each transaction in municipal securities. C) legal opinions. D) the handling of written customer complaints.
Legal opinion Ex: Municipal securities principals are required to approve all new customer accounts, all municipal transactions, and the handling of customer complaints. Legal opinions are prepared by bond counsel to determine the authority of an issuer and tax treatment of new municipal issues.
Which of the following is the computation for the coverage ratio for a municipal revenue bond issue?
Net revenue divided by annual interest and principal expense
non-recourse loan
Non change to cost basis ( except real estate partnership)
All of the following would flow through as a loss to limited partners except A) interest payments on recourse debt. B) principal repayment on recourse debt. C) accelerated depreciation. D) depletion.
Principal payment on recourse debt Ex: Principal repayments are not deductible for tax purposes. The interest is deductible.
All of the following are redeemable securities except A) unit investment trusts. B) variable annuities. C) real estate investment trusts (REITs). D) mutual funds.
Reits Ex: A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or over the counter.
Certificate of Limited Partnership
The basic document filed with a designated state official by which a limited partnership is formed.
When an agent explains mutual funds to a prospective investor, which of the following statements may be made?
The redemption value of mutual fund shares fluctuates according to the fund's portfolio value. Ex: Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds liquid, investors are not guaranteed to receive an amount equal to the original investment.
Pre-refunded bonds
When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities.
The RJN Corporation has issued warrants where each warrant offers the holder the right to purchase one share of RJN's common stock for $20 per share. The warrants are exercisable anytime within the next five years. Chelsea purchases 80 warrants for $2 each. If three years after the purchase, the market price of RJN common stock has risen to $25 per share and Chelsea sells the warrants for their intrinsic value, she has realized
a long-term capital gain of $240. Ex: The intrinsic value of a warrant is the difference between the exercise price and the current market price. Being able to purchase stock at $20 per share when the market price is $25 per share means the warrant is intrinsically worth $5. With 80 warrants, the sale proceeds are $400 (80 times $5 each). Don't forget that Chelsea paid $2 for each warrant, a cost of $160 (80 times $2). That makes her net gain $240 ($400 proceeds minus $160 cost). The gain is long-term because she held the warrants longer than 12 months.
In a variable life annuity with 10-year period certain, a contract holder receives
a minimum of 10 years of variable payments, followed by additional variable payments for life. Ex: The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. For example, if a life annuity with a 10-year period certain contract holder died after five years, payments would continue for five more years to the beneficiary and then stop.
A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show
a per share estimated value of the securities. Ex: A general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, in a manner reasonably designed to ensure that the per share estimated value is reliable.
Accrued interest for U.S. government bonds is computed on the basis of
actual days elapsed. Ex: Accrued interest for U.S. government bonds is calculated on the basis of actual days elapsed.
At 3:55 pm ET, a registered representative receives a market order from an officer of XYZ to buy 75,000 shares of XYZ for the company's account. The registered representative must
advise the officer that a safe harbor under SEC Rule 10b-18 no longer exists before placing the order.
Due to the excellent skill of the investment management team, the XYZ Growth Fund has realized significant long-term capital gains in its portfolio. The fund may distribute these gains to its shareholders
as often as semiannually Ex: Section 19 of the Investment Company Act of 1940 states that "it shall be unlawful for any registered investment company to distribute long-term capital gains more often than once every twelve months." Dividends do not have any restriction on frequency.
You sell a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield must be stated as the yield to
call. Ex: Municipal Securities Rulemaking Board rules require that, when a call date has been fixed by a prerefunding, the yield to call so fixed must be reflected on the confirmation statement. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event. Therefore, it is appropriate to price the bond to the call date. The old maturity on the bond has no further significance.
A risk faced by investors in most CMOs that is not found in corporate bonds is
extension risk. Ex: With mortgage-backed securities, there is an assumption that some of the mortgages will be paid off early. When interest rates are rising, there are fewer prepayments than assumed (no one is going to refinance their mortgage at a higher rate). This delayed repayment of principal is known as extension risk. Corporate bonds are expected to pay back the principal at maturity date, not earlier. All debt securities have the other risks to some degree or another.
All of the following statements regarding a market not-held order are true except
it is given to a specialist (designated market maker). Ex: In a market not-held order, the client agrees not to hold the broker responsible if she cannot fill the complete order. Such an order allows the floor broker to use her judgment on the best execution strategy. Specialists (designated market makers) cannot accept market not-held orders.
An investor purchases an original issue discount municipal bond on the offering at 80. The bond matures in 25 years. Eight years later, the investor sells the bond for 84. The tax consequence of this transaction is
long-term capital loss of $24.
The OTC is a
negotiated market. The exchanges are auction markets.
If a 50% stock dividend is declared, the owner of 1 XYZ Jul 30 call owns
one contract for 150 shares with an exercise price of 20. Ex: When a company pays a stock dividend or effects a fractional stock split, the number of contracts remains the same, but each contract is adjusted by increasing the number of shares the contract covers (100 × 150% = 150 shares). The effective strike price is adjusted so that the position value remains the same before and after the adjustment—in this case, 20 ($3,000 / 150 shares = $20).
One member of a municipal syndicate is opposed to bidding on a particular issue because of some of the restrictions outlined in the official notice of sale. The other eight members of the syndicate have agreed on a price and vote to submit their bid. In this situation, the syndicate manager can do all of the following except
require the dissenting member to accept its prorated share of the offering. Ex: The syndicate manager cannot force members to participate in the bid. The firm can ask members to reach a consensus, change the composition of the syndicate, or withdraw from the bidding process.
A walk-in customer completes the new account form and includes all of the information required by the customer identification program. However, the customer supplies none of the requested financial data and is unwilling to discuss objectives. Under Regulation BI of the SEC,
the account may be opened, but no recommendations may be made. Ex: Regulation BI deals with recommendations from broker-dealers to its customers. As long as there are no recommendations, the rule does not apply. When the customer refuses to supply the necessary suitability information, the account may be opened, but trading must be limited to unsolicited orders. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor
the advance/decline line.
A municipal revenue issue's flow of funds statement is contained in
the bond contract. Ex: The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.
A front-end sales load is defined as
the difference between the public offering price and the net asset value of a mutual fund share.
Treasury STRIPS and Treasury receipts are quoted based on
yield to maturity. Ex: Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.
