S7 Missed Practice Questions
A customer's initial transaction in a margin account is the purchase of 100 shares of XYZ at $15 per share. What amount must be deposited by the customer in this new account?
$1,500 The key to this question is recognizing that this represents the customer's initial purchase of securities in the new margin account. The minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less.
What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF?
$500,000 Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The process for determining the margin requirement on these securities uses the standard SRO maintenance requirement and multiplies by the portfolio leverage factor. In this case, the standard long requirement is 25% which is multiplied by a factor of 2; therefore, the client must maintain a 50% margin. $1,000,000 x 25% = $250,000. $250,000 x 2 = $500,000.
Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?
$697,000 If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 50% of the dividends it receives on stock that it owns (remaining 50% is excluded). The company would need to add $50,000 (50% of $100,000) to its taxable income. The total taxable income, therefore, is $2,050,000. The tax liability is $697,000 ($2,050,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 35% of the dividends would be taxable (65% is excluded).
The amount of margin that must be deposited by the purchaser of an option contract is:
100%
On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is:
30 When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.
A customer who's in his early 50s recently received a sizeable bonus and his investment objective is to maximize his tax-free income. He has two children who are already attending college. Which of the following choices is the BEST method of investing the funds? Contribute the maximum amount allowable to a 529 plan 50% equities, 20% general obligation bonds, 15% utility revenue bonds, and 15% Treasury Inflation-Protected Securities (TIPS) 20% high-yield corporate bonds, 20% airport revenue bonds, 20% general obligation bonds, 20% Treasury bonds, and 20% tax anticipation notes 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds
30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds Since this customer is seeking to maximize his tax-free income, he needs to invest in different types of municipal securities.
An investor owns 12,000 shares of restricted stock. There are 1,000,000 shares outstanding and the stock's average weekly trading volume over the previous four weeks is 4,000 shares. After filing Form 144, if the client had sold 2,000 shares one month ago, how many shares could be sold today?
8,000 After filing Form 144, an investor has 90 days to sell the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks. In this example, 1% of the 1,000,000 outstanding shares is 10,000 shares, which is greater than the average weekly trading volume for the past four weeks of 4,000 shares. As a result, the investor is able to sell an additional 8,000 shares after having sold 2,000 shares in the previous month.
Four municipal bonds have the same maturity date. Which of the following bonds will cost an investor the greatest dollar amount when purchased? A 4 3/4% coupon bond offered on a 5.10 basis A 5 1/4% coupon bond offered on a 5.00 basis A 5 3/4% coupon bond offered on a 6.00 basis A 6 1/4% coupon bond offered on a 6.50 basis
A 5 1/4% coupon bond offered on a 5.00 basis This is the case in all of the choices listed except where the coupon rate of 5 1/4% is greater than the yield to maturity of 5%. This would mean that an investor purchased the bond at a premium (above the $1,000 par value) and paid the greatest dollar amount.
A 75-year-old client is looking for a high level of income for his retirement fund. He wishes to maintain a balance between income and safety of principal. Which of the following funds would MOST likely meet this requirement? A high yield fund A high grade fund A balanced fund A GNMA fund
A GNMA fund For starters, GNMA securities are backed by the U.S. government. In contrast, high grade bonds are still corporate bonds. While neither fund is backed by the government, the GNMA is still a safer choice. Also, while the high grade fund may pay a little more in income, GNMA funds pay more interest than Treasuries because GNMA yields are based on mortgages. These two facts are what make the GNMA fund a better choice for this investor.
The underwriter makes financial commitments in which of the following situations? An all-or-none deal A best-efforts deal A firm-commitment deal A mini-max deal
A firm-commitment deal A financial commitment is a different way of saying a firm commitment. In a firm-commitment deal the underwriter puts its own capital at risk and acts as a principal.
For a broker-dealer to be permitted to use a customer's securities as collateral, the customer must sign:
A hypothecation agreement
The MOST appropriate buyer(s) for a variable life insurance policy is/are:
A person with an understanding of investments who can tolerate market risk
An advertisement for municipal securities states the following: "15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details." According to MSRB rules, this advertisement should also state that:
A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12%
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:
A price near $60 Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).
An investor is looking for an investment that will generate deductions but also provide the potential for future cash flow. Which of the following is NOT an appropriate investment? A raw land program An existing properties real estate program An oil and gas drilling program An oil and gas exploratory program
A raw land program In a raw land program, deductions are negligible and the profit potential comes in the form of capital appreciation, not cash flow.
Cash dividends received from which of the following securities will be taxed as ordinary income? Preferred stock issued by a bank Common stock issued by an oil company A real estate investment trust Convertible preferred stock issued by a software company
A real estate investment trust Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income.
Which of the following entities does not pass through both income and losses? A limited liability company (LLC) A limited partnership A Subchapter S Corporation A real estate investment trust (REIT)
A real estate investment trust (REIT) A REIT is required to pass through a minimum of 90% of its income to its shareholders, but it is NOT permitted to pass through losses.
Joanne is a 50-year-old woman who just left the job she had held for 20 years. She has a substantial amount accumulated in her 401(k), which she's rolling over into an IRA. If she's planning to use this money to retire in 12 to 15 years, which of the following investments is the most appropriate for her? A bonus variable annuity A fixed annuity A stock fund A municipal bond fund
A stock fund Joanne's time horizon is long enough to make a stock fund an appropriate choice for her IRA.
An equity security that is distributed under the provisions of Regulation S may be resold in U.S. markets:
After a one-year waiting period is satisfied
An investor owns a $100 convertible preferred stock that is convertible into 2 shares of common stock. The common is selling at $52 and the preferred is selling at $104. The preferred stock is called at 105. What should the investor do?
Allow the preferred to be called
After opening an account with a firm a customer must receive an updated privacy notice:
Annually According to Regulation SP, a privacy notice must be provided to a customer at the time an account is opened and annually thereafter.
A registered person is concerned that his boss is making inappropriate advances. This allegation must be settled by:
Any method of the registered person's choosing, including remediation through the court system Usually would be arbitration except... An exception exists when the dispute involves statutory discrimination claims, such as sexual harassment. The aggrieved party (the employee) may choose mediation, or may pursue his claim in either arbitration or the court system. (79501)
Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond? Approval by a majority of legal age voters Approval by the state legislature Approval by the bond trustee Approval by the appropriate state agency
Approval by the state legislature State legislative approval is required before a municipality can begin making payments on a moral obligation bond.
Changes in an investor's profile should be updated:
At the time the change occurs.
Which of the following is the lowest Moody's investment-grade bond rating? BBB Baa CBa D
Baa The name Moody's is a capital letter followed by small letters, just like their ratings (e.g., Baa). S&P consists of all capital letters, just like their ratings (e.g., BBB).
Math Industries is seeking to maximize shareholder value by spinning off its Algebra Analytics Division. If this action is undertaken, Math Industries' current shareholders would own stock in:
Both companies with no immediate tax consequences In a spinoff, each shareholder retains shares in the parent corporation and is also granted shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers with the expectation that the combined valuation of the two entities will be greater than that of the single entity.
An investor is short stock at $70. The current market price of the stock is $40 and the investor anticipates that the price will continue to decline. However, he thinks the price will temporarily rise. If he does not wish to close out his short position, his best strategy to prevent a loss is to:
Buy a call
Which of the following will not influence the calculation of fully diluted earnings per share? Convertible bonds Rights Warrants Call options
Call options
On a when-issued municipal bond transaction, the interim confirmation will show the:
Capacity in which the broker-dealer acted The broker-dealer must disclose the capacity (principal or agent) in which it acted.
Which of the following statements is TRUE regarding Class B shares of a mutual fund? Contingent deferred sales charges are assessed, but typically decline to zero after six years The shares convert to Class C shares after three years The shares have lower annual operating expenses than Class A shares A portion of the initial investment is applied as a sales charge and is not invested
Contingent deferred sales charges are assessed, but typically decline to zero after six years
Two types of stock that may contain a stock legend are:
Control stock and restricted stock Control and restricted stock are both subject to transfer restrictions. The restriction stipulates when and how the securities may be lawfully sold. Clean stock, i.e., stock without a legend, may be obtained by getting an opinion letter from the issuer's legal counsel.
Municipal securities Dealer A quotes a price for a block of bonds to Dealer B for one hour with a five-minute recall. This means:
Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes
To be considered a regulated investment company, a mutual fund must:
Distribute a minimum amount of its net investment income to shareholders To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders.
A registered representative (RR) has discretionary authority over a customer's account and has determined a limited partnership investment is suitable for the customer. In order to invest in the partnership, the RR may:
Do so with the written approval from the customer
Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security? Each year the customer will pay both federal and state income tax Each year the customer will pay only federal income tax Each year the customer will not pay any tax The customer will only pay tax at maturity
Each year the customer will pay only federal income tax
Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return? CAPM Efficient frontier Duration Alpha
Efficient frontier According to the Modern Portfolio Theory, a graph of optimal portfolios may be created, which is referred to as an efficient frontier.
On the day prior to the ex-dividend date for an ordinary cash dividend, a holder of a call tenders an exercise notice. The investor will be:
Entitled to the dividend
When a market maker gives a quote for a stock without qualification, the quote is a:
Firm quote for 100 shares When a market maker gives a quote for a stock without qualification, the quote is firm for 100 shares. The market maker is obligated to buy or sell 100 shares at his quoted price. Subject, workout, or nominal quotes are given for informational purposes only.
On Tuesday May 1, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is:
Friday, May 11 Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.
Short-term municipal obligations payable from funds that usually are received from the federal government are:
Grant anticipation notes
A new customer wants to open an account at a brokerage firm to purchase municipal securities. The Municipal Securities Principal of the branch is out of the office for the day, but the customer is adamant about the account being opened right away. What action can be taken?
Have the General Securities Principal of the branch approve the account.
Under MSRB rules, which of the following documents do NOT need to be retained for a specific period? Customer confirmations Written customer complaints Issuers' official statements Customer related correspondence
Issuers' official statements Copies of official statements need not be retained since the MSRB does not have the authority to regulate issuers and, therefore, may not require the preparation of an official statement.
All of the following actions create a conflict of interest for a general partner, EXCEPT if the general partner is: Accepting a payment not to compete with the program Holding partnership monies in his personal bank account Selling property that he owns to the partnership Lending money to the partnership at prevailing interest rates
Lending money to the partnership at prevailing interest rates While partners are not allowed to borrow from the partnership, lending money to the partnership is permitted.
When a client buys a bond above par, the confirmations must indicate the:
Lower of yield to call or yield to maturity A bond's confirmation must disclose the lower of the yield to maturity or the yield to call. This is sometimes referred to as the yield to worst.
Which of the following choices is Moody's BEST rating for a municipal note? MIG 1 MIG 3 Aaa AAA
MIG 1
The spouse of a brokerage firm employee wants to open a brokerage account in order to invest in bonds. If this account is opened at a firm that does not employ her spouse, the employee of the firm is required to:
Obtain the prior written consent of the employing firm in order to open the account
A municipal bond that is issued at par is later purchased at a discount and redeemed for par at maturity. The investor's profit on the transaction is taxed as:
Ordinary income
The term that's used when a company sells stock to the public above par value is:
Paid-in capital
Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:
Par value plus accrued interest
Upon the death of the insured, the proceeds of a variable life policy:
Pass to the beneficiary free from federal income tax
What capacity is reported by a member firm that has conducted a net basis transaction?
Principal In a net basis transaction, a dealer holding a customer order to buy, acquires the stock on a principal basis, and executes the customer order at a different price than the dealer's acquisition price. Since both legs of a net basis transaction are at different prices, the market maker will report both sides of the transaction as principal.
The subscription agreement for a limited partnership does NOT specify:
Priority provisions upon liquidation Priority provisions for liquidating a limited partnership are found in the Certificate of Limited Partnership.
All of the following must be addressed in the written supervisory procedures (WSP), EXECPT: Approval of new accounts Procedures designed to ensure taxes are paid in ERISA qualified accounts Communication between research and investment banking An identity theft prevention program
Procedures designed to ensure taxes are paid in ERISA qualified accounts Broker-dealers are not responsible for their customer's tax obligations. A broker-dealer's WSPs do not need to ensure their customer's are paying the appropriate taxes in ERISA qualified plans.
Which action is NOT taken by the receiving firm when processing an Automated Customer Account Transfer Service (ACATS) request? Submission of the Transfer Initiation Form (TIF) data Submission of corrected TIF data if rejected Acceptance of the transfer Submission of the asset input data
Submission of the asset input data When transferring an account using ACATS, the receiving firm will submit the TIF data, and if there are no exceptions, will review the asset input data that was supplied by the carrying firm and accept the transfer. If there is an issue, the carrying firm will reject the transfer request and the receiving firm will update the TIF data within 24 hours. The carrying firm submits the asset input data since it holds the customer's assets.
When sent to a client, which of the following must be preceded or accompanied by a prospectus? A brochure describing how mutual funds in general work A tombstone ad for a new mutual fund being offered by the XYZ fund complex An omitting prospectus advertisement for the Cerebral Growth Fund Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds
Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds Supplemental sales literature may only be used in the post-effective period and must be preceded or accompanied by a prospectus.
A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy? The LP is considered a limited partner for both the capital contribution and the loan The LP is considered a limited partner for the capital contribution and a creditor for the loan The LP is considered a creditor for the capital contribution and a limited partner for the loan The LP is considered a creditor for both the capital contribution and the loan
The LP is considered a limited partner for the capital contribution and a creditor for the loan A limited partner who has committed capital may also extend a loan to the partnership. If the partnership declares bankruptcy, the LP will be considered a limited partner for the capital contribution and a creditor for the amount of the loan.
Which of the following is NOT considered a don't know (DK) trade? There is a disagreement on the price of the trade There is a mismatch on the size of the trade There is no record of the trade at one of the firms The buyer is suspicious of insider trading
The buyer is suspicious of insider trading. Don't know (DK) trades occur when the contrabrokers disagree or have conflicting details of a trade. While insider trading is illegal, suspicion of insider trading would not cause a DK notice to be sent.
Which of the following statements is TRUE concerning a customer who would like to transfer an account held by a broker-dealer? The customer is required to use the Automated Customer Account Transfer Service (ACATS). The customer is required to use the Automated Clearing House (ACH). The customer is not required to use ACATS. An account may only be transferred if the registered representative servicing the customer's account changes broker-dealers.
The customer is not required to use ACATS. If a customer wants to transfer his account to another member firm, the system used by most broker-dealers is known as ACATS, which is a service offered by the National Securities Clearing Corporation (NSCC). A customer is not required to use this system and is permitted to provide the carrying firm with alternative instructions.
Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? User charges Rental and lease payments The federal funds rate Concessions and fees
The federal funds rate Current interest rates are factors that will affect all bond issuers and would be least useful when analyzing a specific issuer of revenue bonds.
An individual annuitizes his variable annuity contract and begins receiving payments using a straight life settlement option; however, she later decides that a joint and last survivor life annuity settlement option is more appropriate. Which of the following is TRUE concerning this situation? The individual is permitted to change the settlement option without restriction. The individual is not permitted to change the settlement option. The individual could change the settlement option with an additional fee. The individual is limited to changing to a settlement option with a fixed period payout.
The individual is not permitted to change the settlement option. Once an individual has annuitized her contract, no changes can be made to the settlement option.
The ABC Growth Fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for:
The one- and five-year periods by the same ranking entity The standards set forth by the SEC and FINRA regarding mutual fund communications (advertising) are that performance statistics should cover 1-, 5- and 10-year periods. If the fund has not been in existence for 10 years, then disclosure must be made for the relevant for 1- and/or 5-year periods. In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity.
An individual has been purchasing shares of a mutual fund and has chosen to reinvest all distributions rather than take the payments. If the individual chooses to sell the shares purchased through these reinvestments, the cost basis will be:
The purchase price of these shares Investors must report all distributions from a mutual fund as taxable income, whether reinvested or not. When an individual chooses to reinvest the distributions, the cost basis is the purchase price of the shares.
When doing a municipal bond swap, which of the following items is NOT a factor when trying to avoid the wash sale rule? The issuer Maturity date The rating The coupon
The rating The rating of the bonds would not be a factor.
An investment banking representative would require an authorized person of an institutional investor to sign which of the following documents to attest to, or determine, whether the institution has the status of an accredited investor? The private placement memorandum The subscription agreement The confidentiality agreement The engagement agreement
The subscription agreement The subscription agreement is a sales contract for the sale of securities in a private placement. It sets forth the terms and conditions of the securities. The client, or an authorized person of an institutional investor, will sign the agreement attesting to the status of an accredited investor.
Which of the following choices makes a financial commitment in the distribution of a new issue of securities? The selling group The underwriting syndicate A customer who provides an indication of interest The exchange on which the security will be listed
The underwriting syndicate The underwriting syndicate makes a commitment to the issuer to purchase the entire offering.
All of the following information is found in a municipal revenue bond resolution, EXCEPT: Restrictions on the sale of additional bonds Rate covenants Sinking-fund provisions The yields to maturity of the bonds
The yields to maturity of the bonds The indenture or resolution is basically the contract between the issuer and the bondholder. It will specify the rights of the bondholders and the provisions to protect the bondholders' interest. One of the provisions included is a rate covenant in which the issuer pledges to charge rates that are sufficient to cover expenses and debt service. An additional bonds test is included that sets requirements that must be met before additional bonds can be issued. The method of funding and the operation of the sinking fund (used to retire some bonds prior to maturity) are also included. Another important provision is flow of funds, which states how the income generated by the project will be used.
An option contract for RFQ is for 108 shares. This is most likely a result of which of the following circumstances? This not possible because an option contract always represents 100 shares There has been a stock split There has been a stock dividend There has been a cash dividend
There has been a stock dividend The number of shares can be adjusted for a stock dividend or an odd stock split. 108 shares most likely represents an 8% stock dividend.
Which TWO of the following statements are TRUE regarding Eurodollar bonds? They are denominated in U.S. dollars only They are denominated in foreign currencies only They are only traded outside of the U.S. They are traded in the U.S. and international markets
They are denominated in U.S. dollars only They are traded in the U.S. and international markets
Which of the following statements is TRUE regarding interval funds? They offer limited liquidity due to the fact that clients are only able to redeem their shares at specified times. They can offer an above market interest rate to clients who have liquidity needs. They're considered a relatively safe investment due to the type of securities that are purchased by the funds. They're closed-end funds that are traded on the NYSE.
They offer limited liquidity due to the fact that clients are only able to redeem their shares at specified times.
An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day's NAV for the investor. Which of the following statements concerning this potential trade is TRUE? This is a sales practice violation known as late trading This is an acceptable practice known as market timing The RR would need to have prior written approval by a principal of the firm to execute this order The investor may only purchase Class B shares in this case, since Class A shares are not available under this arrangement
This is a sales practice violation known as late trading
If an investor expects interest rates to fall significantly in the next two years, what would be the most appropriate investment?
Treasury bonds
The securities that are deposited in an escrow account for an advance refunding of a municipal bond are:
Treasury bonds
The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the:
Trustee
Under the provisions of Rule 10b-10, a confirmation sent to a customer must disclose all of the following items, EXCEPT: The time of the transaction or a statement that the time of the transaction will be furnished on request The yield at which the transaction was effected Unusual expenses incurred that will justify a higher markup Odd-lot differentials or fees paid
Unusual expenses incurred that will justify a higher markup The factors that are considered in determining the markup do not need to be disclosed.
As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power? Fixed annuities Variable annuities Corporate bonds Mortgage-backed securities
Variable annuities Variable annuities, theoretically, provide the greatest protection against loss of purchasing power. The payout is based on the securities (mostly equity securities) in the separate account, which historically have increased in inflationary periods. This provides for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and do not offer protection against the loss of purchasing power in inflationary periods.
Municipal serial bonds are priced on the basis of:
Yield to maturity
