Series 7
Which of the following are not included in a preliminary prospectus? Final public offering price Effective (release) date Intended purpose for the funds being raised Financial statements and history of the company
Final public offering price Effective (release) date
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.
All of the following statements regarding the risks of investing in an oil and gas limited partnership are true except
development programs have higher risk than exploratory programs.
What would be included in a penny stock risk disclosure statement?
investors' legal rights, the risks of investing in penny stock, the definition of penny stock.
If a customer purchases stock in an existing margin account and fails to make payment within the time period specified under Regulation T, the broker-dealer carrying the account can take all of the following actions except
liquidate the entire account and remit any balance to the customer.
All of the following statements regarding Treasury bills are correct except
most Treasury bill issues are callable
Under Municipal Securities Rulemaking Board (MSRB) rules regarding municipal securities, a control relationship exists when
officers or employees of a broker-dealer hold positions of authority over the municipal issuer. officials of the municipal issuer hold policymaking positions at the broker-dealer.
If a municipal firm purchases a block of municipal bonds in anticipation of a price increase, the firm is engaged in
position trading.
Jack Mercure, age 72, has been a client of yours for many years. You have noticed he's a bit slower than before, but nothing troublesome. This morning, you get a call from Jack, and he wants you to wire a relatively substantial sum from his account to someone with a foreign address. Fearing this might be a case of senior exploitation, you discuss this with your manager. If the feeling is mutual, FINRA rules would permit your firm to
put a temporary hold on releasing the funds for not longer than 15 business days.
If a business owner's goal is to establish an entity that features ease in raising capital and limits personal liability, which of these entities is the most appropriate?
A limited liability company (LLC)
In a single day, a customer purchases 15 ACM Sep 50 puts at 6 and 15 ACM Sep 50 calls at 1. The customer would profit from the positions if ACM traded
A long straddle is profitable on the call side if the price rises above the strike price plus the combined premiums paid ($57). On the put side, it is profitable if the price falls below the strike price minus the combined premiums paid ($43).
There are a number of different types of orders that a registered representative can enter for a client. Of the following, which one has the greatest assurance of being executed?
A market order
Which of the following would be considered improper by FINRA?
A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of the company's proprietary mutual fund
Which of the following refers to the primary market for municipal securities?
A notice of sale
Each of the following are generally used to service state general obligation bond issues except
real estate taxes.
Reasons why a corporation might engage in a stock buy-back program would include all of these except
reducing annual interest expense.
The Securities Exchange Act of 1934 applies to all of the following except
regulation of new issues.
An investor would assume all of the following risks when investing in a collateralized mortgage obligation (CMO) except
regulatory risk.
Your broker-dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is
required at least 10 business days before first use or publication.
Obtaining all of the following complies with the regulations regarding customer identification programs except
A post office box is never acceptable without a physical address.
Which of the following methods of real estate investing is a flow-through vehicle?
A real estate limited partnership (RELP)
A registered representative has been doing some research on his own. He would like to share the information with some of his clients and sends an email to 15 of them. He also has some prospects he's been working on and sends the email to 12 of them during the same week. Under the FINRA rule on communications with the public, this would be considered
retail communication.
All the following retail communications must be prefiled with FINRA except
retail communications concerning public DPPs.
All of the following are excluded from the FINRA filing requirement for communications with the public except
retail communications posted online that require a login to access.
Filing with FINRA within 10 business days of first use is required for all of the following except
retail communications that promote or recommend a specific real estate investment trust (REIT).
The FINRA rule on communications would consider communications that are posted on an online interactive electronic forum (i.e., a chat room) to be
retail communications.
A 3% bond with 20 years to maturity is being issued by a syndicate with a reoffering yield of 4%. What is the term used to describe this bond?
Original issue discount
Which of the following statements could legally appear in mutual fund advertising or sales literature?
Our managers are dedicated to giving you the very best service.
All of the following statements regarding planned amortization class (PAC) collateralized mortgage obligations are true except
PACs have higher yields than comparable TACs.
Which of the following is not a type of CMO tranche?
PSA.
Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is not allowable under the safe harbor provisions of Section 28(e)?
Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934. Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).
Penalties resulting from a Code of Procedure hearing may include all of the following except
Penalties under the Code of Procedure may include censure, expulsion, suspension, and/or fines but not a prison sentence.
The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which, $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Due to obsolescence, Acme sells the lathe for $6 million. The impact of this sale on the company's financials would be that
retained earnings would decrease.
Pooling assets such as auto loans and mortgages into investment vehicles for sale to the public is the process known as
securitization.
When assets are pooled into financial instruments such as collateralized mortgage obligations (CMOs) to better facilitate selling them to the general public, the process is known as
securitization.
When comparing exchange-traded funds (ETFs) to mutual funds, some features available in ETFs that are not found in the mutual funds would include the ability to
sell short. be bought and sold on margin.
Covered put writing is a strategy where an investor
sells a put on a stock he has sold short.
A corporation with an outstanding convertible debenture issue could force conversion by
publishing an announcement that the debenture holders have thirty days to tender their bonds at the call price.
The function of the Federal National Mortgage Association (FNMA) is to
purchase FHA-insured, VA-guaranteed, and conventional mortgages.
For the purpose of reporting sales to the IRS, the method available to investors by the IRS that offers the most flexibility in anticipation of the investor's year-end tax needs is
share identification.
One of your clients is neutral to bearish on a particular stock and would like to sell calls on it to generate some income. Wishing to minimize risk, you would suggest the client cover the call or take other steps to protect against unlimited loss. That could be done in all of the following ways except
simultaneously purchasing a put on that stock with a strike price lower than that of the short call.
Depletion allowances in oil and gas programs are based on the amount of oil
sold.
When a bond is issued by a national government, it is referred to as
sovereign debt.
An investment banker purchasing what is left unsold from a rights offering is engaging in
standby underwriting.
One term you would never see in conjunction with an underwriting of a municipal security is
standby.
All of the following are examples of short-term municipal obligations except
state and local government securities (SLGS).
State and local government securities (SLGS) are purchased by
state and local governments.
In an account opened by two individuals as joint tenants with right of survivorship (JTWROS), all of the following statements are true except
stock certificates may be delivered in the name of either party.
The term for the annual reduction of a municipal bond's cost basis purchased at a premium is
straight-line amortization.
An over-the-counter (OTC) quote that must be reconfirmed with the OTC trading room before a broker-dealer takes action is
subject.
Traders in stock index options are exposed to
systematic risk.
A securities firm that holds stock rather than sells the stock is
taking a position.
All of the following characteristics are advantages of a real estate investment trust (REIT) except
tax deferral.
Qualified distributions from Roth IRAs are
tax free.
All of the following regarding Section 529 education savings plans are true except
tax-deductible contributions are at the federal level. Contributions are made with after-tax dollars and are not deductible.
An investor purchases an original issue discount general obligation municipal bond (OID) on the offering and holds it to maturity. The IRS treats the accretion of the discount as
tax-free interest income.
A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be
taxed as ordinary income.
An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be
ten ABC 6s of 2045 with a conversion price of $41.67.
The type of brokerage account that does not pass assets to other participants at the death of a participant is
tenants in common.
ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should
tender the bonds.
If an investor buys a Jan 30 XYZ call for 4 and sells a Jan 35 call for 2, to become profitable, the spread between the prices of the two options must
widen.
All of the following statements concerning IRA contributions are true except
you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis.
If a journalist receives payments for appearing at a conference, the payments will be taxable as which of the following types of income?
Earned income
Income from all of the following securities is fully taxable at the federal, state, and local levels except
Interest on Treasury bonds is not taxed at the state or local level.
A change in which of the following should be indicated in a customer's file?
Name Investment objectives
Growth companies tend to have all of the following characteristics except
low price-to-earnings (P/E) ratios.
If a customer buys a Mount Vernon Port Authority municipal bond in the secondary market at 109 and holds the bond to maturity, what are the tax consequences?
No capital gain or loss
If an investor with no other positions buys 2 DWQ Jun 45 calls at 3, and he exercises the calls when the stock is trading at 47.25 and immediately sells the stock in the market, what is the investor's profit or loss?
$150 loss
An investor purchased 100 shares of ABC common stock valued at $6,000. What is the adjusted cost basis per share of this position after the company pays a 20% stock dividend?
$50.00
A carrying member—after receiving account transfer instructions from the receiving member—must validate the positions in the account within how many business days of receipt?
1 day.
Regulation FD covers
the selective disclosure of material nonpublic information by issuers.
If a customer places an order to sell 500 ABC at 46 stop limit, which of the following statements are true?
The order will be elected at 46 or lower. The order can be executed at 46 or higher.
Which of the following would not be a concern for an investor writing a naked option?
The premium the investor must pay for the contract
An individual owns Class A shares of the KAPCO Growth Fund with a total value at the current offering price of $20,000. KAPCO has a sales charge of 8% that reduces to 5% at $25,000. If the fund offers a right of accumulation, the sales charge on an additional investment of $10,000 will be
$500.
In a new margin account, if a customer buys 300 shares of XYZ for 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the margin deposit required will be for
$6,900. The requirement of $7,200 is reduced by the premium income received ($300). By depositing $6,900, the customer will have $7,200 in the account—the difference being the premium income credited to the account on settlement date.
If a customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58, what is the maximum risk?
$600. This is a credit spread. The maximum loss is the difference between the strike prices and the net credit.
The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of
1 mill = $0.001. 10 mills = 0.01 (10 × 0.001). $100 million × 50% assessment rate = $50 million. $50,000,000 × 0.01 = $500,000.
When a registered representative opens an options account for a new client, in which order must the following actions take place?
1. Obtain essential facts from the customer 2. Obtain approval from the branch manager 3. Enter the initial order 4. Obtain a signed options agreement
A married couple intending to work another 2-4 years wants to fund a variable annuity to add monthly income during their retirement years. Having used all other available retirement investment vehicles, they want to invest $150,000 in savings toward the retirement objective. They note that these funds need to be paid out for as long as they live. Which of the following would be the most suitable and cost effective?
A single joint with last survivor contract
When an insured person becomes disabled or unable to work, that person may not be required to continue paying premiums on the contract if the contract included
A waiver of premium option allows the premiums on an insurance contract to be waived for a person who has become disabled or otherwise unable to work.
If a customer buys a municipal bond at 110, maturing in eight years, but sells the bond six years later at 103½, the customer will have
a $10 per bond gain.
Written verification of the financial status of the customer is needed for all of the following except
Real estate investment trusts do not require proof of financial status for investment. Limited partnerships and other direct participation programs do.
What is true regarding the 5% markup policy?
A) the markup policy does not apply to securities sold at a specific price and with a prospectus. B) a riskless transaction is generally covered by the 5% markup policy. C) the type of security is a factor to consider. D) a transaction in common stock customarily has a higher percentage markup than a bond transaction of the same size.
You are reviewing a company's financial statements to assist a customer. What kind of information is most likely to be found in the footnotes to those financial statements?
Accounting methods used
An investor seeking income combined with a conservative level of risk would purchase
AA-rated mortgage bonds.
The investment adviser of the GEMCO Special Situations Fund would find which of the following companies least attractive for the fund's portfolio?
ABC Corporation, whose shareholders have just reelected the current board of directors
Municipal Securities Rulemaking Board rules prohibit dealers from entering into which of the following transactions with a mutual fund?
Accepting portfolio trades from the fund as compensation for sales of the fund's shares
A fund aims for consistent total returns. The management is empowered to shift assets among stocks, bonds, and short-term fixed-income securities in accordance with its projections of future market conditions. Because of its ability to diversify among many investment instruments, the fund has the potential to provide maximum returns while reducing volatility. This information describes which of the following mutual funds?
Asset allocation funds shift assets among stocks, bonds, and short-term fixed-income securities in accordance with projections of future market conditions.
Which of the following would be in compliance with the Chicago Board Options Exchange and Options Clearing Corporation rules concerning the nondiscriminatory assignment of an option exercise notice by a firm to one of its customers?
Assignment to the customer with the oldest position in the option
If a customer writes 1 ABC Nov 60 put at 3.50, and the put is exercised when ABC is 57.50, the customer's cost basis in ABC stock is
At exercise, the premium of the contract affects the cost basis of the stock acquired. Because the premium of 3.50 was received when the put was written, the cost basis of the stock will be $60 per share less the premium, or 56.50.
When must a new options customer—who has not yet traded options—receive the Options Clearing Corporation's (OCC's) current disclosure document?
At or before the time the account receives approval for options trading
Which of the following terms or phrases does not apply to real estate investment trusts (REITs)?
Redeemable
Regarding Regulation D (private placement) offerings, which of the following statements is true?
Registration with the SEC is not required.
A Japanese manufacturer sells recorders to a U.S. retailing firm. The manufacturer is to receive USD$1 million in 90 days. How can he best protect himself against a decline in the dollar?
Because he is receiving U.S. dollars, his risk is that the U.S. dollar will go down in value against the Japanese yen. If the dollar goes down against the yen, the yen will rise. Therefore, to protect his risk against a rising yen, he should buy yen calls. The yen calls will increase in value if the yen rises.
GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus five rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of one right?
Because the stock is selling ex (after ex-rights), the formula is ($70 − $55) / 5. ($70 − $55 = $15) ($15 / 5 = $3).
XYZ Corporation has a market price of $45 per share and earnings per share (EPS) of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings (P/E) ratio of XYZ will be
Before the split, the company had a P/E ratio of 15 ($45 per share / $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).
Which of the following provides a measurement of the volatility of a particular stock or portfolio, as compared to the volatility of the market as a whole?
Beta
Who attests to the legality of a bond issue and issues a legal opinion on a proposed new municipal bond issue?
Bond counsel
An accumulation unit in a variable annuity contract is
an accounting measure used to determine the contract owner's interest in the separate account.
A corporation is likely to call eligible debt when interest rates are
declining.
If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate?
Callable
Which of the following is least likely to be part of an equipment leasing partnership?
Casing and piping are materials used in oil and gas well-drilling programs.
If industrial development bonds are called because of condemnation, this would be covered under which of the following clauses in the bond indenture?
Catastrophe
An investor purchased $10,000 of the Class B shares of the ABC Growth Fund. Sixty days later, the investor received an inheritance of $40,000. The investor contacts you and asks about the possibility of backdating a letter of intent to add the original purchase to this new money and reach the breakpoint at $50.000. You would reply that
Class B shares do not have breakpoints because they do not have a front-end load.
An investor mentions the term level load fund shares to a registered representative. The investor is referring to
Class C shares.
A registered representative is explaining the characteristics of a Coverdell Education Savings Account (ESA) to a customer. Which of the following statements regarding this type of savings account is correct?
Contributions are not tax deductible. When used for qualified educational expenses, withdrawals are not taxable.
With a bearish outlook on the market, an investor would like to purchase something that will generate income now during current bearish conditions but would also be able to take advantage of capital appreciation should market sentiment turn bullish. Which of the following would be a suitable purchase recommendation that puts the investor in a position to do both?
Convertible bonds
Corporate stocks trade in all of the following locations except
Corporate securities issues do not trade in the commodities market.
SEC Regulation 14E requires that tender offers be open for at least
Regulation 14E requires that tender offers be open for at least 20 business days and remain open for at least 10 business days after any change to the offering price.
An offering of securities to no more than 35 nonaccredited investors would be associated with
Regulation D.
Which index does the VIX track?
The S&P 500
A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that
ETFs can be purchased throughout the trading day. real-time quotes are available for ETFs.
When you hear your firm's traders talking about institutions trading with a lack of transparency, they are probably referring to
Dark pools, sometimes referred to as dark pools of liquidity, is trading volume that occurs that is not openly available to the public. The bulk of this volume represents large trades engaged in by institutional traders and trading desks away from the exchange markets. Trading in the other choices is relatively transparent.
Which of the following options strategies could be used by an investor who is bearish on a stock?
Debit put spread Long combination straddle
Which of the following would not be examples of overlapping debt?
Debt to build a state office building within city limits Debt backed by two states cooperating in the construction of a bridge
Which of the following would not be a valid use of the partnership democracy?
Deciding which partnership assets should be liquidated to pay creditors
When an outstanding bond issue is the subject of a refunding, the holders of those bonds have their claim on any pledged assets terminated. This is known as
Defeasance occurs when an outstanding bond issue is paid off prior to maturity through a refunding.
Which of the following activities are a registered representative's responsibilities?
Determining the suitability of various investments for individual customers Describing the characteristics and benefits of various securities products
A municipal issuer's net total debt is made up of which of the following?
Direct debt Overlapping debt
A registered representative must obtain written verification of an investor's net worth for which of the following investments?
Direct participation program
Which of the following statements are true regarding BABs?
Direct-payment BABs provide the municipal issuer with payments from the U.S. Treasury. Tax credit or issuer BABs provide the municipal bondholder with a federal income tax credit.
A customer asks his registered representative to purchase $10,000 worth of shares in any pharmaceutical company that looks promising. Which type of account allows the registered representative to act in accordance with this instruction?
Discretionary
Which of the following risks would benefit most from portfolio diversification?
Diversification works best with nonsystematic (unsystematic) risks. Default risk, the possibility of losing money when a specific company cannot pay off its debts, is a common case where spreading the risk around (diversifying) reduces risk.
A customer is considering adding a real estate investment trust (REIT) to her portfolio. She lists all of the following as advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is not an advantage of investing in REITs?
Dividend treatment
When used on the exam, the term "nonexempt security" refers to a security that must register with the SEC. There are cases, however, when registration may be avoided. In most cases, that would be when the transaction involving that security is exempt. Each of the following is a transaction exemption found in the Securities Act of 1933 except
Regulation M.
Which of the following actions taken by a FINRA member firm would not pose a compliance problem?
Rehypothecation
Which type of risk is a mortgage-backed security most likely to experience?
Reinvestment rate risk
All of the following might be used to measure the marketability of a new municipal general obligation issue except
Revdex.
All of the following may be included in an advertisement for a collateralized mortgage obligation (CMO) issue except
The U.S. government does not issue or back CMOs. It is also misleading to state or imply that a CMO's anticipated yield or average life is guaranteed. CMOs must include the coupon rate and the final maturity date, a generic description of the CMO tranche, and disclosure that payment assumptions may or may not be met.
Which of the following actions could affect the holding period on a long position in IBS stock?
The purchase of a put affects a stock's holding period when the stock has been held short term. The holding period begins anew once the put position is closed.
If the strike price of a yield-based option is 62.50, this represents a yield of
To calculate the percentage yield of the underlying Treasury security, divide the strike price by 10 (62.50 / 10 = 6.25%).
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.
According to Municipal Securities Rulemaking Board (MSRB) rules, a municipal finance professional (MFP) is
an associated person of a broker-dealer engaged in municipal securities representative activities other than retail sales. subject to the political contribution rules as outlined in MSRB Rule G-37.
All of the following may receive breakpoint discounts except
an investment club.
As the price of the volatility market index (VIX) rises, investors should expect
call and put option premiums to rise.
Exchange-traded funds (ETFs)
can be bought and sold throughout the trading day. have low expense ratios.
If a customer gives specific instructions to his registered representative to purchase a security that is clearly unsuitable in light of the customer's investment objectives, under FINRA rules, the registered representative
can enter the order.
Although there are general suitability rules that always apply, FINRA's Rule 2330 on variable annuity suitability specifies that, to be considered suitable, there is a reasonable basis to believe that the customer has been informed—in general terms—of various features of
deferred variable annuities.
The writer of an IRX yield-based option, if exercised, must
deliver cash. Yield-based options settle in cash if the option is exercised. The writer must deliver the in-the-money amount in cash.
A 58-year-old investor owns a single premium deferred variable annuity with a current value of $500,000. The original investment was $150,000 and the contract has a death benefit provision. If this investor wished to exchange this policy for one offered by a competing company,
using a 1035 exchange would avoid any current taxation.
A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as
value.
All of the following statements concerning a variable annuity are correct except
variable annuities will protect an investor against capital loss.
Each of the following securities trade and interest except
zero coupon bonds.
Long an ABC Apr 60 call and short an ABC Apr 70 call is
a net debit spread.
If a municipal bond rated BBB is prerefunded, all of the following statements are true except
the marketability of the issue will decrease.
All of the following are allowable municipal dealer quotes except
an unidentified nominal quote.
The longest initial maturity for U.S. T-bills is
52 weeks.
A technical analyst notices that the short interest in a particular stock has been steadily rising. The analyst would take this as
a bullish signal.
Which of the following best describes the investment characteristics of a high-quality long-term municipal bond?
High inflation risk, low default risk
Which of the following explains that including noncorrelated assets in a portfolio can reduce certain risks?
Modern portfolio theory (MPT)
Which of the following circumstances would not cause a registered representative to be identified as a fiduciary?
A registered representative names one of his customers the executor of his estate
An inverted head and shoulders formation would mean which of the following to a chartist?
A reversal of a downtrend
An investor wishing to determine the liquidity of a corporation would find which of the following most helpful?
The current ratio
The computation for accrued interest on corporate and municipal debt obligations is based on
a 30-day month and a 360-day year.
Reinvestment risk is the chance that, after purchasing a bond, interest rates
fall.
Bondholders may not take action against the corporation if it fails to make interest payments for
income bonds.
Regular way settlement for U.S. government bonds is
next business day.
One of the differences between a traditional IRA and a Roth IRA is
deductible contributions are possible with a traditional IRA, but not with a Roth IRA.
If the Swiss franc closes at 56, 1 SF 59 put is
three points in the money.
All of the following concerning collateralized mortgage obligations (CMOs) are true except
z-tranche CMOs carry the lowest prepayment risk.
All of the following statements regarding municipal revenue bonds are true except
the maturity of the revenue bond will usually exceed the useful life of the facility being built.
A taxpayer's most advantageous tax benefit is
a tax credit. A tax credit reduces a person's tax liability dollar for dollar. Deductions, depreciation, and depletion reduce taxable income.
Responding to the student loan crisis, the SECURE Act now permits qualified withdrawals from Section 529 plans to include payments of
student loan interest up to a lifetime maximum of $10,000 per child.
A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is
$11,750. Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $47,000.
One of your customers owns five JLO 5s of 2042. The debentures have a conversion price of $15. When the market price of the convertible is 80, the parity price of the stock is
$12.00.
The following dividends were received by a husband, his spouse, and both of them jointly: husband, $160; spouse, $160; joint, $100. What amount of dividends that would be subject to taxation if they filed a joint tax return?
$160 + $160 + $100 = $420. This would all be taxable as ordinary income.
A customer purchases 2 QRS Jul 30 calls at 2 and 2 QRS Jul 30 puts at 2.50. She will break even when the price of the underlying stock is
$25.50. $34.50.
Which of the following provisions govern the offering of control stock to the public without filing a Form 144?
5,000 shares or fewer are sold. The dollar amount is $50,000 or less.
A couple with children ages 13 and 8 have $200,000 saved to put toward their children's college education. Which of the following would be most suitable for these investment dollars and objective?
80% zero coupon bonds, 20% T-notes
In order for an investment company to qualify as a regulated investment company (RIC), thereby avoiding triple taxation, it must act as a conduit (pipeline) and distribute a minimum of its net investment income (NII) to shareholders. At least what portion of the NII must be distributed?
90%
A corporation's corporate charter allows for cumulative voting. A shareholder with 300 shares would be able to vote in an election for three open seats in any of the following ways except
900 votes for each open seat.
A municipal bond originally issued at 90 with a 10-year maturity will have a compound accreted value (CAV) after five years equal to
95. CAV is the cost basis of the bond, in this case, after five years accretion. There are 10 points to accrete (the difference between the issue price of 90 and par) over 10 years. One point each year will be added, so after five years, the adjusted cost basis will be 90 + 5, or 95.
Which term describes the following position? Write 1 DOH Jan 30 call Write 1 DOH Jan 40 put
A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security.
For which of the following business structures is the income taxed to the business?
A C corporation. Partnerships, limited or general, and S corporations do not pay income tax. Any income earned by the business flows through to the owners. On the other hand, C corporations are taxable entities and must pay tax on their income before they can distribute dividends to shareholders.
A major risk associated with investing in DPPs is the lack of liquidity. What steps could the program sponsor take that could have the effect of increasing the liquidity of an existing program?
A DPP rollup
Which of the following orders may be used to acquire a security at a specific price or better?
A buy stop limit A buy limit
An investor purchases one ABC Jul 50 put and sells one ABC Oct 50 put. This strategy is
A calendar (or time or horizontal) spread is one where the options are of the same type (long and short puts or long and short calls) on the same security, but with different expiration dates.
Which of the following statements is true regarding the mediation rules of the Code of Arbitration Procedure?
Both parties to a dispute must agree to mediation.
When the issuer of an insured municipal bond defaults, what does the insurance company do?
Both principal and interest are returned over the remaining term of the bond.
Under Section 28(e) of the Securities Exchange Act of 1934, which of the following is allowable soft-dollar compensation from a broker-dealer to an investment adviser under the safe harbor provisions?
Custodial services provided by the broker-dealer
What person must sign a stock or bond power to effect good delivery of securities sold from an account set up under the Uniform Transfer to Minors Act?
Custodian
Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering?
Customer identification programs (CIPs)
Which of the following types of oil and gas limited partnership programs is the most risky?
Exploratory
Which of the following characteristics are applicable to real estate investment trusts (REITs)?
Dividends from REITs are taxed as ordinary income.
A customer writes 1 ABC Jan 65 put at 6 and 1 ABC Jan 55 call at 7 when ABC is trading at 60. This position will be profitable if, at expiration, ABC is I. above $68. II. at $60. III. below $52. IV. between $52 and $68.
II and IV
If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are true?
She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account.
If a customer opens a spread on Canadian dollars (10,000 units) by purchasing 1 Dec 74 call for 2.30 and selling 1 Dec 77 call for 1.50, what is the total cost of this debit spread?
The customer pays a premium of 2.30 ($230) and receives a premium of 1.50 ($150) for a net debit of 0.80, or $80.
Which of the following investments is likely to have the least reinvestment risk to interest?
Zero-coupon bonds
An option writer liquidates a position by purchasing an option. This order must be marked as
a closing purchase.
An inherent risk associated with auction rate securities (ARS) is the potential to have
a failed auction.
A gain on the sale of a long equity put option is
always a short-term capital gain.
A client of your member firm dies. In correct order, you should
cancel all open orders. freeze the account. obtain the death certificate and other legal documents. accept orders from the executor.
Features of an employee stock purchase program (ESPP) include all of the following except
contributions are made with pre-tax dollars.
Bond trust indentures are required for
corporate debt securities.
The primary tax benefit of an income oil and gas program is
depletion.
One of the advantages of writing a call option covered by shares of the underlying stock is
immediate income is generated.
As the poet Robert Burns wrote, "The best-laid plans of mice and men often go awry." The same could be said for investment plans. The term used to describe those things that can have an impact on the ability of our plans to reach fulfillment is
investment constraints.
A variable-rate municipal bond investment's main advantage is that
its price should remain relatively stable.
A breakpoint sale is defined as the sale of mutual fund shares in an amount
just below the dollar amount at which the sales charge is reduced.
T-bills are quoted
on an annualized discount yield basis.
When conducting a discussion with a client about the merits of investing in a direct participation program, all of the following could be tax advantages except
recapture of depreciation. tangible drilling expenses.
One of the benefits of adding a sinking fund provision to a municipal bond issue is that the bond will generally
receive a higher rating.
An employee of a FINRA member firm wishes to open an account at another member firm. The employee opening the account must
receive prior written consent from his employer.
The underwriting agreement is signed by
the issuer and the managing underwriter.
American depositary receipt (ADR) owners have all the following rights except
the right to sell the ADR in the foreign market.
When a stock's trendline is moving primarily in a horizontal direction, a technical analyst would consider
the stock's price to be consolidating.
A customer buys a municipal bond in the secondary market at 96 that has four years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are
two points of ordinary income and one point of capital gain.
All of the following statements regarding a Coverdell Education Savings Account (ESA) are true except
unused balances may be used for any purpose the beneficiary chooses.
In a competitive offering of municipal bonds, the issue is usually awarded to the syndicate that offers to sell the bonds
with the lowest net interest cost to the issuer.
If a customer wishes to purchase a nonexempt security in a cash account, Regulation T requires a broker-dealer to receive payment in full
within 4 business days.
If a customer does not anticipate that a stock's price will change, and she wants to take an option position, she would most likely
write a straddle.
A principal of a member firm with the responsibility of supervising registered representatives would perform all of the following duties except
write all sales material and advertising copy intended to be used as a means of communicating with the public.
The visible supply has been increasing steadily over the past 30 days. This is an indication that
yields are likely to rise.
Your FINRA member firm takes 100 GO bonds from a municipal bond dealer out-firm for one hour. This means that
your firm controls the bonds for one hour.
One of your clients who is interested in purchasing some investment company shares brings to your attention a fund with a net asset value per share (NAV) of $22.13 and an asking price of $21.02. The client asks for an explanation, and you would respond,
"This is a closed-end investment company whose selling price is based on supply and demand, not NAV."
The Class B shares of the KAPCO Fund carry a conditional deferred sales charge beginning at 5% and reducing each year after the second by 1% per year until eliminated. An investor making an initial purchase of $10,000 of these shares will pay a sales charge of
$0.00. Unlike Class A shares, there is no front-end load when purchasing Class B shares. All of the money is invested at the net asset value without any sales charge. Should the investor wish to liquidate shares, there is a back-end load until the end of the seventh year, but that has nothing to do with the question.
Equity options that are in the money by what amount will be automatically exercised at expiration, barring any other instructions from the customer?
$0.01 At expiration, unless the customer instructs not to, equity options that are in the money by $0.01 or more will be automatically exercised. This rule is applicable to both retail and institutional customers.
The ABC Corporation has a long-standing policy of maintaining a dividend payout ratio of 45%. ABC's net income for the year is $12 million, and there are 8 million shares of common stock outstanding. After a 3:2 stock split, the annual dividend per share is
$0.45.
If an investor has an established margin account with a current market value of $6,000 and a debit balance of $2,500, with Regulation T at 50%, how much buying power does the investor have?
$1,000
A customer of a member firm has just invested $100,000 into an equipment leasing DPP. Under FINRA rules, the maximum compensation allowable to the firm is
$10,000. FINRA Rule 2310 limits compensation on the sale of a DPP to 10% of the offering price.
An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend?
$100
Because municipal bonds do not trade on any exchange, there is frequently a concern about their marketability. According to most industry experts, which of the following bonds would be the most marketable?
$100,000 of State L general obligation bonds rated AA
A customer has a $10,000 debit balance. What is the maximum value of her securities that the broker-dealer can hypothecate?
$14,000. The broker-dealer can hypothecate 140% of the customer's outstanding balance.
A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is
$2,000.
The KAPCO Growth mutual fund's annual report shows receipt of $10,000,000 of interest income from corporate bonds, $15,000,000 in cash dividends, and $5,000,000 of operating expenses. According to the conduit theory, how much must the fund distribute to investors if it wishes to avoid paying any taxes?
$20,000,000 According to Subchapter M of the Internal Revenue Code, the conduit theory requires that an investment company pay out a minimum of 90% of its net investment income (NII) to investors. In that case, the fund pays taxes on the remaining 10%. However, distributing 100% of the NII leaves no taxable income remaining. A fund's net investment income is the gross investment income minus the expenses. The NII for this fund is the interest ($10 million) plus the dividends ($15 million) minus the expenses ($5 million). That is $10 million + $15 million = $25 million minus $5 million = $20 million.
Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker-dealer charges the client interest on the monies borrowed in the amount of $133. At the end of the month, the value of the stock drops to $36,000. The month-end statement for this client will show a debit balance of
$20,133. A decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.
A municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000, and the bond has 10 years to maturity. If the bond is sold for 97 after five years, what is the taxable gain?
$200
A real estate limited partnership is created for $800,000 with 1 general partner and 10 limited partners. Each of the limited partners has an equal 10% share. The proceeds are used to purchase an office building for $2 million. The additional financing is provided by a nonrecourse bank loan. Economic conditions cause the occupancy rate to fall dramatically, and the partnership is dissolved as insolvent. Each limited partner may claim a loss of
$200,000.
A customer buys a municipal bond at 106 with eight years to maturity. What is the amount of unamortized premium at the end of four years?
$30. The original premium was $60 for eight years, which means that after four years, the remaining premium is half that amount.
A customer has $15,000 of equity in a margin account. That represents 30% of the market value. Therefore, the debit balance is
$35,000. Bring out your middle school algebra book. $15,000 is 30% of what number? Divide $15,000 by 0.30 and the market value is $50,000. With a market value of $50,000 and equity of $15,000, the debit balance is the other $35,000. Perhaps this method is easier for you. If $15,000 is 30% of the market, then the debit must be the other 70%. 70% is 2⅓ times 30%, so $15,000 times 2⅓ = $35,000.
A customer goes long an MMM Jan 40 put at 5 and writes an MMM Jan 50 put at 13. The customer will break even or profit when the market price is at all of the following except
$35. This is a bull spread; the investor wants the stock to rise. Breakeven for put spreads is computed by subtracting the net premium (8) from the higher strike price (50). If it stays above the breakeven price of $42, they will profit.
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?
$400 loss on the call, $250 loss on the put
One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed?
$42.27 $42.75 As a sell stop order with a limit of $42.15, no order may be executed below the limit price of $42.15. This order will be triggered at the price of $42.40. The only remaining prices that will meet the limit requirement after it is triggered are $42.27 and $42.75. Remember, it takes two trades for any stop order: one to trigger the order, the other for execution.
An investor opens the following position: Buy 1 COD Jan 40 put at 6.50 Write 1 COD Jan 30 put at 2.10 His maximum loss is
$440. (6.50 - 2.10)
A customer buys a real estate limited partnership interest by contributing $20,000 and signing a nonrecourse note for $50,000. The customer's beginning basis is
$70,000. Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership.
A new client opens a margin account and deposits $72,000 of fully paid-for GHI common stock. GHI trades on the New York Stock Exchange. At this point in time, the account has buying power of
$72,000.
On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes?
$75
In early September, a customer buys 100 shares of MCS stock for $83 per share and simultaneously writes 1 MCS Mar 90 call for $4 per share. The customer will break even when MCS stock is at
$79. Breakeven is the cost of stock purchased minus premiums.
A customer buys 200 XYZ at 39 and writes 2 XYZ Feb 40 calls at 3. When the stock rises to 44, the customer is exercised for a gain of
$800. (40 − 36 = 4 points × 200 shares = $800).
An investor has a margin account with the following positions: Long 100 shares ABC, LMV is $40 per share and DR is $1,800 Long 200 shares DEF, LMV is $30 per share and DR is $3,100 Short 100 shares GHI, SMV is $50 per share and CR is $9,000 The combined equity in the account is
$9,100. The basic equation for the calculation of combined equity is: LMV + CR - DR - SMV = EQ.
If a client bought 100 shares of GM at $88.50, and on the same day, he went long a put at 90 for 4.25 on GM due to expire within the month, what is the breakeven point?
$92.75
The Options Clearing Corporation (OCC) automatically exercises an open equity option contract if, at expiration, the contract is in the money by
0.01 or more for a member firm. 0.01 or more for a public customer.
Seventy-five basis points are equal to which of the following?
0.75% $7.50
An investor is long 10 XYZ 60 calls. After XYZ goes "ex" a 50% stock dividend, the adjusted position will be
10 XYZ Oct 40 calls, contract size 150 shares.
FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the amount of broker-dealer sales compensation considered fair and reasonable. That limit is
10% of the gross proceeds.
Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest, as long as their interest in the account does not exceed
10%.
An investor owns 400 shares of ABC common stock. ABC's board of directors has declared a 5:4 stock split. As a result, the investor will receive how many additional shares?
100 shares
ABC Corporation offers statutory voting. At the upcoming annual meeting, it is announced that six people are running for the four available open seats on the board. An investor with 100 shares would be able to cast
100 votes for each of four individuals.
Payments received by the owner of a 403(b) plan are
100% taxable.
A customer buys XYZ stock at $60 per share. The stock is currently trading at a 10:1 price-to-earnings (P/E) ratio. The firm declares a 3:1 stock split. What will the P/E ratio be after the split if earnings remain unchanged?
10:1
A mutual fund that charges 12b-1 fees may use the money to cover all of the following except
12b-1 fees may not be used to pay for the portfolio manager's fees, only for sales promotions and fees and other activities relating to the distribution of the fund's shares.
A broker-dealer can hypothecate (pledge) up to
140% of the debit balance in a margin account.
If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold for
15 business days.
On Monday, June 1, an investor pays 92 to purchase a 5% J&J municipal bond maturing on July 1, 2030. Purchasers of bonds pay accrued interest to the seller, in addition to the market price of the bond. How many days of accrued interest will this seller receive?
152
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the previous two years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?
24
Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?
2:1. Generally, a sound debt service (interest and principal) coverage ratio for municipal revenue bonds is 2:1. In other words, $2 of revenue is collected for every $1 of debt service.
The minimum maintenance requirement on short stock selling above $5 is
30% of the market value or $5 per share, whichever is greater.
U.S. Treasury bills are issued for all of the following maturities except
39 weeks. Treasury bills are issued for terms of 4, 8, 13, 26, and 52 weeks.
Member firms must keep records on customer complaints for
4 years.
An investor with no other positions sells 4 DWQ Jun 45 calls at 4. The calls are exercised when the stock is trading at 47.25. What is the investor's profit or loss?
47.25 paid and 49 received equals 1.75 point profit ($175) per contract. $175 × 4 contracts = $700 total profit.
A bond has a 7% coupon and an offering price of 108. The bond matures in ten years. An investor purchasing this bond at the offering price would have a yield to maturity closest to
5.96%. You need to remember that with a bond selling at a premium, the YTM will always be lower than the CY.
A customer purchases a 6% municipal bond in the secondary market on a 7% basis. The effective after-tax yield is
6 to 7%.
A customer, age 62, wants to retire at age 64 and has accumulated investments in an IRA currently valued at $500,000. The IRA portfolio consisting of all mutual funds is allocated as follows: 70% growth funds, 10% corporate bond funds, and 20% sector funds. Still wanting to use mutual funds, which might be the most suitable reallocation of the portfolio as this customer nears retirement?
60% U.S. government bond funds, 30% broad market index funds, 10% growth funds
The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately
7.1%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109% or approximately 7.1%.
Under one of the provisions allowing a company to qualify for an intrastate exemption under Rule 147, what percentage of an issuer's gross business revenues must be derived from sales within the company's home state?
80%
A performance-based management fee is normally associated with which of the following pooled investments?
A hedge fund
Which of the following would not be found in the underwriting of a new corporate bond issue?
A legal opinion
In an effort to raise additional capital, which type of registered investment company may issue debt securities?
A closed-end investment company
From the viewpoint of a fundamental analyst, which of the following has little, if any, significance?
A company's stock reaching new highs or lows
A convertible corporate bond with a conversion price of $20 is trading at 115. The parity price of the common stock is
A conversion price of $20 means the conversion ratio is 50 (i.e., each bond can be converted into 50 shares of common stock). $1,150 / 50 = $23 parity price.
An investor owns $100,000 of convertible bonds with a conversion price of $50. By depositing these bonds into her account, how many covered calls could she write?
A covered call means that the seller of the options has 100 shares of stock to cover each call. These bonds are convertible into 20 shares for each $1,000, making a total of 2,000 shares. At 100 shares per contract, that's enough stock to cover 20 calls.
All of the following are characteristics of both oil and gas, as well as real estate limited partnerships, except
A depletion allowance makes up for the using up of a natural resource. Real estate limited partnerships do not have depletion allowances. Both real estate and oil and gas partnerships offer limited liability, depreciation allowances, and deferred receipt of income and capital gains.
If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend?
A growth fund
An employee of a firm registers to open an account at another member firm. Under FINRA rules, all of the following statements are true except
FINRA must receive duplicate statements and confirmations for each transaction.
Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination?
Actual performance compared to the AIR affects the death benefit of a variable life insurance policy Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity
FINRA Rule 2210 deals with communications with the public. The rule classifies these communications into three different categories. Which of the following is not one of those categories?
Advertising is not one of the three categories.
An investor has a portfolio containing 60% equities, 5% debt instruments, and 35% options and futures. Which of the following would best describe this investor's investment style?
Aggressive
In which of the following types of offerings does a brokerage firm have no financial obligation for unsold securities?
All or none Best efforts
A customer purchases five 6.25% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date?
Although minimum purchase denominations can be less, always use par value ($1,000) for these calculations. A 6.25% bond pays $62.50 annually (6.25% × $1,000 = $62.50). Therefore, a customer purchasing five bonds receives $312.50 each year. Because Treasury notes pay semiannually, each interest payment equals $156.25.
Certificates issued by U.S. domestic banks and trust companies against the deposit of shares of foreign securities are known as
American depositary receipts.
A registered representative (RR) has just explained to a customer that to purchase a particular security, the customer would pay the asking price plus a commission, not a sales charge. Which of the following is the RR speaking of?
Any closed-end fund
Your new customer lists tax-free income as an investment objective but notes that he will need access to $50,000 within the next four to six months for a down payment on a vacation home he is purchasing. To meet the objective of tax-free income, a registered representative considers municipal securities for the $50,000. Which of the following municipal securities recommendations would be the least suitable?
An ARS is a long-term instrument tied to short-term interest rates, and therefore, would not be suitable for someone with a short-term time horizon.
Which of the following accounts allow ownership of real estate?
An UTMA account
Which of the following customer accounts requires the sending of monthly customer statements?
An account containing penny stocks
You have a 70-year-old client who is in excellent health. Both parents lived into their late 90s and the client is concerned about outliving her money. What product guarantees that she will receive monthly payments for life, no matter how long that will be?
An annuity
Which of the following would be the most likely unsuitable recommendation for a client whose objective is steady income?
An income bond
Which of the following factors will not increase the special memorandum account (SMA) in a customer's short margin account?
An increase in current market value
Which of the following purchasers of Class A shares are ineligible for sales charge reductions by reaching a breakpoint?
An individual agent purchasing the shares on behalf of an investment club
Which of the following would not be considered institutional communications with the public?
An internal memo promoting a new product that will be offered to your firm's institutional customers only
A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect?
Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase.
Which of the following is not generally associated with an existing real estate direct participation program?
Appreciation potential
What is the latest date that an IRA participant may make an IRA deposit for the current year?
April 15 of the following year
Municipal bonds would be considered the most suitable for which of the following customer scenarios?
An investor in a high-income tax bracket wanting income for their investment account
Wanting to be clear about an upcoming mutual fund dividend distribution, a shareholder does some research on his own. He comes away with what he thinks are all correct understandings, but one of them is not. Which understanding is not correct?
An investor is not liable for taxes if he automatically reinvests the distributions.
Which of the following statements regarding straddles are true?
An investor who expects no change in a stock's price and wishes to generate income sells a straddle. An investor who expects substantial fluctuations in a stock's price and is unsure as to direction buys a straddle.
A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation?
An oil and gas income program
Which of the following would be of least concern to a registered representative recommending a municipal security to a customer?
Availability of the security
Which of the following affects the holding period of XYZ stock, a position that has been held for six months?
Buying an in-the-money put Buy an out-of-the-money put
An investor has a diversified portfolio of common stock with a market value of $1.7 million and a beta of 1.20. If the OEX (S&P 100) is currently quoted at 680, to protect the portfolio against a decline in value, the investor's best strategy is to buy
Buying puts is the most effective strategy to hedge the risk of decline in a stock portfolio's market value. To determine the number of option contracts necessary to hedge, divide the portfolio value ($1.7 million) by the market value of the index (68,000). Multiply the result (25) by the beta of 1.20. The result is 30 contracts.
ALFA Enterprises pays a quarterly dividend of $0.15 and has earnings per share of $2.40. What is the dividend payout ratio?
Earnings per share are typically calculated for a year, so the annual dividend of $0.60 ($0.15 × 4) is divided by $2.40 to calculate what percentage of earnings is paid as a dividend—or rather, the dividend payout ratio (0.60 / 2.40 = 25%).
Your client's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. If the client is interested in further diversification, which mutual fund would best meet that goal?
Bond fund
A customer with an income objective who resides in a state with a high personal income tax might find it best to purchase
Bond issued by U. S. Territories, such as the Virgin Islands, are triple tax-exempt. That is, investors do not have to pay federal, state, or local income taxes on the interest.
In which of the following strategies would the investor want the spread to widen?
Buy 1 RST May 30 put, write 1 RST May 25 put Write 1 RST Apr 45 put, buy 1 RST Apr 55 put An investor wants a debit spread to widen
If your client was recently approved to trade options and writes 1 XYZ Oct 60 put but fails to return the signed option agreement within 15 days of account approval, which of the following orders could you accept?
Buy 1 XYZ Oct 60 put
An investor purchases 200 shares of ABC common stock, but is concerned about market risk. While the investor cannot use diversification to reduce market risk by investing in the same asset class, they can hedge against the risk. Which of the following options positions would be used as such a hedge?
Buy 2 ABC puts
Which of the following transactions in the same security will affect the holding period of a security held for 12 months or less?
Buy a put Sell short
A customer sold 100 shares of QRS short when the stock was trading at 19. If QRS is now trading at $14, and she wants to protect her gain, which of the following orders should she place?
Buy stop at 14.25
While interviewing a person to fill out the new account form, a registered representative asks the potential new client a number of questions. Information regarding which of the following would not be required on the form?
Educational background
Which of the following corporate bonds is backed by other securities?
Collateral trust bond
The term tranche is associated with which of the following investments?
Collateralized mortgage obligations are a type of mortgage-backed security. A CMO issue is divided into several tranches, or slices, which set priorities for payments of principal and interest.
In a competitive bid, which of the following would the issuer need to determine net interest cost?
Coupon rates Dollar price
Which of the following statements regarding savings incentive match plans for employees (SIMPLEs) is not true?
Employers cannot make matching contributions for employees.
Which of the following debt instruments would likely be suitable for sophisticated investors only?
Equity-linked notes
All of the following statements regarding the Federal National Mortgage Association (FNMA) are true except
FNMA is a publicly held corporation. The interest income on all mortgage-backed securities is fully taxable. Though a government agency, FNMA pass-through certificates are not guaranteed by the U.S. government. The only U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association.
Which of the following are not included in a preliminary prospectus?
Final public offering price Effective (release) date
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
In a new margin account, a customer sells short $60,000 worth of ABC stock and deposits $30,000 to meet the Regulation T requirement. If the value of ABC falls to $55,000, the special memorandum account (SMA) balance in the account would be
For every $1 decrease in market value in a short account, $1.50 of SMA is created. Therefore, if the market value falls by $5,000, the SMA balance would be $7,500.
Which of the following is a required disclosure on the Form U4?
Form U4 requires an applicant to provide a 5-year residency history and a 10-year employment history. With regard to the employment history, the member firm must verify the previous 3 years.
Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will not affect NAV?
Fund shares being redeemed by the fund upon the request of shareholders
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has a net asset value (NAV) of $12 and a public offering price (POP) of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that
GEM may be an open- or closed-end fund, and ABC is a closed-end fund.
Which of the following agency securities has the strongest backing of timely payment of principal and interest?
GNMAs
An investor looking for income with the highest degree of safety would probably choose to purchase
GNMAs.
Gentry is the chief operating officer (COO) of RMBM, a NYSE-listed corporation. Gentry has an account at your firm, and five months ago, Gentry purchased 1,000 shares of RMBM common stock at $50 per share. The RMBM shares are now $125 per share, and Gentry exits the position at that price. Which of the following statements presents the view of the SEC?
Gentry has violated the short-swing profits rule.
Which of the following is least likely to impact an underwriter's considerations when establishing the offering price for a new issue?
Geographic location of the company headquarters
Securities issued by private lending institutions approved by which of the following are directly backed by the federal government?
Government National Mortgage Association (GNMA)
All of the following are investment constraints except
Growth of capital is an investment objective. The other choices represent obstacles (constraints) that might keep the investor from fulfilling that objective.
Which risk is generally lower when holding a municipal bond ETF instead of individual municipal bonds?
Liquidity risk
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?
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.
Which of the following funds is most likely to contain within its portfolio those securities of issuers who have not specified the use of the capital they are raising?
Hedge fund containing blank-check and blind pool offerings in its portfolio
Which of the following is not included in the definition of an investment company under the Investment Company Act of 1940?
Hedge funds do not meet the definition of investment company as described in the act. The three types of investment companies are the face amount certificate company, the unit investment trust, and the management investment company (closed-end and open-end).
A high-net-worth investor with substantial annual income likes real estate as a potential investment. The investor notes that any investment potentially offering tax credits would be most interesting to consider first. Which of the following would be suitable investments to discuss?
Historic rehabilitation and government-assisted housing direct participation programs (DPPs)
Which of the following are acceptable forms of collateral in a margin account?
Listed bonds Listed stocks
The price of DFEC common stock is $32 per share. Your customer owns one DFEC Sep 35 put purchased for a premium of 4. The option
If an option has intrinsic value, it is in-the-money. Puts are in-the-money when the market price of the underlying asset is below the exercise price. The difference between the 35 strike and the 32 current market value represents 3 points of intrinsic value. Intrinsic value (the in-the-money amount) ignores the premium. However, the fact that the premium exceeds the intrinsic value by one point represents one point of time value.
If a customer believes the market price of a stock will sharply rise or fall in the near future, which of the following is the best strategy?
If the stock goes either up or down sharply, the investor will profit from owning a straddle.
Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio?
If this strategy is consistent with the objectives of the plan
Which of the following are spreads? Long 1 FLB May 40 call, short 1 FLB May 50 call Long 1 FLB May 40 call, long 1 FLB May 50 call Long 1 FLB Aug 40 call, short 1 FLB May 40 call Long 1 FLB Aug 40 call, short 1 FLB Aug 50 put
Long 1 FLB May 40 call, short 1 FLB May 50 call Long 1 FLB Aug 40 call, short 1 FLB May 40 call
Your client feels that GGZ, currently trading around 39, would be a good buy at 38. Therefore, she places an order to buy 200 GGZ at 38 GTC. On the ex-date, when the stock splits 2:1, the order is still on the order book. How is the order adjusted on the ex-date?
In a stock split, the number of shares is increased and the price is reduced proportionately on the ex-date (200 shares × 2 = 400 shares; the new price is 38 × 0.5, or 19).
A member of a $5 million Eastern account that has a $500,000 participation fails to sell $200,000 of bonds. At the close of the offering, if $1 million worth of bonds remains unsold, the member must take down
In an undivided (Eastern) syndicate, each member is responsible for its portion of the offering regardless of how many bonds it has already placed. If the member was liable for 10% of the issue's original dollar value, it is committed to take down 10% of any bonds remaining unsold (10% of $1 million equals $100,000).
A mutual fund invested in bonds with medium-length maturities. As the bonds matured, the fund reinvested the proceeds and purchased long-term bonds with maturities of up to 20 years. What might have happened to the fund if the reinvestment had occurred during a period when interest rates were rising?
Increase in yield Increase in income
Designating a beneficiary with a transfer on death (TOD) provision may be done in which of the following accounts?
Individual account and joint tenants with right of survivorship (JTWROS)
You have a high-income client who wishes to maximize his after-tax interest income. Which of the following investments might not meet your client's objective?
Industrial development bonds are private-purpose bonds, and the interest income could subject the holder to the alternative minimum tax. Thus, the interest income may not be completely tax free.
Which of the following statements is true regarding institutional communications?
Institutional communications do not require prior principal review if associated persons receive training in the firm's procedures governing institutional communications.
Which of the following statements regarding Sallie Mae debentures are true?
Interest is tax exempt at the state and local levels.
An investor with a $120,000 investment portfolio, split 60%/40% between a blue-chip stock fund and a utility fund, wants to invest an additional $20,000 in equities only. Increasing diversification within the equities positions and further spreading the overall risk associated with the portfolio is the objective for the new investment dollars. Which of the following investments will further diversify using equities and align with spreading the risk?
International stock fund
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes?
Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.
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?
Intrinsic value 3, time value 1.50
Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers?
Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification.
Which of the following is not under governance of the Municipal Securities Rulemaking Board (MSRB)?
Issuers of municipal fund securities Issuers of municipal bonds
Which of the following may only be accomplished after applying the additional bonds test for a revenue bond?
Issuing new bonds with an equal lien on the project's revenues
If trading is halted in a listed stock, what happens to the trading in the stock's listed options?
It is halted.
A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is true?
It is permitted if provided for in the underlying documentation.
An investor studying the annual report of a registered investment company reads that the net asset value per share has increased from $16.10 to $17.45. He notes that the market price has declined over the period. The investment company must be
It is the closed-end investment company (CEF) where the market price is determined by supply and demand rather than the NAV. As a result, the trading price can be the same, above, or below the NAV.
A bond you are recommending to a customer has call protection. What does that mean?
It is the number of years into the issue before the issuer may exercise the call privilege.
If XYZ Corporation sells an additional 1 million common stock with a par value of $1 for $10 per share, which of the following is true?
Its paid-in surplus will increase.
An investor with no current holdings wants to invest $110,000 in the stock of a company she feels looks sound with good upside potential. A history of small dividend distributions is another reason she likes it. This scenario should prompt a discussion of which of the following first?
Lack of diversification
If a state agency has issued a moral obligation bond that runs into difficulty and requires the secondary backing to be implemented, what is necessary?
Legislative approval
When a company issues additional bonds, which of the following is true?
Leverage is increased.
Which of the following taxes are considered sources of debt service for special tax bonds?
License taxes paid by businesses Special liquor and tobacco taxes
Which of the following orders is reduced on the order book on the ex-dividend date for a cash dividend?
Limit order to buy
Your client is interested in a direct participation program (DPP) limited partnership. Which of the following are most likely to factor into a discussion on suitability of such an investment?
Liquidity Investor's age
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?
Long 35,000 ABC Jan calls, long 30,000 ABC Jan 08 LEAP calls Long 35,000 ABC Mar calls, short 30,000 ABC Mar puts
Which of the following positions violate the rules governing position limits? (Assume SSS stock is subject to a 100,000-option position limit.)
Long 50,000 SSS Aug 40 calls, short 55,000 SSS Aug 40 puts Long 50,000 SSS Aug 40 calls, short 55,000 SSS Jan 40 puts The expiration dates and strike prices may be different or the same. However, the total number of contracts on the same side of the market is limited to 100,000 for this stock. Long calls and short puts are on the same side of the market (the bull side), and short calls and long puts are on the same side of the market (the bear side).
Which of the following would protect a short May 50 call?
Long Jun 45 call. For a long call to cover a short call, it must have the same or lower strike price and the same or longer expiration. This ensures that the investor may purchase the stock without financial loss and deliver it at 50 if the short call is exercised.
Which of the following would protect a short May 50 put?
Long Jun 55 put For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration. This ensures the investor may sell the stock without financial loss if the short put is exercised, and she is forced to buy.
A customer who buys 1 CDE Oct 60 call at 4 and sells 1 CDE Dec 60 call at 6 has created
Long a call and short a call is known as a call spread. If the strike prices are the same, and the expiration months are different (Oct and Dec), it is a calendar spread. Calendar spreads are sometimes called time spreads or horizontal spreads.
A customer has a margin account that shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has special memorandum account of $5,000. The long market value at maintenance is
Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by 0.75 ($90,000 / 0.75 = $120,000).
Which of the following covers a short call?
Long stock Stock rights
The general partner of an oil and gas drilling program might be considered to have a conflict of interest for all of the following reasons except
Managing the partnership is what the general partner's job is, so there would not be a conflict of interest. Owning a potentially competing project could be a conflict of interest. Commingling (combining) investor funds from different programs is not legal and would certainly present a conflict, as would borrowing money from the partnership.
For a client to get immediate execution on an order, it should be placed as which of the following?
Market
A new issue of bonds is offered to the public at a price of 100¾. What is the most likely reason for the issue being priced at a premium?
Market interest rates have gone down since the underwriting commitment was signed.
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?
Maximum gain = $375; maximum loss = $125; breakeven point = $48.75.
An investor opens the following options position: Long 1 RAV Mar 50 put @5¾; short 1 RAV Mar 45 put @3. What is the investor's maximum gain, maximum loss, and breakeven point?
Maximum gain is $225; maximum loss is $275; breakeven point is $47.25.
An investor opens the following options position: Long 1 PKE Apr 60 put @4 and short 1 PKE Apr 55 put @2. What is the investor's maximum gain, maximum loss, and breakeven point?
Maximum gain is $300; maximum loss is $200; breakeven point is $58.00.
An investor opens the following positions: Sell short 100 shares of FAB @72; buy 1 FAB Jun 70 call @5. What is the customer's maximum gain, maximum loss, and breakeven point?
Maximum gain is $6,700; maximum loss is $300; breakeven point is $67.
Which of the following statements describes an oil and gas blind pool offering?
Money is raised without a specific property being stated, and the general partner selects the investments.
If a broker-dealer is acting as a financial advisor to a municipality, which of the following statements is true?
Municipal Securities Rulemaking Board (MSRB) rules prohibit the broker-dealer from acting as an underwriter for the issuer unless they meet the criteria of specific allowable exceptions. There are some underwriting functions that the broker-dealer, in their advisory capacity, may be allowed to participate in, such as assisting with the preparation of the official statement.
Which of the following is federally tax exempt for a corporation?
Municipal bond interest
A customer buys a newly issued municipal zero-coupon original issue discount bond for 85. If the bond is held until maturity, the tax consequence
Municipal original issue discount bonds must be accreted. At maturity, the entire discount will be accreted, and the cost basis will be equal to the par value. No gain or loss will occur at maturity.
Svetlana calls her registered representative and places an order to write an XYZ Oct 90 call, and at the same time, write an XYZ Oct 80 put. The orders are executed at a premium of 5 for the call and 9 for the put. Which of the following best describes the customer's investment strategy?
Neutral
A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in
New Jersey Turnpike revenue bonds rated AA.
Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50%, and the maintenance margin is 25%. CSC stock price has fallen dramatically in recent months, and it closed today with a sharp decline, bringing the closing price to $40 per share. Based on FINRA requirements, will Jensen receive a maintenance margin call?
No, the account meets the minimum maintenance margin requirement.
Which of the following documents would include information about the issuer's financial condition?
Official statement
An investor in which of the following products may not receive dividends?
Oil and gas limited partnership interests
Where must the SEC's no-approval clause appear in a prospectus?
On the cover
An investor purchases a U.S. Treasury bond put option. The option is in the money on the last trading day and the investor exercises the put. Which of the following statements is correct?
On the settlement date, the investor will receive cash in the amount of the intrinsic value.
Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into half a share of common. The preferred stock is selling at $17.50, and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion?
One million shares of preferred, each converted to half a share of common, is 500,000 common shares, and 500,000 shares after conversion, added to 2 million shares of common previously outstanding, equals 2.5 million common shares.
Your customer notices that the exchange rate for the British pound in the spot market is listed at 148.47. What do you tell her when she asks you what this means?
One pound equals $1.4847.
Which of the following activities are disallowed under FINRA rules?
Opening an account for a 16-year-old individual Accepting a sale in a joint account from one of the owners and having the check payable in the name of that individual
Paying for a securities transaction with all of the following could raise concern about the possibility of money laundering except
a personal check.
Which of the following mortgage-backed securities would provide investors with the most predictable maturity date?
Planned amortization classes (PACs)
If interest rates fall, which of the following statements regarding collateralized mortgage obligations are true?
Prepayment risk will increase. Prices of each tranche will rise.
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
As a registered representative, it is important to be able to distinguish between investment goals and investment objectives. Which of the following would be an investment objective rather than an investment goal?
Preserving capital. Just as there are three primary colors, there are three primary investment objectives. Those three are growth, income, and capital preservation.
Which of the following terms are synonymous?
Price spread and vertical spread
Which of the following items appears on the confirmation statement for a when-issued trade of municipal bonds?
Principal or agency trade
Which of the following municipal securities are backed by the full faith and credit of the U.S. government?
Public Housing Authority bonds (PHAs)
An investor has researched XYZ Corporation and is convinced the company's stock will soon decline in value. If the investor wishes to act on that conviction, which investment strategy will allow the investor to take advantage of the anticipated decline in share value with the smallest cash investment?
Purchase a put option
An investor, with a well-diversified portfolio oriented toward growth, has 60% invested in the stocks of 28 different companies. She would like to hedge the downside risk for the equities and is comfortable using options to do so. Which of the following is most suitable?
Purchase index option puts
Which of the following activities can take place in a cash account?
Purchase of new issue common stock
An experienced investor wants to allocate 10% of an existing portfolio to owning real estate but does not want to maintain properties, be a landlord, or wait if cash is needed. Which of the following choices would be suitable, given the investor's objectives?
Purchase shares of an equity REIT
An investor purchases 100 shares of XYZ common stock for $70 and sells it one year later for $50. Which of the following activities would violate the wash sale rule?
Purchasing an XYZ call option 20 days after the sale Purchasing 100 shares of XYZ common stock 20 days after the sale
All of the following are regulated by the Municipal Securities Rulemaking Board (MSRB) except
Quotes, dealers, and sales representatives are regulated by the MSRB, but issuers are not.
A customer wishes to diversify an investment portfolio to include real estate. However, the customer is concerned that real estate tends to be illiquid. Which of the following would be a suitable recommendation?
Real estate investment trusts
Which of the following is considered a source of debt service for a city-issued general obligation (GO) bond?
Real estate taxes
A FINRA member firm sends a promotional piece to 35 individuals over a three-day period. Twenty of these individuals are current customers of the firm. The other 15 are prospects whose names came from a commercially available mailing list service. Under the FINRA rule on communications with the public, this promotional piece would be considered
Retail communication means any written communication that is distributed or made available to more than 25 retail investors, whether current or prospective customers within any 30-calendar-day period.
A distribution from a corporate pension plan to be rolled over into an IRA must be completed within how many days to maintain its tax-deferred status?
Rollovers from pension plans into IRAs must be accomplished within 60 days to retain tax-deferred status.
An investor, age 40, earns $65,000 annually and contributes 3.5% to his employer's 401(k) plan. With the 401(k), his only retirement savings, he wants to do more for retirement and hopes to invest in such a way as to have some tax-free income when he takes distributions later in life. Which of the following is the most suitable given the investor's goals and objectives?
Roth IRA
The sale of nonexempt securities may take place without an SEC registration if done so in a manner that qualifies for a transactional exemption. An example of this would a sale complying with
Rule 144 of the Securities Act of 1933 regulates the sale of control and restricted securities, stipulating the holding period, quantity limitations, manner of sale, and filing procedures.
All of the following are required by limited partnerships except
SEC approval.
All of the following issue mortgage-backed securities except
Sallie Mae is the name for the Student Loan Marketing Association, which does not issue mortgage-backed securities. Ginnie Mae, Fannie Mae, and Freddie Mac do issue mortgage-backed securities.
Which of the following acts requires full and fair disclosure of all material information about nonexempt securities and debt securities offered to the public for the first time?
Securities Act of 1933
If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of
Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).
Which of the following orders on the order book will not be filled if the stock rises?
Sell stop
Which of the following would accelerate a decline in a bear market?
Sell stop
If a registered representative gave her retail customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are true?
She should not have distributed sales literature without the prospectus. She should not have recommended a specific variable annuity without having the prospectus available.
Which of the following is not exempt from SEC registration requirements?
Shelf offerings
If an investor keeps $100,000 invested in U.S. Treasury bills at all times during a 10-year period, she is subject to which of the following?
Stable principal Unstable interest
A working interest in an oil and gas partnership entitles the holder to
a portion of the revenue. responsibility for part of the expense of extraction.
If a customer buys 100 XYZ at $52.50 and buys 1 XYZ Aug 50 put at 1.50, what is the customer's maximum possible loss?
Stockholders often buy puts to protect long positions. In this case, if the stock falls below 50, the investor will exercise the right to sell it at 50. The loss on the stock is limited to 2.50, which, combined with the premium paid of 1.50, results in a $400 loss.
Which of the following registers the securities and packages the program for a limited partnership?
Syndicator
Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory?
Systematic risk
Investors wishing to protect the fixed-income portion of their portfolios from inflation risk would find which of the following choices most suitable?
TIPS bonds
A TIPS bond has a coupon of 3%. Over a two-year period, the annual inflation rate has been 4.5%. At the end of that time, the principal value of the TIPS would be
TIPS bonds have the special feature of adjusting the principal value every six months by the inflation rate. With an annual rate of 4.5%, the adjustment is 2.25% semiannually. There are two ways to solve this. One is to take the calculator given to you at the test center and multiply $1,000 × 102.25%. Take the result and multiply that times 102.25%. Do that two more times (there are four adjustments in two years), and the ending number will be 1,093.08. A faster way is to take the simple interest of 4.5% per year. That is $45 per year or $90 for the two years. Add that to the original principal to get $1,090. That is not the correct answer, but the next highest number in the answer choices is.
All of the following are fiduciary accounts except
TOD is an individual account with a designated beneficiary who receives account assets upon the death of the account owner.
A customer purchased 10 ABC 9s of 2045 convertible debentures at 99. The debentures are callable at 101. The conversion ratio is 40. Some time later, the debentures are called while the common is trading at $24 and the debenture is trading at 98. Which of the following options would be most beneficial to the customer?
Tender the bonds to the corporation
An investor purchased one unit of a real estate limited partnership. The cost of the unit was $20,000. The investor's allocable share of nonrecourse debt was $50,000. During the first year, the investor received an income distribution of $5,000. What is the investor's current tax basis?
The $20,000 purchase price of the unit is basis. Because this is a RELP, nonrecourse debt increases basis. That addition of $50,000 increases the basis to $70,000. Distributions reduce basis, and there was one of $5,000 bringing the basis down to $65,000. Remember, it is only real estate where nonrecourse debt increases basis. Recourse debt increases basis in any DPP.
An investor purchased a new issue corporate zero-coupon bond for $600. The bond has a maturity of 20 years. Six years later, the investor sells the bond for $700. For tax purposes, this would result in
The $400 discount is accreted over the 20 years to maturity. That is an annual accretion of $20. After 6 years, that is $120, making the tax basis of the bond $720. Because the sale at $700 is $20 less than the basis, the investor has a long-term capital loss.
An attractive investment for a customer with a very high risk tolerance might be a leveraged ETF. One your firm recommends is the QUID 3x leveraged ETF. You decide to track its performance for several days during a period of high market volatility. The starting date value is $50 per share. Day one ends with the specified index down 3%. Day two sees the index rise by 4%. One the third and final day, the index declines by 1%. The value of the QUID share is now
The 3x leverage will multiply the index movement by a factor of three. Should you receive a question like this, use the provided calculator as follows: $50 x 91% (3% drop x 3 = 9%) x 112% (4% up x 3 = 12%) x 97% (1% drop x 3 = 3%) and that rounds to $49.43.
A representative enters a customer's immediate-or-cancel (IOC) order to sell 1,000 shares at $12. If only 500 shares can be sold at $12, which of the following will occur?
The 500 shares will be sold at $12; the remainder of the order will be canceled unexecuted.
Stabilizing bids may be entered at
a price no higher than the public offering price.
A Treasury bond is quoted in The Wall Street Journal as follows: Bid 100:15 Asked 100:17 Bid Chg. -1 Yield 7.9 From this information, you know that the nominal yield is
The Bid and Asked prices show that the Treasury bond is being quoted at a premium (above par), with a yield to maturity of 7.9%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.
A significant portion of municipal bond trading is done by dealer banks. These are commercial banks that are not members of FINRA or any exchange. For those market participants, enforcement is in the hands of all of the following except
The MSRB makes rules but is not the one who enforces them. When it comes to bank dealers, those MSRB rules are enforced by these banking agencies. For securities firms, enforcement is in the hands of FINRA.
Your customer is opening a new options account. Which of the following need not occur to open the account?
The OCC must verify the financial information supplied by the client to ultimately approve the account.
What is true regarding over-the-counter (OTC) markets
The OTC market is a negotiated market in which market makers post their quotes to facilitate negotiating price. A bid is the highest price a buyer is willing to pay, and an offer is the lowest price a seller is willing to accept. Among the securities traded OTC, both ADRs and municipal securities would be included.
An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5.25% coupon rate. The investor's yearly return will increase by
The first bonds are 5% and pay $50 per year per bond. The new bonds are 5.25% and pay $52.50 per year per bond, for a difference of $2.50 per bond.
The common stock of Porcine Meat Products, Inc., is currently selling at $60 per share. It has a P/E ratio of 12:1 and pays an annual dividend of $3 per share. That would make Porcine's EPS equal to
The P/E ratio measures the relationship between a stock's market price and the earnings per share (EPS). The ratio for this company is 12 times the earnings. If the market price is $60, then the earnings must be 1/12th of that or $5 per share.
An investor has an established margin account with a short market value (SMV) of $4,000 and a credit balance of $6,750, with Regulation T at 50%. How much excess equity does the investor have in the account?
The Regulation T requirement and equity must be calculated before excess equity can be determined. The Regulation T requirement is 50% of the SMV of $4,000 ($2,000). Equity is calculated by subtracting the SMV of $4,000 from the credit balance of $6,750 ($2,750). Excess equity is calculated by subtracting the Regulation T requirement of $2,000 from the equity of $2,750 ($750).
Which of the following is not considered a short-term investment vehicle?
Treasury bonds are long-term investment vehicles having maturities of 10 years or more.
Securities traders would consider which of the following to be the most relevant indicator of expected market volatility?
The VIX Index
A 4% municipal bond maturing in 2040 has a current yield of 4.4% with a yield to maturity of 4.7%. What is the basis of this bond?
The basis of a municipal bond is its yield to maturity (YTM). The terms are used interchangeably. Therefore, in this question, the basis is the 4.7% stated as the YTM. There will be some questions on the exam similar to this where no math is involved. Just be sure to know your definitions.
A customer is short 100 shares of DFI at 35, and the market price is 35.25. If she believes a near-term rally will occur, which of the following strategies would best hedge her position?
The best hedge for a short stock position is to buy a call, not sell a put. If the stock price rises, the investor has the right to exercise the call and use the stock to close out the short position. To obtain the most protection, the call's strike price should equal the short sale price.
A corporation has an outstanding issue of 8% convertible debentures with a conversion price of $25. The bond indenture contains an antidilutive clause guaranteeing the debt holders the right to maintain proportionate equity conversion in the corporation. If the company pays a 10% stock dividend to its common shareholders, how will that affect the debenture holders?
The bonds will now be convertible at approximately 22.73.
Your client writes 2 ABC Nov 220 calls at 5 and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for the client's position?
The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5). Breakeven is the same if it is one covered call, or 1,000.
In which of the following situations may a broker-dealer enter an order for a customer to sell a stock long?
The broker-dealer has reason to believe that the customer owns the stock and will deliver it promptly. The security is carried in the customer's account at the broker-dealer. The customer owns a bond convertible into the stock and has issued conversion instructions. The customer owns a call option on the stock and has exercised the call.
A customer buys 10 Dec 91.50 calls on the Canadian dollar for 6.70. ($10,000 CD per contract). At the time of purchase, the spot rate for the Canadian dollar was 92.25. What is the margin requirement for the purchase?
The client purchased 10 calls at 6.70 for a total of $6,700. Because—with the exception of LEAPS—options cannot be purchased on margin, the margin requirement is 100% of the premium.
When making recommendations to an advisory client, which of the following carry the most weight?
The client's risk tolerance The client's investment needs and objectives
One of your clients with a margin account is concerned about recent declines in the market price of securities in her portfolio. The current market value of her holdings is $2,100,000, and the debit balance is $900,000. She would like to know how low the value can go before she receives a margin maintenance call. You would reply
The computation for this question is the debit balance ($900,000) divided by 0.75 and that is equal to $1,200,000. At that point, the equity in the account is $300,000, which is equal to 25% of the long market value.
If a March 80 Canadian dollar call option is trading at 6, and the Canadian dollar is at $0.85, which of the following statements is true?
The contract has intrinsic value.
When determining position limits for listed options contracts and LEAPS contracts on the same side of the market, which of the following statements is true?
The contracts must be aggregated.
An investor owns a convertible debenture with a conversion price of $10. If a 10% stock dividend is paid on the company's common stock, which of the following is true?
The conversion price will be adjusted to $9.09.
The income from all of the following securities is taxable on the federal, state, and local income tax levels except
Treasury bonds.
The interest from which of the following bonds is subject to federal income tax?
Treasury notes Federal National Mortgage Association (FNMA)
A convertible bond has a conversion price of $40 per share. If the market value of the bond rises to a 12.5-point premium over par, which of the following are true?
The conversion ratio is computed by dividing par value by the conversion price ($1,000 par / $40 = 25). Parity price of the common stock is computed by dividing the market price of the convertible bond by the conversion ratio ($1,125 / 25 = $45). Or, 112.5% × $40 = $45.
KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year?
The corporate exclusion is 50% of dividend income; therefore, KLP must pay taxes on all $700,000 of its interest income, but only 50% (or $200,000) of its dividend income, for a total of $900,000.
A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need?
The corporation's charter and bylaws The name(s) of natural persons authorized to trade the account
If a customer buys 300 ABC at 53 and writes 3 ABC Jun 55 calls at 4, and the contracts expire unexercised, the customer's cost basis in ABC stock at expiration is
The cost basis in the stock remains at the original purchase price. The premium received must be declared by the investor as a capital gain for tax purposes. Premiums on options will only affect the stock's cost basis or sales proceeds if the option is exercised, or if (on the same day) a customer buys stock and buys a put.
A customer is short 100 XYZ shares at 26 and long 1 XYZ 30 call at 1. What is the maximum potential gain for the customer?
The customer has hedged his short stock position from a market advance by buying the call. If the market falls, the investor can make a maximum of $26 per share if the stock price falls to zero, less the premium of 1 paid to buy the call, for a maximum gain of $2,500 (26 − 1 = 25).
If a customer is short 100 XYZ shares at 54 and long 1 XYZ 55 call at 2, what is the maximum potential loss?
The customer has protected his short stock position from a market advance by purchasing the call. If the market rises, the call is exercised, allowing the customer to buy stock at the options strike price of 55 to cover the short position. Therefore, the most the customer can lose is $100 on the stock position (the difference between the option strike price and short sale price), plus the premium paid for the option ($100 + $200 = $300).
A day order is entered to buy 500 LMN at 24.35. By the close of the trading day the firm has been able to purchase 100 shares at 24.25 and 200 shares at 24.35. If the remainder of the order is unfilled, what is the outcome?
The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close.
Assume that a customer has an established margin account with no special memorandum account, and the account is restricted. With the Regulation T requirement at 50%, the purchase of $10,000 worth of stock would generate a Regulation T call of
The customer must deposit the full margin requirement of the purchase (50% of $10,000), whether the account is restricted or not; therefore, the call would be for $5,000.
If a customer buys 1 ABC Jan 50 call at 2 and 1 ABC Jan 50 put at 4 when ABC is at 49, the customer must deposit
The customer purchased a straddle and must pay the full cost of both options ($200 + $400 = $600 total premium).
In an existing margin account with special memorandum account (SMA) of $2,000, if a customer wishes to buy 300 shares of ABC at $20 per share, how much must the customer deposit?
The customer wishes to purchase $6,000 worth of stock, and the Regulation T requirement is $3,000. The SMA has buying power of 2:1 when Regulation T is 50%, so $2,000 of SMA will purchase $4,000 of stock. Of the remaining $2,000 balance, the broker will lend 50%, so the customer must deposit $1,000.
Which of the following would have the least impact in marketing a municipal bond issue?
The dated date of the issue
A registered representative's customer is speaking of a variable life insurance contract she owns. She makes several statements regarding the contract. Which of the following is not an accurate statement concerning a variable life insurance contract?
The death benefit can never be more than the guaranteed benefit.
Tenants in common (TIC) ownership provides that a deceased tenant's fractional interest in an account is retained by which of the following?
The deceased tenant's estate
If a municipal bond is purchased at a discount, which of the following is true?
The discount is accreted and increases cost basis each year until maturity.
A customer owns shares in ACME Income Fund and decides to exchange them for shares in ACME Growth Fund within the same family of funds. Which of the following statements is true?
The exchange is a taxable event.
A member of the investment banking department of ABC Securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make?
The exercise prices of stock rights are usually below current market value (CMV) of the underlying security at time of issue. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.
Which of the following trades settle next business day?
U.S. government debt Listed options
An investor opens the following options position: Write 1 RAN Dec 35 call @4; short 1 RAN Dec 30 put @1¼. What is the investor's maximum gain, maximum loss, and breakeven point?
The first step is to identify the position. This is a short combination; a short put and a short call with different terms. That means we are going to have two breakeven points. The maximum loss is unlimited because one of the positions is an uncovered call. The maximum profit is the premiums (credit) received of $525. Breakeven points follow the call-up and put-down rule. That is, add the premiums of $5¼ to the strike price of the call ($35 + $5.25= $40.25) and subtract the premiums of $5¼ from the strike price of the put ($30 ‒ $5.25 = $24.75).
A letter of intent for a mutual fund does not contain which of the following provisions?
The fund can halt redemption during the time the letter of intent is in effect.
For a mutual fund that collects a 12b-1 fee, which of the following statements are true?
The fund may use the money to pay for mailing sales literature. The fund's prospectus must disclose the fee.
An options trader establishes the following positions: Long 10 ALF Apr 40 calls at 6 Short 10 ALF Apr 50 calls at 2 What is the client's maximum gain and loss per share?
The gain is 6 (between 44 and 50). If the stock declines, both options will expire for a loss of 4 (6 − 2).
A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed?
The growth portion is taxed as ordinary income. The growth portion is subject to a 10% penalty.
When comparing portfolio managers, a registered representative would most likely recommend the one whose alpha for the past year was
The higher the alpha, the better. When a portfolio has a positive alpha, the manager has created excess returns. That is, the performance was better than would have been expected for the risk taken.
Which of the following describe a securities exchange?
The highest bid and the lowest offer prevail. Only listed securities can be traded.
An investor purchases 100 shares of CDE on December 20, 2019, for $2,000. On the same day, he purchases 100 shares of QRS for $2,000. On January 3, 2020, he sells the CDE stock for $1,700 and the QRS stock for $2,200. On January 24, 2020, he purchases 200 shares of CDE for $3,000. What capital gains or losses did he realize from these transactions?
The investor in this question has a $200 capital gain to report on the purchase of QRS stock for $2,000 and its subsequent sale for $2,200. Because the investor repurchased the CDE stock (January 24) within 30 days of selling it (January 3), the $300 loss incurred ($2,000 - $1,700 = $300) when sold is disallowed under the wash sale rule.
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?
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.
Your customer has made a margin purchase of 100 shares of DMF at 50. Two days later, before the customer has met his call, the current market value of DMF is 60. How much must your customer now deposit? (Regulation T is 50%.)
The investor must come up with the initial call of $2,500. The amount of margin required for a new purchase is based on the current market value of the security at the time of purchase.
A customer buys 100 shares of HEX at 52, and at the same time, sells a HEX call for a premium of 4. What is his margin call deposit?
The margin call for the purchase of the stock is $2,600, and this is reduced by the sale of the call ($400) for a net of $2,200.
An investor opens the following position: Write 1 CDE Oct 30 call at 3.30 Buy 1 CDE Oct 40 call at 0.10 The maximum gain is
The maximum gain on a credit spread is the net credit received (3.30 − 0.10 = 3.20 × 100 shares = $320).
In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is
The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600).
Transactions in all of the following are affected in the money market, as opposed to the capital market, except
The money market is the marketplace for short-term (less than one year) debt obligations. The capital market is where long-term capital is raised. Municipal bonds, being long term, are a part of the capital market.
A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal, and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why?
The municipal bond because its equivalent taxable yield is 6.6%.
When a municipal bond has a net revenue pledge, what is the first item that gets paid from the revenue received?
The operations and maintenance fund.
Which of the following applies to an open order to buy 600 XYZ at 44?
The order may be partially filled at the limit price or better. The order is entered in the order book. It must be executed at the price specified or better.
If a customer believes the Swiss franc will depreciate against the U.S. dollar, which of the following option strategies may best take advantage of the expected depreciation?
Uncovered call writing
A municipal bond dealer is making a bona fide quote. Which of the following statements regarding such a quote is true?
The quote must have a reasonable relationship to fair market value.
Which of the following disclosures regarding a collateralized mortgage obligation (CMO) is accurate?
The rate of return may vary as a result of early prepayment.
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.
A registered representative of a FINRA member firm has developed a LinkedIn friendship with a registered investment adviser. This has resulted in the investment adviser directing transactions for many of their clients to this representative's broker-dealer. The broker-dealer is promoting an all-day seminar with presentations to be delivered by a number of outstanding economists and securities analysts. The seminar location is in a hotel ballroom down the street from the member firm's office. The firm has invited the investment adviser to attend as its guest. That location requires the adviser to fly in the night before and stay at the hotel. As the broker-dealer's guest, which of the following expenses are reimbursable by the broker-dealer without violating the safe harbor provisions of Section 28(e)?
The registration fees for the seminar
Which of the following statements best describes the effect of reinvesting mutual fund distributions?
The reinvestment of capital gains and dividends results in a higher cost basis.
If an investor opens a new margin account and sells short 100 shares of COD at 87.25, with Regulation T at 50%, what is the investor's required deposit?
The required deposit is calculated by multiplying the market value of $8,725 by the Regulation T requirement of 50% ($4,362.50).
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
Which of the following statements regarding a 2-for-1 stock split are true?
The share price is reduced by half. The number of shares doubles.
A client of yours wishes to sell 400 shares of LMNO common stock. You contact your trading desk and receive the following quote: "We are currently quoting LMNO at 42-42.15, 6 by 4." You report this to the client who says, "Do it." The customer will receive
The statement from the trading desk indicates a firm quote. When the client is selling, the price received is the dealer's bid price. This quote indicates that the firm is willing to buy up to 600 shares at the bid price. Multiply 400 shares times the bid of $42 per share to arrive at $16,800. If the client was a buyer, the cost would be the ask price of $42.15 ($16,860). The other two choices are for students who didn't notice the client had 400 shares.
The DCAV corporation has declared a 10% stock dividend. Which of the following is true regarding the shareholders receiving the stock dividend?
The stock dividend would not be taxable upon receipt by the shareholder.
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
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 customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment?
The tax loss is not allowed.
When XYZ stock trades at 40, and an XYZ Oct 35 call trades at 5, which of the following is true?
The time value is zero.
Typically, new municipal bond issues are sold to investors before the bonds are issued and available for delivery. An investor receives a when-issued confirmation describing the bonds. What information is included on this confirmation?
The trade date
The working capital of a corporation includes all of the following except
The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.
A registered representative speaking to a customer is explaining registered funds that invest in nonregistered hedge funds. Which of the following statements is not correct?
These funds, called funds of hedge funds, eliminate all of the risks associated with hedge funds.
Which of the following regarding yield-based (interest rate) debt options is true?
They are European-style exercise.
Which of the following statements regarding the Federal Farm Credit System securities are not true?
They are direct obligations of the U.S. government.
Which of the following regarding revenue bonds are true?
They are not subject to the statutory debt limitations of the issuing jurisdiction. They are analyzed primarily on the project's ability to generate earnings.
Which of the following statements regarding Ginnie Maes are true?
They are quoted in 1/32nds. They are traded with an accrued interest computed on a 30/360 basis.
If a customer buys 1 XYZ Jan 40 call and 1 XYZ Jan 40 put, paying total premiums of $650, and XYZ becomes worthless, the result is
This is a long straddle in which breakeven points are established by adding and subtracting the combined premiums (6½ points) from strike (breakeven points are 46½ and 33½). The customer makes money if the stock moves above 46½ or below 33½. As the stock becomes worthless, the customer earns a 33½ point gain on 100 shares, or $3,350.
The manager will credit each syndicate member based on sales of that particular maturity allotted to the member, and such credits shall extinguish liability based only on such securities that are sold by the member. This statement describes an agreement among underwriters that is
This is part of an agreement for a Western (divided) syndicate.
An investor purchases a zero coupon bond at a price of 64. The bond matures in nine years. Five years later, the investor sells the bond at a price of 80. This would result in
This question deals with accretion of the discount. The discount here is $360 (the difference between the $640 paid and the $1,000 maturity value). With nine years until maturity, the annual accretion is $360 divided by nine, or $40 per year. After five years, the bond's basis has increased by $200 ($40 times 5 years) to $840. The sale at $800 represents a long-term loss of $40.
Before effecting a penny stock transaction with a customer, the member firm must
To avoid price gouging, SEC Rule 15g-3 requires that no penny stock transaction may take place without the member firm providing the customer with the current inside market quotes. Those are the highest bid and the lowest ask price currently quoted. The current quotes are more important to the customer than the most recent trade because that trade may have been hours or even days ago. Trading may commence two business days after sending the risk disclosure document.
Which of the following bonds is most affected by interest rate risk?
To begin with, let's be sure you understand the nomenclature used here. Each of the choices has two numbers. The first is the coupon rate of the bond and the second is the year the bond matures. For example, the 7.3s of '37 pay interest at a rate of 7.3% of the $1,000 par value per year and mature in 2037. The s is just to separate the two numbers. Interest rate risk is the loss in value due to a rise in interest rates. Because there is little difference in coupon rates, the bond with the longest maturity (highest duration) will experience the greatest fall in a rising interest rate market.
Which balance sheet entries may be affected when a company pays a cash dividend?
Total assets Total liabilities
SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is the equity of SSS Corporation's shareholders?
Total assets minus total liabilities equals shareholders' equity ($780,000 - $370,000 = $410,000).
Which of the following is the largest component of a municipal underwriting spread?
Total takedown
A customer, currently finding the income offered from a money market fund quite low, asks if there might be any debt instruments providing income that could be expected to at least keep pace with inflation, as well as offer some tax relief. What suitable recommendation could be made that meets the investor's investment objectives?
Treasury Inflation Protection Securities (TIPS)
Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend?
Treasury STRIPS
A municipality has prerefunded its bond issue maturing in five years. This would mean all of the following except
a reduction to the coupon rate.
A municipal revenue bond indenture contains a net revenue pledge. The following are reported for the year: $30 million of gross revenues, $18 million of operating expenses, $4 million of interest expenses, and $2 million of principal repayment. What is the debt service coverage ratio?
Under a net revenue pledge, bondholders are paid from net revenue, which equals gross revenue minus operating and maintenance expenses. In this example, net revenue is $12 million ($30 million − $18 million). Debt service is the combination of interest and principal repayment. Here, debt service is $6 million ($4 million + $2 million). To compute the debt service ratio, divide net revenue by debt service: $12 million divided by $6 million equals a ratio of 2:1.
All of the following might be found in a money market fund's portfolio except
common stock.
A customer bought a bond that yields 6.5% with a 5% coupon. If the bond matures at this point, the customer will receive
Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.
Which of the following best describes a debenture?
Unsecured corporate debt
For a retired person, which of the following investments would provide the greatest protection against inflation?
Variable annuities
All of the following are financial considerations in a customer profile except
Wanting to learn a new language is a goal and a nonfinancial consideration. Financial investment considerations can be expressed as a sum of money (total liabilities, for example) or as a numerical cash flow (gross income of $160,000 per year, for example).
ABC Corporation has issued a convertible preferred stock with a par value of $100. The stock is convertible at $40. The current market price of the stock is $80. It would be correct to state that the conversion ratio is
When a $100 par preferred has a conversion price of $40, the stockholder can convert into 2.5 shares. That is a 2.5:1 ratio. The current market price of the stock is only relevant if the question asks about the parity price (which is $32).
When does pension payment liability affect the credit rating of a municipality?
When funds needed to make payments exceed funds available
A foreign currency investor is long 40,000 Swiss francs at $0.81. If the investor buys 4 Jul 80 SF puts at 1.25 to hedge, the breakeven point is
When hedging with puts, the breakeven point is the cost of the underlying investment plus premium paid ($0.81 plus $0.0125 equals $0.8225, or 82.25 cents).
A customer contacted her registered representative requesting that her account be updated with her new residential address. The member firm must send a copy of the updated account record to the customer within
Whenever a change is made to a customer record, a copy of that record must be sent to the customer within 30 days.
Which of the following is not a factor when a communication to be distributed to the public is either being reviewed or approved within the broker-dealer?
Whether the piece will be distributed in written form or via electronic media
The main purpose of dividend reinvestment in a mutual fund accumulation plan is to
compound the growth of a mutual fund investment.
All of the following qualified plans are covered by ERISA guidelines except
public sector plans.
In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations?
Your customer's liquid net worth Your customer's monthly credit card payments
A municipal bond dealer gives your firm's trading desk an estimate of a municipal security's market value. This is
a nominal quote.
If a customer has a margin account with a long market value of $140,000 and a debit balance of $60,000, what is the buying power in the account?
With Regulation T at 50% (always assumed), the buying power of a margin account is twice the amount of the SMA. With a long market value of $140,000 and a debit balance of $60,000, this account has equity of $80,000. The Regulation T requirement is $70,000 (50% times $140,000). Therefore, there is excess equity (or SMA) of $10,000. The purchasing power is double that ($20,000).
An investor believes that ICBS, a Nasdaq security, is overpriced at 40. She can sell ICBS short in the over-the-counter (OTC) market under which of the following circumstances?
With no restrictions
You are reviewing the information on a new customer's options account agreement. Which of the following strategies would require the severest scrutiny for suitability purposes?
Writing uncovered call options
A fiduciary acting under the prudent investor rule should recognize that one of the following transactions would not be acceptable or meet the standards of the rule. Which is it?
Writing uncovered calls
A customer purchases $50,000 of bonds at a discount in the secondary market. The bonds mature in 10 years and are callable in five years at par. Under industry rules, the customer's confirmation will show
YTM
The City of Podunk has an outstanding 25-year maturity issue that is callable in seven years. It has prerefunded the issue and established an escrow account containing the proper government securities with face amounts and maturities approximating the call provisions of the original issue. In quoting the original issue, which of the following must be used?
Yield to call
A municipal bond is offered at a discount. It has a 30-year maturity and is callable in 20 years at par. It is callable in five years at a premium and is puttable in 10 years at par. Which of the following yields would be quoted on this basis?
Yield to the 30-year maturity
Which of the following transactions would not be subject to the 5% markup policy?
Your client enters trades to purchase two different mutual funds in the same fund family. The combined purchases do not qualify for any breakpoints. The client is charged a sales charge of 6.5%.
Which of the following choices best describes the formula to determine earnings per share?
[EBIT − (interest + taxes)] − preferred dividends] divided by the number of shares of common outstanding
An investor establishes a $5,000 position by purchasing 100 shares at $50 per share. She then sells all the shares six months later at $60 per share. Her taxable consequences are
a $1,000 short-term capital gain.
If a customer has $9,000 of capital losses and $2,000 of capital gains in a tax year, that year's consequences are
a $3,000 loss deduction with $4,000 carryforward. For tax purposes, the customer can net gains with losses. In this case, the customer's net losses are $7,000. However, there is an annual capital loss deduction limit of $3,000. Therefore, the investor can deduct $3,000 this year and carry forward $4,000 to the following tax year.
A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has
a $50 capital gain.
A tool used by investment banking firms to combine several unsuccessful limited partnership programs into one new entity is
a DPP rollup.
If the Swiss franc is trading at 0.69, and a customer buys 1 Sep SF 70 put and writes 1 Sep SF 65 put, this position is
a bear spread.
A client writes 1 Apr 30 call and buys 1 Apr 40 call. This is
a bear spread. a credit spread.
A quotation on a municipal security between dealers is assumed to be
a bona fide quote.
Encouraging a customer to purchase mutual fund shares in an amount just under the next dollar volume bracket (which entitles the customer to a reduction in sales charges) or remaining silent on the matter is called
a breakpoint sale.
All of the following documentation is necessary for a publicly subscribed limited partnership except
a cash flow analysis. The certificate gives public information about the partnership and is filed in the home state. The partnership agreement spells out the roles of the general and limited partners. The subscription agreement is the instrument by which the limited partners invest.
Mutual fund Class B shares assess
a deferred sales load.
A municipal bond, issued with a covenant that states, "If revenue collections are not sufficient to meet debt service requirements, the issue will be backed by the full faith and credit of the municipality," is known as
a double-barreled bond.
An instrument that illustrates the transfer of title to any dividend, interest, or right that pertains to securities that are contracted for is called
a due bill.
A sharing arrangement in which only deductible costs are apportioned to the investor, with the sponsor bearing all capitalized costs is called
a functional allocation.
A customer buys 100 DEF at 70, but several months later, the stock is trading at 82.85. The customer, concerned about a possible pullback, buys 1 DEF Aug 80 put at 1.50. If the stock subsequently falls to 77.25, and the customer sells her stock by exercising the put, the result is
a gain of $850.
A customer purchased a full faith and credit bond. This bond would be known as
a general obligation bond.
When a securities professional refers to a bond as a full faith and credit issue, it is
a general obligation bond.
Purchasers of municipal revenue bonds are interested in knowing the priority of their claim on the revenues generated by the project. In general, the most senior position is held by
a gross revenue pledge.
The type of REIT in which the issuer purchases real estate properties that produce income as well as mortgages on income-producing real estate properties is
a hybrid REIT.
A broker-dealer informs a customer that her order was not executed because of stock ahead. The order was most likely
a limit order.
A customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58. If XYZ is at 52 at expiration, the customer has
a loss of $400.
A customer shorts 200 shares of XYZ and buys 2 XYZ at the money calls as a hedge. These transactions can be done in
a margin account.
Trading in foreign currency options would most likely be an appropriate hedging tool for
a multinational corporation. a firm in the import and export business.
If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is
a municipal bond fund.
When an institution wishes to take a large position in a municipal bond issue but does not want its activities to be well known, it will generally make use of
a municipal securities broker's broker.
The over-the-counter (OTC) market is
a negotiated market.
Under FINRA's rules governing the activities of member broker-dealers, prior notification to the employing firm and prior written consent from the employing firm would be required to open a brokerage account for all of the following except
a registered representative of another member opening a 529 plan.
For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 72, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as
a required beginning date (RBD). a required minimum distribution (RMD).
An investor purchased 100 shares of ABC common stock at $50 per share on June 17, 2019. On May 11, 2020, with the ABC selling at $60, the investor hedges by purchasing one ABC Oct 55 put at 2. Immediately prior to the expiration date, ABC is selling for $45 per share and the put option is exercised using the long stock for delivery. This would result in
a short-term capital gain of $300.
A married couple has had an account with your FINRA member firm for many years. The account is registered in both names, JTWROS. Upon the advice of their estate-planning attorney, they wish to move the assets in equal proportion to individual accounts. This would require all of the following except
a statement from the couple's attorney explaining the reason for the change.
A hedge fund would be an appropriate recommendation for
a successful surgeon with ample savings and significant financial experience.
A mutual fund, frequently used as the default option in employer-sponsored retirement plans, that adjusts its portfolio growth orientation to principal conservation as a specified date approaches is
a target date fund.
A customer buys a new issue municipal bond at a discount. If held to maturity, the amount of the discount is
accreted and is not taxed.
Accrued interest for U.S. government bonds is computed on the basis of
actual days elapsed.
If an indenture has a closed-end provision, this means
additional issues will have junior liens.
If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following except
adjustment bonds.
All of the following are oil and gas program sharing arrangements except
all-or-none underwriting arrangement. Functional allocation, disproportionate sharing, and reversionary working interest are all types of oil and gas sharing arrangements.
If a customer wishes to change a day order to a good-til-canceled (GTC) order in the middle of the day, the registered representative should
allow the day order to expire at the end of the day and put in the GTC order before the next day's opening.
Each of the following statements concerning fill-or-kill (FOK) orders and all-or-none (AON) orders are true except
an AON order must be canceled if the whole order cannot be executed immediately.
An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is
an S corporation.
An investor writing an XYZ Oct 50 put could cover that put with
an XYZ Oct 55 put.
A municipal finance professional (MFP) is
an employee of a broker-dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker-dealer.
According to FINRA rules, duplicate confirmations of transactions must be sent to an account owner's employer—if requested to do so by the employer—whenever establishing a margin account for
an employee of another broker-dealer. an officer of another broker-dealer.
All of the following items of information must be included in a municipal securities confirmation except
an extraordinary call provision.
All of the following must register as an investment company under the Investment Company Act of 1940 except
an initial public offering for common shares of Amalgamated Investments, a holding company.
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in
an intermediate-term, high-grade corporate bond fund.
Although municipal securities are exempt from SEC registration, full disclosure is still required with the use of
an official statement.
Issuers of municipal securities are exempt from registration requirements under the Securities Act of 1933, but there is a full and fair disclosure document that is identified as
an official statement.
An investor buys a municipal bond at a discount. The bond carries a 3% coupon. At maturity, the bond will pay the face amount to the holder of the bond on the maturity date. In the meantime, the IRS requires accretion of the discount. That accretion is tax-exempt income when the bond is
an original issue discount bond.
An investor purchased a REIT from her broker-dealer in an SEC-registered public offering. The following year, she asked her registered representative for a quote. When told there is no current quote available, you would gather that this is
an untraded REIT.
An individual who invests in an undeveloped land limited partnership would be most interested in
appreciation.
Compared to defined contribution plans, defined benefit plans give the highest return to employees who
are highly compensated. have fewer years until retirement.
Hedge funds
are unregulated. use investment techniques most suitable for sophisticated investors.
A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest its total assets, such that
at least 75% of its assets meet stated diversification requirements.
You have a customer who bought an XYZ Feb 35 put at 5. The current market value (CMV) of XYZ is $33 and the current option premium is $2. The option is trading
at parity. An option trades at parity when the premium is equal to the intrinsic value.
A customer opens an account, and payment and delivery instructions are established. Beyond the opening of the account, these instructions may
be changed for individual transactions, or going forward, for all transactions.
A client, who is a manager of a large pension plan, has recently changed the plan's portfolio weighting from 80% equities and 20% fixed income to 40% equities, 40% short-term Treasury debt, and 20% cash and cash equivalents. More than likely, this is an indication that the client's outlook concerning the market is
bearish.
The analytical tool used to measure the variability between a particular stock's (or portfolio's) movement and that of the market in general is
beta.
A general partner is considered to have a conflict of interest with the business of a limited partnership if she
borrows money from the business.
A customer would buy index calls if she is
bullish on the broad market.
One of your customers is long 400 shares of MMLJ common stock. The price of the stock has risen sharply since the customer purchased it. The customer is concerned about a price pullback and asks you to recommend a hedging strategy. You recommend that the client
buy 4 MMLJ puts.
A customer has an order to buy 400 ABC at 60. ABC declares a 25% stock dividend. On the ex-date, the order on the order book will read
buy 500 shares at 48.
If your client expected short-term interest rates to fall, you might recommend that the client
buy a Treasury bill yield-based put.
To create a credit calendar spread, an investor should
buy the near expiration. sell the distant expiration.
A registered principal must approve all orders
by the end of the trading day.
A broker-dealer that is a financial advisor to a municipal issuer
cannot act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. cannot act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both services.
Your client informs you that a signed discretionary account form is in the mail. Before receiving the form, and unable to contact the client, you notice that one of her stocks is dropping sharply on adverse news. You
cannot enter a discretionary order.
A married couple who files jointly has a $5,000 long-term capital loss with no offsetting capital gains. Regarding the tax treatment of this loss, all of the following statements are true except
capital losses can be used to offset capital gains only.
All of the following will cover a short call except
cash equal to the aggregate exercise value.
An amended U-4 filing is required for a registered person for all of the following reasons except
change in marital status.
An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is
changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices.
All of the following must be sold with a prospectus except
closed-end funds in the secondary market.
All of the following would be considered when evaluating a municipal revenue bond's creditworthiness except
collection ratio.
Debt normally issued by big corporations with reliable credit ratings that seek to finance short-term needs best describes
commercial paper.
A broker-dealer has put customer's securities in its own proprietary accounts. This is a violation of industry rules known as
commingling.
A registered representative of a FINRA member firm uses her personal smartphone to send a client a text message about a security in the client's portfolio. This practice is
considered an electronic communication and must be reviewed by a principal.
All of the following statements regarding 529 plans are true except
contributions are made with pretax dollars at the federal level.
Limited partners assisting the general partner to solicit new investors
could jeopardize their limited partner status.
A joint life with last survivor annuity
covers more than one person. continues payments as long as one annuitant is alive.
Working capital is
current assets minus current liabilities.
All of the following records must be retained for 3 years except
customer statements.
All of the following ratios are measures of the liquidity of a corporation except
debt/equity ratio.
Common stockholders have certain voting rights. Those rights do not include voting on
determining the annual dividend rate.
Dark pools of liquidity
diminish market transparency for public retail customers. accommodate large-volume transactions for institutional traders.
Flow-through of income and loss is a feature of
direct participation programs (DPPs).
Shareholder approval is required for all of the following corporate events except
dividends.
Hedge funds do not register with the SEC under the Investment Company Act of 1940. As such, hedge funds
do not provide the same level of transparency as registered investment companies.
A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 50% of income earned on investments in
domestic corporate common and preferred stock.
The term wildcatting refers to
drilling for oil or gas where none has occurred previously.
An individual purchases a single premium deferred variable annuity. There will be income tax ramifications in all of the following situations except
during the accumulation period.
Once a variable annuity has been annuitized
each annuity unit's value varies with time, but the number of annuity units is fixed.
Mutual fund shares represent an undivided interest in the fund, which means that
each investor owns a proportional part of every security in the portfolio.
All of the following are minimum requirements for listing on the NYSE except
earnings per share.
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 concerned that the stock might backtrack and some of the profit might be lost. One way to protect that profit would be to
enter a sell stop order at $55.
The term churning refers to
entering more transactions than necessary, solely for the purpose of generating commissions.
Tax preference items are used for the purpose of computing the alternative minimum tax. They include
excess intangible drilling costs (wages, fuel, repairs). accelerated depreciation. percentage depletion in excess of basis.
The exchange privilege offered by open-end investment companies allows investors to
exchange shares of one open-end fund for another in the same fund family at a net asset value basis.
Municipal securities broker's brokers
execute trades for other municipal securities broker-dealers.
A risk faced by investors in most CMOs that is not found in corporate bonds is
extension risk.
On exercise of the option, the holder of a put will realize a profit if the price of the underlying stock
falls below the exercise price minus the premium paid.
One of the effects of Regulation BI is to place a limitation on the use of the descriptive term
financial advisor.
The Securities Exchange Act of 1934 regulates or mandates all of the following except
full and fair disclosure on new offerings.
There are various direct participation program offerings giving investors a range of choices of different types of oil and gas drilling opportunities. All of the following are types of oil and gas direct participation programs except
functional allocation
All of the following municipal bonds would be defined as revenue bonds except
general obligation bonds.
When examining the portfolio of a municipal bond client, you notice that every bond is Aaa or Aa rated. In addition, each bond matures at about the same time and the coupon rates do not vary by more than 50 basis points. You also notice that over 10 different states are represented by the issuers with no state being represented more than twice. It would appear that this client has used
geographical diversification.
All of the following statements regarding a qualified pension plan are true except
growth in the account is tax free.
Corporate bonds that are guaranteed are
guaranteed as to payment of principal and interest by another corporation.
A registered representative notices that a fund he has been recommending to a recalcitrant customer has just declared a $1 per share dividend. Recognizing this as a great opportunity, he calls the client and explains that if a purchase is made within the next week, at the end of the month, the investor will receive a cash dividend of $1 for each share purchased. With a current public offering price of approximately $20 per share, that is a return on investment of 5% in a matter of a couple of weeks. This registered representative is
guilty of violating the practice of selling dividends.
One of the key requirements in offering a DPP to a customer is that the program must be suitable. FINRA has some specific suitability requirements for DPPs. Among those is the investor
has a net worth sufficient to sustain the risks of the DPP, including loss of investment.
A company's balance sheet dated December 31 shows retained earnings of $100,000. You can deduce from this information that the company
has had $100,000 in undistributed profits since its inception.
Using listed options to reduce the market risk in a stock position by taking an opposing position in the options that represent an equivalent number of shares is known as
hedging.
A bond investor who is looking for capital gains should invest in bonds when interest rates are
high and expected to decline.
An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by
holding the securities until they mature.
A client of your broker-dealer is interested in collateralized mortgage obligations (CMOs). While determining suitability for the client, all of the following should be discussed except
how currency exchange rates may affect the value of the securities.
When analyzing a company's balance sheet, you notice that it is using the first in, first out accounting method to value its inventory. This information is most likely shown
in a footnote to the balance sheet.
Under Municipal Securities Rulemaking Board (MSRB) rules, a broker-dealer must disclose control relationships
in all customer transactions.
If a corporation has a dividend payout ratio of 70%, the undistributed earnings will
increase retained earnings.
As a new registered representative, you overhear some of the "old hands" discussing tracking risk. More than likely, the topic of the conversation is
index ETFs.
An investor purchasing long-term AAA-rated bonds should be concerned most with
inflation risk.
Variable-rate municipal bonds are subject to all of the following risks except
interest rate.
All of the following appear on a corporation's balance sheet as fixed assets except
inventory.
If an investor watches the latest T-bill auction fall to 4.71% from 4.82%, the best interpretation is that
investors who purchased bills at this auction paid more for them than purchasers last week.
When auction rate securities (ARS) reset the yield to be paid in the upcoming period, the process used
is a Dutch auction. establishes a clearing rate.
Under NYSE rules, a not-held order
is good for the day only.
All of the following statements regarding the over-the-counter (OTC) market are true except
it is an auction market.
All of the following are characteristics of a direct participation program (DPP) except
it pays federal income taxes.
All of the following are risks associated with most mutual funds except
liquidity risk.
Regulation T permits borrowing money for the purchase of each of the following except
listed options with expirations of less than nine months.
An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing
long-term bonds when interest rates are high.
When a mutual fund computes its net investment income, all of the following are included except
long-term capital gains.
All of the following are the advantages of a margin account except
losses are minimized. Any losses on a margin trade are magnified because of the leverage.
Probably the most significant difference between a business development company (BDC) and any other investment company registered under the Investment Company Act of 1940 is that a BDC
makes available significant managerial assistance to the investments in their portfolio.
Nonstatistical factors used in comparing one mutual fund to another would include all of the following except
management fees.
An increasing percentage of registered representatives of FINRA member firms are using social media to increase their business. When using social media to reach out to clients and prospects, compliance with FINRA rules requires
member firm supervision over social media communication with clients and prospects.
All of the following can be associated with asset-backed securities except
minimal risk.
A large amount of cash deposits into an account may indicate that a customer is engaged in
money laundering.
One of your clients has asked for the requirements for having duplicate confirmations and statements for his account be sent to his CPA. To accomplish this, the client
must complete and sign the duplicate statement/confirm request form.
The writer of an equity call option who is assigned
must deliver stock within two business days.
A registered representative's recommendations to a customer
must match the customer's risk tolerance and investment objectives.
An investor opens a long position in one XYZ Nov 140 call @7. Disregarding any commissions, on settlement date, the investor
must pay $700. When an investor takes a long position in an option, it means the investor has purchased the option. As a buyer, the investor must pay the premium on the settlement date.
Under Regulation FD, if an officer of an issuer makes an unintentional disclosure of nonpublic, material information to an institutional investor, the issuer
must promptly make public disclosure of the same information.
A prospectus for a variable annuity contract
must provide full and fair disclosure. is required by the Securities Act of 1933.
If a person wishes to enter orders in his spouse's account, he
needs written permission from his spouse through a power of attorney.
To avoid tax and a penalty, an IRA may be rolled over
no more than once every 12 months within 60 days of the distribution.
When discussing unit investment trusts with a prospect, it would be correct to state that these are
nonmanaged investment companies.
An investor has purchased a number of securities, including municipal bonds on margin. The margin interest paid to borrow the funds to purchase the municipal bonds is
not deductible.
One of your clients owns 300 shares of common stock in a publicly traded corporation. The acquisition cost of those shares was $60,000 and the last trade of the stock was $220 per share. There was a news report that the company was going to pay shareholders a 100% stock dividend. The client wants to know how this dividend will affect the holding. You would respond that the customer will
now own 600 shares and the market price will be approximately $110 per share.
With regard to a variable annuity, all of the following may vary except
number of annuity units.
The placement ratio in The Bond Buyer indicates the relationship for a particular week between the number of bonds sold and the number of bonds
offered for sale in the market that week.
A confirmation of each customer trade must be given or sent
on or before the settlement date.
All of the following securities trade in the over-the-counter (OTC) market except
open-end investment companies.
A municipality is allocating the revenues from an industrial revenue bond under a net revenue pledge. The first priority is
operation and maintenance.
If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are advancing daily, and the number of advancing stocks relative to declining stocks is falling, a technical analyst will conclude that the market is
overbought.
A city and school district are coterminous. When evaluating the debt issues of the city, the school district debt would be considered
overlapping debt.
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are
partially a tax-free return of capital and partially taxable.
When a municipality is allocating funds from a revenue-producing facility under a net revenue pledge, the first priority is to
pay operations and maintenance.
The City of Concord has floated a new bond issue to expand the public library. Concord has arranged for these bonds to be insured. If Concord defaults on these bonds for any reason, the insurance company will
pay the bondholders the principal and interest as scheduled.
The Investment Company Act of 1940 prohibits a closed-end management investment company from pursuing all of these activities except
paying dividends.
Disclosure to customers of control relationships is required in
primary distributions. principal transactions. agency transactions.
The ABC Insurance Company is advertising its variable annuity product as "ABC Lifetime Income—income generated from mutual fund returns." This advertisement is
prohibited because it implies returns from mutual funds.
Broker-dealers who reserve the right to disclose nonpublic private information about their customers to unaffiliated third parties must
provide notice to customers at the time of the account opening. provide reasonable means for customers to opt out of such disclosures.
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
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.
After an extensive feasibility study on the viability of a new shopping mall, the City of Mount Vernon decided to issue bonds that depend on the earning requirements of the facilities. All of the following statements are true except
that the bonds are backed by the full faith and credit of the City of Mount Vernon.
Your firm has just assigned you a new client. Wanting to do the best job you can, you review the current investment holdings of the client. Included are the following mutual fund accounts: $50,000 in Class B shares of the STU Growth Fund $25,000 in Class A shares of the STU International fund $15,000 in Class A shares of the TUV Utility Fund STU and TUV offer rights of accumulation and breakpoints at $25,000, $50,000, and $100,000. If the client wishes to invest $20,000 into the Class A shares of the STU Technology Fund, the sales charge would be based on
the $25,000 breakpoint.
A customer purchases a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield that must be stated is the yield to
the 102 call.
According to the Dow theory, reversal of a primary bullish trend must be confirmed by
the Dow Jones Industrial Average and Transportation Average.
Performance of the terms of a standardized listed option contract are guaranteed by
the Options Clearing Corporation.
The rate on an adjustable preferred stock may be indexed to
the Treasury bill rate.
Your customer's margin account currently has SMA of $7,000. When asked for an explanation of what that means, you could respond that
the account has buying power equal to 200% of the SMA.
An underwriter should consider all of the following factors when determining the spread on a new issue except
the amount of the good faith check.
Variable annuities generally include an assumed interest rate. This is
the annual rate of return required to maintain the level of annuity payments.
The Bond Buyer's 20-Bond Index reflects
the average yield of 20 high-quality general obligation bonds.
A 58 year-old investor owns a single premium deferred variable annuity with a current value of $500,000. The original investment was $150,000 and the contract has a death benefit provision. If the investor suddenly passes away and the beneficiary receives a lump sum payout,
the beneficiary will owe ordinary income taxes on $350,000.
A municipal revenue issue's flow of funds statement is contained in
the bond contract.
The call provisions of a municipal issue would be detailed most completely in
the bond resolution.
The yield to maturity of an outstanding revenue bond has just fallen from 3.8% to 3.4%. All of the following could explain the drop except
the bond's debt coverage ratio has fallen.
A married couple has several individual and joint accounts with your firm. One spouse calls you and requests that you make a transfer of funds between the accounts. This would not present a problem if
the caller is a signatory on both accounts.
One of your customers has a JTWROS account and an individual account. The individual account is the one approved for options trading. The customer wishes to make a large options trade and asks you to transfer a substantial sum from the cash balance in the joint account to the individual account. To do this,
the check would have to be made payable in the name of all the owners of the JTWROS account.
The Municipal Securities Rulemaking Board (MSRB) and FINRA rules requiring uniformity of business practices by member firms may be altered or modified by a mutual agreement between the broker-dealers concerned. There is, however, an exception to modifying the rules when it comes to the rules regarding
the content of confirmations.
If a customer buys 100 shares of stock and writes one out-of-the-money call against her long position, the breakeven point is
the cost of stock purchased less premium.
All of the following would be found in a bond resolution for a new municipal issue except
the costs to be incurred by the issuer in connection with the offering.
One of the most common cases of overlapping municipal debt is when a city's portion of the debt is shared with
the county.
All of the following statements regarding industrial revenue bonds (IRBs) are true except
the credit rating of the bonds is dependent on the credit rating of the municipality.
When a customer instructs a registered representative to transfer and ship, the representative instructs the margin department to transfer ownership into
the customer's name and deliver the securities to the customer.
All of the following information must be disclosed on a municipal bond confirmation of sale except
the dated date on a municipal bond that has been outstanding for two years.
The SEC has just declared the registration of XYZ Corporation's IPO effective for sale. If XYZ wanted to run a tombstone ad, it would not include
the dated date.
The date on which interest will begin accruing on a new municipal issue is
the dated date.
When a member firm receives a written complaint against one of its representatives, the person first informed about the complaint is
the designated principal.
The spread in a municipal competitive bid is
the difference between the bid and production (the price at which the bonds are reoffered to the public).
Many mutual fund investors elect to reinvest their dividends into additional shares of the fund. When an investor does this with dividends paid by a common stock fund,
the dividends are taxable in the year received.
The bond placement ratio, as shown in The Bond Buyer, is computed by taking
the dollar value of new issues sold divided by the dollar value of the new issues offered.
An employee of another broker-dealer would like to open an account with your firm. Under FINRA rules, all of the following statements regarding the employee and the account are true except
the employer must approve each transaction before entry of the order.
An index option differs from an equity option in that
the exercise settlement is in cash.
In some underwritings, the anticipated demand for a new issue is higher than the syndicate estimated. Because they believe they will be able to sell more shares than are available, they will want to invoke
the green shoe clause.
A portion of the OTC market where companies that have been delisted for regulatory reasons are usually traded is
the grey market.
In a margin account, the broker-dealer lends money to the customer to assist in the purchase of a marginable security. Instead of delivering the security to the purchaser, the broker-dealer holds it as collateral for the loan. The form signed by the customer agreeing to this is
the hypothecation agreement.
The Municipal Securities Rulemaking Board (MSRB) is authorized to adopt rules concerning all of the following except
the information to be provided by municipal issuers.
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
the least reinvestment risk. a lower yield.
A qualified legal opinion issued for a municipal bond underwriting means that
the legal opinion is qualified with restrictions and conditions.
All of the following are risks of investing in publicly traded mortgage-backed securities except
the market for mortgage-backed securities is illiquid.
The Investment Company Act of 1940 has a number of rules relating to variable life insurance policies. All of these are included except
the maximum allowable sales charge is 8.5% of the premium payment.
The public offering price for a mutual fund, as quoted in the financial press, reflects
the maximum sales charge the fund distributor collects.
Balance sheets contain
the net worth of the firm as of the date of the balance sheet.
The latest issue of a newsletter your firm subscribes to is especially relevant to one of your firm's investment products. If you decide to send it to clients and prospects, you must disclose that
the newsletter is written and produced by a third party.
Broker-to-broker confirmations must be sent no later than
the next business day.
Investor information about the financial condition of a municipal issuer is most likely found in
the official statement.
A taxable gain or loss on a long call option transaction would be recognized when
the option expires. the option is sold.
Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority except
the optional call provisions.
An order ticket is marked as follows: Buy 10 GGZ 9% debentures at 95 AON good til canceled (GTC). All of the following statements regarding this order are true except
the order will expire at the end of the day.
An investor wishes to purchase shares in a new company that has not yet issued any shares to the public. This investor would be most interested in
the primary market.
A new customer is opening a cash account with your broker-dealer. The new account form must contain the signature(s) of
the principal only.
In the partnership agreement of a limited partnership, all of the following would be disclosed except
the procedures for the annual election of general partners.
A registered primary offering of common stock differs from a registered secondary offering of common stock in that
the proceeds of the primary offering are received by the issuing company, while the issuer receives none of the funds from a secondary offering.
All of the following are advantages of buying a put versus selling stock short except
the put's time value, which gradually dissipates, is added to the intrinsic value.
Gifts exceeding $100 may be given by a registered representative to
the registered representative's unregistered sales assistant.
The trust indenture of a revenue bond will show all of the following except
the reoffering yields.
The rules on opening an options account contain a number of differences from the normal cash account at a broker-dealer. One of those differences is, if applicable,
the requirement to obtain the signature of the registered representative handling the account.
One of your customers owns a variable annuity. When asking about how the performance of the separate account is measured, you would respond that
the separate account performance depends on the performance of the selected subaccounts.
The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that
the syndicate assumes liability for unsold shares, while the selling group does not.
A FINRA member firm wishes to encourage its registered representatives to sell more limited partnership DPPs. As an incentive, the firm offers an all-expenses-paid trip to a popular vacation resort for those reaching certain sales targets. FINRA rules provide that
the target must be based on the total production of associated persons with respect to all direct participation programs offered by the member.
All of the following might affect the credit rating of a municipal revenue issue except
the tax rates of nearby municipalities.
Listed stock options cease to trade on
the third Friday of the month of expiration.
Debt service is best described as
the total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking fund.
Better Bond Sales (BBS) is participating in a firm underwriting of some GO municipal bonds. Their role is that of a syndicate member with a 10% commitment. Should BBS sell some of the bonds, its earnings would be
the total takedown.
A municipal bond transaction is labeled T+2. This means that
the trade is settled regular way in two business days.
It is common for an employer offering an ERISA-qualified retirement plan to match contributions made by employees. The plan documents state the matching percentage. When matching is part of the plan, another important item in those documents is the length of time before those matching contributions become the property of the employee. This is known as
the vesting schedule.
All of the following statements about SEP IRAs are true except
there are no minimum earning requirements to be an eligible participant.
An investor purchases a newly issued convertible bond at par. The bond is convertible at $25. Three years later, the underlying common stock is trading at $33 per share. If the investor sells the bond at the parity price,
there is a long-term capital gain of $320.
All of the following statements regarding negotiable jumbo certificates of deposit are true except
they are fully insured in any denomination by the FDIC. The FDIC insures only up to $250,000.
All of the following statements describe stock rights except
they are most commonly offered with debentures to make the offering more attractive.
All of the following statements about targeted amortization class (TACs) CMOs are correct except
they are the most volatile of the tranches.
Marcus owns 5,000 shares of KYZ stock. He recently received proxies in the mail. Marcus would be able to use the proxies for all of the following except
to buy additional shares of KYZ common stock after the stock splits 2:1.
A buy stop order may be used for all of the following except
to protect a profit in a long position.
In a restricted margin account, if a customer fails to pay for a new purchase, the broker-dealer must sell out stock with a value of
twice the margin call.
A customer requests information on a variable life insurance policy and asks her registered representative to circle the important information in the prospectus and information he thinks will be of special interest to her. This is permitted
under no circumstances.
If a customer buys 100 shares of MTN at 60, buys an MTN 60 call at 3, and buys an MTN 60 put at 3, the investor's maximum gain would be
unlimited. There is no limit to how high a stock's price can rise. Because this investor owns both the stock and an option to buy, the potential for gain is theoretically unlimited.
A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing just one fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B: $495,000 XYZ Research Class B: $310,000 XYZ Investors Growth Stock Class B: $495,000 ABC Capital Enterprise Class B: $495,000 ABC Capital Opportunity Class B: $310,000 Total: $2,105,000 These recommendations are
unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0%.
An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent is to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is
unsuitable because her situation exposes her to surrender charges and early withdrawal penalties in exchange for insufficient benefits.
All of the following sources of revenue could be used to service general obligation debt except
user charges.
All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements except
variable annuities.
Traders can sell short
when a stock ticks up. when a stock ticks down. unrestrictedly in both exchange and over-the-counter (OTC) markets.
According to industry rules, if a customer purchases a bond from your firm, the confirmation must disclose
whether your firm acted as agent or principal. your firm's address.
If an investor opens a new margin account and sells short 100 shares of ABC at 32.50, with Regulation T at 50%, what is the investor's required deposit?
$2,000. The Regulation T requirement is $1,625 ($3,250 × 50%). When selling stock short in a new account, an investor must meet the minimum requirement of $2,000 for any short sales of $4,000 or less. Above $4,000, the deposit is 50% of the short market value.
An aggressive investor buys ABC stock with a beta of 1.7. The S&P 500 has a 10% rate of return for the year, and ABC's return is 12%. What is the alpha for ABC?
-5%
Which of the following quotes represents a municipal dollar bond quote?
Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85.5% of $1,000, or $855.
In a rising interest rate environment, which of the following risks associated with mortgage-backed securities such as a collateralized mortgage obligation (CMO) is of least consequence to a potential investor?
Prepayment risk
If earnings decline significantly, which of the following employer-sponsored qualified retirement plans can reduce or even eliminate its contribution for the year?
Profit-sharing plan
Most rating services rate which of the following?
Quality
Your customer is interested in a leveraged fund and makes the following statements about leveraged funds to you. Which of the statements is not true?
There are no unusual risks associated with these funds, other than those incurred with any index tracking fund.
A customer buys 100 shares of RAN common stock at $62.75 per share and simultaneously buys one RAN Jan 60 put at 1. By January, the market price of the RAN stock has risen to $66.25 per share. The investor allows the put to expire worthless (who would exercise the option to sell stock at 60 when the market price is $66.25?), and the customer sells the RAN at the current price of $66.25 per share resulting in
a gain of $250.
The largest portion of an underwriting spread is
the concession.
A married couple owns Class A shares of the KAPCO Balanced Fund as follows: The older of the pair has an individual account with a current value of $10,000. The other individual's account is valued at $20,000, and they have a JTWROS account valued at $12,000. KAPCO offers rights of accumulation and has breakpoints at $25,000 (4%), $50,000 (3%), and $100,000 (2%). How much will the sales charge be if they invest an additional $15,000 into the JTWROS account?
$450
Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Simultaneously, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. What is the customer's cost basis in SLP?
$98 per share
Which of the following securities is an original issue discount obligation?
13-week U.S. Treasury bills
FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is
15% of the gross proceeds.
A customer enters an order to sell 100 TCB at 49 stop limit. Before the order, TCB was trading at 49.25. Subsequent trades are reported on the tape as follows: TCB 49.10, 48.75, 48.85, 49, 49.25 What trade triggered the order?
48.75
While reviewing a new customer's investment profile, you determine that the customer is willing to tolerate a high degree of risk and does not anticipate utilizing the invested funds for at least 15 years. What would be a suitable recommendation regarding asset allocation for the customer's portfolio, given the customer's risk tolerance and time horizon criteria?
70% equities, 20% debt, and 10% money market instruments
Under Subchapter M of the IRC, a REIT can avoid taxation if it receives at least ____ of its taxable income from real estate and distributes at least ____ of that income to shareholders.
75%, 90%
Which of the following permits the highest annual contributions?
A SEP IRA
When acting as an agent for a customer, Municipal Securities Rulemaking Board (MSRB) rules require the broker to make a reasonable effort to obtain what?
A fair price in relation to prevailing market conditions A reasonable price in relation to prevailing market conditions
A customer invests $20,000 in a direct participation program and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution of $15,000 from the partnership. At year's end, the customer receives a K-1 statement reporting his share of partnership losses of $75,000. How much of the loss may the customer deduct from passive income?
A limited partner can only deduct partnership losses to the extent of his basis. To determine basis, add the original investment ($20,000) to any recourse debt assumed by the investor ($50,000). Recourse debt adds to basis as the partner is liable for this amount. Cash distributions received reduce basis ($15,000). At year's end, the investor's basis and the amount he can deduct from passive income is $55,000.
Arbitration and mediation are two services provided by FINRA to settle disputes between members. Regarding these services, what is true?
Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.
The indenture of a revenue issue would ordinarily include which of the following covenants?
Adequate insurance on the property Proper maintenance of the property
A fundamental analysis is reviewing a corporation's income statement. For the period, the company reported net sales of $10 million, cost of goods sold of $6 million, depreciation expense of $1 million, interest on long-term debt of $1 million, and income taxes of $500,000. With this information, the analyst knows that the company's cash flow from operations was
$2.5 million. Cash flow from operations is the net income plus the depreciation. The net income is found after deducting all the expenses plus the income taxes from the net sales. Those expenses are $8 million ($6 million + $1 million + $1 million) resulting in pretax income of $2 million. After-tax income is $1.5 million. Add the $1 million depreciation to that to arrive at the answer of $2.5 million.
As a registered representative, you often have customers who are interested in learning about derivative products such as options and different derivative strategies. Of the following customer profiles, which would writing calls be considered least suitable for?
Bernard and Judy Jones, both retired, covering monthly expenses with their Social Security and annual mandatory IRA withdrawals. Savings outside of retirement accounts total $25,000. Income is the investment objective listed on the account.
An investor, long 100 shares of XYZ at $23.50, writes 1 XYZ May 25 call at 2. At expiration, if XYZ is trading at $20, the investor has
Breakeven is 21.50 (23.50 − 2). If the stock is trading at 20, the customer has an unrealized loss of $150.
Two years ago, your client purchased 100 shares of ULA common stock at $40 per share. Today, the client buys one ULA Apr 60 put at $2, when the stock's price is $65. At expiration, the ULA stock is selling for $56, and the client exercises his put, delivering the long stock to cover the sale. The client has a gain of
Exercise of the put enables the client to sell the stock at the strike price of $60. The stock was originally purchased at $40, so the result is a $2,000 gain in the stock minus the $200 premium paid for the put, for a net gain of $1,800.
A customer purchases an XYZ municipal bond at 108. It is scheduled to mature in 16 years. After owning the bond for 10 years, she sells the bond at 102. What capital gain or loss must she report for tax purposes at the time of the sale?
If a municipal bond is purchased at a premium, the premium must be amortized over the time until maturity. An $80 premium on a 16-year municipal bond indicates that $5 will be amortized each year ($80 / 16 = $5). Ten years at $5 per year is $50 of amortization. Therefore, after 10 years, the tax basis would be $1,080 minus $50, or $1,030 (103). Because the sale was for 102 ($1,020), the customer has a $10 loss on one bond.
An investor redeems 200 shares of ABC Fund, which has no redemption fee. If the quote is $12.05 bid $13.01 asked, what amount will the investor receive?
If a mutual fund has no redemption fee, the investor will receive the bid price per share (net asset value) multiplied by the number of shares being redeemed. In this case, the investor would receive $2,410 ($12.05 × 200 shares).
Which of the following choices would generate the largest first-year deductions in an oil and gas exploratory drilling program?
Intangible drilling costs
One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due?
Interest started accruing from the dated date of the bond (March 1). Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due. The customer's first interest payment the following August will represent interest that has accrued from the dated date.
Which of the following best describes alpha for an investor's portfolio?
It is a measure of performance that adjusts for risk, relative to a known benchmark.
With regard to position limits, what is the bullish, or buy side of the market?
Long calls Short puts
Which of the following best describes the advantages of an oil and gas income program, as compared to other types of oil and gas programs?
Lowest risk of capital
A customer opens the following positions: Buy 100 shares of CDL @$40; sell 1 CDL Apr 40 call @2. What is the customer's maximum gain, maximum loss, and breakeven point?
Maximum gain is $200; maximum loss is $3,800, breakeven point is $38.
An investor opens the following positions: Buy 100 shares of RJN @46; buy 1 RJN Mar 45 put @2½. What is the customer's maximum gain, maximum loss, and breakeven point?
Maximum gain is unlimited; maximum loss is $350; breakeven point is $48.50.
In addition to their tax advantages, municipal bonds are often purchased for their safety. Your client wishing to purchase municipal bonds with the utmost in safety should buy
NHAs, sometimes called Public Housing Authority or PHA bonds, have the backing of the federal government. As such, they are the safest of all municipal securities.
A customer has entered an option order with your broker-dealer. At which of the following locations could such an order be executed?
NYSE CBOE Nasdaq PHLX
Last week, your customer's margin account showed SMA of $5,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $45,000. This client now has
SMA of $0.00 and buying power of $0.00.
What is the FINRA-approved trade reporting system for corporate bonds trading in the over-the-counter (OTC) secondary market?
TRACE (Trade Reporting and Compliance Engine)
Your firm is interested in submitting a bid on a forthcoming general obligation municipal bond issue. Your firm could obtain the appropriate bid worksheets through a service provided by
The Bond Buyer.
Your customer is opening a new options account. Which of the following need NOT occur to open the account?
The OCC must verify the financial information supplied by the client to ultimately approve the account.
The over-the-counter (OTC) market could be characterized as what type of market?
The OTC market is a dealer market.
An investor has a margin account with the following positions: Long 500 shares JKL, LMV is $80 per share and DR is $15,000 Long 200 shares MNO, LMV is $130 per share and DR is $16,000 Short 400 shares PQR, SMV is $50 per share and CR is $30,000 The combined equity in the account is
The basic equation for the calculation of combined equity is: LMV + CR - DR - SMV = EQ. $45,000
A new client indicates the desire to invest in a highly speculative venture suitable only for those with significant net worth. The client assures you that he has the financial ability to sustain the loss of the entire investment. You believe it is necessary to verify that is the case. What documentation would help you?
The client's tax returns for the past three years
The Investment Company Act of 1940 has two types of management investment companies—the closed-end and the open-end. Which of the following is a significant difference between the two?
The closed-end company generally has a one-time offer of shares, while the open-end company's offer of shares is continuous.
A customer purchases an ABC 6.5% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading two points below parity, the price of ABC common is
The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14.
A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account?
The equity will remain the same.
Which of the following would not be found within the protective covenants for a municipal revenue bond issue?
The issue's rating
Of the following callable bonds, which confirmation must show yield to call?
The only bond priced at a premium is 6% municipal, basis 5.5%, due 2028. On a premium bond, the yield to call will be lower than the yield to maturity.
Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client?
Variable annuities
A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Which of the following recommendations would best meet the customer profile?
Variable annuity
BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM?
When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, 50% of the remaining dividends received are taxable.
A customer has a short margin account. In it, there is one stock currently trading at $14 per share. The minimum maintenance requirement for this account is
When it comes to short margin, for stock trading at $5 per share and above, the minimum requirement is the greater of $5 per share or 30% of the short market value. $5 is more than 30% of $14 ($4.20).
In a restricted margin account, a sale of $5,000 of stock will create
When securities are sold in a restricted margin account, half the proceeds go to reduce the debit and the other half are journaled into SMA. Therefore, a $5,000 sale will generate SMA of 50% of the sale, or $2,500. Buying power is the SMA × 2, or $5,000.
An investor wants to invest $20,000 but anticipates needing those funds in five years for a business investment. Currently, with inflation rising, the government is expected to take action to push interest rates up to reduce the money supply. Given these conditions, which of the following securities would be the least suitable for this investor who needs a specific amount of money in five years?
Zero-tranche collateralized mortgage obligation (CMO) with an estimated five years of life
An investor looking for an open-end investment company with an objective of providing capital appreciation for its shareholders would most likely choose
a growth fund.
A new account is opened at your firm and you notice that there is a trusted contact person form attached to the documentation. You could safely surmise that this is an account for
a specified adult.
In compliance with the Securities Act of 1933, a prospectus is always required when selling interests in
a unit investment trust.
A registered representative explaining variable annuities to a customer would be correct in stating that
a variable annuity does not guarantee an earnings rate of return. a variable annuity guarantees payments for life.
A designated market maker is permitted to do all of the following except
accept a not-held order.
If a 42-year-old customer has been depositing money in a variable annuity for five years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding
accumulation units.
If three individuals open up a joint account with your firm, and one of the parties to the account possesses written authorization from the other parties granting her authority to make all trading decisions, the new account form must contain information on
all three individuals.
A registered representative may never
approve advertising.
An investor would sell a put
because he is bullish.
The writer of an in-the-money put will receive the upcoming dividend from the underlying issuer if the contract is exercised
before the ex-date.
Morgan is a successful registered representative with a well-known broker-dealer. An equally prominent firm has made Morgan an offer that is too good to refuse. Under FINRA Rule 2273, if Morgan wishes to recommend that any existing customers move their accounts to the new firm,
certain disclosures have to be made in an educational format using a FINRA template.
Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except
changing the asset allocation in an existing account.
A legal contract—known as an indenture—between a bond issuer and a trustee appointed to represent the bondholders is required for
corporate bond issues of $50 million or more sold interstate.
When a mutual fund registers with the SEC under the Investment Company Act of 1940, it has the option to elect to be
diversified or nondiversified.
An order to sell at 38.65 stop limit is entered before the opening. The subsequent trades are 38.85, 38.50, and 38.35. The order
has not yet been executed.
Money market mutual funds are highly recommended for those who
have a specific need for funds within the next six months to a year.
All of the following statements regarding convertible bonds are true except
holders receive a higher interest rate.
If another member broker-dealer has already received clearance from FINRA for a retail communication, filing the piece with FINRA so that your broker-dealer can now use it
is not necessary if unaltered and used as originally intended.
DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be
lower than $50.
The holder of a yield-based call option would be more likely to profit if
rates rise debt prices fall
All of the following may be used to service special tax bond issues except
real estate taxes.
When a bond is issued by a national government, it is called
sovereign debt.
What is NOT a risk of investing in publicly traded mortgage-backed securities?
the market for mortgage-backed securities is illiquid.
An investor anticipating a rise in interest rates would likely purchase
variable-rate demand obligations or reset bonds.
Other than the 52-week bills, the U.S. Treasury conducts auctions for Treasury bills
weekly.
Phantom income is a characteristic of
zero-coupon bonds.
