Series 7 accumulation test
All of the following actions must be completed before a customer entering her first option trade except A) completion of the options agreement. B) approval by a sales supervisor. C) delivery of an Options Clearing Corporation disclosure booklet. D) completion of the new account form.
A Explanation Customers do not have to complete (sign) the options agreement before entering an order, although under exchange rules, the agreement must be signed and returned by the customer within 15 days of account approval.
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 A) 15% of the gross proceeds. B) 10% of the gross proceeds. C) 5% of the gross proceeds. D) 2% of the gross proceeds.
A Explanation If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.
IBM sold computers to a Soho retailer and agreed to accept payment of 10 million British pounds in 65 days. In which of the following ways could the company protect the payment against adverse foreign currency fluctuations? A) Buy pound puts B) Buy U.S. dollar calls C) Buy U.S. dollar puts D) Buy pound calls
A EPIC
A front-end sales load is defined as A) the difference between the public offering price and the net asset value of a mutual fund share. B) the commissions paid on the purchase or sale of securities. C) the concessions allowed on the purchase or sale of securities. D) the fee paid to the investment adviser.
A Explanation A sales load is the difference between the public offering price and the net asset value per share of the fund.
Advertising relating to municipal securities must be approved by which of the following? A) A general securities principal or municipal securities principal B) The Municipal Securities Rulemaking Board (MSRB) C) The Securities and Exchange Commission (SEC) D) A designated supervisory analyst
A Explanation According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.
When a customer transfers the proceeds of a sale from one fund to another within the same family of funds, what are the tax consequences? A) All gains and losses are recognized on the transfer date. B) Gains are taxed at the time of the transfer, but losses are deferred until the final redemption. C) No gains or losses are recognized until the final redemption. D) Losses are deducted at the time of the transfer, but gains are deferred until the final redemption.
A Explanation Although a transfer within a family of funds is generally not subject to a sales charge, the customer is liable for any taxes due. The IRS considers this transaction a sale and a purchase. Any losses or gains must be declared on that year's tax form.
An unqualified legal opinion means that A) the bond counsel has rendered an opinion without any qualifying limitations. B) the issue is legal, but certain contingencies may limit the flow of funds in the future. C) the interest is not exempt from state or local taxes. D) the underwriter has failed to disclose sufficient information to qualify the issue.
A Explanation An unqualified legal opinion means that the bond counsel found no problems with the issue. A qualified opinion means that the issue is legal, but certain contingencies exist. For example, the bond counsel might render a qualified opinion because authority to tax is in question or the issuer does not have clear title to the property.
Which of the following would have the least market risk? Why? A) Revenue anticipation notes B) Fannie Maes C) Corporate or municipal bonds with long-term maturities D) AAA corporate debentures
A Explanation Anticipation notes are the shortest term, which gives them the least market risk (the risk that price will fluctuate during the time left to maturity).
Which of the following statements regarding callable municipal bonds are true? Call premiums tend to increase over time. Call premiums tend to decrease over time. Call prices are stated as a percentage of the principal amount to be called. Call prices are stated as a percentage of the market value of the bonds to be called. A) II and III B) I and IV C) II and IV D) I and III
A Explanation Call premiums tend to decrease over time. The longer a customer has to hold the bond (and receive semiannual interest), the less of a premium an issuer will pay to take away the bond before maturity. Call prices are always stated as a percentage of the principal amount (par) to be called. For example, a call price of 103 means the issuer will pay $1,030 for each bond called.
If an investor has received dividends and capital gains distributions on mutual fund shares she has held for four months, she will pay A) capital gains rates on capital gains distributions and ordinary income rates on dividends. B) long-term or short-term capital gains rates, depending on the length of time the customer has held the fund shares. C) ordinary income tax rates on the capital gains and dividends. D) no tax until she liquidates the shares.
A Explanation Capital gains distributions are taxed as capital gains, with their holding status depending on how long the fund has held the securities, not how long the investor has held the mutual fund shares. Dividend distributions are taxed as ordinary income.
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 A) 10% of the gross proceeds. B) 15% of the gross proceeds. C) 2% of the gross proceeds. D) 5% of the gross proceeds.
A Explanation FINRA limits the amount of the sales compensation to 10% of the gross proceeds of the offering. If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.
You received a signed broker-to-broker transfer initiation form (TIF) from an established customer desiring to transfer a specifically designated part of his account to your firm, which is eligible to use the Automated Customer Account Transfer Service (ACATS). Your firm is obligated to submit the transfer instruction to the carrying member by establishing the instruction in the ACATS A) Immediately. B) within 3 business days. C) within 1 business day. D) within 2 business days.
A Explanation FINRA's Uniform Practice Code requires that the receiving member firms immediately forward the TIF to the firm currently carrying the account. A customer may transfer all or part of the securities held in the account.
To qualify for the quantity discount, which of the following may not be joined together under the definition of any person? A) A father and his 35-year-old son investing in separate accounts B) A husband and wife investing in a joint account C) A trust officer working on behalf of a single trust account. D) A father and son in an UTMA account
A Explanation For the purpose of qualifying for breakpoints, the definition of any person includes family units, but only minor children. Adults—other than a husband and wife—are separate persons.
In a functional allocation oil and gas program, which of the following statements are true? The general partner picks up all tangible drilling costs. The general partner picks up all intangible drilling costs. The limited partners pick up all tangible drilling costs. The limited partners pick up all intangible drilling costs. A) I and IV B) I and II C) II and III D) III and IV
A Explanation In a functional allocation program, the general partner picks up all tangible drilling costs, while the limited partners pick up all intangible drilling costs. As intangible drilling costs are deductible as they are incurred, this type of program benefits the limited partners. Tangible drilling costs, however, are deductible pro rata over the estimated life of the well.
If a bond is sold to a customer at par, under Municipal Securities Rulemaking Board rules, all of the following must be disclosed to the customer on his confirmation except A) yield to maturity. B) information on call features. C) total monies due. D) number of bonds purchased.
A Explanation Information on call features, total monies due, and the number of bonds purchased are all important disclosure items for a confirmation. For a bond sold at par, there is no requirement to show yield because the yield is equal to the coupon. What about if the bond is callable? Doesn't the confirmation have to show the lower of yield to call (YTC) or yield to maturity (YTM)? Yes, it does, but this bond is sold at par, and bonds are never called below par. That means the YTC could never be below the YTM. Indeed, because most bonds are called at a premium, the YTC would be the highest yield.
Which of the following statements regarding the exercise of options contracts are true? The exercise of equity options settles the next business day. The exercise of equity options settles in two business days. The exercise of index options settles the next business day. The exercise of index options settles in two business days. A) II and III B) II and IV C) I and IV D) I and III
A Explanation Listed equity options, if exercised, settle in two business days (regular way settlement for equities). Index options, if exercised, settle on the next business day—and in cash.
Which of the following risk factors would be least important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers? A) Credit risk B) Extended payment risk C) Interest rate risk D) Prepayment risk
A Explanation Most CMOs offered to the public are backed by mortgages held by government-sponsored corporations like Fannie Mae, Ginnie Mae, Freddie Mac, et cetera. Credit risk would be a minimal consideration. The other risks are inherent to mortgage-backed securities.
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 A) I and II B) I and IV C) III and IV D) II and III
A Explanation Neither the final public offering price nor the effective date (the date the SEC releases the securities to be sold) are found in a preliminary prospectus.
Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within A) 10 business days of the announcement. B) 5 business days of the announcement. C) 15 business days of the announcement. D) 20 business days of the announcement.
A Explanation Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.
All of the following would flow through as a loss to limited partners except A) principal repayment on recourse debt. B) depletion. C) interest payments on recourse debt. D) accelerated depreciation.
A Explanation Principal repayments are not deductible for tax purposes. The interest is deductible.
A company's balance sheet dated December 31 shows retained earnings of $100,000. You can deduce from this information that the company A) has had $100,000 in undistributed profits since its inception. B) earned a profit of $100,000 for this year. C) has at least $100,000 in cash. D) has had total net income of $100,000 since its inception.
A Explanation Retained earnings represent the accumulated total of all earnings that have been retained in the company since its inception. It is quite possible that the company did not earn $100,000 in that particular year and does not have $100,000 in cash
A fundamental analyst would be interested in all of the following except A) reversals. B) corporate regulatory filings. C) working capital. D) debt-to-equity ratios.
A Explanation Reversals interest technical analysts, who look at fluctuations in the market, not fundamental economic values.
All of the following are true of stockholders' equity except A) that it is carried as an asset on the balance sheet. B) that it is also called net worth. C) that it consists of stock issued, capital surplus, and retained earnings. D) that it is reflected in the book value of the stock.
A Explanation Stockholders' equity or net worth (total assets less liabilities) is what a stockholder is entitled to should a company liquidate.
A technical analyst is concerned with all of the following trends except A) price-to-earnings (P/E) ratios. B) changes in the DJIA. C) reversals. D) support levels.
A Explanation Technical analysts are more interested in forecasting market trends and securities prices than in studying individual corporations. Therefore, they are concerned with market prices, trading volumes, changes in the Dow Jones Industrial Average, reversals, support and resistance levels, advance/decline lines, short interest, and many other factors that might help them with buying and selling decisions. Fundamental analysts, on the other hand, concentrate on a stock's intrinsic quality and are concerned with P/E ratios and earnings per share.
Information found in The Bond Buyer would include all of the following except A) secondary market volume. B) the 30-day visible supply. C) the placement ratio. D) Revdex.
A Explanation The Bond Buyer is a source of information for new (primary market) municipal bond issues. It contains Revdex, an index for revenue bonds, as well as general obligation bond indexes. Additionally, it includes the 30-day visible supply and the placement ratio.
If a customer writes 1 Jul 80 put at 7, and the put is exercised when the market price is at 70, for tax purposes, what is the effective cost basis of the stock put to the seller? A) $73 B) $80 C) $70 D) $87
A Explanation The cost basis is 80 (the price at which the writer must buy) minus 7 (the premium the writer was paid), or $73 per share.
A company very concerned about liquidity would want A) high current ratio. B) low P/E ratio. C) high P/E ratio. D) low current ratio.
A Explanation The current ratio is a measure of liquidity. It is the current assets divided by the current liabilities. The higher the ratio, the more liquid the company. This has no bearing on whether high or low P/E ratios are desirable.
A customer sells short 100 shares of XYZ at 58 and buys 1 XYZ Jan 60 call for 3. If the stock price falls to $52, the customer buys back the stock and closes the option at 1 for A) a gain of $400. B) a gain of $300. C) a loss of $300. D) a loss of $400.
A Explanation The customer made $600 on the short stock position ($58 to $52) and lost $200 on the call (bought for 3, sold at 1). Overall, the gain is $400.
If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is A) oversold. B) unstable. C) overbought. D) becoming volatile.
A Explanation The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom.
The most stringent test of a corporation's ability to meet its current obligations is A) the quick ratio. B) the current ratio. C) the price-to-earnings ratio. D) the debt-to-equity ratio.
A Explanation The quick ratio, sometimes called the acid-test ratio, is a more stringent test than the current ratio because it excludes inventory. The debt-to-equity ratio deals with long-term debt rather than current liabilities. The price-to-earnings (P/E) ratio does not deal with assets and liabilities.
Reduced sales charges are allowed under all of the following circumstances except A) combining separate purchases made by a client and her business partner in their respective IRA accounts. B) additional purchases that qualify for breakpoints under rights of accumulation. C) a lump-sum purchase that qualifies for a breakpoint. D) the customer signing a letter of intent.
A Explanation Two unrelated adults may not combine transactions to receive a breakpoint.
FINRA Rule 2231 describes the required frequency of customer account statements. In those cases where there is a highly active customer account, statements must be sent A) quarterly. B) semiannually. C) annually. D) monthly.
A Explanation Unless a customer account contains penny stocks, statements are sent quarterly. For statement purposes, the term activity includes the receipt of dividends or interest, but that does not change the quarterly requirement.
A customer has written a letter of complaint to the dealer. Upon receipt of the complaint, a municipal securities dealer must first A) accept the complaint and record the action taken. B) submit to arbitration. C) refund any money to the customer making the complaint. D) notify the examining regulatory authority.
A Explanation Upon receipt of a customer complaint, the municipal securities dealer must accept the complaint, record the action taken, put it in a complaint file, and respond. Responses also become part of the complaint file.
When a corporation completes a stock split, it will not have any impact on A) the retained earnings. B) the number of shares outstanding. C) the earnings per share. D) the par value of the stock.
A Explanation When a stock splits, the par value splits accordingly. Obviously, the number of shares outstanding increases. Because there are now more shares outstanding, there is a reduction to the earnings per share. This split will have no effect on retained earnings because there have been no monetary changes to assets or liabilities.
The official statement for a new revenue bond indicates that the flow of funds is based on a net revenue pledge. This means the first payments go to A) pay current operating and maintenance expenses. B) pay the interest and principal maturing in the current year. C) renewal and replacement fund. D) the debt service reserve fund.
A Explanation When the flow of funds is described as a net revenue pledge, it means the operating and maintenance expenses are paid first. Following that is the debt service (interest and this year's principal). In a gross revenue pledge, the order is reversed.
Define "Mark to the market" in a margin
A mark to the market occurs when one party to a contract becomes partially unsecured due to a change in the stock's market value covered by a contract. A mark to the market is a request for additional collateral.
Which of the following best describes the investment characteristics of a high-quality long-term municipal bond? A) High inflation risk, high market risk B) High inflation risk, low default risk C) Low inflation risk, high market risk D) Low inflation risk, low default risk
B Explanation A longer term bond will be subject to more inflation risk. Because the quality of the bond is high, the level of default risk should be low.
A company's changing from straight line to accelerated depreciation will increase income in the early years. decrease income in the early years. increase income in the later years. decrease income in the later years. A) II and IV B) II and III C) I and IV D) I and III
B Explanation Accelerated depreciation increases charged expenses during the early years of equipment life but decreases charged expenses during the later years.
In his margin account, Cynthia exercises her DMF call at 50 and simultaneously sells the 100 shares at $60. What is the amount of her margin call? A) $3,000 B) $0 C) $2,500 D) $2,800
B Explanation Because the trades took place simultaneously, there is no margin required. The sale at $60 more than covers her cost at 50.
A customer receives a cash dividend of $1,000 in his margin account. How much of the dividend will be credited to the special memorandum account (SMA)? A) $0 B) $1,000 C) $250 D) $500
B Explanation Cash dividends and interest are considered nonrequired deposits to a margin account and are credited in full to SMA. Once credited to SMA, 100% of the deposit could be withdrawn unless doing so would create a margin call.
Compared with selling short, it would not be correct to state that buying a put option A) requires a smaller capital commitment. B) offers a high potential profit. C) has a lower loss potential. D) does not require meeting the locate requirement for short sales.
B Explanation In both cases, the investor profits when the price of the underlying asset declines. The maximum profit is when the price of the asset reaches zero. That makes the maximum profit on the long put equal to the strike price minus the premium. Because there is no cost in selling short (the margin deposit requires a capital commitment, but is the investor's money), the maximum profit is the entire decline to zero. For exam purposes, we disregard commissions. Buying a put requires a smaller capital commitment than does shorting the stock and has a lower loss potential (the premium only) because selling short involves unlimited risk. When selling stock short on an exchange, the shares to be borrowed must be located before the sale. This is not a requirement when buying a put.
According to modern portfolio theory (MPT), an investor can reduce the level of risk through diversification. Adding which of the following securities would tend to reduce the portfolio's overall risk? A) A security with equal correlation B) A security with negative correlation C) A security with positive correlation D) A security with a leveraged correlation
B Explanation MPT states that the lower an asset's correlation to the overall portfolio, the greater the diversification. Greater diversification equals lower risk. Adding a security with a negative correlation offers the lowest risk. Adding a security to the portfolio that has a -1.0 correlation reduces the overall risk due to the greater diversification. The higher the security's positive correlation, the less diversification, leading to greater risk.
A client, age 27, is new to investing. With $20,000 saved thus far and $400 to allocate toward investing monthly, his goal is to purchase a home in three to five years. Which is the most suitable recommendation? A) Invest in both equity and corporate debt mutual funds so that a portfolio of stocks and bonds is established. B) Invest in a money market mutual fund to build up more cash reserves. C) Use leveraged index funds (2 or 3×) to maximize gains potential for the small investment amounts. D) Open a long margin account to take advantage of the leverage that margin purchases can create using small amounts of money.
B Explanation Securities or strategies with longer time horizons than that of the goal to purchase a home should not be used until the client has established more liquid cash reserves. The money market mutual fund would be most appropriate because it is liquid and conservative. The balanced fund is not appropriate for someone with a two- to five-year goal, and margin accounts or leveraged funds entail risk unsuitable for a conservative investor with a short investment time horizon.
The Bond Buyer's revenue index is which of the following? A) A daily balance of municipal revenue bond prices B) Yields of municipal revenue bonds with 30 years to maturity C) A daily composite average of municipal revenue bond yields D) Yields of municipal revenue bonds with 20 years to maturity
B Explanation The Bond Buyer's revenue index is an average yield of 25 revenue bonds with 30 years to maturity.
An individual purchases a variable life insurance policy. Under federal law, the individual is entitled to a complete refund of all premiums paid if the request is made within A) 10 days from the execution of the application, or for 45 days from the time the owner receives the policy, whichever is longer. B) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. C) the first 24 months after the policy was delivered to the owner. D) the first 30 days after the policy was delivered to the owner.
B Explanation The Investment Company Act of 1940 specifies a free-look period for the purchaser of a variable life insurance policy. That period is the longer of 45 days after the execution of the application or 10 days after the actual policy is delivered to the owner. The 24 months is the minimum time limit for the exchange of the variable policy into another form of permanent insurance.
When referring to the U.S. stock market, which of the following statements regarding its beta is not true? A) It is, by definition, equal to 1. B) It provides a measurement of a range that the market may move in any given day. C) It serves as a benchmark for measuring the relative volatility of a stock or portfolio against the movement of the market itself. D) It shows that if a stock's beta is 1.2, and the market moves by 5%, the stock would move by 6%.
B Explanation The beta is a benchmark and does not indicate anything about market movement as a whole. It only measures the movement of a particular security or portfolio, as compared to the movement of the entire market.
An agent has recommended investments in the XYZ Fund family to her customers for 10 years. She is referred by one of her customers to a prospect who has inherited $500,000 as the beneficiary of a life insurance policy. The prospect tells the agent he has never invested in the market before, is risk averse, and wants safety of principal to be the first priority, with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares: $200,000 XYZ large-cap growth and Income B shares: $150,000 XYZ liquid reserve money market: $150,000 The recommendation is A) suitable because it addresses the customer's liquidity objective. B) unsuitable because it does not address the customer's two primary objectives. C) suitable because she recommended conservative investments. D) suitable because it addresses the customer's safety objective.
B Explanation The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective.
Which of the following must be included on a municipal securities order ticket? A) Broker-dealer firm's capacity B) Indication of whether the order is solicited, unsolicited, or discretionary C) Statement that the name of the contra party will be given on request D) Statement that time of settlement will be given on request
B Explanation The order ticket must indicate whether the trade is solicited, unsolicited, or discretionary. The other items, which may not be known yet, go on the confirmation.
A corporation buys back its stock on the open market for all of the following reasons except A) to use it for future acquisitions. B) it reduce interest charges. C) to use it for stock options. D) it increase earnings per share.
B Explanation The repurchase of common stock does not reduce interest payments; however, it does reduce total dividends paid.
The portion of a municipal bond underwriting spread that remains after the syndicate manager subtracts the management fee is A) the concession. B) the total takedown. C) the total spread. D) the additional takedown.
B Explanation The total takedown is that portion of the municipal underwriting spread that remains after the underwriting manager takes the management fee. The total takedown consists of the additional takedown and the concession.
Reasons why a corporation might engage in a stock buy-back program would include all of these except A) using the stock for employee stock options. B) reducing annual interest expense. C) increasing earnings per share. D) having stock available for future acquisitions.
B Explanation There is no interest expense with stock. When a company buys back its stock, it becomes treasury stock. That stock is no longer outstanding. Buying back the stock should cause the earnings per share to increase (there are now fewer shares outstanding). Many times one company will acquire another one by paying for the purchase with its treasury stock rather than cash. Many companies offer employees ownership opportunities through employee stock options. This is a way to ensure that the company has enough stock to meet the needs.
A bond with 25 years to maturity, 7% coupon, quoted on a 6.25% basis is callable in 10 years at 103, 15 years at 102, and 20 years at par. On the customer's confirmation, the dollar price quoted must be based on A) 25 years to maturity. B) 10 years to call. C) 15 years to call. D) 20 years to call.
B Explanation This is a premium bond. With premiums, the years to call will be lower than the years to maturity. The question becomes which call date should be used. As a rule of thumb, always use the near-term (first) in-whole call date.
XYZ Corporation owns 18% of the voting common stock of ABCD Enterprises. In the current tax year, XYZ receives $250,000 in dividend income from its investment in ABCD. If XYZ has a marginal tax rate of 21%, what is its tax liability on the dividend income received? A) $0 B) $26,250 C) $52,500 D) $9,450
B Explanation Under the intercorporate dividend exclusion rule, if a corporation owns stock in another corporation, 50% of the dividends received is excluded from taxation. Therefore, only 50% of the $250,000 received is subject to tax (50% × $250,000 = $125,000). Applying a tax rate of 21% to $125,000 results in a tax liability of $26,250.
Which of the following statements regarding qualified retirement plans are true? Contributions are made with pretax dollars. Contributions are made with after-tax dollars. Distributions are 100% taxable. Distributions are taxable only to the extent of earnings. A) II and III B) I and III C) I and IV D) II and IV
B Explanation With qualified plans, participants receive a tax deduction for contributions to their plan. As earnings accumulate tax deferred, distributions, which consist of tax-deferred earnings and contributions for which the participant received a tax deduction, are 100% taxable.
A technical analyst would be most interested in A) current ratio. B) support levels. C) price-to-earnings (P/E) ratio. D) corporate earnings.
B Price and volume on your TECH Explanation Technical analysts care about price and volume trends in the marketplace, such as support levels. A corporation's earnings, P/E ratio, and current ratio would be of most interest to a fundamental analyst who reviews a company's financial statements in more detail.
_____________ measures the systematic risk of a security or a portfolio compared to an index like the S&P 500. Many ________ stocks would have a _____ over 1, probably much higher. A __________ would have a ______ close to zero because its prices hardly move relative to the market as a whole.
BETA measures the systematic risk of a security or a portfolio compared to an index like the S&P 500. Many growth stocks would have a beta over 1, probably much higher. A T-bill would have a beta close to zero because its prices hardly move relative to the market as a whole.
_______ is a measure of volatility relative to a benchmark, such as the S&P 500. ________ is the excess return on an investment after adjusting for market-related volatility and random fluctuations.
Beta is a measure of volatility relative to a benchmark, such as the S&P 500. Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations.
What is the difference between the current ratio and the quick ratio (acid test)? What do they measure
Both measure liquidity, comparing company's current assets to current liabilities. quick ratio (quick asset ratio or acid-test ratio) the inventory is excluded.
Your customer, who still works, informs you that she will be funding a variable annuity (VA) you have recommended from two sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another VA she recently purchased within the past two years without a lifetime income rider like the one you have recommended. Based only on these facts, the VA recommendation is A) not suitable because a lifetime income rider is only for someone who is already retired. B) suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract. C) not suitable. D) suitable regardless of funding sources.
C Explanation Based on the information given in the question, the VA recommendation would not be suitable. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Cashing out life insurance policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase.
If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true? The corporation will be subject to currency risk. The corporation will not be subject to currency risk. The issue must be filed with the SEC. The issue need not be filed with the SEC. A) II and III B) I and III C) II and IV D) I and IV
C Explanation Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the United States, the issue is not registered with the SEC.
An outstanding municipal bond issue has the following characteristics: 7.50% coupon, maturity in 20 years, puttable in five years at 100, callable at 102 in 10 years, declining in a straight line to maturity, and yield to maturity is 6.50%. The issues should now be quoted A) yield to maturity. B) yield-to-put. C) yield to call at 102. D) yield to call at par.
C Explanation Because the bond issue is selling at a premium, the yield to call is less than the yield to maturity. The bonds must be quoted as yield to call at the earliest maturity, which would be the 10-year call at 102. If the bonds were selling at a discount, yield to maturity would be the proper quote. Yield-to-put is not required to be quoted.
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? A) Yield to the 20-year call at par B) Yield to the 10-year put at par C) Yield to the 30-year maturity D) Yield to the 5-year call at a premium
C Explanation Bonds that sell at a discount are always quoted as yield to maturity. This is the lowest possible net yield that the investor would make by holding the bonds until the issuer redeems them.
Which of the following statements regarding convertible bonds is not true? A) Convertible bondholders are creditors of the corporation. B) Coupon rates are usually lower than nonconvertible bond rates of the same issuer. C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. D) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature.
C Explanation Coupon rates are not higher; they are lower because of the value of the conversion feature. The bondholders are creditors. If the stock price falls, the conversion feature will not influence the bond's price.
Which of the following risks would benefit most from portfolio diversification? A) Purchasing power risk B) Market risk C) Default risk D) Interest rate risk
C Explanation 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. The other choices are all systematic risk, and diversification is not very useful for them.
In a rising price environment, which of the following inventory valuation methods will result in the highest reported earnings? A) Straight line B) Average cost C) First in, first out (FIFO) D) Last in, first out (LIFO)
C Explanation FIFO means lower cost inventory is used first in determining the cost of goods sold. This has the effect of inflating earnings. Using LIFO means higher cost inventory is used to determine the cost of goods sold. In a rising price environment, LIFO better matches cost with revenue.
You have a high net worth client who is interested in investing in a hedge fund. Details of the offering would be found in the fund's A) subscription agreement. B) statement of additional information. C) private offering memorandum. D) registration statement.
C Explanation Hedge funds do not register with the SEC, so there is no registration statement. However, the management does prepare an offering document. It could be called the private placement memorandum, the offering circular, or even the prospectus on the exam. The statement of additional information (SAI) is limited to registered management investment companies (open- and closed-ends) and ETFs.
An investor purchases a 3x leveraged ETF. The index value is $100. On day 1, the index falls by 10% and then on day 2 goes up by 10%. How has this affected the investor's account? A) It is even. B) It is up 3%. C) It is down 9%. D) It is down 3%.
C Explanation If the index drops by 10 points on day 1, it has a 10% loss and a resulting value of 90. Assuming it achieved its stated objective, the leveraged ETF would therefore drop 30% on that day and have an ending value of $70. On day 2, if the index rises 10%, the index value increases to 99. For the ETF, its value for day 2 would rise by 30%, which means that the ETF would have a value of $91 (70 × 30% = 21). On both days, the leveraged ETF did exactly what it was supposed to do—it produced daily returns that were two times the daily index returns. But let's look at the results over the two-day period: the index lost 1% (it fell from 100 to 99) while the 3x leveraged ETF lost 9% (it fell from $100 to $91). That means that over the two-day period, the ETF's negative returns were 9 times as much as the two-day return of the index instead of 3 times the return.
Which of the following describes Nasdaq Level 3 service? A) It displays the representative bid and ask quotations on a security in which a minimum of two market makers exist. B) It shows the quotations from all registered market makers entering quotes into the system. C) It allows market makers to enter quotations into the system for a security in which they are registered. D) It displays the representative bid and ask quotations on a security in which a minimum of three market makers exist.
C Explanation Nasdaq Level 3 service allows market makers to enter and update quotations on securities in which the market makers are registered with FINRA.
If a registered representative is seeking to sell shares of an investment company to a client, which of the following statements would be accurate and permissible regarding her recommendation? When the client redeems his shares, he will not immediately know their dollar value. If the client invests just before the dividend distribution, he can benefit by receiving the added value of that dividend. If the client purchases the shares of two or more funds in the same family of funds, he may be entitled to a reduced sales charge. The purchase of Class B shares always provides the greatest return on investment. A) II and III B) I and IV C) I and III D) II and IV
C Explanation The purchase of two funds in the same family of funds may qualify an investor for combination privileges. At redemption, he will receive the next price calculated (forward pricing), which is not yet known. Class B shares, or deferred sales charge shares, may or may not provide the best return. Share class suitability can depend on the amount invested and the client's individual needs. Lastly, while the dividend is received if the fund shares are purchased before the ex-dividend date, there is no added value. The fund share price is reduced by the amount of the dividend on the ex-dividend date, just as it would be for a cash dividend paid on equity securities.
When a registered representative opens an options account for a new client, in which order must the following actions take place? Obtain approval from the branch manager Obtain essential facts from the customer Obtain a signed options agreement Enter the initial order A) I, II, III, IV B) II, I, III, IV C) II, I, IV, III D) I, II, IV, III
C Explanation The steps in opening a new options account occur in the following order: obtain essential facts about the customer, have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 days. What about delivery of the options disclosure document (ODD)? That isn't included in the choices here. It must be delivered at or prior to the time the account is approved for options trading. That would mean before or simultaneously with choice I.
When customers receive their account statements, they will generally not include A) interest charged on debit balances in margin accounts during the statement period. B) total cost of purchases and net proceeds of sales made during the statement period. C) trade dates of all transactions during the statement period. D) security positions at the end of the statement period.
C Explanation Trade dates appear on the trade confirmations.
Under SEC Rule 17a-4, all of the following records must be retained for 6 years except A) the stock record. B) blotters. C) trial balances. D) the general ledger.
C Explanation Trial balances are a 3-year record. Six-year records include blotters, the general ledger, the stock record, customer statements, and customer account information.
If XYZ is trading at 39, and a customer sells 1 XYZ Jun 40 put and buys 1 XYZ Jun 35 put, he will profit if the spread widens. the spread narrows. the contracts expire. the contracts are exercised. A) I and IV B) II and IV C) II and III D) I and II
C Explanation When a spread's premiums are not available, the more valuable option is found by examining the strike price. A put with a higher strike price has a higher premium because a put represents the right to sell. Because the investor is selling the more valuable put (the one with the higher strike price), this is a credit spread, and profit occurs if the options expire worthless (in this case, the customer keeps the net credit) or the spread narrows between the premiums.
If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $600 in stocks B) $381 in securities C) $600 cash D) $325 cash
C Index settles in cash (s&P 100)
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) the amount shown on Tape B the business day before the account statement closing date. B) no valuation for the unlisted REITS and the original investment made in the DPP interest. C) an exact per share value as calculated on the last business day of the month. D) a per share estimated value of the securities.
D Explanation A general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, in a manner reasonably designed to ensure that the per share estimated value is reliable.
Peyton has been a client of Turing Technical Analytics (TTA), a FINRA member broker-dealer, for 10 years. Peyton has decided that it is time to move the account to a new firm, Enigma Mathematical Portfolio Modeling, (EMPM). Which of the following statements accurately reflects the requirements when using the ACATS system? A) TTA has three business days to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). B) EMPM has three business days to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). C) EMPM has one business day to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). D) TTA has one business day to validate or take exception to the positions listed on the Transfer Initiation Form (TIF).
D Explanation ACATS requires the carrying firm (TTA) to validate or take exception to the securities listed on the TIF within one business day. If all is in order, the transfer must be completed within three business days. The receiving firm, EMPM, is responsible for sending the signed TIF to ACATS.
Prime brokerage accounts are most often used by A) investment advisers. B) broker-dealers. C) investment bankers. D) institutions.
D Explanation Although any of these could use prime brokerage accounts, their primary users are institutional investors.
A municipal bond subject to a refunding call must be quoted at yield to call in which of the following instances? A) A bond at par callable at par B) A bond at par callable at a premium C) A bond at a discount callable at par D) A bond at a premium callable at par
D Explanation An investor's yield would be less on a premium bond if called at par rather than if allowed to mature. Thus, a registered representative must quote the lower potential yield scenario (in this case, yield to call).
In April, a customer sold short 100 shares of QRS stock at $50 and simultaneously wrote 1 QRS Jan 50 put for a premium of $7. If the January put is exercised when the market value of QRS is 43 and the stock acquired is used to cover the short stock position, what is the customer's profit or loss per share? A) $0 B) $14 loss C) $7 loss D) $7 gain
D Explanation Because the stock is purchased on exercise of the short put for $50 and is used to cover the $50 short sale, the investor incurs no gain or loss on the stock. The customer keeps the $700 collected in premiums for a profit of $7 per share.
When compared to statutory voting, cumulative voting gives an advantage to A) participating preferred stockholders. B) majority stockholders. C) management rather than the board of directors. D) minority stockholders.
D Explanation Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.
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, A) this would be considered a violation of the Conduct Rules. B) approval from Morgan's current supervising principal would be required before this recommendation could be made. C) no contact can be made until at least three months after Morgan's registration is transferred. D) certain disclosures have to be made in an educational format using a FINRA template.
D Explanation FINRA Rule 2273 states, "A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when the member, directly or through that registered person, individually contacts the former customer of that registered person to transfer assets." This educational communication has to be delivered to any former customer who transfers during the first three months of Morgan's new association.
ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's P/E ratio is higher, that would indicate that A) ABC's sales are higher than MNO's. B) ABC sales are lower than MNO's. C) ABC's net income is higher than MNO's. D) ABC's net income is less than MNO's.
D Explanation If ABC's P/E ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's. Let's use some hypothetical numbers to prove this. The stock price of both companies is $60 per share. Both companies have 1 million shares outstanding. The P/E ratio compares the market price ($60) to the earnings per share. If ABC earned $5 per share and MNO earned $6 per share, their respective P/E ratios would be 12:1 ($60 ÷ $5) and 10:1 ($60 ÷ $6). From that we see, that given the same market price and the same number of shares outstanding, the higher the P/E ratio, the lower the earnings.
A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A) decline the transaction because short-term trading of funds is not allowed. B) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75% 12b-1 fee. D) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee.
D Explanation If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares.
When a member firm sells municipal bonds to a customer out of its inventory, it must A) disclose its cost basis in the bond. B) indicate compliance with the 5% markup policy. C) disclose the amount of commission on the customer's confirmation. D) indicate the amount of markup on the customer's confirmation.
D Explanation In a principal transaction (out of its inventory), the markup must be disclosed on a confirmation, and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities. The firm does not disclose what it paid for the bond. That price could be higher or lower than the current market and is not relevant to computing the markup on inventoried securities.
A corporation plans to make a public tender for 50% of its outstanding bonds. The price of the tender will be set by A) the paying agent. B) the transfer agent. C) the trustee. D) the issuer.
D Explanation In a tender offer, the issuer is offering to buy back all or a portion of the issue at a stated price. The price of the tender is set by the issuer although the issuer may engage an underwriter to help it set the price. This could happen when interest rates have gone up, causing the price of the outstanding bonds to fall. From a practical standpoint, this would mean the corporation paying off debt at a price below face value.
A quotation on a municipal security between dealers is assumed to be A) a workable quote. B) an indication of interest. C) a nominal quote. D) a bona fide quote.
D Explanation Municipal bond quotations between dealers are required to be bona fide, or firm, quotes. They are required to be fair and reasonably related to the current market.
When an agent explains mutual funds to a prospective investor, which of the following statements may be made? A) Mutual funds must make payment within seven days of a redemption request and guarantee a return of the original investment. B) A fund always redeems shares at NAV, with little chance of a financial loss. C) Mutual fund shares are liquid and may be switched from fund to fund without tax liability. D) The redemption value of mutual fund shares fluctuates according to the fund's portfolio value.
D Explanation Mutual fund redemption values fluctuate according to the value of the securities in the portfolio. The tax liabilities associated with mutual fund switching may not be glossed over. While the redemption rules of the Investment Company Act of 1940 do make mutual funds liquid, investors are not guaranteed to receive an amount equal to the original investment.
A firm underwriting of a municipal bond issue usually has a number of different broker-dealers involved. Those who earn a commission on each sale they make are performing in the role of A) a selling syndicate member. B) a registered representative. C) the syndicate manager. D) a selling group member.
D Explanation Selling syndicate members use selling group members to expand their reach. These selling group members receive a selling concession (a commission) on each sale they make. They have no financial commitment and return any unsold bonds to the syndicate member. Although registered representatives will typically earn a commission on the bonds they sell, the question asks about the broker-dealers involved in the underwriting. Be sure to answer the specific question asked.
In which of the following investment strategies would it be illegal for a mutual fund's portfolio manager to engage? A) Going long U.S. Treasury bonds B) Taking a long position in shares of a large-cap company C) Liquidating a position in shares of a small-cap company D) Taking a short position in shares of a mid-cap company
D Explanation The Investment Company Act of 1940 prohibits mutual funds from engaging in short selling. The fund's objective will affect the type of securities to be held in the portfolio, but they can only be long positions.
All of the following Municipal Securities Rulemaking Board (MSRB) Rules of Uniform Practice requirements may be altered by mutual agreement between dealers except A) the terms of delivery. B) the price and time of delivery. C) the payment of shipping expenses. D) the content of confirmations.
D Explanation The MSRB regulates the contents of confirmations to standardize information. There must be an original record of the agreement, even though dealers may mutually agree to change the terms.
A customer establishes the following positions: Buy 100 JMB at 28 Buy 1 JMB Dec 25 put at 2 What is the maximum potential loss? A) $3,000 B) $200 C) $2,800 D) $500
D Explanation 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.
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 A) unstable. B) oversold. C) becoming volatile. D) overbought.
D Explanation The momentum of the market advance seems to be easing as the number of advancers to decliners is leveling out. It looks like the decline/advance line is moving in a direction away from advancers. A technical analyst would conclude that the market is overbought and approaching a top.
One of your more conservative clients is a buy and hold investor. As her registered representative, what would be the most suitable asset allocation strategy you should employ? A) Portfolio rebalancing B) Maximizing alpha C) Tactical asset allocation D) Strategic asset allocation
D Explanation The most appropriate asset allocation strategy for a buy and hold investor (long-term passive investor) would be strategic asset allocation. Using this strategy, the portfolio would be subject to periodic rebalancing, but rebalancing is not an asset allocation strategy. Tactical asset allocation is a suitable allocation strategy for active investors who are trying to time the market, buying when prices are down and selling when prices are up. Alpha measures an investment's actual return to the expected return; it is not an allocation strategy.
If XYZ common stock has a $4 dividend, a yield of 4.2%, a price-to-earnings (P/E) ratio of 12, and it is trading at $96, its approximate earnings per share (EPS) is A) $4.00. B) $50.40. C) $48.00. D) $8.00.
D Explanation The stock's P/E ratio is price to EPS. Dividing the stock's price by the P/E will give the EPS ($96 / 12 = $8).
The Bond Buyer's 30-Day visible supply includes issues of notes sold on a competitive basis. issues of bonds sold on a competitive basis. issues of notes sold on a negotiated basis. issues of bonds sold on a negotiated basis. A) I and III B) I and II C) III and IV D) II and IV
D Explanation The visible supply includes only bonds. Notes are not considered because they do not compete directly with the bonds.
Municipal Securities Rulemaking Board rules prohibit dealers from entering into which of the following transactions with a mutual fund? A) Purchasing the fund's shares to fill customers' orders B) Accepting orders from a fund to buy a new municipal issue C) Acting as a broker's broker for a large block of bonds the fund wishes to sell D) Accepting portfolio trades from the fund as compensation for sales of the fund's shares
D Explanation This prohibited practice is known as reciprocal dealing between a broker-dealer and an investment company. The other examples are routine practices.
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? A) The lower of the yield to call or the yield to maturity B) Current yield C) Yield to maturity D) Yield to call
D Explanation When a bond issue is prerefunded, the issuer is going to redeem the bond on the first call date. The yield must be quoted to call.
The visible supply has been increasing steadily over the past 30 days. This is an indication that A) prices are likely to rise. B) yields are likely to fall. C) fewer new issues will be offered in the next 30 days. D) yields are likely to rise.
D Explanation When the visible supply increases, it tells us that the number of bond issues coming to market is increasing. Greater supply puts downward pressure on prices. As bond prices fall, yields increase.
______________ is a company's net profit divided by the number of common shares it has outstanding. ___ indicates how much money a company makes for each share of its stock, and is a widely used metric to estimate corporate value. A lower/higher ___ indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to its share price.
Earning per share (EPS)
