Series 7 Missed/Unclear Questions
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 A) $79. B) $87. C) $86. D) $94.
A) $79. This is a covered call writer. If the stock rises above $90, the writer will be exercised and will make $700 on the stock (buy at $83, deliver at $90) and keep the $400 received in premiums. If the stock declines, the call expires unexercised. The writer can lose $400 on the stock (the premiums earned) and still break even. This occurs at $79 ($83 − $4). Breakeven is the cost of stock purchased minus premiums.
Compared to defined contribution plans, defined benefit plans give the highest return to employees who I. are highly compensated. II. receive lower compensation. III. have fewer years until retirement. IV. have many years left until retirement. A) I and III B) I and IV C) II and III D) II and IV
A) I and III Highly compensated employees who have fewer years until retirement will experience advantages over other employees with this type of plan. Their retirement benefits are predefined and generally linked to the compensation level they attained while employed. After a short time with the company, a person may qualify for benefits comparable to those it would have taken many years to attain under a defined contribution plan. LO 1.h
Customer A and Customer B both have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments? Receiving cash distributions may reduce Customer A's proportional interest in the fund. Customer A may use the cash distributions to purchase shares later at net asset value (NAV). Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. Due to compounding, Customer B's principal will be at greater risk. A) I and III B) II and IV C) I and IV D) II and III
A) I and III If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, the customer's proportional interest in the fund will decline. The option to have distributions automatically reinvested allows those purchases to be made at NAV, but a purchase made later would be made at the public offering price like any other new purchase.
An agent may open a joint account for which of the following? I. Lee and his 13-year-old son, Tom II. Mary and Kelley, two adult college roommates III. Jerry and Mark, friends and partners in business for more than 20 years IV. Melinda and her minor nephew, John, for whom she is guardian A) II and III B) I and IV C) II and IV D) I and III
A) II and III Joint account owners share ownership of the account and must be adults. A minor may not legally exercise control over an account and may not be an owner of record of an account. LO 1.b
An investor opens the following options position: Buy 1 BOB Jan 60 call @4; Buy 1 BOB Jan 55 put @2½. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is unlimited; maximum loss = $650; breakeven points are $48.50 and $66.50. B) Maximum gain is $650; maximum loss is unlimited; breakeven points are $53.50 and $61.50. C) Maximum gain is unlimited; maximum loss is $1,800; breakeven points at $48.50 and $66.50. D) Maximum gain is unlimited; maximum loss = $650; breakeven points are $53.50 and $61.50.
A) Maximum gain is unlimited; maximum loss = $650; breakeven points are $48.50 and $66.50. The first step is to identify the position. This is a long combination—a long put and a long call with different terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the combination (the two premiums totaling $650). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($60 + $6½ = $66.50) and subtract the premium from the strike of the put ($55 ‒ $6½ = $48.50).
An investor writing an XYZ Oct 50 put could cover that put with A) an XYZ Oct 55 put. B) an XYZ Oct 45 put. C) an XYZ Jul 55 put. D) an XYY Oct 60 put.
A) an XYZ Oct 55 put. A short put can be covered with a long put. The long put must have an exercise price the same or higher than the short put and an expiration date at least as long as the short put. The only choice meeting both criteria is the October 55 put. Two other ways to cover a short put is with short stock and cash. An XYY put will not cover an XYZ put. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 10.d
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 A) defeasance. B) default. C) replacement. D) termination.
A) defeasance. Defeasance occurs when an outstanding bond issue is paid off prior to maturity through a refunding. Once the creditors (the bondholders) have received their funds, any liens on assets or revenues are terminated. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 6.d
Member firms are required to maintain documentation regarding suitable net worth for investors in A) direct participation programs. B) real estate investment trusts. C) variable life insurance. D) high-yield bonds.
A) direct participation programs. It is FINRA Rule 2310 on DPP suitability that requires documentation maintained on certain aspects of the client. Among those is that the investor has a net worth sufficient to sustain the risks of the DPP, including loss of investment. Although part of dealing with customers is obtaining a financial profile, including net worth, the other choices here do not have a specific requirement to keep records on how the firm based its suitability for the purchase. LO 11.h
To be defined as a pattern day trader, the customer must execute at least A) four day trades in five business days. B) four day trades in the same week. C) five day trades in five business days. D) four day trades on a single business day.
A) four day trades in five business days. FINRA defines a pattern day trader as one who executes 4 or more day trades in a 5-business-day period. That can stretch over two different weeks. LO 1.a
A bond analyst plots the yields of AAA corporate bonds and compares them to the yields of U.S. Treasury bonds with similar maturities. This is known as A) yield curve analysis. B) inverse yield analysis. C) yield comparison analysis. D) yield plot analysis.
A) yield curve analysis. The plotting of bond yields results in a curve, usually one where the longer the time to maturity, the higher the yield. The term yield curve analysis is the proper way to describe comparing the yields of highly-rated corporate bonds to those of Treasury bonds. When the spread between the yields is narrow, economic conditions in the United States are generally favorable. If the spread (sometimes called the credit spread) widens, it is generally a sign of a worsening economy. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 4.f
A customer purchases five 6.25% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date? A) $312.50 B) $154.30 C) $156.25 D) $153.50
C) $156.25 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. LO 7.b
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 A) $57. B) $51. C) $53. D) $49.
C) $53. 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. LO 10.i
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 A) $7,200. B) $7,500. C) $6,900. D) $7,350.
C) $6,900. The Regulation T requirement is $7,200 (50% × $14,400). There is no Regulation T requirement for writing covered calls. The requirement to establish both positions is $7,200. However, the question asked for the margin deposit. 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. LO 16.d
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? A) $1,500 B) $100 C) $600 D) $900
C) $600 This is a credit spread. The maximum loss is the difference between the strike prices and the net credit. In this example, the strike price difference is 15 (65 - 50) and the net premium is 9 (10 − 1), or 15 − 9 = 6 × $100 = $600 maximum loss. The maximum gain is the net credit of $900. Credit put spreads are bullish (buy the low strike, sell the high strike). If the stock's price should rise above $65 per share, both options expire worthless (who wants to sell stock at $50 or $65 when the price is above that). If the investor is wrong and the stock price falls below $50, the short put will be exercised and the investor will have to buy the stock at $65 per share. Now that the stock is owned, it can be used to exercise the long put and be sold at $50 per share. That $15 difference between the 50 and 65 strikes is the largest spread possible. Comparing the loss of $1,500 to the initial credit of $900 proves that the maximum risk of loss is $600. LO 10.e
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) $70 B) $80 C) $73 D) $87
C) $73 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. LO 10.i
A margin account with a short credit balance of $39,000 will receive a call for additional funds if the SMV rises above A) $40,000. B) $30,000. C) $10,000. D) $20,000.
B) $30,000. When the price of a stock sold short rises, the account loses money. As a certain point, the margin maintenance level is reached. Once the stock rises above that point, a maintenance call will be issued demanding more money. With the maintenance call, the investor has to return the account to the margin maintenance requirement (30% of CMV here). Dividing the credit balance by 1.30 will give the call level: $39,000 divided by 1.30 equals $30,000. LO 16.d
SEC Regulation 14E requires that tender offers be open for at least A) 30 calendar days. B) 20 business days. C) 15 calendar days. D) 10 business days.
B) 20 business days. 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. LO 14.b
Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date? A) 600 shares at $50 B) 600 shares at $45.45 C) 660 shares at $46.50 D) 660 shares at $46.37
B) 600 shares at $45.45 In this example, adjust only the share price: $50 ÷ (1 + 0.10) = $45.45. The number of shares in the order is not adjusted unless the shares can be increased by a full round lot (100 shares). LO 16.a
When must a new options customer—who has not yet traded options—receive the Options Clearing Corporation's (OCC's) current disclosure document? A) At or before the time the registered representative signs the customer approval form B) Within 15 days of the ROP's approval of the customer's account for options trading C) At or before the time the account receives approval for options trading D) No later than 15 days after the ROP signs the options customer approval form
C) At or before the time the account receives approval for options trading Customers must receive the OCC Disclosure Booklet at or before the time their account is approved for options trading. LO 10.j
Which of the following is applicable to the Nasdaq PHLX? Regional exchange operated by Nasdaq Offers trading in equity securities and options contracts Completely electronic exchange with no physical trading floor Regional exchange operated by FINRA for the execution of over-the-counter stocks only A) II and III B) I and III C) I and II D) I and IV
C) I and II The Nasdaq PHLX is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on the floor. LO 10.j
An investor looking for current income while wishing to reduce interest rate risk would most likely find which of the following investments suitable? A) A $100 par preferred stock callable at 102 in three years B) A bond unit investment trust (UIT) with a duration of five years C) A U.S. Treasury note maturing in eight years D) U.S. Treasury STRIPS maturing in five years
B) A bond unit investment trust (UIT) with a duration of five years One of the features of a unit investment trust is that it has a defined end date. The bonds held in the UIT in our question all mature in five years. Regardless of how high current market interest rates rise, bonds pay off at face value when they mature. The longer the investor has to wait for maturity, the greater the interest rate risk. That makes the Treasury notes a less acceptable choice. You can assume that a callable security, preferred or debt, is not going to be called unless interest rates go down. Remember, when interest rates decline, fixed income investment rise in price so the investor would not want the stock called away. The STRIPs will mature in five years but, as zero coupon securities, will pay no income in the interim. LO 14.a
Who signs the agreement among underwriters for a municipal bond issue? A) Managing underwriter and bond counsel B) All members of the underwriting syndicate C) Managing underwriter and trustee D) Managing underwriter and issuer
B) All members of the underwriting syndicate All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee. LO 20.b
KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? I. Tax rate II. Cash dividend III. Allowance for bad debts IV. Retained earnings A) II and III B) I and III C) II and IV D) I and II
B) I and III Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports. LO 13.c
Which of the following would not be examples of overlapping debt? i. Debt to build a state office building within city limits ii. Debt to maintain a county park district serving a municipality iii. Debt backed by two states cooperating in the construction of a bridge iv. Debt for a high school district within city limits A) II and IV B) I and III C) I and II D) II and III
B) I and III State debt cannot overlap with any other municipal entity. LO 6.b
Given the NAV and asking price per share, which of the following could be open-end investment companies? A) Nav: $10.95 Ask: $12 B) Nav: $19.00 Ask: $20 C) Nav: $22.50 Ask: $25 D) Nav: $21.86 Ask: $20
B) Nav: $19.00 Ask: $20 Open-end investment companies are always priced at net asset value (NAV) plus sales charge (if any). Remembering that makes any choice with an ask price below the NAV an obvious incorrect answer. There is another requirement and that is a maximum sales charge of 8.5% of the ask or public offering price. Only the correct choice fits within that parameter with a sales charge of 5% ($1.00 divided by $20.00). There is another choice that is close, but a bit too high. With an ask price of $12.00 and an NAV of $10.95, the sales charge percentage is 8.75% ($1.05 divided by $12 = 8.75%).
Which of the following positions does not expose a customer to unlimited risk? A) Short 200 shares of XYZ and short 2 XYZ puts B) Short 2 XYZ uncovered puts C) Short 2 XYZ uncovered calls D) Short 200 shares of XYZ
B) Short 2 XYZ uncovered puts The maximum potential loss on a short put position is the market price declining to zero reduced by the premium. Remember, a stock's price can never go below "worthless." For example, if the investor sold 2 XYZ 90 puts and received a premium of 4 point each, the maximum loss would be $8,600 (worthless stock is put to the writer for $9,000 but the writer received the $400 premium) per contract or $17,200. That is a significant loss, but all of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises and there is no upper limit to a stock's price. LO 10.d
Three years ago, a customer purchased 300 shares of ACE Fund. He sold the shares on August 15 for a loss of $400. He then purchased 300 shares of the same fund on September 4 of the same year. If the investor is in a 10% tax bracket, how will the loss be treated for tax purposes in the current year? A) The loss is fully deductible. B) The loss is not deductible. C) The loss is only deductible to the extent that gains of an equal or greater amount were incurred. D) Ten percent of the loss is deductible.
B) The loss is not deductible. Because the customer repurchased the shares within 30 days of the loss transaction, the loss is disallowed under the wash sale rule, and therefore, is not deductible. A wash sale occurs when the same shares are purchased within 30 days before or after the date of sale in which the loss is incurred. LO 13.h
A mutual fund portfolio consists entirely of stocks of companies with either new products just released in the marketplace or companies holding patents pending. This mutual fund is best described as A) a combination fund. B) a special situation fund. C) an index fund. D) a Dow theory fund.
B) a special situation fund. Special situation funds buy securities of companies that are considered to be in a position to benefit from special nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations. LO 8.g
Under Uniform Practice rules, all of the following deliveries are eligible for reclamation except A) bonds delivered subject to a partial call. B) bonds delivered subject to an in-whole call. C) bearer bonds delivered with missing coupons. D) registered bonds delivered without a signature guarantee.
B) bonds delivered subject to an in-whole call. Reclamation is available if a member inadvertently accepts a delivery from another member as good and later discovers that the delivery should have been rejected. Reclamation represents the right to return a security that had previously been accepted. Bonds subject to an in-whole call are never subject to reclamation. The only certificates the seller could have delivered are those subject to the call. Unless identified at time of trade, bonds subject to a partial call are subject to reclamation.
A covered call could be written to A) purchase future securities. B) improve the return on a portfolio. C) lock in a profit. D) protect a short stock position.
B) improve the return on a portfolio. Writing a call will not necessarily lock in the profit. In the form of increased cash flow, it will improve the return on the portfolio. LO 10.d
An investor's portfolio has a beta coefficient of 0.85. If the overall market declined by 10% over the course of a year, the portfolio's value has likely A) decreased by 8.5%. B) increased by 8.5%. C) decreased by 11.76%. D) increased by 10.85%.
B) increased by 8.5%. A beta coefficient of 0.85 means that the portfolio is considered to be 0.85 times as volatile as the overall market. Therefore, if the market declines by 10%, the portfolio with a beta of 0.85 is likely to decline by only 8.5% (0.10 × 0.85). LO 13.b
Funds for Life (FFL) is an SEC registered broker-dealer. The only securities business done by the firm is the sale of redeemable investment company securities. If FFL should go into bankruptcy proceedings, SIPC would A) protect any losses up to $250,000 in cash. B) not offer protection to any of the customers. C) offer protection up to $500,000 per customer. D) offer protection up to $250,000 per customer.
B) not offer protection to any of the customers. SIPC, the Securities Investor Protection Corporation, is a nonprofit membership organization. SIPC members pay assessments into a general insurance fund that is used to meet customer claims in the event of a broker-dealer's bankruptcy. All registered brokers or dealers, by law, automatically become SIPC members, except for those persons whose business as a broker or dealer consists exclusively of the distribution of shares of registered open-end investment companies or unit investment trusts (redeemable securities). Therefore, FFL would not be a member of SIPC, and its customers would not have SIPC protection. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 15.f
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 A) short-term capital gain. B) tax-free interest income. C) taxable interest income. D) long-term capital gain.
B) tax-free interest income. The discount on an OID municipal bond is considered the bond's interest. Because interest on a GO municipal bond is tax free, when that interest is ultimately paid at maturity date, the tax treatment is the same as if interest was paid semiannually. There is a more complicated situation when the OID bond is purchased in the secondary market or when regular municipal bonds are purchased at discount in the market. LO 6.f
A registered representative recently changed firms and is meeting with former customers to see if they will move their accounts to the representative's new firm. Under FINRA Rule 2273, the representative must disclose all of the following except A) differences of products and services between the two firms. B) that the customers must have their identity confirmed as part of the new firm's customer identification program. C) some assets may not be directly transferrable. D) whether the representative may have a financial conflict of interest.
B) that the customers must have their identity confirmed as part of the new firm's customer identification program. FINRA Rule 2273 requires that educational material be provided to customers about potential conflicts of interest, the transferability of assets, differences in products and services, and potential costs of the transfer. Customers do not need to have their identity revalidated by a receiving firm, because the carrying firm has already complied with anti-money-laundering requirements. LO 15.d
Holders of common shares may generally vote on A) whether an administrative assistant should be promoted to management. B) whether the company should issue additional preferred stock. C) whether a cash dividend is to be declared. D) which member of the board of directors should be chairman.
B) whether the company should issue additional preferred stock. Common shareholders must vote to approve the issuance of additional preferred stock because additional preferred shares dilute the common shares' residual assets under a liquidation. Common shareholders do not vote to declare dividends. Board members select the chairman of the board. Shareholders do not get involved in the daily operational activity of the corporation. LO 3.c
An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is A) a general partnership. B) a C corporation. C) an S corporation. D) a limited partnership.
C) an S corporation. The S corporation, the general partnership, and the limited partnership are business models where all income or loss flows through to the owners. This avoids the double taxation on the business level and owner level, as is the case with the C corporation. With C corporations, corporate earnings taxed once at the business level and again when they are paid out to shareholders as dividends. Because the question is asking about the incorporated business model, the correct choice is the S corporation. LO 1.c
One of your older customers passes away. The customer's account had a TOD designation. When you contact the designated heir, you are told that it is unnecessary to inquire about suitability information because you already have it for the deceased customer. From previous discussions with the deceased, you know this heir is a grandchild, and you cannot imagine that the goals and objectives haven't changed. When the customer refuses to supply any new information, under SEC's Regulation BI, you A) can continue the account and make recommendations similar to those made in the past. B) inform the customer that Regulation BI requires the information or the account will be closed. C) can accept orders but cannot make any recommendations without suitability data. D) ask for a copy of the will to determine if this person is the true heir to the account.
C) can accept orders but cannot make any recommendations without suitability data. The SEC's Regulation Best Interest (Regulation BI) under the Securities Exchange Act of 1934 establishes a "best interest" standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. One cannot make a suitable recommendation without sufficient customer information. Therefore, only unsolicited orders may be accepted. Because this account was set up as transfer on death (TOD), there is no need to look at the will. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 2.f
For a customer who has purchased stock and wants to write a call option, the option ticket would be marked A) closing purchase. B) opening purchase. C) opening sale. D) closing sale.
C) opening sale. An opening transaction is used when establishing a new option position. It is an opening purchase if your client is buying the option. It is an opening sale if your client is writing the option. Closing is the term used when the client eliminates an existing option position through a trade of the contract. LO 10.a
On Wednesday, April 22, 2020, your customer purchased a block of City Y 4% Recreation Authority term revenue bonds quoted at 22. The bond's stated interest payment dates are J/J 1. After receiving the confirmation, the customer called you and asked why there was no additional cost for accrued interest. The most likely reason for that is A) there was a mistake on the confirmation, and it will be rectified shortly. B) the trade settled on an interest payment date. C) the bonds are trading flat. D) the accrued interest is paid by the seller.
C) the bonds are trading flat. Bonds trading without accrued interest are trading flat. Every bond trades flat twice a year: when the bond settles on an interest payment date. However, that is not the case here because this trade would settle on April 24 and interest payment dates are January and July 1. The price is a hint. A 4% bond selling at 22% of par indicates that this bond is likely in default of interest and that is why it is trading flat.
Due to a distribution of stock, the contract size in the JGH Oct 50 call options is 108. A customer purchasing one of these contracts for a premium of 2½ would expect to pay A) $250. B) $330. C) $270. D) $258.
C)$270. With a contract size of 108 shares (likely from an 8% stock dividend) and a premium of $2.50 per share, the total cost is $270. Regardless of the reason for the contract size being other than 100 shares, the price paid for an option is always the premium multiplied by the number of shares in the contract. In this question, that would be a premium of $2.50 per share (2½) times 108 = $270.00.
At the birth of a grandchild, your customers, the child's grandparents, purchased 1,000 shares of XYZ stock at $10 per share in their JTWROS account. The child is now an adult and the grandparents gift all the shares to their grandchild when the stock price is $50 per share. If the donee sold all the shares at $55 per share, the tax consequences would be a capital gain of A) $55,000. B) $5,000. C) $50,000. D) $45,000.
D) $45,000. The capital gain would be $45,000 ($55,000 - $10,000). If a gift is made of securities, the donee must use the original cost basis of the donor to calculate the gain or loss on a sale. In this case, the original cost basis for the grandparents was $10,000. The difference between that and the proceeds of $55,000 is a capital gain of $45,000. If the shares were inherited from the grandparents, the grandchild would have received the stock at a stepped-up cost basis, the price of the stock on the decedent's death. Using our numbers, that would be a capital gain of $5,000, the difference between the stepped-up basis of $50,000 and the proceeds of $55,000. LO 13.h
If a municipal bond is issued at par and later purchased for 97 plus accrued interest of $32, what is the purchaser's cost basis? A) $1,002 B) $1,000 C) $938 D) $970
D) $970 The purchase price of 97 ($970) represents the cost basis of the bond. The accrued interest paid by the buyer has no impact on the cost basis and represents the amount of interest that the seller is due, based on the holding period of the bond from its last interest payment date. The buyer will receive the full six-month interest payment the next time the coupon is paid. LO 6.f
Which of the following individuals could most likely open an account at a FINRA member firm without notifying or receiving permission from her employer? A) A purchases and sales clerk of a member B) An agent who sells variable annuities C) A government security trader employed by a member D) A bank employee selling fixed annuities only
D) A bank employee selling fixed annuities only Whenever an employee of a FINRA member wants to open a securities account with another FINRA member firm or financial institution, the employee must give prior written notice to her employer and receive prior written consent from her employer before the account can be opened. Someone selling fixed annuities only (not a security like variable annuities) is most likely not associated with a member. LO 1.d
A technical analyst would find which of the following to be a bullish indicator? A) A breakout through the support level B) More odd-lot purchases than sales C) A decrease in the short interest D) A head and shoulders bottom
D) A head and shoulders bottom A head and shoulders bottom is a bullish sign to the technician because it indicates that the market has bottomed. From the bottom, the only direction is up. It is an increase to the short interest that is bullish, not a decrease. Because odd-lot traders are generally unsophisticated, the technician believes they are always doing the wrong thing. When they are buying, (more purchases than sales), everyone else should be selling (bearish). The support level is where the stock or index seems to stop declining. It receives buying support. That causes the price to begin to rise. When there is a breakout, it means the stock has fallen below the support level. Falling through the support level is a bearish signal. LO 13.e
Progressive taxes would include I. personal income tax. II. gift taxes. III. estate taxes. IV. excise taxes. A) I and II B) II, III, and IV C) I and III D) I, II, and III
D) I, II, and III Progressive taxes are those where the rate of taxation increases as the dollars being taxed increase. Personal income tax, while not as progressive as it was before the 1986 reform, is still considered a progressive tax because the highest tax rate is levied against the highest earnings. Gift taxes and estate taxes are highly progressive, but excise taxes, such as fuel tax and transportation tax, are a fixed rate, and therefore, would not be considered progressive. LO 13.h
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? A) The contracts are considered separately. B) The contracts do not have position limits. C) The contracts are added to increase the position limits. D) The contracts must be aggregated.
D) The contracts must be aggregated. LEAPS and listed options on the same side of the market, on the same underlying security, must be aggregated and remain within position limits. LO 10.j
A customer buys 1 XYZ Dec 30 call at 7 and sells 1 XYZ Dec 40 call at 1. Two months later, if the customer closes the positions when the spread is trading at 9 points, the customer has A) a loss of $100. B) a gain of $100. C) a loss of $300. D) a gain of $300.
D) a gain of $300. The investor established a debit spread and paid a net premium of $600 (7 − 1). The spread widened to 9, giving the investor a profit of $300 (9 − 6). Debit spreads are profitable if the spread between the premiums widens.
All of the following must register as an investment company under the Investment Company Act of 1940 except A) an initial public offering for shares of a closed-end management company. B) a new stock fund created by GHI Mutual Fund Distributors. C) certificates issued by a face amount certificate company. D) an initial public offering for common shares of Amalgamated Investments, a holding company.
D) an initial public offering for common shares of Amalgamated Investments, a holding company. Holding companies are not included in the definition of investment company under federal law. Amalgamated Investments would register with the SEC, just as any other offering of common stock. Investment companies, such as management companies (open-end or closed-end), unit investment trusts (UITs), and face amount certificate companies (FACs) all register under the Investment Company Act of 1940 as investment companies. LO 8.a
A corporation is likely to call eligible debt when interest rates are A) volatile. B) rising. C) stable. D) declining.
D) declining. A corporation generally calls in its debt when interest rates are declining to replace old, higher interest rate debt with new, lower interest rate issues. LO 4.b
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 A) single premium variable annuities. B) deferred annuities of all types. C) immediate variable annuities. D) deferred variable annuities.
D) deferred variable annuities. FINRA's primary suitability concern is with deferred variable annuities. That does not mean there are no requirements for being careful with the others, it is just that most of the violations have involved the deferred VA. LO 9.e
The call provisions of a municipal issue would be detailed most completely in A) the legal opinion. B) the official notice of sale. C) the Bond Buyer. D) the bond resolution.
D) the bond resolution. The bond resolution is the document that authorizes the issuance of a municipal bond. The resolution also describes the proposed issue's features and the issuer's responsibilities to its bondholders. LO 6.b
All of the following are advantages of buying a put versus selling stock short except A) buying a put has a lower dollar-loss potential than does selling stock short. B) one need not locate securities to be borrowed to buy a put. C) buying a put would require a smaller capital commitment. D) the put's time value, which gradually dissipates, is added to the intrinsic value.
D) the put's time value, which gradually dissipates, is added to the intrinsic value. Selling short could result in unlimited loss, whereas buying a put limits loss to the premium and requires a smaller capital outlay than does selling short. Remember that short sales must be done in a margin account, and 50% of the short market value (SMV) must be deposited by the short seller. Short sales require locating the securities to be borrowed; buying a put does not. The time value that erodes in a put option is a disadvantage because for each day that elapses, the option's time value decreases. LO 10.d
