Series 7 Practice Exam 9 Q&A

Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar need to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.)

$0.8582 Explanation: The breakeven formula for call buyers is the strike price plus the premium. The strike price is 85 (0.8500) and the premium is .82 ($0.0082). Therefore, the spot rate for the Canadian dollar would need to be $0.8582 for Mr. Jones to break even.

What is meant by 4.50% less 3/4 for a municipal bond selling in the secondary market?

$1,000 bond at 4.50 yield - $7.50 Explanation: Quotes for serial municipal bonds are usually per $1,000 and on a yield to maturity basis. The less 3/4 represents the concession or discount offered to another dealer (3/4 point = $7.50).

Andrew, a client of yours, anticipates that the value of the U.S. dollar is weakening in relation to the euro and decides to purchase 10 March 95 euro call options at 1.30 when the spot price is 95.55. The contract size of each euro contract is 10,000. Andrew is required to deposit:

$1,300 Explanation: In order to take advantage of the anticipated increase in the value of the euro, Andrew is purchasing 10 euro calls at a premium of 1.30. Euro options are quoted in cents per unit, so the decimal must be moved two places to the left to convert the quote to dollars ($.0130). To calculate the cost of the euro call, multiply the contract size (10,000) times the dollar value of the premium ($.0130). 10,000 x $.0130 = $130 Since Andrew is purchasing 10 options, the total cost is $1,300.

The FRB initial margin requirement is 50%. A customer's initial transaction in a margin account is a purchase of 100 shares of XYZ at $15 per share. The customer would need to deposit what amount in this new account?

$1,500 Explanation: Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase.

An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:

$12,250.00 Explanation: The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of 10 puts quoted at 12.25 is, therefore, $12,250 (12.25 x $100 x 10 = $12,250).

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is:

$2,000 Explanation: This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

A convertible bond is convertible at $25. The bond is currently selling in the market at $960. What should the stock be selling at to be at parity with the bond?

$24.00 Explanation: The bond is convertible at $25. This means the conversion ratio is 40 to 1 ($1,000 par value divided by the conversion price of $25 equals the conversion ratio of 40 to 1). To find parity for the stock, divide the market value of the bond by the conversion ratio. The market value of the bond $960, divided by the conversion ratio of 40 to 1 equals the $24 parity price for the stock.

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. If the client is using the convertible bonds as a hedge, the maintenance requirement is:

$4,600 Explanation: If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. This is an industry rule, not a Regulation T requirement. Each bond is convertible into 50 shares (the par value of $1,000 divided by the conversion price of $20). The client may convert the 40 bonds into a total of 2,000 shares (50 shares x 40 bonds), which is equal to the number of shares the client is short. The maintenance requirement is 10% of the long position, which is equal to $4,600 ($1,150 x 40 bonds x 10%).

An investor's market order to buy 10 ABC June 45 calls is executed when the bid price was $5.10 and the offer price was $5.15. The investor later placed a market order to conduct a closing sale of the 10 contracts when the bid price was $5.20 and the offer price was $5.25. What is the investor's capital gain on these transactions?

$50 Explanation: An investor placing a market order will normally buy at the offer and sell at the bid. In this case, the investor purchased 10 contracts at the offer price of $5.15 and then closed out that position by selling 10 contracts at the bid price of $5.20. The investor's cost basis for 10 contracts is $5,150 (10 contracts x $515 per contract) and the investor's sales proceeds are $5,200 (10 contracts x $520 per contract). The investor's capital gain of $50 is based on the difference between the cost basis and sales proceeds.

A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a:

$500 loss Explanation: The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).

A corporation has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?

$690,200 Explanation: If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company will have to add $30,000 (30% of $100,000) to its taxable income. The total taxable income will, therefore, be $2,030,000. The tax liability will be $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?

$690,200 Explanation: If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company would need to add $30,000 (30% of $100,000) to its taxable income. The total taxable income, therefore, is $2,030,000. The tax liability is $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

A customer has an existing margin account with equity of $36,000. If the FRB requirement is 50% and the customer sells short 100 shares at $15.00 a share, the required deposit is:

$750 Explanation: The FRB requirement is 50%, which is the same for purchases as it is for short sales. Therefore, the required deposit is $750 (50% x $1,500). Since this trade is executed in an existing account, the only requirement is the FRB's. If this had been the initial trade in the account, the required deposit under industry rules would be $2,000.

The market price of ABC Corporation common stock is $56. The quarterly dividend is 75 cents. What is the current yield of the stock?

5.3% Explanation: The current yield of a stock is found by dividing the yearly dividend by the market price of the stock. The market price is $56. The yearly dividend is $3 ($.75 x 4 = $3.00). Therefore, $3 divided by $56 equals 5.3%.

The quarterly dividend of ABC company is 32 1/2 cents. The market price is $24.00 a share. What is the current yield?

5.41% Explanation: The formula for computing current yield (also known as the dividend yield) is: Annual Dividend / Market Price of the Stock Since the quarterly dividend is 32 1/2 cents, the annual dividend is $1.30 (32 1/2 x 4 = $1.30). $1.30 divided by the $24 market price equals 5.41%.

An investor who is currently in the 15% tax bracket receives a promotion that puts her in the 33% tax bracket. If an RR offers to sell her a 3.75% tax-free municipal bond, what yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond?

5.60% Explanation: If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is now in the 33% tax bracket. (The 15% rate is no longer relevant). The municipal bond has a yield of 3.75%. 3.75% (Municipal Bond Yield) / 67% (100% - 33%) = 5.60% Equivalent Taxable Yield

An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within:

60 days Explanation: When a lump-sum withdrawal from a corporate pension plan, Keogh, or IRA is deposited into an IRA, it is referred to as a rollover. If the rollover is done within 60 days, the investor will avoid a taxable event. If the distribution is from a qualified plan other than an IRA, the distributing company must withhold 20% of the distribution for the IRS. Only one rollover is permitted each year.

The dated date of a municipal bond is January 1, 2014. The first coupon date is August 1, 2014. The first coupon will represent how many months of interest?

7 months Explanation: The first coupon will be paid in 7 months. This is known as an odd (in this case, long) first coupon payment. The interest will begin to accrue from the dated date but will be paid on the first coupon date.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. At expiration, the individual will have a profit if the market price of ABC is:

93 Explanation: This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). Therefore, look at the purchase of a 90 call at 2 (net debit). The breakeven point when buying a call is the strike price (90) plus the premium (net debit of 2). Any market price above the breakeven point of 92 will make the position profitable.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit?

95 Explanation: The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).

During a period of stable interest rates, which bond has the most potential to show a significant change in price?

A 7 1/2%, 10-year convertible subordinated debenture Explanation: If interest rates are stable, most bond prices will have little movement. However, a convertible debenture could show significant price appreciation or depreciation if the underlying equity changes in value because of the potential to convert. This keeps the bond price in the vicinity of conversion parity. Parity is achieved when the value of the bond equals the value of the common stock derived from conversion.

A municipal tombstone advertisement must be approved by:

A municipal securities principal Explanation: MSRB rules require that an advertisement must be approved prior to its first use by a municipal securities principal.

The MOST appropriate buyer(s) for a variable life insurance policy is/are: a. A person who requires the discipline of forced savings b. Parents with a modest income who have young children c. A person who wants the assurance of a guaranteed cash value d. A person with an understanding of investments who can tolerate market risk

A person with an understanding of investments who can tolerate market risk Explanation: Similar to a variable annuity, the cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. A person who is knowledgeable about investments may be a candidate for variable life insurance because common stock and bonds are the foundation of the policy. As the market values of the securities fluctuate, the cash value changes and is not guaranteed. Therefore, the insured must be able to tolerate market risk. There are other methods by which an investor may achieve forced savings and the product may not be suitable for parents with a modest income who have young children.

A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:

A price near $60 Explanation: Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).

ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a:

Agent Explanation: When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent).The client is charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it is acting as a dealer (principal). The client in this case is charged a markup or markdown.

A sell stop order most likely will be entered by a technical analyst or chartist:

Below a support level for the stock Explanation: Sell stop orders are entered below the current market. The order will most likely be entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside. This is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.

A designated market maker has an order on its book from a public customer to buy stock at $34.70 and another order from a public customer to sell stock at $34.90. The designated market maker may: a. Buy stock for its own account at $34.65 b. Buy stock for its own account at $34.75 c. Sell stock from its own account at $34.90 d. Sell stock from its own account at $34.95

Buy stock for its own account at $34.75 Explanation: A designated market maker is not permitted to compete with public orders when trading for its own account. The DMM may buy stock at a higher price or sell stock at a lower price. In doing so, the DMM has narrowed the spread (the difference between the bid and ask). The DMM, buying stock at $34.75, is permitted since this price is higher than the price of the public order ($34.70). The other choices would result in the DMM buying lower or selling at a price equal to or higher than the public customer's order.

If a customer is short 1,000 shares of RST stock, the customer:

Can use a buy stop order to limit losses if the stock advances Explanation: A short position will be profitable if the market price of the security decreases. If the stock increases, the investor will have a loss. A buy stop order is placed above the market. If executed, stock will be purchased preventing further loss. There is no limit to the length of time that a short position may remain open. A portion of the short credit balance must always remain in the account to be used eventually to cover the short position. An investor who is short the stock does not receive dividends and does not have the right to vote.

A corporation declares a 2-for-1 stock split payable on November 30 to holders of record on November 1. The ex-date is December 1. The first day that the stock will trade without a due bill attached is:

December 1 Explanation: Whoever is the stockholder of record on the record date (Nov. 1) will be credited with the additional shares resulting from the split. If that person liquidates the position prior to the ex-date (Dec. 1), the buyer must receive a due bill upon settlement of that trade. This is because on Dec. 1 the value of the stock will be cut in half. If the buyer does not receive the additional shares, then the position loses half its value on the ex-dividend date. The first day that the purchaser is not entitled to the additional shares is the ex-date, and this is the first day the stock will not trade with a due bill.

U.S.-denominated currency held in foreign banks is BEST defined as:

Eurodollars Explanation: Eurodollars are defined as U.S. dollars on deposit in all foreign banks, not just banks in Europe.

A person age 63 has an IRA with total assets of $275,000. The maximum amount this person can withdraw from this account without incurring a penalty is:

Explanation: An investor who withdraws money from an IRA before reaching the age of 59 1/2 will pay a 10% tax penalty on the taxable amount withdrawn, and is also liable for ordinary income taxes on the withdrawal. Since this person is over the age of 59 1/2, there is no penalty for withdrawing the funds, but the taxable amount withdrawn, above cost basis, will be added to the investor's taxable income for that year.

Mr. Jones buys an XRX October 50 put when the market price of XRX is also $50 per share, and pays a premium of $5. If XRX declines sharply and Mr. Jones exercises the put, what is the maximum profit Mr. Jones can have?

Explanation: If the stock became worthless, Mr. Jones could then buy 100 shares and put it (sell it) to the writer for the $50 per share strike price, which equals $5,000 ($50 x 100 shares = $5,000). Mr. Jones would then make a profit of $5,000 minus the $500 premium paid for the put, which would be $4,500. The $4,500 is the maximum profit Mr. Jones could have since the stock could go no lower than zero.

A customer purchases a municipal bond with 25 years remaining to maturity. The bond has been prerefunded to its first call date. The issue is callable in 7 years at 108, declining to par in 14 years. It also has a sinking fund call provision that begins in 17 years at par. For confirmation purposes, the bond should be priced to the:

First call date Explanation: When a bond is prerefunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date.

A municipal broker's broker may: I. Deal with broker-dealers II. Deal with dealer-banks III. Underwrite new issues IV. Trade from its own inventory

I and II only Explanation: A municipal broker's broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker's broker never deals with individual investors or establishes an inventory position, and is not involved in the underwriting of a new issue.

Which TWO of the following option positions combined will create a debit spread? I. Buy an ABC June 30 call at 5 II. Buy an ABC June 30 put at 3 III. Sell an ABC June 35 call at 2 IV. Sell an ABC June 35 put at 4

I and III Explanation: The only choice given that will create a debit spread is the purchase of an ABC June 30 call at 5 and the sale of an ABC June 35 call at 2. This spread is executed for a net debit of 3. This is a debit spread because the option being purchased has a larger premium than the option being sold.

Which TWO of the following investors would NOT be permitted to purchase shares of an IPO of KMF? I. An attorney involved in the new issue of KMF II. An investment company registered under the Act of 1940 that has some restricted persons as shareholders III. A portfolio manager of an investment company buying for his personal account IV. The general account of an insurance company

I and III Explanation: Restricted persons include finders and fiduciaries (such as attorneys and accountants) involved in the new issue as well as portfolio managers who buy and sell securities on behalf of institutional investors. The New Issue Rule also provides a number of general exemptions. The exemptions allow a new issue defined under the rule to be sold to the following accounts. - Investment companies registered under the Investment Company Act of 1940 - The general or separate account of an insurance company - A common trust fund - An account in which the beneficial interest of all restricted persons does not exceed 10% of the account. (This is a de minimis exemption that allows an account owned in part by restricted persons to purchase a new issue if all restricted persons combined own 10% or less of the account.) - Publicly traded entities other than a broker-dealer or its affiliates that engage in the public offering of new issues - Foreign investment companies - ERISA accounts, state and local benefit plans, and other tax-exempt plans under IRS Code 501(c)(3)

An investor purchased a municipal bond at a discount. If the investor holds the bond to maturity, a gain will be considered: I. Tax-free interest if the bond is an OID II. A capital gain if the bond is an OID III. Ordinary income if the bond is not an OID IV. Tax-free interest if the bond is not an OID

I and III only Explanation: For an OID (original issue discount), the discount is considered interest. Because this is a municipal bond, the interest is tax-exempt. For a non-OID (a secondary market discount), the discount is reported as ordinary income.

Which TWO of the following new issues may be purchased by an employee of a broker-dealer under the New Issue Rule? I. An exchange-traded fund II. An initial public offering in which the RR's firm is not an underwriter III. A new issue of common stock in which the broker-dealer is the managing underwriter IV. Convertible debt

I and IV Explanation: An employee of a broker-dealer is considered a restricted person and may not purchase new issues under FINRA rules. New issues under the rule are defined as initial public offerings (IPOs) of equity securities sold under a registration statement. Exemptions from the definition of an IPO include all debt offerings, investment company offerings such as mutual funds and exchange-traded funds, and preferred stock. Whether the broker-dealer is participating as an underwriter does not alter the restrictions.

If the Fed's open market trading desk enters into a repurchase agreement, which TWO of the following statements are TRUE? I. The money supply will be increased II. The money supply will be decreased III. Interest rates will tend higher IV. Interest rates will tend lower

I and IV Explanation: On a repurchase agreement, the Fed initially purchases securities. Therefore, money is added to the banking system. This tends to loosen credit and allows interest rates to decline.

A broker-dealer is preparing sales literature on CMOs. Which TWO of the following statements must be disclosed? I. The term collateralized mortgage obligation must be included within the name of the product II. The basis point spread above a comparable Treasury security the client will receive in interest must be included III. The lower of the yield to call or yield to maturity must be included IV. The government agency backing only applies to the face value of the securities

I and IV Explanation: Retail communications (e.g., sales literature) and correspondence about collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the government agency backing only applies to the face value of the securities (not any premium paid). If the client paid a premium to purchase a CMO, only the par value would be backed by the entity backing the security. The actual coupon rate, not the spread above Treasuries, needs to be disclosed. Due to the prepayment risk of CMOs, the yield to average life would be disclosed, not the yield to maturity or yield to call.

Which of the following persons are entitled to participate in a Keogh plan? I. A self-employed doctor II. A security analyst who made $2,000 giving public lectures on technical analysis III. An engineer of a corporation who made $5,000 making public speeches on his specialization IV. An executive of a corporation who received $5,000 in stock options from his corporation

I, II, and III only Explanation: An individual with self-employed income may establish a Keogh. Of the choices given, a doctor may participate because he is self-employed. The security analyst and the engineer could set up a plan for the income they derive from outside, self-employed activities. An executive of a corporation who received $5,000 in stock options may not participate because he is not self-employed.

The Securities Exchange Act of 1934: I. Created the SEC II. Provided for the regulation of credit III. Provided for the regulation of exchanges IV. Provided for the regulation of new issues

I, II, and III only Explanation: The Securities Exchange Act of 1934 created the SEC and provided for the regulation of credit and exchanges. The Securities Act of 1933 provided for the regulation of new issues.

Which TWO of the following offerings are subject to the Trust Indenture Act of 1939? I. An offering of municipal revenue bonds II. An offering of convertible securities by a company listed on the NYSE III. An offering of corporate notes with a maturity of three years IV. A private placement of bonds issued by a corporation, sold by a broker-dealer

II and III Explanation: The Trust Indenture Act of 1939 regulates the public issuance of corporate securities that are sold interstate. It does not cover exempt securities such as U.S. government securities, municipal securities, or private placements. A sale of corporate convertible securities and an offering of corporate notes are subject to the 1939 Act. Corporate debt with a maturity of 270 days or less (commercial paper) is exempt from the 1933 Act and the 1939 Act.

A municipality issues revenue bonds for which TWO of the following reasons? I. To finance the building of a high school II. To finance the construction of a power plant III. To pay the salaries of police and firefighters IV. To pay the salaries of transit workers

II and IV Explanation: Revenue bonds are usually issued to construct and operate some type of revenue producing facility. Examples include power plants, transit systems, turnpikes, colleges, bridges and tunnels, hospitals, sewer systems, and stadiums. General obligation bonds are issued to finance public schools (elementary school and high school) and to pay the general expenses of running a municipality (e.g., police and firefighters).

Which TWO of the following metrics can be calculated by examining the balance sheet statement of a company? I. The earnings before interest and tax (EBIT) II. The debt-to-equity ratio III. The operating profit margin IV. The amount of working capital

II and IV Explanation: The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). Working capital is found by subtracting current liabilities from current assets. All of these numbers may be found in a company's balance sheet. EBIT and the operating profit margin can be calculated by examining the income statement.

A registered representative sends an electronic communication to 75 of her existing customers, explaining that account statements are now available online. Which TWO of the following statements are TRUE? I. This is considered correspondence II. This is considered a retail communication III. This activity requires principal approval prior to use IV. This activity should be reviewed

II and IV Explanation: This activity is considered a retail communication since the registered representative is sending the communication to more than 25 customers. A retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it is considered correspondence. If the retail communication does not make a recommendation, or promote a product or service, prior principal approval is not required. FINRA does not consider announcing the availability of online account statements as promoting a product or service. This activity should, however, be reviewed and supervised by the broker-dealer.

An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? I. The investment risk is assumed by the insurance company II. The investment risk is assumed by the customer III. The amount of the payment to the customer is guaranteed by the insurance company IV. The amount of the payment to the customer is not guaranteed

II and IV Explanation: Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment may increase, decrease, or remain the same, since the amount of the payment is not guaranteed. In addition, since a straight-life settlement option was chosen, payments will stop when the investor dies, regardless of the amount left in the contract.

Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules? 1. An employee of a municipal securities firm may open a new account with another municipal securities firm without the employer being notified II. An employee of a municipal securities firm may open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer III. A bond attorney may open a new account without restriction IV. An officer of a municipal issuer may open a new account without restriction

II, III, and IV only Explanation: MSRB rules only place restrictions on opening an account for an employee of another MSRB member firm. When opening an account for an employee of another MSRB member firm, the employer must be notified and duplicate confirmations of all trades must be sent to the employer.

If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would:

Increase Explanation: If the tax-exempt status were eliminated, yields on newly issued municipal bonds would need to increase to compete with the higher yields of non-tax-exempt bonds.

An investor owns Treasury bonds that mature in 20 years. This investor will be exposed to: a. Credit risk b. Inflationary risk c. No risk d. Capital risk

Inflationary risk Explanation: Credit risk is the risk that the investor will not receive interest and/or principal when it is due. Capital risk is the risk that the investor will lose his investment. Since Treasury bonds are direct obligations of the U.S. government, there is no risk that the investor will not receive interest and/or principal when due, or lose his investment. Therefore, the investor is free of credit and capital risk. All fixed-income securities expose an investor to inflationary risk (purchasing-power risk).

When evaluating numerous mutual funds, what is meant by net investment income?

Interest + dividends - expenses Explanation: Net investment income of a mutual fund is derived from the total interest plus dividends earned by the fund's portfolio minus the expenses of the fund.

If interest rates are expected to rise over a given period, a municipality that must raise money would probably issue securities with:

Long-term maturities Explanation: By issuing securities with long-term maturities, the municipality can lock in the rate of interest it needs to pay on the bonds. Therefore, if interest rates are expected to rise over a given period, the municipality would not be subject to these changes. This would provide the municipality with the capital it needs, without borrowing again at higher rates of interest, as it would need to do if it issued shorter-term or intermediate-term securities.

A registered representative is using a social networking site that permits real-time communication. FINRA would BEST define this type of communication as a(n):

Public appearance Explanation: Social media sites that permit real-time communication or interactive, electronic forums fall under the guidelines of a public appearance, according to FINRA. Examples include Facebook, Twitter, and LinkedIn. Most firms do not permit their RRs to use these types of systems to communicate with customers to conduct business because they are not able to monitor the sites. Correspondence is any oral or written communication distributed or made available to 25 or fewer retail investors.

In April, an investor purchased 1,000 shares of XYZ at $47 and, in August, purchased another 1,000 shares of XYZ at $55 per share. In June of the following year, the investor sold 400 shares of XYZ at $59 per share and stipulated that the shares being sold are from the purchase that was made in August. For tax purposes, the investor will report a:

Short-term capital gain of $1,600 Explanation: In this question, the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor stipulated that the shares being sold were against the shares that were purchased in August and those shares were held for one year or less, the capital gain is short-term. The cost basis of the shares being sold is $55 and the proceeds per share on the sale is $59. Therefore, the gain of $4 per share is multiplied by the 400 share position, resulting in a $1,600 total gain.

The FRB will most likely sell securities if it is attempting to:

Stop an inflationary trend Explanation: Inflation occurs when the money supply expands faster than the supply of goods and services. To combat inflation, the Federal Reserve will most likely sell securities in order to reduce the money supply.

A customer has sold stock but has failed to complete the transaction by delivering the securities. The latest date the broker-dealer may buy in the securities is:

Ten business days from the settlement dat Explanation: SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and custody of securities. Under the custody of securities section, a brokerage firm must buy in securities within 10 business days from settlement when a customer has failed to deliver securities that were previously sold.

According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?

The name of the RR responsible for the account and the manager who approved the account Explanation: Under industry rules, the following items MUST be obtained when opening an account. 1. The customer's name and residence 2. Whether the customer is of legal age 3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account 4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity The name of the beneficiary is not required when opening an account.

In a municipal bond transaction, T + 3 means:

The transaction will settle regular-way in 3 business days from the trade date Explanation: T + 3 in a municipal bond transaction means the bonds will settle regular-way in 3 business days from the trade date.

Municipal serial bonds are priced on the basis of:

Yield to maturity Explanation: Municipal serial bonds are quoted on a yield-to-maturity basis. Municipal term bonds are quoted on the basis of a dollar price.

An investor is looking for an investment that will generate deductions but also provide the potential for future cash flow. Which of the following is NOT an appropriate investment? a. A raw land program b. An existing properties real estate program c. An oil and gas drilling program d. An oil and gas exploratory program

a. A raw land program Explanation: All of the choices provide potential for future cash flow and deductions except for a raw land program. In a raw land program, deductions are negligible and the profit potential comes in the form of capital appreciation, not cash flow.

The Federal Intermediate Credit Bank (FICB) makes: a. Agricultural loans to farmers b. Loans to finance residential mortgages c. Business loans to veterans d. Loans to utility companies

a. Agricultural loans to farmers Explanation: The Federal Intermediate Credit Bank (FICB) makes agricultural loans to farmers.

Which of the following securities assist in financing importing and exporting operations? a. Bankers' acceptances (BAs) b. Treasury bills c. Eurodollar CDs d. American Depositary Receipts (ADRs)

a. Bankers' acceptances (BAs) Explanation: Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt), which facilitates the trading of foreign securities in U.S. markets. Eurodollar certificates of deposit pay interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations.

Section 1035 of the Internal Revenue Code: a. Permits the tax-free exchange of one annuity contract for another b. Forbids the tax-free exchange of an insurance policy for a new life insurance policy c. Forbids the tax-free exchange of an insurance policy for a new annuity contract d. Permits the tax-free exchange of an annuity contract for a life insurance policy

a. Permits the tax-free exchange of one annuity contract for another Explanation: 1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences.

A registered representative is approached by an accountant who wants to receive a finder's fee for introducing her clients to the RR. Which of the following statements is TRUE? a. The RR is not permitted to pay a finder's fee to the accountant b. The RR is permitted to pay a maximum finder's fee of 5% to the accountant c. The RR is permitted to pay a maximum finder's fee of 8.5% to the accountant d. The RR is permitted to pay an annual referral fee to the accountant based on the amount of commissions generated by the referrals

a. The RR is not permitted to pay a finder's fee to the accountant Explanation: A broker-dealer is not permitted to compensate nonregistered persons in exchange for introducing clients to an RR or based on the amount of commissions or fees generated by the account. This would prohibit a firm from paying a finder's fee, rebate, or bonus based on commissions to any person who is not employed by a broker-dealer (an accountant or attorney, for example) unless that person was registered with the broker-dealer.

A 6% bond is selling at a 6.25% basis. The bond will mature in 25 years and has 3 call dates. Which of the following bonds will give the investor the best return? a. The bond is called after 10 years at 103 b. The bond is called after 15 years at 102 c. The bond is called after 20 years at 101 d. The bond is held to maturity

a. The bond is called after 10 years at 103 Explanation: The bond is selling at a discount. The first call in 10 years at 103 will give the investor the best return. The investor receives the highest call price in the shortest number of years.

A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE? a. The director is permitted to sell the shares if the trade is reported b. The director is permitted to sell the shares only if they are held for three additional months and the trade is reported c. The director is permitted to sell the shares and no report is required d. The director is permitted to sell the shares only if the transaction will result in a loss

a. The director is permitted to sell the shares if the trade is reported Explanation: An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding.

Discretionary accounts require: a. Written authorization from the customer b. Oral authorization from the customer c. Written authorization from the client for each trade the registered representative executes d. The registered representative to send the client a letter detailing the proposed transaction

a. Written authorization from the customer Explanation: Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.

Someone who wants to hedge a portfolio of long-term bonds will buy: a. Yield-based call options b. Yield-based put options c. VIX call options d. VIX put options

a. Yield-based call options Explanation: The prices of bonds are inversely related to the movement of interest rates. If the investor is concerned that rising interest rates will erode the value of the bond portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge. The VIX (volatility index) tends to move inversely with the S&P 500 Index. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy VIX call options when he expects the market to decline and volatility to increase. An investor will buy put options on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the stock market. VIX options can be used by investors who expect either an increase or a decrease in volatility. It is not used to hedge a bond portfolio.

A customer in her late 40s, who is currently in the 15% tax bracket has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice concerning investing the inheritance. Which of the following choices would be the BEST method of investing the funds? a. 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes b. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes c. 30% in-state municipal bonds, 30% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes d. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds

b. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes Explanation: Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 40% allocation in equities is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return to this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds in short-term municipal securities such as tax or revenue anticipation notes. Choice (a) has only a 20% allocation in equities and a 50% allocation of funds in tax anticipation notes, offering no growth potential. Having 100% of the funds in fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best method of investing the funds.

The stock of which of the following companies is most likely considered cyclical stock? a. An oil and gas company b. A home appliance company c. A utility company d. A pharmaceutical company

b. A home appliance company Explanation: A cyclical company is one whose sales correspond to changes in the business cycle and, therefore, will be affected by a recession. Examples of cyclical stock includes the stock of household appliance companies, steel companies, and construction companies. A defensive company is one whose sales are not as affected by changes in the business cycle (i.e., it resists recession). Examples of defensive stock includes the stock of pharmaceutical, health care, tobacco, oil and gas, utility, and supermarket companies.

Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer? a. An exchange-traded fund (ETF) b. An equipment leasing direct participation program (DPP) c. A private activity municipal revenue bond d. The PAC tranche of a collateralized mortgage obligation

b. An equipment leasing direct participation program (DPP)

Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond? a. Approval by a majority of legal age voters b. Approval by the state legislature c. Approval by the bond trustee d. Approval by the appropriate state agency

b. Approval by the state legislature Explanation: State legislative approval is required before a municipality can begin making payments on a moral obligation bond.

Which of the following securities has the LEAST amount of capital risk? a. Options b. Bonds c. Warrants d. Stocks

b. Bonds Explanation: Capital risk is the risk of an investor losing her principal, the amount of funds invested in a security. When compared to the other securities, bonds have the least amount of capital risk. At maturity, the investor would receive the principal amount of the bond, thus minimizing the capital risk.

Which of the following choices is NOT TRUE about buying listed put options versus selling the underlying stock short? a. Buying a put will require a smaller capital commitment b. Buying a put has a larger potential loss than selling the stock short c. The put has time value that gradually dissipates d. Buying a put is not subject to the Regulation SHO requirement to borrow shares

b. Buying a put has a larger potential loss than selling the stock short Explanation: Choice (b) is not true. Buying a put has a smaller potential loss than selling the underlying stock short. The maximum loss when buying a put is limited to the premium paid. The loss when selling short is unlimited. All of the other statements are true. The cost for the premium of a put is substantially less than the Regulation T margin requirement for a short sale. The purchase of puts is not subject to the borrowing requirements of Regulation SHO, whereas short sales of equities are. An option's premium consists of intrinsic value and/or time value. Time value gradually dissipates as an option nears its expiration.

Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return? a. CAPM b. Efficient frontier c. Duration d. Alpha

b. Efficient frontier Explanation: According to modern portfolio theory, a graph of optimal portfolios can be created known as an efficient frontier.

An equity security that is distributed under Regulation S may be resold by: a. Immediate sale within the U.S. market b. Immediate sale in a designated offshore market c. Regulatory approval from SROs d. Waiting six months, then selling within the U.S. market

b. Immediate sale in a designated offshore market Explanation: An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas immediately through a designated offshore securities market. There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year period before an equity security sold pursuant to Regulation S may be resold in the U.S.

A customer who has invested historically in mutual funds is considering an investment in a hedge fund for the first time. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE? a. Mutual funds are subject to more regulatory oversight than hedge funds b. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately c. Hedge funds often use higher degrees of leverage than mutual funds d. Mutual funds may be suitable for many customers, whereas hedge funds are generally suitable for sophisticated, wealthy investors only

b. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately Explanation: Mutual funds and hedge funds both pool investors' money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.

Which of the following individuals are NOT permitted to trade on the floor of the NYSE? a. Independent brokers b. Registered representatives c. Floor brokers d. Designated market makers

b. Registered representatives Explanation: Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE.

Which of the following securities are considered nonexempt according to the Securities Act of 1933? a. U.S. government and municipal securities b. Securities of a publicly held finance company c. Securities of a small business investment company d. Securities of a nonprofit organization

b. Securities of a publicly held finance company Explanation: Nonexempt securities are those that are subject to the registration requirements of the Securities Act of 1933. Securities of a publicly held finance company are the only nonexempt securities. All of the other securities listed are exempt from the registration requirements of the Securities Act of 1933.

The Dow Theory states that a major trend is confirmed when which of the following indicators reach new highs or lows? a. The S&P 500 Index and the NYSE Composite Average b. The Dow Jones Industrial Average and the Dow Jones Transportation Average c. The Dow Jones Industrial Average and the Dow Jones Utility Average d. The Dow Jones Composite and the NYSE Composite Average

b. The Dow Jones Industrial Average and the Dow Jones Transportation Average Explanation: The Dow Theory holds that a confirmation of a bullish or bearish trend is made when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction and reach new highs or new lows.

If a cash dividend is paid, how does it affect a margin account? a. SMA is decreased b. The debit balance is reduced c. The market value is increased d. The equity is reduced

b. The debit balance is reduced Explanation: When a cash dividend is paid, the debit balance is reduced by the amount of the dividend. The SMA is also increased by the amount of the dividend. The market value changes due to fluctuations in the price of the security.

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.25% in-state municipal bond b. A 7.10% out-of-state municipal bond c. A 11.65% investment-grade corporate bond d. A 10.85% mortgage bond

c. A 11.65% investment-grade corporate bond Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The investment-grade corporate bond has the best or highest after-tax yield.

A municipal bond trader does NOT: a. Request bids b. Accept bids c. Commit to underwritings d. Negotiate settlement dates in the secondary market

c. Commit to underwritings Explanation: A municipal bond trader is not involved in underwritings of new issues.

Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income program? a. Liquidity b. Depreciation of equipment c. Depletion d. Depreciation of land

c. Depletion Explanation: The most advantageous tax benefit that an investor will receive from an oil and gas program is the depletion deduction. These deductions normally last for as long as the program produces oil and gas. Depreciation of equipment lasts a limited number of years and land may not be depreciated.

When determining whether a CMO is suitable, an RR must offer to a client all of the following information, EXCEPT a: a. Glossary of terms b. Discussion on how changing interest rates may affect the prepayment rates c. Discussion on how changing currency rates may affect the value of the securities d. Discussion on the relationship between mortgage loans and mortgage securities

c. Discussion on how changing currency rates may affect the value of the securities Explanation: Broker-dealers must offer customers educational material about the features of CMOs. This material must include: A discussion of the characteristics and risks of CMOs. This includes: how changing interest rates may affect prepayment rates and the average life of the security, tax considerations, credit risk, minimum investments, liquidity, and transactions costs. A discussion of the structure of a CMO. This includes the different types of structures, tranches, and risks associated with each type of security. It is also important to explain to a client that two CMOs with the same underlying collateral may have different prepayment risk and different interest-rate risk. A discussion that explains the relationship between mortgage loans and mortgage securities A glossary of terms applicable to mortgage-backed securities Changing currency rates are not applicable to the risks associated with CMOs.

If an options brochure containing projections is sent to a prospective customer, it must: a. Contain the annualized rate of return b. Disclose the representative's trading performance for the past three years c. Have an OCC risk disclosure document with it or be sent in advance d. Contain a schedule of commissions and markups

c. Have an OCC risk disclosure document with it or be sent in advance Explanation: Options retail communications containing projections that is sent to a prospective customer must be accompanied by or preceded by a risk disclosure document. An annualized rate of return may be included under certain circumstances. Trading performance, if included, must cover a one-year period. There is no requirement to include a schedule of transaction costs.

Which of the following choices is NOT a reason for a broker-dealer to reject delivery of a municipal bearer bond? a. A mutilated coupon b. Lack of a legal opinion c. No endorsement by the owner d. Lack of a seal on the certificate

c. No endorsement by the owner Explanation: A municipal bearer bond does not require endorsement (signature) by the owner.

Which of the following statements is TRUE about variable annuities? a. The dollar amount of payments is guaranteed b. Participants may not vote to change objectives c. Payout is based on a number of annuity units, which remains fixed for the duration of the payout period d. Annuity payments are of a constant dollar amount throughout the payout period

c. Payout is based on a number of annuity units, which remains fixed for the duration of the payout period Explanation: A variable annuity does not give an annuitant a fixed-dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.

An investor does not expect the price of XYZ stock to change in the immediate future and wishes to generate income. The best strategy is: a. Sell a call b. Sell a put c. Sell a straddle d. Buy a straddle

c. Sell a straddle Explanation: If the market price does not change, neither side of the straddle will be exercised. The premium on both the put and the call will be income to the investor.

Which of the following groups will approve an over-the-counter stock for purchase on margin? a. A State Securities Commission b. The Securities and Exchange Commission c. The Federal Reserve Board d. FINRA

c. The Federal Reserve Board Explanation: Under Regulation T, the Federal Reserve Board is responsible not only for setting margin requirements but also for determining which securities may be sold on margin.

A 1% increase in the federal funds rate will NOT have an effect on: a. Short-term bond prices b. Long-term bond prices c. The discount rate d. Treasury bill prices

c. The discount rate Explanation: The federal funds rate is the rate one bank charges another bank when loaning excess reserves. It is the most sensitive of all interest rates and affects all bond prices and other interest rates except the discount rate which is set by the Federal Reserve Board.

An investor buys a zero-coupon bond at 41. A few years later the bond's basis has been accreted for tax purposes to 46. If the bond is sold at 45, the investor will recognize: a. No gain or loss b. A 1-point capital gain c. A 4-point capital gain d. A 1-point capital loss

d. A 1-point capital loss Explanation: When selling a zero-coupon security, if the bond is sold above the accreted value (not the original cost), it is considered a capital gain and, if sold below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year. If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss.

A customer asks an RR for a recommendation as to how to invest a $150,000 inheritance. The customer needs to preserve the capital since he wants to use the funds to start a new business within the next year. Which of the following funds is the LEAST suitable recommendation for this customer? a. A taxable money-market fund b. A tax-exempt money-market fund c. A short-term Treasury fund d. A balanced fund

d. A balanced fund Explanation: While all of these funds are somewhat conservative, the balanced fund will contain some equity investments and long-term bonds, which will expose the customer to market risk. Given the customer's short-time horizon and objective of preservation of capital, the balanced fund would be the least suitable of the choices listed.

Which of the following securities would NOT be found on the Consolidated Quotation System (CQS)? a. An NYSE MKT stock b. An NYSE MKT warrant c. An NYSE-listed bond d. A non-Nasdaq stock

d. A non-Nasdaq stock Explanation: The Consolidated Quotation System (CQS) displays quotations on all common stock, preferred stock, warrants, and rights that are listed on the New York Stock Exchange (NYSE) or the NYSE MKT (formally NYSE Amex), and trading in the OTC market (third market). While an NYSE MKT stock, an NYSE MKT warrant, and a NYSE-listed bond typically appear on CQS, a non-Nasdaq stock does not appear.

Which of the following statements is TRUE regarding a defined contribution plan? a. It is designed to provide employees with a fixed monthly payout at retirement b. The employer bears all the investment risk c. Employees may deduct all employer contributions d. Each employee has a separate account within the plan

d. Each employee has a separate account within the plan Explanation: A defined contribution plan is one in which the employer makes contributions on behalf of employees, and the size of the retirement benefit depends on the amount of the contributions and the investment performance of the assets in the plan. In this type of plan, the employee assumes the investment risk and only the employer may deduct employer contributions. In addition, each employee has a separate account within the plan to easily track the growth of his retirement assets.

A registered representative is the owner of a marina on the North Shore of Long Island. She wants to build an apartment complex on this property in order to increase the property's cash flow. If she receives a loan from family members, which of the following statements is TRUE? a. Her broker-dealer is required to approve the loan b. She is required to notify her firm of the loan c. She is required to notify FINRA d. She is not required to notify her firm about the loan

d. She is not required to notify her firm about the loan Explanation: Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying one of the following provisions. 1. The customer and the registered person are immediate family members. 2. The customer is a financial institution regularly involved in the business of extending credit or providing loans. 3. Both parties are registered with the same firm. 4. The loan is based on a personal relationship between the customer and the registered person. 5. The loan is based on a business relationship independent of the customer-broker-dealer relationship. If the loan is based on provision 1 (borrowing from family members), firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 apply, the firm must approve the lending activity prior to the execution of the loan.

Which of the following proxy rules is TRUE regarding customer securities held in street name by a brokerage firm? a. The corporation sends the proxy to the customer b. The corporation sends the proxy to the NYSE, which then sends it to the customer c. The corporation sends the proxy to the SEC, which then sends it to the customer d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer

d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer Explanation: A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy, which is a delegation of the shareholder's vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (i.e., in the name of the brokerage firm), the corporation sends the proxy to the brokerage firm, which is the stockholder of record on the corporate books. The brokerage firm sends the proxy to the customer and the corporation then pays the additional expenses. The SEC regulates the solicitations of proxy material.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are not required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are not suitable for the same investors as exchange-traded REITs

d. They are not suitable for the same investors as exchange-traded REITs Explanation: Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Which of the following companies would probably be MOST leveraged? a. Software b. Biotech c. Consumer electronics d. Utilities

d. Utilities Explanation: A leveraged company has a large amount of outstanding debt (bonds) and would be the most leveraged. Of the choices given, utilities are the heaviest users of debt and have the greatest amount of interest charges (fixed charges). The percentage of debt in a utility company's capitalization is usually greater than that of the other companies listed.

Which of the following choices would be found in the subscription agreement for a direct participation program (DPP)? a. The sharing arrangement between the limited and general partners b. The amount of money that the general partner will contribute to the program c. The provisions for dissolving the partnership d. Who is required to sign this document

d. Who is required to sign this document Explanation: In order to purchase an interest in a direct participation program, the investor must complete the subscription agreement. It will specify who is required to sign the agreement. The other choices given are found in the offering documents.