Series 7 Practice Exam - Incorrect Questions

An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 share have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is A) 125,000. B) 150,000. C) 30,000. D) 0.

A) 125,000 The affiliate who has held the restricted shares beyond their 6 month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the 4 weeks before the sale in any 90 day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last 4 weeks aver trading volume (30,000)

The OCC must receive exercise instructions for equity options no later than A) 5:30 pm ET on the third Friday of the expiration month. B) 4:00 pm ET on the third Friday of the expiration month. C) 4:10 pm ET on the third Friday of the expiration month. D) 11:59 pm ET on the Saturday before the third Friday of the expiration month.

A) 5:30 pm ET on the third Friday of the expiration month Although trading stops at 4 pm ET on the 3rd Friday of the expiration month, the final exercise deadline is 5:30 pm ET that same day.

Which of the following provides a measurement of the volatility of a particular stock or portfolio, as compared to the volatility of the market as a whole? A) Beta B) Alpha C) Delta D) Duration

A) Beta The beta value is an index that measures the volatility of a stock or portfolio's movement, as compared to the movement of the market as a hole. By definition, the beta of a market is equal to 0

Which of the following agency securities has the strongest backing of timely payment of principal and interest? A) GNMAs B) Treasury notes C) FNMA D) FHLMCs

A) GNMAs Of the agency securities listed here, the only one that is a direct obligation of the US govt is the GNMA. The others are quite safe but are only a moral obligation. Do NOT be fooled by treasury notes - those are not an agency security.

If a customer does not pay for equity securities purchased within two business days of the regular way settlement date, the BD may request a time extension from A) its designated examining authority. B) the Chicago Stock Exchange. C) the Philadelphia Stock Exchange. D) FINRA.

A) its designated examining authority A time extension may be requested from the BD's designated examining authority, which could be FINRA or one of the exchanges.

All of the following are excluded from the FINRA filing requirements for communications with the public except A) retail communications posted online that require a login to access. B) retail communications that only identify the member firm. C) retail communications posted on an interactive forum online. D) correspondence.

A) retail communication posted online that require a login to access Retail communications, unless specifically exempted, must be filed with FINRA. There is no exemption for requiring a login to access. Correspondence does not need to be filed with FINRA nor does retail communication only identifying the member firm or posted on an online interactive forum.

To meet the initial Regulation T call in a margin account, a customer could deposit A) 50% of the call in cash. B) 200% of the call in fully paid-for marginable securities. C) 50% of the call in fully paid-for marginable securities. D) 100% of the call in fully paid-for marginable securities.

B) 200% of the call in a fully paid-for marginable securities Marginable securities have a loan value of 50% Delivering fully paid for marginable securities in an amount twice the required cash call enables the brokerage firm to lend the client cash sufficient to meet the required call

JDX Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. JDX decides to use all of the treasury stock to pay a dividend to shareholders. As a result, the number of outstanding shares is A) 10,000,000. B) 5,000,000. C) 4,000,000. D) 6,000,000.

B) 5,000,000 Treasury stock is stock that has been issued and reacquired by the company. At that point, it is no longer outstanding in the hands of the public. Sending those shares out as a dividend puts them back in the hands of the investing public. Now, all of the five million issued shares are outstanding.

Which of the following would NOT be found in the underwriting of a new corporate bond issue? A) A market out clause relieving the underwriter of his responsibility B) A legal opinion C) The holding of a due diligence meeting D) A stabilization clause

B) A legal opinion Municipal securities are the only ones requiring a legal opinion. The bond counsel provides the legal opinion attesting to the validity, enforceability, and tax status of the issuer's bond. There is no such requirement for a corporate debt issues.

Which of the following is not generally associated with an existing real estate direct participation program? A) Immediate income stream B) Appreciation potential C) Known history of income and expenses D) Lower risk than other types of real estate programs

B) Appreciation Potential Appreciation potential is generally not associated with existing real estate programs because most appreciation occurs in the earliest years for real estate assets.

A document that allows an investor in Class A shares of a mutual fund to receive a breakpoint on an initial purchase without investing the required breakpoint amount is A) the breakpoint sale memorandum. B) a letter of intent. C) the new account form. D) the rights of accumulation form.

B) a letter of intent The LOI is a document available to mutual fund investors that allows them to receive breakpoints on the initial and subsequent deposits over a 13-month period. Investors can backdate an LOI up to 90 days to pick up previously invested monies. If backdated, the 13 months begins from that date.

A municipal securities advertising piece intended to be distributed to retail customers must be approved by A) a branch manager and the MSRB. B) a municipal securities principal or a general securities principal. C) a general securities principal or a branch manager. D) a municipal securities principal and the MSRB.

B) a municipal securities principal or a general securities principal. Municipal securities advertising intended to be distributed to retail customers must be approved by a municipal securities principal (Series 53) or a general securities principal (Series 24).

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) earnings per share B) cash flow from operations C) cash flow from investments D) net value of fixed assets

B) cash flow from operations Cash flow from operations is computed by adding the year's depreciation deduction to the net income

A fundamental analyst would be interested in all of the following except A) statistics of the U.S. Department of Commerce on disposable income. B) daily trading volumes on the NYSE. C) innovations within the automotive industry. D) corporate annual reports.

B) daily trading volumes of the NYSE Trading volume interests the technical analyst, who looks at fluctuations in the market, not fundamental economic values.

Your client asks you to explain a not-held order. You could correctly explain that a not-held order A) must be executed immediately and in its entirety. B) gives time or price discretion to the floor broker. C) can be filled only on the last trade of the day. D) can only be done in a discretionary account.

B) gives time or price discretion to the floor broker With a not-held order, the customer gives the firm's time or price broker the discretion as to time or price. Remember, however, that time and price alone do not require the order to be done in a discretionary account.

A customer opens a new margin account and immediately purchases 200 shares of XYZ stock, which is trading at $9 per share. The customer must deposit A) $450. B) $2,000. C) $1,800. D) $900.

C) $1,800 If the first trade in a long margin account is less than $2,000, the customer must deposit 100% of the purchase price

An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share after the company pays a 100% stock dividend? A) $400 B) $50 C) $100 D) $200

C) $100 The total value of the initial position is unchanged, remaining at $40,000 (200 x $200). After the stock dividend, the investor owns 400 shares. Therefore, the adjusted cost basis is $100 per share.

In an existing margin account with no SMA, if a customer buys 300 ABC at 40 and simultaneously buys 3 ABC OCT 40 puts at 2.50, the customer must deposit A) $5,250. B) $6,100. C) $6,750. D) $6,375.

C) $6,750 Buying 300 shares at 40 ($12,000) requires a deposit of $6,000. In addition, the customer is purchasing 3 puts at $2.50 = $750. Most options have no loan value and must be paid in full.

The following information has been reported for ABC stock: Annual dividend = $2 PE ratio = 20 Closing price = $100 What is the dividend payout ratio? A) 2% B) 20% C) 40% D) 30%

C) 40% The dividend payout ratio is computed by dividing the dividend by the earnings per share ($2 / $5 = 0.4) the $5 comes from the PE ratio which is share price / earnings per share

Many years ago, an investor bought a bond with a 5% coupon. At that time, the yield to maturity of the bond was 6.5%. When the bond matures, the investor will receive A) $1,025. B) $1,050. C) $1,000 plus a call premium. D) $1,065.

A) $1,025 Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025

An investor establishes the following positions: Long 1 XYZ Apr 45 call at 3.50 Long 1 XYZ Apr 45 call at 2.75 The investor's strategy will realize a gain if XYZ trades above A) $51.25. B) $48.50. C) $47.75. D) $45.00

A) $51.25 A long straddle is profitable if the stock price moves sharply in either direction. In this example, the investor paid a premium of 6.25 to establish the straddle. To realize a gain, the stock must either fall below the strike price minus the combined premium (45-6.25=38.75) or rise above the strike price plus the combined premium (45+6.25 = 51.25)

If a customer places an order to buy 200 shares of ABC stock at $25, and he wants to meet the margin call by depositing full paid listed stock currently trading at $10, how many shares must he deposit? A) 1,000 B) 700 C) 500 D) 600

C) 500 To meet a margin call with marginable stock, an investor must deposit twice the value of the call. In this example, the margin call on the $5,000 purchase is $2,500. Because the customer must deposit $5,000 of marginable stock, at $10 per share, the customer must deposit 500 shares of the stock to meet the call.

Which of the following terms is used in connection with a municipal securities underwriting? A) Cooling-off period B) Effective date C) Agreement among underwriters D) In registration

C) Agreement among underwriters The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. Cooling off period, registration period, and effective date are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements.

A customer has an investment objective of keeping pace with inflation while assuming moderate risk. Which of the following recommendations would best meet the customer profile? A) Variable life insurance policy B) IPO C) Variable annuity D) Money market fund

C) Variable annuity Insurance companies introduced the variable annuity as an opportunity to keep pace with inflation. For the potential advantage, the investor, rather that the insurance company, assumes the investment risk. A variable life insurance policy should be purchased primarily for its insurance features, not its investment features.

An investor is long 300 shares of CTS stock and short 30 CTS May calls. This position can best be described as A) a debit spread with no gain potential. B) a long stock, short call hedge with a limited loss potential. C) a ratio spread with an unlimited loss potential. D) a credit spread with a limited gain potential.

C) a ratio spread with an unlimited loss potential This position is a ratio call spread because more calls were sold (30) than the long stock position covers (only 300 shares). To cover 30 calls, 3,000 share would be needed. This strategy generates additional premium income for the investor, but also it entails unlimited risk because of the short uncovered calls.

You are asked to read the preliminary prospectus for a new issue of common stock for a client. you would expect the preliminary prospectus to include A) the effective date of the offering and the risks associated with the offering. B) the effective date of the offering and the final offering price. C) an overview and history of the issuer's business and any risks associated with the offering. D) an overview and history of the issuer's business and the final offering price.

C) an overview and history of the issuer's business and any risks associated with the offering The preliminary prospectus will include an overview and history of the business as well as any risks associated with it. The preliminary prospectus cannot include the effective date or public offering price because they have yet to be determined.

A UK company exports sweaters to the US and will be paid in US dollars upon deliver. To hedge foreign-exchange risk using listed currency options, the UK company should A) buy British pound puts. B) sell British pound puts. C) buy British pound calls. D) sell British pound calls.

C) buy British pound calls Normally, exporters buy puts on foreign currency to hedge. There are no listed currency options available on the US dollar, so the British company should buy calls on its own currency.

A broker-dealer that is a financial advisor to a municipal issuer A) can act as an underwriter of the issuer's bonds in a negotiated underwriting or competitive bid underwriting and receive compensation for both services. B) can act as an underwriter of the issuer's bonds in a negotiated underwriting only if they want to receive compensation for both services. C) cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. D)can act as an underwriter of the issuer's bonds in a competitive bid underwriting only if they want to receive compensation for both services.

C) cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. Broker-dealers acting as financial advisors to a municipal issue are prohibited by MSRB Rule G-23 to also act as underwriters for the same issue regardless of whether the underwriting process has been done by competitive bid or was negotiated

The possibility of losing all or part of a person's invested principal in a debt security because of the issuer's failure best describes A) business risk. B) inflation risk. C) credit risk. D) market risk.

C) credit risk Credit risk, also called default risk, involves the danger of losing all or part of one's invested principal through an issuer's failure. Although credit risk is most often associated with debt securities, when a company cannot pay its debt, the equity securities can wind up worthless. This is the risk take by investors buying stock in highly leveraged companies. The higher the rating, the lower the credit risk.

A retiree is paid an annual amount equal to 30% of the average of his last 3 years' salary. Which of the following retirement plans offers this type of payment? A) Defined contribution B) Deferred compensation C) Defined benefit D) Profit-sharing

C) defined benefit

The writer of an IRX US Treasury bill yield-based option, if exercised, must A) receive cash equal to amount the contract is in-the-money B) receive Treasury bills C) deliver cash equal to the intrinsic value of the contract. D) deliver T-bills equal to the dollar amount of T-bills in the contract

C) deliver cash equal to the intrinsic value of the contract Like some other of the non-equity based options, upon exercise, yield-based options settle in cash. That is because there is no delivery of the underlying security. If you buy an IRX call and exercise it, you're not going to be buying Treasury bills. The writer must deliver the in-the-money amount in cash.

In a seller's option, securities may be delivered before the date specified if the seller A) cannot deliver on the specified date. B) gives notice to the buyer on the day of delivery. C) gives one day's written notice to the buyer. D) wishes to be paid earlier.

C) gives one day's written notice to the buyer In a seller's option trade, the seller may give the buyer written notice one day before making delivery

A customer wishing to open a numbered account must be informed that A) the account may only be opened with prior permission from the SEC. B) he must supply proof of U.S. citizenship and reside permanently in the United States. C) he must supply a written statement attesting to his ownership of the account. D) numbered accounts are restricted to cash accounts.

C) he must supply a written statement attesting to his ownership of the account Numbered - or symbol - accounts require that a written statement, which is signed by the client and acknowledges ownership, be kept on file.

XYZ County Sewer Revenue 6.5% municipal bonds mature in 20 years. If they are currently offered at 92, they have a yield to maturity of approximately A) 5.96%. B) 6.50%. C) 6.23%. D) 7.19%.

d) 7.19% Because this bond has a nominal yield of 6.5% and is sell at a discount (92), the yield to maturity has to be greater than 6.5%. Remember: price down, yield up

An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above A) $9,000. B) $11,000. C) $13,000. D) $10,000.

D) $10,000. Minimum maintenance rules require a minimum maintenance of 30% for a short margin account. The maintenance level is determined by dividing the credit balance by 1.3 (13,000/1.3 =$10,000)

With ABC stock trading at 33.10, a customer buys 2 ABC Jun 35 puts at 4.35. What is the time value of each contract? A) $4.90 B) $1.90 C) $0 D) $2.45

D) $2.45 Time value is the premium minus the intrinsic value ($4.35 - $1.90 = $2.45)

If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $381 in securities B) $600 in stocks C) $325 cash D) $600 cash

D) $600 cash Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised. With the index closing price of $381 and the strike price at $375, the difference is 6 points.

Which of the following would be the most likely unsuitable recommendation for a client whose objective is steady income? A) A subordinated debenture B) A bank CD C) A U.S. Treasury bond D) An income bond

D) An income bond Income (or adjustment) bonds carry the unique characteristic of requiring payment of interest only when the issuer's income is sufficient. They are used primarily for companies undergoing a financial restructuring, usually after a bankruptcy filing. Don't be fooled by the subordinated debenture. Although it stands last in line of the creditors in the event of a liquidation, that does not mean the investor is not going to get regular interest payments, especially when the debenture is investment grade. Bank CDs typically pay interest quarterly.

Regulations regarding how contributions are made to tax-qualified plans relate to which of the following ERISA requirements? A) Reporting and disclosure B) Nondiscrimination C) Vesting D) Funding policy

D) Funding policy The funding policy covers how an employer contributes to, or funds, a retirement policy

ABC stock is going ex dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following order would be reduced? A) Sell 100 ABC at 45 stop B) Buy 100 ABC at 50 stop C) Sell 100 ABC at 50 D) Buy 100 ABC at the market

A) Sell 100 ABC at 45 stop The ex-dividend date for a stock is the date that its shares begin trading without the benefit of the next dividend payment for new shareholders. New shareholders who purchase shares on or after the ex-dividend date will not receive the next dividend payment. You only reduce orders that are below the current market value, unless there are "Do not reduce" instructions. Orders that are below the current market value would have to be buy limits and sell stop orders, otherwise they would already be executed

One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed? A) The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. B) There is a combination of ordinary income and return of principal based on the exclusion allowance. C) The earnings will be taxed as capital gains and will be withdrawn first using LIFO. D) A portion of each payment will be taxed as ordinary income with the balance considered a return

A) The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. Because this a nonqualified annuity, there are not contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment.

An example of a taxable bond issued by a municipal government is A) a Build America Bond (BAB). B) a tax anticipation note (TAN). C) a general obligation bond (GO). D) Series EE bonds.

A) a Build America Bond BABs are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing the cost of issuing municipalities and to stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations.

Your customer wants to buy 1,000 shares of XYZ stock and has entered a not-held order with instructions to you to purchase the stock when you feel the price looks right. Under the rules, this order will be treated as A) a day order. B) a good-til-canceled (GTC) order. C) an immediate-or-cancel (IOC) order. D) a limit order.

A) a day order Unless the customer designates that the order is GTC, a not-held order is treated as a day order, and any unexecuted portion of the order remaining at the end of the day will be canceled.

Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) although they trade in line with the issuer's common stock, they are less volatile than the common shares B) It is generally best to convert when the common stock is selling below its parity price C) the conversion feature protects against an early call D) They generally pay a higher interest rate than nonconvertible debentures

A) although they trade in line with the issuer's common stock, they are less volatile than the common shares The lower volatility of a convertible debenture stems from the fact that it has fixed interest payments and will be redeemed at maturity as any other bond or debenture would. No such guarantees apply to common stock

Under the Securities Act of 1933, SEC registration is required for A) an offering of $25 million of a corporate bank holding company. B) a municipal revenue note offering of $4 million. C) a private placement offering of $60 million by a brokerage firm. D) a commercial paper offering of $30 million maturing in 180 days.

A) an offering of $25 million of a corporate bank holding company While some banks and savings and loans are exempt, issuers' corporate bank holding companies are not. Private placements, and commercial paper (short term) are all exempt from federal registration.

A registered representative correctly explains to a new customer who wants to learn about the tax and risk characteristics of collateralized mortgage obligations that the securities are A) taxable at all levels and subject the holders to prepayment risk. B) tax exempt at the federal level and do not have fixed maturity dates. C) tax exempt in the states where the mortgages originated from and they subject holders to prepayment risk. D) taxable only in the state where the mortgages originated from and are backed by the federal government.

A) taxable at all levels and subject the holder to prepayment risk CMOs are taxable at all levels. One of the primary risks of CMOs is the prepayment of principal because they are backed by the mortgage paper. If interest rates fall, mortgage holders will refinance paying off existing mortgages earlier than expected.

For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on A) the amount of the natural resource sold. B) the condition or grade of the natural resource. C) the cost of moving the natural resource to refiners and distributors. D) the amount of the natural resource extracted.

A) the amount of the natural resource sold. Depletion allowances may be taken only on the oil or gas that is sold and is based on the amount sold (depleted)

The Bond Buyer's 20-Bond Index reflects A) the average yield of 20 high-quality general obligation bonds. B) the average maturity of 20 high-quality municipal bonds. C) the average yield of 20 high-quality revenue bonds. D) the average yield of 20 high-quality municipal bonds.

A) the average yield of 20 high-quality general obligation bonds The Bond Buyer 20-Bond index is defined as the average yield of 20 general obligation bonds having a rating of A or better and a maturity of 20 years.

A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal, and your client is in a 28% marginal tax bracket, which bond do you tell the client to purchase and why? A) The municipal bond because its equivalent taxable yield is 6.6%. B) The corporate bond because the after-tax yield is 6.25%. C) The municipal bond because its equivalent taxable yield is 6.3%. D) The corporate bond because the after-tax yield is 4.5%.

A) the municipal bond because its equivalent taxable yield is 6.6% This is calculated using the tax-equivalent yield formula: municipal yield/(100%-investors tax bracket) 4.75/.72=

Better Bond Sales (BBS) is participating in a firm underwriting for some GO municipal bonds. Their role is that of a syndicate member with a 10% commitment. Should BBS sell some of the bonds, its earning would be A) the total takedown. B) the spread. C) the selling concession. D) the takedown.

A) the total takedown The syndicate manager is the only participant who earns the spread when it makes a sale. Syndicate members earn the total takedown (all the spread other than the manager's fee) when they sell the bonds. That includes the takedown plus the additional takedown. The selling group members earn the selling concession.

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor B) brokers acting as agents in all order execution scenarios. C) trades in NYSE-listed securities occurring on the NYSE. D) brokers executing orders as agents in an auction market on any exchange trading floors.

A) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor FINRA's TRF is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.

Treasury STRIPS and Treasury receipts are quoted based on A) yield to maturity. B) amortization of premiums. C) 0.125 (⅛ of a point in dollars). D) 0.03125 (1/32 of a point in dollars).

A) yield to maturity Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax (AMT), which of the following securities should an agent recommend? A) Corporate bond B) General obligation (GO) bond C) Treasury bond D) Industrial revenue bond

B) GO bond Municipal bonds are suitable for the portfolio of an investor who is in the high tax bracket because the interest is exempt from federal income tax. A GO bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.

Your BD has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new BD. How long does your BD have to validate the positions listed on the form? A) Three business days B) One business day C) No later than the end of business on the Friday of the week the TIF was received D) Seven calendar days from the time the TIF is received

B) One business day When transferring a customer's positions to another broker dealer via the TIF under the Uniform Practice Code, the carrying BD has one business day to validate positions and three business days to transfer the positions to the receiving BD after validation.

Which of the following best describes a debenture? A) A long-term corporate debt obligation with a claim against securities rather than against physical assets B) Unsecured corporate debt C) A corporate debt obligation that allows the holder to purchase shares of the company's common stock at specified dates before maturity D) An investment in the debt of another corporate party

B) Unsecured corporate debt

A customer holds the following positions: Short 100 XYZ shares at 40 Short 1 XYZ Oct 40 put at 5 With XYZ trading at 35, the customer is assigned an exercise notice on the put, and he uses the stock purchased to cover the short stock position. This results in A) a $500 loss. B) a $500 gain. C) a $1,000 loss. D) a $1,000 gain.

B) a $500 gain When exercised, the customer is forced to buy stock at 40 that is used to cover the short position for not gain or loss. Because the premium of $500 was received, the investor has a gain of $500 on this position. Money Out = $4,000 (exercise of the put - obligation to buy) Money In = $4,000 (short sale of 100 XYZ @40) $500 Premium for the short put) Therefore, the investor has a $500 gain

Which of the following investments would be MUST suitable for an IRA? A) Short sale of a stock that has just started what is expected to be a prolonged decrease in price B) A covered call (selling a call option on a stock owned within the IRA) C) Highly rated general obligation bond D) Uncovered call on a stock whose price is extremely stable

B) a covered call Short sales, uncovered calls, and municipal bonds are all inappropriate for individual retirement accounts.

A website maintained by a fund company shows that one of the company's mutual funds currently has a NAV for $9.50 and a POP of $10 per share. You client sees this information and enters an order to make $10,000 purchase. He asks you to calculate the number of shares he will be able to buy with today's investment. You respond that A) based on the 5% sales charge, he will be receiving exactly 950 shares into his account immediately. B) it cannot be determined until after the order is processed by the fund at the next calculated (forward) price. C) based on the $9.50 NAV, he will be receiving exactly 1,052.63 shares into his account at the end of the day. D) based on the $10 POP, he will be receiving exactly 1,000 shares into his account immediately.

B) it cannot be determined until the order is processed by the fund at the next calculated (forward) price. Mutual funds use forward pricing, so the purchase price or redemption price is never known until after the order is processed. This order will be executed at the next calculated POP.

With the underlying stock at $37, an ABC Jan 35 call is trading at $2. All of the following statements regarding the option are true EXCEPT: A) it is at parity. B) it has time value. C) it is in the money. D) it is trading at breakeven.

B) it has time value. This option is at parity or breakeven. An option trading at parity has no time value. When an option has no time value remaining, it is very near or at the moment of expiraiton.

A municipal revenue bond has a catastrophe call feature, but otherwise, is not callable. Which of the following statements regarding the features of this bond that must be described on a customer's confirmation is true? A) It must be designated as callable. B) It need not be designated as callable. C) It must be designated as callable in the event of an act of God. D) It must be designated as subject to eminent domain.

B) it need not be designated as callable Catastrophe call provisions associated with municipal revenue bond issues are not included on customer confirmations. Only call provisions with specific dates are included on confirmations.

For the purpose of reporting sales to the IRS, the method available to investors by the IRS that offers the MOST flexibility in anticipation of the investor's year-end tax need is A) average cost basis. B) share identification. C) first in, first out. D) none of these.

B) share identification Share identification is most flexible of the three methods. The investor keeps track of the cost of each share purchased and specifies which shares to sell based on this anticipated year-end tax needs. For investors, the idea to minimize tax liability, if possible, by limiting gains or maximizing losses in anticipation of what one's year end tax liability might be.

Revenue bonds may be called for all of the following reasons except A) the facility has been destroyed. B) the issuer has reached a statutory debt limit. C) interest rates have fallen. D) a provision in a sinking fund agreement is calling for a partial call.

B) the issuer has reached a statutory debt limit Statutory debt limits only apply to general obligation bonds

An investor anticipating a rise in interest rates would likely purchase A) bonds issued by the U.S. Treasury. B) variable-rate demand obligations or reset bonds. C) corporate bonds. D) callable bonds.

B) variable-rate demand obligations or reset bonds When interest rates increase, the market price of all fixed-income securities declines. In the case of variable rate or reset bonds, the interest rate on those is adjusted based on the movements of market interest rates. As a result, when interest rates increase, the rate paid by the variable rate security increases as well. This tends to keep the market price stable rather than declining as well as providing increased income to the investor. A callable bond works to the issuer's advantage when interest rates fall but offers no added benefit to an investor when interest rates rise. Corporate of government issued bonds offer no advantage for an investor anticipating a rise in interest rates because with fixed interest rates, their price will decline.

Which of the following does the capital asset pricing model (CAPM) assume? A) Investors are comfortable with risk because they do not believe that it can be diversified away. B) Investors are averse to risk and believe that no type of risk can be diversified away. C) Investors are averse to risk and believe that diversification can be used to reduce risk. D) Investors are comfortable with risk and believe that diversification can be used to reduce risk.

C) Investors are averse to risk and believe that diversification can be used to reduce risk. The CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it. Therefore, the pricing of an asset must reflect that.

A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in A) Delaware Wetlands Developments municipal bonds rated AA. B) Michigan Upper Peninsula revenue bonds rated AA. C) New Jersey Turnpike revenue bonds rated AA. D) high-yield municipal bonds rated BB.

C) New Jersey Turnpike revenue bonds rate AA The Michigan revenue bonds, the subinvestment-grade municipal bonds, and the Delaware municipal bonds have possible state disadvantages or are less than investment grade.

A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage payments? A) FINRA B) DEA C) PSA D) Bond Buyer

C) PSA The Public Securities Association is the source of historical date for prepayment projections on CMOs

Which of the following registers the securities and packages the program for limited partnership? A) Property manager B) General partner C) Syndicator D) Limited partners

C) Syndicator A syndicator handles the registration of the limited partnership units

Securities traders would consider which of the following to be the most relevant indicator of expected market volatility? A) The market's beta B) The S&P 500 Index C) The VIX Index D) The advance/decline ratio

C) The VIX Index The VIX index, sometimes called the "fear" index, is considered the most accurate indicator of anticipated market volatility

A customer's confirm of a municipal securities transaction must include A) lowest potential yield the customer may receive & info regarding the catastrophic call provision B) highest potential yield the customer may receive & the amount of markup/down in a principal transaction C) lowest potential yield the customer may receive & whether the bond is taxable or subject to the alternative minimum tax D) highest potential yield the customer may receive & info regarding the catastrophic call provision

C) The lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax Customer confirmations always reflect a worst-case scenario regarding yield. Any possible tax ramifications, such as the bond being designated at an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed in the confirmation. Commissions and markup/markdowns are disclosed, but not the highest yield.

A bond is being issued to build a toll road. It has been identified that the State does not own all of the property that the road is going to be built upon. Which of the following documents would disclose this information? A) trust indenture B) bond resolution C) qualified legal opinion D) prospectus

C) The qualified legal opinion Any legal uncertainty of which bondholders should be informed is first identified by the legal opinion obtained by the municipality issuing the bond. Municipal bonds are exempt from registration with the SEC, and therefore, do not have a prospectus requirement. The full and fair disclosure document for municipal bonds is called the official statement (which would disclose this information as well)

An hour ago, you entered a sell limit order for your customer in XYZ stock. Looking at a current quote, you could expect the order to have been executed if A) the bid price for XYZ is higher than your customer's sell limit, & the last reported price in the stock is below the sell limit price. B) the offer or ask price for XYZ is lower than your customer's sell limit, & the last reported price in the stock is above the sell limit price. C) the bid price for XYZ is higher than your customer's sell limit, & the last reported price in the stock is above the sell limit price. D) the offer or ask price for XYZ is lower than your customer's sell limit, & the last reported price in the stock is below the sell limit price.

C) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price. A sell limit order sets the minimum price an investor will accept. The order should have been executed if the current bid price is higher than the sell limit or the last reported price in the stock is higher then the sell limit.

XYZ, Inc., has 5 million shares outstanding and will issue 1 million new shares of stock through an upcoming rights offering. Regarding the rights offering, the RR should know that A) XYZ will issue 1 million rights. B) the value of the right will generally increase after the ex-date. C) the exercise price is generally lower than the current market price at issuance. D) a shareholder will generally have two to three weeks to exercise the rights.

C) the exercise price is generally lower than the current market price at issuance The exercise price is generally below the current market price at issuance. None of the other choices are true because the value of the right drops on the ex-rights date. Each existing share receives 1 right, so in this case, XYZ will issue 5 million rights. An investor must exercise the rights within 30-45 days of issuance; otherwise, they will expire.

A new offering has a green shoe option. This means A) the syndicate is obligated to purchase up to 15% of the offering. B) the syndicate members have purchased put options to protect against a decline in the price of the stock. C) the syndicate can oversell by up to 15% of the offering. D) the issuer has purchased put options to protect itself against a decline in the price of the stock.

C) the syndicate can oversell by up to 15% of the offering If the syndicate manager, based on anticipated demand, wants to sell more shares than initially registered with the SEC, the manager can invoke the green shoe clause on short selling. A green shoe clause, negotiated with and agreed to by the issuer, allows the syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. The additional shares are made available to the syndicate by the issuer. To be effective, a green shoe clause must be disclosed in both the registration statement filed with the SEC and the prospectus.

The IRS has determined that the NYNY real estate existing property limited partnership is abusive. The MOST likely reason would be because A) all of the assets were found to be rental properties. B) no net profit was generated after losses were taken. C) there was no viable profit motive. D) each partner received enough in losses to shelter all income.

C) there was no viable profit motive. To qualify as a limited partnership direct participation program, above all else, there must be a viable chance to make a profit. Any DPP established without a profit motive or with the intention of only generating tax losses for investors may be determined abusive by the IRS subjecting the partners to penalties including prosecution for fraud.

A registered representative at a broker deal mentions continuity of life as it pertains to limited partnerships. The reference can best be explained by which of the following statements? A) Continuity of life is a characteristic of LPs because they are scheduled to end on a predetermined date. B) LPs have continuity of life, which means they will exist in perpetuity. C) LPs will exist until the last partner is deceased. D) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date.

D) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. Continuity of life is a corporate characteristic that must be avoided for a partnership to qualify as a direct participation program. The phrase refers to the fact that a corporation should exist in perpetuity. LPs, however, are all scheduled to end on a predetermined specific date.

Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk? A) Companion B) TACs C) Z-tranche D) PACs

D) PACs PACs have targeted maturity dates. they are retired first, and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) because changes in prepayments are transferred to companion tranches, also called support tranches.

FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is NOT one of those three? A) Customer-specific suitability B) Reasonable-basis suitability C) Quantitative suitability D) Qualitative-basis suitability

D) Qualitative-basis suitability The rule does not refer to qualitative-basis suitability. It does say that a recommendation may be suitable if at least some investors would benefit from it.

If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer's portfolio? A) Blue-chip equity fund B) Growth stocks C) High-yield bond fund D) T-bills

D) T-bills While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bill makes the most sense.

A customer calls you and excitedly tells you the she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) Blue-chip stocks B) AAA rated municipal bonds maturing in 18 years C) U.S. Treasury bonds with 18 years to maturity date D) U.S. Treasury STRIPS maturing in 18 years

D) U.S. Treasury STRIPS maturing in 18 years STRIPS are issued at a discount, and are backed by the US Treasury. Purchasing these maturing in 18 years give the client the guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bond will certainly pay off at maturity, but there is no growth potential. The same problem plagues municipal bonds. Common stock, no matter how respectable the company is today, offers no guarantees for the future.

A municipality has prefunded its bond issue maturing in 5 years. This would mean all of the following except A) greater marketability. B) a higher rating. C) the bonds will be called in more than 90 days. D) a reduction to the coupon rate.

D) a reduction to the coupon rate The current bond still exists until the specified call date. As such, the coupon has not changed. Advance or pre-funding is refinancing an existing municipal bond issue before its maturity or call date by using money from the sale of a new bond issue. Because the proceeds of the news issue are placed into special US government securities, the rating is automatically at the top. The higher rating increases the marketability. If the refunding is done in 90 days or less, it is called current refunding.

Because of their unlimited loss potential, short positions A) require a higher initial margin deposit. B) can only be taken by those who are accredited investors. C) must be approved by a designated principal before execution. D) are marked to the market at the close of each day.

D) are marked to the market at the close of each day Although most securities positions are marked to the market on a daily basis, it is more important that this be done with short positions because of how quickly they can reach the maintenance margin level. The initial margin is the same as long purchases, and the term accredited investors applies to private placements. Short sales, just as with any transaction, must be approved by principal, but not in advance.

Having been a customer of a broker dealer for over 10 years, currently holding equity positions and cash in his account, Daryl Smith wants to purchase 1,000 shares of a penny stock. Smith is A) exempt from the disclosure requirement but must receive a suitability statement. B) required to receive both the suitability statement and the disclosure. C) exempt from both the requirement to receive a suitability statement and the disclosure requirement. D) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement.

D) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement Smith meets the criteria for an established customer under the penny stock rules. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements.

Using listed options to reduce the market risk in a stock position by taking an opposing position in the options that represent an equivalent number of shares is known as A) straddling. B) market timing. C) spreading. D) hedging.

D) hedging. This describes hedging, which is a technique used to reduce the market risk or adverse price movements in a tock position using options. Each standardized listed equity option contract represents 100 shares, so the number of contracts needed to hedge an existing stock position is determined by the number of shares the investor is currently long or short.

The item that is NOT true when you read a bond quote of 6.5s of 29 at 99 is A) the bond matures in 2029. B) the bond is trading at a 1-point discount. C) if traded at this price, the yield to maturity rather than the yield to call would be shown on the confirmation. D) if the price quote was changed to a basis quote, the yield would be less than 6.5%.

D) if the price quote was changed to a basis quote, the yield would be less than 6.5%. This bond is trading at a discount of 1 point ($10); therefore, a basis quote, which is the bond's yield to maturity, will be greater than the 6.5% coupon, not less that 6.5%. YTC is only shown when it produces the lowest yield. That would never be the case with a bond traded at a discount.

You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. B) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call. C) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put. D) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put.

D) long 1XYZ Jan 30 put and short 1 XYZ Jan 40 put Of the choices given, the correct answer is the put spread. Credit put spreads are bullish. Anytime the long option in a spread has a lower strike price than the short position, the spread is know as a bullish spread. We refer to that strategy as buy low, sell high

The capitalization structure of an open-end investment company can include A) preferred and common stock with no bank borrowing allowed. B) only debt issues with no bank borrowing allowed. C) preferred stock, common stock, and bonds. D) one issue of common stock.

D) one issue of common stock Open-end investment companies may only issue shares of common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. It is the closed-end investment company that can have a preferred stock and bond offering. Don't confuse what a mutual fund uses to raise money (the common stock it issues) with what it does with that money. The capital raised from the sale of shares may be used to buy whatever securities meet the fund's objectives.

Several years ago, one of your customers bought an original issue discount municipal bond at $960. The bond has now matured. For federal income tax purposed, the discount is A) taxed as a long-term capital gain. B) taxed at maturity as ordinary income. C) taxed each year as ordinary income. D) tax free.

D) tax free When buying an OID municipal bond, the discount must be accreted each year and treated as interest income. Because interest income from a municipal bond is tax free at a federal level, the discount is not taxed if the bond is held to maturity. If the customer had purchased at a discount in the secondary market, the discount would have have been accreted and taxed as ordinary income

All of the following municipal securities are quoted on a yield basis except A) tax anticipation notes. B) secured bonds. C) serial bonds. D) term bonds.

D) term bonds Term bonds, or dollar bonds, are quoted like corporate bonds as a percentage of par. All other municipals are quoted in basis.

Your customer has just signed a limited partnership subscription agreement. Regarding the signing of this agreement, it is important for the customer to know that A) the registered representative (RR) and general partner are required to sign before the customer can become a limited partner. B) a copy of the agreement signed by all partners must be filed with the SEC. C) a new agreement is required anytime assets in the partnership are bought or sold. D) the customer will be considered a limited partner only after the subscription agreement has been signed by the general partner.

D) the customer will be considered a limited partner only after the subscription agreement has been signed by the general partner On of the unique characteristics of DPPs (limited partnerships) is that a customer must be accepted by the general partner to become a limited partner in the venture. Therefore, the customer is not a limited partner until the general partner signs the subscription agreement.

The date on which interest will begin accruing on a new municipal issue is A) the filing date. B) the closing date. C) the delivery date. D) the dated date.

D) the dated date

FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. FINRA's suitability rules would likely find a registered representative is NOT in violation of complying with those three if A) the recommendation was profitable for the investors. B) control relationships were disclosed. C) proper disclosures were made of the representative's compensation received. D) the recommendation made would be suitable for at least some customers.

D) the recommendation made would be suitable for at least some customers. This question refers to the three specific obligations under Rule 2111. Those three are 1) reasonable-basis suitability, 2) customer-specific suitability, 3) quantitative suitability. Complying with the first of the 3 means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors. Control relationships must always be disclosed, but that is not part of the 3 obligations. Compensation may have to be disclosed, but that is not part of the 3 obligations.

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing just one fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B: $495,000 XYZ Research Class B: $310,000 XYZ Investors Growth Stock Class B: $495,000 ABC Capital Enterprise Class B: $495,000 ABC Capital Opportunity Class B: $310,000 Total: $2,105,000 These recommendations are A) suitable because they achieve the diversification the customer seeks. B) suitable because the customer fully understands all of the ramifications and is satisfied. C) unsuitable because the investments are not equal in amount. D) unsuitable because Class A shares in either (

D) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0% All mutual funds with Class B shares also have Class A shares. How do we know that? Because one of the characteristics of Class B shares is that, once the deferred load period is up, the Class B shares are converted into Class A shares. That would be impossible if there were no Class A shares. All Class A shares provide sales charge discounts at stated breakpoints. At a purchase of this quantity, the sales charge is likely 0%. That means that, just like with Class B shares, all of the money is invested into the funds. The advantages of Class A shares is that their operating expenses are lower than Class B shares and there is no back-end load to this investor if the funds were needed unexpectedly in a few years.

Which of the following statements regarding a municipal variable-rate demand obligation are true? I. Interest payments are tied to the movements of another specified interest rate. II. Interest payments are tied to the movements of an underlying stock or index. III. The coupon rate stays the same for the life of the demand obligation, and the price fluctuates. IV. The coupon rate of the bond changes, and the price remains stable.

I and IV A municipal variable rate demand obligation has interest payments tied to the movements of a specified interest rate. Because the coupon rate of the bond changes with the market, the price of the demand obligation tends to remain stable.

A customer purchases 2 QRS Jul 30 calls at 2 and 2 QRS Jul 30 puts at 2.50. She will break even when the price of the underlying stock is I. $25.50. II. $27.50. III. $32.00. IV. $34.50.

I and IV The customer has purchased calls and puts with the same strike price and expiration date, so the position is a long straddle. Straddles have two breakeven points: the strike price plus the sum of the two premiums, and the strike price minus the sum of the two premiums. The customer profits in a long straddle when the stock price is outside the breakeven points (higher than 34.50 or lower than 25.50). Remember, when we find the breakeven point, we ignore the number of contracts.

Which of the following statements regarding the flow of funds within a municipal trust indenture are true? I. It describes the disbursement of funds for revenue bond issues. II. It describes the disbursement of funds for general obligation issues. III. It is found within the official statement. IV. It is found within the bond contract.

I and IV The term "flow of funds" relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts, as specified in the trust indenture found in the bond contract.

Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination? I. Actual performance compared to the AIR affects the cash value of a variable life insurance policy II. Actual performance compared to the AIR affects the death benefit of a variable life insurance policy III. Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity IV. Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity

II and IV Actual performance compared to the AIR affects the death benefit of a variable life insurance policy Actual performance compared to the AIR affect the value of an annuity unit of a variable annuity When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice versa.

Which of the following responsibilities did the MSRB receive through the Securities Acts Amendments of 1975? I. Regulation of municipal issuers II. Establishment of recordkeeping requirements for municipal broker-dealers III. Enforcement of any municipal regulations it adopts IV. Creation of regulations for participants in the municipal securities secondary market

II. and III. The MSRB creates rules for municipal trading and issues interpretations of its rules. It does not regulate issuers or have any enforcement capability. For broker-dealers, MSRB rules are enforced by FINRA.

Market interest rates have risen steadily over the past several months. The market price of which two of the following shares would probably reflect the biggest impact of this change? I. Growth stock II. Money market mutual fund III. Preferred stock IV. Public utility stock

III and IV Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock, with its fixed dividend, and utility stocks, with their high degree of debt leverage, are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

A corporation with an outstanding convertible debenture issue could force conversion by A) soliciting proxies from the common shareholders asking them to vote for mandatory conversion. B) publishing an announcement that the debenture holders have thirty days to tender their bonds at the call price. C) decreasing the coupon rate on the debenture to a level where the dividend on the common stock provides a higher return. D) issuing new debentures with a higher coupon rate.

Most convertible debt securities are callable, usually at a price slightly above the par value. When the price of the underlying common stock rises to a point where the converted value of the bond is worth more than the par value, issuers will frequently exercise their call privilege. Because the call price is usually significantly less than the converted value, it is only common sense that the debenture holders will exercise their conversion privilege.

Your customer, age 46, has been investing money in a variable annuity for several years. He plans to stop the deposits to meet current financial obligations, but he does not intend to withdraw any of the funds already invested until retirement, which is still several years away. Until the withdrawals are made, the client will be holding A) accumulation units. B) accumulation shares. C) annuity units. D) deferred units.

a) accumulation units Until the customer withdraws funds or annuitizes, the annuity is still in the deferral stage, and the customer is holding accumulation units.