Series 7 Practice Exam Review

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Quite period

A member firm, acting as manger or comanager of a securities offering, may not publish research nor may an analyst make a public appearance regarding the subject company for 40 days following the initial public offering (IPO) or 10 days after additional issues offering

If a customer of a member firm would like to file a claim under the Code of Arbitration Procedure, the claim will not be eligible once A) six years have elapsed from the occurrence or event giving rise to the claim. B) four years have elapsed from the occurrence or event giving rise to the claim. C) two years have elapsed from the occurrence or event giving rise to the claim. D) ten years have elapsed from the occurrence or event giving rise to the claim.

A) six years have elapsed from the occurrence or event giving rise to the claim. The statute of limitations for filing an arbitration claim is six years from the occurrence or event giving rise to the claim.

One respect in which TIPS bonds differ from all other U.S. Treasury securities issued at par value is that they A) subject the investor to phantom income. B) have a variable coupon rate. C) pay interest annually. D) are quoted in 1/8 increments.

A) subject the investor to phantom income. The inflation protection of a TIPS bond comes from the semiannual adjustment to the principal value. Those increases are reported to the IRS as ordinary income to the investor. It is called phantom income because the investor does not "see" that money currently, but still must pay taxes on it. Like other Treasuries issued at par (T-notes and T-bonds), interest is paid semiannually at the fixed coupon rate. The actual interest will vary based on the principal adjustment, but the coupon is fixed. As with the other two mentioned, quotes are in 32nds.

Your customer is interested in buying call options on CDL common stock. The client asks you, "Who issues CDL options?" The proper response is A) the Options Clearing Corporation. B) CDL Corporation. C) the seller of the option. D) the exchange where the option is traded.

A) the Options Clearing Corporation. The issuer and guarantor of the options covered on the exam is the Options Clearing Corporation (OCC). Unlike other derivatives, such as rights and warrants, a corporation does not issue options on its own stock. Please do not confuse this with employee stock options, which is a different topic. As the guarantor, the OCC guarantees that the writer (seller) of the option will perform. That is, if exercised on a call, the stock will be delivered at the strike price, and if exercised on a put, the seller will pay the strike price.

A municipal bond underwriter looking in The Bond Buyer would recognize the percentage of new issues sold versus new issues offered for sale the prior week as A) the acceptance or placement ratio. B) the visible supply. C) the revenue bond index. D) the general obligation (GO) index.

A) the acceptance or placement ratio. The placement ratio, also known as the acceptance ratio, is compiled weekly and reflects the municipal bonds sold divided by the municipal bonds offered in the previous week.

All of the following statements regarding the short sale of a listed security are true except A) the buyer must be advised that he is purchasing borrowed shares. B) short sales may take place at the opening. C) a short sale can be executed at any time in the trade sequence. D) short sales may take place at the closing.

A) the buyer must be advised that he is purchasing borrowed shares. On an exchange floor, short sales can be effected at any time in the trade sequence. In addition, short sales may be effected at either the opening or closing. The buyer is never informed that shares being purchased represent borrowed shares.

An important feature of scheduled premium variable life insurance policies is that A) the death benefit can never fall below the guaranteed minimum amount. B) the cash value can never fall below the guaranteed minimum amount. C) purchasers must understand that there are no guarantees with these policies. D) better than expected performance of the separate account can lead to reduced premiums.

A) the death benefit can never fall below the guaranteed minimum amount. Scheduled (fixed) premium variable life always has a guaranteed death benefit. Cash values cannot be guaranteed, only the death benefit. Better than expected performance of the separate account will lead to increased cash values, but it will not affect the premiums.

Maintaining a fair and orderly market on the NYSE trading floor is the responsibility of A) the designated market maker. B) the order book official. C) the floor brokers. D) the traders.

A) the designated market maker. The designated market maker maintains a fair and orderly market on the NYSE exchange floor. The role historically was filled by the specialist, a term that might still appear on the exam. Floor brokers represent member firms in the execution of their customer orders.

Retail Communication

Any written communication distributed or made available to 25 or more retail investors in a 30 day period -Maintained by firm for 3 years -If new firm registered with Central Registration Depository for less than 12 months, must file all retail communication with FINRA 10 days prior to first use unless previously filed with no material changes -Firms registered > 12 months file 10 days after first use

Institutional Communication

Any written communication that is distributed or made available only to institutional investors but does not include a member firm's internal communications. Excludes the individuals participants of employee benefit plans from the definition of institutional inventors

A brother and sister would like to open an account together. Contributions to the account will be disproportionate. Both the brother and sister have children and they each want their children to get their proportionate shares when either the brother or sister dies. What type of account would you recommend? A) Joint tenants with rights of survivorship B) Tenants in common C) Community property D) Partnership

A customer just opened a new account at your firm and gave her lawyer limited power of attorney (POA). Which of the following statements is true? A) The POA must be renewed on the last business day of April and October. B) The POA ceases upon the death of either party. C) Confirmations will only be sent to the party given the POA unless otherwise requested. D) Confirmations of trades will be sent to the account owner and the lawyer.

A quotation on a municipal security between dealers is assumed to be A) an indication of interest. B) a bona fide quote. C) a workable quote. D) a nominal quote.

A quote of 2.20 bid 2.18 ask would most likely be a quote on A) a T-bond. B) a T-bill. C) a T-note. D) a GO bond.

An individual younger than age 70½ may contribute to a traditional IRA A) provided she does not own a self-employed retirement plan such as a SEP. B) if she has earned income. C) provided she is not a minor. D) provided she is not covered by a qualified

An investment adviser has a client who wants to save for college for her child. The child will be entering college in five years. This would be an example of A) tactical asset allocation. B) an investment constraint. C) a capital need. D) planning too late.

Each of the following is a defined contribution plan except A) a 401(k) plan. B) a stock option plan. C) a profit-sharing plan (qualified). D) a money-purchase pension plan.

Given the following choices, the most suitable investment recommendation for a customer who wants monthly income is A) income bonds. B) GNMAs. C) high-yield bonds. D) utility stocks.

If a customer writes 2 ABC Feb 90 puts at 8 and buys 2 ABC Feb 80 puts at 2, which of the following statements are true? The spread is bullish. The spread is bearish. The breakeven point is 84. The breakeven point is 86. A) II and III B) I and III C) I and IV D) II and IV

If a registered representative opens a joint account for three people, the registered representative should obtain information on A) a single tenant of the account holders' choosing. B) all of the tenants. C) the senior tenant in the account. D) the tenant with trading authority.

If an investor in the 27% federal marginal income tax bracket invests in municipal general obligation public purpose bonds nominally yielding 4.5%, what is the tax-equivalent yield? A) 0.0329 B) 0.0616 C) 0.0572 D) 0.1667

In a variable life annuity with 10-year period certain, a contract holder receives A) fixed payments for 10 years, followed by variable payments for life. B) a minimum of 10 years of variable payments, followed by additional variable payments for life. C) 10 years of variable payments. D) variable payments for 10 years, followed by fixed payments for life.

Payment of interest and principal on which of the following securities is a direct obligation of the U.S. government? A) Federal Home Loan Mortgage bonds B) Government National Mortgage Association pass-through securities C) Federal National Mortgage Association bonds D) Federal Housing Authority bonds

Sam Brown has several stock rights. Which of the following is not an alternative regarding these stock rights? A) Gifting the rights to his son to exercise B) Redeeming them from the issuer for cash C) Exercising the stock rights before expiration to purchase shares of stock D) Selling in the open market at the prevailing

The XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock? A) $40 per share B) $36 per share C) $44 per share D) $22.50 per share

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? A) Unit investment trusts B) Closed-end management investment companies C) Open-end management investment companies D) Face-amount certificate companies

Which of the following securities would not be issued by the U.S. Treasury? A) Treasury bonds B) Treasury stock C) Treasury notes D) Treasury bills

Which of the following statements concerning Section 529 plans are true? Qualified withdrawals are exempt from federal income tax. Contributions are tax qualified. Up to $10,000 per year can be used for K-12 tuition expenses. Qualified withdrawals may be used for any expenses incurred by a student. A) II and III B) I and III C) I and IV D) II and IV

Your customer owns a leveraged ETF having a performance goal of 200% of the underlying index. When purchased two days ago, the ETF was priced at 50. If the index was down 10% the first day and up 20% the second day, what is the value of the ETF today if it performed as it was intended to? A) 54 B) 56 C) 45 D) 36

A corporate bond is quoted in the Wall Street Journal as follows: Bid: 100½ Asked: 100¾ Bid Chg.: -⅛ YTM: 5.75% From this information, you know the nominal yield is A) less than 5.75%. B) greater than 5.75%. C) 5.625%. D) 5.75%.

B) greater than 5.75%. The bid and asked prices show that the bond is being quoted at a premium (above par), with a yield to maturity of 5.75%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.

Electronic Communications

Websites are considered retail communication. Must be reviewed by principal before first use and must contain no aggregate claims

A 65-year-old man called the branch manager to complain about a recent exchange of a deferred variable annuity proposed and performed by the registered representative handling his account. The customer said he was unaware that there would be charges associated with the transaction and was shocked that the account value diminished substantially during a recent downturn in the market. The manager should do which of the following? A) Interview the registered representative to ascertain whether firm procedures were adhered to with regard to suitability and disclosure of charges and risks associated with exchanges. B) Retrain the registered representative to make exchanges in variable products only by prospectus and require future sales calls to be recorded. C) Document the facts of the complaint and submit a report to FINRA. D) Promptly refund the customer's losses and unwind the transaction.

A customer long 100 shares of XYZ stock who wishes to reduce risk and generate income should A) sell an XYZ call. B) buy an XYZ put. C) buy an XYZ call. D) sell an XYZ put.

ABC Corp. has outstanding a 10% noncumulative preferred stock. Two years ago, ABC omitted its preferred dividend. Last year, it paid a dividend of $5 per share. In order to pay a dividend to common shareholders, each preferred share must be paid a dividend of A) $10. B) $15. C) $25. D) $5.

All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan except? A) the nonqualified plan provides an immediate income tax deduction for the employer. B) the nonqualified plan is not subject to ERISA reporting and disclosure requirements. C) the nonqualified plan provides greater flexibility. D) the nonqualified plan can discriminate in favor of highly compensated employees.

Among the requirements of Regulation SP is that a broker-dealer must provide an initial and annual privacy policy statement to A) retail customers. B) shareholders. C) retail consumers. D) business customers.

An investor wishes to open a cash account and give trading authorization to a sibling. The required documentation would include which of the following? A) A limited power of attorney B) A new account form signed by the investor C) A joint account agreement D) CIP information on the sibling

FINRA rules before selling nonconventional products such as distressed debt, members are required to perform a reasonable-basis suitability analysis. not required to perform a reasonable-basis suitability analysis. required to perform a customer-specific suitability analysis. not required to perform a customer-specific suitability analysis. A) I and III B) II and IV C) I and IV D) II and III

If your client wished to purchase a preferred stock that would offer him the highest likelihood of assured income, plus the opportunity to take part in the growth of the company's common stock, which of these features might he consider? Callable Convertible Cumulative Straight A) II and III B) II and IV C) I and II D) I and III

In April, a customer buys 1 MCS Oct 50 call for 9 and sells 1 MCS Jul 50 call for 4. What will the customer's profit or loss be if he buys back the July call for $1 and sells the October call for $12? A) $600 profit B) $100 profit C) $600 loss D) $100 loss

Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11¼% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include A) the issue may be junior-in-lien to another security issue. B) the company might demand that she accept common stock for her bond. C) the conversion price might change, causing the parity price to rise. D) the new barges might sink and the collateral would be gone.

Moody's bond ratings are based primarily on an issuer's A) financial strength. B) expected trading volume of a bond issue. C) expected marketability of a bond issue. D) capitalization.

Several investors open an account in joint tenancy. Which of the following statements regarding the account is true? A) Mail need only be sent to one of the parties to the account. B) Checks may be made payable to one tenant of the account. C) Only one designated account holder need sign a margin agreement or other forms pertinent to the account. D) Checks need not be endorsed by all parties to the account in order to be deposited.

When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate? A) Convertible B) Callable C) Cumulative D) Zero-coupon

Which of the following is an issuer of federal agency securities? A) The Tennessee Valley Authority B) The U.S. Treasury C) The Indiana Highway Authority D) The California Urban Development Authority

Which of the following statements about warrants is not true? A) Warrants may not be traded in the secondary market. B) Warrants have longer lifetimes than rights. C) Warrants have an exercise price above the current market price of the common stock when issued. D) Warrants may be attached to another of the issuer's securities.

Your new customer lists tax-free income as an investment objective but notes that he will need access to $50,000 within the next four to six months for a down payment on a vacation home he is purchasing. To meet the objective of tax-free income, a registered representative considers municipal securities for the $50,000. Which of the following municipal securities recommendations would be the least suitable? A) An auction rate security (ARS) B) A tax anticipation note (TAN) C) A bond anticipation note (BAN) D) A variable rate demand note (VRDN)

Which of the following client statements describes an investment objective rather than an investment constraint? A) "I want to maximize my income." B) "I will not invest in any polluter of the atmosphere." C) "I want my investments to be liquid." D) "See how much in taxes you can save."

A) "I want to maximize my income." Income is an objective. Liquidity, tax considerations, and personal attitudes are investment constraints.

A customer opens a new margin account, and the first trade is the short sale of 100 shares of ABC, at a price of $18 per share. What is the required margin deposit? A) $2,000 B) $900 C) $1,800 D) $9,000

A) $2,000 The minimum of $2,000 is never waived for short sale margin requirements. If the short sale calculation is less than $2,000 ($1,800 in this case), the customer is still required to deposit the $2,000 minimum.

A customer's margin account shows the following entries: MV = 25,000 DR = 15,000 You may inform the customer that he will receive a maintenance call if the LMV falls below A) $20,000. B) $24,000. C) $21,000. D) $22,500.

A) $20,000. To determine long market value at maintenance, divide the debit balance by 0.75 (the complement of the maintenance margin requirement of 0.25). $15,000 divided by 0.75 equals $20,000.

The Jefferson County Water Works revenue bond is being underwritten by a syndicate led by ABC Securities, Inc. The bond has serial maturities going out up to 25 years with a balloon at 30. The coupons range from 3.2% to 4.1%, and all the bonds are offered at par. The terms of the syndicate agreement call for a total takedown of ¾ of a point with a selling concession of ½ point. A syndicate member who sells 500 of the bonds will earn A) $3,750. B) $7,500. C) $2,500. D) $6,250

A) $3,750 When a member of the syndicate sells a bond it is entitled to the total takedown—in this case, ¾ of a point ($7.50) per bond. The computation is 500 bonds sold × $7.50 per bond = $3,750 underwriting profit. Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead. Did you notice how much extraneous information is in this question?

ALFA Electronics has been trading around 70. A customer tells his registered representative that if 1,000 shares of the stock can be purchased in a single attempt, the customer will take it. If not, the customer is not interested and the order should be canceled immediately. How should the representative enter this order? A) 1,000 ALFA FOK at 70 B) 1,000 ALFA at 70 C) 1,000 ALFA AON at 70 D) 1,000 ALFA IOC at 70

A) 1,000 ALFA FOK at 70 A fill-or-kill (FOK) order designates that the customer wants the order to be filled in its entirety in one attempt or be canceled. With an all-or-none (AON) order, the broker-dealer can make numerous attempts to fill the order in its entirety. With an immediate-or-cancel (IOC) order, the broker-dealer can make only one attempt to fill the order, but a partial fill is acceptable.

When an account is owned by an individual who is 65 years old or older, or the client is 18 years old or older and a member firm believes the client has an impairment that prevents the person from defending their interests, a temporary hold is permitted on disbursements for how many days if the firm comes to reasonably believe that an attempt at exploiting the person has been made? A) 15 business days B) 5 business days C) 30 calendar days D) 3 business days

A) 15 business days FINRA Rule 2165 permits firms to place a temporary hold of 15 business days on disbursements from the accounts of individuals aged 65 or older and individuals aged 18 or older whom firms reasonably believe have an impairment that prevents them from protecting their own interests (a specified adult). This is done if the firm has a reasonable belief that financial exploitation of the specified adult has occurred or been attempted. This gives the firm time to notify a trusted contact person and begin an internal review.

ZOO is trading at 50.63. Your customer, who owns 100 shares of the stock, places an order to sell ZOO at 50.25 stop limit. The tape subsequently reports the following trades: ZOO 50.63 50.75 50.13 50.17 50.27 Your customer's order could first be executed at A) 50.27. B) 50.17. C) 50.13. D) 50.75.

A) 50.27. The sell stop limit order is elected (triggered) at the first trade of 50.13; when the stock trades at or below the stop price of 50.25, the order becomes a sell limit order at 50.25. The order can be executed at that price or higher (the limit placed by the customer). The next trade reported after the trigger is reached is below the limit price. The order could be executed at the next trade of 50.25 or higher, and that is the trade at 50.27.

On November 4, a customer writes an S&P 100 Jan 785 put at 6. The maximum potential gain on this position is A) 600. B) unlimited. C) 100. D) 300

A) 600. The potential gain on a short option is the premium received on the transaction.

A customer wrote 10 KLM Jun 80 calls for a premium of 4.75 at a time when the market value of KLM was 81.75. What is his gain or loss if he now closes out his positions at 2.12? A) A $2,630 gain B) A $2,630 loss C) A $4,750 gain D) A $4,750 loss

A) A $2,630 gain If the customer sold at 4.75 and purchased at 2.12, he nets 2.63, which is multiplied by 100 to yield a $263 gain per contract: 10 × $263 = $2,630 total gain.

Which of the following investments is most likely to have extension risk? A) A CMO B) A zero-coupon bond C) A mortgage bond D) A hedge fund

A) A CMO Extension risk is the uncertainty that a debt will be paid off ahead of schedule. This happens most frequently with mortgage-backed securities, such as CMOs. A CMO's yield and maturity are estimates based on historical data or projections of mortgage prepayments from the Public Securities Association (PSA). When that estimate is incorrect and the mortgage prepayments decline (such as in a period of rising interest rates), yields turn out to be lower than projected. Bonds do not have their maturity dates extended, so there is no extension risk.

Which of the following forms of written communication must a principal approve before use? A) A letter sent this month to 50 prospective customers offering advice about a stock B) A letter to a customer confirming an annual account review appointment C) A preliminary prospectus D) An interoffice memorandum

A) A letter sent this month to 50 prospective customers offering advice about a stock Letters sent to more than 25 retail investors within any 30-calendar-day period are considered retail communication and must be approved by a principal before use. Letters sent to fewer than 26 retail investors within a 30-calendar-day period are considered correspondence, which does not need prior approval but is subject to subsequent review.

Under the conduit theory of taxation, which of the following statements are true? A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are not taxed on earnings they reinvest. A fund is only taxed on interest income. Investors are taxed on earnings they receive in cash. A) I and IV B) III and IV C) II and III D) I and II

A) I and IV By qualifying as a regulated investment company (the conduit, or pipeline, tax theory), the fund is liable only for taxes on retained income if it distributes at least 90% of its net investment income to shareholders. Investors will pay taxes on distributed income, whether it is received in cash or reinvested.

Which of the following statements best describes a hedge fund? A) A private and unregistered investment pool that accepts the investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets B) An investment company, registered under the Investment Company Act of 1940, that charges higher than usual management fees and employs sophisticated investment techniques in an attempt to provide level returns during periods of market uncertainty C) A closed-end investment company employing leverage through the use of debt and preferred stock financing D) An investment pool that is generally unregistered and that, through the use of sophisticated market tools, offers investors returns that generally exceed those available elsewhere

A) A private and unregistered investment pool that accepts the investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets As of the date of this course, hedge funds are not registered with the SEC (their managers generally are) and they are invariably sold in private offerings, usually under Regulation D of the Securities Act of 1933. Hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets are some of the primary techniques used by these funds. Although some hedge funds do outperform the market, a blanket statement cannot be made.

Which of the following bodies may not incur overlapping debt? A) A state government B) A county highway department C) A school district D) A parks and recreation department

A) A state government Overlapping debt is debt of another issuing body that is paid by property taxes of residents. School districts, parks and recreation departments, highway departments, and library systems are all paid through real estate taxes (GOs). State debt is least likely to be overlapping, as states do not generally tax real estate.

Regarding a summary section and a statement of additional information (SAI) for management investment companies, which of the following is true? A) A statement of additional information need not be included in the prospectus of a management company. B) Both must be included in the prospectus of a management company. C) Neither are required to be in the prospectus of a mutual fund. D) A summary section need not be included in the prospectus of a mutual fund.

A) A statement of additional information need not be included in the prospectus of a management company. A statement of additional information (SAI) need not be in a prospectus. It must be available for investors in open- and closed-end investment companies. It consists of information that is not necessarily needed to make an informed purchase decision but is still useful to the investor. The SEC, however, mandates that enhanced disclosure in the form of a summary section be included in the prospectus of open-end investment companies (mutual funds). It must be written in plain language, and the SEC mandates which items must be addressed in the summary and in what order.

An investor is concerned about safety. When consulting the ratings, which of the following securities would appear to be least likely to default on its obligation to make timely payment of interest and principal? A) AA rated debenture B) AAA rated common stock C) BB rated sovereign debt D) A rated mortgage bond

A) AA rated debenture When it comes to reducing default risk, "the As have it." That is, the more As in the rating, the lower the default risk. True, the common stock is rated triple A, but stock has no obligation to pay interest and repay principal. Why isn't the mortgage bond a safer bet than the debenture? Aren't secured bonds the safest? These are good questions, but the rating services take that into consideration when giving a rating. In their eyes, the debenture, an unsecured debt, merits a double A rating while the mortgage bond, even with the pledged collateral, can only be awarded a single A rating. Sovereign debt, the debt of a country's government, is usually quite safe, but history has shown us that governments can, and do, default. The BB rating here indicates a certain question as to the safety.

All of the following securities would be suitable investments for a traditional IRA except A) AAA rated municipal bonds. B) blue-chip common stocks. C) AAA rated U.S. government agency bonds. D) A rated corporate bonds.

A) AAA rated municipal bonds. Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. One loses the federally tax-free income at distribution.

All sell orders must indicate whether they are long or short. In which of the following cases would the sell order be marked long? A) An investor has purchased the stock being sold but the trade has not yet settled. B) An investor owns debentures convertible into the stock to be sold but has not tendered them. C) An investor owns warrants to buy the stock to be sold but has not yet exercised them. D) An investor has a call option to buy the stock to be sold but has not exercised the option.

A) An investor has purchased the stock being sold but the trade has not yet settled. A customer is considered long a security only if she owns the stock or has entered into an unconditional contract to buy the stock and will deliver the shares; owns convertible securities, has converted them, and will deliver; or owns an option, has exercised it, and will deliver. Otherwise, the sale is marked as a short sale on the order memorandum.

On the order book, all of the following orders are reduced on the ex-date for a cash dividend except A) buy stop. B) buy limit. C) sell stop. D) sell stop limit.

A) buy stop. Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price. Buy stops are entered above the market price.

When evaluating a client's suitability, which of the following would be considered a nonfinancial consideration? A) Attitude B) Net worth C) Salary D) Debt

A) Attitude Nonfinancial considerations are those which cannot be quantified. The client's salary, debt, and net worth can be described numerically, but attitudes cannot.

An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for three years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class C shares of the ABC Investment-Grade Bond Fund B) Class A shares of the MNO High-Yield Bond Fund C) Class B shares of the XYZ Growth Fund D) Class B shares of the ABC Investment-Grade Bond Fund

A) Class C shares of the ABC Investment-Grade Bond Fund The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best, because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the three years of his investment.

An investor is looking for a fixed-income investment that can provide a reasonable income while offering potential inflation protection. Which of the following would be the best recommendation to meet this investor's objective? A) Convertible bonds B) Cumulative preferred stock C) Common stock D) High-yield bonds

A) Convertible bonds Convertible bonds offer the best solution for this client. The bond carries a fixed interest rate, meeting the goal of reasonable income. The ability to convert the bond into common stock offers the potential to keep pace with inflation. Common stock historically has been the best inflation hedge. Why isn't it the correct answer here? Because common stock is not considered a fixed-income investment. Although the cumulative preferred stock is a fixed-income investment, there is no inflation protection (the cumulative feature only provides assurance that past dividends are likely to be paid). High-yield bonds will provide income but, once again, there is no inflation protection. What's more, these are known as junk bonds, and the steady income might be questionable due to the low quality of many of these bonds.

Liquidity ratios measure the solvency of a firm, or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A) Current assets divided by current liabilities B) Gross profit divided by net sales C) Net income divided by average total equity D) Dividends divided by earnings per share

A) Current assets divided by current liabilities Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio, which measures how much of a company's earnings are distributed to common stockholders.

When discussing a client's finances, which of the following would be of least importance when planning to make a lump-sum investment? A) Current salary B) Year-end bonus C) Winning the lottery D) Expected inheritance

A) Current salary Salary enables the registered representative to determine the funds available for periodic investment. A lump-sum investment could be made with money from an inheritance, a year-end bonus, or lottery winnings.

When it comes to securities data, the industry relies heavily on acronyms. Which of the following is used exclusively for municipal securities? A) EMMA B) TRACE C) OATS D) ACT

A) EMMA EMMA is the Electronic Municipal Market Access system. EMMA is a centralized online source for free access to municipal disclosures, market transparency data, and educational materials about the municipal securities market and is operated by the MSRB. ACT is the Automated Confirmation Transaction Service. TRACE is the Trade Reporting and Compliance Engine. OATS is the Order Audit Trail System. All of these serve various parts of the industry, but EMMA is the only one exclusively devoted to municipal securities.

Asset allocation refers to the spreading of portfolio funds among different asset classes with different risk and return characteristics. When allocating among asset classes, you would not include A) ETFs. B) stock. C) bonds. D) cash and cash equivalents.

A) ETFs. ETFs are a way of investing in equity (stock) or debt (bonds) securities and are not a separate asset class.

The GHI Transportation Company has run into decreased sales and is forced into a bankruptcy liquidation. Which of the following would have the most junior claim? A) Holders of GHI commercial paper B) Holders of GHI's mortgage bonds C) Holders of GHI's equipment trust certificates D) Holders of GHI's collateral trust certificates

A) Holders of GHI commercial paper Secured debt (such as the mortgage bond), the collateral trust certificate, and the equipment trust certificate have first priority in the event of a bankruptcy. Commercial paper is a promissory note relying on the creditworthiness of the issuer.

Which of the following must be registered as investment companies under the Investment Company Act of 1940? Closed-end investment companies Separate accounts of insurance companies offering variable products Variable annuity contracts Variable life insurance policies A) I and II B) II and III C) I and IV D) III and IV

A) I and II Under the Investment Company Act of 1940, face amount certificate companies, unit investment trusts, open- and closed-end management companies, and separate accounts of insurance companies used to fund variable annuity and variable life contracts must register with the SEC as investment companies. Note that the separate account is registered as an investment company, not the variable contract.

FINRA Rule 2330, which deals with members' responsibilities regarding variable annuities, applies under which of the following circumstances? The initial purchase of a deferred variable annuity. The initial purchase of an immediate variable annuity. The initial subaccount allocations. The initial subaccount reallocations. A) I and III B) I, II, and III C) II and IV D) I, II, III, and IV

A) I and III This rule applies to recommended purchases and exchanges of deferred (not immediate) variable annuities and recommended initial subaccount allocations (there is no such thing as initial reallocations). On the other hand, this rule does not apply to reallocations among subaccounts made or to funds paid after the initial purchase or exchange of a deferred variable annuity.

If two customers are tenants in common in a joint account, which of the following statements are true? If one of the tenants dies, the survivor will automatically assume full ownership. They need not make equal investments in the account. They need not have equal interests in the property in the account. If one of the tenants dies, the account need not be frozen. A) II and III B) II and IV C) I and IV D) I and III

A) II and III Under tenants in common, the tenants may make unequal investments in the account and may own a disproportionate interest in the property in the account. If one of the tenants dies, their assets are passed to their estate, not to the surviving joint tenant. The account must be frozen until this is carried out.

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are true? She will receive the annuity's entire value in a lump-sum payment. She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account. The annuity unit's value represents a guaranteed return. A) II and III B) I and IV C) I and III D) II and IV

A) II and III When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account's performance.

SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock Open-end funds from issuing preferred stock Closed-end funds from issuing bonds Open-end funds from issuing bonds A) II and IV B) I and III C) I and IV D) II and III

A) II and IV Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock. They may not issue senior securities.

A method of analyzing limited partnerships by identifying the sources of revenues and expenses is known as A) cash flow analysis. B) technical analysis. C) liquidity analysis. D) capital analysis.

A) cash flow analysis. Cash flow analysis compares income (revenues) to expenses.

Which of the following statements regarding revenue bonds issued by a state or municipality is true? A) Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. B) Interest and principal payment is guaranteed. C) The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes. D) Interest and principal payment is backed by the full faith and credit of the issuer.

A) Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. Because revenue bonds are not backed by the full faith and credit of the municipality that issues them, the earnings of the revenue-producing project must be large enough to cover the interest and principal payments.

If TCB is trading at 43 and the TCB Apr 40 call is trading at 4, what are the intrinsic value and the time value of the call premium? A) Intrinsic value: 3; time value: 1 B) Intrinsic value: 3; time value: 4 C) Intrinsic value: 4; time value: 0 D) Intrinsic value: 1; time value: 3

A) Intrinsic value: 3; time value: 1 The option is in-the-money by 3 points because the strike price is 40 and the market price is 43. This sets a minimum premium of $3 per share. Because the actual premium is 4, the balance of 1 represents time value. The premium, minus the intrinsic value, equals the time value. This is true whether the option is a put or a call.

Which of the following is not a right conferred upon ownership of common stock? A) Limited liability B) Voting in person or by proxy C) Transferability of shares D) Dividends, if declared by the board of directors

A) Limited liability Although ownership of common stock means the holder's maximum loss is limited to the original investment, it is not a stockholder right. The doctrine of limited liability is a legal construct and shields stockholders from being responsible for debts of the company. Being able to vote the shares; being able to sell them without needing the issuer's permission; and dividends, if declared, are considered rights of owning stock.

For tax-reporting purposes, qualified dividends are considered to be what type of income? A) Portfolio B) Passive C) Earned D) Phantom

A) Portfolio Portfolio income includes dividends (qualified or not), interest, and net capital gains derived from the sale of securities.

Which of the following is not considered a debt security? A) Prior lien preferred stock B) Debenture C) Promissory note D) Equipment trust certificate

A) Prior lien preferred stock Stock, whether preferred or common, represents equity (ownership) and is never considered a debt security. The most common example of a promissory note on the exam is commercial paper, a money market instrument. Debentures represent an unsecured debt of the issuer. Equipment trust certificates represent debt secured by specific equipment, typically rolling stock.

Fairweather Securities Corp. (FSC), a registered broker-dealer, has invited several IARs from Econometric Advisory Services (ESA), a registered invested adviser that directs transactional business to FSC, to a seminar featuring a disquisition on current economic trends being presented by a leading economist. It would be permitted for FSC to cover which of the following expenses? A) Registration fees for the seminar B) Travel and transportation fees, but not the seminar fee C) None of these; because ESA directs commission business to FSC, it would be an unethical business practice for FSC to pay any portion of the expenses D) Registration fees for the seminar plus travel expense

A) Registration fees for the seminar Payment for seminar fees, but not travel and transportation expenses, is permitted under the safe harbor provisions in Section 28(e) of the Securities Exchange Act of 1934.

The Bond Buyer compiles several indexes of municipal bonds. Which of the following is limited to bonds with the highest ratings? A) The 11 Bond Index B) The 20 Bond Index C) The Revdex 25 D) The 40 Bond Index

A) The 11 Bond Index This index takes the highest rated (AA or better) bonds from the 20 Bond Index of bonds with A ratings or better.

The market-wide circuit breaker (MWCB) rule uses which of the following as the pricing reference point to measure a market decline? A) The S&P 500 index recalculated daily B) The Wilshire index recalculated daily C) The DJIA recalculated quarterly D) The S&P 100 index recalculated monthly

A) The S&P 500 index recalculated daily The MWCB rule uses the S&P 500 recalculated daily as the pricing reference point to measure market declines for the purpose of triggering market circuit breakers to halt trading.

The performance of the XYZ Growth Fund has been in the top 1% of all funds in its category for the past 1-, 5-, and 10-year periods. Which of the following would be the biggest risk factor to an investor investing in this fund? A) The manager's tenure is six months B) A dividend yield of less than 2% C) Lack of diversification in the portfolio D) Past performance is no assurance of future results

A) The manager's tenure is six months Although one cannot predict the future from the past, when a portfolio manager has consistently been ranked at the top, it is not considered a major risk to bet on a winner. The problem here is that almost all of that performance was achieved under the direction of previous management. With only six months on the job, the new manager is untested and there is no way to know how the future performance will rank. You might see this referred to as tenure risk. Diversification is one of the benefits, not risks, of a mutual fund. In a growth fund, one does not expect a high dividend yield.

Which of the following statements describing Section 529 plans is true? A) The maximum lifetime contribution varies from state to state. B) Most state college savings plans require either the owner or the beneficiary of the plan to be a state resident. C) They can only be opened for children under the age of 18. D) The fees associated with them are generally the same from state to state.

A) The maximum lifetime contribution varies from state to stat The features of Section 529 plans, including their contribution limits and fees, vary widely from state to state. Section 529 plans have no age limits as to participation; they are open to both children and adults who plan to attend college or graduate school. For college savings plans, there is no state residency requirement for either owners or beneficiaries of Section 529 plans.

Danielle is the CFO of the XYZ Manufacturing Company. XYZ's shares are listed on the NYSE. She purchased shares of XYZ common stock through her registered representative of a FINRA member firm 165 days ago and, wishing to add on to her home, sells the stock and realizes a $50,000 profit. Under SEC rules, how will this transaction be treated? A) This is considered a short-swing profit and it must inure to the benefit of the issuer. B) The sale will be reversed and she will have her initial investment returned to her. C) Because the shares were purchased in the open market, she gets to keep the profit. D) This is a violation of the rules on insider trading and could result in fines and/or imprisonment.

A) This is considered a short-swing profit and it must inure to the benefit of the issuer. The first point to understand is that this question has nothing to do with Rule 144 concerning the sale of control or restricted stock. It relates to another SEC rule that also deals with control stock, but for a different purpose. As an executive officer, Danielle is subject to the short-swing profits rule involving the sale of control stock. When control stock is sold prior to a six-month holding period, any profits are defined as short-swing profits and must be disgorged to the issuer. The phrase "inure to the benefit" refers to the profits being returned to the issuer.

While acting in a financial advisory capacity to a municipal issuer, a municipal securities dealer wants to be part of a syndicate in the underwriting of one of the issuer's new bonds. Which of the following statements regarding this situation is true? A) This is recognized by the MSRB as a potential conflict of interest; municipal rules generally prohibit a broker-dealer from acting in both capacities. B) The dealer would be allowed to participate and collect fees for both advisory and underwriting services supplied. C) The dealer must obtain the MSRB's written approval before signing the syndicate letter. D) Only an approval by the SEC could allow the broker-dealer to function in both capacities.

A) This is recognized by the MSRB as a potential conflict of interest; municipal rules generally prohibit a broker-dealer from acting in both capacities. MSRB rules to eliminate conflicts of interest generally prohibit broker-dealers from acting in both an advisory capacity to an issuer and as an underwriter of the issuer's bonds. The MSRB rules do address certain allowable exceptions, but neither MSRB written approval nor the approval of the SEC would be required should the conditions of the allowable exceptions exist.

Which of the following equity securities has the longest expiration date? A) Warrants B) Preferred stock C) Common stock D) Preemptive rights

A) Warrants Warrants commonly have expiration dates that are one, five, or even more years in the future. Preemptive rights generally expire in a maximum of 45 days, and common and preferred stock do not have expiration dates.

Which of the following would be considered a bullish strategy? A) Writing a put B) A credit call spread C) Writing a call D) A debit put spread

A) Writing a put Those who write put options benefit when the price of the underlying asset increases (bullish). It is just the opposite for those who write a call. Spreads are bearish when the low strike price is sold and the high strike price is bought. That results in a debit when it is a put spread and a credit when it is a call spread. Credit put spreads and debit call spreads are bullish because it is the low strike that is purchased and the high strike that is sold.

A registered representative places an ad in her church newsletter promoting her services as an expert retirement planner. Does this advertisement need to be preapproved by a principal? A) Yes, the ad will be defined as retail communication, which requires preapproval of a principal. B) No, because the church is a nonprofit organization, and therefore the ad is exempt from preapproval requirements. C) Yes, but only if the newsletter is mailed as opposed to handed out on church property. D) No, because the ad only promotes a service, not a specific product.

A) Yes, the ad will be defined as retail communication, which requires preapproval of a principal. Although it isn't specified that the ad will be received by more than 25 retail investors during a 30-day period, the best answer is the ad will be defined as retail communication requiring preapproval of a principal. How retail communication is delivered (mailed as opposed to handed out) in this question is not relevant; whether promoting a service or product, either would need preapproval, and the fact that the ad is placed in a church newsletter provides no exemption from preapproval requirements.

A customer writes two ABC Jul 15 puts at 2 when ABC is 14. If the contracts are closed at a premium of 4 when ABC is 13, the customer has A) a $400 loss. B) a $200 gain. C) a $400 gain. D) a $200 loss.

A) a $400 loss. The investor receives $400 in premiums (2 × $200) and pays $800 to close out the options (2 × $400), resulting in a net loss of $400 ($800 − $400).

If an investor wishes to open a cash account in her name only and allow her spouse to make trading decisions as well as withdraw cash and securities, she must instruct her broker-dealer to open A) a cash account with full power of attorney. B) a cash account with limited power of attorney. C) a margin account. D) a cash account.

A) a cash account with full power of attorney. For a person other than the account owner to be able to withdraw assets, a full power of attorney is required. A limited power of attorney allows someone other than the account owner to trade in the account, but not to withdraw assets.

Regulation T controls the extension of credit from A) broker-dealer to customer. B) bank to broker-dealer. C) broker-dealer to broker-dealer. D) bank to customer.

A) broker-dealer to customer. Regulation T controls the extension of credit from broker-dealer to customer, with customer securities providing the collateral for such loans.

All of the following statements about variable annuities are true except A) a minimum rate of return is guaranteed. B) the number of annuity units becomes fixed when the contract is annuitized. C) the rate of return is determined by the underlying portfolio's value. D) such an annuity is designed to combat inflation risk.

A) a minimum rate of return is guaranteed. The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates.

An investor receiving a quote of 102 for a municipal security is probably interested in A) a term bond. B) a serial bond. C) a bond anticipation note. D) a general obligation bond.

A) a term bond. A quote of 102 is referred to as a dollar quote ($1,020) rather than a yield quote. The most common dollar bonds are those with a term maturity. The other choices are most often quoted on a yield basis rather than a price basis.

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that A) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. B) agency issues are taxable on the federal level, while Treasury issues are not. C) agency issues are more likely to be issued in larger amounts. D) agency issues frequently trade on the NYSE, while Treasuries never do.

A) agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing. Agencies, with very few exceptions (GNMA being one), do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges, and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

A type of alternative trading system that trades listed stocks and is required to register with the SEC as a broker-dealer is A) an ECN. B) an ETN. C) the fourth market. D) a dark pool.

A) an ECN. Electronic communication networks (ECNs) are a type of alternative trading system (ATS) that trade listed stocks and other exchange-traded products. Unlike dark pools, another type of ATS, ECNs display order in the consolidated quote stream. As ATSs, ECNs are required to register with the SEC as broker-dealers and are also members of FINRA. Trading in the fourth market (institution to institution) is done largely through ECNs.

An exchange-traded fund whose strategy is to generate performance opposite that of the designated index is called A) an inverse fund. B) a leveraged fund. C) a reverse fund. D) a hedge fund.

A) an inverse fund. Inverse ETFs (also called short funds) seek to deliver the opposite of the performance of the index or benchmark they track. There are some who call these reverse funds, but the SEC, FINRA, and NASAA do not use that term. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. There are leveraged inverse funds, but the term inverse would have to be in the description. Hedge funds are not exchange traded.

A limited partnership brought to market through a Rule 506(b) private placement may be sold to any of the following except A) an unlimited number of unaccredited investors. B) an investor with over $1 million net worth. C) 35 unaccredited investors. D) an unlimited number of accredited investors.

A) an unlimited number of unaccredited investors. The primary sale of a limited partnership through a private placement is usually done in compliance with Regulation D. Under Rule 506(b), the offering is limited to a maximum of 35 non-accredited investors with the rest required to meet the accredited investor standard. Rule 506(c) is for accredited investors only, but unlike Rule 506(b), advertising is permitted. An accredited investor would include an investor with $1 million in net worth, not including net equity in a primary residence; an individual who has earnings in excess of $200,000 in each of the two previous years with a reasonable expectation of reaching that level in the current year ($300,000 if jointly with spouse); or an individual who is an officer or insider of the offering. Also, any large financial institution—such as a bank, an insurance company, or a savings and loan—would be considered an accredited investor.

Prior to effecting an initial penny stock transaction for a new customer, the registered representative must do all of the following except A) determine if the client has been receiving monthly statements. B) obtain a signed suitability statement from the customer. C) determine suitability based on financial condition, investment experience, and investment objectives. D) obtain a signed risk disclosure document from the customer.

A) determine if the client has been receiving monthly statements. The question tells us this is the first trade in penny stocks for a new customer. The monthly statements haven't started yet. The penny stock rules require registered representatives to provide disclosure information to all penny stock buyers. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. As additional protection, the customer must sign the suitability statement.

On exercise of the option, the holder of a long call will realize a profit if the price of the underlying stock A) exceeds the exercise price plus the premium paid. B) falls below the exercise price minus the premium paid. C) exceeds the exercise price. D) falls below the exercise price.

A) exceeds the exercise price plus the premium paid. To profit on a long call, the market price must exceed the strike price plus the premium paid (the breakeven point) computed using the call up rule.

A client of a member broker-dealer is disgruntled with the attitude of some of the firm's staff. A complaint is sent by email to the manager of the branch servicing the account. FINRA rules require that a record of this complaint be maintained for no less than A) four years. B) whatever time period the firm wishes, because the only time a complaint is recognized is if it is in writing. C) three years. D) six years.

A) four years. FINRA rules require that written complaints (and a complaint filed electronically is considered written) be kept for a minimum of four years. This is the only four-year FINRA requirement you are apt to see on the exam. The MSRB rule on retention of customer complaints is six years so be sure to keep these two straight because both are testable.

An investor acquires limited partner status in a direct participation program when A) he and the general partner have both signed the subscription agreement. B) his money is received by the general partner. C) he submits a signed copy of the subscription agreement. D) the certificate of limited partnership is filed in its home state.

A) he and the general partner have both signed the subscription agreement. The investor must sign a copy of the subscription agreement, but he is not considered a limited partner until the agreement is also signed by the general partner indicating acceptance of the limited partner.

FINRA Rule 4530 states that each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following, otherwise than when the member or an associated person of the member A) is the subject of an adjudication of bankruptcy by any domestic, military, or foreign court. B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery. C) is barred from becoming associated with any member of any securities, insurance, or commodities self-regulatory organization. D) is indicted, or convicted of, or pleads guilty to, or pleads no contest to, any felony, or any misdemeanor that involves the purchase or sale of any security in a domestic, military, or foreign court

A) is the subject of an adjudication of bankruptcy by any domestic, military, or foreign court. FINRA Rule 4530 has very broad reporting requirements, but a broker-dealer or associated person being declared bankrupt is not one of them. If a member firm were to go bankrupt, FINRA would be notified immediately, not within 30 days.

Bob Smith, who is in his 40s, has just become covered by an extremely generous defined benefit retirement plan at his company. He has decided he no longer needs his variable annuity for retirement purposes and wants to use the money for a trip to Africa. Over the past 10 years, he has invested $60,000 in the annuity, and its net value is now $80,000. If Bob should go ahead and surrender the annuity, the tax consequences will be A) ordinary income tax on $20,000 and a $2,000 penalty. B) capital gains tax on $60,000 and a $6,000 penalty. C) capital gains tax on $20,000 and a $2,000 penalty. D) ordinary income tax on $60,000 and a $6,000 penalty.

A) ordinary income tax on $20,000 and a $2,000 penalty. If an annuity is cashed in, the growth and accumulation portion of its value ($20,000 in this case) is taxable as ordinary income. If the annuitant is under the age of 59½, he must also pay a 10% penalty on the growth withdrawn, a penalty of $2,000 in this case.

If a client asked you about an equity security with a cumulative feature, the question would most likely be dealing with A) preferred stock. B) outstanding stock. C) preemptive rights. D) common stock.

A) preferred stock. It is preferred stock that can offer the cumulative feature. Cumulative refers to the fact that dividends in arrears (past dividends that haven't been paid) accumulate and must be paid along with the current dividend before any dividends can be paid on the issuer's common stock. The term never applies to common stock and preemptive rights. Aren't these shares of preferred stock outstanding? Yes—if they weren't, there wouldn't be any dividends to accumulate. Why isn't that the answer? Because common stock is also outstanding; that choice doesn't directly answer the question. Sometimes there is a second choice that is a true statement, but it is not the best answer to the question. In this case, the question is dealing only with the cumulative feature.

An order memorandum or ticket must be prepared A) prior to order execution. B) by the close of business on the trade date. C) by the settlement date. D) by the close of business on T+1.

A) prior to order execution. Order tickets must be prepared prior to order execution. Please read the question carefully. Preparation is the first step and that must be done before the order can be sent for execution. After the execution report, the order ticket is completed with the execution information.

Limited partnership programs are categorized as direct participation programs. The term direct participation refers to A) the flow-through of profits and losses of the partnership to the individual limited partners. B) the ability of any partner, limited or general, to participate in the running of the partnership. C) the ability, through the partnership democracy, for each partner to have her vote flow through to the general partner. D) the general partners directly participating in the day-to-day management of the partnership.

A) the flow-through of profits and losses of the partnership to the individual limited partners. Understanding the flow-through concept is critical with DPPs. Only DPPs allow flow-through of losses.

A generic ad for an investment company placed by a broker-dealer would contain A) the name of the broker-dealer, but not the name of the investment company. B) both the name of the investment company and the name of the broker-dealer. C) neither the name of the investment company nor the name of the broker-dealer. D) the name of the investment company, but not the name of the broker-dealer.

A) the name of the broker-dealer, but not the name of the investment company. Generic advertising of investment companies presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker-dealer who is placing the ad must be named.

KAPCO Manufacturing Corporation declares a 5-for-1 stock split on its outstanding shares of $20 par value common stock. This split will cause A) the par value of the shares to change to $4 per share. B) the price of the shares to change to $4 per share. C) the dividend per share on KAPCO's preferred stock to be reduced. D) a change to KAPCO's net worth.

A) the par value of the shares to change to $4 per share. Whenever there is a stock split (forward, such as this, or reverse), the par value is adjusted for the split. With a $20 par and a 5-for-1 split, the par value now becomes $4 per share. The stock's market value will drop by approximately 20% (⅕) of the pre-split price. The question only tells us the par value, not the market value (and those two values are unrelated). A split to the common stock has no effect on the preferred stock. The net worth remains the same because no money is involved.

XYZ Widgets is a publicly traded corporation. Upon the death of one of the founders of the company, a donation of 100,000 shares of XYZ stock is made by the executor of the deceased's estate. This would now be considered A) treasury stock. B) retired stock. C) unissued stock. D) outstanding stock.

A) treasury stock. Treasury stock is issued and outstanding stock of the corporation that has been reacquired by the company. In some cases, such as this question, the stock is donated back to the company, but in most cases, it has been purchased by the company in the open market. Regardless of how stock is acquired, it is no longer outstanding, and it is held in the company's treasury. Once stock has been issued, it is always issued, even when it is no longer outstanding. How do we know the stock was donated back to the company and not to a charity? The key is the word now in the final sentence. Now means that something has changed. If the shares were donated to a charity, they would still be outstanding—nothing has changed. It is only because they were donated back to the issuer that there has be a status change.

A customer has the following margin account balance: Market value: $50,000 Balance: (DR) $26,000 SMA: $0 Regulation T: 50% If a customer sells securities in the amount of $20,000 in this account, what is the maximum amount she can withdraw from the account after the settlement date? A) $14,000 B) $10,000 C) $6,000 D) $10,500

B) $10,000 When stock is sold in a restricted margin account, 50% of the proceeds can be withdrawn. This account is restricted because the equity of $24,000 (LMV of $50,000 − DR of $26,000) is less than Regulation T ($25,000 = 50% of the LMV) but more than minimum maintenance ($12,500 = 25% of the LMV).

If a customer has a long margin account with a market value of $20,000, a debit balance of $12,000, and SMA of $5,000, how much cash can the customer withdraw from the account? A) $2,500 B) $3,000 C) $1,500 D) $5,000

B) $3,000 SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $5,000 (25% of $20,000) and the current equity in the account is $8,000 ($20,000 LMV − $12,000 DB). Because the debit balance cannot exceed $15,000, only $3,000 may be withdrawn to keep the equity at the minimum of $5,000.

To be designated as an accredited investor under Regulation D, a married couple must have an income in excess of A) $200,000 for the past two years with an expectation of reaching that level again this year. B) $300,000 for the past two years with an expectation of reaching that level again this year. C) $500,000 for the past two years with an expectation of reaching that level again this year. D) $100,000 for the past two years with an expectation of reaching that level again this year.

B) $300,000 for the past two years with an expectation of reaching that level again this year. To be accredited, a couple must have more than $300,000 in annual income for the past two years with an expectation of reaching that level again this year. For individuals, the income threshold is more than $200,000.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) $100 B) $75 C) $40 D) None

B) $75 Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule: investors who sell securities at a loss and repurchase them, including their equivalents, 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 ÷ 40) of KLP common stock. Hence, the investor has bought back the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed.

One of your customers purchased a fixed premium variable life insurance policy five years ago. The face value of the policy is $2 million and the current cash value is $107,237. The customer calls you and asks about taking a policy loan. Although the exact details are in the prospectus, you know that the minimum amount that could be borrowed is A) $1,500,000.00. B) $80,427.75. C) $96,513.30. D) $107,237.00.

B) $80,427.75. Once a variable life insurance policy has been in effect for at least three years, the policy must allow for a policy loan equal to a minimum of 75% of the current cash value.

A registered representative of a FINRA member firm has been found guilty of a trade practice violation. If desired, the Code of Procedure requires the individual to file an appeal within A) 45 days after receiving the decision. B) 25 days after receiving the decision. C) 60 days after receiving the decision. D) 30 days after receiving the decision.

B) 25 days after receiving the decision. Under the Code of Procedure, appeals must be filed with the NAC within 25 days after receiving the decision.

A customer establishes the following positions: Buy 100 ABC at 28 Buy 1 ABC Dec 25 put at 2 What is the breakeven point? A) 26 B) 30 C) 23 D) 27

B) 30 The breakeven point is where an investor neither makes nor loses money. In this hedged position, the buyer must recover the cost of the stock and the premium paid to break even (28 + 2 = 30). Please note that the call up and put down rule does not apply when there is a stock position.

Which of the following is used to report a bankruptcy filing of a registered representative of a FINRA member firm? A) ADV B) DRP C) BF D) TIF

B) DRP DRP stands for disclosure reporting page. That is the part of the Form U4 where a registered person indicates certain mandatory disclosures. In addition to bankruptcy filing, it includes the following: · Criminal disclosures · Civil disclosures related to nonsecurities cases · Disclosures of actions taken by regulatory authorities · Customer complaints · Termination for cause The TIF is the transfer initiation form used with ACATS to transfer a customer account from one member firm to another. ADV is the form used by investment advisers to register with the SEC or the appropriate state(s). There is no Form BF.

Your customer owns a variable annuity contract. The assumed interest rate (AIR) stated in the contract is 5%. In January, the realized rate of return in the separate account was 7%, and she received a check in February based on this return for $200. In February, the rate of return was 10%, and she received a check in March for $210. For her April check to be $210, what rate of return would the separate account have to earn in March? A) 3% B) 5% C) 10% D) 7%

B) 5% Each month's payout depends on the actual earnings compared to the AIR. If the actual rate of return equals the assumed interest rate, the check will stay the same. We don't compare one month's return to another's; we compare the actual to the assumed. If the actual is higher, the following month's check goes up. If the actual is lower, the following month's check goes down. And, as stated earlier, if the actual equals the assumed, there is no change.

An investor owns six RIF Apr 150 puts. How many shares of the RIF will change hands if all the options are exercised? A) 900 B) 600 C) 150 D) 100

B) 600 Each of the six contracts allows the owner to sell (put) 100 shares of the RIF stock at $150 per share. If all six contracts are exercised, that will be 6 × 100 = 600 shares.

When market interest rates are rising, the market price of which of the following securities would probably be affected the most? A) DEF Technologies, a cybersecurity firm B) ABC Gas and Electric, a regulated public utility C) JKL Corporation adjustable-rate preferred stock D) GHI Money Market mutual fund

B) ABC Gas and Electric, a regulated public utility Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Utility stocks, with their high degree of debt leverage and liberal dividend payout ratios, are considered interest rate sensitive. Preferred stock is also subject to interest rate risk, but the adjustable-rate feature minimizes the risk because the dividend rate changes to mirror the market rate. The yield of the money market fund will change, but the combination of the short maturities and the attempt to keep the NAV fixed at $1 per share limits the price risk.

Certain investments are available only to those who meet the SEC's definition of an accredited investor. Which of the following qualify? A) An individual who has joint income with that person's spouse in excess of $200,000 in each of the previous two years and has a reasonable expectation of reaching the same income level in the current year B) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence C) An individual with earnings of $200,000 in the previous year with a reasonable expectation of reaching the same income level in the current year D) An individual with net worth in excess of $1 million, inclusive of the equity in a primary residence

B) An individual with net worth in excess of $1 million, exclusive of the equity in a primary residence Those using the net worth standard to qualify as an accredited investor must exclude the equity in their primary residence. Those using the income standard must reach levels in excess of $200,000 as individuals and in excess of $300,000 when combining with the income of a spouse. Those earnings must have been achieved in the previous two years along with an expectation of similar earnings for the current year.

If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk? A) Buying five calls on the stock B) Buying five puts on the stock C) Writing five puts on the stock D) Writing five straddles

B) Buying five puts on the stock A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and it protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk.

Under SEC rules, which of the following events requires a broker-dealer to furnish an updated account statement to a customer? A) Disciplinary action taken against the registered representative assigned to the account B) Change of the customer's name or address C) Change of the broker-dealer's address D) Change in the registered representative assigned to the account

B) Change of the customer's name or address Any change in a customer's status, particularly one that could be a sign of potential identity theft, requires a broker-dealer to update the customer account record. A copy of the change must be furnished to the customer within 30 days for verification purposes. A change to the broker-dealer's address has no impact on the account. If there is a change to the individual handling the account, it will be done separately from the account statement. Account statements are not the proper place to disclose disciplinary actions.

Under the rules on communication with the public, review of which of the following by a principal may take place either before or after distribution? A) Seminar scripts B) Correspondence to 25 or fewer retail investors within any 30-calendar-day period C) Advertising in a newspaper D) Independently prepared reprints

B) Correspondence to 25 or fewer retail investors within any 30-calendar-day period A principal may review correspondence before or after its distribution as long as it is limited to no more than 25 retail investors during any 30-calendar-day period. The other choices require principal approval rather than just review before first use.

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Use of vacant office space in the broker-dealer's facilities B) Customized software designed to give clients access to asset allocation programs C) Desks remaining after the broker-dealer redesigned its office D) Meal expenses to attend an investment seminar sponsored by the broker-dealer

B) Customized software designed to give clients access to asset allocation programs Among the items generally in the safe harbor are those items designed to assist the firm's customers. Customized software that helps clients would be acceptable. Although seminar registration expenses are in the safe harbor, travel and transportation expenses, such as meals and lodging, are not. Rent and office furniture are specifically listed as out of the safe harbor.

Which of the following types of municipal bonds is subject to statutory debt limits? A) Special tax bonds B) General obligation (GO) bonds C) Hospital bonds D) Industrial development revenue (IDR) bonds

B) General obligation (GO) bonds Only GO bonds, which are backed by the taxing authority of the issuer, are subject to statutory debt limits.

Arbitration and mediation are two services provided by FINRA to settle disputes between members. Regarding these services, which of the following statements are not true? Mediation is mandatory; arbitration is not. Arbitration always results in a binding decision; mediation may not. If arbitration is unsuccessful, the dispute moves on to mediation. A mediator in a dispute may not serve as an arbitrator in the same dispute. A) I and IV B) I and III C) II and III D) II and IV

B) I and III Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.

Your customer, a small-business owner, likes investments that are short term, relatively safe from credit risk, and liquid. He's heard that higher rates of return can be realized from auction rate securities than the rates he is currently getting on the Treasury bills in his portfolio. He asks you to explain them to him. Which of the following would you note as being reasons why they are not suitable for him? Auction rate securities are intended as long-term investments. Interest or dividend rates are reset at established intervals based on a Dutch auction. If the auction fails, holders of ARSs may not have immediate access to their funds. The interest or dividend rate is set as the lowest rate to match supply and demand at the time of the auction. A) I and IV B) I and III C) II and III D) II and IV

B) I and III Auction rate securities (ARSs) are long-term variable rate bonds with maturities of 20 to 30 years tied to short-term interest rates. As long-term instruments, they are not suitable for an investor favoring short-term investments. Additionally, interest rates are reset using a Dutch auction method at predetermined intervals, typically 7, 28, or 35 days. A failed auction can occur due to lack of demand; in this case, no bids are received to reset the rate. This risk would not align the investment objectives of safety and liquidity.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes which of the following? Their name Oral assurance that the customer is of legal age A street address, unless the primary mailing address is a post office box located in the state of residence A taxpayer identification number A) III and IV B) I and IV C) I and II D) II and III

B) I and IV Oral assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A post office box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired drivers license or passport.

A customer believes ABC's stock price will rise, but she does not currently have the money to buy 100 shares. How could the customer use options to profit from a rise in the stock's price? Buy calls Write calls Buy puts Write puts A) I and III B) I and IV C) II and IV D) II and III

B) I and IV When the price of a stock that underlies a call option increases in price, the owner (holder) of that option stands to profit. An investor who has sold a put option on that stock will also benefit because the option will expire unexercised and the writer will get to keep the premium.

For each violation of FINRA or MSRB rules, FINRA may impose which of the following sanctions? Fines Censure Restitution Expulsion A) I, III, and IV B) I, II, and IV C) I and II D) I, II, III, and IV

B) I, II, and IV Restitution is not one of the sanctions that may be imposed by FINRA. However, that could be imposed by a court.

The certificate of limited partnership contains which of the following? The market-out clause The amount of time the partnership expects to exist Each investor's net worth All conditions of dissolution A) II and III B) II and IV C) I and II D) I and III

B) II and IV The certificate contains, among other information, the limited partnership's name and business, the amount of time the partnership intends to exist, and the conditions of dissolution. It does not contain each partner's net worth, nor is there a market-out clause like those generally associated with underwriting agreements for new issues.

In discussing a direct participation program with your customer, she notes investment characteristics that are important to her and some that are not. For a DPP to be considered suitable for the customer, rank the following items in order of those that should be most important to those that should be least important. Tax write-offs Liquidity and marketability Potential for economic gain SEC approval A) I, II, III, IV B) III, I, II, IV C) II, III, IV, I D) III, IV, II, I

B) III, I, II, IV In the eyes of the IRS, a program's economic viability should be the most important aspect of the investment for a limited partner and the first priority in the assessment of the DPP. While the IRS considers programs designed solely to generate tax benefits abusive, they do allow for some in terms of writing off passive income and allowable tax credits, so these factors would be the next concern for an investor. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority, and because there is no SEC approval of any investment, it would be of no concern.

Which of the following is a bull spread? A) Short Aug 40 call, short Aug 40 put B) Long Jul 30 put, short Jul 35 put C) Long Aug 30 call, short Aug 25 call D) Long May 40 put, short May 35 put

B) Long Jul 30 put, short Jul 35 put A debit call spread is bullish and a credit put spread is bullish. Long Jul 30 put, short Jul 35 put is the only bullish position in the answer choices. Short Aug 40 call, short Aug 40 put is a short straddle, not a spread, and the remaining two positions are bearish: long Aug 30 call, short Aug 25 call and long May 40 put, short May 35 put. Remember, buying the low strike and selling the high strike is always a bull spread, regardless of the spread being puts or calls.

Which of the following is associated with a process whereby a municipal issuer first appoints and then works with the underwriters who will be establishing the interest rate and offering price for a new municipal bond issue? A) Western underwriting B) Negotiated underwriting C) Eastern underwriting D) Competitive bid

B) Negotiated underwriting In a negotiated underwriting the municipality appoints an underwriting group of investment bankers or broker-dealers to underwrite the offering. The underwriters will then work with the municipal issuer to establish the interest rate and offering price of the new issue to best meet the municipality's needs and in light of current market conditions.

Advantages of owning a real estate DPP program include all of the following except A) depreciation. B) depletion. C) cash flow. D) appreciation.

B) depletion. Depletion only applies to natural resources, such as oil or gas. Land does not get "used up" as does oil, gas, or coal, for example.

A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus was that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken? A) Switch to short-term bonds B) No action would be taken C) Liquidate and begin to move into cash or cash equivalents D) Ladder the maturities

B) No action would be taken One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.

If an investor expects to have a large amount of passive income over the next two years, which of the following programs listed will most likely lead to the largest amount of shelter? A) Real estate income B) Oil and gas drilling C) Undeveloped land purchasing D) Equipment leasing

B) Oil and gas drilling Passive income can only be sheltered by passive loss, so the real estate income program will only add to the income. Oil and gas drilling programs allocate the majority of investment dollars to drilling. These are intangible drilling costs (IDCs), which are 100% deductible when drilling occurs. Undeveloped land has very little in the way of losses, and equipment leasing programs usually generate income shortly after starting.

Which of the following are directly backed by the U.S. government? A) Double-barreled bonds B) PHAs and NHAs C) General obligation bonds D) Moral obligation bonds

B) PHAs and NHAs Public Housing Authority and New Housing Authority issues are unique as municipal instruments because they are fully backed by the U.S. government.

The interest on which of the following municipal securities may be considered preference income for alternative minimum tax purposes? A) Original issue discount bonds B) Private purpose bonds C) TANs D) PHAs

B) Private purpose bonds Interest on private activity municipal bonds is included in the taxable income of an investor who is subject to the alternative minimum tax.

Which of the following exemption provisions of the Act of 1933 may not be used for an initial offering of securities? A) Rule 147 B) Rule 144 C) Regulation A D) Regulation D

B) Rule 144 Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

In a volatile market, which of the following option strategies carries the most risk? A) Credit spread B) Short straddle C) Long straddle D) Debit spread

B) Short straddle To establish a short straddle, the investor sells a call and a put; the short call carries unlimited loss potential.

On a single day, a customer purchases 15 TPL Sep 50 puts at 6 and 15 TPL Sep 50 calls at 1. If the price of TPL is $45 per share and the customer has no other security positions, what is this position called? A) Covered B) Straddle C) Combination D) Spread

B) Straddle A long straddle is the purchase of a call and a put on the same stock with the same strike price and expiration. A straddle differs from a combination in that the strike prices and/or the expiration dates on a combination are different. A spread is a long put and a short put or a long call and a short call, rather than a put and a call.

Which of the following documents spells out the rights of each member of the underwriting syndicate and how the issue is allocated? A) Legal opinion B) Syndicate letter C) Preliminary official statement D) Official notice of sale

B) Syndicate letter The syndicate letter (also called the agreement among underwriters, syndicate agreement, syndicate account letter, or account summary report) is the document that forms the syndicate and spells out each member's rights and obligations. The allocation of the new bond offering that is accorded each syndicate member is detailed in this agreement.

A customer, currently finding the income offered from a money market fund quite low, asks if there might be any debt instruments providing income that one could expect to at least keep pace with inflation as well as offer some tax relief. What suitable recommendation could be made that meets the investor's investment objectives? A) Participating preferred B) TIPS C) GNMAs D) U.S. T-bills

B) TIPS The investor has requested a debt security that can meet three criteria: provide income, keep pace with inflation, and offer tax relief. Treasury Inflation Protection Securities (TIPS) are specifically designed to provide income that keeps pace with inflation. In addition, the interest is tax exempt at the state and local level, providing some tax relief. GMNAs will provide income, but they are fully taxable on a state and federal level and offer no inflation protection. T-bills provide income that is probably lower than the money market fund the investor was unhappy with, and participating preferred stock is not a debt security.

Which of the following securities is frequently offered with a 50-year maturity? A) U.S. Treasury bond B) TVA bonds C) Federal Home Loan Bank D) GNMA pass-through

B) TVA bonds Tennessee Valley Authority bonds are the only government security available today with a maturity as long as 50 years. Most of the agencies don't offer anything longer than 20 years, and the maximum on Treasury bonds is usually 30 years.

Which of the following events requires a member firm to provide a client with a specific FINRA-designed educational communication? A) The firm is the subject of a disciplinary event resulting in the firm being suspended for a period of five business days or longer. B) The firm, directly or through a registered representative, individually contacts a former customer of that registered representative to transfer assets to the firm. C) The firm has invited select clients to attend a seminar describing highly sophisticated alternative investments. D) The firm proposes to transfer the client account into a wrap-fee program administered by its affiliated registered investment advisory firm.

B) The firm, directly or through a registered representative, individually contacts a former customer of that registered representative to transfer assets to the firm. Registered representatives who leave their firms often contact former customers and emphasize the benefits the former customers would experience by transferring their assets to the firm that recruited the registered representative (recruiting firm) and maintaining their relationship with the representative. In this situation, the former customer's confidence in and prior experience with the representative may be one of the customer's most important considerations in determining whether to transfer assets to the recruiting firm. However, former customers may not be aware of other important factors to consider in making a decision whether to transfer assets to the recruiting firm, including direct costs that the customer may incur. Therefore, to provide former customers with a more complete picture of the potential implications of a decision to transfer assets, Rule 2273 requires delivery of a FINRA-created educational communication by the recruiting firm highlighting key considerations for former customers in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets.

SEC Rule 17a-4 describes the retention requirements for records made by registered broker-dealers. Which of the following records has a retention requirement of six years? A) Trade confirmations for transactions with institutional customers B) The record of a transfer of a customer account to another member firm C) Records of the disposition of written customer complaints D) Articles of incorporation if the member firm is a corporation

B) The record of a transfer of a customer account to another member firm When using the ACATS system to transfer a customer account from one member to another, the transferring member must keep records of the transfer for six years. The reason is that customer account records have a six-year retention requirement, and the transfer documentation contains the account information. Customer complaints are a four-year record—and corporate documents, such as charters or articles of incorporation, are for the lifetime of the firm. Trade confirmations are a three-year record, regardless of the nature of the customer.

Which of the following statements regarding customer confirmations is not true? A) They must disclose commissions if the firm acted as an agent. B) They must disclose the current yield on equity securities. C) They must disclose the date and time of the transaction (or the fact that the time of the transaction will be furnished upon written request). D) They must disclose whether the broker-dealer is a market maker in the security sold.

B) They must disclose the current yield on equity securities. There are specific yield disclosures required for debt securities, but not for equities. The final dollar amount of the transaction always reflects any agency commissions. The firm's capactiy (agency or principal) is always disclosed. When the firm is a market maker, that information is specified as well. The date and time of the transaction (or the fact that this will be furnished upon written request) is a part of every confirmation.

Your client lives in a state with a personal income tax. To minimize that tax liability, it would probably be best for this client to purchase A) GNMAs. B) U.S. Treasury bonds. C) FNMAs. D) Freddie Macs.

B) U.S. Treasury bonds. With few exceptions, securities issued by the U.S. Treasury are the only government securities carrying an exemption from state income tax. They are, however, taxable on the federal level. The other choices here are taxed at the local, state, and federal levels.

Which of the following would be considered a bearish strategy? A) A credit put spread B) Writing a call C) Writing a put D) A debit call spread

B) Writing a call Those who write call options benefit when the price of the underlying asset declines (bearish). It is just the opposite for those who write a put. Spreads are bearish when the low strike price is sold and the high strike price is bought. That results in a debit when it is a put spread and a credit when it is a call spread. Credit put spreads and debit call spreads are bullish because it is the low strike that is purchased and the high strike that is sold.

A characteristic of hedge funds that would not be found in a mutual fund is A) the ability to be purchased on margin. B) a lock-up period. C) a diversified portfolio. D) professional management.

B) a lock-up period. Hedge funds generally employ a lock-up provision. This is to ensure that capital invested by shareholders will remain with the fund long enough for the manager to implement the intended fund strategy. There is no standard lock-up period; it can differ from fund to fund. It should always be noted that during the lock-up period, the investment is essentially rendered illiquid. Hedge funds and mutual funds have professional management and diversified portfolios. Although hedge funds can use margin in portfolio transactions, they, like mutual funds, cannot be purchased on margin.

Options communications may contain projected performance figures (including projected annualized rates of return), provided that A) the client has returned the options account agreement within the specified time. B) all such communications are accompanied or preceded by the Options Disclosure Document. C) all such communications are accompanied or preceded by a warning of the possible defalcation by an officer of the exchange. D) in communications relating to annualized rates of return, the returns are not based on any less than a 30-day experience.

B) all such communications are accompanied or preceded by the Options Disclosure Document. Once the communications get specific enough to include performance figures, prior or concurrent delivery of the ODD is necessary. Although the risks must be disclosed, possible defalcation by an exchange officer (a form of embezzlement), is not an investment-related risk. The requirement to return the options account agreement within 15 days has nothing to do with permitted options communications. When annualized rates of return are shown, the minimum is a 60-day period, not 30 days.

Under FINRA rules, customers who are approved to trade options must receive a copy of the OCC Options Disclosure Document A) within 15 days of account approval. B) at the time of or before account approval. C) at the time of or before the mailing of the confirmation representing the first options trade. D) at the time of or before the mailing of the next monthly statement.

B) at the time of or before account approval. All customers who are approved by the ROP to trade options must receive a copy of the OCC Options Disclosure Document at or before the time the account is approved to trade options. It is the options account agreement that must be returned by the customer within 15 days.

A corporation has determined that if it were to go bankrupt, common stockholders would receive $8.47 per share. This calculation is known as A) net asset value per share. B) book value per share. C) retained earnings per share. D) settlement value per share.

B) book value per share. The liquidating value of the company is its book value; the book value per share is what the common stockholders would receive.

An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is unsuitable because A) withdrawal of her cost basis is tax free. B) her situation exposes her to surrender charges and early withdrawal penalties. C) an 18-year-old can't own a variable annuity. D) the investment grows tax deferred.

B) her situation exposes her to surrender charges and early withdrawal penalties. The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals of earnings before age 59½.

The Securities and Exchange Commission regulates all of the following except A) investment adviser and client relationships. B) intrastate securities offerings. C) initial public stock offerings. D) the secondary market.

B) intrastate securities offerings. The Securities and Exchange Commission was created by the Securities Exchange Act of 1934 as a federal commission with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. If a security is being offered in a single state and solely to residents of that state, it will generally qualify for the Rule 147 exemption from registration. However, it will likely have to register in that state before the offering may take place.

A new client of yours indicates that they remember hearing stories from grandparents who lived through the Great Depression of the 1930s. Those relatives lost almost everything they had in the stock market, and the client is not interested in seeing a repeat of the family history. When doing your information gathering, this would be an indication of the client's A) values. B) level of risk tolerance. C) net worth. D) employment stability.

B) level of risk tolerance. Risk tolerance is one of the primary nonfinancial considerations that must be addressed. Those who do not wish to lose money in investments must be presented with recommendations offering a higher level of capital preservation. Values are more likely to be expressed by indicating industries not to be included (or the opposite). If the client's reference to the 1930s dealt with unemployment, then perhaps employment stability would be a correct choice.

A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to A) hypothecate securities in the account. B) loan out the customer's margin securities. C) commingle the customer's securities with securities owned by the firm. D) lend the customer money.

B) loan out the customer's margin securities. A signed loan consent agreement permits a firm to loan out a customer's margin securities; this is considered another way to finance a customer's debit balance.

All of the following are exempt securities except A) bankers' acceptances. B) municipal bond mutual funds. C) commercial paper. D) T-bills.

B) municipal bond mutual funds. While municipal bonds are an exempt security, bond mutual funds are not; they are investment company securities, which must be registered with the SEC prior to public sale.

Moody's Investment Grade (MIG) ratings are applied to A) municipal bonds. B) municipal notes. C) corporate bonds. D) money market instruments.

B) municipal notes. Moody's Investment Grade ratings are applied to municipal notes, which are short-term municipal debts such as bond anticipation notes (BANs).

An investor in an oil and gas limited partnership program is subject to the economic consequences of all of the following except A) recourse loans. B) nonrecourse loans. C) operating losses. D) depreciation on tangible assets.

B) nonrecourse loans. Nonrecourse loans only have economic consequences for investors in real estate programs.

For several months, there has been no activity in a client's account. A monthly statement would be required if the account contained A) mutual funds. B) penny stocks. C) unlisted REITs. D) municipal bonds.

B) penny stocks. SEC rules require that monthly statements be sent to a customer when there are penny stocks in the account. Otherwise, statements for all accounts are sent quarterly. In the case of DPPs and unlisted REITs, an estimated value of the security must be provided.

All of the following terms are associated with general obligation (GO) bonds except A) coterminous debt. B) protective covenants. C) voter referendum. D) limited tax bond.

B) protective covenants. The protective covenants are found in the trust indenture of a revenue bond. Among the more common protective covenants are the rate covenant and the maintenance covenant. The former is a promise to maintain rates sufficient to pay expenses and debt service. The latter is a promise to maintain the equipment and facility/facilities. Coterminous debt, or overlapping debt, exists when a single property is taxed by more than one taxing authority (e.g., when property is taxed by both a school district and a county). Certain GOs may have limitations imposed on increasing any of the taxes that back them and are called limited tax bonds. GO bonds require voter approval.

Complying with the suitability rules involves evaluating all of the following except A) customer-specific suitability. B) qualitative suitability. C) reasonable-basis suitability. D) quantitative suitability.

B) qualitative suitability. Under FINRA Rule 2111, there are three main obligations: reasonable-basis suitability, customer-specific suitability, and quantitative suitability. There is no such thing as qualitative suitability.

When processing the morning mail, your firm's trading department notices a confirmation for an unrecognized trade. The proper procedure to follow is A) sending a reclamation notice to the sender of the confirmation. B) sending a DK notice to the sender of the confirmation. C) sending a rejection notice to the sender of the confirmation. D) waiting a day or two to see if the sending party recalls the confirmation.

B) sending a DK notice to the sender of the confirmation. DK stands for don't know, and the DK notice is used when one member to a trade does not recognize that transaction. Reclamation is returning or demanding the return of securities previously delivered. Rejection is done at the time of delivery.

Under Regulation T, when a customer purchases securities, payment must be received by the broker-dealer no later than A) the settlement date. B) two business days after the settlement date. C) one business day after the settlement date. D) one business day before the settlement date.

B) two business days after the settlement date. Regulation T requires that customer payment for a securities purchase be received no later than two business days after the settlement date.

In an account opened by two individuals as joint tenants with right of survivorship, all of the following are true except A) mail may be directed to the joint owner agreed upon by both parties to the account. B) stock certificates may be delivered in the name of either party. C) in the event of death, the other party assumes full ownership of the account. D) orders may be entered by either party.

B) stock certificates may be delivered in the name of either party. In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

FINRA Rule 2330 states: no member or person associated with a member shall recommend to any customer the exchange of a deferred variable annuity unless such member or person associated with a member has a reasonable basis to believe the exchange suitable, taking into consideration whether A) the customer's health has declined since the purchase of the initial annuity. B) the customer has had another deferred variable annuity exchange within the preceding 36 months. C) the new annuity has a higher assumed interest rate. D) the customer is at least 59½ and will not be subject to the 10% tax penalty.

B) the customer has had another deferred variable annuity exchange within the preceding 36 months. FINRA Rule 2330 specifies the suitability conditions surrounding the recommended exchange of an existing deferred variable annuity contract for a new one. Included in the list of considerations is determining if the customer has made another variable annuity exchange within the previous 36 months. Unlike life insurance, where the insured's health is important, there are no health questions on an annuity application. It is safe to assume that any annuity exchange will be done under the provisions of Section 1035. This means there are no tax consequences. The assumed interest rate is for internal purposes; it is not a differentiator when deciding which variable contract to purchase.

When creating a diversified municipal bond portfolio, all of the following should be considered except A) the source of funds backing the bonds. B) the denomination of the bonds included in the portfolio. C) the credit rating. D) the geographic location of the issuer.

B) the denomination of the bonds included in the portfolio. The denomination of the bonds in a portfolio is not relevant to diversification. What difference does it make if the bonds carry a denomination of $1,000 or of $5,000? We diversify by quality by including bonds with different ratings. We recognize that the United States is a large country with some geographic areas outperforming others. That is why we diversify the portfolio by including bonds from different states. Another way to diversify the portfolio is by including GO bonds and revenue bonds.

In portfolio theory, the alpha of a security or a portfolio is A) the risk of the portfolio associated with the factors that affect all risky assets. B) the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. C) a measure of the variance in returns of a portfolio divided by its average return. D) a measurement of a portfolio's performance versus a standard benchmark such as the S&P 500.

B) the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. Alpha is the difference between the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the factors that affect all risky assets is systematic risk.

The STU Corporation has issued common stock, preferred stock, promissory notes, and mortgage bonds. Should STU enter bankruptcy proceedings, the order of payment against claims would be A) the mortgage bonds, the preferred stock, the common stock, and the promissory notes. B) the mortgage bonds, the promissory notes, the preferred stock, and the common stock. C) the promissory notes, the mortgage bonds, the preferred stock, and the common stock. D) the preferred stock, the common stock, the mortgage bonds, and the promissory notes.

B) the mortgage bonds, the promissory notes, the preferred stock, and the common stock. In a bankruptcy, secured creditors, such as those with a mortgage against real property, have the first priority. They are followed by unsecured creditors, such as holders of promissory notes, with stock holders coming last. Preferred stock is "preferred" over common stock in both liquidation priority and payment of dividends.

An analyst reports that a stock's price is consolidating. This means A) the stock's trendline is moving primarily in a downward direction. B) the stock's trendline is moving primarily in a horizontal direction. C) no distinct pattern can be observed. D) the stock's trendline is moving primarily in a upward direction.

B) the stock's trendline is moving primarily in a horizontal direction. In general, when the trendline of a stock's market price is moving within a very narrow range (the chart is basically a pattern of horizontal movement), the technician views that as a consolidation. Within a relatively short time after the consolidation has been verified, it is expected the price will move. What isn't determined yet is if the movement will be up (bullish) or down (bearish).

If a customer writes one uncovered in-the-money put, the maximum loss to the customer is A) the strike price plus the premium multiplied by 100 shares. B) the strike price minus the premium multiplied by 100 shares. C) 100% of the premium. D) unlimited.

B) the strike price minus the premium multiplied by 100 shares. If the stock becomes worthless, the investor will be forced to buy the stock at the strike price, but they still keep the premium received when the option was written. Essentially, maximum loss is breakeven multiplied by 100 shares. The fact that the put was in-the-money when the option was written is of no consequence. It is only there to distract you.

All of the following are reasons for entering a stop order except A) to protect profits on an existing short position. B) to guarantee execution at a specified price or better. C) to limit losses on an existing long position. D) to protect unrealized gains on an existing long position.

B) to guarantee execution at a specified price or better. A stop (loss) order is entered to protect a profit or to limit a loss. Execution at a specific price can never be guaranteed because a stop order becomes a market order when the stop price is hit. It is only a limit order (if executed) where the specified price (or better) is guaranteed.

In a direct participation program (DPP) limited partnership, the general partner has A) limited liability and an active role. B) unlimited liability and an active role. C) limited liability and a passive role. D) unlimited liability and a passive role.

B) unlimited liability and an active role. In a DPP limited partnership, the general partner is the active partner managing the business who assumes unlimited liability. Limited partners who take an active role jeopardize their limited liability status.

With ABC stock selling for $49, a client sells one ABC 50 Nov call option in his cash account with your firm. One week later, ABC is now at $51 per share and his spouse sells two ABC 50 Nov calls in her account. In early November, ABC is selling for $62 per share and the spouse is assigned an exercise notice on one of the calls. The client calls and asks you, "Why was the exercise notice assigned to my spouse and not me?" You should respond: A) your broker-dealer assigns exercise notices based on LIFO. B) your broker-dealer uses random allocation when assigning exercise notices. C) your broker-dealer assigns exercise notices based on the market price at the time the option was written. D) your broker-dealer assigns exercise notices based on the larger position.

B) your broker-dealer uses random allocation when assigning exercise notices. When an option is exercised, the Options Clearing Corporation (OCC) determines the broker-dealer to whom it will be assigned by random selection. Broker-dealers then will assign the exercise to a customer with a short position in that contract. There are two common methods used. BDs can elect to use either random selection or first-in, first-out (FIFO). The options account agreement will specify which one the firm uses. The size of the position is never taken into consideration, nor is the market price at the time of the write. Last-in, first-out (LIFO) is not an acceptable manner for assigning options.

A commonly used investment to provide a defined sum in the future, such as for college education or retirement, is A) warrants. B) zero-coupon bonds. C) convertible bonds. D) common stock

B) zero-coupon bonds. The key to this question is the defined sum. Zero-coupon bonds are usually purchased at a deep discount, which helps a small initial deposit grow into a substantial sum at maturity. Common stocks can't promise a specific sum when it is time for college. Warrants simply give the holder an opportunity to purchase the specified stock in the future; they have no defined value. Although convertible bonds with a maturity at the target date will provide the defined sum, the internal compounding of the zero-coupon bond will generally provide a higher return.

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where she works. The annuity contract is currently valued at $16,000, and she plans to retire. On what amount will the customer be taxed if she chooses a lump-sum withdrawal? A) $10,000 B) $16,000 C) $6,000 D) No taxes owed because annuity was nonqualified

A holder of an American depositary receipt (ADR) assumes all of the following risks except A) market risk. B) political risk. C) liquidity risk. D) foreign currency risk.

A municipal issuer is frequently able to diversify a single municipal bond issue by maturity because A) every state issues municipal bonds. B) many municipal securities are very marketable. C) many municipal bonds are serial issues. D) municipal securities are mostly long term.

A registered representative cannot adequately advise a client without knowing the client's financial status. When determining that status, it is important to differentiate between financial and nonfinancial considerations. Which of the following would be considered a financial consideration rather than a nonfinancial one? A) The client's marital status B) The client's membership in Greenpeace C) The client's rare coin collection D) The fact that both parents were smokers who died of lung cancer

A registered representative is contacted by a new client who wishes to transfer his 401(k) plan assets into an IRA at your firm. The amount being transferred is $1,050,000 and the registered representative recommends diversifying into Class C shares of five different funds in the XYZ mutual fund group. This recommendation would be A) suitable because a sum that large is correctly diversified into several different mutual funds in the same fund family. B) suitable because the savings of investing in Class C shares having no front-end load would be substantial. C) unsuitable because a purchase of that size is likely going to reach a significant Class A share breakpoint. D) unsuitable because diversifying would require investing in at least two different mutual fund groups rather than one.

All of the following option strategies could be effectively used in a bear market except A) a short call. B) a credit call spread. C) a short straddle. D) a debit put spread.

An investor owns a 6% bond issued by ABC Corporation that is callable at 102 ($1,020) next May 1. All of the following statements are true regarding the call except A) when bonds are called, they are usually called at a premium to par. B) it is likely that once the bond is called, the investor will also be exposed to reinvestment risk. C) the bond is probably being called by the issuer because interest rates went up. D) up until May 1, the investor has call protection.

An investor purchases a TIPS bond with a 3% coupon. During the first year, if the inflation rate is 8%, the principal value of the security at the end of that year will be closest to A) $1,080.00. B) $1,030.23. C) $1,081.60. D) $1,030.00.

An investor would like to make an intermediate-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA-rated bonds should the registered representative recommend? A) DEF 10-year 8% bond maturing in eight months B) MNO zero-coupon bond maturing in eight months C) XYZ zero-coupon bond maturing in five years D) ABC 8% 10-year bond maturing in five years

Each of the following securities is issued with a fixed rate of return except A) preferred stock. B) bonds. C) common stock. D) convertible preferred stock.

Fee-based accounts would tend to be most suitable for investors who follow A) a passive approach to investing.. B) a strategic approach to the market. C) an active approach to investing. D) a buy-and-hold philosophy.

For U.S. investors holding American depositary receipts (ADRs), dividends received are A) tax free in both the country of origin and in the United States. B) tax free in the country of origin. C) subject to a foreign withholding tax. D) taxed as a capital gain in the United States.

If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following except A) convertible bonds. B) variable rate bonds. C) adjustment bonds. D) debentures.

If an investor purchased a municipal bond in the secondary market, which of the following would not be a factor in calculating the total dollar amount paid for the bond? A) The coupon rate B) The settlement date C) The scale D) The dated date

Investors who are subject to AMT must have which of the following preference items added to adjusted gross income to calculate their tax liability? A) Distributions from a corporate bond mutual fund B) Interest on a municipal bond issued to finance highway construction C) Interest on a private purpose municipal bond D) Income from a municipal security issued to finance parking garages

Ratio call writing exposes an options investor to which of these? Limited loss Unlimited loss Limited gain Unlimited gain A) II and IV B) I and IV C) II and III D) I and III

The Investment Company Act of 1940 contains a number of terms used to describe investment companies. When used as an adjective, the term diversified would apply to which type of investment company? A) Face-amount certificate company B) Unit investment trust C) Management company D) Business development company

The market attitude of a customer who establishes a credit call spread is A) neutral. B) bullish. C) bearish. D) speculative.

Trade confirmations must show yield to call on which of the following bonds? A) 6½%, at par, callable 2025, maturing 2059 B) 5½%, 5½% basis, maturing 2038 C) 5½%, 5% basis, maturing 2038 D) 6½%, 7% basis, maturing 2038

When the inside market (best bid and best offer) for XYZ stock was 17.30-17.60, a market maker bought 100 shares from a customer at 16.90. At the time of the trade, the market maker's market was 17.25-17.70. What was the amount of the markdown? A) $0.65 B) $0.35 C) $0.40 D) $0.75

C) $0.40 Markdown is always based on the inside quote. In this case, the inside bid is 17.30 and the difference between that and the 16.90 buying price represents a $0.40 markdown.``

On December 13, an investor buys six ABC Feb 60 calls at 2.25 each, when ABC is trading at 59.50 per share. If the calls expire unexercised, how much money will the investor lose? A) $225 B) $810 C) $1,350 D) $6,000

C) $1,350 Buyers of options lose premiums if the options expire unexercised. The most this investor can lose is the number of contracts (6) multiplied by the amount of the premium (2.25). This investor's maximum loss is $1,350.

A customer's margin account shows a debit balance of $10,000. Federal law permits the broker-dealer to rehypothecate a maximum of A) $10,000 of the customer's margin securities. B) $20,000 of the customer's margin securities. C) $14,000 of the customer's margin securities. D) $5,000 of the customer's margin securities.

C) $14,000 of the customer's margin securities. When a customer buys securities on margin, the broker-dealer holds the purchased securities as collateral for the margin loan. That is known as hypothecation. In most cases, broker-dealers rehypothecate the securities to a lending institution to recover the funds they loaned to the margin client. SEC rules limit the rehypothecation to 140% of the customer's debit balance (140% × $10,000 = $14,000).

A corporation is having a rights offering. The terms of the offering require six rights plus $60 to purchase one share. With the stock's current market price at $74 per share, the theoretical value of one right before the ex-rights date is A) $0.20. B) $0.23. C) $2.00. D) $2.33.

C) $2.00. Because the question is asking about the value before ex-rights, it means we use the cum-rights (with rights) formula; that is, the market price minus the subscription price divided by the number of rights it takes to buy one share plus one. Plugging in the numbers gives us ($74 - $60) ÷ (6 + 1) = $14 ÷ 7 = $2.00.

A customer is short a DMF 50 call for which he received a premium of 4. Seven months later, the call was exercised when the current market for DMF was 56. Under the Internal Revenue Code, what were the proceeds of his sale? A) $5,000 B) $4,600 C) $5,400 D) $5,600

C) $5,400 He wrote a call and received a premium of 4. He later sold the security at $50, which made his total receipts for the stock $54. Proceeds in this case refers to the total amount he took in (a $400 premium plus $5,000 upon the sale).

If an investor buys one KLP Oct 95 put at 6.50, what is the investor's maximum potential gain? A) $9,650 B) $9,500 C) $8,850 D) $10,150

C) $8,850 The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). One contract represents 100 shares, so the buyer's maximum gain is $8,850 if the stock declines to zero. Because put buyers are bearish, they will make money if the stock falls below the breakeven point of 88.50.

If an investor sold two BCD Feb 40 calls at 4 on August 4, 2018, and the call expired unexercised, what were the tax consequences? A) $800 ordinary income for tax year 2019 B) $800 ordinary income for tax year 2018 C) $800 short-term capital gain for tax year 2019 D) $400 short-term capital gain for tax year 2019

C) $800 short-term capital gain for tax year 2019 For tax purposes, any premiums earned are recognized at the expiration date. In this case, the February call options sold in August 2018 for $400 each and expired in February 2019. Uncovered options writers always have short-term gains or losses.

A customer has placed an open order to buy 1,600 shares of GHI at $60. GHI declares a 25% stock dividend. On the ex-date, this order is considered a buy limit order for A) 2,000 shares at $60. B) 1,600 shares at $50. C) 2,000 shares at $48. D) 1,600 shares at $45.

C) 2,000 shares at $48. The order is adjusted on the ex-date. The number of shares increases by the percentage of the stock dividend, and the specified price is reduced to compensate. In this case, the number of shares increased to 2,000 (1,600 + 25%), and the specified price is adjusted to $48 per share. To get the adjusted price, divide the total value of the original market order (1,600 × $60 = $96,000) by the new number of shares ($96,000 ÷ 2,000 = $48). The order's total market value, $96,000, remains the same.

A registered representative has just been disciplined under the Code of Procedure. Within how many days does the U-4 need to be updated? A) 20 B) 60 C) 30 D) 10

C) 30 The U-4 must be updated within 30 day of a qualifying event, such as a change to the residence address or a disciplinary action.

Based on yesterday's closing price of $60 per share, Blech Sheet Metal, Inc., has a current P/E ratio of 12:1. If the current quarterly dividend payment is $0.50 per share, the dividend payout ratio is A) 10%. B) 16.66%. C) 40%. D) 3.33%.

C) 40%. With a price-to-earnings ratio of 12:1, the earnings per share (EPS) is $5.00 ($60 divided by 12). Four quarterly dividends of $0.50 is an annual dividend of $2.00 per share. If the company is paying $2 per share from the $5 per share earnings, that is a dividend payout ratio of 40%.

A customer gives you a limit order to buy 500 shares of XYZ at 30. You erroneously buy 1,000 shares at 29. The customer is entitled to A) 1,000 shares at 30. B) 1,000 shares at 29. C) 500 shares at 29. D) 500 shares at 30.

C) 500 shares at 29. The customer is entitled to 500 shares at 29. A buy limit order may be executed at the limit price or better (lower). If the firm buys more shares than indicated on the order ticket, the customer cannot be held responsible.

You have been given the name of a new potential client who responded to a marketing piece sent out by your broker-dealer. Which of the following would be the most appropriate way to obtain information about the client's objectives and investment constraints? A) An interview with the client's neighbors B) The client's LinkedIn page C) A face-to-face meeting at the client's home D) Monitoring the client's tweets

C) A face-to-face meeting at the client's home There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. Privacy laws would make interviewing a client's neighbors unethical.

Which of the following actions would increase SMA in a long margin account? A) A long purchase B) A decline in CMV C) A long sale D) A stock dividend received

C) A long sale Of these choices, an increase in SMA can only be accomplished by a sale of securities held long in the account. A purchase would decrease the SMA if it is used to make the purchase. Stock dividends have no effect on the balances in a long margin account; only the number of shares is changed. A decline in the CMV would not change the SMA.

A 45-year-old client of yours receives an inheritance of $100,000 and wishes to invest it without having to worry about any taxes being due until she reaches age 68. In addition, the client would like to have some protection against inflation. Which of the following would be the most appropriate recommendation? A) An S&P 500 index fund B) A single premium variable life insurance policy C) A single premium deferred variable annuity D) An immediate variable annuity

C) A single premium deferred variable annuity\ There are two benefits to the deferred variable annuity. The first is that taxes on all earnings are deferred until withdrawal. The second is that, if the proper separate account subaccounts are selected, there is potential inflation protection. An index fund will meet the second objective, but, even though index funds tend to be tax efficient, there will be certainly be dividend distributions from an S&P 500 index fund and possibly some capital gains as well. An immediate variable annuity begins payout immediately, so taxes start immediately as well. Variable life will never be an answer to a question unless the question describes a need for life insurance coverage—it cannot be sold strictly as an investment.

A fund seeks maximum capital appreciation by investing in common stocks of companies located outside the United States. The management selects well-established companies that are listed on their national stock exchanges and that have demonstrated high earnings potential. This information describes which of the following mutual funds? A) ATF Capital Appreciation Fund B) ABC Stock Index Fund C) ATF Overseas Opportunities Fund D) ATF Biotechnology Fund

C) ATF Overseas Opportunities Fund Foreign funds, which may also be called international funds, invest in common stocks of companies located outside the United States.

Which of the following is contained in an official notice of sale? A) Agreement among underwriters B) Delivery date C) Amount of good-faith deposit required with the bid D) Reoffering yields on the bond

C) Amount of good-faith deposit required with the bid The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good-faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters.

Investing in undeveloped land satisfies which of the following primary objectives? A) Tax-deferred income B) Investment tax credits C) Appreciation D) Deductible interest expense

C) Appreciation The primary reason to invest in raw land is the appreciation in value.

An investor purchases 100 shares of JKL common stock at a price of $42 per share on April 22, 2018. On June 27, 2019, JKL's market price is $51 and the investor liquidates the position. Which of the following transactions made on October 17, 2018, would have an effect on the investor's tax treatment of this gain? A) Buying a Feb 45 JKL call B) Selling a Feb 45 JKL put C) Buying a Feb 45 JKL put D) Selling a Feb 45 JKL call

C) Buying a Feb 45 JKL put Long-term capital gains tax rates are available when one has a holding period of more than 12 months. Although this investor held the JKL stock for more than 14 months, the purchase of the put caused the holding period to be tolled (the IRS term for suspended). It means that the holding period from April 22 to October 17 (almost 6 months) is put on hold until the put is disposed of or expires. When that happens in February, the "clock" picks up where it left off and runs another 4+ months until June 27. The total time period is approximately 10 months, less than the 12 months required for long-term treatment. None of the other positions affects the holding period of a long stock position.

A customer is very concerned about investments that may not keep pace with inflation. He asks which securities would have the least exposure to inflation risk. Which of the following would be the best answer? A) Preferred stock B) Fixed annuity C) Common stock D) Cash

C) Common stock The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power than the other choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed-income instruments.

What might happen if a limited partner begins making business decisions for the partnership? A) He may be removed from the partnership completely. B) He ascends to general partnership status as a reward for his decision-making contribution. C) He might jeopardize his limited liability status. D) There would be no effect because of the partnership democracy.

C) He might jeopardize his limited liability status. If a limited partner has control over the partnership operation (i.e., he makes partnership decisions), he could be judged a general partner and, thus, have unlimited liability.

A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable? A) Investment-grade bond funds B) Municipal GOs C) High-yield bond funds D) Treasury STRIPS

C) High-yield bond funds High-yield bonds yield more than investment-grade bonds. Because the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds, which yield less. Not only do the Treasury STRIPS provide zero income, but they certainly are not suitable for those with a high risk tolerance. Similarly, the municipal GO bonds are generally quite safe and, at least for test purposes, municipal bonds are never a suitable investment unless the investor is in a high tax bracket.

Which of the following statements regarding ADRs is not true? A) ADRs make it easy to own a foreign security. B) Dividends are received in U.S. dollars. C) Holders generally have voting rights. D) Key risks to identify include currency and political risks.

C) Holders generally have voting rights. ADRs, with few exceptions, do not have voting rights. The sponsor of the ADR (the bank) holds the foreign securities and issues a receipt for them. That receipt is the ADR, and it is a U.S. security traded in the U.S. markets in U.S. dollars. Of importance to the holder is that everything is in English and dividends, if any, are received in U.S. currency. Therefore, it is correct to state that the holder of an ADR does not hold the shares of the underlying foreign security but instead holds a receipt for that security. There is both currency and political risk associated with ADRs.

Which of the following statements regarding the suitability of municipal bonds are true? The tax-free interest payments make them more suitable for those in higher tax brackets. The tax-free interest payments make them more suitable for those in lower tax brackets. The tax-free interest is why municipal bonds are not considered suitable investments to be included in one's retirement account, such as an IRA. The tax-free interest is one reason why municipal bonds are considered suitable investments to be included in one's retirement account, such as an IRA. A) II and III B) I and IV C) I and III D) II and IV

C) I and III Tax-free interest payments are more suitable for those for whom the tax advantage has the most impact. That would be those in higher tax brackets, who would pay more taxes on the interest received if the interest payments were taxable. Additionally, the tax-free interest is why municipal bonds are not suitable for retirement accounts. This is because the earnings in retirement accounts are already tax deferred, and the impact of receiving tax-free interest is lost or diminished.

If an investment representative hosts an investment seminar and intends to discuss general investment concepts and a specific mutual fund for which he has performance charts, which of the following are true? He may discuss the investment returns of the mutual fund in general, provided he does not use a specific time frame. He may discuss the investment returns of the mutual fund using a specific time frame. He must disclose all material facts regarding the mutual fund to the audience. He may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details. A) I and III B) II and IV C) II and III D) I and IV

C) II and III He may discuss the investment returns of the mutual fund as long as he uses a specific time frame. When discussing an investment, he must disclose all material facts pertaining to the investment, both negative and positive.

To meet a Fed call, a customer must deposit which of the following? 50% of the call in cash 100% of the call in cash 100% of the call in marginable securities 200% of the call in marginable securities A) I and IV B) I and III C) II and IV D) II and III

C) II and IV To meet an initial call, the customer can deposit cash equal to the call or deposit fully paid-for marginable securities with a market value equal to twice the call. For example, if the trade is for $10,000, the margin call will be 50% of that, or $5,000. If the customer wishes to deposit fully paid-for marginable securities, it has to be in an amount sufficient for the BD to lend the account $5,000. With Regulation T at 50%, $10,000 of free and clear stock has a loan value of $5,000—exactly what is needed for the margin call.

Voter approval may be required for new bond issues for construction of which of the following? Airports Turnpikes State prisons Public high schools A) I and II B) II and IV C) III and IV D) I and III

C) III and IV Voter approval may be required for new issues of GO bonds. State prisons and public high schools are among the facilities for the public good that are built and supported by GO issues. User fees (like tolls) support revenue bond issues for the construction of facilities such as airports and turnpikes.

From first to last, which of the following sequences reflects the priority of payments made when a limited partnership is liquidated? General partners Limited partners General creditors Secured creditors A) IV, III, I, II B) I, II, III, IV C) IV, III, II, I D) I, IV, III, II

C) IV, III, II, I Creditors are paid first in a liquidation, with priority given to the secured lenders; general partners are the last to be paid.

The ABC Corporation would like to raise capital via a Regulation D private placement. Under Rule 506(c), which of the following statements is true? A) If the offering is limited to no more than 35 nonaccredited investors, advertising is permitted. B) Private placements under Regulation D cannot be publicly advertised. C) If the offering is limited to accredited investors, advertising is permitted. D) Under Rule 506(c), a prospectus is only required for nonaccredited investors.

C) If the offering is limited to accredited investors, advertising is permitted. Rule 506(c) of Regulation D differs from Rule 506(b) in that all of the investors must be accredited. In that case, advertising is permitted. It is Rule 506(b) that permits the exemption if no more than 35 of the investors are nonaccredited, but advertising would not be permitted. If the sale is exclusively to accredited investors, the private placement may advertise.

It would be most unusual to see which of the following issued at a discount? A) Treasury bill B) Commercial paper C) Jumbo CD D) Banker's acceptance

C) Jumbo CD Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

In the trading of options, there are a number of different multiple option strategies. An investor has the following position: Buy one RIF Apr 120 call Buy one RIF Jul 130 put Which strategy is the investor using? A) Long straddle B) Diagonal spread C) Long combination D) Time spread

C) Long combination A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security. A straddle is when the expiration dates and exercise prices are the same. A spread consists of a long and short position in the same options class (two puts or two calls). In a diagonal spread, the exercise price and the expiration dates are different. In a time spread, everything is the same except the expiration dates.

Your client's position is long 100 MNO purchased at 90. Which of the following strategies will limit the customer's loss to $700? A) Short one MNO 90 call at 4, short one MNO 90 put at 3 B) Buy a MNO 90 call at 7 C) Long one MNO 90 call at 4, long one MNO 90 put at 3 D) Sell a MNO 90 call at 7

C) Long one MNO 90 call at 4, long one MNO 90 put at 3 It is the long put in this straddle position that limits the maximum loss on the long stock position. If the MNO stock drops to $0, the customer loses $9,000 on the long stock position but retains the right to sell the stock to someone at $9,000, to prevent loss beyond the premium of $300. The call would expire out of the money, for a total loss of $700.

Which of the following municipal bonds may be paid by a state's legislative apportionment of funds to service the debt? A) Special assessment B) Industrial development revenue C) Moral obligation D) Special tax

C) Moral obligation If a moral obligation bond goes into default, bondholders do not have the right to sue to force a tax to pay off the bonds. The only way bondholders can recover the principal is through legislative apportionment. The issuer's legislative body has to appropriate funds to pay off the bonds. With a moral obligation bond, issuers have the moral, but not legal, obligation to service the debt.

A new customer has given you written authorization to transfer the holdings in his account at another broker-dealer to his new account at your broker-dealer. Under the Uniform Practice Code, using the Automated Customer Account Transfer Service (ACATS) Form, the carrying broker-dealer would have how many days to validate the positions? A) Two business days B) Five business days C) One business day D) Three business days

C) One business day Under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer to the receiving broker-dealer after validation.

Which of the following mortgage-backed securities would provide investors with the most predictable maturity date? A) Fannie Maes B) Ginnie Maes C) PACs D) TACs

C) PACs PACs are planned amortization class CMOs and have established maturity dates. Prepayment risk is transferred to the PAC companion, or support, class bonds.

TCB Corporation wants to offer $75 million worth of common stock solely to residents of its home state. The issue will not be registered at the federal level. What type of registration will TCB use to register with the state? A) Notice filing B) Coordination C) Qualification D) Regulation D

C) Qualification If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state.

Which of the following is not a type of corporate debt instrument? A) Mortgage bond B) Subordinated debenture C) Revenue bond D) Income bond

C) Revenue bond A revenue bond is a type of municipal bond. Income bonds are usually issued by companies coming out of a bankruptcy where the company is obligated to pay the semiannual interest only if there are sufficient earnings. Mortgage bonds are secured by real property, such as the company's physical facilities, and subordinated debentures are unsecured debt and come last in line among the creditors. The course will not describe municipal revenue bonds until the next unit. How were you supposed to know what they are? You might have a question where the correct response is something you never heard of—what do you do? Eliminating the choices you know are incorrect is an important test-taking technique. Look at this question. We covered the other three choices in our text on corporate debt issues; that should have made the correct answer obvious.

Your customer has contributed $1,000 annually into her Roth IRA for seven years. Which of the following statements concerning her Roth IRA distributions is true? A) The distributions are taxed as ordinary income. B) The distributions are taxed as capital gains. C) She will not be taxed on the distributions if she is over age 59½ and the money has been held in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for her. D) She will pay ordinary income taxes on the part of the distribution that represents earnings.

C) She will not be taxed on the distributions if she is over age 59½ and the money has been held in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for her. Distributions from Roth IRAs made after age 59½ are tax free if the money was in the account for five years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Contributions to Roth IRAs are made with after-tax dollars.

A bond was issued 3 years ago with a coupon of 6%. The bond matures in 21 years and is callable at 103. Current market interest rates are 8%. Which of the following is most likely true? A) The coupon will be changed. B) The bond is selling at a premium. C) The bond is selling at a discount. D) The bond will be called.

C) The bond is selling at a discount. This question contains more information than is needed. Simply, this is a bond where interest rates have gone up since it was issued. When interest rates go up, bond prices go down. Bonds are not called when current interest rates are higher than the coupon; the reverse is true.

Who has the final responsibility for debt service on an industrial revenue bond? A) The MSRB B) The municipal authority established by the issuer C) The corporation leasing the facility D) The municipal issuer of the bonds

C) The corporation leasing the facility The issuer of industrial revenue bonds is a municipality or an authority established by a municipality. However, no municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the source of revenue for debt service. Therefore, the ultimate responsibility for the payment of the principal and interest on an industrial revenue bond rests with the corporate lessee.

An investor purchased 10 GO bonds at a discount of 2 points per bond. The bonds mature in 10 years. After holding the bonds for 5 years, they were sold at par. For tax purposes, the investor has A) no gain and no loss. B) a $100 loss. C) a $100 gain. D) a $50 gain.

C) a $100 gain. The cost per bond is $980. The accretion amount each year is $20. $20 ÷ 10 years = $2 per year. $2 per year × 5 years = $10 per bond accretion, making the adjusted cost basis $990 per bond. When the bonds are sold at par ($1,000), there is a profit of $10 per bond × 10 bonds, which equals a $100 gain.

All of the following will cause a change in SMA in a long account except A) an increase in market value. B) a purchase of stock. C) a decrease in market value. D) a sale of stock.

C) a decrease in market value. Once SMA is created in a long account, it is not reduced by a decline in market value. The SMA may still be taken out, provided it will not pull the account below the maintenance level. An increase in market value or a sale of stock increases SMA. The purchase of stock decreases available SMA.

Instead of signing on the back of a security sold, the registered owner could sign on a separate paper called A) an endorsement. B) a proxy. C) a stock (or bond) power. D) a stock split.

C) a stock (or bond) power. If the client were to sign the back of the certificate, that security would now be completely negotiable. If lost, it would be the same as losing an endorsed check. To minimize problems, make the assignment on a stock power, which is a separate piece of paper, and when it is put together with the actual certificate, it is treated as if the certificate itself had been signed.

Under SEC Rule 10b-10, customer confirmations must be sent at or before A) the end of the month in which the transaction took place. B) the date of the transaction. C) completion of a transaction. D) the settlement date plus two business days.

C) completion of a transaction. Rule 10b-10 is the SEC's rule on delivery of customer confirmations, and it requires that they be sent no later than the completion of the trade (synonymous with the settlement date). The settlement date plus two business days refers to Regulation T payment.

A FINRA member firm sends a promotional piece to 23 individuals over a three-day period. Ten of these individuals are current customers of the firm. The other 13 are prospects whose names came from a commercially available mailing list service. Under the FINRA rule on communications with the public, this promotional piece would be considered A) correspondence to the existing customers, and retail communication to the prospects. B) direct mail. C) correspondence. D) retail communication.

C) correspondence. Correspondence is defined as any written (including electronic) communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. If it goes to more than 25, it is retail communication. The fact that some of the recipients are customers and others are prospects is irrelevant. It is simply the number of people during the 30-day period.

After receiving and accepting securities from another firm, a broker-dealer discovers that the securities received were not in good deliverable form. Recourse for the broker-dealer is to A) cancel the trade and file a complaint. B) sell out the securities. C) file a reclamation. D) buy in the securities.

C) file a reclamation. After receiving the securities, the broker-dealer can file a reclamation and demand good delivery.

An angry customer has written a letter of complaint and sent it to the registered representative handling the account. The first step the registered representative must take is to A) notify the firm's designated examining authority (DEA). B) contact the customer and try to resolve the issue. C) forward the complaint to the proper supervisory person. D) accept responsibility for the problem and offer a refund to the customer.

C) forward the complaint to the proper supervisory person. Handling of complaints is a serious matter in this industry. Normally, the complaint is sent to the firm, who formally accepts the complaint and records the action taken. In this case, where the individual servicing the account receives the complaint, the firm's procedures manual will invariably require that the complaint be forwarded and specify to whom it should be forwarded. This is not something to be dealt with by the registered representative, at least not initially, and we don't have enough information to determine if it is the kind of complaint (e.g., forgery, theft) that must be reported to the firm's DEA.

An investor whose primary objective is a steady income flow would probably be best served by building a portfolio of A) preferred stock. B) cumulative common stock. C) investment-grade debentures. D) income bonds.

C) investment-grade debentures. The "trick" here is to remember that income bonds are issued during a corporate reorganization and only pay interest when and if the company has sufficient earnings. When a bond or debenture is investment grade, the likelihood of receiving timely interest payment is high. Preferred stock is generally a good source of income, but, because the dividends are not an obligation in the way that interest is, the stability of the income is less assured. There is no such thing as cumulative common stock, only preferred.

Compared to U.S. government agency-backed CMOs, CDOs have A) greater liquidity. B) generally more secure collateral. C) less prepayment risk. D) less credit risk.

C) less prepayment risk. Although there is some prepayment risk with CDOs, it is minimal when compared to CMOs. Unlike mortgages, which are frequently paid off early when homeowners move, those who move can take their cars or their credit cards with them and continue to make the payments. The same is true with refinancing. You don't see ads for people to refinance their auto loan to the extent you do with home mortgages. In generally, CDOs carry greater credit risk than CMOs backed by FHA and VA loans. The nature of CDOs, with the enormous variety of collateral options available, means that the liquidity of separate offerings tends to be less than that of these CMOs. Both of these are complex securities, but the experts in the field consider CMOs to be somewhat more so. The credit quality of government insured mortgages is more secure than that of credit card debt or automobile loans.

When opening an options trading account, a broker-dealer is required by FINRA to A) deliver the OCC Options Disclosure Document to the customer within five business days of the account being opened. B) determine if the customer is approved for options trading at any other member firm. C) make sure the options agreement is signed and returned to the firm within 15 days of the account being approved. D) have the customer sign the options account agreement prior to or concurrent with the first trade in the account.

C) make sure the options agreement is signed and returned to the firm within 15 days of the account being approved. The options agreement must be signed and returned to the firm within 15 days of the account being approved. If it is not, then the only options activity permitted is closing transactions. A Registered Options Principal (Series 4) or Sales Principal (Series 10) signs off on the account approval. There is no requirement to determine the existence of accounts (options or otherwise) at another member firm.

When investing in securities, there are many potential risks. When recommending a specific security to clients, a member firm A) may disclose the existence of a control relationship between the firm and the subject company if it is material. B) may follow the dictum of caveat emptor. C) must disclose the existence of a control relationship between the firm and the subject company. D) must have a reasonable belief that the recommended security will outperform the overall market.

C) must disclose the existence of a control relationship between the firm and the subject company. While it is not often thought of as a risk, disclosing the existence of a control relationship between the member firm and the subject security is something that must be done. There is no question that this is material. Not all recommendations are for securities that will outperform the market. What about a stock recommendation to sell short? Buyer beware (caveat emptor) has no place in this industry.

Your clients, an elderly retired couple on a small fixed monthly income, want to write uncovered (naked) calls in their joint account to generate income. For this account, this option strategy would most likely be deemed A) not suitable, because this strategy cannot be used in a joint account. B) suitable, because it has minimal risk characteristics. C) not suitable, because it is a speculative strategy with unlimited loss potential. D) suitable, because it is a standard strategy recommended to all retired customers to add income to their accounts.

C) not suitable, because it is a speculative strategy with unlimited loss potential. Writing naked calls has an unlimited loss potential and is considered a speculative option strategy. While it can be employed in any investment account (single or joint) to generate income, its speculative nature and unlimited loss potential would make it unsuitable for retired persons currently on a small fixed monthly income.

Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86, while the NAV was $10 per share. The client's order is placed at 2:00 pm Eastern time. Based on this information, you could confirm to the client a purchase of A) 4,604.052 shares. B) 5,000 shares. C) nothing yet, as you must wait for the POP to be computed based on the day's close. D) more than 4,604.052 shares, but fewer than 5,000 shares.

C) nothing yet, as you must wait for the POP to be computed based on the day's close. Mutual funds use forward pricing, so we never know what we'll be paying per share (if purchasing) or receiving per share (if redeeming) until the next calculated price.

One way in which open-end investment companies differ from closed-end investment companies is that an open-end investment company's shares A) may be priced at a premium or discount relative to its net asset value. B) are traded in the secondary markets rather than on an exchange. C) outstanding will vary in number at any point in time. D) are purchased and redeemed based on supply and demand

C) outstanding will vary in number at any point in time. Open-end investment companies are capitalized with a continuous offering of new shares. As a result, the number of shares outstanding is constantly changing. It is the closed-end company, traded in the secondary markets, whose share prices are based on supply and demand, which causes them to be bought or sold at a premium or discount to the NAV.

All of the following are common to both DPPs and REITs except A) centralized management. B) pass-through of income. C) pass-through of losses. D) capital gains distributions.

C) pass-through of losses. Both DPPs and REITs are professionally managed pools that pass through income and capital gains distributions to participants. REITs, unlike DPPs, do not pass through losses.

All of the following will affect the working capital of a corporation except A) an increase in current assets. B) a decrease in current liabilities. C) payment of a cash dividend. D) declaration of a cash dividend.

C) payment of a cash dividend. Working capital is defined as current assets minus current liabilities. On the declaration date, the future dividend payment is "booked" as a current liability (dividend payable). When the payment date comes, disbursement of the cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.

Greater Growth Capital (GGC), a FINRA member firm, has just been acquired by Better Retirement Outcomes (BRO), a much larger FINRA member. If GGC would like to effect a bulk transfer of its customer accounts using a negative consent procedure, FINRA rules A) require GGC to obtain affirmative written consent before transferring a customer's account to BRO. B) prohibit GGC from charging a fee to any existing GGC customers who elect to transfer their accounts to BRO, but permit a nominal charge if the customer wishes to transfer to another member firm. C) prohibit GGC from charging a fee to any existing GGC customers who decide to transfer their accounts to a different firm. D) require that GGC send a notice to each affected customer at least 60 calendar days before it effects the bulk transfer.

C) prohibit GGC from charging a fee to any existing GGC customers who decide to transfer their accounts to a different firm. In the case of a bulk transfer, such as when a member firm is acquired by another member, some customers may wish to opt out of the transfer. In those cases, it is prohibited for them to be charged any fees for transferring their accounts to another member firm. This is true only if the customer opts out during the allowable time period, which is 30 calendar days, not 60. The FINRA rule permits negative consent as long as the requirements are met.

All of the following risks are considered diversifiable except A) sovereign risk. B) liquidity risk. C) purchasing power risk. D) default risk.

C) purchasing power risk. Purchasing power risk, also known as inflation risk, is a systematic risk and, as such, is one that cannot generally be lessened through diversification. The other choices are forms of unsystematic (nonsystematic) risk and can be reduced through diversification.

When reviewing a client's account, your supervisor notices that although each recommendation appears to be suitable based on that client's profile, there is a concern regarding the frequency of activity in the account. This is an example of A) customer-specific suitability. B) qualitative suitability. C) quantitative suitability. D) reasonable-basis suitability.

C) quantitative suitability. Quantitative suitability requires a member firm who has control over a customer account to believe that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.

With regard to a variable annuity, all of the following may vary except A) the value of annuity units. B) the number of accumulation units. C) the value of accumulation units. D) the number of annuity units.

An investor who purchases 20-year Aaa rated corporate zero-coupon bonds would be least concerned with A) default risk. B) purchasing power risk. C) reinvestment risk. D) interest rate risk.

C) reinvestment risk. Zero-coupon securities have no reinvestment risk because there are no interest payments to reinvest. All fixed-income securities have purchasing power (inflation risk), especially when the maturity is as long as 20 years. The same is true for interest rate risk. In fact, zero-coupon bonds, because of their long duration, are the most sensitive to changes in interest rates. Is there default risk? Yes, even with a triple A rating. A lot can happen in 20 years.

One concern that FINRA has with fee-based accounts is that they might lead to A) churning. B) higher commissions. C) reverse churning. D) over-trading.

C) reverse churning. Churning is the practice of over-trading an account, resulting in higher commissions. Reverse churning occurs when a client in a fee-based account pays more in fees than would be paid in a commission-based account. This is generally the case when the customer trades infrequently.

The practice of dollar cost averaging requires the investor to A) buy a security in a falling market and sell it in a rising market. B) buy a security in a falling market and buy it in a rising market. C) sell a security in a falling market and sell it in a rising market. D) sell a security in a falling market and buy it in a rising market.

C) sell a security in a falling market and sell it in a rising market. Dollar cost averaging requires the investor to invest a fixed amount of money on a regular basis, regardless of whether the stock market is rising or falling. When this is done, more shares are purchased when the price per share is low and fewer when the price per share is high. In following this scheme, the investor's average cost per share is lower than the average price paid per transaction.

If the State of Texas has solicited bids for a proposed municipal bond offering, the underwriters for that offering would be the syndicate that would A) generate the most proceeds for the State of Texas. B) sell the issue at the highest price. C) sell the issue at the lowest net interest cost to the State of Texas. D) sell the issue at the lowest price.

C) sell the issue at the lowest net interest cost to the State of Texas. The syndicate manager that offers the lowest net interest cost to the State of Texas will be awarded the bid. Once the State of Texas decides how much money it must raise, the question is how much this issue will cost in net interest during its entire life. Keeping it simple, the borrower (the state) is looking to borrow money at the lowest rate.

A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that A) he should begin to liquidate the ABC stock using the FIFO accounting method. B) owning too much ABC stock has increased credit risk to an unacceptable level. C) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk. D) because ABC has performed well over a 15-year period, he should keep the stock but sell it if inside information indicates a fall in value is imminent.

C) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk. This prospect is exposed to a significant amount of business (nonsystematic) risk, as indicated by the large investment in ABC common stock. Business risk can be reduced by diversifying the portfolio; therefore, recommending the sale of a portion of the ABC stock and using the proceeds to purchase mutual funds is suitable. There will be tax considerations, but the use of FIFO accounting will likely expose the prospect to higher capital gains taxes than other accounting methods and may not be the best approach to liquidation.

An investor buys two ABC Nov 50 calls, three ABC Dec 45 calls, and one ABC Jan 50 call. The best way to describe the portfolio is that it consists of A) six options of the same series. B) six options of the same type. C) six options of the same class. D) two options of one class, three of another class, and one of a third class.

C) six options of the same class. A class of options is when they are all of the same type (in this case, calls) and all on the same underlying security (in this case, ABC). Yes, they are all of the same type, but, in a question like this, FINRA is asking for the most specific answer. Same class is more specific than same type. The same series would be if they all had the same expiration date and exercise price.

Opening a margin account involves a number of different documents. The document describing how the interest on the margin debt is calculated is generally known as A) the hypothecation agreement. B) the loan consent agreement. C) the credit agreement. D) the risk disclosure document.

C) the credit agreement. It is the credit agreement, sometimes referred to as the margin agreement, that describes the creditor-debtor relationship. This includes the method of computing interest on the debit balance (the amount owed). The hypothecation agreement allows the broker-dealer to maintain possession of the margined securities as collateral for the loan, and the loan consent agreement allows the broker-dealer to lend out the client's margined securities. The risk disclosure document is provided to make sure the client understands the risks of margin trading.

A brokerage order ticket must contain all the following except A) the price and time limits, if any. B) the discretionary authority exercised. C) the date the account was opened. D) the account number for which the order is entered.

C) the date the account was opened. The date of the trade will absolutely be on the order ticket. However, the date the account was opened will not be included.

When a customer, who is at least 59½, withdraws money from a traditional IRA that has been funded totally with deductible contributions, A) the basis is taxed as ordinary income, and the gains are taxed at the capital gains rate. B) the entire amount withdrawn is subject to taxation at ordinary income tax rates with an additional 10% penalty. C) the entire amount withdrawn is subject to taxation at ordinary income tax rates. D) the withdrawal causes the entire IRA balance to be subject to taxation at ordinary income tax rates.

C) the entire amount withdrawn is subject to taxation at ordinary income tax rates. All withdrawals from a traditional IRA that has been funded with pretax contributions are subject to taxation at ordinary income tax rates. There is no 10% penalty once the account holder has reached age 59½.

When a corporation issues a debt security, the terms of the loan are expressed in a document known as the bond's deed of trust. The deed of trust is sometimes referred to as A) the loan agreement. B) the debenture. C) the indenture. D) the bond resolution.

C) the indenture. The indenture, sometimes also referred to as the deed of trust, states the issuer's obligation to pay back a specific amount of money on a specific date. A debenture is a debt security containing an indenture. Bond resolution is a term used for municipal bonds, not corporate debt.

The rights and liabilities of general and limited partners are listed in A) the certificate of partnership. B) the partnership title. C) the partnership agreement. D) the Uniform Limited Partnership Act.

C) the partnership agreement. The agreement is the contract between the general and limited partners, and it contains each entity's rights and duties. The certificate of partnership is the document legally establishing the enterprise.

An investor purchases a bond on its initial public offering. Even though the bond has a maturity value of $1,000 in 10 years, the offering price is only $600. If the bond is held to maturity, A) $400 is reported as ordinary income. B) there is a $400 long-term capital gain. C) there are no tax consequences to report. D) there is a $360 long-term capital gain and $40 in ordinary income.

C) there are no tax consequences to report. A bond issued at a significant discount from its maturity value is known as an original issue discount bond (OID). In the case of a corporate bond, the computation is more complex than can be tested, but there are two things you need to know: A portion of the discount is taxed as ordinary income each year until maturity, even though it is not actually received. This is called phantom income. Each year's taxable amount is reported on Form 1099-OID. Because a portion of the discount has been taxed each year, at maturity there are no tax consequences—no gain, no interest.

There are many different types of asset-backed securities, but the common theme uniting all of them is A) they are usually backed by a single source of payment. B) they tend to be exchange traded. C) they are supported by a contractual obligation to pay. D) they are a form of equity financing.

C) they are supported by a contractual obligation to pay. Asset-backed securities (ABS) are structured debt financing backed by a contractual agreement to pay. They are "first cousins" to MBS (mortgage-backed securities), with the primary difference being that the collateral is not real estate. These securities trade in the OTC market. One of the benefits of the structured package is that the investor is not relying on payments from a single borrower; rather, there is a pool of loans, whether they be auto, credit card, or others.

Common risk factors found when investing in penny stocks would include all of the following except A) limited transparency. B) illiquidity. C) unfavorable tax treatment. D) high volatility.

C) unfavorable tax treatment. The tax treatment on gains or losses in penny stock investing are no different from any other stock. But penny stocks have these other risks. Because these are not traded on the exchanges or Nasdaq, it is not always easy to find a buyer or seller at your price. Many of these companies are not bound by the same financial reporting requirements as listed companies, making it difficult to really determine where the money is going. These low-priced stocks tend to fluctuate much more, with daily price swings of 25% or more not being unusual.

A registered investment company whose share price fluctuates independently of its net asset value is most likely A) an index mutual fund. B) a unit investment trust. C) an open-end fund. D) a closed-end fund.

All of the following securities are issued at a discount except A) Treasury bills. B) commercial paper. C) zero-coupon bonds. D) CDs.

In a scheduled premium variable life insurance policy, all of the following are guaranteed except A) the ability to borrow at least 75% of the cash value after the policy has been in force at least three years. B) a minimum death benefit. C) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months. D) a minimum cash value.

Interest received from which of the following federal agency securities is exempt from all state and local taxation? A) Federal Home Loan Mortgage Corporation bonds B) Government National Mortgage Association pass-through securities C) Federal National Mortgage Association bonds D) Farm Credit System bonds

Investors in zero-coupon corporate bonds would find all of the following to be true except A) the bond's duration is equal to its length to maturity. B) the discount is in lieu of periodic interest payments. C) the discount must be accreted and is taxed annually. D) the discount must be accreted annually with taxation deferred until maturity.

The unqualified legal opinion on a municipal bond states that A) the bond has passed the additional bonds test (parity test). B) the bond counsel needs more time to qualify the opinion. C) the bond is marketable. D) the issuer has the authority to issue bonds that are legal, valid, and enforceable obligations of the issuer.

Which investor has the greatest potential risk if the price of QRS goes up? A) Long 10 puts on QRS B) Short 10 puts on QRS C) Long 10 calls on QRS D) Short 10 calls on QRS

Which of the following individuals could most likely open an account at a FINRA member firm without notifying or receiving permission from their employer? A) A life insurance agent who sells variable annuities B) A government security trader employed by a member C) A purchases and sales clerk of a member D) An individual who sells only fixed annuities

Which of the following securities would most likely have the lowest expense ratio? A) Variable annuity B) Balanced mutual fund C) Closed-end fund D) Exchange-traded fund

Which of the following statements regarding Roth IRAs are true? Contributions are made with pretax dollars. Earnings accumulate tax free. Distributions are not taxable if a holding period and age requirement are satisfied. Only cost basis is taxable at the time of distribution. A) II and IV B) I and II C) I and III D) II and III

Under which of the following terms does the underwriter act in a dealer capacity? A) Best efforts B) Selling group C) Syndicate D) Firm commitment

D) Firm commitment The firm commitment is the most commonly used type of underwriting contract. Under its terms the underwriter commits to buy the securities from the issuer, and as such is acting in a dealer capacity.

Government agency bonds issued by which of the following carry a minimum denomination of $1,000 with $1 increments? A) Federal Home Loan Bank B) Freddie Mac C) Sallie Mae D) Ginnie Mae

D) Ginnie Mae GNMA securities are available with a minimum denomination of $1,000 and in increments of $1.00. That means, for example, that a client can purchase one for $1,003.00 or $1,337.00 if desired. The only other agency with that type of pricing is the FNMA.

A Western account underwriting of $100 million in municipal bonds is established. A member firm agrees to underwrite 10% of the issue and sells out its entire allotment of $10 million. However, some of the other firms participating in the underwriting are unable to sell their full allocation, and $15 million of the bonds remain unsold. What is the financial obligation of the underwriting firm who sold their entire allotment? A) $150,000 B) $1.5 million C) Pooled responsibility for $15 million D) $0

D) $0 Divided liability in a Western account means that if a member meets its commitment, it has no further liability for unsold bonds. If that had been an Eastern account, the member would be obligated for 10% of the unsold bonds, or $1.5 million.

A customer purchases ten 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,812 B) $10,116 C) $10,015 D) $10,150

D) $10,150 Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 plus 1/2 = $1,015; $1,015 × 10 bonds = $10,150.

In a new margin account, a customer buys 300 shares of ABC at $40 per share, 100 shares of the Ajax Mutual Fund at $24, and 10 PDQ Aug 30 calls at 4. The customer will receive a margin call for A) $4,400. B) $9,200. C) $10,800. D) $12,400

D) $12,400 The customer must pay 50% of the value of the stock and 100% of the value of the mutual fund shares and the options because these securities are nonmarginable and require full payment. To calculate the total payment required, add $6,000 (50% of $12,000) plus $2,400 (Ajax) plus $4,000 (PDQ calls) to arrive at $12,400.

A customer's long margin account contains the following securities: 100 shares of DEF, CMV $40 per share 200 shares of AMF, CMV $50 per share 100 shares of KLP, CMV $80 per share The current debit balance in the account is $10,800. If each of the securities held in the account were to appreciate by $5 per share, the equity in the account would be A) $12,700. B) $8,200. C) $11,200. D) $13,200.

D) $13,200. Before the $5 increase, the total long market value in the account is $22,000 and, therefore, the equity is $11,200 ($22,000 - $10,800 = $11,200). If each of the 400 shares in the account increases by $5, which represents an increase of $2,000 in long market value, the equity will increase by the same amount. After the increase, the long market value is $24,000 and the equity is $13,200 ($24,000 - $10,800 = $13,200).

A customer purchases an ABC $100 par 6½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is A) $16. B) $12. C) $18. D) $14.

D) $14. The conversion ratio is computed by dividing par value by the conversion price ($100 par ÷ $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 ÷ 5 = $16). $16 − 2 = $14.

A corporation has $20 million net income after taxes, 7 million common shares outstanding, and $15 million of 6% preferred stock ($25 par). What is the corporation's earnings per share (EPS)? A) $2.83 B) $2.54 C) $2.86 D) $2.73

D) $2.73 Begin by calculating how much of the net income is available for common stockholders (net income after taxes minus preferred dividends results in the earnings available for common stockholders). The preferred stockholders received $900,000 in dividends ($15 million par × 6% = $900,000), or 600,000 shares × $1.50 per share = $900,000). After subtracting $900,000 from the net income of $20 million, this leaves $19.1 million (earnings available for common stockholders). Compute EPS (earnings available for common ÷ number of common shares outstanding = $19.1 million ÷ 7 million shares = $2.73 per share EPS).

A customer has the following accounts: Market value: long account $35,000; short account $40,000 Balance: long account (DR) $23,000; short account (CR) $60,000 SMA: long account $3,000 Regulation T: 50% What is the combined minimum maintenance requirement for the long and short margin positions? A) $18,750 B) $12,750 C) $8,750 D) $20,750

D) $20,750 The minimum maintenance for long accounts is 25% of the LMV (25% × $35,000 = $8,750). The minimum maintenance for short accounts is 30% of the SMV (30% × $40,000 = $12,000). In this case, $8,750 plus $12,000 equals a combined maintenance of $20,750.

A customer in the 28% tax bracket wants to buy a municipal GO bond with a 7.5% yield that matures in 6 years. The tax-equivalent yield of this bond is A) 0.060. B) 0.075. C) 0.026. D) 0.104.

D) 0.104. To calculate the taxable return, use the tax-free equivalent yield formula: municipal bond yield ÷ (1 − investor's tax bracket). Using this formula, 0.075 ÷ (1 - 0.28) = 0.104, or 10.4%. This means the investor, who is in the 28% tax bracket, must earn 10.4% in taxable interest to equal the 7.5% tax-free municipal interest yield.

If a contract calls for a delivery between member broker-dealers of 500 shares of stock, all of the following certificate combinations would be a good delivery conforming with the FINRA Uniform Practice Code except A) 1 certificate for 200 shares and 1 certificate for 300 shares. B) 10 certificates for 50 shares each. C) 5 certificates for 40 shares each and 5 certificates for 60 shares each. D) 10 certificates for 30 shares each and 4 certificates for 50 shares each.

D) 10 certificates for 30 shares each and 4 certificates for 50 shares each. Good delivery between member firms requires delivery of certificates of 100 shares, in multiples of 100, or the ability to put certificates of less than 100 shares into stacks of 100 shares. Note that the 10 certificates, each for 30 shares, could not be stacked in units of 100. Each of the five certificates for 40 shares can be combined with one of the five certificates for 60 shares. Clearly, 40 plus 60 equals 100, and that can be done five times. Likewise, the 10 certificates for 50 shares can be taken two at a time, giving us five pairs of 100 shares. The 200- and 300-share certficates are multiples of 100 (they end in 00), and that makes them acceptable.

The minimum maintenance requirement on long stock accounts is what percentage of the market value? A) The same percentage as the initial margin requirement B) 50% C) 30% D) 25%

D) 25% The minimum maintenance in a long account is 25% of the market value. It is 30% of the short market value in a short margin account and 50% is the initial margin requirement.

In general, commercial paper, a popular money market instrument, has a maturity not exceeding A) 30 days. B) 90 days. C) 365 days. D) 270 days.

D) 270 days. Although there are rare cases where the maturity extends as long as 12 months (365 days), for exam purposes, think of CP with a maximum maturity of 270 days (9 months).

An investor is long 500 shares of DEFG common stock, short 200 shares of DEFG common stock, and short 300 shares of DEFG 5% preferred stock. A tender offer for DEFG common shares is announced. Under SEC rules, this investor is permitted to tender A) 500 shares. B) 800 shares. C) 0 shares. D) 300 shares.

D) 300 shares. The rules permit tendering of net long shares. That means the difference between the long and short positions. In this question, the investor is net long 300 shares: the difference between the 500 long and the 200 short. The preferred shares are not relevant because the tender is only for the common stock.

Your client sells one naked MAV Oct 40 call at 2 when the market price of MAV is $41. What must MAV be selling at for the client to break even? A) 40 B) 38 C) 43 D) 42

D) 42 The breakeven point for a call is the strike price plus the premium (call up). The breakeven point is the same for both the buyer and the writer.

ABC Company has issued $20,000,000 of convertible bonds with a coupon of 5% and a current market value of 120. The conversion price is $40. If all the bonds are converted, how many additional shares of common stock will ABC have outstanding? A) 400,000 B) 600,000 C) 1,000,000 D) 500,000

D) 500,000 Each bond will convert to 25 shares of common stock ($1,000 ÷ $40). 20,000 bonds were issued ($20,000,000 ÷ $1,000). Therefore, 500,000 additional shares (20,000 × 25) will be outstanding if all the bonds are converted.

A bond with a 9% coupon, maturing in 18 years and 6 months, is selling at 120. The yield to maturity is closest to A) 11.66%. B) 7.50%. C) 9.00%. D) 7.05%.

D) 7.05%. Don't waste time trying to do the yield to maturity computation. This bond is selling at a premium (120% of par). Therefore, all of the computed returns must be lower than the 9% nominal (coupon) yield. Only two of them are. The 7.50% represents the current yield ($90 ÷ $1,200). We know from our charts that, just like a seesaw, the farther from the center you go, the bigger the move at the end. That means the nominal yield is the highest, followed by the current yield (CY), the yield to maturity (YTM), and finally the yield to call (YTC) as the lowest. Because only one choice is lower than the CY, you get the correct answer with minimal effort.

A customer establishes the following positions: Buy 100 ABC for 63 Write 1 ABC Jan 70 call for 1 What is the customer's maximum gain? A) 700 B) Unlimited C) 600 D) 800

D) 800 Maximum gain on the covered call position occurs when the stock's market value rises. The short call is exercised when the stock is above 70, so the stock bought for 63 will be sold for 70—a profit of $7 per share. In addition, the customer receives the premium of $1, so the total profit is $800 ($700 + $100).

Which of the following debt securities would be most likely to offer a conversion feature into common stock? A) Commercial paper B) A mortgage bond C) Preferred stock D) A debenture

D) A debenture Invariably, when it comes to convertible debt securities, they are debentures rather than secured bonds. The conversion concept makes no sense with money market securities—they mature in one year or less. Preferred stock is often convertible, but it is an equity security, not a debt security.

Which of the following would be defined as a research report? A) A written opinion that the economy is poised for recovery B) A notice that the rating for a bond has been downgraded by Moody's C) A technical analysis that indicates the demand for steel is increasing based on the trading volume and price of the steel industry D) A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should sell the security

D) A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should sell the security One of the keys to defining a research report is that it suggests taking action (buy, sell, or hold) on the subject security. The term does not include commentaries on economic, political, or market conditions.

Which of the following accounts would a CMO Z-tranche be best suited for? A) A joint account where the owners are looking to diversify and lower their risk B) A custodial account set up under the Uniform Transfer to Minors Act (UTMA) C) An IRA account for a middle-aged client who is willing to defer the income D) A professionally managed hedge fund specializing in real estate portfolio securities

D) A professionally managed hedge fund specializing in real estate portfolio securities A zero tranche (Z-tranche) CMO is considered to be among the most volatile CMO tranches because no payments are received until all preceding tranches of the CMO are retired. Generally, CMO tranches are not suitable for smaller or unsophisticated investors, which is why customers are required to sign a suitability statement before purchasing any CMO tranche. Of the answer choices given, the best suited account would be the one that is professionally managed and already specializing in real estate investments.

A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. Her current portfolio consists of the following: $50,000 cash $200,000 in retirement accounts $100,000 in various individual stocks in different industries $100,000 in a balance fund She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which of the following investments would be the most appropriate? A) DEF Asset Allocation Fund B) MNO High-Yield Bond Fund C) XYZ Value Equity Fund D) ABC Capital Appreciation Small-Cap Fund

D) ABC Capital Appreciation Small-Cap Fund For someone who is willing to take the risk and invest for the long haul, a small- or mid-cap growth fund would be appropriate.

Your customer, age 60, is retired and living at home with a fully paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a long-time investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her traditional IRA. How are the distributions taxed from her IRA? A) The distribution is taxed as either ordinary income or capital gains, depending on the source of the distribution. B) If the IRA has been owned for more than one year, the distributions are long-term capital gains. C) If a security is sold for more than it was purchased for, the distribution of the profit is taxed as a capital gain. D) All taxable distributions from a traditional IRA are taxed as ordinary income.

D) All taxable distributions from a traditional IRA are taxed as ordinary income. All taxable distributions from a retirement account, including IRAs, are taxed as ordinary income, not capital gains.

Which of the following is true regarding an institutional communication? A) It must be filed with FINRA. B) It must be preapproved by a principal. C) No more than five retail customers may receive an institutional communication. D) An individual with $50 million or more in total assets is considered an institution.

D) An individual with $50 million or more in total assets is considered an institution. This is the rare case when an individual is considered an institution. As long as assets are at least $50 million, it is an institution. Institutional communication is not required to have the preapproval of a principal, nor is it required to be filed with FINRA. There must a reasonable belief that the communication will not be seen by any retail investors. If that should happen, the communication may lose its status and come under the retail communications requirements.

There are certain securities offerings that are limited to those who meet the definition of accredited investor. The SEC requires that the issuer shall take reasonable steps to verify that purchasers of securities sold in those offerings are accredited investors. One way in which this may be accomplished for natural persons is obtaining a written confirmation from certain persons or entities that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor. Confirmation from which of the following would not meet the SEC's requirements? A) A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office B) A registered broker-dealer C) A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law D) An investment adviser registered and in good standing under the laws of the state of its principal office

D) An investment adviser registered and in good standing under the laws of the state of its principal office It is only investment advisers registered with the SEC, not the state(s), for whom the written confirmation of their accredited investor status is acceptable.

Under the Code of Arbitration Procedure, arbitrators fall into one of two categories: public or nonpublic arbitrators. Which of the following persons could not be a public arbitrator? A) A retail investor who has filed a complaint against a broker-dealer in the last two years B) Private investors who have substantial mutual fund holdings C) An attorney who has represented an investor in an arbitration case once in the past five years D) Any person who worked in the financial industry for any portion of her career

D) Any person who worked in the financial industry for any portion of her career Those who have worked in the financial industry for any duration during their careers will always be classified as nonpublic arbitrators. Certain professionals, such as attorneys and accountants, can be considered nonpublic if at least 20% of their revenues comes from representing financial industry firms or any parties to an arbitration. One time in five years is certainly not going to be 20% of their revenues.

Customer account statements must include the per-share estimated value of a direct participation program (DPP) or unlisted real estate investment trust (REIT) security held in the account. Which of the following does FINRA accept as an estimated value methodology? A) Gross investment B) Tax basis C) Market value D) Appraised value

D) Appraised value For these securities, where a ready market does not exist, the estimated value must be based on an appraised valuation of the assets and liabilities of the DPP or REIT. This appraisal must be performed at least annually, by, or with the material assistance or confirmation of, a third-party valuation expert or service. The value must be derived from a methodology that conforms to standard industry practice. Because there is no market value, an alternative, such as appraisal, must be used. There is another method known as net investment, not gross investment. Tax basis is irrelevant to the current value.

Which of the following underwriting arrangements is associated with an invitation, typically found in The Bond Buyer, directed at investment bankers and broker-dealers, intended to solicit interest in underwriting a new municipal issue? A) All or none B) Negotiated C) Best efforts D) Competitive bid

D) Competitive bid With a competitive bid underwriting, a municipality publishes invitations to bid in The Bond Buyer or another municipal bond publication. Investment bankers and broker-dealers interested in underwriting the new municipal issue would respond to the invitation to bid.

All of the following statements regarding the Federal National Mortgage Association (FNMA) are true except A) interest on FNMA certificates is taxable at all levels. B) FNMA is a publicly held corporation. C) FNMA pass-through certificates are not guaranteed by the U.S. government. D) FNMA is owned by the U.S. government.

D) FNMA is owned by the U.S. government. FNMA is a publicly held corporation; it is not owned by the federal government. The interest income on all mortgage-backed securities is fully taxable on the local, state, and federal levels. Though FNMA is a government agency, FNMA pass-through certificates are not guaranteed by the U.S. government. The only tested U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association (GNMA).

Which of the following securities has the direct backing of the U.S. Treasury? A) Treasury stock B) Fannie Maes C) Freddie Macs D) Ginnie Maes

D) Ginnie Maes Securities issued by the Government National Mortgage Association (GNMA) are the only agency security with the direct backing of the U.S. Treasury. Other agencies are not directly backed. Treasury stock is a corporate issue and has nothing to do with the U.S. Treasury.

Which of the following statements regarding hedge funds is correct? A) Hedge funds are typically favored by inexperienced investors to hedge against losses they may experience as they gain investment savvy. B) Hedge funds are passively managed in an attempt to provide predictable returns for investors. C) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management. D) Hedge funds are usually structured as a partnership.

D) Hedge funds are usually structured as a partnership. Hedge funds are usually structured as a partnership, with the general partner as the investment manager and the investors as limited partners. Hedge funds are actively and aggressively managed, seeking superior returns, and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.

In a strong bull market, which of the following positions utilizing leverage has the potential for the highest percentage gain? A) Holding stocks B) Writing puts C) Selling short D) Holding calls

D) Holding calls Both a long call and a long stock position are profitable in a rising market. However, because options use leverage, the profit relative to the money invested is larger with option positions. A put writer also profits in a rising market, but only by the amount of the premium. A short seller loses money if the stock rises.

You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? 401(k) balance Credit card balance Monthly income Electric bill A) II and III B) I and IV C) III and IV D) I and II

D) I and II The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills, such as the electric bill, are found on the income statement.

Which of the following securities can be traded in the third market? I. A closed-end investment company II. An exchange-traded fund III. An open-end investment company IV. A unit investment trust A) II and IV B) II and III C) I and IV D) I and II

D) I and II The third market is defined as the trading of listed securities over the counter. There is no secondary market trading in open-end investment companies and unit investment trusts. Although most exchange-traded funds (ETFs) are structured as open-end companies, unless something in the question is dealing with the ETF's structure, open-end will always refer to a mutual fund.

Which of the following would be found on a when-, as-, and if-issued confirmation? Trade date Settlement date Price Accrued interest A) III and IV B) I and II C) II and IV D) I and III

D) I and III Information that does not appear on a when-issued confirmation can easily be remembered as SAT (settlement date, accrued interest, and total amount due). The trade date and price per bond are included on the when-issued confirmation.

In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes? The capital gain distribution is treated as long term. The capital gain from redemption is treated as long term. The capital gain from redemption is treated as short term. The capital gain distribution is treated as short term. A) III and IV B) I and II C) II and IV D) I and III

D) I and III When long-term capital gains are distributed, the length of time an investor has owned the fund is not relevant; it's still a long-term distribution. However, redemption of shares follows the normal holding period rules. Therefore, when this customer sold shares 10 months (July to May) after the purchase, the gain, like any other gain from a holding period that does not exceed 12 months, is short term.

Which of the following statements regarding limited partnerships are true? The maximum commission in selling partnership offerings is 5%. The maximum commission in selling partnership offerings is 10%. Commissions taken are deducted from the original investment to determine beginning cost basis. Commissions taken are not deducted from the original investment to determine beginning cost basis. A) II and III B) I and III C) I and IV D) II and IV

D) II and IV Under FINRA rules, the maximum compensation that can be taken by sponsors selling direct participation programs is 10%. Up-front costs, such as commissions taken and accounting costs, do not reduce the beginning cost basis.

A legal opinion issued for a municipal bond covers which of the following? Feasibility of public works projects Creditworthiness of the issuing municipality Tax status of the municipal debt Constitutionality and legality of the municipal debt A) II and III B) I and II C) I and IV D) III and IV

D) III and IV Municipal securities are reviewed by specialized lawyers who render a legal opinion. The opinion covers two main issues: constitutionality (i.e., it ensures that the bonds are legal, valid, and binding obligations of the issuer) and verification of the tax status of the debt (i.e., interest on the bonds is exempt from federal income taxes as well as state and local taxes in some cases).

Your firm is bidding on a new general obligation bond issue. As the issuer weighs and evaluates the competitive bids, what factor will be most important in deciding who will be awarded the winning bid? A) Takedown B) Scale C) Concession D) Net interest cost

D) Net interest cost Net interest cost measures an issuer's overall cost of borrowing for a particular bond issue. It is, therefore, the most important item an issuer considers when evaluating competing bids.

A client interested in the returns offered by CMOs asks you which type has the lowest prepayment risk. What should you say? A) Z-tranche B) Plain vanilla C) TACs D) PACs

D) PACs Although there can be exceptions, in general, the planned amortization class (PAC) has the lowest prepayment risk. The Z-tranche is the most unpredictable because it is paid off only after all of the other tranches.

Which of the following would be considered an equity security? A) Equity-linked notes B) Negotiable CDs C) Exchange-traded notes D) Preemptive rights

D) Preemptive rights Rights (and warrants) are included in the term equity security. Confusingly, equity-linked notes are debt securities, even though the term equity is in the name. On this exam, notes always represent a form of debt security.

Which of the following statements regarding SMA balances is true? A) SMA balances are free credit balances available to be withdrawn upon demand. B) SMA balances may be withdrawn without restriction regardless of the account status being below or brought below minimum maintenance by the withdrawal. C) SMA balances, which are considered a line of credit, may only be used to purchase additional securities. D) SMA balances may be withdrawn provided the withdrawal does not bring the account below minimum maintenance.

D) SMA balances may be withdrawn provided the withdrawal does not bring the account below minimum maintenance. SMA is a line of credit that may always be withdrawn (even in a restricted account), provided the withdrawal does not bring the account below minimum maintenance.

A stock is trading consistently between $20 and $24. The investor with a long position is neutral on the stock. The goal is to generate income. Which of the following recommendations is most appropriate? A) Buy a put B) Sell a put C) Buy a call D) Sell a call

D) Sell a call The investor should sell a call on the stock and collect the premium (income). The investor is long the stock, so it would be better if the price goes up rather than down. Therefore, the sale of a call is better than the sale of a put, and those are the only real choices when the investor wants income through options.

Which of the following would establish a covered put? A) Long stock at 40, short put at 35 B) Long stock at 40, long put at 45 C) Short stock at 40, long put at 45 D) Short stock at 40, short put at 35

D) Short stock at 40, short put at 35 A covered put is created when a short stock is combined with a short put. Covered puts are established when the investor is neutral or slightly bearish; therefore, the strike price of the put is less than the cost of the stock sold short. The reason the put writer is covered (protected) is that if the stock's price should decline below 35 and the holder of the option exercises, the stock purchased by the writer is used to cover (replace) the borrowed stock for the short sale at 40.

The owner of an IRA, age 45, has contributed $10,000 into the account and the IRA is now worth $20,000. The owner is going to convert the entire $20,000 into a Roth IRA. What are the tax consequences of this conversion? A) $10,000 will be taxable as ordinary income, and $10,000 will be taxed as a capital gain; in addition, there will be a $2,000 tax penalty for early withdrawal. B) The $20,000 is taxable as ordinary income, but there is a $2,000 tax penalty for early withdrawal. C) $10,000 will be taxable as ordinary income, and $10,000 will be taxed as a capital gain. D) The $20,000 is taxable as ordinary income in the year of the conversion.

D) The $20,000 is taxable as ordinary income in the year of the conversion. When converting from a traditional IRA to a Roth IRA, the distribution is all taxed as ordinary income in the year of the conversion. There is no 10% tax penalty if the conversion is done prior to age 59½.

Under the Investment Company Act of 1940, which of the following statements regarding the renewal provisions of an investment adviser's contract is not true? A) The renewal must be approved by either majority vote of the board or majority vote of the outstanding shares, as well as majority vote of the noninterested members of the board. B) The contract must be terminable upon no more than 60 days' notice. C) The renewal must state the adviser's compensation. D) The renewal may be executed orally, provided it is done within two years of the initial contract.

D) The renewal may be executed orally, provided it is done within two years of the initial contract. When an investment company employs an outside investment advisory firm to manage its portfolio, the act requires a written contract setting forth the adviser's compensation. The contract is for two years initially and must be renewed annually thereafter. The contract must be initially approved by a majority vote of the outstanding shares and the noninterested members of the board of directors and annually renewed by either a majority vote of the board of directors or of the outstanding shares, as well as a majority vote of the noninterested members of the board. The contract must be terminable at any time, with a maximum of 60 days' notice and with no penalty, upon a majority vote of the board of directors or of the outstanding shares, and it must terminate automatically if assigned.

Which of the following is not a characteristic of hedge funds? A) They invest in private securities, real assets, derivatives, and structured products. B) They use leverage, short positions, and concentrated positions. C) They are privately organized and generally unregistered. D) They offer managers high fixed fees.

D) They offer managers high fixed fees. Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20%, where 2% is the fixed fee and 20% of the profits is the performance portion.

One of your existing clients wishes to open a new account in the name of his spouse and enter orders on her behalf. Which of the following statements is true? A) This practice is ordinary and acceptable. B) The agent could be liable if the stock declines in value. C) This action is prohibited unless the customer signs a trading authorization on behalf of his spouse. D) This action is prohibited unless the spouse signs a trading authorization.

D) This action is prohibited unless the spouse signs a trading authorization. Effecting transactions without specific written authority from the beneficial owner of the account is prohibited. This customer cannot sign a trading authorization on behalf of his spouse. The spouse must sign the authorization.

It is important for a registered representative to be able to distinguish between a client's investment objectives and investment constraints. Which of the following is an example of an investment constraint? A) Capital growth B) Educational funding C) Retirement income D) Time horizon

D) Time horizon Of the choices, time horizon is an example of an investment constraint while the others are investment objectives. Remember, an objective is where you want to go; a constraint is what is keeping you from getting there. If your time horizon is very short, you might not be able to reach any of the objectives listed here.

Which of the following is an example of sovereign debt? A) Sony Corporation debentures B) Royal Bank of Canada CDs C) Bank of England notes D) U.S. Treasury bonds

D) U.S. Treasury bonds Sovereign debt represents loans to governments. On the exam, it is likely that the examples will be foreign governments, not U.S. Treasury securities. The Royal Bank of Canada is a privately owned corporation and its debts are not those of the Canadian government. Bank of England notes are the paper currency issued (e.g., the ₤10 and ₤20 notes).

A bond is currently priced at 96. Which of the following yields would be the highest? A) Current yield B) Nominal yield C) Coupon yield D) Yield to maturity

D) Yield to maturity When a bond is selling at a discount (96 means 96% of par value, or $960), the investor's yield is greater than the stated coupon or nominal yield (those two terms are synonymous). Because the yield to maturity considers the $40 profit to be made when the bond matures, the YTM is higher than the current yield.

Each of the following trades occurs in the secondary market except A) an agent buying unlisted securities for a client. B) an insurance company buying corporate bonds directly from another insurance company. C) a specialist (designated market maker) on the NYSE buying stock as a principal. D) a corporate bond syndicate selling new issues to the public.

D) a corporate bond syndicate selling new issues to the public. New issues sell in the primary market. Sales between investors are always in the secondary market.

When a broker-dealer makes a market, it is acting as A) a broker. B) an agent. C) an underwriter. D) a principal.

D) a principal. Making markets is a principal activity. The broker-dealer stands ready, willing, and able to buy or sell securities for its own account. A dealer acts as a principal when it owns the securities it trades. When the broker-dealer is not acting for its own account, it acts as a broker or an agent.

One of the major concerns of the regulatory bodies is the growing problem of senior exploitation. To combat this issue, at the time of an account opening, whether margin or cash, a member firm must disclose in writing that the member or an associated person is A) unable to further update the customer record with regard to a trusted contact person without written consent from the contact person. B) unable to open the account in the absence of the name and contact information for a trusted contact person. C) required to meet the requirements with respect to opening a new account, including obtaining the contact information of a trusted person for any account, retail or institutional. D) authorized to contact the trusted contact person provided on the new account form by the customer and to disclose information about the customer's account in addressing possible exploitation.

D) authorized to contact the trusted contact person provided on the new account form by the customer and to disclose information about the customer's account in addressing possible exploitation. Member firms must obtain the name and contact information for a trusted contact person who is 18 or older. This person may be contacted about the customer's account. This is required for retail but not institutional accounts. At the time of the account opening, the member firm must disclose in writing to the customer that the member or an associated person is authorized to contact the trusted contact person. Contacting is done to disclose information about the customer's account to address possible exploitation. The absence of the name and contact information for a trusted contact person does not prevent a member from opening or maintaining an account for a customer, as long as the member makes a reasonable effort to obtain this information.

If an OTC market maker provides a firm quote to another broker-dealer then refuses to buy or sell at the price quoted, the market maker is said to be A) freeriding. B) crossing quotes. C) interpositioning. D) backing away.

D) backing away. A dealer that does not honor its quote is said to be "backing away." Interpositioning is the unethical act of a member firm placing a third party between itself and the best available market. Freeriding is a term used when securities are purchased and then sold without making payment for the purchase on settlement date. Crossing quotes is a term that would only appear on the exam as an incorrect choice (as it does here).

A technology fund manager concerned about a downturn in the value of his portfolio would hedge by A) buying broad-based index puts. B) selling broad-based index calls. C) selling narrow-based index calls. D) buying narrow-based index puts.

D) buying narrow-based index puts. The portfolio consists of sector-specific securities, so broad-based index puts such as the OEX would not be appropriate. Instead, the manager should buy narrow-based index puts (for example, indices on technology and electronics).

An example of overlapping debt would be a school district and A) a water pollution control facility. B) corporate debt of the county's largest employer. C) a local utility power plant. D) county general debt.

D) county general debt. Do not combine revenue bonds with GOs to determine overlapping debt. Overlapping debt occurs in real estate taxing situations. Only GOs are backed by real estate taxes.

A customer asks your advice regarding a deferred compensation plan at work. You should state that A) if they sit on the board of directors and are also an employee of the company, they are not eligible for the plan. B) if the business fails, the employee is considered a secured bondholder in terms of liquidation priority and getting paid back. C) deferred compensation plans usually benefit younger employees because the money in the plan has more time to grow prior to retirement. D) deferred compensation plans may be somewhat risky because the employee covered by the plan becomes a general creditor if the business fails.

D) deferred compensation plans may be somewhat risky because the employee covered by the plan becomes a general creditor if the business fails. If the business fails, the employee can lose everything they put in the plan. The participant will become a general creditor of the company and will be on the same level as unsecured bondholders in the liquidation priority.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding except A) profit-sharing plans. B) corporate pension plans. C) Keogh plans. D) deferred compensation plans.

D) deferred compensation plans. Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

Each of the following is affected by the sale of securities in a restricted margin account except A) SMA. B) market value. C) debit balance. D) equity.

D) equity. When securities in a margin account are sold, the market value in the account will decline, the debit balance will be reduced by the cash proceeds, and SMA will increase by 50% of the sale. Equity in the account will not be affected unless the customer decides to withdraw some of the proceeds through the use of SMA.

As a new registered representative, there is much industry jargon to learn. If you overheard your manager discussing a stock power, it would be in reference to A) a power of attorney granted from a client to a third party. B) the firm's technical analyst reporting a breakout on a stock. C) authorization to sell stock in a discretionary account. D) good delivery of a stock certificate.

D) good delivery of a stock certificate. A stock power is a separate document attached to a stock certificate (bond power for bonds) that is used instead of signing the actual certificate. A signed stock certificate is a negotiable instrument (like a blank signed check). If it is misplaced, lost, or stolen, anyone holding it can sell it and make delivery. Because the certificate itself is unsigned, good delivery requires both documents.

A structured instrument known as an asset-backed security would not be backed by A) student loans. B) credit card debt. C) auto loans. D) loans on marginable securities.

D) loans on marginable securities. One common theme uniting asset-backed securities is the contractual obligation to make payments. In the case of a margin account, there is no repayment schedule. The margin debt can exist for years with the only payment being that of interest.

A member of the board of directors of the Able Baker Charlie Company (ABCC) took her director's fees and purchased 200 shares of ABCC on the Nasdaq Stock Market at $20 per share. If she wished to sell these shares, compliance with Rule 144 would entail A) meeting a time limit, but not a size limit. B) meeting both a size limit and a time limit. C) meeting a size limit, but not a time limit. D) meeting neither a size limit nor a time limit.

D) meeting neither a size limit nor a time limit. A member of the board of directors of a publicly traded corporation is considered a control person. These individuals come under the provisions of Rule 144 when they wish to sell their stock in the company. In this question, there are two factors to consider. The first is that the stock is not restricted. How do we know that? Because it was purchased on the Nasdaq Stock Market in a secondary transaction. Therefore, there is no time limitation before she can sell. The second is that the sale meets the de minimis level (no more than 5,000 shares and less than $50,000). That means there is no need to file a Form 144 with its size limitations (the greater of 1% of the total outstanding shares of the same class at the time of sale, or the average weekly trading volume in the stock over the past four weeks on all exchanges or as reported through Nasdaq.) Be careful to answer the question being asked, because there is another issue for this director to consider. Section 16(b) of the Securities Exchange Act of 1934 prohibits control persons from taking short-swing profits, defined as those realized within a period of less than six months. You can read more about that in your LEM at LO 20.e.

High-tax-bracket investors are likely to receive the most favorable tax treatment from investing in A) preferred stock. B) bonds issued by the U.S. Treasury. C) GNMA pass-through securities. D) municipal bonds issued by a political subdivision of their state.

D) municipal bonds issued by a political subdivision of their state. Municipal bonds issued by a political subdivision of the investor's state are free of federal, state, and local income taxes. Treasury securities are taxed on the federal level, but not the state and local levels. GNMAs are taxed at every level. Qualifying dividends on preferred stock are taxed on all levels, although generally at a rate not exceeding 20%.

An arbitration case dealing with a dispute between a customer and a member firm in the amount of $72,000 will be heard by A) one arbitrator, unless FINRA determines three is more appropriate. B) three arbitrators, all of whom must be public. C) three arbitrators, the majority of whom must be public. D) one arbitrator, unless both parties agree to three.

D) one arbitrator, unless both parties agree to three. When the amount in dispute is more than $50,000 and no more than $100,000, the usual number of arbitrators is one. If both parties agree, it can be three. When the dispute involves an amount greater than $100,000, there are three arbitrators unless both parties agree to one. In a dispute with a customer that involves an amount greater than $100,000, the customer can request that all three arbitrators selected be from the public sector.

If interest rates increase, the interest payable on outstanding corporate bonds will A) increase. B) decrease. C) change according to the inverse payout theory. D) remain unchanged.

D) remain unchanged. The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year regardless of the prevailing interest rates in the market. It is the market price of bonds, not the interest payable, that responds inversely to changes in interest rates.

All of the following option contracts are in-the-money when XYZ is 54 except A) long XYZ 60 put. B) long XYZ 50 call. C) short XYZ 45 call. D) short XYZ 50 put.

D) short XYZ 50 put. Call options are in-the-money whenever the market price is greater than the strike price. Put options are in-the-money whenever the market price is lower than the strike price. Try to remember: call up and put down.

Determining a client's investment objectives is an important function of being a registered representative. A customer who identifies as having a conservative investment posture would probably avoid A) income. B) growth. C) preservation of capital. D) speculation.

D) speculation. Those with a conservative outlook on investing are unlikely to be willing to engage in speculation. Preservation of capital is generally the most conservative, followed by income and growth.

A customer asks for sales literature for a money market mutual fund. Upon receiving the literature, she notices A) the fund is an appropriate addition for investors seeking capital appreciation. B) the fund stipulates that future results will be substantially the same as the past performance listed in the 1-, 5-, and 10-year returns. C) the fund's current yield is insured by the Federal Deposit Insurance Corporation. D) the fund seeks to maintain a stable price but the fund can lose money.

D) the fund seeks to maintain a stable price but the fund can lose money. Sales literature for money market mutual funds must include the fact that it is possible to lose money when investing in the fund.

If a prospectus for a variable life insurance product contains hypothetical projections of returns, A) they may be used to demonstrate why this is an investment product. B) they must reflect returns for the past 1-, 5-, and 10-year periods. C) the issuer could be liable for civil action. D) the maximum return permitted is 12%, and there must be an illustration showing a 0% return as well.

D) the maximum return permitted is 12%, and there must be an illustration showing a 0% return as well. In discussions of variable life insurance with customers, projections of hypothetical returns may be used. This is to demonstrate how the program really works and the risks involved if the projections are not met. The maximum allowable hypothetical rate of return is 12%, and there must also be a projection shown assuming a 0% return. Variable life insurance must not be sold as an investment product. It must always be emphasized that the policy should be purchased to meet an insurance need.

Perhaps the most important thing to understand when a business is organized as a sole proprietorship is that A) all profits are taxed at business level, which will likely lower overall taxes. B) all losses are taxed to the sole proprietorship. C) this type of business mode is best for raising large amounts of money. D) the owner is liable for all the debts of the business.

D) the owner is liable for all the debts of the business. The most important characteristic to understand as a sole proprietor is that you are responsible if the business liquidates and, therefore, you could lose everything.

Marking-to-the-market is A) the calculation of the difference in value between the current market price and the Regulation T requirement. B) the calculation of the difference between the maintenance margin and the Regulation T requirement. C) the revaluing of a margin account's equity based on the market price on the settlement date. D) the revaluing of securities held long or short in the account based on the actual CMV of the securities.

D) the revaluing of securities held long or short in the account based on the actual CMV of the securities. Marking-to-the-market is the revaluing of an account based on the CMV of all securities positions in the account. In order to determine the necessity of additional maintenance calls or the availability of SMA, this revaluing is done at least once per business day in accounts that have margin balances.

Limited partners in a real estate partnership have all of the following rights except A) the right to monitor the partnership on an ongoing basis. B) the right to sue the general partner for violating the partnership agreement. C) the right to receive their pro rata share of income or loss. D) the right to decide which properties the partnership purchases.

D) the right to decide which properties the partnership purchases. The limited partners have the right to inspect partnership records and the right to sue a general partner who acts outside the partnership agreement. The general partner normally sets her own compensation in the original agreement and makes all management decisions relative to the partnership's interests.

If an investor establishes a call spread, and buys the lower exercise price and sells the higher exercise price at a net debit, he anticipates that A) the exercise prices will change. B) the price of the underlying stock will not change. C) the spread will narrow. D) the spread will widen.

D) the spread will widen. Debit spreads are profitable when both sides are exercised or the spread widens between the premiums. Credit spreads are profitable when both sides expire or the spread narrows between the premiums.

The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that A) the securities offered by each differs within the offering. B) the size of a syndicate member firm will always be larger than a selling group member firm. C) the price per share paid by the public (POP) is more if purchasing new shares from a selling group member. D) the syndicate member assumes liability for unsold shares and the selling group member does not.

D) the syndicate member assumes liability for unsold shares and the selling group member does not. The underwriting syndicate makes a financial commitment in a firm underwriting to bring a new issue to market and to take liability for unsold shares. A member of a selling group only agrees to provide a sales service for a certain number of shares in exchange for a commission on the shares it sells. It has no responsibility for any unsold shares. The securities offered are identical, and the public offering price is the same. Both large and small firms can be either syndicate members or selling group members.

A fundamental analyst researching a stock is concerned with all of the following except A) management efficiency. B) the capitalization ratio. C) the stock's market price as a multiple of the company's earnings. D) the volume of shares traded.

D) the volume of shares traded. A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio. A technical analyst is concerned with trading volumes or market trends and prices.

You have a client who invested in the PQR Growth Fund 10 years ago and now, as retirement age approaches, asks you about using the exchange privilege to move into the PQR Balanced Fund. The client should know that A) the exchange qualifies for any breakpoint reduction. B) any tax consequences are deferred until the Balanced Fund shares are liquidated. C) the old shares are liquidated at NAV and the new shares are purchased at the POP. D) this exchange is considered a taxable event as of the date of the exchange.

D) this exchange is considered a taxable event as of the date of the exchange. The exchange privilege allows for an exchange at net asset value (NAV) between funds that are members of the same "family." The exchange is considered a taxable event. Because the exchange is made at NAV, the concept of breakpoint is irrelevant.

A member firm's client has issued instructions for the assets held in an account at another member to be transferred to this account. The member firm has received the proper ACATS validation from the carrying firm. Therefore, it is expected that the transfer will be completed within A) three additional business days. B) five additional business days. C) one additional business day. D) two additional business days.

D) two additional business days. When using the ACATS system, validation takes place in one business day and the transfer in three business days. Please note the question states that validation has been received. That means the transfer will take place in two more business days (making it a total of three business days). Follow this trail. On Monday, the receiving firm sends the TIF to the carrying firm. On Tuesday, the carrying (delivering) firm validates the TIF and has three business days to make delivery (by Friday). On Wednesday, the validation gets to the receiving firm. Yes, the exam can be that tricky.

Which of the following positions subject an investor to unlimited risk? Short naked call Short naked put Long put Short sale of stock A) I and II B) I and III C) II and III D) I and IV

I and IV Short stock and short naked calls subject an investor to unlimited risk because there is no limit on how high a stock's price might rise. Risk is limited for the other positions.

Public Appearance

Is participation in a seminar, webinar, radio, or television interview, or other public appearance or public speaking activity. Seen by 25 or more in 30 days= retail communication (Needs preapproval from principal)

Independently Prepared Reprint (IPR)

Retail communication. Consists of any article reprint that meets certain standards. Reprint was prepared by an independent publisher and was not materially altered by the member. Qualifies if its publisher is not an affiliate of the member using reprints or any underwriter or issuer of the security mentioned in the reprint. members may alter the contents to make it consistent with applicable regulatory standards or to correct factual errors.

Research Reports

is a document prepared by an analyst or strategist, typically as a part of a research team for an investment adviser or broker-dealer.

Filing with FINRA

is required at least 10 business days before first use or publication for retail communications having to do with options.

Correspondence

is written or electronic communication that is distributed or made available to 25 or fewer retail investors within 30 calendar day period Must have pre or post approval from principal

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