Series 7 prep test questions

A firm is not permitted to accept an exercise notice from a customer for a listed equity option after: A5:30 p.m. Eastern Time on the expiration date of the option B4:30 p.m. Eastern Time on the expiration date of the option C2:30 p.m. Eastern Time on the expiration date of the option D3:30 p.m. Eastern Time on the expiration date of the option

5:30 p.m. Eastern Time on the expiration date of the option. According to SRO rules a firm is permitted to accept from a customer, an exercise notice for a listed equity option no later than 5:30 p.m. Eastern Time on the expiration date of the option (the third Friday of the expiration month). Brokerage firms, however, may set an earlier deadline for notification of an option holder's intention to exercise.

All of the following information should be obtained by a registered representative when opening a new account for a customer, EXCEPT the: AEducation BTax identification number CStreet address DOccupation

A

A broker-dealer receives a confirmation for a trade that does not appear on its records. The broker-dealer should send a DK notice to: AThe contrabroker BThe customer represented in the transaction CFINRA DThe SEC

A A DK notice is sent to the contrabroker upon receipt of the confirmation for an uncompared trade. The broker-dealer sending the DK notice states that the trade does not appear on its records and, therefore, denies any responsibility for the settlement of the trade unless the contraparty can prove that the trade did indeed take place.

A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy? AThe LP is considered a limited partner for the capital contribution and a creditor for the loan BThe LP is considered a limited partner for both the capital contribution and the loan CThe LP is considered a creditor for the capital contribution and a limited partner for the loan DThe LP is considered a creditor for both the capital contribution and the loan

A A limited partner who has committed capital may also extend a loan to the partnership. If the partnership declares bankruptcy, the LP will be considered a limited partner for the capital contribution and a creditor for the amount of the loan.

An investor writes an XYZ October 70 call at 3 and an XYZ October 70 put at 1. This strategy is known as a: A - Short straddle B - Bull spread C - Short combination D - Bear spread

A A long straddle consists of purchasing a put and a call, on the same underlying security, with the same strike price and same expiration. A short straddle consists of selling a put and a call, on the same underlying security, with the same strike price and expiration.

A broker-dealer's privacy notice must include all the following information, EXCEPT the: ANames of any other financial institutions with which the firm is affiliated BType of personal information that the firm collects CFact that clients may opt out of having their information shared with non-affiliates DTypes of third parties to which the firm may disclose information

A A privacy notice is not required to include the names of any other financial institutions with which the firm is affiliated.

An investor purchased stock at $50 per share and the stock is now trading between $75 and $77. The investor doesn't want to eliminate the position unless the stock drops significantly. Which of the following orders is the MOST suitable for her to place? ASell stop at $70 BSell stop at $75 CSell limit at $70 DBuy limit at $70

A Although the customer has a significant unrealized gain, there's still the possibility that it could trend higher. If the investor wants to protect a portion of the gain, he should enter a sell stop order, which will become a market order if the stop price is hit or traded through. Entering a sell stop at $70 will serve this purpose. If he enters the sell stop at $75, it may very easily be triggered by a small decrease in the stock's price, thereby eliminating his position. For that reason, the sell stop at $70 is a better choice. A sell limit order is one that's entered above the market price (i.e., not at $70). The customer is looking for an order that will result in selling his stock in the event that it declines significantly; therefore, a buy order is of no benefit.

In an undivided (Eastern) municipal syndicate account, the remaining liability of an account member is computed: A - From the number of bonds that are unsold in the account B - From the number of the bonds he has sold C - By dividing the number of bonds in a single maturity year by the total number of account members D - By the syndicate manager who randomly selects a member to sell the remainder of the bonds

A An Eastern account is undivided as to liability. As long as any bonds in the account are still unsold, each member of the account is liable for his proportionate share of the unsold amount. If the member has a 10% participation in a $10,000,000 issue, originally his liability is for $1,000,000 of those bonds. If there is a balance of bonds unsold by other members, he will still have a liability of 10%, whether he sold all or none of his bonds.

Which of the following agencies would NOT be used to back a CMO? \ ASLMA BGNMA CFHLMC DFNMA

A The Student Loan Marketing Association (SLMA), also known as Sallie Mae, provides liquidity to student loan makers and financing for state student loan agencies. Securities issued by SLMA are not backed by the U.S. government. Interest earned on Sallie Mae securities is subject to federal tax, but state and local taxes vary by state. Since SLMA does not deal in mortgages, it would not be used to fund a collateralized mortgage obligation (CMO). CMOs contain mortgage-backed securities issued by GNMA, FNMA, and FHLMC.

Which of the following statements is TRUE regarding interval funds? A They offer limited liquidity due to the fact that clients are only able to redeem their shares at specified times. B They're considered a relatively safe investment due to the type of securities that are purchased by the funds. C They're closed-end funds that are traded on the NYSE. D They can offer an above market interest rate to clients who have liquidity needs.

A An interval fund is classified as a type of closed-end fund that continuously offers shares to investors. However, unlike most closed-end funds, interval fund shares don't trade above or below their NAV and they don't trade in the secondary market on an exchange. Instead, investors are allowed to sell a portion of their shares back to the fund at the current net asset value only at preset interval (e.g., monthly, quarterly, semiannually). Since shareholders are only able to exit these funds at certain intervals that are stated in the fund's prospectus, interval funds are illiquid investments. Due to their limited liquidity, interval funds are suitable for long-term investors, those seeking income-producing investments, and those seeking to diversify their portfolios. In fact, these funds can provide individual investors with access to the types of exotic or alternative investments (e.g., private equity and commercial real estate investments) that are typically limited to hedge funds and institutional investors. Interval funds' fees and expenses tend to be much higher than other closed-end funds and mutual funds. (18980)

XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of: A$70,000 B$50,000 C$60,000 D$35,000

A An owner of the bonds will receive 7% of the par value yearly regardless of the cost. In this example, the investor purchased $1,000,000 face value of bonds and will, therefore, receive $70,000 (7% of $1,000,000 = $70,000) in yearly income

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

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

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? A - The federal funds rate B - User charges C - Rental and lease payments D - Concessions and fees

A Current interest rates are factors that will affect all bond issuers and would be least useful when analyzing a specific issuer of revenue bonds. The other choices are all sources of revenue to be used to pay the interest and principal on a municipal revenue bond.

Harriet purchased 1,000 shares of the Overseas Growth Fund several years ago for $9 per share. The shares are now worth $22.50 each. Harriet gives the shares to her nephew Bob as a college graduation present. What is Bob's cost basis for the shares? A$9 B0 CThe NAV on the day Bob sells the shares D$22.50

A In general, the cost basis of gifted shares is equal to the donor's basis at the time of the gift. In this case, Harriet's basis is $9 per share, so this becomes Bob's basis as well. Note that the rule related to inherited shares is different. The basis of inherited shares is generally the value of the shares at the time of the decedent's death. (84656)

An increase in which of the following will cause the price of an existing bond to decline? A - The general level of interest rates B - The bond's rating C - The bond's liquidity D - The issuer's financial strength

A Interest rates and existing bond prices are inversely related. When interest rates rise, bond prices will fall. Conversely, when interest rates fall, bond prices will rise. All other choices will usually have a positive effect on a bond's price.

XYZ Corporation has a 6 1/2% convertible bond outstanding that is convertible into 40 shares of common stock. The bond is currently selling in the market at 85 ($850) and the common stock is selling at 21. The XYZ Corporation is offering its existing bondholders a new straight (nonconvertible) bond paying 6 1/2% that matures at the same time as the convertible bond. The effect of the successful completion of the proposal would be to:Reduce interest costsReduce potential dilutionHave no effect on interest costsIncrease dilution AII and III BI and III CIII and IV DI and IV

A Prior to the refunding, if all of the bonds were converted into common stock, outstanding shares would increase causing earnings per share to decrease (dilute). The effect of the successful completion of the proposal (refunding) would be to reduce potential dilution because the conversion provision is being eliminated. There would be no reduction in interest costs since the new bonds are paying the same rate of interest as the old bonds (6 1/2%).

Which of the following transactions would NOT take place on an exchange? AThe purchase of a municipal bond BThe sale of an options contract CThe short selling of an equity security DThe purchase of an exchange-traded fund

A The SEC definition of an exchange is a marketplace that brings buyers and sellers together. An exchange may be a physical location such as the NYSE or a purely electronic system such as Nasdaq. Most exchanges trade equities (common and preferred stock, closed-end or exchange-traded funds), equity derivatives (options, rights, and warrants). Some exchanges will also trade corporate debt. Most corporate debt and other types of fixed-income or debt securities (i.e., municipal bonds) are not traded on an exchange, but traded directly between broker-dealers. (63155)

Which of the following indexes is the broadest equity market indicator? AThe Wilshire Index BThe NYSE Index CThe Nasdaq Composite Index DThe Major Market Index

A The Wilshire 5000 Equity Index consists of approximately 3,500 stocks that trade on the New York Stock Exchange and Nasdaq. The Index is referred to as the Wilshire 5,000 because, when created, it contained approximately 5,000 stocks. The Wilshire Index still is considered the broadest of all indexes and averages.

Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar need to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.) A$0.8582 B$0.8500 C$858.20 D$0.8418

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

A client's wife calls and wants to purchase 200 shares of XYZ in her husband's personal account. The registered representative handling the account knows that a favorable earnings report is about to be issued. The registered representative: A - May not accept the order because the wife does not have trading authorization to enter orders for the husband's personal account B - May enter the order in the husband's account if the wife also has a joint account with her husband C - May enter the order because the husband had previously mentioned he would like to establish a position in XYZ D - May not enter the order because the earnings report has not been released

A The registered representative may not accept the order because the wife does not have trading authorization to enter orders for her husband's personal account.

When an option contract is exercised, the writer: AMust fulfill the obligation to buy or sell the underlying instrument BMay retransmit the assignment notice CMay close out the position upon receipt of the assignment notice DWill establish a capital loss

A The writer must fulfill the obligation to deliver the underlying instrument for the exercise of a call or cash for the exercise of a put.

A margin account with 50% equity has a long market value of $15,000. If $80 of interest is charged on the debit balance and $110 is credited in dividends, what's the revised debit balance? A$7,470 B$7,580 C$7,390 D$7,500

A This account has equity of $7,500 ($15,000 x 50%) and, as a result, has a $7,500 debit balance ($15,000 LMV - $7,500 equity). After the interest charge of $80, the debit balance is increased to $7,580. However, when the $110 of dividends is credited, the debit balance is reduced by this full amount and is now $7,470.

The prospectus for a variable annuity contract:Must be filed with the SECMay be delivered electronicallyMust provide full and fair disclosureMust detail all sales charges and ongoing expenses of the contract AI, II, III, and IV BI, III, and IV only CI, II, and III only DI and II only

A Variable annuity products are subject to the provisions of the Securities Act of 1933 which requires delivery of a prospectus. The prospectus details all material facts of the contract and can be delivered electronically. However, if a person requests a printed copy one must be delivered.

A new issue of municipal bonds has an aggregate par value of $10,000,000. The syndicate received $5,000,000 in designated orders, $5,000,000 in group orders, and $5,000,000 in member orders. How will the issue be allocated? A$5 MM group and $5 MM designated B$3 1/3 MM designated, $3 1/3 MM group, and $3 1/3 MM member C$5 MM designated, $2 1/2 MM group, and $2 1/2 MM member D$5 MM group and $5 MM member

A When allocating bonds in a new municipal issue, presale orders normally have first priority. This is followed by group net, designated, and then member orders. The 5 MM in group orders and 5 MM in designated orders will be allocated. There are no bonds left for member orders. (73152)

Which of the following factors is not taken into consideration when determining the markup on a municipal securities transaction? AThe financial condition of the customer BThe fact that the dealer is entitled to make a profit CThe dollar amount of the trade DThe best judgement of the dealer

A All of the choices given must be taken into consideration except the financial condition of the customer.

As it relates to convertible bonds, which of the following provides an arbitrage opportunity? A Stock trading at a premium to parity. BStock trading at a discount to parity. CBond trading at a premium to parity. DStock trading at parity.

A Parity exists when a convertible security is trading at a price that's equal to the total value of the stock into which it's convertible. If the stock is trading at a premium to the parity price, the bond can be converted into the stock and then sold at the higher price. This results in an arbitrage opportunity. Conversely, if the stock is trading at or below the parity price, nothing can be gained through conversion. Finally, if the convertible bond is trading at a premium to parity, there's no reason to convert it into the stock.

Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident: AAfter six months BAfter 30 days CImmediately DAfter three months

A SEC Rule 147 and Rule 147A of the Securities Act of 1933 provides an exemption from registration for securities being sold on an intrastate basis. If securities are sold only to residents of a state by an issuer that is also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of six months following the last date of sale by the issuer. If an individual intends to sell the securities prior to six months, he may do so only to a resident of the same state.

On Tuesday May 1, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is: AFriday, May 11 BThursday, May 24 CTuesday, May 1 DMonday, May 14

A Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.

A mutual fund has the following breakpoints: Dollar AmountsBreakpoints$0 to $24,9995.50%$25,000 to $49,9994.50%$50,000 to $74,9993.50%$75,000 to $99,9992.50%$100,000 and above1.50% A customer has signed a letter of intent for $100,000 and makes the following three investments: $35,000 in April$52,000 in June$24,000 in September What's the sales charge percentage on each purchase? A April 1.50%, June 1.50%, September 1.50% BApril 4.50%, June 3.50%, September 5.50% CApril 3.50%, June 2.50%, September 1.50% DApril 4.50%, June 2.50%, September 1.50%

A When signing a letter of intent (LOI), all purchases over a 13-month period are accumulated and the sales charge on the first and subsequent purchases are based on the letter of intent amount. In this example, the purchases total $111,000 and, as a result, the sales charge will be 1.50% on each purchase. (17050)

When determining whether a recommended transaction is suitable, which of the following factors is LEAST important? A - The level of education the customer achieved B - The tax status of the customer C - The customer's age D - The customer's liquidity needs

A - Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning her investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. The educational level of the customer or what type of degree she has would be the least important factor listed.

Which of the following statements is NOT TRUE of industrial development revenue bonds? A. Their credit rating is determined by an analysis of the municipal government issuing the bonds B. They may be used to finance the construction of commercial property that will be used by private corporations C. Interest is paid from rents received from private corporations D. They are issued by local municipal governments

A. Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.

Under what circumstances will the payout from a variable annuity increase? A The performance of the separate account exceeds the AIR B The performance of the separate account for the current period exceeds the performance of the separate account for the previous period CThe performance of the separate account exceeds the rate of inflation DThe rate of inflation exceeds the AIR

A. Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.

A municipality borrowing for a short-term period to finance a capital project would issue: A - Debentures B - Commercial paper C - Bond anticipation notes D - Tax anticipation notes

C A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.

What type of bond would MOST likely be secured by an excise tax, cigarette tax, or gasoline tax? ASpecial assessment bond BSpecial tax bond CDouble-barreled bond DGO bond

B

Which of the following choices is another way of expressing the earnings multiple? ADebt-to-equity ratio BPrice-earnings ratio CDividend payout ratio DOperating profit ratio

B

A customer sells 500 shares of stock to a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n): AAgency capacity and charged the customer a commission BPrincipal capacity and charged the customer a markdown CPrincipal capacity and charged the customer a commission DAgency capacity and charged the customer a markup

B A broker-dealer that is always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and a markup when selling stock to a customer. When acting in an agency capacity, the broker-dealer will normally charge the customer a commission.

A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend? AA real estate investment trust (REIT) BA business development company (BDC) CA direct participation program (DPP) DA collateralized mortgage obligation (CMO)

B A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm. (73994)

The tranche with the longest maturity and, therefore, the last to receive interest and principal payments within a CMO, is known as the: A - Supersinker B - PAC tranche C - Z-tranche D - Companion tranche

C The separate classes of a CMO are known as tranches. The longest maturity is frequently called the Z-tranche or the accrual bond, and does not receive interest or principal payments until the shorter maturing tranches have been retired.

A company, which has investors with registration rights, has recently conducted an initial public offering. Typically, how long must these investors wait to sell their shares after the IPO? AThree years B180 days CTwo years DOne year

B A lock-up agreement dictates the amount of time that pre-IPO investors, such as private placement buyers (private equity investors) and other insiders, typically must wait to sell their shares once the company has gone public. Although a lock-up agreement will generally expire six months (180 days) following the closing of the company's IPO, there's no statutory time limit. The lock-up is designed to prohibit management and venture capitalists that initially funded the company from immediately liquidating their shares once the issue goes public. The shares will then be sold under a Rule 144 exemption. Registration rights allow, but don't require, these holders to sell their shares along with the company when it conducts the IPO. (17063)

Which of the following circumstances is NOT a reason for rejecting a municipal bond delivery? AA missing coupon BA sudden change in market value CThe lack of a legal opinion DA mutilated certificate

B A municipal bond can be rejected if it is missing a legal opinion, has missing or mutilated coupons, or the certificate is mutilated. It may not be rejected because of a sudden change in market price.

Which of the following will not offer protection in the event of a municipal bond declining in value due to rising interest rates or financial difficulties of the issuer? APut provisions BCall provisions CLetters of credit DBond insurance

B Bond insurance, letters of credit, or other credit enhancements can provide security in the event the issuer is at risk of defaulting on its municipal debt. If a bond declines in value due to rising interest rates, a put provision may be used by an investor to force the issuer to repurchase the bond at a predetermined price. Call provisions allow the issuer to retire the debt at a predetermined price, but this generally occurs when interest rates have fallen and bond prices have gone up. (17067)

A mortgage-backed security that is available in several "tranches," each with different cash flow characteristics, is a: AReal Estate Investment Trust BCollateralized Mortgage Obligation CGovernment National Mortgage Association pass-through certificate DPublic Housing Authority bond

B Collateralized mortgage obligations, or CMOs, are securities backed by pools of mortgages or pools of mortgage-backed securities, such as GNMA pass-throughs. However, unlike GNMA pass-throughs, a single issue of CMOs is divided into several classes, or tranches. When principal repayments are received by the CMO company or trust, the principal is paid to the various tranches according to a predetermined sequence of priority. Some tranches receive principal repayments immediately; others will not receive principal repayments for several years.

Which of the following would be considered the most volatile mutual fund? AA U.S. government securities fund BAn emerging markets fund CA municipal bond fund DA balanced fund

B Emerging markets funds invest in securities issued by countries with unsure economic, political, and social climates. This leads to significant volatility in share prices.

A U.S. importer needs to purchase British pounds to pay for a shipment of goods. The exchange of U.S. dollars for British pounds would occur: AIn the over-the-counter market BIn the Interbank market CIn the third market DOn the Philadelphia Stock Exchange

B Foreign exchange rates are established in the Interbank market. The Interbank market involves the purchase and sale of foreign currencies between commercial banks. The Philadelphia Stock Exchange is where foreign currency option transactions take place.

Dennis, Al, and Dan have opened a securities account with your firm as tenants in common. All of the following are TRUE, EXCEPT: A - Checks issued by your firm from the account will be in the name of all three co-owners B - If Dennis dies, his interest in the account will pass to Al and Dan C - When opening the account, you should obtain Social Security numbers from all three co- owners D - You may accept an order from either Dennis, Al, or Dan

B In a tenants-in-common account, the interest of a deceased owner passes to the estate of the deceased. The surviving owners of the account (Al and Dan) would receive the securities if the account was a joint tenants with rights of survivorship account.

Junius Arbor purchased stock in 2002 for $24,000. In April 20XX, Mr. Arbor passed away. His estate valued the stock at $82,000. The stock was willed in equal amounts to his daughter Cathy and his son Bob. Cathy sold her stock on September 2, 20XX for $48,000. Bob sold his stock on May 8, 20XX for $56,000. Which of the following statements is TRUE? A - Cathy has a short-term gain of $36,000 and Bob has a short-term gain of $44,000 B - Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 C - Cathy has a long-term gain of $36,000 and Bob has a long-term gain of $44,000 D - Cathy has a short-term gain of $7,000 and Bob has a short-term gain of $15,000

B In the case of inherited securities, the value of the securities is determined at the time of death. The heirs are always considered to have long-term holding periods. The capital gains or losses for Bob and Cathy are found as follows: The securities at the time of death were valued at $82,000. Bob and Cathy were willed equal amounts of $41,000 each, establishing a cost basis for both of $41,000. To determine the gain, compare the cost basis to the sales proceeds. Cathy sold her stock for $48,000, creating a $7,000 gain, while Bob sold his stock for $56,000, creating a $15,000 gain.

Accrued interest on new municipal bonds is calculated from the: ALast interest payment BDated date CSettlement date DPurchase date

B Interest on new municipal bonds is calculated from the dated date, which is the date from which interest starts to accrue on a municipal bond.

All of the following factors are of importance with regard to debt structure when analyzing a municipal bond, EXCEPT: ATotal direct debt BMatured debt COverlapping debt DTotal bonded debt

B Matured debt is debt of the municipality that is no longer outstanding and, therefore, is not included in analyzing the debt structure of a municipal bond. Total bonded debt is all of the general obligation debt issued by a municipality, regardless of its purpose. Total direct debt is the sum of the total debt and any unfunded debt (i.e., short-term notes) of a municipality. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities.

A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him? AA growth fund BA value fund CA fund of funds DAn emerging markets fund

B Of the choices given, a value fund would be the best option for the investor. As with a growth fund, the main objective of a value fund is long-term capital appreciation. Value funds are usually considered less volatile than growth funds, since they invest in companies that are priced low in relation to their earnings. They also tend to invest in more mature companies that are more likely to pay regular dividends than pure growth funds. Both a fund of funds and an emerging markets fund would be too risky for him. (31624)

A registered representative is meeting with a new client who's 92 years old. The client receives Social Security, a monthly pension, and has a $1.2 million portfolio which has a current allocation of 35% in bonds and 65% in equities. What should the RR recommend? A - Leave the bond allocation the same, liquidate the equity portion, and invest the proceeds a fixed annuity B - Rebalance the portfolio to 10% equities and 90% bonds C - Make no changes to the portfolio's allocation D - Sell all of the equities and invest the proceeds in bonds

B Since the client is in her early 90s, approximately 90% of the portfolio should be invested in bonds and 10% should be invested in equity securities. As a rough estimate, a client's age (e.g., 92) is the percentage of the portfolio that should be in bonds and 100% minus the customer's age is the percentage to be invested in equity (e.g., 100% - 92% = 8%). It's unnecessary for 100% of the portfolio to be invested in bonds since the client is receiving income from Social Security and her pension (i.e., safe sources of income).

Which of the following statements is NOT a feature of GNMA pass-through certificates? AThey are backed by the U.S. government BInterest is subject to federal tax but is exempt from state tax CInterest and principal payments are made on a monthly basis DPools consist of fixed-rate residential mortgages

B The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.

When a firm's customer exercises a call option, the firm will submit an exercise notice to the Options Clearing Corporation. The Options Clearing Corporation, in turn, will select a firm to receive the exercise notice based on: A - Any method that is fair and equitable B - A random selection basis C - A first-in, first-out (FIFO) basis D - The largest short position

B The Options Clearing Corporation selects a member firm on a random selection basis only. Member firms can select customers with open short positions on a first-in, first-out basis, a random selection basis, or any method that is fair and equitable.

A client with an options account takes the following position: Long GHI Nov 65 puts and Short GHI Nov 55 puts. Which of the following statements is TRUE regarding this position? AThis position will only be profitable if the market price of the stock is trading between 55 and 65. BThis position will be profitable if the market price of the security declines. CThis position subjects the client to unlimited risk. DThis position will be profitable if the market price of the security increases in value.

B This position is referred to as a debit put spread. It's a debit because the cost to purchase a put with a higher strike price will be more than the amount received for selling a put with a lower strike price. The investor will make money if the stock declines (bearish) in value since the long put will be exercised first (it has a higher strike price and thereby more intrinsic value). The fact that the premiums are not given is irrelevant since the cost of a put with the higher strike price will always be more valuable that a put with a lower strike price (if given the same expiration month). The position may be profitable if the stock price was trading between 65 and 55, but will also be profitable if the stock is trading below 55.

XYZ convertible debentures are convertible into 20 shares of XYZ Corporation common stock. If the bonds were selling in the market at $960, what would the common stock need to be selling for to be on parity? A$19.20 B$48 C$20 D$50

B To find the stock's parity price, divide the current market price of the bond ($960) by the conversion rate (ratio) which is given as 20 shares. This equals $48.

Which CMO tranche provides the greatest safety of principal? AThe companion tranche BThe A tranche CThe floating rate tranche DThe Z tranche

B Tranche A (the fast-pay tranche) is the first to receive principal, while the Z tranche only receives payments after all of the other tranches are paid. The companion or support tranche is considered a very volatile tranche. A floating rate tranche simply adjusts its interest rate based on an index (e.g., LIBOR).

An individual received $500 in dividends from the common shares that she owns of an oil company. How much of this dividend income is subject to taxation? A$350 B$500 C0 D$400

B Under current tax law, all cash dividends that individuals receive are fully taxable.

An individual purchased stock for $10,000 and has written calls against the stock over a two-year period. She received premiums totaling $1,500 in the first year and $2,000 in the second year, with all of the options expiring. What's her total cost basis on the stock after the second year? A$3,500 B$10,000 C$6,500 D$8,500

B When covered calls expire (as in this question), the premium will be realized as a short-term capital gain and the cost basis for the stock will generally remain the same. If the options were closed out prior to expiration, the result is either a capital gain or loss based on the difference in premiums. If an option was exercised, the premium would be added to the option's strike price to determine the sales proceeds and the gain/loss would be either short-term or long-term based on how long the stock had been held prior to its sale. Keep in mind, to find the breakeven point on a covered call, the premium received is subtracted from the cost to purchase the stock.

An investor must pay accrued interest for a secondary market purchase of: AZero-coupon bonds BTax anticipation notes CTreasury bills DSeries EE savings bonds

B Zero-coupon bonds and Treasury bills are original issue discount securities and trade without accrued interest. While Series EE bonds are also OID securities, they do not trade in the secondary market. Tax anticipation notes (TANs) are typically interest-bearing securities and trade with accrued interest.

An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE? AThe firm must keep a copy of the complaint for six years BA memo must be prepared describing any action taken in response to the complaint CThe firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted DThe principal must review the complaint and submit a written response to the customer

B All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years. (66219)

Which of the following factors is NOT used in determining the value of an annuity unit? A Income distributions from securities held in the separate account that are reinvested B The assumed interest rate C Capital gain distributions from securities held in the separate account that are reinvested D The value of the separate account

B The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.

A bond swap is done for all of the following reasons, EXCEPT to: AIncrease the overall yield of the bond portfolio BIncrease the current income of a bond portfolio CTake advantage of a large amount of accrued interest DEstablish a tax loss to offset income

C A bond swap occurs for all of the reasons given except to take advantage of accrued interest. The amount of accrued interest is not a factor in a municipal bond purchase or sale.

A customer would like to open an account designated by number. The registered representative should: ANot open the account because it is a violation of industry rules BOpen the account COpen the account if the customer signs a written statement acknowledging the account is the customer's DNot open the account because it is a violation of SEC rules

C A customer may open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging the fact that the account is the customer's. This must be kept on file at the brokerage firm.

Which of the following statements is TRUE regarding spreads? AA put spread created for a net credit is bearish BA call spread created for a net credit is bullish CA put spread created for a net debit is bearish DA call spread created for a net debit is bearish

C A put spread created for a net debit is bearish. A bearish put (or call) spread involves selling the lower exercise price and buying the higher exercise price. For a put spread, the lower exercise price will have the lower premium and, therefore, the spread will be done at a debit. The following table summarizes call and put spreads created at debits and credits. Debit call spreadBull SpreadCredit call spreadBear SpreadDebit put spreadBear SpreadCredit put spreadBull Spread

The subscription agreement for a limited partnership does NOT specify: A -To whom the check must be made payable B - Who must sign the agreement C - Priority provisions upon liquidation D - Suitability standards

C All sales for limited partnership interests are conditioned upon acceptance by the general partner. Typically, a limited partner is considered accepted into the program once the general partner signs the subscription agreement. The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he understands the ramifications of the investment. Priority provisions for liquidating a limited partnership are found in the Certificate of Limited Partnership.

Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)? AThey are designed to deliver a multiple of the performance of an index or other benchmark BThey are designed to deliver a multiple of the opposite performance of an index or other benchmark CThey are designed to deliver the opposite of the performance of an index or other benchmark DThey are designed to deliver the same performance as an index or other benchmark

C An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. For example, an inverse ETF based on the DJIA seeks to deliver opposite performance of that index. So, if the DJIA rises by 1%, an inverse ETF would decrease by 1%, and if the DJIA falls by 1%, the inverse ETF would increase by 1% before fees and expenses. A regular ETF is designed to deliver the same performance as an index or other benchmark. A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. A leveraged inverse ETF is designed to deliver a multiple of the opposite performance of an index or other benchmark.

A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity? A$100 tax-free interest B$100 capital loss C$100 ordinary income D$100 capital gain

C An investor purchasing a secondary market discount municipal bond will have ordinary income if the bond is held to maturity. Since the bond was purchased at 90 ($900) and held to maturity when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as ordinary income.

A bond has a 6% coupon and is trading with an 8.34% basis. The bond is trading at which of the following price levels? ACannot be determined BA premium CA discount DPar

C Basis (or yield basis) is a different method of expressing yield to maturity. In this case, the yield to maturity is higher than the coupon rate. The only time a client's yield to maturity is above the coupon is when the bond has been purchased at a price less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.

Which of the following choices is NOT a type of overlapping debt? AThe issuance of debt for an adjoining school district BDebt issued between two counties CDebt issued between two states DThe issuance of debt for an adjoining road district

C Debt issued between two states is not considered overlapping debt. Overlapping debt is general obligation debt of other governmental units for which residents of a particular municipality are responsible. It is the debt shared by residents of a municipality for services or facilities shared by several municipalities. Examples of overlapping debt include debt for an adjoining road district or school district, or debt issued between two counties.

The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? A It will have a positive impact on the security B It will have no impact on the security C It will have a negative impact on the security D The issuer will be obligated to repay the investor his principal immediately

C Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.

A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock? A$25.00 B$40.60 C$48.00 D$30.00

C If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant.

A municipal dealer has a customer's order to purchase bonds on an agency basis. According to MSRB rules, the customer's order must be executed at: AThe average price obtained from all dealers contacted BA price that does not exceed 5% of the last reported transaction CA price that is fair and reasonable DThe first price obtained

C MSRB rules require that transactions be executed at a price that is fair and reasonable.

Python Industries has previously issued 5.0% bonds ($1,000 par value). The bonds mature in 12 years and are selling at a 20% discount to par. What is the current yield on the Python bonds? A5.00% B5.60% C6.25% D8.50%

C The current yield is found by dividing the annual interest payment by the current market price. The bonds pay interest of $50 per year. The bonds are currently trading at a 20% discount to par; therefore, the bonds are priced at 80% of par, or $800 ($1,000 x .8). The current yield is 6.25% ($50 / $800). The fact that the bond will mature in 12 years is not necessary to find the current yield, although it is needed to find the yield to maturity.

A customer's niece has third party authorization and has recently been appointed to be the customer's trusted contact person. Although the customer seemed disoriented when she appointed her niece, the paperwork was still signed. The niece begins making cash withdrawals and changing investments in the account. When the registered representative contacts the customer to confirm the transactions, the customer sounds surprised; however, she states, "since it's my niece, just go along with it." What action should the registered representative take? A - Contact the customer to suggest that she appoint a different trusted contact person. B - Immediately place a temporary hold on the account. C - Contact a principal of the firm to discuss the niece's withdrawals. D - Follow the niece's instructions since she's the customer's trusted contact person.

C Of the choices listed, the best course of action is for the RR to contact a principal to discuss the situation. If an RR suspects financial exploitation, the firm can place a temporary hold, but that action should not be taken until the firm conducts an investigation. FINRA encourages firms to attempt to resolve a matter with a customer before placing a temporary hold. Prior to following up with the customer or following the niece's instructions, the RR should discuss this situation with a principal and the firm's compliance department. If a firm places a temporary hold on disbursements of funds or securities from the account, it's required to notify the trusted contact person, unless the firm believes that the trusted contact person is engaged (or will engage) in financial exploitation of the specified adult.

The securities that are deposited in an escrow account for an advance refunding of a municipal bond are: A General obligation bonds B Revenue bonds C Treasury bonds D Federal agency bonds

C Only Treasury obligations are acceptable securities as escrow when a municipal bond is being advance refunded. (72665)

A high net worth individual with a significant margin portfolio employs numerous hedging strategies to hedge the risk on his investments. He will find it most beneficial to use: A Combined margin B Strategy-based margin C Portfolio-based margin D Day trading margin

C Portfolio-based margin evaluates the total risk in the margin account by taking into consideration the long and short positions, as well as various hedging strategies put in place. The margin requirement is based on the net risk in the account.

Ms. Jones reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:10 rights plus $10.50 are required to subscribe to one new share of stockFractional shares become whole sharesThe record date is Friday, October 17JPMorgan Chase and Bank of America are the transfer agentsGoldman Sachs and Morgan Stanley are the standby underwriters If Ms. Jones currently owns 87 shares of the preferred stock of the XYZ Corporation, how many additional shares can she subscribe to and at what cost? A9 shares plus $94.50 8.7 shares plus $91.35 Preferred stockholders are not permitted to participate in a rights offering D9 shares plus $91.35

C Preferred stockholders are not permitted to participate in a rights offering. Pre-emptive rights are only made available to common stockholders. By participating in rights offerings, common stockholders are able to maintain their percentage of ownership.

Which of the following statements is TRUE concerning reverse convertible securities? A - An investor will receive a coupon rate below prevailing market rates. B - An investor is anticipating a decrease in the value of the underlying asset. C - The investor is anticipating that the price of the underlying asset would be above the knock-in value. D - They are suitable for an investor who wants to own shares of the underlying asset.

C Reverse convertible securities are short-term notes that are issued by banks and broker-dealers and usually pay a coupon rate that's above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security that's unrelated to the issuer, a basket of stocks, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value, which is referred to as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. Since the investor is not able to participate in any increase in the value of the underlying asset, the investor is anticipating that its price will remain stable. Reverse convertibles are unsuitable for investors who want to own the underlying asset, since being obligated to buy those securities is an undesirable outcome.

A woman with a low income has saved $5,000 to invest for her young son's college education. Which of the following investments would be the MOST appropriate? AA real estate limited partnership BMunicipal bonds CZero-coupon bonds DT-bills

C Since the woman has a low income, municipal bonds and limited partnerships would not be of benefit. Since the son is young, a long-term investment would be most appropriate. (72276)

An investor has recently rolled over his 401(k) into an IRA at your firm. Which of the following securities will be MOST suitable if the investor wanted diversification and a higher return? AA Treasury note BA municipal revenue bond CA hybrid REIT DAn equity REIT

C Since this is a tax-deferred (retirement) account, the municipal security would not be suitable and, since the investor wants a higher return, the Treasury note would not be the best choice. Although either REIT may be suitable, the hybrid REIT is a better choice since the investor wants diversification. There are three types of REITs: mortgage REITs which provide funds to real estate owners in the form of lending them funds (i.e., a mortgage), equity REITs which own and operate income producing real estate (for example, apartment buildings, commercial property, shopping malls and other types of retail property, and vacation resorts), and hybrid REITs, which invest in both of these ventures. By purchasing a hybrid REIT, the investor can take advantage of buying a security that invests in actual equity ownership of real estate as well as investing in an interest-rate-sensitive security such as a mortgage REIT. (73282)

A customer's margin account is as follows. Long Market Value$45,000 Debit Balance$20,000 SMA$5,000 Credit Balance $15,000 Short Market Value$9,000 What is the total equity in this account? A$36,000 B$6,000 C$31,000 D$25,000

C The equity in the long margin account is $25,000 ($45,000 LMV - $20,000 DR). The equity in the short margin account is $6,000 ($15,000 CR - $9,000 SMV). The total equity is $31,000. SMA is not considered part of the equity.

On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share. What is the breakeven point for Mr. Smith per option? A$45 B$58 C$53 D$48

C The strike price plus the premium equals the breakeven point for the buyer of a call. The breakeven point is $53 ($50 strike price + the $3 premium = $53).

A registered representative is sending out electronic communication that has been prepared by her firm to 75 of her existing retail customers. The communication explains to the customers that their account statements are now available online. Which TWO of the following statements are TRUE?This is considered correspondenceThis is considered retail communicationThis activity requires principal approval prior to useThis activity should be reviewed AII and III BI and III CII and IV DI and IV

C This electronic communication is considered retail communication since the registered representative is distributing it to more than 25 retail customers. Retail communication is considered any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it is considered correspondence. If the retail communication does not make a financial recommendation or does not promote a product or service of the firm (which the electronic communication in this question does not), prior principal approval is not required. In other words, FINRA does not consider announcing the availability of online account statements as promoting a product or service of the firm. However, this activity should be reviewed and supervised by the broker-dealer.

When analyzing a mutual fund's expenses, an analyst does NOT consider: AThe fund's expense ratio BThe fees charged by the fund's custodian CThe sales load charged to buy fund shares DThe management fees charged by the investment adviser

C When analyzing a mutual fund's expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund's expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund's custodian. Total net assets are the fund's assets minus liabilities. Sales charges are not considered expenses of the fund.

When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT: AFluctuations in the dollar price of long-term bonds are usually greater than for short-term bonds when the general level of interest rates change BThere is more purchasing power risk with long-term bonds when compared to short-term bonds CLong-term bonds generally provide greater liquidity than short-term bonds DLong-term bonds generally have higher yields

C When comparing long-term bonds and short-term bonds, all of the choices listed are true except long-term bonds generally provide greater liquidity than short-term bonds. Short-term bonds do not suffer from as large a price movement as long-term bonds when interest rates are changing. Long-term bonds are open to greater market risk, interest-rate risk, and purchasing-power risk. Both individual and institutional investors alike are more willing to accept a lower return (yield) in favor of more stable principal (less severe price swings).

While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a: AFixed number of accumulation units BFixed number of annuity units CVarying number of accumulation units DVarying number of annuity units

C When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.

Eurodollars are primarily used in: AFunding investments in the United States BArbitrage CFinancing investments outside of the United States DInternational payments

C Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe. Although they can be used for various purposes, Eurodollars are primarily used for financing investments outside of the United States. (17047)

A client has established the following position: Long 1 DEF May 50 call at 2Short 1 DEF May 40 call at 6 In which of the following situations will the client have the maximum potential profit? AIf both option contracts are exercised BIf the market price of the stock is trading above 48 CIf both options contracts expired unexercised DIf the market price of the stock is trading below 52

C This position is referred to as a credit call spread. It's a credit because the client received more for the short call with the lower strike price than what was paid for the call with the higher strike price. If both calls expire unexercised, the client will keep the net premium (the maximum gain). This will occur If DEF remains at or below $40 per share, since neither call will be exercised. If the stock price is trading below 44 (the breakeven point), the client may have a profit, but the maximum profit is realized if both options expired unexercised. (17058)

Which of the following funds would typically have the LEAST amount of stability in NAV? A short-term bond fund B An S&P 500 Index fund C A sector fund D A money-market mutual fund

C Sector funds focus their investments in specific areas of industry or geography. As a result the funds tend to have more risk and volatility (less stability), than money-market mutual funds, short-term bond funds or index funds that track the broad market indices such as the Standard & Poor's 500.

Mr. Jones purchases 100 shares of IBM at $116 per share and writes an IBM June 115 call option at 5. Mr. Jones' breakeven point is: A 110 B 120 C 121 D 111

D The writer of a covered call will have a breakeven point equal to the purchase price of the stock (116) less the premium received (5). Therefore, his breakeven point is $111 ($116 - $5 = $111).

A fundamental analyst is NOT interested in which TWO of the following metrics?Short interestThe P/E ratioTrading volumeEPS AII and IV BI and IV CII and III DI and III

D

An investor purchases a fund that has a contingent deferred sales charge. The customer has traditionally purchased load funds in which the sales charge is deducted up front. In order to clarify the sales charge procedure, the customer should be told: A - To contact the fund distributor for more details B - "You pay when you exit" C - The fund meets the definition of a no-load fund D - By means of a written disclosure: "On selling your shares you may pay a sales charge. For the charge and other fees, see the prospectus"

D

An investor's goal is to buy a security that establishes a fixed return, for a long period, with no reinvestment risk. Which of the following securities BEST suits the investor's needs? ACommon stock BHighly rated corporate bonds CTreasury bonds DTreasury STRIPS

D

Which TWO of the following statements are TRUE about real estate investment trusts (REITs)? They must distribute 90% of their earnings to shareholders They may invest only in short-term construction loans They must invest in mortgages and securities Their profits are derived from the difference between the payments made on outstanding mortgages and the amount received in rental income A I and II B II and III C II and IV D I and IV

D 1 and 4 Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages. Their profit is derived from the rental income they receive as well as the difference between the interest they pay and the greater amount of interest they receive. In order to qualify for favorable tax treatment, REITs must pay 90% of their income to shareholders. (72103)

When a carrying firm receives a transfer request from the Automated Customer Account Transfer Service (ACATS) system, it must validate or protest the transfer within: A A reasonable period B Two business days C Three business days D One business day

D A broker-dealer must cooperate in the transfer of a customer's account. If notified of a customer's intent to transfer an account through ACATS, the carrying firm must either validate or reject the request for a valid reason within one business day.

Which of the following municipal bonds requires a feasibility study to determine the issuer's ability to pay interest when due? AA special tax bond BA revenue anticipation note CA general obligation bond DA revenue bond

D A feasibility study is made by a qualified expert to determine if revenues of a project will be sufficient to pay interest when due. A revenue bond, which is backed by the earning power of a specific project, such as tolls from bridges, tunnels, or turnpikes, requires a feasibility study by qualified experts to determine if the revenue generated will be sufficient to pay the interest on the bonds. A special tax bond is secured by a special tax, such as a gasoline tax, and would not require a feasibility study. A general obligation bond is backed by the full faith, credit, and taxing power of the issuing municipality and would not require a feasibility study. A revenue anticipation note (short-term security) is considered a general obligation security.

Which of the following statements is TRUE regarding separate accounts and general accounts? AGeneral accounts hold bonds, while separate accounts hold equities. BBoth types of accounts are registered under the Investment Company Act of 1940. CBoth types of accounts pay a guaranteed minimum return. DThe subaccounts of a variable annuity may include both types of accounts.

D A variable annuity may allow an investor to allocate funds between several subaccounts. One of these accounts may be the general account of the insurance company, which offers a minimum guaranteed rate of return. The other subaccounts may consist of various accounts, each with a different portfolio and investment objective. Some subaccounts hold equities, some hold bonds, and some actually may hold both. The return on a subaccount is not guaranteed; therefore, the purchaser assumes the investment risk. Only separate accounts are registered under the Investment Company Act of 1940.

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the: ACurrent market value BPar value less accrued interest CPar value DPar value plus accrued interest

D A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.

A brokerage customer is long 100 shares of ABC Company 6% cumulative preferred stock ($100 par). Over the last three years, ABC Company has had negative net income and the customer hasn't received any dividends during that period. How much must the customer receive in dividend income this year before common stockholders can receive a cash dividend? A$600 B$6 C$24 D$2,400

D Although the stated dividend is 6%, the board of directors for ABC Company must decide whether to declare it. Without sufficient earnings for the previous three years, the dividend could not be paid and, therefore, no common dividends were paid during the same period. Currently, there's $1,800 (6% x $100 par x 100 preferred shares x three years) of preferred dividends in arrears that must be paid to this customer before a dividend can be paid to common shareholders. Also, the $600 that the customer will need to be paid for the current year must be added to the $1,800 from past years. As a result, $2,400 must be paid to the customer before a common dividend can be paid.

One of your investment banking clients has a significant amount of cash on hand. The client has sought your firm's advice regarding income-producing equity investments. Which TWO of the following investments pay a dividend but are NOT eligible for the corporate dividend exclusion?Common stockA money-market fundPreferred stockA real estate investment trust AII and III BI and III CI and IV DII and IV

D Corporations are allowed an exclusion on dividends received from investments in common and preferred stock. Real estate investment trusts (REITs) make distributions in pretax dollars. The payout from a REIT normally results from collections of rent or mortgage interest. Money-market fund dividends are distributions of interest earned on short-term debt securities.

Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT: AShort-term securities are quoted on a discount yield BLong-term securities are quoted as a percentage of par CThey trade in the over-the-counter market DAll are government guaranteed

D Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.

Which of the following is included on an income statement? ACurrent liabilities BCurrent assets CStockholders' equity DGross revenues

D Gross revenues (also referred to as gross sales) is found on an income statement. On the other hand, current assets, current liabilities, and stockholders' equity are all found on a balance sheet.

A broker who transacts an order for a customer must send a confirmation disclosing all of the following information, EXCEPT: AIf it acted as a principal for its own account BThe yield computation employed CIf it acted as an agent for the customer and as an agent for another person DIf it acted as principal and that it prepares research on the security

D If the broker-dealer acted as an agent for both the customer and for a third party, it must disclose this fact. A broker is not required to disclose on a confirmation whether it prepares research on the security. The yield computation employed (YTM or YTC) must be disclosed to the client.

Which of the following statements is TRUE regarding the disclosure of back-end sales charges to customers? AAs long as the back-end charges are clearly disclosed, the fund may be represented as "no load". BA statement in the prospectus is sufficient. CDisclosure is required in addition to that in the prospectus only if the broker-dealer and mutual fund are affiliated through common ownership. DA confirmation should be sent disclosing that a sales charge may have to be paid upon redemption.

D In addition to the disclosure in the prospectus, a confirmation sent by a member firm selling a fund with a back-end load (CDSC) must include a statement that a sales charge may be assessed upon redemption.

A customer who purchases shares of an exchange-traded fund (ETF) may be extended credit by a broker-dealer: AIf the position has been held for at least 30 days BUnder no circumstances CIf the position has been held for at least 10 days DImmediately

D In this question, the client is purchasing shares of an ETF. ETF shares trade on an exchange and are not considered new issues; therefore, credit may be extended immediately. Some investment company securities, such as mutual fund shares, are marginable under Reg. T. However, since mutual fund shares are considered new issues, the Securities Exchange Act of 1934 prevents a broker-dealer from extending credit on them for at least 30 days. Once the mutual fund shares have been held for 30 days, they may be used as collateral for a loan in a margin acc

Windsor Corporation has 7,000,000 shares of common stock ($.01 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price is $20. The market capitalization of Windsor Corporation's common stock is: A$5,000,000 B$7,000,000 C$4,500,000 D$90,000,000

D Market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, and restricted shares held by insiders, but does not include treasury stock (shares repurchased by the company). Therefore, there are 4,500,000 shares outstanding at a $20.00 market price for a total of $90,000,000.

If a New York resident is subject to the AMT and is considering the following bonds that have similar yields, which bond is MOST suitable? AA triple exempt bond that's subject to the AMT BA corporate bond CA Buffalo, NY bond that's subject to the AMT DAn Albany, NY bond that's not subject to the AMT

D Municipal bonds that are subject to the alternative minimum tax (AMT) will no longer offer federally tax-free interest to individuals who are subject to the AMT. As a result, the Albany, NY bond that's not subject to the AMT will provide federally tax-exempt interest. Since the yields are similar on each of these bonds, the Albany bond will provide a better yield than the corporate bond due to the corporate bond interest being subject to both federal and state tax.

Which of the following securities is NOT guaranteed by the U.S. government? AGovernment National Mortgage Association (Ginnie Mae) certificates BTreasury notes CTreasury bills DFederal National Mortgage Association (Fannie Mae) bonds

D Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA was created as a government-chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not directly backed by the U.S. government.

Which TWO of the following choices are characteristics of reverse convertible securities?The coupon rate is usually above prevailing market ratesThe coupon rate is usually below prevailing market ratesThe investor may have an obligation to purchase shares of an equity securityThe investor may have the right to sell shares of an equity security AII and IV BII and III CI and IV DI and III

D Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

The Dow Jones Industrial Average is considered an index of: ANYSE stocks only BValue stocks CGrowth stocks DLarge-capitalized stocks

D The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.

An investor has a large portfolio which includes cash, equities, and bonds. The investor is now seeking an alternative investment and is willing to tie up his funds for a long period. Which of the following investments should the investor's RR recommend? AA mutual fund which is concentrated in convertible securities BAn asset allocation mutual fund CA closed-end fund that's listed on the NYSE and invests in undervalued small-cap companies DAn interval fund

D The best recommendation is an interval fund, which is type of closed-end fund that continuously offers shares to investors. However, unlike most closed-end funds, interval fund shares don't trade above or below their NAV and they don't trade on an exchange. Instead, investors are allowed to sell their shares back to the fund at the current net asset value only at a preset interval (e.g., monthly, quarterly, semiannually). Since shareholders are only able to sell these funds at certain intervals that are stated in the fund's prospectus, interval funds are illiquid investments. Due to their limited liquidity, interval funds are suitable for long-term investors, those seeking income-producing investments, and those seeking to diversify their portfolios. In fact, these funds can provide individual investors with access to the types of exotic or alternative investments (e.g., private equity and certain commercial real estate investments) that are typically limited to hedge funds and institutional investors. Another issue for investors to understand about interval funds is that their fees and expenses tend to be much higher than other closed-end funds and mutual funds.

A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed? AThe broker-dealer has a 1% or greater beneficial ownership in ABC common stock BABC Corp is an investment banking client of the broker-dealer CThe broker-dealer makes a market in ABC common stock DThe broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds

D The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.

Which inventory evaluation method shows the greater profit in a period of rising costs? ADepreciation BLIFO CDepletion DFIFO

D The first-in, first-out (FIFO) method of valuing inventories uses the cost of the first item purchased. The last-in, first-out (LIFO) method uses the cost of the last item purchased. In a period of rising prices, the FIFO method, because of the lower cost basis, results in an increase in inventory profits. (72402)

An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers: ACoupon diversification BType diversification CMaturity diversification DGeographical diversification

D The portfolio offers the investor geographical diversification because the issues are from different municipalities throughout the country.

XYZ Corporation earned $4 per share and paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price/earnings ratio of XYZ Corporation is: A - 2 to 1 B - 28 to 1 C - 9.3 to 1 D- 14 to 1

D The price/earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price/earnings ratio of 14 to 1 ($56 divided by $4 equals 14).

The ABC Growth Fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for: ASince the fund has not been in existence for at least 10 years, it may not use ranking based on total return in its advertising BAt least one year CThe one- and five-year periods by all ranking entities DThe one- and five-year periods by the same ranking entity

D The standards set forth by the SEC and FINRA regarding mutual fund communications (advertising) are that performance statistics should cover 1-, 5- and 10-year periods. If the fund has not been in existence for 10 years, then disclosure must be made for the relevant for 1- and/or 5-year periods. In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity.

A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield? A8.0% B7.0% C7.5% D8.3%

D To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. Since each bond has a par value of $1,000 the yearly interest is $80 ( $1,000 x 8%). The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%).

Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following statements is TRUE? ALyle and Molly must change the arrangement to a Joint Tenants with Right of Survivorship BThe account would be liquidated as soon as the brokerage firm learns of Seena's death CSeena's share of the assets in the account are automatically transferred to Lyle and Molly DSeena's estate has a claim on her portion of the account's assets

D Upon learning of Seena's death, the brokerage firm will freeze the account. Seena's executor will then provide documentation to establish authority to act on behalf of the estate. Typically, Seena's estate will become the third joint owner in the existing Tenants in Common arrangement.

Which of the following is a benefit of purchasing variable life insurance? AThe entire premium paid is invested in subaccount products. BThe premiums paid to purchase a variable life insurance policy are tax deductible. CThe minimum death benefit is based on the value of the subaccount products. DThe death benefit can exceed the guaranteed minimum based on the value of the subaccount products.

D Variable life insurance policies provide a guaranteed minimum death benefit. However, the death benefit may be increased based on the performance of the subaccount products into which the owner directs the excess premiums. When an individual purchases a variable life insurance policy, a portion of the premium is used to pay for the minimum death benefit, with much of the balance directed to purchasing subaccount products. The premiums payments are not tax-deductible.

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term rates compared to long-term rates? ABoth long- and short-term rates fluctuate equally. BLong-term rates fluctuate more sharply than short-term rates. CThere is no relationship between the fluctuations in long-term and short-term rates. DShort-term rates fluctuate more sharply than long-term rates.

D When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices.

The term that's used when a company sells stock to the public above par value is: AExtraordinary earnings BEarned surplus CCapital excess DPaid-in capital

D Shares are often priced well above their par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, a company prices its IPO at $18 per share, but the par value is $10 per share. In this case, $8 is added to the Capital Surplus in the Stockholders' Equity section of the balance sheet. A more common term for this excess is Paid-in Capital. Retained earnings can also be referred to as earned surplus. (17072)

Which of the following indicators is bullish? A The top of an inverse saucer pattern B A breakout below a support level C A decrease in the amount of short interest D The bottom of a saucer pattern

D The bottom of a saucer A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator. A breakout below the support level is a bearish signal. The term short interest refers to the amount of a company's shares of common stock that have been sold short and have not yet been covered (closed out). An increase (not decrease) in short interest has historically been considered a bullish indicator by a technical analyst.

On June 5, 2013, an investor purchased 100 shares of ABC at 20. On November 10, 2013, he purchased an additional 100 shares of ABC at 12. On January 20, 2014, he sold 100 shares of ABC at 15. For tax purposes, he would have reported a: A$300 capital loss in 2014 B$500 capital gain in 2014 C$500 capital loss in 2014 D$300 capital gain in 2013

In this question, the investor has two positions in ABC stock. Each was purchased at different times and at different prices. When selling a portion of his holdings, unless the investor identifies (on the order ticket) the specific shares he is selling, the Internal Revenue Code requires the use of the FIFO method. Since the investor did not identify the shares sold, it is assumed that the first shares purchased (at 20, in June) were the shares sold. Therefore, the investor would have reported a loss of $500 in 2014.

A syndicate is formed on an undivided (Eastern) account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is: A Liable to sell all of the unsold bonds B Liable to sell $1,000,000 of the unsold bonds C Liable to sell 10% of the unsold bonds D Not liable to sell the unsold bonds

Liable to sell 10% of the unsold bonds In an Eastern (undivided) account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is also responsible to sell 10% of the unsold bonds.

To compute equity in a margin account with both short and long positions, the formula is: A The long market value plus the credit balance plus the debit balance minus the short market value B The long market value plus the debit balance minus the short market value minus the credit balance C The long market value plus the credit balance minus the short market value minus the debit balance D The long market value minus the credit balance minus the short market value minus the debit balance

The long market value plus the credit balance minus the short market value minus the debit balance equals the equity in both a long and short margin account.

A firm that is planning an offering of common stock has not filed a registration statement. Which of the following actions on the part of a registered representative are NOT a violation of the Securities Act of 1933? AAttempting to obtain indications of interest for the shares to be offered BHaving the registered representative contact an investment banker at the firm CInforming a customer that he may receive as many shares as he desires DAccepting orders for the shares to be offered

There is no prohibition restricting an RR to contact an investment banker at the firm. The other actions listed are in violation of the Securities Act of 1933, if a registration statement has not been filed with the SEC. A registered representative may not inform a customer that the customer may receive as many shares as desired. Nor may the registered representative solicit buy orders or solicit indications of interest from the customer. A registration statement needs to be filed before indications of interest may be accepted, and only indications of interest will be acceptable at this time, not orders.