Series 7 QBank Review Set 13

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.30 B) $7.80 C) $8.57 D) $8.42

A) $8.30 The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. In this case, the NAV is $7.80 and we are told the sales load is $0.50. Adding the two numbers together equals the public offering price of $8.30. The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.

Which of the following corporate bonds is backed by other securities? A) Collateral trust bond B) Mortgage bond C) Equipment trust certificate D) Debenture

A) Collateral trust bond Collateral trust bonds are backed by a portfolio of other securities, while mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment, while debentures are backed only by the company's promise to pay.

For a mutual fund that collects a 12b-1 fee, which of the following statements are true? i. The fund may use the money to pay for mailing sales literature. ii. Advertising materials must always state that the fund is no load. iii. The fund may use the money to pay for commissions on portfolio transactions. iv. The fund's prospectus must disclose the fee. A) I and IV B) III and IV C) II and III D) I and II

A) I and IV 12b-1 fees may be used only to cover promotional and other distribution expenses for funds that are distributors of their own shares; fee amounts must be disclosed in the prospectus. The fund may not use the term no load in any communications with the public if the 12b-1 fee and other service fees exceed 0.25% of average net assets.

A member firm must prefile its retail communications if i. the member has not previously filed with FINRA. ii. it appertains to standardized options prior to the distribution of the ODD. iii. the advertising relates to single stock futures. iv. under an order from FINRA to prefile. A) I, II, III, and IV B) II and IV C) I and IV D) II and III

A) I, II, III, and IV For a member that has not previously filed retail communications with FINRA, prefiling is required for the 1-year period following the first filing. Retail communications relating to single stock futures must be prefiled, as do options if prior to the distribution of the options disclosure document. In addition, if a member is under an order from FINRA to prefile, it must do so.

Which of the following statements accurately describes the positions of a general partner in an equipment leasing direct participation program? i. Limited liability ii. Unlimited liability iii. Management responsibility iv. A passive investor A) II and III B) I and III C) I and IV D) II and IV

A) II and III In a DPP, it is the general partner who manages the program and accepts unlimited liability. The limited partners are the investors with limited liability and a passive role.

An investor opens the following options position: Buy 1 BOB Jan 60 call @4; Buy 1 BOB Jan 55 put @2½. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is unlimited; maximum loss = $650; breakeven points are $48.50 and $66.50. B) Maximum gain is $650; maximum loss is unlimited; breakeven points are $53.50 and $61.50. C) Maximum gain is unlimited; maximum loss is $1,800; breakeven points at $48.50 and $66.50. D) Maximum gain is unlimited; maximum loss = $650; breakeven points are $53.50 and $61.50.

A) Maximum gain is unlimited; maximum loss = $650; breakeven points are $48.50 and $66.50. The first step is to identify the position. This is a long combination—a long put and a long call with different terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the combination (the two premiums totaling $650). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($60 + $6½ = $66.50) and subtract the premium from the strike of the put ($55 ‒ $6½ = $48.50).

A customer has a $75,000 bank CD that is about to mature, and she wants some recommendations from the registered representative handling her brokerage account. Which of the following items would be the least important when considering a suitable recommendation? A) The name of the bank issuing the CD B) The customer's need for liquidity C) The customer's current portfolio D) The customer's investment goals

A) The name of the bank issuing the CD The name of the bank is of little or no consequence, while the other three points are critical for making a suitable recommendation.

The antifraud provisions of the Securities Exchange Act of 1934 apply to all of the following except A) commodities. B) municipal bonds. C) Nasdaq- and exchange-listed securities. D) options.

A) commodities. All securities are subject to the antifraud provisions of federal securities laws. It should be recognized that commodities like wheat or oil are not securities.

A highly leveraged company has the smallest percentage of its total capitalization in A) common stock. B) long-term debt. C) preferred stock. D) short-term debt.

A) common stock. Common stock, which represents ownership, would account for the smallest amount of capitalization of a highly leveraged company. Highly leveraged companies have the largest amount of their capitalization in debt instruments. Preferred stock, although an equity, is more like a debt instrument because of the stated dividend rate.

The Securities Exchange Act of 1934 regulates or mandates all of the following except A) full and fair disclosure on new offerings. B) creation of the SEC. C) manipulation of the secondary market. D) extension of credit to customers.

A) full and fair disclosure on new offerings. The Securities Exchange Act of 1934 created the SEC and regulates the secondary market. The Securities Exchange Act of 1934 does not address full and fair disclosure issues; the Securities Act of 1933 addresses these issues.

All of the following are regulated by the Municipal Securities Rulemaking Board (MSRB) except A) issuers. B) quotes. C) sales representatives. D) dealers.

A) issuers. Quotes, dealers, and sales representatives are regulated by the MSRB, but issuers are not.

The first step is to identify the position. This is a long combination—a long put and a long call with different terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the combination (the two premiums totaling $650). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($60 + $6½ = $66.50) and subtract the premium from the strike of the put ($55 ‒ $6½ = $48.50). A) long stock/short call. B) short stock/short put. C) short stock/long call. D) long stock/long put.

A) long stock/short call. If the stock rises, the put will expire, leaving the customer short stock with an unlimited loss potential.

One of your customers owns a single premium deferred variable annuity policy. The customer has been discussing a policy offered by a different insurance company that has a wider selection of investment portfolios. Should the customer elect to engage in a Section 1035 policy exchange, A) principal approval of any sale or exchange (including a 1035 exchange) must be obtained within seven business days. B) you need to explain that any earnings on the exchanged policy will be subject to tax at ordinary income rates plus a 10% penalty if the customer is not at least 59 ½. C) the customer will not be able to add any additional funds to the new policy. D) principal approval of any sale or exchange (including a 1035 exchange) must be obtained within three business days.

A) principal approval of any sale or exchange (including a 1035 exchange) must be obtained within seven business days. FINRA Rule 2330 requires a registered principal to review and determine whether to approve a customer's application for a deferred variable annuity before sending the application to the issuing insurance company. This must occur no later than seven business days after the broker-dealer receives a complete and correct application. It makes no difference if this is an initial sale or, as is the case in this question, an exchange (which is a purchase of a new policy using the proceeds of an old one). When done properly, there are no taxes or penalties with a Section 1035 exchange. Even though the old policy was purchased in a single premium, there is generally no problem with adding money when making an exchange.

In analyzing a municipal government obligation bond, an increase in all of the following would be a negative indication except A) property values. B) delinquent taxes. C) municipal operating expenses. D) unemployment.

A) property values. Increasing property values would have a tendency to increase the taxes paid to the municipality.

One of your clients is neutral to bearish on a particular stock and would like to sell calls on it to generate some income. Wishing to minimize risk, you would suggest the client cover the call or take other steps to protect against unlimited loss. That could be done in all of the following ways except A) simultaneously purchasing a put on that stock with a strike price lower than that of the short call. B) depositing a security convertible into 100 shares of the stock into the account. C) depositing 100 shares of the stock into the account. D) simultaneously purchasing a call on that stock with a strike price lower than that of the short call.

A) simultaneously purchasing a put on that stock with a strike price lower than that of the short call. Buying a short put does not cover a long call or offer protection against loss. If the stock price rises, the writer of the call loses and the put expires worthless. There are several ways to cover a call. The most common is being long the underlying stock. Short calls can also be covered by a security convertible into the appropriate number of shares. That would include convertible preferred stock, convertible debt securities, and warrants. They must be convertible without cost (that is generally the case and can be assumed unless the question says otherwise). A third way to cover a short call is with a long call. The strike price has to be the same or lower and the long call cannot expire before the short call. Buying a short put does not cover a long call. However, in this case, although the writer is protected, the long call will cost more than the short, so the objective of income will not be realized. Buying a call with a higher strike price will result in a net credit (income), and the writer is protected to the extent of the difference between the strike prices and the credit. This is your basic credit call spread.

If a customer buys 100 shares of stock and writes one out of the money call against her long position, the breakeven point is A) the cost of stock purchased less premium. B) the strike price less premium. C) the strike price plus premium. D) the cost of stock purchased plus premium.

A) the cost of stock purchased less premium. When the investor owns stock and sells a call, the call is covered. Breakeven is computed by subtracting the premium from the stock's purchase price. For example, let's say the customer paid $50 per share for the stock ($5,000). An out-of-the-money option is going to have a low premium, so we'll say the covered call was sold for 1 point ($100). That makes the customer's out-of-pocket cost $4,900 ($5,000 for the stock, less the $100 premium received). As with anything we buy, if our cost is $4,900, we will break even if we can sell what we bought (the stock) for our cost, which in this case is $4,900 ($49 per share).

A customer of a broker-dealer has opted to use share identification for tax reporting when selling shares of her mutual funds. With this method of tax reporting, she would want to identify the shares to be sold as those that have A) the highest cost basis generating the least gain. B) the lowest cost basis generating the greatest gain. C) the highest cost basis generating the greatest gain. D) the lowest cost basis generating the least gain.

A) the highest cost basis generating the least gain. For tax reporting purposes, showing the lowest taxable gain is always the most advantageous. One way to do this when selling shares is to identify the shares that cost the most when purchased, those that give one the highest cost basis. The higher the cost basis, the lower any gains will be.

In a margin account, the broker-dealer lends money to the customer to assist in the purchase of a marginable security. Instead of delivering the security to the purchaser, the broker-dealer holds it as collateral for the loan. The form signed by the customer agreeing to this is A) the hypothecation agreement. B) the loan consent agreement. C) the stock pledge agreement. D) the credit agreement.

A) the hypothecation agreement. There are three special margin account agreement forms. The hypothecation agreement is the one in which the customer agrees to allow the broker-dealer to keep the securities purchased as collateral for the margin loan. The credit agreement contains the terms of the loan, such as interest to be charged, and the loan consent agreement is an optional form agreeing to let the broker-dealer lend out those securities.

Top Notch Securities is the managing underwriter for a new issue of 1 million shares of ABC common on a firm commitment basis. If part of the ABC issue remains unsold and results in a loss, the loss will be divided proportionately among A) the underwriting firms. B) the selling group firms. C) the underwriting firms and the selling group firms. D) the underwriting firms and the issuer.

A) the underwriting firms. In a firm commitment arrangement, any losses incurred are divided among the underwriters' syndicate members according to the terms in the agreement among underwriters.

One of your customers is speaking to you about spread strategies for equity options and makes several statements about spreads. Which of her statements is false? A) "No spread can ever have an unlimited maximum loss potential." B) "With a time or horizontal spread, both options expire at the same time, which means the position expires simultaneously." C) "If a position, whether long or short, begins to move against me, I can always close it out in the market." D) "With spreads, I always know exactly how much I can lose or gain once the position is established."

B) "With a time or horizontal spread, both options expire at the same time, which means the position expires simultaneously." Spreads have a defined maximum gain and loss, and neither can ever be unlimited. Spreads like single option positions can be closed in the market before expiration. Time or horizontal spreads have contracts that expire in different months, not the same time.

A TIPS bond has a coupon of 3%. Over a two-year period, the annual inflation rate has been 4.5%. At the end of that time, the principal value of the TIPS would be A) $1,061.36. B) $1,093.08. C) $1,090.00. D) $1,060.00.

B) $1,093.08. TIPS bonds have the special feature of adjusting the principal value every six months by the inflation rate. With an annual rate of 4.5%, the adjustment is 2.25% semiannually. There are two ways to solve this. One is to take the calculator given to you at the test center and multiply $1,000 × 102.25%. Take the result and multiply that times 102.25%. Do that two more times (there are four adjustments in two years), and the ending number will be 1,093.08. A faster way is to take the simple interest of 4.5% per year. That is $45 per year or $90 for the two years. Add that to the original principal to get $1,090. That is not the correct answer, but the next highest number in the answer choices is.

If a customer buys 100 shares of XYZ common stock at 49 and writes 1 XYZ Nov 50 call, receiving $350 in premiums, the breakeven point is A) $53.50. B) $45.50. C) $52.50. D) $46.50.

B) $45.50. This is a covered call, so the investor is protected against declining stock prices to the extent of the premium received, and the breakeven is $45.50 ($49 − $3.50).

Your customer's broad-based portfolio consisting of quality equity securities has returned 4% this year. The S&P 500, a bench mark index, has returned an average 6% over the past several years. Compared to the benchmark index, the customer's portfolio has an alpha of A) +4%. B) -2%. C) -1.5%. D) +2%.

B) -2% The alpha for any investment, such as a particular asset or portfolio, is the abnormal rate of return on the investment in relation to what would normally be predicted by a known benchmark. Alpha can be positive or negative, and in this case, because the portfolio underperformed the benchmark index by 2%, it currently has an alpha of -2%.

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC? A) 65% B) 50% C) 100% D) 70%

B) 50% The corporate dividend exclusion permits a corporation receiving dividends from another corporation to exclude 50% of those payments. Therefore, the corporation will only pay tax on the remaining 50%. This exclusion applies only to dividends, not interest.

What is the best way to hedge a short put position? A) A long stock position B) A long put C) A short stock position D) A short call

B) A long put A short put can be hedged by a long put (the short put is negated by the long put). The short put and short stock position risk exposure to unlimited losses, while the downside movement has only a limited gain.

Which of the following business structures will generally have the fewest number of owners? A) An S corporation B) A sole proprietorship C) A general partnership D) An LLC

B) A sole proprietorship A sole proprietorship has only one owner. That is what the "sole" means. Although S corporations and LLCs can be formed with a single shareholder or member, that would be the exception rather than the rule. A partnership needs at least two persons.

(con't) Assuming ABC is subject to a 60,000-contract position limit, which of the following customer accounts are in violation of the exchange's position limits? i. Long 35,000 ABC Jan calls, long 30,000 ABC Jan 08 LEAPS calls ii. Long 35,000 ABC Mar calls, long 30,000 ABC Mar puts iii. Long 35,000 ABC Mar calls, short 30,000 ABC Jan 08 LEAPS calls iv. Long 35,000 ABC Mar calls, short 30,000 ABC Mar puts A) I and II B) I and IV C) III and IV D) II and IV

B) I and IV III. Long calls and short calls are opposite positions (long call is bullish, short call is bearish), so they're not combined and there is no violation. IV. Long calls and short puts both benefit if the market is bullish, so they are combined and that total of 65,000 exceeds the position limit. Don't be mislead by the fact that some of the positions are LEAPS (options with expirations much longer than the normal 9 months). The position limits are not based on expiration dates or strike prices. The limit is based solely on the number of contracts with the same market sentiment.

Assuming ABC is subject to a 60,000-contract position limit, which of the following customer accounts are in violation of the exchange's position limits? i. Long 35,000 ABC Jan calls, long 30,000 ABC Jan 08 LEAPS calls ii. Long 35,000 ABC Mar calls, long 30,000 ABC Mar puts iii. Long 35,000 ABC Mar calls, short 30,000 ABC Jan 08 LEAPS calls iv. Long 35,000 ABC Mar calls, short 30,000 ABC Mar puts A) I and II B) I and IV C) III and IV D) II and IV

B) I and IV When aggregating contracts to determine if the position limit has been exceeded, we add together all positions in that security on the same side of the market. That is, we look at contracts that are hoping for a move to the upside and combine them, or we look for contracts that are hoping for a move to the downside and combine them. Long calls and short puts benefit from a move to the upside. The reverse is true of long puts and short calls. Let's look at the choices: I. Both positions are long calls so they are combined. 35,000 + 30,000 = 65,000. This is above the 60,000 limit. II. Long calls and long puts are on opposite sides of the market ("call up and put down"), so they are not combined and we haven't exceeded the 60,000 limit.

Which of the following statements is not correct for a general partnership? A) All of these. B) No one can lose more than their investment and proportionate interest. C) Management is responsible for all aspects of the partnership's operation. D) There is unlimited liability for all partnership business losses and debts.

B) No one can lose more than their investment and proportionate interest. Only in a limited liability partnership can no one lose more than their investment and proportionate interest.

One of your customers signed the loan consent agreement in their margin account. The customer is long 100 shares of KSF, Inc., common stock. Two months after your firm used this stock to make delivery on a short sale by a different customer, KSF paid a $1.25 per share dividend. How does this affect the long customer's account? A) The account is debited for $125. B) The account is credited with $125. C) There is no effect; the purchaser of the stock sold short receives the dividend. D) The stock that was loaned out will be returned before the payable date of the dividend.

B) The account is credited with $125. One of the rules regarding lending securities for short sales is that the lender is entitled to any dividends that would have been received if the shares were still in the account. The buyer is now the owner of record and is the person who actually receives the dividend from the issuer.

A corporate profit-sharing plan must be set up under A) an administrator. B) a trust. C) a beneficial ownership. D) a conservatorship.

B) a trust. All corporate pension and profit-sharing plans must be set up under trust agreements. A plan's trustee assumes fiduciary responsibility for the plan.

Investing in ADRs presents certain risks that do not apply to investing in domestic stocks. One specific risk that applies only to ADRs is A) business risk. B) currency risk. C) financial risk. D) market risk.

B) currency risk. Because the ultimate value of the ADR is based on the underlying stock's value in its local currency, ADRs have currency risk. Both have market risk. You may not know business or financial risk, but you should know that currency risk is part of investing in ADRs.

A bond offered at par has a coupon rate A) greater than its yield to maturity. B) equal to its current yield. C) less than its yield to maturity. D) less than its current yield.

B) equal to its current yield. When a bond is selling at par, its coupon or nominal rate, current yield, and yield to maturity are all the same.

An investor has received a cash dividend on a stock that they have owned for over 10 years. It is the first dividend the company has paid. The cash dividend would be taxable to the investor as A) a return of principal. B) income in the year in which it is received. C) a long-term capital gain in the year in which it is received. D) a short-term capital gain in the year in which it is received.

B) income in the year in which it is received. Cash dividends are always treated as income and are taxable to the investor in the tax year in which they are received by the investor. In those cases where the dividend is qualified, it will be taxed at a lower rate than the investor's ordinary income. That does not affect this question because the answer is the same if the dividend is qualified or not. A capital gain occurs when an investor sells an asset for more than its cost basis.

Under FINRA policies, a breakpoint sale is the sale of A) investment company shares in a dollar amount reaching the point at which the sales charge is reduced. B) investment company shares in a dollar amount just below the point at which the sales charge is reduced. C) a security at the point where the proceeds equal the investor's cost causing the investor to breakeven. D) investment company shares in a dollar amount just below the point at which the conditional deferred sales charge is reduced.

B) investment company shares in a dollar amount just below the point at which the sales charge is reduced. FINRA considers breakpoint sales to be a violation. This is when a registered representative fails to inform investors that they may obtain a sales charge reduction with a small additional investment or the signing of a letter of intent. This is not following high standards of conduct and can lead to disciplinary action. Breakpoints apply to Class A shares only; the CDSC is for Class B and Class C shares.

A transaction made for regular way settlement occurs on Thursday. The following Monday is President's Day, when the stock markets are closed. The buying broker-dealer is domestic, while the selling broker-dealer is foreign based. The trade took place on the Nasdaq Stock Market. Settlement between the broker-dealers would take place A) on Friday, the business day preceding the holiday. B) on Tuesday, the next business day following the holiday. C) on Monday, because the seller is foreign based. D) on the date specified as a seller's option.

B) on Tuesday, the next business day following the holiday. The transaction would settle on Tuesdaythe business day following the holiday. This question includes distracting information. The key elements describe a transaction that uses regular way settlement (T+2). The first day is Friday and the next business day is Tuesday. The description of the selling broker-dealer as foreign based has no bearing on regular way settlement provisions. Had a seller's option been specified at the time of the trade between the broker-dealers, the Uniform Practice Code permits delivery at an agreed date after T+2.

An investor would assume all of the following risks when investing in a collateralized mortgage obligation (CMO) except A) interest rate risk. B) regulatory risk. C) prepayment risk. D) extension risk.

B) regulatory risk. Regulatory risk is generally not associated with investing in CMOs. All of the other risks are associated with CMOs. Extension risk is the uncertainty that the mortgages will be paid off later than expected. This typically happens when interest rates rise. After all, who is going to refinance a mortgage at a higher rate? Prepayment risk is just the opposite; the mortgages might be paid off more quickly and the income stream will cease. This typically happens when interest rates decline, but they are also a factor in people moving and selling their homes. CMOs are subject to interest rate risk just like other debt securities.

A registered representative's compensation consists of trailer commissions. The most likely reason for this is A) some of the representative's customers own stock in trucking companies. B) some of the representative's customers own mutual funds with 12b-1 charges. C) the registered representative is sharing the account with another representative. D) the registered representative has entered into a deferred compensation package with the firm.

B) some of the representative's customers own mutual funds with 12b-1 charges. Trailer commissions are a feature when you have customers owning mutual funds with 12b-1 charges. In most cases, those charges are levied every year and, over time, can add up to considerable compensation to the representative.

A married couple has several individual and joint accounts with your firm. One spouse calls you and requests that you make a transfer of funds between the accounts. This would not present a problem if A) you have the caller send the request in writing. B) the caller is a signatory on both accounts. C) you verify the identity of the caller. D) the caller is a signatory on the account receiving the funds.

B) the caller is a signatory on both accounts. It is only when the party initiating the transfer of funds between accounts is not a signatory on both accounts that this request presents a problem. In that case, a principal of the firm needs to get involved.

The spread in a municipal competitive bid is A) the difference between the stated yield and reoffering price. B) the difference between the bid and production (the price at which the bonds are reoffered to the public). C) the difference between the takedown price and reoffering price. D) the excess of the dollar bid over par.

B) the difference between the bid and production (the price at which the bonds are reoffered to the public). Bid refers to the winning bid and is the price the syndicate pays to buy the bonds from the issuer. The term production is a sales term and refers to the price at which the bonds are reoffered to the public. The difference between the two is the spread.

One of your clients has a margin account with the following balances: long market value $50,000, debit balance $24,000, short market value $40,000, and credit balance $65,000. The account will be at the minimum maintenance level when A) the long market value is $32,000 and the short market value is $52,000. B) the long market value is $32,000 and the short market value is $50,000. C) the long market value is $37,500 and the short market value is $52,000. D) the long market value is $37,500 and the short market value is $50,000.

B) the long market value is $32,000 and the short market value is $50,000. When there is a combined (mixed) margin account, the maintenance is computed separately for the long and the short positions. The maintenance level on a long margin account is reached when the equity is only 25% of the market value. To find that level, divide the debit balance by 75% or multiply the debit by 4/3. In a short margin account, the maintenance level is when the equity is 30% of the market value of the short stock. To find that level, divide the credit balance by 130% (or 1.3). The math for our question becomes the debit balance of $24,000 ÷ .75 resulting in a quotient of $32,000. Alternatively, multiplying $24,000 times 4 and then dividing by 3 = $96,000 ÷ 3, or $32,000. Continuing to the short account, the credit balance is $65,000. Dividing that by 130% (or 1.3) results in a quotient of $50,000.

Marking to the market is used to adjust A) the maintenance level to Regulation T. B) the positions in margin accounts based upon current market prices. C) the contract price to the settlement price. D) the margin requirement to Regulation T.

B) the positions in margin accounts based upon current market prices. Marking to the market means adjusting cost to current market value. All margin account positions are adjusted daily.

All of the following statements regarding negotiable jumbo certificates of deposit are true except A) they are readily marketable. B) they are fully insured in any denomination by the FDIC. C) they are usually issued in denominations of $100,000 to $1,000,000. D) they usually have maturities of less than one year.

B) they are fully insured in any denomination by the FDIC. The FDIC insures only up to $250,000.

Typically, general obligation bonds are not sold short because A) Municipal Securities Rulemaking Board regulations prohibit short selling. B) thin markets may make it difficult to cover a short municipal position. C) they are backed by the full faith and credit of the issuing authority. D) they trade over the counter.

B) thin markets may make it difficult to cover a short municipal position. Because the municipal trading market is thin, it is often difficult to cover (buy back) a municipal security that has been sold short. It is easy to short 100 shares of GM (borrow the stock), for example, because an equivalent 100 shares of GM can be purchased on the NYSE at any time.

When a client calls you and says they have some "lettered" stock, you know this stock A) has the client's name on the certificate. B) was acquired in a private placement. C) has the number of shares written out on the certificate. D) is common stock.

B) was acquired in a private placement. Lettered stock, sometimes called legend stock, has that name because there is a legend on the stock certificate indicating that sales of the shares is restricted. Invariably, this is stock acquired in a private placement that cannot be sold unless meeting the requirements of Regulation D or Rule 144 of the Securities Act of 1933. Once met, the legend is removed. Common and preferred stock can be the subject of a private placement.

A customer bought 200 ABC at 76 and simultaneously wrote 2 ABC Mar 80 calls at 2. If the stock rises to 83, and the customer is assigned on the short calls, the customer has a gain of A) $800. B) $1,400. C) $1,200. D) $1,800.

C) $1,200. The customer bought 200 shares at 76 and was forced to sell those shares at 80 for a gain of $800. In addition, the customer received $400 for writing the calls, so the overall gain is $1,200. The price of 83 is irrelevant. It only explains why the customer was exercised (the 80 calls are in the money). Breakeven for covered call writing is the cost of stock (76) less premiums (2). The breakeven point is 74, and the customer sold at 80 (6 points × 200 shares = $1,200).

Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year? A) None B) $4,500 C) $2,500 D) $5,500

C) $2,500 He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward.

What is the breakeven point on the following position? Buy 1 QRS Jan 40 call at 2.35 Write 1 QRS Jan 45 call at 0.85 A) $43.25 B) $41.75 C) $41.50 D) $43.50

C) $41.50 Because this is a call spread, the breakeven point is calculated by adding the net premium of 1.50 to the lower strike price (40 + 1.50 = 41.50).

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

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

The following chart shows the capital transactions of ABC Corporation. 10-19-2016 Initial offering 6 million shares 4-1-2020 Treasury purchase 500,000 shares ABC wants to raise additional capital by selling 2 million shares through a rights offering and engages an underwriter on a standby basis. By the expiration date, ABC was only able to sell 1 million shares to existing shareholders. After expiration, how many shares does ABC have outstanding? A) 8 million B) 7 million C) 7.5 million D) 6.5 million

C) 7.5 million Before the rights offering, the company had 5.5 million shares outstanding (6 million issued minus 500,000 treasury shares). In connection with the offering, ABC engages a standby underwriter that commits to purchase any unsold shares. Therefore, regardless of the number of shares initially subscribed to, all 2 million shares will be sold.

A customer is short 100 shares of DFI at 35, and the market price is 35.25. If she believes a near-term rally will occur, which of the following strategies would best hedge her position? A) Write a DFI put with an exercise price of 40 B) Write a DFI call with an exercise price of 40 C) Buy a DFI call with an exercise price of 35 D) Buy a DFI call with an exercise price of 40

C) Buy a DFI call with an exercise price of 35 The best hedge for a short stock position is to buy a call, not sell a put. If the stock price rises, the investor has the right to exercise the call and use the stock to close out the short position. To obtain the most protection, the call's strike price should equal the short sale price.

A margin account is restricted by $5,000. Which of the following actions may the customer take to bring the account to the Regulation T requirement? A) Deposit $2,500 cash. B) Deposit $5,000 of fully paid marginable stock. C) Deposit $10,000 of fully paid marginable stock. D) Withdraw $5,000 of SMA.

C) Deposit $10,000 of fully paid marginable stock. As we teach in the course, KISS (Keep It Series 7 Simple). Saying the account is restricted is just to make it seem more difficult. The question asks how to get the account off restriction? The customer needs $5,000 in cash to do so. However, there is no answer of $5,000. But there is another way to get money—deposit fully paid marginable securities. How much? The deposit should be 200% or twice the amount of cash needed. That would be $5,000 × 2, or $10,000.

Which of the following is not a benefit gained by using a TOD account? A) Probate is avoided. B) Percentage allocations can be changed at any time. C) Estate taxes are reduced. D) Beneficiaries can be changed at any time.

C) Estate taxes are reduced. The TOD (transfer on death) designation offers many benefits, but reducing estate taxes is not one of them. The assets in the account are included in the decedent's estate. However, the hassles of probate are avoided, and without any legal impediments, the owner of the account can make changes at will.

In a new municipal bond offering, which of the following orders is placed after the bid is awarded and credits the entire syndicate with the takedown? A) Designated B) Presale C) Group D) Member

C) Group A presale order is entered before the bid is awarded. If the syndicate wins the bid, the takedown is credited to all syndicate members. A group order is entered after the bid is awarded and the takedown is credited to all syndicate members. A designated order, entered after the bid is awarded, credits some, but not all, syndicate members with the takedown. A member order, entered after the bid is awarded, credits only the syndicate member entering the order with the takedown.

A customer buys 1 LMB Aug 70 put for 4 and 1 LMB Aug 70 call for 4. The customer will break even at i. $62 ii. $66 iii. $74 iv. $78 A) II or IV B) II or III C) I or IV D) I or III

C) I or IV This is a straddle (a put and a call on the same stock with identical terms). There are two breakeven points solved by using the "call up" and "put down" rule. To break even, the customer must recover $800 total paid in premiums. On the long 70 call, this occurs if the market price rises to 78 ("call up" 8 points from 70). On the long 70 put, this occurs if the market price falls to 62 ("put down" 8 points from 70).

Which of the following are characteristics of the volatility market index (VIX)? i. It is a bullish or bearish measure. ii. It is a measure of implied expectations of market volatility. iii. It is often referred to as the Chicago Board Options Exchange (CBOE) index. iv. It is often referred to as the fear index. A) I and IV B) I and III C) II and IV D) II and III

C) II and IV The VIX is a measure of investors' expectations regarding market volatility. High or low readings are neither bullish nor bearish, but instead, reflect expectations of volatility in the S&P 500 over the next 30 days. This index is referred to as the fear index, and VIX options are traded on the CBOE.

Which of the following DTET option contracts are out of the money when DTET is trading at $88 per share? I. A short DTET 90 put, current premium is 4 II. A long DTET 90 put, current premium is 4 III. A short DTET 90 call, current premium is 4 IV. A long DTET 90 call, current premium is 4 A) I and II B) I and III C) III and IV D) II and IV

C) III and IV When computing in or out of the money, the premium is disregarded. We are looking at the option, not the investor. The call-up rule applies here. Call options (long or short) are out of the money when the market price is below the strike and in the money when the market price is (up) above the strike price. With a strike of 90 and a market of 88, the call options are out of the money by 2 points. Likewise, using the put-down rule, the two put options are in the money by 2 points because the market price is (down) below the strike price (90 − 88 = 2).

Which of the following is the computation for the coverage ratio for a municipal revenue bond issue? A) Revenues collected divided by annual principal expense B) Annual interest and principal expense divided by revenues collected C) Net revenue divided by annual interest and principal expense D) Revenues collected divided by annual interest expense

C) Net revenue divided by annual interest and principal expense Debt service coverage measures the amount of money available for debt service compared to the annual debt service requirements. Annual debt service includes both interest and principal expense.

A client sends you a text message containing a complaint alleging mishandling of the account. One day later, that client sends you a text message rescinding the complaint. Which of the following would be the appropriate action? A) Ignore the incident because the complaint was rescinded. B) Ignore the incident because the complaint was not in writing. C) Report the complaint to your manager/supervisor. D) Thank the client for rescinding the complaint and, because it was not in writing, no report need be made.

C) Report the complaint to your manager/supervisor. It is important to note that complaints delivered electronically (text, email, IM, etc.) are considered written complaints. Even when the complaint is rescinded, a registered representative must report it to the appropriate supervisory person (who will then enter the complaint and its disposition into the company's complaint file).

C) Selling calls against restricted (Rule 144) shares is prohibited because the restricted shares could not be delivered if the calls were exercised by the buyer. D) This is prohibited because the customer may need to sell the stock before the restriction is lifted

C) Selling calls against restricted (Rule 144) shares is prohibited because the restricted shares could not be delivered if the calls were exercised by the buyer. Restricted shares under Rule 144 are considered illiquid until the restriction is lifted. They may never be used to cover short calls because the shares, due to the restriction, could not be sold if the owner of the calls were to exercise the right to buy the stock. There is a de minimis exemption from the filing of a Form 144, but that is limited to 5,000 shares.

Which of the following statements regarding the Federal Farm Credit System securities are not true? A) The proceeds are used to make loans to farmers. B) Interest is tax exempt at the state and local levels. C) They are direct obligations of the U.S. government. D) They issue short-term notes and long-term bonds.

C) They are direct obligations of the U.S. government. With the exception of Ginnie Mae, all agency securities are indirect obligations of the U.S. government.

All of the following are allowable municipal dealer quotes except A) bona fide quotes. B) requests for offers only. C) an unidentified nominal quote. D) requests for bids only.

C) an unidentified nominal quote. Municipal Securities Rulemaking Board Rule G-13 requires municipal brokers and dealers to give bona fide bids and offers for municipal securities. (Bona fide quotes are those good for trading.) It also allows for requests for bids (BW = bids wanted) and requests for offers (OW = offers wanted). A nominal quote (those for informational purposes only) is permissible, but only if it is identified as such.

A married couple who files jointly has a $5,000 long-term capital loss with no offsetting capital gains. Regarding the tax treatment of this loss, all of the following statements are true except A) the maximum they can deduct this year is $3,000. B) they can carry forward $2,000 to future years. C) capital losses can be used to offset capital gains only. D) capital losses can be deducted dollar for dollar against capital gains.

C) capital losses can be used to offset capital gains only. Capital losses are deducted from ordinary income, and therefore, reduce tax liability. The maximum that individuals or married couples can deduct is $3,000 annually. If the long-term capital loss exceeds the maximum, the excess is carried forward to future years until the loss is exhausted. Under current IRS regulations, $1 in losses results in $1 in deductions.

One of your clients has $30,000 in the Balfour Balanced Fund in her personal account. She is preparing to invest an additional $12,000. Balfour has a breakpoint at $50,000. The client mentions that she has other holdings in Balfour and wonders if they will count toward the breakpoint. You respond that all of the following accounts would qualify except A) her IRA. B) the UTMA account where she is custodian for her child. C) her mother's account. D) her holdings in her 401(k) plan at work.

C) her mother's account. In most cases (all on the exam), a mutual fund will allow investors to get a breakpoint discount by combining their fund purchases with those of their spouse and minor children. They are also able to credit mutual fund transactions in retirement accounts, educational savings accounts, or even in accounts at other brokerage firms.

If a customer buys 1 ABC Oct call at 7 on March 10 and sells it for 3 on October 10, the customer has a capital A) loss of $700. B) gain of $400. C) loss of $400. D) gain of $700.

C) loss of $400. The investor paid $700 to buy the call and received $300 to sell the call, for a net loss of $400. Options are capital items. If a put or call on a stock expires unexercised, the amount a writer receives is a short-term capital gain. The amount a buyer pays is a capital short-term loss.

It is required that any informational changes to Form U4 must be made A) no later than 15 days after the member becomes aware of these changes. B) promptly after the member becomes aware of these changes. C) no later than 30 days after the member becomes aware of these changes. D) no later than 60 days after the member becomes aware of these changes.

C) no later than 30 days after the member becomes aware of these changes. Any changes to this information requires the filing of an amended form with the Central Registration Depository no later than 30 days after the member becomes aware of changes.

Regarding the purchase of new equity issues, restricted persons may A) purchase shares of a new issue only if they work for a bank. B) purchase shares of a new issue only if they are employed by a broker-dealer as a registered representative on a part-time basis. C) not purchase shares of a new issue. D) purchase shares of a new issue only in amounts that are not substantial in relation to the total number of shares being issued.

C) not purchase shares of a new issue. Persons characterized as restricted persons are prohibited from purchasing shares of new issues.

An investor takes a short position in one XYZ Nov 140 put @ 7. Disregarding any commissions, on settlement date the investor A) must pay $14,000. B) receives $14,000. C) receives $700. D) must pay $700.

C) receives $700. When an investor takes a short position in an option, it means the investor has sold, or written the option. As a seller, the investor receives the premium on the settlement date.

Municipal bonds are not normally sold short because A) short sales are prohibited by municipal statute. B) the transaction is expensive to execute. C) the municipal bond market is illiquid. D) short sales are prohibited by Municipal Securities Rulemaking Board rules.

C) the municipal bond market is illiquid. While there is no law or industry rule prohibiting short sale of municipal bonds, it is not a common practice. To short a security, it must be borrowed, and because most municipal securities are thinly traded, it is often difficult to locate the specific issue needed to cover the short position.

A municipality's net total debt is calculated as A) the total debt plus self-supporting debt plus sinking fund accumulations minus overlapping debt. B) the total debt plus self-supporting debt minus sinking fund accumulations minus overlapping debt. C) the total debt minus self-supporting debt minus sinking fund accumulations plus overlapping debt. D) the total debt minus self-supporting debt plus sinking fund accumulations plus overlapping debt.

C) the total debt minus self-supporting debt minus sinking fund accumulations plus overlapping debt. The net total debt of a municipality is the net overall debt (total debt minus self-supporting debt minus sinking fund accumulations) plus overlapping debt (shared with other municipalities). States cannot have overlapping debt; it is their municipalities that can.

A customer wants to buy $12,000 worth of stock using other marginable securities owned as collateral for the purchase. With Regulation T at 50%, what must the current market value of the securities deposited be? A) $6,000 B) $18,000 C) $24,000 D) $12,000

D) $12,000 Stock buys stock dollar for dollar. With $12,000 worth of fully paid marginable securities, the customer can borrow $6,000 against them. The $6,000 can be the 50% initial requirement for the additional $12,000 purchase.

Acme Pharmaceuticals previously had issued $200 million of common stock in an IPO. A year later, it issued $50 million of debentures at par value. Acme's leverage is what percentage of its total capital? A) 50% B) 400% C) 25% D) 20%

D) 20% The leverage is the extent to which borrowed funds make up the company's total capital. Total capital is the value of the equity and debt financing combined. Acme has issued $50 million of debentures (debt capital) and $200 million of equity capital (the common stock). That makes the total capitalization of Acme equal to $250 million. The leverage is $50 million divided by $250 million, or 20%. An analyst would consider this conservative leverage.

For an investor in the 37% federal income tax bracket, the tax-equivalent yield of a general obligation municipal bond with a coupon rate of 4.17% is A) 11.27%. B) 5.72%. C) 2.63%. D) 6.62%.

D) 6.62%.. The computation for tax-equivalent yield is done by dividing the coupon rate by (100% - tax bracket). In this question, that is 4.17% ÷ (100% − 37%) = 4.17% ÷ 63%. That equals 6.62%.

Under Municipal Securities Rulemaking Board rules, which of the following would indicate a control relationship between a municipal dealer and an issuer? A) The dealer was an underwriter of the municipality's last issue B) The principal of the dealer lives within the municipality C) The dealer is engaged as an underwriter for the issuer D) A dealer's officer sits on the issuer's board of trustees

D) A dealer's officer sits on the issuer's board of trustees A control relationship exists if someone represents both an issuer and municipal securities dealer.

If your customer bought an original issue discount bond from the Mount Vernon Port Authority, how is the discount on this bond taxed? A) Amortized during the life of the bond and not taxed B) As ordinary income C) As capital gains D) Accreted during the life of the bond and not taxed

D) Accreted during the life of the bond and not taxed Under IRS rules, an owner of an original issue municipal discount bond must adjust the bond's cost basis by accreting the discount over the life of the bond. The accretion is not taxed.

Who signs the agreement among underwriters for a municipal bond issue? A) Managing underwriter and issuer B) Managing underwriter and bond counsel C) Managing underwriter and trustee D) All members of the underwriting syndicate

D) All members of the underwriting syndicate All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee.

Which of the following statements regarding collateralized mortgage obligations (CMO) investors are true? i. They have interest rate risk. ii. They do not have interest rate risk. iii. They have little or no risk exposure. iv. They can be exposed to extension and prepayment risk. A) II and IV B) I and III C) II and III D) I and IV

D) I and IV CMOs are backed by mortgages. All mortgage-backed securities are subject to interest rate risk. If rates rise, extended maturity risk exists, which means the actual life of the underlying mortgage will be longer than the expected life. If rates fall, prepayment risk exists, which means mortgage holders will likely refinance their existing mortgages. As a result, the actual life of the underlying mortgages will be shorter than the expected life.

The holder of a yield-based call option would be more likely to profit if i. rates rise. ii. rates fall. iii. debt prices rise. iv. debt prices fall. A) II and IV B) II and III C) I and III D) I and IV

D) I and IV Holders of yield-based call options profit if rates rise. Prices of debt securities fall if rates rise.

European-style foreign currency options can i. be exercised at any time. ii. only be exercised at expiration. iii. be traded at any time. iv. only be traded at expiration. A) II and IV B) I and III C) I and IV D) II and III

D) II and III All U.S. exchange-listed currency contracts are European-style exercise, which can only be exercised at expiration. However, positions can be closed at any time until expiration.

A customer requests that his broker-dealer hold his fully paid for stock. Which of the following are required? i. A written stock power from the customer ii. Full power of attorney from the customer to the broker-dealer iii. The securities must be segregated from those of the firm and other customers iv. The customer must be informed that the securities may be withdrawn by him at any time A) II and IV B) I and II C) II and III D) III and IV

D) III and IV The broker-dealer must segregate the customer's fully paid for securities and inform the customer that the securities can be withdrawn at any time.

A client purchases 1,000 shares of the XYZ Value Fund when the NAV is $18.75 and the POP is $19.74. Five years later, the client makes a gift to her daughter when NAV is $24.50 and POP is $25.79. The daughter elects to receive all distributions in cash. Two years after the gift, she sells all shares when the NAV is $34.25 and POP is $36.05. What are the tax consequences of this sale? A) Long-term capital gain of $15,500 B) Long-term capital gain of $16,310 C) Long-term capital gain of $17,300 D) Long-term capital gain of $14,510

D) Long-term capital gain of $14,510 In the case of a gift of securities, the donee acquires the donor's cost basis—$19.74 per share. Sale (redemption) takes place at the NAV ($34.25) for a profit of $14.51 per share (times 1,000 shares = $14,510.00).

Which of the following statements describes an oil and gas blind pool offering? A) The oil exploration occurs in an area that is not adjacent to any known oil reserves. B) The income from producing wells is purchased at a discount from the present value of the projected future flows. C) An unknown number of representatives participate in the sale of known partnership units. D) Money is raised without a specific property being stated, and the general partner selects the investments.

D) Money is raised without a specific property being stated, and the general partner selects the investments. A blind pool offering, also known as a nonspecified program, involves an investment in a program without specific prospects or properties being identified.

In terms of the number of issues traded, the largest secondary market for securities is the over-the-counter market (OTC). Which of the following securities cannot be traded OTC? A) Exchange traded funds B) U.S. Treasury bills C) Preferred stock listed on the NYSE D) Mutual funds

D) Mutual funds Any security that trades in the secondary markets may be traded in the OTC market. That includes securities listed on the stock exchanges. Mutual funds (and variable annuities) are securities for which there is no secondary market trading. Shares (or units) in these securities are bought and redeemed through the issuer.

Which of the following is not part of the Federal Farm Credit System? A) The Federal Land Banks B) The Bank for Cooperatives C) The Federal Intermediate Credit Bank D) The Federal Home Loan Banks

D) The Federal Home Loan Banks The Federal Farm Credit Bank system is for farms and rural homes. Included in the system are the FICB, the Federal Land Banks and the Bank for Cooperatives. The FHL Banks provide long- and short-term advances (loans) to their members such as thrift institutions, commercial banks, credit unions. These loans are a source of funding for mortgages and are collateralized primarily by residential mortgage loans.

If a customer sells short 100 ABC at 40 and sells 1 ABC Jun 40 put at 4, what is the maximum loss? A) $400 B) $0 C) $3,600 D) Unlimited

D) Unlimited A short stock position subjects an investor to unlimited risk. Writing a put against a short stock position only protects the investor to the extent of the premium received.

A quote of 2.20 bid 2.18 offered would most likely be a quote on A) a Ginnie Mae bond. B) a general obligation bond. C) a T-bond. D) a T-bill.

D) a T-bill. Discounted instruments (such as T-bills) are quoted on a discount yield basis. Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price.

The placement ratio, as shown in The Bond Buyer, represents the dollar value of A) bonds offered divided by bonds unsold. B) bonds offered divided by bonds placed. C) bonds placed divided by bonds unsold. D) bonds placed divided by bonds offered.

D) bonds placed divided by bonds offered. The placement ratio is a measure of investor demand for new issue municipal bonds. It is computed by dividing the dollar amount of bonds placed (sold) each week by the dollar amount offered that week. A high ratio indicates a strong demand, while a low ratio reveals the opposite.

FINRA Rule 2330 deals with a member's responsibility in the sale of certain insurance company-based products. Specifically, the concern is with A) variable life insurance. B) fixed-index annuities. C) immediate variable annuities. D) deferred variable annuities.

D) deferred variable annuities. The subject of the FINRA rule is deferred variable annuities. It applies to the sale or exchange of this specific product.

A new bond issue will include warrants to A) increase the capital raised by the issuer through the bond offering. B) increase the spread to the underwriter. C) increase the price of the issue to the public. D) increase the attractiveness of the issue to the public.

D) increase the attractiveness of the issue to the public. By including warrants with debt issues, issuers increase the marketability of bonds. The warrants offer a long-term opportunity to buy the underlying stock at a fixed price. In addition to increasing the marketability of the issue, the issuer can offer the bonds with a lower coupon rate and, as a result, reduce fixed costs.

An investor takes a long position in a put option with an exercise price of $45. The premium paid is 8 points and the market price of the underlying security is $38 per share. It is correct to state that the put A) is a covered put. B) is out of the money by one point. C) has no time value. D) is in the money by seven points.

D) is in the money by seven points. A put option with intrinsic value is in the money. A long put has intrinsic value when the market price of the underlying asset is less than the exercise (strike) price. With a market price of $38 and a strike price of 45, this put is in the money by seven points. It may help to remember the "put down" rule. When figuring intrinsic value, the premium is irrelevant (we're not speaking about the investor). It is the option that is in (or out) of the money.

All of the following communications are exempt from filing with FINRA except A) prospectuses and preliminary prospectuses. B) retail communications previously filed with FINRA. C) communications that refer to an investment solely as part of a listing of products offered by the member. D) retail communications that make a financial or investment recommendation.

D) retail communications that make a financial or investment recommendation. Retail communications previously filed with FINRA, prospectuses and preliminary prospectuses, and communications that refer to an investment solely as part of a listing of products offered by the member are all exempt from filing with FINRA. Any retail communication that makes a financial or investment recommendation would require filing.

One of your customers mentions that she heard a friend say that whenever she buys stock, she has her registered representative use the DRS program. When the customer asks you for an explanation, you would reply that the DRS is A) the Direct Reporting System, where execution of transactions is reported simultaneously to the firm and the customer. B) the Dow-rating system where all listed stocks are assigned a rating based on expected future performance. C) the dividend reporting service where the dates of all upcoming dividends are reported to the investor. D) the Direct Registration System, where the customer's name as owner is recorded in book-entry form at the issuer or its transfer agent.

D) the Direct Registration System, where the customer's name as owner is recorded in book-entry form at the issuer or its transfer agent. DRS stands for Direct Registration System. It is a program that began in the mid-1990s as an alternative to "street name" registration for customer securities. Like street name, DRS is based on electronic bookkeeping. In direct registration, a stock is registered in an investor's name, but the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form, instead of a broker-dealer. All the other choices are made-up distractors. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

The trust indenture of a revenue bond will show all of the following except A) the application of flow of funds. B) the rate covenant. C) the revenue pledge. D) the reoffering yields.

D) the reoffering yields. Reoffering yields are unrelated to trust indentures. However, the trust indenture for a revenue bond issue does include covenants (or promises) between the issuer and the trustee for the bondholders' benefit. Among these covenants are the flow of funds and the rate covenant.

Your customer informs you that he has 8,000 shares of stock restricted under Rule 144. He suggests that he wants to sell covered calls against the shares he owns to bring additional income into his account. Which of the following should you advise? A) This is permitted because there is no restriction against using covered calls to bring income into any account. B) This is permitted, as the calls would be considered covered by the restricted shares.

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