Series 7 Questions

The term "disintermediation" refers to: A) the flow of money from traditional, low-yielding savings accounts to higher- yielding money market instruments. B) the flow of money from money market instruments into traditional savings vehicles. C) using margin to leverage one's returns. D) protecting a diversified portfolio through the purchase of index put options.

A) the flow of money from traditional, low-yielding savings accounts to higher- yielding money market instruments. This is the industry-accepted definition of disintermediation, and it typically occurs when the Federal Reserve Board tightens the money supply and interest rates rise faster in the marketplace than at bank accounts.

In a new margin account, if a customer buys 300 shares of XYZ for 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the margin call will be for: A) 7500. B) 6900. C) 7200. D) 7350.

B) 6900. The Regulation T requirement is $7,200 (50% × $14,400). There is no Regulation T requirement for writing covered calls. The requirement to establish both positions is $7,200. However, the question asked for the margin call (a margin deposit). The requirement of $7,200 is reduced by the premium income received ($300). By depositing $6,900, the customer will have $7,200 in the account, the difference being the premium income credited to the account on settlement date.

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

B) prior to order execution. Order tickets must be prepared prior to order execution.

Variable annuity salespeople must register with all of the following EXCEPT: A) the SEC. B) the state banking commission. C) FINRA. D) the state insurance department.

B) the state banking commission. Variable annuity salespeople must be registered with FINRA and the state insurance department. Registration with FINRA is de facto registration with the SEC; no registration is required by the state banking commission.

An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following EXCEPT A) they are a form of municipal revenue bond B) they would require voter approval before a municipality could issue them C) the holder of a COP could foreclose on the asset generating the revenue in the case of default D) the holder of the COP participates in lease or loan payments from a specific piece of equipment or facility purchased or built by the municipality

B) they would require voter approval before a municipality could issue them Certificates of participation (COPs) are considered revenue issues and, therefore, do not require voter approval. They are a form of lease revenue bond that allow the holders of the certificates to participate in some revenue stream (lease or loan payments) associated with land, equipment, or facilities purchased or built by the municipality. They are unique in that in the case of default, the holders of the COPs could foreclose on the asset associated with the certificate.

As an initial transaction in a margin account, a customer sells short 1,000 shares of a capital market stock at $2 per share. If Regulation T is 50%, how much money will the customer be required to deposit? A) 2000. B) 3000. C) 2500. D) 1000.

C) 2500. The industry requirement to short stocks below $5 per share is 100% of market value or $2.50 per share (whichever is greater).

On February 13, your customer buys an 8% Treasury bond maturing in 2009 for settlement on February 14. If the bonds pay interest on January 1 and July 1, how many days of accrued interest are added to the buyer's price? A) 45. B) 43. C) 44. D) 14.

C) 44. Accrued interest for government bonds is figured on an actual-days-elapsed basis. The number of days begins with the previous coupon date and continues up to, but not including, the settlement date. The bonds pay interest on January 1. There are 31 days of accrued interest for January. The bonds settle February 14. There are 13 days of accrued interest for February. Do not count the settlement date (31 + 13 = 44 days).

An instrument that illustrates the transfer of title to any dividend, interest, or right that pertains to securities contracted for is called: A) a warrant. B) a power of attorney. C) a due bill. D) a right.

C) a due bill. A due bill is an assignment of a forthcoming distribution from the seller to the new owner.

At 2PM ET a customer enters an order to buy GGZ at the close on the NYSE. GGZ traded between 70 and 71 all day. Then, after a last-minute rally, it closed up 4 points at 74. The customer should expect to pay the: A) opening price the next morning. B) average price calculated for the entire day. C) closing price. D) price as near to the close as possible, at the floor broker's discretion.

C) closing price. When an order is placed market at the close (MOC) on an exchange, a customer should expect execution at the closing price.

An annuity may be purchased under all of the following methods EXCEPT: A) single payment immediate annuity. B) periodic payment deferred annuity. C) periodic payment immediate annuity. D) single payment deferred annuity.

C) periodic payment immediate annuity. A periodic payment immediate annuity is a contradiction in terms. The annuitant may not contribute and withdraw simultaneously.

An affiliate or insider holding unregistered shares can sell under Rule 144: A) 1 time a year. B) 2 times a year. C) 12 times a year. D) 4 times a year.

D) 4 times a year. Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days, which would allow for as many as four filings per year.

All of the following kinds of orders may be turned over to the specialist (designated market maker) for execution EXCEPT: A) market. B) limit. C) stop. D) not-held.

D) not-held. A not-held order (NH) is a market order in which the investor has given the authority to choose the price and time to the floor broker to achieve the best possible execution.

A fidelity bond insures against what?

Theft by employees

An investor has an established margin account with a short market value of $8,000 and a credit balance of $13,000, with Regulation T at 50%. A maintenance call would be triggered if the short market value increased above: A) 10000. B) 13000. C) 9000. D) 8000.

A) 10000. To find short market value at maintenance, divide the credit balance of $13,000 by 1.3 ($10,000).

The Three Contact Rule does NOT apply to the purchase or sale of a non-Nasdaq security provided there is at least: A) 2 priced quotations available electronically . B) 3 priced quotations available electronically . C) 4 priced quotations available electronically . D) 1 priced quotation available electronically.

A) 2 priced quotations available electronically . Provided there are at least 2 priced quotations available electronically, the Three Contact Rule does not apply.

A commercial bank purchasing qualified GO bonds may deduct what percentage of the interest cost necessary to fund the purchase? A) 80%. B) 100%. C) 50%. D) 20%.

A) 80%. A bank-qualified municipal bond issue is a small issue, generally a GO issue of $10 million or less. If a bank were to purchase any part of a qualified issue, 80% of the annual costs necessary to fund the purchase would be tax deductible to the bank.

Which of the following is true regarding exchange traded funds (ETFs)? I. The SEC has classified them as mutual funds. II. The SEC has classified them as a type of open-end fund. III. They have operating costs and expenses that are higher than most mutual funds. IV. They have operating costs and expenses that are lower than most mutual funds. A) II and IV B) I and IV C) II and III D) I and III

A) II and IV The SEC has classified exchange traded funds as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.

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

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

Sell order tickets must be: A) marked as either long or short. B) marked only if they are long sales. C) executed in accordance with the appropriate rules, but not necessarily marked. D) marked only if they are short sales.

A) marked as either long or short. Every sell order must be marked as either a long sale or a short sale.

Which of the following would be most likely to require a mandatory sinking fund? A) A GO. B) A water and sewer revenue bond. C) A TAN. D) A PHA.

B) A water and sewer revenue bond. Sinking funds force revenue bond issuers to set aside a portion of their revenue for debt retirement.

Which of the following underwriting arrangements allows an issuer whose stock is already publicly traded to structure the timing of sales for an additional issue? A) Negotiated. B) Shelf. C) Standby. D) Competitive.

B) Shelf. A shelf registration with the SEC allows an issuer to sell the registered securities for up to 3 years from the effective date. This allows an issuer to time its sales with market conditions.

Distributions from nonqualified variable annuities are: A) taxed as ordinary income. B) taxed as ordinary income only to the extent of earnings. C) tax free. D) taxed at a reduced rate.

B) taxed as ordinary income only to the extent of earnings. As contributions are made with after-tax dollars, only the earnings generated are taxed on withdrawal.

All of the following statements regarding a municipality's debt limit are true EXCEPT that: A) the purpose of debt limits is to protect taxpayers from excessive taxes. B) the debt limit is the maximum amount a municipality can borrow in any one year. C) revenue bonds are not affected by statutory limitations. D) unlimited GO bonds may be issued when a community's taxing power is not restricted by statutory provisions.

B) the debt limit is the maximum amount a municipality can borrow in any one year. The debt limit is the maximum amount of debt a municipality can have outstanding.

Mr. Brown has several stock rights. Which of the following is NOT an alternative regarding these stock rights? A) Giving the rights to his son. B) Exercising. C) Redeeming them from the issuer for cash. D) Selling at the market.

C) Redeeming them from the issuer for cash. Rights are not redeemable by the issuer. They may be sold in the secondary market or be given to someone else to exercise. If exercised, rights are exchanged for an appropriate number of shares of the underlying common stock.

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

C) payment of a cash dividend Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.

Long term securities issued by municipalities that use a Dutch auction method to reset short term interest rates known as "clearing rates" are: A) American Depositary Receipts (ADRs). B) Real Estate Investment Trusts (REITs). C) Collateralized Mortgage Obligations (CMOs). D) Auction Rate Securities (ARSs).

D) Auction Rate Securities (ARSs). Auction Rate Securities (ARSs) are long term securities issued by municipalities that use a Dutch auction to reset interest rates at short term intervals. The reset rate is known as the "clearing rate" and establishes the rate paid during the period following the auction

The Trust Indenture Act of 1939 applies to each of the following corporate debt offerings EXCEPT: A) interstate offerings. B) offerings over $5 million. C) nonexempt debt securities. D) offerings under $5 million.

D) offerings under $5 million. Corporate debt offerings under $5 million and exempt issues are not subject to the Trust Indenture Act of 1939.

The principal underwriter of an open-end investment company is also known as the: A) registrar. B) dealer. C) trustee. D) sponsor.

D) sponsor. A mutual fund's underwriter is also known as the sponsor or distributor of the fund

If a customer is short 100 XYZ shares at 54 and long 1 XYZ 55 call at 2, what is the maximum potential loss? A) 300. B) 200. C) Unlimited. D) 100.

A) 300. The customer has protected his short stock position from a market advance by purchasing the call. If the market rises, the call is exercised, allowing the customer to buy stock at the options strike price of 55 to cover the short position. Therefore, the most the customer can lose is $100 on the stock position (the difference between the option strike price and short sale price), plus the premium paid for the option ($100 + $200 = $300).

Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products but only one of them is accurate. Which is it? A) Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer. B) If I want to sell my shares of an exchange-traded fund (ETF) I have to wait until the next price is calculated to value the portfolio of securities. C) Exchange-traded funds (ETFs) have a fixed coupon rate that I should expect to realize when they mature. D) Exchange-traded notes (ETNs) are equity securities because they trade on exchanges.

A) Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer. The only accurate statement is the one expressing that (ETNs) are issued by financial institutions and therefore the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks or an equity index. While ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day they are priced by supply and demand like all exchange traded products. They are not forward priced like open-end mutual fund shares are.

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

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

If a customer places an order to sell 500 ABC at 46 stop limit, which of the following statements are TRUE? The order will be elected at 46 or lower. The order will be elected at 46 or higher. The order can be executed at 46 or higher. The order can be executed at 46 or lower. A) I and III. B) II and III. C) I and IV. D) II and IV

A) I and III. Sell stop limits are placed below the current market and will be elected when the stock trades at or through (lower than) the stop price. Once elected, the order becomes a limit order to sell at 46 or better (higher).

If a client has a margin account with $23,000 in securities and a debit of $12,000, and Regulation T is 50%, which of the following statements are TRUE? I. The account is restricted. II. The client will receive a margin call for $500. III. The client may withdraw securities if he deposits 50% of the securities' value. IV. The account has excess equity of $5,250. A) I and III. B) II and III. C) I and II. D) III and IV.

A) I and III. The account is restricted by $500 because the equity of $11,000 is less than the Regulation T requirement of 50% ($11,500). However, the client will not receive a margin call for the $500 because Regulation T applies only to the initial purchase. Because the account is restricted, any withdrawal of securities requires a cash deposit of 50% or a deposit of securities with a loan value of 50% of the value of the securities withdrawn. The account is $5,250 above the required minimum maintenance margin, but this amount is not considered excess equity.

Which of the following may be done only with the approval of the shareholders of an investment company? I. A change from diversified to nondiversified status. II. The purchase of particular bonds on the open market. III. Personnel changes in the transfer agent's organization. IV. A change in the fund's objectives. A) I and IV. B) I and III. C) II and IV. D) II and III.

A) I and IV. Any substantive change in an investment company's form, structure, investment objective, or business operation must be approved by a majority vote of the outstanding shares. Bond purchases are left to the fund's portfolio manager, and the transfer agent is trusted with its organization's personnel changes.

The issuance of a debenture by a company would have an immediate effect on which of the following balance sheet items? I. The total assets. II. The total liabilities. III. The working capital. IV. The shareholders' equity. A) I, II and III. B) II, III and IV. C) I, II and IV. D) I, III and IV.

A) I, II and III. The cash received from the sale of the bonds is a current asset of the company and as such would increase assets and working capital on the balance sheet. The debentures are debts of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and cash distributions (dividends) to shareholders.

Which of the following describes a quote on Nasdaq Level I? A) Inside market. B) Nominal. C) Lowest bid/highest offer. D) Available to traders only.

A) Inside market. Nasdaq Level 1 quotes represent the highest bid and lowest asking prices of all dealers. This is known as the inside market.

Under MSRB rules, which of the following statements regarding a fidelity bond is TRUE? A) It insures against loss due to theft. B) It will insure against the price decline of a security. C) It insures brokerage firm customers in the event the brokerage firm must liquidate. D) It is contained in the trust indenture.

A) It insures against loss due to theft. MSRB members are required to have a fidelity bond which protects against loss due to employee theft.

A customer buys a municipal bond regular way on Tuesday, December 23. The transaction will settle on the following: A) Tuesday. B) Friday. C) Monday. D) Thursday

A) Tuesday. Municipal bonds, like corporate bonds, settle 3 business days after the trade date. December 25 (Christmas) is not a business day.

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

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

Mutual fund Class B shares assess: A) a deferred sales load. B) a level load. C) no load. D) a front-end load.

A) a deferred sales load. Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares carry a level load.

If a customer wishes to change a day order to a GTC order in the middle of the day, the registered representative should: A) allow the day order to expire at the end of the day and put in the GTC order before the next day's opening. B) enter the new order as GTC and immediately cancel the day order. C) enter a change notice immediately. D) enter the new GTC order immediately and do nothing about the day order.

A) allow the day order to expire at the end of the day and put in the GTC order before the next day's opening. The GTC order is treated as a new order. The registered representative should wait until the close of trading so as not to lose the time priority of the original order that day.

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

A) at or before account approval. All customers who are approved by the ROP to trade options must receive a copy of the OCC Disclosure Booklet at or before the time the account is approved to trade options.

If a customer gives specific instructions to his registered representative to purchase a security that is clearly unsuitable in light of the customer's investment objectives, under FINRA rules, the registered representative: A) can enter the order. B) cannot enter the order. C) can only enter the order if the customer puts his verbal instructions into written form. D) can only enter the order with the prior approval of a principal.

A) can enter the order. Under FINRA rules, the representative may execute the trade at the customer's request; the trade ticket should indicate that the order was unsolicited.

If a married couple with a long-term growth objective is considering a mutual fund and they are concerned about the fund's annual expenses, they should select a: A) common stock fund with a low portfolio turnover. B) preferred stock fund. C) long-term corporate bond fund. D) common stock fund with a high portfolio turnover.

A) common stock fund with a low portfolio turnover. Of the choices given, common stock is the only vehicle capable of providing long-term growth. Preferred stock will provide dividends, but it will not provide much growth as it trades like a bond in line with interest rate changes. Of the two common stock funds, the one with the lower portfolio turnover will have lower annual expenses.

After-hours trading in large blocks of stock by institutional investors can be accomplished through: A) electronic communications networks (ECNs). B) the intermarket. C) any regional exchange. D) Nasdaq.

A) electronic communications networks (ECNs). Institutional investors can trade stock after hours through ECNs, which are open 24 hours per day

A sharing arrangement in which only deductible costs are apportioned to the investor with the sponsor bearing all capitalized costs is called a(n): A) functional allocation. B) overriding royalty arrangement. C) carried interest. D) reversionary sharing arrangement.

A) functional allocation. Functional allocation is a sharing arrangement in which the general partner pays for all tangible drilling costs (capitalized costs) and the limited partners pay for all intangible drilling costs (deductible costs).

A member firm receives a signed proxy from a customer who failed to indicate how his shares held in street name are to be voted at the annual shareholder's meeting. Under NYSE rules, the member firm: A) must vote the shares as recommended by management of the issuer. B) may vote the shares as it sees fit. C) may vote the shares as it sees fit only if a principal attends the meeting. D) cannot vote the shares.

A) must vote the shares as recommended by management of the issuer. If the beneficial owner of street name stock returns a signed proxy statement but fails to indicate how the shares are to be voted, the member must vote the shares as recommended by management of the issuer.

A corporate offering of 200,000 additional shares to existing stockholders may be made through a: A) rights offering. B) warrant. C) secondary offering. D) tender offer.

A) rights offering A rights offering is an offering of additional shares of stock to existing shareholders.

Your next-door neighbor approaches you with a proposed security offering, knowing that you are a registered representative with a large, affluent client base. If he asks you to present this investment opportunity to your clients, you must tell him that: A) you must first show the offering to your broker/dealer and receive permission to proceed with it. B) you will present the offering only to those clients whose investment objectives make it a suitable purchase for them. C) you may make recommendations on the offering only after you have done a due diligence determination. D) you will present the offering to your clients only after you have established that it is either registered or exempt from registration requirements.

A) you must first show the offering to your broker/dealer and receive permission to proceed with it. You must receive permission from your broker/dealer before you sell or offer for sale any security to your clients. To avoid a charge of selling away, you must also see to it that any sales that result are carried on your broker/dealer's books.

Two customers in their twenties, married only a few years, should select which investment for their IRAs? A) Oil and gas exploration limited partnerships. B) Growth-oriented mutual funds. C) High-tech funds. D) High yield bond funds.

B) Growth-oriented mutual funds. A growth mutual fund may be appropriate for a young couple's IRA account; all other selections incur high risk that is not appropriate for a retirement account.

A customer purchases a 4% corporate bond yielding 5%. A year before the bond matures, new corporate bonds are issued at 3%, and the customer sells the 4% bond. Which of the following statements regarding the bond are TRUE? I. The customer bought it at a discount. II. The customer bought it at a premium. III. The customer sold it at a premium. IV. The customer sold it at a discount. A) II and III. B) I and III. C) II and IV. D) I and IV

B) I and III. A 4% bond yielding 5% has a YTM of 5%. If a bond's yield to maturity is higher than its coupon (or nominal yield), the bond is selling at a discount to par. If interest rates decline, new bonds will be issued with lower coupons, and outstanding bonds with higher coupons will trade at a premium.

Which of the following statements regarding nonsystematic risk are TRUE? I. It is the risk that an individual stock will not perform well. II. It is the same as market risk. III. Diversification reduces it. IV. Diversification does not reduce it. A) I and IV. B) I and III. C) II and IV. D) II and III.

B) I and III. Nonsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks.

Sally is the named beneficiary of her grandmother's IRA. After the death of her grandmother who was 80 years old, what would Sally's options be regarding the IRA? A) Wait until age 59½ to begin taking distributions, to avoid the 10% tax penalty. B) Take minimum required distributions based on Sally's life expectancy. C) Roll over her grandmother's money into Sally's own IRA. D) Wait until age 70½, to maximize tax deferral, and then begin required minimum distributions.

B) Take minimum required distributions based on Sally's life expectancy Before age 80, Sally's grandmother would have already begun mandatory distributions. When someone inherits an IRA for which the initial owner has begun mandatory distributions, payout must continue but is now based on the life expectancy of the new owner.

The prospectus of the ABC Fund contains the phrase "will have at least one-quarter of common stock investments in the field of business machines." The ABC Fund is: A) a balanced fund. B) a specialized fund. C) a diversified fund. D) a growth and income fund.

B) a specialized fund. A fund that, as part of its investment policy, makes a commitment to invest 25% or more of its assets into a particular economic or geographical sector is a specialized fund. A balanced fund invests in a balance of bonds and common and preferred stocks. A diversified fund does not invest more than 5% of the fund's assets in any one issuer. A growth and income fund may invest in many industries, seeking both dividends and capital gains.

A customer buys a new issue municipal bond at a discount. If held to maturity, the amount of the discount is: A) accreted and taxed as ordinary income. B) accreted and is not taxed. C) taxed as a long-term capital gain. D) taxed as a short-term capital gain.

B) accreted and is not taxed. Original issue discounts are accreted, which allows for a step-up in cost basis. Accretion on original issue discount municipal bonds is not taxed.

A gain on the sale of a long equity put option is: A) a short- or long-term capital gain. B) always a short-term capital gain. C) ordinary income. D) always a long-term capital gain.

B) always a short-term capital gain. Any trading in options produces only short-term gains or losses; therefore any gain on the sale of a long put option must always be a short-term capital gain. (If a question wishes you to consider LEAPS, the question will refer to them.)

A buy stop order is elected (triggered) when the underlying stock trades A) at or below the stop price B) at or above the stop price C) through the stop price only D) anywhere below the stop price

B) at or above the stop price A buy stop order is placed above the prevailing market price and is elected (triggered), becoming a market order to buy when the stock trades at or through (above) the stop price.

A member firm's customer is requesting that IRA contributions converted from a traditional IRA to a Roth IRA now be moved back to a traditional IRA. This is A) never allowed under any circumstances B) called a re-characterization and is allowed by the IRS so long as certain requirements are met C) called a re-characterization and is permitted under all circumstances and within any time frame D) called a rollover and allowed by the IRS as long all requirements are met

B) called a re-characterization and is allowed by the IRS so long as certain requirements are met The IRS allows an individual to re-characterize contributions made to one type of IRA as if they had been made to another type of IRA as long as the requirements as to when the re-characterization can occur have been met.

Each of the following is an example of a qualified retirement plan EXCEPT a: A) profit-sharing plan. B) deferred compensation plan. C) Keogh plan. D) defined benefit plan.

B) deferred compensation plan. A deferred compensation plan is considered a nonqualified plan because IRS approval is not required to initiate such a plan for employees.

The manager will credit each syndicate member based on sales of that particular maturity allotted to the member, and such credits shall extinguish liability based only on such securities that are sold by the member. This statement describes an agreement among underwriters that is a(n): A) Eastern account. B) divided account. C) proportionate underwriting. D) undivided account.

B) divided account. This is part of an agreement for a Western (divided) syndicate

Continuing commissions in connection with the sale of investment company securities: A) are a form of deferred compensation; therefore, when a registered representative resigns, the registered representative must be paid all commissions due. B) may be paid to a retired employee provided a bona fide contract calling for such payment was entered into by the registered representative while employed by a member. C) is illegal. D) must be paid by a member whether or not the person receiving the commissions is a registered representative of a member

B) may be paid to a retired employee provided a bona fide contract calling for such payment was entered into by the registered representative while employed by a member. FINRA rules permit the payment of continuing commissions to retired registered representatives in connection with the sale of investment company securities if a bona fide contract to do so exists between the firm and the registered representative.

Establishing short positions is typical for all of the following EXCEPT: A) listed stock. B) municipal bonds. C) OTC common stock. D) preferred stock.

B) municipal bonds. Even though there is no regulation that prohibits short sales of municipal bonds, this is rarely done. To short a security, it must be borrowed and later covered. The general illiquidity of the municipal market makes this difficult.

Long an ABC Apr 60 call and short an ABC Apr 70 call is a: A) calendar spread. B) net debit spread. C) net credit spread. D) straddle

B) net debit spread. This is a vertical spread, not a calendar spread. To determine whether it is a net credit or debit, look at the strike prices. For call options with the same expiry month, the lower strike price will always have a higher value. In this case, the investor is long the higher valued option, which gives a net outflow of cash to enter the entire position (more money was spent on the lower strike price call than received for the higher strike price call). Therefore, the investor has a net debit for his account.

A customer buys 10 DEC 91.50 calls on the Canadian dollar for 6.70. ($10,000 CD per contract). At the time of purchase, the spot rate for the Canadian dollar was 92.25. What is the margin requirement for the purchase? A) 9225. B) 9150. C) 6700. D) 3350.

C) 6700. The client purchased 10 calls at 6.70 for a total of $6,700. The margin requirement is 100% of the premium.

Which of the following is a true statement regarding payment to informants (whistleblowers)? A) Awards can only be paid for information regarding violations of the Insider Trading Securities Fraud Enforcement Act. B) If an award is paid to a "whistleblower", the amount of the award can not be based on any amount recovered. C) Awards may be paid in connection with original information concerning any violation of securities law that leads to successful enforcement. D) Awards are not paid for information regarding securities law violations regardless of the success of any enforcement action taken.

C) Awards may be paid in connection with original information concerning any violation of securities law that leads to successful enforcement. Awards to "whistleblowers" may be paid in connection with original information concerning any violation of securities law including but not limited to violations of the Insider Trading Securities Fraud Enforcement Act. Those awarded may be paid a percentage of the amount collected.

LMN Securities is the managing underwriter for a new issue of one million MIC common shares. LMN has agreed to sell as much stock as possible in the market, and MIC has agreed to take back any unsold shares. If MIC has not specified a minimum amount of capital for LMN to raise, this is what type of offering? A) All-or-none. B) Contingency. C) Best efforts. D) Standby.

C) Best efforts. In a best efforts underwriting, any stock that remains unsold is returned to the issuing corporation.

Which of the following would NOT be a valid use of the partnership democracy? A) Removing the general partner. B) Consenting to a legal judgment against the partnership. C) Deciding which partnership assets should be liquidated to pay creditors. D) Consenting to an action of a general partner that is contrary to the agreement of limited partnership.

C) Deciding which partnership assets should be liquidated to pay creditors. Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in their being treated as general partners with respect to liability, and possible loss of limited partner status.

Which of the following types of retirement plans would be most beneficial to a young employee of a corporation? A) Keogh plan. B) Profit-sharing plan. C) Defined contribution pension plan. D) Defined benefit pension plan.

C) Defined contribution pension plan. The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years to go in the workforce, so the investments made with the defined contributions will have a maximum time period to grow.

Which of the following two are TRUE of a leveraged exchange traded fund (ETF)? I. The leverage ETF may be purchased on margin. II. Securities within the leveraged fund portfolio may be purchased on margin. III. The leveraged ETF may never be purchased on margin. IV. Securities within the leveraged fund portfolio may never be purchased on margin. A) I and IV. B) III and IV. C) I and II. D) II and III

C) I and II. Because an exchange traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products such as purchasing them on margin, would apply. Leveraged funds can use a number of different securities types including derivative products, and trading techniques such as trading on margin as a means of attaining the leveraged returns they promise.

In which of the following types of offerings does a brokerage firm have no financial obligation for unsold securities? I. All-or-none. II. Best efforts. III. Standby. A) II and III. B) I and III. C) I and II. D) I, II and III.

C) I and II. In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In an all-or-none (AON) offering, the underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment).

An increase in the Federal Reserve Board's (FRB) reserve requirement has which of the following effects on total bank deposits? I. Decrease. II. Increase. III. Multiplier effect. IV. Logarithmic effect. A) II and IV. B) I and IV. C) I and III. D) II and III.

C) I and III. If the FRB raises the reserve requirement, total bank deposits decrease, with the overall impact being increased because of the multiplier effect. If banks must meet a higher reserve requirement, they will have less money available to lend.

An investor purchases 100 shares of XYZ common stock for $70 and sells it one year later for $50. Which of the following activities would violate the wash sale rule? I. Purchasing an XYZ call option 20 days after the sale. II. Purchasing an XYZ put option 20 days after the sale. III. Purchasing 100 shares of XYZ common stock 20 days after the sale. IV. Selling short 100 shares of XYZ common stock 20 days after the sale. A) III and IV. B) I and II. C) I and III. D) II and IV.

C) I and III. The wash sale rule is violated when an investor sells a security at a loss and purchases the same or a substantially identical security within 30 days of the sale date. The IRS considers a call option substantially identical to the underlying stock because it represents the right to buy the shares

The Sarbanes-Oxley Act legislation was established to enhance standards for Market makers in U.S. exchange listed securities Boards of directors of U.S. publicly traded companies Public accounting firms Block traders in stocks of U.S. exchange listed securities A) I and IV B) I and III C) II and III D) II and IV

C) II and III The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to a number of major corporate and accounting scandals. The legislation established enhanced standards for all U.S. public company boards of directors, management, and public accounting firms.

Investment clubs: I. can take advantage of breakpoints on mutual fund purchases. II.cannot take advantage of breakpoints on mutual fund purchases. III. are permitted to purchase new equity issues at the POP. IV. are not permitted to purchase new equity issues at the POP. A) I and IV. B) I and III. C) II and III. D) II and IV.

C) II and III. Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases.

Which two statements are TRUE regarding margin calls? I. Customers are entitled to an extension of time. II. Customers are not entitled to an extension of time. III. Firms can sell securities without first contacting the customer. IV. Firms cannot sell securities without first contacting the customer. A) I and IV. B) II and IV. C) II and III. D) I and III.

C) II and III. Some customers mistakenly believe that a firm must contact them for a margin call to be valid, which is not the case. Most firms will attempt to notify their customers of margin calls, but are not required to do so. Also, there is no entitlement when it comes to an extension of time.

Which of the following may only be accomplished after applying the additional bonds test for a revenue bond? A) Increasing the project's user charges. B) Prerefunding an outstanding bond issue. C) Issuing new bonds with an equal lien on the project's revenues. D) Spending revenues already allocated for project expansion.

C) Issuing new bonds with an equal lien on the project's revenues. The additional bonds test must be met under the provisions of a revenue bond indenture before additional bonds with an equal lien on project revenues can be issued. The conditions under which additional bonds may be issued are specified in the bond indenture. This is an open-end covenant.

A resident of New York City purchases an Albany, New York general obligation bond and receives $600 of interest from that bond during the year. How is that $600 taxed? A) Taxation is deferred until the bond matures. B) It is subject to state income tax at ordinary rates. C) It is not subject to federal income tax. D) It is subject to federal income tax at ordinary rates.

C) It is not subject to federal income tax. Interest from public purpose municipal bonds is exempt from federal income tax and most states have chosen to make interest on their municipal bonds exempt from state income tax to residents of their states.

A hedge fund has contracted with your broker/dealer to handle all of its clearing functions and provide all back office support functions while it is executing transactions through numerous other broker/dealers whom your broker dealer will have agreements with. This type of account is known as A) a custodial account B) a numbered account C) a prime account D) a joint account

C) a prime account In a prime account, a customer contracts with one broker, the prime broker, to provide a list of support services, such as clearing and settlement of transactions, while contracting with numerous other brokers for executions services.

Before a firm distributes a prepared summary official statement for a new issue of municipal bonds to customers, it must have the written approval of the: A) bond attorney. B) issuer. C) firm's municipal securities principal. D) MSRB.

C) firm's municipal securities principal. A person qualified as a general securities or municipal securities principal must give prior written approval for municipal securities advertising or sales pieces that are intended to be used as communications with the public. Abstracts and summaries of official statements are included in the MSRB's definition of advertising.

All of the following events would cause FINRA to terminate quotations in a SmallCap stock EXCEPT A) the issuer's independent auditor rendering a disclaimer opinion B) FINRA deeming termination to be in the public's best interest C) having only 2 broker/dealers making a market in the stock D) the issuer declaring bankruptcy

C) having only 2 broker/dealers making a market in the stock Although 3 market makers are required initially for an issue to be included on Nasdaq, only 2 market makers are needed to continue being quoted on the system. The other answers, bankruptcy, a disclaimer opinion being rendered by auditors, or any reason FINRA deems termination to be in the general publics interest, are sufficient reason for termination of quotations.

Variable rate municipal bonds are subject to all of the following risks EXCEPT: A) market. B) liquidity. C) interest rate. D) default.

C) interest rate. A variable rate bond is one whose coupon is adjusted periodically (semiannually or annually) to reflect current interest rates. Therefore, if rates rise, forcing prices down, the coupon on a variable rate bond will be adjusted upward, thereby tending to keep the bond's price at or near par. Therefore, no interest rate risk is associated with these bonds. However, if rates fall, the coupon will be adjusted downward, keeping the bond's price at or around par. Normally, a fall in rates will force prices up, but not with variable rate bonds.

A municipal bond dealer is making a bona fide quote. Which of the following statements regarding such a quote is TRUE? The quote must have a reasonable relationship to fair market value. The quote may take into consideration any anticipated market movement. The quote cannot represent an offer to sell bonds the dealer does not currently own. The quote need not be one that the dealer is prepared to act upon (buy or sell). A) III and IV B) II and III C) I and IV D) I and II

D) I and II A bona fide quote is one the dealer is prepared to buy or sell on, as opposed to a workable, nominal or subject quote. A bona fide quote must have a reasonable relationship to fair market value and can be made in consideration of any anticipated market movement. On the offer side of a bona fide quote a dealer may make an offer to sell bonds that it does not hold in its own inventory but must know where to obtain the bonds if they are needed to complete the transaction.

An individual is employed as a research analyst for a member firm that specializes in investment banking and has just completed a research report comparing two companies in the semiconductor business. Which of the following would be considered prohibited activities by this analyst, under FINRA rules? I. Purchasing shares of a semiconductor company before that issuer's IPO. II. Trading in these two stocks or their derivatives in a manner inconsistent with that analyst's recommendation. III. Purchasing shares of either of these two stocks for a personal account after the research report has been issued. IV. Purchasing shares of the XYZ Semiconductor Fund, a fund qualifying as a diversified management investment company under the Investment Company Act of 1940 but not covered or analyzed in the research report. A) II and III. B) III and IV. C) I and IV. D) I and II

D) I and II FINRA rules restrict personal trading by research analysts. They are never permitted to acquire shares in advance of an IPO in a company in the same type of business that the analysts research. They are never permitted to engage in trading contrary to their opinions, as published in their firm's research reports. Once the report has been issued, they may trade in accordance with their recommendations. Purchasing shares of a mutual fund, even one that specializes in their field of research, is permitted.

Which of the following are TRUE of municipal securities quotations? I. A quotation can be an indication of interest. II. A quotation cannot be an indication of interest. III. A quotation can be a one-sided request for a bid or offer (bids wanted and offers wanted). IV. A quotation cannot be a one-sided request for a bid or offer (bids wanted and offers wanted). A) II and IV B) II and III C) I and IV D) I and III

D) I and III MSRB rules pertaining to quotations cover all bona fide bids and offers including one-sided requests for bids wanted and offers wanted which are considered indications of interest.

A member firm has decided to allow a registered representative to operate from his residence. Which of the following statements are TRUE? I. Prior consent of the member's self regulatory organization (SRO) is required. II. Prior consent of the member's self regulatory organization (SRO) is not required. III. The residence may be advertised. IV. The residence may not be advertised. A) II and IV. B) II and III. C) I and IV. D) I and III.

D) I and III. Prior approval of the member firm's SRO is required when opening any office, including a private residence. The home address and telephone number may be advertised in any normal manner such as business cards, stationery, local newspapers, and so forth.

A customer calls his registered representative and asks that the firm hold his mail as he will be traveling for an extended period of time. Under the rules governing requests to hold mail, which of the following statements are TRUE? I. The request must be made in writing with a specific time period designated. II. For the sake of convenience, the customer can request any length of time for mail to be held. III. Under the rules, the broker dealer is obligated to grant any reasonable request to hold mail. IV. During the time that mail is being held, the broker dealer must still be able to communicate with the customer. A) II and III B) I and III C) II and IV D) I and IV

D) I and IV All requests to hold mail must be made in writing with a specific period of time designated up to three months. While requests for longer periods can be made and granted, the rules specifically prohibit it merely for the sake of convenience. Broker dealers must still be able to communicate with customers in a timely manner and are required to apprise the customer of ways in which that can or will be done. While these requests are commonly granted, doing so is not required under the rule. It is considered a courtesy that the a broker dealer may or may not accommodate.

If an investor buys 300 shares of FLB, and one month later buys 1 FLB Jul 50 put, how does this affect the holding period on his or her stock? A) It stops the holding period on 300 shares. B) It ends the holding period on the put. C) It has no impact on the holding period for any of the shares owned by the investor. D) It stops the holding period on 100 shares.

D) It stops the holding period on 100 shares. The put purchase ends the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns 1 put, this stops the holding period on 100 shares owned. The other 200 shares are unaffected.

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

D) 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

Mr. Jones calls his registered representative and places an order to write an XYZ Oct 90 call and at the same time to write an XYZ Oct 80 put. The orders are executed at a premium of 5 for the call and 9 for the put. Which of the following best describes the customer's investment strategy? A) Bearish strategy. B) Mixed strategy. C) Bullish strategy. D) Neutral strategy

D) Neutral strategy A customer who writes both a call and a put on the same underlying security wishes for little or no market movement. This is referred to as a neutral strategy. Technically, the customer has created a short combination (an investment position very similar to a short straddle, with the same investment characteristics), and, in this case, a little less risk than a pure straddle because of the spread in the strike prices.

Customers could pay a commission, rather than a sales charge, for shares of a(n): A) open-end investment company. B) mutual fund. C) front-end load fund. D) closed-end investment company.

D) closed-end investment company Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares.

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

D) 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.

The issuer of an ADR is a: A) domestic branch of a domestic bank. B) domestic branch of a foreign bank. C) foreign branch of a foreign bank. D) foreign branch of a domestic bank.

D) foreign branch of a domestic bank. The American Depositary Receipt (ADR) is issued by a foreign branch of a domestic bank. Everything is in English and in U.S. dollars.

In a seller's option, securities may be delivered before the date specified if the seller A) cannot deliver on the specified date. B) wishes to be paid earlier. C) gives notice to the buyer on the day of delivery . D) gives 1 day's written notice to the buyer.

D) gives 1 day's written notice to the buyer. In a seller's option trade, the seller may (at his option) give the buyer written notice 1 day before making delivery.

All of the following orders could be placed on the specialist (designated market maker) order display book EXCEPT: A) stop limit orders. B) limit orders. C) stop orders. D) market orders.

D) market orders. Market orders are executed immediately. The order display book is for orders that are away from the current market, such as stop and limit orders.

An investor seeking a high level of income combined with a moderate level of risk would purchase: A) income bonds. B) junk bonds. C) convertible bonds. D) mortgage bonds.

D) mortgage bonds. Bonds provide a semiannual stream of fixed income. Because convertible bonds normally have a lower coupon rate than nonconvertible bonds-and income bonds only pay interest if the company declares a payment-the best choice is the mortgage bond, which is secured by real estate.

An issuer may direct sales of a new issue to all of the following EXCEPT: A) officers of the issuer. B) officers of its largest customer. C) officers of its largest supplier. D) officers of the managing underwriter

D) officers of the managing underwriter Issuer-directed sales are permitted if the persons to whom the new issue is sold are not restricted. Officers of the managing underwriter are restricted.

Margin requirements on exempt securities (U.S. government securities and municipal securities) are set by: A) the FRB. B) the DOE. C) the SEC. D) the DEA.

D) the DEA. The FRB sets the initial margin requirements for nonexempt securities. The margin requirements for exempt securities, such as U.S. governments, are set by a firm's SRO or DEA (designated examining authority).

A customer is long 100 shares of ABC @ 32 and short 1 ABC July 30 call @ 4. What is his deposit requirement?

$1200 $1600 (50% of stock price for Reg T) - $400 (Premium received)

A customer is long 1 July 30 Call @ 3. How much cash must he deposit?

$300 100% of the premium

The determination of a broker/dealer's financial failure is made under the provisions of the A) Securities Investor Protection Act of 1970 B) 1939 Trust Indenture Act C) Securities Act of 1933 D) Bank Secrecy Act

A) Securities Investor Protection Act of 1970 Determination of financial failure is made under the Securities Investor Protection Act of 1970

All of the following are required by limited partnerships EXCEPT: A) SEC approval. B) partnership agreement. C) subscription agreement. D) certificate of limited partnership.

A) SEC approval. The SEC does not approve limited partnerships or any other securities. In public offerings of limited partnerships (as opposed to private placements), federal registration and a prospectus are required.

A customer bought a bond that yields 6-½% with a 5% coupon. If the bond matures at this point, the customer will receive: A) $1,025. B) $1,050. C) $1,000 plus a call premium. D) $1,065.

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

A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that currently is yielding 8.7%. He is considering buying tax-exempt securities. What is the comparable yield for a municipal bond? A) 0.0626. B) 0.125. C) 0.0648. D) 0.1208.

A) 0.0626. When comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 8.7% × .72 = 6.264%. Remember to use the yield to maturity, not the coupon rate. The bond is currently priced to yield 8.7%. In this case, a tax-exempt bond yielding more than 6.264% will provide a higher after-tax return.

If a customer fails to meet a Regulation T margin call of $2,500, securities may be sold out of the account with a value of: A) 5000. B) 3333. C) 8000. D) 2500.

A) 5000. Securities valued at twice the Regulation T cash call must be sold out if a customer fails to meet a Regulation T margin call ($2,500 × 2 = $5,000).

In an existing margin account with no SMA, if a customer buys 300 ABC at 40 and simultaneously buys 3 ABC OCT 40 puts at 2.50, the customer must deposit: A) 6750. B) 6375. C) 5250. D) 6100.

A) 6750. Buying 300 shares at 40 ($12,000) requires a deposit of $6,000. In addition, the customer is purchasing 3 puts with a total premium of $750 (3 × 2½). Most options have no loan value and must be paid in full. Adding $6,000 and $750 results in a deposit of $6,750.

The current yield on a bond with a coupon rate of 7.5% currently selling at 105-½ is approximately: A) 7.1%. B) 6.5%. C) 7.5%. D) 8%.

A) 7.1%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109%, or approximately 7.1%.

A customer buys a real estate limited partnership interest by contributing $20,000 and signing a nonrecourse note for $50,000. The customer's beginning basis is: A) 70,000. B) 50,000. C) 20,000. D) 30,000.

A) 70,000. Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership.

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

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

A registered representative (RR) has just explained to a customer that to purchase a particular security the customer would pay the asking price plus a commission, not a sales charge. Which of the following is the RR is speaking of? A) Any closed-end fund B) All open-end funds C) All management company offerings D) Mutual funds

A) Any closed-end fund Closed-end funds are purchased on an exchange or over the counter where buyers pay the ask price plus a commission. The RR could not be speaking of all open-end funds because mutual funds, one classification of open-end funds, are purchased at the POP, which includes a sales charge. Management company offerings include both open-end and closed-end funds.

Which of the following govern the sale of a publicly offered direct participation program? I) FINRA II) Securities Act of 1933 III) The Investment Company Act of 1940 IV) The Internal Revenue Service A) I and II B) III and IV C) II and III D) II and IV

A) I and II The sale of a publicly registered DPP, like any other newly issued nonexempt security, is governed by the Securities Act of 1933, FINRA, and any applicable blue-sky (state) securities laws. While IRS tax code is applicable to DPPs, the IRS does not govern the sale of the securities.

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 January calls; long 30,000 ABC January 08 LEAP calls. II. Long 35,000 ABC March calls; long 30,000 ABC March puts. III. Long 35,000 ABC March calls; short 30,000 ABC January 08 LEAP calls. IV. Long 35,000 ABC March calls; short 30,000 ABC March puts. A) I and IV. B) III and IV. C) II and IV. D) I and II.

A) I and IV. The maximum limit for ABC is 60,000 contracts on the same side of the market. The upside is long calls and short puts; the down side is long puts and short calls. LEAPs are included in the calculation.

Which of the following statements regarding a shelf offering are TRUE? I. It can be used to distribute an initial public offering only. II. It can be used to distribute an additional offering only. III. Its maximum duration is 90 days. IV. Its maximum duration is 3 years. A) II and IV. B) I and III. C) II and III. D) I and IV

A) II and IV. Shelf offerings are used by publicly traded companies to issue additional equity or debt securities. The issuer must sell the securities within 3 years after the registration is declared effective.

Which of the following oil and gas programs would be associated with the least risk? A) Income. B) Exploratory. C) Developmental. D) Raw land.

A) Income. For oil and gas programs, ranking from least to most risk would be as follows: Income, Developmental and Exploratory. Raw land is a type of real estate program.

Which of the following best describes an intangible drilling cost? A) Labor, fuel, or drilling rig rental. B) Proven reserve of oil or gas. C) Tax liability. D) Exploratory well drilling.

A) Labor, fuel, or drilling rig rental. Intangible drilling costs are the noncapital costs of putting in a well. They are currently deductible expenses, like fuel, wages, and rent. An intangible drilling cost is one which, after expenditure, has no salvage value.

A technical analyst is concerned with all of the following trends EXCEPT: A) PE ratios. B) support levels. C) changes in the DJIA. D) reversals.

A) PE ratios. Technical analysts are more interested in forecasting market trends and securities prices than in studying individual corporations. Therefore, they are concerned with market prices, trading volumes, changes in the Dow Jones Industrial Average, reversals, support and resistance levels, advance/decline lines, short interest, and many other factors that might help them time buying and selling decisions. Fundamental analysts, on the other hand, concentrate on a stock's intrinsic quality and are concerned with PE ratios and earnings per share.

A certificate in the name of Smith & Company may be signed: A) Smith & Company, "Smith & Co.," or "Smith and Company". B) Smith & Company, aka SmithCo. C) Smith & Company. D) Smith & Company or "Smith & Co.".

A) Smith & Company, "Smith & Co.," or "Smith and Company". Corporate signers are the exception to the general rule that endorsement of a certificate must match exactly the name on the front. The word "and "may be substituted with "&" and the word "company" may be abbreviated.

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

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

Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Variable annuities. B) Common stock. C) Corporate bonds. D) Treasury notes.

A) Variable annuities. Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.

When does pension payment liability affect the credit rating of a municipality? A) When funds needed to make payments exceed funds available. B) Pension liability cannot affect the rating of municipal debt. C) When the return on funds invested to meet future needs exceeds anticipated payments. D) When funds are invested presently to meet future pension needs.

A) When funds needed to make payments exceed funds available. The credit rating for a municipality's debt would be adversely affected if funds needed to make payments exceeded funds available. This is an unfunded pension liability and can result if monies set aside to make future payments are not enough or if poor investment decisions deplete the funds.

A broker/dealer informs registered personnel that, to satisfy the annual compliance meeting requirements, they have recorded a Webcast that individuals can view at their own convenience. A Webcast of this type would be: A) allowed for all registered personnel if informed of the opportunity to submit questions and receive answers in a timely fashion. B) prohibited because this is recorded and not a live Webcast. C) allowed for principals only. D) allowed for registered representatives but not for principals.

A) allowed for all registered personnel if informed of the opportunity to submit questions and receive answers in a timely fashion. Using a recorded Webcast for the annual compliance meeting is allowed for all registered personnel so long as certain safeguards are in place. One such safeguard is the opportunity to ask questions and receive answers in a timely fashion; the firm's registered individuals should be made aware of this opportunity.

When a member firm opens an account for a registered representative of another member, the employer-member must be sent written notification: A) before executing an order. B) either by the representative or by the firm opening the account. C) only if requested by the registered representative. D) within 5 business days.

A) before executing an order. When a registered representative of one member firm opens a brokerage account with another member firm, the firm opening the account must send written notification to the registered representative's employer before the execution of any transaction.

All of the following are nonexempt securities EXCEPT a: A) fixed annuity. B) variable annuity unit. C) municipal unit investment trust share. D) U.S. government bond mutual fund share.

A) fixed annuity. A fixed annuity is an insurance product exempt from registration with the SEC. Variable annuities, which carry investment risk, are nonexempt securities under the Securities Act of 1933 and must be registered before public sale. Similarly, unit trusts and mutual funds are nonexempt even though the underlying securities may be exempt, such as municipals and U.S. government securities.

Upon being informed that one party to a tenants in common account has died, a registered representative should: A) freeze the account. B) transfer half of the assets to the survivor. C) transfer all of the assets to the surviving tenants. D) allow the surviving tenants to continue trading.

A) freeze the account. The assets of a deceased tenant in a TIC account eventually go to his estate. A registered representative first freezes the account and then awaits the proper court documents. If the account was JTWROS, trading by the surviving tenants could continue.

If another member broker/dealer has already received clearance from FINRA for a retail communication, filing the piece with FINRA so that your broker/dealer can now use it A) is not necessary if unaltered and used as originally intended B) must be done within 3 days after use by your broker dealer, even if unaltered C) must be done 10 days before your broker dealer can use it, even if unaltered D) must be done before publication by your broker dealer whether it is altered or unaltered

A) is not necessary if unaltered and used as originally intended If unaltered and used as it was originally intended, re-filing with FINRA is not required. If the piece had been altered or was intended to be used in a manner inconsistent with how it had been originally intended to be used, filing with FINRA would be required.

A purchase or redemption order for investment company shares must be executed at a price based on the: A) net asset value next computed after the fund receives the order. B) best net asset value computed the same day the fund receives the order. C) net asset value computed at the close of trading on the NYSE the day before the fund receives the order. D) net asset value last computed before the fund receives the order.

A) net asset value next computed after the fund receives the order. Purchase or redemption of mutual fund shares occurs at the net asset value next calculated after the fund receives the order; this is known as forward pricing.

Regulation T allows a customer to pay for securities with all of the following EXCEPT: A) newly purchased mutual funds pledged as collateral. B) cash. C) check. D) marginable securities.

A) newly purchased mutual funds pledged as collateral. Regulation T does not allow mutual funds to be used as collateral until they have been owned fully paid for 30 days.

If a ROP is asked to approve a discretionary order to buy 1 XYZ Oct 60 put and sell 1 XYZ Oct 55 put for a net debit of $5, he should: A) not approve the order. B) approve the order if the customer has sufficient funds in his accounts. C) obtain the best execution for the order. D) approve the order in writing.

A) not approve the order. Because this is a debit spread, the maximum gain occurs if both sides are exercised. If this occurs, the investor earns $5 (buy stock at 55 when the short put is exercised and sell stock at 60 by exercising the long put). Because the net premium paid for the spread is $5, there can never be any gain. This spread is not economical.

All of the following would flow through as a loss to limited partners EXCEPT: A) principal repayment on recourse debt. B) interest payments on recourse debt. C) accelerated depreciation. D) depletion.

A) principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.

Your customer has a Coverdell Education Savings Account for each of four preteen daughters. What is the maximum amount of pretax contributions that he can make to each ESA? A) 2000. B) 500. C) 8000. D) 0.

D) 0. Pretax contributions cannot be made to Coverdell ESAs. The customer is allowed to make a $2,000 after-tax contribution annually for each student until their 18th birthday.

If a customer fails to return a proxy statement to a member firm by the 10th day before the annual meeting, the member may vote the shares: A) provided the matters to be voted on are of minor importance. B) without restriction. C) under no circumstances. D) with the permission of the issuer.

A) provided the matters to be voted on are of minor importance. If a customer signs and returns a proxy statement and fails to indicate how the shares are to be voted, the member must vote the shares as recommended by management of the issuer. If, however, the customer does not return the proxy by the 10th day before the annual meeting, the member may vote the shares as it sees fit as long as the matters to be voted on are of minor importance. If the matters are of major importance (e.g., a merger or the issuance of additional shares), the member may never vote the shares.

Depletion allowances in oil and gas programs are based on the amount of oil: A) sold. B) in reserve. C) extracted. D) lost to shrinkage.

A) sold. Depletion allowances are allowed to compensate for a mineral resource, which is considered accomplished when it is sold.

All of the following statements regarding OTC markets are true EXCEPT A) the OTC market is an auction market B) securities traded OTC include ADRs and municipal bonds C) a bid is the highest price a dealer will pay when buying D) an offer is the lowest price a dealer will accept when selling

A) the OTC market is an auction market The OTC market is a negotiated market in which market makers post their quotes in order to facilitate negotiating price. A bid is the highest price a buyer is willing to pay, and an offer is the lowest price a seller is willing to accept. Among the securities traded OTC, both American Depositary Receipts (ADRs) and municipal securities would be included.

Investment company shareholders must receive financial reports at least semiannually. All of the following are true regarding these reports EXCEPT A) the report is regulated under FINRA's rules regarding communications with the public B) one of the semiannual reports must be audited C) a statement of all compensation paid to the board of directors (BOD) must be included D) a valuation of all securities in the IC portfolio as of the date of the balance sheet provided in the report must be included

A) the report is regulated under FINRA's rules regarding communications with the public The reports are required to be supplied to IC shareholders under the Investment Company Act of 1940. They are prepared and distributed by the investment companies. Unless forwarded by broker/dealers to their customers, the semiannual reports would not be regulated under FINRA's communication with the public rules for broker/dealers.

A customer purchased on margin 100 shares of ABC stock at 120 and sold short 100 shares of XYZ stock at 100. The customer also wrote an ABC 120 call @ 3 and an XYZ 100 put @ 2. What is the margin requirement for the combined transactions? A) $10,500 B) $11,000 C) $11,500 D) $22,000

B) $11,000 The FRB margin requirement for the purchase or short sale of stock is 50%. Therefore, the margin requirement for the stock purchase is $6,000 (50% of $12,000) and for the short sale is $5,000 (50% of $10,000). The call is covered since the customer owns the underlying stock and the put is covered since the customer is short the underlying stock. Since there is no margin requirement for a covered call or put, the total margin requirement is $11,000. If the question had asked for the cash deposit, subtract the total premiums received ($500) from the margin requirement of $11,000.

In a new margin account, a customer buys 300 shares of ABC at $40 per share, 100 shares of the Ajax Mutual Fund at $24, and 10 PDQ Aug 30 calls at 4. The customer will receive a margin call for: A) 9200. B) 12400. C) 10800. D) 4400

B) $12400 The customer must pay 50% of the value of the stock, and 100% of the value of the mutual fund shares and the options because these securities are nonmarginable (NMS) and must be paid for in full (50% of $12,000 = $6,000). To calculate the total payment required, add $6,000 (stock) plus $2,400 (Ajax) plus $4,000 (PDQ calls) which equals $12,400.

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. If the client is using the convertible bonds as a hedge, the maintenance requirement is: A) $4,400 B) $4,600 C) $11,500 D) $13,200

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

A customer has an existing margin account with equity of $36,000. If the FRB requirement is 50% and the customer sells short 100 shares at $15.00 a share, the required deposit is: A) $450 B) $750 C) $1,500 D) $2,000

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

How many business days after an index option is exercised should a cash settlement occur? A) 2. B) 1. C) 3. D) 5

B) 1. Exercised stock index options settle on the next business day.

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights? A) 15 B) 10 C) 5 D) 3

B) 10 The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 − $50) / 2 = $10

The longest initial maturity for U.S. T-bills is: A) 2 years. B) 26 weeks. C) 13 weeks. D) 39 weeks.

B) 26 weeks. Maximum initial maturity for T-bills is subject to change. Though T-bills have been issued in 1 yr (52 weeks) maturities, historically the longest initial maturity of T-bills has been 6 months (26 weeks); the shortest initial maturity is 4 weeks.

Under FINRA rules, delivery on a seller's option can be made no sooner than the: A) 5th business day following the transaction. B) 4th business day following the transaction. C) 3rd business day following the transaction. D) day following the trade date.

B) 4th business day following the transaction. Seller's option trades, under FINRA rules, allow a seller to settle later than a regular-way settlement. With T + 3 regular-way settlements, a seller's option would settle no earlier than 4 business days after the trade date. If the seller could deliver any earlier in compliance with regular-way, there would be no need for a seller's option contract.

Which of the following permits the highest annual contributions? A) A traditional spousal IRA for which the contribution has been deducted. B) A SEP IRA. C) A Coverdell Education Savings Account. D) A traditional nondeductible IRA.

B) A SEP IRA. Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for ESAs or traditional or Roth IRAs.

Which of the following persons may legally open an account to trade on margin? A) A minor child with approval of a court-appointed guardian. B) A corporation. C) A custodian of an UTMA account. D) An open-end investment company.

B) A corporation. A corporation may open an account to trade on margin if provided for in the charter and authorized in the bylaws. Both UTMA and UGMA specifically prohibit custodians from either engaging in speculative trading or borrowing money or securities in the name of the minor through trading on margin. Mutual funds are also prohibited from trading on margin.

Which of the following securities has the LEAST amount of capital risk? A) Options B) Bonds C) Warrants D) Stocks

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

Your customer is interested in long-term corporate bonds. Which of the following interest-rate environments makes a call protection feature most valuable to your customer? A) Stable interest rates B) Declining interest rates C) Rising interest rates D) Volatile interest rates

B) Declining interest rates A call protection feature is an advantage to bondholders in periods of declining interest rates. When interest rates are falling, issuers are more likely to call in bonds previously issued at higher interest rates. For bondholders this creates reinvestment risk for them when the bonds are called as they are unlikely to be able to reinvest at the rate they had been earning. Call protection gives the bond holder a specified length of time during which the bond cannot be called.

Which of the following is an effect of advance refunding on a municipal bond issue? A) Cancellation. B) Defeasement. C) Lowered rating. D) Redemption.

B) Defeasement. Advance refunding (or pre-refunding) is in part the establishment of an escrow account in connection with an outstanding bond issue. Funds from a subsequent issue, deposited in the escrow account and generally invested in Treasury securities, will be used to call the bonds on the first available call date. When the bonds are escrowed to maturity, the outstanding debt is considered defeased.

Which of the following industries is most likely to be considered cyclical? A) Food. B) Durable goods. C) Utilities. D) Pharmaceutical.

B) Durable goods. The production of durable goods depends on whether the economy is in an expansion or a contraction phase. Pharmaceuticals, utilities, and food are always necessary.

If a corporation begins a nonqualified retirement plan, which of the following statements is TRUE? A) The employer must abide by all ERISA requirements. B) Employee contributions grow tax deferred if they are invested in an annuity. C) Employee contributions are tax deductible. D) Employer contributions are tax deductible.

B) Employee contributions grow tax deferred if they are invested in an annuity. Earnings accumulate tax deferred if the plan is funded by an investment vehicle that offers tax deferral, such as an annuity contract. Tax has been paid on all amounts the employees and the employer contribute to the plan. Nonqualified plans need not comply with all ERISA requirements.

Interest paid on I bonds is: A) Taxable at all levels. B) Exempt from state and local taxation. C) Exempt at all levels. D) Exempt at the federal level only.

B) Exempt from state and local taxation. Interest paid on I bonds is exempt from state and local taxes but is taxable at the federal level. Although, federal income taxes can be deferred for up to 30 years or until the bonds are redeemed, whichever comes first.

The Nasdaq market includes securities in the: I. Global select market. II. Global market. III. Bulletin Board listings. IV. Electronic OTC Pink listings. A) II and III. B) I and II. C) III and IV. D) I and IV.

B) I and II. The Nasdaq Market includes securities in 3 market tiers; global select, global, and capital markets. Bulletin Board securities (OTCBB) are issues that are not listed on Nasdaq or any U.S. exchange. OTC Pink issues are unlisted and, like Bulletin Board stocks, are referred to as non-Nasdaq.

With ABC trading at 39, a customer buys 1 ABC March 40 call and sells 1 ABC March 35 call. A profit occurs if: I. the spread widens. II. the spread narrows. III. ABC declines sharply. IV. both contracts are exercised. A) II and IV. B) II and III. C) III and IV. D) I and III.

B) II and III. This investor established a credit spread because the premium he received for the 35 call is more than he will pay for the 40 call; a call with a lower strike always carries a higher premium. As a general statement, credit spreads are bearish, and are profitable if the spread narrows between the premiums or the contracts expire unexercised (this will happen if the stock falls).

An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. Which of the following statements are TRUE? I. The investor's tax basis will be $10,000. II. The investor's tax basis will be $50,000. III. The investor's maximum loss will be $10,000. IV. The investor's maximum loss will be $50,000. A) I and IV. B) II and IV. C) I and III. D) II and III.

B) II and IV. A recourse note means that the limited partner agrees to pay the note no matter what happens. He is legally liable for the $40,000, which makes both his tax basis and maximum loss potential $50,000.

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? I. The entire amount is taxed as ordinary income. II. The growth portion is taxed as ordinary income. III. The growth portion is taxed as a capital gain. IV. The growth portion is subject to a 10% penalty. A) I and IV. B) II and IV. C) II and III. D) III and IV

B) II and IV. On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59-½ and must pay an additional 10% penalty on the taxable amount.

Your client is interested in a direct participation program (DPP) limited partnership. Which of the following two are most likely to factor into a discussion on suitability of such an investment? I. Beta. II. Liquidity. III. Duration. IV. Age. A) II and III. B) II and IV. C) I and IV. D) I and III.

B) II and IV. The key here is to recognize that with DPPs, the customer's age is a relevant consideration in determining suitability. DPPs are long-term and illiquid. For example, it is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation. Beta, having to do with measuring an investment's volatility as related to the overall market, and duration having to with bonds are not factors that would be associated with DPPs.

Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? A) Keogh plan. B) Payroll deduction plan. C) Profit-sharing plan. D) Defined benefit pension plan.

B) Payroll deduction plan. A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

Tenants in common ownership provides that a deceased tenant's fractional interest in an account is retained by which of the following? A) The surviving tenant. B) The deceased tenant's estate. C) Will be decided during probate. D) The registered representative for the account.

B) The deceased tenant's estate TIC (tenants in common) ownership of an account provides that a deceased tenant's interest in an account is retained by that tenant's estate and not passed on to the surviving tenant.

Nonmembers of a syndicate who are assisting in its sale of bonds buy the bonds at a discount called: A) the basis price. B) a concession. C) a net designated price. D) a takedown.

B) a concession. Members of the syndicate buy the bonds at the offering price minus the takedown, nonmembers buy at offering price minus a concession. The basis price is the yield to maturity.

If an investor opens a new margin account and buys 100 shares of DEF at 39, with Regulation T at 50%, what is the investor's initial margin requirement? A) 3900. B) 1950. C) 975. D) 2000.

D) 2000. In a new margin account, for first trades between $2,000 and $4,000 the initial margin requirement is $2,000.

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

B) an unlimited number of unaccredited investors. The primary sale of a limited partnership through a private placement is covered by Regulation D. Sales of the issue may be made to 35 individuals, which need not meet any financial standards. If, however, sales are made to more than 35 individuals, any other purchasers must meet certain standards of financial accreditation, known as accredited investors. An accredited investor would include an investor with $1 million or more in net worth not including net equity in a primary residence, or an individual who has earnings of $200,000 in the current year and $200,000 in the previous 2 years, or is an officer or insider of the offering. Also, any large financial institution, such as a bank, an insurance company, a savings and loan, etc., would be considered an accredited investor.

The demand is far less than anticipated for a new issue of common stock. In this situation, the underwriter may stabilize the issue by placing bids in the open market: A) at or anywhere above the public offering price. B) at or slightly below the public offering price. C) slightly above the public offering price. D) at the public offering price only

B) at or slightly below the public offering price. When demand for a new issue is less than anticipated, thus causing the price to fall, an underwriter may place a stabilizing bid at or just below the public offering price.

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

B) commodities All securities are subject to the antifraud provisions of federal securities law. It should be recognized that commodities such as wheat or oil are not securities.

Short against the box is a strategy associated with: A) avoiding the locate requirement when selling stock short. B) deferring capital gains. C) designating one tax ID number on a joint account for tax purposes. D) hedging short stock positions with options.

B) deferring capital gains. Selling short against the box is a strategy that is used to lock in a capital gain that will be deferred into a later tax period. For the deferral to be allowed, the IRS requires certain criteria to be met.

Regulation T permits borrowing money for the purchase of each of the following EXCEPT: A) listed warrants. B) listed options with expirations of less than 9 months. C) unlisted stocks and bonds. D) listed stocks and bonds.

B) listed options with expirations of less than 9 months. Options with expirations of less than 9 months must be fully paid without exception. With some exceptions, warrants, stocks, and bonds may be purchased on margin.

When a customer enters a sell order and the customer is in possession of the certificates, a broker/dealer must determine all of the following EXCEPT: A) the location of the securities. B) whether the transfer agent has accepted the securities. C) whether the securities are in deliverable form. D) whether the client can make delivery promptly .

B) whether the transfer agent has accepted the securities. A firm must make an affirmative determination and be reasonably sure the client can make prompt delivery. Conversely, approval of the transfer agent is not a factor when accepting a sell order.

Treasury STRIPS and Treasury receipts are quoted based on A) 0.03125 (1/32 of a point in dollars) B) yield to maturity C) amortization of premiums D) 0.125 (1/8 of a point in dollars)

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

Which of the following plans requires an actuary's services? A) Defined contribution. B) 401(k). C) Profit-sharing. D) Defined benefit.

D) Defined benefit In a defined benefit plan the payout is established, and employers must contribute annually to assure payment of the benefit amount. An actuary must calculate the annual contribution amount necessary to meet the benefit requirement.

The FRB initial margin requirement is 50%. A customer's initial transaction in a margin account is a purchase of 100 shares of XYZ at $15 per share. The customer would need to deposit what amount in this new account? A) $375 B) $750 C) $1,500 D) $2,000

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

A corporation has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability? A) $680,000 B) $686,800 C) $690,200 D) $714,000

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

Your customer has a Coverdell Education Savings Account for each of four preteen daughters. What is the maximum amount of pretax contributions that he can make to each ESA? A) 8000. B) 2000. C) 0. D) 500.

C) 0. Pretax contributions cannot be made to Coverdell ESAs. The customer is allowed to make a $2,000 after-tax contribution annually for each student until their 18th birthday.

To make a public offering, a registered investment company must have a minimum net worth of: A) $10 million. B) $100 million. C) 100000. D) $1 million.

C) 100000. Investment companies are not required to register an offering with the SEC unless they have a net worth of $100,000.

A registered representative who leaves the industry must requalify by examination to return to the industry if he is unaffiliated with a broker/dealer for more than: A) 5 years. B) 3 years. C) 2 years. D) 10 years.

C) 2 years. All securities licenses become null and void once an individual is unaffiliated for more than 2 years.

A customer invests $20,000 in a DPP and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution from the partnership of $15,000. At year end, the customer receives a K-1 statement reporting his share of partnership losses of $75,000. How much of the loss may the customer deduct from passive income? A) 0. B) 35,000. C) 55,000. D) 75,000.

C) 55,000. A limited partner can only deduct partnership losses to the extent of his basis. To determine basis, add the original investment ($20,000). to any recourse debt assumed by the investor ($50,000). Recourse debt adds to basis as the partner is liable for this amount. Cash distributions received reduce basis ($15,000). At year end, the investor's basis and the amount he can deduct from passive income is $55,000.

A customer purchased a municipal bond with a 6.50% coupon rate that was priced at a 6.95 basis. If the bond is currently trading at $945, the current yield is: A) 6.95% B) 6.73% C) 6.88% D) 6.50%

C) 6.88% The current yield is found by dividing the yearly interest payment of $65 by the market price of $945. This equals 6.88%. The fact that the bond was purchased at a 6.95 basis is not relevant.

Cash dividends received from which of the following securities will be taxed as ordinary income? A) Preferred stock issued by a bank B) Common stock issued by an oil company C) A real estate investment trust D) Convertible preferred stock issued by a software company

C) A real estate investment trust Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is not relevant to the tax status of the cash dividend.

Which of the following best describes a nominal municipal bond quotation? A) Likely bid or offer. B) Firm bid or offer. C) Approximate price reflecting current market value with no bid or offer. D) Subject bid or offer that must be reconfirmed before a trade.

C) Approximate price reflecting current market value with no bid or offer. A nominal quote is an indication of the approximate market value of a municipal bond, provided for informational purposes only. A nominal quote does not represent an actual bid or offer.

An underwriting bid for a municipal GO issue would include which of the following? I. The dollar amount. II. The coupon rate. III. The yield-to-maturity. IV. The underwriting spread. A) II and IV. B) I and III. C) I and II. D) II and III.

C) I and II. The only information the underwriter must furnish to the issuer is the dollar amount of the bid (the amount the issuer will receive) and the coupon rate (the amount of interest the issuer will pay). From this the issuer can determine the lowest net interest cost and award the bonds on that basis.

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

C) Discussion on how changing currency rates may affect the value of the securities 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 statements is TRUE concerning a customer who purchases an out-of-state original issue discount (OID) general obligation bond? A) Each year the customer will pay both federal and state income tax B) Each year the customer will pay only federal income tax C) Each year the customer will pay only state and local income tax D) The customer will not pay any tax

C) Each year the customer will pay only state and local income tax The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on an out-of-state municipal security is exempt from federal tax, but subject to state and local income tax. The tax rate is based on the state in which the customer maintains his primary residence.

MSRB rules for NYSE member firms are enforced by: A) the NYSE. B) the MSRB. C) FINRA. D) the SEC

C) FINRA. The board's rules are enforced by FINRA for securities firms. The MSRB has rule-making authority but no enforcement or examination authority.

Which statements are TRUE regarding contribution limits? I. The contribution limit to a Coverdell ESA can be reduced or eliminated for high-income individuals. II. The contribution limit to a Coverdell ESA cannot be reduced or eliminated for high-income individuals. III. The contribution limit to a Section 529 plan can be reduced or eliminated for high-income individuals. IV. The contribution limit to a Section 529 plan cannot be reduced or eliminated for high-income individuals. A) II and IV. B) II and III. C) I and IV. D) I and III.

C) I and IV. The after-tax contribution limit of $2,000 can be reduced or eliminated for high-income taxpayers. However, there are no income limitations placed on individuals opening Section 529 plans.

A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? I. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. II. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. III. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. IV. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer. A) I and II. B) I only. C) I, II, III and IV. D) I, II and III.

C) I, II, III and IV. All are true statements. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

The Securities Exchange Act of 1934: I. Created the SEC II. Provided for the regulation of credit III. Provided for the regulation of exchanges IV. Provided for the regulation of new issues A) I and III only B) I and IV only C) I, II, and III only D) II, III, and IV only

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

When evaluating numerous mutual funds, what is meant by net investment income? A) Interest only B) Dividends only C) Interest + dividends - expenses D) Dividends + capital gains - expenses

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

Which of the following securities is the least suitable recommendation for a qualified retirement account plan account? A) Treasury bill. B) Blue-chip common stock. C) Investment-grade municipal bond. D) A rated corporate bond.

C) Investment-grade municipal bond. Municipal bonds provide tax-exempt interest payments and, consequently, offer lower yields. Because earnings in a qualified retirement plan account grow tax deferred, the municipal bond is not a suitable investment. In addition, they will be fully taxed on withdrawal.

How often will the IRS allow a Health Savings Account (HSA) to be funded via an IRA distribution without paying federal taxes or penalties on the distribution? A) Never, taxes and penalties for early distributions are always due. B) Once each calendar year. C) One time. D) There are no funding limits when HSAs are funded from another qualified account.

C) One time. Health Savings Accounts (HSAs) are qualified employer sponsored plans. The IRS allows a one time funding distribution from an IRA to a qualified HSA without paying federal taxes or penalties on the IRA distribution.

The legislation that required SRO's to establish research analyst conflict of interest rules for its members is: A) Securities Investors Protection Act. B) Securities Act of 1933. C) Sarbanes-Oxley. D) Regulation D

C) Sarbanes-Oxley. The research analyst conflict of interest rules were mandated by the Sarbanes-Oxley Act.

Sally is the named beneficiary of her grandmother's IRA. After the death of her grandmother who was 80 years old, what would Sally's options be regarding the IRA? A) Roll over her grandmother's money into Sally's own IRA. B) Wait until age 70½, to maximize tax deferral, and then begin required minimum distributions. C) Take minimum required distributions based on Sally's life expectancy. D) Wait until age 59½ to begin taking distributions, to avoid the 10% tax penalty.

C) Take minimum required distributions based on Sally's life expectancy. Before age 80, Sally's grandmother would have already begun mandatory distributions. When someone inherits an IRA for which the initial owner has begun mandatory distributions, payout must continue but is now based on the life expectancy of the new owner.

Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as: A) Open-end investment companies B) Closed-end investment companies C) Unit investment trusts D) Face amount certificate companies

C) Unit investment trusts Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as unit investment trusts (UITs). Investors can receive a reduced sales charge if they purchase a certain amount of a UIT

Of the following bonds, which has the greatest price volatility? A) Corporate bond fund. B) AA corporate bond with 7 years to maturity. C) Zero-coupon bond with 15 years to maturity. D) Zero-coupon bond with 5 years to maturity.

C) Zero-coupon bond with 15 years to maturity. The longer the duration of a bond, the greater the volatility will be of its market price when interest rates change. Because zero-coupon bonds do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds.

An investor purchased a municipal bond at par to yield 5.5% to maturity. If, two years later, he sold the bond at a price equivalent to a 5% yield to maturity, the investor incurred: A) no taxable result at this time. B) a capital loss. C) a capital gain. D) taxable interest income.

C) a capital gain. Because the investor sold the bond at a price that will yield less than the yield when he purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor incurred a capital gain-lower yield, higher price.

Which of the following accounts would a CMO Z-tranche be best suited for? A) an IRA account for a middle aged client B) a custodial account set up under the uniform transfer to minors act (UTMA) C) a professionally managed hedge fund specializing in real estate portfolio securities D) a joint account with a non working spouse

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

All of the following are restricted persons EXCEPT: A) finders and fiduciaries acting on behalf of the managing underwriter. B) portfolio managers. C) any persons owning 5% or more of a member firm. D) employees of members

C) any persons owning 5% or more of a member firm. Rules prohibit member firms from selling initial equity public offering stock to any account in which restricted persons are beneficial owners. Restricted persons include FINRA members, employees of member firms, finders and fiduciaries acting on behalf of the managing underwriter, portfolio managers, and any person owning 10% or more of a member firm. Also included are a restricted person's immediate family members.

A nonqualified deferred compensation plan: A) guarantees payment to the employee even if the company becomes insolvent. B) must be offered to all employees. C) does not guarantee that the employer will fulfill the obligation. D) must be approved by the IRS.

C) does not guarantee that the employer will fulfill the obligation. Nonqualified deferred compensation plans are agreements between an employer and an employee in which the employee agrees to defer receipt of part of their salary. Nonqualified deferred compensation plans do not require IRS approval and may discriminate (need not be offered to all employees). In fact, they are generally offered only to officers and other high-ranking executives. In the event of a business failure, there is no guarantee that deferred amounts will be paid.

If a corporation has a dividend payout ratio of 70%, the undistributed earnings will: A) decrease book value. B) increase capital surplus. C) increase retained earnings. D) increase earnings per share.

C) increase retained earnings. Retained earnings represent income that has not been paid out to shareholders.

A customer signs a trading authorization form granting written discretion over the account to the registered representative. All of the following practices are permitted EXCEPT: A) shifting funds among several mutual funds within a fund family, based upon the representative's expectations for market performance. B) notifying the customer periodically of the account's performance. C) indicating that trades in which the representative used discretion were unsolicited or solicited. D) buying or selling stocks without notifying the customer.

C) indicating that trades in which the representative used discretion were unsolicited or solicited. When discretion is used in a discretionary account, order tickets must be marked accordingly.

One of the benefits of using arbitration to settle disputes between member firms is that it: A) gives more time to prepare arguments. B) is not binding on both parties. C) is relatively inexpensive. D) does not allow for arguments from parties outside the industry.

C) is relatively inexpensive. Arbitration is a method for settling disputes between member firms that is less costly than litigation. In addition, all decisions are final and binding on all parties.

All of the following are regulated by the MSRB EXCEPT: A) dealers. B) quotes. C) issuers. D) sales representatives.

C) issuers. Quotes, dealers, and sales representatives are regulated by the MSRB; issuers are not.

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

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

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

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

A customer is interested in an IPO of a stock in registration. He requests that you highlight the important information on the preliminary prospectus and send an analysis of the company's past performance. You may: A) comply with the request because the customer solicited the information and analysis. B) comply with the request because it involves an IPO in which little information is known about the issuer. C) not comply with the request because the preliminary prospectus may not be altered. D) not comply with the request because the stock is not yet listed for trading on any exchange.

C) not comply with the request because the preliminary prospectus may not be altered. A prospectus, whether preliminary or final, is a legal document that cannot be altered by the registered representative. It is illegal for a registered representative to mark on or attach anything to a prospectus (even if requested by a client). Important information may be pointed out orally but not highlighted.

If a municipal firm purchases a block of municipal bonds in anticipation of a price increase, the firm is engaged in: A) hedging. B) short selling. C) position trading. D) arbitrage.

C) position trading. The dealer is buying for its inventory (position trading).

The 5% markup policy applies to: A) All of these. B) new issues. C) principal OTC trades. D) mutual funds

C) principal OTC trades The 5% markup policy applies to agency and principal nonexempt securities and transactions both exchange and OTC traded. It does not apply to prospectus offerings (mutual funds and new issues).

When determining whether a tax swap of municipal bonds will result in a wash sale, each of the following are considered EXCEPT: A) coupon. B) issuer. C) principal amount. D) maturity.

C) principal amount. In judging whether bonds purchased are substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate. If at least two of the three are different, a wash sale will generally not result.

On the trading floor, the highest bid and offer receive first consideration. When several bids at the same price occur, the trade will be awarded based on: A) parity, precedence, then priority. B) priority then parity. C) priority, precedence, then parity. D) priority then precedence.

C) priority, precedence, then parity. When there are several bids or offers at the same price, the order in which they are filled is based upon time entered and size of order. This is known as priority, precedence and parity on the NYSE.

The manager of a portfolio that consists predominately of large- and mid-cap stocks could hedge against a market downturn and generate additional income by A) buying broad index puts. B) selling broad index puts. C) selling broad index calls. D) buying broad index calls.

C) selling broad index calls. The only way to generate income through the use of options is to sell them. If one is concerned that the market may fall, selling calls is the appropriate strategy.

The term that describes options of the same exercise price and expiration date for the same underlying security is: A) type. B) issue. C) series. D) class.

C) series. Options at the same exercise price and expiration date for the same underlying security are known as a series of options.

The last day that stocks can be bought for cash and still receive the dividend is: A) the business day prior to the regular way ex-date. B) on the ex-date. C) the record date. D) the day after the record date.

C) the record date. A cash trade settles the same day. Stocks bought for cash on the record date will be entitled to the dividend under an exception to the 2-business day rule for regular way transactions.

Mutual fund shareholders are NOT taxed on: A) reinvested dividends. B) interest distributions. C) unrealized capital gains. D) capital gains distributions.

C) unrealized capital gains. Interest, dividends, and realized capital gains are all taxed. However, unrealized capital gains are not taxed. Unrealized gains contribute to NAV appreciation and to a shareholder's capital gain upon redemption.

An outstanding municipal bond issue has the following characteristics: 7.50% coupon; maturity in 20 years; puttable in 5 years at 100; callable at 102 in 10 years; declining in a straight-line to maturity; yield-to-maturity is 6.50%. The issues should now be quoted: A) yield-to-put. B) yield-to-maturity. C) yield-to-call at 102. D) yield-to-call at par.

C) yield-to-call at 102. Since the bond issue is selling at a premium, the yield-to-call is less than the yield-to-maturity. The bonds must be quoted as yield-to-call at the earliest maturity, which would be the 10-year call at 102. If the bonds were selling at a discount, yield-to-maturity would be the proper quote. Yield-to-put is not required to be quoted.

For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 1 round lot. B) 1 odd lot. C) 25 odd lots. D) 25 round lots.

D) 25 round lots. For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.

If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date? A) 30. B) 40. C) 45. D) 25.

D) 25. If either side is displeased with a Code of Procedure decision, an appeal must be made within 25 days of the decision date.

Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 4 years ago; it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) 3800. B) 0. C) 4200. D) 2800

D) 2800 This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). The tax on this is $2,800 ($10,000 x 28%). Because the client is older than age 59-½, he does not pay 10% premature distribution penalty tax.

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is: A) 5.60% B) 6.40% C) 6.80% D) 7.60%

D) 7.60% The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The common stock ratio is: A) 21% B) 26% C) 74% D) 79%

D) 79% The common stock ratio is found by dividing total shareholder equity by a company's total capital. Shareholder equity is equal to the par value of the common stock + paid-in capital + retained earnings, and the total capital is found by adding the debt to shareholder equity. The common stock ratio is 79% [par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million / $1,085 million ($225 million + $860 million)]. The common stock ratio is used to analyze the capital structure of a company.

As a requirement of investing in a particular investment, your customer has just signed a statement attesting to his annual income, net worth and affirming that the risks associated with the investment are understood. Which of the following investments would have such a requirement? A) A variable annuity B) A collateralized mortgage obligation C) A hedge fund D) A direct participation program

D) A direct participation program Investors purchasing limited partnership participations or DPPs are required to sign a subscription agreement. In part the investor would be attesting to annual income, net worth and that they understand the risks associated with the type of program they are investing in. While suitability would be a factor for each of the investments listed, they do not require this type of statement be signed by the customer.

ABC Investors Group is looking to do a leveraged buyout of the XYZ Corporation. Which of the following would be the most likely source of capital to fund this takeover? A) XYZ's liquid assets. B) ABC's liquid assets. C) XYZ's creditors. D) A long-term bank loan.

D) A long-term bank loan. The word "leverage" generally implies the use of borrowed money. The acquiring company will either issue a bond or borrow from a bank and use that money to fund the acquisition. In most cases, the assets of the target company are used as collateral for the loan.

A significant increase in which of the following types of orders may cause a bull market to accelerate? A) Short sales. B) Sell stops. C) Buy limits. D) Buy stops.

D) Buy stops. If the market is rising, only those orders on the order book above the current market will be executed. Buy stops and sell limits are both entered above the prevailing market price. Of these two, only buy orders (in this case buy stops) will accelerate a rise in the market.

An employee not covered under his company's pension plan has been contributing to a traditional IRA for 5 years. If he leaves his current job, starts a new job, and is covered under the new corporation's pension plan, which of the following statements is TRUE? A) The money in his IRA must be combined with any money he will receive from the pension plan. B) Contributions to his IRA must stop; the money in the account will be frozen, but interest and dividends can accrue tax-free until he retires. C) His traditional IRA must be closed. D) Contributions to his traditional IRA may continue.

D) Contributions to his traditional IRA may continue. An employee covered under a qualified retirement plan may continue to own and contribute to an IRA. The contributions to a traditional IRA may not be fully tax-deductible, depending on the amount of compensation earned, but the employee benefits from the tax deferral of IRA earnings.

Which of the following taxes does NOT impact the holder of an ADR? A) Foreign income tax. B) State income tax. C) Federal income tax. D) Excise tax.

D) Excise tax. Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investor's federal income tax return.

For which of the following would the net revenue to debt service ratio be applicable? A) GO bonds. B) School bonds. C) Tax anticipation notes. D) Hospital bonds.

D) Hospital bonds. This is the Coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built with the proceeds of revenue bond issues.

Which of the following statements describe the conduit theory of taxation? I. A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income. II. Earnings distributed by a regulated investment company are taxed three times. III. Dividends and interest are passed through to the investor without the fund being taxed. IV. Dividends and interest accumulate tax free to the shareholder. A) II and IV. B) II and III. C) I and IV. D) I and III

D) I and III Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.

The initial confirmation of a when-issued municipal bond contains which of the following? I. Number of bonds involved in the transaction. II. Settlement date. III. Yield to maturity. IV. Total dollar amount due. A) I and II. B) III and IV. C) II and IV. D) I and III.

D) I and III. On a new municipal bond offering, where the customer receives a when-, as-, and if-issued confirmation, the final settlement date is not known; therefore, the amount of accrued interest is unknown (because it is payable up to but not including settlement). Thus, the total dollar amount is unknown because it includes accrued interest. The number of bonds purchased and the yield to maturity (price) are known and must be included on the confirmation.

What is a bank-qualified municipal issue? A) One considered safe enough for a bank to invest in-same as investment grade. B) An escrow receipt. C) One in which the bank guarantees the payment of interest and principal. D) One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds

D) One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds A bank-qualified municipal issue is one that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry (issue) the bonds. An issue is qualified if it is for a public purpose and the issuer issues no more than $10 million in the calendar year of the issue. Bank qualified has no bearing on the quality of the issue.

Which of the following regarding a Roth IRA are TRUE? I. The contributions are nondeductible. II. Contributions must cease at age 70½. III. Withdrawals must begin at age 70½. IV. Withdrawals after age 59½ can be tax free. A) II and IV. B) I and III. C) II and III. D) I and IV.

D) I and IV. With a Roth IRA, the contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the account has been open for at least 5 years. There is no age at which withdrawals must begin or contributions must cease.

Under SEC rules, a customer short sale on an exchange floor can be executed on which of the following? I. Plus tick. II. Zero-plus tick. III. Minus tick. IV. Zero-minus tick. A) I and III. B) I and II. C) II and IV. D) I, II, III and IV.

D) I, II, III and IV. On an exchange floor, a customer short sale can be executed at any time in the trade sequence.

Which of the following are signs that a customer may be engaged in money laundering? I. Excessive journal entries between related accounts. II. Excessive journal entries between unrelated accounts. III. Lack of concern for risk, commissions, and other transaction costs. IV. Excessive concern for risk, commissions, and other transaction costs. A) II and IV. B) I and III. C) I and IV. D) II and III.

D) II and III. Examples of red flags include a lack of concern regarding risk, commissions, and other costs, and a large number of wire transfers to, or journal entries between, unrelated third parties.

Rank the following in the usual sequence of order allocation. I) Syndicate. II) Member at the take down. III) Presale. IV) Designated. A) II, IV, III and I. B) I, II, III and IV. C) III, II, IV and I. D) III, I, IV and II

D) III, I, IV and II The standard order priority for allocation of municipal bond issues is (as stated within the syndicate letter): presale, syndicate, designated, and member. Orders that benefit all syndicate members have the highest priority.

Which of the following bonds trade flat? A) GO bonds. B) Mortgage bonds. C) Revenue bonds. D) Income bonds.

D) Income bonds. Bonds that trade flat do not trade with accrued interest. These include income bonds (also known as adjustment bonds), zeroes, bonds in default, and bonds that settle on an interest payment date.

At a social gathering, an officer of a publicly traded company confides to his neighbor, a registered representative, that his company will announce a major acquisition in the coming week. Which of the following statements regarding the SEC's insider trading rules is TRUE? A) The officer is in violation. B) Both the officer and the registered representative are in violation. C) The registered representative is in violation. D) Neither the officer nor the registered representative is in violation.

D) Neither the officer nor the registered representative is in violation. Simply giving someone material, nonpublic information (while imprudent) is not a violation. However, if the information is used to trade for profit or to avoid a loss, both the tipper and the tippee would have violated the law.

A member firm broker/dealer wishing to go public may sell a new equity issue of its own securities to all of the following EXCEPT: A) public customers. B) owners, officers, and employees of the firm. C) family members of owners, officers, and employees of the firm. D) employees of other full-service member firms

D) employees of other full-service member firms Rules regarding restricted persons generally prohibit member firms from selling new issue securities to employees of member firms including their own. However, when member firms sell their own securities, rules regarding restricted persons do not apply to the issuer's own employees but still apply to the employees of other full-service member firms.

Which of the following materials is subject to FINRA's filing requirements? A) Prospectus for a closed-end management investment company. B) Internal memo describing the benefits of an investment in a certain unit investment trust. C) Prospectus for a face amount certificate company. D) Retail communications for an open-end management investment company.

D) Retail communications for an open-end management investment company. Retail communications for investment companies are subject to filing requirements with FINRA. Those that include a performance ranking that is either created by the investment company or from a source that is not regularly published require pre-filing. Those that do not include such a performance ranking can be filed within 10 business days of first use. Prospectuses and internal memos need not be filed with FINRA.

For the purpose of reporting sales to the IRS, which method available to investors by the IRS offers the most flexibility in anticipation of the investor's year-end tax needs? A) None offer any flexibility in anticipation of year-end tax needs B) Average cost basis C) First in, first out (FIFO) D) Share identification

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

Which of the following will halt trading in listed options when there is a trading halt in the underlying stock? A) The exchange on which the stock is listed. B) The SEC. C) The OCC. D) The options exchange on which the option is listed.

D) The options exchange on which the option is listed. If trading is halted in any stock on which options trade, trading in those options is also halted by the CBOE.

If a 40-year-old customer earns $65,000 a year and his 38-year-old spouse earns $40,000 a year, how much may they contribute to IRAs? A) Only the higher wage earner may contribute to an IRA. B) They may not contribute because their combined income is too high. C) They may contribute up to the maximum annual allowable dollar limit split evenly between both accounts. D) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA.

D) They may each contribute 100% of earned income or the maximum annual allowable dollar limit, whichever is less, to an IRA. No matter how much income individuals or couples receive, they may contribute to their IRAs if they have earned income. Each is entitled to contribute 100% of earned income up to the maximum allowed. However, if either or both of them are covered under a qualified plan, limits may exist on the deductibility of the contributions.

If a stock's ex-dividend date is Tuesday, January 13, when is the record date? A) Tuesday, January 20. B) Wednesday, January 7. C) Thursday, January 8. D) Thursday, January 15.

D) Thursday, January 15. The record date is two business days after the ex-dividend date (Thursday, January 15).

Which of the following companies would probably be MOST leveraged? A) Software B) Biotech C) Consumer electronics D) Utilities

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

The Trust Indenture Act of 1939 covers all of the following securities transactions EXCEPT: A) a sale of an equipment trust bond issue worth $6 million. B) a public issue of debentures worth $5.5 million sold by a single member firm throughout the United States. C) a corporate bond issue worth $10 million sold interstate. D) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2011.

D) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2011. The Trust Indenture Act of 1939 requires all corporate debt issues of $5 million or more sold interstate to have a trust indenture; U.S. governments are exempt.

An accumulation unit in a variable annuity contract is: A) none of these. B) an accounting measure used to determine payments to the owner of the variable annuity. C) fixed in value until the holder retires. D) an accounting measure used to determine the contract owner's interest in the separate account.

D) an accounting measure used to determine the contract owner's interest in the separate account. When money is deposited into the annuity, it is purchasing accumulation units.

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT: A) national and state bank securities. B) state and municipal bonds. C) commercial paper and bankers' acceptances that have maturities of no more than 270 days. D) commercial bank holding company securities

D) commercial bank holding company securities Commercial bank holding companies are corporations that have to register with the SEC. State and municipal bonds do not have to be registered under the Securities Act of 1933. Commercial paper and bankers' acceptances that have maturities of no more than 270 days are exempt from the registration provisions. National and state banks are regulated by various state and federal agencies.

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

D) 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 such issues.

Under FINRA rules, a registered representative is permitted to borrow money from a customer: A) under no circumstances. B) if written notification is given to the firm. C) without restriction. D) if written notification is given to the firm and the representative receives written approval.

D) if written notification is given to the firm and the representative receives written approval. Firms are not required to permit lending arrangements between registered representatives and their customers. If they do, they must have procedures in place to monitor such arrangements. If permitted by the firm, the arrangement must fall into one of five permissible categories: the customer is a member of the representative's immediate family; the customer is in the business of lending money; the customer and the representative are both registered with the same firm; the arrangement is based on a personal relationship outside of the customer/representative relationship; or the arrangement is based on a business relationship outside of the customer/representative relationship. If permitted by the firm, the representative must advise the firm in writing of the proposed borrowing, and receive written permission.

A workable indication for a block of municipal bonds is a: A) likely offer. B) firm bid. C) firm offer. D) likely bid.

D) likely bid. A bid is the price at which a dealer states its willingness to purchase securities from another broker/dealer. A dealer soliciting a workable indication is often working to satisfy a customer's order to sell securities. A dealer giving a workable indication is free to revise its bid if market conditions change.

An associated person of a broker dealer who wishes to accept an outside employment opportunity must notify the A) customers of the broker dealers in writing B) SEC in writing C) FINRA in writing D) member firm in writing

D) member firm in writing Notification must be made to the member firm in writing.

Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must: A) determine the identity of the purchaser. B) accept the order. C) reject the order. D) obtain a representation from the bank that the purchaser is not restricted.

D) obtain a representation from the bank that the purchaser is not restricted. If a member receives an order from a conduit such as a bank, the member must make an inquiry as to whether the ultimate purchaser is restricted. It is not necessary to determine the identity and business affiliations of the purchaser.

The determination as to whether an OTC stock is eligible for purchase on margin is made by: A) FINRA. B) the SEC. C) the FDIC. D) the Federal Reserve Board.

D) the Federal Reserve Board. All decisions regarding initial margin eligibility are the role of the Federal Reserve Board.

A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. The registered representative wants to sell shares of a common stock IPO to the investment club. This is allowed: A) with written principal approval. B) with written notice to the SEC. C) only if the IPO is suitable for the investment club. D) under no circumstances.

D) under no circumstances. Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules the account would not be restricted if the assets owned by the spouse composed less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.

To avoid tax and penalty, an IRA may be rolled over once each: A) quarter, by the end of the calendar quarter. B) 3 years, within 90 days. C) 5 years, by the end of the calendar year. D) year, within 60 days.

D) year, within 60 days IRA rollovers, which must be completed within 60 days, may be done no more often than once a year.

Expiration length of Options vs. LEAPs

Options: less than 1 year LEAPs: 1 year of longer