Series 7 STC

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Which item need NOT appear on a customer confirmation for a municipal bond transaction? A Whether the interest paid on the bonds is subject to the alternative minimum tax B The name of the bond counsel C Existence of call features D Whether the bonds are insured

B The name of the bond counsel MSRB rules do not require that the name of the bond counsel be disclosed on a confirmation. The existence of call features, bond insurance, the applicability of the alternative minimum tax, or any special relationships between the issuer and the broker-dealer (such as financial advisory and control relationships) are among the numerous disclosures that must be made to customers on a confirmation.

An article in The Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This indicates that: A Buyers of new bills purchased the bills above par B Buyers of new bills paid less than buyers paid the previous month C Buyers of new bills paid more than buyers paid the previous month D Interest rates are increasing

C Buyers of new bills paid more than buyers paid the previous month Treasury bills are purchased at a discount from the dollar amount on its face. The larger the discount, the higher the discounted yield to maturity. In this example, the discounted yield to maturity has gone down to 4.58% from 4.61% from the previous month. This indicates that buyers of new bills paid more for the Treasury bills (meaning the discount was less) than buyers paid the previous month.

Which of the following transactions qualifies a customer as a pattern day trader? A 3 day trades executed in one week B 10 day trades executed in one month C 3 day trades executed in one day D 4 day trades executed in one week

D 4 day trades executed in one week A customer is considered a pattern day trader if 4 or more day trades are executed over any 5-business-day period. The minimum equity required for a pattern day trader is $25,000.

An open-end investment company has increased in value because of a rise in the market. This is best characterized as: A capital gain B A profit C Ordinary income D Appreciation

D Appreciation An increase in the market price of an open-end investment company or other security from the purchase price is appreciation. There is only a capital gain when the security is sold and the appreciation is realized.

In which of the following documents are bid limitations for a new municipal bond issue found? A The official statement B The notice of sale C The indenture D The syndicate agreement

B The notice of sale The notice of sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the notice of sale.

A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares. Assuming that all of the shares are sold, what amount will the syndicate members receive for their risk on shares sold by the selling group? A $0.25 per share for a total of $1,000,000 B $0.40 per share for a total of $400,000 C $0.25 per share for a total of $250,000 D $0.65 per share for a total of $650,000

C $0.25 per share for a total of $250,000 The members of the syndicate receive $0.25 per share for their risk. Since the selling group was allocated 1,000,000 shares, the syndicate will receive $0.25 per share on 1,000,000 shares for a total of $250,000. *Trick here is the not over read the part stating selling group amount of shares*

The net asset value (NAV) of an open-end investment company is $22.20 and its sales charge is 8%. What is the public offering (asked) price? A $23.98 B $22.20 C $20.42 D $24.13

D $24.13 The public offering price (POP) or asked price is $24.13. To find the POP, the net asset value is divided by the complement of the sales charge, as follows: NAV / (100% - sales charge) $22.20 / (100% - 8%) $22.20 / 92% $22.20 / 92% = $24.13 Remember, a mutual fund's sales charge is always expressed as a percentage of the POP. For this reason, it is incorrect to use the sales charge (8%) multiplied by the NAV ($22.20).

An investor purchases 200 shares of STC at $35 and subsequently purchases 2 STC Jan 35 puts at 2. At what market price must STC trade for the investor to have a profit? A 32 B 34 C 36 D 38

D 38 If an investor is long stock and long a put, he will have a profit if the market price exceeds the cost of his stock plus the premium for the option. The stock must trade above 37 (35 cost + 2 premium).

A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT to: A Make a primary offering to establish a public sewer system B Raise capital to expand its school system C Raise additional capital for a government housing project D Refund a mass transportation bond

D Refund a mass transportation bond A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for refundings, working capital, and private activity bonds.

Evelyn has established the following position. Long 1 DEF May 50 call at 2 Short 1 DEF May 40 call at 6 She expects to profit in which TWO of the following situations? I. Both options expire unexercised II. Both options are exercised III. DEF rises in value IV. DEF falls in value

I and IV This position is referred to as a credit call spread. Evelyn has received more for establishing the position because the short call has a strike price less than the long call. If both calls expire unexercised, Evelyn will keep the difference. If DEF falls below $40 per share, neither call will be exercised, resulting in a profit for Evelyn.

A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale? A $1,500 B $2,000 C $1,000 D None

A $1,500 This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500.

An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25 and has a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, the cost basis per share for the newly acquired common stock is: A $26.50 B $28.00 C$27.50 D$27.75

A $26.50 To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The formula for calculating conversion ratio is the par value of the preferred stock ($100) divided by the conversion price ($25). As a result, four shares of common stock are received if the preferred stock is converted into common stock. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4) ($106 ÷ 4 = $26.50). Any future gains or losses on the sale of the common stock will be calculated by using the basis of $26.50.

Of the following broad-based indicators, the one with the narrowest measure of the market is the: A Dow Jones Composite B Wilshire Associates Equity Index C New York Stock Exchange Composite Index D Standard and Poor's 500 Index

A Dow Jones Composite The Dow Jones Composite contains only 65 stocks. The Wilshire Associates Equity Index shows the dollar value of approximately 7,000 stocks. The S&P 500 Index contains 500 stocks. The NYSE Composite Index consists of all common stocks listed on the NYSE.

An investor owns 280 shares of XYZ Corporation. XYZ Corporation pays a 15-cent quarterly dividend. XYZ Corporation announces a 5-for-4 split. The dividend per share is adjusted to reflect the split. How much will the investor receive in dividends each quarter after the split? A $42.00 B $80.00 C $40.00 D $52.50

A $42.00 After the split, the investor would own 350 shares (280 x 5/4 = (280 x 5) / 4 = 350) and would receive $42.00 each quarter (350 shares x $0.12 = $42.00) in dividends. To find the adjusted dividend per share, multiply the inverse of the split by the original dividend of $0.15 ([$0.15 x 4] / 5 = $0.12). Since the dividend is adjusted for the split, the investor would receive the same total dividends after the split as before (280 shares x $0.15 per share = $42).

An investor buys 100 shares of XYZ at $50 per share and, at the same time, writes an XYZ May 50 call option for a $5 premium. Excluding commissions and dividends, at what price would XYZ need to be selling for the writer to break even? A $45 B $58 C$50 D$42

A $45 The breakeven point for the writer of a covered call is the original cost of the stock minus the premium received on the option (50 - 5 = 45). If the market price were at 45 at expiration, the call would expire and the writer would keep the $500 premium. However, the stock purchased at $50 would be worth only $45, which is equal to the investor's cost.

A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. When the issue is completely sold, the managing underwriter's fee will total: A $60,000 B $600,000 C $160,000 D$260,000

A $60,000 The syndicate manager receives $1.50 for every bond sold, which includes the bonds sold by other syndicate members as well as the selling group. The manager will receive, in total, $60,000 (40,000 bonds x $1.50 per bond).

A client has a margin account in which she is long and short 1,000 shares of the same security. Based on this position, if the current market value of the stock is $80 per share, the client is permitted to borrow up to: A $76,000 B$4,000 C$20,000 D$40,000

A $76,000 This is a tricky question and the answer is based on the margin maintenance requirement of a short against the box position. If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000. The choice of $40,000 (the Reg. T requirement of $80,000) is incorrect since it fails to take into account the client's total position.

An investor purchases a $100,000 face value municipal bond with a 5-year maturity at 105. After two years, the bond is sold at 95. For tax purposes, the investor has a(n): A $8,000 loss B $4,000 loss C $10,000 loss D $2,000 loss

A $8,000 loss When a municipal bond is purchased at a premium, the bond's premium must be amortized to find an adjusted cost basis. If the bond is sold above the adjusted cost basis, the result is a capital gain. If the bond is sold below the adjusted cost basis, the result is a capital loss. If the bond is held to maturity, there is neither a loss nor a gain for tax purposes. This is because the adjusted basis would equal the par value after the premium is amortized. This bond is purchased at $105,000 with a 5-year maturity. The premium of $5,000 ($105,000 - $100,000 = $5,000) must be amortized over a 5-year period ($5,000 divided by 5 years equals $1,000 per year). Therefore, each year the original cost of the bond is reduced by $1,000. If the bond is sold after 2 years, the adjusted cost basis is $103,000 ($105,000 - $2,000 = $103,000). Since the bond is sold at $95,000, there is a capital loss of $8,000 ($103,000 - $95,000).

An individual purchases $100,000 of a 2x leveraged inverse ETF. If the underlying index appreciates by 10% on the first day and then depreciates by 10% on the second day, the value of the individual's investment will be: A $96,000 B $99,000 C$108,000 D$100,000

A $96,000 An inverse ETF is designed to return the inverse of the performance of an index, and a 2x leveraged inverse ETF is designed to reflect twice the performance of the underlying index in an opposite direction. In this case, a 10% increase in the underlying index would result in a 20% decrease in the value of the investment, $100,000 x 20% = $20,000, or a value of $80,000 on the first day. A 10% decrease on the second day would result in a 20% increase in the value of the investment, $80,000 x 20% = $16,000, or a value of $96,000 ($80,000 + $16,000).

Your firm is the managing underwriter of an initial public offering. How many days must the firm's research analyst wait before issuing a research report on this IPO? A 10 days B 25 days C There is no waiting period and research may begin anytime after the effective date D Three days

A 10 days If a firm is involved in an underwriting of an initial public offering and is the manager or co-manager, it must maintain a quiet period of 10 days following an IPO or three days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 10 days.

A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis? A 101.50 B 106 C 104.50 D 100

A 101.50 When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).

An investor purchases a zero-coupon municipal bond that matures in 15 years, but it is callable in five years at 102. If the bond is called, the investor will receive: A 102% of the compound accreted value B 102% of the original cost C 102% of the par value D Par value

A 102% of the compound accreted value The key to this question is in realizing that the basis of a zero-coupon or original issue discount (OID) bond must be accreted (upwardly adjusted) on an annual basis. After the first year's accretion, the bond's original cost is no longer of importance. Also, any reference to the bond's par value will only become valid if the bond reaches maturity and the investor receives the par amount. Therefore, in this question, it is important to note that any reference to a call premium is based on the bond's compound accreted value. If this bond is called, the investor will receive 102% of the compound accreted value, which is equal to the original value of the bond plus the annual accretion (interest earned, but not received) to date. However, if the bond was not an OID bond and was called, the investor would receive 102% of par ($1,020).

An investor purchases a municipal bond on Monday, June 6. The bond's interest payment dates are November 1 and May 1. The buyer will need to pay the seller of the bond the purchase price plus accrued interest for: A 37 days B 39 days C 35 days D 36 days

A 37 days Accrued interest is calculated from the last interest payment date (May 1) up to but not including the settlement date. The purchase is made Monday, June 6. The settlement date is two business days later, which is Wednesday, June 8. Accrued interest is calculated up to but not including the settlement date, which is from May 1 to June 7. This equals 37 days as follows. Municipal and corporate bond interest is computed on a 30-day month and a 360-day year. If the interest payment date is on the fifteenth of the month, the first month will have 16 days because the fifteenth of the month is counted. If the interest payment date is on the first of the month, the first month will have 30 days.

An individual has an IRA account. He is 75 years old, but has not withdrawn funds from the plan. What is the penalty that the individual will be subject to for not withdrawing funds from the plan? A 50% penalty on the actuarial amount B 6% penalty on the actuarial amount C No penalty will be levied D 10% penalty on the actuarial amount

A 50% penalty on the actuarial amount The individual will be subject to a penalty of 50% of the actuarial amount (the amount specified by the IRS that should have been withdrawn). This is the penalty for not making withdrawals from the plan. Distributions must start after the planholder reaches age 70 1/2.

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 6.88% B 6.50% C 6.95% D 6.73%

A 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.

During a period of stable interest rates, which bond has the most potential to show a significant change in price? A 7 1/2%, 10-year convertible subordinated debenture B An 8%, 5-year high-grade corporate bond C A 6%, 6-month Revenue Anticipation Note D A 7%, 30-year U.S. Treasury Bond

A 7 1/2%, 10-year convertible subordinated debenture The key to this question is to recognize that if interest rates are stable, then most bond prices will experience little movement. However, to identify the bond that is still expected to fluctuate the most, find the answer that is the most unique. In this question, the convertible debenture may still experience a significant change in price based on the changing value of the underlying equity (i.e., the security into which the bond may be converted). For example, if the value of the underlying stock increases, the value of the bond will also increase to keep the bond's price in the vicinity of conversion parity. Parity is achieved when the value of the bond is equal to the value of the common stock which is able to be obtained at conversion.

An investor is in the 28% tax bracket. Which of the following investments will afford him the BEST after-tax yield? A A 5% municipal bond B A 6 3/4% convertible bond C A 5 3/4% corporate bond D A 6 1/2% Yankee bond

A A 5% municipal bond The 5% municipal bond will offer the best after-tax yield because the interest income is completely free from federal income taxes. The other investments are types of corporate debt subject to federal income taxes and 28% of the income received will be taxable. The taxable equivalent yield of the 5% municipal bond is 6.94%. This is calculated by dividing the 5% municipal yield by the complement of the tax bracket which is 72%. The result is greater than the other choices.

Which of the following is TRUE regarding contingent deferred sales charges? A A confirmation for a fund that assesses a contingent deferred sales charge must disclose that a charge may be assessed upon redemption, even if the same disclosure is made in the prospectus B A redemption charge that reverts to the fund's portfolio is considered a contingent deferred sales charge C A contingent deferred sales charge is not assessed if the customer redeems the shares at a loss D Funds that assess a contingent deferred sales charge may be represented as a no-load fund because there is no front-end fee

A A confirmation for a fund that assesses a contingent deferred sales charge must disclose that a charge may be assessed upon redemption, even if the same disclosure is made in the prospectus Industry rules require that the following disclosure be printed on the front of a confirmation for the purchase of a mutual fund that assesses a contingent deferred sales charge: "On selling your shares, you may pay a sales charge. For the charge and other fees, see the prospectus." Funds that assess such charges may not be represented as no-loads and may not be referred to as no initial load without further explanation. Sales charges are fees that are used to pay sales-related expenses, such as commissions and advertising costs. A redemption fee that reverts to the fund's portfolio is not considered a contingent deferred sales charge.

A corporation wishes to open a cash account. Which of the following documents is required? A A corporate resolution B A copy of the corporate charter C A risk disclosure document D A hypothecation agreement

A A corporate resolution A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.

All of the following choices are requirements for a stock to be listed on the NYSE, EXCEPT: A A minimum 25% dividend payout ratio B A national interest in the company C A minimum number of round-lot shareholders D An agreement to solicit proxies

A A minimum 25% dividend payout ratio To be listed on the NYSE, a corporation must have a minimum number of round-lot shareholders, a minimum number of publicly held shares, a minimum aggregate market value of publicly held shares, a positive earnings history, national interest in the corporation, and agreement to solicit proxies. Dividend payout ratios are not a listing requirement.

A municipal tombstone advertisement must be approved by: A A municipal securities principal B A municipal securities financial and operations principal C A municipal securities principal and the branch manager D The MSRB

A A municipal securities principal MSRB rules require that an advertisement must be approved prior to its first use by a municipal securities principal. *ONLY THE PRINCIPAL*

A registered representative services a joint tenants with right of survivorship account for a married couple, but also maintains an account for their adult son. The RR received a phone call from the couple's son informing her that his father has died. As part of helping his mother sort out the many details associated with his father's death, the son requests that the assets in the account be transferred to an account established in his mother's name only. In order to transfer the account, the firm must first receive: A A notarized copy of the death certificate B A request from the executor of the deceased's estate C A copy of the will of the deceased D A written request from the surviving spouse

A A notarized copy of the death certificate A death certificate serves as proof of death before transferring an account. Although the transfer will proceed and probate will be avoided, a notarized copy of the death certificate must first be received by the broker-dealer that carries the account. A will is not required since the survivor is now the owner of the account.

The MOST appropriate buyer(s) for a variable life insurance policy is/are: A A person with an understanding of investments who can tolerate market risk B A person who wants the assurance of a guaranteed cash value C Parents with a modest income who have young children D A person who requires the discipline of forced savings

A A person with an understanding of investments who can tolerate market risk Similar to a variable annuity, the cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. A person who is knowledgeable about investments may be a candidate for variable life insurance because common stock and bonds are the foundation of the policy. As the market values of the securities fluctuate, the cash value changes and is not guaranteed. Therefore, the insured must be able to tolerate market risk. There are other methods by which an investor may achieve forced savings and the product may not be suitable for parents with a modest income who have young children.

An advertisement for municipal securities states the following: "15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details." According to MSRB rules, this advertisement should also state that: A A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% B A principal approved the advertisement C The tax-free return is actually greater than 12% if the bond is held to maturity D The tax-free return is actually less than 10% if the bond is held to maturity

A A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% According to MSRB rules, the advertisement must state that a portion of the yield to maturity for a discount bond may be subject to taxation and, therefore, does not represent a fully tax-free yield. In this question, the bond is being offered at a discount because the yield to maturity (12%) is greater than the nominal yield (coupon rate 10%). At maturity, the discount would be subject to taxation as ordinary income, causing the net yield to be between 10% and 12%.

Which of the following would increase a partner's basis in a limited partnership? A A pro-rata portion of a recourse loan B Losses C Cash distributions D Assessments not met by the partner

A A pro-rata portion of a recourse loan A partner's basis in a limited partnership represents the maximum loss that the limited partner may sustain in the program. It is increased by income, additional contributions made by the partner, and the portion of a recourse loan for which the partner is responsible. The basis is reduced by cash distributions and losses. Assessments not met by the partner normally result in a dilution of the partner's ownership interest.

Which of the following would increase a partner's basis in a limited partnership? A A pro-rata portion of a recourse loan B Assessments not met by the partner C Cash distributions D Losses

A registered representative opens an option account for a customer on October 1 and buys 5 ABC November 30 calls at 4. On October 16, the premium of the calls has decreased to 2 and the registered representative has not received a signed options agreement. The registered representative may: A Accept an order to sell the 5 ABC November 30 calls that were previously purchased B Not accept any orders from the customer until the signed options agreement is received C Accept an order to buy 5 additional ABC November 30 calls D Accept an order to buy 5 XYZ December 40 calls

A Accept an order to sell the 5 ABC November 30 calls that were previously purchased If the customer does not return the options agreement within 15 days of the approval of the account, the customer is permitted only to close out existing positions. Since the account was approved on October 1, the customer must sign the options agreement and return it to the firm by October 16. As of October 16, the customer may only open new options positions after the signed form is returned to the firm.

An investor wishes to establish a tax loss but still wants to own the same security. The customer sells the security and repurchases it two weeks later. The tax loss is: A Disallowed B Amortized C Recognized D Established

A Disallowed The tax loss is disallowed. The customer must wait more than 30 days before repurchasing the same security or any security convertible into the security (a right, option, warrant, or convertible bond). The customer repurchased the same security two weeks later. This is considered a wash sale for tax purposes by the IRS and the loss is disallowed.

If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: A Alpha B Expense ratio C Rating D Beta

A Alpha Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.

A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? A An S&P 500 Index mutual fund B An DJIA exchange-traded fund C An S&P 500 Index exchange-traded fund D A managed closed-end fund

A An S&P 500 Index mutual fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.

Which of the following securities is NOT suitable for an investor with $80,000 who will need the funds in three months to purchase a house? A An auction rate preferred stock that resets its rate every three months B A three-month CD that is yielding 20 basis points above the prime rate C A money-market fund D A 13-week Treasury bill

A An auction rate preferred stock that resets its rate every three months An auction rate security is a long-term security that resets its interest rate periodically through an auction process. Since the client will need the funds in three months, any investment should be free from potential loss of principal. There is no guarantee he will be able to sell this security at the price at which it was purchased. The other three investments will offer this client very little or no principal risk.

An investor is looking for a fund that, with little risk to her principal investment, will supplement her current wages. Which of the following funds best suits this investor? A An income fund B A no-load fund C A growth fund D A sector fund

A An income fund A mutual fund investor most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.

A limited partner would be in jeopardy of losing her limited liability if the partner: A Assisted in the decision of which properties to acquire B Received a portion of the project's income and deductions C Made a loan to the partnership D Insisted on examining the partnership's financial records

A Assisted in the decision of which properties to acquire Limited partners have the right to receive their portion of income and losses, examine books and records, and make loans to the partnership. If they get involved in the management of the program, such as deciding which properties to acquire, they could be considered general partners and lose their limited liability.

Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as: A Bank-qualified bonds B Private activity bonds C Alternative minimum tax bonds D Moral obligation bonds

A Bank-qualified bonds Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.

Super Entertainment Inc., a publicly traded firm on the NYSE, spins off its domestic syndication division, creating 1,000,000 new shares. To receive the new shares, investors must exchange 25% of their old shares. Investors who receive shares of the new company will: A Be required to receive a prospectus under the Securities Act of 1933 B Not receive a prospectus because the shares were sold through a private placement C Receive a prospectus only if they received 500 shares or more D Not receive a prospectus because this is a Rule 144A offering

A Be required to receive a prospectus under the Securities Act of 1933 This scenario is an example of an offering regulated by Rule 145. Rule 145 defines certain types of reclassifications of securities as sales subject to the registration and prospectus requirements of the Securities Act of 1933. Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the rule. The amount of shares is irrelevant.

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

A 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.

An investor is long one ABC Jan 40 call at 10 and long one ABC Jan 60 call at 2.50. The investor is also short two ABC Jan 50 calls at 5. The investor has created a: A Butterfly spread B Combination C Strangle D Variable hedge

A Butterfly spread This is an example of a long call butterfly spread. It is created with four calls that have three different strike prices. An investor will be long one contract with the lowest strike price, long one contract with the highest strike price, and short two contracts with the middle strike price. To recognize a butterfly spread, look for the 1—2—1 formation.

A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: A Cash flow B Common stock ratio C Net working capital D Debt-to-equity ratio

A Cash flow Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.

Which of the following terms relates to the graph that is used to determine optimal portfolios resulting from a comparison of risk and return? A Efficient frontier B The yield curve C Alpha D Duration

A Efficient frontier The key to this question is the reference to the term graph. According to the Modern Portfolio Theory, a graph of optimal portfolios can be created on what is referred to as the efficient frontier. As for the wrong answers, the yield curve represents the plotting of a bond's yield against the length of time until its maturity. Duration measures the sensitivity of a bond's price due to small changes in interest rates. Alpha is a form of risk-adjusted return for an asset.

A customer sells $1,000 worth of stock in a restricted margin account. All of the following statements are TRUE, EXCEPT the: A Equity will be increased B SMA will be increased C Debit balance will be decreased D Market value of the account will be reduced

A Equity will be increased When securities are sold in a restricted account, the customer is permitted to withdraw an amount equal to the FRB initial margin requirement (currently 50%). This amount is first credited to the SMA and may then be withdrawn. The full amount of the sale is used to reduce the debit balance. The market value will decrease since securities were sold. The equity will remain the same since the market price and debit balance were reduced by the amount of the sale. If the customer withdraws the amount credited to the SMA, the debit balance will increase and the equity will decrease.

Foreign currency options use: A European style exercise with U.S. dollar settlement B European style exercise with delivery in the foreign currency C American style exercise with delivery in the foreign currency D American style exercise with U.S. dollar settlement

A European style exercise with U.S. dollar settlement Foreign currency options use European style exercise, which means that a buyer is only able to exercise her option on the day of expiration. Currency options also settle in U.S. dollars, rather than in the foreign currency. Investors who exercise currency options will receive U.S. dollars in an amount that is equal to the intrinsic value of their options on the day of exercise.

A broker-dealer is underwriting an initial public offering (IPO) for a company that will be listed on the NYSE. The broker-dealer is required to deliver prospectuses: A For 25 days after the effective date B For 40 days after the effective date C Only on purchases made, at the public offering price D For 90 days after the effective date

A For 25 days after the effective date When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus delivery requirement for an IPO that will not be listed on an exchange continues for 90 days after the deal closes.

An investor purchasing a reverse convertible security would be MOST interested in: A High current income B Capital appreciation C Preservation of capital D Conservative income

A High current income An investor purchasing a reverse convertible security is seeking an above-market coupon rate. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). The investor will not be able to participate if the underlying asset increased. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

If an issue of commercial paper is rated P-1 by Moody's, it is considered: A Highest quality B On credit watch C Speculative D Intermediate quality

A Highest quality P-1 (also called Prime 1) is the highest rating that Moody's will assign to commercial paper. Intermediate ratings are P-2 and P-3. Speculative commercial paper would receive a rating of NP (not prime).

Which of the following statements is NOT TRUE regarding the characteristics of options and warrants? A If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost B Both options and warrants can be bought and sold in the secondary market C Both options and warrants can expire worthless if they are not exercised D Warrants are created by the corporation whose stock underlies the instrument, and options are created by contract between an option buyer and an option writer

A If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost Both options and warrants have a strike price. If exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or convertible preferred stock that investors can convert the security into the underlying stock with no additional payment of money.

The provisions for the flow of funds of a revenue bond issue appear in the: A Indenture B Notice of sale C Syndicate letter D Account summary statement

A Indenture The indenture contains all the agreements and covenants pertaining to a bond issue, and also contains the provisions for the application and allocation of funds of a revenue bond.

A registered representative employed by the research department of a member firm is NOT permitted to be supervised by which department of a broker-dealer? A Investment banking B Sales C Operations D Trading

A Investment banking Current regulations require a member firm's research department to be separate from its investment banking department to avoid conflicts of interest. An RR employed by the research department is not allowed to be supervised by the investment banking department. The rules do not specify which area of a broker-dealer must supervise an RR working in research, but they do state which department is not permitted to supervise.

A call premium is best described as the amount the: A Issuer pays above 100 to retire bonds prior to maturity B Investor pays above the par value C Bondholder receives at maturity D Investor will receive if the bond is sold above the par value

A Issuer pays above 100 to retire bonds prior to maturity A bond issue's indenture will usually require that, if an issuer calls bonds (redeems prior to maturity), it must pay the bondholder a premium (above par value). For example, a bond that matures in 30 years is callable at 103.5 in 10 years. The issuer must pay a premium of $35 per bond (103.5% of $1,000 is $1,035) above par to retire the bonds prior to maturity.

Which of the following statements is TRUE regarding the Interbank market? A It helps establish the spot prices for foreign currencies B It is the guarantor of foreign currency options C It is the market for fed funds between banks D It administers loans to foreign countries

A It helps establish the spot prices for foreign currencies The Interbank market is the purchase and sale of foreign currencies among large banks. The market helps establish the cash (spot) prices for foreign currencies. Spot prices are often referred to as the spot rate.

Which of the following statements is NOT TRUE regarding an equity-indexed annuity (EIA)? A It is considered a security B It offers a guaranteed minimum rate of return C It provides a return that is based on the performance of a stock market index D It provides tax-deferred growth

A It is considered a security Equity-indexed annuities (EIAs) are a type of fixed annuity that provide a guaranteed minimum rate of return (unlike variable annuities), but may potentially provide a greater rate of return. An EIA's return is tied to the performance of a stock market index to which it is linked. As with standard annuities, they also provide tax-deferred growth. However, EIAs are not currently considered securities; instead, they are categorized as a life insurance product.

A company currently has $125,000,000 of 3 1/4% convertible bonds. The company is going to offer bondholders $125,000,000 of 3 1/4% nonconvertible bonds plus cash of $15,000,000 for the convertible bonds. How will this transaction, if successful, affect the company's financial status? A It will reduce the cash position and the potential dilutive effect on the common stock B It will increase the cash position and reduce the potential dilutive effect on the common stock C It will reduce the cash and debt position and reduce the potential dilutive effect on the common stock D It will reduce the cash position and increase the debt position

A It will reduce the cash position and the potential dilutive effect on the common stock The effect of the transaction will be to reduce the cash position and the potential dilutive effect on the common stock. The company is paying out cash and is also issuing nonconvertible bonds in place of convertible bonds (which could have been converted into common stock). This will reduce the cash position and the potential dilutive effect on the common stock.

A person who purchases an annuity with an expectation that she may consider exchanging into another better performing annuity after three years, should consider purchasing: A L shares B A shares C B shares D None of these type of shares since a person should not exchange into another annuity within such a short period

A L shares Variable annuity L shares, also referred to as short surrender annuities, generally have surrender periods of three to four years, after which no sales charges apply. B shares, the normal annuity shares with contingent deferred sales charges (CDSC) typically have surrender periods of seven to eight years before sales charges disappear. Suitability is the main consideration when deciding whether to purchase or exchange into an annuity. Generally, exchanges that are made within three years are considered unsuitable, especially if deferred sales charges apply. However, L shares offer an opportunity to avoid sales charges after the short surrender period.

An individual who adds an option to an existing position to create a straddle is said to have: A Legged into the position B Settled into the position C Straddled into the position D Combined into the position

A Legged into the position When an individual buys or sells an option to add to an existing position to create a more complex option position, such as a straddle or spread, it is said the individual has legged into the position. For example, if a customer who is long an XYZ March 55 call then purchases (adds) a March 55 put, it is referred to as having legged into a long straddle.

Which annuity settlement option provides a payout period of at least 20 years or for the annuitant's lifetime, whichever is greater? A Life annuity with period certain B Life annuity C Joint and last survivor life annuity D Unit refund life annuity

A Life annuity with period certain This is a description of a life annuity with period certain (in this case, 20 years). It is the best settlement payout option. This option will provide monthly or other periodic payments to the annuitant for life. However, if the annuitant dies prior to the end of the specified period, the beneficiary will receive a lump-sum payment or continue to receive installments until the end of the period certain. A life annuity is a contract in which an annuitant receives payments for as long as she lives, but this method makes no provision for a designated beneficiary. Under a unit refund life annuity, periodic payments are made during the annuitant's lifetime. If the annuitant dies before an amount equal to the value of the annuity units is paid out, the remaining units will be paid to a designated beneficiary. A joint and last survivor life annuity is an option in which payments are made to two or more persons.

Which of the following choices gives the best indication of current interest rates on revenue bonds? A List of bonds with 30-year maturities B List of 20 bonds C Placement ratio D Visible supply

A List of bonds with 30-year maturities The Bond Buyer's for Revenue reflects a 25 bonds with a 30 year maturity.

Which of the following choices is Moody's lowest rating for a municipal note? A MIG 3 B Aaa C MIG 1 D C

A MIG 3 MIG stands for Moody's Investment Grade and is used to rate municipal notes. There are three MIG ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating for bonds, and C is its lowest rating for bonds. MIG = Municipal Letters = Bonds

Promotional material made available to the public may compare collateralized mortgage obligations (CMOs) to: A No other investment product B Corporate bonds backed by fixed assets C FDIC-insured certificates of deposit D Treasury securities

A No other investment product Any type of promotional communication made available to customers may not compare CMOs to any other security. This is due to the uniqueness of this product.

If a registered representative recommends the purchase of a variable annuity in an IRA, the RR should disclose the fact that the contract's tax-deferred accrual feature: A Offers no additional benefits B Waives the required minimum distribution (RMD) C Provides necessary additional tax protection D Creates capital gains at the time the funds are distributed

A Offers no additional benefits A tax-qualified plan (e.g., an IRA) already offers the benefit of tax-deferred growth. Therefore, FINRA's position is that the tax-deferred accrual feature of an annuity is unnecessary since it provides no additional benefits. The recommendation of a variable annuity in a tax-deferred account should only be made if the annuity's other benefits support the recommendation. Other benefits include lifetime income payments, family protection through the death benefit, and guaranteed fees. If an IRA contains an annuity, the RMD provisions still apply.

How long after a new issue is registered for sale will it be shown on the Nasdaq system? A On the effective date B 30 days after the effective date C 10 days after the effective date D 45 days after the effective date

A On the effective date A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public.

An exercise limit is the maximum number of options contracts that a customer may exercise in a five-consecutive-business-day period for each: A Underlying stock on each side of the market B Underlying stock on the long side of the market only C Series of options in an underlying stock D Account that she maintains at each brokerage firm

A Underlying stock on each side of the market Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply cumulatively to all accounts that a customer maintains at all brokerage firms, not for each account at each firm.

An investor has been following XYZ Corporation for several years and believes that the company is poised for some very profitable years. Since she wants to purchase a security that offers a consistent annual distribution and one that benefits from XYZ deciding to pay a significant cash dividend to its stockholders, she should consider purchasing: A Participating preferred stock B Common stock C Collateral secured bond D Cumulative preferred stock

A Participating preferred stock Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than the stated amount based on the profits of the issuing company. In contrast, the benefit of cumulative preferred stock is that it allows the owner to add up all of the unpaid dividends to a future payment if the issuer intends to pay a cash dividend to its common shareholders. Cumulative preferred stock may be beneficial during a period of time where the company is unable to pay the full dividend since the holder is able to accrue the missing payments. A collateral secured bond is one that provides the holder with safety based on it being backed by a specific asset of the issuer; however, the issuer will pay no more than the bond's stated rate of interest. Common stock will pay cash dividends, but only if they are declared by the company's board of directors.

A registered representative has limited discretion over a customer's account. The registered representative may: A Place orders before the order has been approved by a principal B Remove money freely from the account C Have all confirmations of transactions sent only to himself D Not enter buy stop orders

A Place orders before the order has been approved by a principal Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be approved promptly afterward.

A registered representative tells a municipal bond fund manager that, in return for purchasing bonds for the fund, the representative will sell that bond fund exclusively to clients. This arrangement is: A Prohibited according to MSRB rules B Permitted provided that it is disclosed to customers C Permitted without restriction D Permitted if approved by a principal

A Prohibited according to MSRB rules MSRB rules prohibit a broker-dealer or registered representative from having reciprocal dealings with investment companies. A registered representative may promote the services of the firm (such as timely executions and quality research) to solicit business from a municipal bond fund manager, but may not offer to sell fund shares in return for brokerage business from the fund.

An investor is interested in purchasing an interest in a real estate limited partnership. What step could be taken by an RR to verify the investor's suitability for the investment? A Refer to the investor's most recent tax return B Refer to the completed subscription agreement C Obtain executed copies of subscription agreements from other programs in which the investor is a limited partner D Obtain a notarized document which attests to the fact that the investor is an expert in managing real estate

A Refer to the investor's most recent tax return When a person invests in a DPP, an RR must verify that the investor meets all of the suitability standards. This verification may be accomplished by referring to the investor's financial documents, such as his past tax return or statement of net worth.

Income that is derived from which of the following sources may NOT be used to fund an IRA contribution? A Rental income received from a summer rental B Money earned from a part-time job C A bonus D Taxable alimony

A Rental income received from a summer rental Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.

Which of the following money-market instruments does NOT trade in the secondary market? A Repurchase agreements B Directly placed commercial paper C Bankers' acceptances (BAs) D Eurodollar CDs

A Repurchase agreements Repurchase agreements typically are not traded in the secondary market. Eurodollar CDs are certificates of deposit payable in Eurodollars (U.S. currency on deposit in foreign banks). Eurodollar CDs, commercial paper, and BAs are traded in the secondary market.

A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? A Sell stop $63 B Sell limit $63 C Sell stop-limit $63 D A market order

A Sell stop $63 This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order will not allow the client to receive further profits if the stock increases above $70. A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit.

Which of the following statements is NOT TRUE concerning a structured product offered by an RR? A Since this product is usually sold by a bank, the principal will be protected by the FDIC B They are usually registered with the SEC C The principal that the investor would receive may be based on the value of a stock traded on an exchange D The principal the investor would receive may be based on the value of a foreign currency

A Since this product is usually sold by a bank, the principal will be protected by the FDIC Structured products may be linked to individual securities, commodities, foreign currencies, or indexes. These products are underwritten by most major financial services institutions and are usually registered as securities with the SEC. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

When purchasing a straddle, an investor's maximum profit is: A Unlimited B The premium C Limited to the narrowing of the spread D The strike price minus the premium

A Unlimited A long straddle consists of purchasing both a call and put with the same expiration and strike price. Since it involves purchasing a call, there is an unlimited profit potential.

The Taft Food Company intends to distribute shares of its grocery business to existing stockholders. The shares of this company will be traded separately from Taft. This is an example of a(n): A Spinoff B Stock dividend C Reverse merger D Initial public offering

A Spinoff Spinoff transactions occur when a company is seeking to divest a division. In a spinoff, each shareholder of the parent retains her original shares, but is also given shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers in the hopes that the combined valuation assigned by the market to the two (now) separate companies will be greater than that of the single combined entity. A stock dividend is a situation where each shareholder is given additional shares of the existing company. When a company with no shares currently trading publicly begins trading in the public market, it is an initial public offering (IPO). In a reverse merger, a private company buys a public company with the acquirer's shareholders swapping their shares for a majority stake in the publicly traded shell corporation. This technique allows a private company to obtain publicly listed status quickly, and to avoid much of the regulatory expense incurred with an IPO.

Which of the following statements is NOT considered misleading regarding a variable annuity communication? A Telling a client about the negative impact of an early redemption B Making a representation that a death benefit guarantee applies to the investment return of the annuity C Telling a client that a variable annuity is a mutual fund D Representing that a variable annuity will meet short-term liquidity needs

A Telling a client about the negative impact of an early redemption FINRA is concerned about misleading communications regarding product identification, liquidity, and claims regarding guarantees. A firm should not imply that the underlying account is a mutual fund. Annuities should be purchased with long-term goals in mind, not short-term liquidity needs. Death benefits may be guaranteed, but investment results may not. It would be advisable to inform a potential investor of surrender charges incurred as a result of early redemption.

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of XOP at $48 per share and makes the necessary deposit. If XOP increases in value to $57 per share and later declines to $45 a share, which of the following statements is TRUE? A The SMA in the account is $4,500 and the equity is $21,000 B The SMA in the account is $4,500 and the equity is $33,000 C The SMA is $9,000 and the equity is $33,000 D There is no SMA and the equity is $21,000

A The SMA in the account is $4,500 and the equity is $21,000 First, determine the amount of the debit balance. If the customer purchased $48,000 worth of stock at a 50% margin requirement and deposited $24,000, the debit balance is $24,000 ($48,000 market value - $24,000 margin requirement = $24,000 debit balance). XOP increased to $57 per share, making the market value $57,000. The equity increases to $33,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $28,500 (50% of $57,000) from the actual equity in the account of $33,000. The SMA is, therefore, $4,500. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increase in value can create excess equity (SMA) but, if these securities later decline in value, this will not decrease SMA. The equity decreases since the market value declined to $45 per share and is now $21,000 ($45,000 - $24,000).

If a customer enters an order that is good for one month only, who is responsible for cancelling the order at the end of the month if the order is not executed? A The brokerage firm that entered the order B The customer C The designated market maker D The NYSE

A The brokerage firm that entered the order A customer can enter an order good for a week, a month, or any specified time. If the order is not executed by the end of the specified time, the brokerage firm is responsible for cancelling the order.

An investor purchases a U.S. Treasury bond in the secondary market. When is settlement? A The next business day B 2 business days C 4 business days D 4 calendar days

A The next business day Transactions for Treasury securities in the secondary market settle on the next business day.

A customer without a discretionary account gives a registered representative the following verbal instructions: Buy 1,000 shares of General Electric whenever you think the price is right. Under current regulations: A The order may be executed by the RR only on the same trading day B The RR is not permitted to accept this type of order C The order may be executed by the RR on any trading day D The order must be marked discretionary and approved by a branch manager

A The order may be executed by the RR only on the same trading day The order may be executed by the RR, but only on the same trading day. It is not a discretionary order, which requires written power of attorney. The customer indicated to the registered representative the name of the specific stock (GE), the action (to buy), and the amount (1,000 shares), so this is a not-held order. Allowing the RR to make decisions limited to price and time does not constitute discretion. Absent written instructions from the client, this type of time and price discretion is only valid the same trading day.

On the NYSE, an investor enters an order to buy 400 shares of HRJ at $56 per share. Which of the following statements is TRUE regarding this order? A The order may be partially filled B The order must be executed in its entirety or not at all C An order must be executed at $56 before this order can be executed D The order must be executed immediately or cancelled

A The order may be partially filled Since the order specifies a price, it is a limit order. A limit order may be executed at the limit price or better. In this question, the investor is wants to buy HRJ at $56 or lower (i.e., the order is not required to be executed at exactly the limit price). Since the order does not indicate an all-or-none (AON) qualifier, a portion of the order may be filled. Also, since the order does not indicate an immediate-or-cancel (IOC) qualifier, it is not required to be executed immediately. As for the remaining choice (an order must be executed at $56 before this order can be executed), an order is not required to be executed at $56 for this order to receive execution.

The penny stock rules would apply under which of the following circumstances? A The transaction is recommended by the broker-dealer B The stock is listed on the NYSE C The customer is an active trader in penny stocks D The broker-dealer is not a market maker in the stock

A The transaction is recommended by the broker-dealer A penny stock, according to SEC rules, is a stock that sells for less than $5.00 that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) In nonrecommended or unsolicited transactions In transactions by a broker-dealer that is not a market maker in that security In transactions by an institutional accredited investor

If a municipal bond is selling at a discount and is callable at par, the customer's confirmation will disclose which of the following? A The yield-to-maturity B The yield-to-call C The greater of the yield-to-maturity or yield-to-call D The fact that if rates decline, the bond will most likely be called

A The yield-to-maturity MSRB rules require dealers to quote the lower of the yield-to-call (YTC) or the yield-to-maturity (YTM). If the bond is selling at a discount, the bond will be quoted on a yield-to-maturity basis (since the YTM is lower than the YTC). On the other hand, if the bond is selling at a premium and is callable at a premium, the bond will be quoted on the basis of yield-to-call or yield-to-maturity, whichever is lower. The yield for a municipal bond that is selling at a premium and is callable at par is calculated to the call date. The yield-to-call measures the yield that will be earned if the bonds are called at the call price and not held to the maturity date.

When comparing an Albany, New York hospital revenue bond to a Buffalo, New York hospital revenue bond, you notice that they have similar maturities but the Buffalo bond has a higher yield. A possible reason for this is: A There are more hospitals located in Buffalo than in Albany B Income taxes in Buffalo are higher than in Albany C The cost of living is greater in Buffalo than in Albany D Per-capita debt is higher in Buffalo than in Albany

A There are more hospitals located in Buffalo than in Albany Competing hospitals could affect the project's revenue and, therefore, could reduce the bond's security. Each of the other choices relates to taxes, which do not secure revenue bonds.

Which of the following statements is TRUE concerning electronic communication networks (ECNs)? A They can be used to obtain automatic execution B They can be used only by retail investors C They can be used only by institutional investors D They can be used by clients that do not want to use a broker-dealer

A They can be used to obtain automatic execution Electronic communication networks (ECNs) are trading systems designed to match buyers with sellers of securities. They can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another, but allow subscribers such as broker-dealers to use these systems to execute the orders sent to them by their clients.

Gross Domestic Product (GDP) has declined for two consecutive quarters in the U.S. Which of the following industries will most likely be negatively affected by this downturn in the economy? A Transportation B Medical C Food D Cosmetics

A Transportation Two consecutive quarters of declining GDP figures would be considered recessionary by most economists. Transportation stocks (e.g., railroads, trucking, airlines) are cyclical and the performance of these companies will be affected directly by this event.

The Federal Reserve Board's Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims? A Treasury bills B Treasury notes C Agency bonds D Treasury bonds

A Treasury bills The Federal Reserve Board's Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board's aims of influencing the money supply. The securities most often used are Treasury bills.

When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are: A Treasury bonds B Revenue bonds C Federal agency bonds D General obligation bonds

A Treasury bonds Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.

When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T? A Two business days after the settlement date B Two business days after the trade date C When the securities are delivered D On the settlement date

A Two business days after the settlement date Regulation T states that payment for a new issue in a cash account is due within two business days following the settlement date of the transaction. When buying shares of a new issue, an investor will receive a when-issued confirmation. Payment is due two business days following the date that the securities are ready for delivery.

Ralph, a New York City resident, sold his apartment for $250,000. He is contemplating purchasing another property within the next 2 to 6 months, but wants to keep the proceeds invested while he is looking. Ralph's primary goals are preservation of capital, liquidity, and limiting his tax liability. Which of the following securities best meets his objectives? A U.S. government money-market fund B High-grade preferred stock C A corporate bond fund rated AA D MBIA-insured revenue bonds

A U.S. government money-market fund A U.S. government money-market fund is not only safe, but the income received by Ralph is exempt from state and local taxes. This is not to be confused with a U.S. government bond fund, which may experience loss of capital if interests rates were to rise sharply. The other investments can result in a loss of capital if interest rates rise.

An exercise limit is the maximum number of options contracts that a customer may exercise in a five-consecutive-business-day period for each: A Underlying stock on each side of the market B Series of options in an underlying stock C Account that she maintains at each brokerage firm D Underlying stock on the long side of the market only

A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover her short position. The customer instructs her registered representative to cover the short position at the market on the close. The order: A Will be executed as close as possible to the closing price B Is not permitted to be entered by a retail customer C Will be executed at any price within the last 15 minutes of trading D Will be executed only at the closing price of the day

A Will be executed as close as possible to the closing price A market-on-close (MOC) order will be executed as close as possible to the closing price of the day

All of the following municipal securities are suitable for a resident of New Jersey who is subject to the alternative minimum tax, EXCEPT: A private activity bond B A revenue bond that is issued by the Central Florida Expressway Authority C A variable rate demand obligation (VRDO) D A general obligation bond that is issued by the state of Texas

A private activity bond A private activity bond is a specific type of municipal bond whose income is subject to federal taxation under the alternative minimum tax (AMT). This type of bond is not suitable for a person who is subject to the AMT.

Mordecai is a 73-year-old retired machine lathe operator. He earns $35,000 in retirement benefits. Last year he earned $1,650 as a pitching instructor for the Altoona Miners and received $800 in dividend income. What is the maximum contribution he may make to his Roth IRA? A $5,500 B $1,650 C 0 D $6,500

B $1,650 Roth IRAs do not have an age limitation placed on contributions or withdrawals. The annual contribution is limited to 100% of the individual's earned income, not to exceed $6,500 ($5,500 + $1,000 catch-up provision) per year. Mordecai may contribute up to $1,650. Earnings received as retirement benefits ($35,000) and investment income ($800) are not eligible for the calculation of Roth IRA contributions.

A Treasury bond has increased in value from 98.4 to 98.8. The bond has increased by: A $.50 per $1,000 par value B $1.25 per $1,000 par value C $5.00 per $1,000 par value D $.40 per $1,000 par value

B $1.25 per $1,000 par value Treasury bonds are quoted in 32nds of a point, and are then calculated as a percentage of the par value ($1,000). The difference between 98.4 and 98.8 is 4/32. One point equals $10, so 4/32 or 1/8 of a point equals $1.25.

ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC? A $7.72 B $11.80 C $6.40 D $10.91

B $11.80 Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.

An investor purchased $100,000 face value of a 12% municipal bond that matures December 1, 2041. The transaction settles on August 1. The investor owes accrued interest of: A $8,000 B $2,000 C $200 D $800

B $2,000 The bonds purchased by the investor will generate yearly interest of $12,000 ($100,000 par multiplied by 12%). The fact that the bonds mature on December 1, 2041 indicates that interest payments are made every December 1 and June 1. The investor will owe 60 days of accrued interest (from June 1, the last coupon, up to but not including the settlement date of August 1). Since the yearly interest is $12,000, accrued interest would be $2,000 (60/360 x $12,000).

A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of: A $0.08 B $2.50 C $0.80 D $8.00

B $2.50 GNMA pass-through certificates (as well as T-notes and T-bonds) are quoted in 32nds of a point. The spread of .08 represents 8/32 or 1/4 (.25) of a point. One point (1%) for a bond is equal to $10 ($1,000 x 1%); therefore, 1/4 of a point is equal to $2.50 per $1,000.

An investor sells ten 5% bonds and buys another 10 bonds with a 5 1/4% coupon rate. The investor's yearly cash flow from the bonds will have increased by: A$1.25 per bond B $2.50 per bond C $5.00 per bond D $1.50 per bond

B $2.50 per bond The investor's yearly return will have increased by $2.50 per bond. The increase is 1/4% (5% to 5 1/4%), which is 1/4 of 1% of the par value of $1,000, or $2.50.

B $26.50 To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The formula for calculating conversion ratio is the par value of the preferred stock ($100) divided by the conversion price ($25). As a result, four shares of common stock are received if the preferred stock is converted into common stock. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4) ($106 ÷ 4 = $26.50). Any future gains or losses on the sale of the common stock will be calculated by using the basis of $26.50.

A client has a margin account with the following arbitrage position: 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 $13,200 D $11,500

B $4,600 To answer this question, the industry margin maintenance requirement for an arbitrage position must be applied. If a client is long a security that is convertible into an equal number of shares of a short position being 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 (40 bonds x 50 shares), 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%).

An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share? A $63.25 B $47.83 C $47.75 D$55.00

B $47.83 A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).

A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest? A $15,000 B $5,000 C 0 D $20,000

B $5,000 Customers are charged interest on the average daily amount of the debit balance in their account. Generally, they are not charged interest in a short account.

A customer purchases $10,000 of stock on margin. Before depositing the required amount, the stock rises to a market value of $12,000. What amount is the customer required to deposit? A $7,000 B $5,000 C $6,000 D $4,000

B $5,000 Regulation T requires 50% of the purchase price to be deposited by the customer within two business days after the settlement date of the transaction (four business days from the trade date). Any market price change during this period will not affect the amount of the deposit. The requirement will be $5,000 (50% of the purchase price of $10,000).

A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive: A $55,000 B $50,000 C $42,750 D $85,500

B $50,000 At maturity, the holder of the bonds will receive the par value, which in this example is $50,000. The call price and market value are not relevant.

What is the maximum allowable percentage that may be sold above the original size of the offering through a Green Shoe option? A 10% B 15% C 25% D 20%

B 15% The overallotment provision of an underwriting agreement may contain a Green Shoe clause that allows the syndicate to increase the number of shares sold by 15% over the original number of shares in the offering.

What is the maximum allowable percentage that may be sold above the original size of the offering through a Green Shoe option? A 25% B 15% C 10% D 20%

Ashton purchased 100 shares of XYZ common stock in January 2003, at a price of $25 per share. XYZ pays a quarterly dividend of $.25 per share. Today, XYZ closed at $30 per share. What is the dividend yield of XYZ common stock? A 4.00% B 3.33% C 1.25% D .83%

B 3.33% The dividend yield for a stock is equal to the annualized dividend divided by the current market price. Since dividends are paid quarterly, the annual dividend is $1 per share ($.25 x 4). The annualized dividend of $1 divided by the current market price of $30 per share results in a dividend yield of 3.33%.

Listed equity options stop trading at: A 4:30 p.m. Central Time, 5:30 p.m. Eastern Time on the expiration date of the option B 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the expiration date of the option C 4:00 p.m. Central Time, 5:00 p.m. Eastern Time on the expiration date of the option D 2:00 p.m. Central Time, 3:00 p.m. Eastern Time on the expiration date of the option

B 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the expiration date of the option Listed equity options stop trading at 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the expiration date of the option. Beginning February 15, 2015, the expiration date for equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within: A 5 days B 7 days C 10 days D 3 days

B 7 days Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. If the customer had sold the option at $8 instead of exercising the option, the profit would have been taxable as: A An ordinary gain of $700 B A $500 capital gain C An $800 capital gain D An ordinary loss of $500

B A $500 capital gain If the customer had sold the option at $8 instead of exercising it, the $5 profit per share ($8 sale minus $3 cost equals $5 profit) would be taxable as a capital gain.

An investor buys a zero-coupon bond at 41. A few years later the bond's basis has been accreted for tax purposes to 46. If the bond is sold at 45, the investor will recognize: A A 4-point capital gain B A 1-point capital loss C A 1-point capital gain D No gain or loss

B A 1-point capital loss When selling a zero-coupon security, if the bond is sold above the accreted value (not the original cost), it is considered a capital gain and, if sold below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year. If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss.

Which of the following bonds has the most interest-rate risk? A A 3%-coupon, five-year Treasury note B A 30-year Treasury STRIP C A three-month Treasury bill D A 6%-coupon, 30-year Treasury bond

B A 30-year Treasury STRIP The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon. This price sensitivity is based on the concept of duration. The first step is to identify the bond or bonds that have the longest maturity. In this question, there are two bonds with 30-year maturities, which eliminates the possibility of the three-month and five-year bonds as the answer. The second step is to find the long-term bond that offers the lowest coupon rate. Since a T-STRIP is a form of zero-coupon bond, it clearly has more interest-rate risk than another long-term bond that offers a 6% coupon.

When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to: A The research report's past earning for the company B A chart showing a recent history of the market price of the stock C The company's dividend payout ratio D A chart showing the price-earnings ratio for all automobile stocks

B A chart showing a recent history of the market price of the stock The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing).

A corporation wishes to open a cash account. Which of the following documents is required? A A risk disclosure document B A corporate resolution C A copy of the corporate charter D A hypothecation agreement

B A corporate resolution A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.

If a customer is currently short ABC stock and also short an ABC put, this position is referred to as: A A covered call B A covered put C An uncovered put D Short against the box

B A covered put A covered put is created when an investor sells (writes) a put against an existing short stock position. This position is suitable for a client who believes that the stock will remain stable or decline slightly. However, due to the potential risk of the stock's increase in value against the short stock position, a covered put should only be created by clients with a high risk tolerance.

If a customer is currently short ABC stock and also short an ABC put, this position is referred to as: A An uncovered put B A covered put C A covered call D Short against the box

Structured products are typically comprised of two components including: A Two different types of derivative products B A fixed-income note and a derivative product C A fixed-income note and common stock D A fixed-income note and a fixed-equity contract

B A fixed-income note and a derivative product A structured product is typically built around a fixed-income instrument and a derivative product. The note pays a specified rate of interest to the investor at defined intervals. The derivative component establishes the amount of payment at maturity.

Crossway Shopping Centers, a REIT, is making a public offering of 3,000,000 units at $20/share. An investor who buys the issue in the primary market must receive: A An offering memorandum B A prospectus C An offering circular D An educational brochure explaining the general nature of REITs

B A prospectus REITs are regulated as securities under the Securities Act of 1933. An investor purchasing a REIT in the primary market must receive a prospectus.

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

B 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 funds is the least suitable for investors mainly seeking income? A A municipal bond fund B A sector fund C A mortgage-backed securities fund D A balanced fund

B A sector fund A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.

Which of the following circumstances is NOT a reason for rejecting a municipal bond delivery? A A missing coupon B A sudden change in market value C The lack of a legal opinion D A mutilated certificate

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

Which of the following choices BEST describes a municipal security that is referred to as a certificate of participation (COP)? A A type of bond that is backed by a special tax B A type of bond that is typically created through a lease agreement C A type of bond that is typically created to fund a project for a corporation D A type of bond that is based on payments from residential mortgages

B A type of bond that is typically created through a lease agreement A certificate of participation (COP) is a lease financing agreement which is typically issued in the form of a tax-exempt or municipal revenue bond. COPs have traditionally been used as a method of monetizing existing surplus real estate. This financing technique provides long-term funding through a lease that does not legally constitute a loan, thereby eliminating the need for a public referendum or vote. CERTIFICATE OF PARTICIPATION = LEASE AGREEMENT

A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This most likely will be accomplished through the issuance of: A Bankers' Acceptances B American Depositary Receipts C Eurodollar bonds D Yankee bonds

B American Depositary Receipts American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

Under Rule 144A, a registered representative is NOT permitted to sell unregistered securities to which of the following? A An investment adviser B An accredited investor C An insurance company D An investment company

B An accredited investor Under Rule 144A of the Securities Act of 1933, unregistered securities may be resold only to qualified institutional buyers (QIBs). Qualified institutional buyers are entities that have at least $100 million of investable assets. The term institution includes insurance companies, investment advisers, investment companies, employee benefit plans, or other types of institutional investors. Individual investors, even if they are deemed to be accredited investors, are not considered to be QIBs.

Which of the following choices BEST describes the Bond Buyer's Municipal Bond Index? A An indication of the average yield on 20 selected municipal revenue bonds with 20-year maturities B An estimate of the prices of 40 long-term municipal bonds C An indication of the average yield on 25 general obligation bonds with 30-year maturities D An indication of the average yield on 11 selected municipal revenue bonds with 20-year maturities

B An estimate of the prices of 40 long-term municipal bonds

A high put/call ratio would MOST likely be associated with a(n): A Indicator that the trading volume will be increasing B Bullish indicator C Bearish indicator D Indicator that the market will trade within a narrow range

B Bullish indicator The put/call ratio is a technical market indicator and is found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course and turn bullish. The opposite is true for a low put/call ratio, which is viewed as a bearish indicator.

If a customer is short 1,000 shares of RST stock, the customer: A Must cover the position within six months B Can use a buy stop order to limit losses if the stock advances C Is entitled to receive dividends and vote at the annual meeting D May use the entire credit balance in the account to buy more stock

B Can use a buy stop order to limit losses if the stock advances A short position will be profitable if the market price of the security decreases. If the stock increases, the investor will have a loss. A buy stop order is placed above the market. If executed, stock will be purchased preventing further loss. There is no limit to the length of time that a short position may remain open. A portion of the short credit balance must always remain in the account to be used eventually to cover the short position. An investor who is short the stock does not receive dividends and does not have the right to vote.

A direct participation program in real estate does NOT have which of the following characteristics? A The tax benefit of depreciation B Cash dividends C Passive income D A tax rate on capital gains that is lower than ordinary income

B Cash dividends A direct participation program in real estate, which is also known as a real estate limited partnership (RELP), would distribute either passive income or passive losses. Both depreciation of the buildings and a lower tax rate on capital gains if the property is sold after one year, are characteristics found in any real estate investment. A REIT, not a RELP, pays cash dividends that are taxable at the same rate as ordinary income.

A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: A Common stock ratio B Cash flow C Debt-to-equity ratio D Net working capital

B Cash flow Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.

If the auction for auction rate securities fails, the current holder will: A Continue to hold the securities and the interest rate will be set to the minimum rate allowed in the plan documents B Continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents C Receive the par value of the securities D Continue to hold the securities and the interest rate will be set to a rate of zero

B Continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents A failed auction occurs when there are an insufficient number of bids to cover the amount of auction rate securities being sold. If this happens, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents. This rate is normally higher than the rate that would have cleared a successful auction.

Which of the following statements regarding the Roth IRA is NOT TRUE? A An individual may contribute up to $5,500 per year B Contributions are tax-deductible C Qualified distributions are not included in an individual's gross income D Qualified distributions are not subject to the 10% early withdrawal penalty

B Contributions are tax-deductible While contributions to traditional IRAs are tax-deductible under certain conditions, contributions to a Roth IRA are nondeductible. Individuals may contribute up to $5,500 per year if they have earned income and if they meet certain income eligibility requirements. Qualified distributions are tax-free and are not subject to the 10% early withdrawal penalty.

The dividend policy of most money-market funds is to declare dividends: A Quarterly and pay, credit, or reinvest the dividends on a quarterly basis B Daily and pay, credit, or reinvest the dividends on a monthly basis C Monthly and pay, credit, or reinvest the dividends on a monthly basis D Monthly and pay, credit, or reinvest the dividends on a quarterly basis

B Daily and pay, credit, or reinvest the dividends on a monthly basis Most money-market funds will declare dividends daily and pay, credit, or reinvest the dividends on a monthly basis. This information is usually found in the prospectus of the money-market fund. MONEY MARKET = DAILY DIVIDENDS

Buyers of municipal bonds would normally NOT include: A Insurance companies B Defined benefit plans C Banks D Mutual funds

B Defined benefit plans A defined benefit plan is a type of pension fund. Pension funds and other tax-deferred accounts would not benefit from the tax exemption provided by municipal bonds. As a result, unless the bonds are taxable and offer yields equivalent to other taxable bonds, pension funds would not include municipal bonds in their portfolio. The exception would be Build America Bonds (BABs), which are taxable municipal bonds.

An investor is expecting a sharp decline in interest rates in the near future. To capitalize on this situation, the investor should buy: A Premium bonds with short maturities B Discount bonds with long maturities C Discount bonds with short maturities D Premium bonds with long maturities

B Discount bonds with long maturities Long-term bond prices are more volatile than short-term bond prices. Discount bond prices are more volatile than premium bond prices. If the investor expects interest rates (yields) to decline, she is anticipating rising bond prices. The bonds that will rise (fluctuate) the most are long-term, discount bonds.

A municipal broker's broker will MOST likely participate in which of the following activities? A Earn commissions from selling bonds to the public B Earn a commission by acting as an intermediary between two brokers C Underwrite new issues and receive part of the spread D Earn a profit by selling bonds from inventory

B Earn a commission by acting as an intermediary between two brokers A broker-dealer may ask another firm to assist it in buying or selling municipal bonds in the secondary market. The firms that provide this assistance are referred to as broker's brokers and they deal exclusively with other brokerage firms and banks. Broker's brokers do not underwrite new issues, carry inventory positions, or deal with public customers. Instead, they act as agents when buying and selling for brokers and dealers, receive commissions for the services they provide, and preserve the anonymity of their customer.

When interest rates are trending upward, the economy will normally be in which phase of the business cycle? A Peak B Expansion C Contraction D Trough

B Expansion Increasing interest rates, along with increased costs and lower unemployment, are frequently associated with an expanding economy where there is an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.

When interest rates are trending upward, the economy will normally be in which phase of the business cycle? A Peak B Expansion C Trough D Contraction

A registered representative is aware of a large order sitting on the firm's institutional trading desk. He decides to execute an order for his own account before the institutional order is entered. This practice is known as: A Insider trading B Frontrunning C Pegging D Interpositioning

B Frontrunning Each of these practices are considered prohibited. Although knowledge of this order may not be public, the execution of an order ahead of a customer order in an effort to make a profit or protect against a loss is known as frontrunning—not insider trading. Insider trading is based on material non-public information concerning an issue of securities. Interpositioning is placing another broker-dealer between yourself and the customer, which generally results in an increase in execution costs and a detriment to the customer. Pegging is setting a floor on how low a security can go and unless it involves stabilization, this practice is considered manipulative.

A clause in an underwriting agreement that allows an underwriting syndicate to purchase additional shares from the issuer for sale to the public is a(n): A Violation B Green Shoe clause C Best-efforts clause D All-or-none clause

B Green Shoe clause A clause in an underwriting agreement that allows the syndicate to sell more of an issue than was originally available, and acquire those shares from the issuer, is known as a Green Shoe clause. This clause is found in the offering's overallotment provision and is limited to 15% of the offering.

When telemarketing, a registered representative is NOT required to provide a prospect with: A The purpose of the call B How he obtained the prospect's home number C His identity and the name of his firm D The firm's telephone number

B How he obtained the prospect's home number Registered representatives, when telemarketing, are not required to tell prospects how their names were obtained. However, an RR must disclose his name, contact information, and the purpose of the call.

Level I of Nasdaq indicates the: A Cumulative trading volume of the security listed B Inside market for the security listed C Price of transactions as they occur D Market makers for the security listed

B Inside market for the security listed Nasdaq Level I provides subscribers with the highest bid and the lowest offer (i.e., the inside market) for a security that has at least two market makers; however, the actual market makers are not listed. Level I does not display the cumulative trading volume or the prices of the transactions as they occur. Although non-members firms can also subscribe to Nasdaq Level I, it is typically used by the branch offices of member firms.

During the first year, an investment in an oil and gas drilling program will generate the largest deduction from: A Depreciation B Intangible drilling costs C Depletion D Oil and gas production

B Intangible drilling costs Intangible drilling costs may be taken as an expense item. Therefore, these costs provide a large deduction in the first year. Depletion and depreciation provide deductions that are spread out over a period of years. Production is an income item, not a deduction.

According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT: A Industry risk B Interest-rate risk C Credit risk D Business risk

B Interest-rate risk Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification.

What is the intrinsic value and the time value of the call premium if ABC is trading at 43 and the ABC April 40 call is trading at 4.50? A Intrinsic value is 1.50 and the time value is 3 B Intrinsic value is 3 and the time value is 1.50 C Intrinsic value is 3 and the time value is 4.50 D Intrinsic value is 4.50 and the time value is 0

B Intrinsic value is 3 and the time value is 1.50 The call is in-the-money (has intrinsic value) since the market price is above the strike price. The in-the-money amount of 3 points is intrinsic value, and the balance of the premium is time value (1.50). Time Value = Premium - Intrinsic Value

Which of the following statements BEST describes a banker's acceptance (BA)? A It is issued by nondomestic banks and is secured by Eurodollar deposits B It helps to finance foreign trade between importers and exporters C It is used by a municipal issuer in raising funds to meet a seasonal need for cash D It facilitates the trading of foreign stocks in the United States

B It helps to finance foreign trade between importers and exporters Bankers' acceptances (BAs) help facilitate foreign trade. ADRs permit the trading of foreign stocks in the U.S.

The advance-decline theory states that: A A bull market exists if the Dow industrials and transportations averages make new highs B It is bullish if more stocks go up than go down during the day C A bear market exists if more put options have been purchased by investors than call options D A large number of shares sold short is bullish

B It is bullish if more stocks go up than go down during the day ADVANCE DECLINE = PATTERN OF STOCK MOVEMENT

The stock price of XYZ Corporation has remained stable despite the fact that the company has increased the amount of its dividend. Under these conditions, what would happen to the stock's current yield? A The effect on current yield cannot be determined without knowing the investor's tax bracket B It would increase C It would remain the same D It would decrease

B It would increase The current yield of a stock is found by dividing the stock's annual dividend by its market price. If the dividend increases while the market price remains the same, the stock's current yield will increase.

How would preferred stock most likely be affected by an increase in interest rates? A Its dividend would decrease B Its market value would decrease C There would be no effect D Its market value would increase

B Its market value would decrease Since preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as bonds. If interest rates rise, the value of existing bonds and preferred stock will fall. If interest rates fall, the value of existing bonds and preferred stock will rise.

Which of the following choices gives the best indication of current interest rates on revenue bonds? A Visible supply B List of bonds with 30-year maturities C List of 20 bonds D Placement ratio

B List of bonds with 30-year maturities The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.

Which of the following persons may contribute to a 457 plan? A Self-employed IT consultant B Local government employee C Federal government employee D Computer programmer employed by IBM

B Local government employee A Section 457 plan is a type of retirement plan used by many public sector workers (state and local, not federal). These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers.

Which of the following positions best enables an investor to take advantage of a significant appreciation in DEF stock? A A debit DEF call spread B Long a DEF straddle C A credit DEF put spread D Short a DEF straddle

B Long a DEF straddle The long straddle offers an investor the ability to realize unlimited gains since the client is long a call option. The gains are determined by the amount the stock appreciates. While a debit call spread is bullish, the gain is limited to the difference between the strike price on the long call and the strike price on the short call. The credit put spread is also bullish, but the gain is limited to the net premium received. The short straddle exposes an investor to unlimited risk if the stock rises.

If the Federal Reserve Board increases the discount rate, you would expect: A That there would be no effect on either long-term or short-term bond prices B Long-term bonds to decrease more in price than short-term bonds C Short-term bonds to decrease more in price than long-term bonds D Long-term bonds would increase more in price than short-term bonds

B Long-term bonds to decrease more in price than short-term bonds If the FRB increases the discount rate, the general level of interest rates increases. The prices of long-term bonds decreases more in price than the price of short-term bonds.

If the S&P 500 has been increasing on high volume for several days, what term would BEST define this situation? A Market neutral B Market momentum C A resistance level D An efficient market

B Market momentum The term market momentum is used to describe a situation where prices are moving in a certain direction and there is a high level of trading volume. There is also an expectation that this pattern will continue in the near future. For example, if the S&P 500 Index has been trading up or down significantly over a period of days along with heavy trading volume, some traders will anticipate this pattern may continue for a few more days. Market neutral is used to describe attempting to profit by buying some securities while at the same time selling short others. A resistance level is a point on a chart where the price of a security stops increasing. Efficient market is a term used to define that stock prices already represent all available information and there is no benefit that may be gained by using professional analysis.

For tax purposes, which of the following is NOT deducted from rental income in a real estate program? A Depreciation B Mortgage amortization C Maintenance D Property tax

B Mortgage amortization Expenses that are deducted from rental income in a real estate program include maintenance, property tax, depreciation, and mortgage interest. Paying off (amortizing) the principal of a mortgage is not an expense and may not be deducted from rental income for tax purposes.

For tax purposes, which of the following is NOT deducted from rental income in a real estate program? A Maintenance B Mortgage amortization C Property tax D Depreciation

A manager with a portfolio of oil and gas stocks will most likely hedge against a downward movement by purchasing: A Broad-based index puts B Narrow-based index puts C Narrow-based index calls D Broad-based index calls

B Narrow-based index puts Put options are commonly used to protect (hedge) a long stock position against a downward movement. As prices decline, the value of puts rises thus offsetting the decrease in the stock owned. For a portfolio consisting of companies from one industry, narrow-based index options are the best hedge since their performance will closely follow that industry.

An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense may the investor use as a deduction for federal income tax purposes? A $5,000 B None C$10,000 D$12,000

B None The investor may not use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities may not be used as an interest expense deduction for federal income tax purposes. The investor is already receiving the benefit of tax-free interest income from the municipal bond and the IRS will, therefore, not allow the interest expense to be deducted as well.

A designated market maker (DMM) may not accept which of the following orders? A Day order B Not-held order C Good-'til-cancelled (open) order D Market order

B Not-held order They may accept both a Day Order and a Good-'til'cancelled (open) order (GTC). They can do a market order but cannot put on their books.

A broker-dealer appears on the Nasdaq system as a market maker for DCIR common stock. An employee of the firm who is responsible for maintaining the firm's inventory in DCIR is referred to as a: A Floor broker B Position trader C Compliance director D Risk arbitrage trader

B Position trader A position trader is a person who is employed by a broker-dealer and is responsible for maintaining the firm's inventory as well as trading the firm's account.

When a corporation seeks a bank loan, the bank will base its charge to the corporation on the: A Discount rate B Prime rate C Federal funds rate D Call rate

B Prime rate A corporation pays the prime rate when borrowing from a bank if it is among the bank's best-credit-rated customers. Other corporations pay a higher rate, but it is based on the prime rate. PRIME RATE = CORPORATION BORROWING

Which of the following methods is used by the Options Clearing Corporation in assigning exercise notices? A To the member firm holding a long position that first requests an exercise B Random selection C On the basis of the largest position D First-in, first-out

B Random selection The OCC assigns exercise notices on a random selection basis only. The other three choices are all for selection of a client.

FINRA disseminates bond transaction information for all these securities, EXCEPT: A Non-investment-grade corporate bonds B Rule 144A securities C Investment-grade corporate bonds D GSE bonds

B Rule 144A securities TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. It is not a quotation system or an execution system. Broker-dealers provide quotes and will execute transactions in corporate bonds. There is no regulatory quote or execution system as there is for equity securities. FINRA disseminates bond transaction information for publicly traded, TRACE-eligible securities (which include investment-grade and non-investment-grade bonds, and debt securities issued by a government-sponsored enterprise). Although transactions for securities issued under Rule 144A are reported to TRACE, the information is not disseminated.

Which of the following ratios would be used by an analyst examining the capital structure of an industrial corporation? A The current ratio B The debt-to-equity ratio C The price/earnings ratio D The dividend payout ratio

B The debt-to-equity ratio The capital structure of a corporation is the dollar amount of the corporation's capitalization (equity and debt securities). An analyst will, therefore, be interested in the debt-to-equity ratio. This is actually the ratio of those securities creating fixed charges (bonds plus preferred stock) to common stock.

A client creates an opening sale in a LEAP and closes out the position 15 months later by buying back the option. The tax consequence is a: A Long-term gain or loss B Short-term gain or loss C Passive gain or loss D Gain or loss that may not offset other trading positions or ordinary income

B Short-term gain or loss A LEAP is a long-term option that can have an expiration of up to 39 months. The client held the position for more than one year, but any gain or loss on a short position is treated as short-term. The IRS does not recognize a holding period on a short sale of a stock or an opening sale of an option. If the client created an opening purchase by buying a LEAP and held the position for 15 months before closing it out, the resulting gain or loss would be long-term.

In a municipal bond underwriting, the difference between what the issuer receives and the public offering price is known as the: A Manager's fee B Spread C Concession D Total takedown

B Spread

When an issuer is raising additional capital and conducts a rights offering, it may enter into an arrangement whereby a syndicate agrees to purchase all of the shares that the issuing corporation may not be able to sell. This is referred to as a(n): A Firm-commitment underwriting arrangement B Standby underwriting arrangement C Best-efforts underwriting arrangement D All-or-none underwriting arrangement

B Standby underwriting arrangement When an issuer conducts a rights offering in an attempt to raise additional capital and enters into an arrangement whereby an underwriting syndicate agrees to buy all of the shares that remain unsubscribed after the rights offering, it is referred to as a standby underwriting. The term syndicate refers to a group of underwriters that is formed for the purpose of buying securities from an issuer and selling them to investors. In a rights offering, the issuing corporation realizes that many of its existing shareholders may choose not participate, which will leave a large number of shares remaining unsold. If that is the case, the corporation will not receive the money for the shares that remain unsubscribed. A standby underwriter will actually standby to await the results of the rights offering and then purchase all of the unsubscribed shares at a slight discount. This type of an arrangement assures the issuing corporation that it will be able to raise the amount of capital it requires.

Which of the following factors is LEAST important when recommending a long-term brokered CD to a client? A The firm may make a market in this CD, but is not obligated to do so B The CD was issued by a bank located in a different state from where the client lives C The client will be purchasing the CD in a retirement account D The CD has a feature in which the interest rate is based on a percentage increase in an equity index

B The CD was issued by a bank located in a different state from where the client lives The state in which the client or issuing bank is located is not an important factor when recommending a long-term brokered CD. The features that establish the interest rate of the security, such as an index of fixed-income or equity securities, is relevant to the client. The amount of FDIC insurance and tax considerations are different depending on whether the CD is purchased in a retirement account. In addition, a broker-dealer is not required to maintain a secondary market or act as a market maker in a CD that was sold to the client. This will limit the liquidity of the security if the client needs the funds prior to maturity.

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

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

When opening an account for a customer, MSRB rules do NOT require the dealer to obtain: A The customer's occupation B The address of each residence that is owned by the customer C The name and address of customer's employer D Whether the customer is employed by another broker-dealer

B The address of each residence that is owned by the customer Although the firm is required to obtain the customer's principal address, there is no requirement to obtain the address of each residence that is owned by the customer.

A customer owns a municipal bond that has been escrowed to maturity. Which of the following statements is TRUE? A The issuer has deposited money in an escrow account that will contain other municipal bonds used to pay off the municipal bonds at maturity B The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds at maturity C The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds prior to maturity D The issuer has deposited money in an escrow account containing U.S. government securities that will create a tax liability for the municipal bondholder at maturity

B The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds at maturity When interest rates fall, a municipality may want to engage in advance refunding. In this case, the municipality will sell a new issue with the proceeds of the sale going into an escrow account containing U.S. government securities. Since the municipal bond has been escrowed to maturity, the U.S. government securities would be purchased with a maturity date that coincides with the maturity date of the municipal bonds.

An investor purchases a U.S. Treasury bond in the secondary market. When is settlement? A 4 calendar days B The next business day C 2 business days D 4 business days

B The next business day Transactions for Treasury securities in the secondary market settle on the next business day.

In a Rule 144A transaction, which of the following statements is NOT TRUE? A The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB) B The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) C The buyer must be able to establish its credentials as a QIB, through relevant documentation D If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB

B The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) The SEC has provided several examples of documents that can be relied on by the seller when establishing its belief that a purchaser is a qualified institutional buyer. Audited financial statements and a certification from the issuer are common methods of demonstrating that the purchaser is a QIB.

An article in The Bond Buyer states that the placement ratio rose to 91.5%, up from 78.7% a week ago. Based on this information, which of the following statements BEST describes the placement ratio? A The ratio between deals that have come to market and those that still remain on the calendar B The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale C The ratio between deals that have been announced previously and those that have already come to market D The percentage of bonds awaiting sale to the public compared to those that will be underwritten in the next 30 days

B The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale The placement ratio is a means of gauging the amount of bonds that have been underwritten recently on a new-issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds there are moving into the hands of investors.

A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations? A The exchange of one variable annuity for another B The reallocation of assets among subaccounts after the initial purchase C The initial purchase of a variable annuity D The initial subaccount allocations

B The reallocation of assets among subaccounts after the initial purchase According to FINRA Rule 2330, suitability requirements for recommendations concerning the purchase of variable annuities apply to: • New purchases • Exchanges • Initial subaccount allocations These rules do not apply to the reallocation of subaccount assets after the initial purchase, nor do they apply to purchases of employer-sponsored qualified plans unless a recommendation is made regarding the allocation of subaccount assets in the initial purchase. Many states and brokerage firms require documentation of a customer's acknowledgment of a replacement transaction. These switch acknowledgement forms are typically signed by the annuity contract owner and the salesperson. The acknowledgement form provides a comparison of the features and costs of an existing contract to a proposed contract, and points out the relevant factors to be considered when contemplating an exchange.

Kyle, a client at TLC brokerage firm, anticipates a decline in the earnings of LPOP. LPOP is a thinly traded issue. Which of the following statements BEST describes what the RR should disclose to Kyle? A Exchange-traded put options are available on all securities and are a less risky method to profit B The stock may be difficult to sell short because the shares may not be available to borrow C All securities may be sold short provided the client has a margin account D As long as the order ticket is marked sell long, the stock could be sold short

B The stock may be difficult to sell short because the shares may not be available to borrow A client may sell short or buy a put to profit from a decline if the value of a security is anticipated. In order to sell short, the broker-dealer is required to borrow the security. Although short sales may be executed only in a margin account, if an issue is thinly traded, it may be difficult or impossible to borrow the security. A put option may be an attractive alternative to selling short. However, put options are unlikely to be available on a thinly traded security.

Richard Smith, a variable life insurance policyholder, dies. Which of the following statements best describes the tax consequences of his variable life insurance policy? A The policy proceeds are federally taxable to the beneficiary B The value of the policy will be included in Richard's estate for tax purposes C There are no tax consequences to his beneficiary and the death benefit is not included in his taxable estate D There are gift taxes due from his beneficiary in the year he died

B The value of the policy will be included in Richard's estate for tax purposes Although there are no tax consequences to Richard Smith's beneficiary, the death benefit is included in his estate for tax purposes.

Which of the following choices best describes the primary cause of inflation? A Foreign investments appreciating faster than U.S. investments B Too much money compared to the goods that are available C U.S. investments appreciating faster than foreign investments D Too many goods compared to the money that is available

B Too much money compared to the goods that are available Inflation is a general rise in the prices of goods and services. If there is too much money in the economy, the demand for goods and services will increase, pushing up prices. This is sometimes described as too much money chasing too few goods.

When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T? A Two business days after the trade date B Two business days after the settlement date C On the settlement date D When the securities are delivered

B Two business days after the settlement date Regulation T states that payment for a new issue in a cash account is due within two business days following the settlement date of the transaction. When buying shares of a new issue, an investor will receive a when-issued confirmation. Payment is due two business days following the date that the securities are ready for delivery.

The security with the longest expiration date would normally be a: A Right B Warrant C Put D Call

B Warrant A warrant generally has an expiration date longer than a put, call, or right. There are some warrants which never expire.

Once a Transfer Initiation Form (TIF) is received, when must the carrying firm either validate or take exception to the account transfer request? A Immediately B Within one business day C Within three business days D Within five business days

B Within one business day When a customer wants to transfer part or all of the assets of her brokerage account to another firm, she must complete the Transfer Initiation Form (TIF). This form is entered by the new broker-dealer (the receiving firm) and the request is delivered to the current broker-dealer (the carrying firm) through a system that is referred to as the Automated Customer Account Transfer Service (ACATS). Once the form is received from a customer, the receiving firm must immediately enter it. Within one business day of receipt, the carrying firm must either validate the instructions or take exception to the transfer. If the transfer is being validated, the carrying firm must complete the transfer of the account and deliver the securities to the receiving party within three business days.

Under SRO rules, the carrying firm must complete the transfer of a customer account: A Within one business day of receipt of the transfer instructions B Within three business days of validation of the transfer instructions C Immediately upon receipt of the transfer instructions D Immediately upon validation of the transfer instructions

B Within three business days of validation of the transfer instructions If a customer wants to transfer an account to another broker-dealer, she must sign a transfer request. The firm where the client has the existing account is known as the carrying firm and the new firm is known as the receiving firm. According to SRO rules, the transfer of a customer account must be completed by the carrying party within three business days of validation of the transfer instructions. The carrying firm must either validate the instructions or take exception within one business day.

A municipal bond is currently trading at 92 and is callable in 10 years at par. What is the effective yield that must be disclosed on a customer's confirmation? A Fixed yield B Yield to maturity C Current yield D Yield to call

B Yield to maturity The MSRB regulates the yield that must be disclosed on a client's confirmation. The yield disclosed is the lower of the yield to maturity or yield to call. In other words, the yield to worst. If a bond is callable and trading at a discount, the lower of the two would be the yield to maturity.

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

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

ABC Corporation has net income of $10,000,000 and 5,000,000 common shares outstanding. ABC Corporation pays out $1,000,000 in dividends annually. ABC Corporation pays an annual dividend per share of: A$10.00 B $0.10 C $0.20 D$5.00

C $0.20 To determine the dividend being paid per share, divide the $1,000,000 in dividends by the 5,000,000 shares of common stock outstanding. $1,000,000 dividends divided by 5,000,000 shares equals $0.20.

Pennsylvania Power Company has announced that it will refund $800 million of its outstanding 6 1/4% bonds that were to mature in 2040. The bonds will be refunded at 106.75% of par value from the proceeds of an $800 million refunding issue. The refunding issue has a 4 1/2% coupon rate and matures in 2030. Bondholders who own 6 1/4% bonds maturing in 2040 will receive: A The new 4 1/2% bonds being issued without accrued interest B The new 4 1/2% bonds being issued plus accrued interest C $1,067.50 plus accrued interest D $1,000 plus accrued interest

C $1,067.50 plus accrued interest The company is refunding the bonds at 106.75% of its par value. The bondholders who own the 6 1/4% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest.

A customer's initial transaction in a margin account is the purchase of 100 shares of XYZ at $15 per share. What amount must be deposited by the customer in this new account? A $2,000 B $750 C $1,500 D $375

C $1,500 The key to this question is recognizing that this represents the customer's initial purchase of securities in the new margin account. The minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less. Since the transaction represents a $1,500 purchase (which is less than $2,000), the customer must deposit the full $1,500. A broker-dealer will not provide a loan in a new margin account unless the customer has equity of at least $2,000.

An investor purchases $40,000 of a mutual fund when the price of the fund is $18.50. In the same year, the investor receives a $700 dividend distribution and a capital gain distribution of $1,100. Both distributions are reinvested in additional shares at a price of $17.90. If the fund has a current value of is $22.80 and the investor sells $9,000 worth of the fund, what is the investor's capital gain using the average cost method? A No gain or loss is reported B $456 C $1,710 D $118

C $1,710 Using the average cost method, the gain is found by subtracting the cost basis from the sales proceeds. To calculate the cost basis using the average cost method, divide the sum of all investments by the number of shares owned by the investor. The investor purchased $40,000 of the fund at a price of $18.50, The total number of shares purchased is 2,162.16. The investor also received a total of $1,800 in distributions, all reinvested in additional shares when the price is $17.90. The total number of shares purchased is 100.59. The total amount invested is $41,800. The total number of shares owned is 2,262.75. Therefore, the average cost is $18.47. The number of shares being sold is 394.74 ($9,000 / 22.80). If we subtract the cost basis of $7,290 (394.74 x $18.47) from $9,000, this equals a capital gain of $1,710.

C $11.80 Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 2,000 shares of EXA at $24. The client's maintenance requirement is: A $13,200 B $11,500 C $2,400 D $2,200

C $2,400 The answer to this question is determined by calculating the margin maintenance requirement of a short against the box position. If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. In this question, since the long position is equal to $48,000, the maintenance requirement is $2,400 ($48,000 x 5%).

A closed-end fund trading on the NYSE has a current bid price of $21.50 and an offer price of $21.70. A customer purchasing the fund would pay: A $21.70 plus a sales charge B $21.50 plus a commission C $21.70 plus a commission D $21.50 plus a sales charge

C $21.70 plus a commission The customer would pay $21.70 plus a commission. A closed-end fund is purchased and sold like any other stock traded on the NYSE. The customer would pay the offer price plus a commission or receive the bid price less a commission when selling the security. The term sales charge refers to the built-in compensation charged by an open-end (mutual fund) company when a customer buys shares of the fund.

A client purchases $900,000 of stock in a margin account and deposits the Regulation T margin requirement. If the current value of the stock is $800,000 and the broker-dealer declares bankruptcy, SIPC would cover: A $450,000 B $100,000 C $350,000 D $500,000

C $350,000 When the customer met the original Reg. T call, he deposited $450,000 (50% of $900,000) and borrowed $450,000, which is the debit balance. Now the market value (MV) has fallen from $900,000 to $800,000, so the new equity level is $350,000 ($800,000 MV minus the debit balance of $450,000 equals $350,000). SIPC will cover the customer's current equity in the margin account of $350,000. SIPC does not cover a decline in the market value of securities.

An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor breaks even when XYZ is at: A $33.25 per share B$35.25 per share C $38.75 per share D $36.75 per share

C $38.75 per share The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a premium of 1.75 (long XYZ 35 put). The investor will break even when the price of XYZ is at $38.75 ($37 purchase price of the stock + the 1.75 premium on the put).

A customer purchases 10 M Dade Co. Florida 7.50% G.O. bonds at a 9.50 basis. How much interest will she collect each year? A $950 B $95 C $750 D $75

C $750 10 M equal's $10,000 par value of bonds (the symbol M refers to thousands). The coupon rate is 7.50%. Therefore, the annual interest is $750 ($10,000 x 7.50%). **Need to remember there are 10 contracts**

A corporation calls for the redemption of 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock are $2.50 per share. The common stock is selling at 35.75. What will the market price of the preferred stock be if it is selling at parity with the common stock? A 20 B 19 C 17.88 D 71.50

C 17.88 The preferred stock is convertible into 1/2 share of common stock. The common stock is selling for 35.75. Parity (or equality in dollar value) for the preferred stock is 1/2 of 35.75 (17.88).

XYZ Corporation has 2,000,000 shares of common stock authorized. The company has issued 1,000,000 common shares of which 200,000 shares are treasury stock. The company has earnings of $2.00 per share. The XYZ Corporation has repurchased: A 1,000,000 shares B 800,000 shares C 200,000 shares D 500,000 shares

C 200,000 shares XYZ corporation has repurchased 200,000 shares. This is known as treasury stock. Treasury stock is previously outstanding stock that has been repurchased by a corporation.

An investor has a long-term objective of capital appreciation. Which of the following investment strategies will MOST closely achieve this goal? A 50% in an ETF that follows the S&P 500 and 50% in a diversified bond fund B 20% in an oil and gas fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund C 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund D 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund

C 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund Since the investor is seeking long-term capital appreciation (also referred to as capital growth), the best strategy will the one that has the greatest percentage devoted to equities. Of the answers given, the best one is 30% in an ETF based on the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund. This answer has very little invested in debt securities.

A customer entered a GTC sell stop order for GM at $35. GM was selling at $38 when the order was entered. GM sells ex-dividend by the amount of the dividend which is $1.60. The customer's order will appear on the designated market maker's book after the stock goes ex-dividend as: A 36.40 B 38 C 33.40 D 35

C 33.40 All GTC orders that are entered below the current market on the designated market maker's (DMM) book (buy limit, sell stop, and sell stop-limit orders) will be reduced by the amount of the dividend when the stock sells ex-dividend. The stock will always be reduced by an amount to cover the dividend entirely. The dividend is $1.60, so the order will be reduced 1.60, which will reduce the stop price on the order to 33.40.

According to Regulation T, when purchasing an option contract the transaction must be paid for within: A 1 business day B 7 business days C 4 business days D 3 business days

C 4 business days According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is two business days, payment is required within four business days from the trade date. Although option transactions settle next day, the customer has four business days to pay for a purchase.

Company R has announced a tender offer for Company T. A shareholder of Company T is long 1,000 shares of stock and has written 5 covered calls against the stock. For the purpose of tendering shares, the shareholder may tender: A 1,000 shares B 800 shares C 500 shares D 300 shares

C 500 shares An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. If a shareholder has written call option positions against the long stock, the options positions will reduce his net long holdings in the stock.

A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? A 7.5 times B 6.5 times C 8 times D 8.6 times

C 8 times The price-earnings ratio is the market price ($56) of the stock divided by the earnings per share ($7), which equals 8 times. The earnings per share of $7.00 is found by dividing the $7,000,000 of available income to the common stockholders by the 1,000,000 shares of common stock outstanding.

Which of the following statements is TRUE regarding dollar cost averaging? A It can only be set up through a payroll deduction plan B If employed, the average price will be less than the average cost C It is a systematic method of investing D The benefits can be obtained if one invests in a money-market fund

C It is a systematic method of investing Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. At expiration, the individual will have a profit if the market price of ABC is: A 91 B 90 C 93 D 92

C 93 This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). Therefore, look at the purchase of a 90 call at 2 (net debit). The breakeven point when buying a call is the strike price (90) plus the premium (net debit of 2). Any market price above the breakeven point of 92 will make the position profitable.

A mother wants to set up an investment account to provide funding for her child to attend private elementary and secondary schools. Which of the following choices is most suitable? A A 529 education plan B A prepaid tuition plan C A Coverdell ESA D A custodial account

C A Coverdell ESA An advantage of ESAs (Education Savings Accounts) is the ability to make tax-free withdrawals to pay for private elementary, high school, and postsecondary school expenses. State-sponsored 529 plans allow tax-advantaged withdrawals only for postsecondary school (usually college) expenses.

Which of the following choices will qualify for a sales breakpoint on large purchases of mutual fund shares? A A joint account formed between two unrelated individuals B An investment club coordinated by a registered representative C A husband and wife who are joint tenants with right of survivorship D A partnership formed to buy the securities

C A husband and wife who are joint tenants with right of survivorship Quantity discounts are allowed only for individuals and individual entities such as corporations. Partnerships and investment clubs are not entitled to a quantity discount. Joint accounts normally do not qualify for breakpoints except in cases where there is a dependency relationship in the account (e.g., husband and wife).

Which of the following choices best describes a wrap account? A A consolidated account in which the investor can buy or sell options, equities, or bonds B An investment club account with no more than 99 investors C A managed account in which advisory and transaction charges are included in one comprehensive fee D A personal, joint, and IRA account with one account number

C A managed account in which advisory and transaction charges are included in one comprehensive fee The term wrap account refers to the fee arrangement where one fee, usually ranging from one to three percent annually, is charged by a broker-dealer. The fee is used to cover administrative, portfolio management, and transaction costs. A wrap account is usually managed by an investment adviser.

A reverse repurchase agreement is sometimes referred to as: A Arbitrage B A treasury sale C A matched sale D Federal funds

C A matched sale A reverse repurchase agreement is also referred to as a matched sale and is created when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This activity has the short-term effect of absorbing (removing) funds from the money supply. Federal funds or fed funds are the monies that are borrowed overnight on a bank-to-bank basis.

Crossway Shopping Centers, a REIT, is making a public offering of 3,000,000 units at $20/share. An investor who buys the issue in the primary market must receive: A An offering memorandum B An educational brochure explaining the general nature of REITs C A prospectus D An offering circular

C A prospectus REITs are regulated as securities under the Securities Act of 1933. An investor purchasing a REIT in the primary market must receive a prospectus.

Approval by a principal is NOT required when sending a customer which of the following documents? A A research report B An abstract from an Official Statement C A red herring D A form letter

C A red herring An abstract from an Official Statement, a form letter, and a research report are considered advertising or sales literature and must be approved. A red herring (preliminary prospectus) is used to provide a potential investor with information and is regulated by the SEC.

Approval by a principal is NOT required when sending a customer which of the following documents? A A form letter B An abstract from an Official Statement C A red herring D A research report

XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates are not attractive from its viewpoint, the company knows that interest rates could drop suddenly. The company would like to be ready to sell its bonds quickly and also wants its bonds to be as liquid as possible in order to attract investors. Which of the following choices is most appropriate for its needs? A A traditional registration statement B An intrastate offering under Rule 147 C A shelf registration under Rule 415 D A private placement under Regulation D

C A shelf registration under Rule 415 While the sales described in a Regulation D private placement, under Rule 147, and Rule 415 will typically be faster than a full registration, both Regulation D and Rule 147 place various restrictions on resales, which reduces the liquidity of the issue. A shelf registration under Rule 415 will satisfy all of XYZ Corporation's needs.

An investor would NOT purchase an oil and gas limited partnership for which of the following reasons? A Tax incentives B The oil depletion allowance C Recapture provisions D Intangible drilling costs

C Recapture provisions All of the choices would be reasons for investing in an oil and gas limited partnership except recapture. Recapture is the amount added back to income for tax purposes that was allowed as a deduction in a prior period.

ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a: A Underwriter B Dealer C Agent D Designated market maker

C Agent When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent).The client is charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it is acting as a dealer (principal). The client in this case is charged a markup or markdown.

An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option? A European style, next business day settlement B European style, two business days' settlement C American style, two business days' settlement D American style, next business day settlement

C American style, two business days' settlement Long-term anticipation securities (LEAPS) may be exercised on any day prior to expiration (American style). Exercise settlement is in the underlying stock, in two business days.

If a customer's objectives are safety of principal and income, you as the registered representative would NOT suggest: A AA-rated corporate bonds B High-grade preferred stocks C An Exchange-Traded Fund that tracks the S&P 500 Index D A bond fund which invests in investment-grade municipal bonds

C An Exchange-Traded Fund that tracks the S&P 500 Index An ETF that tracks the S&P 500 Index invests in common stocks that will not pay a high dividend and will fluctuate in value with the general equity market. This customer wants income and safety of principal, which may be found in the other three investment choices.

An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should NOT recommend which of the following municipal securities? A A variable-rate demand obligation (VRDO) B A bond anticipation note (BAN) C An auction-rate security (ARS) D A tax-anticipation note (TAN)

C An auction-rate security (ARS) A VRDO and an ARS are both long-term securities with short-term trading features. A VRDO has a put feature that permits the holder to sell the securities back to the issuer or third party. An auction rate security (ARS) does not have this feature and, if the auction fails, the investor may not have immediate access to his funds. TANs and BANs are short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market.

Which of the following securities are based on the credit rating of the issuer? A A closed-end bond fund B An exchange-traded fund (ETF) C An exchange-traded note (ETN) D A mutual fund that contains only non-investment-grade securities

C An exchange-traded note (ETN) Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs. The credit rating of the securities included in a mutual fund, closed-end bond fund company, or ETF has an impact on these types of securities. These securities are not affected by the ratings of the company that is issuing the fund or ETF.

Which of the following statements is TRUE regarding stock index options? A The shortest initial expiration is three months B All index options use the European style of exercise C An exercise is settled by cash instead of the delivery of securities D The index is affected if a stock in the index should split

C An exercise is settled by cash instead of the delivery of securities The exercise of a stock index option is settled by cash instead of the delivery of securities. An index will not be affected if one of its components should split. Some index options are American style (may be exercised any day up to expiration), while others use the European style (may only be exercised on the last trading day prior to expiration). Stock index options have a monthly expiration cycle.

A business development company (BDC) is MOST suitable for which of the following investors?: A An investor who is seeking a liquid investment in a portfolio of established companies B An investor who is seeking a speculative investment in a portfolio of distressed companies and understands that the investment will not offer liquidity C An investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity D An investor who is seeking a non-speculative investment in a portfolio of companies that are privately held

C An investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides the investor with access to their capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. Due to the speculative nature of BDC investments, RR's should inform investors of all of the potential risks before making the investment.

A collateralized debt obligation (CDO) is BEST defined as a type of: A Municipal revenue bond B Closed-end investment company C Asset-backed security D REIT

C Asset-backed security Remember it is backed by collateral which in this case is debt (bond). Very similar to CMO - Collateralized Mortgage Obligation

The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered: A To yield 5 1/2% B At par C At a discount D At a premium

C At a discount Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.

A customer is considering writing an XYZ April 90 put for an $8 premium but is concerned about the risk of a large loss. Which of the following positions, when added, provides the BEST protection? A Selling an XYZ April 85 put for a premium of 5 B Buying an XYZ April 95 call for a premium of 5 C Buying an XYZ April 80 put for a premium of 2 D Selling an XYZ April 90 call for a premium of 8

C Buying an XYZ April 80 put for a premium of 2 The short put position has a maximum risk of $8,200 if the stock declines to zero. If, in addition, the customer buys an XYZ April 80 put for 2, it becomes a credit spread. The maximum risk is reduced to $400, which is the difference between the strike prices (10) and the net premium received (6).

Investors who are seeking income may invest in all of the following securities, EXCEPT: A Special tax bonds B Moral obligation bonds C Capital appreciation bonds D Lease rental bonds

C Capital appreciation bonds A capital appreciation bond (CAB) has a similar structure to a zero-coupon bond. CABs do not pay periodic interest and are NOT suitable for investors who seek income.

A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take? A Instruct the client to obtain that information from the SEC database of mutual fund prospectuses B Refer the client to the fund's sponsor since the RR may not be authorized to release this information C Inform the client that this information may be obtained by reviewing the front of the fund's prospectus D Instruct the client to obtain the information from FINRA

C Inform the client that this information may be obtained by reviewing the front of the fund's prospectus Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.

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

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

A corporation with an excellent earnings record has several issues of bonds outstanding. During a period of stable interest rates, which of the following securities are expected to fluctuate the most? A Mortgage bonds B Commercial paper C Convertible bonds D Debenture bonds

C Convertible bonds The convertible bonds will fluctuate the most because they are convertible into common stock. The price fluctuates with the price movements of the common stock. The fact that interest rates are stable is another reason why convertible bonds is the best answer. If the question had stated that interest rates were moving sharply upward or downward, then all other bonds would fluctuate sharply in price to bring yields in line with interest rates. However, the question asks what will happen in a period of stable interest rates. Given that statement, the best answer is that convertible bonds will fluctuate the most.

A customer entered an order with her broker-dealer to buy 1,000 shares of GM at the market. If the execution report from the floor of the exchange states that 1,200 shares were purchased at $78, the: A Registered representative should ignore the execution and enter a new order to buy 1,000 shares of GM at $78 for the customer B Customer must accept the execution despite the fact that it conflicts with the order C Customer is obligated to accept only the amount ordered, not the amount executed D Registered representative should advise the exchange about the error

C Customer is obligated to accept only the amount ordered, not the amount executed Although the customer is not required to accept more than her original order for 1,000 shares, the order should not be cancelled. Since an error was made, the registered representative should speak with his supervisor to determine how to handle the situation. Automatically entering a new order to buy 1,000 shares does not solve the problem since, if the new order is executed, the firm will then be long 2,200 shares of stock.

Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds? A Stable interest rates B Volatile interest rates C Decreasing interest rates D Increasing interest rates

C Decreasing interest rates Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds.

Eliminating a bond issuer's responsibility to pay back bondholders from an offering, and also relieving their obligation to bondholder's rights, is referred to as: A A put provision B Refunding C Defeasance D A sinking fund

C Defeasance When a bond is prerefunded, (advance refunded), the proceeds from a new bond offering are invested and the securities are placed in escrow. If these funds will be used only to retire the outstanding issue, that issue is considered to be defeased. The responsibility to pay the interest and principal on the outstanding issue is now of the escrow account. In addition the bondholder's rights as described in the indenture agreement from the prerefunded issue, are eliminated.

A corporation is planning to issue new stock to the public but has not yet filed a registration statement with the SEC. As a registered representative of the firm that is expected to do the underwriting, you are permitted to take which of the following actions? A Obtain indications of interest from prospective purchasers B Send a customer a copy of a preliminary prospectus (red herring) C Discuss the offering with investment bankers at your firm D Guarantee a customer that he will be able to purchase 1,000 shares of the issue

C Discuss the offering with investment bankers at your firm A registered representative may discuss the offering only with employees at the firm. None of the other choices listed are permitted since the corporation has not filed a registration statement with the SEC. If a registration statement has been filed with the SEC, the registered representative may send a customer a red herring and obtain indications of interest to purchase the new issue. The registered representative cannot accept money nor guarantee a customer a particular amount of the issue.

Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) corporate bond? A Each year the customer will not pay any tax B The customer will only pay tax at bond maturity C Each year the customer will pay both federal and state income tax D Each year the customer will pay only federal income tax

C Each year the customer will pay both federal and state 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 corporate bonds is subject to both federal and state income tax. CORPORATE BOND = BOTH

Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security? A Each year the customer will not pay any tax B The customer will only pay tax at maturity C Each year the customer will pay only federal income tax D Each year the customer will pay both federal and state income tax

C Each year the customer will pay only federal income tax The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amounted accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on U.S. government securities is subject to federal income tax, but exempt from state and local income taxes.

On the day prior to the ex-dividend date for an ordinary cash dividend, a holder of a call tenders an exercise notice. The investor will be: A Entitled to the dividend only if the holder owns the underlying stock B Required to pay the dividend to the writer C Entitled to the dividend D Required to pay the dividend to the writer only if the writer owns the underlying security

C Entitled to the dividend The holder of a call will get a dividend only if the option is exercised prior to the ex-dividend date. This will result in the buyer being listed as holder of record on the books of the transfer agent.

For which of the following is there no secondary market? A Treasury notes B Bankers' acceptances C Federal funds D Treasury bills

C Federal funds Federal funds are short-term funds (usually overnight) that one bank lends to another to correct a deficit reserve position. Federal funds are not traded in the secondary market since they are not securities.

A customer purchases a municipal bond with 25 years remaining to maturity. The bond has been prerefunded to its first call date. The issue is callable in 7 years at 108, declining to par in 14 years. It also has a sinking fund call provision that begins in 17 years at par. For confirmation purposes, the bond should be priced to the: A Sinking fund date B Final maturity date C First call date D First par call

C First call date When a bond is prerefunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date. Prerefunded = CALL DATE

Short-term municipal obligations payable from funds that usually are received from the federal government are: A Revenue bonds B Bond anticipation notes C Grant anticipation notes D Tax anticipation notes

C Grant anticipation notes Grant anticipation notes are short-term municipal notes issued on the expectation of receiving grant money, usually from the federal government.

A corporation is NOT considered to be in default if it fails to pay interest on which of the following bonds? A Debenture B Subordinated debenture C Income bond D Second mortgage bond

C Income bond For an income (adjustment) bond, an issuer is only expected to pay interest if it has sufficient income. However, on all of the other debt securities, interest must be paid regardless of the corporation's income. The mortgage bond is secured, but both the debenture and subordinated debentures bonds are unsecured. Although the claims of subordinated debenture holders come after those of the mortgage or debenture bondholders, the corporation is considered to be in default if it fails to make the required interest payments.

If a customer leaves a message on an RR's voicemail which provides details of a securities order, the firm: A Is required to accept the order B Is permitted to accept the order only if the voicemail message was left during normal trading hours C Is permitted, but not required, to accept the order D Is permitted to accept the order only if the customer has a margin account

C Is permitted, but not required, to accept the order A broker-dealer may accept an order that is left over voicemail, but is not required to do so. A member firm's actual policy is disclosed in its account opening documentation as well as on its voicemail message.

Which annuity settlement option would provide the greatest monthly return for an individual? A Life annuity with a 10-year certain B Life annuity with a 20-year certain C Life annuity with a 5-year certain D Unit refund life annuity

C Life annuity with a 5-year certain A life annuity with a short period certain settlement option would have a greater monthly payout than a unit refund life annuity settlement option since this choice (life annuity with a 5-year certain) only guarantees payments for five years, whereas this choice (unit refund life annuity) guarantees payout of all accumulated value less expenses. The shorter the period certain the greater the risk the annuitant's beneficiary will not receive any payments, which will be rewarded with a higher payment to the annuitant.

If the Federal Reserve Board increases the discount rate, you would expect: A Short-term bonds to decrease more in price than long-term bonds B That there would be no effect on either long-term or short-term bond prices C Long-term bonds to decrease more in price than short-term bonds D Long-term bonds would increase more in price than short-term bonds

C Long-term bonds to decrease more in price than short-term bonds If the FRB increases the discount rate, the general level of interest rates increases. The prices of long-term bonds decreases more in price than the price of short-term bonds. INCREASING DISCOUNT RATE = INTEREST RATES ARE INCREASING

The investment banking department of a broker-dealer usually does NOT perform which of the following activities? A Provide financing for industrial corporations B Distribute large blocks of already outstanding securities C Make a secondary market for new issues D Underwrite new issues

C Make a secondary market for new issues The investment banking department does not make a secondary market for new issues. This is a function of the equity trading department known as market making.

Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity? A Stabilization B Churning C Matched orders D Capping

C Matched orders A matched order is also known as painting the Tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity. The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume. Churning is a violation in which a salesperson effects a series of transactions in a customer's account that are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize her income (in commissions, sales credits or markups) derived from the account. Capping is a situation where a manipulator is attempting to stop a securities price from rising. Stabilization is a practice used in connection with certain public offerings in which an underwriter posts an open bid for securities at a stated price. Stabilization is intended to maintain an orderly market for the securities during the underwriting and to prevent sharp fluctuations in the market for the securities due simply to supply factors. Properly disclosed, this is an acceptable practice.

A customer enters a sell stop-limit order for 100 XYZ at 25.50. XYZ trades occur as follows: 25.50, 25.25, 25.13, 25.45. The customer's order was: A Executed at 25.45 B Executed at 25.25 C Not executed D Executed at the market price after the order was entered

C Not executed The first trade listed at 25.50 touched the stop price of 25.50 and, therefore, the order became an active (triggered) order to sell 100 shares of XYZ at a limit price of 25.50 or better. For the order to be executed, the stock must be traded at 25.50 or higher. Since the stock remained below 25.50 after the order was triggered, the customer's order did not receive execution.

How long after a new issue is registered for sale will it be shown on the Nasdaq system? A 30 days after the effective date B 45 days after the effective date C On the effective date D 10 days after the effective date

C On the effective date A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public.

Which of the following choices is NOT a characteristic of a HOLDR? A The right to vote B Diversification C Once-a-day pricing D The ability to control when distributions are taxed

C Once-a-day pricing Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a certain sector (e.g., biotech, internet, retail) into a trust and selling interests in the trust to investors. HOLDRs offer investors a level of diversification that is similar to an exchange-traded fund (ETF). Unlike ETFs, the owner of a HOLDR has an ownership interest in the shares of the companies in which the HOLDR is invested and retains the right to vote. Once the portfolio has been created, the composition of the portfolio will typically not change. However, if a company that is included in the portfolio goes bankrupt or merges with another company, the makeup of the HOLDR may be altered. Investors have the ability to control when they are taxed, since they determine when to hold or sell the HOLDR. An investor in a mutual fund does not have that benefit since the portfolio manager determines when to hold or sell the securities in the fund. Benefits also include liquidity and pricing throughout the day (i.e., they are exchange-traded) as compared to an index or sector mutual fund, which has daily pricing and is purchased directly from the fund. HOLDRs have no management fees and are considered low-cost since there are only small transaction costs and custodian fees.

A customer would like to open an account designated by number. The registered representative should: A Not open the account because it is a violation of SEC rules B Open the account C Open the account if the customer signs a written statement acknowledging the account is the customer's D Not open the account because it is a violation of industry rules

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

All of the following can be bought on margin, EXCEPT: A Common stocks listed on an exchange B Preferred stocks listed on an exchange C Options with nine months or less to expiration D Stocks on Nasdaq

C Options with nine months or less to expiration Options expiring in nine months or less may not be bought on margin. They do not have loan value and, therefore, must be paid in full. However, credit may be extended to purchase LEAPS with more than nine months to expiration.

The amount of new issues sold, compared to those offered for sale, as of the close of business each Friday is reported in the The Bond Buyer's: A 20-Bond Index B Notices of sale C Placement ratio D Visible supply

C Placement ratio The placement ratio is a means of gauging the amount of bonds that have been underwritten recently on a new-issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds there are moving into the hands of investors. The visible supply is the total par value of all negotiated and competitive issues scheduled to come to market during the next 30 days. The 20-Bond Index is the average yield on 20 selected municipal bonds.

The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called: A Guaranteed bonds B Double-barreled bonds C Prerefunded bonds D Structured notes

C Prerefunded bonds The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs.

A variable annuity contract holder dies during the accumulation period. In this situation, which of the following statements is TRUE regarding the tax consequences? A Proceeds are not taxable if the beneficiary rolls them over into an IRA B Proceeds in excess of cost are taxable as capital gains to the beneficiary C Proceeds in excess of cost are taxable as ordinary income to the beneficiary D All proceeds pass to the beneficiary tax-free

C Proceeds in excess of cost are taxable as ordinary income to the beneficiary When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.

Which of the following risk factors is the MOST important for purchasers of long-term, high-grade bonds? A Limited marketability B The ability to pay principal upon maturity C Purchasing power risk D The ability to pay interest when due

C Purchasing power risk Long-term, high-grade bonds are relatively safe investments, but do have purchasing-power risk. Because the amount of interest income is fixed, the purchasing power of the interest income may decline over the long term because of inflation. A rise in inflation reduces the amount of goods and services that can be purchased with the fixed amount of dollars.

A term bond has a mandatory sinking fund call feature. What method will be used to determine which specific bonds will be called? A Investors with the largest position B Investors with the largest coupon C Random selection D Investors with the longest maturity

C Random selection TERM BONDS = RANDOM

Mr. Jones requests that his securities be held in street name. To honor his request, the broker-dealer must: A Have the customer sign a hypothecation agreement B Not honor his request since securities may not be held in street name C Segregate the securities from the B/D's own securities D Have the customer sign a margin agreement

C Segregate the securities from the B/D's own securities The only requirement for holding securities in street name is that they must be segregated. A customer signs a margin agreement and hypothecation agreement only when opening a margin account.

A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? A Sell limit $63 B Sell stop-limit $63 C Sell stop $63 D A market order

C Sell stop $63 This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order will not allow the client to receive further profits if the stock increases above $70. A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit.

An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options MOST likely has an investment objective of: A Safety of principal B Liquidity C Speculation D Tax-exempt income

C Speculation An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options most likely has an investment objective of speculation.

In a municipal bond underwriting, the difference between what the issuer receives and the public offering price is known as the: A Manager's fee B Concession C Spread D Total takedown

C Spread The spread in a municipal bond underwriting is the gross profit earned by the syndicate. It is the difference between the amount the issuer receives for the bonds and the public offering price for the bonds. The takedown is the discount given to syndicate members by the manager of the syndicate on any bonds sold. The concession is a trade discount given to dealers who are not members of the syndicate. For example, a syndicate member may take down bonds at par minus 5/8 and sell them to the public at par, making a 5/8-point profit. The dealer who is not a member of the syndicate may buy the bonds at par minus 1/4-point concession and sell them to the public at par, making a 1/4-point profit.

When an issuer is raising additional capital and conducts a rights offering, it may enter into an arrangement whereby a syndicate agrees to purchase all of the shares that the issuing corporation may not be able to sell. This is referred to as a(n): A All-or-none underwriting arrangement B Firm-commitment underwriting arrangement C Standby underwriting arrangement D Best-efforts underwriting arrangement

C Standby underwriting arrangement When an issuer conducts a rights offering in an attempt to raise additional capital and enters into an arrangement whereby an underwriting syndicate agrees to buy all of the shares that remain unsubscribed after the rights offering, it is referred to as a standby underwriting. The term syndicate refers to a group of underwriters that is formed for the purpose of buying securities from an issuer and selling them to investors. In a rights offering, the issuing corporation realizes that many of its existing shareholders may choose not participate, which will leave a large number of shares remaining unsold. If that is the case, the corporation will not receive the money for the shares that remain unsubscribed. A standby underwriter will actually standby to await the results of the rights offering and then purchase all of the unsubscribed shares at a slight discount. This type of an arrangement assures the issuing corporation that it will be able to raise the amount of capital it requires.

Which of the following choices is NOT considered a tax-preference item when calculating the alternative minimum tax (AMT)? A Excess mining, exploration, and development costs B Excess intangible drilling costs C Straight-line depreciation D Accelerated depreciation in excess of straight-line depreciation

C Straight-line depreciation Under AMT rules, taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due are the greater of the two calculations. Tax-preference items are used in calculating the alternative minimum tax. Straight-line depreciation is not a tax-preference item.

According to MSRB rules, a municipal securities representative is NOT permitted to: A Trade securities B Work in the syndicate department C Supervise a branch office D Structure new issues of revenue bonds

C Supervise a branch office Under MSRB rules, any person in a supervisory position must qualify as a principal.

For an investor to be permitted to purchase an over-the-counter stock on margin, approval must be obtained from: A The Securities and Exchange Commission B FINRA C The Federal Reserve Board D A state securities Administrator

C The Federal Reserve Board Under Regulation T, the Federal Reserve Board is given the authority to set the margin requirements for different securities as well as to determine which securities are marginable.

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of XOP at $48 per share and makes the necessary deposit. If XOP increases in value to $57 per share and later declines to $45 a share, which of the following statements is TRUE? A The SMA is $9,000 and the equity is $33,000 B The SMA in the account is $4,500 and the equity is $33,000 C The SMA in the account is $4,500 and the equity is $21,000 D There is no SMA and the equity is $21,000

C The SMA in the account is $4,500 and the equity is $21,000 First, determine the amount of the debit balance. If the customer purchased $48,000 worth of stock at a 50% margin requirement and deposited $24,000, the debit balance is $24,000 ($48,000 market value - $24,000 margin requirement = $24,000 debit balance). XOP increased to $57 per share, making the market value $57,000. The equity increases to $33,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $28,500 (50% of $57,000) from the actual equity in the account of $33,000. The SMA is, therefore, $4,500. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increase in value can create excess equity (SMA) but, if these securities later decline in value, this will not decrease SMA. The equity decreases since the market value declined to $45 per share and is now $21,000 ($45,000 - $24,000). Equity is the INITIAL Margin Requirement minus the final share price value

Which of the following items is NOT found by reviewing a company's balance sheet? A The dollar value of the inventory B The amount of short-term debt C The amount of interest paid on the company's bonds outstanding D The value of the treasury stock

C The amount of interest paid on the company's bonds outstanding The amount of interest paid on the company's bonds outstanding (interest expense) is found in a company's income statement. A company's assets (inventory), liabilities (debt or bonds), and shareholders' equity (treasury stock), are found on the balance sheet.

A customer buys a premium bond that is callable. Which of the following is LEAST beneficial for the customer? A The bond is called at its par value in twenty years B The bond is called at its par value in fifteen years C The bond is called at its par value in five years D The bond is called at its par value in ten years

C The bond is called at its par value in five years If the bonds are called in five years at par, the premium paid for the bond will be amortized over the shortest period. This results in the investor realizing a lower yield than if the bond were called after a longer period. It is important to note that rules require a firm to disclose to a customer the lowest possible yield that the customer can realize. On a premium bond (as in this example), the lowest yield will result from the bond being called at par in the shortest period.

According to MSRB rules, which of the following situations will cause a broker-dealer to reject the delivery of municipal bonds? A Registered bonds are expected and delivered with proper endorsement B Bearer bonds are delivered in $5,000 denominations C The bonds have been called by the issuer D A legal opinion is attached to, rather than imprinted on, the bonds

C The bonds have been called by the issuer Good delivery for municipal bonds, unless otherwise specified, requires delivery of bonds that have not been called unless identified as called at the time of the trade and that have an imprinted or attached legal opinion. The bonds may be in bearer or registered form. Bearer bonds may be delivered in $1,000 or $5,000 denominations. If delivery of registered bonds is expected, they must be endorsed properly and in any denomination from $1,000 to a maximum of $100,000, in $1,000 increments.

Which of the following items is NOT found on a sell ticket? A The customer's account number B Solicited or unsolicited C The customer's original purchase price of the stock D The location of the securities

C The customer's original purchase price of the stock All order tickets must contain the customer's account number and whether the registered representative solicited the order or it was unsolicited. A sell ticket must indicate if it is a short sale or a sale of securities owned by the client. The location of the securities must be indicated (long in the customer's account or held by the customer).

Which of the following sources of revenue is NOT used to pay the debt service on general obligation bonds? A Licensing fees and traffic fines B Income taxes C Tolls collected at a tunnel located in the municipality D Property taxes

C Tolls collected at a tunnel located in the municipality A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond.

The separate account of a variable life policy has performed poorly for some time. A client is concerned about her cash value and death benefit. Which of the following statements is TRUE? A The death benefit is the lesser value of the contract or the amount of the investment B The cash value is guaranteed C The death benefit may decline, but not below a contractual minimum D The cash value may decline, but not below a contractual minimum

C The death benefit may decline, but not below a contractual minimum If the performance of the separate account of a variable life insurance policy is less than the assumed interest rate (AIR), the death benefit will decline. However, the death benefit can never drop below the face value of the policy. The cash value may also decline. However, there is no guaranteed minimum.

Which of the following BEST describes the term, payment for order flow? A The prohibited practice of mutual fund distributors paying kickbacks to registered representatives B The concession paid to a member of a selling group C The payment to a broker-dealer by a market maker in return for routing orders to that market maker D The portion of a mutual fund's 12b-1 fee that is paid to a third-party salesperson

C The payment to a broker-dealer by a market maker in return for routing orders to that market maker It is permissible for broker-dealers to receive payments from a market maker in return for executing orders through that market maker. Any payments for order flow must be disclosed to customers.

Which of the following statements is TRUE concerning Rule 144A transactions? A The securities may be offered only to accredited investors B Only domestic issuers may offer securities under this type of offering C The securities may be offered only to qualified institutional buyers D An investor buying these securities must hold them for six months

C The securities may be offered only to qualified institutional buyers Rule 144A provides an exemption for the purchase of restricted securities by qualified institutions. Qualified institutional buyers (QIBs) are defined as financial institutions that have at least $100 million invested in securities of issuers not affiliated with the entity. These institutions may buy and sell directly with one another without meeting the requirement of Rule 144. The securities offered under Rule 144A may be debt or equity, may be offered by either a domestic or foreign issuer, and may be resold immediately to another QIB. There is no 6-month holding period, as with restricted stock. A private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as a person with either a net worth of $1,000,000 or annual income of $200,000.

Relative to a convertible bond, which of the following choices will produce a desirable arbitrage situation? A The stock is at parity with the bond B The yield on the bond equals the yield on the stock C The stock is at a premium to parity and the bond is trading at par D The stock is at a discount to parity and the bond is trading at par

C The stock is at a premium to parity and the bond is trading at par An arbitrage situation occurs when there is a price difference in comparable securities. If the stock is selling above parity, the value of the stock received from converting the bond is more than the value of the bond. An investor could sell the stock short and buy the bond, and then convert the bond and use the stock to cover the short position. For example, a bond convertible into 25 shares is trading at 104 and the stock is selling at $42. If an investor sold 25 shares short at $42 (equaling $1,050), that would be worth more than the value of the bond ($1,040).

Which of the following choices best represents the placement ratio? A The total par value of new issues sold during the previous week, divided by the total par value of new issues issued during the previous month B The total par value of new issues scheduled during the upcoming 30 days C The total par value of new issues sold during the previous week divided by the total par value of new issues issued during the previous week D The total par value of new issues sold during the upcoming month, divided by the total par value of new issues issued during the previous month

C The total par value of new issues sold during the previous week divided by the total par value of new issues issued during the previous week The placement ratio is published weekly by The Bond Buyer. It expresses the amount of bonds sold by new issue syndicates as a percentage of the total amount of new issues brought to market during that week.

Richard Smith, a variable life insurance policyholder, dies. Which of the following statements best describes the tax consequences of his variable life insurance policy? A There are no tax consequences to his beneficiary and the death benefit is not included in his taxable estate B There are gift taxes due from his beneficiary in the year he died C The value of the policy will be included in Richard's estate for tax purposes D The policy proceeds are federally taxable to the beneficiary

C The value of the policy will be included in Richard's estate for tax purposes Although there are no tax consequences to Richard Smith's beneficiary, the death benefit is included in his estate for tax purposes.

Which of the following statements is NOT TRUE about defined benefit plans? A Contributions are based on a predetermined distribution amount B These plans are ERISA-qualified retirement plans C These plans provide tax-free distributions to participants D The employee does not know the amount her employer will contribute each year

C These plans provide tax-free distributions to participants An ERISA-qualified retirement plan is generally established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is made each year and benefits are equal to the amounts provided by the total of contributions and earnings in the plan. A defined benefit plan promises specific benefits at retirement. Contributions to the plan are calculated to provide the promised benefits upon retirement and, therefore, the employee does not know the amount her employer will contribute each year. Distributions from a pension plan are not tax-free and are typically considered ordinary income.

When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are: A Federal agency bonds B Revenue bonds C Treasury bonds D General obligation bonds

C Treasury bonds Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.

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.

The turnover that a dollar experiences over a given period is known as the: A Inflation rate B Multiplier effect C Velocity of money D Market momentum

C Velocity of money The velocity of money represents the number of times that a dollar is spent over a given period. It is a measure of business activity in the marketplace. The multiplier effect, created by the reserve requirements placed on members of the Federal Reserve System, refers to the fact that small changes in bank deposits result in large changes in the money supply.

The term opening sale applies to a: A Buyer of common stock B Seller of common stock C Writer of an option D Buyer of an option

C Writer of an option The term opening sale applies to the seller (writer) of a listed option. This designation must be written on the order ticket.

Which of the following positions/strategies is NOT bullish? A long 40 call and a short 50 call B A married put C Writing a straddle D A short put

C Writing a straddle Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.

A woman with a low income has saved $5,000 to invest for her young son's college education. Which of the following investments would be the MOST appropriate? A A real estate limited partnership B T-bills C Zero-coupon bonds D Municipal bonds

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

An investor owns 1,000 shares of an open-end investment company. The bid price is $11.00 and the offer price is $11.58. The investment company charges a 1/2% redemption fee. If the investor redeems his 1,000 shares, how much will he receive? A $11,522 B $11,000 C $10,450 D $10,945

D $10,945 When redeeming shares of an open-end investment company (mutual fund), an investor receives the NAV (bid price) minus any redemption fee. The investor would receive $11,000 (1,000 shares x $11.00 NAV) minus the redemption fee of $55 ($11,000 x 1/2%), which equals $10,945.

The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. If the bonds were subsequently trading in the market at $1,020, the market price of the common stock, to be on parity with the bond, will be: A $10.20 B $12.04 C $9.54 D $10.74

D $10.74 Take the Par value of bond ($1,000) and divide by the conversion amount ($10.50): $1,000 / $10.50 = $95 Then take the market value of bond ($1,020) and divide by conversion ratio ($95): $1,020 / $95 = $10.74

The minimum denomination for negotiable certificates of deposit is: A $1,000 B $10,000 C $5,000 D $100,000

D $100,000 The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.

A 60-year-old investor has contributed $30,000 to a non-qualified variable annuity. The annuity's value has increased to $40,000. If the investor withdraws $20,000 and is in a 28% tax bracket, his tax liability is: A $1,400 B 0 C $5,600 D $2,800

D $2,800 In this question, the annuity has earnings of $10,000 (from $30,000 to $40,000), but the investor is withdrawing $20,000. Therefore, the first portion of the withdrawal is the $10,000 of earnings (which is taxable at the investor's ordinary rate) and the remaining $10,000 is considered a return of capital (which is untaxed). This results in tax liability of $2,800 ($10,000 of earnings x 28% tax bracket).

D $2,800 The amount contributed to a non-qualified variable annuity may not be deducted from income; in other words, the contribution is made after-tax. However, all of the earnings will accrue on a tax-deferred basis. Any withdrawal from the annuity will be taxed on a LIFO basis, which means that the earnings (last in) will be considered the first to be withdrawn and will be taxed. If being withdrawn, the earnings are taxed as ordinary income, but the invested amount is considered a return of capital and is not taxed. In this question, the annuity has earnings of $10,000 (from $30,000 to $40,000), but the investor is withdrawing $20,000. Therefore, the first portion of the withdrawal is the $10,000 of earnings (which is taxable at the investor's ordinary rate) and the remaining $10,000 is considered a return of capital (which is untaxed). This results in tax liability of $2,800 ($10,000 of earnings x 28% tax bracket).

If ABC stock is currently trading at $35.25 and the ABC October 35 put option has a premium of 2.25, what is the time value of this option? A Zero B $200 C $250 D $225

D $225 An option's premium is made up of two components—intrinsic value and time value (Premium = Intrinsic Value + Time Value). Intrinsic value is the amount by which an option is in-the-money. Put options are in-the-money if the market price of the underlying stock is below the option's strike price. In this question, the strike is $35 and the market price of the stock is $35.25. Since the stock's market price is above (not below) the put option's strike price, it is out-of-the-money. This is why the option's intrinsic value is zero. Therefore, the entire premium of $2.25 ($225) represents the time value. ($2.25 Premium = $0 Intrinsic Value + $2.25 Time Value).

The net asset value (NAV) of an open-end investment company is $22.20 and its sales charge is 8%. What is the public offering (asked) price? A $20.42 B $22.20 C $23.98 D $24.13

An investor sells short 1,000 shares of JonCo stock at 3.50. The customer must deposit: A $2,500 B $2,000 C $1,750 D $3,500

D $3,500 The required equity for a short sale where the stock is less than $5 per share is the greater of $2.50 per share or 100% of the market value. An investor selling 1,000 shares of JonCo stock short must deposit $3,500 because the market value (1,000 shares x $3.50) is greater than $2.50 per share (1,000 shares x $2.50).

An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor breaks even when XYZ is at: A $35.25 per share B $33.25 per share C $36.75 per share D $38.75 per share

D $38.75 per share The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a premium of 1.75 (long XYZ 35 put). The investor will break even when the price of XYZ is at $38.75 ($37 purchase price of the stock + the 1.75 premium on the put).

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit? A 92 B 94 C 90 D 95

D 95 The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).

D $47.83 A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).

What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF? A $1,000,000, since these securities are not eligible for additional margin B $125,000 C $250,000 D $500,000

D $500,000 Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The process for determining the margin requirement on these securities uses the standard SRO maintenance requirement and multiplies by the portfolio leverage factor. In this case, the standard long requirement is 25% which is multiplied by a factor of 2; therefore, the client must maintain a 50% margin. $1,000,000 x 25% = $250,000. $250,000 x 2 = $500,000.

Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of: A $66 B $91.88 C $918.75 D $660

D $660 A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.

Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of: A $918.75 B $91.88 C $66 D $660

D $660 A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.

What is the maximum amount a customer may withdraw from a Special Memorandum Account? A 2 times the SMA B 25% of the SMA C 3 times the SMA D 100% of the SMA

D 100% of the SMA The full amount or 100% of the SMA may be withdrawn. The buying power is 2 times the SMA.

An individual in the 28% tax bracket can purchase an 8 1/2% municipal bond at par. What taxable yield would be required to equal the yield on the municipal bond? A 20.2% B 8.5% C 3.0% D 11.8%

D 11.8% The taxable equivalent yield of a municipal bond equals the municipal yield divided by the complement of the tax bracket (100% minus the tax bracket). In this example, the municipal yield (8 1/2%) divided by the complement of the tax bracket (72% or 0.72) equals 11.8%.

Listed equity options stop trading at: A 4:30 p.m. Central Time, 5:30 p.m. Eastern Time on the expiration date of the option B 4:00 p.m. Central Time, 5:00 p.m. Eastern Time on the expiration date of the option C 2:00 p.m. Central Time, 3:00 p.m. Eastern Time on the expiration date of the option D 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the expiration date of the option

D 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the expiration date of the option Listed equity options stop trading at 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the expiration date of the option. Beginning February 15, 2015, the expiration date for equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

If a Build America Bond (BAB) has a 7% coupon, what is the overall or net interest paid by the municipal issuer? A 0% B 7.00% C 2.45% D 4.55%

D 4.55% They get a discounted rate at 35%. 7.00% * 100-35% = 4.55%

A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would need a municipal bond with a yield of: A 9.4% B 7.9% C 10.2% D 8.6%

D 8.6% To determine the net yield of a taxable bond, multiply the yield by the complement of the tax bracket. The net yield is 8.6% (12% yield multiplied by 72%, which is the complement of the tax bracket).

RSR Corporation has earned $4 per share and has paid a 75 cent dividend per share. If the stock is selling at $38 a share, what is its price/earnings ratio? A 50.7 B 2.02 C 12.6 D 9.5

D 9.5 The price/earnings ratio is found by dividing the market price of $38 by the earnings per share of $4. This equals a price/earnings ratio of 9.5 ($38 / $4). The amount of the dividend is not relevant in calculating the price/earnings ratio.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit? A 90 B 92 C 94 D 95

The Bond Buyer Municipal Bond Index is based on: A Diversified bonds with approximately 40 years to maturity B A cross section of zero-coupon bonds C Noncallable long-term bonds D A 40-Bond Index

D A 40-Bond Index The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.

To which of the following customers would a registered representative be LEAST likely to recommend an exchange-traded note (ETN)? A A customer seeking capital appreciation B A customer seeking to benefit if an index increases C A customer seeking to benefit if an index decreases D A customer seeking income on a regular basis

D A customer seeking income on a regular basis Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. An investor seeking income on a regular basis would not be a suitable candidate for an ETN. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. Most ETNs are traded on a national exchange (e.g., NYSE) which has the feature of liquidity. Therefore, an investor seeking capital appreciation has the ablity to sell when advantageous.

An investor with an investment objective of speculation wants to purchase a security that will increase three times as much the Russell 2000 Index. Which of the following securities should be recommended? A A leveraged inverse exchange-traded fund (ETF) B An inverse exchange-traded fund (ETF) C An exchange-traded fund (ETF) D A leveraged exchange-traded fund (ETF)

D A leveraged exchange-traded fund (ETF) A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the Russell 2000 Index seeks to deliver three times the performance of that index. Therefore, if the Russell 2000 Index rises by 1%, a leveraged ETF will increase by 3% before fees and expenses are deducted. An inverse exchange-traded fund (EFT) will be suitable if the customer anticipates a decrease in the Russell 2000. A leveraged inverse exchange-traded fund (ETF) is suitable if the customer wants a return that is a multiple or higher return and anticipates a decrease in the Russell 2000. Lastly, an exchange -traded fund (ETF) is suitable if the customer only wants to track the return of the Russell 2000.

A type of security which combines a sophisticated, non-traditional investment strategy with the liquidity of a mutual fund is: A A hedge fund B A non-traded REIT C A private equity fund D A liquid alternative investment

D A liquid alternative investment The term alternative investments refers to investments that use non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. Non-traditional strategies differ from simply buying, holding, and selling securities (a long-only strategy), and are often viewed as a way to diversify a portfolio through the use of securities other than equities and bonds. Non-traditional (alternative) strategies are used by hedge funds and private equity funds. One of the disadvantages of investing in hedge funds and private equity funds is their lack of liquidly. They often state a specific time when an investor may only take out their money. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment. Most REITs are traded on an exchange (e.g., the NYSE) and offer investors a high degree of liquidity. Similar to limited partnership interests, shares of non-traded REITs do not trade on an exchange and offer very limited liquidity. Non-traded REITs are not suitable for investors who are seeking liquidity.

A customer contends that his registered representative made unauthorized trades in his account and will take this matter to an arbitration panel. Regarding the makeup of this panel, which of the following statements is TRUE? A A majority of the arbitration panel will come from within the securities industry B All arbitrators must come from outside the securities industry C All arbitrators must come from inside the securities industry or must be attorneys D A majority of the arbitration panel must come from outside the securities industry

D A majority of the arbitration panel must come from outside the securities industry Under the Code of Arbitration, if a public customer takes a member firm to arbitration to resolve a dispute, the majority of the panel must come from outside the securities industry, unless the customer requests a panel with a majority of industry arbitrators. Neither the broker-dealer nor the customer may actually pick the arbitrators and arbitrators do not need to be attorneys.

Which of the following choices best describes a wrap account? A A personal, joint, and IRA account with one account number B A consolidated account in which the investor can buy or sell options, equities, or bonds C An investment club account with no more than 99 investors D A managed account in which advisory and transaction charges are included in one comprehensive fee

D A managed account in which advisory and transaction charges are included in one comprehensive fee The term wrap account refers to the fee arrangement where one fee, usually ranging from one to three percent annually, is charged by a broker-dealer. The fee is used to cover administrative, portfolio management, and transaction costs. A wrap account is usually managed by an investment adviser. WARP ACCOUNT = ONE FEE

A reverse repurchase agreement is sometimes referred to as: A Arbitrage B A treasury sale C Federal funds D A matched sale

D A matched sale A reverse repurchase agreement is also referred to as a matched sale and is created when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This activity has the short-term effect of absorbing (removing) funds from the money supply. Federal funds or fed funds are the monies that are borrowed overnight on a bank-to-bank basis.

All of the following choices are requirements for a stock to be listed on the NYSE, EXCEPT: A An agreement to solicit proxies B A national interest in the company C A minimum number of round-lot shareholders D A minimum 25% dividend payout ratio

D A minimum 25% dividend payout ratio To be listed on the NYSE, a corporation must have a minimum number of round-lot shareholders, a minimum number of publicly held shares, a minimum aggregate market value of publicly held shares, a positive earnings history, national interest in the corporation, and agreement to solicit proxies. *Dividend payout ratios are not a listing requirement.*

The MOST appropriate buyer(s) for a variable life insurance policy is/are: A Parents with a modest income who have young children B A person who requires the discipline of forced savings C A person who wants the assurance of a guaranteed cash value D A person with an understanding of investments who can tolerate market risk

D A person with an understanding of investments who can tolerate market risk Similar to a variable annuity, the cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. A person who is knowledgeable about investments may be a candidate for variable life insurance because common stock and bonds are the foundation of the policy. As the market values of the securities fluctuate, the cash value changes and is not guaranteed. Therefore, the insured must be able to tolerate market risk. There are other methods by which an investor may achieve forced savings and the product may not be suitable for parents with a modest income who have young children.

Which of the following companies is LEAST affected by changes in the business cycle? A A construction company B An automobile manufacturer C A machine tool company D A pharmaceutical company

D A pharmaceutical company Changes in the business cycle will have the least effect on a defensive company (such as pharmaceuticals or utilities). The demand for the products produced by defensive companies will not be hurt by a downturn in the economy. The other choices are examples of cyclical companies. These companies tend to parallel the economy of the country. If the economy is expected to prosper, then you can expect a cyclical company to prosper. If the economy is expected to decline, then you can expect a cyclical company to be less prosperous.

According to MSRB rules, which of the following documents need not be approved by a principal prior to being sent to a customer? A An abstract of an official statement B A research report C An advertisement regarding the firm's products and services D A preliminary official statement

D A preliminary official statement A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is, therefore, considered advertising. A final official statement and a firm's offering list are also not considered advertising.

When an investor sells an interest in a limited partnership, her cost basis for tax purposes is the: A Accredited value B Original investment C Original investment plus accretion D Adjusted basis

D Adjusted basis An investor's basis will be reduced by any claimed losses and any cash distributions. This reduced (adjusted) basis is the cost basis at the time of sale.

An equity security that is distributed under the provisions of Regulation S may be resold in U.S. markets: A After regulatory approval is obtained from an SRO B After a six-month waiting period is satisfied C Immediately D After a one-year waiting period is satisfied

D After a one-year waiting period is satisfied Before a security that is sold under the provisions of Regulation S may be resold in the U.S., there is a distribution compliance period (waiting period) that must be satisfied. For debt securities, the waiting period is 40 days, but for equity securities (as referenced in this question), the waiting period is one year. However, if an overseas investor acquires securities through a Regulation S offering, she may immediately sell the securities overseas through a designated offshore securities market.

If a customer's objectives are safety of principal and income, you as the registered representative would NOT suggest: A A bond fund which invests in investment-grade municipal bonds B AA-rated corporate bonds C High-grade preferred stocks D An Exchange-Traded Fund that tracks the S&P 500 Index

D An Exchange-Traded Fund that tracks the S&P 500 Index An ETF that tracks the S&P 500 Index invests in common stocks that will not pay a high dividend and will fluctuate in value with the general equity market. This customer wants income and safety of principal, which may be found in the other three investment choices.

Which of the following statements is NOT TRUE concerning VIX options? A VIX options can be used if an investor expects an increase or decrease in the volatility of the S&P 500 Index B An investor will buy VIX calls as a hedge if he expects the S&P 500 Index to fall C An investor will buy VIX calls if he expects the S&P 500 Index to fall D An investor will buy VIX puts if he expects an increase in the volatility of the S&P 500 Index

D An investor will buy VIX puts if he expects an increase in the volatility of the S&P 500 Index The VIX (volatility index) measures the implied volatility of S&P 500 options. Although implied volatility is calculated using S&P 500 options, the VIX actually predicts how much the S&P 500 index will fluctuate in the next 30 days. Because the VIX is a way to predict market declines, some investors call the VIX the fear index. The implied volatility of options, as well as the VIX itself, will increase when the S&P Index decreases in value (i.e., an inverse relationship). Investors can buy VIX calls to hedge against a downturn in the S&P 500.

An IRA contribution may be claimed for a tax year providing the contribution is deposited in the IRA no later than: A The filing date of the person's tax return B December 31 of the year for which the contribution is claimed C December 31 of the subsequent year D April 15 of the subsequent year

D April 15 of the subsequent yea Regardless of when a person files his tax return, the IRA contribution must be made no later than April 15 of the following year.

A client of a broker-dealer is the president of XYZ Corporation and intends to sell XYZ shares under Rule 144. For the client to be able to sell these securities, a filing must be made with the SEC: A 90 days after the sell order is placed B 15 days before the sell order is placed C 30 days after the sell order is placed D At the time the sell order is placed

D At the time the sell order is placed Under Rule 144, an investor who intends to sell either restricted or control stock must notify the SEC by filing Form 144 at the time the sell order is placed. Once the filing is made, it is effective for 90 days.

Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as: A Alternative minimum tax bonds B Private activity bonds C Moral obligation bonds D Bank-qualified bonds

D Bank-qualified bonds Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.

According to technical analysis, a head and shoulders top formation indicates a trend that is: A Highly unpredictable B Bullish C Neutral D Bearish

D Bearish A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it indicates the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it indicates a reversal of a downward trend in the price movement of a particular stock (bullish indicator).

A limited partner lends money to the partnership. The limited partner will: A Be violating his fiduciary responsibility B Be considered a general partner now C Lose his limited liability D Become a general creditor of the partnership

D Become a general creditor of the partnership A limited partner is permitted to lend money to the partnership. He will be considered a general creditor since he was a lender.

The transfer of bonds from one party to another may be accomplished by an endorsement on the back of the bond certificate or through a: A Bid form B Letter of credit C Legal opinion D Bond power

D Bond power A customer who sells a security is required to sign the certificate. The usual method of endorsing a stock (or bond) certificate is to sign on the back and then mail the certificate to the broker-dealer. In order to safeguard the certificate, the seller can send the certificate by registered mail. An alternate method is for the customer to send the certificate, unsigned, in one envelope and to send a signed bond (or stock) power in a separate envelope. In this way, if the certificate were to fall into unauthorized hands, it would have no value since it would not be negotiable.

A designated market maker has an order on its book from a public customer to buy stock at $34.70 and another order from a public customer to sell stock at $34.90. The designated market maker may: A Buy stock for its own account at $34.65 B Sell stock from its own account at $34.95 C Sell stock from its own account at $34.90 D Buy stock for its own account at $34.75

D Buy stock for its own account at $34.75 A designated market maker is not permitted to compete with public orders when trading for its own account. The DMM may buy stock at a higher price or sell stock at a lower price. In doing so, the DMM has narrowed the spread (the difference between the bid and ask). The DMM, buying stock at $34.75, is permitted since this price is higher than the price of the public order ($34.70). The other choices would result in the DMM buying lower or selling at a price equal to or higher than the public customer's order.

A CDSC is associated with which share class? A Class A shares B Class C shares C A no-load D Class B shares

D Class B shares The differences in mutual fund share classes represent the method by which a fund collects any applicable sales charge. Class A shares typically have a front-end load, which is assessed at the time that a customer purchases the shares. On the other hand, Class B shares have a back-end load, which is assessed at the time a customer redeems the shares. On B shares, if the back-end load declines over time based on how long an investor owns the shares, it is referred to as a contingent deferred sales charge (CDSC). Class C shares may assess a small front-end load, but always have a 12b-1 fee. The 12b-1 fee is an annual fee that is levied in each year that an investor owns the shares.

Which of the following communications is NOT required to be filed with FINRA? A Communication sent to customers concerning direct participation programs B Communication that provides information on unit investment trusts C Communication sent to customers concerning collateralized mortgage obligations D Communication sent only to customers that are registered investment advisers

D Communication sent only to customers that are registered investment advisers A registered investment adviser is a type of institutional customer, and any communication directed only to institutional customers does not need to be filed with FINRA. Retail communications concerning direct participation programs (DPPs), collateralized mortgage obligations (CMOs), and investment companies are all required to be filed with FINRA. Investment companies include variable insurance products, mutual funds, closed-end funds, unit investment trusts (UITs), and exchange-traded funds (ETFs).

Which of the following statements regarding the Roth IRA is NOT TRUE? A Qualified distributions are not subject to the 10% early withdrawal penalty B Qualified distributions are not included in an individual's gross income C An individual may contribute up to $5,500 per year D Contributions are tax-deductible

D Contributions are tax-deductible While contributions to traditional IRAs are tax-deductible under certain conditions, contributions to a Roth IRA are nondeductible. Individuals may contribute up to $5,500 per year if they have earned income and if they meet certain income eligibility requirements. Qualified distributions are tax-free and are not subject to the 10% early withdrawal penalty.

The JOBS Act allows small businesses to use the internet as a means of raising capital through a process that is referred to as: A Development B Fundraising C Polling D Crowdfunding

D Crowdfunding The Jumpstart Our Business Startups (JOBS) Act established the provisions that allow small businesses to raise capital using the internet through a process that is referred to as crowdfunding. This process gives certain members of the general public the ability to invest in start-up companies. Suitability is of great consideration due to the potential risks of investing in these types of companies. For this reason, there is a limit to the amount that these individuals are permitted to invest based on their annual income and/or net worth.

An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT: A Runway maintenance expenses B Salaries of airport personnel C Hangar expenses D Debt service expenses

D Debt service expenses Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.

From the issuer's perspective, when comparing serial bonds to term bonds, serial bonds have: A Increasing interest payments and increasing principal amounts B Stable interest payments and declining principal payments C Stable interest payments and stable principal amounts D Declining interest payments and declining principal amounts

D Declining interest payments and declining principal amounts Serial bonds have several (a series of) maturity dates with a lower amount of debt outstanding as time goes by. Each series of bonds will have declining interest payments and declining principal amounts. In comparison, term bonds have one maturity date (i.e., the entire principal balance is paid on one date) and have stable interest payments.

Which of the following statements is NOT a characteristic of an electronic communication network (ECN)? A ECNs permit trading after-hours B ECNs permit trading electronically C ECNs permit trading anonymously D ECNs act as market makers

D ECNs act as market makers Electronic communication networks allow market participants to display quotes and execute transactions. These participants are referred to as subscribers and pay a fee to the ECN to trade electronically through the system. ECNs allow subscribers to trade after-hours, and to quote and trade without disclosing their names (anonymously). ECNs act in an agency capacity and will not buy or sell for their own account as with a market maker.

Which of the following statements is TRUE regarding a defined contribution plan? A It is designed to provide employees with a fixed monthly payout at retirement B The employer bears all the investment risk C Employees may deduct all employer contributions D Each employee has a separate account within the plan

D Each employee has a separate account within the plan A defined contribution plan is one in which the employer makes contributions on behalf of employees, and the size of the retirement benefit depends on the amount of the contributions and the investment performance of the assets in the plan. In this type of plan, the employee assumes the investment risk and only the employer may deduct employer contributions. In addition, each employee has a separate account within the plan to easily track the growth of his retirement assets.

A customer sells $1,000 worth of stock in a restricted margin account. All of the following statements are TRUE, EXCEPT the: A SMA will be increased B Debit balance will be decreased C Market value of the account will be reduced D Equity will be increased

D Equity will be increased When securities are sold in a restricted account, the customer is permitted to withdraw an amount equal to the FRB initial margin requirement (currently 50%). This amount is first credited to the SMA and may then be withdrawn. The full amount of the sale is used to reduce the debit balance. The market value will decrease since securities were sold. The equity will remain the same since the market price and debit balance were reduced by the amount of the sale. If the customer withdraws the amount credited to the SMA, the debit balance will increase and the equity will decrease.

Before a broker-dealer may offer a portfolio margin program to its clients, the firm must obtain approval from: A The OCC B The options exchange C The SEC D FINRA

D FINRA

A registered representative has two tickets to an event and the tickets are valued at $150 each. The tickets are for the RR and a client; however, on the day of the event, the RR is unable to attend. Which of the following is the RR's BEST course of action? A Inform the client since he cannot attend, neither can the client B Give one ticket to the client C Give both tickets to the client D Have another RR attend the event with the client

D Have another RR attend the event with the client Member firm personnel may not give, or permit to be given, a gift of material value that exceeds $100 per recipient, per year to persons who are employed by another member firm or client. However, exemptions from the $100 limit are made for occasional meals, tickets to sporting and cultural events, reminder advertising (e.g., boxes of pens or key chains), and expenses related to legitimate business travel. In order for an activity to qualify for the exemption, the RR must attend the event and not just give the tickets to another person or persons. In the question, since each ticket is valued at $150, the best course of action is for another RR to attend the event with the client.

Relative to stock index options, which of the following statements is NOT TRUE? A If traded, settlement is the next business day B There are options that expire each month C At exercise, an investor's profit or loss is determined by the difference between the option's strike price and the exercise-settlement value D If exercised, settlement is in cash in two business days

D If exercised, settlement is in cash in two business days When exercised, a stock index option settles in cash on the next business day. On the other hand, if an equity option is exercised, settlement and the delivery of the underlying security must be made within two business days. For index options, the settlement amount is determined by the difference in the option's strike price and the exercise-settlement value on the day of exercise. Both index options and stock options have expirations that occur each month. All purchases and sales of options (i.e., option trades) settle on the next business day.

A fidelity bond is: A A nonconvertible corporate bond B A noncallable municipal bond C Insurance protecting customers in the event of a broker-dealer bankruptcy D Insurance purchased by broker-dealers to protect them against fraud

D Insurance purchased by broker-dealers to protect them against fraud Every broker-dealer is required to have a fidelity bond, which provides insurance in the event of a fraud judgement against the broker-dealer.

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

D 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.

A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if: A Interest rates are stable B The yield curve slopes downward C Interest rates are rising D Interest rates are falling

D Interest rates are falling The call protection provision of five years would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.

Treasury arbitrage restrictions generally prohibit issuers of municipal securities from: A Selling municipal securities with coupon rates that are higher than Treasury securities B Investing bond proceeds in lower-yielding Treasury securities C Selling municipal securities with coupon rates that are lower than Treasury securities D Investing bond proceeds in higher-yielding Treasury securities

D Investing bond proceeds in higher-yielding Treasury securities Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.

Which TWO of the following types of securities may a Municipal Securities Representative sell? I. General obligation bonds II. Treasury notes III. Variable-rate demand obligations (VRDOs) IV. Unit investment trusts which contain municipal securities

I and III A Municipal Securities Representative may sell any type of municipal security. General obligation bonds and VRDOs are two types of municipal securities. According to the MSRB, a Municipal Securities Representative is not properly registered to sell any types of corporate securities, government or Treasury securities, or shares of unit investment trusts or mutual funds (even those which contain municipal securities).

TUV Sep 5.00 puts trade on the CBOE. With the approval of its shareholders, TUV Corporation will reduce its outstanding shares by a factor of 20, which has the effect of increasing its market price 20-fold. What effect will this have on the TUV Sep 5.00 put? A The TUV option will be closed out B Investors who previously owned 1 TUV Sep 5.00 put contract will now own 20 TUV Sep 5.00 puts C Investors who previously owned 20 TUV Sep 5.00 puts will now own 1 TUV Sep 100 put D Investors who previously owned 1 TUV Sep 5.00 put will now own 1 TUV Sep 100 put

D Investors who previously owned 1 TUV Sep 5.00 put will now own 1 TUV Sep 100 put TUV Corporation has executed a reverse stock split. When a corporation's stock has a reverse or forward stock split, all associated options contracts are adjusted. When a reverse stock split occurs, the number of shares underlying each option will be reduced and the strike price will increase. In the case of a 1-for-20 reverse split, the number of shares underlying the contracts will be reduced to 5 (100 / 20), and the strike price will be increased by the inverse of the split ($5 x 20 = $100). The contract's aggregate exercise price will remain the same after the adjustment. The number of contracts does not change with a reverse split.

Which of the following descriptions BEST defines a business development company (BDC)? A It invests in companies traded in foreign companies B It invests in medium-size, publicly traded companies C It invests in initial public offerings of small and medium-size companies D It invests in private small and medium-size companies

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

Which of the following statements is TRUE about treasury stock? A It receives dividends B It is part of unauthorized stock C It has voting power D It is treated as a deduction from outstanding shares

D It is treated as a deduction from outstanding shares Treasury stock is issued stock that has been repurchased by the corporation and is retired. It is treated as a deduction from the outstanding shares of a corporation and is no longer part of the capitalization of the corporation. It has no voting rights and does not receive dividends.

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? A It provides loans to educational institutions B It issues securities that are not backed by the U.S. government C It purchases federally sponsored student loans D It issues securities that can be redeemed to pay for college education

D It issues securities that can be redeemed to pay for college education The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.

Which of the following positions best enables an investor to take advantage of a significant appreciation in DEF stock? A A debit DEF call spread B A credit DEF put spread C Short a DEF straddle D Long a DEF straddle

D Long a DEF straddle The long straddle offers an investor the ability to realize unlimited gains since the client is long a call option. The gains are determined by the amount the stock appreciates. While a debit call spread is bullish, the gain is limited to the difference between the strike price on the long call and the strike price on the short call. The credit put spread is also bullish, but the gain is limited to the net premium received. The short straddle exposes an investor to unlimited risk if the stock rises.

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

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

A person who is employed by a brokerage firm and responsible for maintaining an inventory of stock to buy from and sell to the firm's customers, is a(n): A Trader B Registered representative C Institutional salesperson D Market maker

D Market maker A person who is employed by a brokerage firm and responsible for maintaining an inventory of stock to buy from and sell to the firm's customers is typically defined as a market maker. The term trader is a broad term with multiple definitions which include a person who trades for the firm's own account, but does not trade with the firm's customers.

Knowing a client's tax bracket is particularly useful when evaluating the suitability of which type of investment? A Preferred stocks B Common stocks C Variable annuities D Municipal bonds

D Municipal bonds Knowing a client's tax bracket is particularly useful when evaluating the suitability of municipal bonds. The interest on municipal bonds is typically tax-exempt, which is less of an advantage if the client is in a low tax bracket.

Pickette Financial Services is participating in the IPO of Swank Tanks, Inc., as the managing underwriter. If a research analyst at Pickette wants to initiate coverage on Swank Tanks, she: A Can initiate coverage immediately B Must wait three calendar days after the offering date C May not issue a research report due to a conflict of interest D Must wait 10 calendar days after the offering date

D Must wait 10 calendar days after the offering date A research analyst of Pickette Financial Services must wait 10 calendar days after the date of the offering to publish a research report, or make a public appearance. This quiet period is applied to members that have agreed to participate as a manager or comanager of the IPO. Other participants, such as syndicate and selling group members, must also wait 10 days to publish a research report or make a public appearance after the IPO date. Concerning an emerging growth company (EGC), the 10- and three-day quiet periods restricting an analyst's ability to publish research reports and making public appearances, does not apply.

A customer owns 1,000 shares of LRR preferred stock and the company is in the process of conducting a rights offering for its common stock. Under the terms of the rights offering, two rights are required to buy one new share and the subscription price is $25 (the stock's current market price is $26.50). This customer would be entitled to which of the following? A 1,000 shares if the customer pays $25 per share B 500 shares if the customer pays $26.50 per share C 500 shares if the customer pays $25 per share D No additional shares

D No additional shares As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to the offering. Instead, rights offerings are made available to common stockholders.

A municipal dealer would violate MSRB rules if it gave a quote that is: A Identified as a subject quote B Bona fide C Specified as AON D Nominal and not specified as such

D Nominal and not specified as such MSRB rules require that any quote be bona fide (firm at the time given). Nominal or subject quotes are permitted if they are identified as such at the time given.

When a stock is at its resistance price, a technical analyst will most likely say that it is: A Oversold B Upward sloping C Inverted D Overbought

D Overbought A stock is overbought at its resistance level and oversold at its support level.

A variable annuity contract holder dies during the accumulation period. In this situation, which of the following statements is TRUE regarding the tax consequences? A All proceeds pass to the beneficiary tax-free B Proceeds in excess of cost are taxable as capital gains to the beneficiary C Proceeds are not taxable if the beneficiary rolls them over into an IRA D Proceeds in excess of cost are taxable as ordinary income to the beneficiary

D Proceeds in excess of cost are taxable as ordinary income to the beneficiary When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.

A client would like to open a numbered account. An RR may open the account: A Provided the broker-dealer has a written statement on file signed by the client that is also filed with the appropriate SRO B Under no circumstances C Provided the broker-dealer has a written statement on file signed by the client and the client is an accredited investor D Provided the broker-dealer has a written statement on file signed by the client

D Provided the broker-dealer has a written statement on file signed by the client Any client may open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging ownership of the account. This document must be kept on file at the brokerage firm, but does not need to be filed with an SRO.

Which of the following individuals are NOT permitted to trade on the floor of the NYSE? A Independent brokers B Floor brokers C Designated market makers D Registered representatives

D Registered representatives Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE.

According to MSRB rules, a municipal securities representative is NOT permitted to: A Structure new issues of revenue bonds B Trade securities C Work in the syndicate department D Supervise a branch office

D Supervise a branch office Under MSRB rules, any person in a supervisory position must qualify as a principal.

Recently, the federal funds rate has been rising. This may indicate all of the following situations, EXCEPT: A Banks will find it more expensive to obtain overnight loans to satisfy a minor deficit in their reserve accounts B Rates for short-term loans have been increasing C The Federal Reserve may be engaging in matched sales to absorb reserves from the banking system D The Federal Reserve is easing credit

D The Federal Reserve is easing credit The federal funds rate is the rate that one bank charges another bank for overnight borrowing. This borrowing is done when a bank is in need of reserves. If the fed funds rate is steadily rising, it indicates that the Federal Reserve is tightening credit. Therefore, banks may find difficulty in obtaining overnight loans to meet reserve requirements.

A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or another person at her firm must notify: A FINRA B The SEC C The Office of the Comptroller of the Currency D The Treasury Department

D The Treasury Department Firms are prohibited from transacting business with individuals and entities that are identified on the Office of Foreign Assets Control (OFAC) list. If a registered representative discovers that one of the owners or beneficiaries of an account is on the OFAC list (or if someone on the list tries to open an account with his firm), the RR or another person from her firm should contact the U.S. Treasury Department immediately. The Financial Crimes Enforcement Network (FinCEN) and OFAC are both a part of the Treasury Department.

An investor reading the newspaper sees that yesterday's effective federal funds rate was 3.47%. On the previous day, the rate was 3.41%. This information indicates: A The Federal Reserve took measures to inject money into the banking system B Member banks that needed to obtain overnight loans from the Federal Reserve paid more than the previous day C The Federal Reserve increased the federal funds rate D The average rate charged on overnight loans throughout the country increased

D The average rate charged on overnight loans throughout the country increased The effective federal funds rate is the daily average rate that commercial banks charge throughout the country for overnight loans. It is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate normally signifies that the Fed has taken money out of the banking system.

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

D The bond is called after 10 years at 103 The question references a bond that is selling at a discount (the nominal yield of 6% is lower than the yield-to-maturity or basis of 6.25%). If the bond is held to maturity, the investor will simply receive the difference between the discounted purchase price and par. If the bond the bond is called in 20 years, the investor will receive the amount of the discount plus one extra point (101). If the bond is called in 15 years, the investor will receive the amount of the discount plus two extra points (102). If the bond is called in 10 years, the investor will receive the amount of the discount plus three extra points (103). Therefore, the bond being called at the first date in 10 years at 103 will give the investor the best return since the investor will be receiving the highest call price in the shortest number of years.

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

A broker-dealer may reject a delivery of municipal bonds if: A The bonds were called by the issuer and were identified as such at the time of the trade B $5,000 denominations are delivered C The market price increases after the trade date D The bonds are missing a legal opinion

D The bonds are missing a legal opinion A delivery of municipal bonds may be rejected if they do not meet good delivery requirements, such as missing or mutilated coupons or if they are delivered without a legal opinion. The bonds may be in denominations of $1,000 or $5,000. Bonds that have been called should not be delivered unless they were identified as called at the time of the trade. A change in market price is not a reason for rejecting delivery of municipal bonds (or any other security).

A call option would be considered covered if it was written against all of the following choices, EXCEPT: A The underlying common stock held in a bank B The underlying common stock held in a trust company C The underlying common stock held in a cash account D The convertible bonds or convertible preferred stock of another corporation

D The convertible bonds or convertible preferred stock of another corporation The option would be considered covered if written against all of the choices listed except the convertible preferred stock or convertible bonds of another corporation. A security that is convertible into common stock is acceptable, but it must be of the same corporation and be convertible immediately into at least the same number of shares represented by the options written.

Industrial development revenue bonds are backed by: A The local municipal district in which the facility is domiciled B The state in which the facility is domiciled C Both the corporate guarantor and municipality D The corporate guarantor

D The corporate guarantor The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds.

Which of the following parties is responsible for the safekeeping of the securities owned by a mutual fund? A The sponsor B The transfer agent C The registrar D The custodian bank

D The custodian bank The custodian bank is responsible for the safekeeping of the securities owned by a mutual fund. The custodian bank has no responsibility relating to the management of the fund's portfolio.

A registered representative is permitted to borrow from, or lend funds to, customers in all of the following situations, EXCEPT: A The customer has a personal relationship with the registered representative B The customer is an immediate family member of the registered representative C The loan is based on a business relationship independent from the member firm customer relationship D The customer is an accredited investor

D The customer is an accredited investor They can help out family or friend but cannot help out a customer (investor)

As it relates to a Nasdaq market maker, the term spread is BEST defined as which of the following? A The difference between the price that an issuer will receive for its securities and the price that the public will pay for the securities B The amount of profit that a firm will make when it buys a security from or sells a security to a customer C The amount of the firm's markup or markdown to a customer who buys or sells a security D The difference between the price at which a firm will buy a security and the price at which it will sell a security

D The difference between the price at which a firm will buy a security and the price at which it will sell a security When used in reference to a Nasdaq market maker, the spread represents the difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security. For example, if the bid price is $21.20 per share and the offer price is $21.30 per share, the market maker's spread is $.10. The difference between the price that an issuer will receive for its securities and the price that the public will pay for the securities is the spread or profit that an underwriter makes when it sells an IPO to a customer. The amount of profit that a firm will make when it buys a security from or sells a security to a customer is a market maker's profit based on its inventory cost for a security (i.e., the price at which it purchased a security from a customer compared to the price at which it was sold to a different customer). Concerning this choice (the amount of the firm's markup or markdown to a customer who buys or sells a security), the markup or markdown is the difference between the prices the customer paid or received compared to the best bid or offer price of all Nasdaq market makers (the inside market). For example, if the inside market is $25.50 - $25.70 and the customer paid $25.90 to purchase the stock, the markup is $.20

Which of the following rates is set by the Federal Reserve Board? A The broker loan rate B The federal funds rate C The prime rate D The discount rate

D The discount rate Of the choices given, only the discount rate is set by the Federal Reserve Board. The prime rate is the rate of interest that commercial banks charge their best-rated customers and is established by each bank. The broker loan rate, which is the rate of interest charged to brokerage firms for margin loans, is set by each bank. The federal funds rate is the charge for overnight loans between banks and is set by each bank.

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

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

Which of the following statements is NOT TRUE regarding the purchaser of a put option? A The purchaser has a right to sell stock B The purchaser benefits if the value of the underlying stock declines C The purchaser limits the amount of money he could lose if the value of the underlying stock increases D The only way to realize a profit is to exercise the option

D The only way to realize a profit is to exercise the option There is more than one way the investor could profit. The investor could profit by either exercising or liquidating the put. The other choices are true statements. The purchaser of a put has a right to sell stock. The maximum loss that a purchaser of an option (put or call) can sustain is the amount of the premium paid. The purchaser of a put can profit if the underlying stock declines in value.

One of the major differences between an open-end and closed-end investment company is: A The composition of their portfolios B A closed-end investment company is exempt from new issue registration requirements C The method of calculating net asset value D The types of securities that each may issue

D The types of securities that each may issue Both open and closed-end investment companies must register when they issue securities. A major difference between open-end and closed-end investment companies is their capitalization (i.e., the types of securities they issue to raise money). Open-end companies, also referred to as mutual funds, may only issue common stock. However, closed-end companies may issue common stock, preferred stock, or bonds

All of the following statements are TRUE concerning preconditions for sale requirements under the New Issue Rule, EXCEPT: A After the initial verification, an annual negative consent letter will be permitted B The verification may be made through electronic communication C The verification must be conducted prior to the sale of new issues D The verification may be made through oral communication

D The verification may be made through oral communication Prior to selling a new issue to an account, a firm must meet certain preconditions for sale. A firm must obtain representation from an account holder or an authorized party of an account, stating that the account is eligible to purchase new issues in accordance with the New Issue Rule before distributing a new issue to that account. The representation from the account holder may be in the form of an affirmative statement that positively declares that the account is eligible. A firm may use electronic communications to verify account eligibility for new issues, but may not rely on oral statements. A member firm that sells new issues must reverify eligibility every 12 months and must retain copies of all information and records used in the verification for a minimum of three years. This is known as a negative consent letter which satisfies the pre-conditions for sale requirements.

Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)? A They are designed to deliver the same performance as an index or other benchmark B They are designed to deliver a multiple of the performance of an index or other benchmark C They are designed to deliver a multiple of the opposite performance of an index or other benchmark D They are designed to deliver the opposite of the performance of an index or other benchmark

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

Which of the following choices is NOT a factor in secondary-market municipal joint accounts? A There may be a takedown B There may be an order period C Members may not publish different offering prices D They require a good faith deposit

D They require a good faith deposit A good faith deposit is a sum of money given to the issuer of a new municipal bond issue along with a syndicate's bid and is not a factor in secondary-market transactions. A secondary-market joint account exists when two or more dealers form an account to jointly offer a block of bonds in the secondary market. As with a new issue, there may be an order period as well as a takedown (member's discount). MSRB rules prohibit members of the account from offering the bonds at different prices.

T-bills purchased at the weekly auction will have a settlement date on the: A Fifth business day B Monday following the auction C Next business day D Thursday following the auction

D Thursday following the auction The auction for 13- and 26-week T-bills is held each Monday. Settlement is on Thursday of the same week.

For a new municipal issue, which of the following choices is the responsibility of the underwriting syndicate? A To file the official statement with the SEC B To submit the final official statement to FINRA C To hire the bond counsel that provides the legal opinion D To submit the official statement to the MSRB's EMMA system

D To submit the official statement to the MSRB's EMMA system Municipal securities are exempt from the registration and filing requirements of the SEC. However, the underwriting syndicate must submit the official statement to the MSRB's Electronic Municipal Market Access (EMMA) system and must also provide the official statement to customers. It is the responsibility of the issuer to hire the bond counsel.

Which of the following persons establishes positions in secondary market municipal bonds for a broker-dealer? A Agent B Underwriter C Principal D Trader

D Trader A trader is responsible for positioning (carrying inventory) secondary market municipal bonds. An underwriter is involved in the distribution of new issues.

The potential loss when writing uncovered straddles is: A Limited to the premium B Limited to the exercise price minus the premium C Limited to the exercise price plus the premium D Unlimited

D Unlimited A straddle involves the sale (writing) of a call and put with the same expiration and exercise price. Writing an uncovered call involves unlimited loss potential.

Alan and Marie Johnson have one child and have just purchased a home. The Johnsons count on Marie's regular income from her medical practice to pay their mortgage and other regular bills. Alan's irregular income from the sale of his sculptures provides investment and discretionary income. The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan's income. Which of the following types of insurance is MOST appropriate for the Johnsons? A Universal life insurance B Variable life insurance C Whole life insurance D Variable universal life insurance

D Variable universal life insurance Universal life insurance will allow the Johnsons to vary their premiums based on current income levels and insurance requirements, while variable life insurance will provide returns based on the performance of a separate account. A combination of the two types, called variable universal life or flexible premium variable life, is most appropriate.

Which TWO of the following metrics can be calculated by examining the balance sheet of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio

I and IV The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The current ratio is found by dividing the current assets by the current liabilities. The operating profit margin and the bond coverage ratio can be calculated by examining the income statement.

Alan and Marie Johnson have one child and have just purchased a home. The Johnsons count on Marie's regular income from her medical practice to pay their mortgage and other regular bills. Alan's irregular income from the sale of his sculptures provides investment and discretionary income. The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan's income. Which of the following types of insurance is MOST appropriate for the Johnsons? A Whole life insurance B Variable life insurance C Universal life insurance D Variable universal life insurance

If an equity option is exercised, when is the settlement date for the stock transaction? A On the same business day B Within seven business days C On the next business day D Within two business days

D Within two business days When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected within 2 business days (regular-way settlement for stock).

Your client owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to: A Buy calls B Buy puts C Write covered puts D Write covered calls

D Write covered calls The most conservative strategy for the investor to achieve her objective is to write covered calls. The call premium received will increase the yield on her portfolio of stocks because it will add to the income generated by the dividends received from the stock.

An investor that wants to hedge a portfolio of preferred stocks can buy: A S&P 500 call options B S&P 500 put options C Yield-based put options D Yield-based call options

D Yield-based call options Yield-based options are based on the yield-to-maturity of Treasury bonds, rather than the price of Treasury bonds. Essentially, yield-based calls will increase in value as bond prices fall because of the inverse relationship between yield and price. As is true for bond prices, preferred stock prices are inversely related to the movement of interest rates. An investor who wants to hedge its preferred stocks is worried that the prices will decline and that interest rates and yield-to-maturity on bonds will rise. An investor who fears that yields will rise should buy the option that gains value due to an increase in yields. The best hedge for the investor is to buy yield-based call options.

A registered representative should know all the essential facts about a customer's financial status, investment objectives, ability to assume risk, age, occupation, and other pertinent information: I. For the registered representative to determine if option trading is suitable for the customer II. For the brokerage firm to determine if it should approve the customer's account for option trading III. For the brokerage firm to determine if it should send an options risk disclosure document to the customer IV. Before the registered representative answers questions the client has about options

I & II Option trading is not suitable for all investors because of the risks involved. The registered representative must obtain all the essential facts about the customer to determine if option trading meets the customer's investment objectives, financial background, and ability to assume the added risk. An option order (to buy or write the option) may not be accepted from a customer unless the customer's account has first been approved for option trading by the brokerage firm. Whether the account is approved or not depends on the essential facts about the customer. The answer therefore is (I) and (II) only. A customer must be sent a current option disclosure document at or prior to the time the account is approved for option transactions.

An investor owns stock that has increased in value. To protect his profit, he can: I. Enter a buy stop order II. Enter a sell stop order III. Buy put options on the stock IV. Buy call options on the stock

I & III A sell stop order can be used to protect a profit or limit a loss on an existing long position. It is not activated until the market declines to or below the stop price. By purchasing put options, the investor will have the right to sell his stock at a set price (strike price) and will establish a specific sales price.

The Bond Buyer Revenue Bond Index is: I. A 30-year index II. A 20-year index III. A 25-bond index IV. A 30-bond index

I & III The Bond Buyer Revenue Bond Index (commonly referred to as the Revdex) is an index of the yields on 25 revenue bonds. It is compiled on a weekly basis by The Bond Buyer and contains 30-year maturity bonds with an average rating on S&P of A+ and on Moody's of A1.

Under the New Issue Rule, an employee of a broker-dealer is prohibited from purchasing which TWO of the following new issues? I. An initial public offering for which the employee's firm is not an underwriter II. An exchange-traded fund III. Convertible debt IV. A new issue of common stock for which the employee's broker-dealer is the managing underwriter

I & IV According to FINRA, an employee of a broker-dealer is considered a restricted person and is not permitted to purchase certain new issues. Under the rule, new issues are defined as initial public offerings (IPOs) of equity securities that are sold under a registration statement. The purchase restrictions apply regardless of whether the employee's broker-dealer is participating as an underwriter for the offering. Exemptions from the IPO definition include all debt offerings, investment company offerings (e.g., mutual funds and exchange-traded funds), and preferred stock.

When a registered representative makes a recommendation to a customer involving a leveraged exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST important? I. The security may be recommended to at least some investors II. The security may be able to produce a profit over a long period III. The security may be able to be sold quickly IV. The security may be a good investment for a specific customer

I & IV Although all of the choices are important factors for determining the suitability of a recommendation, the FINRA suitability rule has listed three main suitability obligations. 1. The reasonable-basis obligation requires a member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for at least some investors. If the firm or its RRs do not understand the product, it should not be recommended to customers. 2. The customer-specific obligation requires the member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer's investment profile. A customer's investment profile would include, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives and experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose. Even though a customer is not obligated to provide all of this information, the RR should try to obtain the information necessary to make a suitable recommendation. 3. The quantitative obligation requires the member firm and an RR to have a reasonable basis for believing that a series of recommended transactions, even if suitable for a customer, are not excessive when taken together in light of the customer's investment profile.

When comparing high-grade bonds to low-grade bonds, lower-grade bonds have which TWO of the following choices? I. Higher yields II. Lower yields III. Higher market prices IV. Lower market prices

I & IV One of the basic principles of investing is the greater the risk, the greater the return, and the lower the risk, the lower the return. Since lower-grade bonds are riskier than higher-grade bonds, they will have higher yields and lower market prices.

Which TWO of the following actions may an RR engage in when selling shares of a mutual fund? I. Tell a customer to invest in a family of funds to take advantage of a breakpoint II. Sell dividends III. Explain that the exact value can be determined at redemption IV. Allow a customer to sign a letter of intent two months after his initial investment

I & IV Selling dividends means to suggest purchasing shares just prior to the ex-date and is a violation of securities rules since it does not benefit the investor. A letter of intent may be backdated up to 90 days. When redeeming shares, the price is based on the next calculated NAV so it is not known at the time of redemption. A family of funds allows an investor to take advantage of breakpoints although investing in more than one fund.

A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should: I. Buy 5 bonds II. Buy 100 shares of stock III. Sell 5 bonds short IV. Sell 100 shares of stock short

I & IV Since the bond is convertible into 20 shares of stock ($1,000 par divided by $50) and the bond is priced at 120, the parity for the stock is $60 per share ($1,200 bond price divided by 20 shares). An arbitrage situation exists because the stock is selling at a 5-point premium to parity (65 market price versus 60 parity price). An investor can profit from this situation by purchasing bonds at 120 and shorting the stock at 65. Each bond may be converted into 20 shares of stock at a cost of $60 per share. These shares may then be used to cover the short sale, establishing a 5-point profit (65 short sale price - 60 cost).

Variable annuities sold by insurance companies must be registered with: I. The SEC II. The FRB III. FINRA IV. The State Insurance Commission

I & IV Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents.

Which TWO of the following actions must be completed at or prior to an options trade? I. Send the customer a current copy of the risk disclosure document II. Have the ROP approve the account for options trading III. Deposit the customer's money in the account IV. Have the customer sign an options agreement

I and II At or prior to the approval of an options account, a registered representative must send the customer a copy of a current risk disclosure document. Also, trades will not be executed until the account is approved for options trading by a registered options principal (ROP). *Customers must sign and return the options agreement within 15 days of account approval.*

Which TWO of the following statements are TRUE under the Uniform Transfers to Minors Act (UTMA) regarding a custodian account in which an individual is custodian for her son? I. The securities purchased must be suitable for the minor II. The mother's Social Security number is used for purposes of reporting and paying taxes III. The custodial relationship is terminated when the son reaches majority IV. The securities will be registered in the mother's name until the son reaches the age of majority

I and III A custodian under the Uniform Transfers to Minors Act is required to act under the Prudent Man Rule in the handling of the account. The custodian may make any transactions that a prudent man or woman would make for her own account. The transaction, however, must be suitable for the minor. All stock in the account must be registered in the name of the custodian as custodian for the minor. The account would be registered, for example, as "Mary Jones as custodian for Robert Jones under the New York Uniform Transfers to Minors Act." The custodial relationship is terminated when the minor reaches the age of majority.

Which TWO of the following financial products are defined as derivatives? I. Collateralized mortgage obligations II. Commercial paper III. Call options IV. Corporate high-yield bonds

I and III A derivative is a financial product that derives its value from movements in another financial product. If the price of the underlying security changes in value, the price of the derivative will fluctuate. For example, a CMO is a security backed by other mortgage-backed securities. If changes occur to the prices of these securities due to fluctuating interest rates and other factors, the price of the CMO will change. The price of an option contract is based on changes in the underlying security. A call option provides the holder the right to buy a security at a specified price. If the underlying security increases in value, the value of the call option will rise. Other types of derivatives include warrants and convertible bonds.

Mr. Jones is a small business owner who has purchased Treasury bills and other short-term securities during times when he has excess funds available in the business. He likes the aspects of liquidity and safety. A friend has told him he can get higher rates from auction rate securities. He wants to know why you have not recommended this investment to him. Which TWO of the following explanations would you cite as your reasons? I. Auction rate securities are long-term investments II. Interest or dividend rates are reset at established intervals based on a Dutch auction III. If the auction fails, the client may not have immediate access to his funds IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the auction

I and III Although auction rate securities are usually sold as an alternative to other short-term securities, they are long-term securities. An RR must disclose to a client that, if the auction fails, the client may not have immediate access to his funds. The RR also has a duty to disclose to clients any material fact relating to the specific features of the auction rate securities and the customer's need for a liquid investment when recommending this type of product. The fact that the interest or dividend rate is reset at specified intervals is a material fact, but is not a reason to avoid recommending the investment. The same reasoning applies to the fact that the rate is set at the lowest rate that matches supply and demand. These investments may not be suitable for investors who have a need for liquidity.

Which TWO of the following statements are TRUE about contributions made to an IRA? I. They must be in the form of cash II. They may be in the form of securities III. They are permitted regardless of whether the individual is covered by an employer's plan IV. They are permitted only for individuals not covered by an employer's plan

I and III Contributions to an IRA must be made in cash and may then be invested in intangible assets such as stocks and bonds. Any individual who earns income may contribute to an IRA. However, individuals covered under an employer plan may be limited to making contributions in after-tax dollars.

Which TWO of the following choices can be calculated by examining the income statement of a company? I. The earnings before interest and tax (EBIT) II. The debt-to-equity ratio III. The operating profit margin IV. The amount of working capital

I and III EBIT may be found by subtracting the operating expenses from the sales or revenue of a company, and the operating profit margin is found by dividing the sales by the operating expenses. All of this information can be found in the income statement. The debt-to-equity ratio and amount of working capital can be calculated by examining a company's balance sheet.

Which TWO of the following documents are required to be sent to the purchaser of a new issue of a municipal bond? I. A confirmation II. The offering document that was filed with the SEC III. An official statement of the issuer IV. A complete list of the syndicate members

I and III MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction whether on a new issue or on a secondary market trade. There is no offering document filed with the SEC (municipal securities are exempt) and a list of the syndicate members does not need to be sent. MSRB rules require underwriters of new municipal issues to submit a final official statement to the Electronic Municipal Market Access (EMMA) system. Investors can also access the official statement through EMMA.

In most cases, municipal bond investors may obtain which TWO of the following choices? I. Reduced interest-rate risk by investing in issues with different maturities II. A federal tax exemption by investing in private activity bonds III. A state and local tax exemption by investing in bonds in their state of residency IV. A reduced risk of default by investing in bonds in their state of residency

I and III Municipal bond investors can obtain reduced interest-rate risk by investing in issues with different maturities. Bonds with short-term maturities will only experience a small decline in price if the general level of interest rates increases. Although most municipal bonds are exempt from federal income tax, they are not exempt from state income tax unless the owner is a resident of the state that issued the bonds, and the state elects not to tax the purchaser of the bond. The interest on municipal private activity bonds is subject to federal income tax if the investor is subject to the alternative minimum tax (AMT). The risk of default is not reduced by investing in bonds in the investor's state of residency.

Which TWO of the following statements concerning The Bond Buyer 20-Bond Index are TRUE? I. It is compiled weekly II. It consists of revenue bonds III. It is used to show trends in yields IV. It is used as an indication of the new issue market for municipal securities

I and III The Bond Buyer 20-Bond Index is compiled each week and is calculated from the yields on 20 specific general obligation issues with an average rating of AA and its purpose is to show trends in municipal yields. The 20-Bond Index does not contain any revenue bonds. It is the Bond Buyer's Visible Supply and Placement Ratio statistics that are used as indicators of the new issue market for municipal securities.

A municipal dealer purchased $100,000 face value of 6.00% bonds at a 6.00 basis. If the dealer reoffered the bonds, which TWO of the following choices will be considered reasonable? I. 101 II. 108 III. 5.80 basis IV. 4.00 basis

I and III The dealer purchased the bonds at par (6% coupon at a 6.00 basis). When reoffering the bonds, the dealer's markup should be reasonable. A one-point markup (101) is considered reasonable, whereas an eight-point markup (108) is not. An offering of 5.80 represents a reduction in yield of 20 basis points and is considered reasonable. A reduction in yield of 200 basis points (6.00 basis minus 4.00 basis reoffering) is excessive.

Which TWO of the following statements are TRUE concerning the Securities Act of 1933? I. Registration provisions apply if the securities beings sold are listed on the NYSE II. Antifraud provisions do not apply if the securities being sold are listed on the NYSE III. Registration provisions do not apply to securities issued by a municipality IV. Antifraud provisions do not apply to securities issued by a municipality

I and III The registration provisions of the 1933 Act apply if securities sold are listed on the NYSE or Nasdaq, but do not apply to securities issued by a municipality. The antifraud provisions of the Securities Act of 1933 apply to all securities, even those exempt from registration.

Which TWO of the following statements are TRUE regarding a variable annuity accumulation unit? I. It is an accounting measure used to determine an owner's interest during the pay-in phase II. It is an accounting measure used to determine an owner's interest during the payout phase III. The value of the units will remain fixed IV. The value of the units will fluctuate

I and IV Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the accumulation or pay-in phase. Their value will vary based on the performance of the separate account. (Annuity units are used during the annuity or payout phase.)

Which of the following choices represent logical strategies for a technical analyst? I. Buy calls when a stock breaks through a resistance level II. Buy calls when a stock breaks through a support level III. Buy puts when a stock breaks through a resistance level IV. Buy puts when a stock breaks through a support level

I and IV A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.

An underwriting syndicate that offered a new issue at $21 could stabilize the offering at which TWO of the following prices? I. $20.90 II. $21.01 III. $21.20 IV. $20.20

I and IV An underwriter can stabilize a new issue at or below the offering price. The underwriter could stabilize at $20.90 and $20.20.

An investor has been saving for her child's college education using a 529 plan. If her child will be attending college in a few years, which TWO of the following actions are MOST suitable? I. Moving money from equity and bond investments to money-market funds II. Moving money from money-market funds to equity funds III. Moving money from bond funds to equity funds IV. Moving money from equity funds to bond funds

I and IV As a child approaches college age, a suitable investment strategy is to move from growth-oriented securities, such as equities, to income-oriented securities, such as bonds, and money-market funds. Once a child begins to attend college, most of the funds should be invested in money-market funds or other types of short-term investments that are liquid with very little risk of capital.

Regulation NMS applies to which TWO of the following choices? I. Listed equity trades II. Listed debt trades III. Quotes available for manual execution IV. Quotes available for electronic execution

I and IV One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers. Reg NMS does not apply to securities subject to manual execution. Nor does it apply to debt securities, whether electronically or manually executed.

When the market price of MMS is $24, a customer purchases 10 MMS May 20 puts at 2 in a cash account. Which TWO of the following statements are TRUE regarding the option purchase? I. The settlement date for the option purchase is one business day II. The settlement date for the option purchase is two business days III. The Regulation T payment date is two business days IV. The Regulation T payment date is four business days

I and IV Option transactions (purchases or sales) settle on the next business day following the trade date (T+1). On the other hand, stock transactions settle two business days following the trade date (T+2). According to Regulation T, payment for transactions that are executed in cash and margin accounts must be made by the customer within four business days (i.e., both stock and option trades must be paid for in four business days).

Which TWO of the following choices are characteristics of reverse convertible securities? I. They are short-term securities II. They are usually long-term securities III. The investor is guaranteed to receive his original principal back at maturity IV. The investor may receive less than the value of his original principal back at maturity

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

Series K preferred stock has which TWO of the following characteristics? I. The dividend payable begins at a fixed rate and switches to a floating rate II. The dividend payable begins at a floating rate and switches to a fixed rate III. The dividend is cumulative IV. The dividend is non-cumulative

I and IV Series K preferred stock has the following characteristics: It is issued by a financial service company It has no maturity date It pays a fixed rate for a period and switches to a floating rate (usually based on LIBOR) It's dividend is non-cumulative and it may not carry voting rights It is callable at the option of the issuer

I and IV Series K preferred stock has the following characteristics: • It is issued by a financial service company • It has no maturity date • It pays a fixed rate for a period and switches to a floating rate (usually based on LIBOR) • It's dividend is non-cumulative and it may not carry voting rights • It is callable at the option of the issuer

Which TWO of the following statements are TRUE concerning the death benefit on a variable annuity? I. The benefit skips the probate process II. The benefit must go through probate prior to distribution III. The beneficiary receives the proceeds tax-free IV. The beneficiary may have a tax liability when receiving the proceeds

I and IV The death benefit on a variable annuity skips the probate process. Probate is a lengthy legal process in which the decedent's bills are paid and remaining assets distributed based on instructions generally left in a will. The recipient of a death benefit from a variable annuity may need to pay taxes on any amount above the contract's cost basis. For example, if a client invested $100,000 and died when the contract was worth $150,000, a nonspouse beneficiary may be required to pay taxes on the $50,000 above the decedent's contributions.

If interest rates increase, which TWO of the following events will most likely occur? I. Yield-based call premiums will increase II. Yield-based put premiums will increase III. Bond prices will rise IV. Bond prices will fall

I and IV The value of yield-based options is determined by the difference between the yield of a Treasury index and the strike price. Yield-based calls have intrinsic value when the Treasury index yield is above the strike price. Yield-based puts have intrinsic value when the Treasury index yield is below the strike price. When interest rates (yields) increase, yield-based call premiums will increase. Bond prices move in the opposite direction, falling when interest rates increase.

Upon written request, duplicate account statements would be required under which TWO of the following circumstances? I. The customer is an employee of a member firm and is opening a brokerage account at a bank II. The customer is an employee of a mutual fund and is on the board of directors III. The customer is an employee of a bank and is opening an account at a broker-dealer IV. The customer is an employee of a member firm and is opening a brokerage account at a financial institution

I and IV Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens a brokerage account at another member, investment adviser, bank, or other financial institution. There is no requirement to send duplicate statements if the customer is an employee at a financial institution.

When a stock sells ex-dividend, which TWO of the following orders on a designated market maker's (DMM's or specialist's) book will be reduced? I. Buy-limit order II. Sell-limit order III. Buy-stop order IV. Sell-stop order

I and IV When a stock sells ex-dividend, the DMM (specialist) will reduce those orders on his book that were entered below the market. A buy-limit order and a sell-stop order will be reduced by the amount the stock sells ex-dividend since these orders are entered below the market.

Duties of the ROP include: I. Reviewing selected customer accounts II. Establishing option training programs for registered representatives and ROPs III. Reviewing retail communications

I, II, and III All of the items indicated in the answer are duties of the registered options principal (ROP).

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

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.

Prior to being listed on an exchange, which of the following factors must be evaluated? I. The number of shareholders II. The dividend payout III. The earnings record IV. The current market price

I, III, and IV only Listing requirements include: a minimum number of round-lot shareholders, a minimum number of shares publicly held, minimum market values, a positive earnings history, and national interest in the stock. The amount of dividends paid or the dividend payout ratio is not a factor.

Corporations repurchase their own stock in the open market to: I. Increase the number of voting shares that the corporation holds II. Increase earnings per share III. Have stock available for stock option plans for key employees IV. Make the stock more marketable

II & III Corporations repurchase their own stock in the open market to increase earnings per share and to have stock available for stock option plans for key employees. Stock repurchased becomes treasury stock, which does not have voting rights, and its marketability is very difficult to predict.

Which TWO of the following statements are TRUE about SIPC? I. It was created by an Act of Congress and is considered a U.S. government agency II. It is a nonprofit organization that broker-dealers join III. It provides insurance for customer accounts in the event of bankruptcy by a broker-dealer IV. It provides insurance for customer accounts for fraud, embezzlement, and counterfeiting

II & III SIPC can borrow from the U.S. government, but it is not an agency of the U.S. government. SIPC provides insurance coverage for customer accounts in the event of a brokerage firm's failure. Each brokerage firm must take out a separate insurance policy (known as a fidelity bond) to insure itself for fraud, embezzlement, and counterfeiting. This bonding is not provided by SIPC.

Which TWO of the following statements are TRUE regarding brokered CDs sold by registered representatives? I. A callable CD gives the investor the right to redeem the security prior to maturity II. If the CD is called by the issuer, the client may not be able to receive a comparable rate of interest III. A callable CD that is called prior to maturity may offer a client a return that is less than the yield to maturity IV. Since the security is issued by a bank, a callable CD will provide no limit to the amount of FDIC insurance

II & III When a client purchases a brokered or long-term CD issued by a bank, the broker-dealer offering the product is required to provide a client with certain disclosures. These disclosures will be based on the potential risk and investment considerations relevant to the client. The following disclosures should be made concerning callable CDs. The issuer at its sole discretion may decide to call in the CD prior to maturity. Therefore, the client does not have the right to redeem the CD prior to maturity. If the CD is called prior to maturity, the client may be unable to reinvest the funds and receive a comparable rate of interest (if rates have declined). A CD that is called prior to maturity may offer a client a return that is less than the yield to maturity. The CD may not be called by the issuer, requiring the client to hold the security until maturity. All brokered CDs carry limited FDIC insurance if the amount of the CD at one bank exceeds the regulatory limits established by the FDIC.

Prior to first use, a municipal securities principal must approve which TWO of the following documents? I. The official statement II. The abstract of an official statement III. The red herring IV. The research report

II & IV Advertising must be approved prior to first use by a municipal securities principal. An official statement or preliminary official statement is not considered advertising. However, a dealer-prepared summary or abstract of the official statement is considered advertising. Research reports are also considered advertising. A red herring (preliminary prospectus) relates to a requirement of the Securities Act of 1933 from which municipal issues are exempt. HINT IS PRIOR - ABSTRACT USED THEN NOT OFFICIAL

Which TWO of the following statements are TRUE regarding an international fund? I. It will invest in U.S. and non-U.S. companies II. It will invest in only non-U.S. companies III. There is no currency risk since it is issued by a U.S. mutual fund family IV. There is currency risk since the portfolio has international exposure

II & IV An international fund is one that invests exclusively in non-U.S. companies. This is in contrast to a global fund, which invests in U.S. and non-U.S. companies. Since the international fund will hold securities issued by companies in various countries, currency fluctuations could damage the value of the securities within the portfolio (currency risk).

Retail communications regarding options: I. Must be submitted to the exchange 15 days prior to initial use II. Must be submitted to the exchange 10 days prior to initial use III. Must be kept on file by the member firm for six years IV. Must be kept on file by the member firm for three years

II & IV Retail communications regarding options must be submitted to the firms option regulator (an exchange or FINRA) for approval at least 10 days prior to initial use. All retail communications must be maintained on file by the member firm for three years.

Which TWO of the following statements are TRUE concerning Section 457 plans? I. These plans are state-sponsored and used to fund higher education expenses II. These plans are used to fund retirement III. These plans grow tax-deferred IV. These plans grow tax-free

II and III A Section 457 plan is a type of qualified retirement plan used by many public sector workers. 457 plans grow on a tax-deferred basis and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference between the plans is the type of employee who may use them. A 401(k) plan is used primarily by for-profit employees, a 403(b) plan by nonprofit employees, and a 457 plan by some local government workers. State-sponsored, higher education savings plans that may be opened by an investor are referred to as Section 529 plans, not 457 plans.

Which TWO of the following statements are normally TRUE of money-market mutual funds? I. They are load funds II. They are no-load funds III. Dividends are computed daily and credited monthly IV. Dividends are computed weekly and credited monthly

II and III Money-market funds are normally no-load, open-end investment companies. Their portfolio consists of short-term, fixed-income securities such as Treasury bills, commercial paper, and bankers' acceptances. Dividends on money-market fund shares are usually computed daily and credited monthly. Investors may elect to reinvest the dividends each month, thereby buying more shares.

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

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

Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company? I. There is a limit on the amount of registered stock the director may purchase II. There is no limit on the amount of registered stock the director may purchase III. There is a limit on the amount of unregistered stock the director may sell IV. There is no limit on the amount of unregistered stock the director may sell

II and III Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for six months before she may dispose of it. Control stock is registered stock that is acquired by an affiliate (control) person, such as an officer or director, in the secondary market. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock.

Which TWO of the following would be considered the MOST advantageous when considering an investment in a limited partnership? I. Tax deductions II. Tax credits III. Loans secured are non-recourse IV. Loans secured are recourse

II and III Tax credits provide a dollar-for-dollar reduction on tax liabilities whereas tax deductions are used to reduce taxable income. Non-recourse loans are secured by the property owned by the partnership and is not the responsibility of the limited partners, however; recourse loans are the responsibility of the limited partners.

An insider of XYZ Corporation buys XYZ stock in the open market at $63 per share. Now, 10 months later, the insider intends to sell the stock at its current market price of $68 per share. Which TWO of the following statements are TRUE regarding this transaction? I. The sale is subject to the six-month holding period under Rule 144 II. This sale is not subject to the six-month holding period under Rule 144 III. The sale is subject to the volume limitations under Rule 144 IV. The sale is not subject to the volume limitations under Rule 144

II and III The key to this question is to realize that the investor is an insider who acquired his shares through an open market purchase; therefore, he is holding control stock. Under Rule 144, control stock is not subject to the holding period requirement. However, both control and restricted stock are subject to the volume limitations that are imposed by the rule. If an investor is holding restricted (unregistered) stock, Rule 144 requires that it be held for six months before it may be resold.

Which TWO of the following metrics may be calculated by examining the income statement of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio

II and III The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.

Which TWO of the following choices would NOT be included in a subscription agreement for a direct participation program (DPP)? I. A statement indicating the purchaser understands the risks of this investment II. The priority provisions if the partnership is liquidated III. A statement listing the amount of tax credits or deductions the investor will receive IV. A statement that attests to the investor's ability to meet the financial requirements of this investment

II and III The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he or she understands the ramifications of the investment and can meet the financial requirements of this investment. Priority provisions for liquidating a limited partnership, and the tax implications, would be found in the offering documents.

Which TWO of the following securities are typically sold at a discount? I. TIPS II. Treasury bills III. Bankers' acceptances IV. Collateralized mortgage obligations

II and III Treasury bills and bankers' acceptances are typically sold at a discount. The amount of interest is based on the difference between the purchase price and the face value.

An individual who owns STC stock could provide protection against a decrease in market value by: I. Buying calls II. Buying puts III. Selling calls IV. Selling puts

II and III only In order to protect against a decline in market value, an investor could buy puts or sell calls. If the market price were to fall, the price of the puts purchased would rise and an investor could realize a profit by exercising the puts or selling the puts at the higher premium. The price of the calls would fall and the calls would most likely expire, enabling the seller to keep the premium received.

Which TWO of the following taxes would best describe income taxes and estate taxes? I. Flat taxes II. Graduated taxes III. Regressive taxes IV. Progressive taxes

II and IV A progressive tax is graduated (the tax rate increases as the taxable amount increases). Income taxes, estate taxes, and gift taxes are progressive. A flat tax is a situation where the tax rate remains constant regardless of the taxable amount. Flat taxes tend to be regressive in nature, which means that they have a greater effect on lower wage earners. Therefore, flat taxes are often categorized as regressive. Examples of regressive taxes are sales taxes and gasoline taxes.

A buy stop order is entered: I. Below a support level II. Above a resistance level III. To limit a loss on a long stock position IV. To limit a loss on a short stock position

II and IV A stop order may be used to limit a loss or protect a profit on an existing position. If an investor is short stock, he can enter a buy stop order which, if activated, will cover his short position and protect the profit or limit the loss on the short position. A technical analyst may also place a buy stop above the resistance level to purchase the stock should there be a price breakout.

Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds? I. To qualify, the municipality may only issue up to $10,000,000 every six months II. To qualify, the municipality may only issue up to $10,000,000 annually III. Commercial banks may receive a 70% tax deduction of the interest costs IV. Commercial banks may receive an 80% tax deduction of the interest costs

II and IV Bank-qualified bonds are issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds.

Which TWO of the following statements concerning convertible bonds are TRUE? I. Coupon rates are usually higher than nonconvertible bonds of the same issuer II. Convertible bondholders are considered creditors of the corporation III. Convertible bonds are usually issued by companies with strong credit ratings IV. It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond

II and IV Convertible bondholders are considered creditors of a corporation and provide investors with the ability to convert their bonds into shares of common stock of the same issuer at a set price (conversion price). This feature links these types of bonds to the equity markets and the price of a convertible bond is affected by the price of the underlying stock. However, if the price of the underlying stock declines to the point where there is no advantage to the conversion feature, the bond may sell at a price based on its inherent value as a bond, disregarding the convertible feature. Moreover, convertible bonds are issued by companies with weaker credit ratings and allow the issuer to sell debt at a lower cost. Since the conversion feature is a benefit to the bondholder, convertible bonds will have a lower coupon than similar nonconvertible bonds.

A customer owns a mutual fund that invests primarily in foreign securities. Which TWO of the following amounts will be reported to the customer concerning the tax treatment of interest and dividends? I. The net amount of dividends and interest II. The gross amount of interest and dividends III. The amount of tax paid to the Internal Revenue Service (IRS) IV. The amount of tax withheld by the foreign government

II and IV If an investor owns a mutual fund that invests in foreign securities, and dividends and interest are paid to a U.S. investor, these earnings may be subject to withholding tax by the country from which they were paid. The broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.

Bergen County has issued Build America Bonds to improve its transportation system. Which TWO of the following statements are TRUE concerning these bonds? I. The interest income on these bonds is exempt from federal income tax II. The interest income on these bonds is subject to federal income tax III. The issuer will not receive a federal reimbursement IV. The issuer will receive a federal reimbursement

II and IV The Bergen County bonds are an example of Direct Pay Build America Bonds (BABs). BABs are a type of municipal bond that pay taxable interest, but the Treasury will reimburse the issuer for 35% of the interest paid on the bonds. The reimbursement thereby reduces the issuer's cost of borrowing and allows it to compete with corporate issuers when raising capital.

An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? I. The investment risk is assumed by the insurance company II. The investment risk is assumed by the customer III. The amount of the payment to the customer is guaranteed by the insurance company IV. The amount of the payment to the customer is not guaranteed

II and IV Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment may increase, decrease, or remain the same, since the amount of the payment is not guaranteed. In addition, since a straight-life settlement option was chosen, payments will stop when the investor dies, regardless of the amount left in the contract.

Bud Jones purchased 100 shares of DEF at 20 on June 16 and passed away on July 27 when the market value of DEF was 25. If the 100 shares of DEF are inherited by Mr. Jones's daughter Mary, what are the tax implications? I. Mary assumes a cost basis of 20 II. Mary assumes a cost basis of 25 III. The holding period for the stock is short-term IV. The holding period for the stock is long-term

II and IV only When securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.

Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I. Current yield II. Nominal yield III. Yield to maturity IV. Yield to call

II, I, III, IV A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par.

Place in order from first to last, the normal manner in which an underwriting manager would allocate bonds in an underwriting. I. Group net II. Presale III. Member IV. Group less concession

II, I, III, IV The confusion with this question is with the group less concession allocation. This is an order for which the selling group gets credit—receiving the concession for introducing the customer. The members would still receive the additional takedown. The selling group generally gets credit for orders only after all others are allocated to the members.

The following four bonds have the same maturity. On a pre-tax basis, place them in their order of yield (during most economic times), from the highest to lowest. I. Treasury bond II. Investment-grade corporate bond III. Investment-grade municipal general obligation bond IV. Investment-grade municipal revenue bond

II, I, IV, III To answer this question, it is important to first recognize that corporate bonds (which have fully taxable yields and generally lower quality) offer the highest yield. This identification eliminates choices (a) and (d) since they do not list corporate bond yields as the highest. Corporate bond yields are followed by the yield on Treasuries (yields taxable at the federal level), and then finally the yield on municipal bonds (yields are federally tax-free). Municipal bonds typically have the lowest yield since they are exempt from federal income tax. When comparing the different types of municipal bonds, general obligation bonds are generally considered safer than revenue bonds and, therefore, carry a lower yield.

When computing the dollar price of a municipal bond sold on a yield basis, which of the following call features will be used? I.Sinking fund call II.Catastrophe call III.In-whole call

III.In-whole call When pricing a bond, only a call feature that allows the issuer to call the entire issue is used.

A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales. A $2.50 per bond for a total of $50,000 B $2.50 per bond for a total of $100,000 C $4.00 per bond for a total of $80,000 D $4.00 per bond for a total of $160,000

A $2.50 per bond for a total of $50,000 The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).

An investor purchases an ABC Corporation October 50 put and pays a premium of $7. The underlying security declines to $40 per share. For tax purposes, the proceeds of the sale are: A $4,300 B $4,700 C $5,700 D $4,000

A $4,300 The proceeds of the sale for tax purposes are $4,300 ($5,000 strike price minus the $700 premium paid for the option equals the proceeds of the sale). The cost basis of the stock purchased is $4,000. The customer's profit is then $300.

The Bond Buyer contains a 20-Bond Index and an 11-Bond Index. The bonds included in the 11-Bond Index have an average rating of: A AA+ B A+ C AAA- D AA

A AA+ The 11-Bond Index contains general obligation bonds with an average rating on S&P of AA+ and on Moody's of Aa1. The 20-Bond Index has an average rating on S&P of AA and on Moody's of Aa2.

Which of the following choices is LEAST important to an investor considering a bond swap? A Accrued Interest B Maturity dates C Annual income D Capital loss

A Accrued Interest A bond swap involves selling one bond and using the proceeds to buy another bond with either a different yield, interest rate, or maturity date. This is usually done to establish a capital loss for tax purposes. Of the choices given, the least important factor to consider in the swap or exchange is accrued interest since accrued interest paid will be included in the next interest payment and all accrued interest received has been earned prior to the bond being sold.

Which of the following statements is NOT TRUE regarding a SEP-IRA? A Employees are permitted to make contributions to the account B An employer makes contributions to a SEP-IRA established for each eligible employee C Employees are immediately vested for any contributions that are made to the account D An employer is not required to make annual contributions

A Employees are permitted to make contributions to the account In a simplified employee pension plan (SEP-IRA) employees are NOT permitted to make contributions. Instead, SEPs are funded by employer contributions only.

A customer has a cash account that has securities valued at $320,000 and $180,000 in cash. The customer and a spouse also have a joint account with securities valued at $120,000 and $270,000 in cash. If the member firm were to become bankrupt, the coverage under SIPC would be: A Full coverage of cash and securities for both accounts B $500,000 for the individual account and $370,000 for the joint account C $500,000 for the individual account and $390,000 for the joint account D $500,000 for the individual account and $290,000 for the joint account

B $500,000 for the individual account and $370,000 for the joint account Both the individual account and the joint account are considered separate customers and will each receive independent coverage of $500,000, of which no more than $250,000 may be for cash. In the individual account, full coverage will be provided of $500,000 ($320,000 of securities and $180,000 in cash). In the joint account, the full value of the securities is covered. However, only $250,000 of the cash in the account is covered. The total coverage for the joint account would be $370,000 ($120,000 + $250,000). For the balance of $20,000 cash, the customer will become a general creditor of the broker-dealer.

A customer purchases $15,000 in convertible bonds (15 bonds at $1,000 par). The Federal Reserve Board margin requirement is 50% and the customer deposits $7,500. If the bonds increase in value to 108 ($16,200), how much excess equity will the customer have in the account? A $300 B $600 C $1,200 D $8,700

B $600 If the bonds increase in value to $16,200, the equity in the account will be $8,700 (market value of $16,200 - $7,500 debit balance). The initial FRB requirement on $16,200 market value is $8,100 (50% x $16,200). Since there is $8,700 of equity, there is $600 of excess ($8,700 equity - $8,100 requirement).

XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000? A 1,750 shares B 1,680 shares C 1,635 shares D 1,600 shares

B 1,680 shares To compute the number of shares that can be purchased, first determine how much of the investment will go to the sales charge. This amount is $1,400 ($35,000 investment x 4% sales charge). This leaves $33,600 for purchasing shares. The investor will purchase 1,680 shares ($33,600 divided by $20 NAV per share). You do not divide by the public offering price since it includes a sales charge and you have already deducted $1,400 in sales charges.

The amount of margin that must be deposited by the purchaser of an option contract is: A 20% B 100% C 10% D 50%

B 100% According to Federal Reserve Board Regulation T, options may not be bought on margin. Therefore, the buyer will need to deposit 100% of the purchase price, which is the premium.

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 6.40% B 7.60% C 5.60% D 6.80%

B 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. 7.20 is actually 720 40 is actually .4 So, 7.20 + .4 = 7.60%

What information can be found on the Consolidated Quotation System? A Indications of interest on private placements to be sold to qualified institutional investors B Bid/asked quotations for listed stocks reported by national exchanges and OTC third market makers C Bid/asked quotations for OTC stocks not listed on Nasdaq D Bid/asked quotations for small-cap OTC securities

B Bid/asked quotations for listed stocks reported by national exchanges and OTC third market makers The Consolidated Quotation System (CQS) provides subscribers with bid/asked quotations for securities listed on national exchanges, including quotes from OTC market makers in those securities (the third market).

Which of the following securities would you LEAST likely recommend to an investor requiring a fixed sum of funds to be received in 10 years? A zero-coupon municipal bond B A high-yield corporate bond C Collateralized mortgage obligations (CMOs) D Treasury Inflation-Protected Securities (TIPS)

A zero-coupon municipal bond Which of the following securities would you LEAST likely recommend to an investor requiring a fixed sum of funds to be received in 10 years?

When evaluating two CMOs backed by GNMAs, one having a 6% yield and the other having a 10% yield, which TWO of the following statements are TRUE? I. Prepayment risk is greater for the CMO with the 10% yield II. Prepayment risk is greater for the CMO with the 6% yield III. Credit risk is greater for the 10% CMO IV. Credit risk is the same for both securities A I and IV B II and IV C I and III D II and III

A I and IV Prepayment risk measures the possibility that homeowners will refinance (prepay) their mortgages. Historically, the speed of prepayment increases when interest rates fall. If this happens, payments will flow into the CMOs at an accelerated rate, forcing investors to reinvest these monies at lower-than-anticipated rates. Therefore, the CMO with the higher interest rate will have higher prepayment risk. GNMA-backed CMOs are highly rated and, therefore, have little credit risk. Since both CMOs are backed by GNMAs, credit risk is minimal for both pools.

Which of the following annuities offers the shortest surrender period to avoid sales charges? A L shares B C shares C A shares D B shares

If interest rates are expected to rise over a given period, a municipality that must raise money would probably issue securities with: A Long-term maturities B Short-term maturities C Call provisions D Intermediate-term maturities

A Long-term maturities By issuing securities with long-term maturities, the municipality can lock in the rate of interest it needs to pay on the bonds. Therefore, if interest rates are expected to rise over a given period, the municipality would not be subject to these changes. This would provide the municipality with the capital it needs, without borrowing again at higher rates of interest, as it would need to do if it issued shorter-term or intermediate-term securities.

On Wednesday, March 11, a customer purchases 1,000 shares of an OTC equity security in a cash account through an online brokerage firm. The transaction will settle: A On March 13 B On March 12 C Immediately D By the close of business on March 11

A On March 13 For corporate securities, regular way settlement is two business days following the trade date. In this question, the settlement occurs on Friday, March 13. The key to this question is understanding that any corporate transactions which are being executed in either cash or margin accounts will settle on a regular way basis (T + 2). However, if a question references a cash trade, a cash transaction, or a trade settling for cash, it has special treatment and will settle on the same day as the trade.

Which of the following securities may not be used as collateral in a margin account? A Option contracts B NYSE-listed securities C Treasury bills D Nasdaq-traded securities

A Option contracts Option contracts have no loan value and therefore may not be used as collateral in a margin account. The exception is LEAPS, which can be bought on margin and, therefore, have loan value. LEAPS are equity options that can have a maximum life of 39 months.

A bond swap is done for all of the following reasons, EXCEPT to: A Take advantage of a large amount of accrued interest B Establish a tax loss to offset income C Increase the current income of a bond portfolio D Increase the overall yield of the bond portfolio

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

A customer is willing to accept a partial execution on an order to buy up to 800 shares of XYZ stock at 30. If the client does not want the unexecuted portion to be left open, this order should be entered as: A Buy 800 XYZ at 30 Day Order B Buy 800 XYZ at 30 IOC C Buy 800 XYZ at 30 GTC D Buy 800 XYZ NH

B Buy 800 XYZ at 30 IOC An immediate-or-cancel (IOC) order must be executed immediately but does not need to be executed in its entirety. Part of the order may be executed. The unexecuted portion of a day order or a GTC order is placed on the designated market maker's book. A not-held (NH) order gives the floor broker discretion as to when to execute the order.

Within a 30-calendar day period, a member firm sends an email to 40 total investors, of which 20 are retail investors and 20 are institutional investors. The e-mail is considered: A Institutional communication B Correspondence C Institutional correspondence D Retail communication

B Correspondence The key to this question is to identify the number of retail investors who are receiving the communication. Since the number of retail investors is limited (20 in this question), FINRA is willing to allow the communication without a great deal of oversight. The communication to a limited number of retail investors is categorized as correspondence. Correspondence is officially defined as any written or electronic message that a member firm distributes or makes available to 25 or fewer retail investors within a 30-calendar-day period. On the other hand, retail communication is defined as any written or electronic communication that a member firm distributes or makes available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Although the communication is being sent to 40 investors, only 20 were retail investors; therefore, the email is considered correspondence.

Which of the following statements is TRUE regarding a defined contribution plan? A The employer bears all the investment risk B Each employee has a separate account within the plan C Employees may deduct all employer contributions D It is designed to provide employees with a fixed monthly payout at retirement

B Each employee has a separate account within the plan A defined contribution plan is one in which the employer makes contributions on behalf of employees, and the size of the retirement benefit depends on the amount of the contributions and the investment performance of the assets in the plan. In this type of plan, the employee assumes the investment risk and only the employer may deduct employer contributions. In addition, each employee has a separate account within the plan to easily track the growth of his retirement assets.

Two sisters have a joint account that is established as tenants in common. One of the sisters dies and her spouse contacts the RR to request that her assets be transferred into his name. The appropriate step for the RR is to: A Transfer the cash in the account if the spouse of surviving sister provides the proper paperwork, however, the securities may not be transferred B Not permit the transfer of the assets C Transfer the assets if the surviving sister approves the transfer D Transfer the assets if the spouse provides the proper paperwork

B Not permit the transfer of the assets In a joint account that is established as tenants in common, each owner has a percentage of ownership and, at the time of death, the decedent's interest passes to her estate. Since the spouse is not an owner of the account, he is not entitled to the assets in this account. The surviving account owner has access only to her share of the account and is not permitted to approve any transfer of the decedent's assets. Whether the proper paperwork is provided is irrelevant since this account is not established as joint tenants with right of survivorship.

A customer has a nondiscretionary account at a broker-dealer. The customer received a research report and instructs the registered representative to purchase 500 shares of a specific stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? A Contact the customer and ask her to place a limit order to buy the security B Purchase the stock no later than the end of that business day C Have the order preapproved by a principal and then purchase the stock D Purchase the stock any day that you think is best

B Purchase the stock no later than the end of that business day This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security. In some cases, a registered representative may accept the customer's verbal authorization to make certain decisions without it being considered discretionary. If a customer (1) selects the specific security, (2) decides whether to buy or sell the security, and (3) specifies the number of shares, leaving discretion only as to time and/or price, it would not be considered a discretionary order and written authorization would not be required. The customer mentioned all three of these details. This time and price discretion concerning the order is limited to the trading day on the day the order was placed, and must be noted on the order ticket. The client is permitted to give her RR written instructions for a longer period. There is no requirement to have the order preapproved by a principal.

In which of the following situations does an investor have unlimited risk? A Sold a put and is long the stock B Sold a put and is short the stock C Sold a call and is long the stock D Bought a call and is short the stock

B Sold a put and is short the stock Selling a put and being short stock would be the only choice given where an investor would have unlimited risk. The short position would be the unlimited risk situation if the stock were to increase in value. If the market value of the stock is increasing, the purchaser of the put will not exercise the option. The short seller will lose money on the increase of the stock price. In choice (c), the short seller is protected against a rise in the stock by owning a call. In choice (a), the investor will have a loss if the price of his stock declined. However, the potential loss is limited since the stock's price can only decline to zero, creating a loss equal to the stock's cost minus the premium received for selling the call. In choice (b), the loss will again be limited to the stock's value declining to zero.

A bank or brokerage firm is applying to become a primary dealer in government securities. Which government body appoints the financial institution as a primary dealer? A FINRA B The Federal Reserve Board C The SEC D The Treasury Department

B The Federal Reserve Board The Federal Reserve Board appoints primary dealers in government securities.

The Founders Income Fund has declared a dividend that is payable to stockholders of record on Thursday, May 29. This mutual fund's ex-dividend will typically be on: A Monday, May 26 B The date that is set by the fund or its principal underwriter (sponsor) C Tuesday, May 27 D Wednesday, May 28

B The date that is set by the fund or its principal underwriter (sponsor) Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend date for a mutual fund will not automatically be one day before the record date, as it is for common stock. Instead, a mutual fund's ex-dividend date is on a date that is determined by the fund or its principal underwriter (sponsor). In practice, mutual funds will often use the day after the record date as the ex-dividend date.

If a cash dividend is paid, how does it affect a margin account? A SMA is decreased B The debit balance is reduced C The market value is increased D The equity is reduced

B The debit balance is reduced When a cash dividend is paid, the debit balance is reduced by the amount of the dividend. The SMA is also increased by the amount of the dividend. The market value changes due to fluctuations in the price of the security.

A floor broker goes to a trading post to execute an order. When told of the floor broker's order, the designated market maker replies, "you're stopped at 21." This means: A The floor broker cannot trade the stock until it hits 21 B The floor broker is guaranteed a price of 21 C The floor broker will enter a limit order at 21 D The stock stopped trading at 21

B The floor broker is guaranteed a price of 21 When a designated market maker stops stock, the price is guaranteed. Stopping stock may be done only for a public order.

What information would NOT be found in a subscription agreement in a direct participation program (DPP)? A The suitability standards B The name of the limited partner's certified public accountant C The signature of the limited partner D To whom the check is made payable to

B The name of the limited partner's certified public accountant The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he understands the ramifications of the investment and can meet the financial requirements of this investment. The name of the limited partner's accountant would not need to be included in this agreement.

When analyzing a mutual fund's expenses, an analyst does NOT consider: A The management fees charged by the investment adviser B The sales load charged to buy fund shares C The fees charged by the fund's custodian D The fund's expense ratio

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

A registered representative who previously was the CEO of a cosmetics company wants to send a report to clients. She will include detailed information concerning individual equity securities of cosmetics companies she feels are good investments. Although the report analyzes different stocks she feels are attractive investments, it does not contain a recommendation. Which of the following statements is TRUE? A This is not a research report since the report does not contain a recommendation B This is a research report and requires approval C This is not a research report since the RR does not hold the title of a research analyst D This is a research report but does not need to be approved

B This is a research report and requires approval A registered representative does not need to hold the title of research analyst in order for the report to be considered a research report. If the report provides sufficient information concerning individual equity securities for a client to make an investment decision and is distributed to clients, it is considered a research report. A research report must be approved by a supervisory analyst and contain the proper disclosures.

The minimum equity requirement for a pattern day trader is: A Four times the maintenance requirement for the account B $25,000, which the client has five business days to deposit C $25,000, which must be deposited before the client may continue day trading D $2,000 or 100% of the short market value

C $25,000, which must be deposited before the client may continue day trading The minimum equity requirement for a pattern day trader is $25,000. This amount must be deposited in the account before the customer may continue day trading and must be maintained in the customer's account at all times. Day-trading buying power is limited to four times the trader's maintenance margin excess, determined as of the close of the previous day.

A woman will be retiring in 2030. She is interested in income and having her principal available at retirement. Which of the following municipal bonds would you recommend? A A highly rated GO bond maturing in 2025 B A non-investment-grade revenue bond maturing in 2030 C A highly rated revenue bond maturing in 2030 D A highly rated GO bond maturing in 2034, which is callable in 2023 at 105

C A highly rated revenue bond maturing in 2030 Since the woman wants her principal available at retirement, a bond maturing in 2030 (the year of her retirement) would be the best choice. Since the revenue bond is highly rated, there is a higher probability the issuer will be able to pay off the principal at maturity compared to the non-investment-grade revenue bond.

Mr. Smith sells an ABC Corporation April 30 put for $5 and an April 30 call for $3. ABC Corporation is selling in the market at $28. ABC Corporation subsequently declines to $25 per share. The call option expires and the put side of the straddle is exercised. Mr. Smith then sells the 100 shares of ABC Corporation put to him, at the current market price of $25. The overall profit or loss for Mr. Smith is a: A $500 loss B $300 loss C $300 profit D $500 profit

C $300 profit Mr. Smith received $800 in premiums. The call option expires. The put side of the straddle is exercised. Mr. Smith must buy 100 shares of ABC Corporation that is put to him at the exercise price of $30. He then sells the shares purchased for $30 at the current market price of $25, realizing a loss of $5. However, he has received $8 in premiums. Therefore, he will have an overall $300 profit ($8 premium received for the straddle minus the $5 loss on the sale of 100 shares of ABC Corporation equals a $3 profit).

C $4,600 To answer this question, the industry margin maintenance requirement for an arbitrage position must be applied. If a client is long a security that is convertible into an equal number of shares of a short position being 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 (40 bonds x 50 shares), 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%).

XYZ corporation has income before taxes of $2 million and received $100,000 in preferred dividends from a company in which it owns 25% of the outstanding shares. If XYZ corporation is in the 34% tax bracket, it will pay taxes of: A $966,000 B $1,050,000 C $691,900 D $926,900

C $691,900 Since XYZ corporation owns 25% of the outstanding shares, it is exempt from paying taxes on 65% of dividends received from the stock. The corporation would need to pay taxes on only $35,000 of the dividends received (35% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $691,900. (34% of $2,035,000 = $691,900.)

In a limited partnership, a general partner's minimum participation in profits and losses is: A 10% B 5% C 1% D 15%

C 1% According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status.

A corporation has $125,000,000 of convertible bonds outstanding. The conversion price is $50. The corporation refunds $75,000,000 of the bonds for nonconvertible bonds. How many additional shares of common stock will be outstanding if the remaining bonds are converted? A 1,500,000 shares B 2,000,000 shares C 1,000,000 shares D 2,500,000 shares

C 1,000,000 shares After the refunding, $50,000,000 of convertible bonds will remain outstanding. If these bonds are converted, there will be an additional 1,000,000 shares of common stock outstanding ($50,000,000 of bonds / the conversion price of $50 = 1,000,000 shares of common stock).

A customer owns an AMF October 30 call option. If AMF should split 2 for 1, the customer will own: A 1 AMF October 15 call for 200 shares B 1 AMF October 30 call for 100 shares C 2 AMF October 15 calls each for 100 shares D 2 AMF October 30 calls each for 100 shares

C 2 AMF October 15 calls each for 100 shares When a stock splits 2 for 1 (an even split), the number of contracts increases and the strike price is reduced proportionately. The number of shares representing each listed option remains at 100 shares. The customer will now have 2 calls for 100 shares each at the adjusted strike price of $15 or 2 AMF October 15 calls for 100 shares each of AMF. Listed options are adjusted for odd stock splits, stock dividends, and rights offerings, but are not adjusted for cash dividends.

A customer in his early 50s who recently received a sizeable bonus has an investment objective of maximizing his tax-free income. He has two children attending college. Which of the following choices would be the BEST method of investing the funds? A 20% high-yield corporate bonds, 20% airport revenue bonds, 20% general obligation bonds, 20% Treasury bonds, and 20% tax anticipation notes B Contribute the maximum amount allowable to a 529 plan C 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds D 50% equities, 20% general obligation bonds, 15% utility revenue bonds, and 15% Treasury Inflation-Protected Securities (TIPS)

C 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds A - Has Corporate and Treasury bonds which are both taxable B - Children are already in college so would be pointless D - Equities and TIPS are both taxable *Remember he wants TAX FREE*

On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. How many days of accrued interest is the investor required to pay? A 16 B 226 C 46 D 51

C 46 Since the bonds mature on Nov. 1, we know the semiannual interest payments are made on Nov. 1 and May 1. The bonds were purchased in June, so accrued interest must be calculated from the last interest payment date, (May 1, up to but not including settlement.) Since the transaction will settle on June 17, we count 16 days in June. So the total number of days of accrued interest is 30 days for May (remember, in calculating accrued interest for municipal bonds, a 30-day month and 360-day year are used) and 16 days for June. Accrued interest of 46 days is owed to the seller.

On September 22, a customer purchases 2 listed XYZ May 70 calls and pays a $4 premium for each call. The current market price of XYZ Corporation is $69 per share. What is the customer's breakeven point? A 73 B 66 C 74 D 78

C 74 The strike price plus the premium equals the breakeven point for the buyer of a call. The breakeven point is $74 (the $70 strike price + the $4 premium = $74). The fact that the investor bought multiple contracts is not relevant since the breakeven point is a price per share.

A client sells short 1,000 shares of KPL at $46 a share. If the client covers the short sale 14 months later and then, on the same day, delivers the stock to close out the short position at $35 a share, what will he report for tax purposes? A Neither a gain nor a loss since the trade involved a short sale B A long-term capital gain C A short-term capital gain D A short-term capital loss

C A short-term capital gain Any resulting gain or loss on a short sale is typically treated as short-term, since the investor is not holding an asset (i.e., does not establish a holding period for the security). The customer closed out the short position the same day; therefore, the holding period was less than one day. In this example, the client realizes a short-term capital gain which is taxable in the year in which the short sale was covered by delivering the stock. On the other hand, if this question was related to the sale of securities that had appreciated in value and were owned by a customer for 14 months, the correct answer would have been a long-term capital gain [choice (b)].

Which investment company does NOT charge a management fee? A An open-end investment company B A closed-end investment company C A unit investment trust D An exchange-traded fund

C A unit investment trust A unit investment trust does not charge a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed.

All of the following statements are TRUE concerning a municipal bond issue having a serial maturity, EXCEPT: A The issue has a decreasing outstanding principal B The issue has decreasing total interest payments C All of the bonds mature on one date in the future D The bonds are priced on a yield-to-maturity basis

C All of the bonds mature on one date in the future Serial bonds mature in successive years and are priced on a yield-to-maturity basis. As a serial issue nears its final maturity, the outstanding principal and total interest payments decrease. Term bonds mature at one date in the future and are priced at a dollar price (percentage of par).

Series K preferred stock is suitable for which of the following investors? A An investor who is seeking a floating rate dividend for the life of the security B An investor who is seeking a fixed rate dividend for the life of the security C An investor who is seeking a high fixed dividend for a period of time followed by a floating rate dividend D An investor who is seeking capital appreciation if the value of the common stock increases

C An investor who is seeking a high fixed dividend for a period of time followed by a floating rate dividend Series K preferred stock has the following characteristics: • It is issued by a financial service company • It has no maturity date • It pays a fixed rate for a period and then switches to a floating rate (usually based on LIBOR) • It's dividend is non-cumulative and it may not carry voting rights • It is callable at the option of the issuer Series K preferred stock is suitable for an investor who is seeking a high fixed dividend for a period followed by a floating rate dividend. An investor who is seeking capital appreciation based on the increasing value of the common stock should consider convertible preferred stock, not K shares.

The additional bonds covenant for a revenue bond is found normally in the: A Official notice of sale B Prospectus C Bond indenture D Syndicate agreement

C Bond indenture All protective covenants for a revenue bond are found in the bond's indenture. Also included in the indenture are the rights and obligations of the issuer and the bondholders. The official notice of sale contains the information and procedures necessary for syndicates that wish to bid on a competitive issue of bonds. The syndicate agreement is a contract among the underwriters that defines their working relationship and addresses such items as the priority of orders and sharing of the underwriting spread. A prospectus is a disclosure document for issues that are registered under the Securities Act of 1933. Municipal revenue bonds are exempt from that Act.

Claire, an attorney, has contributed to her IRA account for many years. Her new employer, Digiphone, has a pension plan. Which of the following statements is TRUE regarding further IRA contributions? A Whether she may continue to contribute depends on her income level B Claire may contribute, but the growth in the account will be taxable in the year earned C Claire may continue to contribute as long as she has earned income D Due to her participation in a pension plan, Claire may not continue to make IRA contributions

C Claire may continue to contribute as long as she has earned income As long as Claire has earned income, she can fund her IRA. However, based on her income level and tax filing status, she may not be able to deduct her contributions on her tax returns. Claire's participation in a pension plan has no bearing on her ability to contribute to her IRA.

Co. A Co. B Co. C Co. D Earnings per Share: $2.00 $6.50 $5.20 $7.80 Dividends: $0.10 $2.50 $2.60 $6.00 Percentage of Retained Earnings: 95% 62% 50% 23% An investor has decided to diversify her portfolio into a more defensive position by including utility stocks. Which of the above companies is probably a utility? A Company B B Company A C Company D D Company C

C Company D Company D is probably a utility since utility companies usually have a high dividend payout ratio and a low percentage of retained earnings.

Who enacts fiscal policy? A The Comptroller of the Currency B The FDIC C Congress D The Federal Reserve Board

C Congress Fiscal policy is enacted by Congress. Fiscal policy is the use of the government's power to tax and spend. Control of the economy by changing the levels of government spending and taxation can either put money into the economy, or take money out of the economy. Monetary policy is carried out by the Federal Reserve Board's use of its available options for increasing or decreasing the supply of money and credit in the economy.

Aglet International, Inc. 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 $686,800 B $714,000 C $680,000 D $697,000

D $697,000 If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 50% of the dividends it receives on stock that it owns (remaining 50% is excluded). The company would need to add $50,000 (50% of $100,000) to its taxable income. The total taxable income, therefore, is $2,050,000. The tax liability is $697,000 ($2,050,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 35% of the dividends would be taxable (65% is excluded).

An individual is in the third year of accumulating an interest in a variable annuity with a deferred sales charge. A registered representative recommends a switch to a newly created variable annuity with a larger number of subaccount choices, also offered with a deferred sales charge. Which TWO of the following statements are TRUE of this switch? I. FINRA will probably consider the switch unsuitable II. FINRA will probably not consider the switch unsuitable, since both annuities are offered with a deferred sales charge III. The switch is taxable if it qualifies as a 1035 exchange IV. The switch is not taxable if it qualifies as a 1035 exchange A II and III B I and III C I and IV D II and IV

C I and IV Since the investor is in the third year of accumulation, there will be a deferred sales charge incurred. By switching to another variable annuity, the individual will now be subject to the highest deferred sales charge, thus making the switch unsuitable. If a registered representative recommends that a client switch from one annuity to another within a three-year period, the representative may be considered to be churning. An exchange of annuities that qualifies for IRS Section 1035 treatment is not a taxable event.

A customer has two children and wants to open one UTMA account which will be shared by the two of them. The RR should take which of the following actions? A Instruct the customer that one UTMA account may be shared by both children as long as they are at least 14 years of age B Instruct the customer that the account may be set up for both children provided it is preapproved by the firm's compliance department C Instruct the customer to open two UTMA accounts, one for each child D Instruct the customer that one UTMA account may be opened if the customer's spouse also signs the new account agreement

C Instruct the customer to open two UTMA accounts, one for each child A custodial account (UTMA or UGMA) may be established for the benefit of one minor only. In this question, the customer should open two UTMA accounts, one for each of his children.

A municipal dealer gives another dealer a firm quote of par for a block of municipal bonds. The dealer that gave the quote: A Must give the other dealer ten minutes to accept the quote B Has given a nominal quote to the other dealer C Must do the trade at par D Has given a subject quote

C Must do the trade at par The dealer that gave the firm quote must do the trade at par.

John Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 1. 10 rights plus $10.50 are required to subscribe to one new share of stock 2. Fractional shares become whole shares 3. The record date is Friday, October 17 4. JPMorgan Chase and Bank of America are the transfer agents 5. Goldman Sachs and Morgan Stanley are the standby underwriters John chose to subscribe to the rights offering and purchased additional XYZ Corporation common stock on October 16. Based on his latest stock purchase, he will: A Be permitted to subscribe B Be permitted to subscribe provided that the trade was executed regular-way C Not be permitted to subscribe because the stock traded ex-rights on October 16 D Be permitted to subscribe because the record date has no bearing on when the stock trades ex-rights

C Not be permitted to subscribe because the stock traded ex-rights on October 16 John would not be permitted to subscribe to the rights offering for the new shares because he purchased the stock on October 16 when the stock sold ex-rights. The thought process behind solving this question is similar to the one used in determining a stock's ex-dividend date. The ex-date is one business day prior to the record date.

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the: A Current market value B Par value less accrued interest C Par value plus accrued interest D Par value

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

A customer has a nondiscretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? A Purchase a small amount of the stock and have the customer sign a written authorization form no later than the same business day B Purchase a small amount of the stock and contact the customer no later than the same business day C Purchase the stock on behalf of the customer and have the order approved promptly by a principal D Contact the customer and ask her to place an order to buy the security

C Purchase the stock on behalf of the customer and have the order approved promptly by a principal. This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security.

A 10M trade of municipal bonds that had been accepted previously for delivery is found to be as missing. The process by which these securities will be returned is known as: A Rejection B Refunding C Reclamation D Reimbursement

C Reclamation Reclamation is defined as the return of securities that were previously accepted for delivery. Rejection is defined as the refusal to accept a delivery of securities. Refunding involves replacing an existing issue of bonds with a new issue. Reimbursement does not apply to this situation.

A double-barreled municipal bond is backed by the: A Revenues of a project B Taxes of a municipality C Revenues of a project and taxes of a municipality D Revenues of the U.S. government

C Revenues of a project and taxes of a municipality A double-barreled municipal bond is backed by two sources of income, which would be the revenues of a project and the taxes of a municipality.

A municipal bond counsel will NOT: A Prepare the legal opinion B Examine the Treasury arbitrage restrictions so that the issuer will not violate tax laws C Set the underwriting concession D Validate the issue

C Set the underwriting concession The bond counsel will not determine the underwriting concession. This will be determined by the underwriting syndicate.

In April, an investor purchased 1,000 shares of XYZ at $47 and, in August, purchased another 1,000 shares of XYZ at $55 per share. In June of the following year, the investor sold 400 shares of XYZ at $59 per share and stipulated that the shares being sold are from the purchase that was made in August. For tax purposes, the investor will report a: A Long-term capital gain of $12,000 B Long-term capital gain of $3,000 C Short-term capital gain of $1,600 D Short-term capital gain of $4,000

C Short-term capital gain of $1,600 In this question, the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor stipulated that the shares being sold were against the shares that were purchased in August and those shares were held for one year or less, the capital gain is short-term. The cost basis of the shares being sold is $55 and the proceeds per share on the sale is $59. Therefore, the gain of $4 per share is multiplied by the 400 share position, resulting in a $1,600 total gain.

A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase: A The IPO from the RR's broker-dealer B The IPO but only from a member of the selling group C The IPO from a different broker-dealer D Only a limited quantity of the IPO from any broker-dealer

C The IPO from a different broker-dealer A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies. There is no exemption for restricted persons to purchase limited quantities of an IPO. An immediate family member of an employee (an RR) of a member firm may be a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a non-supported, immediate family member buys the IPO from a different broker-dealer. There is no requirement to purchase the shares only from a selling group member.

When selling a security for a customer, all of the following items MUST be included on the sell ticket, EXCEPT: A The number of shares or par value B The location of the security C The customer's Social Security number D The customer's account number

C The customer's Social Security number An order ticket must include the customer's account number, number of shares or par value (for a bond), name of the security, limitations (limit, stop, etc.), and whether it is buy or sell. If it is a sell order, the location of the security (long or short) must be indicated. The customer's Social Security number is not needed on the order ticket.

Which of the following choices is NOT directly controlled by the Fed? A The reserve requirement B Regulation T C The fed funds rate D The discount rate

C The fed funds rate The fed funds rate is the rate charged by one bank with excess reserves to another bank needing overnight loans to meet reserve requirements. Although it is greatly influenced by the Fed, it is the only choice not under the Fed's direct control.

Which of the following descriptions best defines a tax swap? A The purchase and sale of bonds to incur commissions B The exchange of convertible bonds for stock to avoid the receipt of taxable interest income C The purchase and sale of bonds to realize a capital loss to offset against a capital gain for tax purposes D Exercising the exchange privilege of a mutual fund

C The purchase and sale of bonds to realize a capital loss to offset against a capital gain for tax purposes

Discretionary accounts require: A Written authorization from the client for each trade the registered representative executes B The registered representative to send the client a letter detailing the proposed transaction C Written authorization from the customer D Oral authorization from the customer

C Written authorization from the customer Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.

A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account. Only the MFP signs the check. According to the MSRB political contribution rules, the contribution would be viewed as a: A$200 contribution from each party B $200 contribution from each party, but it must be reported to the MSRB C $400 contribution from the spouse D $400 contribution from the MFP

D $400 contribution from the MFP If the MFP is the only party who signs the check, the entire amount of the contribution is allocated to the MFP. In this case, the underwriting ban would be triggered since the amount exceeds $250. When both the MFP and her spouse sign the contribution check, the contribution is viewed as being split equally between the contributors. There is no limit if the spouse writes a check from his personal account, rather than the joint checking account.

In a new municipal issue, what is a group order? A An institution purchasing bonds from a syndicate B A dealer buying for a group of investors C An order placed by three or more members D An order allowing all members to benefit

D An order allowing all members to benefit There are four types of orders that can be placed with a syndicate: 1. A presale order is any order placed before the syndicate that actually purchases the issue from the issuer 2. A group order is a situation where all members of the syndicate share in the profit 3. A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale 4. A member order is an order placed by members for their customers

Which of the following Moody's ratings is the most speculative? A Aa B A C Baa D Ba

D Ba Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.

An investor believes that the U.S. dollar will strengthen in the coming months. Which of the following option strategies provides the greatest potential gain? A Buying euro calls B Buying U.S. dollar calls C Writing euro straddles D Buying euro puts

D Buying euro puts If the U.S. dollar strengthens, the euro will typically fall. Buying euro puts provides the greatest potential gain. There are no listed options on the U.S. dollar. Selling options provides a maximum gain that is limited to the total premium. Short straddles are profitable only if the underlying investment remains stable in price.

Which of the following statements is TRUE concerning gift and estate taxes paid by a husband and wife? A Tax-free gifts between spouses are limited to $15,000 per year, but taxes are not due on any excess until one spouse passes away B Gifts between spouses are unlimited and there is no gift tax, but estate taxes must be paid when one spouse passes away C Tax-free gifts between spouses are limited to $15,000 per year and taxes must be paid on any excess in the year the gift is given D Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away

D Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away There is no limit on the amount of a gift between spouses. A husband or wife may give any amount to a spouse without incurring a tax liability. An estate tax may be levied on the value of a decedent's assets, but there will not be any estate tax due when one spouse dies if all the assets are passed along to the surviving spouse. The entire estate may pass tax-free to the survivor. If assets are distributed to persons other than the decedent's spouse, the estate may be taxed if the amount exceeds the allowable limits established by current tax law. Gift taxes must be paid by a donor, not the recipient of the gift. An individual may give a gift of $15,000 per person, per year ($30,000 for joint returns) without incurring a gift tax. The donor must pay the gift tax on amounts given over this figure.

D I and III Municipal bond investors can obtain reduced interest-rate risk by investing in issues with different maturities. Bonds with short-term maturities will only experience a small decline in price if the general level of interest rates increases. Although most municipal bonds are exempt from federal income tax, they are not exempt from state income tax unless the owner is a resident of the state that issued the bonds, and the state elects not to tax the purchaser of the bond. The interest on municipal private activity bonds is subject to federal income tax if the investor is subject to the alternative minimum tax (AMT). The risk of default is not reduced by investing in bonds in the investor's state of residency.

A buy stop order is entered: I. Below a support level II. Above a resistance level III. To limit a loss on a long stock position IV. To limit a loss on a short stock position A I and III B I and IV C II and III D II and IV

D II and IV A stop order may be used to limit a loss or protect a profit on an existing position. If an investor is short stock, he can enter a buy stop order which, if activated, will cover his short position and protect the profit or limit the loss on the short position. A technical analyst may also place a buy stop above the resistance level to purchase the stock should there be a price breakout.

A customer wishes to open an account with a brokerage firm to trade options. The customer provides all the necessary new account information required but refuses to provide financial information. The brokerage firm: A May not open the account under any circumstances B Must record the customer's refusal on its records and may open the account with the approval of the Options Clearing Corporation only C May open the account without restrictions but requires the customer to sign a waiver D Must record the customer's refusal on its records and use whatever information it can obtain on its own in determining whether it should accept the account for options trading

D Must record the customer's refusal on its records and use whatever information it can obtain on its own in determining whether it should accept the account for options trading According to the rules of the options exchanges, the brokerage firm must record the customer's refusal on its records, and must use whatever information it can obtain on its own in determining whether it should accept the account for options trading.

An investor is long one ABC Jan 40 call at 10 and long one ABC Jan 60 call at 2.50. The investor is also short two ABC Jan 50 calls at 5. The investor's strategy is: A Unable to be determined B Bearish C Bullish D Neutral

D Neutral An investor who creates a butterfly spread is utilizing a neutral strategy. In other words, the investor believes that the underlying security will not vary greatly in price by expiration. The maximum profit is realized when the price of the underlying security (ABC in this question), is at the middle strike price. This type of strategy has both limited risk and limited profit potential.

Listed options are issued and guaranteed by: A FINRA B The company whose stock underlies the contract C The exchange where the options trade D The Options Clearing Corporation

D The Options Clearing Corporation Options that are listed on exchanges are issued and guaranteed by the Options Clearing Corporation. The exchange on which the option trades sets the terms of the option contract.

A 3-month Treasury bill is issued at a discount to yield 9.5%, and a corporate bond is issued to yield 9.5%. The bond is to mature in 10 years. If both are offered on the same day on a bond equivalent yield basis, which of the following statements is TRUE? A The bond equivalent yield and tax equivalent yield are equal B The bond has a greater yield than the bill C The yield is the same for both D The bill has a greater yield than the bond

D The bill has a greater yield than the bond T-bills are issued and quoted on a discount yield basis, whereas corporate bonds are quoted on a yield-to-maturity basis. These yields are calculated in different manners. The bond equivalent yield of a T-bill is always higher than its discount yield.

Regarding a company's financial statements, total assets are equal to: A Stockholders' Equity + Goodwill B Total Liabilities - Stockholders' Equity C Total Liabilities + Stockholders' Equity - Depreciation D Total Liabilities + Stockholders' Equity

D Total Liabilities + Stockholders' Equity The balance sheet formula is: Total Assets = Total Liabilities + Stockholders' Equity. Total Assets is, therefore, equal to Total Liabilities + Stockholders' Equity.

Wireless Communications is offering 2,000,000 common shares (par value $.10) at $15. Which TWO of the following choices describe the financial impact on the company? I. An increase in paid-in capital II. A reduction in the long-term debt ratio III. A reduction in liquidity IV. An increase in fixed assets by $30,000,000

I and II The company will receive cash from the sale of the stock, so liquidity will increase. The common stock account and the paid-in capital account, which are part of stockholders' equity, will also increase. The long-term debt ratio will fall as the equity capital rises and, since the company is raising cash, current assets will increase. Finally, fixed assets will be unchanged.

Which TWO of the following statements are TRUE concerning a Health Savings Account? I. The contribution is made in pretax dollars II. The contribution is made in after-tax dollars III. The funds grow tax-free if used to pay qualified medical expenses IV. The funds grow tax-deferred if used to pay qualified medical expenses

I and III A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to those persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. All funds withdrawn that are used for nonqualified medical expenses are taxable and subject to a 20% IRS tax penalty.

Which TWO of the following choices are characteristics of GNMA pass-through certificates? I. Interest and principal payments are received monthly II. The investor will receive her principal back at maturity III. Timely payment of interest and principal is guaranteed by the U.S. government IV. Interest is subject to federal tax but exempt from state and local tax

I and III GNMA pass-through certificates are guaranteed by the U.S. government. Interest and principal payments are received monthly and, therefore, the investor will receive principal payments before, not at maturity. The interest is subject to federal, state, and local taxes.

A woman wishes to open an account at a municipal securities firm. She identifies herself as the spouse of a trader at another municipal securities firm. Which TWO of the following are TRUE? I. The representative must follow all instructions from the trader's employer II. The MSRB must be notified III. The carrying broker-dealer must send written notification of each transaction to the trader's employer IV. The trader's employer must approve all transactions of the spouse

I and III MSRB rules require that when opening an account for an employee of another municipal firm, a municipal registered representative must: 1. Notify the employer and follow all instructions (effectively receiving the employer's permission) 2. Send duplicate confirmations to the employer Included in the definition of employee is spouse, minor children, and anyone else dependent on the employee. The MSRB need not be notified and the trader's employer is not required to approve each trade.

An investor purchases Swiss francs in the spot market at 61. As a hedge, the investor buys a Swiss franc June 60 put at 0.50. This strategy will be profitable if: I. The U.S. dollar weakens II. The U.S. dollar strengthens III. The spot price for the Swiss franc is 61.75 IV. The spot price for the Swiss franc is 59.25 A I and III only B I and IV only C II and III only D II and IV only

I and III only An investor who buys Swiss francs would purchase a put to provide protection if the U.S. dollar strengthens (which would cause the Swiss francs to decrease). If the Swiss francs decline, the investor could exercise the put or sell the put at a profit. The investor will break even when Swiss francs increase to a value equal to his cost (61) plus the premium paid (0.50). This makes the breakeven point 61.50 or $.6150 (since strike prices and premiums for Swiss franc options are in cents per unit, the decimal must be moved two places to the left). The investor will have a profit if the Swiss franc rises above the breakeven point (61.50) which would occur if the U.S. dollar weakens.

If a broker-dealer is preparing sales literature on CMOs, which TWO of the following statements is TRUE? I. The term collateralized mortgage obligation must be included within the name of the product II. The basis point spread that a client will receive in interest above a comparable Treasury security must be included III. The lower of the yield-to-call or yield-to-maturity must be included IV. The backing of a government agency only applies to the face value of the securities

I and IV Retail communications (e.g., sales literature) and correspondence that relate to collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the backing of a government agency only applies to the face value of the securities (not any premium paid). In other words, if the client paid a premium to purchase a CMO, only the par value is backed by the entity backing the security. Only the actual coupon rate, not the spread above Treasuries, is required to be disclosed. Due to the prepayment risk of CMOs, the yield to average life is required to be disclosed, not the yield-to-call or yield-to-maturity.

A customer has purchased 10 ABC January 50 calls, paying a $2 premium, and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer's breakeven points are: I. $46 II. $48 III. $52 IV. $54

I and IV The customer has the right to call the stock at $50. He has paid a $400 premium per straddle. The breakeven point on the call is determined by adding the 50 strike price to the premium of 4. This equals a breakeven of $54. The customer also has the right to put or sell the stock to the writer at $50, but has paid a $400 premium. The breakeven point on the put is four points below the strike price of $50, which equals $46. The buyer's breakeven points will, therefore, be $46 and $54.

Which TWO of the following time limitations must be complied with regarding the delivery of a risk disclosure document? I. A brokerage firm must deliver a risk disclosure document to a customer at the time the account has been approved for options trading II. A brokerage firm must deliver a risk disclosure document to a customer prior to the time the account has been approved for options trading III. A brokerage firm must deliver a risk disclosure document to a customer after the account has been approved for options trading IV. A brokerage firm must deliver a risk disclosure document to a customer after the first order has been entered

I or II According to the rules of the exchanges where options are traded, a brokerage firm must deliver a risk disclosure document to a customer at or prior to the account being approved for options trading.

A broker-dealer is acting as a principal in which of the following scenarios? I. Selling bonds from inventory to an individual II. Selling bonds from inventory to another broker-dealer III. Buying bonds from another broker-dealer for inventory IV. Buying 500 bonds to fill an insurance company's order for 250 bonds

I, II, III, and IV A broker-dealer is acting as a principal when buying for or selling from inventory. In choice (IV), the broker-dealer is buying 500 bonds to fill an order for 250 bonds. The remaining 250 bonds will be for inventory.

Which TWO of the following securities will enable an investor to consistently receive interest income and also have a maturity date on which their principal will be returned in one lump sum without requiring the investor to sell the securities? I. A municipal bond fund that contains mostly revenue bonds II. Municipal bonds that are subject to the alternative minimum tax III. A closed-end fund that contains the municipal bonds of one state IV. A portfolio of municipal bonds, some which have call provisions

II and IV All of the securities listed will pay interest income to investors. The municipal bond fund and the closed-end fund invest in municipal bonds that pay interest which will then be passed through to the holders of these securities, either monthly, quarterly, or semiannually. Only by investing in actual bonds will an investor be able to have her principal returned in one lump sum when the bonds mature, rather than being required to sell the securities. The type of municipal bond, whether they are callable, and whether they are subject to the AMT is irrelevant to the question. One of the major differences between investing in actual bonds versus bond funds is that the actual bonds will have a maturity date, while bond funds do not. If an investor owns shares of a bond and wants to receive her principal back, she is required to sell or redeem her shares of the fund.

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