Series 7 Unit 2
The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A) Life annuity B) Joint tenants annuity C) Joint and last survivor annuity D) Life annuity with period certain
A Explanation Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies.
The date on which interest will begin accruing on a new municipal issue is A) the dated date. B) the delivery date. C) the filing date. D) the closing date.
A Explanation New issues of municipal bonds begin accruing interest as of the dated date.
An investor owning an option contract liquidates the position. The liquidation is A) a closing sale. B) an opening sale. C) a closing purchase. D) an opening purchase.
A Explanation When an investor liquidates an existing option position that is owned, the investor is entering a sale that closes the existing position.
GIN Corporation is offering shareholders the right to subscribe to a new issue of stock at $30 per share. The current market price of the GIN stock is $44 per share, and it takes 20 rights plus the subscription price to purchase one share. The theoretical value of a single right, prior to the ex-rights date, is approximately A) $1.50. B) $0.67. C) $0.70. D) $0.73.
B Explanation Because this is cum rights (before the ex-rights date), the formula is M ‒ S N + 1 Thus, $44 ‒ $30 = 14 ÷ 21 = $0.67 20 + 1
All of the following are objectives in a direct participation program (DPP) except A) deferment of taxes. B) short-term capital gains. C) long-term capital gains. D) deductions against passive income.
B Explanation DPPs are used to defer present income into the future and take advantage of time. In doing so, any gains will be taxed at favorable long-term rates. The expected losses in the early years may be taken as deductions against passive income from other sources.
A municipal bond is purchased in the secondary market at 102½. The bond has five years to maturity. Two years later, the bond is sold for 102. The tax consequence to the investor is A) a capital loss of $5 per bond. B) a capital gain of $5 per bond. C) no capital gain or loss. D) a capital loss of $20 per bond.
B Explanation Municipal bonds bought at a premium, either in the new issue or secondary market, must be amortized. The amount of the premium is 2½ points, or $25. As the bond has five years to maturity, the annual amortization amount is $5 per bond. After two years, the bond's basis has been amortized down to 101½. At that point, a sale at 102 generates a capital gain of $5 per bond.
Treasury stock is A) authorized but unissued stock owned by the company. B) preferred stock. C) stock repurchased by the issuer. D) issued by the U.S. Treasury Department.
C Explanation A company may, from time to time, go into the market and buy some of its own outstanding stock, which is then placed in the Treasury and called Treasury stock. Treasury stock has no voting rights and does not receive dividends. Treasury stock is not included when calculating shareholders' equity or net worth.
A convertible preferred stock with a par value of $100 is currently trading at $125 per share. The conversion ratio is 5:1. If the common stock is trading at $30 per share, what must the preferred stock's price be to be at parity? A) $103 B) $70 C) $150 D) $130
C Explanation The math is 5 × $30 = $150. The logic is, you can convert the preferred stock into five shares of the common. If the common is trading at $30 per share, to be equal, the preferred stock must be selling for five times that price.
Customer account information must be updated at least every A) 24 months. B) 48 months. C) 12 months. D) 36 months.
D Explanation Customer account information must be updated at least every 36 months. This ensures that up-to-date information for suitability requirements and potential red flags.
Which of the following characteristics is not shared by both a mutual fund and a variable annuity's separate account? A) The client assumes the investment risk. B) The client may vote for the board of directors or board of managers. C) The investment portfolio is managed professionally. D) The payout plans provide the client income for life.
D Explanation Only variable annuities have payout plans that provide the client income for life.
A mutual fund's unrealized loss last month results in which of the following? Lower net asset value (NAV) per share Lower dividend payments to shareholders Reduction in the proceeds payable to shareholders who liquidate their shares Higher tax liability to shareholders A) I and III B) I and IV C) II and III D) II and IV
A Explanation An unrealized loss is the same as a decrease in NAV. An investor receives less at redemption than she would have if the redemption had taken place before the asset's depreciation.
ABC Corporation's earnings have increased in price by 10%, and its shares outstanding has increased 5%. This has what impact on ABC's EPS? A) EPS has increased. B) There is not enough information to answer the question. C) EPS has decreased. D) EPS has stayed the same.
A Explanation If earnings (net income) have increased faster than the shares outstanding, EPS will increase.
Regressive taxes would include A) estate tax. B) sales tax. C) personal income tax. D) gift tax.
B Explanation A regressive tax is one that is flat regardless of the amount being taxed. Sales tax is probably the most common of those. Certain excise taxes, such as fuel tax, are also regressive because the percentage of tax levied is level. Progressive taxes are those where the tax rate increases as the taxable amount increases. The most familiar is personal income tax. Gift and estate taxes are also progressive.
A customer owns shares in ACME Income Fund and decides to exchange them for shares in ACME Growth Fund within the same family of funds. Which of the following statements is true? A) The exchange results in a deferral of tax. B) The exchange is a taxable event. C) Tax or loss on the exchange cannot be determined until ACME Growth Fund is sold. D) The exchange is a nontaxable swap.
B Explanation The IRS deems an exchange to be a sale and repurchase of shares. On any sale of securities, capital gains or losses are realized; as such, exchanges are a taxable event.
All of the following are expenses to the operation of mutual funds except A) the fees paid to the fund's investment adviser. B) the compensation paid to the underwriter or distributor. C) the custodian bank's charges. D) the legal costs of SEC filings.
B Explanation The underwriters receive their compensation from the sales charges. Investors pay those charges rather than the fund itself.
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $50,000 B) $100,000 C) $0 D) $90,000
C Explanation Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.
American depositary receipts (ADRs) are used to facilitate A) the foreign trading of U.S. government securities. B) the domestic trading of U.S. government securities. C) the foreign trading of domestic securities. D) the domestic trading of foreign securities.
D Explanation An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.
A carrying member—after receiving account transfer instructions from the receiving member—must validate the positions in the account within how many business days of receipt? A) 4 days B) 7 days C) 5 days D) 1 day
D Explanation Within 1 business day following receipt of the transfer instruction form (TIF), the carrying firm must validate the positions in the account and return the transfer instruction to the receiving member with an attachment showing all securities positions eligible for transfer through the Automated Customer Account Transfer Service (ACATS).
A covered call could be written to A) lock in a profit. B) protect a short stock position. C) purchase future securities. D) improve the return on a portfolio.
D Explanation Writing a call will not necessarily lock in the profit. In the form of increased cash flow, it will improve the return on the portfolio.
A customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58. If XYZ is at 52 at expiration, the customer has A) a loss of $600. B) a gain of $600. C) a gain of $400. D) a loss of $400.
D The 50 put expires because it is out of the money. The customer closes the position in the 65 put by purchasing it for its intrinsic value: $1,300. Because the account was credited $900 when the spread was established, there is a $400 loss ($1,300 − $900). Alternately, breakeven is 56 (65 − 9), and the spread is bullish. Therefore, the customer makes money above 56 and loses below 56. Because the stock is at 52 at expiration, the customer has a $400 loss (56 to 52).
When calculating net investment income, an investment company includes A) dividends plus interest minus operating expenses. B) only interest. C) just dividends plus interest. D) only dividends.
A Explanation Net investment income equals gross investment income minus operating expenses. Gross investment income is interest and dividends received from securities in the investment company's portfolio.
Your customer notices that the exchange rate for the British pound in the spot market is listed at 148.47. What do you tell her when she asks you what this means? A) One pound equals 14.847 cents. B) One pound equals $1.4847. C) $1 equals 14.847 pounds. D) $1 equals 1.4847 pounds.
B Explanation The exchange rate refers to cents per British pound; 148.47 equals $1.4847.
Due to an escalating trade war, the portfolio manager of an equity mutual fund anticipates a negative impact on his fund's assets. To protect her investment portfolio, the fund manager would A) buy S&P 500 index calls. B) sell S&P 500 index calls. C) buy S&P 500 index puts. D) sell S&P 500 index puts.
C Explanation A portfolio manager who expects a decline in the market as a result of a trade war (or any factor that might hurt stock prices) would buy puts on a broad market index, such as the S&P 500, to protect her position. Selling calls limits upside potential and only protects the portfolio to the extent of the income received from the sale of the calls.
A call spread is the combination of A) a long call and long put. B) a long put and a short put. C) a long call and a short call. D) a short call and short put.
C Explanation A spread option is always a long and short position in the same type of option (two puts or two calls) on the same underlying asset. A long call combined with a short call is a call spread. A long put and a short put constitutes a put spread. A long call and a long put is a long straddle. A short call and short put is a short straddle.
Which of the following would be most likely to issue an equipment trust certificate? A) A company using specialized equipment on an oil drilling rig B) A user of farming equipment C) An airline company D) A social media company installing new servers
C Explanation When you see "equipment trust certificate," think transportation companies such as airlines and railroads.
Which of the following transactions would have to be reported on a Currency Transaction Report? A) An investor purchases $12,000 worth of securities with twelve $1,000 postal money orders. B) A 60-year-old customer directs his registered representative to liquidate $40,000 worth of growth mutual funds in his account and use the proceeds to purchase shares in a long-term bond fund. C) An investor purchases $40,000 worth of speculative and other low-grade bonds with a personal check. D) A new customer brings $40,000 worth of securities in to his broker-dealer firm for deposit into his account.
A Explanation A currency transaction totaling more than $10,000 on a single business day must be reported on a Currency Transaction Report. Included as currency are cash, postal money orders, and traveler's checks.
Under SEC rules, which of the following events require a broker-dealer to furnish a copy of the account record to a customer? Change of broker-dealer's address Change of customer's name or address Change of customer's investment objectives Change in registered representative assigned to the account A) II and III B) I and IV C) II and IV D) I and III
A Explanation Any change in a customer's status, particularly those that may affect the suitability of recommendations, requires a broker-dealer to update the customer account record and furnish it to the customer within 30 days of receipt of the change notice.
Which of the following securities is considered the most junior? A) Common stock B) Debenture C) Prior lien preferred stock D) Mortgage bond
A Explanation In the event of a company's bankruptcy, common stock owners have the lowest priority in claims against corporate earnings and assets. This identifies common stock as the most junior security.
If a customer writes 1 ABC Jan 35 call at 13.50 and 1 ABC Jan 55 put at 12.50 when ABC is trading at 45, excluding commissions, this position will be profitable if ABC is above $29. below $29. above $61. below $61. A) I and IV B) III and IV C) I and II D) II and III
A Explanation This is a short in-the-money combination. To compute the breakeven points, add the combined premiums (26) to the strike price of the call and subtract the combined premiums from the strike price of the put. The breakeven points are 61 (35 + 26) and 29 (55 − 26). With a short combination like a short straddle, the customer makes money if the stock stays inside the breakeven points.
Which of the following options strategies could be used by an investor who is bearish on a stock? Debit call spread Debit put spread Long call Long combination straddle A) I and IV B) II and IV C) I and III D) II and III
B Explanation A debit put spread is a bearish strategy that could realize a profit (the difference between the strike prices minus the premium paid for the spread) if the stock price fell. A long combination, which consists of both a long call and a long put, is both bullish and bearish and could also yield a profit if the stock price fell as a result of the long put. However, both a debit call spread and a long call are bullish strategies and would not be used if one is bearish on the stock.
Before effecting an initial penny stock transaction for a new customer, the registered representative must confirm whether the person is an established customer. obtain a signed risk disclosure document from the customer. obtain a signed suitability statement from the customer. determine suitability based on financial condition, investment experience, and investment objectives. A) I, II, III, and IV B) II, III and IV C) I and IV D) I and II
B Explanation According to the penny stock rules, registered representatives must provide risk disclosure information to all penny stock buyers, which customers must sign. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. If an investor is not considered an established customer, they must sign a suitability statement, as well. In this case, we are told this is the initial trade by a new customer, so we are not going to confirm status as an established customer.
If a customer buys 5 ABC Jan 40 puts and writes 5 ABC Jan 45 puts, which of the following statements are true? The customer profits if the spread widens. The customer profits if the spread narrows. The customer is a bull. The customer is a bear. A) I and IV B) II and III C) I and III D) II and IV
B Explanation Because a put is a right to sell, the premium on the 45 puts is higher than that of the 40 puts. The customer is writing the put with the higher premium, so this is a credit spread, and the bullish investor will profit at expiration if the difference between the two premiums narrows as the contracts lose value.
Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Tax consequences would be minimized if the investor A) used the LIFO method. B) sold the shares purchased in June at $55 and the shares purchased in April at $52. C) used the FIFO method. D) used the average cost basis.
B Explanation By using the identified cost method, the investor would sell the highest cost purchases. This would result in the lowest taxable gain (or perhaps even a loss). Average cost is only available for mutual funds.
When a corporation issues a debt security, the terms of the loan are expressed in a document known as the bond's indenture. The indenture is sometimes referred to as A) the debenture. B) the deed of trust. C) the loan agreement. D) the bond resolution.
B Explanation The indenture, sometimes also referred to as the deed of trust, states the issuer's obligation to pay back a specific amount of money on a specific date. A debenture is a debt security containing an indenture. The bond resolution is a term used for municipal bonds not corporate debt.
An investor purchased 100 shares of ABC common stock valued at $6,000. What is the adjusted cost basis per share of this position after the company pays a 20% stock dividend? A) $48.00 B) $50.00 C) $60.00 D) $72.00
B Explanation The total value of the initial position is unchanged, remaining at $6,000. After the stock dividend, the investor owns 120 shares (100 × 20% = 20 + 100 = 120). Therefore, the adjusted cost basis is $50 per share ($6,000 divided by 120 = $50). It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same.
An option writer liquidates a position by purchasing an option. This order must be marked as A) a closing sale. B) a closing purchase. C) an opening sale. D) an opening purchase.
B Explanation Writers liquidate (close) their short positions by purchasing back an option of the same series as the one they wrote. This order is known as a closing purchase transaction.
Bondholders may not take action against the corporation if it fails to make interest payments for A) debentures. B) convertible bonds. C) income bonds. D) subordinated debentures.
C Explanation Income bonds pay interest only if earnings are sufficient and declared by the board of directors. This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds).
A municipality's net total debt is calculated as A) the total debt plus self-supporting debt plus sinking fund accumulations minus overlapping debt. B) the total debt minus self-supporting debt plus sinking fund accumulations plus overlapping debt. C) the total debt minus self-supporting debt minus sinking fund accumulations plus overlapping debt. D) the total debt plus self-supporting debt minus sinking fund accumulations minus overlapping debt.
C Explanation The net total debt of a municipality is the net overall debt (total debt minus self-supporting debt minus sinking fund accumulations) plus overlapping debt (shared with other municipalities). States cannot have overlapping debt; it is their municipalities that can.
One of the distinguishing differences between variable annuities and mutual funds is that variable annuities A) are considered securities. B) offer a guaranteed rate of return. C) have a separate account. D) generally have lower surrender charges.
C Explanation The variable part of a variable annuity is the separate account. That is what makes it a security product similar to a mutual fund. The only guarantee with a variable annuity is that, once annuitized, payments will continue for life (or the designated period certain). The amount of those payments will vary based on the performance of the separate account. One of the negative features of variable annuities is that they typically have surrender charges that can last a decade or longer.
A client, who is a manager of a large pension plan, has recently changed the plan's portfolio weighting from 80% equities and 20% fixed income to 40% equities, 40% short-term Treasury debt, and 20% cash and cash equivalents. More than likely, this is an indication that the client's outlook concerning the market is A) unknown. B) neutral. C) bullish. D) bearish.
D Explanation Because the client has reallocated the portfolio into highly conservative assets, one would think the manager is expecting a bear market. This new allocation is an attempt to protect against incurring losses from the anticipated market decline.
If the owner of a variable annuity dies during the accumulation period, any death benefit will A) be returned to the separate account. B) be paid to the issuing company to complete the plan. C) be paid to any legal heirs as recognized by the annuitant's state of domicile. D) be paid to a designated beneficiary.
D Explanation The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased.
A city's day-to-day operational expenses may be met by the issuance of A) credit-linked notes (CLNs). B) bond anticipation notes (BANs). C) grant anticipation notes (GANs). D) tax anticipation notes (TANs).
D Explanation When a city needs short-term cash flow to meet ordinary operating expenses (e.g., to meet the payroll for city employees), it issues TANs. These notes are paid off when the city collects the expected tax revenues.
If XYZ is trading at 39, and a customer sells 1 XYZ Jun 40 put and buys 1 XYZ Jun 35 put, he will profit if the spread widens. the spread narrows. the contracts expire. the contracts are exercised. A) II and III B) I and IV C) I and II D) II and IV
A Explanation When a spread's premiums are not available, the more valuable option is found by examining the strike price. A put with a higher strike price has a higher premium because a put represents the right to sell. Because the investor is selling the more valuable put (the one with the higher strike price), this is a credit spread, and profit occurs if the options expire worthless (in this case, the customer keeps the net credit) or the spread narrows between the premiums.
A corporation's corporate charter allows for cumulative voting. A shareholder with 300 shares would be able to vote in an election for three open seats in any of the following ways except A) 900 votes for each open seat. B) 450 votes for any two open seats. C) 300 votes for each open seat. D) 900 votes for any one open seat.
A Explanation With cumulative voting, the shareholder multiplies the number of shares owned by the number of seats being contested. With 300 shares and three seats, the shareholder has 900 shares to be invested in any manner desired. But, that is a total of 900, not 900 times 3.
Which of the following regarding yield-based (interest rate) debt options is true? A) They are European-style exercise. B) Their strike prices reflect dollar amounts. C) Debt securities are delivered to the contract owner when exercised. D) Calls are purchased by those who believe prices of debt securities are rising.
A Explanation Yield-based debt options are European-style contracts, meaning that they can only be exercised on the last day of trading. All yield-based contracts, when exercised, are settled in cash. There is no delivery of debt instruments when these contracts are exercised. All strike prices reflect yield. (35 strike price represents 3.5% yield.) Yield-based options are a bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).
Investment clubs can take advantage of breakpoints on mutual fund purchases. cannot take advantage of breakpoints on mutual fund purchases. are permitted to purchase new equity issues at the public offering price (POP). are not permitted to purchase new equity issues at the POP. A) I and IV B) II and III C) II and IV D) I and III
B Explanation Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore, are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases.
The capitalization structure of an open-end investment company can include A) preferred and common stock with no bank borrowing allowed. B) only debt issues with no bank borrowing allowed. C) one issue of common stock. D) preferred stock, common stock, and bonds.
C Open-end investment companies may only issue shares of common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. It is the closed-end investment company that can have a preferred stock and bond offering. Don't confuse what a mutual fund uses to raise money (the common stock it issues) with what it does with that money. The capital raised from the sale of shares may be used to buy whatever securities meet the fund's objectives.
If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is A) the original cost of the stock. B) the original cost of the stock adjusted for any estate taxes paid. C) the market value at date of distribution to the customer. D) the market value at date of death.
D Explanation When securities are inherited, the heir receives a cost basis calculated as of the deceased party's date of death.
An investor opens the following positions: Sell short 100 shares of ROC @90; sell 1 ROC May 90 put @3. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is unlimited; breakeven point is $93. B) Maximum gain is $300; maximum loss is $8,700; breakeven point is $87. C) Maximum gain is $8,700; maximum loss is $300; breakeven point is $87. D) Maximum gain is $9,300; maximum loss is unlimited; breakeven point is $93.
A Explanation The first step is to identify the position. This is a short sale of stock and a sale of a put option. The sale of the put provides some income and offers protection only to the extent of the premium. Short sellers want the stock's price to decline. They lose when it rises. The investor has received $9,300 ($9,000 from the sale of the stock and $300 from the sale of the option). That makes the breakeven point $93 per share. Once the price of the ROC stock goes above that, the investor loses money. Because there is no limit as to how high the stock's price can go, the maximum loss is unlimited. If, on the other hand, the stock's price declines into the 80s or lower, the owner of the 90 put will exercise and our investor will pay $9,000 to purchase the stock. That stock will be used to cover the short sale. That means the investor sold the stock (short) at $90 and bought it back at $90 for no gain. At that point, the investor's only profit is the $300 from the premium on the sale of the put. Why doesn't the breakeven follow the "put-down" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.
You have a high net worth client who is interested in investing in a hedge fund. Details of the offering would be found in the fund's A) registration statement. B) private offering memorandum. C) statement of additional information. D) subscription agreement.
B Explanation Hedge funds do not register with the SEC, so there is no registration statement. However, the management does prepare an offering document. It could be called the private placement memorandum, the offering circular, or even the prospectus on the exam. The statement of additional information (SAI) is limited to registered management investment companies (open- and closed-ends) and ETFs.
One of your clients has $30,000 in the Balfour Balanced Fund in her personal account. She is preparing to invest an additional $12,000. Balfour has a breakpoint at $50,000. The client mentions that she has other holdings in Balfour and wonders if they will count toward the breakpoint. You respond that all of the following accounts would qualify except A) the UTMA account where she is custodian for her child. B) her mother's account. C) her holdings in her 401(k) plan at work. D) her IRA.
B Explanation In most cases (all on the exam), a mutual fund will allow investors to get a breakpoint discount by combining their fund purchases with those of their spouse and minor children. They are also able to credit mutual fund transactions in retirement accounts, educational savings accounts, or even in accounts at other brokerage firms.
A municipal bond originally issued at 90 with a 10-year maturity will have a compound accreted value (CAV) after five years equal to A) 100. B) 10. C) 95. D) 5.
C Explanation CAV is the cost basis of the bond, in this case, after five years accretion. There are 10 points to accrete (the difference between the issue price of 90 and par) over 10 years. One point each year will be added, so after five years, the adjusted cost basis will be 90 + 5, or 95.
A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 50% of income earned on investments in A) government and agency securities. B) municipal bonds from the same state in which the corporation is located. C) domestic corporate common and preferred stock. D) industrial development bonds.
C Explanation Corporate ownership of another company's stock allows the investor to exclude 50% of the dividends from taxation.
An investor has the following tax picture in 2018: Tax loss carryover from 2017: $9,000 Capital gains realized in 2018: $15,000 Capital losses realized in 2018: $2,000 What is the investor's reportable gain or loss for 2018? A) $6,000 net capital gains B) $13,000 net capital gains and a $4,000 loss carryover into 2019 C) $4,000 net capital gains D) $13,000 net capital gains
C Explanation In determining an investor's capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other. In this situation, the prior year's loss carryover of $9,000 is added to the current year's loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000, for a net capital gain of $4,000. 11,000 - 15,000 = 4,000
Market timing is normally associated with which of the following portfolio management styles? A) Strategic asset allocation B) Passive management C) Tactical asset allocation D) Modern portfolio theory
C Explanation Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy.
If a customer with no other position sells 1 KLP Jul 80 call for 10 and buys 100 shares of KLP stock for $85 per share, he will break even when KLP stock is trading at A) $75. B) $70. C) $92. D) $95.
A Explanation Breakeven for a covered call writer is the purchase price less premiums received. In this case, breakeven is $85 minus $10, or $75 per share; below $75, the customer loses money.
If your great-grandmother is interested in safety, liquidity, and tax-free income, which of the following would you recommend? A) An insured short-term municipal bond fund B) A high-yield income fund C) Income bonds D) An exploratory oil and gas pool
A Explanation High-yield income funds usually invest in low-rated bonds, and income bonds do not pay interest unless the board of directors declares a payment. An insured short-term municipal bond mutual fund is relatively safe, very liquid, and provides income free from federal tax.
Progressive taxes would include personal income tax. gift taxes. estate taxes. excise taxes. A) I and II B) I, II, and III C) II, III, and IV D) I and III
B Explanation Progressive taxes are those where the rate of taxation increases as the dollars being taxed increase. Personal income tax, while not as progressive as it was before the 1986 reform, is still considered a progressive tax because the highest tax rate is levied against the highest earnings. Gift taxes and estate taxes are highly progressive, but excise taxes, such as fuel tax and transportation tax, are a fixed rate, and therefore, would not be considered progressive.
Which of the following balance sheet entries may be affected when a company pays a cash dividend? Shareholders' equity Total assets Total liabilities Working capital A) I and III B) II and IV C) II and III D) I and IV
C Explanation When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected. Shareholders' equity—or net worth—is also not affected when the dividend is paid.
A registered representative speaking to a customer is explaining registered funds that invest in nonregistered hedge funds. Which of the following statements is not correct? A) Hedge funds are directly available to sophisticated (accredited) investors, while funds of hedge funds allow all investors to invest in hedge funds indirectly. B) To divest of your fund of hedge fund investment, the shares will need to be redeemed by the mutual fund issuer. C) These funds generally allow purchases with an initial investment that is lower than what is required to invest directly in a hedge fund. D) These funds, called funds of hedge funds, eliminate all of the risks associated with hedge funds.
D Explanation Because the portfolio of the registered fund consists of shares of nonregistered hedge funds, virtually all of the risks associated with hedge funds are transferred to the mutual fund. Funds of hedge funds allow all investors—not just accredited investors—to have access to hedge fund investments, and they are likely to have lower initial investment requirements, making that access even easier. To divest of fund of hedge fund shares, the issuer would have to redeem them from the investor, as is the case with all registered mutual funds.
Municipal securities broker's brokers A) share the names of their clients with the executing dealers. B) participate in selling groups on new municipal issues. C) bid on negotiated underwritings. D) execute trades for other municipal securities broker-dealers.
D Explanation Broker's brokers are what the term implies. They represent other firms and use their connections to facilitate trades, usually with institutions. They never take an inventory position or get involved with underwriting new issues. One of their key roles is preserving the anonymity of their clients.
A new customer has been approved for all levels of options trading and has signed the options disclosure document. Even though approved for all levels of options trades, she notes that she will not be employing, and the registered representative (RR) should not recommend, any strategies with unlimited maximum loss potential. Given this criteria, an RR could suitably recommend A) short or long straddles. B) short or long uncovered calls. C) short stock or short stock/short put hedge. D) short or long spreads.
D Explanation Of the pairings offered, only short and long spreads both have defined loss potentials. Short stock, short calls, short straddles, and a short stock/short put hedge positions all have unlimited loss potentials.
Changes in payments on a variable annuity correspond most closely to fluctuations in A) the cost of living. B) the Dow Jones Industrial Average. C) the prime rate. D) the value of underlying securities held in the separate account.
D Explanation Payments from a variable annuity depend on the securities' value in the separate account's underlying investment portfolio.
Which of the following would be most likely to require a mandatory sinking or surplus fund? A) A general obligation B) A public housing authority. C) A tax anticipation note D) A water and sewer revenue bond
D Explanation Sinking or surplus funds force revenue bond issuers to set aside a portion of their revenue for debt retirement.
Which of the following statements regarding the discussion of options with customers is true? A) In every discussion about the benefits of options, a statement must be made regarding the corresponding risks. B) Covered call writing has such a limited risk that it is unnecessary to point out risk factors. C) Buying or selling straddles only would require no risk disclosures. D) An Options Clearing Corporation options disclosure document must be in a customer's hands before options can be discussed.
A Explanation Any description of options must include a description of the risks. This rule applies to all communications with the public—written, electronic, or in person.
Your customer, who still works, informs you that she will be funding a variable annuity (VA) you have recommended from two sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another VA she recently purchased within the past two years without a lifetime income rider like the one you have recommended. Based only on these facts, the VA recommendation is A) not suitable. B) suitable regardless of funding sources. C) suitable if she has enough equity in the home to fund the variable annuity without cashing out the other VA contract. D) not suitable because a lifetime income rider is only for someone who is already retired.
A Explanation Based on the information given in the question, the VA recommendation would not be suitable. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Cashing out life insurance policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase.
The Profligate Perpetual Growth Fund's prospectus states that the fund meets the Investment Company Act of 1940's qualifications of a diversified management company. If the fund has net assets of $1 billion, A) no more than $300 million can be invested in the voting shares of any single issuer. B) no more than $50 million can be invested in the voting shares of any single issuer. C) no more than $250 million can be invested in the voting shares of any single issuer. D) no more than $100 million can be invested in the voting shares of any single issuer.
A Explanation Diversified management companies must follow the 75-5-10 rule. That means, of 75% of the fund's net assets, no more than 5% of the fund's total assets can be in the voting shares of a single issuer. There are no restrictions on the other 25%; it can be invested as desired. Five percent of the $1 billion total is $50 million. The other 25% of the total assets ($250 million) can be invested in this stock without limitation. That makes the total possible investment into the voting shares of one issuer 30% of the total net assets or $300 million.
Which combination of the following statements regarding the investment strategy known as dollar cost averaging is true? Invests the same dollar amount each period over a length of time Purchases the same number of shares each period over a length of time Lowers average cost per share over a length of time (assuming share price fluctuations) Invests the same dollar amount each period to protect the investment from loss of capital A) I and III B) II and IV C) I and II D) II and III
A Explanation Dollar cost averaging is when an equal dollar amount is invested periodically. This does not prevent capital losses but can lower the average cost per share because of periods of decline in the stock price. During those times, the fixed dollar amount will allow for the purchase of more shares at the lower price.
A customer purchases a 6% municipal bond in the secondary market on a 7% basis. The effective after-tax yield is A) 6 to 7%. B) greater than 7%. C) 7%. D) 6%.
A Explanation In every case but one, the yield to maturity is the effective after-tax yield to a municipal bond buyer. The one exception is a bond bought at a discount in the secondary market. In this case, the annual accretion is taxed as ordinary income. The discount, which is included in the stated yield to maturity, is taxable, reducing the effective after-tax yield to somewhere between the coupon of 6% and the yield to maturity of 7%.
When a mutual fund registers with the SEC under the Investment Company Act of 1940, it has the option to elect to be A) diversified or nondiversified. B) open-end or unit investment trust. C) open-end or closed-end. D) an ETF.
A Explanation Mutual funds can be registered as diversified or nondiversified. The term mutual fund will always mean an open-end investment company. A closed-end company may be called a closed-end fund, but not a mutual fund. Although most ETFs are open-end investment companies, they are not mutual funds.
A senior official of an issuer learns that nonpublic information was disclosed to an institutional shareholder of the issuer and/or an analyst covering the issuer at a private meeting. To avoid violating Regulation FD, the issuer must do which of the following? A) Promptly disclose the information no later than 24 hours after discovery. B) Nothing need be done as long as no trading is done based on the selective disclosure. C) Obtain affidavits from those to whom the information was disclosed. D) Disclose the selective disclosure in its next SEC filing.
A Explanation Regulation FD prohibits selective disclosure to analysts and institutional shareholders. The disclosures must be made to all shareholders of the issuer. The SEC has agreed that public conference calls, press releases or press conferences, and webcasts are FD-compliant methods of public disclosure.
Which of the following transactions would not be subject to the 5% markup policy? A) Your client enters trades to purchase two different mutual funds in the same fund family. The combined purchases do not qualify for any breakpoints. The client is charged a sales charge of 6.5%. B) A client sells shares of an over-the-counter stock and uses the proceeds to purchase shares from your firm's inventory account. C) Your firm agrees to do an agency cross-transaction between two of your clients. Each client has been charged a commission. D) A client enters an order to purchase one share of a stock to be put in the name of her grandchild. You charge the client the minimum commission for your firm ($45) even though the stock is currently trading at $26 per share.
A Explanation Transactions in securities that are sold by a prospectus are not subject to the 5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule. Five percent is a guideline, and markups can exceed it.
Investors placing zero-coupon bonds in their portfolios are most likely to be looking to provide accumulation of capital. current income. protection against reinvestment risk. tax deferral. A) I and III only B) I and IV only C) II and III only D) II and IV only
A Explanation Zero-coupon bonds are always purchased at a discount because they pay no interest. At maturity, the bondholders receive the maturity value. That represents the initial investment plus interest. Therefore, the investors are receiving more capital than invested (capital accumulation). Zero-coupon securities avoid reinvestment risk because there are no periodic interest payments to be reinvested. When you purchase one of these securities, the quoted yield to maturity is exactly what you will earn if you hold it to the end. With no interest payments, there is no current income. There is no tax deferral with a zero. In fact, unless it is a zero coupon municipal bond, there is phantom income; income not currently received but currently taxable.
An investor begins a periodic payment deferred variable annuity purchase program. One respect in which this differs from purchasing a mutual fund is that A) the variable annuity contract will generally have lower expenses than the mutual fund. B) the investor in the variable annuity contract reports no taxable consequences during the accumulation period. C) there is a minimum guaranteed return with the variable annuity, while there are no guarantees with the mutual fund. D) the mutual fund will generally have a surrender charge for early withdrawal and variable annuities only charge for surrender when annuitizing.
B Explanation One of the features of annuities is the tax deferral of all earnings until the money is withdrawn. Mutual fund distributions are taxable when received. On the other hand, when the annuity accumulation is withdrawn, everything above the cost basis is taxed as ordinary income (10% penalty if younger than 59½)—there is never any capital gains treatment with annuities. Variable annuities invariably have higher expense ratios than mutual funds with similar portfolios. Surrender charges are found with annuities. Do not confuse those with the conditional deferred sales charge (CDSC) applied to certain mutual fund share classes.
Proceeds from the sale of securities in a customer's account are usually kept in the account unless the customer requests a payment. Those funds are swept into a money market mutual fund or an interest-bearing bank deposit account. One of the advantages of having cash swept into the bank deposit account rather than the money market mutual fund is that A) the bank deposit account offers a higher yield. B) the bank deposit account is insured by the FDIC. C) the bank deposit account is insured by the SIPC. D) the bank deposit account offers a check-writing feature.
B Explanation One question that seems to appear on the exam with high regularity deals with knowing that money market mutual funds are not protected by FDIC insurance. That is only available to banking accounts. SIPC insures broker-dealers. The difference in yields varies with neither option constantly offering higher rates. Money market funds usually have check-writing provisions, and some broker-dealer bank deposit accounts do as well.
The SEC requires that all sell orders be identified as either long or short. A person is not considered to be long a security if he A) owns a security convertible into or exchangeable for the security and has tendered such security for conversion or exchange. B) has sold an in-the-money put option on that security simultaneously with entering the short sale order. C) has purchased the security but the trade has not yet settled. D) has title to it.
B Explanation Selling a put only obligates the investor to buy the stock when the option is exercised. Merely writing the option does not result in possession of the stock. Having title to it does. Once purchased, the investor is long the stock even if the trade has not yet settled. Turning in a convertible security with conversion instruction has the same effect as entering a purchase order and waiting for settlement.
Your customer is opening a new options account. Which of the following need not occur to open the account? A) The background and financial information provided by the client must be verified by the client and returned within 15 days of the time the account was approved. B) The OCC must verify the financial information supplied by the client to ultimately approve the account. C) The registered representative must document that the client has received a current OCC disclosure document. D) The client must agree that any material change in financial status requires the broker-dealer be notified and the options agreement be amended.
B Explanation The client must have a current Options Clearing Corporation (OCC) disclosure document. This is verified by the client's signature on the options agreement form, which must be signed and returned within 15 days of account approval. The client must agree to notify the firm of any changes in financial status as soon as possible, and the options agreement must be amended, if necessary. OCC approval for an options account is not required, nor do they verify any information given by the client.
A customer purchases an ABC 6.5% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading two points below parity, the price of ABC common is A) $12. B) $14. C) $18. D) $16.
B Explanation The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14.
If an investor sells 1 AMF Apr 50 put for 2.50 and buys 1 AMF May 60 put for 7.75, the investor has profit when the spread narrows. the spread widens. both puts are exercised. both puts expire. A) I and III B) II and III C) I and IV D) II and IV
B Explanation The investor created a debit spread, which is profitable when both sides are exercised or the spread widens. Conversely, credit spreads are profitable when both sides expire or the spread narrows.
Dividends may be paid to holders of A) Treasury stock. B) warrants. C) American depositary receipts (ADRs). D) rights.
C Explanation ADR owners have most of the rights common stockholders normally hold. One of these includes the right to receive dividends when declared. Rights and warrants allow holders to purchase stock from a corporation, and Treasury stock is stock that has been issued by the corporation and then bought back. Rights, warrants, or Treasury stock holders do not have the right to receive dividends.
A FINRA member firm wishes to encourage its registered representatives to sell more limited partnership DPPs. As an incentive, the firm offers an all-expenses-paid trip to a popular vacation resort for those reaching certain sales targets. FINRA rules provide that A) sales incentives are limited to gifts that do not exceed $100 in value. B) the member can weight the credits differently for different investment companies. C) the target must be based on the total production of associated persons with respect to all direct participation programs offered by the member. D) the target must be based on the total production of associated persons with respect to specific investment company securities distributed by the member.
C Explanation FINRA made a slight modification to its rules on noncash compensation because of the SEC's Regulation BI (best interest). Specifically, if there is to be any kind of sales contest or other method of incentivizing registered representatives, sales of the particular product type must give equal weighting to all of those investments sold by the firm. This applies largely, but not exclusively, to sales of investment companies, variable products of life insurance companies, and direct participation programs. Previously, firms could give higher weighting to sales of proprietary products, but that ended on June 30, 2020. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
Leveraged index funds can be exchange-traded funds (ETFs). can never be exchange-traded funds. can be inverse or reverse funds. can never be inverse or reverse funds. A) I and IV B) II and IV C) I and III D) II and III
C Explanation Leveraged funds—those attempting to deliver a multiple (e.g., 2X or 3X) of the returns delivered by the index they track—can be ETFs, as well as inverse (reverse) funds. Inverse funds attempt to deliver returns the opposite of those realized by the index they track.
A municipal issuer's net total debt is made up of which of the following? Direct debt Defeased debt Overlapping debt Paid-up debt A) III and IV B) I and II C) I and III D) II and III
C Explanation Municipal bond analysts examine an issuer's net total debt to determine an issue's safety. Debt that is not a burden on the municipality is not included in total debt. Defeased debt and paid-up debt can be removed from the municipality's debt accounts. Direct debt is debt issued by the municipality, and overlapping debt is the municipality's share of debt issued by authorities that draw revenues from the same sources as the municipality. Together, direct debt and overlapping debt constitute the municipality's net total debt.
Which of the following is federally tax exempt for a corporation? A) Foreign corporate stock dividends B) Preferred stock dividends C) Municipal bond interest D) Capital gains
C Explanation Municipal bonds are tax exempt for corporations as well as for individuals. Preferred stock dividends are taxable but at a reduced rate for corporations due to the 50% dividend exclusion. That break does not apply to the dividends on foreign securities. Regardless of the security, capital gains are taxable.
Regulation FD covers A) standardization of financial reporting to the SEC. B) certifications required of research analysts who make public appearances. C) the selective disclosure of material nonpublic information by issuers. D) customer notification requirements regarding a firm's privacy policies.
C Explanation Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company's material disclosures at the same time.
A retail customer purchases a municipal bond from your firm. According to Municipal Securities Rulemaking Board rules, the confirmation must disclose which of the following? Where your firm acquired the bonds Whether your firm acted as agent or principal Your firm's address The price your firm paid for the bonds A) II and IV B) I and IV C) II and III D) I and III
C Explanation The broker-dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker-dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker-dealer is not required to disclose where it acquired the bonds or the price it paid.
An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5.25% coupon rate. The investor's yearly return will increase by A) $1.50 per bond. B) $1.00 per bond. C) $2.50 per bond. D) $2.00 per bond.
C Explanation The first bonds are 5% and pay $50 per year per bond. The new bonds are 5.25% and pay $52.50 per year per bond, for a difference of $2.50 per bond. 5% of 1000 is 50
When comparing portfolio managers, a registered representative would most likely recommend the one whose alpha for the past year was A) +0.78% B) ‒3.6%. C) +2.7%. D) 0%.
C Explanation The higher the alpha, the better. When a portfolio has a positive alpha, the manager has created excess returns. That is, the performance was better than would have been expected for the risk taken.
An investor wants to invest $200,000 in the banking industry sector. The investor would like to use leverage and make this purchase in a margin account. Additionally, she stresses wanting to avoid year-end tax statements showing capital gains liabilities. You would suggest which of the following as suitable, given the investor's criteria? A) A money market fund holding short-term bank notes B) Stocks in the three largest U.S. banks C) A bank sector exchange-traded fund (ETF) D) A bank sector mutual fund
C Explanation The investor's criteria eliminates mutual funds as suitable. Mutual funds make annual capital gains distributions for which the owner incurs a tax liability, and mutual funds cannot be purchased on margin. Conversely, an ETF will rarely make a capital gains distribution, and because they trade like all exchange-traded products, they can be purchased on margin, making them more suitable for this investor. Buying only a few select bank stocks is not a good representation of the entire sector.
Acme Pharmaceuticals previously had issued $200 million of common stock in an IPO. A year later, it issued $50 million of debentures at par value. Acme's leverage is what percentage of its total capital? A) 400% B) 50% C) 20% D) 25%
C Explanation The leverage is the extent to which borrowed funds make up the company's total capital. Total capital is the value of the equity and debt financing combined. Acme has issued $50 million of debentures (debt capital) and $200 million of equity capital (the common stock). That makes the total capitalization of Acme equal to $250 million. The leverage is $50 million divided by $250 million, or 20%. An analyst would consider this conservative leverage.
A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be A) $25.00. B) $40.00. C) $25.25. D) $43.91.
C Explanation To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1,010 / 40 = $25.25).
BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM? A) 100% B) 70% C) 50% D) 0% (all dividends received are tax free)
C Explanation When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, 50% of the remaining dividends received are taxable.
An options trader goes long 1 XYZ Oct 60 put at 6 and purchases 1 XYZ Oct 60 call for 6. If XYZ is at 68 at expiration, what is the investor's gain or loss? A) $1,200 loss B) $400 gain C) $200 gain D) $400 loss
D Explanation If the market price of XYZ is at $68 per share, the put is out of the money and will expire worthless. The call could be sold for the intrinsic value of 8. (There is no time value because the option is at the expiration date.) Because the investor originally spent $1,200 (a premium of $600 was paid for each option), the net result is a loss of $400.
Inverse exchange-traded funds, also known as reverse or short funds, are managed to A) be profitable only when interest rates are rising. B) be used only by professional traders and market makers. C) outperform a benchmark market index such as the S&P 500. D) perform contrary to a benchmark market index such as the S&P 500.
D Explanation Inverse funds, which are also commonly referred to as short funds, try to deliver returns that are the opposite of the benchmark index they are tracking. When they are exchange traded, they can be bought on margin and are priced throughout the trading day like other exchange-traded products. They are available to individual public investors and firm proprietary traders as well.
An investor has losses on the sale of municipal bonds. Which of the following, for tax purposes, is true? A) The losses can be applied only against gains on the sale of other municipal bonds. B) The losses can be applied only against gains on the sale of other debt instruments (bonds). C) No losses on municipal bonds can be applied against gains on sales of any securities. D) The losses can be applied against the gains on the sale of any other security.
D Explanation Losses on the sale of one investment can generally be deducted against gains on the sale of any other investment.
A mutual fund can use the term, "no-load" as long as A) there is no 12b-1 charge. B) any 12b-1 charge does not exceed 1.00%. C) any 12b-1 charge does not exceed .75%. D) any 12b-1 charge does not exceed .25%.
D Explanation Mutual fund can call themselves no-load as long as they do not have a 12b-1 charge that exceeds .25%. In addition, there cannot be any front-end load.
If an investor who has owned FLB stock for two years buys 1 FLB Oct put, this will A) end the holding period and cause any gain or loss to be long term. B) end the holding period and cause any gain or loss to be short term. C) end the holding period and cause any loss to be long term and any gain to be short term. D) have no effect on the holding period.
D Explanation The investor already held the stock long term when the put was acquired, so there is no effect on the holding period.
A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $8.42 B) $7.80 C) $8.57 D) $8.30
D Explanation The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. In this case, the NAV is $7.80 and we are told the sales load is $0.50. Adding the two numbers together equals the public offering price of $8.30. The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.
Because municipal bonds do not trade on any exchange, there is frequently a concern about their marketability. According to most industry experts, which of the following bonds would be the most marketable? A) City of Z, rated BBB with a 6% coupon maturing in 7 years B) City of A, rated BB with a 7% coupon maturing in 15 years C) City of Y, rated AAA with a 4% coupon maturing in 10 years D) City of X, rated AAA with a 5% coupon maturing in 5 years
D Explanation The primary factors affecting marketability of a municipal bond are its rating (the higher the better), its coupon (the higher the better), and the maturity (the shorter the better). The City of X bond scores the highest using these factors. High rating& Coupon, SHORT maturity
The official statement for a new revenue bond indicates that the flow of funds is based on a net revenue pledge. This means the first payments go to A) pay the interest and principal maturing in the current year. B) the debt service reserve fund. C) renewal and replacement fund. D) pay current operating and maintenance expenses.
D Explanation When the flow of funds is described as a net revenue pledge, it means the operating and maintenance expenses are paid first. Following that is the debt service (interest and this year's principal). In a gross revenue pledge, the order is reversed.
