SIE Study

What is the minimum amount of a negotiable CD? A $10,000 B $100,000 C $250,000 D There is no minimum amount

B $100,000

If the SEC sends a deficiency letter to the issuer regarding an issue in registration, then: A it disapproves of registering the issue B disclosure is not considered to be adequate C the underwriters have failed to establish the Public Offering Price D due diligence has not been performed by the underwriters

B disclosure is not considered to be adequate

A customer buys 100 shares of XYZ at $60 in a margin account regular way settlement. Two days after the trade, XYZ has risen to $70. The customer will receive a margin call for: A. $2,000 B. $3,000 C. $3,500 D. $6,000

B. $3,000 The initial margin requirement is 50% of the original purchase price. 50% of $6,000 = $3,000. The rise in value will result in the account having SMA, which can be borrowed by the customer once the initial margin is deposited.

A securities firm does a trade for a customer and charges a mark-up. In what capacity did the firm act? A. Agent B. Dealer C. Broker D. Middleman

B. Dealer FINRA Firms can be either Agent or Dealer: - Agent: Routing the best market; charges commission (middleman) - Dealer: Maintains inventory of the security, and then selling out of inventory; charges "mark-up"

Margins on government and municipal securities are set by (the): A. MSRB B. FINRA C. FRB D. SEC

B. FINRA Because municipals and governments are exempt, the Federal Reserve has no power to set margins. However, FINRA sets minimum maintenance margins for these securities that member firms must meet.

The credit rating of a guaranteed corporate bond is based on the credit quality of the: A. corporate issuer B. corporate guarantor C. FDIC D. SIPC

B. corporate guarantor Guaranteed corporate bonds are guaranteed by another corporation (typically a parent company guaranteeing the debt of a wholly owned subsidiary). The guarantor will have the higher credit rating, so the bonds will be able to be issued at a lower interest cost. Such bonds take on the credit rating of the corporate guarantor, who is liable for payment if the issuer defaults.

If there is no trading activity in a customer's account, a statement must be mailed: A. that month B. that quarter C. semi-annually D. annually

B. that quarter If there is no activity in a customer's account, statements are mailed quarterly. However, if trades take place, a statement must be sent for that month.

The Dow Jones Industrial Average consists of: A 15 stocks B 20 stocks C 30 stocks D 65 stocks

C 30 stocks

PDQ Company $1 par common stock currently trading at $55. PDQ is currently paying a quarterly common dividend of $1.10 per share. The current yield of PDQ stock is: A. 2.0% B. 4.4% C. 8.0% D. 44.0%

C. 8.0% Yields are based on annual return. The formula for current yield is: Annual Income/Market Price = Current Yield $4.40 $55 = 8%

The trading of listed securities over-the-counter occurs in the: A. First Market B. Second Market C. Third Market D. Primary Market

C. Third Market First Market: Trading of exchange listed securities on stock exchanges Second Market: Trading of unlisted securities over-the-counter Third Market: Trading of exchange listed securities over-the-counter The Primary Market is where new issues are sold (not traded).

Treasury Bonds are issued by the U.S. Government in: A. bearer form for minimum denominations of $100 B. bearer form for minimum denominations of $10,000 C. book entry form for minimum denominations of $100 D. book entry form for minimum denominations of $10,000

C. book entry form for minimum denominations of $100 The U.S. Government issues Treasury Bonds (and Treasury Bills and Notes) in book entry form, in minimum denominations of $100.

A Prime Banker's Acceptance is one: A. rated AAA by Moody's B. rated P-1 by Moody's C. eligible for trading with the Federal Reserve D. eligible for trading with commercial banks

C. eligible for trading with the Federal Reserve A Prime BA is of sufficient quality to be an eligible for Fed trading.

All of the following are reported on Form 1099-DIV EXCEPT: A. cash dividends paid B. qualifying cash dividends paid C. interest paid on taxable bonds D. capital gains distributions paid by mutual funds

C. interest paid on taxable bonds Form 1099-DIV is the report to the IRS by issuers of cash dividends paid and capital gains distributions made by mutual funds. Dividends that "qualify" for the lower 15% (or 20% for higher earners) tax rate are reported in a separate box on the form. Interest paid on taxable bonds and tax-free bonds is reported on Form 1099-INT.

The definition of a "short swing" profit under the Securities Exchange Act of 1934 is a completed round turn trade effected at a profit within: A. the same day by any investor B. six months by any investor C. six months by an insider D. within one year by an insider

C. six months by an insider A "short swing" profit is defined as one achieved by an insider (officer, director, or 10% shareholder) trading that company's stock within a six month period. Short swing profits must be returned to the corporation under the Act.

The breakeven point for the holder of a put is: A. the premium paid B. unlimited C. strike price minus premium paid D. strike price plus premium paid

C. strike price minus premium paid

Under Regulation D regarding private placements, how many accredited investors are allowed to invest in the offering? A. 10 B. 35 C. 50 D. An unlimited number

D. An unlimited number Regulation D permits a private placement to be sold to a maximum of 35 non-accredited investors and an unlimited number of accredited (wealthy and institutional) investors.

When does an investor receive payment of interest and principal on a Capital Appreciation Bond (CAB)? A. Both interest and principal payments are made semi-annually B. Interest is paid semi-annually and principal is paid at maturity C. Principal is paid semi-annually and interest is paid at maturity D. Both interest and principal are paid at maturity

D. Both interest and principal are paid at maturity

A corporation declares a cash dividend on Wednesday, December 1st. The record date is set at Tuesday, December 21st, with the dividend payable on Friday, December 31st. Based on this information, the ex date is set at Friday, December 17th. The "tax event" occurs on: A. Wednesday, December 1st B. Friday, December 17th C. Tuesday, December 21st D. Friday, December 31st

D. Friday, December 31st For tax purposes, payments by issuers to securities holders are considered to be received as of the date the issuer sends the check. In this case, the check is sent on Friday, December 31st (payable date), therefore the income is taxable as of this date.

Mr. Jones, a New York resident, is a widower with a 6 year old son. He opens an account for the son under the Uniform Gifts to Minors Act. Three years later, Mr. Jones remarries, and moves to California, a community property state. Under what conditions can Mrs. Jones enter orders into the UGMA account? A. Only if a power of attorney is granted by the son B. Only if a power of attorney is granted by Mr. Jones C. Mrs. Jones can enter orders without restriction because California is a community property state D. Mrs. Jones can not enter orders into the account under any circumstances

D. Mrs. Jones can not enter orders into the account under any circumstances Custodial accounts are not permitted to have "third parties" that can trade the account. Only the custodian can enter orders. If the wife wishes, she can open a separate custodial account for the minor. The fact that California is a community property state is irrelevant to this question.

Regular way trades of all of the following securities settle "next business day" EXCEPT: A. Options B. U.S. Government Bonds C. U.S. Government T-Bills D. Municipal Debt

D. Municipal Debt = T+2

If it is now December, regular options contracts could be traded with all of the following expirations EXCEPT: A. January B. April C. July D. November

D. November The maximum life of a regular stock option contract is 8 months (this may be tested as 9 months, though). Longer term stock options, known as LEAPs (Long Term Equity AnticiPation options) have a maximum life of 28 months.

To sell a variable annuity, what license(s) is (are) needed? A. Series 6 only B. Series 7 only C. Series 6 or Series 7 only D. Series 6 or Series 7 plus a state insurance license

D. Series 6 or Series 7 plus a state insurance license Because variable annuities are both a securities and insurance product, a state insurance license is needed, in addition to the federal Series 6 (Investment Company Securities) or Series 7 (General Securities) license.

The sale of an "at the money" put is a: A. bull strategy B. bear strategy C. neutral strategy D. bull/neutral strategy

D. bull/neutral strategy The seller (writer) of a put has the obligation to buy stock at a fixed price in a falling market, in return for which the writer collects a premium. If the market stays the same, or rises, the put expires and the writer keeps the collected premium. This is a bull/neutral market strategy.

What is purchasing power risk?

Risk of inflation; chance that the investment will not be worth as much in the future

If an individual is found guilty of insider trading, the civil penalty imposed can be how many times the profit achieved or loss avoided? A. 1X B. 2X C. 3X D. 4X

3X If an individual is found guilty of insider trading, he or she must pay back the profit achieved or loss avoided, and in addition must pay a penalty equal to 3 times that amount. This is called "treble damages."

The annual contribution limit for an IRA in 2019 is _____, or _____ if you're age 50 or older.

6,000; 7,000

Debenture vs. Bond

A Debenture is backed by the credit worthiness of the company (Higher risk; Higher interest) vs A Bond is backed by an asset

What is a Capital Appreciation Bond (CAB)?

A capital appreciation bond (CAB) is a municipal security on which the investment return on an initial principal amount is reinvested at a stated rate until maturity, at which time the investor receives a single payment representing the face value of the bond and all accrued interest.

The nominal yield on a bond is: A stated interest rate / bond par value B stated interest rate / bond market value C market interest rate / bond par value D market interest rate / bond market value

A stated interest rate / bond par value

What is a Fixed Unit Investment Trust (Fixed UIT)?

A unit investment trust (UIT) is an investment company that offers a fixed portfolio, generally of stocks and bonds, as redeemable units to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income

Ford Motor Company has issued 8% convertible debentures, convertible at a 50:1 ratio. Currently the debenture is trading at 110. The stock is trading at 21. What is the conversion price of the stock? A. $20 B. $21 C. $22 D. $50

A. $20 The bond is convertible into common at a 50:1 ratio, based on the par value of the bond. The conversion price formula is: Par Value/ Conversion Ratio = Conversion Price $1,000/50 = $20

Under the "penny stock rule," an established customer that is exempt from the rule is defined as a person who has made a deposit of funds or securities with that broker-dealer more than: A. 1 year previously B. 2 years previously C. 3 years previously D. 5 years previously

A. 1 year previously Suitability statements are not required under the "penny stock rule" for so-called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.

Rule 144 Allows the sale of: A. 1% of the outstanding shares B. 10% of the outstanding shares C. the daily average of the prior 4 weeks' trading volume D. the weekly average of the prior 8 weeks' trading volume

A. 1% of the outstanding shares Rule 144 allows the sale, every 90 days, of the greater of 1% of the outstanding shares of that company; or the weekly average of the prior 4 week's trading volume.

Under Regulation T, an extension request that is granted by FINRA typically gives a customer how many additional business days to pay for a securities purchase? A. 2 days B. 4 days C. 7 days D. 10 days

A. 2 days If payment is not received on the 4th business day after trade date, a Regulation T extension may be requested from FINRA. An extension gives another 2 business days. Also note that if FINRA grants a 2 day extension, the member firm may shorten this period of time to the customer.

The minimum maintenance margin for long stock positions is set at: A. 25% of the long market value B. 30% of the long market value C. 50% of the long market value D. 100% of the long market value

A. 25% of the long market value The minimum maintenance margin requirement is set by FINRA at 25% of the long market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 25% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 25% minimum.

High-earning parents would like to invest in equities to fund their child's higher education expenses. The best investment choice would be a: A. 529 College Savings Plan B. Coverdell Education Savings Account C. Uniform Gifts to Minors Account D. Series EE Treasury Bonds

A. 529 College Savings Plan High-earning individuals cannot contribute to a Coverdell Education Savings Account. High earning individuals who invest in U.S. Government Savings Bonds and use the interest to pay for higher education expenses are taxed on the interest at the federal level. Contributions to custodial accounts are not deductible regardless of income level and the earnings in the account are taxable annually - there is no tax benefit here, regardless of income level. Investments in 529 Plans are not federally tax-deductible, but the earnings grow tax-deferred, and distributions to pay for qualified higher education expenses are not taxable. This tax benefit is not subject to income phase-out rules, as is the case with Coverdell ESAs and U.S. Government Savings Bond investments to pay for higher education. (The interest earned when Series EE bonds are redeemed to pay for qualified education expenses is tax-free for lower income individuals.)

Which statement is TRUE? A. A securities dealer will buy stock at the bid price and sell stock at the ask price B. A securities dealer will sell stock at the bid price and buy stock at the ask price C. A securities dealer will buy stock and sell stock at the midpoint between the bid and ask price D. A securities dealer will buy and sell stock at the price of the last reported trade

A. A securities dealer will buy stock at the bid price and sell stock at the ask price Securities dealers quote stocks with a bid and ask. The bid is the price at which the dealer is willing to buy from the customer (therefore, the customer is selling to the dealer at the bid). The ask is the price at which the dealer is willing to sell to the customer (therefore, the customer is buying from the dealer at the ask).

A securities firm does a trade for a customer and charges a commission. In what capacity did the firm act? A. Agent B. Dealer C. Principal D. Market Maker

A. Agent A FINRA member firm can do securities transactions in one of two ways. It can act as a broker, routing the order to the best market, charging a commission for this service. This is called an agency trade, and the firm is acting as a middleman in the transaction. The other way to do the trade is to act as a dealer. Here, the firm maintains an inventory of the security, and acts as a principal, buying the security into inventory from the customer; or selling to the customer out of inventory. When acting as a principal, the firm earns a mark-up when selling to the customer out of inventory; or a mark-down when buying into inventory.

An unmarried person, earning $100,000 a year, is not covered by a pension plan and has been contributing to an IRA account annually. If this individual joins a corporation at the same salary, and is included in that company's pension plan, which statement is TRUE? A. Annual contributions to the IRA can continue but will not be tax deductible B. Annual contributions to the IRA can continue and continue to be tax deductible C. Annual contributions to the IRA must cease D. The IRA must be closed and the balance transferred to the pension plan

A. Annual contributions to the IRA can continue but will not be tax deductible Anyone who has earned income can contribute to an IRA, whether covered by a pension plan or not. However, the contribution is not tax deductible for individual employees covered by a pension plan who earn over $74,000 in year 2019 (the deduction phases out between $64,000 - $74,000 of income).

What is the Net Asset Value per share of a mutual fund? A. Assets - Liabilities / Outstanding Shares B. Assets - Operating Expenses / Issued Shares C. Assets - Management Fees / Outstanding Shares D. Assets - Redemption Fees / Issued Shares

A. Assets - Liabilities / Outstanding Shares The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.

Which statement is TRUE about the Investment Company Act of 1940's requirements for management companies? A. At least 40% of the Board of Directors must be "non-interested" persons B. At least 50% of the Board of Directors must be non-interested C. At least 60% of the Board of Directors must be non-interested D. At least 75% of the Board of Directors must be non-interested

A. At least 40% of the Board of Directors must be "non-interested" persons The Investment Company Act of 1940 requires that at least 40% of the Board of Directors be "non-interested parties" - that is, they are not affiliated with the sponsor, custodian, transfer agent, or firms in the selling group.

The only order listed that is reduced on the ex date is an open: A. buy limit B. buy stop C. sell limit D. buy limit DNR

A. Buy Limit The orders that are reduced on ex date are "OBLOSS" - Open Buy Limits and Open Sell Stops. These are the orders below the current market. The intent is to make sure that the order does not become executable due to the fact that the stock's opening price is reduced by the dividend amount. Therefore, Choice A would be reduced. If the order is DNR, this means Do Not Reduce and on ex date the order would NOT be adjusted.

The principal difference between an open end management company and a closed end management company is: A. capitalization B. management C. investment objective D. expense ratio

A. Capitalization Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. The expense ratio of a fund measures of the "cost" of running the fund, and applies to both open and closed end funds (the largest component of the cost of running either type of fund is the annual management fee).

The exercise of an SPX (S&P 500 Index) option will result in the delivery of: A. cash the next business day B. cash in 2 business days C. SPDRs the next business day D. SPDRs in 2 business days

A. Cash the next business day Unlike stock options, if there is an exercise of an index option, the writer must pay the holder the "in the money" amount the next business day. There is no physical delivery of the underlying securities in the benchmark index. Note, for your information, that the SPDR is the S&P 500 Depository Receipt - it is one of the most popular exchange traded funds (ETFs) based on the S&P 500 Index

Which of the following is defined as passive income? A. Distributive share of income from a real estate limited partnership investment B. Dividends received from a real estate investment trust investment C. Interest received from a corporate debenture investment D. Proceeds from the sale of a partnership unit in excess of the tax basis of that unit

A. Distributive share of income from a real estate limited partnership investment Passive income and loss is defined as that derived from real estate investments and limited partnership investments. Income from a real estate investment trust is "portfolio income." Income from corporate bonds is "portfolio income." Finally, a gain on the sale of any security (including partnership units) is a capital gain; and all capital gains are "portfolio income".

Which statement is TRUE regarding Federal Funds? A. Federal funds are overnight loans between member institutions of the Federal Reserve System B. Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution C. The interest rate charged on Federal Funds is the LIBOR Rate D. The interest rate charged on Federal Funds is the Discount Rate

A. Federal funds are overnight loans between member institutions of the Federal Reserve System Federal Funds are overnight loans of reserves from Fed member bank to Fed member bank. The interest rate charged on Fed Funds is the Federal Funds Rate. When the Federal Reserve Bank lends directly to a member bank, it does so at the discount rate. LIBOR" = London Interbank Offered Rate.

Which of the following securities deliveries is "good"? A. Guardian securities with an assignment performed by the legal guardian B. Custodial securities with an assignment performed by the recipient of the gift C. Estate securities with an assignment performed by the deceased person D. Trust securities with an assignment performed by the beneficiary of the trust

A. Guardian securities with an assignment performed by the legal guardian Guardian account securities are assigned by the legal court appointed guardian. Custodial account securities cannot be assigned by the minor. The minor has no legal authority. Any assignment must be made by the custodian. Trust account securities must be assigned by the designated trustee - they cannot be assigned by the beneficiary of the trust. Securities held in the name of an estate must be assigned by the executor of the estate. When a person dies, their signature dies with them!

Who is responsible for preparing the Official Statement for a new municipal bond offering? A. Issuer B. Bond counsel C. Underwriter D. Underwriter's counsel

A. Issuer The Official Statement is the disclosure document, similar to a prospectus, for municipal bond issues. It is the responsibility of the issuer to prepare the Official Statement, though the actual preparation is usually done by the bond counsel, on behalf of the issuer. The bond counsel renders a legal opinion on the bonds, and also can prepare, on behalf of the issuer, the authorizing resolution, bond contract, and Official Statement.

Which statements are TRUE about marking securities positions to market? A. Long securities positions are marked to market daily B. Long securities positions are marked to market weekly C. Short securities positions are marked to market twice per day D. Short securities positions are marked to market weekly

A. Long securities positions are marked to market daily Securities positions held in margin accounts, whether long or short, are marked to market daily, based on the closing price of the security (last reported trade). If the market value of a long position falls too far; or the market value of a short position rises too far; the equity in the account can fall below the FINRA minimum, generating a maintenance call for additional margin.

The purchase of a put has all of the following advantages over selling a security short EXCEPT: A. No loss of time value as the position is held B. No requirement to make up dividend payments on the borrowed shares C. Lower capital requirement D. Less potential risk

A. No loss of time value as the position is held The advantages of buying a put over selling that security short are a lower capital requirement (paying 100% of the premium is lower than putting up 50% initial margin on the full value of the stock position to short the shares) and no requirement to make up dividend payments on borrowed shares. Also, short selling exposes the investor to an unlimited (infinite) risk if the stock goes up whereas the worst case scenario when buying a put is the option expires worthless and the premium is lost. A disadvantage of holding an option is that every day its time value decreases, to zero at expiration. This does not occur with stock positions, since there is no finite life on the position.

When a bond trades at a premium, which bond yield will be the highest? A. Nominal B. Yield to maturity C. Current D. Basis

A. Nominal Fact Sheet; Yield Triangle When bonds are trading at a premium, the stated yield or nominal yield will be the highest, since it is the annual income divided by par value. Current yield is lower because it is annual income divided by the current market price (which is at a premium to par). Basis (or yield to maturity) is even lower because it not only considers that the current market price is at a premium to par; it also pro-rates the loss of the premium over the life of the bond, reducing the annual yield below the current yield.

What does NOT have to be discussed with a customer when recommending a variable life policy? A. Probate fees B. State premium fees C. Mortality expense charges D. Administrative expense charges

A. Probate fees Probate fees are the fees charged by attorneys to process the estate of a deceased person through probate court in that state. They have nothing to do with the recommendation of a variable life policy. Insurance companies are state-regulated and the way that the state gets reimbursed for the cost of this is by imposing a premium tax or fee on insurance premiums. This cost should be disclosed to the client. The mortality expense charge is essentially the fee charged by the insurance company to pay for risk of death - the older the person, the higher the fee. This should be discussed with the customer. Finally, the insurance company can charge a fee against the policy for its administrative expenses - another fee to be discussed with the client.

Which of the following actions must be taken if a municipality wishes to raise its debt limit? A. Public referendum B. Court order C. Judicial edict D. Tax assessment

A. Public referendum If a municipality wishes to raise its debt limit, the voters must approve via a public referendum. In effect, the voters are approving an increase in their taxes when they approve such a measure.

Which order to sell is placed below the current market? A. Sell 100 ABC @ 50 Stop B. Sell 100 ABC @ 50 Day C. Sell 100 ABC @ 50 GTC D. Sell 100 ABC @ 50 AON

A. Sell 100 ABC @ 50 Stop There is only one order to sell which is placed below the current market - a sell stop order. Sell Stops are placed below the current market and are elected at or below the stop price and then executed at the next available price (either at, above, or below the stop price of $50). The other choices are all sell limit orders that are placed higher than the current market. They are qualified in other ways - one is a day order; one is a good-til-canceled (GTC) order; and one is an all or none (AON) order.

Interest income from all of the following bond issues is exempt from Federal State and Local tax EXCEPT: A. State of Hawaii B. Puerto Rico C. Guam D. Virgin Islands

A. State of Hawaii Interest income received from bonds issued by territories or possessions such as Puerto Rico, Guam and the Virgin islands, is exempt from Federal, State and Local tax, no matter where the purchaser lives. Interest income from State issues is always exempt from Federal income tax, but is only exempt from State and Local tax if purchased by a resident of that State.

Which item would be found on a corporation's income statement? A. Taxes B. Quick Assets C. Liabilities D. Stockholders' Equity

A. Taxes The income statement details all items of revenue and expense to arrive at net income after tax. Thus, taxes are deducted from the income statement to arrive at this figure. This is the income figure that is used to compute earnings per share. Assets and quick assets (those that can be turned quickly to cash) are balance sheet items, as are liabilities. All assets minus all liabilities equals net worth - this is the same as stockholders' equity. These are all found on the balance sheet - not the income statement.

Which of the following is TRUE? A. The Securities Act of 1933 defines exempt issuers in the primary market B. The Securities Exchange Act of 1934 defines exempt issuers in the primary market C. The Securities Act of 1933 defines exempt transactions in the secondary market D. The Securities Exchange Act of 1934 defines exempt transactions in the primary market

A. The Securities Act of 1933 defines exempt issuers in the primary market The Securities Act of 1933 covers the new issue (primary market) and defines exempt issuers and exempt transactions. If an issuer is exempt or if a new non-exempt issue is sold in an exempt transaction, that new issue does not have to be registered under the Act. Otherwise, registration is required. The Securities Exchange of 1934 consists of a variety of rules covering the secondary (trading) market.

Which of the following conditions must be met to send a confirmation solely to a person holding a power of attorney in a customer account? A. The customer must request the sending of the confirmation in writing B. The person holding the power of attorney must request the sending of the duplicate confirmation in writing C. The registered representative must believe that the action is prudent D. The manager must approve of the action in writing

A. The customer must request the sending of the confirmation in writing To send a confirmation to someone designated by a customer, the customer must make the request in writing. This is a purely clerical procedure, so no approval of the principal is required, nor is there a "prudent man" test. Remember, the account belongs to the customer, and all actions taken are at the direction of the customer.

A husband and wife both have individual accounts at a brokerage firm and they also have a custodial account for their minor child. They have $60,000 that they wish to invest in ABC mutual fund shares, for which breakpoints start at a $25,000 investment. They wish to allocate the investment as follows: $20,000 - Husband's IRA account $20,000 - Wife's IRA account $20,000 - Custodial account As the registered representative handling these accounts, you should tell these customers that: A. These purchases will qualify for a breakpoint B. These purchases will not qualify for a breakpoint because each account is buying less than the $25,000 minimum C. These purchases should be made initially as 1 purchase in 1 account to qualify for the breakpoint and then the investment should be allocated and disbursed in $20,000 amounts to the desired accounts D. These purchases will not qualify for the breakpoint because investors cannot join together to take advantage of breakpoint sales charge reductions

A. These purchases will qualify for a breakpoint Mutual fund breakpoints are generally calculated using all investments made within a family - that is, parents and their children. Note, however, that groups of unrelated individuals cannot join together to get the benefit of a breakpoint.

Which statement about Treasury STRIPS is FALSE? A. Treasury STRIPS are not susceptible to purchasing power risk B. Treasury STRIPS are zero coupon instruments C. Treasury STRIPS are not subject to reinvestment risk D. Treasury STRIPS are not subject to default risk

A. Treasury STRIPS are not susceptible to purchasing power risk Treasury STRIPS are government bonds that are "stripped" of coupons. They do not provide current income. This is a long term zero coupon obligation with a "locked in" rate of return over the life of the bond (thus, it is not subject to reinvestment risk).

High-earning individuals can make contributions to: A. UGMA Accounts B. Roth IRAs C. Spousal Roth IRAs D. Coverdell ESAs

A. UGMA Accounts Custodial accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened. On the other hand, high-earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account.

Treasury bonds: A. are issued in minimum $100 denominations B. are issued with maximum 20 year maturities C. are issued at a discount D. mature at par plus accrued interest

A. are issued in minimum $100 denominations Treasury bonds are issued at par in minimum denominations of $100 each, and pay interest semi-annually. Initial maturities can be up to 30 years. At maturity, the bondholder receives par.

A registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must: A. ascertain the location of the stock B. ascertain that the securities can be delivered in 4 business days to meet Reg. T requirements C. validate that the securities are in "good form" D. obtain physical possession of the securities

A. ascertain the location of the stock FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 2 business days. There is no requirement to obtain physical possession of the securities before placing the sell order, nor is there a requirement to validate the securities as "good for delivery."

When opening an account over the phone to trade stocks and options, all of the following signatures are needed on the new account form(s) EXCEPT: A. customer signature B. registered representative signature C. general principal signature D. registered options principal signature

A. customer signature

If interest rates decline continuously for 3 consecutive quarters, this is known as a period of: A. deflation B. depression C. recession D. disinflation

A. deflation

Western syndicate accounts are: A. divided as to selling responsibility and divided as to liability B. divided as to selling responsibility and undivided as to liability C. undivided as to selling responsibility and divided as to liability D. undivided as to selling responsibility and undivided as to liability

A. divided as to selling responsibility and divided as to liability A Western syndicate account is divided as to selling responsibility and divided as to liability. This contrasts to an Eastern syndicate account which is undivided as to selling responsibility and undivided as to liability.

An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Home Loan Bank bonds with a 20 year maturity. An investor who purchases the new issue of Federal Home Loan Bank bonds can expect to pay: A. par B. par plus a mark-up C. discount D. discount plus a mark-up

A. par New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. In contrast, direct U.S. Government obligations are sold through auction.

All of the following statements are true about margin on securities EXCEPT: A. the FRB sets initial margins for exempt securities B. the FRB sets initial margins for non-exempt securities C. FINRA sets minimum margins for exempt securities D. FINRA sets minimum margins for non-exempt securities

A. the FRB sets initial margins for exempt securities The Federal Reserve Board (FRB) only has the power to set margins for non-exempt issues. It has no power to set margins for exempt issues under the Securities Exchange Act of 1934. However, FINRA sets minimum margins for both exempt and non-exempt issues. For example, there is no Regulation T margin for corporate bond positions (a non-exempt security), but FINRA sets the minimum at the greater of 7% of face or 20% of market value. For example, there is no Regulation T margin for municipal bond positions (an exempt security), but FINRA sets the minimum at the greater of 7% of face or 15% of market value.

The Second Market is the: A. trading of OTCBB stocks B. issuance of listed stocks C. trading of listed stocks on the floor of an exchange D. issuance of listed and unlisted stocks

A. trading of OTCBB stocks The Second Market is over-the-counter trading of securities that are not listed on a stock exchange. For equities, the Second Market is the OTCBB (Over-The-Counter Bulletin Board) and the Pink OTC Markets. The First Market is trading of listed stocks on an exchange. Choices B and D are definitions of the primary (new issue) market - not the secondary (trading) markets.

A stock certificate that has been damaged with a large ink stain has been authenticated by the issuer. The next buyer of the stock receives that certificate and does not believe the authentication. Which statement is TRUE? A The customer can demand a new replacement stock certificate and will not be charged for this B The customer can demand a new replacement stock certificate and will be charged for this C The customer has no recourse since the certificate has been authenticated D The customer can break the trade since the certificate was not delivered in good form

B The customer can demand a new replacement stock certificate and will be charged for this

The minimum dollar amount of a negotiable certificate of deposit is usually: A. $10,000 B. $100,000 C. $1,000,000 D. $10,000,000

B. $100,000 Negotiable certificates of deposit are issued in minimum units of $100,000. They are designed for institutional investment - not for individual purchasers. They are also not FDIC insured for any deposit amount that exceeds FDIC limits (currently $250,000).

A distribution of $15,000 is taken from a Coverdell Education Savings Account in a given year, but only $13,000 is used for the beneficiary's qualified education expenses in that year. The tax consequence is: A. $2,000 is taxable B. $2,000 is taxable and a 10% penalty will be imposed C. $15,000 is taxable D. $15,000 is taxable and a 10% penalty will be imposed

B. $2,000 is taxable and a 10% penalty will be imposed Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, a 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!

A customer sells short 100 shares of PDQ at $47 and sells 1 PDQ Sep 50 Put @ $6. The maximum potential gain while both positions are in place is: A. 0 B. $300 C. $600 D. unlimited

B. $300 If the market falls, the short put is exercised and the stock must be bought at $50. Since it was already "sold" at $47, there is a loss of $3 per share ($300 total). But the customer collected $600 in premiums; so the end result is a net gain or $300. This is the maximum potential gain. Conversely, if the market rises, the short put expires, leaving a short stock position that has potentially unlimited loss.

Contributions to a Coverdell Education Savings Account must cease when the beneficiary reaches the age of: A. 16 B. 18 C. 21 D. 30

B. 18 Contributions must stop at 18; distributions must cease at 30

The minimum maintenance margin for short stock positions is set at: A. 25% of the short market value B. 30% of the short market value C. 50% of the short market value D. 100% of the short market value

B. 30% of the short market value The minimum maintenance margin requirement is set by the exchanges at 30% of the short market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 30% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 30% minimum.

What are initial and maintenance margins for stock positions in a long margin account? A. 50 / 50 B. 50 / 25 C. 50 / 30 D. 25 / 30

B. 50 / 25 Initial margin for a long stock positions is set by the Federal Reserve (FRB is the Federal Reserve Board) under Regulation T at 50%. Maintenance margin for long stock positions is set by FINRA at 25%.

A company has decided to terminate its retirement plan. In order to defer taxation on the distribution, the employee must roll over the funds into an Individual Retirement Account within how many days of the distribution? A. 30 B. 60 C. 90 D. 120

B. 60 Lump sum distributions from qualified plans can be "rolled over" into an Individual Retirement Account without dollar limit and remain tax deferred as long as the rollover is performed within 60 days of the distribution date.

If a corporation reports a loss for a year, it is obligated to make interest payments on all of the following bonds EXCEPT: A. Reset bonds B. Adjustment bonds C. Convertible bonds D. Callable bonds

B. Adjustable Bonds Adjustment bonds, also known as income bonds, pay interest only if the corporation hits a predetermined level of earnings. If the income level is not sufficient, there is no obligation to make the interest payment. Reset bonds are obligated to pay interest, however the rate is reset annually. Conversion and call features have no effect on the obligation to pay.

Which statement is TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? A. All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more annuity units B. All interest, dividends, and capital gains from the securities in the account are automatically reinvested and build tax deferred C. All interest, dividends, and capital gains from the securities in the account are taxable D. All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units

B. All interest, dividends, and capital gains from the securities in the account are automatically reinvested and build tax deferred

Which of the following are characteristics of Defined Contribution Plans? A. Annual contribution amounts are fixed and the benefit amount to be received is fixed B. Annual contribution amounts are fixed and the benefit amount to be received will vary C. Annual contribution amounts will vary and the benefit amount to be received is fixed D. Annual contribution amounts will vary and the benefit amount to be received will vary

B. Annual contribution amounts are fixed and the benefit amount to be received will vary Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.

Cash payments made to investors (except for extremely high earners) from which of the following investments are subject to the lower 15% maximum tax rate? A. Common stocks only B. Common and Preferred stocks C. Convertible bonds and common stocks D. All bonds and preferred stocks

B. Common and Preferred stocks Dividends from both common and preferred issues qualify for this advantageous tax treatment. Interest payments received from bond investments (whether the bonds are convertible or not) do not qualify for the lower 15% tax rate. Also note that this rate is raised to 20% for individuals in the highest tax bracket.

Which statement is TRUE about a Coverdell Education Savings Account? A. Distributions must stop when the beneficiary reaches age 18 B. Distributions must stop when the beneficiary reaches age 30 C. There is no limit on the annual amount that can be contributed D. The funds in the account can only be used to pay for higher education expenses

B. Distributions must stop when the beneficiary reaches age 30 Coverdell ESAs limit annual contributions to $2,000 per year per beneficiary. The funds can be used to pay for all levels of education. Contributions must stop at age 18, and the funds must be used up by age 30. High-earning individuals cannot contribute - there is a phase-out as income levels increase.

The manager of a pension plan would most likely invest in all of the following debt issues EXCEPT: A. Corporate Bonds B. Municipal Bonds C. Ginnie-Maes D. T-Bills

B. Municipal Bonds Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower interest rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher interest rates because their interest income is taxable by the Federal government.

Which characteristic is NOT common to both Treasury STRIPS and Treasury Bills? A. Minimum $100 denominations B. Quoted as a percent of par in 32nds C. Pay interest at maturity D. Guaranteed by the U.S. Government

B. Quoted as a percent of par in 32nds Treasury Bills and STRIPS have a minimum $100 par value; are zero coupon original issue discount obligations that do not have a stated interest rate, paying interest at maturity; and are directly backed by the U.S. Government. T-STRIPS are quoted in 32nds, as are all other long term Treasuries and Agency securities. T-Bills are quoted on a discount yield basis since they are a short term money market instrument.

Which statement is TRUE regarding intrastate offerings under Rule 147? A. Resale of the securities is permitted within that state and outside the state immediately following the initial offering B. Resale of the securities is permitted within that state immediately following the offering but resale outside the state is prohibited for the 6 month period following the initial offering C. Resale of the securities is prohibited within that state for 6 months following the offering but resale outside the state is permitted immediately D. Resale of the securities is prohibited within that state and outside the state for the 6 month period following the initial offering

B. Resale of the securities is permitted within that state immediately following the offering but resale outside the state is prohibited for the 6 month period following the initial offering Securities that are sold under a Rule 147 exemption (intrastate exemption) cannot be resold outside that state for 6 months following the initial offering. There is no restriction on resales within that state. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."

All of the following statements about Securities Investor Protection Corporation (SIPC) are true EXCEPT: A. SIPC is a non-profit corporation B. SIPC is a U.S. Government agency C. SIPC is an insurance fund protecting customer accounts against broker-dealer insolvency D. every broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC

B. SIPC is a U.S. Government agency Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.

The purchase price of each of the following can be negotiated EXCEPT: A. Commercial Paper B. Savings Bond C. Certificate of Deposit D. Banker's Acceptance

B. Savings Bond Savings bonds are non-negotiable - they do not trade. Commercial paper, certificates of deposit, and banker's acceptances are all money market instruments that are negotiable (i.e., trade in the market).

What type of registration allows the issuer to sell securities for the upcoming 3 years? A. Primary registration B. Shelf registration C. Term registration D. Extended Registration

B. Shelf registration "Seasoned" issuers are permitted to use the shelf registration rule. A seasoned issuer is one that has already registered securities with the SEC and that has a minimum $75 million market capitalization. The issuer can file a blanket registration statement that goes on the SEC's "shelf" and then can sell anytime during the next 3 years.

Which of the following is a potential money laundering activity? A. Laddering B. Structuring C. Diversifying D. Amortizing

B. Structuring "Structuring" is the illegal patterning of cash transactions so they fall under the $10,000 reporting limit - such patterns require the filing of a "CTR" (Currency Transaction Report); and if the firm is suspicious about the customer, an "SAR" report (Suspicious Activities Report) must be filed as well.

Which of the following characteristics of brokered CDs should be disclosed to customers? A. CDs are actively traded instruments, so the customer should experience minimal marketability risk if the CD is sold prior to maturity B. The CD may have an initial interest rate that is higher than the market rate of interest, but that rate will be lowered after the CD is held for a stated time period C. CDs can be redeemed at any time with the issuer, but the issuer can impose a penalty for early withdrawal of funds D. CDs can be callable, and if interest rates rise during the life of the instrument, the issuer may call the CD, forcing the holder to reinvest at lower current rates

B. The CD may have an initial interest rate that is higher than the market rate of interest, but that rate will be lowered after the CD is held for a stated time period Brokered CDs can be "step-up, step-down" instruments. As such, they can have an introductory "teaser" interest rate that is substantially higher than the market; and then the rate "steps-down" to a more realistic market rate after the 1st 6 month interest payment is made. Most of these instruments are held to maturity, so the secondary market is very limited. There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. Brokered CDs, which can have lives of up to 5 years, can be callable. If interest rates drop (not rise) after issuance, then the issuer can call in the CD, forcing the investor to reinvest the refunded monies at lower current market interest rates.

A municipal bond dealer gives a quote on a new issue 20 year, 4% General Obligation bond. The quote includes a 20 basis point mark-up. Because of the mark-up, which statement is TRUE? A. The dollar price of the bond will increase and the yield of the bond will increase B. The dollar price of the bond will increase and the yield of the bond will decrease C. The dollar price of the bond will decrease and the yield of the bond will increase D. The dollar price of the bond will decrease and the yield of the bond will decrease

B. The dollar price of the bond will increase and the yield of the bond will decrease Any "mark-up" of a new issue purchased by a dealer at a net offering price less a concession, as defined by the MSRB as any remuneration in addition to the concession received by the dealer as a result of increasing the offering price on the securities. If the offering price of the bond is increased, the yield on the bond must decline.

Which procedure is NOT required in order to open a new account for an individual customer? A. The member firm must independently verify the customer's identity by matching customer provided information against government issued documents or a database B. The member firm must independently verify the validity of supporting government issued documents provided by the customer to prove identity C. The member firm must check the customer's name against a government watch list of known or suspected terrorists D. The member firm must give notice to the customer that it will be requesting information to help fight funding for terrorism or money laundering activities

B. The member firm must independently verify the validity of supporting government issued documents provided by the customer to prove identity

A customer places an order to buy bonds. The order reads "Buy 5M ABC 9s M '35 @ 90 GTC." Which statement is TRUE about this order? A. The order will be canceled at the end of the day if an execution is not possible B. The order must be executed at a price of 90% or better C. If executed, the customer will pay $4,500 for the bonds D. The customer is establishing a short position with this order

B. The order must be executed at a price of 90% or better Since a price is specified with no other qualifications, this is a limit order to buy $5,000 face amount ("5M") of 9% bonds maturing in 2035. Since this order was entered "GTC" - "good til canceled" - the order stays open until execution is possible. The customer is attempting to establish a long position with this order and wants to buy for 90% of par or less if possible. If executed, the customer is buying $5,000 par value of bonds at 90% = $4,500 or less

If a callable bond is purchased at a premium, and is then called at par which of the following is TRUE? A. The yield to call is higher than the nominal yield B. The yield to call is lower than the nominal yield C. The yield to call is the same as the nominal yield D. The yield to call moves inversely to the nominal yield

B. The yield to call is lower than the nominal yield The yield to call will be lower than the yield to maturity if the bond was purchased at a premium (which will be lost faster if the bond is called early). Since the bond is purchased at a premium, both yield to call and yield to maturity must be lower than the nominal yield.

A registered representative solicits a customer to buy a stock, explaining that: "Because the trade settles in 2 business days, if the stock rises, you can sell at any time during this time period and we will send you a check for the net profit. On the other hand, if the stock falls, you can sell at any time during this time period and only have to pay for the net loss." This statement is: A. true B. a misrepresentation of the requirements of Regulation T C. permitted only if the security or transaction is exempt D. permitted only if the security or transaction is non-exempt

B. a misrepresentation of the requirements of Regulation T Regulation T requires that customers pay for securities purchases promptly. If the customer sells the position prior to settlement, payment for the purchase is still required. The only way in which a customer is required to pay for a net loss, or will receive the proceeds of a net gain, is if both the buy and sell occur on the same day.

A customer brings $50,000 of cash to the brokerage firm office and gives it to the registered representative to pay for a securities purchase. The registered representative should: A. reject the cash payment, since cash payments over $10,000 cannot be accepted B. accompany the customer to the cashier, so that the customer can be given a receipt for the payment C. accept the payment on the firm's behalf D. deposit the cash to his personal account and issue a check in the same amount to the firm for crediting to the customer's account

B. accompany the customer to the cashier, so that the customer can be given a receipt for the payment Cash can only be accepted from a customer if it is to be deposited to the customer's account. A registered representative cannot personally accept cash from a customer.

Credit can be extended on new issues: A. immediately after the offering is complete B. after 30 days have elapsed from the completion of the offering C. after 60 days have elapsed from the completion of the offering D. after 90 days have elapsed from the completion of the offering

B. after 30 days have elapsed from the completion of the offering New issues are not eligible for margin until 30 days have elapsed from the completion of the offering.

The President of PDQ Corporation donates restricted PDQ shares to the United Way after holding them for 3 months fully paid. United Way can sell the stock without restriction: A. immediately B. after holding the securities for 3 months C. after holding the securities for 6 months D. after holding the securities for 9 months

B. after holding the securities for 3 months As long as the 6-month holding period requirement has been met on the restricted shares, when they are donated, the charity can sell them immediately. In this case, the officer only held the shares for 3 months before they were donated, so that charity must complete the 6 month holding period requirement by holding the securities for another 3 months.

The advantage of a limited partnership business structure as opposed to a corporate business structure is that limited partnerships: A. are taxed at lower tax brackets than corporations B. allow for "flow through" of gain and loss, while corporations do not C. limit liability of owners while corporate shareholders have unlimited liability D. have a better "track record" for economic success than corporations

B. allow for "flow through" of gain and loss, while corporations do not The advantage of the partnership form of business is that the partnership itself is not a taxable entity; income and loss from the partnership "flows-through" onto the individual partners' tax returns. Thus, any net income is taxed once; and any net loss is included on the partner's tax return.

In 2019, a customer buys 5 GE 10% debentures, M '39. The interest payment dates are Feb 1st and Aug 1st. The current yield on the bonds is 11.76%. The bonds are callable as of 2029 at 103. The bond is trading: A. at a premium B. at a discount C. at par D. in the money

B. at a discount If the bond's current yield (11.76%) is higher than the coupon yield (10%), the bond is trading at a discount. In order for the yield to rise above the stated fixed coupon rate, the price of the bond must drop in the market.

The effective Fed Funds Rate is the: A. rate charged by the largest members of the Federal Reserve System B. averaged rate of member banks throughout the United States C. highest rate charged by member banks, calculated on Wednesdays D. lowest rate charged by member banks, calculated on Wednesdays

B. averaged rate of member banks throughout the United States The effective Federal Funds Rate is the average daily rate charged by member banks for overnight loans of reserves.

The most efficient way for a client to hedge a broadly diversified $2,500,000 stock portfolio is to: A. buy put contracts on the individual stock positions held in the portfolio B. buy SPX 2500 put options C. sell short the exact same stock positions as those held in the portfolio D. sell long the exact same stock positions as those held in the portfolio

B. buy SPX 2500 put options Index options can be used to "efficiently" hedge a broadly diversified stock portfolio because each contract has a large "notional" value. Each SPX 2500 contract covers 2500 (index value x 100 (multiplier) = $250,000 of portfolio value. The hedge a $2,500,000 portfolio, 10 put contracts are needed. This is much easier than attempting to buy individual put contracts on the stock positions held in the portfolio. If the market drops, the gain on the index puts offsets the loss on the physical stock portfolio. The short sale of stock positions in the portfolio results in a "net 0" position, so there could be no further possible gain if the market rises (and no further loss if it falls). Selling the securities in the portfolio "long" would liquidate those positions - again, that is not a hedge.

All of the following are required to sell "144" stock EXCEPT: A. seller's representation letter B. buyer's representation letter C. issuer's representation letter D. broker's representation letter

B. buyer's representation letter To effect Rule 144 transactions, certain representations are required to ensure that the sale is not being made in contravention of the rule. The issuer must represent that the corporation is current with all required SEC filings because it is prohibited to use Rule 144 to sell if this is not the case. The seller must represent that the securities have been held fully paid for 6 months, otherwise Rule 144 cannot be used. Finally, the broker must represent that it did not solicit the transaction and that it acted as agent in executing the transaction. There is no representation required on the part of the buyer - when the restricted stock is sold through the rule, the buyer receives "clean" unrestricted shares from the transfer agent.

All of the following statements about e-mail sent by a registered representative to 50 retail clients are true EXCEPT the communication: A. must be reviewed and approved in advance by a principal B. can recommend a new issue C. can be sent from the branch office where the representative works D. can recommend stocks

B. can recommend a new issue E-mails can contain recommendations of securities; but they cannot recommend new issues (unless the e-mail also contained a copy of the prospectus).

A mutual fund that issues "Class A" and "Class B" shares, is one which: A. is a dual purpose fund, issuing shares that receive dividends only (Class A); and shares that receive capital gains only (Class B) B. gives the investor a choice of either an initial sales charge (Class A); or a contingent deferred sales charge (Class B) C. gives the investor a choice of either a managed portfolio (Class A); or an unmanaged portfolio (Class B) D. allows investors to redeem at any time (Class A); or requires that investors redeem only at specified dates (Class B)

B. gives the investor a choice of either an initial sales charge (Class A); or a contingent deferred sales charge (Class B)

An investor in 30-year Treasury Bonds would be most concerned with: A. deflation B. inflation C. marketability risk D. call risk

B. inflation The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk caused by inflation.

An order to sell 100 shares of ABC at 50 GTC on the Specialist's book (DMM) is a: A. market order B. limit order C. stop order D. stop limit order

B. limit order A limit order specifies an execution price ("the limit"). An order to sell at 50 is a limit order. Market orders do not specify a price. Stop orders must state "Stop" with a price.

In order to open a new account for a customer, the customer's name, date of birth, address and tax identification number must be: A. obtained and independently verified prior to account opening B. obtained prior to account opening and independently verified within a reasonable time before or after account opening C. obtained within a reasonable time before or after account opening and independently verified prior to account opening D. obtained and independently verified within a reasonable time before or after account opening

B. obtained prior to account opening and independently verified within a reasonable time before or after account opening To open an account for a new customer, 4 critical pieces of information must be obtained before the account can be opened - customer name, mailing address, social security number, and birthdate. This information must be used to independently verify the customer's identity within a reasonable time after account opening. This verification can be done by matching the 4 critical pieces of information to a valid government issued identification (which cannot be expired); or by using a database service such as Equifax to do the matching.

The sending of customer account statements and confirmations by e-mail is: A. prohibited B. permitted if the customer submits a valid e-mail address C. permitted if the customer makes the request verbally D. permitted only if the branch manager approves

B. permitted if the customer submits a valid e-mail address Customer mailings can be sent by e-mail instead of through the physical mail system if the customer provides a valid e-mail address. This is done by the customer e-mailing the request for electronic mailings.

A customer buys stock in an existing margin account, and fails to meet the Regulation T call within the specified maximum 4 business day limit. The action that may be taken is: A. the broker-dealer can request an extension for payment from the FRB B. the broker-dealer can sell securities from the account in an amount to satisfy the call C. the customer can sell "short against the box" enough securities held in the account to meet the Regulation T call D. the entire account must be liquidated

B. the broker-dealer can sell securities from the account in an amount to satisfy the call

The Price / Earnings Ratio is a measure of: A. profitability B. valuation C. volatility D. velocity

B. valuation The P/E ratio of a company is a valuation measure. Rapidly growing companies tend to have high P/E ratios, while mature companies tend to have low P/E ratios.

An investor in a "Ginnie Mae" mutual fund assumes all of the risks EXCEPT: A Fluctuation of Net Asset Value B Reinvestment Risk C Default Risk D Prepayment Risk

C Default Risk

Payment for U.S. Government securities that are sold through auction is made on: A Auction Date B Auction Date + 1 C Issue Date D Issue Date + 1

C Issue Date

Mortgage bonds are a(n): A unsecured debt and pay interest monthly B unsecured debt and pay interest semi-annually C secured debt and pay interest semi-annually D secured debt and pay interest monthly

C secured debt and pay interest semi-annually

A municipality has a tax rate of 12 mills. A piece of real property in the municipality is assessed at $225,000 and has a fair market value of $250,000. The annual tax liability on the property is: A. $120 B. $300 C. $2,700 D. $3,000

C. $2,700 One mill = .001; 12 mills = .012. Taxes are based on assessed valuation, not fair market value. .012 x $225,000 = $2,700. Another way to think about it is that 1 mill = $1 of tax for each $1,000 of assessed value.

A customer buys 5M of 3 3/4% Treasury Bonds at 95-5. The customer will pay how much for the bonds? A. $4,750.05 B. $4,752.50 C. $4,757.81 D. $4,875.13

C. $4,757.81 The purchase price is 95-5 = 95 and 5/32nds = 95.15625% of $5,000 = $4,757.81.

A husband and wife wish to open a spousal IRA. The wife works while the husband does not. What is the permitted maximum contribution to this spousal IRA for the year 2019? A. $6,000 for the wife; $0 for the husband B. $6,000 for the wife; $3,000 for the husband C. $6,000 for the wife; $6,000 for the husband D. $60,000 for the wife; $60,000 for the husband

C. $6,000 for the wife; $6,000 for the husband For the year 2019, the maximum contribution to a spousal IRA, is $6,000 each, in two accounts, for a total of $12,000. It makes no difference if the spouse works or not.

A seller who has filed Form 144 can sell 1% of the outstanding shares or the weekly average of the last 4 week's trading volume. This amount may be sold: A. 1 time a year B. 2 times a year C. 4 times a year D. 12 times a year

C. 4 times a year Rule 144 allows the sale of 1% of the issuer's outstanding shares or the weekly average of the preceding 4 weeks' trading volume (whichever is greater). This amount can be sold every 90 days (every 3 months), so a sale can occur 4 times per year.

The Regulation T initial margin requirement for long stock positions is: A. 25% B. 30% C. 50% D. 100%

C. 50% Regulation T initial margin for long stock positions is set at 50%.

customer sells short 100 shares of ABC stock at $38 and buys 1 ABC Mar 40 Call @ $5. The maximum potential loss is: A. $200 B. $500 C. $700 D. unlimited

C. 700

Which statement is TRUE regarding bids placed at the Treasury Auction? A. Competitive Bids are filled at inferior yields B. Negotiated Bids are filled at superior yields C. All filled bids receive the same yield D. Only the highest interest rate bids are filled

C. All filled bids receive the same yield At the weekly Treasury auction, non-competitive bids are always filled at the average winning yields of the competitive bids. Only the lowest interest rate competitive bids are filled; the higher rate competitive bids that exceed the amount of securities up for auction that week are rejected. All filled bids receive the same yield.

Under Keogh rules, any distributions from a Keogh Plan must start no later than: A. April 1st of the year following the year the individual turns 59 1/2 B. December 31st of the year following the year the individual turns 69 1/2 C. April 1st of the year following the year the individual turns 70 1/2 D. April 15th of the year following the year the individual turns 70 1/2

C. April 1st of the year following the year the individual turns 70 1/2 Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 70 1/2.

Which statement is TRUE? A. Both Fannie Mae and Ginnie Mae are owned by the U.S. Government B. Both Fannie Mae and Ginnie Mae are publicly traded companies C. Both Fannie Mae and Ginnie Mae issue mortgage backed pass-through certificates D. Both Fannie Mae and Ginnie Mae issues are indirectly backed by the U.S. Government

C. Both Fannie Mae and Ginnie Mae issue mortgage backed pass-through certificates Ginnie Mae is a government owned (not a private) company and cannot be spun off because of the guarantee of the U.S. Government that its securities carry. Fannie Mae was "spun off" by the government as a public company listed on the NYSE (so was Freddie Mac). Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets. Fannie Mae debt issues are implicitly backed by the U.S. Government - they are not directly backed. Both Fannie and Ginnie buy VA and FHA mortgages from originating lenders, pool them, and then sell mortgage-backed pass through certificates to the public.

An order ticket is filled out and sent to the New York Stock Exchange floor for execution. After being executed on the floor, it is discovered that the account number is incorrect. Under FINRA rules, the account number may be changed to the correct one by the: A. Registered Representative B. Specialist C. Branch Office Manager D. Floor Governor

C. Branch Office Manager Under FINRA rules, alterations to executed order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch manager. This person must understand all the facts of the situation before approving of the change, and is responsible for the change.

All of the following are sources of income that can be used for debt service on municipal revenue bonds EXCEPT: A. User Fees B. Special Taxes C. Capitalized Interest D. Lease Rentals

C. Capitalized Interest A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.

If a customer does not return a signed options agreement, which statement is TRUE? A. The account must be frozen for 90 days B. Opening transactions are permitted in the account C. Closing transactions are permitted in the account D. Payment in advance is required for any further transactions

C. Closing transactions are permitted in the account If the customer does not return the signed options agreement within 15 days' of account opening, no new positions can be initiated in the account. Orders can be accepted only to close out existing positions. There is no requirement to liquidate the account, nor to freeze the account, nor is there a requirement that cash be paid in advance for any further transactions.

Which of the following information items is NOT needed to open a cash account for a customer? A. Customer's name and address B. Customer's social security number or tax I.D. number C. Customer's signature D. Customer's occupation and employer

C. Customer's signature A customer signature is not needed to open a cash account (thus cash accounts can be opened over the phone). A signature is required for margin accounts only, since such an account requires that the customer pledge all the securities in the account to the brokerage firm in return for a margin loan.

All of the following features are common to both preferred stock and bonds EXCEPT: A. Fixed rate B. Can be callable C. Fixed maturity date D. Semi-annual payments

C. Fixed maturity date Preferred's technically have an unlimited life because they have no fixed maturity date, but they may be called by the issuer after a certain date

Which statement is TRUE regarding money market funds? A. Money market funds are typically sold with a nominal sales charge B. Money market funds typically do not impose management fees C. Fund dividends are taxable even if reinvested D. Typical maturities of securities held in the portfolio are 270 days or less

C. Fund dividends are taxable even if reinvested Money market funds usually do not impose sales charges but all funds impose management fees. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares. The reason why these funds are called "money" funds is that the securities held in the portfolios have very short maturities (less than 30 days) and turn over into cash quickly.

All of the following are defined as investment companies under the Investment Company Act of 1940 EXCEPT: A. Management Company B. Unit Investment Trust C. Hedge Fund D. Face Amount Certificate Company

C. Hedge Fund A hedge fund is not defined under the Investment Company Act of 1940 as an "investment company" since these products are generally sold as private placements to accredited investors. The defined types of investment companies under the 1940 Act are: face amount certificate companies; unit investment trusts; and management companies.

Which of the choices given is a coincident economic indicator? A. Consumer Debt Levels B. Durable Goods Orders C. Index of Industrial Production D. Corporate Profits

C. Index of Industrial Production Durable goods orders are a leading economic indicator, on the assumption that the goods are yet to be produced. Thus, the economic activity associated with these orders will happen in the future. The Index of Industrial Production is a coincident indicator - it is showing economic activity at the moment. Consumer debt levels and reported corporate profits are lagging indicators. They show the results of past activity

A client owns a municipal bond fund. What is the tax status of distributions from the fund? A. Both interest distributions and capital gains distributions are subject to federal tax B. Both interest distributions and capital gains distributions are exempt from federal tax C. Interest distributions are exempt from federal tax, but capital gains distributions are subject to federal tax D. Interest distributions are subject to federal tax, but capital gains distributions are exempt from federal tax

C. Interest distributions are exempt from federal tax, but capital gains distributions are subject to federal tax Interest income from municipal bonds is generally exempt from federal income tax. However, capital gains on municipal bonds are subject to federal tax.

A mutual fund sponsor has three different income funds, holding AAA rated debt securities with similar maturities. Assuming that the expense ratios for the funds are identical, which fund would have the lowest yield from investment income? A. Government Bond Fund B. Corporate Bond Fund C. Municipal Bond Fund D. Any of the above

C. Municipal Bond Fund Corporates are considered more risky than both governments and municipals, and are fully taxable, so their yield is the highest. Governments are less risky than municipals, but are taxable by the Federal government, so government yields are higher than municipal yields. The order from highest to lowest yield is: Corporates, Governments, Municipals.

Issuers of federal tax exempt commercial paper include: A. Corporations B. Federal Government C. Municipal Governments D. Ginnie-Mae

C. Municipal Governments Only municipal issues are exempt from federal income tax on interest income. Corporate and U.S. Government debt interest income is subject to federal income tax.

Which of the following securities is redeemable with the sponsor? A. Real estate investment trusts B. Closed end funds C. Mutual funds D. Corporate preferred stock

C. Mutual Funds Mutual funds (open end funds) are redeemable with the sponsor - they do not trade. REITs, closed-end funds, and corporate stock (both common and preferred) are listed on exchanges or OTC and are traded.

If an investor does not pay within the time period specified under Regulation T, all of the following statements are true EXCEPT: A. The investor must pay cash in advance for additional purchases B. The investor must deliver securities in advance for sales C. No trading is permitted in the account for 90 days D. The account is frozen for a 90 day period

C. No trading is permitted in the account for 90 days When an account is frozen, this means that the customer did not pay within the maximum time period specified under Regulation T. When an account is frozen, to buy securities, payment must be made in advance; and to sell securities, delivery of the security must be made in advance. The freeze lasts for 90 days.

When comparing Real Estate Investment Trusts (REITs) to Real Estate Limited Partnerships (RELPs), all of the following statements are true EXCEPT: A. REITs allow for flow through of gain B. RELPs allows for flow through of gain C. REITs allow for flow through of loss D. RELPs allow for flow through of loss

C. REITs allow for flow through of loss REITs do not allow for flow through of loss - only net income flows through to shareholders under conduit tax treatment. On the other hand, Real Estate Limited Partnerships are a tax sheltered investment that allow both gain and loss to flow through to the partnership investors.

The FINRA suitability rule requires a progression of suitability determinations. Which factor should be examined first? A. Quantitative suitability B. Customer specific suitability C. Reasonable basis suitability D. Profitability

C. Reasonable basis suitability FINRA requires that suitability determinations include multiple levels of review. These are to be completed in the following order: Reasonable Basis Suitability: This is a review of the features, returns, costs and risks of the recommended product or strategy. Only those products with the best combination can be recommended to clients. In essence, this rule requires that firms have an internal "recommended list" that has completed this review. Customer-Specific Suitability: Once the recommendation has completed "reasonable basis" suitability, that does not mean that it can be recommended to all customers. To recommend it to a customer requires that "customer-specific" suitability be determined. Quantitative Suitability: A single recommendation might be suitable for a customer, however a large number of similar recommendations might not be. It all depends of the customer's objectives, needs, and ability to pay for the recommended transactions. Note that the "Suitability" rule only applies to recommended transactions. It explicitly does not apply to unsolicited trades; and it also does not apply to institutional customers - only to retail customers.

All of the following retirement plans require that minimum distribution amounts be taken once the participant reaches the age of 70 1/2 EXCEPT: A. 403(b) plans B. 401(k) plans C. Roth IRAs D. Traditional IRAs

C. Roth IRAs Roth IRA contributions are not deductible. As long as the assets are held in the Roth IRA for at least 5 year and distributions start after age 59 1/2, they are tax-free. Since the IRS does not get to tax the distributions, they don't care when they start! On the other hand, Traditional IRA contributions, 401(k) contributions and 403(b) contributions, are all tax deductible. Distributions at retirement age are taxable, and the government wants its money before the plan participant dies. Thus, RMDs (Required Minimum Distributions) must commence at age 70 1/2. If they don't, a draconian tax rate of 50% is applied to any under distributed amount.

All of the following tools are used by the Federal Reserve to control the money supply EXCEPT: A. open market operations B. setting the discount rate C. setting the federal funds rate D. setting reserve requirements

C. Setting the Federal Funds rate

Which statement is TRUE about stock cost basis reporting? A. Stock cost basis is reported on Form 1099-DIV and LIFO is the default assumption B. Stock cost basis is reported on Form 1099-B and LIFO is the default assumption C. Stock cost basis is reported on Form 1099-B and FIFO is the default assumption D. Stock cost basis is reported on Form 1099-DIV and FIFO is the default assumption

C. Stock cost basis is reported on Form 1099-B and FIFO is the default assumption Cost basis reporting to the IRS is required on Form 1099-B. The Form includes the cost basis of the security, the sale proceeds, and whether the holding period is short term or long term. If there are multiple purchases of the stock position, absent customer instructions, FIFO is used to report cost basis. If the customer gives instructions to the broker, then specific identification can be used - which is beneficial if higher cost shares are selected to either reduce capital gains or increase reported capital losses.

Which is the TRUE statement about listed options contracts? A Stock option contracts and most index options contracts are issued American style B Stock option contracts and most index options contracts are issued European style C Stock option contracts are issued American style while most index option contracts are issued European style D Stock option contracts are issued European style while most index option contracts are issued American style

C. Stock option contracts are issued American style while most index option contracts are issued European style Options contracts can either be issued as "American style" or "European style." An American style option is one that can be exercised at any time - and equity stock options are all American style. A European style option is one that can only be exercised at expiration - not before. Almost all index options, with the exception of the OEX, are European style.

Three individuals wish to open a joint account as "tenants in common." If one of the individuals dies, which statement is TRUE? A. The account is liquidated and the proceeds divided into 3 equal parts, shared among the 2 survivors and the decedent's estate B. Trading must be halted in the account until the executor is named as the replacement for the decedent C. The 2 survivors continue as co-tenants in the account, along with the estate of the decedent D. The 2 survivors remain as joint tenants in the account; with the estate opening a separate account representing its interest

C. The 2 survivors continue as co-tenants in the account, along with the estate of the decedent When a joint account is opened as "tenants in common," each tenant specifies a percentage ownership interest. If one of the tenants dies, his or her share of the account belongs to his or her estate, and the estate assumes the position that the deceased person had in the account. The executor of the estate must present the proper papers to the brokerage firm before it is permitted to assume this position. There is no requirement to liquidate the account, nor to stop trading in the account, since each of the joint owners is separately authorized to trade that account.

To send a confirmation to a person holding a power of attorney designated by the customer, which statement is TRUE? A. The person holding the power attorney must request the sending of the duplicate confirmation in writing B. The registered representative must believe that the action is prudent C. The customer must request the sending of the duplicate confirmation in writing D. The manager must approve of the action in writing

C. The customer must request the sending of the duplicate confirmation in writing To send a confirmation to someone designated by a customer, the customer must make the request in writing. This is a purely clerical procedure, so no approval of the principal is required, nor is there a "prudent man" test. The written request must come from the customer, not the recipient of the confirmation. Remember, the account belongs to the customer, and all actions taken are at the direction of the customer.

Which statement is FALSE about a SIMPLE IRA? A. The maximum annual contribution is higher than for a Traditional IRA B. The contribution is made by the employee, who gets a salary reduction for the amount contributed C. The plan is available to any size employer D. The employer must make a matching contribution

C. The plan is available to any size employer SIMPLE IRAs are only available to small businesses with 100 or fewer employees. The plan is established by the employer and is much more simple to establish and administrate than a traditional pension plan (hence the name SIMPLE).

A married registered representative with 2 children has a client who is her father-in-law. The father-in-law wants to establish a Trust account for his son (the representative's husband) and his 2 grandchildren. The grandfather wants to appoint the representative as the trustee and pay her a trustee fee. Which statement is TRUE about this? A. The registered representative cannot act as the trustee because she is an immediate family member B. The registered representative cannot act as the trustee because she is being paid C. The registered representative cannot act as the trustee because of the conflict of interest D. The registered representative can act as the trustee without restriction

C. The registered representative cannot act as the trustee because of the conflict of interest The trustee over a trust account is a fiduciary who must manage the account in the best interest of the beneficiaries. It is an inherent conflict of interest for a registered representative handling an account to act as the trustee over that account. As an example of the potential conflict, is the representative effecting trades in the account to benefit the beneficiaries or is the representative effecting trades to generate personal commission income? Typically, a trustee is a bank or an investment adviser, both of whom are already under a fiduciary obligation. While it is "possible" for a registered representative to be a trustee in such an account (if there is written disclosure to the grantor of the trust (the father-in-law) of the nature of the conflict of interest and if the fees charged by the trustee are "reasonable"), most brokerage firms have an internal policy of prohibiting their representatives from being trustees in any accounts that they oversee.

An elderly client has a $400,000 portfolio that is conservatively invested in blue chip stocks and government bonds. He calls his representative and tells him that he wants to liquidate the entire portfolio and buy growth stocks. His son also has an account serviced by the same representative, so the representative calls the son to ask him about how his father is doing, to which the son responds: "Dad has not been himself lately." What step should the representative take? A. The representative should follow the customer's instructions, liquidate the portfolio, and buy growth stocks B. The representative should refuse to follow the customer's instructions C. The representative should contact the client and explain the risks inherent in the customer's strategy D. The representative should contact compliance and ask them to file a SAR

C. The representative should contact the client and explain the risks inherent in the customer's strategy This one is kinda cute! The basic rule for elderly clients that appear to be "out of it" is to escalate the matter to compliance and let them deal with it. However, a SAR is a Suspicious Activities Report, which is filed with the Federal Government if the firm is suspicious that a client is money laundering or supporting terrorism. So Choice D is incorrect!

Which of the following are risks that should be disclosed to customers when recommending the purchase of a CD sold through a brokerage firm? A. There is a substantial penalty for early withdrawal of funds B. If interest rates have fallen after issuance and the CD is sold prior to maturity, the investor may experience a loss of principal C. The secondary market is limited, so that sale prior to maturity can incur higher than normal transaction costs D. Brokered CDs do not qualify for FDIC insurance coverage if the issuing bank should fail

C. The secondary market is limited, so that sale prior to maturity can incur higher than normal transaction costs There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity). Most of these instruments are held to maturity, so the secondary market is very limited. Finally, brokered CDs qualify for FDIC insurance as long as the CD is titled in the customer's name.

A customer places a competitive bid through a primary dealer for $10,000,000 of 91-Day Treasury Bills at the weekly auction. The customer's bid wins. Settlement of the transaction will occur on the: A. Same day as the auction B. Business day following the auction date C. Thursday following the auction date D. Monday following the auction date

C. Thursday following the auction date The Federal Reserve conducts the Treasury Bill auctions weekly on Monday and Tuesday. The Bills are issued to the winning bidders, and must be paid for, on the Thursday immediately following the auction date

XYZ Corporation has declared a rights offering to stockholders of record on Wednesday, November 15th, payable on Tuesday, December 5th. Under the offer, shareholders need 5 rights to subscribe to 1 new share at a price of $24. Fractional shares can be rounded up to purchase 1 full share. The last day to buy XYZ shares before they go ex rights is: A. Friday, November 10th B. Monday, November 13th C. Tuesday, December 5th D. Wednesday, December 6th

C. Tuesday, December 5th For non-cash distributions, the ex date is set at the business day following the payable date. The payable date is Tuesday, December 5th, therefore the ex date is Wednesday, December 6th.

All of the following must be registered under state blue sky laws EXCEPT: A. Sales Representatives B. Broker-Dealers C. U.S. Government Issues D. Real Estate Investment Trust Issues

C. U.S. Government Issues Blue Sky Laws: commonly used name for Uniform Securities Act - the state laws (as opposed to the federal securities laws) that govern the securities industry. - Sales representatives, broker-dealers, and non-exempt issues (such as REITs) must be registered.

Real Estate Investment Trusts are not suitable as tax advantaged investments because they: A. have too many corporate characteristics B. do not qualify for conduit tax treatment under Subchapter M C. are not allowed to pass operating losses to shareholders D. are not allowed to pass capital gains to shareholders

C. are not allowed to pass operating losses to shareholders REITs are not tax shelter vehicles because they cannot distribute losses to shareholders through conduit tax treatment; they can only distribute income and capital gains through conduit tax treatment to shareholders.

Long positions in margin accounts are marked to market: A. continuously throughout the day B. based on the opening trade each day C. based on the closing trade each day D. based on the security's average value computed at market close

C. based on the closing trade each day Securities positions held in margin accounts, whether long or short, are marked to market daily, based on the closing price of the security (last reported trade)

All of the following statements are true regarding defined benefit plans EXCEPT: A. contributions made to the plan can vary from year-to-year B. employees with the highest salaries and the fewest years to retirement benefit the most C. benefits paid to employees consists of a tax-free return of capital and a taxable return of earnings D. actuarial tables are used to determine contribution rates for each employee

C. benefits paid to employees consists of a tax-free return of capital and a taxable return of earnings Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true.

If a foreign broker-dealer that does not have U.S. based operations wishes to solicit customers in the United States, the broker-dealer: A. may only deal with retail accounts B. is not required to establish an SEC-registered U.S. subsidiary C. can effect its business through another registered U.S. broker-dealer D. can effect its business directly as long as the foreign broker dealer only solicits accredited individuals.

C. can effect its business through another registered U.S. broker-dealer In order for a broker-dealer to solicit in the U.S., it must be registered with the SEC. For foreign broker-dealers, this means setting up an SEC-registered U.S. subsidiary; or establishing a correspondent relationship with a registered U.S. based broker-dealer. Note that there is no exception offered for foreign broker-dealers that only wish to offer exempt securities in the United States; nor is there an exemption for solicitation of accredited investors.

Over a period of 18 months, prices of goods and services decrease by 2%, and market interest rates decrease by 3%. This signals that the economy is in a period of: A. depression B. prosperity C. deflation D. recession

C. deflation When there is persistent inflation, asset prices increase and market interest rates rise. When there is persistent deflation, asset prices decrease and market interest rates fall. "Disinflation" is a decline in the inflation rate - so it means that the rate of inflation is decreasing. A recession is 2 consecutive quarters of GDP decline. A depression is 6 consecutive quarters of GDP decline.

All of the following statements are true regarding both mutual funds and variable annuities EXCEPT: A. the return to investors is dependent on the performance of the securities in the underlying portfolio B. the Investment Company Act of 1940 is the regulating legislation C. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made D. the underlying portfolios are managed

C. distributions from the underlying mutual fund are taxable to the holder in the year the distribution is made Dividends and capital gains in variable annuity separate accounts must be reinvested during the accumulation phase and build tax deferred. In contrast, mutual fund distributions are taxable. Both mutual funds and variable annuities are managed, are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain or loss potential.

All of the following are true statements about Individual Retirement Accounts EXCEPT: A. the earliest a taxpayer may make an annual contribution is January 1st of that tax year B. the latest a taxpayer may make an annual contribution is April 15th of the following tax year C. if the taxpayer obtained a 4 month filing extension, he can make the annual contribution up to the extension date D. annual contributions may be made even if the person is covered by another qualified retirement plan

C. if the taxpayer obtained a 4 month filing extension, he can make the annual contribution up to the extension date Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. IRA contributions can be made even if the employee is covered by another qualified pension plan, but may not be tax deductible in that case.

The purpose of OFAC (Office of Foreign Assets Control) is to: A. set higher margin requirements for foreign nationals that wish to invest in the United States B. monitor the activities of foreign investors in the U.S. markets C. impose economic sanctions against hostile foreign countries and groups D. monitor foreign currency inflows into the U.S. markets

C. impose economic sanctions against hostile foreign countries and groups The Department of Treasury's Office of Foreign Assets Control (OFAC) maintains a list of named countries, organizations, and individuals with whom anyone in the U.S. is prohibited from doing business. The "SDN" (Specially Designated Nationals) list includes such countries as Iran and North Korea and such organizations as the Al-Qaeda, as well as specified individuals associated with these countries and organizations. The intent is to place economic pressure on these groups by stopping U.S. investment in them. The SDN list must be checked before opening an account for a foreigner or foreign entity.

The separate account that the insurance company maintains for a variable annuity is: A. directly invested in common stocks B. invested in Legal List securities only C. invested in designated mutual funds D. invested in U.S. Government guaranteed securities

C. invested in designated mutual funds The separate investment account buys shares of a designated mutual fund. The performance of the mutual fund shares held in the separate account determines the amount of the annuity to be received.

Intangible drilling costs consist of: A. depreciation of real property used in connection with the oil and gas program B. depletion of the mineral rights cost on either the "cost" or "percentage" method C. labor, fuel, rental and materials expenses, with no salvage value D. management fees paid to the general partner during the drilling period

C. labor, fuel, rental and materials expenses, with no salvage value Intangible drilling costs are 100% deductible as drilled, and represent the costs of drilling holes in the ground to find oil and gas reserves. These costs include drilling equipment rental fees, labor, fuel, materials, etc. Once the holes are drilled, there is no residual value to these costs, hence they are termed "intangible."

A municipal variable rate demand note is a: A. short term issue issued at short-term interest rates B. short term issue issued at long-term interest rates C. long term issue issued at short-term interest rates D. long term issue issued at long-term interest rates

C. long term issue issued at short-term interest rates A municipal variable rate demand note is a long-term municipal security because it has no stated maturity, but it is issued at short-term (lower) interest rates, because the holder has the right to "put" the bond to the issuer at par at each interest payment date. The interest rate is reset, usually weekly at the interest payment date, to an indexed rate for the next week. Thus, the interest rate will vary. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.

Commercial Paper is a: A. money market instrument subject to the Securities Act of 1933 B. capital market instrument subject to the Securities Act of 1933 C. money market instrument exempt from the Securities Act of 1933 D. capital market instrument exempt from the Securities Act of 1933

C. money market instrument exempt from the Securities Act of 1933 Commercial paper is a money market instrument issued by corporations. It is an exempt security under the Securities Act of 1933 as long as its maturity does not exceed 270 days and can be sold without a prospectus.

The Securities Act of 1933 is primarily concerned with registration of: A. broker-dealers B. exempt issues C. non-exempt issues D. self-regulatory organizations

C. non-exempt issues The Securities Act of 1933 requires that new issues that are not exempt from the Act be registered with the SEC. Thus, the 1933 Act is concerned with the primary (new issue) market. The Securities Exchange Act of 1934 consists of a variety of rules covering the trading (secondary) market. It requires the registration of broker-dealers and self-regulatory organizations (the exchanges).

The essential difference between an open end fund and closed end fund is that a(n): A. open-end fund is managed; while a closed-end fund is not managed B. closed-end fund is managed; while an open-end fund is not managed C. open-end fund has a different capital structure than a closed-end fund D. open-end fund computes Net Asset Value daily; while a closed-end fund does not

C. open-end fund has a different capital structure than a closed-end fund Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both open-end and closed-end funds compute Net Asset Value per share daily.

The date that SIPC uses to value securities for purposes of insurance coverage limits is the date that the: A. securities were purchased by the customer B. securities were sold by the customer C. petition was made in court for a trustee appointment D. certificates are retrieved from Depository Trust

C. petition was made in court for a trustee appointment The "valuation date" for coverage purposes in an SIPC liquidation is the date that SIPC files in court to be the trustee in the bankruptcy of the failed broker-dealer.

A customer has placed an order to sell 500 shares of XYZ stock, which the customer is holding in a safe deposit box. When the certificates are received by the brokerage firm, four 100 share certificates have been signed by the customer, and one 100 share certificate is unsigned. The proper procedure is to: A. return all certificates to the customer by registered mail with instructions that they must all be signed B. return only the unsigned certificate to the customer by registered mail with instructions that it must be signed C. retain all the certificates and send the customer a stock power with instructions that it must be signed D. retain and deliver all the certificates, since they are acceptable once they have been guaranteed by the broker-dealer

C. retain all the certificates and send the customer a stock power with instructions that it must be signed A stock power represents a legal transfer document, when accompanied by the stock certificate. The proper procedure is to send the customer a stock power for his signature. When this is returned to the broker-dealer, it is attached to the unsigned certificate, and makes that certificate a "good delivery." While the customer could be returned the unsigned certificate (Choice B), this is not the best answer. It is imprudent to send stock certificates through the mail. This can be avoided by using a stock power instead.

All of the following persons can contribute to a 403(b) plan EXCEPT: A. professor at a university B. nurse at a hospital C. student at a college D. secretary at a foundation

C. student at a college 403(b) retirement plans are established by non-profit institutions for their employees. Employees of schools, universities, municipalities, hospitals, etc, would fall under this type of plan. Students at a university are not employees of the institution and do not qualify.

Execution of a trade routed to an ECN is: A. guaranteed since the ECN is a market maker in the security B. only guaranteed during regular market hours C. subject to the "best execution" rule D. assured only for trades below 10,000 shares

C. subject to the "best execution" rule ECNs - Electronic Communications Networks - do not act as dealers - only as agents, earning a fee on each successful transaction. Thus, there is no assurance that an order placed on an ECN will be filled. All orders sent by broker-dealers to any public marketplace are subject to the "best execution rule" - that is, the broker-dealer can only direct the order to the market posting the best price at that moment. If a number of markets are posting the same "best" price, then the broker-dealer can choose any of those markets to get the order - and can use "payment for order flow" as a deciding factor in the order routing.

Section 529 Plans are established by: A. the IRS B. the SEC C. the State D. FINRA

C. the State State sponsored education savings programs are "Section 529" plans. What is Section 529? - a state-sponsored education savings plan that allows non-tax deductible contributions to be made to a trust to pay for a beneficiary's qualified higher education expenses. Maximum annual contributions and funding are set by each state.

Common stockholders have all of the following "rights" EXCEPT: A. the right to transfer ownership B. the right to inspect the company's books and records C. the right to receive dividends in any profitable quarter D. the right to vote if the corporation wishes to issue convertible bonds

C. the right to receive dividends in any profitable quarter Dividend payout is decided by the Board of Directors, so merely having a profitable quarter will not assure a payment. Common shareholders have the right to transfer ownership (the shares are "negotiable"); the right to inspect the books and records (mainly through financial statements that are required to be sent to shareholders); the right to maintain proportionate ownership (also known as the pre-emptive right); and the right to vote if the corporation wishes to issue convertible bonds (because if the bonds are converted into shares of common stock, each shareholder's ownership interest is diluted).

A firm holds a joint cash account for a husband and wife. The wife calls the registered representative and says "Sell 500 shares of ABC out of the account immediately and send a check for the proceeds made out to my name." The representative should inform the wife that: A. her instructions will be followed exactly B. the transaction requires approval of the husband since it is a joint account C. the trade can be performed but the check must be made out to both names on the account D. a written power of attorney must be on file to perform the trade

C. the trade can be performed but the check must be made out to both names on the account Any party in a joint account can enter orders. However, any checks drawn on the account must be made out to all names on the account.

All of the following are characteristics of index option contracts EXCEPT: A. they are generally issued in European style B. exercise settlement results in a delivery of cash C. they can only be traded at expiration D. trade settlement is next business day

C. they can only be traded at expiration Index option contracts, such as the SPX (Standard and Poor's 500 Index Option) allow an investor to bet on broader market movements, as opposed to individual stock price movements. They are also useful to institutions that wish to hedge their portfolios, or that wish to generate extra income against their portfolios. They are more "potent" than individual stock options, because the value of the S&P 500 Index is so high (around 2,700), so in theory 1 contract covers 100 x 2,700 = $270,000 worth of stock. So, in theory, for an institution that wishes to hedge a portfolio, fewer contracts need to be purchased (lower cost hedging). Unlike stock options, index options are generally issued European style (exercise can only occur at expiration, not before). Exercise settlement is in cash, unlike stock options where exercise settlement results in a delivery of stock. Like stock options, index options can be traded anytime, and trade settlement is next business day for both

Which statement about 403(b) Plans is TRUE? A. Contributions grow tax free B. Contributions are tax deductible to the employee C. These plans are available to employees of any organization D. These plans are available to for-profit organization employees only

Contributions are tax deductible to the employee

Coverdell ESA vs. UTMA (Uniform Transfers to Minors Act) in regards to high earning individuals

Coverdell is not available to high earners. UTMA is available to everyone with max contribution being 15k/year (non-tax deductable)

Futures contracts trade on the: A NYSE B AMEX (NYSE American) C CBOE D CBOT

D CBOT one of the world's oldest futures and options exchanges

Who is responsible for preparing the Official Statement for a new municipal bond offering? A Issuer B Bond counsel C Underwriter D Underwriter's counsel

D Underwriter's counsel

John Jones has an individual cash account; a joint margin account with his wife; a custodial account for his minor daughter; and a custodial account for his minor son; all at the same brokerage firm. If the firm should fail, Securities Investor Protection Corporation will cover: A all of the accounts as a single account B the individual and joint accounts as one account; and the custodial accounts as one account C the individual and joint accounts as one account; and each custodial account separately D each account separately

D each account separately Securities Investor Protection Corporation coverage is applied "per customer name." If a customer has an individual cash account, that is one name; the joint margin account is a second name; the custodian account for the daughter is the third name; and the custodian account for the son is the fourth name.

A closed end fund has a Net Asset Value of $10 per share. The minimum price at which the shares can be purchased is: A $10 B $10 plus a commission C market price D market price plus a commission

D market price plus a commission

Typically, a dual listed stock is one that trades in: A the First and Third Markets B the Second and Third Markets C the Third and Fourth Markets D multiple First Markets

D multiple First Markets

A foreign broker-dealer that is not SEC registered is permitted to deal with clients in the United States: A under no circumstances B only if the clients are accredited investors C only if the clients are sophisticated D only if the clients are major institutional investors

D only if the clients are major institutional investors

A corporation's capitalization is: 1st Mortgage Bonds 9% M '45 $10,000,000 Preferred Stock 8% 5,000,000 Common Stock ($.10 par) 200,000 Capital in Excess of Par 800,000 Retained Earnings 6,000,000 The company's common stock ratio is: A. 3% B. 14% C. 27% D. 32%

D. 32% The formula for the common stock ratio is: $200,000 + $800,000 + $6,000,000 $7,000,000 ------------------------------------------ = -------------- = 32% $7,000,000 + $5,000,000 + $10,000,000 $22,000,000

A social security number or tax identification number is needed to open a securities account for: A. a U.S. individual only B. both U.S. and foreign individuals only C. U.S. individuals and corporations only D. All of the above

D. All of the above To open an account for a U.S. resident, a social security number is needed; to open an account for a U.S. corporation, the tax identification number is needed. If a foreign resident or foreign corporation wishes to open an account, then that person must have a U.S. tax identification number.

Julia and Jim are the parents of twins who are just turning 4 years old. They want to open a custodial account for each under the Uniform Transfers to Minors Act to start saving for their school expenses. Who can be the custodian in this type of account? A. Only Julia and Jim as joint custodians B. Only Julia or Jim as individual custodian C. Any relative of each child as individual custodian D. Any adult, related or unrelated, as individual custodian

D. Any adult, related or unrelated, as individual custodian Any adult can be a custodian under either UGMA (Uniform Gifts to Minors Act) or UTMA (Uniform Transfers to Minors Act). The custodian does not need to be related to the minor. The registration on the account must be "One Custodian for One Minor." There cannot be more than 1 custodian, nor can there be more than 1 child, named on the account registration.

Which statement is FALSE about margin rules? A. New issues are not marginable for 30 days B. Regulation T has rules covering both cash accounts and margin accounts C. FINRA margin rules can be more restrictive than Regulation T requirements D. Broker-dealers can determine which securities are marginable

D. Broker-dealers can determine which securities are marginable The Federal Reserve determines which securities are marginable. - FINRA margin rules can be more restrictive than Regulation T (for example, FINRA sets a minimum maintenance margin of $5 per share to short a $5 stock; while Regulation T only requires 50% margin on this transaction)

Which first market does NOT trade stocks? A. NYSE B. AMEX (NYSE American) C. PHLX D. CBOT

D. CBOT The NYSE trades stocks. The AMEX and PHLX trade stocks and stock options. (The AMEX is a wholly owned subsidiary of the NYSE, and it has renamed its equities market "NYSE American," while its options market is still called the AMEX.) The CBOT - Chicago Board of Trade - is not a securities exchange. Rather, it is a futures market.

Under FINRA rules, a registered representative must obtain and retain all of the following information relating to the customer's account EXCEPT: A. Customer Physical Address B. Country of Citizenship C. Financial Status D. Customer Email Address

D. Customer Email Address FINRA rules require that a registered representative obtain a customer's name and address (makes sense!) Country of citizenship is required as well, since if the customer is a non-U.S. citizen, a copy of the customer's passport must be obtained and the customer must have a U.S. tax identification number. Customer financial information must be obtained to perform a suitability determination under the requirements of the "Know Your Customer" rule. An e-mail address would be helpful but it's not required.

Which index is the narrowest measure of the market? A. Wilshire Index B. Value Line Index C. NYSE Composite Index D. Dow Jones Industrial Average

D. Dow Jones Industrial Average The Dow Jones Industrial Average consists of 30 stocks (principally NYSE listed issues). This is the narrowest measure of the market. The Value Line Index is broader, including 1,700 issues. The NYSE Composite Index consists of the approximately 2,500 issues listed on the NYSE. The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public."

Which agency's securities are directly backed by the U.S. Government? A. FNMA B. FHLMC C. FHLB D. GNMA

D. GNMA Only GNMA - Government National Mortgage Association - issues pass through certificates that are directly backed by the U.S. Government. FNMA - Federal National Mortgage Association - also issues pass through certificates, but these are implicitly backed - not directly backed. FHLMC - Federal Home Loan Mortgage Corporation and FHLB - Federal Home Loan Banks - do not issue pass through certificates and are implicitly backed.

All of the following statements are true about Health Savings Accounts EXCEPT: A. HSAs are only appropriate for those individuals covered by high-deductible health insurance plans B. HSAs can be set up to include dependents of the covered individual C. HSA contributions are tax deductible D. HSA contributions are subject to phase-out when an individual's income exceeds $250,000

D. HSA contributions are subject to phase-out when an individual's income exceeds $250,000 Health Savings Accounts (HSAs) were first authorized by Congress starting in the beginning of 2004. They are a tax advantaged medical savings account that is owned by the individual. They are established by corporate employers as part of their health insurance plans, and only plans that have a high deductible can set up HSAs for employees. More employers are adopting these high-deductible plans coupled with HSAs as a way of reducing, or slowing the growth of, their health insurance expenses. The HSA permits the employer or employee to make a deductible contribution in 2019 of up to $3,500 for a single individual, or $7,000 for a family, to the account. The contribution amount is indexed for inflation annually. The account is invested in a similar manner to an IRA. It grows tax-deferred and withdrawals to pay for qualified medical expenses are tax-free. There are no income phase out rules for HSAs.

Which statement is TRUE under FINRA rules? A. The maximum 12b-1 fee is limited to .25% if the fund charges the maximum 8.5% up-front sales charge B. The maximum combined 12b-1 fee and up-front sales charge is 9.25% C. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 8.50%. D. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25%

D. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% 12b-1 fees are permitted under SEC Rule 12b-1. If a fund adopts a 12b-1 plan it may charge its existing shareholders for the cost of soliciting new investment to the fund. For example, if you see a television or web advertisement for a mutual fund, it is being paid for by 12b-1 fees. The "cost" of soliciting new investment also includes compensation to registered representatives selling the fund shares. The maximum annual 12b-1 fee is .75% of net assets per year under FINRA rules. If a fund imposes a 12b-1 fee, FINRA limits to maximum up-front sales charge to 7.25% instead of 8.50%.

All of the following are variable annuity payment options EXCEPT: A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor D. Joint Tenants with Rights of Survivorship

D. Joint Tenants with Rights of Survivorship Annuity payment options include a life annuity; life annuity with a period certain (which pays for a minimum guaranteed period, regardless); and a joint and last survivor annuity (which covers 2 lifespans, such as both a husband and wife). Joint tenants with rights of survivorship is an ownership option for a joint account, where each tenant 100% owns the account (typical for a husband and wife).

All of the following are types of real estate direct participation programs EXCEPT: A. New Construction Real Estate Limited Partnership B. Existing Housing Real Estate Limited Partnership C. Raw Land Real Estate Limited Partnership D. Mortgage Real Estate Investment Trust

D. Mortgage Real Estate Investment Trust Direct participation programs allow the partners to directly participate in income and loss. Types of RELPs (Real Estate Limited Partnerships) are: New Construction; Existing Housing; Raw Land: and Condominium investments. Real Estate Investment Trusts (REITs) are not direct participation programs. These are stock companies that invest in real estate in a closed-end investment company form. These investment companies do not allow for "flow-through" of loss to shareholders.

In a corporate liquidation, the priority of claim to corporate assets is: A. Unpaid wages and taxes, debenture holders, mortgage bond holders, preferred stockholders B. Unpaid wages and taxes, preferred stockholders, debenture holders, mortgage bondholders C. Mortgage bond holders, debenture holders, unpaid wages and taxes, preferred stockholders D. Mortgage bond holders, unpaid wages and taxes, debenture holders, preferred stockholders

D. Mortgage bond holders, unpaid wages and taxes, debenture holders, preferred stockholders The priority of claim to corporate assets in a liquidation is: Secured creditors, unpaid wages and taxes, trade creditors, unsecured bondholders, preferred stockholders, common stockholders.

Under MSRB rules, which of the following documents, if prepared, must be sent to the purchaser of a new issue municipal bond? A. Prospectus B. Legal Opinion C. Official Notice of Sale D. Official Statement

D. Official Statement The MSRB requires that all purchasers of new issue municipal bonds receive a Final Official Statement, if one has been prepared. If the Final is not going to be prepared, but a Preliminary Official Statement is available, then this document must be sent.

Regarding bonds with put options, which statement is TRUE? A. Exercise of the put is at the option of the issuer B. Exercise of the put guarantees the investor gets back his or her purchase price. C. Yields on bonds with put options are higher than similar bonds without this feature D. Put features are most likely to be used when rates rise.

D. Put features are most likely to be used when rates rise. Put options are exercisable at the option of the bondholder (not the issuer). Because the put option removes some or all of the market risk from the bond if interest rates rise, this feature is valued by bondholders, who will accept lower yields on bonds having this option. The put feature can permit the owner to put the bond back to the issuer at par, or at a fixed price that is lower than par, therefore it does not guarantee that the investor will get back his or her purchase price.

U.S. Government Agency securities are: A. Quoted in 1/8ths and traded with accrued interest computed on an actual day month / actual day year basis B. Quoted in 1/8ths and traded with accrued interest computed on a 30 day month / 360 day year basis C. Quoted in 1/32nds and traded with accrued interest computed on an actual day month / actual day year basis D. Quoted in 1/32nds and traded with accrued interest computed on a 30 day month / 360 day year basis

D. Quoted in 1/32nds and traded with accrued interest computed on a 30 day month / 360 day year basis

What can be given to a client during the 20-day cooling off period for a new securities offering? A. Prospectus B. Advertisement C. Recommendation D. Red Herring

D. Red Herring When a new issue is "in registration" during the 20-day cooling off period, the SEC reviews the filing for full and fair disclosure. This is the "quiet period" during which the issue cannot be advertised, recommended or sold. The only permitted communication is a preliminary prospectus, also called a red herring (because it has a red disclaimer stating that it is not an advertisement). The red herring does not include the final POP, but it can have an estimated price range. The final POP is not set until the very end of the 20-day cooling off period.

All of the following statements are true regarding Government National Mortgage Association pass-through certificates EXCEPT: A. GNMA securities are guaranteed by the U.S. Government B. Dealers typically quote GNMA securities on a basis point differential to equivalent maturity U.S. Government Bonds C. Credit risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds D. Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds

D. Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds GNMA securities are guaranteed by the U.S. Government. Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. Governments. Reinvestment risk is greater for Ginnie Maes than for U.S. Governments. Reinvestment risk is the risk that over a long-term investment time horizon, interest rates are dropping and payments received from investments are reinvested at lower and lower rates. Ginnie Mae pass through certificates make monthly payments that must be reinvested, as opposed to U.S. Governments which only make semi-annual payments. Furthermore, if market interest rates drop, the homeowners in the mortgage pool prepay their mortgages, and these early principal repayments must be reinvested, again at lower rates.

In order to render an opinion on a new municipal bond issue, the bond counsel will examine all of the following EXCEPT: A. Municipal statutes B. State constitution and amendments C. Tax code and interpretive regulations D. Securities Act of 1933

D. Securities Act of 1933 The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he or she examines municipal statutes, state laws, judicial edicts, and tax regulations. Municipal securities, as well as Government and Agency securities, are exempt from the provisions of the Securities Acts (with the exception of these Acts' broadly written anti-fraud provisions). Thus, these would not be examined by the bond counsel in connection with rendering a legal opinion

The bond counsel will review all of the following sources to ascertain if a municipal issuer has the authority to sell bonds EXCEPT: A. State constitution and judicial opinions B. Validity of the signatures of the issuer's representatives C. Enabling legislation and local statutes D. Securities Exchange Act of 1934

D. Securities Exchange Act of 1934 The bond counsel will review several sources to ascertain if a municipal issuer has the authority to sell bonds. The state constitution which gives those powers; any enabling legislation which affects the issuance of new bonds; any court opinions that are relevant; and the counsel will ascertain that the issuer's representatives are authorized to sell the bonds. Municipal bonds are exempt securities and not subject to the Securities Act of 1933 or the Securities Exchange Act of 1934, with the exception of the anti-fraud provisions.

All of the following statements are true regarding the U.S. securities markets EXCEPT: A. The Federal Reserve Board decides which securities can be traded on margin B. FINRA has regulatory authority over the U.S. securities markets and market participants in the trading of all non-exempt securities C. The Securities and Exchange Commission has regulatory authority over the U.S. securities market and market participants D. The MSRB has regulatory authority over the U.S securities markets and market participants in the trading of all exempt securities

D. The MSRB has regulatory authority over the U.S securities markets and market participants in the trading of all exempt securities Both FINRA and the SEC regulate the U.S. securities markets. FINRA is the SRO (Self Regulatory Organization) that regulates the markets under SEC oversight. The Federal Reserve decides which securities are marginable, since it has power over margin rules given under the Securities Exchange Act of 1934. The MSRB only write regulations covering the trading of municipal bonds - not U.S. Government or Agency bonds - so the statement that the MSRB regulates trading in all exempt securities is untrue.

Which procedure is NOT required for discretionary accounts? A. A written power of attorney must be obtained from the customer before discretionary trades are effected B. Every discretionary order ticket must be approved promptly by the manager or principal C. Every order ticket initiated by the registered representative must be marked "discretionary" D. The customer must be contacted before each discretionary trade is executed

D. The customer must be contacted before each discretionary trade is executed Discretionary Account: Requires a written power of attorney, an account in which an investor gives the broker authority to choose the amount and/or the security to be traded in the account.

Which statement is TRUE regarding rights? A. Rights give the holder the long term option to buy stock B. Rights typically give the holder a 6-9 month option to buy stock C. The exercise price of a right is set at a premium to the stock's current market price D. The exercise price of a right is set at a discount to the stock's current market price

D. The exercise price of a right is set at a discount to the stock's current market price Rights are very short term options (about 1 or 2 months) that give existing shareholders the right to subscribe to new shares at a discount to the stock's current market price. Warrants give the holder the long term option to buy stock - they usually have a life of 5 years or so.They are attached by the issuer to preferred stock or bond offerings to make the deal more attractive to investors. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. Thus, for a warrant to have real value, the price of the common stock must subsequently rise in the market

An officer of an issuer has received restricted stock as part of her compensation package. If she wishes to sell some of the stock under Rule 144, which statement is TRUE? A. The officer can sell the stock immediately without restriction B. The officer can sell the stock within 90 days of purchase C. The officer can sell the stock within 6 months of purchase D. The officer can sell the stock within 90 days and 6 months of purchase

D. The officer can sell the stock within 90 days and 6 months of purchase In order to sell restricted stock under Rule 144, the stock must have been held fully paid, at risk, for at least 6 months. Once the 6 month holding period is cleared, a Form 144 can be filed, specifying the amount that can be sold over the next 90 days.

Which statement is TRUE when comparing a Life Annuity to a Life Annuity with Period Certain? A. Both annuities will cease when the person dies B. The Life Annuity is a safer choice since the Period Certain contract stops all payments when the stated period expires C. The periodic payment for a Life Annuity will be lower than the periodic payment for a Period Certain annuity D. The periodic payment for a Period Certain Annuity will be lower than the periodic payment for a Life Annuity

D. The periodic payment for a Period Certain Annuity will be lower than the periodic payment for a Life Annuity Because of the minimum guaranteed payment period offered by a period certain annuity, the monthly payment amount is lower than a simple life annuity (since the insurance company must pay for a minimum guaranteed time period).

A registered representative has prepared a research report about a new issue that is "in registration." Which statement is TRUE? A. The research report may be sent to any customer expressing an "indication of interest" B. The research report may be sent to any customer if it is accompanied by a preliminary prospectus C. The research report may only be sent to customers who have bought new issues within the preceding 12 months D. The research report may not be sent

D. The research report may not be sent Since this issue is "in registration," it is in the 20-day cooling off period. The only permitted written communications during this period are the red herring preliminary prospectus, and a tombstone announcement (which, in reality, is not published until the effective date). This research report cannot be sent, since it would be considered to be a prohibited "offer to sell" the securities.

What determines the purchase price of a share of a closed-end management company? A. The Board of Directors of the company B. The next computed NAV after the order is received C. The current bid price in the market where the security trades D. The supply and demand for the shares in the market

D. The supply and demand for the shares in the market Closed-end fund shares are listed and trade in the market like any other stock. They are negotiable securities and are not redeemable. Remember, it is open-end fund shares that are redeemable. When an order is placed to buy any share in the market, the customer pays the ask price. When a customer places an order to sell, the customer receives the bid (lower) price. Since this is an order to buy in the market, it is not filled at the bid - rather, it is filled at the ask price. So this becomes a economics question - what determines the price of anything in a marketplace - supply and demand!

A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statement is TRUE? A. There will be no tax liability B. There will be regular tax liability, but no 10% penalty tax liability C. There will be a 10% penalty tax liability, but no regular tax liability D. There will be both regular tax liability and a 10% penalty tax liability

D. There will be both regular tax liability and a 10% penalty tax liability Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full.

An agent is who resides in State A, and whose customers are in State A, is registered in State A under the Uniform Securities Act. Which statement is TRUE if this individual wishes to do business with retail clients in State B? A. Because this individual is registered in State A, he or she does not have to be registered in State B to do business with retail clients who reside in State B B. This individual only has to be registered in State B if he or she contacts more than 5 retail clients in that State C. This individual only has to be registered in State B if he or she visits the client in State B D. This individual must be registered in State B

D. This individual must be registered in State B State "blue sky" laws require that agents (representatives) be registered in their state of residence, and also in each state in which they solicit retail business or do business. Each state typically requires an annual registration fee for the rep to do business in the state - payable at the end of each year. This allows each state to know who is conducting business in that state, and more importantly, allows the state to collect annual fee revenue!

All of the following paperwork is customarily needed to open a margin account EXCEPT: A. Customer's agreement B. Loan consent agreement C. Credit agreement D. Trading authorization

D. Trading Authorization To open a margin account, the customer must sign a margin agreement (also known as the customer's agreement), which pledges the securities in the account as collateral for the margin loan. The credit agreement explains how interest is charged on the loan. The loan consent agreement permits the broker to lend out the customer's securities for short selling by other customers of the firm. These three documents are needed to open the account. A third party trading authorization is signed by the customer only if he or she wishes to allow someone else to trade the account.

Which of the following annuity payment options will pay the estate of the annuitant if the full value of the account was not received? A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor Annuity D. Unit Refund Annuity

D. Unit Refund Annuity If the holder of a unit refund annuity dies before receiving the full investment value from the separate account, his or her estate gets a "refund" of the remaining value.

All of the following recommendations are "red-flags" that are usually unsuitable for seniors EXCEPT: A. Variable annuities B. Structured products C. Mortgaging home equity for investment purposes D. Using retirement savings to invest in Ginnie-Maes

D. Using retirement savings to invest in Ginnie-Maes FINRA has stated that it does not prohibit any particular recommendation to a senior citizen as long as it is suitable, however certain types of recommendations are "red-flags" - meaning that the firm must be able to strongly defend such a recommendation to a senior citizen. Included on the list of "no-no's" are recommendations to seniors to: purchase variable annuities, equity indexed annuities, and real estate limited partnerships purchase variable life settlements purchase complex structured products such as CDOs (Collateralized Debt Obligations) mortgage their residence to obtain funds for investment purposes use retirement savings, including early withdrawals from IRAs, to invest in high-risk investments Ginnie-Maes are conservative investments that may be suitable for a senior investor.

Which statement is TRUE about preferred stock? A. When interest rates rise, preferred stock prices rise B. When interest rates fall preferred stock prices fall C. Preferred stock is unaffected by interest rate swings D. When interest rates rise, preferred stock prices fall

D. When interest rates rise, preferred stock prices fall Preferred stock is a fixed income security, and hence, when market interest rates move, the only way for the yield on the security to adjust to the market is to have the price change. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security.

A portfolio that only holds the securities of a few different issuers has: A. no risk B. systematic risk C. nonsystematic risk D. both systematic and nonsystematic risk

D. both systematic and nonsystematic risk The basic idea of diversification of a portfolio is that it reduces risk. If a portfolio consists of only a few positions, an adverse event affecting one of the positions can result in a big loss. If the portfolio consists of a broad range of positions, an adverse event affecting only a single position will not have as big a negative impact. A portfolio that is fully diversified still has risk. It is said to only have "systematic" risk, which is the same as market risk. If the overall market drops, the portfolio will likely drop by a similar percentage. A portfolio that is not fully diversified is said to have both "systematic" and "nonsystematic" risk. As more and more positions are added to the portfolio, the "nonsystematic risk" is diversified away, leaving the portfolio only with "systematic" risk.

An order ticket to sell may be marked "long" in all of the following circumstances EXCEPT the customer: A. is long a call on that stock that has been exercised B. is short a put on that stock that has been exercised C. holds fully-paid convertible preferred stock of that issuer and has given instructions to convert D. holds fully paid warrants to buy the underlying stock in custody of the broker-dealer

D. holds fully paid warrants to buy the underlying stock in custody of the broker-dealer -A customer is "long" if the customer owns an option, right or warrant on that stock and has exercised (so we know that the stock is actually coming in). -Similarly, if a customer is short a put and it has been exercised, we know that the customer will be receiving the stock - so the customer is "long." -A customer is "long" if the customer owns a convertible security (into that stock) and has given irrevocable instructions to convert. -If a customer simply owns a right, call, or warrant; is short a put; or owns a convertible; this is not considered to be "long" the underlying stock until the action is taken to turn that instrument into that stock.

The Third Market trades: A. listed and unlisted stocks between institutions without the use of a broker B. listed securities on the trading floors of regional exchanges C. unlisted securities over-the-counter D. listed securities over-the-counter

D. listed securities over-the-counter The "Third Market" is over-the-counter trading of exchange listed securities. It can be viewed as a competitor for the exchanges as a place to execute trades of exchange listed stocks. Third Market Makers are OTC firms such as Jefferies and Co. and Weeden and Co. that stay open 24 hours a day and capture much of their trading volume in NYSE-listed issues when the NYSE is closed.

An individual who has successfully passed the SIE exam may: A only sell equity securities B only sell securities that are either issued or guaranteed by the U.S. Government or its wholly-owned agencies C only sell redeemable securities of investment companies registered under the Investment Company Act of 1940 D not sell any securities until successfully competing the appropriate representative qualification exam

D. not sell any securities until successfully competing the appropriate representative qualification exam The SIE is a "corequisite exam." In order to be licensed as a registered representative, the SIE must be passed; and the appropriate representative qualification exam must be passed (e.g., Series 6 or Series 7).

A corporation issues a stock dividend. Which statement is TRUE? A. Total stockholders' equity will increase B. Total stockholders' equity will decrease C. Market value per common share will increase D. Par value per common share will remain the same

D. par value per common share will remain the same If a corporation declares a stock dividend, the market price of the stock will fall since there will be additional shares outstanding. The stock dividend is appropriated from retained earnings (reducing retained earnings) and used to increase the number of common shares outstanding. Par value per share remains the same, but since there are more shares outstanding, aggregate par value increases (as does capital in excess of par). The dollar decrease in retained earnings exactly equals the increase in common at par, and capital in excess of par, so the net result is a "wash," with no dollar change in total stockholders' equity.

A serial bond is one that: A. makes its interest payment only at maturity B. repays the principal amount only at maturity C. makes no interest payments D. repays principal periodically over its life

D. repays principal periodically over its life The most basic type of bond structure is a "term" bond issue. All of the $1,000 par bonds are issued on the same date and are redeemed on the same date in the future. From the issuer's standpoint, the bond pays interest only over its life, and then repays all principal at maturity. Generally, only the safest issuers can sell term bond issues. For example, all Treasury debt has a term structure. In contrast, a serial bond issue is one where all the bonds are issued on the same date, and then a portion of the issue matures "serially" - usually yearly. Thus, the issuer is paying annual interest and is also repaying a portion of principal each year. A serial structure ensures that the issuer is paying down principal over time (similar to a mortgage repayment schedule). This can make a bond issue more marketable, because the bondholders know that the issuer must budget to repay principal yearly, aside from paying interest on the outstanding bonds. Most municipal General Obligation bonds are a serial structure.

Rule 144 applies to: A purchases of control stock only B purchases of restricted stock only C sales of control stock only D sales of both control and restricted stock

D. sales of both control and restricted stock

A customer owns a long-term negotiable CD. If the customer wishes to tender the CD prior to maturity, the registered representative should inform the customer that: A. a prepayment penalty will be charged B. he or she will receive par value of the principal plus accrued interest C. the CD may not be redeemed prior to maturity D. the customer will receive the market value plus accrued interest

D. the customer will receive the market value plus accrued interest If the customer redeems prior to maturity, the customer will receive the market value of the CD at that point in time. If market interest rates have risen, the CD value will be lower than par.

Under MSRB rules, confirmation disclosure for bonds sold at a discount or premium must include all of the following EXCEPT: A. the yield at which the transaction was effected and the resulting dollar price B. whether the securities are callable C. capacity in which the broker-dealer acted D. the rating assigned to the bond by a national ratings agency

D. the rating assigned to the bond by a national ratings agency Confirmation information that must be shown for municipal bonds traded at a discount or premium from par includes the yield at which the transaction was effected (which will differ from the stated rate of interest because the bonds were not traded at par) and the resulting dollar price; whether the securities are callable, with disclosure of "in-whole" call dates; the capacity in which the broker-dealer acted (either as "agent" or "principal"); and the total dollar amount of the transaction. There is no requirement to disclose the bond's rating on the confirmation.

What is Default Risk?

Default risk is the chance that a company or individual will be unable to make the required payments on their debt obligation

Options Agreement vs. Options Disclosure Agreement

Options Agreement: an agreement drawn up after a customer is approved for options trading that reconfirms the suitability information given by the customer; and which states the types and levels of options transactions that the customer can perform in the account based upon that suitability determination. The customer must sign and return the options agreement no later than 15 days after the account is opened Options Disclosure Agreement: a document that explains the basic risks, uses, and important rules of options investing. It is required that a broker-dealer to send the Options Disclosure Document to the customer, at or before, the opening of an options account

What Is Participating Preferred Stock?

Participating preferred stock is a type of preferred stock that gives the holder the right to receive dividends equal to the customarily specified rate that preferred dividends are paid to preferred shareholders, as well as an additional dividend based on some predetermined condition. Participating preferred stock can also have liquidation preferences upon a liquidation event.

What is Prepayment Risk?

Prepayment risk is the risk involved with the premature return of principal on a fixed-income security. When principal is returned early, future interest payments will not be paid on that part of the principal, meaning investors in associated fixed-income securities will not receive interest paid on the principal

What is a fiduciary account?

a company, trust or person who holds or invests funds for someone else, acting in the best interest of the account owner. Trust, guardian, and custodian accounts are all fiduciary accounts.

(T/F) REIT's are liquid

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A municipal syndicate member takes a 10% participation in a $2,500,000 underwriting in a Western Account. At the termination of the offering, this member sold its entire participation, but $250,000 of bonds remains unsold in the syndicate account. The member's remaining liability is: A. 0 B. $25,000 C. $225,000 D. $250,000

A. 0

Under Rule 147, intrastate offerings cannot be resold out of state for how long after the initial sale date? A. 6 months B. 12 months C. 18 months D. 24 months

A. 6 months Rule 147 requires that resale of securities sold under the intrastate exemption be restricted to intrastate only for 6 months following first sale. Thereafter, they can be resold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."

A customer wishes to invest in corporate bonds that offer minimum market risk. Which recommendation is appropriate? A. Bonds with short term maturities B. High yield bonds C. Guaranteed bonds with medium term maturities D. Bonds with long term maturities and high call premiums

A. Bonds with short term maturities Market risk for a bondholder is the risk of rising interest rates forcing the price of a bond to drop. As interest rates rise, the price of a long term bond falls faster than that of a short term bond. To avoid market risk, a bondholder would want to invest in the shortest maturity possible.

The trading of securities on regional stock exchanges is most similar to trading, as it takes place, on the: A. NYSE B. CBOE C. NASDAQ D. MSRB

A. NYSE -The regional stock exchanges use a Specialist (Designated Market Maker) system for trading similar to the NYSE. -NASDAQ uses a system of competing market makers, instead of a single Specialist/DMM in each security. -The CBOE uses a system similar to that of the Chicago Board of Trade, where the Specialist market maker function is handled by a Market Maker; while the Specialist book function is handled by an Order Book Official (OBO). -The MSRB does not trade municipal securities. Trading of municipal securities is conducted over-the-counter and is supervised by FINRA (FINRA audits broker-dealers for compliance with MSRB rules).

Payment of interest and principal on Ginnie Mae pass through certificates is: A. backed by the faith and credit of both GNMA and the U.S. Government B. backed by the faith and credit of GNMA only C. backed by the faith and credit of both Federal and state governments D. backed by the faith and credit of the U.S. Government only

A. backed by the faith and credit of both GNMA and the U.S. Government Ginnie Mae Pass through certificates are backed by the faith and credit of both GNMA and the U.S. Government.

All of the following are terms associated with preferred stock EXCEPT: A. renewable B. cumulative C. negotiable D. convertible

A. renewable Preferred stock is not a renewable security; there is no stated maturity or redemption date. Preferred stock is a negotiable security, meaning that it is traded. Preferred stock can be callable, cumulative, and convertible.