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151 Cards in this Set

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A municipality issues an original issue discount bond. If an investor buys the bond when it is first issued and holds the bond until it matures, what is the tax treatment on the discount?
a. The discount is treated as a long-term capital gain.
b. The discount is treated as ordinary income.
c. The discount is treated as interest income and subject to federal tax.
d. The discount is treated as part of the interest income and exempt from federal taxes.
D
If a municipality issues an original issue discount bond and the investor holds the bond until it matures, the discount is treated as part of theinterest income and is exempt from federal taxes. If the bond is sold prior to maturity, then an adjusted cost basis is determined and compared to sale proceeds to determine if there is any gain or loss on the transaction. (21-11)
All of the following are benefits of owning a real estate investment trust EXCEPT:
a. Stable dividend income
b. Ability to buy and sell shares easily
c. Diversification
d. Protection against rising interest rates
D
Real estate investment trusts offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase the value of their shares will usually decrease as other newly issued income earnings securities become more attractive.
A customer enters a sell stop-limit order for 100 XYZ at 25.50. XYZ trades occur as follows: 25.50, 25.25, 25.13, SLD 25.50. The customer's order was:
a. Executed at the market price after the order was entered
b. Executed at 25.25
c. Executed at 25.50
d. Not executed
d
The first trade at 25.50 touched the stop price of 25.50 and the order became an active or live order to sell 100 shares of XYZ at a limit price of 25.50 or better. Thus, the stock must increase to at least 25.50 for an execution. The only other trade at 25.50 has the symbol SLD next to it, indicating that a trade occurred previously (assume prior to the other trades shown), was reported out of sequence and is now being shown to indicate that fact. There is no trade at the customer's limit price of 25.50 after the customer's order became a live order. Therefore, the customer's order was not executed.
Listed equity options stop trading at:
a. 3:00 p.m. Eastern Time
b. 4:00 p.m. Eastern Time
c. 4:15 p.m. Eastern Time
d. 5:30 p.m. Eastern Time
b
Listed equity options stop trading at 4:00 Eastern Time each trading day. Trading ceases on the third Friday of the expiration month. The expiration date is on the Saturday immediately following the third Friday of the expiration month.
T-bills purchased at the weekly auction will have a settlement date on the:
a. Next business day
b. Fifth business day
c. Monday following the auction
d. Thursday following the auction
d
The auction for 13- and 26-week T-bills is held each Monday.Settlement is on Thursday of the same week.
For a competitive offering of municipal securities, an issuer's right to reject any and all bids received will normally be contained in the:
a. Official Statement
b. Notice of Sale
c. Underwriting Agreement
d. Legal Opinion
b
The Notice of Sale for a municipal bond offering will normally contain a provision stating that the issuer retains the right to reject any and all bids if it is considered to be in its best interest to do so. This is done to protect the issuer from being obligated to accept an unsuitable bid.
An aunt wishes to give her niece some securities as a gift. The niece's parents have recently died and a court has appointed a guardian other than the aunt. The aunt:
a. Must register the securities in the guardian's name
b. May give the securities without the permission of the guardian
c. May give the securities only if they would qualify under the State's legal list requirements
d. May give the securities only if the guardian is also appointed the custodian
b
The aunt may give securities to the minor as a gift. There are no restrictions on a donor giving a gift.
JULY 20XX
S M T W T F S
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31
Use the calendar above to answer this question.
If a customer bought $50,000 par value of Treasury notes on July 3rd, when would payment be due?
a. July 3rd
b. July 4th
c. July 5th
d. July 11th
c
U.S. government notes have a next-business-day settlement anddelivery date. Therefore, payment is due for the notes on the next business day which would be July 5th. Remember, July 4th is a U.S. national holiday and is not considered a business day
A customer sells XYZ short at $40 and sells one XYZ October 40 put at 5. What would the customer's profit or loss per share be if the put is exercised when the market value of the stock is $35, and the stock received pursuant to that exercise is used to cover the short stock position?
a. $10 profit
b. $5 profit
c. 0
d. $5 loss
b
If the put is exercised when the market price is less than $40, the stock acquired by the writer will be used to close out the short position. There is no profit or loss on the short sale (sell short at $40 and cover at $40). The entire profit is the premium income of $5. The seller of a put who sells short can never profit by more than the premium when the short sale price and the strike price are the same.
Which of the following is NOT a leading economic indicator?
a. Building permits
b. Money supply
c. Prime rate
d. Stock prices
c
The prime rate is considered to be a lagging economic indicator. (22-4)
For tax purposes, corporations may exclude a portion of the dividends received from:
I. Municipal bonds
II. Corporate bonds of other corporations
III. Preferred stocks of other corporations
IV. Common stocks of other corporations
a. I and II only
b. II and III only
c. III and IV only
d. II, III, and IV only
c
Corporations may exclude a portion of the dividends received fromequity investments in other corporations. This includes common stockand preferred stock.
Which of the following must be done at or prior to an options trade?
I. Send the customer a current copy of the risk disclosure document
II. Get the ROP to approve the account for options trading
III. Deposit the customer's money into the account
IV. Have the customer sign an options agreement
a. I and II only
b. II and III only
c. III and IV only
d. I, II, III, and IV
a
At or prior to the approval of an options account, a registered representative must send the customer a copy of a current riskdisclosure document. Also, trades will not be executed until the account is approved for options trading by a registered options principal (ROP). Customers must sign and return the options agreement within 15 days of account approval.
Which of the following positions is the most conservative strategy?
a. Long stock, long call
b. Long stock, short call
c. Short stock, long put
d. Short stock, short put
b
A conservative investor is someone who is not looking to create undue risk in the portfolio. This would exclude choices (c) and (d), as both have unlimited loss potential. Choice (a) involves two bullish positions, but also exposes the investor to greater downside risk. The most conservative position would be an investor who is long a stock position and uses the income from selling the call to lower the breakeven point, and still have upside gain potential. If the market price falls, the investor may liquidate the stock before it falls too far and will not lose a large amount of money. However, if the market price rises, the stock will be called away from the investor at the call strike price, and the investor will have a limited profit potential.
Which of the following positions would NOT have unlimited gain potential?
a. Long 1 ABC Jun 60 call and long 1 ABC Jun 60 put
b. Long 1 ABC Jun 60 call and long 1 XYZ Jun 60 put
c. Long 100 ABC at 50 and short 1 ABC Jun 60 call
d. Long 100 ABC at 50 and short 1 ABC Jun 40 put
c
Choice (c) is an example of a covered call. If the market price rises above 60 per share, the long stock position will be called away at 60 and the gain will be capped at the-10 point difference between the purchase price (50) and strike price (60) plus the call option premium (which is not given). For choice (a) and (b) there is unlimited gain potential if ABC rises in value. For choice (d) there will be unlimited gain potential if ABC rises, as the put would expire and the stock still has upside potential.
A transaction occurs between two dealers for a Nasdaq stock. The trade must be reported by:
a. The buyer within 30 seconds
b. The seller within 30 seconds
c. Both within 30 seconds
d. Both by the end of the day
b
Transactions in Nasdaq stocks must be reported to FINRA by the seller within 30 seconds of the trade.
The exchanges require customers to exercise their listed equity option positions with member firms no later than:
a. 2:30 p.m. Eastern Time on the business day prior to the expiration date of the option
b. 3:30 p.m. Eastern Time on the business day prior to the expiration date of the option
c. 4:30 p.m. Eastern Time on the business day prior to the expiration date of the option
d. 5:30 p.m. Eastern Time on the business day prior to the expiration date of the option
d
The exchanges require customers to notify their firms of their intention to exercise an option contract no later than 5:30 p.m. Eastern Time on the business day preceding the expiration date. Be sure to make the distinction between when an option ceases trading (4:00 p.m. Eastern Time) and the latest time the exchanges allow a customer to exercise an option (which is 5:30 p.m. Eastern Time).
A customer owns an Eastman Kodak October 50 listed call option. Eastman Kodak has declared a $1.00 cash dividend. When Eastman Kodak sells ex-dividend, which of the following will reflect the price and the number of shares of the Eastman Kodak October 50 option?

--------Strike
--------Price Number
of Shares
a. $49--------100
b. $50--------95
c. $50--------100
d. $50--------105
c
Listed call options are not reduced for cash dividends. The strike priceand the number of shares of the Eastman Kodak October 50 optionwould remain the same after Eastman Kodak sold ex-dividend.
Which of the following option strategies has the greatest risk?
a. Buying a long straddle
b. Writing an uncovered put
c. Writing an uncovered call
d. Buying a long combination
c
An uncovered (naked) call has unlimited risk. The underlying stock could theoretically continue to rise in price. If the option were exercised, the writer would have to buy the stock to deliver. In choices A and D, the investor has purchased options and the maximum loss is the premium. In choice B, the investor has written an uncovered putwhich has a limited loss potential (strike price minus the premium received).
Which of the following transactions would require a customer to be considered a pattern day trader?
a. 3 day trades executed in one week
b. 3 day trades executed in one day
c. 4 day trades executed in one week
d. 10 day trades executed in one month
c
A customer is considered a pattern day trader if 4 or more day trades are executed over any 5-business-day period. The minimum equityrequired for a pattern day trader is $25,000.
An investor writes a Treasury bond call option contract. He would be considered covered by a deposit of:
a. A basket of bonds
b. Specific T-bonds
c. One hundred shares of the underlying security
d. The required margin
b
A treasury bond call option writer would be considered covered only if the specific underlying T-bonds are deposited.
On a when issued municipal bond transaction, the interim confirmation would show which of the following?
a. Settlement date
b. Final money amount
c. Accrued interest amount
d. Capacity in which the broker-dealer acted
d
A bond trades when issued (WI) because a final settlement date has not been established. Without a settlement date, accrued interestcannot be calculated and therefore the final money amount cannot be calculated. The broker-dealer must disclose the capacity (principal oragent) in which it acted.
When doing a municipal bond swap, to avoid the wash sale rule you could alter any of the following EXCEPT:
a. Issuer
b. Maturity
c. Rating
d. Coupon
c
If a security is sold at a loss and within 30 days (prior to and after the sale) substantially the same security is purchased, the IRS considers it a wash sale and will disallow the loss. To avoid purchasing a security that the IRS would consider substantially the same as the security sold, you should purchase bonds either by a different issuer or with a different coupon or maturity. The rating of the bonds would not be a factor.
A secondary market exists for:
a. Dealer-placed commercial paper
b. Federal funds
c. Repurchase agreements
d. U.S. savings bonds
a
A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds.
The managing underwriter of a new municipal issue has an obligation to provide:
I. An Official Statement to all selling members
II. An Official Statement to all purchasers of the issue
III. The names of the syndicate members to all purchasers of the issue
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III only
a
The managing underwriter of a new municipal issue has an obligation to provide an Official Statement to other dealers upon request and to all purchasers of the issue. The managing underwriter does not have to provide the names of the syndicate members to all purchasers of the issue. The Official Statement is a voluntary document which need not be created by the issuer. However, if created, the above rules apply
A client purchased 1,000 shares of ABC Corporation preferred stock at $80 per share. The company is paying a quarterly dividend of $1.25 and the current market price is $90. The current yield is:
a. .56%
b. 5.56%
c. 6.25%
d. 16.67%
b
The current yield on common or preferred stock is found by dividing the yearly dividend by the current market price of the stock. In this example, the current market price of the preferred stock is $90 and the yearly dividend is $5 ($1.25 x 4). This equals a current yield of 5.56% ($5 divided by $90 equals 5.55%). The number of shares the client owns and the original cost of the stock are not relevant in calculating the current yield.
A customer believes a stock will have a wide fluctuation in price over a short period of time. If he wanted to engage in an option strategy that would be profitable from a sharp movement either on the upside or downside, he would buy a:
a. Put
b. Call
c. Straddle
d. Spread
c
The customer would buy a straddle which is the simultaneous purchase of a put and a call with the same expiration dates and the same strike prices. If the market moved up sharply, the call could be exercised and if it moved down sharply, the put could be exercised, resulting in a profit.
Your client owns a portfolio of blue chip equity securities and would like to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to:
a. Write covered calls
b. Buy calls
c. Write covered puts
d. Buy puts
a
The most conservative strategy for the investor to achieve his objective is to write covered calls. The call premium received will increase theyield on his portfolio of stocks because it will add to the income generated by the dividends received from the stock. (
The City of Phoenix, Arizona has published an advertisement stating that it is willing to accept bids for the sale of $20,000,000 Sewer Revenue Bonds. The advertisement is called:
a. An Official Statement
b. An indenture
c. An Official Notice of Sale
d. A tombstone ad
c
An advertisement announcing the request for bids for the sale of amunicipal bond issue by a municipality is called an Official Notice of Sale. (10-2)
When referring to call option contracts, the term open interest would mean:
a. The number of contracts that have not been closed out through a sale or by expiration
b. Only the number of contracts with the same expiration date that have not been closed out
c. Only the number of contracts with the same exercise price that have not been closed out
d. The total number of contracts of the same series that were traded on a given day
a
The term open interest when referring to call option contracts would mean the number of contracts that have not been closed out through a sale or by expiration. (16-13)
A put option may be written in a cash account if the investor:
a. Is long the underlying security in the account
b. Is short the underlying security in the account
c. Has cash in the account equal to the exercise price
d. Is long a call option on the same underlying security
c
To write a put in a cash account, the customer must have cash in the account equal to the exercise price. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction cannot be written in a cash account, only in a margin account.
The Federal Intermediate Credit Bank (FICB) makes:
a. Agricultural loans to farmers
b. Loans to finance residential mortgages
c. Business loans to veterans
d. Loans to railroads
a
The Federal Intermediate Credit Bank (FICB) makes agricultural loans to farmers. (7-11)
A broker-dealer appears on the Nasdaq system as a market maker for DCIR common stock. An employee of the firm responsible for maintaining the firm's inventory in DCIR is known as a:
a. Specialist
b. Floor broker
c. Compliance director
d. Position trader
a
A position trader is responsible for maintaining a broker-dealer's inventory as well as trading the firm's account. (12-1)
When a manager of a municipal underwriting syndicate determines the priority of orders to be allocated, the orders would include all of the following EXCEPT:
a. Group net
b. Designated
c. Member takedown
d. Opening purchase
d
An opening purchase is an order to establish an option position and is not related to municipals. The priority of orders in a municipalsyndicate becomes important when marketing the bonds. If the offering is oversubscribed, low priority orders may not get filled. The typical priority of orders from the highest to the lowest is as follows:
1. Pre-sale
2. Group net
3. Designated
4. Member takedown
A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is:
a. $5,000
b. $10,000
c. $15,000
d. $20,000
c
The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is equal to $15,000.
In April, a customer purchased 1 ABC July 85 call for 5 and purchased 1 ABC July 90 put for 8. ABC stock is currently trading at $87. If both options are sold for the amount each is in-the-money, the investor would realize a(n):
a. $500 profit
b. $800 loss
c. $1,000 loss
d. $1,100 loss
b
The call is in-the-money by $200 and the put is in-the-money by $300. If the call is sold for $200, the loss on the call would be $300. If the put is sold for $300, the loss would be $500.
A narrow-based index option may be used to hedge a portfolio of:
a. Treasury bonds
b. Money market securities
c. Oil company stocks
d. Diversified blue chip stocks
c
A portfolio consisting of stocks from the same industry may be protected (hedged) against adverse market movements by using narrow-based index options. A narrow-based index gives a measurement of stocks in a particular industry or sector of the economy. A broad-based index option would be used to hedge a diversified stock portfolio.
According to MSRB rules, each broker-dealer engaging in municipal securities activities must have a municipal securities principal promptly review and/or approve in writing:
I. Each customer account for trading in municipal securities
II. Every transaction for municipal securities
III. All written customer complaints
IV. All advertising and other written correspondence pertaining to municipal securities activities
a. I and II only
b. III and IV only
c. I, III, and IV only
d. I, II, III, and IV
d
A municipal securities principal is responsible for supervising activities relating to municipal securities transactions. Included in his responsibilities are the review and/or approval of all the choices given. (12-33)
All of the following are fixed by the exchange on which an option contract trades EXCEPT:
a. The strike price
b. The expiration date
c. The premium
d. The contract size
c
The premium for an option is not fixed by the exchange on which the option trades. The premium is determined by supply and demand on the floor of the exchange. (14-3)
The FRB initial margin requirement is 50%. A customer opening a new margin account with the purchase of 100 shares of XYZ at $15 per share would have to deposit:
a. $375
b. $750
c. $1,500
d. $2,000
c
Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase. (13-6)
An investor who buys 1000 shares of XYZ at 48 and also sells 10 XYZ Oct 60 calls at 2 would best be described as:
I. Bullish
II. Bearish
III. Aggressive
IV. Conservative
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
b
An investor who has both a stock position and an option position on the same underlying security will still have an investment strategy that follows the stock position. In this case, the long stock position indicated the investor is bullish. However, this investor is also taking a conservative approach to the long stock position by selling call options against the long stock position. This indicated the investor does not anticipate the market price of the stock rising dramatically in the short term. If the market price does rise above 60, the stock would be called away, and the investor will still have a profit. If the market price does not increase above 60 by the October expiration date, the option would expire unexercised and the premium would be retained by the investor. The premium would provide a small amount of downside protection if the stock price falls. (15-1, 15-2)
Which of the following would most likely have a mandatory sinking fund?
a. Serial issue
b. Balloon issue
c. Term issue
d. Convertible issue
c
A term issue is one in which all the bonds mature in one specific year. To accumulate monies to help retire the bonds, the issuer will deposit monies (above the amount to pay interest) into a sinking fund. These monies will generally be used to retire some of the bonds prior to maturity. (5-18)
When interest rates decrease, which two of the following are TRUE regarding the value of Treasury bond options?
I. Call options increase.
II. Call options decrease.
III. Put options increase.
IV. Put options decrease.
a. I and III
b. I and IV
c. II and III
d. II and IV
b
As interest rates decrease, the price of Treasury bonds increase. As the price of the underlying security increases, the value (premium) of calls increase and puts decrease. Should interest rates increase, the price of Treasury bonds would decrease. The value of calls would then decrease and puts increase. (15-48)
A corporation would be considered in default if it did not pay interest on all of the following EXCEPT:
a. Second mortgage bond
b. Debenture
c. Subordinated debenture
d. Adjustment bond
d
Interest on an adjustment (income) bond only needs to be paid if the corporation has sufficient income. Interest on all other debt securities must be paid regardless of the corporation's income. (6-12)
An investor writes an XYZ Aug 90 put at 4.50. If the put is exercised when XYZ is trading at 84.50, the investor would have:
I. A cost basis of 84.50
II. A cost basis of 85.50
III. A loss of $100 if the stock is sold at the current market price
IV. A gain of $100 if the stock is sold at the current market price
a. I and III
b. I and IV
c. II and III
d. II and IV
c
If the put is exercised, the writer will be put stock (must buy stock) at the strike price regardless of the current market price. The writer's cost will be 85.50 (the 90 strike price minus the premium of 4.50). Since the stock has a market price of only 84.50, liquidating the stock will result in a $100 loss. (14-17)
All of the following are TRUE regarding dividends EXCEPT:
a. A growth company normally has a low dividend payout ratio
b. A stock dividend creates a current tax liability when received
c. A blue chip company has a long history of paying dividends
d. The market price of a preferred stock is influenced by its dividend payout
b
The only false statement of those listed is that stock dividends are taxable upon receipt. A stock dividend reduces the cost basis of an overall stock position for calculating gains or losses whenever the securities are sold. Blue chip companies have a long history of making dividend payments. Growth companies tend to retain earnings to fuel growth making their dividend payout ratios low. The market price of a preferred stock is influenced by the amount of dividends paid in addition to the current level of interest rates. (21-4, 4-14, 4-19)
A corporation calls for redemption 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock is $2.50 per share. The common stock is selling at 35.75.
If all shares were converted, how many shares of common stock would be outstanding?
a. 500,000
b. 2,000,000
c. 2,500,000
d. 3,000,000
c
If all of the preferred stock were converted into common stock, there would be an additional 500,000 shares of common stock outstanding (1/2 of 1,000,000 = 500,000). This, added to the 2,000,000 shares outstanding, would equal 2,500,000 shares of common stock. (4-15)
Where would a listing of the allocation of bonds for a new municipal issue be found?
a. Notice of Sale
b. Underwriting Agreement
c. Account Summary Report
d. Official Statement
c
After the sale of a new issue, the syndicate manager must distribute a summary of the account to the members of the syndicate. This summary statement will include the allocation of bonds. (10-11)
All of the following would be found in a municipal revenue bond resolution EXCEPT:
a. Restrictions on the sale of additional bonds
b. Rate covenants
c. Sinking fund provisions
d. The yields-to-maturity of the bonds
d
The indenture or resolution is basically the contract between the issuer and the bondholder. It will specify the rights of the bondholders and the provisions to protect the bondholders' interest. One of the provisions included is a rate covenant in which the issuer pledges to charge rates that are sufficient to cover expenses and debt service. An additional bonds test is included which sets requirements that must be met before additional bonds could be issued. The method of funding and the operation of the sinking fund (used to retire some bonds prior to maturity) would also be included. Another important provision is flow of funds which states how the income generated by the project will be utilized. (8-12)
A syndicate manager in the sale of a new municipal bond issue would normally allocate bonds in which of the following orders of priority?
I. Member orders
II. Orders for the benefit of the syndicate account
III. Designated orders
a. I, II, and III
b. III, II, and I
c. II, III, and I
d. III, I, and II
c
Orders for bonds are usually allocated in the following order of priorities:
1. Pre-sale orders
2. Syndicate (group account) net, which are orders at a net price for the members of the account on a pro-rata basis
3. Designated orders
4. Member orders
In this question, pre-sale orders, which is the first priority, is not mentioned. The next priority would be orders for the benefit of the account (syndicate), designated orders, and individual member orders.
An investor reading the newspaper sees that yesterday's effective federal funds rate was 7.47%. On the previous day, the rate was 7.41% This information indicates:
a. The average rate charged on overnight loans throughout the country increased
b. The Federal Reserve took measures to inject money into the banking system
c. The Federal Reserve increased the federal funds rate
d. Member banks that needed to obtain overnight loans from the Federal Reserve paid more than the previous day
a
The effective federal funds rate is the daily average rate that commercial banks charged throughout the country for overnight loans. It is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate normally signifies that the Fed has taken money out of the banking system.
An investor purchases a 20-year 5% bond at par value which will yield 5 3/4% if called at the first call date in five years. The yield-to-maturity on bond is:
a. 5%
b. More than 5%
c. Between 5% and 5 3/4%
d. 5 3/4%
a
The bond has a coupon rate of 5%. If the bond is purchased at its par value and is not called but held to maturity, the bond yield will be the same as the coupon rate, which is 5%.
Which of the following new bond issues would most likely be purchased through competitive bidding?
a. Corporate bonds
b. General obligation bonds
c. High yield bonds
d. Revenue bonds
b
Of the choices given, the issue that would most likely be purchased through competitive bidding would be general obligation bonds. This is usually the method by which most general obligation bonds are sold. Corporate and revenue bonds are usually sold on a negotiated basis and income bonds are usually issued when a corporation that is in bankruptcy is being reorganized.
Which of the following are true about SIPC?
I. It was created by an Act of Congress and is considered a U.S. government agency.
II. It is a nonprofit organization that only broker-dealers may join.
III. It provides insurance for customer accounts in the event of bankruptcy by a broker-dealer.
IV. It provides insurance for customer accounts for fraud, embezzlement, and counterfeiting.
a. I and II
b. I and IV
c. II and III
d. III and IV
c
SIPC can borrow from the U.S. government, but it is not an agency of the U.S. government. SIPC provides insurance coverage for customer accounts in the event of a brokerage firm's failure. Each brokerage firm must take out a separate insurance policy (known as a fidelity bond) to insure itself for fraud, embezzlement, and counterfeiting. This bonding is not provided by SIPC.
Term bond quotes are based on:
a. Yield-to-maturity
b. Current yield
c. Nominal yield
d. Dollar price
d
Term bonds (bond issues which have one maturity date) are quoted based on a dollar price. Term bonds are also known as dollar bonds. Municipal serial bonds (which have several maturity dates) are quoted on a yield-to-maturity basis. (5-3)
All of the following issue securities which are exempt from state and local taxes EXCEPT the:
a. U.S. Government
b. Federal Home Loan Bank
c. Commonwealth of Puerto Rico
d. State of Hawaii
d
The securities of the State of Hawaii are not exempt from state and local taxes unless the investor is a resident of Hawaii. All of the others listed are exempt. The interest is exempt from federal taxes because Hawaii is a state, but not exempt from state and local taxes. The securities issued by the federal government are exempt from state and local taxes. Securities issued by Puerto Rico, through a special Act of Congress, are exempt from federal, state, and local taxes (triple-tax exempt).
An advertisement for municipal securities states the following:
"15-year 10% Tax-free bond priced to yield 12% to maturity. Call us now for more details."
According to MSRB rules, this advertisement should also state that:
a. The tax-free return is actually greater than 12% if the bond is held to maturity
b. A portion of the yield-to-maturity is taxable if the bond is held to maturity making the after-tax return between 10% and 12%
c. The tax-free return is actually less than 10% if the bond is held to maturity
d. A principal approved the advertisement
b
According to MSRB rules, the advertisement must state that a portion of the yield-to-maturity for a discount bond may be subject to taxation and therefore does not represent a fully tax-free yield. In this question, the bond is being offered at a discount because the yield-to-maturity (12%) is greater than the nominal yield (coupon rate 10%). At maturity, the discount would be subject to taxation as ordinary income causing the net yield to be between 10% and 12%.
A woman wishes to open an account at a municipal securities firm. She identifies herself as the spouse of a trader at another municipal securities firm. Which of the following is (are) correct?
I. The rep must follow all instructions from the trader's employer.
II. The MSRB must be notified.
III. The carrying broker-dealer must send written notification of each transaction to the trader's employer.
a. I only
b. II only
c. I and III only
d. I, II, and III
c
MSRB rules require that when opening an account for an employee of another municipal firm, a municipal registered representative must:
1. Notify the employer and follow all instructions (interpretation is to get the employer's permission)
2. Send duplicate confirmations to the employer
Included in the definition of employee is spouse, minor children, and anyone else dependent on the employee. (12-30)
A reduction in the rate of inflation is known as:
a. Stagflation
b. Deflation
c. Disinflation
d. Stagnation
c
A reduction in the rate of inflation is known as disinflation. This should not be confused with deflation which is when prices and business activity drop, usually leading to increased unemployment. Stagnation is a period of no economic growth or economic decline. Stagflation is a combination of inflation and stagnation. This occurs when the economy is stagnant but prices are rising. (22-2)
All of the following are taken into consideration when determining the markup on a municipal securities transaction EXCEPT:
a. The dollar amount of the trade
b. The best judgement of the dealer
c. The fact that the dealer is entitled to make a profit
d. The financial condition of the customer
d
All of the choices given must be taken into consideration except the financial condition of the customer.
The subscription agreement for a limited partnership would specify all of the following EXCEPT:
a. Suitability standards
b. Priority provisions upon liquidation
c. To whom the check must be made payable
d. Who must sign the agreement
b
All sales for limited partnership interests are conditioned upon acceptance by the general partner. Typically, a limited partner is considered accepted into the program once the general partner signs the subscription agreement. The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he or she understands the ramifications of the investment. Priority provisions for liquidating a limited partnership are found in the Certificate of Limited Partnership. (20-2)
How many days would have to pass before a member of a syndicate can extend credit for a customer on a security that was part of a new issue?
a. 30 days
b. 60 days
c. 90 days
d. 120 days
a
According to the Securities Exchange Act of 1934, 30 days must pass before a member of a syndicate can extend credit for a customer on a new issue.
From the issuer's perspective, when comparing term bonds and serial bonds, serial bonds have:
a. Declining interest payments and declining principal amounts
b. Increasing interest payments and increasing principal amounts
c. Stable interest payments and stable principal amounts
d. None of the above
a
Serial bonds have different maturity dates with lesser amounts of debt outstanding as time goes by. The bonds will have declining interest payments and principal amounts. Term bonds, by comparison, mature at the same time and would have stable interest payments with the principal paid on one maturity date.
An investor in a direct participation program should:
I. Have liquidity in other investments
II. Have a need for both present and future tax benefits
III. Be aware of the risks involved
IV. Be able to tie up funds for a long period of time
a. I and III only
b. I, II, and III only
c. II, III, and IV only
d. I, II, III, and IV
d
An investment in a direct participation program is usually a long-term investment which provides tax benefits. The investor should be aware of the risks involved and have liquidity in other investments since the money will be tied up for a long time
Which of the following securities would provide an investor with protection against purchasing power risk?
a. Treasury Bills
b. Treasury Notes
c. TIPS
d. STRIPS
c
Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS the rate of interest is fixed; however, the principal amount on which that interest is paid will vary based on the CPI. They are usually purchased as protection against inflationary or purchasing power risk. The other choices are U.S. government securities that either pay an investor a fixed rate or amount.
A brokerage firm is holding $600,000 of securities for a customer. The securities are registered in the name of the customer. If the firm was being liquidated by SIPC, the customer would:
a. Be insured for $500,000 of securities
b. Receive the entire $600,000 of securities
c. Be insured for $100,000 of securities
d. Lose the entire $600,000
b
Securities registered in the names of customers are not part of SIPC coverage and are returned to the appropriate individuals
All of the following are true regarding the role of a transfer agent EXCEPT that the transfer agent:
a. Keeps a record of each stockholder's name and shares owned
b. Issues and cancels stock certificates
c. Resolves problems due to mutilated certificates
d. Makes sure that outstanding shares do not exceed authorized shares
d
The transfer agent is responsible for issuing new certificates, cancelling old certificates, keeping a record of shareholders and the number of shares each owns, and handling problems that come about in cases of missing, lost, stolen, or mutilated securities. The registrar makes sure that outstanding shares do not exceed authorized shares. (4-6)
An investor who sells index straddles or combinations is anticipating the market will be:
a. Bullish
b. Bearish
c. Neutral
d. Volatile
c
An investor who sells straddles or combinations is selling both calls and puts on the same underlying security. This type of investor is neither bullish or bearish, but is anticipating the price of the underlying security (in this case an index) will remain relatively stable or neutral. (15-16)
Which best describes the Revenue Bond Index?
a. Average yield on a list of bonds with 30 year maturities
b. Average yield on a list of 11 bonds
c. Average yield on a list of 20 bonds
d. Average yield on a list of new revenue issues
a
The Bond Buyer publishes different indexes. They include:
1. The 20-Bond Index -- The average yield-to-maturity on a particular day of 20 specific GO bonds with 20-year maturities.
2. The 11-Bond Index -- The average yield-to-maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index.
3. The Revenue Bond Index -- The average yield-to-maturity on a particular day of 25 specific revenue bonds with 30-year maturities. (12-27)
All of the following are TRUE about stopping stock on the NYSE EXCEPT it:
a. Is permitted only for public orders
b. Requires permission of an exchange official
c. Is done by the specialist
d. Will guarantee a price for the order
b
A specialist can stop stock if it is for a public order and the specialist is guaranteeing a price. (11-16)
MSRB rules state that a dealer must try to obtain all the following information from a customer EXCEPT the customer's:
a. Financial condition
b. Investment history
c. Investment objectives
d. Date of birth
d
MSRB rules specifically state that a dealer should make every effort to obtain all of the information listed except the customer's date of birth. The dealer should determine that the customer is not a minor, but not specifically his date of birth. (12-29)
A sales breakpoint of a mutual fund is:
a. The minimum dollar amount of a purchase of a mutual fund where a volume discount is given
b. The minimum share amount of a purchase of a mutual fund where a volume discount is given
c. The point at which a letter of intent can be obtained
d. The point at which a letter of intent can be backdated
A
A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of sales charge declines when certain minimum dollar amounts are reached. (18-22)
All of the following statements are true about closed-end investment companies EXCEPT that the:
a. Number of outstanding shares is constant
b. Shares are sold at the current market price
c. Shares may not sell below the current net asset value
d. Shares may be listed on the NYSE
c
Closed-end investment companies are bought and sold in the same manner as common stocks. If a customer wanted to sell a closed-end fund at the market, he would receive the current bid price (the market quote, not the net asset value). If a customer wanted to buy a closed-end investment company at the market, he would buy it at the current offering or asked price. The market price of the shares can be at, above, or below the net asset value. Closed-end investment companies have only one issue of shares. Once sold, no new shares are issued. The amount of outstanding shares will remain constant. The shares may be listed on an exchange or trade in the OTC market. (18-2)
An investor buys $10,000 par value of 8% Treasury bonds due July 1, 2014. For tax purposes, the interest earned on these bonds is:
I. Subject to federal income tax
II. Exempt from federal income tax
III. Subject to state income tax
IV. Exempt from state income tax
a. I and III
b. I and IV
c. II and III
d. II and IV
b
Interest on U.S. government bonds is subject to federal income tax but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds where the interest is exempt from federal tax, but may be subject to state tax. (7-1, 7-8)
Which of the following would not require a majority vote of a mutual fund's shares?
I. Changing the fund from open-end to closed-end
II. Changing the investment objectives of the fund
III. Increasing the capital gain distribution paid by the fund
IV. Decreasing the dividend paid by the fund
a. I and II only
b. I and III only
c. III and IV only
d. I, II, III, and IV
c
A majority vote of the shareholders is required to change the investment objectives of a mutual fund and to change the fund from open-end to closed-end. However, shareholders do not vote on dividend or capital gain distributions. (18-15, 18-29)
An investor purchased $100,000 face value of a 12% municipal bond that matures December 1, 2010. The transaction settled on August 1st. The investor owed accrued interest of:
a. $200
b. $800
c. $2,000
d. $8,000
c
The bonds purchased by the investor will generate yearly interest of $12,000 ($100,000 par multiplied by 12%). The fact that the bonds mature on December 1, 2010 signifies that interest payments are made every December 1st and June 1st. The investor would therefore owe 60 days of accrued interest (from June 1st, the last coupon, up to but not including the settlement date of August 1st). Since the yearly interest is $12,000, accrued interest would be $2,000 (60/360 x $12,000). (8-24)
Which of the following may be reasons for a revenue bond issue to be called?
I. A change in the tax status of the issuer
II. Surplus funds are available
III. Interest rates rise dramatically
IV. Destruction of the facility by fire
a. III and IV only
b. II, III, and IV only
c. I, II, and IV only
d. I, II, III, and IV
c
Destruction by fire would be included in a catastrophe call provision and permit the issue to be called. Any surplus monies may typically be used to retire a portion of outstanding bonds. If the tax status of an issuer is in doubt at the time of issuance, there is usually a provision requiring that the issue be called if the tax status of the issuer changes and the bonds become taxable. An issuer may refund an outstanding issue if interest rates are declining, not rising. (8-13, 5-17)
The State of North Carolina is offering $50,000,000 5 1/2% sewer improvement bonds.
The bonds are:
I. Exempt from the margin requirements of Regulation T
II. Exempt from the Securities Act of 1933
III. Exempt from the Trust Indenture Act of 1939
a. I only
b. I and II only
c. II and III only
d. I, II, and III
d
The bonds are municipal revenue bonds which are exempt from all federal acts and regulations except antifraud provisions. (8-1)
When comparing long-term bonds and short-term bonds, all of the following are true EXCEPT:
a. Long-term bonds generally have higher yields
b. Fluctuations in the dollar price of long-term bonds are usually greater than short-term bonds when the general level of interest rates change
c. Long-term bonds generally provide greater liquidity than short-term bonds
d. There is more purchasing power risk with long-term bonds when compared to short-term bonds
c
When comparing long-term bonds and short-term bonds, all of the choices listed are true except long-term bonds generally provide greater liquidity than short-term bonds. Short-term bonds do not suffer from as large a price movement as long-term bonds when interest rates are changing. Long-term bonds are open to greater market risk, interest rate risk, and purchasing power risk. Both individual and institutional investors alike are more willing to accept a lower return (yield) in favor of more stable principal (less severe price swings). (5-11)
A British company expecting payment from a customer in U.S. dollars is fearful that the dollar will decline in value. To hedge against a decline in the U.S. dollar, the British company should:
a. Buy British pound puts
b. Buy British pound calls
c. Write British pound calls
d. Write British pound straddles
b
If the value of the U.S. dollar declines, the value of the British pound increases. The company should buy British pound calls since it would profit on the calls if the U.S. dollar declined (British pound increased). The profit on the call could help to offset the loss on the U.S. dollars it is expecting as payment. (15-45)
All of the following securities trade with accrued interest EXCEPT:
a. Treasury bonds
b. Treasury STRIPS
c. Jumbo certificates of deposit
d. Convertible bonds
b
Securities that pay interest periodically or have a stated rate of interest (such as Treasury bonds, municipal bonds, corporate bonds, and certificates of deposit) trade "and interest" (with accrued interest). However, many money-market securities such as Treasury bills and bankers' acceptances trade at a discount and are therefore purchased without paying accrued interest. Zero-coupon bonds (i.e., Treasury STRIPS) do not pay periodic interest and are traded without accrued interest. (7-4)
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.
The round-lot sale that activated the order was at:
a. 18.25
b. 18.38
c. 18.50
d. 18.63
a
In order for a sell-stop order to be activated, a transaction must occur at or below the stop price. In this example, the stop was at 18.50. The first transaction was 18.25, which is at or below the stop price of 18.50, and that activated the order. (11-23)
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered occurred at 18.25, 18.38, 18.50, and 18.63.
The trade was executed at:
a. 18.25
b. 18.38
c. 18.50
d. 18.63
c
After the order was activated by the round-lot sale of 18.25, the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and would be the execution price. (11-23, 11-24)
A company currently has $125,000,000 of 3 1/4% convertible bonds. The company is going to offer $125,000,000 of 3 1/4% nonconvertible bonds plus cash of $15,000,000 for the convertible bonds. How will this transaction, if successful, affect the company's financial status?
a. It will reduce the cash and debt position and reduce the potential dilutive effect on the common stock.
b. It will reduce the cash position and increase the debt position.
c. It will increase the cash position and reduce the potential dilutive effect on the common stock.
d. It will reduce the cash position and the potential dilutive effect on the common stock.
d
The effect of the transaction will be to reduce the cash position and the potential dilutive effect on the common stock. The company is paying out cash and is also issuing nonconvertible bonds in place of convertible bonds (which could have been converted into common stock). This would reduce the cash position and the potential dilutive effect on the common stock. (6-8)
A corporation has $125,000,000 of convertible bonds outstanding. The conversion price is $50. The corporation refunds $75,000,000 of the bonds for nonconvertible bonds. How many additional shares of common stock will be outstanding if the remaining bonds are converted?
a. 1,000,000 shares
b. 1,500,000 shares
c. 2,000,000 shares
d. 2,500,000 shares
a
After the refunding, $50,000,000 of convertible bonds will remain outstanding. If these bonds are converted, there will be an additional 1,000,000 shares of common stock outstanding ($50,000,000 of bonds divided by the conversion price of $50 equals 1,000,000 shares of common stock). (6-6)
Concerning Moody's ratings, which is the most speculative in the investment grade category?
a. Aa
b. A
c. Baa
d. Ba
c
The top four ratings in both Moody's and S&P are referred to as "investment grade or bank quality". The top 4 ratings are:
Moody's S&P
Aaa AAA
Aa AA
A A
Baa BBB
If the question had simply asked for the most speculative, then Ba would have been the answer. (5-16)
The closing prices of two mutual funds on Monday, July 17th are:
Bid Offer Change
WORLD FUND 18.30 20.00 +.10
OCEAN FUND 5.25 5.50 +.02
Given the information above, the sales charge of the OCEAN Fund is:
a. 4.5%
b. 4.8%
c. 8.5%
d. 9.3%
a
The sales charge of the OCEAN Fund is the difference between the bid price of $5.25 and the offer price of $5.50. This equals $.25 ($5.50 - $5.25 = $.25). The sales charge is always expressed as a percentage of the offering price. The sales charge divided by the offering price of $5.50 equals a sales charge for OCEAN Fund of 4.5% ($.25 sales charge divided by the $5.50 offering price equals 4.5%). (18-20)
A corporation is in the 34% tax bracket. Which of the following choices would provide the best return if the corporation wanted to invest some of its surplus cash?
a. A preferred stock paying a 7.50% dividend
b. A corporate bond yielding 8%
c. A common stock yielding 6%
d. A municipal bond yielding 6%
A corporation is in the 34% tax bracket. Which of the following choices would provide the best return if the corporation wanted to invest some of its surplus cash?
a. A preferred stock paying a 7.50% dividend
b. A corporate bond yielding 8%
c. A common stock yielding 6%
d. A municipal bond yielding 6%
A stock closed at $44 on the NYSE on September 14th. It trades ex-dividend 50 cents a share on the opening of trading on September 15th. The specialist will reduce which of the following GTC orders on his book?
I. An open buy limit order
II. An open sell limit order
III. An open buy stop order
IV. An open sell stop order
a. I and III
b. I and IV
c. II and III
d. II and IV
b
All GTC orders that are entered below the market (buy limit orders, sell stop orders, and sell stop-limit orders) are automatically reduced by the dollar amount of the dividend or right when the stock sells ex- (without the) dividend or right. These orders are reduced unless they are marked DNR (do not reduce) when they are entered. The open buy limit order and open sell stop order are entered below the market and will therefore be reduced. (11-24)
According to technical analysis, a head and shoulders top formation indicates a trend that is:
a. Bearish
b. Bullish
c. Neutral
d. Highly unpredictable
a
A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it would indicate the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it would indicate a reversal of a downward trend in the price movement of a particular stock (bullish indicator). (22-39)
Which of the following would probably provide the greatest protection of purchasing power?
a. Fixed annuities
b. Variable annuities
c. Corporate bonds
d. Treasury bonds
b
Variable annuities would theoretically provide the greatest protection against loss of purchasing power. The payout is based upon the securities in the separate account which historically have increased in inflationary periods. This would provide for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and would not offer any protection against the loss of purchasing power in inflationary periods. (19-2)
If an investor had cash and securities in his account, why would the investor write call options against the securities?
a. To hedge his position
b. To engage in an arbitrage
c. To increase the overall rate of return of the portfolio
d. To postpone paying taxes
c
The purpose of writing calls against securities owned is to increase the overall rate of return of the portfolio. The premium the purchaser of the call would pay the writer would be added to whatever dividends the writer was receiving to increase the yield of the portfolio to the writer. (15-2)
A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is a member of the syndicate, the firm is entitled to the:
a. Takedown less the concession
b. Additional takedown plus the management fee
c. Total takedown less the management fee
d. Total takedown
d
A member of the syndicate is entitled to the additional takedown plus the concession, which is also known as the total takedown. Only the syndicate manager is entitled to the management fee. A broker-dealer that is not a member of the syndicate selling part of a new issue of municipal bonds is entitled to the concession. (10-8)
Which of the following would be considered creditors of a corporation?
I. Debenture holders
II. Convertible bondholders
III. Common stockholders
IV. Preferred stockholders
a. I and II only
b. I and IV only
c. III and IV only
d. II, III, and IV only
a
Stockholders, both common and preferred, are owners of a corporation. Bondholders are creditors of a corporation; they have loaned the corporation money and received bonds as evidence of the corporation's debt to them. (6-1)
What would be the most advantageous tax benefit that an investor would receive from an oil and gas direct participation income program?
a. Liquidity
b. Depreciation
c. Depletion
d. Intermediation
c
The most advantageous tax benefit that an investor would receive from an oil and gas program would be the depletion deduction. These deductions normally last for as long as the program produces oil and gas. (20-17)
All of the following are Bond Buyer Indexes EXCEPT:
a. The average yield on 25 revenue bonds with 30-year maturities
b. The average yield on 20 selected municipal bonds with 20-year maturities
c. The average yield on 11 selected municipal bonds with 20-year maturities
d. The total of all new issues scheduled to be sold during the upcoming 30 days
d
The Bond Buyer computes and publishes a number of indexes which include the 20-Bond Index (choice B), the 11-Bond Index (choice C), and the Revenue Bond Index (choice A). Choice D is not an index, but is the Visible Supply. (12-27)
If the Federal Reserve wishes to make money easy, it can:
I. Decrease the discount rate
II. Increase the discount rate
III. Sell securities
IV. Buy securities
a. I and III
b. I and IV
c. II and III
d. II and IV
b
If the Federal Reserve wanted to make money "easy" (more available), it would take action to inject money into the banking system. This would occur if the FRB decreased the discount rate making it less expensive for commercial banks to borrow from Federal Reserve Banks. Buying securities in the open-market by the FRB would put cash into the banking system which would have a multiplier effect. Reducing the discount rate and buying securities would both have the net effect of making more money available to the banking system and the economy. This would cause money to be "easy" and interest rates would probably decline. (22-10)
A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of:
a. $150
b. $300
c. $420
d. $525
b
Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).
A municipal broker's broker can:
I. Deal with broker-dealers
II. Deal with dealer-banks
III. Underwrite new issues
IV. Trade from its own inventory
a. I and II only
b. I and III only
c. II, III, and IV only
d. I, II, III, and IV
a
A municipal broker's broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker's broker would never deal with individual investors, establish an inventory position, or be involved in the underwriting of a new issue. (12-25)
A registered representative is considering a recommendation that a customer sell uncovered options. The recommendation would not be suitable if the registered representative:
a. Failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks
b. Failed to receive written approval to make the recommendation by the firm's registered options principal
c. Failed to receive written approval to make the recommendation by his branch manager
d. All of the above
a
The recommendation would not be a suitable one if the registered representative failed to satisfy himself that the customer was aware of the risks involved and had the financial capacity to assume such risks. Written approval from the firm's registered options principal or branch manager is required to open an account. There is no requirement to receive written approval prior to giving a recommendation to a client. (16-11, 2-6)
In which of the following situations would an investor have unlimited risk?
a. Sold a call and is long the stock
b. Sold a put and is long the stock
c. Bought a call and is short the stock
d. Sold a put and is short the stock
d
Selling a put and being short stock would be the only example given where an investor would have unlimited risk. The short position would be the unlimited risk situation if the stock were to increase in value. If the market value of the stock is increasing, the purchaser of the put would not exercise the option. The short seller would lose money on the increase of the stock price. In choice (C), the short seller is protected against a rise in the stock by owning a call. In choice (A), the investor would have a loss if the price of his stock declined. However, the potential loss is limited since the stock's price can only decline to zero creating a loss equal to the stock's cost minus the premium received for selling the call. In choice (B), the loss would again be limited to the stock's value declining to zero. (15-7)
Relative to a custodian account, which of the following are TRUE?
I. The minor is responsible for tax consequences.
II. The custodian is responsible for tax consequences.
III. Income generated in the account is taxed as it is received.
IV. Income generated in the account is taxed when the minor becomes an adult.
a. I and III
b. I and IV
c. II and III
d. II and IV
a
The minor is responsible for any tax consequences in the account. Income is taxed as it is received, not when the minor becomes an adult. (2-9)
A customer owns 20 ABC Corporation October 30 calls in a cash account. The customer exercises the calls and the same day sells the stock at $32. The customer will have to deposit into the account:
a. $20,000
b. $30,000
c. $60,000
d. No cash deposit is required
c
Since the option is exercised in a cash account, a deposit of cash is required even though the stock is sold on the same day. The client must deposit $60,000 (100 shares per contract x 20 contracts = 2,000 shares; 2,000 shares x 30 strike price). (13-13)
Normally, the largest expense incurred by an open-end investment company is the:
a. Sales charge reallowed to the broker-dealers
b. Custodial fee
c. Investment advisory fee
d. Accountant's fee
c
Management (investment advisory) fees are normally the largest expense incurred by an open-end investment company (mutual fund). (18-15)
ABC Corporation has a capitalization that consists of a large amount of debt securities relative to a small amount of equity securities. ABC Corporation would be considered to have a capitalization that is:
a. Conservative
b. Ordinary
c. Under-leveraged
d. Leveraged
d
When a corporation has a capitalization that consists of a small amount of equity securities relative to a large amount of debt securities, that capitalization is said to be leveraged. (5-1
The theory which states that the small investor is usually wrong, buying at market peaks and selling at market bottoms, is called:
a. The Dow theory
b. The odd-lot theory
c. The short interest theory
d. The advance-decline theory
b
The theory which states that the small investor is usually wrong because he is uninformed, buying at market peaks and selling at market bottoms, is called the odd-lot theory. According to this theory, the small investor can only afford to buy an odd-lot (less than 100 shares of stock) Odd-lot buying on balance (more buying than selling) is bearish and odd-lot selling on balance (more selling than buying) is bullish. (22-37)
When buying listed put options versus selling the underlying stock short, which of the following is NOT an advantage?
a. Buying a put would require a smaller capital commitment.
b. Buying a put has a smaller dollar loss potential than selling the stock short.
c. The put has a time value beyond an intrinsic value that gradually dissipates.
d. Buying a put is not subject to Regulation SHO
c
Choice (c) is a correct statement, but it is not an advantage for the buyer of a put. An options premium may consist of intrinsic value and/or time value. The portion of the premium represented as time value declines over time. For example, if an XYZ July 50 put is purchased for $5 when the market price is $47, the intrinsic value (in-the-money value) is $3 and the time value is $2. As the put nears expiration, the time value gradually dissipates, which is a disadvantage to the buyer.
All of the other statements are advantages of buying a put as opposed to selling short. The premium of a put is substantially less than the Regulation T margin requirement for a short sale. In a put purchase, the potential loss is limited to the premium, while the potential loss on a short sale of stock is unlimited. The purchase of puts is not subject to the borrowing requirements of Regulation SHO, whereas short sales of equities are. (14-15)
Which of the following rates is the most volatile?
a. The prime rate
b. The discount rate
c. The call rate
d. The federal funds rate
d
Rates fluctuate the most on short-term securities. The federal funds rate, which is the rate of interest one bank charges another bank for the use of excess reserves for short-term periods of time (usually overnight), would fluctuate the most since it has the shortest maturity. (22-10, 5-11)
The settlement date between the Options Clearing Corporation and the clearing firm for options transactions.
Use the following choices to answer this question.
a. One business day from the trade date
b. Three business days from the trade date
c. Two business days from the settlement date
d. Ten business days from the settlement date
a
The settlement date between the Options Clearing Corporation and a clearing member is one business day from the trade date for options transactions. (16-1)
All of the following are TRUE of covered call option writing EXCEPT:
a. The writer can increase the overall yield on his portfolio
b. It is considered a conservative option strategy
c. The premium received guarantees the writer cannot have a loss on the underlying security
d. The writer will have a short-term capital gain if the option expires unexercised
c
All of the choices listed are true except the premium received guarantees the writer cannot have a loss on the underlying security. The security can decline in price below the "breakeven point" (cost price of the stock minus the premium), causing the writer to have a loss on the stock. If the option expires, the writer will always have a short-term capital gain from the premium received. (15-2)
An investor bought 5 ATT June 30 puts. These options will have intrinsic value when the market price of ATT is:
a. $25
b. $30
c. $35
d. $40
a
A put will have intrinsic value (also known as being "in-the-money") when the market price of the underlying security is less than the strike price. Of the choices given, the only answer which is lower than the exercise price is $25. (14-4)
Which two of the following circumstances would lead to disintermediation?
I. When interest rates at savings banks are lower than money market instruments
II. When interest rates at savings banks are higher than money market instruments
III. When the FRB is pursuing a tight monetary policy which is causing a rise in interest rates
IV. When the FRB is pursuing a loose monetary policy causing interest rates to decline
a. I and IV
b. II and IV
c. I and III
d. II and III
c
The term disintermediation describes money being withdrawn from savings banks and savings and loan associations by depositors and reinvesting the funds in higher yielding money market instruments (Treasury bills, certificates of deposit, money market funds). This would occur when interest rates at savings banks are lower than money market instruments. The FRB is pursuing a tight monetary policy, which is causing a rise in interest rates, creating a demand for the higher yielding money market securities. (22-13)
All of the following are TRUE regarding variable annuities and mutual funds EXCEPT:
a. Mutual funds and variable annuities are regulated under the Investment Company Act of 1940
b. Variable annuity companies will retain any dividends paid, but the owner of the variable annuity must pay taxes on the dividends each year
c. Both mutual funds and variable annuities are considered securities
d. The payout of both mutual funds and variable annuities will depend on the performance of the securities owned in the portfolio
b
All of the statements listed are true regarding variable annuities and mutual funds except variable annuity companies will retain any dividends paid but the owner of the variable annuity must pay taxes on the dividends each year. This statement is not true, since an owner of a variable annuity has the income tax deferred. An owner of a mutual fund would have to pay taxes on dividends received that year. (19-8)
Closing spot prices for foreign currencies are disseminated daily by the:
a. NYSE
b. IMM
c. FRB
d. FINRA
c
The Federal Reserve Board disseminates closing spot prices of foreign currencies daily. (15-41)
An investor believes that the U.S. dollar will weaken in the coming months. Which option strategy would provide the greatest potential gain.
a. Buying U.S. dollar puts
b. Selling euro puts
c. Writing euro straddles
d. Buying euro calls
d
If the dollar weakens, the euro will typically rise. Buying euro calls would provide a potentially unlimited gain. There are no listed options on the U.S. dollar. Selling options provides a maximum gain that is limited to the total premium. In addition, short straddles are profitable only if the underlying investment remains stable in price. (15-45)
Rule 145 applies to which of the following situations?
a. A stock split
b. A stock dividend
c. An adjustment in par value
d. A merger
d
Rule 145 applies to mergers, consolidations, reclassification of securities, or transfer of corporate assets. Stock splits, dividends and the resulting changes in par value are specifically exempted from filing under Rule 145. (9-22)
Which of the following will not affect the SMA in a long margin account?
a. Cash dividends paid on securities in a margin account
b. Cash deposited in the account to reduce the debit balance
c. Stock dividends paid on securities held in the margin account
d. Appreciation in market value of the securities in a margin account
c
Stock dividends paid on securities held in a margin account will not increase the SMA. The market value of the stock already in the account will be reduced by the amount of the stock dividend as the number of shares of the stock increases. The total dollar value will remain the same. All of the other choices will have an effect on the SMA. (13-8, 4-8)
If a limited partnership were to liquidate, the last party to receive a distribution of assets would be the:
a. General creditors
b. Secured creditors
c. Limited partners
d. General partners
d
As owners, the interests of the partners (general and limited) are subordinate to that of creditors. Of the two types of partners, the interests of the general partners come after that of the limited partners in a liquidation. (20-4)
A single worker makes $43,000 per year and has no dependents. If she is eligible for all four of the following plans, which one would you be LEAST likely to recommend?
a. An IRA
b. A 403(b)
c. A 401(k)
d. A 457
a
Although all four retirement plans are advantageous to this worker, there are a few advantages the three others have over an IRA. The 403(b), 401(k), and the 457 plans offer a higher annual tax-deductible contribution and the possibility of an employer match. Even if the worker decides not to contribute a larger sum of funds, the employer match would provide additional funds to the worker to help fund her retirement. (17-1, 17-10, 17-11)
Which of the following would have a negative effect on the U.S. balance of payments?
a. Increase U.S. exports to foreign countries
b. Foreign purchases of U.S. securities
c. New U.S. investments abroad
d. New foreign investments in the U.S
c
New U.S. investments abroad would tend to increase the basic deficit in the U.S. balance of payments because dollars are leaving the U.S. and are being invested in foreign countries. (22-14)
The exercise (strike) prices of listed options are NOT adjusted for:
a. Stock splits
b. Cash dividends
c. Rights offerings
d. Stock dividends
b
The strike prices of listed options are not adjusted for cash dividends. Listed options are adjusted for stock splits, stock dividends, and rights offerings. Over-the-counter traded options are adjusted for cash dividends as well as the other distributions listed. (16-10)
A client would like to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations would be the most suitable?
a. A managed closed-end fund
b. An S&P 500 Index mutual fund
c. An S&P 500 Index Exchange Traded Fund
d. An DJIA Exchange Traded Fund
b
Although all of these investments would be suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund would be the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were purchasing a large dollar amount at one time, any of these funds may be appropriate. (18-7)
In "easy money" periods, bonds of similar quality will generally have:
I. Short-term yields lower than long-term yields
II. Long-term yields lower than short-term yields
III. Both short-term and long-term yields below normal
IV. Both short-term and long-term yields higher than normal
a. I and III
b. I and IV
c. II and III
d. II and IV
a
In periods of "easy money," there is availability of money. Therefore, interest rates will decline or be lower. In these periods of "easy money," bonds of similar quality will generally have short-term yields lower than long-term yields. Both short-term and long-term yields will be below normal. This situation would create a positively sloped yield curve where yields rise from short to long term. (22-10)
Co. A Co. B Co. C Co. D
Earnings per Share $2.00 $6.50 $5.20 $7.80
Dividends $0.10 $2.50 $2.60 $6.00

Percentage of
Retained Earnings 95% 62% 50% 23%
Which of the above companies is probably a utility?
a. Company A
b. Company B
c. Company C
d. Company D
d
Company D is probably a utility since utility companies usually have a high dividend payout ratio and a low percentage of retained earnings. (4-19)
Which of the following would be the least important to an investor considering a bond "swap"?
a. Accrued interest
b. Annual income
c. Capital loss
d. Maturity dates
a
A bond "swap" is selling one bond and using the proceeds to buy another bond with either a different yield, interest rate, or maturity date. This is usually done to establish a capital loss for tax purposes. Of the choices given, the least important factor to consider in the "swap" or exchange is accrued interest since any accrued interest paid will be included in the next interest payment and any accrued interest received has been earned prior to the bond being sold. (21-17)
A customer's margin account is as follows:
Long Market Value $45,000
Debit Balance $20,000

SMA $5,000

Credit Balance $15,000
Short Market Value $9,000
What is the total equity in this account?
a. $6,000
b. $25,000
c. $31,000
d. $36,000
c
The equity in the long margin account is $25,000 ($45,000 LMV - $20,000 DR). The equity in the short margin account is $6,000 ($15,000 CR - $9,000 SMV). The total equity is $31,000. SMA is not considered to be part of the equity. (13-19)
A syndicate letter used in the formation of a municipal syndicate account will contain all of the following EXCEPT:
a. The account manager
b. The member participation
c. The reoffering yields
d. The duration of the account
c
A syndicate letter is used to form a syndicate (group of underwriters) to bid on a new municipal issue. It would be sent by the syndicate manager and would include each member's participation, the type of account and its duration, the priority of orders, and the amount of the good faith deposit. The reoffering yields would not be determined until after the syndicate was formed and was ready to submit its bid. The reoffering yields would be determined by market conditions including current supply, demand, and existing yields on similar outstanding bonds. (10-7)
The investment banking department of a broker-dealer generally does all of the following EXCEPT:
a. Underwrites new issues
b. Provides financing for industrial corporations
c. Distributes large blocks of already outstanding securities
d. Makes a secondary market for new issues
d
An investment banker generally does all of the items mentioned except make a secondary market for new issues. (9-1)
Cash dividends declared by a corporation:
a. Are taxed as capital gains
b. Are a current liability to the corporation when declared
c. Must be approved for payment by the shareholders
d. Does not affect working capital
b
Cash dividends are considered a current liability to a corporation when declared by the Board of Directors. The Board of Directors of the corporation has the authority to declare dividends. Working capital (current assets - current liabilities) would be reduced since current liabilities would be increased. Although dividends are currently taxed at the same rate as capital gains, they are not capital gains. Dividends are taxed as dividends. (22-29)
Which of the following proxy rules would be correct regarding customer securities held in "street name" by a brokerage firm?
a. The corporation would send the proxy to the customer.
b. The corporation would send the proxy to the NYSE who would then send it to the customer.
c. The corporation would send the proxy to the SEC who would then send it to the customer.
d. The corporation would send the proxy to the brokerage firm who would then send it to the customer.
d
A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy which is a delegation of the shareholder's vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (in the name of the brokerage firm), the corporation would send the proxy to the brokerage firm who is the stockholder of record on the corporate books. The brokerage firm would send the proxy to the customer and the corporation would pay the additional expenses. The SEC regulates the solicitations of proxy material. (3-2)
Which of the following is an employee of an options exchange?
a. Market maker
b. Board broker
c. Order book official
d. Floor broker
c
The CBOE uses a market maker system to facilitate the trading of options. Each underlying security is assigned to several market makers who are exchange members that buy and sell securities for their own accounts. A board broker is an exchange member who acts as an agent in executing orders entered by other members. An Order Book Official (OBO) is an exchange employee who assists board brokers in maintaining the public customer limit order book. (16-3)
Money received by a corporation when it sells its stock above its par value is called:
a. Excess capital
b. Earned surplus
c. Paid-in capital
d. Stockholders' capital
c
Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different than earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends. (22-23)
Mr. Smith buys an XYZ Corporation October 70 put and pays a $16 premium for the put. XYZ declines to $52. Mr. Smith purchases 100 shares of XYZ at the market price and puts it to the writer. According to IRS rules, the proceeds received by the customer from the sale of the stock to the writer is:
a. $200
b. $5,200
c. $5,400
d. $7,000
c
When a customer exercises a put option, the proceeds of the sale equals the strike price minus the premium. This is then compared to the client's cost of acquiring the securities to determine a gain or loss on the transaction. When Mr. Smith sells the stock which was purchased in the market at $52 per share, he will receive the strike price of $70 per share or $7,000. Mr. Smith paid a $16 premium or $1,600. Subtracting the premium of $1,600 from the strike price of $7,000 equals the proceeds of the sale for tax purposes. This equals $5,400 ($7,000 exercise price - $1,600 premium paid for the put option = $5,400 proceeds of the sale). To find Mr. Smith's profit, subtract the $5,200 purchase price of 100 shares from the $5,400 proceeds from the sale. (21-18)
A broker-dealer selling mutual fund shares to a client is permitted a maximum sales charge of:
a. 8%
b. 8 1/2%
c. 9%
d. 10%
b
FINRA permits a maximum sales charge of 8 1/2% for mutual fund transactions. (18-20)
On January 16th, an investor sells XYZ stock at $34 for a 2-point loss. On January 24th, the investor purchases XYZ stock at a price of $36. For tax purposes, the investor's cost basis for the stock purchased on January 24th is:
a. 32
b. 34
c. 36
d. 38
d
To determine the investor's cost basis for tax purposes, the 2-point loss on XYZ stock must be added to the new cost of $36. According to the wash sale rule, if a security is sold at a loss and repurchased within 30 days, the loss is disallowed and added to the investor's cost basis. Had the investor waited at least 31 days before repurchasing XYZ stock, the 2-point loss would have been deductible and the investor's cost basis for the stock purchased January 24th would have been $36. (21-16)
A customer in the 28% tax bracket buys a 10% corporate bond at par. What is the investor's net yield?
a. 2.8%
b. 7.2%
c. 10%
d. 13.9%
b
The interest earned on corporate bonds is fully taxable at the investor's tax bracket. The investor's yield from a 10% corporate bond purchased at par would be 10%. Since the investor must pay taxes at a rate of 28%, the investor may keep 72% of all earnings (100% - 28%). Therefore, the investor's net yield from a corporate bond yielding 10% is 7.2% (10% x 72% = 7.2%). (21-2)
Treasury notes have initial maturities of:
a. Less than one year
b. 2 to 10 years
c. 11 to 30 years
d. More than 30 years
b
Treasury notes mature from two to ten years. (7-1)
Which of the following is TRUE regarding the purchaser of a call option?
a. The yield on the purchaser's portfolio would increase by purchasing the option.
b. The purchaser would limit the amount of money he could lose if the underlying stock declined.
c. The purchaser would benefit if the underlying stock declined.
d. The purchaser would exercise the option if the stock declined.
b
The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value and would exercise the call only if the stock had increased. Increasing the yield on a portfolio is a benefit of writing, not purchasing, call options. (14-12, 15-2)
All of the following municipal bond transactions take place in the secondary market EXCEPT:
a. Submitting an offer to sell bonds to a sinking fund
b. A tax swap
c. Two municipal securities broker-dealers purchasing a block of bonds jointly
d. The placing of a designated order
d
All of the choices listed take place in the secondary market except the placing of a designated order. A designated order is an order directed to a syndicate manager by an institutional account designating two or more members of the underwriting account to receive credit for that order. This order is placed directly with the syndicate manager during the order period prior to the release of the bonds for secondary trading. (10-9)
All of the following are prohibited according to the Securities Exchange Act of 1934 EXCEPT:
a. A trader buys shares late in the day to prevent the price of a security from falling
b. Short sales of municipal bonds
c. Selling short shares of an exchange-traded stock without borrowing the security
d. Two traders enter into transactions where ownership does not actually change, in order to increase trading volume
b
All of the choices listed are prohibited according to the Securities Exchange Act of 1934 except short sales of municipal bonds. Short sales of securities are subject to the borrowing requirements of Regulation SHO. This makes choice (c) a violation. Municipal bonds are exempt securities and are not subject to the borrowing requirements of Regulation SHO. Any person that buys or sells a security for the purpose of attempting to stop the price from falling (pegging) or rising (capping) would be engaging in a manipulative action. Persons who enter into transactions to increase volume, without ownership changing, have engaged in painting the tape. This is a manipulative act and is a violation. (11-4)
ABC Corporation has net income of $8 million. There are one million shares of common stock and one million shares of preferred stock outstanding. The preferred stock pays a $1.00 annual dividend. The earnings per share for the common stock is:
a. $4 per share
b. $6 per share
c. $7 per share
d. $8 per share
c
Earnings per share for the common stock is calculated after deducting the payment of preferred dividends. The preferred dividends are $1,000,000. After deducting $1,000,000 from the net income of $8,000,000, the $7,000,000 that is available for the common stockholders is divided by the 1,000,000 common shares outstanding. The earnings per common share is equal to $7 per share ($7 million divided by 1 million common shares equals $7 earnings per share). (22-28)
With no other securities position, a customer sells short 100 shares ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at:
a. $35
b. $50
c. $45
d. $40
c
An individual who sells short risks loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss would be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale PLUS the premium. (15-7)
All of the following are features of a 529 plan EXCEPT:
a. Withdrawals from 529 plans used for educational purposes are not subject to federal taxation
b. There are no income limits placed on contributors
c. Contributions are unlimited
d. Earnings in the account are tax-deferred
c
Although contribution limits are considerably higher than a Coverdell Education Savings Account (limited to $2,000 per year), contributions are not unlimited. (17-4)
The Gross Domestic Product (GDP) is the total value of:
a. Goods and services produced in the U.S.
b. Minerals produced in the U.S. economy
c. Foodstuffs and manufactured products produced in the U.S.
d. All of the above
a
The Gross Domestic Product (GDP) is the total value of goods and services produced in the U.S. in any particular year. (22-1)
If an equity option is exercised, when is the settlement date for the stock transaction?
a. Next business day
b. Two business days
c. Three business days
d. Seven business days
c
When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected in 3 business days (regular-way settlement for stock). (16-5)
A sell stop order would most likely be entered by a technical analyst or chartist:
a. Below a support level for the stock
b. Above a resistance level for the stock
c. Below a previous low for the stock
d. To take advantage of a rising market
a
Sell-stop orders are entered below the current market. The order would most likely be entered by a technical analyst or chartist below a support level for the stock. If the price of the stock went below the support level, it would be a breakthrough on the downside. This would be a bearish indication. Once the stop price has been reached, the stock would be sold at the market. (22-39)
An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. What is the individual's basis?
a. 0
b. $30,000
c. $50,000
d. $80,000
d
Under the IRS "at risk" rule, an investor may include in his basis those monies for which he is in fact liable. Since the loan is a recourse loan, the investor is liable for its repayment. The investor's basis would therefore be $80,000 ($30,000 investment + $50,000 recourse loan). (20-6)
An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. Assuming sufficient passive income, the maximum passive losses that a limited partner may claim is:
a. 0
b. $30,000
c. $50,000
d. $80,000
d
The maximum amount of losses that may be deducted by a limited partner is the extent of his basis (in this question, $80,000). Assuming sufficient passive income, the limited partner may deduct $80,000. (20-5)
Which two of the following choices are advantages of trading exchange traded funds (ETFs)?
I. They can be purchased on margin.
II. Investors can receive breakpoints.
III. There is no fee to liquidate shares.
IV. They can be sold short.
a. I and III
b. II and III
c. I and IV
d. III and IV
c
Exchange traded funds (ETFs) represent a basket of securities. They are structured to represent an index of securities such as the Nasdaq 100 or the Dow Jones Industrial Average. Their shares are purchased and sold on an exchange; therefore, they can be purchased on margin and sold short. Mutual funds cannot be purchased on margin or sold short since they are sold under prospectus and not on an exchange. Investors pay a commission whenever they buy or sell shares of ETFs. Investors receive breakpoints on sales if they purchase a specified amount of a mutual fund, not an ETF. (18-8)
All of the following statements regarding the Roth IRA are TRUE EXCEPT:
a. Contributions are tax-deductible
b. Qualified distributions are not included in an individual's gross income
c. Qualified distributions are not subject to the 10% early withdrawal penalty
d. An individual may contribute up to $5,500 per year
a
While contributions to traditional IRAs are tax-deductible under certain conditions, contributions to a Roth IRA are nondeductible. Individuals may contribute up to $5,500 per year if they have earned income and if they meet certain income eligibility requirements. Qualified distributions are tax-free and are not subject to the 10% early withdrawal penalty. (17-3)
A limited partner lends money to the partnership. The limited partner would:
a. Become a general creditor of the partnership
b. Now be considered a general partner
c. Lose his limited liability
d. Be violating his fiduciary responsibility
a
A limited partner is permitted to lend money to the partnership. He would be considered a general creditor since he was a lender. (20-4)
All of the following are true regarding the Interbank market for foreign currencies EXCEPT:
a. It is decentralized
b. It is unregulated
c. Transactions may settle on a spot or forward basis
d. It is unaffected by actions taken by a government's central bank
d
The Interbank market relates to the trading of foreign currencies amongst large international banks. The Interbank market is therefore not centralized. It is basically unregulated and is affected by national economic policies, actions taken by central banks, and other occurrences that would affect the relative value of currencies. Foreign currency transactions may settle on a spot (2 business days) or forward (more than 2 business days) basis. (15-41)