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125 Cards in this Set

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1. A market order to buy should be executed at the:

a. Highest bid available
b. Lowest bid available
c. Highest offer available
d. Lowest offer available
(D) A market order to buy should be executed at the lowest offer price available. A market order to sell should be executed at the highest bid price available. (11-1)
2. All of the following enforce MSRB rules EXCEPT the:

a. Comptroller of the Currency
b. FINRA
c. MSRB
d. SEC
(C) The MSRB has no enforcement power. The SEC and FINRA enforce municipal regulations for
broker-dealers. The Comptroller of the Currency, FRB, and FDIC enforce municipal regulations for dealer banks. The MSRB establishes its rules but has no enforcement powers. (10-10)
3. How long after a new issue is registered for sale will it be shown on the Nasdaq system?

a. On the effective date
b. 10 days after the effective date
c. 30 days after the effective date
d. 45 days after the effective date
(A) A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public. (12-2)
4. An investor purchases a BAT Sept 30 put @ 2 and also writes a BAT Sept 40 put @ 8. The investor will profit if:

I. The spread widens to more than 6
II. The spread narrows to less than 6
III. Both options expire
IV. Both options are exercised

a. I or III
b. I or IV
c. II or III
d. II or IV
(C) The position described is a spread. The investor received more (8) for the put that he sold than he paid (2) for the put that he purchased. The spread is therefore a credit spread and the investor wants the spread to narrow. If both options expire, the investor gets to keep the 6 points of net premium and would have a profit. (15-23)
5. Which of the following are entitled to partic¬ipate in a Keogh Plan?

I. A self-employed doctor
II. A security analyst who made $2,000 giving public lectures on technical analysis
III. An engineer of a corporation who made $5,000 making public speeches on his specialization
IV. An executive of a corporation who re¬ceived $5,000 in stock options from his corporation

a. I and II only
b. II and III only
c. I, II, and III only
d. I, II, III, and IV
(C) An individual with self-employed income may establish a Keogh. Of the choices given, a doctor could participate because he is self-employed.

The security analyst and the engineer could set up a plan for the income they derived from outside self-employed activities. An executive of a corporation who received $5,000 in stock options could not participate because he is not self-employed. (17-10)
6. An investor is in the 28% tax bracket. Which of the following investments would afford him the best after-tax yield?

a. A 5% municipal bond
b. A 5 3/4% corporate bond
c. A 6 1 /2% yankee bond
d. A 6 3/4% convertible bond
(A) The 5% municipal bond would offer the best after-tax yield because the interest income is completely free from federal income taxes. The other investments are types of corporate debt subject to federal income taxes and 28% of the income received would be taxable. The taxable equivalent yield of the 5% municipal bond is 6.94%. This is calculated by dividing the 5% municipal yield by the complement of the tax bracket which is 72%. The result is greater than the other choices. (8-26)
7. A specialized or specialty fund invests in stocks that are primarily:

a. In many industries
b. In a particular industry or geographical area
c. Traded in the OTC market
d. Special situations
(B) A specialized or specialty fund is a type of a fund that invests primarily in a particular industry or geographical area. (18-8)
8. A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is NOT a member of the syndicate, the firm is entitled to the:

a. Total takedown
b. Additional takedown
c. Syndicate expenses
d. Concession
(D) 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. A member of the syndicate is entitled to the additional takedown plus the concession, which is also known as the total takedown. (10-8)
9. A customer sells 100 shares of CM short. CM pays a 5% stock dividend. When the customer covers the short position, the customer will have to deliver:

a. 5 shares of CM
b. 100 shares of GM
c. 105 shares of GM
d. None of the above
C) When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer.
All cash and stock dividends paid are the responsibility of the customer who sold the stock short. In this example, GM paid a 5% stock dividend. Therefore, a customer who sold 100 shares of GM short would have to deliver 105 shares (100 shares x 5% = 5 additional shares) when he covers the short sale. (4-8)
10. If SIPC does not cover a customer's account in a brokerage firm that has gone bankrupt, the investor would be a:

a. General creditor
b. Secured creditor
c. Preferred creditor
d. Guaranteed creditor
(A) If SIPC does not cover a client's account in a brokerage firm that has gone bankrupt, the client would be a general creditor. The client would rank equally with all other general creditors. (3-8)
11. All of the following may be used to pay the debt service on general obligation bonds EXCEPT:

a. Income taxes
b. Property taxes
c. Licensing fees and traffic fines
d. Tolls collected at a tunnel located in the municipality
(D) A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond. (8-2)
12. All of the following are required to be in¬cluded in a preliminary prospectus according to the Securities Act of 1933 EXCEPT:

a. A written statement in red on the left border of a preliminary prospectus ("red herring") that states that the prospectus may be subject to changes
b. The purpose for which the funds are being raised
c. The final offering price
d. The financial status and history of the company
(C) All of the items listed are required in a preliminary prospectus (red herring) except the final offering price. Many preliminary prospectuses do include a proposed offering price range, but it is not required. (9-12)
13. 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)
14. Where would bid limitations for a new municipal bond issue be found?

a. Official Statement
b. Indenture
c. Notice of Sale
d. Syndicate Agreement
(C) The Notice of Sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the Notice of Sale. (10-2)
15. A stock trades ex-dividend on Monday the 20th. What is the last day an investor can purchase the stock and be entitled to the dividend?

a. Monday the 13th
b. Thursday the 16th
c. Friday the 17th
d. Monday the 20th
(C) To be entitled to receive the dividend, the stock must be purchased prior to the ex-dividend date. Friday the 17th is the last day an investor could purchase the stock and be entitled to the dividend, since it is the business day prior to the ex-date. (4-7)
16. 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)
17. 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)
18. 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% non-convertible bonds plus cash of $15,000,000 for the convertible bonds. How will this transaction, if successful, affect the com¬pany'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)
19. Which of the following securities assists in financing importing and exporting operations?

a. Bankers' acceptances
b. Treasury bills
c. Eurodollar CDs
d. ADRs
(A) Of the choices given, a bankers' acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt) which facilitates the trading of foreign securities in U.S. markets. A Eurodollar certificate of deposit pays interest and principal in Eurodollars (U.S. dollars deposited in non-domestic banks) and are not used to finance importing and exporting operations. (7-21)
20. A corporation has $125,000,000 of convert¬ible 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 out-standing ($50,000,000 of bonds divided by the conversion price of $50 equals 1,000,000 shares of common stock). (6-6)
21. Which of the following corporations would be least affected by an increase in interest rates?

a. A manufacturing company
b. A utility company
c. A cosmetics company
d. An automotive company
(C) When interest rates are rising, industrial corporations that market "big ticket" items as well
as utilities which are heavy borrowers would be adversely affected. Cosmetic companies, due to the nature of the business and low cost of their products, are not affected as much by rising interest rates. (22-5)
22. 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)
23. 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

An investor who bought 300 shares of WORLD Fund on Monday July 17th would pay:

a. $1,575
b. $1,650
c. $5,490
d. $6,000
(D) When an investor buys shares of a mutual hind (open-end investment company), the investor pays the offering price, which includes the sales charge. When buying the WORLD Fund, the investor would pay the offering price of $20.00. Three hundred shares purchased at $20.00 would equal $6,000 ($20.00 x 300 shares = $6,000). (18-19)
24. 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)
25. In a municipal bond transaction, "T + 3" means:

a. The bond trades with a 3-point premium
b. The bond trades with an additional takedown of 3 points
c. The transaction will settle regular way in 3 business days from the trade date
d. Three bonds will be delivered on the settlement date
(C) "T + 3" in a municipal bond transaction means the bonds will settle regular way in 3 business days from the trade date. (11-1)
26. A corporation is in the 34% tax bracket. Which of the following 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) Corporations have a tax advantage as to dividends received from investments in preferred stock and common stock of other corporations. If the corporation owns at least 20% of the distributing corporation, it must declare, as income, only 20% of the dividends received (80% is excluded). If the corporation owns less than 20% of the distributing corporation, it must declare as income only 30% of the dividends received (70% is excluded). The 7.50% preferred stock would provide the best return since at least 70% would be excluded for tax purposes. (21-3)
27. Which of the following persons may purchase a new issue from a member firm according the New Issue Rule?

a. The brother-in-law of a person associated with a member firm
b. The uncle of a person associated with a member firm
c. A buy-side trader employed by a mutual fund
d. The owner of a member firm
(B) Restricted persons are not permitted to purchase shares of equity IPO under FINRA's new issue rule. Immediate family members of a person associated with a member firm, portfolio managers and owners of a broker-dealer would be considered restricted persons. Aunts, uncles, and cousins are not defined under the rule as immediate family members and are therefore not considered restricted persons. A buy-side trader would have the ability to make trading decisions and would be defined as a portfolio manager, who are individuals considered restricted persons under the rule. (9-4, 9-5, 9-6)
28. The 5% markup policy applies when a member is acting as:

a. An investment banker
b. A mutual fund underwriter
c. A broker-dealer in the OTC market
d. A specialist on the floor of the NYSE
C) A broker is an agent acting for another party and receives a commission when a trade is executed. A dealer is a principal acting for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% markup policy which is a guide broker-dealers in the OTC market must follow. The 5% markup policy covers all transactions except those requiring a prospectus (i.e., the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter (sponsor), it would be involved in a new issue and if acting as a sponsor it would be involved in the sale of a mutual fund. Since both of these transactions require a prospectus, they would not be covered by the 5% markup policy. Specialists on the floor of the NYSE are regulated by a different rule. (12-3)
29. 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
11. 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)
The following appears on the NYSE ticker tape: T 18.25 .50. This means that:
a. American Telephone is quoted 18.25 - 18.50
b. 100 shares of American Telephone traded at 18.25, followed by another trade of 100 shares at 18.50
c. An odd-lot of American Telephone traded at 18.25, followed by a round-lot at 18.50
d. None of the above
(B) The symbol for American Telephone and Telegraph is T. When a trade is for 100 shares, only the price is shown. Therefore, the answer is 100 shares of American Telephone traded at 18.25, followed by another trade of American Telephone at 18.50. (11-28)
31. The following appears on the NYSE ticker tape: X 67. 3s. 13. Relating to this, which of the following is true?

a. USX Corp. is quoted at 67 to 67.13.
b. Someone is bidding for 100 shares of USX Corp. at 67 and someone else is offering 300 USX Corp. at 67.13.
c. 100 shares of USX Corp. traded at 67, followed by a trade of 300 at 67.13.
d. USX Corp. opened at 67 followed by a trade of 300 shares at 67.13.
(C) The answer is 100 shares of X (the symbol for USX Corp) traded at 67, followed by a trade of 300 shares at 67.13. When 100 shares of a stock trades, only the symbol of the stock and price are printed. When the amount is from 200 to 9,900, the last two zeros are omitted and the symbol for the 100-share round-lot is added. For example, it is shown as 2s for 200, 3s for 300, 10s for 1,000, and 99s for 9,900. When the amount traded is 10,000 shares or more, the entire amount is printed (for example, X 10,000s 67 means that 10,000 shares of USX traded at 67). (11-28)
32. In a Rule 144A transaction, each of the following is true EXCEPT:

a. The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB)
b. The buyer must be able to establish its credentials as a QIB, through relevant documentation
c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers)
d. If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB
(C) The SEC has provided several examples of documents that can be relied upon by the seller when establishing its belief that a purchaser is a Qualified Institutional Buyer. Audited financial statements and a certification from the issuer are common methods of demonstrating that the purchaser is a QIB. (9-21)
33. 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)
34. If a technical analyst looked at a chart of a stock to identify the support level, he would look for the point at which the stock:

a. Stopped increasing
b. Stopped decreasing
c. Remained relatively stable
d. Reached a new high
(B) A support level is found at the bottom of a trading range, where buyers came into the market to buy the stock and thereby support its price. It would be at this point that the stock stopped decreasing. (22-39)
. It'a technical analyst looked at a chart of a stock to identify the resistance level, he would look for the point at which the stock:
a. Stopped increasing
b. Stopped decreasing
c. Remained relatively stable
d. Reached a new high
(A) A resistance level is found at the top of a trading range where people would sell and thereby depress the price. The level of resistance for a stock in an uptrend would be where the stock stops increasing. (22-39)
36. Which of the following would probably be most leveraged?

a. A software company
b. A biotech company
c. A consumer electronics company
d. A utility company
(D) A leveraged company is one with a large amount of outstanding debt (bonds). The utility company would be the most leveraged. Of the choices given, utilities are the heaviest users of debt and would have the greatest amount of interest charges (fixed charges). Therefore, utilities would be the most leveraged. The percentage of debt in a utility company's capitalization is usually greater than the other companies listed. (5-1)
37. Which two of the following would cause U.S. exports to become more competitive than foreign exports?

I. The U.S. dollar weakens when compared to foreign currencies.
II. The U.S. dollar strengthens when com¬pared to foreign currencies.
III. Foreign currencies strengthen against the U.S. dollar.
IV. Foreign currencies weaken against the U.S. dollar.

a. I and III
b. I and IV
c. II and III
d. II and IV
(A) A weakening or devaluation of the dollar would make U.S. exports more competitive with foreign exports. The U.S. dollar would be worth less in relation to foreign currencies. Foreigners would spend a relatively smaller amount of their currency to purchase U.S. products making U.S. products more competitive. Likewise, a strengthening in foreign currencies to the U.S. dollar would also cause U.S. products to become more competitive. (22-14)
38. If a corporation reports a loss, it would not have to pay interest on:

a. Mortgage bonds
b. Guaranteed bonds
c. Adjustment bonds
d. Debentures
(C) Corporations must pay interest on debt obligations whether they have earnings in a particular year or not. One exception would be for income (adjustment) bonds, which require the payment of interest only if the corporation has earnings to pay the interest. If the corporation has no earnings in a particular year, it is not required to pay the interest on these bonds. (6-12)
39. Which one of the following will NOT result in an profit to an uncovered call writer?

a. The price of the underlying security falls below and remains below the exercise price of the option.
b. The call is exercised and the underlying security price is greater than the exercise price plus the premium received.
c. The price of the option contract declines.
d. The option contract expires without being exercised.
(B) An uncovered call writer does not own the underlying stock. If the market price of the underlying stock rises above the exercise price, the stock will be called away. If the market price rises above the exercise price by an amount exceeding the premium, the difference in prices will represent the loss to the writer. For example, if an individual writes 1 XYZ July 50 call for 5 and the market price rises to 60, the stock will be called away. The writer will be required to buy the stock at 60. Since the investor received only 55 (exercise price of 50 plus premium of 5), there will be a 5-point loss. (14-14)
40. Which of the following would probably pro¬vide 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)
41. Who prepares the syndicate agreement for a municipal underwriting?

a. Counsel for the issuer
b. Counsel for the underwriters
c. Financial officer of the syndicate
d. Issuer
(B) The underwriter's counsel is an attorney who represents the interest of the underwriters.
His duties may include negotiating the underwriting agreement, reviewing the issuer's bond resolution, and reviewing the official statement. (10-3)
42. A customer wishes to buy stock in a closely held corporation with a small amount of outstanding shares. The registered repre¬sentative should advise him:

a. That it is a good investment
b. That he will receive a greater percentage ownership and it is a good investment
c. About the risks inherent in buying "thin" issues because of the probability of wide price fluctuations and possible difficulties in selling the stock because of the small amount of outstanding shares
d. About the profit possibilities in a rising market
(C) The registered representative should inform the customer of the risks involved in buying "thin" issues because of the probability of wide price fluctuations (volatility) and because of the small amount of the shares outstanding. (12-20)
43. A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is:

a. $ 950.87
b. $ 952.80
c. $ 958.75
d. $9,528.00
(C) U.S. government bonds are quoted in 32nds. 95.28 would be equivalent to 95 28/32nds (28/32 = .875). This is equivalent to 95.875 percent of the par value of $1,000, which is $958.75. (7-2)
44. 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)
45. A broker-dealer that is an MSRB member firm sells bonds to one ofits 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)
46. The initial FRB margin requirement is 50%. A customer has a margin account with a market value of $20,000, a debit balance of $12,000 and equity of $8,000. If the customer was to sell $1,000 worth of stock, the amount of the adjusted increase in the SMA would be:

a. $ 300
b. $ 400
c. $ 500
d. $1,000
(C) This account is restricted since the equity ($8,000) is less than the Reg T requirement of the account's market value ($20,000 x 50% = $10,000). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds times the RegT requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's SMA. The customer is then at liberty to borrow the credited amount. (13-13)
47. 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)
48. Which of the following would NOT require additional documentation to transfer stock?

a. Partnership account signed by a general partner
b. Corporate account signed by an authorized officer
c. Custodial account signed by the custodian
d. Executor signing for an estate
(C) The only authorized signature for a custodial account is that of the custodian. There would be no further documentation required. In each of the other choices, the transfer agent would require documentation showing that the person signing the certificate was authorized to do so. (2-9)
49. How much margin must the purchaser of one RFQ Feb 60 call for a $3 premium deposit?

a. 25%
b. 40%
c. 50%
d. 100%
(D) Options cannot be purchased on margin. According to Regulation T, the full purchase price (the premium) must be deposited. (16-5)
50. Accrued interest for municipal bonds is computed on:

a. A 30-day month and a 360-day year
b. A 30-day month and a 365-day year
c. Actual days elapsed and a 360-day year
d. Actual days elapsed and a 365-day year
(A) Accrued interest for municipal bonds is computed in the same manner as for corporate bonds which is based on a 30-day month and a 360-day year. Accrued interest for U.S. government bonds is figured on a 365-day year counting actual days elapsed. Accrued interest on all bonds is calculated from the last interest payment, up to but not including settlement date. (8-24)
51. Which of the following Moody's rated bonds would be considered speculative?

a. Aaa
b. Aa
c. Baa
d. Ba
(D) The top four Moody's ratings, Aaa, Aa, A, and Baa, are termed investment grade (basically nonspeculative). Ratings lower than Baa (such as Ba) would be considered speculative. The investment grade category in S&P ratings includes AAA, AA, A, and BBB. (5-16)
52. An ad valorem tax is based upon:

a. Property values
b. Population growth
c. Family income
d. Debt per capita
(A) An ad valorem tax is based upon property values. The tax is based on the assessed value of the property and the millage rate (tax rate). It may also be referred to as a real estate or property tax. (8-2)
53. The interest income on which of the following bonds is exempt from federal, state, and local taxes?

a. Puerto Rico
b. New York
c. Alaska
d. Hawaii
(A) Bonds issued by Puerto Rico are exempt from federal, state, and local taxes. The triple-tax exemption of bonds issued by the Commonwealth of Puerto Rico was provided for by a special act of Congress. The triple exemption also applies to obligations of other territories and possessions of the United States such as the Virgin Islands and Guam. Bonds issued by New York, Alaska, and Hawaii have the interest income exempt from federal taxes, but may be subject to state taxes. (21-2)
54. A legal opinion issued by a municipal bond attorney will state all of the following EXCEPT:

a. Interest is exempt from federal income
taxes
b. Information about maturities, coupon rates, and call features if the bond is callable
c. A statement that the bond constitutes a legal and binding debt of the issuing municipality
d. A guarantee by the bond attorney that the interest will be paid when due
(D) A legal opinion will state all of the items listed except a guarantee by the bond attorney that the interest will be paid when due. (10-3)
According to the MSRB rules, which of the 60. following would cause a broker-dealer to reject the delivery of municipal bonds?
a. A legal opinion is attached to, rather than imprinted on, the bonds.
b. Registered bonds are expected and delivered with proper endorsement.
c. Bearer bonds are delivered in $5,000 denominations.
d. The bonds have been called by the issuer.
(D) Good delivery for municipal bonds, unless otherwise specified, requires delivery of bonds not subject to a partial call and an imprinted or attached legal opinion. (Partially called bonds are not considered good delivery.) The bonds may be in bearer or registered form. Bearer bonds may be delivered in $1,000 or $5,000 denominations. If delivery of registered bonds is expected, they must be properly endorsed and in any denomination from $1,000 to a maximum of $100,000, in $1,000 increments. (12-29)
56. The City of Richmond, Virginia is issuing 8 1/4% general obligation bonds at 100% of their par value. The bonds will mature in 20 years. An investor purchasing a bond at its offering price and holding the bond for 20 years will receive a yield-to-maturity of:

a. 8.25%
b. Less than 8.25%
c. More than 8.25%
d. Cannot be determined
(A) When a bond is purchased at its par value, the yield-to-maturity will be the same as the nominal yield or coupon rate. In this example, the coupon rate is 8 1/4%. Therefore, the yield-to-maturity would also be 8 1/4% (8.25%). When a bond is issued or purchased at a discount (below par value), the yield-to-maturity will be greater than the coupon rate. When a bond is issued or purchased at a premium (above par value), the yield-to-maturity will be lower than the coupon rate. (5-9)
57. Which of the following municipal bonds would require a feasibility study to determine the issuer's ability to pay interest when due?

a. A special tax bond
b. A general obligation bond
c. A revenue bond
d. A revenue anticipation note
C) A feasibility study is made by a qualified expert to determine if revenues of a project will be sufficient to pay interest when due. A revenue bond which is backed by the earning power of a specific project, such as tolls from bridges, tunnels, or turnpikes, would require a feasibility study by qualified experts to determine if the revenue generated will be sufficient to pay the interest on the bonds. A special tax bond is secured by a special tax, such as a gasoline tax, and would not require a feasibility study. A general obligation bond is backed by the "full faith, credit, and taxing power" of the issuing municipality and would not require a feasibility study. A revenue anticipation note (short-term security) is considered a general obligation security. (10-2)
58. Federal and state registration requirements 63 apply to all of the following EXCEPT:

a. Publicly traded limited partnerships
b. Preferred stock
c. Municipal securities
d. Open-end investment companies
(C) Municipal and U.S. government securities are exempt from the registration requirements of the Securities Act of 1933 and from state registration requirements. (9-19)
59. 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)
60. 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 muni¬cipal bonds with 20-year maturities
c. The average yield on 11 selected muni¬cipal 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)
61. When computing "coverage" for revenue bonds, the ratio used is:

a. Net revenue to debt service
b. Gross revenue to operating expenses
c. Gross revenue to annual interest payments
d. Net revenue to operating expenses
(A) The term "coverage" is used when discussing revenue bonds. It is an indication of the number of times by which the earnings generated over a period of time will exceed the debt service for a period of time. The debt service is the required payments for interest and retirement of principal. The coverage is computed by comparing the ratio of net revenue (gross revenue minus operating and maintenance expense) to debt service. (8-12)
62. All of the following are true about a bond issue having serial maturities EXCEPT:

a. All of the bonds mature on one date in the future
b. The bonds are priced on a yield-to-maturity basis
c. The issue has a decreasing outstanding principal
d. The issue has decreasing total interest payments
(A) Serial bonds mature in successive years and are priced on a yield-to-maturity basis. As a serial issue nears its final maturity, the outstanding principal and total interest payments decrease. Term bonds all mature at one date in the future and are priced at a dollar price (percentage of par). (5-3)
63. An investor purchases a British pound Apr 135 call @ 7.50 when the British pound is trading at 140.37. The contract size is 10,000 British pounds. What is the investor's total cost for the call option?
a. $135
b. $140.37
c. $537
d. $750
(D) Premiums (and exercise prices) for British pound option contracts are quoted in cents per
British pound. To convert the premium to dollars per British pound, move the decimal point two places to the left. The total cost is the premium times the contract size. Therefore the total cost is $750 (10,000 x $0,075). (15-44)
64. Which of the following best represents the placement ratio?
a. Total par value of new issues sold
during previous week
Total par value of new issues issued
during previous month
b. Total par value of new
issues sold during upcoming month
Total par value of new issues issued
during previous month
c. Total par value of new
issues sold during previous week
Total par value of new issues issued during previous week
d. Total par value of new issues scheduled
during the upcoming 30 days
(C) The placement ratio is published weekly by the Bond Buyer. It expresses the amount of bonds sold by new issue syndicates as a percentage of the total amount of new issues brought to market during that week. (12-26)
65. An investor in the 35% tax bracket can buy a 5.10% tax-free municipal bond at par. What yield would the investor need in a taxable corporate bond to receive the same after¬tax yield in the municipal bond?

a. 6.90%
b. 7.85%
c. 8.80%
d. 10.22%
(B) If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is:
Municipal Bond Yield = Equivalent Taxable Yield 100% - investor's tax bracket
The customer is in the 35% tax bracket. The municipal bond has a 5.10% coupon rate and since it is purchased at par, the yield is also 5.10%.

5.10% (municipal bond yield) = 7.85% Equivalent Taxable Yield 65% (100% - 35%) (8-26)
66. A customer sells an XYZ April 30 put for $5 and an XYZ April 30 call for $3. If the put is repurchased at $4 and the call is repurchased for $1, the customer will have:

a. A profit of $300
b. A loss of $300
c. A profit of $800
d. A loss of $800
66. (A) The customer sold a straddle and received $500 for the put and $300 for the call or a total of $800 for the straddle. The put was repurchased for $400 and the call for $100 or a total cost of $500. The difference between the amount of premiums received from the sale of the straddle ($800) and the cost of repurchasing the straddle ($500) is a profit of $300 for the customer. (15-15)
67. 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)
68. Broker-dealers are permitted to:

I. Tell investors to buy mutual funds shortly before a dividend or capital gains distribution is to be paid
II. Assign loan value to fully paid shares that have been owned for more than 30 days
III. Provide a discount to nonmember broker-dealers when selling them investment company shares
IV. Continue to compensate retired registered representative for prior sales if a contract was signed with the registered representative who has retired
a. IV only
b. I and II only
c. II and IV only
d. I, II, III, and IV
(C) Under industry rules, broker-dealers are permitted to continue to compensate retired registered representatives for sales made prior to retirement ("continuing commissions or trails") if a contract is signed with the registered representative who has retired.

To induce an investor to buy mutual fund shares shortly before a dividend or capital gain distribution is to be paid is a violation of the Conduct Rules and is called "selling dividends."

There is no benefit to the customer because the value of the mutual fund will decline when the fund sells ex- (without the) dividend or when there is a capital gain distribution. The customer could just as well have waited and received the same value in shares.

The broker- dealer used the imminent payment of the dividend or capital gain distribution as a sales "tool" to sell the customer, whereas the customer's needs and objectives should have been the salesman's major consideration.

Although broker-dealers cannot obtain credit for a customer to buy open-end shares (because mutual funds cannot be bought on margin), loan value can be assigned to fully paid shares which the customer has owned for more than 30 days. Also, broker-dealers cannot give a discount to nonmember broker-dealers when selling investment company shares. (13-1, 18-19, 18-21)
69. A corporate bond that has no specific collateral backing it and is guaranteed by the full faith and credit of the issuing corporation is called a(n):

a. Debenture
b. Guaranteed bond
c. Income bond
d. Equipment trust certificate
(A) A corporate bond that has no specific collateral backing it and is guaranteed by the "full faith and credit" of the issuing corporation is called a debenture. A strong, financially sound, well regarded company is able to borrow money backed by its "full faith and credit" and its reputation and does not have to provide collateral as a guarantee. (6-2)
70. Duties of the ROP include which of the following?

I. Reviewing selected customer accounts
II. Establishing option training programs for registered representatives and ROPs
III. Reviewing advertisements and sales literature

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(D) All of the items indicated in the answer are duties of the Registered Options Principal (ROP). (16-12)
71. All of the following are TRUE of treasury stock EXCEPT it:

a. Is listed on the company's balance sheet
b. Has no voting rights and does not receive dividends
c. Is outstanding stock that has been re-purchased by the corporation
d. Has been issued by the U.S. Treasury and was purchased by a corporation
(D) Treasury stock is stock that has been issued and outstanding and has been repurchased by the company. Treasury stock does not have voting rights nor the right to receive dividends. (4-6)
. Blue Sky laws apply to which of the following?

I. Registered representat ives
II. Securities
III Tombstone ads
IV
REITs
a. 1 and II only
b. II and III only
c. I, II, and III only
d. I, II, III, and IV
(D) Blue Sky laws are state securities laws. These laws apply to the registration of sales personnel (registered representatives), the registration and sale of securities, and proper advertisement of securities. REITs (Real Estate Investment Trusts) are considered securities and are therefore regulated by state laws. (9-15)
73. A revenue bond is backed by a pledge of net revenues. This indicates that:

a. All revenues are pledged to pay debt service on the bonds
b. Net revenues are pledged to pay operating and maintenance expenses
c. The first use of net revenues is to pay the debt service on the bonds
d. The issuer guarantees that net revenues from the facility will be sufficient to pay debt service on the bonds
(C) The flow of funds for a municipal net revenue issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues. (8-12)
74. The bid price of a Treasury bond is $875. The bid price as quoted in the Wall Street Journal would appear as:

a. 87.12
b. 87.16
c. 87.5
d. 87.8
(B) U.S. Treasury bonds are quoted in 1 /32nds of a point. If the bid price of a Treasury bond is stated at a dollar value of $875, it would mean that the bond is 87 1/2% of its par value of $1,000. Because 1/2 point in 32nds would be 16/32nds, the bid price as quoted in the paper would be 87.16. This would be the same as 87 1/2 or $875. In this question, we have to work backwards from the dollar value to the quote. In most other examples, you are given the quoted price of corporate or government bonds and are asked to find the dollar value. (7-2)
75. Which of the following would be most suitable for a Non-Managed Fee-Based Account?

a. Clients that buy and hold securities
b. Clients seeking professional advice from an investment adviser
c. Clients that buy many different types of mutual funds
d. Clients who use their own research and often rebalance their portfolios
Use the following information to answer questions 76 and 77.
XYZ Corporation has $20 million convertible bonds outstanding. Each bond is convertible into 20 shares of common stock.
(D) A Non-Managed Fee-Based account is when a broker-dealer charges the client a fixed percentage fee for all transactions, which is based on the value of an account, instead of paying a commission per transaction. A client would be suitable for this type of account if they are not seeking investment advice and trades frequently. (3-5)
76. XYZ Corporation has $20 million convertible bonds outstanding. Each bond is convertible into 20 shares of common stock.

The conversion price is:

a. $ 20
b. $ 25
c. $ 50
d. $100
(C) To find the conversion price, divide the $1,000 par value by the 20-share conversion ratio. This equals a conversion price of $50 ($1,000 par value divided by the 20-to-l conversion ratio = $50). (6-6)
77. XYZ Corporation has $20 million convertible bonds outstanding. Each bond is convertible into 20 shares of common stock.

If all the bonds were converted to common stock, how many additional shares of com¬mon stock would be outstanding?

a. 100,000
b. 200,000
c. 300,000
d. 400,000
(D) $20 million par value ($1,000) bonds, which equals 20,000 bonds ($20,000,000 divided by $1,000 equals 20,000), multiplied by the 20 to 1 conversion ratio would result in 400,000 shares of additional common stock outstanding (20,000 bonds x 20 = 400,000). (6-6)
78. A customer is short 1,000 shares of ABC. If the current market price of ABC is $30 per share, what is the minimum maintenance requirement for equity in the account?

a. $2,500
b. $5,000
c. $7,500
d. $9,000
(D) The minimum maintenance requirement for a short margin account is 30% of the short
market value or $5.00 per share, whichever is greater. In this example, 30% of the short market value is equal to $9,000 ($30,000 x 30%). This is greater than $5.00 per share which would be $5,000 ($5 x 1,000 shares). (13-16)
79. A customer in the 35% tax bracket has $1,500 in long-term capital gains from stock trans¬actions at the end of the year. The customer will have to pay taxes of:

a. $150
b. $225
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 15%. Although the investor's tax bracket is 35%, the investor will be taxed at a rate of 15%. Therefore, the customer would have to pay taxes of $225 ($1,500 x 15% = $225). (21-9)
80. 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)
81. ABC Corporation is paying a $5 yearly div¬idend on its preferred stock. The market price of the preferred stock is $80. The current yield is:

a. 5.55%
b. 6.25%
c. 7.35%
d. 8.25%
(B) The current yield on common or preferred stock is found by dividing the yearly dividend by the market price of the stock. In this example, the market price of the preferred stock is $80 and the yearly dividend is $5. This equals a current yield of 6.25% ($5 divided by $80 equals 6.25%). (4-16)
82. 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. (2-6, 16-11)
83. 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)
84. A buyer of a call option would have:

I. Limited risk
II. Protection against a short position
III. A leveraged position

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(D) Buying a call option provides leverage since you control 100 shares of stock for a relative small cost (the premium). The risk is limited to the premium since that is the maximum potential loss. If an investor is short stock, he would risk a loss if the market price of the stock increased. Buying a call would provide protection against this situation since he could buy stock at a set price by exercising the call. (14-12, 15-5)
85. 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)
86. 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 (20 calls at $3,000 each). (13-13)
87. A customer opens a new margin account and buys 100 shares of XYZ Corporation at $40 per share and then writes a call option against the position and receives a $2 pre¬mium. The customer must deposit cash into the account of:

a. $1,800
b. $1,900
c. $2,000
d. $2,100
(A) The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000). Since the call is covered, there is no margin requirement. The customer received $200 in premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of $1,800. (16-5)
88. Accrued interest on new municipal bonds is calculated from the:

a. Purchase date
b. Settlement date
c. Dated date
d. Last interest payment
(C) Interest on new municipal bonds is calculated from the dated date, which is the date from which interest starts to accrue on a municipal bond. (8-25)
. 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)
90. The 30-day visible supply of municipal sec¬urities refers to new municipal bonds that:

a. Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds
b. Have been sold through a negotiated sale in the past 30 days
c. Will be sold in the next 30 days through a negotiated sale of general obligation and revenue bonds
d. Will be sold in the next 30 days through a competitive sale of general obligation and revenue bonds
(A) The 30-day visible supply of municipal securities refers to the face amount of new municipa bonds that will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds. It is an indication of expected supply in the new issue market and is published each day in the Bond Buyer. (12-26)
91. A customer purchases ten 7% $1,000 par value bonds selling at a discount that have a yield-to-maturity of 9%. The customer will receive a semiannual interest payment of:

a. $350
b. $450
c. $700
d. $900
(A) The customer will receive a semiannual interest payment of $350. The bond pays 7% interest based on the $1,000 par value. There are 10 bonds in this example which would have a par value of $10,000. Seven percent of $10,000 would be $700. Since interest is paid semiannually, the payment would equal $350. (5-3)
92. 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)
93. When a gift of securities is purchased for a minor in a custodian account, the gift becomes the property of the minor:

a. When the custodian releases the account
b. When the donor approves the transaction
c. When the minor reaches the age of majority
d. At the time of the execution of the order
(D) According to the Internal Revenue Code, the gift becomes the property of the minor at the time of the execution of the order. (2-8)
94. The theory which states that the small in¬vestor 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)
95. When setting prices for a competitive muni-cipal bid, the underwriter will consider all of the following EXCEPT:

a. Call premiums
b. Maturity
c. Good faith deposit
d. Coupon rates
(C) When presenting a bid to an issuer, the underwriter will include a check as a good faith deposit. This serves as a partial payment for the issue if the underwriter's bid is accepted. It is not a factor when calculating the bid. (10-7)
96. Which of the following long option positions would be a straddle?

a. Long an October 50 put and long an October 50 call
b. Long an October 40 put and long an October 50 call
c. Long an October 50 put and long a January 50 call
d. Long an October 40 put and long a January 50 call
96. (A) A long straddle is the purchase of a put and a call on the same underlying security with the same exercise price and the same expiration date. Of the choices given, the long October 50 put and October 50 call (the strike price and expiration date are the same) would be a straddle. (15-13)
97. A brokerage firm's research department has issued a buy recommendation for XYZ Corporation's common stock. The report must contain all of the following informa¬tion EXCEPT:

a. The firm was the managing underwriter in a recent public offering of the stock
b. The number of shares the firm owns of the stock
c. The partners of the firm hold options to purchase the stock
d. The firm makes a market trading in the stock
(B) The report must contain all of the items listed except the number of shares the firm owns
of the stock. The firm does need to disclose that it owns shares of the stock but not the actual number. (12-16)
98. The tranche with the longest maturity and therefore the last to receive interest and principal payments within a CMO, is known as the:

a. PAC tranche
b. Z-tranche
c. Supersinker
d. Companion tranche
(B) The separate classes of a CMO are known as "tranches." The longest maturity is frequently called the Z-tranche or the "accrual bond," and does not receive interest or principal payments until the shorter maturing tranches have been retired. (7-19)
99. When the underlying common stock sells ex-dividend, a GTC buy-limit order will:

a. Remain unchanged
b. Be reduced
c. Be increased
d. Change at the discretion of the specialist
(B) All GTC (good-until-cancelled orders) entered below the current market at the time they are entered are automatically reduced by the amount of the dividend on the ex-dividend date (unless they are market DNR - Do Not Reduce). A buy-limit order is entered below the current market at the time it is entered and would be reduced. (11-24)
100. All of the following are types of municipal underwritings EXCEPT:

a. Negotiated
b. Competitive
c. All or none
d. Fill or kill
(D) Fill or kill is a type of order placed to buy or sell a security in the secondary market, it is not a type of underwriting. (9-1)
101. All of the following are true regarding the SuperDOT system EXCEPT:

a. Orders are sent directly to the specialist by computer
b. Orders do not go through a floor broker
c. All orders may be entered into the system regardless of the number of shares involved
d. Transaction reports are received faster than those executed by floor brokers
(C) The SuperDOT System (Designated Order Turnaround) provides a direct computer tie-in with the specialist and thus bypasses the floor brokers. It can be used for odd-lots, consolidated odd-lots, market orders and limit orders. The NYSE sets limits on the number of shares that may be entered. (11-29)
102. A registered rep holding limited discretion¬ary authority over a customer's account may:

a. Buy or sell securities in the account without consulting the customer
b. Withdraw money from the account
c. Receive a fee for using his discretion in trading the account
d. Borrow assets from the customer's account
(A)A registered representative holding limited discretionary authority over a customer's account can buy or sell securities in the account without consulting the customer. Only hill discretionary authority allows a registered representative to withdraw money out of a client's account. An account executive cannot receive a fee for using his discretion in trading a customer's account. Borrowing client assets is never allowed. (2-9)
103. 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.
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)
When comparing long-term bonds to short-term bonds, all of the following are TRUE EXCEPT:
a. They usually have higher yields than short-term bonds
b. They usually provide greater liquidity than short-term bonds
c. They usually are more often callable than short-term bonds
d. Their market prices are more sensitive to interest rate changes than short-term bonds
(B) All of the statements listed about long-term bonds as compared to short-term bonds are true except they usually provide greater liquidity than short-term bonds. (5-11)
105. The proceeds of the sale of a municipal bond issue are invested in U.S. government sec-urities that are sufficient to cover interest, principal, and call premiums on an out¬standing bond issue. The outstanding bonds are called:

a. Covered bonds
b. Safe bonds
c. Guaranteed bonds
d. Pre-refunded bonds
(D) The outstanding bonds are called pre-refunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow at lower rates and therefore save interest costs. (5-17)
106. 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. (5-11,22-10)
107. A customer enters a stop order to sell 100 shares of XYZ at 20. The current market price of XYZ is 22. If XYZ trades at 20, the stop order:

a. Will only be executed at 20 or better
b. Becomes a market order for immediate execution
c. Will be cancelled
d. Will be executed at the discretion of the floor broker
(B) A sell stop order becomes a market order when the security trades at or below a particular price. If XYZ trades at 20, the stop order becomes a market order for immediate execution. A buy stop order becomes a market order when the security trades at or above the stop price. (11-23)
108. A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity can sell the stock:

a. Freely
b. Freely under Rule 144
c. After six months
d. After six months and then under Rule 144
(B)The charity can sell the stock freely (immediately) since the required six-month holding period for restricted stock has already been met by the director. However, the stock is still restricted (unregistered) and must be sold under Rule 144. (9-20)
109. The payment date for securities purchased in a cash or margin account as stated by Regulation T.

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
(C)According to current FRB requirements, securities purchased in a cash or margin account must be paid for within two business days of the settlement date of the transaction. (11-3)
110. The settlement date between the Options Clearing Corporation and the clearing firm for options transactions.

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 trade date tor options transactions. (16-1)
111. The latest date that a broker-dealer may buy-in stock when the customer who sold the stock fails to deliver.

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
(D)SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and custody of securities. Under the custody of securities section, a brokerage firm must buy-in securities within 10 business days from settlement when a customer has failed to deliver securities that were previously sold. (11-3)
112. 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)
113. 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)
114. 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)
115. An analysis of the quality of a general obligation bond to be issued would include all of the following EXCEPT:

a. The tax base of the community
b. The economic character of the community
c. The dollar denominations of the bonds to be issued
d. The makeup of the population of the community
(C) An analysis of the quality of a general obligation bond to be issued would include all of the following except the dollar denominations of the bonds to be issued. (8-2)
116. An investor purchases an ABC October 40 put and sells an ABC October 45 put. The purchase and sale is called a(n):

a. Spread
b. Straddle
c. Arbitrage
d. Combination
(A) The purchase of a put (or call) and the sale of a put (or call) of the same underlying security with different strike prices (as in this example) or different expiration dates is called a spread. (15-22)
117. Which of the following is TRUE regarding Eurodollar bonds?

I. They are denominated in U .S. dollars only.
II. They are denominated in foreign currencies only.
III. They are only traded outside of the U.S.
IV. They are traded in the U.S. and interna¬tional markets.

a. I and III
b. I and IV
c. II and III
d. II and IV
(B) Eurodollar bonds are issued by both U.S. and foreign companies and are denominated in U.S. dollars. Eurodollar bonds are actively traded in the U.S. Since the issuance of Eurodollar bonds does not comply with U.S. securities laws, they cannot be purchased as new issues in the U.S. (6-12)
118. An investor is interested in investing in a stock with growth potential. He instructs his broker to use the firm's research and buy $10,000 worth of a stock of the broker's choosing. Which of the following statements is correct?

a. The broker can buy the stock for the customer with approval from a manager.
b. The broker can buy the stock for the customer since it is a stock the firm recommends.
c. The broker can buy the stock for the customer provided that the broker has first obtained a written power of attorney from the customer.
d. The broker can buy the stock for the cus¬tomer based on the verbal authorization.
(C) An order where the registered representative has the power to determine what stock to buy must be done in a discretionary account. The registered representative must first obtain written authorization (power of attorney) from the customer. (2-9)
119. 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)
120. MSRB rules apply to all of the following EXCEPT:

a. Salespeople
b. Firms
c. Underwriters
d. Issuers
(D) Municipal Securities Rulemaking Board (MSRB) rules apply to all of the parties listed except municipal bond issuers. The MSRB does not have the power to regulate municipal bond issuers. (10-9)
121. All of the following are true about a good faith deposit EXCEPT that it is:

a. Applied against payment for the issue
b. Returned to unsuccessful bidders
c. Lost if the syndicate fails to carry out the provisions of the underwriting agreement
d. Returned to the winning syndicate to cover any loss incurred in the subsequent sale of the issue
(D) All of the statements are true regarding a "good faith" deposit except it is returned to the winning syndicate to cover any loss incurred in the subsequent sale of the issue. Bidding syndicates make a "good faith" deposit to indicate their sincerity. Losing syndicates will have their deposit returned. The issuer will retain the deposit of the winning syndicate to insure performance. When the bonds are sold, the deposit is deducted from the amount due from the underwriter. The "good faith" deposit usually represents 1% to 2% of the total dollar amount of the bonds being offered. (10-7)
122. ("losing 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)
123. An order entered with a brokerage firm will be processed in which order?

I. Cashier's department
II. Margin department
III. Purchase and sale (P&S) department
IV. Wire room (order department)
a. I, II, III, and IV
b. I, III, II, and IV
c. IV, III, II, and I
d. II, III, I, and IV
(C) When an order is entered by a customer, it is processed first in the wire room or order room, then in the P&S department, then the margin department, and then the cashier's department. (11-18)
124. 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)
125. 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)