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125 Cards in this Set

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On February 13th, an investor sold 700 shares of ABC stock for a loss. On the next day, the investor purchased 3 ABC February calls. Which of the following is correct?

A. The entire loss from the sale of stock would be disallowed.
B. A portion of the loss from the sale of the stock would be disallowed.
C. The loss from the sale of stock would not be affected.
D. Any future loss on the options would be disallowed.
(B) The wash sale rule states that all (or part) of a loss will be disallowed if the same (or substantially the same) security is purchased within 30 days (before and after) of the sale. The purchase of a call option on a security is considered substantially the same as the security, thus causing a wash sale. In this question, the purchase of 3 call options would disallow the loss on 300 of the 700 shares that were sold for a loss on February 13th. (21-16)
A real estate limited partnership that does not specify the actual properties to be purchased is known as a:
Staged program
Private placement
Blind pool
Section 8 housing program
(C) If a real estate program's prospectus does not specify the actual properties to be purchased, it is known as a blind pool (or non-specified property) program. An oil and gas program may also be considered a blind pool if the properties to be drilled are not specified in the prospectus.
All of the following would be needed to open a new discretionary margin account EXCEPT a:
New account form
Basic customer agreement
Trust Agreement
Power of attorney
(C) A new account form, basic customer agreement, and power of attorney would be needed to open a new discretionary account. The basic customer agreement includes the hypothecation, loan consent, and credit agreements. A trust agreement is needed to open a trust account
Which of the following is TRUE regarding stock index options?
a. The index is affected if a stock in the index should split.
b. All index options use the European style of exercise.
c. The shortest initial expiration is three months.
d. An exercise is settled by cash instead of the delivery of securities.
(D) The exercise of a stock index option is settled by cash instead of the delivery of securities. An index will not be affected if one of its components should split. Some index options are American style (may be exercised any day up to expiration) while others use the European style (may only be exercised on the last trading day prior to expiration). Stock index options have a monthly expiration cycle.
Interest rates have declined over a sustained period of time. Which of the following companies would have benefitted?
I. ABC Savings and Loan Association
II. RFL Power Company
III. XYZ Brokerage
IV. BTO Airline

A. I and III only
B. II and IV only
C. I, II, and IV only
D. I, II, III, and IV
(D) Declining interest rates are generally helpful to all companies since their borrowing costs decline. Utilities and airlines are typically leveraged companies (heavy borrowers) and are therefore benefitted by lower interest rates. Savings and loans are in the business of lending money and are benefitted when their borrowing costs decline. Brokerage firms benefit from lower borrowing costs and also an increase in business because of a usual rise in the stock market when interest rates decline.
When evaluating two CMOs backed by GNMAs, one having a 6% yield and the other having a 10% yield, which of the following is/are TRUE?
I. Prepayment risk is greater for the CMO with the 10% yield.
II. Prepayment risk is greater for the CMO with the 6% yield.
III. Credit risk is greater for the 10% CMO.

A. I only
B. II only
C. I and III only
D. II and III only
(A) Prepayment risk measures the possibility that homeowners will refinance (prepay) their mortgages. Historically, the speed of prepayment increases when interest rates fall. If this happens, payments will flow into the CMOs at an accelerated rate, forcing investors to reinvest these monies at lower than anticipated rates. Therefore, the CMO with the higher interest rate will have higher prepayment risk.

GNMA-backed CMOs are AAA rated and therefore have little credit risk. Since both CMOs are backed by GNMAs, credit risk is nonexistent for both pools.
An investor purchases a T-bond Mar 120 call at 1.16. The investor's breakeven point is:
A.118.16
B. 118.84
C. 121.16
D. 1.60
(C) When purchasing a call, the breakeven point is the strike price (120) plus the premium (1.16) equaling 121.16.
All of the following are true relating to a Keogh plan EXCEPT:
A It must follow ERISA standards for eligibility, funding, and vesting
B It may be defined benefit or defined contribution
C Distributions paid to participants at retirement are fully taxable as ordinary income
D An individual covered by a Keogh plan may not maintain an IRA
(D) A Keogh plan must follow all ERISA standards. It may be established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is made each year and benefits are whatever is provided by the total of contributions and earnings in the plan. A defined benefit plan promises specific benefits at retirement. Payments made at retirement under either method are fully taxable as ordinary income. An individual may maintain a Keogh and an IRA. However, deductions may only be claimed for IRA contributions if the individual's income is below a specified amount.
Which of the following would be a violation under industry rules concerning gifts and gratuities?
A Taking a client to a dinner valued at $80 per person
B Attending a concert with your client valued at $105 per ticket
C Giving a $300 wedding gift to your brother who is employed at a member firm
D Giving two tickets to your client to attend a basketball game valued at $65 per ticket
D Member firm personnel may not give or permit to be given a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate business travel. In order for the activity to be considered an expense, the RR must attend the event, not give the tickets to another person(s). The value of two tickets ($130) exceeds the $100 limit.

An exemption is provided if the gift is given to another family member for an event relation to a family relationship (a wedding).
A customer's margin account has a market value of $750,000 and a debit balance of $400,000. He also has a commodities account that has equity of $150,000. If the firm went bankrupt, SIPC would provide coverage to this customer for:

A $350,000 in the margin account and nothing for the commodities account
B $150,000 in the commodities account and nothing for the margin account
C $350,000 in the margin account and $150,000 in the commodities account
D $500,000 in the margin account and $150,000 in the commodities account
(A) SIPC will cover the customer's equity in the margin account ($350,000). SIPC does not provide coverage for commodities accounts.
To be considered a regulated investment company a mutual fund must:

A Distribute a minimum amount of its net investment income to shareholders
B Pay tax on all net investment income prior to making distributions to shareholders
C Retain all net investment income to avoid paying tax
D Distribute all of its net investment income to shareholders
(A) To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders. Meeting this requirement allows the investment company to pass on distributions to shareholders without the company having to first pay taxes on the income distributed. (18-29)
Last year, an individual invested $30,000 in a nonqualified variable annuity. The annuity's value is currently $40,000. If the individual withdraws $20,000 and is in a 28% tax bracket, what will be his tax liability?
A 0
B $1,400
C $2,800
D $5,600
(C) The amount invested in a nonqualified variable annuity may not be deducted from income. Any earnings accrue tax-deferred. A withdrawal will be taxed on a LIFO method meaning the earnings (last in) will be considered the first to be withdrawn. Earnings are taxed as ordinary income. Withdrawal of the invested amount is considered return of capital and is not taxed. The annuity has earnings of $10,000 and therefore $10,000 of the $20,000 withdrawn is taxable and the remaining $10,000 is considered return of capital. The tax liability is $2,800 ($10,000 taxable amount x 28% tax bracket).
Which of the following would NOT apply to underwritings of municipal securities?
a. Eastern or Western accounts
b. Negotiated or competitive deals
c. Firm commitment or all-or-none basis
d. Primary or secondary offerings
D
Offerings of municipal securities are not registered with the SEC. They are conducted on a competitive or negotiated basis. Syndicate liability may be divided (Western account) or undivided (Eastern account). The offering may be conducted as a firm commitment, all or none, or best efforts underwriting. (10-1, 9-1)
Who has the responsibility to investigate the accuracy of the information in a prospectus for a DPP?
a. SEC
b. FINRA
c. IRS
d. Managing Underwriter
D
The SEC only reviews the information in a prospectus. It never attests to its accuracy. The managing underwriter is responsible to investigate the accuracy of the information.
15.) An investor has taken the following gains and losses during the tax year: $19,000 gain, and a $24,000 loss. What amount of ordinary income can the investor offset this year?
a. $1,000
b. $2,000
c. $2,500
d. $3,000
B
The maximum capital loss an investor can write off against ordinary income in one tax year is $3,000. The balance of the $2,000 capital loss must be carried forward to the next year. (21-16)
16.) The Dow Theory states that a major trend is confirmed when which of the following indicators reach new highs or lows?
a. The S&P 500 and the NYSE Composite Average
b. The Dow Jones Industrial Average and the Dow Jones Transportation Average
c. The Dow Jones Industrial Average and the Dow Jones Utility Average
d. The Dow Jones Composite and the NYSE Composite Average
B
The Dow Theory holds that a confirmation of a bullish or bearish trend is made when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction and reach new highs or new lows.
17.) XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20.
The value of the outstanding common stock on the balance sheet is:
a. $4,500,000
b. $5,000,000
c. $7,000,000
d. $90,000,000
A
Outstanding shares are issued shares minus treasury stock (shares repurchased by the company). Therefore, there are 4,500,000 shares outstanding at $1 par value for a total of $4,500,000. (4-6)
18.) XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20.
The market capitalization of XYZ common stock is:
a. $4,500,000
b. $5,000,000
c. $90,000,000
d. $100,000,000
C
A company's market capitalization is found by multiplying the market value by the outstanding shares. $20 market value x 4,500,000 shares outstanding = $90,000,000.
19.) An investor purchased a $10,000 Treasury bond that has an 8% coupon and matures 11-1-26. He purchased the bond on Monday, September 10, 201X for regular-way settlement. He sold the bonds on February 11th of the next year for cash settlement. What amount of interest income was taxable in 201X?
a. $108.50
b. $245.50
c. $335.34
d. $400.00
A
When the investor purchased the bond on September 10th, he paid the seller accrued interest from the last interest payment date, up to but not including the settlement date of September 11th. The last interest payment date was May 1st. The buyer therefore owed the seller for 133 days of accrued interest (May = 31 days, June = 30 days, July = 31 days, August = 31 days, September = 10 days). To determine the dollar amount paid, multiply the annual interest payment of $800 by the portion of the year in question:
$800 x 133/365 = $291.50
This means that when the buyer received his $400 semiannual interest payment on November 1, $291.50 represented the amount he paid to the seller and $108.50 represented interest income. Only the interest income of $108.50 received that year is taxable to the investor.
20.) An investor owns Treasury bonds which mature in 20 years. This investor will be exposed to:
a. Credit risk
b. Inflationary risk
c. No risk
d. Capital risk
B
Credit risk is the risk that the investor will not receive interest and/or principal when it is due. Capital risk is the risk that the investor will lose his investment. Since Treasury bonds are direct obligations of the U.S. government, there is no risk that the investor would not receive interest and/or principal when due or lose his investment. Therefore, the investor is free of credit and capital risk. All fixed-income securities expose an investor to inflationary risk (purchasing power risk).
21.) The real interest rate is best defined as the:
a. Interest earned by an investor after taxes
b. Interest rate charged to investors in a margin account
c. Interest earned that exceeds the inflation rate
d. Amount that the prime rate exceeds the discount rate
C
The real interest rate received by an investor is the amount of interest received minus the inflation rate. If an investor is receiving a 10% interest rate when inflation is at 6%, the real interest rate received is 4% (10% - 6%).
22.) Foreign currency spot transactions normally settle in:
a. One business day
b. Two business days
c. Three business days
d. Five business days
B
Settlement for foreign currency spot transactions is usually two business days.
The measurement of output that covers goods and services produced within the United States is called:
a. Gross private domestic investment
b. Transfer of payments
c. Net production
d. Gross domestic product
A
GDP is a measurement of goods and services produced in the United States, even if the suppliers are not U.S. residents. Many economists today are using this measure of output
Which of the following best describes a wrap account?
a. A personal, joint, and IRA account with one account number
b. A managed account in which advisory and transaction charges are included in one comprehensive fee
c. A consolidated account in which the investor can buy or sell options, equities, or bonds
d. An investment club account with no more than 99 investors
B
The term wrap account refers to the fee arrangement where one fee, usually ranging from one to three percent annually, is charged by a broker-dealer. The fee is used to cover administrative, portfolio management, and transaction costs. A wrap account is usually managed by an investment adviser
25.) An indenture for a corporate bond includes all of the following EXCEPT:
a. Early redemption features
b. A list of all bonds previously issued by the corporation
c. A description of any pledged collateral
d. The interest payment dates
B
A bond indenture would not contain a list of all bonds issued by the corporation. The other items are found in the indenture. (6-1)
26.) In January an investor receives a bonus from her employer. She will need to have access to the funds in April. An RR should NOT recommend which of the following municipal securities?
a. A variable rate demand obligation
b. An auction rate security
c. A tax anticipation note
d. A bond anticipation note
B
VRDOs and ARS are both are long-term securities with short-term trading features. VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARS) do not have this feature and if the auction fails the investor may not have immediate access to their funds. TANs and BANs are short-term municipal notes and if their maturities extend beyond April, these securities could be easily sold in the secondary market.
27.) If a broker-dealer is assigned an exercise notice on Monday, May 2nd, on what day will the called stock settle?
a. Thursday, May 5
b. Tuesday, May 10
c. Wednesday, May 11
d. Friday, May 6
A
If an option contract is exercised, the settlement date for the stock is three business days from the date the option was exercised.
.) Which of the following methods are used by the Options Clearing Corporation in assigning exercise notices?
I. Random selection
II. First-in, first-out
III. To the member firm holding a long position that first requests an exercise
IV. On the basis of the largest position
a. I only
b. I and III only
c. II and IV only
d. I, II, and III only
A
The OCC assigns exercise notices on a random selection basis only
29.) Which of the following statements is TRUE under MSRB rules?
a. A broker-dealer is not permitted to act as a financial adviser to an issuer of municipal securities.
b. A broker-dealer is permitted to act as a financial adviser and underwriter for the same issuer if the securities are sold on a negotiated basis.
c. A broker-dealer is permitted to provide advice to an issuer relating to the issuance of municipal securities in the capacity of acting as an underwriter and not as a financial adviser.
d. A broker-dealer is not permitted to act as an underwriter for the same issuer on both negotiated and competitive offerings.
C
Under MSRB rules, a financial advisory relationship exists when a municipal securities broker or dealer gives, or enters into an agreement with an issuer to give, financial advisory or consultant services regarding the issuance of municipal securities. A broker-dealer is permitted to provide advice to an issuer relating to the issuance of municipal securities in the capacity of acting as an underwriter and not as a financial adviser. A financial adviser usually charges an issuer a fee, whereas an underwriter's profit comes from the underwriting spread. A broker-dealer that has a financial advisory relationship is prohibited from acting as an underwriter with respect to the same issuer of municipal securities. The rule applies whether the issue is sold on a negotiated or competitive bid basis. There is no restriction on a broker-dealer acting as an underwriter for the same issuer on both negotiated and competitive offerings.
When opening a new account, what is the order in which the following actions take place?
I. Obtain approval from the ROP
II. Obtain essential facts from the customer
III. Obtain a signed options agreement
IV. Enter the initial order
D
When opening an account, the first step would be to obtain the essential facts regarding the investor's investment objectives and financial means. The account would then be approved by the manager and the initial order would be entered. The member firm has 15 days to obtain the signed options agreement.
Which two of the following are TRUE relating to the notes issued by the Federal Farm Credit Banks Consolidated System?
I. They are issued at a discount.
II. They are issued at par.
III. They are interest bearing.
IV. They are non-interest bearing.
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
B
The Farm Credit Banks issue consolidated systemwide notes which are issued at a discount (like T-bills) and are non-interest bearing. Bonds are also issued which are interest bearing (have a stated interest rate). Interest is subject to federal taxation but is exempt from state and local taxation
Quotes for non-Nasdaq, over-the-counter traded equities can be obtained from:
I. The third market
II. The Pink Sheets
III. Consolidated Quotation System
IV. The OTC Bulletin Board
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
D
Quotes for non-Nasdaq, over-the-counter traded equities can be found in the Pink Sheets and the OTC Bulletin Board (OTCBB). The third market refers to exchange-listed securities trading over-the-counter and the quotes can be found on the Consolidated Quotation System
33.) A customer wishes to sell restricted stock under Rule 144 and files Form 144. The filing is good for:
a. 90 days
b. 120 days
c. 180 days
d. One year
A
The filing under Rule 144 covers a 90-day period.
34.) If a security has a low beta it will:
I. Underperform the market when prices rise
II. Underperform the market when prices fall
III. Outperform the market when prices rise
IV. Outperform the market when prices fall
a. I and III
b. I and IV
c. II and III
d. II and IV
B
Beta measures a security's volatility in relation to the market. A stock with a low beta (less than 1) would be less sensitive to market movements. In a rising market, a low-beta security would lag in performance. However, when prices are declining, this security would do better as it would fall less than the market, in general. A stock with a high beta (greater than 1) would be more sensitive to market movements. A high-beta stock would rise and fall faster than the overall market.
35.) A transaction for a listed stock settles on a regular-way basis. This means that settlement occurs:
I. In three business days
II. In five business days
III. At the buyer's premises
IV. At the seller's premises
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
A
Regular-way settlement for stock transactions is in three business days. Since the seller must deliver the securities, settlement takes place at the buyer's premises.
36.) Which of the following would have a negative impact on a municipality's creditworthiness?
a. An increase in per capita income
b. An increase in property values
c. An increase in unfunded pension liabilities
d. A decrease in per capita debt
C
Many municipalities have pension funds for their employees. If there is less money in the fund than the amount needed to pay future benefits, it is referred to as an unfunded pension liability. This is a negative factor since the municipality would have to contribute that amount in the future. This drain on monies could affect the municipality's ability to meet its bonded debt (total outstanding debt).
37.) The resolution for a revenue bond would contain all of the following EXCEPT:
a. Insurance covenant
b. Provisions to provide financial reports
c. Additional bonds covenant
d. Amount of the good faith deposit
D
The bond resolution or indenture contains the covenants, flow of funds provision, and provisions to provide financial reports. The amount of the good faith deposit would be found in the Notice of Sale and Syndicate Letter.
38.) All of the following issue securities EXCEPT:
a. Government National Mortgage Association
b. Federal National Mortgage Association
c. Federal Reserve Board
d. Federal Farm Credit System
C
The Federal Reserve Board (FRB) is responsible for monetary policy within the country. It does not issue any securities.
39.) All of the following are true relating to a secondary market joint account in municipal bonds EXCEPT:
a. Members may not publish different offering prices
b. They require a good faith deposit
c. There may be an order period
d. There may be a takedown
B
A good faith deposit is a sum of money given to the issuer of a new municipal bond issue along with a syndicate's bid. It is not involved in secondary market transactions. A secondary market joint account exists when two or more dealers form an account to jointly offer a block of bonds in the secondary market. As with a new issue, there may be an order period as well as a takedown (member's discount). MSRB rules prohibit members of the account from offering the bonds at different prices.
.) The Federal Reserve will normally:
I. Buy securities in the open market during inflationary times
II. Sell securities in the open market during inflationary times
III. Buy securities in the open market during deflationary times
IV. Sell securities in the open market during deflationary times
a. I and III
b. I and IV
c. II and III
d. II and IV
C
When buying securities in the open market, the FRB would be adding money to the banking system. The FRB would take this action during deflationary times to make more funds available (looser credit) causing interest rates to decline hoping to stimulate a sluggish economy. The Fed would sell securities to take money out of the banking system when combating inflation.
41.) Leslie Moore has an account with Zucker Securities in New York City. She decides to move to Montana to raise cattle. She still intends to maintain an account with Zucker, which is registered only in New York. Which of the following statements is correct?
a. This is permitted provided Ms. Moore maintains a P.O. Box in New York.
b. This is permitted since the account was opened in New York prior to the client's move to Montana.
c. This is only permitted if Zucker registers as an investment adviser in Montana.
d. This is prohibited.
D
A broker-dealer must be registered in each state in which it conducts business. In addition, the securities and the registered representative must be registered in all states in which the issue is sold. Registration as an investment adviser is not the same as registration as a broker-dealer. (9-15)
42.) Auction Rate Security is a type of investment that has the interest or dividend rate reset periodically. The term "net clearing rate" refers to which of the following?
a. The average rate of all submitted bid
b. The highest rate to match supply and demand
c. The lowest rate to match supply and demand
d. The lowest rate of all submitted bids
C
Based on submitted bids from holders and prospective buyers, the net clearing rate set by the auction agent will be the lowest rate that matches supply and demand. After the deadline for submission of orders, the auction agent assembles all the orders from lowest to highest bid and determines the net clearing rate. The net clearing rate is the lowest rate bid sufficient to cover all the securities exposed for sale. (8-19)
43.) A limited partner has a $40,000 basis in a partnership. During the past year, the limited partner received a cash distribution of $20,000 from the partnership. The same year, his share of partnership losses was $35,000. What is the maximum loss that the limited partner could declare for tax purposes during that year?
a. 0
b. $20,000
c. $35,000
d. $40,000
B
Before losses may be declared, a limited partner's basis must be reduced for any cash distribution. The limited partner may not declare losses that are greater than his basis. The basis after adjustment for the cash distribution is $20,000 ($40,000 - $20,000). The maximum loss that can be declared is therefore $20,000.
44.) An apprentice at a municipal securities firm is not permitted to:
a. Trade with another municipal securities firm
b. Accept an unsolicited order from a customer
c. Request a bid from his firm's trader
d. Give a bid to another municipal securities firm
B
Prior to being registered as a municipal securities representative, an individual must serve as an apprentice for a minimum of 90 days. An apprentice may function as a representative in all activities except contact with the public and being compensated on the basis of transactions (receive commissions). The apprentice may execute transactions with other firms, but not with customers, even if they are unsolicited.
45.) ll of the following must be approved by a municipal securities principal EXCEPT:
a. A research report sent to a customer regarding municipal securities
b. Each account engaging in municipal securities transactions
c. All advertising relating to municipal securities
d. All orders to buy municipal bond funds
D
A municipal securities principal must promptly approve (initial) all transactions for municipal securities but not municipal securities bond funds, correspondence, and advertising. Research reports are considered advertising.
46.) An investor enters an order to buy 400 shares of HRJ @ 56 on the NYSE. Which of the following are TRUE regarding this order?
I. The specialist may hold this order in his book.
II. The order can only be executed at 56.
III. A portion of the 400 shares may be purchased.
IV. The order must be executed immediately.

a. I and III only
b. II and III only
c. II and IV only
d. I, II, III, and IV
A
Since a price is specified, it is a limit order. A limit order may be executed at the limit price or better (lower for a buy order). It does not have to be executed at exactly the limit price. A specialist is permitted to hold a stop, limit, and stop limit order. A portion of the order may be executed since the order was not marked AON (all or none). It does not have to be executed immediately since it was not marked IOC (immediate or cancel). (11-22)
47.) Which of the following are TRUE regarding account statements that are sent by member firms to customers?
I. Active accounts get monthly statements.
II. Active accounts get quarterly statements.
III. Inactive accounts get monthly statements.
IV. Inactive accounts get quarterly statements.
a. I and III
b. I and IV
c. II and III
d. II and IV
B
Brokerage firms are required to send customer statements quarterly for accounts with no activity. If there is activity, statements are sent monthly.
48.) An individual purchases $5,000 BRT Corporation 7 3/8% bonds that mature 10-1-29. The transaction was executed on Thursday, August 5, 20XX for regular-way settlement. The bonds were sold on March 10th of the following year. How much interest must the individual report for tax purposes in 20XX?
a. $52.24
b. $132.13
c. $142.38
d. $220.22
A
On October 1st, the investor will receive a semiannual interest payment of $184.37 ($5,000 x 7 3/8% divided by 2). The investor, for tax purposes, would deduct the amount of accrued interest (7 3/8% x $5,000 x 129/360 = $132.13) paid at the time of the transaction from the amount received ($184.37) on October 1st and report the difference as income earned and received ($184.37 - $132.13 = $52.24). (
49.) An investor is short stock at $70. The current market price of the stock is $40 and the investor anticipates that the price will continue to decline. However, he thinks the price will temporarily rise. If he does not wish to close out his short position, his best strategy to prevent a loss would be to:
a. Buy a call
b. Sell a call
c. Buy a put
d. Buy a straddle
A
The investor has an unrealized profit of $3,000 on the short position and anticipates that the stock will continue to decline and wishes to maintain the short position. However, the investor anticipates a temporary rise in the price and wishes to protect the unrealized profit. The best strategy would be to buy a call. If the stock should rise in price, the loss on the short position will be offset by the profit on the call.
Let's assume that the investor buys a 40 call for a premium of 3 when the market price is $40. The price of the stock rises to $45, thereby reducing the unrealized profit on the short position by $500. The call, which is now 5 points in-the-money, rises to 7.50. The investor sells the call for a profit of $450. The total loss of unrealized profits on the short position is $50 rather than $500.
50.) A common shareholder has all of the following rights EXCEPT the right to:
a. Vote for the board of directors
b. Receive dividends if voted by the board of directors
c. Give or sell shares to anyone he wishes
d. Examine any and all corporate records
D
Shareholders have the right to examine some, but not all corporate records.
51.) A young woman opens an IRA and contributes $2,000. She has an annual income of $17,000. Which of the following would be the MOST appropriate investment for her IRA?
a. Municipal bonds
b. Growth mutual fund
c. Options
d. Futures
B
IRAs are retirement vehicles. And like other retirement plans, the participant is penalized if the money is used prior to age 59 1/2. This fact makes growth investments the most suitable types of investment choices. Of the choices given, the growth mutual fund is the most suitable choice. Options and futures are wasting assets and are therefore inappropriate for an IRA account. Municipal bonds are also inappropriate, because when placed in an IRA, the interest becomes taxable at retirement. The main reason that investors buy municipal bonds it to take advantage of tax-exempt interest. If that characteristic is removed, municipal bonds are not very attractive.
52.) A municipal bond trader looking for the best price of a specific municipal issue in the secondary market would use:
a. The Yellow Sheets
b. The Daily Bond Buyer
c. Munifacts
d. A broker's broker
D
A broker's broker is a primary source for a quote in the secondary market and would help the trader to find the best price on a specific issue. The Yellow Sheets will show interdealer offerings in the secondary market for corporate bonds. The Daily Bond Buyer's focus is on new issues, not the secondary market.
53.) Which of the following are covered under the Securities Exchange Act of 1934?
I. Short selling of municipal revenue bonds
II. Short selling of listed securities
III. Registration of broker-dealers
IV. Registration of new issues
a. I and II only
b. II and III only
c. I, II, and III only
d. II, III, and IV only
B
Registration of broker-dealers, publicly traded companies, exchanges, and other self-regulatory organizations are regulated under the Securities Exchange Act of 1934. Registration of new issues is covered under the Securities Act of 1933. The 1934 Act, through Regulation SHO, governs short sales of equity securities. Short sales of municipal bonds are not covered under the 1934 Act, and are exempt from registration under the Securities Act of 1933.
.) The purchase of a new issue prior to settlement with the issuer can best be described as:
a. A subject or workout transaction
b. A when issued transaction
c. A seller's option contract
d. A violation of the Securities Act of 1933
B
When issued refers to new issue transactions in securities prior to settlement with the issuer. The purchase or sale of new issue securities prior to registration may be a violation of the 1933 Act.
55.) A registered representative for ABC Brokerage has just been elected president of the Harper Valley School Board. The school district is going to float a new serial issue of general obligation bonds backed by ad valorem taxes.
ABC Brokerage's relationship to the school district can be described as:
a. Financial advisor
b. Underwriter of the issue
c. A control relationship
d. An affiliated relationship
C
A control relationship exists when a brokerage firm or an employee of a firm is in a position to control or influence the issuance of securities by an issuer.
56.) A registered representative for ABC Brokerage has just been elected president of the Harper Valley School Board. The school district is going to float a new serial issue of general obligation bonds backed by ad valorem taxes.
ABC must disclose this relationship to clients if:
I. The clients purchase the new Harper Valley bonds in the primary market
II. The clients purchase any Harper Valley bonds in the secondary market
III. ABC is acting as principal
IV. ABC is acting as agent
a. I and III only
b. II and III only
c. II and IV only
d. I, II, III, and IV
D
If a control relationship exists, the broker-dealer must disclose the relationship to all customers purchasing the issuer's securities in all situations.
Bonds Curr. Yld. Vol. Close Net Chg.
AlaP 10 1/2 25 10.4 25 100 7/8 -1/8
AlldC zr29 . . . 110 14 1/8 -1/2
AMAX 8 1/2 25 13.6 3 104 1/2 +1/8
AmMed 9 1/2 21 cv 15 97 +1
ATT 5 1/2 27 7.2 14 76 -1 1/4
An investor purchased 10 ATT 5 1/2 27. How much interest will the investor receive each year?
a. $55
b. $97
c. $550
d. $970
C
The description ATT 5 1/2 27 represents a 5 1/2% bond maturing in 2027. The investor would receive interest equal to 5 1/2% of the face value ($10,000) each year. The investor would receive $550 (5 1/2% x $10,000). (6-13)
58.)
Bonds Curr. Yld. Vol. Close Net Chg.
AlaP 10 1/2 25 10.4 25 100 7/8 -1/8
AlldC zr29 . . . 110 14 1/8 -1/2
AMAX 8 1/2 25 13.6 3 104 1/2 +1/8
AmMed 9 1/2 21 cv 15 97 +1
ATT 5 1/2 27 7.2 14 76 -1 1/4
An investor asks you to recommend bonds that would generate cash flow. All of the following would be suitable EXCEPT:
a. Ala P 10 1/2 25
b. AMAX 8 1/2 25
c. AlldC zr29
d. AmMed 9 1/2 21
C
The AlldC zr29 is a zero-coupon bond. It would not provide any cash flow since the investor would not receive any interest.
59.)
Bonds Curr. Yld. Vol. Close Net Chg.
AlaP 10 1/2 25 10.4 25 100 7/8 -1/8
AlldC zr29 . . . 110 14 1/8 -1/2
AMAX 8 1/2 25 13.6 3 104 1/2 +1/8
AmMed 9 1/2 21 cv 15 97 +1
ATT 5 1/2 27 7.2 14 76 -1 1/4
What was the previous day's closing for AmMed 9 1/2 21?
a. 16
b. 96
c. 97
d. 98
B
The net change for the AmMed 9 1/2 21 is +1. The closing price of 97 is therefore 1 point higher than the previous day's close. The previous day's close would be 96
60.) All of the following money market instruments trade in the secondary market EXCEPT:
a. Directly placed commercial paper
b. Eurodollar CDs
c. Repurchase agreements
d. Bankers' acceptances
C
Repurchase agreements typically are not traded in the secondary market. Eurodollar CDs are certificates of deposit payable in Eurodollars (U.S. currency on deposit in foreign banks). Eurodollar CDs are traded in the secondary market.
61.) An investor is expecting a sharp decline in interest rates in the near future. To capitalize on this situation the investor should buy:
a. Premium bonds with short maturities
b. Premium bonds with long maturities
c. Discount bonds with short maturities
d. Discount bonds with long maturities
D
Long-term bond prices are more volatile than short-term bond prices. Discount bond prices are more volatile than premium bond prices. If the investor expects interest rates (yields) to decline, he is anticipating rising bond prices. The bonds which will rise (fluctuate) the most are long-term, discount bonds.
62.) A covered call writer could be described as being:
a. Short the call, and short the stock
b. Short the call, and long the stock
c. Long the call, and short the stock
d. Long the call, and long the stock
B
When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.
63.) Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?
a. $680,000
b. $686,800
c. $690,200
d. $714,000
C
If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock which it owns (70% is excluded). The company would have to add $30,000 (30% of $100,000) to its taxable income. The total taxable income would therefore be $2,030,000. The tax liability would be $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.
64.) If an investor wrote one OEX March 525 put option and the option was exercised when the index was 522.00, the writer would be obligated to deliver:
a. 100 shares of the OEX index
b. $300
c. $16,200
d. $16,500
B

If a stock index option is exercised against the writer, the writer is obligated to deliver the cash difference between the exercise price and the index value as of the close of trading on that day if the option is in-the-money. The exercise price of the put option is 525 and the lower index value is 522.00. The writer is obligated to deliver the cash difference of $300. (15-37)
Exercise price 525 x $100 = $52,500
Index value 522.00 x $100 = - 52,200
Difference $300
65.) Which of the following are important factors in determining the suitability of a municipal bond recommendation to a customer?
I. State of residence
II. Tax bracket
III. Financial condition
D
An investor's tax bracket and financial condition are important factors. The state in which the investor resides is important since the interest earned on a municipal bond may be subject to that state's income tax.
66.) All of the following funds would be suitable recommendations for investors mainly seeking income EXCEPT:
a. Money market fund
b. Municipal bond fund
c. Balanced fund
d. Sector fund
D
A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.
67.) Which of the following securities would be most appropriate for an investor seeking to buy a new home within the next year?
a. A long-term CD purchased in the secondary market, with 2 years to maturity, but callable in six months
b. A newly issued 20-year bond callable in six months
c. A newly issued non-callable 5-year Treasury note
d. A long-term CD purchased in the secondary market, that matures in 12 months
D
In general, the most liquid securities are money-market securities (those that mature in a year or less). Securities with longer maturities tend to be more volatile. Even if a security is callable, there is no guarantee that the call will take place. If interest rates are rising, bond prices will fall, and call features are unlikely to be exercised by issuers.
68.) An investor shorts a stock at $6 per share. What is the minimum maintenance requirement for this position?
a. $1.80 per share
b. $2.50 per share
c. $3.00 per share
d. $5.00 per share
D
The minimum maintenance requirement for a stock sold short at $5 per share or above is $5 per share or 30% of the market value, whichever is greater.
69.) On September 14th, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer:
I. Has engaged in a debit spread
II. Has engaged in a credit spread
III. Wants the spread to widen
IV. Wants the spread to narrow
a. I and III
b. I and IV
c. II and III
d. II and IV
A
To determine if the customer wants the spread to widen or narrow, it is necessary to determine if the spread is a debit or credit spread. The premium for an option is determined by two factors; the in-the-money amount of the option (intrinsic value) and the time value. Since both options have the same strike price, the intrinsic values (in-the-money amount) are equal. Therefore, any difference in premium is the result of a difference in time value. Since the December contract has longer until expiration than the November contract, it has more time value. Therefore, the premium for the December contract will be larger than for the November contract. Since the customer purchased the December contract (higher premium), it is a debit spread and will profit if the spread widens.
70.) Which type of oil and gas program would offer an investor the highest potential return on investment?
a. Developmental
b. Exploratory
c. Balanced
d. Income
B
Drilling in a new area (exploratory) poses more risk than in a proven area (developmental) but if oil and gas are found, the return will be substantial
71.) A U.S. citizen owns shares of a foreign stock. Which of the following is TRUE regarding dividends received by the investor?
a. Dividends on the stock are completely tax-free to the investor.
b. The investor may apply any foreign tax paid on the dividend as a credit against U.S. income tax.
c. If foreign tax is paid, the investor does not have to pay U.S. income tax on any of the dividend.
d. Dividends received are classified as passive income.
B
An investor owning shares of a foreign stock may be required to pay foreign tax on dividends. Subject to certain limitations, the IRS allows investors to take a tax credit on the amount of foreign tax paid.
72.) Prior to first use, a municipal securities principal must approve a(n):
I. Official Statement
II. Abstract of an official statement
III. Red Herring
IV. Research Report
a. IV only
b. I and II only
c. II and IV only
d. I, II, III, and IV
C
Advertising must be approved prior to first use by a municipal securities principal. An official statement or preliminary official statement is not considered advertising. However, a dealer prepared summary or abstract of the official statement is considered advertising. Research reports are also considered advertising. A red herring (preliminary prospectus) relates to a requirement of the Securities Act of 1933 from which municipal issues are exempt.
73.) Under industry rules, the final approval to open a new account is given by a(n):
a. Registered Representative
b. Operations Manager
c. Partner or Principal
d. Financial Principal
C
Advertising must be approved prior to first use by a municipal securities principal. An official statement or preliminary official statement is not considered advertising. However, a dealer prepared summary or abstract of the official statement is considered advertising. Research reports are also considered advertising. A red herring (preliminary prospectus) relates to a requirement of the Securities Act of 1933 from which municipal issues are exempt.
74.) Which of the following may write calls covered by XYZ stock?
I. The president of XYZ Corporation
II. The trustee of XYZ Corporation's pension fund
III. XYZ Corporation
IV. ABC Corporation
a. II and IV only
b. I, II, and III only
c. I, II, and IV only
d. I, III, and IV only
C
Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock.
75.) When calculating cost depletion for an oil program, all of the following are necessary EXCEPT the:
a. Adjusted basis of the property
b. Recoverable reserves
c. Amount extracted and in storage
d. Amount extracted and sold
C
To calculate cost depletion, the adjusted basis, amount of recoverable reserves, and the amount extracted and sold are needed. Percentage depletion is based on a percentage of gross income from the property.
76.) A 7% convertible bond has a conversion ratio of 40. The bond has a non-dilutive feature and the common is selling at $43 a share. If the company distributes a 10% stock dividend, which of the following is true regarding the convertible bond?
a. Conversion ratio remains at 40, but the conversion price is reduced.
b. Conversion ratio increases to 45.50 and the conversion price remains constant.
c. Conversion price decreases to $22.73 and the conversion ratio remains the same.
d. Conversion price decreases to $22.73 and the conversion ratio increases to 44.
D
A non-dilutive feature requires that the conversion features be adjusted should there be a stock split or stock dividend. The conversion ratio will be increased and the conversion price will be reduced. The new conversion ratio will be 44 [the old ratio (40) plus the old ratio times the percentage dividend (40 x 10% = 4)]. The new conversion price will be the par value of the bond divided by the new conversion ratio ($1,000 divided by 44 equals $22.73).
77.) Which of the following municipal entities would not issue overlapping debt?
a. Park district
b. Library district
c. School district
d. Turnpike authority
D
Overlapping debt involves only general obligation borrowing. A turnpike authority would typically issue only revenue bonds.
78.) Which of the following statements is true concerning Electronic Communication Networks (ECNs)?
a. They can only be used by retail investors.
b. They can be used to obtain automatic execution.
c. They can only be used by institutional investors.
d. They can be used by clients that do not want to use a broker-dealer.
B
Electronic communication networks or ECNs are trading systems designed to match buyers with sellers of securities. They can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another, but allow subscribers such as broker-dealers to use these systems to execute the orders sent to them by their clients.
79.) Under the partnership democracy provisions of a limited partnership, the limited partners would be permitted to do all of the following EXCEPT:
a. Petition the court to have the general partner removed
b. Petition the court to have the partnership dissolved
c. Sell assets owned by the partnership
d. Sue the general partner
C
Selling assets is a management decision and is therefore not the role of the limited partners. Democracy provisions would permit the other choices. (20-3)
80.) Mr. Smith purchases 100 shares of MNP @ 30 and also purchases 1 MNP May 30 put @ 3. Mr. Smith is:
a. Guaranteed against a loss until the option expires
b. Guaranteed a profit until the option expires
c. Protected from a decline in the market for as long as he owns the stock
d. Protected from a decline in the market until the option expires
D
The purchase of a put will provide protection against a decline in a long stock position. Should the stock decline, the holder could exercise the put and deliver his stock at the strike price. This would limit Mr. Smith's loss. The protection would last only until the put expired. Mr. Smith does have a limited potential loss until expiration but is not guaranteed against a loss or guaranteed a profit.
81.) If the FRB engages in repurchase agreements, which two of the following are TRUE?
I. Money supply is being increased.
II. Money supply is being decreased.
III. Fed funds rate could rise.
IV. Fed funds rate could decline.
a. I and III
b. I and IV
c. II and III
d. II and IV
B
The immediate result of a FRB repo is an increased money supply which would have the effect of lowering interest rates
82.) Which of the following transactions would not violate FINRA's New Issue Rule regarding the sale of an equity IPO to a restricted person?
a. A registered representative involved in the distribution sells shares to her brother who she does not support.
b. The wife of a registered representative purchases shares from a broker-dealer that does not employ her spouse.
c. A registered representative sells shares to an uncle that she supports.
d. The mother of a registered representative purchases shares from a broker-dealer that does not employ her child.
D

The prohibition of IPO purchases by a restricted person include the following people.
• FINRA member firms and any associated person (i.e. an employee) of the member firm
• An immediate family member of an employee of a member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm.
The aforementioned immediate family members would only be considered a restricted person if any one of the following three conditions apply:
• The employee gives/receives material support to/from the immediate family member. Material support is defined as providing more than 25% of the person's income or living in the same household as the person associated with the member firm.
• The family member is employed by the member firm that is selling the new issue.
• The family member has the ability to control the allocation of the new issue.
Since the mother is not supported by her child and is purchasing the shares from a broker-dealer, which does not employ her child, she is not restricted on this purchase. (9-4)
83.) Mr. Green buys 300 shares of RSW at 15. He then writes 3 RSW July 20 calls at 1 and writes 3 RSW July 10 puts at 50 cents. Mr. Green's maximum potential loss is:
a. Unlimited
b. $4,050
c. $4,950
d. $7,050
D
Mr. Green has written 3 covered calls and 3 uncovered puts. In both cases, the maximum loss occurs if the underlying stock (RSW) becomes worthless. If the market price of RSW is zero, the 3 covered calls would result in a $4,200 loss (300 shares x $15 purchase price - $300 premium received). At zero, the 3 uncovered puts are exercised for a net loss of $2,850 (3 contracts x $10 strike price - the premium received of $150). Thus, the total loss is $7,050 ($4,200 + $2,850).
84.) Which TWO of the following may be included in the STRIPS program to create zero-coupon securities?
I. Treasury bills
II. Treasury notes
III. Savings bonds
IV. Treasury bonds
a. I and III
b. I and IV
c. II and III
d. II and IV
D
Treasury STRIPS are created when Treasury notes and Treasury bonds are separated (stripped) of their coupons. Treasury bills and savings bonds are not permitted to be stripped.
85.) The current yield for a 9% Treasury bond trading at 101:14 is:
a. 8.77
b. 8.87
c. 8.90
d. 8.93
B
Current yield is the interest rate divided by the asked price. It is 8.87% (9% interest rate divided by the asked price of 101 14/32 or 101.4375). Treasury bonds are quoted as a percentage of par in 32nds of a point.
86.) The payout option which would provide an investor with income for the later of 10 years or death.
Select the choice which best matches the statement:
a. Straight life
b. Straight life with period certain
c. Variable annuity
d. Fixed annuity
B
A period certain payout guarantees that a minimum number of payments will be made even if the annuitant dies before the period certain has elapsed.
87.) XYZ Corporation borrows money at a rate of interest that is one point above LIBOR. Therefore, the rate is based on:
a. A long-term bond index
b. The U.S. prime rate
c. The London Interbank Offered Rate
d. A rate established by the Federal Reserve
C
LIBOR is the London Interbank Offered Rate. It is the average rate that banks charge each other on loans for London deposits of Eurodollars.
89.) From the items below, choose the one that best describes the economic theory that relies on controlling 88.) From the items below, choose the one that best describes the economic theory that emphasizes increasing the government's role in managing the economy through both fiscal and monetary measures.
a. Keynesian economic theory
b. Supply-side economics
c. Monetarist theory
d. Random walk theory
A
Keynesian economics places emphasis on increasing government intervention when attempting to manage the economy.
89.) From the items below, choose the one that best describes the economic theory that relies on controlling the money supply and interest rates to manage the economy.
a. Keynesian economic theory
b. Supply-side economics
c. Monetarist theory
d. Random walk theory
C
The moneterist believes that the economy can be controlled by increasing or decreasing the money supply
90.) Tax preference items would include all of the following EXCEPT:
a. Accelerated depreciation in excess of straight line
b. Straight-line depreciation
c. Excess intangible drilling costs
d. Excess mining, exploration, and development costs
B
Tax preference items are used in calculating the alternative minimum tax (AMT) (A tax designed to prevent wealthy investors from using tax shelters to avoid other (income) taxes. The calculation of the AMT takes into account tax preference items. See also: Tax Preference Item.). Straight-line depreciation (A method of calculating depreciation or amortization that results in a uniform expense spread evenly over the life of the asset (vs. Accelerated Depreciation). See also: Depreciation; Amortization.) is not a tax preference item.
91.) Which of the following is true regarding REITs?
a. They are exempt from the Securities Act of 1933.
b. They are regulated investment companies.
c. They may pass losses through to the investors.
d. They may be traded on an exchange.
D
REIT shares may be traded either OTC or on an exchange. REITs are nonexempt securities under the 1933 Act. REITs are not regulated investment companies and may not pass losses to the investors.
92.) Why would a new account be designated TOD?
a. To allow for joint trading on the account.
b. To designate a pattern day trading account
c. To avoid probate
d. To prevent freeriding
C
TOD (Transfer on Death) is a form of account ownership that allows for the transfer of the account to a beneficiary upon the death of the primary owner. Such an account enables the transfer of assets without probate.
93.) When is the regulatory element of continuing education required to be completed by a registered rep?
I. On the second anniversary of initial registration
II. On the third anniversary of initial registration
III. Every two years thereafter
IV. Every three years thereafter
a. I and III
b. I and IV
c. II and III
d. II and IV
B
Registered reps are required to participate in regulatory element training on the second anniversary of their initial registration, and every three years thereafter.
94.) A drill manufacturer in the U.S. has a contract with a French company to deliver equipment in the near future. Payment will be made in Euros. The U.S. manufacturer could protect itself against an adverse change in the value of the Euro by:
a. Buying euros
b. Buying euro puts
c. Buying euro calls
d. Shorting euro puts
B
Since France uses the euro as its currency, the U.S. manufacturer will receive euros in payment. Should the value of the euro decline, the U.S. manufacturer would be adversely affected. Buying euro puts would provide some protection since their value would increase if the euro declined. Each of the other positions would produce a loss if the euro declined.
95.) Which of the following best describes Eurodollars?
a. U.S. dollars on deposit in U.S. banks
b. U.S. dollars on deposit in European banks
c. U.S. dollars on deposit in foreign banks
d. European currency on deposit in U.S. banks
C
Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.
96.) Frederick Forsythe is the manager for an asset allocation fund. In May, the fund's portfolio is allocated as follows.
Cash (including T-bills) 5%
Convertibles 12%
Corporate Bonds 18%
Common Stock 65%
During the first week of June, Mr. Simian shifted the assets in the portfolio to reflect:
Cash (including T-bills) 65%
Convertibles 5%
Corporate Bonds 12%
Common Stock 18%
The reason for the change is most likely that Mr. Simian:
a. Is bearish on bonds and stocks
b. Anticipates a decrease in interest rates
c. Is employing fundamental analysis
d. Is bearish on stocks and bullish on bonds
A
The portfolio shift reflects significantly lower emphasis on stocks and a reduced position in bonds. If the manager anticipated a decrease in interest rates, he would be bullish on bonds. The bond allocation would then be expected to increase. Fundamental analysts are not market timers.
97.) Munifacts could contain:
I. The fed funds rate
II. Information about an upcoming municipal issue
III. The amount of a new issue that is yet unsold (new issue balance)
IV. Dealer to dealer availability of municipal bonds in the secondary market
a. I and II only
b. I, II, and III only
c. II, III, and IV only
d. I, II, III, and IV
D
Munifacts is a wire service to which many firms subscribe. It provides information about specific new issues as well as general financial information. There are also secondary market offerings of municipal bonds on Munifacts
98.) Pursuant to the bid form for a new municipal issue, it:
I. Is used for a competitive sale
II. Is used for a negotiated sale
III. Will contain the proposed interest rate
IV. Will contain the price the bidder will pay for the issue
a. I and III only
b. II and III only
c. I, III, and IV only
d. II, III, and IV only
Negotiated issues do not require a bid form since the underwriter is appointed. The bid form will contain the interest rate proposed by the bidder as well as the price the bidder will pay.
99.) A husband and wife are both currently employed. The husband earns $95,000 per year and the wife earns $120,000 per year. Which of the following are true concerning contributions to a Roth IRA?
I. The husband can contribute $5,000 per year.
II. The husband cannot contribute.
III. The wife can contribute $5,000 per year.
IV. The wife cannot contribute.
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
D
Contributions cannot be made to a Roth IRA by either spouse since their combined income is in excess of $183,000 per year. The fact that the husband is earning less than the single allowance ($125,000) is not a factor since eligibility must be based on their joint income.
100.) Which of the following statements are TRUE concerning custodian accounts?
a. A donor can give gifts of cash only.
b. A donor can give gifts of securities only.
c. A donor can give gifts of cash and securities.
d. An individual cannot be both the custodian and donor.
C
The only true statement given about custodian accounts is a donor can give gifts of cash and securities.
101.) Discretionary accounts require:
a. Written authorization from the customer
b. Oral authorization from the customer
c. Written authorization from the client for each trade the registered representative executes
d. The registered representative to send the client a letter detailing the proposed transaction
A
Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.
102.) SIPC is a(n):
a. Not-for-profit corporation
b. Self-regulatory organization
c. U.S. government agency
d. Insurer of municipal bonds
A
The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation that was created by an act of Congress in 1970. SIPC insures a customer's account for up to $500,000 in the event of a brokerage firm's failure. SIPC is not a government sponsored agency or a regulatory body.
103.) All of the following would normally be a characteristic of a growth company EXCEPT that it has a:
a. High price-earnings ratio
b. High dividend payout ratio
c. High amount of research and development costs
d. Wide trading range for the price of its stock
B
Growth companies will normally retain most of their earnings to enable the company to continue its growth. They would typically have low dividend payout ratios, high research and development expenses, and high price-earnings ratios, as well as a wide trading range for the stock.
104.) A stock closes at $37. The next day the stock sells ex-dividend $0.68 per share. At what price should the stock open the next day if it opens at the same level it closed the day before?
a. 36.66
b. 36.32
c. 37.00
d. 37.68
B
The price of a stock is reduced by an amount sufficient to cover the dividend. The price will be reduced by 68 cents. Therefore, $37 - .68 = $36.32.
105.) Shares that are issued but not outstanding are classified as:
a. Restricted stock
b. Treasury stock
c. Preferred stock
d. Participating stock
B
Treasury stock is stock that is issued by a corporation and is repurchased at a later point in time. It is no longer considered to be outstanding, does not receive dividends, and has no voting rights.
106.) When a stock splits 5 for 4, by what percentage will the price of the stock be reduced?
a. 20%
b. 25%
c. 50%
d. 80%
A
When a stock splits 5 for 4, the price will be 4/5 of its original price. This represents a decrease of 1/5 or 20%. The number of shares that an investor owns will increase by a ratio of 5/4, which represents an increase of 1/4 or 25%. (4-8)
107.) When determining position and exercise limits for a listed equity option, which of the following are considered to be on the same side of the market?
I. Long calls and long puts
II. Long calls and short puts
III. Short calls and short puts
IV. Short calls and long puts
a. I and III
b. I and IV
c. II and III
d. II and IV
D
When calculating position and exercise limits for a listed equity option, bullish strategies are considered to be on the same side of the market as are bearish strategies. Therefore, long calls (bullish) are on the same side of the market as short puts. Short calls (bearish) are on the same side of the market as long puts.
An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:
$122.50
$1,225.00
$12,250.00
$122,500.00
C
The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of ten puts quoted at 12.25 would therefore be $12,250 (12.25 x $100 x 10 = $12,250).
109.) A Registered Options Principal (ROP) must review:
I. Advertisements and sales literature
II. General prospecting letters
III. Seminar transcripts
IV. Allocation of exercise notices
a. I, II, and III only
b. II, III, and IV only
c. I, II, and IV only
d. I, II, III, and IV
D
The Registered Options Principal (ROP) is specifically responsible for the firm's compliance program with respect to its options activities. The ROP performs an audit function to determine that these activities are conducted in compliance with current applicable regulations and rules. Some of the ROP's principal duties include establishing guidelines for options advertising and sales literature and reviewing all such material before it is used. The ROP also reviews general prospecting letters and seminar transcripts and the method of allocation of exercise notices.
110.) The term marking-to-the-market refers to:
a. A market maker and the securities he trades
b. Adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required
c. The comparison of the market value of an investor's stock portfolio to the stock market
d. The pledge of securities for the purpose of obtaining a loan
B
Marking-to-the-market refers to adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required. This may occur when a customer writes uncovered options and the underlying stock moves against the writer. The customer might need to deposit additional funds and would be marked-to-the-market for the appropriate amount. This could also occur when a customer sells stock short and the stock increases in value.
111.) An investor purchasing a variable rate demand obligation seeks:
a. Guaranteed payments of principal and interest
b. A fixed rate of return for the life of the investment
c. Capital appreciation if interest rates decline
d. Capital preservation if interest rates rise
D
The issuer of a variable rate demand obligation will adjust (reset) the interest rate at specified intervals. The demand feature permits owners of the notes to demand that the issuer purchase the obligations, at par, on the date that the interest rate is reset.
112.) An investor writes an uncovered RST May 25 put for a premium of 4.
At what market price will the investor break even?
a. $21
b. $25
c. $29
d. $35
A.
The writer calculates his breakeven point by deducting the $4 premium from the $25 exercise price. The writer would therefore break even at $21.
113.) An investor writes an uncovered RST May 25 put for a premium of 4.
What is the maximum loss the investor could sustain?
a. $2,100
b. $2,500
c. $2,900
d. $3,500
A
The RST Corporation could go bankrupt and the market price could go to pennies per share. The owner of the put could buy the RST stock for pennies and put it to the writer for $25 per share or $2,500. This is the price at which the writer would have to buy the stock. However, since the writer received $400 in premiums, the maximum loss he could have would be $2,100 ($2,500 loss - $400 premium = $2,100 loss).
114.) An investor writes an uncovered RST May 25 put for a premium of 4.
What is the maximum profit that the investor could realize?
a. $400
b. $2,100
c. $2,500
d. An unlimited amount
A
The writer received the $400 premium. If the option expired, he would have no obligation, recognizing the entire premium as profit. The premium represents the most that the writer could profit.
115.) An investor writes an uncovered RST May 25 put for a premium of 4.
When RST is at 16, the put option is exercised. If the stock is immediately sold at the current market price, what is the investor's profit or loss?
a. $500 loss
b. $500 profit
c. $900 loss
d. $900 profit
A
116.) Which of the following is TRUE about variable annuities?
a. Fixed annuity payments are guaranteed.
b. Participants may not vote to change objectives.
c. Payout is based on a number of annuity units which remains fixed for the duration of the payout period.
d. Annuity payments are of a constant dollar amount throughout the payout period.
C
A variable annuity does not give an annuitant a fixed dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.
117.) A municipal dealer must disclose the syndicate's priority of orders to a client:
a. On the final confirmation
b. Only if the information is not in the Official Statement
c. In discretionary accounts only
d. Only if the customer requests the information
D
The priority of orders must be disclosed to any client who requests it. The priority of orders will not be shown in the Official Statement or on the customer's confirmation.
118.) On a proposed new municipal issue, which of the following documents would the issuer send to a prospective bidder?
I. Notice of Sale
II. Preliminary Official Statement
III. Syndicate Agreement
IV. Bid Procedures
a. I and III only
b. II, III, and IV only
c. I, II, and IV only
d. I, II, III, and IV
C
The issuer would send all documents which the prospective bidder would require to enter a bid. The syndicate agreement is used by the firms that join together to bid on an issue and is therefore not provided by the issuer. (10-2)
119.) If interest rates rise:
I. T-note call premiums will rise.
II. T-note put premiums will rise.
III. T-note call premiums will fall.
IV. T-note put premiums will fall.
a. I and II only
b. I and IV only
c. II and III only
d. III and IV only
C
If interest rates rise, T-note prices will fall. If T-note prices fall, T-note call premiums will fall, while T-note put premiums will rise
120.) A stop order would NOT be used to:
a. Protect a gain when a long stock position appreciates
b. Limit a loss if the market price of a short position increases
c. Receive a specific price when buying or selling
d. Limit a loss if the market price of a long stock position decreases
C
A knowledgeable investor would use a sell-stop order to protect a profit (or limit a loss) in a long position and a buy-stop order to limit a loss in a short position. A sell-stop order is entered below the current market and becomes a market order when the stop price is reached or penetrated on the downside. A buy-stop order is entered above the current market and becomes a market order when the stop price is reached or penetrated on the upside. Since it becomes a market order when the stop price is hit or penetrated, there is no guarantee as to execution price.
121.) All of the following statements regarding a letter of intent are true EXCEPT:
a. A letter of intent is valid for 13 months
b. A shareholder's privilege to redeem shares is suspended during the time the letter of intent is in effect
c. A letter of intent may be backdated up to 90 days
d. When shares are purchased under a letter of intent, it is customary for the fund to hold some shares in escrow in the event the additional purchase is not made
B
All of the statements regarding a letter of intent are true except a shareholder's privilege to redeem shares is suspended during the time a letter of intent is in effect. This is not true because a shareholder has the right to redeem shares at any time.
122.) All of the following must be reported for tax purposes by the owner of mutual fund shares EXCEPT:
a. Receiving a dividend which is subsequently reinvested into the fund at the net asset value
b. Appreciation in the value of the shares
c. Exchanging shares of one fund for another fund within the same family of funds
d. Receiving a capital gains distribution that was not reinvested into the fund
B
Dividends and capital gains distributions are taxable to the investor regardless of whether they are reinvested back into the fund. Exchanging shares for another fund within the same family of funds must also be reported on the investor's tax return since shares of one fund are being sold to buy another fund. Appreciation in the value of fund shares would not be taxable until the shares are sold to establish a capital gain. (
123.) If a Kingdom of Sweden Eurobond is purchased by a U.S. citizen:
I. Interest is subject to income taxes
II. Interest is exempt from income taxes
III. Gains are subject to capital gains treatment
IV. Gains are exempt from capital gains treatment
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
A
Eurobonds (bonds issued outside the country of the issuer) are subject to full taxation if purchased by a U.S. citizen. However, if foreign taxes are withheld on the interest, they may be claimed as a credit against U.S. tax liability.
124.) On June 5, 2007 an investor purchased 100 shares of ABC at 20. On November 10, 2007 he purchased an additional 100 shares of ABC at 12. On January 20, 2008 he sold 100 shares of ABC at 15. For tax purposes he would report a:
a. $300 capital gain in 2007
b. $300 capital loss in 2008
c. $500 capital gain in 2008
d. $500 capital loss in 2008
D
On June 5, 2007 an investor purchased 100 shares of ABC at 20. On November 10, 2007 he purchased an additional 100 shares of ABC at 12. On January 20, 2008 he sold 100 shares of ABC at 15. For tax purposes he would report a:
$300 capital gain in 2007
$300 capital loss in 2008
$500 capital gain in 2008
$500 capital loss in 2008
Explanation:
NO ANSWER CHOSEN.
In this question the investor has two positions in ABC stock. Each was purchased at different times and at different prices. When selling a portion of his holdings, unless the investor identifies (on the order ticket) the specific shares he is selling, the Internal Revenue Code requires the use of the FIFO method. Since the investor did not identify the shares sold, it is assumed that the first shares purchased (at 20, in June) were the shares sold. Therefore, the investor would report a loss of $500 in 2008.
125.) Sarah would like to help fund her 10-year-old niece's future education. Which of the following would be her best option?
a. Set up a Coverdell ESA for her niece
b. Set up a traditional IRA for her niece
c. Open a joint account with her niece
d. Set up a joint UGMA account with her niece
A
Anyone may set up or deposit funds into a Coverdell Education Savings Account as long as the total amount deposited from all parties does not exceed $2,000 in any one year. Individuals without earned income may not contribute to an IRA. A minor cannot participate in a joint account. (17-4, 2-8, 17-1)