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125 Cards in this Set

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1. A director of a company owns 180,000
shares of BDG stock which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE?
a. The director is permitted to sell the shares if the trade is reported.
b. The director is permitted to sell the shares only if they are held for three additional months and the trade is reported.
c. The director is permitted to sell the shares and no report is required.
d. The director is only permitted to sell the shares if the transaction would result in a loss.
(A) An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of their ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock and are not subject to the six month holding period. (11-5)
2. The underwriting spread in a new corporate stock issue depends upon:
a. The dollar amount of the issue
b. The business and financial history of the corporation
c. The type of corporation and the kind of industiy it is in
d. All of the above
(D) The underwriting spread (the underwriter's compensation) depends upon all of the items listed since they help to determine the amount of risk that the underwriters take. (9-3)
3. All of the following are features of GNMA pass-through certificates EXCEPT:
a. They are backed by the U.S. government
b. Interest is subject to federal tax but is exempt from state tax
c. Interest and principal payments are made on a monthly basis
d. Pools consist of fixed-rate residential mortgages
(B) The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes. (7-13)
4. Which two of the following are prohibited activities of an apprentice until she becomes a qualified municipal securities representative?
I. Selling municipal securities to another municipal securities dealer
II. Selling municipal securities and receiving commissions
III. Discussing the purchase and sale of municipal securities with the investing public
IV. Discussing the purchase and sale of municipal securities with broker-dealers
a. I and III
b. I and IV
c. II and III
d. II and IV
(C) During the 90-day apprenticeship period, the apprentice is not permitted to discuss the
purchase or sale of municipal securities with the investing public. However, the apprentice may discuss the purchase or sale of municipal securities with other municipal securities dealers. The apprentice may sell municipal securities but, again, only to other municipal securities dealers and may not receive commissions or compensation based on sales. Regular salary or bonuses are the only compensation permitted. (10-10)
5. Which of the following will not affect the SMA in a long margin account?
a. Cash dividends paid on securities in a margin account
b. Cash deposited in the account to reduce the debit balance
c. Stock dividends paid on securities held in the margin account
d. Appreciation in market value of the securities in a margin account
(C) Stock dividends paid on securities held in a margin account will not increase the SMA. The market value of the stock already in the account will be reduced by the amount of the stock dividend as the number of shares of the stock increases. The total dollar value will remain the same. All of the other choices will have an effect on the SMA. (4-8,13-8)
6. If a limited partnership were to liquidate the last party to receive a distribution of assets would be the:
a. General creditors
b. Secured creditors
c. Limited partners
d. General partners
(D) As owners, the interests of the partners (general and limited) are subordinate to that of
creditors. Of the two types of partners, the interests of the general partners come after that of the limited partners in a liquidation. (20-4)
7. A NYSE-listed stock closed at $72. The next day the stock is ex-dividend 60 cents. That morning, the stock should open at:
a. 71.40
b. 71.70
c. 72.60
d. 72
(A) The stock will be reduced by 60 cents. The stock must be reduced in price to entirely cover the dividend. Therefore, the stock will open at 71.40 (72 - .60 = 71.40). (4-8)
8. A single worker makes $43,000 per year and has no dependents. If she is eligible lor all lour of the following plans, which one would you be LEAST likely to recommend?
a. An IRA
b. A 403(b)
c. A401(k)
d. A 457
(A) Although all four retirement plans are advantageous to this worker, there are a few advantages the three others have over an IRA. The 403(b), 401(k), and the 457 plans offer a higher annual tax-deductible contribution and the possibility of an employer match. Even if the worker decides not to contribute a larger sum of funds, the employer match would provide additional funds to the worker to help fund her retirement. (17-10,17-11)
9. Which of the following would have a negative effect on the U.S. balance of payments?
a. Increase U.S. exports to foreign countries
b. Foreign purchases of U.S. securities
c. New U.S. investments abroad
d. New foreign investments in the U.S.
(C) New U.S. investments abroad would tend to increase the basic deficit in the U.S. balance of payments because dollars are leaving the U.S. and are being invested in foreign countries. (22-14)
10. An individual has received $500 from
dividends paid on common shares of Texas Oil Company. How much of this dividend income is subject to taxation?
a. -0-
b. $350
c. $400
d. $500
(D) Under the current tax law, all dividends received by individuals are fully taxable. (21-3)
11. The third market is concerned with:
a. OTC securities only
b. Listed securities only
c. NYSE-listed securities traded in the OTC market
d. U.S. government securities traded OTC
(C) The "third market" is the term used to describe a situation where a security listed on the NYSE is traded in the OTC market. (12-7)
12. Which of the following can a RR do when selling shares of a mutual fund?
I. Tell a customer to invest in a family of funds to take advantage of a breakpoint
II. Sell dividends
III. Explain that the exact value cannot be determined at redemption
IV. Allow a customer to sign a Letter of Intent two months after his initial investment
a. I and III only
b. II and IV only
c. I, III, and IV only
d. I, II, III, and IV
(C) Selling dividends means to suggest purchasing shares just prior to the ex-date and is a violation of securities rules since it does not benefit the investor. A Letter of Intent may be backdated up to 90 days. When redeeming shares, the price is based on the next calculated NAV so it is not known at the time of redemption. A family of funds allows an investor to take advantage of breakpoints although investing in more than one fund. (18-19,18-21)
13. All of the following would affect an outstanding airport revenue bond EXCEPT:
a. Tourism
b. Debt per capita
c. Airport traffic
d. Energy costs
(B) Debt per capita is used when analyzing a general obligation bond and would not be considered for a revenue issue. (8-3, 8-12)
14. Which of the following could be found on a customer's confirmation?
I. If the firm acted as principal
II. If the firm acted as the customer's agent
III. If the firm acted for a third party
IV. If the firm is a bona fide market maker in the security
a. I and II only
b. I and IV only
c. II and III only
d. I, II, III, and IV
(D) All of the items listed would be found on a customer's confirmation. An indication that the firm acted for a third party is given to the customer if requested. This information is detailed on the back of the confirmation. (3-4)
15. A bond is convertible at $40 and is selling in the market for 120. If the stock has a current market price of $50, the parity price for the bond would be:
a. $ 960
b. $1,200
c. $1,250
d. $1,500
(C) It is necessary to find the conversion ratio to solve this problem. The bond is convertible at
$40. $ 1,000 divided by $40 equals the conversion ratio of 25 shares of stock to one bond, or 25 to 1. To find the parity price of the bond, multiply the market price of the stock of $50, by the conversion ratio of 25 ($50 x 25 = $1,250). This means that the bond must sell for $1,250 to be equal in value to the stock when the stock has a market value of $50 per share. (6-7)
16. An investor who has granted power of attorney to his son dies. The power of attorney:
a. Remains in effect until cancelled by the executor of the estate
b. Remains in effect until cancelled by the son
c. Remains in effect only if the son is the sole heir to the estate
d. Is cancelled on the death of the principal in the account
(D) If an individual who has granted power of attorney to another individual dies, the power of attorney automatically terminates. (3-3)
17. If an investor is primarily seeking capital gains, when would be the best time to buy bonds?
a. When interest rates are high and are expected to drop
b. When interest rates are low and are expected to rise
c. When interest rates are stable and are expected to remain stable
d. When bond prices are low and interest rates are expected to rise
(A) If an investor is primarily seeking capital gains, the best time to buy bonds would be when interest rates are high and expected to drop. Interest rates and bond prices have an inverse or opposite relationship. If interest rates decline, bond prices will go up to bring yields in line with the new lower coupon rates. (5-10)
18. An individual wants to buy an interest in an oil and gas limited partnership that would have the least amount of risk. The best recommendation would be a(n):
a. Income program
b. Exploratory program
c. Drilling program
d. Balanced program
(A) Since an income program purchases producing wells and the risk of not finding oil is eliminated, it is the safest investment of the four types of oil and gas programs. Developmental programs drill in areas of known reserves and reduce the risk of not striking oil and /or gas. Exploratory programs drill in new areas and would have the highest risk of not striking oil and/or gas. A balanced program does some developmental and some exploratory drilling. It is therefore more risky than a developmental program but less risky than an exploratory program. (20-17)
19. The exercise (strike) prices of listed options are NOT adjusted for:
a. Stock splits
b. Cash dividends
c. Rights offerings
d. Stock dividends
(B) The strike prices of listed options are not adjusted for cash dividends. Listed options are adjusted for stock splits, stock dividends, and rights offerings. Over-the-counter traded options are adjusted for cash dividends, as well as the other distributions listed. (16-10)
20. A customer entered a market order to purchase 100 shares of XYZ Corporation. The brokerage firm confirms to the customer the purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually executed at 28.75. The customer:
a. Must pay 28.25
b. Must pay 28.75
c. Can accept the 28.75 or cancel the order
d. Can cancel the order
(B) The customer must pay 28.75 which was the actual purchase price, even though the brokerage firm confirmed (erroneously) to the customer that the purchase was made at 28.25. (11-32)
21. A client would like to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations would be the most suitable?
a. A managed closed-end fund
b. An S&P 500 index mutual fund
c. An S&P 500 index Exchange Traded fund
d. An DJIA Exchange Traded Fund
(B) Although all of these investments would be suitable for a client seeking broad exposure to
the U.S. equity market, the mutual fund would be the most cost effective method for an investor to accomplish this goal with $250 per month. The closed end fund and ETF's are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were purchasing a large dollar amount at one time any of these funds may be appropriate. (18-7)
22. In "easy money" periods, bonds of similar quality will generally have:
I. Short-term yields lower than long-term yields
II. Long-term yields lower than short-term yields
III. Both short-term and long-term yields below normal
IV. Both short-term and long-term yields higher than normal
a. I and III
b. I and IV
c. II and III
d. II and IV
(A) In periods of "easy money," there is availability of money. Therefore, interest rates will decline or be lower. In these periods of "easy money," bonds of similar quality will generally have short-term yields lower than long-term yields. Both short-term and long-term yields will be below normal. This situation would create a positively sloped yield curve where yields rise from short to long term. (22-10)
23. A Co. B Co.C Co. D
Earnings per Share $2.00 $6.50 $5.20 $7.80
Dividends $0.10 $2.50 $2.60 $6.00 Percentage of
Retained Earnings 95% 62% 50% 23%
Which of the above companies is probably a growth company?
a. Company A
b. Company B
c. Company C
d. Company D
(A) Company A is probably a growth company since it has the smallest dividend payout ratio and the largest percentage of retained earnings. The company pays out only 5% of its earnings in the form of dividends, retaining 95% to finance its growth. (4-19)
24. A Co. B Co.C Co. D
Earnings per Share $2.00 $6.50 $5.20 $7.80
Dividends $0.10 $2.50 $2.60 $6.00 Percentage of
Retained Earnings 95% 62% 50% 23%

Which of the above companies is probably a utility?
a. Company A
b. Company B
c. Company C
d. Company D
(D) Company D is probably a utility since utility companies usually have a high dividend payout ratio and a low percentage of retained earnings. (4-19)
25. A customer has a long margin account with the following securities in the account:
Market Market Debit Stock Price Value Balance
100 A Co. $30 $ 3,000 $8,400 100 B Co. $25 $ 2,500 200 C Co. $15 $ 3,000 100 D Co. $35 $ 3,500
$12,000

The minimum maintenance requirement for this account is:
a. $2,000
b. $2,200
c. $3,000
d. $5,000
(C) The minimum maintenance requirement states that the equity must equal 25% of the market value of the securities in the account. This would equal $3,000 (25% of $12,000 = $3,000). (13-7)
26. A customer has a long margin account with the following securities in the account:
Market Market Debit Stock Price Value Balance
100 A Co. $30 $ 3,000 $8,400 100 B Co. $25 $ 2,500 200 C Co. $15 $ 3,000 100 D Co. $35 $ 3,500
$12,000


List from last to first the order of payments if a limited partnership declares bankruptcy:
I. Secured creditors
II. General partners
III. Limited partners
IV. General creditors
a. I, II, III, IV
b. IV, III, II, I
c. II, HI, IV, I
d. I, IV, III, II
(C) If a limited partnership declares bankruptcy, state law provides a priority for settling accounts.
The order for settling accounts would be: secured creditors, general or unsecured creditors, limited partners, and last, general partners. Remember that this question is asking last to first. (20-4)
27. I f interest rates are expected to rise over a period of time, a municipality that must raise money would probably issue securities with:
a. Short-term maturities
b. Intermediate-term maturities
c. Long-term maturities
d. Call provisions
(C) By issuing securities with long-term maturities, the municipality can lock in the rate of interest it has to pay on the bonds. Therefore, if interest rates are expected to rise over a period of time, the municipality would not be subject to these changes. This would provide the municipality with the capital it needed, without borrowing again at higher rates of interest, as it would have to do if it issued shorter or intermediate term securities. (5-11)
28. Which of the following would be the least
important to an investor considering a bond "swap"?
a. Accrued interest
b. Annual income
c. Capital loss
d. Maturity dates
(A) A bond "swap" is selling one bond and using the proceeds to buy another bond with either a different yield, interest rate, or maturity date. This is usually done to establish a capital loss for tax purposes. Of the choices given, the least important factor to consider in the "swap" or exchange is accrued interest since any accrued interest paid will be included in the next interest payment and any accrued interest received has been earned prior to the bond being sold. (21-17)
29. An investor wishes to buy a limited partnership investment that has the goal of capital appreciation without producing currently taxable cash flow. Which of the following best suits the investor's needs?
a. Low Income Housing
b. Oil and Gas Income Program
c. Raw Land
d. Equipment Leasing
(C) Raw land would satisfy an investor's need for an investment that has the potential for capital appreciation without producing currently taxable income. However, raw land is not eligible for depreciation deductions or tax credits. Due to the limited benefits, an investment in raw land is considered speculative. (20-15)
30. A customer's margin account is as follows:
Long Market Value $45,000 Debit Balance $20,000
SMA $ 5,000
Credit Balance $15,000 Short Market Value $ 9,000


What is the total equity in this account?
a. $ 6,000
b. $25,000
c. $31,000
d. $36,000
(C) The equity in the long margin account is $25,000 ($45,000 LMV - $20,000 DR). The equity in the short margin account is $6,000 ($15,000 CR - $9,000 SMV). The total equity is $31,000. SMA is not considered to be part of the equity. (13-19)
31. A level debt service bond issue is one in which:
a. Combined annual interest and principal payments are equal
b. Annual interest payments are equal
c. Annual principal payments are equal
d. All principal is paid at the issue's final maturity
(A) A level debt service bond issue is one in which combined annual interest and principal payments are equal. (8-2)
32. Which of the following can be traded in the over-the-counter market?
I. Municipal bonds
II. Treasury bonds
III. Treasury bills
IV. Corporate bonds
a. I and II only
b. II and III only
c. I and IV only
d. I, II, III, and IV
(D) All of the securities listed can be traded in the over-the-counter market. (12-1)
33. A customer wishes to close out a short
option position by liquidating the option. The registered representative should mark the order ticket:
a. Closing purchase
b. Closing sale
c. Opening purchase
d. Opening sale
(A) The client initially had an opening sale transaction. To liquidate the short option position,the client must purchase the option contract. The registered representative should therefore mark the order ticket "closing purchase." (16-4)
34. An individual wishes to sell restricted securities according to the Rule 144 exemption. There are 6,000,000 shares outstanding. The trading volumes for the last 5 weeks prior to the sale are:
April 1........45,000
April 8........62,000
April 15........70,000
April 22........75,000
April 29........72,000
If the customer were to sell the securities as of May 6th, how many shares can he sell?
a. 60,000
b. 63,000
c. 69,750
d. 72,000
(C) The average weekly volume for the last four weeks prior to the sale equals 69,750 shares (add the weekly volume for the four weeks from 4/8 to 4/29 and divide by 4). One percent of the shares outstanding is 60,000. The individual can sell the greater of these two amounts which is 69,750 shares. (9-20)
35. The following closed-end funds are listed in the Wall Street Journal:
Net Asset Value Market Price
American Fund.........23.75..................24.25
Bunker Hill Fund.......21.85..................21.50

A customer purchasing the Bunker Hill Fund at the current market price would pay:
a. $21.50 + a sales charge
b. $21.50 + a commission
c. $21.85 + a sales charge
d. $21.85 + a commission
(B) The customer would pay $21.50 plus a commission. The Bunker Hill Fund is a closed-end investment company which sells at its current market value ($21.50) plus a commission. A client would purchase the common stock of a corporation in the same manner. Open-end investment companies (mutual funds) sell at their offering price, which is the net asset value plus a sales charge (when applicable). (18-2)
36. The following closed-end funds are listed in the Wall Street Journal:
Net Asset Value Market Price
American Fund.........23.75..................24.25
Bunker Hill Fund.......21.85..................21.50

American Fund is selling at:
a. A premium
b. A discount
c. Net asset value
d. Parity
(A) The American Fund is a closed-end fund that is selling at 24.25. This is above its net asset value of 23.75. It is therefore selling at a premium. (18-2)
37. An article in the Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This would indicate:
a. Buyers of new bills paid more than buyers paid the previous month
b. Buyers of new bills paid less than buyers paid the previous month
c. Interest rates are increasing
d. Buyers of new bills purchased the bills above par
(A) Treasury bills are purchased at a discount from the dollar amount on its face. The larger the discount the higher the discounted yield-to-maturity. In this example, the discounted yield-to-maturity has gone down to 4.58% from 4.61% from the previous month. This indicates that buyers of new bills paid more for the Treasury bills (meaning the discount was less) than buyers paid the previous month. (7-3)
38. A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy?
a. The LP is considered a limited partner for both the capital contribution and the loan.
b. The LP is considered a limited partner for the capital contribution and a creditor for the loan.
c. The LP is considered a creditor for the capital contribution and a limited partner for the loan.
d. The LP is considered a creditor for both the capital contribution and the loan.
(B) A limited partner who has committed capital may also extend a loan to the partnership. If the partnership declares bankruptcy, the LP would be considered a limited partner for the capital contribution and a creditor for the amount of the loan. (20-4)
39. A customer has the following accounts with a brokerage firm:
Cash Account $20,000 securities (market value)
$10,000 cash
Long Margin $60,000 securities (market Account value)
$30,000 debit balance
$10,000 SMA
Short Margin $40,000 securities (market Account value)
$60,000 credit balance

The total amount of cash that can be withdrawn from all the accounts is:
a. $ 6,000
b. $15,000
c. $20,000
d. $40,000
(C) The $10,000 in cash can be withdrawn from the cash account. The $10,000 SMA in the long margin position may also be withdrawn for a total of $20,000. The short margin position does not have any SMA. Therefore, in this example, nothing can be withdrawn from that position. (13-8)
40. As a group, limited partners may NOT:
a. Sue the general partner
b. Sell assets to pay creditors
c. Vote to remove the general partner
d. Inspect the partnership's books
(B) Limited partners are not permitted to be involved in management and could not sell assets to pay a creditor (a management decision). They do have the right to inspect the books, as well as sue and/or remove the general partner. (20-3)
41. The following dividend information for New York Stock Exchange listed common stocks is reported in the Wall Street Journal.
Quarterly Record Payable Company Dividend Date Date
Cummings Corp. 50 cents 4/10 5/15
Federal Corp. 85 cents 4/13 5/25 General Electric
Corp. 95 cents 4/8 5/21
A buyer of Cummings Corporation on May 10th:
a. Would be entitled to receive the 50-cent quarterly dividend
b. Would not be entitled to receive the 50-cent quarterly dividend
c. Would be entitled to receive the 50-cent quarterly dividend if the trade was made for "cash"
d. Would be entitled to the 50-cent quarterly dividend if he paid for the stock by May 15th
(B) A buyer of Cummings Corporation would not be entitled to receive the 50-cent quarterly dividend because the purchase was made on May 10th. This was after the stock had already sold ex-dividend or without the dividend. The ex-dividend date is not given but the record date of April 10th is. Stocks sell without the dividend or ex-dividend on the second business day preceding the record date. This would be two business days prior to April 10th, which is more than one month before the customer bought the stock. Even if the purchase was made for cash, which requires a same-day payment, it would still be one month too late for the buyer to receive the dividend. (4-7)
42. A corporation is contemplating the refunding of its debt issues. The refunding could accomplish which of the following?
I. Reduce interest costs
II. Change the maturity schedule of the corporation's debt
III. Remove restrictive provisions from the indenture
a. I only
b. I and II only
c. II and III only
d. I, II, and III
(D)Refunding means to replace a debt issue with another debt issue. A corporation can refund a debt issue to accomplish each of the choices. (5-17)
43. The interest paid on special assessment bonds is derived from:
a. Ad valorem taxes
b. Toll road revenues
c. Charges on the benefitted property
d. Excise taxes
(C) The interest paid by the issuer to holders of special assessment bonds are derived from charges made to the users of the benefitted property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets. (8-11)
44. An investor purchasing one Intgph Sep 30 call would pay a total of:
a. $ 0.65
b. $ 6.50
c. $ 65.00
d. $650.00
(C) The Intgph Sep 30 call is shown trading at .65 or $0.65 per share. The total cost would be $65.00 since the option represents 100 shares. (14-3)
45. An investor purchasing ten Kraft Sep 60 straddles would pay a total of:
a. $ 125
b. $ 375
c. $1,250
d. $3,750
(C) A straddle is the purchase of a call and a put with the same expiration and strike price. The purchase of 10 Kraft Sep 60 straddles would require the purchase of 10 Sep 60 puts at 1 and 10 Sep 60 calls at .25. Each put would cost $100 and each call would cost $25. Each straddle would cost $125 and ten straddles would cost $1,250. (15-13)
46. Investors in mutual funds usually are seeking all of the following EXCEPT:
a. Diversification
b. Professional management
c. Short-term trading
d. Liquidity
(C) Investors in mutual funds usually seek all of the objectives listed except short-term trading.(18-13)
47. During periods of tight money, when the yield curve becomes inverted, the highest yield would probably be found in:
a. 3-month Treasury bills
b. 3-month negotiable certificates of deposit
c. 5-year Treasury notes
d. 30-year municipal bonds
(B) When interest rates have moved up due to a tight monetary policy, the yield curve may become inverted causing short-term rates to be higher than long-term rates. Moreover, negotiable certificates of deposit (CDs), which are issued by banks, will generally have yields several basis points higher than T-bills which are of higher quality. (5-14)
48. In a dispute between a registered representative and his employer the dispute typically must be settled by:
a. Arbitration
b. The SEC
c. FINRA
d. MSRB
(A) Any dispute between firms, a firm and its employee, and a firm and a clearing corporation must go to arbitration. A dispute between a firm and one of its customers can go to arbitration at the option of the customer. (1-14)
49. A customer enters a stop order to sell 1,000 shares of ATT at 35. The order will be executed at:
a. 35
b. 34.99 or below
c. The next trade after 35 is touched
d. 35.01 or above
(C) Stop orders become market orders once the stop order becomes activated. After the order is activated at or below 35, the next trade will be the execution price. (11-23)
50. Three-month and six-month Treasury bills are auctioned by the Federal Reserve Board:
a. Daily
b. Weekly
c. Monthly
d. Annually
(B) Three-month and six-month Treasury bills are sold at public auctions each Monday. (10-12)
51. The Federal Reserve Board Regulation T margin requirement is 50%. A customer buys 100 shares of XYZ Corporation at $80 per share in a margin account and 1 call option on XYZ Corporation at 5. The customer will have to deposit:
a. $4,000
b. $4,250
c. $4,500
d. $8,500
C) The customer would have to deposit $4,500. Margin on the $8,000 stock purchase would be $4,000. The premium of $500 for the option would have to be paid in full as options cannot be purchased on margin although they may be purchased in a margin account. The total deposit would be $4,500 ($4,000 margin purchase + $500 option premium). (16-5)
52. A syndicate letter used in the formation of a municipal syndicate account will contain all of the following EXCEPT:
a. The account manager
b. The member participation
c. The reoffering yields
d. The duration of the account
(C) A syndicate letter is used to form a syndicate (group of underwriters) to bid on a new municipal issue. It would be sent by the syndicate manager and would include each member's participation, the type of account and its duration, the priority of orders, and the amount of the good faith deposit. The reoffering yields would not be determined until after the syndicate was formed and was ready to submit its bid. The re-offering yields would be determined by market conditions including current supply, demand, and existing yields on similar outstanding bonds. (10-7)
53. Prior employer permission would be required for a registered representative to give public:
I. Speeches
II. Seminars
III. Lectures
a. I only
b. I and II only
c. II and III only
d. I, II, and III
(D) Prior employer permission would be required for a registered representative to give public speeches, seminars, and lectures. (1-9)
54. All of the following would be a good delivery in the sale of 500 shares of common stock EXCEPT:
a. One five-hundred-share certificate
b. Five one-hundred-share certificates
c. Ten fifty-share certificates
d. Four fifty-share certificates and ten thirty-share certificates
(D) Delivery must be made in 100-share certificates, multiples of 100, or any combination which adds up to 100 shares. In choice (D), four certificates of fifty shares would be acceptable, but 10 thirty-share certificates would not be, since 30-share certificates cannot be combined to add up to 100 shares. (12-14)
55. A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity he will receive:
a. $42,500
b. $50,000
c. $55,000
d. $85,000
(B) At maturity, the holder of the bonds will receive the par value, which in this example is $50,000. (5-1)
56. The investment banking department of a broker-dealer generally does all of the following EXCEPT:
a. Underwrites new issues
b. Provides financing for industrial corporations
c. Distributes large blocks of already outstanding securities
d. Makes a secondary market for new issues
(D) An investment banker generally does all of the items mentioned except make a secondary market for new issues. (9-1)
57. A call option would be considered
"covered" if it was written against all of the following EXCEPT:
a. The underlying common stock held in a cash account
b. The underlying common stock held in a bank
c. The underlying common stock held in a trust company
d. The convertible bonds or convertible preferred stock of another corporation
(D) The option would be considered "covered" if written against all of the choices listed except the convertible preferred stock or convertible bonds of another corporation. A security that is convertible into common stock is acceptable, but it must be of the same corporation and be immediately convertible into at least the same number of shares represented by the options written. (16-6)
58. Which of the following employees of a broker-dealer must provide written notification to his or her employer in order to open a securities account at another firm?
I. A registered representative
II. A principal
III. A secretary
IV. A janitor
a. I and II only
b. Ill and IV only
c. I, II, and III only
d. I, II, III, and IV
(D) Any employee of a broker-dealer must provide written notification to his or her employer in order to open an account at another firm. (1-9)
59. All of the following can be bought on margin EXCEPT:
a. Common stocks listed on an exchange
b. Preferred stocks listed on an exchange
c. Over-the-counter stocks on Nasdaq
d. Options with nine months or less to expiration
(D) Options expiring in nine months or less cannot be bought on margin. They do not have loan value and therefore must be paid in full. However, credit can be extended to purchase LEAPS with more than nine months to expiration. (16-6)
60. A client would like all trade confirmations sent to his investment adviser. This will require:
a. A written letter from the client
b. Approval by a partner in the firm
c. Approval by a branch manager
d. All of the above
(A) Written approval is required only from the client. (3-4)
61. For secondary market transactions, a municipal securities broker-dealer may use a broker's broker to:
I. Disseminate the availability of the securities
II. Sell securities but remain anonymous
III. Increase the market price of the securities
IV. Guarantee a profit on a trade
a. I and II only
b. I and III only
c. I, II, and III only
d. II, III, and IV only
(A) A municipal securities broker-dealer may use a broker's broker to help sell bonds. Using a broker's broker will allow for good exposure to the market for the bonds. The broker's broker also keeps the identity of its client confidential. A broker's broker does not divulge the contra party's name to the buyer or seller. (12-25)
62. Cash dividends declared by a corporation:
a. Are taxed as capital gains
b. Are a current liability to the corporation when declared
c. Must be approved for payment by the shareholders
d. Does not affect working capital
(B) Cash dividends are considered a current liability to a corporation when declared by the Board of Directors. The Board of Directors of the corporation has the authority to declare dividends. Working capital (current assets - current liabilities) would be reduced since current liabilities would be increased. Although dividends are currently taxed at the same rate as capital gains, they are not capital gains. Dividends are taxed as dividends. (22-29)
63. A municipal bond pays interest on February 1st and August 1st. How many days of accrued interest will the buyer pay the seller if the bond is purchased on Wednesday, May 31st?
a. 96 days
b. 120 days
c. 124 days
d. 125 days
(C) The trade date is Wednesday, May 31st. The bond pays interest on February 1st and August 1st. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Monday, June 5th. The following calculation illustrates the answer:
February 30 days
March 30 days
April 30 days
May 30 days
June 4 days
124 days (8-24)
64. Which of the following would NOT be allowed under MSRB rules?
a. A gift of basketball tickets to a customer valued at $100
b. A business dinner with a client costing $135
c. Reserving a hotel room for a client at a municipal bond seminar costing $150
d. A Christmas gift to a client valued at $125
(D) MSRB rules prohibit gifts in excess of $100 per year to a person oilier than an employee or partner of the gifting individual, if such payments or services are in relation to the municipal securities activities of the employer, of the recipient, of the payment or service. (Therefore, a Christmas gift to the client valued at $125 would not be allowed.) However, costs incurred for business lunches or hotel accommodations for clients at business seminars are business expenses and are allowed as long as they are not frequent or excessive. (12-17, 12-34)
65. Which of the following proxy rules would be correct regarding customer securities held in "street name" by a brokerage firm?
a. The corporation would send the proxy to the customer.
b. The corporation would send the proxy to the NYSE who would then send it to the customer.
c. The corporation would send the proxy to the SEC who would then send it to the customer.
d. The corporation would send the proxy to the brokerage firm who would then send it to the customer.
(D) A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy which is a delegation of the shareholder's vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (in the name of the brokerage firm), the corporation would send the proxy to the brokerage firm who is the stockholder of record on the corporate books. The brokerage firm would then send the proxy to the customer if the corporation paid the additional expenses. The SEC regulates the solicitations of proxy material. (3-2)
66. Which of the following is an employee of an options exchange?
a. Market maker
b. Board broker
c. Order book official
d. Floor broker
(C) The CBOE uses a market maker system to facilitate the trading of options. Each underlying security is assigned to several market makers who are exchange members that buy and sell securities for their own accounts. A board broker is an exchange member who acts as an agent in executing orders entered by other members. An Order Book Official (OBO) is an exchange employee who assists board brokers in maintaining the public customer limit order book. (16-3)
67. Mr. Jones purchases 100 shares of XYZ at $80 per share and writes an XYZ June 85 call receiving a $3 premium.

What is Mr. Jones' maximum potential loss?
a. $ 300
b. $7,700
c. $8,000
d. $8,500
(B) Mr. Jones bought XYZ at $80 and sold an XYZ call option receiving a $3 premium. If XYZ should become worthless, the option would not be exercised. However, Mr. Jones still owns 100 shares of XYZ. The maximum loss that Mr. Jones could sustain equals the $8,000 purchase of the stock minus the $300 premium received ($8,000 - $300 = $7,700). (15-2)
68. Mr. Jones purchases 100 shares of XYZ at $80 per share and writes an XYZ June 85 call receiving a $3 premium.

If XYZ increased to $90 and the call option is exercised, Mr. Jones' profit is:
a. $ 300
b. $ 500
c. $ 800
d. $1,800
(C) If the option was exercised, Mr. Jones would have to deliver his stock to the option holder at the 85 strike price. The IRS considers the proceeds of the sale to be the strike price (85) plus the initial premium received (3). Mr. Jones would therefore receive $8,800 for the stock that initially cost $8,000. His profit would be $800 ($8,800 - $8,000 = $800). (15-2)
69. ABC Corporation announces a 5-for-4 split. After the split the market price of ABC Corporation will be reduced by:
a. 15%
b. 20%
c. 25%
d. 50%
(B) To find the market price of the stock after the split, multiply the original market price by the reciprocal of the split. In this example, the reciprocal of a 5 for 4 split is 4/5. The stock will now sell at 4/5 its original value. Therefore, it is selling for 1/5 less tfian its original value, which is a decrease of 20%. (4-8)
70. When does the risk disclosure document have to be sent to a customer?
a. Within 15 days of the first transaction
b. Within 15 days after the first transaction
c. At or prior to the time that the account has been approved for options trading
d. At or prior to the time that an order is accepted
(C) The risk disclosure document must be sent to a customer at or prior to the time the account is approved for options trading. (16-12)
71. Money received by a corporation when it sells its stock above its par value is called:
a. Excess capital
b. Earned surplus
c. Paid-in capital
d. Stockholders' capital
(C) Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different than earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends. (22-23)
72. A Treasury bond has increased in value from 98.4 to 98.8. The bond has increased by:
a. $ .40 per $1,000 par value
b. $ .50 per $1,000 par value
c. $1.25 per $1,000 par value
d. $5.00 per $1,000 par value
(C) Treasury bonds are quoted in 32nds of a point, which are then calculated as a percentage of the par value ($1,000). The difference between 98.4 and 98.8 is 4/32. One point equals $10, therefore 4/32 or 1/8 of a point equals $1.25. (7-2)
73. XYZ Corporation has earned $4 per share and has paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price-earnings ratio of XYZ Corporation is:
a. 2 to 1
b. 9.3 to 1
c. 14 to 1
d. 28 to 1
(C) The price-earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price-earnings ratio of 14 to 1 ($56 divided by $4 equals 14). (22-28)
74. Mr. Smith buys an XYZ Corporation
October 70 put and pays a $16 premium for the put. XYZ declines to $52. Mr. Smith purchases 100 shares of XYZ at the market price and puts it to the writer. According to IRS rules, the proceeds received by the customer from the sale of the stock to the writer is:
a. $ 200
b. $5,200
c. $5,400
d. $7,000
(C) When a customer exercises a put option, the proceeds of the sale equals the strike price minus the premium. This is then compared to the client's cost of acquiring the securities to determine a gain or loss on the transaction. When Mr. Smith sells the stock which was purchased in the market at $52 per share, he will receive the strike price of $70 per share or $7,000. Mr. Smith paid a $16 premium or $1,600. Subtracting the premium of $1,600 from the strike price of $7,000 equals the proceeds of the sale for tax purposes. This equals $5,400 ($7,000 exercise price - $1,600 premium paid for the put option = $5,400 proceeds of the sale). To find Mr. Smith's profit, subtract the $5,200 purchase price of 100 shares from the $5,400 proceeds from the sale. (21-18)
75. A registered representative opens a joint
options account for three brothers. According to the rules of the options exchanges, the account executive would be required to obtain background and financial information from:
a. One of the brothers
b. A majority of the brothers
c. All of the brothers
d. The Options Clearing Corporation
(C) According to the rules of the options exchanges, background and financial information must be obtained from all participants of the account. All of the brothers must provide information concerning their background and financial information. (2-7)
76. An investor purchased T-bonds that mature January 1, 2012. He purchased the T-bonds on Friday, February 20, for regular-way settlement. How many days of accrued interest did the investor owe?
a. 51
b. 53
c. 54
d. 55
(B) Accrued interest is calculated from the last interest payment date up to but not including settlement date. The last interest payment was made January 1st (since maturity is January 1, 2012, interest payments are every January 1st and July 1st). The settlement date is Monday, February 23rd (a transaction for government securities settles on the next business day). Government securities accrue interest on actual days elapsed. The investor would therefore owe 31 days for January and 22 days for February (not including settlement date) for a total of 53 days. (12-24)
77. In most cases, municipal bond investors can obtain:
I. Diversification by investing in issues with different maturities
II. Federal tax exemption from the interest income received
III. Income that is tax-exempt at the state level
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(A) Municipal bond investors can obtain diversification by investing in issues with different maturities as well as federal tax exemption on the interest income received. Municipal bonds are not exempt from state tax unless the owner is a resident of the state that issued the bonds and the state elects not to tax the purchaser of the bond. (8-1)
78. A broker-dealer selling mutual fund shares to a client is permitted a maximum sales charge of:
a. 8%
b. 8 1/2%
c. 9%
d. 10%
(B) FINRA permits a maximum sales charge of 8 1/2% for mutual fund transactions. (18-20)
79. Which of the following are true regarding the sale of restricted securities under SEC Rule 144?
I. The securities must be fully paid
II. The sale can be made on an agency or principal basis
III. A Form 144 notice of sale must be filed with the SEC not later than 30 days after the sale
IV. The securities must be owned for six months
a. I only
b. I and II only
c. 1, II, and III only
d. I, II, and IV only
(D) The securities must be fully paid, owned for six months and can be sold on an agency or principal basis. A 144 notice of intent to sell, which is good for 90 days, must be filed with the SEC on the date of the sale. (9-20)
80. An individual purchased an Australian
Dollar fune 65 Put at 2.34 that was sold at 3.68. If the contract size is 10,000 Australian pounds, what was the individual's profit?
a. $65
b. $134
c. $234
d. $368
(B) Premiums for Australian Dollars options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $.0234) which equals $234. Since the contract was sold at 3.68 ($368), the profit was $134. (15-44)
81. The Options Clearing Corporation selects a member firm to receive an exercise notice on a random selection basis only. Which of the following methods can the member firm choose to allocate the exercise notice to its customer?
I. Any method that is fair and equitable, as long as the customer is aware of the method
II. On a first-in, first-out basis
III. On a random selection basis
IV. On the basis of the client having the largest position of written contracts
a. I or II only
b. I or III only
c. I, II, or III only
d. I, II, III, or IV
(C) When the Options Clearing Corporation assigns an exercise notice to a clearing member, the member firm is required to allocate the exercise notice to a customer maintaining a position as a writer in the account. The rules of the exchanges trading options require the member firms to allocate the notice upon any method that is fair and equitable, so long as the customer is aware of the method. This could be on a "first-in, first-out" basis or a random selection basis. Each member is required to inform its customers in writing of the method it uses to allocate exercise notices to customer accounts, explaining the manner of operation and consequences of the allocation system used. The "first-in, first-out" method means the customer who is carrying the oldest position will be the first to receive the exercise notice. The random selection method means that any writer can receive the notice, since it is done randomly. Member firms will never select a customer on the basis that the customer has the largest open short position of option contracts. (16-5)
82. On January 16th, an investor sells XYZ stock at $34 for a 2-point loss. On January 24th, the investor purchases XYZ stock at a price of $36. For tax purposes, the investor's cost basis for the stock purchased on January 24th is:
a. 32
b. 34
c. 36
d. 38
(D) To determine the investor's cost basis for tax purposes, the 2-point loss on XYZ stock must be added to the new cost of $36. According to the wash sale rule, if a security is sold at a loss and repurchased within 30 days, the loss is disallowed and added to the investor's cost basis. Had the investor waited at least 31 days before repurchasing XYZ stock, the 2-point loss would have been deductible and the investor's cost basis for the stock purchased January 24th would have been $36. (21-16)
83. A registered representative has established a discretionary municipal bond account for Mr. Smith. Which of the following may the registered representative purchase for Mr. Smith's account?
a. General obligation bonds only
b. Bonds rated Baa or higher only
c. Double barreled bonds only
d. Any suitable bonds
(D) A registered representative must be sure that the bonds purchased are suitable. (12-30)
84. A brokerage firm would like to increase its marketing efforts in option transactions through the use of certain advertisements. All of the following are considered forms of advertising EXCEPT:
a. Newspapers and magazines
b. The Options Clearing Corporation Risk Disclosure Document
c. Radio, telephone messages, and television
d. Newsletters, sales literature, and research
85. A customer in the 28% tax bracket buys a 10% corporate bond at par. What is the investor's net yield?
a. 2.8%
b. 7.2%
c. 10%
d. 13.9%
(B) All are forms of advertising when referring to options except the Options Clearing Corporation risk disclosure document. The OCC risk disclosure document discusses the rules and regulations of options trading, as well as the risks involved in options trading. The OCC risk disclosure document must accompany or precede any kind of printed or written communication by firms concerning options. Also, the way in which to acquire an OCC risk disclosure document must be mentioned in oral or televised advertisements about options. Newspapers, magazines, radio, telephone messages, television, newsletters, sales literature, and research reports are ways to advertise about options. They must all mention the risks involved with options and be done in good taste, as well as adhere to generally accepted standards of truthfulness. (16-12)
85. A customer in the 28% tax bracket buys a 10% corporate bond at par. What is the investor's net yield?
a. 2.8%
b. 7.2%
c. 10%
d. 13.9%
(B) The interest earned on corporate bonds is fully taxable at the investor's tax bracket. The investor's yield from a 10% corporate bond purchased at par would be 10%. Since the investor must pay taxes at a rate of 28%, the investor may keep 72% of all earnings (100% - 28%). Therefore, the investor's net yield from a corporate bond yielding 10% is 7.2% (10% x 72% = 7.2%). (21-2)
86. All of the following are true about treasury stock EXCEPT it:
a. Is stock that has been repurchased by a corporation
b. Does not receive dividends
c. Has voting rights
d. Is listed on the company's balance sheet
(C) Treasury stock (shares repurchased by the company) does not receive dividends and does not have voting rights. (4-6)
87. An investor's goal is to buy a security that establishes a fixed return, for a long period of time, with no reinvestment risk. Which of the following best suits the investor's needs?
a. Treasury bills
b. Common stock
c. AAA corporate bonds
d. Treasury STRIPS
(D) The typical yield-to-maturity calculation assumes that each interest payment is reinvested at the same yield. There would be no guarantee that the investor could reinvest at the same yield (reinvestment risk). Treasury STRIPS are zero-coupon bonds (long-term). Interest is automatically reinvested and compounded at the same yield and reinvestment risk is avoided. (7-4)
88. Treasury notes have initial maturities of:
a. Less than one year
b. 2 to 10 years
c. 11 to 30 years
d. More than 30 years
(B) Treasury notes mature from two to ten years. (7-1)
89. All of the following are of importance with regard to the debt structure when analyzing a municipal bond EXCEPT:
a. Total bonded debt
b. Total direct debt
c. Overlapping debt
d. Matured debt
(D) Matured debt is debt of the municipality that is no longer outstanding and therefore is not included in analyzing the debt structure of a municipal bond. Total bonded debt is all of the general obligation debt issued by a municipality, regardless of the purpose. Total direct debt is the sum of the total debt and any unfunded debt (i.e., short-term notes) of a municipality. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities. (8-4)
90. To determine what would happen to the coverage of revenue bonds when more bonds are to be issued in the future, one should examine:
a. The rate covenants of the bond
b. Feasibility studies
c. The refunding procedure of the bond
d. The additional bonds test
(D) The additional bonds test sets a minimum level of coverage of debt service for interest and principal for all outstanding bonds and for future debt. The additional bonds test protects original bondholders against the dilution of the debt service coverage. Rate covenants insure that rates will increase in line with costs to insure proper revenues for the maintenance of the facility or project and payment of the debt service. Feasibility studies are conducted to insure the proper need of the project being developed. Refunding is used to lower interest expense on bonds through the issuance of new bonds at lower coupon rates. The proceeds of the new bond sale would be used to repurchase the already outstanding high coupon bonds. (6-1, 8-13)
91. When considering the credit strength of a municipal issuer, one should include in the
analysis:
I. The condition of the local economy
II. The current Financial status of the municipality
III. Money supply figures
IV. The general capability of the fiscal officers of the municipality
a. I and II only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV
(C) The state of the local economy is an important factor in determining a municipality's worthiness. For example, communities at different stages of growth may require more or less debt and this must be understood in the analysis. The current financial status is also important to determine the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures which are published by the Federal Reserve Board are irrelevant with regard to the credit strength of a municipality. (8-2)
92. A new convertible bond has a provision that it cannot be called for five years after the issue date. This call protection would be most valuable to a recent purchaser of the bond if:
a. Interest rates are falling
b. Interest rates are rising
c. Interest rates are stable
d. The yield curve slopes downward
(A) The call protection would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, bond prices rise. Corporations will call back bonds when interest rates decline and issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds. (5-17)
93. Which of the following is TRUE regarding the purchaser of a call option?
a. The yield on the purchaser's portfolio would increase by purchasing the option
b. The purchaser would limit the amount of money he could lose if the underlying stock declined
c. The purchaser would benefit if the underlying stock declined
d. The purchaser would exercise the option if the stock declined
(B) The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value and would exercise the call only if the stock had increased. Increasing the yield on a portfolio is a benefit of writing, not purchasing, call options. (14-12, 15-2)
94. When an option contract is exercised, the writer:
a. May retransmit the assignment notice
b. May close out the position upon receipt of the assignment notice
c. Will establish a capital loss
d. Must fulfill the obligation to buy or sell the underlying instrument
(D) The writer must fulfill the obligation to deliver the underlying instrument for the exercise of a call or cash for the exercise of a put. (14-1)
95. As far as rights offerings are concerned:
a. Common shareholders do not have the right to subscribe to rights offerings
b. Preferred shareholders do not have the right to subscribe to rights offerings
c. Both of the above are correct
d. None of the above are correct
B) As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to rights offerings but common stockholders do. (4-10)
96. All of the following municipal bond transactions take place in the secondary market EXCEPT:
a. Submitting an offer to sell bonds to a sinking fund
b. A tax swap
c. Two municipal securities broker-dealers purchasing a block of bonds jointly
d. The placing of a designated order
(D) All of the choices listed take place in the secondary market except the placing of a designated order. A designated order is an order directed to a syndicate manager by an institutional account designating two or more members of the underwriting account to receive credit for that order. This order is placed directly with the syndicate manager during the order period prior to the release of the bonds for secondary trading. (10-9)
97. All of the following are prohibited according to the Securities Exchange Act of 1934 EXCEPT:
a. A trader buys shares late in the day to prevent the price of a security from falling
b. Short sales of municipal bonds
c. Selling short shares of an exchange-traded stock without borrowing the security
d. Two traders enter into transactions where ownership does not actually change, in order to increase trading volume
(B) All of the choices listed are prohibited under the Securities Exchange Act of 1934 except short sales of municipal bonds. Short sales of securities are subject to the borrowing requirements of Regulation SHO. This makes choice (c) a violation. Municipal bonds are exempt securities and are not subject to the borrowing requirements of Regulation SHO. Any person that buys or sells a security for the purpose of attempting to stop the price from falling (pegging) or rising (capping) would be engaging in a manipulative action. Persons who enter into transactions to increase volume, without ownership changing, have engaged in painting the tape. This is a manipulative act and is a violation. (11-4)
98. According to MSRB rules, which of the
following must be disclosed to a customer in a negotiated sale of municipal bonds?
I. The amount of the underwriting spread
II. The initial offering of each maturity
III. Any fee received as agent for the issuer
IV. The name of the underwriter's counsel
a. I and II only
b. II and IV only
c. I, II, and III only
d. I, II, III, and IV
(C) According to the MSRB rules, in a negotiated sale of municipal bonds, the customer must be informed of the amount of the underwriting spread, the initial offering of each maturity, and any fee received as agent for the issuer. (12-28)
d. I, II, III, and IV
99. All of the following are true regarding a private placement EXCEPT:
a. There is a limit to the number of nonaccredited investors that may purchase the securities
b. The securities are exempt from registration
c. Solicitation of investors may not be permitted
d. It is usually a very liquid investment
(D) Private placements are exempt from registration requirements under the Securities Act of 1933. Generally, the number of nonaccredited investors permitted to purchase the securities is limited to 35. General solicitation (i.e., cold calling) ofinvestors is normally not allowed. A disadvantage of buying securities issued in a private placement is that it is usually an illiquid investment. (9-20)
100. Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules?
I. An employee of a municipal securities firm can open a new account with another municipal securities firm without the employer being notified
II. An employee of a municipal securities firm can open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer
III. A bond attorney can open a new account without restriction
IV. An officer of a municipal issuer can open a new account without restriction
a. I and III only
b. II and IV only
c. Ill and IV only
d. II, III, and IV only
(D) MSRB rules only place restrictions on opening an account for an employee of another MSRB member firm. When opening an account for an employee of another MSRB member firm, the employer must be notified and duplicate confirmations of all trades must be sent to the employer. (12-30)
101. If a corporalion went bankrupt, any remaining assets would be distributed in which of the following orders of priority?
I. Common stockholders
II. Mortgage bondholders
III. Convertible bondholders
IV. Unpaid workers
a. IV, II, III, and I
b. IV, III, II, and I
c. II, III, I, and IV
d. Ill, II, IV, and I
(A) If a corporation should go bankrupt, first salaries and wages are paid to unpaid workers. The assets would then be distributed to the secured bondholders (e.g., mortgage bonds), debenture holders (who are unsecured bondholders but still creditors such as the convertible bondholders), and common stockholders (who are equity owners, not creditors). Preferred stockholders (who are also equity owners) would be paid prior to common stockholders. (6-3)
102. ABC Corporation has issued $100,000,000 worth of bonds at a $1,000 par value. The effect of the issuance of the bonds would be an increase in:
I. Working capital
II. Total liabilities
III. Total assets
IV. Stockholders' equity
a. I only
b. I and II only
c. I, II, and III only
d. I, II, III, and IV
(C) Working capital equals current assets minus current liabilities. The cash received from the sale increases current assets. The bonds are not a current liability. Therefore working capital would increase. There would be an increase in current assets from the cash received on the sale of the bonds, therefore increasing total assets. The long-term liabilities of the company would increase because of the amount of debt incurred. There would be no increase or decrease in stockholders' equity as the money received would be exactly offset by the amount of money owed. (22-29)
103. ABC Corporation has net income of $8 million. There are one million shares of common stock and one million shares of preferred stock outstanding. The preferred stock pays a $1.00 annual dividend. The earnings per share for the common stock is:
a. $4 per share
b. $6 per share
c. $7 per share
d. $8 per share
(C) Earnings per share for the common stock is calculated after deducting the payment of preferred dividends. The preferred dividends are $1,000,000. After deducting $1,000,000 from the net income of $8,000,000, the $7,000,000 that is available for the common stockholders is divided by the 1,000,000 common shares outstanding. The earnings per common share is equal to $7 per share ($7 million divided by 1 million common shares equals $7 earnings per share). (22-28)
104. With no other securities position, a customer sells short 100 shares ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at:
a. $35
b. $50
c. $45
d. $40
(C) An individual who sells short risks loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss would be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale PLUS the premium. (15-7)
105. All of the following are features of a 529 plan EXCEPT:
a. Withdrawals from 529 plans used for educational purposes are not subject to federal taxation
b. There are no income limits placed on contributors
c. Contributions are unlimited
d. Earnings in the account are tax-deferred
(C) Although contribution limits are considerably higher than a Coverdell Education Savings Account (limited to $2,000 per year), contributions are not unlimited. (17-4)
106. The Gross Domestic Product (GDP) is the total value of:
a. Goods and services produced in the U.S.
b. Minerals produced in the U.S. economy
c. Foodstuffs and manufactured products produced in the U.S.
d. All of the above
(A) The Gross Domestic Product (GDP) is the total value of goods and services produced in the U.S. in any particular year. (22-1)
107. If an equity option is exercised, when is the settlement date for the stock transaction?
a. Next business day
b. Two business days
c. Three business days
d. Seven business days
(C) When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected in 3 business days (regular-way settlement for stock). (16-5)
108. Which of the following companies would most likely pay a dividend in stock rather than cash?
a. A company with a large cash position and very little growth in earnings
b. A company whose earnings are growing at 5% a year and has a small amount of cash
c. A company growing at 10% a year with 20% of its assets in cash
d. A company with a small amount of cash whose earnings are growing at a rate of 20% per year
(D) A company thai has a high rale of growth would pay a dividend in slock rather than cash. The company needs to retain the cash in the corporation to finance the high rate of growth. Of the choices given, the corporation with the largest growth rate would most likely pay a dividend in stock rather than a cash payout. This would be a company with a small amount of cash whose earnings are growing at a rate of 20% per year. (4-19)
109. Fully paid customer securities held at a brokerage firm:
a. May be used as collateral for brokerage firm loans
b. May be commingled with other customers' securities
c. Must be segregated and identified as belonging to the customer
d. None of the above
(C) Fully paid customer securities held at a brokerage firm must be segregated and identified as belonging to the customer. (3-2)
110. A sell slop order would most likely be
entered by a technical analyst or chartist:
a. Below a support level for the stock
b. Above a resistance level for the stock
c. Below a previous low for the stock
d. To take advantage of a rising market
(A) Sell-stop orders are entered below the current market. The order would most likely be entered by a technical analyst or chartist below a support level for the stock. If the price of the stock went below the support level, it would be a breakthrough on the downside. This would be a bearish indication. Once the stop price has been reached, the stock would be sold at the market. (22-39)
111. A dividend has been declared on ATT
common stock. Which two of the following investors would be entitled to the dividend?
I. The owner of an ATT call option who exercised the option prior to the ex-dividend date
II. The owner of an ATT put option who exercised the option prior to the ex-dividend date
III. The writer of an ATT put option which was exercised prior to the ex-dividend date
IV. The writer of an ATT call option which was exercised prior to the ex-dividend date
a. 1 and III
b. I and IV
c. II and III
d. II and IV
(A) The owner of a call and the writer of a put would be entitled to receive the dividend if the option is exercised before the ex-dividend date. In both cases, the exercise will result in the individual buying stock. To be entitled to a dividend, stock must be purchased prior to the ex-dividend date. (16-10)
112. All of the following should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction EXCEPT:
a. The costs involved in executing the trade
b. The dollar value of the security
c. The cost price of the securities held in inventory by the dealer
d. The availability of the security
(C) All of the choices given should be taken into consideration by an over-the-counter dealer when determining the commission to charge in an agency transaction except the cost price of securities held in inventory by the dealer. The price charged should be based on the current market price, not the cost of the inventory position. (12-3)
113. The riskiest type of oil and gas project would be a(n):
a. Income program
b. Development program
c. Wildcat program
d. Stripper program
(C) Exploratory (also called "wildcat") projects search for oil in unproven areas. They are considered the riskiest type of oil and gas program due to the high rate of failure. Income programs are the safest because the wells are currently producing oil or gas. A stripper well is a type of income well that produces less than 10 barrels of oil each day. Development programs drill for oil in proven, surveyed sites. (20-16)
114. Which two of the following are TRUE about contributions made to an IRA?
I. Must be in the form of cash
II. May be in the form of securities
III. Are permitted regardless of whether the individual is covered by an employer's plan
IV. Are permitted only for individuals not covered by an employer's plan
a. I and III
b. I and IV
c. II and III
d. Ill and IV
(A) Contributions to an IRA must be made in cash and may then be invested into intangible assets such as stocks and bonds. Any individual who earns income may contribute to an IRA. However, individuals covered under an employer plan may be limited to making contributions in after-tax dollars. (17-1)
115. An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000.

What is the individual's basis?
a. -0-
b. $30,000
c. $50,000
d. $80,000
(D) Under the IRS "at risk" rule, an investor may include in his basis those monies for which he is in fact liable. Since the loan is a recourse loan, the investor is liable for its repayment. The investor's basis would therefore be $80,000 ($30,000 investment + $50,000 recourse loan). (20-6)
116. An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000.

Assuming sufficient passive income, the maximum passive losses that a limited partner may claim is:
a. -0-
b. $30,000
c. $50,000
d. $80,000
(D) The maximum amount of losses that may be deducted by a limited partner is the extent of his basis (in this question, $80,000). Assuming sufficient passive income, the limited partner may deduct $80,000. (20-5)
117. A client is notified by his broker-dealer that certain trades may be executed by an Electronic Communication Network (ECN). Which two of the following are risks of using this type of system?
I. Trades are not subject to SRO regulations
II. Limited ability to execute transaction
III. Higher commission
IV. System may only accept certain types of orders
a. I and III
b. I and IV
c. II and III
d. II and IV
(D) Some broker-dealers use ECNs to execute customer orders. ECNs act as matching systems to execute orders from subscribers. Some broker-dealers will use a market maker during normal business hours and an ECN to execute trades after normal business hours (after 4 p.m.). If the system cannot match a buyer and seller, a client's order can have a limited ability to be executed. Some ECNs will only accept certain types of orders, such as limit orders. Trades would be subject to SRO regulations and the commissions clients are charged would generally not be higher if a broker-dealer used an ECN. (12-8)
118. Which two of the following choices are advantages of trading exchange traded funds (ETFs)?
I. They can be purchased on margin.
II. Investors can receive breakpoints
III. There is no fee to liquidate shares.
IV. They can be sold short
a. I and III
b. II and III
c. I and IV
d. Ill and IV
(C) Exchange traded funds (ETFs) represent a basket of securities. They are structured to represent an index of securities such as the Nasdaq 100 or the Dow Jones Industrial Average. Their shares are purchased and sold on an exchange, therefore, they can be purchased on margin and sold short. Mutual funds cannot be purchased on margin or sold short since they are sold under prospectus and not on an exchange. Investors pay a commission whenever they buy or sell shares of ETFs. Investors receive breakpoints on sales if they purchase a specified amount of mutual fund, not an ETF. (18-8)
119. All of the following statements regarding the Roth IRA are TRUE EXCEPT:
a. Contributions are tax deductible
b. Qualified distributions are not included in an individual's gross income
c. Qualified distributions are not subject to the 10% early withdrawal penalty
d. An individual may contribute up to $5,000 per year
(A) While contributions to traditional IRAs are tax deductible under certain conditions,contributions to a Roth IRA are nondeductible. Individuals may contribute up to $5,000 per year if they have earned income and if they meet certain income eligibility requirements. Qualified distributions are tax-free and are not subject to the 10% early withdrawal penalty. (17-3)
120. A limited partner lends money to the partnership. The limited partner would:
a. Become a general creditor of the partnership
b. Now be considered a general partner
c. Lose his limited liability
d. Be violating his fiduciary responsibility
(A) A limited partner is permitted to lend money to the partnership. He would be considered a general creditor since he was a lender. (20-4)
121. Claire, an attorney, has contributed to her IRA account for many years. Her new employer, Digiphone, has a pension plan. Which of the following statements is correct regarding further IRA contributions?
a. Claire can contribute, but the growth
in the account will be taxable in the year earned
b. Whether she may continue to contribute depends on her income level
c. Claire can continue to contribute as long as she has earned income
d. Due to her participation in a pension plan, Claire cannot continue to make IRA contributions
(C) As long as Claire has earned income, she can fund her IRA. However, based on her income level and tax filing status, she may not be able to deduct her contributions on her tax returns. Claire's participation in a pension plan has no bearing on her ability to contribute to her IRA. (17-1)
122. The Securities Exchange Act of 1934:
I. Created the SEC
II. Provided for the regulation of credit
III. Provided for the regulation ol exchanges
IV. Provided for the regulation of new issues
a. I and III only
b. I and IV only
c. I, II, and III only
d. II, III, and IV only
C) The Securities Exchange Act of 1934 created the SEC and provided for the regulation of credit and exchanges. The Securities Act of 1933 provided for the regulation of new issues. (11-2)
123. An individual in the 28% tax bracket can purchase an 8 1/2% municipal bond at par. What taxable yield would be required to equal the yield on the municipal bond?
a. 3.0%
b. 8.5%
c. 11.8%
d. 20.2%
(C) The taxable equivalent yield of a municipal bond equals the municipal yield divided by the complement of the tax bracket (100% minus the tax bracket). In this example, the municipal yield (8 1/2%) divided by the complement of the tax bracket (72% or 0.72) equals 11.8%. (8-26)
124. All of the following are true regarding the Interbank market for foreign currencies EXCEPT:
a. It is decentralized
b. It is unregulated
c. Transactions may settle on a spot or forward basis
d. It is unaffected by actions taken by a government's central bank
(D) The Interbank market relates to the trading of foreign currencies amongst large international banks. The Interbank market is therefore not centralized. It is basically unregulated and is affected by national economic policies, actions taken by central banks, and other occurrences that would affect the relative value of currencies. Foreign currency transactions may settle on a spot (2 business days) or forward (more than 2 business days) basis. (15-41)
125. An individual buys 100 shares of XYZ at 60 and two weeks later buys an XYZ June 60 put at 3. If he exercises the put and delivers the stock when XYZ is trading at 50, what will be the client's profit or loss?
a. $300 loss
b. $700 loss
c. $300 gain
d. $700 gain
(A) If the client exercises the put, he will sell his stock at a net price of 57 (the strike price of 60 minus the premium of 3). Since the original cost for the stock was 60, the client will have a $300 loss (60 purchase price minus 57 sale price). (15-4)