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125 Cards in this Set

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1.If a customer wants to purchase securities in an account that has been frozen, when must he deposit the required cash in the account?
a. On the same day of the purchase
b. No later than 5 business days after the purchase
c. No later than 3 business days after the purchase
d. Before the purchase transaction is made
(D) A frozen account requires the full amount of money to be deposited in the account before the order is accepted. If the client wanted to sell securities in a frozen account, the securities have to be in the account before the sale is made. (11-3)
2.All of the following investors would have limited liability EXCEPT:
a. A owner of common stock
b. A holder of a call option
c. Th e shareholder of a mutual fund
d. A general partner
(D) A general partner has unlimited liability. All the other investors have limited liability. (20-3)
3.A type of offering in which whatever is not sold is retained by the issuing corporation is:
a. A firm commitment
b. A best efforts
c. An all or none
d. A standby underwriting
(B) A type of offering in which whatever is not sold is returned to the issuing corporation is a best-efforts underwriting. (9-2)
4.A type of offering in which the issuing corporation is assured of receiving the full amount of the offering, and whatever is not sold is retained by the underwriter, is:
a. A firm commitment
b. A best efforts
c. An all or none
d. A standby underwriting
(A) A type of offering in which the issuing corporation is assured of receiving the full amount of the offering and whatever is not sold is retained by the underwriter is a firm commitment. (9-1)
5.A type of offering in which the offering is cancelled if the entire amount of the shares is not sold is:
a. A firm commitment
b. A best efforts
c. An all or none
d. A standby underwriting
(C) A type of offering in which the offering is cancelled if the entire amount of shares is not sold is an all-or-none offering. (9-2)
6.A registered representative wants to take on a second job working part-time as a waiter in a restaurant. This is allowed as long as the individual notifies:
a. The MSRB
b. The FRB
c. FINRA
d. His employer
(D) Prior written notification would be required to be provided to the registered representative's employer. (1-9)
7.A registered representative wants to open a new account for a client who is a resident of Mexico. Which two of the following statements are correct?
I. Customer verification of the client's personal information is not required if the customer was referred by an existing client.
II. Customer verification of the client's personal information is required under any circumstances.
III. The client can have either a taxpayer identification number or a passport number and country of origin.
IV. The client must have a taxpayer identification number to open the account.
a. I and III
b. II and IV
c. I and IV
d. II and III
(D) If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens the firm must obtain the client's name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. An RR would always need to verify the client's personal information regardless of whether or not the customer was referred by an existing client. (3-13)
8.A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest?
a. 0
b. $5,000
c. $15,000
d. $20,000
(C) Customers are charged interest on the average daily amount of the debit balance in their account. (13-2, 13-6)
9.The public offering price of a new issue of a corporation is determined by which of the following?
I. The dividends paid by the corporation
II. The past earnings record of the corporation
III. A comparison with other corporations in the same industry
IV. Market conditions at the time the new issue is expected to be sold
A. I and II only
B. I and III only
C. I, II, and III only
D. I, II, III, and IV
(D) The public offering price of a new issue of a corporation is determined by all of the factors listed. (9-3)
10.The custodian bank of a mutual fund:
a. Manages the fund
b. Acts as the distributor of the fund
c. Holds the fund's cash and securities and performs essential clerical functions but does not manage the fund
d. Guarantees investors against any loss that may be incurred if the fund should decline in value
(C) The custodian bank of a mutual fund only holds the fund's cash and securities and performs important clerical functions. It does not manage the fund, which is the responsibility of the investment adviser. The custodian bank does not distribute the fund or guarantee investors against any loss that may be incurred if the fund should decline in value. (18-16)
11. Variable annuities sold by insurance companies must be registered with the:
I. SEC
II. FRB
III. FINRA
IV. State Insurance Commissions
a. I and III only
b. I and IV only
c. III and IV only
d. I, II, III, and IV
(B) Variable annuities are generally sold by RRs of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered to be securities by the SEC, and therefore must be registered with the SEC and the State Insurance Commission. (19-2)
12. An investor writes an XYZ October 70 call at 3 and an XYZ October 70 put at 1. This strategy is known as a:
A. Short combination
b. Short straddle
c. Bull spread
d. Bear spread
(B) A long straddle consists of purchasing a put and a call, on the same underlying security, with the same strike price and same expiration. A short straddle consists of selling a put and a call, on the same underlying security, with the same strike price and expiration. (15-13)
13 .Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar have to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.)
a. $0.8418
b. $0.8500
c. $0.8582
d. $858.20
(C) The breakeven formula for call buyers is the strike price plus the premium. The strike price is 85 (0.8500) and the premium is .82 ($0.0082). Therefore, the spot rate for the Canadian dollar would have to be $0.8582 for Mr. Jones to break even. He would exercise the call at $0.85, paying $8,500 ($0.85 x 10,000), and then sell the Canadian dollars at his breakeven point resulting in total proceeds of $8,582 ($0.8582 x 10,000). The net gain on the exercise and sale is $82 ($8,582 - $8,500); however, this was the total premium paid when Mr. Jones purchased the call ($0.0082 x 10,000 = $82). (15-42)
14.When opening an options account for a client, in what order should the following be accomplished?
I. Client signs the option agreement
II. Registered representative determines suitability
III. ROP approves the account
IV. A transaction is executed
I, II, III, IV
II, I, III, IV
II, III, IV, I
III, II, I, IV
(C) The first step in opening an options account is to obtain financial information from the customer to determine suitability. The account must then be approved for options trading by an ROP (registered options principal). After approval, a transaction may be executed. A signed option agreement must be obtained within 15 days of the approval of the account. (16-11)
15. An engineer earning $60,000 a year is not covered under a pension plan by his employer. The engineer is also a self-employed antique dealer and has earned $18,000 from this source. The engineer would like to start a Keogh plan. Contributions to the Keogh plan for the year would be based upon income of:
a. $13,000
b. $18,000
c. $69,000
d. $78,000
(B) The engineer can make a maximum deductible contribution to a Keogh plan of 20% of the income earned as a self-employed antique dealer or $51,000, whichever is less. Therefore, contributions would be based upon an income of $18,000. The engineer cannot use the $60,000 earned from his regular occupation because it is not income derived from self-employment. (17-10)
16. When looking at a newspaper listing for foreign currency options, the spot prices for the underlying foreign currencies are quoted in:
a. European terms
b. U.S. terms
c. 1/32 of a point
d. 1/8 of a point
(B) For foreign currency options, spot prices are quoted in U.S. terms (the cost in U.S. dollars to purchase one unit of the foreign currency). All of the spot prices are quoted in cents per unit except the Japanese yen (1/100th cent per unit). (15-42)
17. The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2020 and are being issued at a $1,000 par value.
The bonds are secured by:

a. The barges and equipment of the Barge Towing Corporation
b. The common stock of the Barge Towing Corporation
c. The underwriter of the Barge Towing Corporation
d. The "full faith and credit" and no specific collateral of the Barge Towing Corporation
(D) The tombstone ad states the bonds to be issued are subordinated debenture bonds, which are unsecured bonds. The bonds are secured by the "full faith and credit" and no specific collateral of the Barge Towing Corporation. (6-2)
18. The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2020 and are being issued at a $1,000 par value.
The conversion ratio of the bonds is approximately:

a. 75 to 1
b. 85 to 1
c. 95 to 1
d. 100 to 1
(C) The conversion price is given as $10.50. To find the conversion ratio, divide the par value ($1,000) of the bond by the conversion price of $10.50. This equals a conversion ratio of 95 to 1 ($1,000 divided by $10.50 equals 95). (6-6)
19. The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2020 and are being issued at a $1,000 par value.
If the bonds were subsequently trading in the market at $1,020, the market price of the common stock, to be on parity with the bond, would have to be:

a. $9.54
b. $10.20
c. $10.74
d. $12.04
(C) To find parity (equality in dollar value) for the stock, divide the market price of the bond by the conversion ratio. The market price of the bond is 102 ($1,020) and the conversion ratio is 95 to 1. Therefore, $1,020 divided by 95 would equal approximately $10.74. This would be the parity price for the stock. (6-7)
20. Which statement best describes an indenture?
a. It is a written agreement between an option buyer and the option writer.
b. It is a written agreement between the brokerage firm and its customers allowing the customers to buy securities on credit.
c. It is a contract between the issuer of bonds and the trustee for the benefit of the holder of the bonds.
d. It is found on every stock certificate.
(C) An indenture is a written contract between the issuer of bonds and the trustee under which bonds and debentures are issued. Listed in the indenture are: the maturity date, the coupon rate, and other terms for the benefit of the bondholder. (6-1)
21. For a new issue to be sold in its home state and neighboring states:
I. The issuer must file a Rule 147 form.
II. Registered representatives selling the stock must be registered in whatever states they plan to make sales in.
III. FINRA must approve the sale in all the states.
IV. The Blue Sky laws (state securities laws) of all the states in which the securities will be sold must be observed.
a. I and III
b. I and IV
c. II and III
d. II and IV
(C) For the issue to be sold in its home state and neighboring states, individuals selling the new issue must be registered to sell the securities in those states. The Blue Sky laws (state securities laws) of those states in which the securities will be sold must also be observed. (9-15)
22. The antifraud provisions of the Securities Act of 1933 apply to:
I. Brokers
II. Broker's brokers
III. Dealers
IV. Issuers
I and II only
I and III only
II, III, and IV only
I, II, III, and IV
(D) The antifraud provisions of the Securities Act of 1933 apply to all of the choices listed. (9-19)
23. The American Telephone Company announced in an ad in The Wall Street Journal that it intends to call for redemption all of its outstanding 10% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. Which alternative is most advantageous to the bondholder?
a. Redeem the bonds.
b. Sell the bonds at the current market price.
c. Do nothing and hope for a takeover bid from another company.
d. Hold the bonds to maturity and continue to earn interest.
(A) When bonds are called for redemption, the bondholder can only redeem the bond at the callable price or sell them in the market. The bondholder cannot continue to hold the bonds in anticipation of a better offer or until maturity. (5-17)
24. A specialist can accept all of the following orders EXCEPT a:
a. Not-held order
b. Market order
c. Good-'til-cancelled (open) order
d. Day order
(A) A specialist can accept all of the orders listed except a not-held order, which allows a floor broker to use discretion in executing an order. If the question asked which orders can the specialist accept and place on his "book," the answer would be open (GTC) and day orders only. A specialist can accept a market order but must execute it immediately and cannot place it in his book. (11-16, 11-25)
25. If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be:
a. A capital loss at the time the option expires
b. A capital gain at the time the option expires
c. An ordinary loss at the time the option was purchased
d. An ordinary loss at the time the option expires
(A) If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be a capital loss at the time the option expired. (21-18)
26. Which of the following statements concerning convertible bonds are true?
I. Coupon rates are usually lower than nonconvertible bonds.
II. Convertible bondholders are creditors of the corporation.
III. It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond.
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(D) Convertible bonds give holders the ability to convert their bonds into shares of common stock of the same issuer at a set price (conversion price) at their discretion. This feature links these types of bonds to the equity markets and the price of a convertible bond is affected by the price of the underlying stock. However, if the price of the underlying stock declines to the point where there is no advantage to the conversion feature, the bond may sell at a price based on its inherent value as a bond, disregarding the convertible feature.

Moreover, since a convertible is a bond first, anyone who holds one is a creditor of the issuer. Also, since the conversion feature is a benefit to the bondholder, convertible bonds will have a lower coupon than similar nonconvertible bonds. (6-8)
27. When you purchase an option contract, according to Regulation T, the transaction must be paid for in:
a. 1 business day
b. 3 business days
c. 5 business days
d. 7 business days
(C) According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase. (11-3)
28. All of the following assets can be depreciated EXCEPT:
a. Equipment
b. Furniture and fixtures
c. Machinery
d. Land
(D) All of the fixed assets listed lose value through usage or wear and are depreciated except land. The Internal Revenue Service does not allow for land to be depreciated. (20-4)
29. Which of the following would not be taxable to the owner of mutual fund shares?
a. Dividends which were reinvested at net asset value
b. Fund shares that appreciated which are exchanged for other shares in the same family of funds
c. Fund shares held by the investor which have appreciated but have not yet been sold
d. A capital gains distribution which was reinvested at net asset value
(C) Owning fund shares that have appreciated in value would not incur taxes. The appreciation becomes taxable as a capital gain when the shares are sold for the profit. An exchange within a family of funds is considered to be a sale and subsequent purchase and would be a taxable event if the sale resulted in a gain. Dividends and capital gain distributions are taxable events whether or not they are reinvested. (18-28, 18-29, 18-30)
30. An account executive has limited discretion over a customer's account. The account executive can:
a. Remove money freely from the account
b. Have the account reviewed by a supervisor
c. Not enter buy stop orders
d. Have all confirmations of transactions sent only to himself
(B) Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. (2-9)
31. Ms. Green owns 600,000 shares of a company's stock. If there are 3,000,000 outstanding shares, she would be considered an insider:
a. Only if she was an officer or director
b. Only if she did not report all changes in position to the SEC
c. Only if she did not sell the shares according to Rule 144
d. Under all circumstances
(D) According to the Securities Exchange Act of 1934, any person who is an officer or director, or who owns more than 10% of a company's outstanding stock, is considered an insider. Ms. Green owns 20% of the outstanding shares (600,000 divided by 3,000,000) and is therefore considered an insider. (11-5)
32. Which of the following is NOT TRUE as it relates to a bond selling at a discount?
a. The yield-to-maturity is greater than the nominal yield.
b. The nominal yield is less than the current yield.
c. Interest rates most likely decreased after the bonds were issued.
d. The par value exceeds the market price.
(C) If the par value of a bond is greater than the bond's market price, it is selling at a discount. A bond sells at a discount because of an increase in interest rates since the bond was issued. For a discount bond, the yield-to-maturity is highest, followed by the current yield, with the nominal yield being lowest. (5-9)
33. When securities are sold in a restricted margin account:
I. The debit balance is decreased
II. The SMA is increased
III. The equity is increased
IV. The market value of the account is decreased
a. I and II only
b. I and III only
c. II and III only
d. I, II, and IV only
(D) When securities are sold in a restricted account, 100% of the sale proceeds will be used by the broker-dealer to reduce the customer's debit balance and the broker-dealer will, in turn, credit the customer's SMA for an amount equal to the Reg T requirement (50%) multiplied by the sale proceeds. The market value of the account will be reduced since securities have been sold. (13-13)
34. A FINRA member subscribing to CQS, calls a market maker displaying a quote on the system and executes a trade. This transaction would be considered to have occurred in the:
a. Primary market
b. Private market
c. Third market
d. Fourth market
(C) CQS displays quotations by members for NYSE and AMEX listed securities. Transactions in listed securities between FINRA members in the over-the-counter market are considered third market transactions. Although executed in the over-the-counter market, such transactions must still be reported to the Tape. (12-8)
35. Pennsylvania Power Company has announced it will refund $100 million of its outstanding 12% bonds that were to mature in 2020. The bonds will be refunded at 106.75% of par value from the proceeds of a $100 million refunding issue. The refunding issue has a 6% coupon rate and matures in 2012.
The refunding will reduce all of the following EXCEPT the:

a. Interest cost to the issuer
b. Company's maturity schedule
c. Company's annual debt service obligation
d. Amount of outstanding debt
(D) Pennsylvania Power has reduced the interest charges (from 12% to 6%) by advancing the repayment of its existing debt. The company is paying off the 12% bonds, due in 2020, with the issuance of another bond. It is also improving its debt service by reducing the interest rate from 12% to 6%, thereby reducing its fixed charges each year. However, the amount of debt outstanding will remain the same at $100 million. (5-17)
36. Pennsylvania Power Company has announced it will refund $100 million of its outstanding 12% bonds that were to mature in 2020. The bonds will be refunded at 106.75% of par value from the proceeds of a $100 million refunding issue. The refunding issue has a 6% coupon rate and matures in 2012.
Bondholders who owned 12% bonds maturing in 2020 will receive:

a. $1,067.50 plus accrued interest
b. The new 6% bonds being issued plus accrued interest
c. $1,000 plus accrued interest
d. The new 6% bonds being issued without accrued interest
(A) The company is refunding the bonds at 106.75% of its par value. The bondholders who owned the 12% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest. (5-17)
37. An outstanding municipal bond would most likely be called when interest rates:
a. Rise above the bond's nominal yield
b. Rise above the bond's yield to maturity
c. Fall below the bond's nominal yield
d. Fall below the bond's yield to maturity
(C) Bonds may contain a provision that allows the issuer, at its option, to redeem the bonds before they mature. Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline. The issuer may then refinance the debt at a lower rate of interest. For instance, if an issuer's outstanding bond is paying a coupon rate (nominal yield) of 9% at a time when similar bonds are paying only 5%, it can reduce its interest costs by calling in the 9% bonds and issuing new ones at 5%. As rates decline, the bond's yield to maturity or yield to call also would decline. (5-17)
38. The call feature on callable bonds would be most relevant when the economy is:
a. Experiencing a slowdown and the FRB is trying to stimulate growth
b. Experiencing a slowdown and inflation is increasing
c. Growing and the FRB is trying to slow down the economy
d. Growing and inflation is stable
(A) The call feature on callable bonds are most relevant when the general level of interest rates are declining. Rates will tend to decline when the FRB is trying to stimulate the economy by increasing the money supply. The goal would be to bring down interest rates to allow the economy to grow. Rising inflation usually causes the FRB to decrease the money supply to drive up interest rates. If the economy is growing and inflation is stable, this is a beneficial situation and the FRB may simply leave rates unchanged. (22-12, 5-17)
39. A bond secured by other bonds and securities is referred to as a:
a. Debenture bond
b. Guaranteed bond
c. Mortgage bond
d. Collateral trust bond
(D) A bond secured by other bonds and securities is called a collateral trust bond. (6-2)
40. If a company's total assets remain the same but stockholders' equity decreases, which of the following is true?
a. Total liabilities increased.
b. Accrued expenses decreased.
c. Retained earnings increased.
d. Capital in excess of par increased.
(A) When total assets remains the same and stockholders' equity declines, then total liabilities has to increase. The correct formula for a balance sheet is:

Total Assets = Total Liabilities + Stockholders' Equity
41. Which of the following statements is true regarding warrants?
1.Warrants receive dividends when the common stock receives dividends.
b. Warrants can be perpetual.
c. Warrants are only issued by blue chip corporations.
d. Warrants are guaranteed by the Options Clearing Corporation.
(A) Warrants can be perpetual in their duration. Warrants give the holder the ability to convert the warrant into the common stock of the same corporation at a specified price and at the holder's option. (4-11)
42. Under the Investment Company Act of 1940, which of the following are considered investment companies?
I. A bank holding company
II. A face-amount certificate
III. An insurance company
IV. A management company
a. I and II only
b. I and IV only
c. II and IV only
d. II, III, and IV only
(C) A face-amount certificate and a management company are two types of investment companies. The third type is a unit investment trust. The Investment Company Act of 1940 does not consider holding companies and insurance companies to be investment companies. (18-1)
43. A registered representative should know all the essential facts about a customer's financial status, investment objectives, ability to assume risk, age, occupation, and other pertinent information:

I. For the registered representative to determine if option trading is suitable for the customer
II. For the brokerage firm to determine if it should approve the customer's account for option trading
III. For the brokerage firm to determine if it should send an options risk disclosure document to the customer
I and II only
I and III only
II and III only
I, II, and III
(A) Option trading is not suitable for all investors because of the risks involved. The registered representative must obtain all the essential facts about the customer to determine if option trading meets the customer's investment objectives, financial background, and ability to assume the added risk. An option order (to buy or write the option) may not be accepted from a customer unless the customer's account has first been approved for options trading by the brokerage firm. Whether the account would be approved or not would depend upon the essential facts about the customer. The answer therefore is (I) and (II) only. A customer must be sent a current option disclosure document at or prior to the time the account is approved for option transactions. (16-11)
44. SEC regulations state that a brokerage firm must provide a current financial statement (balance sheet) to:
a. A customer when requested by the customer
b. A noncustomer who requests it
c. Both of the above
d. None of the above
(A) SEC regulations states that a brokerage firm must provide a current financial statement (balance sheet with net capital computation) to a customer upon request. The customer has the right to know the financial condition of the company with which he is doing business. (3-3)
45. A type of order that becomes a market order when a round-lot trades at or through a particular price is called a:
a. Market order
b. Limit order
c. Stop order
d. Stop-limit order
(C) A type of order which becomes a market order when a round-lot trades at or through a particular price is called a stop order. A variation of a stop order is a stop-limit order which is activated when a round-lot trades at or through a particular price but then the limit price must be satisfied. (11-23)
46. An individual purchases 600 shares of BAZ preferred stock. One week later the stock pays a dividend of $1.20 per share and the investor sells the stock the next day. For tax purposes, how will the dividends be taxed?
a. 70% of the dividend will be tax-exempt; the remainder will be taxed as ordinary income.
b. 70% of the dividend will be tax-exempt; the remainder will be taxed as a capital gain.
c. The dividend will be taxed at long-term capital gains rates.
d. The dividend will be taxed as ordinary income.
(D) Currently, dividends paid on stock held by individuals for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date are taxed at a maximum rate of 20%. This is the same maximum tax rate as long-term capital gains. Since the individual held the stock less than the 60-day period, the dividend is taxed as ordinary income. The corporate dividend exclusion allows a corporation to exclude from taxation 70% of the dividends it receives from other corporations. (21-1)
47. The purpose of a sinking fund is for redeeming a corporation's:
a. Common stock
b. Warrants
c. Rights
d. Bonds
(D) A sinking fund is setting aside monies to be used for the purpose of redeeming a corporation's bonds before or at maturity. (5-18)
48. A measurement of the market based on 65 stocks is known as the:
a. Standard and Poor's Index
b. Dow Jones Composite Average
c. Dow Jones Index
d. Moody's Average
(B) A measurement of the market based on 65 stocks is known as the Dow Jones Composite Average. It consists of 30 industrial stocks, 20 transportation stocks, and 15 utility stocks. The Standard & Poor's Index consists of 500 stocks of which 400 are industrial stocks. When one states that "the market is up" or "the market is down," this often refers to the Dow Jones Industrial Average of 30 industrial stocks. (22-36)
49. Maintaining a fair and orderly market and acting as a broker for other brokers is the function of the:
a. Specialist
b. Odd-lot dealer
c. Floor trader
d. Two-dollar broker
(A) Maintaining a fair and orderly market, and acting as a broker (agent) when executing orders for other brokers, is the function of the specialist. (11-16)
50. Joseph Carlyle is a customer of a municipal securities firm. Based on his existing account documentation, he is clearly unsuitable for any securities with a speculative credit rating. However, he has entered an order to purchase a bond that is rated BB by Standard and Poor's. His representative, Bob Thomas, has communicated to him that this transaction is not in his best interest based on the information that the firm has on file. Regarding this situation, which of the following statements is TRUE?
a. Bob should process the order because a BB rating is not speculative.
b. Bob should process the order because MSRB rules allow the order to be filled if the rep explains to Joseph that the trade is unsuitable.
c. Bob should process the order because registered reps are not fiduciaries and therefore must always do what the customer says.
d. Bob should not process the order because MSRB rules prohibit the processing of a clearly unsuitable transaction.
(B) According to recent interpretations of the MSRB's suitability rule, Bob should process the customer's order as long as he takes the time to explain to Mr. Carlyle why he believes the investment is unsuitable for him. (12-30)
51. A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2026 at 99 1/2% of their par value. The yield-to-maturity on the bond is:
a. 8%
b. Less than 8 1/2%
c. 8 1/2%
d. Greater than 8 1/2%
(D) The 8 1/2% bonds are being offered at a discount at 99 1/2% of their $1,000 par value. An investor who purchased the bonds at the offering and held the bonds to maturity would receive the par value of $1,000. The investor would therefore have a yield-to-maturity that is greater than 8 1/2%. (5-9)
52. Mr. Jones earns $40,000 per year and has contributed to his Individual Retirement Account (IRA) for each of the past two years. The company he works for has recently instituted a pension plan. Since he is now covered by a corporate pension plan, which of the following is true regarding his IRA?
a. He must liquidate the IRA by taking a lump-sum distribution.
b. He may keep the IRA but additional contributions are prohibited.
c. He may keep the IRA and may make a tax-deductible contribution of up to $17,500 this year.
d. He may keep the IRA and may make a tax-deductible contribution of up to $5,500 this year.
(D) An individual who is covered by a corporate pension plan may continue to make pretax contributions of up to $5,500 to an IRA providing the individual's income does not exceed specified levels. (17-1)
53. Which of the following would not be available to pay interest on a revenue bond issue?
a. Special taxes
b. Lease payments
c. Ad valorem taxes
d. Capitalized interest
(C) Ad valorem (property) taxes secure a general obligation bond, not a revenue bond. (8-2)
54. Which of the following represent logical strategies for a technical analyst?
I. Buy calls when a stock breaks through a resistance level
II. Buy calls when a stock breaks through a support level
III. Buy puts when a stock breaks through a resistance level
IV. Buy puts when a stock breaks through a support level
a. I and III
b. I and IV
c. II and III
d. II and IV
(B) A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst would purchase calls if the stock's price broke through a resistance level. The analyst would buy puts if the stock's price broke through a support level since the analyst would believe the stock's price will continue to decline until the next support level. (22-39)
55. A new municipal underwriting is shown as 1/8 + 1/4. What is the discount to a member?
a. $1.25
b. $2.50
c. $3.75
d. $5.00
(C) In a new municipal securities offering, a member of the syndicate will receive a discount, from the public offering price, equal to the total takedown. The total takedown is broken into two parts, the concession and the additional takedown. A member is entitled to both and would therefore receive a discount of 3/8 point ($3.75 per $1,000). A nonmember of the syndicate would buy bonds less the concession ($1.25 per $1,000). (10-8)
56. A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid out a dividend of $2.00 per share on the common stock. The dividend payout ratio is:
a. 25%
b. 40%
c. 60%
d. 100%
(B) Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%. (22-29)
57. A municipal bond is currently trading at 92 and is callable in 10 years at par. What would be the effective yield that must be disclosed on a customer's confirmation?
a. Yield to call
b. Yield to maturity
c. Fixed yield
d. Current yield
(B) The MSRB regulates the effective yield that must be disclosed on a client's confirmation. The effective yield on a bond trading at a discount is the yield to maturity. (8-24)
58. Upon exercise of the option, the holder of a long put will realize a profit if the price of the underlying stock:
a. Falls below the exercise price
b. Falls below the exercise price minus the premium paid
c. Exceeds the exercise price
d. Exceeds the exercise price plus the premium paid
(B) The buyer of a put profits if the market price drops below the exercise price by an amount exceeding the premium. For example, if an investor buys the XYZ July 50 put for 5, there will be a profit if the price drops below $45. If the price drops to $42, the investor will buy stock in the open market at this price and put the stock at the exercise price of $50. The net selling price will be $45 (exercise price of $50 MINUS premium of $500). As the cost to buy the stock was $42, there would be a profit of $300.

If the price dropped to $48, the investor would also exercise the put, but would have a net loss because the stock would be acquired at the market price of $48 and put to the writer at $50. The net selling price would be $45 after subtracting the premium, and the investor would therefore have a net loss of $300. (14-15)
59. On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share.
What would the breakeven point be for Mr. Smith per option?

a. $45
b. $48
c. $53
d. $58
(C) The strike price plus the premium equals the breakeven point for the buyer of a call. The breakeven point is $53 ($50 strike price + the $3 premium = $53). (14-12)
60. On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share.
When will the calls expire at the Options Clearing Corporation?

a. 2:00 p.m. Central Time, 3:00 p.m. Eastern Time on the third Friday of the month
b. 3:10 p.m. Central Time, 4:10 p.m. Eastern Time on the third Friday of the month
c. 4:30 p.m. Central Time, 5:30 p.m. Eastern Time on the third Friday of the month
d. 10:59 p.m. Central Time, 11:59 p.m. Eastern Time on the Saturday following the third Friday of the month
(D) The calls will expire 10:59 p.m. Central Time, 11:59 p.m. Eastern Time on the Saturday following the third Friday of the month (July). Options stop trading at 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the third Friday of the month. The Options Clearing Corporation will accept an exercise notice up to 4:30 p.m. Central Time, 5:30 p.m. Eastern Time on the day prior to expiration. (16-2)
61. On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share.
If the market price of XYZ Corporation was $45 and the calls expired, Mr. Smith would lose:

a. $1,000
b. $1,500
c. $2,000
d. $4,000
(B) Mr. Smith, the buyer of the calls, will not exercise the options. The market price is $45 which is $5 less than the exercise price. Therefore, the options would expire worthless. Mr. Smith would then lose the entire amount of the premiums paid ($1,500). (14-12)
62. Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation.
Which of the following is true regarding this offering?

a. It is an initial public offering.
b. A registration statement is not required.
c. It is a combined offering.
d. It is a private placement.
(C) Of the 500,000 shares being offered, 250,000 shares are being issued for the first time from authorized but unissued shares. This is considered a primary distribution. The 250,000 shares being offered by the selling stockholders have already been issued by the corporation. This would make them a secondary distribution. The offering is therefore a combined primary and secondary distribution. A registration statement is required because the securities are being offered to the public. (9-1)
63. Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation.
The effect of this offering will be:


I. A dilution in the earnings per share
II. An increase in the earnings per share
III. The number of shares outstanding will increase by 500,000
IV. The number of shares outstanding will increase by 250,000

a. I and III
b. I and IV
c. II and III
d. II and IV
(B) After the offering is completed, there will be 250,000 new shares outstanding (the shares sold by the selling stockholders were already outstanding). This will result in the earnings per share being diluted because the earnings will now be divided by a greater amount (250,000 shares) of new outstanding stock. (4-6, 22-28)
64. Which TWO of the following statements are TRUE regarding the maintenance requirements for selling short stock that is trading at less than $5 per share?

I. The maintenance requirement for shorting a stock at $2.00 per share is 100% of the market value.
II. The maintenance requirement for shorting a stock at $2.00 per share is $2.50 per share.
III. The maintenance requirement for shorting a stock at $4.00 per share is 100% of the market value.
IV. The maintenance requirement for shorting a stock at $4.00 per share is $2.50 per share.

a. I and III
b. I and IV
c. II and III
d. II and IV
(C) The industry maintenance requirement when shorting stock that is trading at less than $5.00 per share, is the greater of $2.50 per share or 100% of the market value. When shorting stocks less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value. (13-16)
65. Under the know your customer rule, when a registered representative opens a new account for a customer, the registered representative should determine, among other things, the customer's:

I. Financial condition and needs
II. Objectives
III. Ability to assume risk

a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
(D) According to the know your customer rule, the registered representative should determine all of the items listed. (2-2)
66. Which of the following would be considered nonexempt securities according to the Securities Act of 1933?

a. U.S. government and municipal securities
b. Securities of a publicly held finance company
c. Securities of a small business investment company
d. Securities of a nonprofit organization
(B) Nonexempt securities are securities that are subject to the registration requirements of the Securities Act of 1933. Securities of a publicly held finance company are the only nonexempt securities. All of the other securities listed would be exempt from the registration requirements of the Securities Act of 1933. (9-19)
67. Mr. Brown buys 100 shares of XYZ at $62 per share and at the same time writes an XYZ 60 call option for an $8 premium. Excluding commissions and dividends, at what price would XYZ have to be selling at for Mr. Brown to break even on these transactions?

a. $52
b. $54
c. $60
d. $68
When Mr. Brown (the writer) received the $8 premium, it in effect reduced his purchase price by $8. Therefore, his "breakeven" price would be $8 less or $54 ($62 - $8 premium = $54). (15-2)
68. The Federal Reserve Board's Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims?

a. Treasury bills
b. Treasury notes
c. Treasury bonds
d. Agency bonds
(A) The Federal Reserve Board's Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board's aims of influencing the money supply. The securities most often used are Treasury bills. (22-10)
69. A 3-month Treasury bill is issued at a discount to yield 9.5% and a corporate bond is issued to yield 9.5%. The bond is to mature in 10 years. If both are offered on the same day on a bond equivalent yield basis, which of the following statements is true?

a. The bill would have a greater yield than the bond.
b. The bond would have a greater yield than the bill.
c. The yield would be the same for both.
d. The bond equivalent yield and tax equivalent yield are equal.
(A) A 3-month Treasury bill is issued at a discount to yield 9.5% and a corporate bond is issued to yield 9.5%. The bond is to mature in 10 years. If both are offered on the same day on a bond equivalent yield basis, which of the following statements is true?
The bill would have a greater yield than the bond.
The bond would have a greater yield than the bill.
The yield would be the same for both.
The bond equivalent yield and tax equivalent yield are equa
70. An investor purchases a LEAP on February 10th. The position is liquidated for a profit 13 months later. This profit would be taxed as:
a. A short-term capital gain
b. A long-term capital gain
c. Dividend income
d. Passive income
(B) LEAPS (Long-term Equity Anticipation Securities) are types of options that have a maximum expiration date date of up to 39 months. Therefore, a LEAP sold for a profit after being held for more than one year would receive long-term capital gains treatment. (21-18)
71. A new municipal bond issue is dated January 1st and pays interest each April 1st and Oct. 1st. An investor purchased bonds from the issue with a Thursday, January 31st settlement date. How many days of accrued interest did the investor owe?

a. 29
b. 30
c. 33
d. 34
(B) Accrued interest on a new municipal issue is calculated from the dated date up to but not including settlement date. Since the investor's settlement date was January 31st, he owes from the 1st to the 30th of January (30 days). (8-24)
72. An investor owns $10,000 worth of XYZ Corporation convertible bonds callable at 102. Prior to the call the bonds are selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive:

a. $10,000
b. $10,200
c. $10,300
d. $10,500
(B) When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond times 10 bonds). Before the call the bonds are selling in the market for $10,300; however, when the call is announced the market price of the bond will gravitate to $10,200. (5-17)
73. A double-barreled security is a municipal security that:

a. Is exempt from federal and state taxes
b. Is exempt from state and local taxes
c. Can be paid from the revenues of a project and is a general obligation of the U.S. government
d. Can be paid from the revenues of a project and is a general obligation of a municipal government
(D) A double-barreled security is a municipal security that can be paid from the revenues of a project and is also a general obligation of a municipal government. (8-11)
74. A customer owns a call on ABC Corporation that has a $60 strike price. ABC Corporation has announced a 5-for-4 split. After the split, the customer will own:

a. Two calls for 100 shares at a $30 strike price
b. One call for 125 shares at a $60 strike price
c. One call for 125 shares at a $48 strike price
d. One call for 100 shares at a $60 strike price
(C) The company has announced a 5-for-4 split. After the split, the customer will own one call contract representing 125 shares with a $48 strike price. In an odd split, the number of contracts remains the same. The number of shares per contract is increased by multiplying 100 times the split ratio (100 x 5/4 = 125). The strike price is reduced by multiplying it by the inverse of the split ratio (60 x 4/5 = 48). (16-9)
75. A mutual fund charges a maximum front-end load of 5.50% for purchases of less than $100,000 and 3.50% for purchases of $100,000 but less than $250,000. An individual invests $75,000 into the fund and signs a letter of intent. Prior to the expiration date of the letter the individual invests another $75,000. What is the total sales charge the individual should pay?

a. $7,250
b. $6,750
c. $5,250
d. $8,250
(C) If a client signs a letter of intent and contributes enough money to receive the discount, she will pay the lower sales charge on the entire amount invested. The total amount invested is $150,000 which is equal to or greater than $100,000; therefore, the investor will pay a 3.50% sales charge. 3.50% of $150,000 is equal to $5,250. (18-22)
76. A corporation is planning to issue new stock to the public but has not as yet filed a registration statement with the SEC. As a registered representative of the firm that is expected to do the underwriting, you cannot:

I. Obtain indications of interest from prospective purchasers
II. Receive monies from customers who intend to purchase the issue
III. Guarantee a customer that he will be able to purchase 1,000 shares of the issue
I only
I and II only
II and III only
I, II, and III
(D) A registered representative cannot do any of the choices listed. The corporation has not filed a registration statement with the SEC. If a registration statement had been filed, the registered representative could obtain indications of interest to purchase the new issue. He could not accept money nor guarantee a customer that he would receive a particular amount of the issue. (9-16)
77. A corporation has income before taxes of $2 million and additionally has received $100,000 in preferred dividends. If the corporation owns 25% of the distributing company and is in the 34% tax bracket, it will pay taxes of:

a. $340,000
b. $510,000
c. $686,800
d. $1,020,000
(C) A corporation is exempt from paying taxes on 80% of dividends received from common and preferred stock of another corporation if it owns at least 20% of the distributing corporation. The corporation would only have to pay taxes on $20,000 of the dividends received (20% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $686,800 (34% of $2,020,000 = $686,800). (21-3)
78. An investor will be in a position to acquire stock under which of the following circumstances?

I. The investor is buying a call.
II. The investor is buying a put.
III. The investor is selling a call.
IV. The investor is selling a put.
a. I and III
b. I and IV
c. II and III
d. II and IV
(C) An investor who buys a call and exercises the call will acquire 100 shares of stock. An investor who sells a put that is exercised against him will also acquire 100 shares of stock. (14-12, 14-17)
79. Dow Chemical bonds are listed in the NYSE bond table as having a nominal yield of 6.6% and having closed the previous day at 91 7/8. An owner of 10 bonds would receive a yearly interest payment of:

a. $600
b. $660
c. More than $660
d. Less than $660
(B) A nominal yield of 6.6% for a corporate bond with a $1,000 par value would equal $66 in interest payments. If an investor owned 10 bonds, he would receive an annual interest payment of $660. (5-3)
80. Dow Chemical bonds are listed in the NYSE bond table as having closed the previous day at 91 7/8. The closing price of Dow Chemical bonds is:

a. $910.88
b. $917.80
c. $918.75
d. $1,000.00
(C) The closing price of 91 7/8 is equal to 91 7/8% of the $1,000 par value. When converted to a decimal, it equals .91875 of $1,000. Therefore, the correct answer is $918.75. (5-2)
81. Alabama Power 5 1/4s of '08 are listed in the bond table as having closed the previous day at 88 3/4. A buyer of 10 bonds at the close would have to pay:

a. $880.75
b. $8,850.00
c. $8,875.00
d. $8,900.00
(C) The market price of 88 3/4 is 88 3/4% of $1,000. When converted to a decimal it is .8875 of $1,000, which equals a dollar value of $887.50. A purchaser of 10 bonds would have to pay $887.50 x 10 = $8,875. (5-2)
82. Industrial Development Revenue Bonds are backed by:

a. The local municipal district in which the facility is domiciled
b. The state in which the facility is domiciled
c. The corporate guarantor
d. Both the corporate guarantor and municipality
(C) The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent upon that corporation, not on the municipality issuing the bonds. (8-10)
83. On May 25th, the president of MaxCo bought 3,000 shares of MaxCo stock in the OTC market at $33. Two months later, the stock has increased to a price of $40. If the president wants to sell the shares:

a. Permission must be granted by the MaxCo board of directors
b. The profit from the trade must be forfeited according to the short-swing profit rule
c. The sale would not be permitted due to the holding period required by Rule 144
d. Permission must be granted by FINRA
(B) The Securities Exchange Act of 1934 prohibits insiders from making short-swing profits. A short-swing profit is a profit made on stock held by insiders for less than six months. If the president of MaxCo sold stock two months after it was purchased, MaxCo could sue for recovery of the profit. (11-5)
84. In periods of easy money, when interest rates are declining, yield curves would tend to slope:

a. Upward from the shorter to the longer maturities
b. Downward from the shorter to the longer maturities
c. Remain flat
d. Upward from the longer to the shorter maturities
(A) In periods of easy money when interest rates are declining, yields on shorter maturities would be less than that of longer maturities. Yield curves would tend to slope upward from the shorter to the longer maturities. (22-10, 5-14)
85. In which of the following circumstances would an investor have unlimited risk?

I. Short 1 XYZ July 50 put
II. Short 100 shares of XYZ stock
III. Short 1 XYZ July 50 uncovered call
IV. Short 1 XYZ July 50 covered call

a. II only
b. II and III only
c. II, III and IV only
d. I, II, III, and IV
(B) An investor risks unlimited loss when short stock and when shorting an uncovered call. If an individual is short stock or short an uncovered call, there is no limit to how high the price of the stock can rise. In the case of the short stock position and the short call position, the investor will be required to buy the stock in the market at the prevailing price. The loss is theoretically unlimited. (14-14, 13-14)
86. A company has chosen accelerated depreciation instead of straight-line depreciation. Which of the following is true?

a. Earnings are overstated in the early years and understated in later years.
b. Earnings are understated in the early years and overstated in later years.
c. Earnings are understated in both early and later years.
d. Earnings are not impacted by the method of depreciation.
(B) Accelerated depreciation allows a company to take a larger amount of the cost of an asset as a deduction in the early years and less in the later years. Since large deductions are taken, earnings will be understated (reduced) in the early years. Small deductions in later years will overstate earnings. (20-4)
When the Federal Reserve Board buys U.S. government securities in the open market, the effect on the banking system will be:

I. An increase in deposits
II. An increase in reserves
III. A decrease in deposits
IV. A decrease in reserves

a. I only
b. I and II only
c. II and III only
d. III and IV only
(B) When the Federal Reserve Board buys U.S. government securities in the open market, the effect on the banking system will be to inject additional money into the system, causing an increase in deposits and an increase in reserves. (22-11)
88. ABC Corporation has issued two $1,000 par value bonds with the same coupon rate, one paying interest annually and the other paying interest semiannually. If both bonds are held to maturity in 10 years, the bond paying interest annually will have a total return that is:

a. Less than the bond paying interest semiannually
b. More than the bond paying interest semiannually
c. The same as the bond paying interest semiannually
d. Two times greater than the bond paying interest semiannually
(A) The bond paying interest annually will have a yield-to-maturity which is less than the bond paying interest semiannually. Yields-to-maturity assume a reinvestment and compounding of interest. The compounding of interest will be greater for the bond paying semiannual interest. (5-7)
89. Interest on all of the following may be subject to state taxes EXCEPT:

a. GNMA bond
b. Municipal bond
c. Corporate bond
d. Treasury note
(D) Interest paid on corporate debt is subject to both federal and state taxes. Interest on municipal debt, especially if the buyer resides in a state different from the issuer, may be taxable. Interest on Treasury notes, as well as all direct U.S. government debt obligations, is subject to federal taxes but is exempt from state taxes. (7-8, 6-15, 8-1)
90. The amount of margin that must be deposited by the purchaser of an option contract is:

a. 10%
b. 20%
c. 50%
d. 100%
(D) According to Federal Reserve Board Regulation T, options cannot be bought on margin. Therefore, the buyer would have to deposit 100% of the purchase price which is the premium. (16-5)
91. A corporation intends to raise additional funds from its existing shareholders rather than using the services of an underwriter. The corporation would be engaging in a:

a. Rights offering
b. Secondary distribution
c. Special offer
d. Private placement
(A) The corporation would be engaging in a rights offering. It will issue rights to all existing shareholders enabling them to subscribe to new stock below the current market price of the outstanding securities thereby saving the corporation the costs involved in using an underwriter. (4-10)
92. An employee of a municipal securities firm would like to open an account with another municipal securities firm. All of the following statements regarding the employee and the account are TRUE EXCEPT:
a. The employer must receive duplicate copies of all transactions made in the account
b. The employer must be notified about the opening of the account
c. The employer must be notified in writing of the employee's intention to open the account
d. The employer must approve each transaction before the execution of the transaction
(D) All of the statements listed regarding the employee and the account are true except the employer must approve each transaction before the execution of the transaction. This statement is not true because prior approval is not required. (12-30)
93. Which of the following would have the least capital risk for a client?

a. Options
b. Bonds
c. Warrants
d. Stocks
(B) When compared to the other securities, bonds have the least capital risk. At maturity, the investor would receive the principal amount of the bond thus minimizing the capital risk. (5-1, 4-2, 4-11, 14-19)
94. All of the following are guaranteed by the U.S. government EXCEPT:

a. Treasury notes
b. Treasury bills
c. Government National Mortgage Association (Ginnie Mae) certificates
d. Federal National Mortgage Association (Fannie Mae) bonds
(D) Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA is a government chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not backed by the U.S. government. (7-13)
95. A customer owns stock of a corporation that has declared a $1 dividend to holders of record Monday, December 22nd. If the customer wishes to sell the stock but still be entitled to the dividend, he should sell the stock on:

I. Wednesday, December 17th, regular-way settlement
II. Thursday, December 18th, regular-way settlement
III. Monday, December 22nd, cash settlement
IV. Tuesday, December 23rd, cash settlement

a. I or III
b. I or IV
c. II or III
d. II or IV
(D) The customer should sell the stock Thursday, December 18th on a regular-way settlement basis or Tuesday, December 23rd on a cash settlement basis. The ex-dividend date is Thursday, December 18th. This is two business days preceding the record date of December 22nd. This means that a seller on the ex-dividend date will receive the dividend because on this date the stock is selling without the dividend. If the stock is sold on December 23rd on a cash contract basis (which requires a same-day payment, same-day delivery), the seller would be entitled to receive the dividend. The buyer will not receive the dividend because the last day a buyer could receive the dividend on a cash contract would be the record date, which is December 22nd. (4-7)
96. A convertible debenture is convertible at $25. It has a nondilutive feature in its indenture. If a stock dividend is distributed, which of the following will be true?

a. The conversion price will be reduced.
b. The conversion price will be increased.
c. The conversion ratio will be reduced.
d. The conversion ratio will be increased.
(B) A nondilutive feature means that if there is a stock split or stock dividend, the bond's conversion features must be adjusted. The bondholder would receive more shares upon conversion because the conversion ratio would be increased. The conversion price would be reduced to permit this increase in the conversion ratio. (6-6)
97. A municipal securities principal must approve:

I. Memos in response to customer complaints
II. The opening of accounts
III. Advertisements to be used for a seminar
IV. Correspondence to customers

a. II only
b. II and III only
c. I, II, and IV only
d. I, II, III, and IV
(D) MSRB rules require a municipal securities principal to approve all the choices given. In addition, the principal must approve all transactions and must frequently review all discretionary accounts. (12-29, 12-32, 12-33)
98. Which of the following would be acceptable as a custodian on a UGMA account?

a. Ajax Corporation
b. John and Mary Doe
c. John Doe
d. ABC Partnership
(C) Only an individual (not a corporation or partnership) is an acceptable custodian. There can only be one custodian for one minor. Joint custodians or joint minors are not permitted. (2-8)
99. In order to have an issuer of securities exempt from the provisions of the Securities Act of 1933 under Regulation D, which of the following is true?

I. Purchasers must sign an investment letter.
II. The size of the offering must be limited.
III. The number of accredited buyers is unlimited.
IV. The number of nonaccredited buyers is limited.

a. I only
b. I and II only
c. I, II, and III only
d. I, III, and IV only
(D) According to the Regulation D, certain conditions must be met for the securities to be exempt from the provisions of the Securities Act of 1933. The offering must be restricted to persons who are knowledgeable and experienced in business and financial matters and who are able to afford the economic risks involved. The issuer must provide the buyer with detailed financial information, the number of nonaccredited purchasers must be limited to 35, and the offering must be made in direct negotiations between the issuer and the buyer or his purchaser representative. Also, the buyer must sign an investment letter stating that the purchase was made for investment and not for short-term trading purposes. The size of the offering is not limited. (9-20)
100. Which of the following orders will be reduced when XYZ Corporation sells ex-dividend?

I. A GTC order to sell 100 XYZ at $50
II. A GTC to buy 100 XYZ at $50 stop
III. A GTC to buy 100 XYZ at $50
IV. A GTC to sell 100 XYZ at $50 stop

a. I and II
b. II and III
c. II and IV
d. III and IV
(D) Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked do not reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC buy limit and sell stop orders are entered below the market, and are reduced on the ex-dividend date. (11-24)
101. Dorothy Hill is 53 and her annual income is $63,000. What is the maximum annual amount Dorothy is permitted to contribute to her IRA?

a. $2,000
b. $3,500
c. $5,500
d. $6,500
(D) Dorothy is allowed to contribute $6,500 to her IRA. The annual contribution limit to an IRA is $5,500. Also, there is a catch-up provision for people who are age 50 and older, which allows for an additional $1,000 increase in contributions. (17-1)
102. Which of the following is NOT a characteristic of an electronic communication network (ECN)?

a. ECNs will act as market makers.
b. ECNs permit trading electronically.
c. ECNs permit trading anonymously.
d. ECNs permit trading after-hours.
(A) Electronic communications networks allow market participants to display quotes and execute transactions. These participants are referred to as subscribers and pay a fee to the ECN in order to trade electronically through the system. ECNs allow subscribers to trade after-hours, quote and trade without disclosing their name (anonymously). ECNs will act in an agency capacity and will not buy or sell for their own account like a market maker. (12-8)
103. A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would need a municipal bond with a yield of:

a. 7.9%
b. 8.6%
c. 9.4%
d. 10.2%
(B) To determine the net yield of a taxable bond, multiply the yield times the complement of the tax bracket. The net yield would be 8.6% (12% yield times 72%, which is the complement of the tax bracket). (8-26)
104. A technical analyst would review all of the following EXCEPT:

a. The advance-decline line
b. The price-earnings ratio of the Dow Jones stocks
c. Short interest
d. The trendline theory
(B) The price-earnings ratio of the Dow Jones stocks is an indicator that a fundamental analyst would examine. A technical analyst would review the advance-decline theory, short interest, and the trendline theory. (22-28, 22-37, 22-38)
105. The three bonds listed have the same maturity. Place them in their order of yield, from highest to lowest.

I. Treasury bond
II. Aaa utility bond
III. Aaa municipal bond
I, II, and III
II, I, and III
II, III, and I
III, I, and II
(B) The municipal bond will typically have the lowest yield since it is exempt from federal income tax. The utility bond (a corporate bond) is of lower quality than the Treasury bond (a U.S. government obligation) and will therefore have a higher yield. (8-1, 6-15, 7-8)
106. A customer's account is currently frozen. A registered representative may do all of the following EXCEPT:

a. Accept an order in a cash account if all the money is in the account before the order is entered
b. Accept an order in a margin account if the total dollar amount of the purchase is in the account before the order is entered
c. Accept a sell order for a security in a cash account if the security is in the cash account before the order is entered
d. Accept a sell order for a security in a cash account if the security is not in the account before the order is entered
(C) All of the statements about a frozen account are true except that a registered representative can accept a sell order for a security in a cash account if the security is not in the account before the order is entered. (11-3)
107. When a bond is selling at a premium:

a. The market price is greater than the par value
b. The current yield is higher than the nominal yield
c. It is a better quality bond than one selling at a discount
d. The yield-to-maturity is greater than the current yield
(A) The only true statement given is the market price is greater than the par value. The other choices are incorrect. When a bond is selling at a premium, the current yield is lower than the coupon rate. Bonds that are selling at a premium are not necessarily of better quality than bonds selling at a discount. (5-10)
108. Mordecai is a 73-year-old retired machine lathe operator. He earns $35,000 in retirement benefits. Last year he earned $1,650 as a pitching instructor for the Altoona Miners and received $800 in dividend income. What is the maximum contribution he may make to his Roth IRA?

a. 0
b. $1,650
c. $5,500
d. $6,500
(B) Roth IRAs do not have an age limitation placed on contributions or withdrawals. The annual contribution is limited to 100% of the individual's earned income, not to exceed $6,500 ($5,500 + $1,000 catch-up provision) per year. Mordecai may contribute up to $1,650. Earnings received as retirement benefits and investment income are not eligible for the calculation of Roth IRA contributions. (17-3)
109. An investor writes an ABC June 70 put at 4. If the option is exercised, the investor will have:

a. A capital loss of $400
b. A capital gain of $400
c. Sale proceeds of $6,600 for the stock sold in the exercise
d. A cost basis of $6,600 for the stock acquired in the exercise
(D) When a put is exercised, the premium received by the writer is treated as a reduction in the cost of the underlying stock. The strike price of the put (70), minus the premium received by the writer (4), equals the writer's cost basis in the underlying stock (66). The writer will have a gain or loss depending on the stock's price when it is sold. (21-18)
110. A revenue bond's indenture will include which of the following?

I. The legal opinion
II. A rate covenant
III. The maturity feature
IV. Reoffering yields

a. I and II only
b. I and III only
c. I, II, and III only
d. I, II, III, and IV
(C) A revenue bond's indenture would include the legal opinion, the rate covenant, and the maturity feature. A rate covenant is the agreement of the municipality to maintain rates that are charged to customers for the use of a facility at a sufficient level to pay debt service. Reoffering yields are not found in the indenture of the revenue bond. Reoffering yields are the rates at which the syndicate bidder will offer the bonds to the public, after buying the bonds from the municipality. (10-7, 8-12)
111. A client purchased 300 shares of Emily Airlines common stock at $28 a share in July of 2004. In June of 2005 the client writes 2 October 35 calls at 5 against the stock position. If the market price of Emily Airlines is trading at $39 at expiration, what is the client's realized gain?

a .$1,000
b. $1,700
c. $2,400
d. $4,300
(C) The question is asking for the client's realized gain. The investor is long 300 shares, but is only writing 2 covered calls. Since the market price of Emily Airlines (39) is above the strike price (35) at expiration, the call options would be exercised against the writer. The client would be obligated to deliver or sell 200 shares at $35. The realized gain on the stock is $1,400 (purchased 200 shares at $28 which is sold at $35). The client received $1,000 from writing two covered call options (2 calls @ 500); therefore the total realized gain is $2,400. The client would still own 100 shares at a cost basis of $28. (15-3)
112. Mrs. Smith owns 100 shares of DEF stock. Mrs. Smith is concerned the stock is going to decrease in price temporarily, but does not want to sell the stock. Which option position would give Mrs. Smith the BEST downside protection?

a. Buy 1 DEF put
b. Sell 1 DEF put
c. Buy 1 DEF call
d. Sell 1 DEF call
(A) The best possible downside protection could be accomplished with choice (a), buy 1 DEF put. If Mrs. Smith is long a put, this would allow her to put the stock to the writer if the stock goes down, thus taking advantage of the price decline. (15-4)
113. A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000.
The equity in the account is:

a. $6,000
b. $7,000
c. $8,000
d. $14,000
(B) The equity in a long margin account equals market value minus debit balance. The equity equals $7,000 ($15,000 - $8,000). SMA does not enter into the calculation of equity. (13-6)
114. A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000.
If the customer sold $1,000 of securities in the account, what amount could the customer withdraw after the sale?

a. None
b. $1,000
c. $1,500
d. $2,000
(C) This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds times the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500. (13-13)
115. An over-the-counter trader, when talking about the spread, is referring to:

a. The difference between the bid and asked price of a stock at the current market
b. The difference between his cost price and his selling price
c. The amount of his markup from his cost price
d. The 5% markup which is allowable under the Conduct Rules
(A) The over-the-counter trader, when referring to the spread, is referring to the difference between the current bid and asked price of a stock. (12-3)
116. According to SEC rules, a stock that sells for $5 or less, that is not on the Nasdaq system or listed on an exchange, is known as a(n):

a. Restricted security
b. Control stock
c. Penny stock
d. Exempt security
(C) A penny stock, according to SEC rules, is a stock that sells for $5 or less, that is not on the Nasdaq system or listed on an exchange. (12-20)
117. Municipal bearer bonds that are in default of interest trade:
a. With unpaid coupons attached
b. Without unpaid coupons attached
c. In registered form only
d. Without a legal opinion attached
(A) Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments. (12-29)
118. A quote of 5.90 - 5.75 would be a quote for which of the following securities?

a. Treasury bills
b. Treasury notes
c. Treasury bonds
d. Debentures
(A) Treasury bills are quoted on a discount yield basis while the other choices are quoted at a price. Since yield is inversely related (moves opposite) to price, the higher yield (5.90) represents the lower price and is the bid. The lower yield (5.75) represents the higher price and is the ask (offer). (7-3)
119. All of the following are true regarding negotiable CDs EXCEPT:

a. The minimum denomination is $100,000 but they commonly have face values of $1,000,000 or more
b. They are unsecured and normally have a fixed rate of interest
c. Owners can resell negotiable CDs in the secondary market
d. Maturities of more than one year are prohibited
(D) Negotiable CDs are traded in the secondary market in minimum denominations of $100,000 but typically trade in $1,000,000 denominations. They are issued by commercial banks and are secured only by the bank's credit. Maturities of less than one year are common but there is no time limit. (7-22)
120. How much may be withdrawn from a Special Memorandum Account?

a. 2 times the SMA
b. 3 times the SMA
c. 25% of the SMA
d. 100% of the SMA
(D) The full amount of cash or 100% of the SMA may be withdrawn. (13-8)
121. All of the following are TRUE regarding trading halts on the NYSE EXCEPT:

a. When the DJIA declines by 5% from its previous day's close, all trading halts for 30 minutes
b. When the DJIA declines by 10% from the previous day's close, trading halts for one hour
c. When the DJIA declines by 20% from the previous day's close, trading halts for two hours
d. When the DJIA declines by 30% from the previous day's close, the trading session ends
(A) Trading halts on the New York Stock Exchange are triggered by a decline in the Dow Jones Industrial Average (DJIA) of 10%, 20%, and 30%. Choice (a) is incorrect. The initial trading halt is based on a decline of 10% from the previous day's close. All of the other choices are correct according to Rule 80B, which regulates the introduction of trading halts due to extraordinary circumstances. (11-32)
122. An investor wrote a 850 Index Option Call. The option was exercised and the index closed at 860. The writer would:

a. Deliver the index
b. Receive the index
c. Deliver cash
d. Receive cash
(C) Settlement on an index option contract is made in cash. The writer must pay the contract's in-the-money amount times $100. (15-37)
123. All of the following would be governed by MSRB rules EXCEPT:

a. Fickleburg School District, an issuer of general obligation bonds
b. Mimi Mee, head of the municipal finance department of BigDog Brokerage
c. Eighth National Bank, which underwrites Fickleburg's GO issues
d. E-Nuff, an online broker-dealer that accepts only unsolicited orders for municipal bonds
(A) The rules of the Municipal Securities Rulemaking Board apply to MSRB members and their associated persons. Members include broker-dealers and bank dealers that engage in municipal securities sales, trading, underwriting, or financial advice to issuers. MSRB rules do NOT apply to municipal issuers. (10-9)
124. The spread for a new municipal bond issue is as follows:

Manager's fee: 1/4
Additional Takedown: 3/8
Concession: 3/8

A syndicate member who sold $25,000 of bonds would be entitled to:

a. $62.50
b. $93.75
c. $187.50
d. $250.00
(C) A member of the syndicate is entitled to receive the total takedown (concession plus additional takedown). The member would therefore receive 3/4 or $7.50 per $1,000 face value for a total of $187.50 ($7.50 x 25). (10-8)
125. Relative to 13-week and 26-week Treasury bills, which of the following are TRUE?

I. They are auctioned weekly.
II. They are issued at a discount.
III. Noncompetitive tenders receive the lowest price of the competitive tenders that are awarded.
IV. Noncompetitive tenders are awarded before competitive tenders.

a. I and II only
b. II and III only
c. I, II, and III only
d. I, II, III, and IV
(D) 13-week and 26-week T-bills are auctioned weekly and are issued (and traded) at a discount. Noncompetitive tenders are awarded first, but the price they will pay (the lowest accepted price of the competitive tenders) cannot be determined until after the competitive tenders are awarded. (10-12)