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46 Cards in this Set
- Front
- Back
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Distributions from Roth IRAs are subject to a penalty if withdrawals are made within:
A. 1 year of original contribution B. 3 years of original contribution C. 5 years of original contribution D. 10 years of original contribution |
The best answer is C. Contributions to Roth IRAs are not tax deductible. If the monies remain invested in the Roth IRA for at least 5 years, they can be withdrawn with no tax due (assuming that the beneficiary is at least age 59 1/2 when distributions commence).
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The Consolidated Tape reports trades of NYSE listed issues that occur:
A. on the NYSE Floor B. on Regional Exchanges C. in the Third Market D. all of the above |
The best answer is D. The Consolidated Tapes shows trades of NYSE listed issues, no matter where the trade occurred. It "consolidates" and reports trades of NYSE listed issues that took place on the NYSE floor; on regional stock exchanges for dual listed issues; and trades of NYSE listed issues that occurred over-the-counter in the Third Market.
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Which of the following statements are TRUE regarding trades of U.S. Government bonds?
I Regular way trades settle on the same day as the trade date II Regular way trades settle on the business day after trade date III Trades settle in Fed Funds IV Trades settle in Clearing House funds A. I and III B. I and IV C. II and III D. II and IV |
The best answer is C. Trades of U.S. Government securities settle "regular way" the next business day in Fed Funds. Payment by check is not permitted since the clearance time is greater than one business day.
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A municipal securities dealer is participating in a joint underwriting account for a new issue of general obligation bonds. During the order period, the dealer places a net order with the manager for 200M of the bonds of 2039. The bonds are to be placed in an accumulation account for a municipal unit investment trust that the dealer is sponsoring. Which statement is TRUE?
A. The dealer must disclose that the order is being placed for a related portfolio and the order will be accorded pre-sale status B. The dealer must disclose that the order is being placed for a related portfolio and the order will be accorded member status C. No disclosure is required from the dealer placing the order and the order will be accorded group status D. No disclosure is required from the dealer placing the order and the order will be accorded designated status |
The best answer is B. When an order for a new municipal issue is for an "accumulation account," those bonds are not being sold to the general public. Instead, they are being placed into a municipal unit investment trust run by the member placing the order. This must be disclosed to the manager at the time the order is placed and this order is filled last by the manager (receiving member status), since the bonds are not going to the general public.
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The current yield on a bond is:
A. stated interest rate / bond par value B. stated interest rate / bond market value C. market interest rate / bond par value D. market interest rate / bond market value |
The best answer is B. The current yield is the stated rate of interest on the bond, based on current market value.
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The ACT system:
A. is used to report backing away violations to FINRA for real-time resolution B. permits NASDAQ Order Entry firms to contract with a market maker to enter and maintain its limit orders C. routes market and limit orders electronically to market makers for locked-in execution and settlement D. intakes entries of completed trades for reporting, matching and clearance |
The best answer is D. The ACT system is where the details of completed trades are entered by market participants (The NASDAQ System does ACT reporting automatically; the information must be entered manually for OTCBB and Pink Sheet trades). The ACT system then reports the trade to the tape; to the contra-party to the trade for matching; and to the clearing corporation. FQCS - the Firm Quote Compliance System - is used to file reports of backing away violations (this is not tested on Series 7). ACES is the system that allows NASDAQ Order Entry firms to "pass through" their limit orders to NASDAQ Market Makers for order entry and maintenance. The NASDAQ Market Center Execution System is the automated quotations and execution system for trades of NASDAQ issues.
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Customer Jane Jennings' suitability information is presented below:
Age:39 Marital Status:Single Dependents:1 Child - Age 10 Annual Income:$80,000 Tax Bracket:28% Net Worth:$510,000 excluding home Home:$350,000 fully paid Investment Portfolio:$422,000 (60% equities; 20% long bonds; 20% money market ) The customer wants to start a college fund for her child. The anticipated tuition, starting 8 years from now, is $50,000 per year ($200,000 total tuition). Which of the following recommendations is most appropriate for this customer? B. take out a second mortgage on the customer's residence in the amount of $200,000 and invest the proceeds in a tax-deferred annuity funded by an income separate account C. liquidate $160,000 of the common stock and invest the proceeds in laddered Treasury Notes and Bonds of $40,000 amounts maturing 8, 9, 10 and 11 years from now D. liquidate $100,000 of the bonds in the customer's portfolio and $100,000 of common stock in the customer's portfolio and invest the entire proceeds in 8-year Adjustment Bonds |
The best answer is C. To fund this child's college education, payments of $50,000 per year are needed over a period of 4 years, starting 8 years from now. There is no reason to fund the entire $200,000 right now, since this amount will grow over the next 8 years - making Choices A, B and D incorrect. Also, please note that this customer is only 39 years old - a fairly young age. She should keep as much of her portfolio in growth stocks as possible.
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Which of the following statements are TRUE regarding fixed unit investment trusts (UITs)?
I Fixed UITs are managed II Fixed UITs are unmanaged III The composition of the portfolio can be changed IV The composition of the portfolio cannot be changed A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who makes a market in trust units.
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A customer buys 1 ABC Jul 55 Call @ $2 and 1 ABC Jul 60 Put @ $5 on the same day. Just prior to expiration, the stock is trading at $59 and the customer closes the positions at intrinsic value. The customer has a net loss of:
A. $50 B. $100 C. $200 D. $700 |
The best answer is C. The customer has purchased a long combination, for combined premiums of $700. When the stock is at $59, the long 60 put is 1 point "in the money," resulting in a 1 point gain to the holder while the long 55 call is 4 points "in the money," resulting in a 4 point gain to the holder. $700 paid in premiums minus a $500 profit = $200 loss.
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A market maker enters a quote of $20.50 Bid; $21.00 Ask; with a size of "5 x 5" into the NASDAQ System. If a market order to buy is entered into the system for 1,500 shares, and this dealer's quote is matched, the market maker will be obligated to sell:
A. 500 shares at $20.50 B. 500 shares at $21.00 C. 1,500 shares at $20.50 D. 1,500 shares at $21.50 |
The best answer is B. A market order to buy will be matched, in sequence, against the "Ask" quotes in the system, from lowest to highest. Such a market order "sweeps" the book from low to high price, until it is filled. Because this dealer's Ask of $21.00 is only for 500 shares, this is the amount that the system will match. It will then move to the next Ask quotes from other dealers, in sequence, until the order is filled for 1,500 shares
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Under MSRB rules, which of the following call provisions can affect the yield that is shown on a customer's municipal bond confirmation?
I In-whole call II Sinking fund call III Extraordinary mandatory call A. I only B. III only C. II and III D. I, II, III |
The best answer is A. The MSRB requires that dollar prices of bonds quoted on a yield basis be computed to the lowest dollar amount of Yield to Maturity or Yield to Call. The only calls that must be considered are those where there is reasonable certainty that specified bonds will be called. Under an "in whole" call, the issuer establishes dates when the entire issue can be called. This meets the reasonable certainty test. Sinking fund calls are handled by random choice. It is not known which bonds will be called - only that a preset dollar amount of bonds will be called at the call dates. This does not meet the reasonable certainty test. Extraordinary calls, such as a calamity call, also do not meet the reasonable certainty test.
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A customer has made the following purchases of XYZ stock:
Year 1: 300 shares @ $62 Year 2: 400 shares @ $66 Year 3: 100 shares @ $63 Year 4: 500 shares @ $69 Year 5: 200 shares @ $68 It is now Year 6 and the stock is trading at $70. The customer wishes to sell 1,000 shares. To minimize tax liability, the customer should use which tax valuation method for the shares that are sold? B. First In First Out C. Average Cost D. Specific Identification |
The best answer is D.
A customer that has purchased stock over many years and that sells part of the position can choose to use "specific identification" to identify the specific shares being sold. In this case, the customer will lower his or her tax bill by choosing the highest cost shares. These would be the 500 shares purchased at $69 in Year 4; the 200 shares purchased at $68 in Year 5; and 300 of the 400 shares purchased at $66 in Year 2 as the 1,000 shares sold for $70. These are the highest cost shares and this will reduce the capital gain. If the customer does not use specific identification, the IRS mandates FIFO accounting for shares sold. Average cost accounting can only be used for mutual fund shares; not for individual stocks. |
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The New York Stock Exchange stops the trading of a company's stock, pending release of an important news announcement. The trading of the option will be halted by the:
A. Options Clearing Corporation B. Specialist (DMM) on the NYSE floor C. Exchange where the option trades D. Issuer of the securities |
The best answer is C. When an exchange stops trading in a stock, the options exchange stops trading in the option (since there is no longer a way to price these "derivative" securities, whose price is based on the price movements of the underlying stock).
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A customer wishes to determine the call provisions on a municipal bond that he currently holds. Which source provides this information?
A. Munifacts B. EMMA C. The OTCBB D. The Bond Buyer |
The best answer is B.
EMMA is the MSRB's municipal bond website, intended for retail investors (EMMA stands for Electronic Municipal Market Access). It reports trades of municipal bonds and also includes the Official Statement for each municipal issue outstanding. The Official Statement (OS) is the disclosure document, similar to a prospectus. In the OS will be all the details of the bond's call provisions. The OTCBB is the Over The Counter Bulletin Board for non-NASDAQ stocks. The Bond Buyer is the "new issue" municipal newspaper. Municipal issuers place announcements of new issues in this publication. Munifacts is a newswire service published by the Bond Buyer that mainly announces new issue offerings by syndicates, and also includes some general news items that can affect the secondary market. |
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Under NYSE rules, every broker or dealer who communicates bids and offers on the exchange floor must comply with which of the following rules?
I The highest bid and the lowest offer have precedence in all cases II Bids and offers must be publicly announced III Any bid or offer for less than the normal trading unit has no standing in the trading crowd IV Bids and offers must be set by floor officials A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV |
The best answer is C. Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). Bids and offers are always set by market participants; they are not set by floor officials (the regulators) under any circumstances.
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Which statement is FALSE about Exchange Traded Funds (ETFs)?
A. ETFs are registered under the Investment Company Act of 1940 B. ETFs are typically structured as open-end management companies C. ETFs hold the underlying shares of companies included in a stock index D. ETFs permit individual investors to buy creation units |
The best answer is D.
ETFs are almost a "hybrid" type of investment company structure because they allow for the creation of additional shares, like an "open-end" fund; but they are listed and trade like a "closed-end" fund. Technically, most ETFs are structured as open-end investment companies, since they allow for the creation of additional shares in minimum "creation units" of $50,000 - $100,000. If the shares are trading in the market at a discount to NAV, institutional investors can buy new creation units and short the equivalent shares that compose the units, in an arbitrage trade. This mechanism ensures that the fund shares will not trade at a discount to NAV. Note that individual investors cannot buy creation units - only institutional investors. Because new shares can be created, these are registered as open-end funds under the Investment Company Act of 1940. Since ETFs are securities, they are regulated by the SEC and FINRA. |
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On the same day, a customer sells 1 ABC Jan 55 Call @ $7 and buys 1 ABC Jan 65 Call @ $2. Above which of the following prices will every dollar gained on the long call be exactly offset by a dollar lost on the short call?
A. $55 B. $60 C. $65 D. $73 |
The best answer is C. The breakeven point is $60 per share. As the market rises above $60, the customer loses 1 point on the short call for every $1 rise in the price of ABC stock. Once the market goes above $65, the long call will also be "in the money," and a dollar will be gained for every dollar lost on the short call. Thus, above $65, there is no further loss. The maximum potential loss is 5 points or $500.
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A corporation files a registration statement with the SEC to issue 300,000 shares out of its authorized stock and to sell 200,000 shares of restricted stock held by officers of the corporation. Which statements are TRUE?
I This is a primary distribution of 500,000 shares II This is a primary distribution of 300,000 shares III Proceeds from the sale of 500,000 shares will go to the company IV Proceeds from the sale of 300,000 shares will go to the company A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. This is a combined primary and secondary distribution. The primary distribution of 300,000 shares consists of the newly issued shares where the proceeds will go to the issuer. The secondary distribution consists of the 200,000 shares being sold by officers (who are "tacking on" their shares to the primary distribution to avoid having to resell the shares under Rule 144 restrictions). Only the proceeds from the primary distribution will go to the company. The proceeds from the secondary distribution go to the selling shareholders.
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What is ABC Corporation's Earnings Per Common Share?
A. $1.30 B. $1.00 C. $ .60 D. $ .40 for the year ending 12-31-XX 1,000 Total Operating and Non Operating Income
3,000 Interest Expense 800Net Income Before Tax2,200Taxes 900Net Income After Tax1,300Statement of Changes To Retained Earnings for the year ending 12-31-XX Current Assets($000) Current Liabilities($000) Cash and Marketable Securities9,000 Accounts Payable900Accounts Receivable3,000 Wages Payable800Inventory 3,000 Taxes Payable900 Interest Payable 400 Total Current Assets15,000 Total Current Liabilities 3,000 Notes Receivable due after one year1,000 Long Term Debt 10%8,000Property and Equipment (valued at cost less accumulated depreciation of $3,000)6,000 Stockholder's Equity Intangible Costs1,000 Preferred Stock - $100 par 10%3,000 Common Stock - $2 par2,000 Capital in excess of par value3,000 Retained Earnings4,000Total Long Term Assets 8,000 Total Stockholder's Equity12,000Total Assets23,000 Total Liabilities and Stockholder's Equity23,000 |
The best answer is B. Earnings for common is Net Income After Tax minus any preferred dividends paid. This company has $1,300,000 of Net Income After Tax and paid preferred dividends of $300,000, so Earnings for Common is $1,000,000. There is $2,000,000 of common stock ($2 par) on the balance sheet, so 1,000,000 common shares are outstanding. The Earnings Per Common Share are:
$1,000,000 1,000,000=$1.00 Per Common Share |
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An individual customer says the following to his broker: "Buy 100,000 shares of ABC stock whenever you think the time is best. This order is good unless I call you to cancel." Which statement is TRUE about the handling of this order?
A. An executed power of attorney must be obtained from the customer prior to accepting the order B. The order must be executed by the close of the market on that trading day C. The order can be accepted as given, and can be executed at the discretion of the brokerage firm at any time or day D. This order can only be accepted if the customer places it via fax or e-mail |
The best answer is B. Discretion over price and time of execution can be given verbally. However, the order must be filled by the close of the market on that day or it is canceled. If price and time discretion are given for a time period that is longer than 1 day, then a written power of attorney from the customer is required to accept the order.
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A customer makes a purchase of $22,100 of ACME Income Fund in her margin account. The customer must deposit:
A. $5,525 B. $6,630 C. $11,050 D. $22,100 |
The best answer is D. Mutual fund shares are new issues sold with a prospectus, and as such, require that 100% of the purchase amount be paid. Once the position has been held in the account for 30 days, it becomes marginable and has loan value.
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A young couple in a low tax bracket wishes to invest long term for their infant child's college education. They are looking for a safe investment that requires little involvement on their part until the child reaches college age. The BEST recommendation would be:
A. T-Bills B. T-Notes C. T-Strips |
The best answer is C.
The answer we would like is not here - 529 plans! From the choices offered, the question is heading towards zero-coupon Treasury Strips. These are long term zero coupon bonds that can be purchased at a deep discount and then grow internally until they mature at par, years in the future. These would be purchased with maturity dates that match the years the kids would be in college. There are no semi-annual interest payments to reinvest, which would be the case if conventional T-Bonds were purchased, so T-Strips meet the customer's wish for little involvement. T-Bills mature within 1 year, so their maturity is too short. The same is true for T-Notes, which have a maximum 10 year maturity. Finally, there is a tax issue with buying T-Strips - the annual accretion of the discount is taxable, even though the money is not received until maturity. Because the couple is in a low tax bracket, this is much less of an issue. |
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A customer account holds the following: 20%Plain Vanilla CMOs 20% ACME Drug Company shares 10%REITs25% Health Care Sector ETFs 15%Growth Fund SharesThis portfolio is MOST susceptible to which risk? B. business risk C. interest rate risk D.purchasing power risk |
The best answer is B. This portfolio is concentrated in the Health Care sector, with 25% of the portfolio being in Heath Care ETFs and 20% in a drug company. A portfolio concentrated in one stock or industry is susceptible to business risk - the risk that the business may turn sour. For drug companies, this can result from existing profitable drugs losing patent protection, so prices and profitability drops; class-action lawsuits for selling dangerous drugs, etc.
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An open order is in the Specialist's book (DMM's book) to sell 100 XYZ at 60 Stop GTC. The company has declared a 20% stock dividend. On the morning of the ex date, the order on the book will be:
A. Sell 100 XYZ at 50 Stop GTC B. Sell 120 XYZ at 50 Stop GTC C. Sell 100 XYZ at 60 Stop GTC D. Sell 120 XYZ at 60 Stop GTC |
The best answer is A. To adjust the order for the 20% stock dividend, the number of shares is multiplied by a factor of 1.20 (since there are 20% extra shares) while the order price is divided by a factor of 1.20.
100 shares x 1.20 = 120 shares, but the Specialist will not place an odd lot amount on his book. Since this adjustment resulted in an odd lot, the number of shares would remain at 100. However, the price would still change to: $60 price / 1.20 = $50 adjusted order price. Note that the NYSE has renamed the Specialist the "DMM" - the Designated Market Maker. |
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Which statement is TRUE regarding a corporation that has adopted cumulative voting?
A. Each stockholder must accumulate his votes and cast them for one director B. Minority stockholders have the ability to elect the director of their choice C. Each director must be elected by a majority of the shareholders D. Minority stockholders are given proportionately more votes than majority stockholders |
The best answer is B. Under "cumulative" voting, shareholders can accumulate their votes and place them on any directorship (or combination of directorships). Thus, minority shareholders who place all of their accumulated votes on 1 director have a reasonable chance of electing that person. The statement that each shareholder must accumulate his votes and cast them for 1 director is false - the votes are accumulated and can be cast as the stockholder sees fit. The statement that each director must be elected by a majority of the shareholders is incorrect - each director must be elected by a majority of the outstanding shares. The statement that minority shareholders are given proportionately more votes than majority shareholders is incorrect - the benefit of cumulative voting is that the minority shareholder can vote all of his votes for 1 (or for a few) director(s), and by virtue of the extra weight of those votes, get the director(s) elected.
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Which statements are TRUE regarding Treasury Inflation Protection securities?
I In periods of deflation, the amount of each interest payment will decline II In periods of deflation, the amount of each interest payment is unchanged III In periods of deflation, the principal amount received at maturity will decline below par IV In periods of deflation, the principal amount received at maturity is unchanged at parA. I and III B. I and IV C. II and III D. II and IV |
The best answer is B. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. In periods of deflation, the principal amount is adjusted downwards. Even though the interest rate is fixed, the holder receives a lower interest payment, due to the decreased principal amount. In this case, when the bond matures, the holder receives par - not the decreased principal amount
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If a customer buys 100 shares of ABC stock on Tuesday, July 2nd in a regular way trade, the trade will settle on: B. July 5th C. July 8th D. July 9th |
The best answer is C. Regular way trades settle 3 business days after trade date. Since July 4th is a legal holiday, 3 business days after July 2nd is July 8th for regular way settlement.
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Which of the following cover a short call contract?
I Long a depository receipt for the stock II Long the cash value of the stock III Long an escrow receipt for the stock IV Long the stock A. IV only B. I and III only C. I, III, IV D. I, II, III, IV |
The best answer is C. A short call cannot be covered by the deposit of cash because the theoretical loss is unlimited. The only way to cover a short call is with the ownership of the stock or owning an option that allows for the purchase of the stock at a price not to exceed the strike price of the short call, good for the entire life of the short call. Being long the stock covers a short call; long an escrow receipt shows that the stock is on deposit at a bank; long a depository receipt shows that the stock is on deposit with a clearing corporation.
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Which of the following are TRUE statements regarding the tax equivalent yield of a municipal bond?
I The tax equivalent yield is disclosed on the customer confirmation II The yield will vary depending on the tax bracket of the customer III The tax equivalent yield will change as the market price of the bond varies IV The tax equivalent yield is the complement of the current yield A. I and IV B. III and IV C. II and III D. II, III, IV |
The best answer is C. The tax equivalent yield of a municipal bond varies with the customer's tax bracket. Remember, the formula for tax equivalent yield is:
As the customer's tax bracket increases, so does the tax equivalent yield. In addition, as the market price of the bond moves, its yield changes. This also changes the tax equivalent yield. There is no requirement to disclose the tax equivalent yield on a customer's confirmation. The last choice (IV) is irrelevant. |
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An investor's securities portfolio has depreciated by $5,000 this year. How much of the loss can the investor deduct on this year's tax return?
A. 0 B. $2,000 C. $3,000 D. $5,000 |
The best answer is A. An investor cannot deduct depreciation of an asset that is currently held as a capital loss. To recognize the loss for tax purposes, he or she must first sell those securities. Investors can only deduct $3,000 of net realized capital losses per year
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Under FINRA rules, the maximum sales charge that may be imposed on a mutual fund purchase is:
I 5% II 8 1/2% III of Net Asset Value IV of the Public Offering PriceA. I and III B. I and IV C. II and III |
The best answer is D. Under FINRA rules, the maximum sales charge that may be imposed by a mutual fund is 8 1/2% of the Public Offering Price. Note that in the real world, competition among funds has forced sales charges well below this maximum permitted level. Note that the maximum is a percentage of all dollars invested; it is not a percentage of Net Asset Value.
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The broadest measure of the money supply is:
A. M-1 B. M-3 C. L D. GDP |
The best answer is C. The broadest measure of the money supply is "L." L consists of M-3 plus money market instruments and government savings bonds. Note that the Federal Reserve no longer computes M-3 or L, but these may still be tested.
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Which of the following will decrease the tax basis of a limited partnership interest?
I Cash contribution II Cash distribution III Distributive share of partnership incomeIV Distributive share of partnership loss A. I and III B. I and IV C. II and III D. II and IV |
The best answer is D. The "basis" is the theoretical value of the investment in the partnership. The "basis" amount establishes the limit of tax deductions that may be taken by the partner - so the larger the basis, the better it is for the partner.
Cash contributions and assumption of debt will increase the basis (more money going into the partnership investment). In addition, each partner's "distributive" share of income increases the basis (this is income that is retained in the partnership that has not physically been sent to the partner). Cash distributions and pay down of debt by the partnership reduce the basis (this is cash being paid out of the partnership). In addition, each partner's "distributive" share of losses decreases the basis (these are losses that are retained in the partnership that have not physically been sent to the partner). |
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A customer who is long 1 ABC Jan 30 Call wishes to create a "long call spread." The second option position that the customer must take is:
A. long 1 ABC Jan 20 Call B. long 1 ABC Jan 40 Call C. short 1 ABC Jan 20 Call D. short 1 ABC Jan 40 Call |
The best answer is D. A spread is a buy and a sell of the same type of option. Since the customer is already long a call, he or she must be short a call to create a spread. In order for the position to be a "long call spread," the customer must be a net buyer, meaning he or she must purchase the more expensive contract and sell the less expensive one. Since the lower strike price contracts are worth more money (for calls, since it is more advantageous to buy cheaper), he must sell the higher strike price contract to be a net buyer of the position. In this case, since the customer is already long a Jan 30 Call, to create a spread, a higher strike price call must be sold - and the only choice given that meets this criteria is to sell a Jan 40 Call. This is a moderately bullish strategy.
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A customer purchases a variable annuity contractual plan with plan completion insurance. This means that if the customer dies prior to completion of the contract, the:
A. insurance company pays the custodian bank the balance due on the contract B. insurance company pays the custodian bank monthly until the contract is completed C. custodian bank pays the insurance company the amount due on the contract D. custodian bank pays the insurance company monthly until the contract is completed |
The best answer is A. If a variable annuity sold under a contractual plan has "plan completion insurance" and the annuity holder dies before annuitization, the insurance company makes a lump sum payment to the fund custodian representing the balance due on the contract.
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A prospectus MUST accompany which of the following mailings to a customer?
I A research report written by the firm about a mutual fund that the firm sells II An annual report issued by the corporation III A report analyzing the effect of future budget deficits on market valuation A. I only B. II onlyC. III only D. I, II, III |
The best answer is A. Prospectuses are required for any "offer" of a new issue that is not exempt from the provisions of the Securities Act of 1933. Every mutual fund share that is sold is "newly issued" by that fund, therefore mutual funds must be offered with a prospectus. A research report on a new issue sent to a customer typically recommends the purchase of that issue and thus constitutes an "offer" under the Act. Any offer must be accompanied with, or preceded by, a prospectus. There is no requirement to send out a prospectus with annual reports or with general economic analyses - these are not "offers" of securities.
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A customer would sell call contracts because the customer:
A. is bullish on the underlying security B. is bearish on the underlying security C. wishes to generate earned income D. wishes to defer taxation of gains on the underlying stock |
The best answer is B. Call contracts are sold when a customer is bearish on the market. If the market falls, the calls expire "out the money" and the writer retains the premiums earned. This is the maximum potential gain for the writer of a call. When the calls expire, the premium received is treated as a short term capital gain for income tax purposes. It is not earned income (which is income from one's occupation) - rather it is "portfolio income," making Choice C incorrect.
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During prolonged periods of economic recession all of the following will likely occur EXCEPT:
A. interest rates can be expected to fall B. the Federal Reserve will begin to loosen credit C. business activity drops D. demand for loans rises |
The best answer is D. During prolonged periods of recession, interest rates drop. This occurs because the Federal Reserve loosens credit to get the economy moving again; and because demand for loans falls as business activity drops.
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Assuming that the Standard and Poor's 500 Index closes at 1,230, the U.S. listed equities markets will close its market for the balance of the day if the index declines below:
A. 1,169 B. 1,144 C. 1,070 D. 984 |
The best answer is D. Under the "circuit breaker" rule on the U.S. equities markets, if theStandard and Poor's 500 Index falls by a cumulative 20% in a single day, the market will be shut for the balance of the day. If the Standard and Poor's 500 Index closes at 1,230, a 20% drop is 246 points. 1,230 - 246 = 984.
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If an order is placed "immediate or cancel":
I it must be filled in its entirety II it can be filled in part or in full III there can be another attempt to fill the order if not filled immediately IV there can not be a further attempt to fill the order if not filled immediately A. I and III B. I and IVC. II and III D. II and IV |
The best answer is D. If an order is placed "Immediate or Cancel," it can be filled in its entirety or in part at that time, with any unfilled portion being canceled. There can be no attempt at re-execution if the order is not filled immediately.
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General obligation bond analysis would consider all of the following EXCEPT the:
A. record of tax collections B. ratio of total debt per capita C. protective covenants in the trust indenture D. trend of assessed valuation of property |
The best answer is C. G.O. bonds are typically issued without a trust indenture. The specific protections of an indenture are not needed since the municipality's taxing power is unconditionally pledged to pay off the bonds. Trust indentures are found in revenue bond issues, where only the revenues are pledged to pay off the debt, and purchasers of the bonds demand additional protections that are spelled out in the trust indenture, such as rate, insurance, and maintenance covenants. To assess whether taxes are likely to be sufficient to pay off the debt, G.O. bond analysis includes evaluation of the tax collection record; trend of assessed valuation of property in the area; and debt to population ratios.
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REITs can invest in which of the following?
I Limited partnerships II Government securities III Mortgages IV Real estate A. IV only B. II and IV C. II, III and IV D. I, II, III, IV |
The best answer is C. REITs do not invest in limited partnerships, which are tax shelter vehicles. This makes sense because REITs cannot pass losses to their shareholders. They invest primarily in real estate and mortgages; excess funds can be invested in securities, such as U.S. Governments and the shares of other REITs (however, under the tax code, at least 75% of the REIT's assets must be invested in real estate or mortgages).
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A "consolidating market" is one where trading:
A. volumes are stable B. prices are stable C. volumes are volatile D. prices are volatile |
The best answer is B. The market is said to be "consolidating" when prices are flat - not moving in any direction for a long period after a previous price rise or fall.
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403(b) Plans are permitted to invest in all of the following EXCEPT:
A. Common stocks B. Mutual Funds C. Fixed Annuities D. Variable Annuities |
The best answer is A. 403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Note that these are all "managed" products - where an investment adviser is managing the portfolio. Direct investments in common stocks selected by the plan participant are prohibited.
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A municipality has a tax rate of 18 mills. A piece of real property in the municipality is assessed at $180,000 and has a fair market value of $165,000. The annual tax liability on the property is:
A. $1,800 B. $2,970 C. $3,240 D. $4,420 |
The best answer is C. One mill = .001; 18 mills = .018. Taxes are based on assessed valuation, not fair market value. .018 x $180,000 = $3,240. Another way to think about it is that 1 mill = $1 of tax for each $1,000 of assessed value.
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Settlement of spot contracts which have been traded in the Interbank market takes place:
A. on the same day as the trade B. one or two business days after trade date C. five business days after trade date D. seven business days after trade date |
The best answer is B. Settlement of "spot" trades in the Interbank market takes place either one or two business days after trade date (the more actively traded currencies settle next day; less actively traded currencies settle in 2 business days).
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