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124 Cards in this Set
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An insider owning 500,000 shares of unregistered ABC stock has filed a Form 144 Notice of Offering. The weekly volume of trading for ABC on all exchanges was:
June 30 61,000 June 23 62,000 June 16 64,000 June 09 65,000 June 02 40,000 ABC has 6,500,000 shares of stock outstanding. On July 3, the insider would like to sell a portion of his unregistered stock. What is the maximum amount of shares he may sell under Rule 144? a. 57,750 b. 58,400 c. 63,000 d. 65,000 |
d. 65,000
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On July 3, the insider wants to sell unregistered ABC stock under Rule 144. The trading volume for the previous four weeks was:
June 30 61,000 June 23 62,000 June 16 64,000 June 09 65,000 Total four-week volume 252,000 The average volume is 63,000 shares (252,000 divided by four weeks equals 63,000). Rule 144 states that the insider may sell an amount equal to the average weekly volume of the previous four weeks, or 1% of the outstanding shares, whichever is greater. One percent of the 6,500,000 outstanding shares equals 65,000. Therefore, the investor may sell 65,000 shares of the security. |
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A sell stop order most likely will be entered by a technical analyst or chartist:
a. Below a support level for the stock b. Above a resistance level for the stock c. Below a previous low for the stock d. To take advantage of a rising market |
a. Below a support level for the stock
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Sell stop orders are entered below the current market. The order will most likely be entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside. This is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.
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An investor is a limited partner in a direct participation program that the IRS has determined to be abusive. This investor:
a. Will lose his entire investment b. May be subject to pay back taxes as well as penalties and interest c. Will escape all adverse tax consequences due to his limited status d. Will be forbidden by the IRS to invest in any other limited partnerships |
b. May be subject to pay back taxes as well as penalties and interest
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If the IRS deems a direct participation program abusive, deductions previously claimed may be disallowed causing investors to pay back taxes as well as interest and penalties on the back taxes. A DPP may be considered abusive if it is based on a false assumption or if it overstated property values for the purpose of generating large deductions.
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A customer in her late 40s, who is currently in the 15% tax bracket, has recently inherited $7,000,000. She informs you that she considers herself a conservative investor and wants your advice concerning investing the inheritance. Which of the following choices would be the BEST method of investing the funds?
a. 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes b. 80% in equities, a 10% mixture of in-state and out-of-state municipal bonds, 10% in corporate bonds c. 30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds d. 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 20% in corporate bonds, 20% in Treasury bonds, 10% in revenue anticipation notes, and 10% in tax-exempt money- market funds |
c. 30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market fund s
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Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 30% allocation in equities is reasonable (lower than 50%). However, since she is a conservative investor, this is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return for this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds in short-term municipal securities such as tax or revenue anticipation notes and tax-exempt money-market funds. Choice (a) has only a 20% allocation in equities and a 50% allocation of funds in tax anticipation notes, offering no growth potential. Having 100% of the funds in fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best method of investing the funds.
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Which of the following statements is TRUE concerning periodic payment variable annuities?
a. A client's number of annuity units never changes b. A client's number of accumulation units never changes c. Annuity contracts never have a beneficiary d. The monthly payout is fixed by the inflation index |
a. A client's number of annuity units never changes
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During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.
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A municipal securities broker's broker will complete transactions for a:
I. Retail customer II. Dealer bank III. Municipality IV. Municipal broker-dealer a. I and II only b. I and III only c. II and III only d. II and IV only |
d. II and IV only
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A broker's broker works only for other professionals in the industry, executing trades for dealer banks or other broker-dealers, but not for retail customers or municipalities. The purpose of a broker's broker is to provide anonymity to market participants.
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If a registered representative opens an account for an investor, the registered representative would need to know all of the following information, EXCEPT:
a. The investor's tax identification number b. If the investor is a U.S. citizen c. The investor's investment objectives d. The investor's educational background |
d. The investor's educational background
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A registered representative does not need to know the customer's educational background to open an account. A reasonable attempt should be made to obtain all the other information when opening an account for a customer.
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Municipal term bond quotes are based on:
a. Yield to maturity b. Current yield c. Nominal yield d. Dollar price |
d. Dollar price
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Municipal term bonds (bond issues that have one maturity date) are quoted based on a dollar price. Term bonds are also known as dollar bonds. Municipal serial bonds (that have several maturity dates) are quoted on a yield-to-maturity basis.
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Which of the following political contributions made by a municipal finance professional will NOT violate the provisions of the MSRB Rule G-37?
a. $100 to a candidate for whom you may vote b. $100 to a candidate for whom you may not vote c. $500 to a candidate for whom you may vote d. $500 to a candidate for whom you may not vote |
a. $100 to a candidate for whom you may vote
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Municipal finance professionals (MFPs) are allowed to make political contributions of up to $250 per person to candidates for whom they are permitted to vote. Any contribution made to a candidate for whom they are not entitled to vote would be a violation. For example, if you are an MFP and a resident of New Jersey, you may not contribute to an election campaign for the governor of New York.
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When purchasing a straddle, an investor's maximum profit is:
a. The premium b. The strike price minus the premium c. Limited to the narrowing of the spread d. Unlimited |
d. Unlimited
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A long straddle consists of purchasing both a call and put with the same expiration and strike price. Since it involves purchasing a call, there is an unlimited profit potential.
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If a registered representative receives information that a client has recently received a large sum of money, the proper course of action is to:
a. Encourage increased leverage in the account b. Suggest a sizable investment in tax-exempt investments c. Solicit the sale of taxable investments that the investor is holding d. Determine if the customer's investment objectives have changed |
d. Determine if the customer's investment objectives have changed
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Registered representatives have a responsibility to update customer information periodically in case something has changed that would alter a customer's goals and objectives. Given that the customer has just experienced a financial windfall, the representative should check to see if the customer's investment objectives have changed before making any recommendations.
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A customer, who is going on vacation, enters a GTC order to buy a stock. The order is executed. The customer tells the registered representative that he wants the stock but will not return in time to pay for the security by the payment date. The customer states he will send in a check a few days late. The registered representative should:
a. Cancel the trade b. Pay for the stock himself with a principal's approval c. Transfer the order to a margin account d. Request an extension |
d. Request an extension
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The customer has indicated that he wants to purchase the stock but will not be able to pay for it in time because he will be on vacation. The order was a good-until-cancelled (GTC) order, so the customer did not know if and when the order would be executed. The reason for the late payment is due to the customer being on vacation. This is a valid reason, and the registered representative should request an extension.
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Taxable income normally includes:
a. The interest on municipal bonds issued in the state in which the taxpayer lives b. The taxpayer's annual 401(k) contributions c. Reinvested dividends paid on a mutual fund investment d. Any unrealized capital appreciation on stocks that the taxpayer owns |
c. Reinvested dividends paid on a mutual fund investment
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Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.
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A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. Each existing share receives one right. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would she need to buy 100 new shares of stock?
a. 95 b. 100 c. 350 d. 950 |
d. 950
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The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights. (10 rights x 100 shares = 1,000 rights.) The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 950 rights.
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In a direct participation program, the point at which revenues begin to exceed deductions is known as:
a. The cash-on-cash return b. The maximum cash flow c. The crossover point d. Phantom income |
c. The crossover point
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The crossover point is reached when the project's revenues exceed expenses and net income is produced.
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In order to sell variable annuities to clients, a person must hold which of the following?
a. A life insurance license only b. A securities registration only c. A life insurance license and securities registration d. No licenses or registrations |
c. A life insurance license and securities registration
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Variable annuities are considered both insurance products and securities. As a result, an individual must be properly registered (Series 6 or 7) and hold a life insurance license.
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Which of the following objectives is the least suitable reason for investing in a mutual fund?
a. Diversification b. Professional management c. Short-term trading d. Liquidity |
c. Short-term trading
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Investors in mutual funds usually seek all of the objectives listed except short-term trading.
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A high net worth investor seeking safety of principal would MOST likely invest in which of the following securities?
a. High-grade general obligation bonds b. High-yield corporate bonds c. Low-grade general obligation bonds d. High-yield revenue bonds |
a. High-grade general obligation bonds
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Safety of principal refers to a customer being able to preserve or retain the initial amount of, the investment over its life. Many bonds offer investors this feature. The higher the rating, the greater the likelihood the investor will achieve safety of principal. High-grade generally refers to an investment-grade or highly rated bond. A general obligation bond would also offer a high net worth investor tax-exempt income. High-yield refers to non-investment- grade or junk bonds that would expose the investor to the risk of not achieving safety of principal.
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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 IV. Before the registered representative answers questions the client has about options a. I and II only b. I and III only c. II and III only d. II and IV only |
a. I and II only
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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 option trading by the brokerage firm. Whether the account is approved or not depends on 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.
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Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend?
I. A GTC order to sell 100 XYZ at $50 stop II. A GTC order to sell 100 XYZ at $50 stop-limit III. A GTC order to buy 100 XYZ at $50 stop IV. A GTC order to buy 100 XYZ at $50 stop-limit a. I and II b. II and III c. II and IV d. III and IV |
a. I and II
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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 sell stop and sell stop-limit orders are entered below the market and are reduced on the ex-dividend date.
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MSRB rules state that subject or nominal quotes may be given for:
a. Revenue bonds only b. General obligation bonds only c. Informational purposes d. Municipal notes only |
c. Informational purposes
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MSRB rules state that a dealer who does not wish to buy or sell securities based on a quote given, must identify the quote as a subject or nominal quote. Such quotes can be given for informational purposes only.
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A client owns 3,000 shares of stock in a company headquartered outside the U.S. The client receives a cash dividend and tax is withheld by the country where the company is located. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client?
I. The dividend received is treated as a return of capital II. The taxes paid may be used as a credit III. The dividend paid is exempt from taxes IV. The taxes paid may be used as a deduction a. I and III b. I and IV c. II and III d. II and IV |
d. II and IV
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U.S. citizens and corporations owning foreign stock may receive dividends from which foreign taxes have been withheld. The investor still owes U.S. income tax on the net dividend. The amount of the foreign tax, however, may be claimed by the investor as a deduction against income or may be applied as a credit against U.S. income tax.
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XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of the outstanding common stock is: a. $90,000,000 b. $7,000,000 c. $5,000,000 d. $4,500,000 |
a. $90,000,000
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Outstanding shares are issued shares minus treasury stock (shares repurchased by the company). There are 4,500,000 shares outstanding with a market value of $20.00 per share. Therefore, the market capitalization is $90,000,000.
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A 28-year-old single investor has funds saved at a bank. He contacts an RR and wants to begin allocating funds to a retirement account. Which of the following choices is the most appropriate asset allocation?
a. 80% stocks, 20% bonds b. 60% stocks, 40% bonds c. 50% stocks, 50% bonds d. 30% stocks, 70% bonds |
a. 80% stocks, 20% bonds
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Long-term, risk-tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Over long periods, stocks usually keep pace or offer higher returns as measured against inflation. Inflationary risk is also referred to as purchasing-power risk. Since the investor is many years from retirement, a large percentage of his portfolio should be allocated to stocks.
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According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?
a. The name of the beneficiary for the customer's account b. Whether the customer is subject to IRS backup withholding rules c. A written acknowledgment that the customer has received the fund's prospectus d. The name of the RR responsible for the account and the manager who approved the account |
d. The name of the RR responsible for the account and the manager who approved the account
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Under industry rules, the following items MUST be obtained when opening an account.
1. The customer's name and residence 2. Whether the customer is of legal age 3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account 4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity The name of the beneficiary is not required when opening an account. |
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A customer contacts a registered representative and indicates her risk tolerance is to accept some risk to her initial principal in exchange for higher returns. The RR asks the customer if she understands that the account may lose value but may keep pace with or exceed inflation, and the customer agrees to these conditions. This customer's risk tolerance would BEST be defined as:
a. Conservative b. Moderate c. Moderate conservative d. Moderate aggressive |
b. Moderate
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An investment risk tolerance in which the customer is willing to accept some risk to her initial principal, with some volatility and a possible loss of the funds invested in exchange for higher returns, is best defined as moderate. Moderate conservative includes low risk with an understanding there may be some volatility in exchange for a small amount of portfolio returns. Moderate or medium aggressive is a situation where the customer is willing to accept high risk and high volatility with a possible loss to her initial principal in exchange for high returns.
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An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT:
a. Runway maintenance expenses b. Debt service expenses c. Hangar expenses d. Salaries of airport personnel |
b. Debt service expenses
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Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.
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In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the:
a. After-tax yield b. Discount rate c. Real interest rate d. LIBOR |
c. Real interest rate
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The real interest rate is the yield of a security reduced by the inflation rate. While it represents earnings remaining once inflation is taken into account, the real interest rate does not factor in the tax consequences. The discount rate is the rate of interest that the Federal Reserve charges member banks for loans. LIBOR (the London Interbank Offered Rate) is the rate of interest that banks in London charge each other for short-term loans.
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A convertible bond is convertible at $25. The bond is currently selling in the market at $960. What should the stock be selling at to be at parity with the bond?
a. $24.00 b. $25.00 c. $26.40 d. $38.40 |
a. $24.00
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The bond is convertible at $25. This means the conversion ratio is 40 to 1 ($1,000 par value divided by the conversion price of $25 equals the conversion ratio of 40 to 1). To find parity for the stock, divide the market value of the bond by the conversion ratio. The market value of the bond $960, divided by the conversion ratio of 40 to 1 equals the $24 parity price for the stock.
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The term fast market is characterized by which TWO of the following descriptions?
I. An imbalance of orders II. A very low number of trades III. Highly volatile prices IV. The quotes of market makers being updated very quickly a. I and III b. I and IV c. II and III d. II and IV |
a. I and III
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The term fast market is characterized by very heavy trading, fast moving prices, and high volatility. There also may be an imbalance in the number or shares clients are willing to buy or sell. For example, there are 500,000 shares to buy and only 100,000 shares to sell. Quotes may take a long time to update since prices and trades are moving so quickly. A client's order may take a longer time to execute, and if a market order is entered by a client, the price received may be significantly higher or lower then the quoted price.
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A registered representative has limited discretion over a customer's account. The registered representative may:
a. Remove money freely from the account b. Place orders before the order has been approved by a principal c. Not enter buy stop orders d. Have all confirmations of transactions sent only to himself |
b. Place orders before the order has been approved by a principal
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Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be approved promptly afterward.
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Which of the following statements does NOT describe an equity-indexed annuity?
a. It offer a guaranteed minimum rate of return b. It provides a return based on the performance of a stock market index c. It is considered a security d. It provides tax-deferred growth |
c. It is considered a security
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Equity-indexed annuities (EIAs) are annuities that provide a guaranteed minimum rate of return (unlike variable annuities), but can yield a greater rate of return based on the performance of a linked stock market index. They also provide tax-deferred growth. Currently, EIAs are not considered securities.
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An individual considering the purchase of an equity-indexed annuity should understand that:
a. The return over long periods of time will equal the underlying index b. These products tend to outperform the stock market over long periods of time c. These products do not have sales charges or surrender fees like mutual funds and should only be purchased by seniors who want a death benefit and life payout d. The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum |
d. The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum
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Equity indexed annuities (EIAs) are a hybrid product that combines the elements of fixed and variable annuities. They provide a guaranteed minimum rate of return, but their performance is linked to a securities stock market index. Participation in the return found in the index is usually less than 100% and the calculation excludes dividends, which are normally based solely on appreciation. These products typically have surrender charges, fees based upon the riders selected, generally making these unsuitable for senior citizens or those needing access to their money.
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On Tuesday, the S&P 500 Index closed at 1,600. At 11:30 the next morning, the S&P 500 Index is at 1,488. All NMS stocks will:
a. Stop trading for 15 minutes b. Stop trading for 30 minutes c. Stop trading for the remainder of the day d. Continue to trade |
a. Stop trading for 15 minutes
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If the S&P 500 Index falls by 7% from the previous trading day's closing price, it is defined as a Level 1 Market Decline and triggers a 15-minute trading halt. In this question, the drop from the closing price of 1,600 to 1,488 the next day (112 points) is a 7% decline.
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Which of the following indexes or averages is made up of the largest number of stocks?
a. The Dow Jones Composite Index b. The S&P 500 Index c. The NYSE Index d. The Wilshire Associates Equity Index |
d. The Wilshire Associates Equity Index
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The Wilshire Associates Equity Index shows the market value in dollars of roughly 7,000 NYSE, NYSE MKT (formally NYSE Amex), and Nasdaq stocks. It contains the most stocks of the choices listed.
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In order to implement a portfolio margin program, the firm must obtain approval from:
a. The options exchange b. FINRA c. The SEC d. The OCC |
b. FINRA
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Firms establishing a portfolio margin program are required to obtain approval from FINRA.
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Which of the following securities is an example of a collateralized time draft?
a. Commercial paper b. American Depositary Receipts c. Bankers' acceptances d. Eurodollars |
c. Bankers' acceptances
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A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank.
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One of your clients anticipates a significant decline in XYZ stock. The client wants to establish a position to take advantage of a large decline, but not expose himself to significant risk. Which of the following actions best satisfies your client's needs?
a. Short XYZ stock b. Purchase an XYZ put c. Purchase an XYZ straddle d. Establish an XYZ debit put spread |
b. Purchase an XYZ put
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A long put will allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is at risk only for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium.
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A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense?
I. The annual interest payments are found on the balance sheet II. The annual interest payments are found on the income statement III. The interest payment is deducted from net income IV. The interest payment is deducted from EBIT a. I and III b. I and IV c. II and III d. II and IV |
d. II and IV
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The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.
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Ashton purchased 100 shares of XYZ common stock in January 2003, at a price of $25 per share. XYZ pays a quarterly dividend of $.25 per share. Today, XYZ closed at $30 per share. What is the dividend yield of XYZ common stock?
a. .83% b. 1.25% c. 3.33% d. 4.00% |
c. 3.33%
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The dividend yield for a stock is equal to the annualized dividend divided by the current market price. Since dividends are paid quarterly, the annual dividend is $1 per share ($.25 x 4). The annualized dividend of $1 divided by the current market price of $30 per share results in a dividend yield of 3.33%.
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If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would:
a. Increase b. Decrease c. Remain the same d. Decrease temporarily but remain stable over a period |
a. Increase
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If the tax-exempt status were eliminated, yields on newly issued municipal bonds would need to increase to compete with the higher yields of non-tax-exempt bonds.
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An investor establishes a long margin account and buys 1,000 shares of TMP at $55. The value of the securities increases and SMA is created. All of the following actions affect SMA, EXCEPT:
a. The value of the securities declines b. The value of the securities increases c. Cash is withdrawn from the account d. The buying power of the accounts used |
a. The value of the securities declines
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The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. A decrease in the market value of the securities does not affect the SMA in a long account since, once created, SMA is reduced only when used. An increase in the market value of the securities can increase SMA, since equity increases. Withdrawing cash and buying of additional securities for the account will reduce the SMA since the SMA is used.
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An investor buys a zero-coupon corporate bond at 37. After three years, the bond's basis has accreted for tax purposes to 40. If the bond is sold for its accreted value, the investor will recognize:
a. No gain or loss b. A 3-point capital gain c. A 3-point capital loss d. Interest income of 3 points |
a. No gain or loss
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If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss. When selling a zero-coupon security, any amount above the accreted value is considered a capital gain and below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year.
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Regulation T applies to:
I. Cash accounts II. Margin accounts III. Commodity accounts IV. Municipal bond margin accounts a. I and II only b. II and III only c. II and IV only d. III and IV only |
a. I and II only
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Regulation T of the Federal Reserve Board applies to cash accounts and margin accounts. Regulation T does not apply to commodity accounts or municipal bond margin accounts. For municipal bond accounts, industry rules require a margin deposit of 7% of the market value of the bond. Margin requirements for commodity accounts are set by the individual commodity exchanges.
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Which of the following securities are guaranteed by the federal government?
a. Fannie Mae securities b. Ginnie Mae securities c. Freddie Mac securities d. Federal Home Loan Bank securities |
b. Ginnie Mae securities
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Of the choices given, only Ginnie Mae securities or the Government National Mortgage Association securities (GNMAs) are fully guaranteed as to principal and interest by the federal government.
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An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:
a. 10 b. 7 c. 3 d. 0 |
c. 3
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Intrinsic value is defined as the in-the-money amount of the contract. A foreign currency put option is in-the-money when the spot price is less than the strike price. Since the spot price (157) is less than the strike price (160), the contract is in-the-money by 3 points.
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A client invested $35,000 in a mutual fund and receives a lower sales charge by signing a letter of intent based on a purchase level of $50,000. If, one year later, she has not contributed additional funds, which of the following choices is the BEST course of action for the RR handling the account?
a. Ask the client to sign a new letter of intent for $15,000 b. Allow the client a 90-day extension from the date of the original letter of intent c. Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed d. Contact the client and disclose that she is obligated to deposit $15,000 |
c. Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed
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A letter of intent (LOI) enables an investor to qualify for a reduced sales charge based on the breakpoint schedule of a mutual fund, without initially depositing the entire amount required. The LOI states the investor's intention to deposit the required money within 13 months of the inception of the letter. It may not be renewed for another 13 months. The letter of intent may be backdated for up to 90 days, but may not be extended for 90 days. Letters of intent are not binding on the investor. The investor is not obligated to contribute the additional $15,000. Investors who fail to make the additional investments are charged the amount that would equal the higher sales charge that applied to the original purchase. The fund insures that it will be able to recover the additional sales charge by withholding sufficient shares in escrow for this purpose.
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All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT:
a. They are based on the S&P 500 Index b. The levels are calculated on a monthly basis c. A trading halt on one exchange applies to all exchanges d. A 7% decline will halt trading for 15 minutes |
b. The levels are calculated on a monthly basis
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Marketwide trading halts are based on the S&P 500 Index and are calculated daily (not monthly). A trading halt on one exchange applies to all exchanges that trade the same security. A Level 1 Market Decline (7%) and a Level 2 Market Decline (13%) will halt trading for 15 minutes. For a Level 3 Market Decline (20%), trading will be halted for the remainder of the day.
Which TWO of the following activities are normally functions of the investment banking department of a broker-dealer? I. Working with issuers to raise capital II. Selling securities to institutional investors III. Assisting companies with mergers and acquisitions IV. Making a secondary market for new issues a. I and III b. I and IV c. II and III d. II and IV |
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A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a:
a. $500 profit b. $500 loss c. $1,000 profit d. $1,000 loss |
b. $500 loss
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The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).
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Lucretia has a significant gain in Jaymont shares that she has held for 10 months. If she buys a put on Jaymont, which TWO of the following statements are TRUE?
I. She still has upside potential in the stock II. She can achieve a long-term gain by holding the put and stock for three months III. She terminates the holding period IV. She cannot suffer a loss on the investment a. I and III b. I and IV c. II and III d. II and IV |
a. I and III
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If a stock is held short-term (one year or less) and a put is purchased, the holding period is terminated and will not resume until the put is sold or expires. When the holding period resumes, it will do so as if the stock was purchased on that day. If a long-term holding period were established on the stock, then the acquisition of the put will not affect the investor's holding period.
If the stock and the put are purchased on the same day, that is termed a married put. In that case, the price of the put will be added to the price of the stock to arrive at a cost basis for the entire position. When the put expires, there will not be a taxable event, since the stock must be sold to trigger a capital gain or loss. The purchase of the put will create a hedge by allowing the investor to sell at the strike price, but this does not necessarily mean there will be no loss. There is still potential for the stock to rise and for Lucretia to achieve large gains. |
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A customer will be taking a six-month trip to a foreign country and will not have access to her mail. If the customer provides written instructions and includes a valid reason:
a. The firm is not permitted to hold a customer's mail under any conditions b. The firm may hold the customer's mail for the six-month period provided a power of attorney is signed in advance by the customer c. The firm may hold the customer's mail for only three months d. The firm may hold the customer's mail for the six-month period |
d. The firm may hold the customer's mail for the six-month period
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A broker-dealer may hold mail for a customer who will not be receiving mail at his usual address provided the firm receives written instructions from the customer that include the time-period during which the mail is to be held. If the period exceeds three consecutive months, the customer's instructions must also include a valid reason for the request.
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An investor purchases an EPG Jan 40 put at 5 and writes an EPG Jan 50 put at 13. The investor would profit in all of the following situations, EXCEPT:
a. The spread narrows b. Both options expire c. The Jan 50 put is closed out at 10 and the Jan 40 put is closed out at 4 d. The spread widens |
d. The spread widens
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This is an example of a credit spread (more premium received for the option sold than paid for the option purchased). In a credit spread, the investor will profit if the spread (difference in premium) narrows.
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In the Interbank market, foreign currency transactions:
a. May settle on a spot or forward basis b. Occur on exchanges throughout the world c. Are regulated by the SEC d. Are reported on the Nasdaq system |
a. May settle on a spot or forward basis
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The Interbank market is an unregulated over-the-counter market in which currencies of different countries are bought and sold. Foreign currency transactions may settle on a spot or forward basis. Spot transactions settle in two business days from the trade date. In a forward transaction, the exchange rate is established on the trade date but settlement occurs in more than two business days. While foreign currency transactions are not reported on Nasdaq, spot quotes are available from information vendors such as Knight-Ridder Financial Information Systems, Reuters, and Telerate.
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The payout on a variable annuity is based on a:
a. Fixed number of accumulation units with a fluctuating value per unit b. Fixed number of annuity units with a fluctuating value per unit c. Fixed value per unit with a fluctuating number of annuity units d. Fixed number of annuity units with a fixed value per unit |
b. Fixed number of annuity units with a fluctuating value per unit
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When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing the units.
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Abigail is long 500 shares of GHI at $18 per share. In November, GHI is trading at $24 per share, but is expected to decrease in value over the next few months. Abigail wants to protect as much of her gain as possible and is willing to sacrifice upside potential to reduce her cost. Which of the following positions would you recommend to her to accomplish her goal?
a. Purchase 5 GHI Jan 25 puts and sell 5 GHI Jan 30 calls b. Sell 5 GHI Jan 25 puts and sell 5 GHI Jan 25 calls c. Purchase 5 GHI Jan 25 puts and purchase 5 GHI Jan 30 calls d. Sell 5 GHI Jan 25 puts and purchase 5 GHI Jan 25 calls |
a. Purchase 5 GHI Jan 25 puts and sell 5 GHI Jan 30 calls
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In order to protect some of the gain, Abigail will need to purchase 5 puts that expire in January.
To reduce the cost of purchasing the 5 GHI Jan 25 puts, Abigail can sell 5 GHI Jan 30 calls to generate income from the premiums she receives and margin will not be required since Abigail owns 500 shares of GHI that could be called away should the short calls be exercised. |
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Which of the following securities would be LEAST suitable for an investor interested in preservation of capital?
a. Long-term CDs b. Reverse convertible bonds c. A corporate bond fund d. A floating rate bond maturing in five years |
b. Reverse convertible bonds
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Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.
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You discover that one of your clients is on the OFAC list. You must:
a. Contact federal law enforcement authorities immediately b. Call the client to see if a mistake has been made c. Investigate the matter further to see if there is evidence of suspicious activity d. Notify FINRA |
a. Contact federal law enforcement authorities immediately
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You must contact the federal law enforcement authorities immediately if you discover that a client is on the list of suspicious persons and entities maintained by the Office of Foreign Assets Control (OFAC). You must also freeze the account and block further transactions.
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On February 10, an investor sold 100 shares of ABC short at $50/share. The investor covers the position on November 1 by purchasing 100 shares of ABC at $58/share, establishing an 8-point loss. If, on November 15, the investor shorts 100 shares of ABC at $56/share:
a. The investor is short 100 shares of ABC against the box b. The wash sale rule has been violated c. The investor has a $200 short-term capital gain d. The investor has an $800 short-term capital loss |
b. The wash sale rule has been violated
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Reinstating a position within 30 days of realizing a loss is a violation of the wash sale rule. The November 15 short sale creates a new short position in ABC only 15 days after establishing a loss on an original short position in ABC. Therefore, the loss may not be claimed at this time.
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The system used to report municipal securities transactions is called the:
a. Trade Reporting and Compliance System b. Order Audit Trail System c. Trade Reporting and Compliance Engine d. Real-Time Transaction Reporting System |
d. Real-Time Transaction Reporting System
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Broker-dealers are required to report transactions in municipal securities to the Real-Time Transaction Reporting System (RTRS), which is operated by the MSRB.
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Variable annuities sold by insurance companies must be registered with:
I. The SEC II. The FRB III. FINRA IV. The State Insurance Commission a. I and III only b. I and IV only c. III and IV only d. I, II, III, and IV |
b. I and IV only
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Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents.
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A CMO would be suitable for an investor seeking:
a. Monthly tax-free income, assuming he does need the principal returned at maturity b. Quarterly income, assuming he does not need the principal returned at maturity c. Monthly income, assuming he needs the entire principal returned at maturity d. Monthly income, assuming he does not need the entire principal returned at maturity |
d. Monthly income, assuming he does not need the entire principal returned at maturity
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CMOs pay monthly income made up of interest, which is taxable, and principal, which is a tax-free return of capital. Due to the structure of a CMO, a fluctuating amount of principal is returned monthly, not at maturity, which makes CMOs different from most other fixed-income securities.
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A customer purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share.The buyer of these 10 straddles will need to deposit:
a. $1,000 b. $2,000 c. $4,000 d. $10,000 |
c. $4,000
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When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer has purchased 10 straddles and paid $400 per straddle for a total of $4,000 (10 straddles x $400 = $4,000).
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Which of the following securities has prepayment risk?
a. Mortgage bonds issued by a utility company b. Bonds issued by Freddie Mac c. Collateralized mortgage obligations d. Commercial paper |
c. Collateralized mortgage obligations
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Many homeowners pay off their mortgages early. When interest rates fall, homeowners have an incentive to refinance and pay off their existing mortgages. These prepayments are passed through to the pools holding the old mortgages. The investors then need to reinvest this large amount of principal at a time when interest rates have declined. This is referred to as prepayment risk and it is associated with mortgage-backed securities such as CMOs. Although both Fannie Mae (FNMA) and Freddie Mac (FHLMC) issue mortgage-backed securities, in this question choice (b) covers the bonds of these issuers, which do not have prepayment risk.
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Income that is derived from which of the following sources may NOT be used to fund an IRA contribution?
a. Money earned from a part-time job b. A bonus c. Rental income received from a summer rental d. Taxable alimony |
c. Rental income received from a summer rental
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Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.
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Which TWO of the following choices are methods of underwriting municipal securities?
I. Standby II. Negotiated III. Competitive IV. Fill-or-kill a. I and III b. I and IV c. II and III d. II and IV |
c. II and III
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A municipal issuer will choose an underwriter either through a negotiated offering or competitive bidding process. A standby underwriting is associated with a rights offering of common stock. Fill-or-kill is a type of order placed to buy or sell a security in the secondary market. It is not a type of underwriting.
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An RR sees that a CMO is yielding 5.95% while the comparable Treasury is yielding 5.10%. This means that:
a. The CMO is rated below investment-grade b. The yield pick-up on the CMO is 85 basis points c. The annual cash flow from the CMO is $85 greater than the Treasury d. The yield curve is inverted |
b. The yield pick-up on the CMO is 85 basis points
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If the yield on a CMO is 85 basis points higher (5.95 - 5.10) than a comparably maturing Treasury security, the CMO provides a yield pick-up or higher yield of 85 basis points.
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A municipal securities principal must review and approve municipal transactions made with:
I. Individuals II. Trust departments III. Commercial bank portfolios IV. Casualty insurance companies a. I only b. I and IV only c. I, II, and III only d. I, II, III, and IV |
d. I, II, III, and IV
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MSRB rules require a municipal securities principal to approve all transactions in municipal securities.
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An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers:
a. Maturity diversification b. Coupon diversification c. Geographical diversification d. Type diversification |
c. Geographical diversification
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The portfolio offers the investor geographical diversification because the issues are from different municipalities throughout the country.
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A client has a brokerage account with a broker-dealer in New York City. She decides to move to Montana to retire. She still intends to maintain the account with the broker-dealer, which is registered only in New York. Which of the following statements is TRUE?
a. This is permitted provided the client maintains a P.O. Box in New York b. This is permitted since the account was opened in New York prior to the client's move to Montana c. The client can maintain the brokerage account if the firm registers as an investment adviser in Montana d. The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana |
d. The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana
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A broker-dealer must be registered in each state in which it conducts business. In addition, the securities and the registered representative must be registered in all states in which the issue is sold. Registration as an investment adviser is not the same as registration as a broker-dealer.
All of the following statements are TRUE regarding yield curves, EXCEPT: a. In an ascending curve, short-term rates are lower than long-term rates b. They are fixed and may only be changed by the Federal Reserve Board c. In a descending curve, short-term rates are greater than long-term rates d. In a flat yield curve, both short-term and long-term rates are equal |
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When an investor purchases a municipal fund security, she will pay a sales load that is stated in the official statement. Which TWO of the following statements are TRUE regarding an advertisement for this municipal fund security?
I. The minimum sales load should be stated in the ad II. The maximum sales load should be stated in the ad III. Sales charges may not be reflected in performance data IV. Sales charges may be reflected in performance data a. I and III b. I and IV c. II and III d. II and IV |
d. II and IV
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A 529 College Savings Plan is a type of municipal fund security. If sales loads are depicted in municipal fund securities advertising, the maximum amount of the sales charge should be stated. Additionally, sales charges may be reflected in the performance data of the investment and, if they are not, a statement to that effect should be made.
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Which of the following funds is the least suitable for investors mainly seeking income?
a. A mortgage-backed securities fund b. A municipal bond fund c. A balanced fund d. A sector fund |
d. A sector fund
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A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.
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A portfolio's mix of investments and two potential investors are described below.
• 20% investment-grade corporate bonds • 30% blue-chip common stock • 20% variable annuity • 20% equity mutual funds • 10% money-market funds Investor A: A 35-year-old single individual, who earns a good salary, makes the maximum contribution to his employer's 401(k), and is willing to assume a moderate degree of risk. Investor B: A 40-year-old married female, who along with her spouse works and earns a good salary. She chooses not to contribute to her employer's 401(k). She is willing to assume a moderate degree of risk. The portfolio is MOST suitable for: a. Neither Investor A nor Investor B b. Both Investor A and Investor B c. Investor A only d. Investor B only |
c. Investor A only
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The fact that this portfolio includes an investment in variable annuities is the determining factor for which investor is the most suitable. Generally, an annuity should only be considered after a person contributes the maximum amount to the qualified plans that is sponsored by his employer since it provides for deductible contributions, tax-deferred growth, and the potential for a company match. Investor A has contributed the maximum amount to his employer's 401(k) plan and could use the variable annuity as an additional retirement vehicle. Since Investor B is not contributing to her employer's pension plan, she should probably not include a variable annuity in her portfolio.
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Relative to a sales tax, which TWO of the following statements are TRUE?
I. It is a progressive tax II. It is a regressive tax III. It affects low income individuals the most IV. It affects all individuals equally a. I and III b. I and IV c. II and III d. II and IV |
c. II and III
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A regressive tax applies the same tax rate regardless of a person's income. This has an adverse effect on a low-income person since the tax represents a higher percentage of income.
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Which of the following securities have the most interest-rate risk?
a. 2X short-term bond leveraged ETFs b. 2X long-term bond leveraged ETFs c. Long-term bond leveraged ETFs d. Short-term bond leveraged ETFs |
b. 2X long-term bond leveraged ETFs
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An essential bond concept is that long-term bonds have a higher degree of interest-rate risk than short-term bonds. A leveraged ETF seeks to deliver a multiple of the performance of an index or other benchmark. Therefore, a 2X long-term bond leveraged ETF will have the highest degree of interest-rate risk of the answer choices.
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The Securities Exchange Act of 1934:
I. Created the SEC II. Provided for the regulation of credit III. Provided for the regulation of exchanges IV. Provided for the regulation of new issues a. I and III only b. I and IV only c. I, II, and III only d. II, III, and IV only |
c. I, II, and III only
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The Securities Exchange Act of 1934 created the SEC and provided for the regulation of credit and exchanges. The Securities Act of 1933 provided for the regulation of new issues.
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An investor purchases a Canadian dollar September 80 call and writes a Canadian dollar September 82 call. This position is a:
a. Bullish spread b. Bearish spread c. Long straddle d. Credit combination |
a. Bullish spread
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A spread is the simultaneous purchase and sale of options of the same class (both calls or puts), on the same underlying security, with different strike prices and/or expiration months. A debit spread is created when the premium of the option purchased is greater than the premium of the option sold. The September 80 call, which is the right to buy the Canadian dollar at 80, is more valuable than an option that provides the right to buy at 82. Therefore, the call purchase will be the controlling factor in the spread. Since buying calls is bullish, a call debit spread is a bullish strategy.
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Which of the following choices makes a financial commitment in the distribution of a new issue of securities?
a. The selling group b. The underwriting syndicate c. A customer who provides an indication of interest d. The exchange on which the security will be listed |
b. The underwriting syndicate
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The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss. While the selling group also participates in the sale of the new issue, it does not run the risk of losses if the securities do not sell. Regarding choice (c), a customer who provides an indication of interest has no obligation of any kind.
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All of the following actions create a conflict of interest for a general partner, EXCEPT if the general partner:
a. Accepting a payment not to compete with the program b. Holding partnership monies in his personal bank account c. Selling property that he owns to the partnership d. Lending money to the partnership at prevailing interest rates |
d. Lending money to the partnership at prevailing interest rates
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A general partner is not permitted to compete with the limited partnership. Accepting a payment not to compete would be a conflict of interest. Selling property to the partnership is a definite violation of the conflict of interest provisions, as is commingling partnership funds. While partners are not allowed to borrow from the partnership, lending money to the partnership is permitted.
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What information would NOT need to be disclosed by a broker-dealer in a research report?
a. The broker-dealer received compensation for assisting the company in an acquisition b. The analyst provided a target price for the company c. The analyst is a director of the company d. The analyst had owned shares in the company one year before writing the report |
d. The analyst had owned shares in the company one year before writing the report
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A broker-dealer is required to make certain disclosures in its research reports. Any investment banking compensation paid during the last 12 months, the anticipated price target, and the fact that the analyst is a director of the company are all required disclosures. In addition, any ownership in the company held by the analyst or a member of the analyst's immediate family at the time the report is issued must be disclosed. The fact that the analyst formerly owned shares that were sold does not need to be disclosed.
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Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)?
a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are not required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are not suitable for the same investors as exchange-traded REITs |
d. They are not suitable for the same investors as exchange-traded REITs
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Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.
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Dedicated Securities has been invited to join a syndicate selling a new offering of common stock. The head of the firm's syndicate department notices that the agreement among underwriters mentions a penalty bid. Which of the following choices is an example of a penalty bid?
a. If Dedicated fails to sell its allotment, it will be liable for twice its normal commitment b. If Dedicated fails to solicit a certain number of indications of interest, it will be required to pay a fee to the syndicate manager c. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated will forfeit the concession on those shares d. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated could be penalized for failure to maintain the public offering price |
c. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated will forfeit the concession on those shares
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A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member when securities originally sold are repurchased by the syndicate in stabilizing transactions.
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Which of the following money-market securities assists in financing importing and exporting operations?
a. Bankers' acceptances b. Treasury bills c. Eurodollar CDs d. Revenue anticipation notes |
a. Bankers' acceptances
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Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt) which facilitates the trading of foreign securities in U.S. markets. A Eurodollar certificate of deposit pays interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and is not used to finance importing and exporting operations. A revenue anticipation note is a short-term municipal security issued in anticipation of receiving revenues from the federal or state government.
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Which of the following choices may write calls covered by XYZ stock?
I. The president of XYZ Corporation II. The trustee of XYZ Corporation's pension fund III. XYZ Corporation IV. ABC Corporation a. II and IV only b. I, II, and III only c. I, II, and IV only d. I, III, and IV only |
c. I, II, and IV only
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Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock.
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To apply for a securities registration, a previously unregistered individual must:
I. Complete Form U5 II. Complete Form U4 III. File the necessary form with FINRA IV. File the necessary form with the SEC a. I and III only b. I and IV only c. II and III only d. II and IV only |
c. II and III only
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To apply for a securities registration, a person must file Form U4 with FINRA.
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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. U.S. terms
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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).
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An established customer has purchased penny stocks through a broker-dealer on five occasions. When making future recommendations to the customer regarding these securities, the broker-dealer must:
a. Obtain a written statement from the customer for each trade b. Have the customer sign a suitability statement for each trade c. Have the trades preapproved by a principal d. Be sure that the recommendations take into account the customer's investment objectives |
d. Be sure that the recommendations take into account the customer's investment objectives
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The account approval requirements for penny stocks under SEC Rule 15g-9 do not apply to existing customers who have maintained an account with a broker-dealer for more than one year or have previously engaged in three or more transactions involving penny stocks. All recommendations to a customer should take into account the customer's investment objectives.
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Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer?
a. An exchange-traded fund (ETF) b. An equipment leasing direct participation program (DPP) c. A private activity municipal revenue bond d. The PAC tranche of a collateralized mortgage obligation |
b. An equipment leasing direct participation program (DPP)
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A registered representative may not purchase a direct participation program in a discretionary account without prior written approval by the customer.
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An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option?
a. European style, next business day settlement b. European style, three business days' settlement c. American style, next business day settlement d. American style, three business days' settlement |
d. American style, three business days' settlement
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Long-term anticipation securities (LEAPS) may be exercised on any day prior to expiration (American style). Exercise settlement is in the underlying stock, in three business days.
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The federal tax exemption for interest earned on an industrial revenue bond is NOT available if the:
a. Holder of the bond is a substantial user of the facility b. Issuer does not subscribe to equal opportunity employer standards c. Bonds are not approved by the MSRB d. Underwriter has a control relationship with the issuer |
a. Holder of the bond is a substantial user of the facility
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If the holder of an industrial revenue bond is a substantial user of the facility, then the federal tax exemption on the interest earned does not apply.
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Recently, the federal funds rate has been rising. This may indicate all of the following situations, EXCEPT:
a. Rates for short-term loans have been increasing b. The Federal Reserve may be engaging in matched sales to absorb reserves from the banking system c. Banks will find it more expensive to obtain overnight loans to satisfy a minor deficit in their reserve accounts d. The Federal Reserve is easing credit |
d. The Federal Reserve is easing credit
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The federal funds rate is the rate that one bank charges another bank for overnight borrowing. This borrowing is done when a bank is in need of reserves. If the fed funds rate is steadily rising, it indicates that the Federal Reserve is tightening credit. Therefore, banks may find difficulty in obtaining overnight loans to meet reserve requirements.
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A registered representative is sending an e-mail to all her customers in anticipation of a new product being offered by the firm. If her customers consist of a large group of individual investors with assets from $100,000 to $100,000,000, which of the following statements is TRUE?
a. This would be defined as a correspondence b. This would be defined as an institutional communication c. This would be defined as both a retail and an institutional communication d. This would be defined only as a retail communication |
d. This would be defined only as a retail communication
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FINRA's Communications with the Public Rule defines different types of communication.
• Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. • Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. • Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. • Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). An institutional investor under this rule is any bank, S&L, insurance company, registered investment adviser or investment company (mutual fund), any person with total assets of at least $50 million, government entity, employee benefit plan, any member firm or registered person of the firm, and any person acting solely for any institutional investor. Since the e-mail is being sent to both retail and institutional investors, it is defined as a retail communication. If the communication is made available only to customers with total assets of at least $50 million, then it would be defined as an institutional communication. |
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Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules?
I. An employee of a municipal securities firm may open a new account with another municipal securities firm without the employer being notified II. An employee of a municipal securities firm may open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer III. A bond attorney may open a new account without restriction IV. An officer of a municipal issuer may open a new account without restriction a. I and III only b. II and IV only c. III and IV only d. II, III, and IV only |
d. II, III, and IV only
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MSRB rules only place restrictions on opening an account for an employee of another MSRB member firm. When opening an account for an employee of another MSRB member firm, the employer must be notified and duplicate confirmations of all trades must be sent to the employer.
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Which TWO of the following types of municipal securities does NOT require voter approval?
I. A general obligation bond backed by income taxes II. A special tax bond III. A bond backed by ad valorem taxes IV. A certificate of participation a. I and III b. I and IV c. II and III d. II and IV |
d. II and IV
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A general obligation bond would require voter approval since it is backed by the full faith and credit of the issuing municipality. A bond backed by ad valorem or real estate taxes is a type of general obligation bond. A special tax bond is financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter approval. A certificate of participation (COP) is a revenue bond backed by a lease payment that does not require voter approval.
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Which of the following is NOT considered a don't know (DK) trade?
a. There is a disagreement on the price of the trade b. There is a mismatch on the size of the trade c. There is no record of the trade at one of the firms d. The buyer is suspicious of insider trading |
d. The buyer is suspicious of insider trading
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Don't know (DK) trades occur when the contrabrokers disagree or have conflicting details of a trade. While insider trading is illegal, suspicion of insider trading would not cause a DK notice to be sent.
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Which of the following choices helps the U.S. balance of payments?
a. U.S. corporations building plants abroad b. Lending money to foreigners at high interest rates c. U.S. investment in foreign securities d. Foreign investment in the U.S. |
d. Foreign investment in the U.S.
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Foreign investments in the U.S. will direct money into the country, helping the U.S. balance of payments.
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A corporation announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 7.25% 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 of the following alternatives is MOST advantageous to an existing 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. Redeem the bonds
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When bonds are called for redemption, the bondholder can only redeem the bonds at the callable price or otherwise sell them in the market. The bondholder cannot continue to hold the bonds in anticipation of a better offer or until maturity.
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Which of the following securities will probably have the greatest fluctuation in price when interest rates move up or down?
a. Commercial paper b. Treasury bills c. Treasury notes d. Treasury bonds |
d. Treasury bonds
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Treasury bonds have the longest maturity of the choices listed and will have the greatest fluctuation in price. Since they have the longest maturity, they will be exposed to the risks of the marketplace for the longest period.
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The marketability of a municipal bond would NOT be affected by the:
a. Rating b. Block size c. Maturity date d. Dated date |
d. Dated date
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The dated date of a municipal bond is the date that interest begins to accrue and will not affect its marketability. The marketability of a municipal bond will be affected by the rating it received by either Moody's or Standard and Poor's. The marketability of a municipal bond will also be affected by the block size. A block is considered to be a large quantity of municipal bonds (minimum of $100,000 par value). The maturity of the bond will also affect the marketability of the bond. The closer the bond is to maturity, the more liquid it becomes.
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Municipal securities Dealer A quotes a price for a block of bonds to Dealer B for one hour with a five-minute recall. This means:
a. Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes b. Dealer B may call Dealer A within the one-hour period and demand a decision of Dealer A in five minutes c. Dealer B must take the bonds if he does not call Dealer A back within five minutes after the one-hour quote period has ended d. Dealer A may cancel its quote within the one-hour period by recalling Dealer B within the first five minutes |
a. Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes
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When municipal bonds are offered on a firm basis to Dealer B for one hour with a five-minute recall, the offering dealer, Dealer A, may not offer the bonds to anyone but Dealer B without giving Dealer B the first opportunity to take the bonds. Since the recall period is five minutes, if Dealer A recalls Dealer B, Dealer B then has five minutes to take the bonds or else Dealer A is free to sell the bonds to someone else.
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If an investor had cash and securities in his account, why would the investor write call options against the securities?
a. To hedge his position b. To engage in an arbitrage c. To increase the overall rate of return of the portfolio d. To postpone paying taxes |
c. To increase the overall rate of return of the portfolio
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The purpose of writing calls against securities owned is to increase the overall rate of return of the portfolio. The premium the purchaser of the call pays the writer will be added to whatever dividends the writer was receiving to increase the yield of the portfolio to the writer. If the stock declines in value, the writer will make the premium on the expiring call. However, the investor is still exposed to large downside risk in the stock. Therefore, generating income for the portfolio is a better choice than to hedge.
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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. I, II, III, and IV
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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.
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If an investor was primarily interested in safety of principal, which of the following securities would you LEAST likely recommend?
a. State GO bond b. GNMA security c. Railroad equipment trust bond d. Industrial development revenue bond |
d. Industrial development revenue bond
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Industrial development revenue bonds are secured by a lease agreement with a corporation and are only as secure as the corporation. State GOs are generally of high quality and a GNMA is secured by the U.S. government. The holder of an equipment trust bond has a lien on the equipment that secures the issue.
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When opening a new customer account to trade options, which of the following documents is not needed?
a. A new account agreement b. An options account agreement c. A hypothecation agreement d. The approval for options trading |
c. A hypothecation agreement
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A customer needs all of the items listed except a hypothecation agreement. This is needed to open a margin account and gives the brokerage firm the right to pledge customer securities to a bank as collateral for a loan.
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When opening a new account, what is the order in which the following actions should take place?
I. Obtain approval from the ROP II. Obtain essential facts from the customer III. Obtain a signed options agreement IV. Enter the initial order a. I, II, III, and IV b. I, II, IV, and III c. II, I, III, and IV d. II, I, IV, and III |
d. II, I, IV, and III
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When opening an account, the first step is to obtain the essential facts regarding the investor's investment objectives and financial means. The account is then approved by the manager and the initial order can be entered. The member firm has 15 days to obtain the signed options agreement.
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A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is:
a. $5,000 b. $10,000 c. $15,000 d. $20,000 |
c. $15,000
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The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is $15,000.
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When considering the credit strength of a municipal issuer, which TWO of the following choices are the MOST important?
I. The condition of the local economy II. The current financial status of the U.S. economy III. Money supply figures IV. The general capability of the fiscal officers of the municipality a. I and III b. I and IV c. II and III d. II and IV |
b. I and IV
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The state of the local economy is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt, and this must be understood in the analysis. The current financial status of the U.S. economy is not as important as the local economy in determining the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board, are irrelevant with regard to the credit strength of a municipality.
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A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of:
a. $4,700 b. $5,000 c. $5,300 d. $6,000 |
c. $5,300
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The customer paid $300 for the call option plus $5,000 when he exercised the option at the $50 strike price. The customer's cost basis is, therefore, $5,300. The strike price plus the premium equals the cost basis for a buyer of a call who is exercising the option.
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A customer owns a total of 750 shares of a mutual fund and has invested $22,000 over the last three years. If the fund is currently valued at $31.20, what is the customer's cost basis using the average cost method?
a. $29.33 b. $30.27 c. $31.20 d. $60.53 |
a. $29.33
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To calculate the cost basis using the average cost method, divide the sum of all investments by the total shares owned by the investor. The investor owns 750 shares and the total amount invested is $22,000. Therefore, the average cost is $29.33. The current value of the fund is not relevant.
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Mr. Jones has a margin account in which there is activity each month. The firm sends Mr. Jones an account statement:
a. Each month when there is activity during the month b. At the end of calendar quarter c. Each week when there is activity during the week d. After each trade is executed |
a. Each month when there is activity during the month
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Brokerage firms send customer statements monthly for accounts with activity during that month. For inactive accounts, statements must be sent at least quarterly.
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According to industry regulations, a writer of an ABC March 50 put is considered covered for margin purposes if the writer is long an ABC:
a. March 60 put b. March 30 put c. March 50 call d. March 60 call |
a. March 60 put
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A writer of a put option is covered if he is long another put on the same underlying stock, with an equal or greater exercise price, having the same or later expiration date. The writer is short a put with a $50 strike price. The writer is covered if he is long an ABC March 60 put. The strike price is higher and the expiration date is the same.
This satisfies the requirements for the writer to be covered for margin purposes. If the put option that the writer sold is exercised, he is required to purchase 100 shares of the stock at the strike price of 50. In turn, the writer can exercise the put he purchased and sell the 100 shares at the 60 strike price. |
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An investor who sells 1 GE Dec 50 call and sells 1 GE Dec 40 put has:
a. Created a vertical spread b. Created a horizontal spread c. Sold a straddle d. Sold a combination |
d. Sold a combination
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Selling a call and put on the same security with different strike prices, or different expiration dates, is a short combination.
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Which of the following choices is NOT taxable to the owner of mutual fund shares?
a. Dividends that 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 that was reinvested at net asset value |
c. Fund shares held by the investor, which have appreciated but have not yet been sold
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Owning fund shares that have appreciated in value does 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 a sale and subsequent purchase, and will 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.
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Decisions of the District Business Conduct Committee regarding complaints:
a. Are final if the complaints are between members b. Are final if the complaints are between member firms and their employees c. Can be appealed to the National Adjudicatory Council d. Can be appealed to a Federal District Court |
c. Can be appealed to the National Adjudicatory Council
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Decisions of a Hearing Panel regarding complaints can be appealed to the National Adjudicatory Council. Arbitration decisions are final.
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Which TWO of the following statements are TRUE concerning a company that becomes delisted from the NYSE or Nasdaq?
I. It may be quoted on the OTC Bulletin Board II. It may only be quoted in the OTC Pink market III. Firm quotes would no longer be available IV. Firm quotes may still be available a. I and III b. I and IV c. II and III d. II and IV |
b. I and IV
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A company that fails to meet the maintenance requirements of securities listed on the NYSE or Nasdaq will become delisted. When this occurs, the company may be quoted (but not listed) on the OTC Bulletin Board or in the OTC Pink Market (also called the Pink Sheets). Quotes on the OTCBB or the electronic Pink Sheets generally are firm quotes. Firm quotes obligate the offering dealer to buy or sell the amount quoted.
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A customer may contribute money to an IRA based on which of the following sources?
a. Dividends received from preferred stock b. Taxable alimony c. Interest received from a convertible bond d. Payments received from a variable annuity |
b. Taxable alimony
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Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.
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An investor is in the 35% tax bracket. Which of the following investments would afford him the BEST after-tax yield?
a. A 3.50% general obligation bond b. A 4.10% Treasury bond c. A 5.25% investment-grade corporate bond d. A 5.75% non-investment-grade corporate bond |
d. A 5.75% non-investment-grade corporate bond
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The 3.50% general obligation bond (municipal bond) is exempt from federal income taxes. The other investments are subject to federal income taxes and 35% of the income received would be taxable. The taxable equivalent yield of the 3.50% municipal bond is 5.38%. This is calculated by dividing the 3.50% municipal yield by the complement of the tax bracket which is 65%. The highest (best after-tax yield) would be found in the 5.75% non-investment-grade corporate bond.
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An investor has been following XYZ Corp. for several years and feels that the company is poised for some very profitable years. Since she wants to purchase a security that offers a consistent annual distribution and one that benefits from XYZ deciding to pay a significant cash dividend to its common stockholders, she should consider purchasing:
a. Cumulative preferred stock b. Participating preferred stock c. Collateral secured bond d. Common stock |
b. Participating preferred stock
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Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. A collateral secured bond provides the holder with safety due to it being backed by a specific asset of the issuer; however, the issuer will pay no more than the bond's stated rate of interest. Common stock will pay only cash dividends if they are declared by the company s board of directors.
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An investor has been following XYZ Corp. for several years and feels that the company is poised for some very profitable years. Since she wants to purchase a security that offers a consistent annual distribution and one that benefits from XYZ deciding to pay a significant cash dividend to its common stockholders, she should consider purchasing:
a. Cumulative preferred stock b. Participating preferred stock c. Collateral secured bond d. Common stock |
b. Participating preferred stock
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Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. A collateral secured bond provides the holder with safety due to it being backed by a specific asset of the issuer; however, the issuer will pay no more than the bond's stated rate of interest. Common stock will pay only cash dividends if they are declared by the company s board of directors.
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All of the following choices are characteristics of a Health Savings Account (HSA), EXCEPT:
a. The amount a person may contribute each year is limited b. It is not open to individuals who are enrolled in their company's health insurance plan c. The funds may be invested in mutual funds d. The funds must be used each year and may not be carried over |
d. The funds must be used each year and may not be carried over
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A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. The funds may be invested in mutual funds, although the types of funds may be limited by an HSA trustee (a financial institution). The funds do not need to be used each year and may be carried over to be used in the future. Once you reach age 65, your funds can be withdrawn at any time and are subject only to ordinary income tax. (You avoid the 20% IRS penalty.) However, you may avoid any tax by continuing to use the funds for qualified medical expenses.
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All of the following municipal bond transactions take place in the secondary market, EXCEPT:
a. Submitting an offer to sell bonds to a sinking fund b. A tax swap c. Two municipal securities broker-dealers purchasing a block of bonds jointly d. The placing of a designated order |
d. The placing of a designated order
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All of the choices listed take place in the secondary market except the placing of a designated order. A designated order is an order directed to a syndicate manager by an institutional account designating two or more members of the underwriting account to receive credit for that order. This order is placed directly with the syndicate manager during the order period prior to the release of the bonds for secondary trading.
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When analyzing a general obligation bond, which of the following factors is NOT a positive indicator of the bond's quality?
a. Voter registrations have increased over the last 18 months b. The department of motor vehicles reports that out-of-state drivers have been registering their cars in your state at an increasing rate c. The state increased the toll for the use of the turnpike d. A multiplex cinema, do-it-yourself store, and book-selling chain have all announced new franchises in your community |
c. The state increased the toll for the use of the turnpike
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An increasing population trend and a mixture of diverse businesses (both new and established) are positive demographic indicators that reinforce the quality of general obligation issues. User fees are generally associated with revenue bond issuers.
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A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed?
a. ABC Corp is an investment banking client of the broker-dealer b. The broker-dealer has a 1% or greater beneficial ownership in ABC common stock c. The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds d. The broker-dealer makes a market in ABC common stock |
c. The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds
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The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.
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An investor is looking for a fund that, with little risk to her principal investment, will supplement her current wages. Which of the following funds best suits this investor?
a. A growth fund b. An income fund c. A sector fund d. A no-load fund |
b. An income fund
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A mutual fund investor most interested in current yield (i.e., regular dividend checks) as an investment objective will most likely purchase an income fund. A growth fund invests in companies that are growing rapidly and pay out a small percentage of earnings in dividends. Investors seeking capital gains will most likely purchase a growth fund. A no-load fund is an open-end investment company that does not have a sales charge and whose investment objectives may be income or capital gains. A sector fund is a mutual fund that invests primarily in a particular industry or geographical area, such as the energy or high technology industries.
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What is the maximum allowable percentage that may be sold above the original size of the offering through a Green Shoe option?
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b. 15%
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The overallotment provision of an underwriting agreement may contain a Green Shoe clause that allows the syndicate to increase the number of shares sold by 15% over the original number of shares in the offering.
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