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Series 7

If a customer places an order to buy bonds at 104 net, it indicates that the customer:
Wants to pay a maximum of 104 including any markup or commission
An option that is about to expire will automatically be exercised by the OCC if no instructions are given and if it is in-the-money by at least
One Cent
When an investor sells shares in a mutual fund, he will receive the what price?
the bid price or net asset value
Which TWO of the following events may be reasons for a revenue bond issue to be called?
-There is a change in the tax status of the issuer
-The facility is destroyed by fire
Which of the following statements is TRUE concerning periodic payment variable annuities?
A client’s number of annuity units never changes
What information would NOT need to be disclosed by a broker-dealer in a research report?
The analyst had owned shares in the company one year before writing the report
A person hired by a municipal dealer must be registered:
Before effecting a transaction with a customer
A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site?
I The FINRA logo must be displayed
II.The registered representative’s firm name must be displayed
III.A reference to FINRA membership is permitted
IV. Links to other Web sites are not permitted
II and III
Which TWO of the following statements are TRUE concerning the Securities Act of 1933?

I.Registration provisions apply if the securities beings sold are listed on the NYSE
II. Antifraud provisions do not apply if the securities being sold are listed on the NYSE
III. Registration provisions do not apply to securities issued by a municipality
IV.Antifraud provisions do not apply to securities issued by a municipality

I and III
Which of the following investors would be LEAST suitable for an oil and gas direct participation program (DPP)?
An investor who is concerned about the AMT
Which of the following is NOT one of The Bond Buyer’s indices?
The total of all new issues scheduled to be sold during the next 30 days
The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2/% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The bonds are secured by:
The full faith and credit and no specific collateral of the Barge Towing Corporation
Which of the following securities will MOST likely be subject to a withholding tax?
A Eurodollar bond
A Yankee bond
A banker’s acceptance (BA)
An exchange-traded note (ETN)
A Yankee Bond- Issued by foreign corps and governemnts, dollar – denominated securities
Which TWO of the following statements are TRUE concerning Section 457 plans?
I. These plans are state-sponsored and used to fund higher education expenses
II. These plans are used to fund retirement
III. These plans grow tax-deferred
IV.These plans grow tax-free
These plans are used to fund retirement
These plans grow tax-deferred
A municipal bond swap may be executed to:
Establish a loss for tax purposes
Increase cash flow
Improve maturities
Improve yields
All
A put option may be written in a cash account if the investor:
Has a cash balance in the account equal to the total exercise value of the contract
A woman will be retiring in 2020. She is interested in income and having her principal available at retirement. Of the following municipal bonds, you would recommend a(n):
Aa-rated 8.5% G.O. maturing in 2020
Long-term certificates of deposit (CDs) have which of the following characteristics?
They may be sold prior to maturity at a price that is different from the client’s original cost
A client contacts an RR after reviewing the financial statements of the S-Works Carbon Company. The client is confused since the company paid a cash dividend but had a loss for the last fiscal year. Which of the following statements is TRUE?
The company is permitted to pay a cash dividend even though it had a loss
An investor with an investment objective of speculation wants to purchase a security that will increase by the same percentage as a decline in the S&P 500 Index. Which of the following securities would you recommend?
An inverse exchange-traded fund (ETF)
Which of the following factors is LEAST important when recommending a long-term brokered CD to a client?
The CD was issued by a bank located in a different state from where the client lives
When interest rates are trending upward, the economy will normally be in which phase of the business cycle?
Expansion
Which of the following items is NOT found by reviewing a company’s balance sheet?
The amount of interest paid on the companys bonds outstanding
The stock price of XYZ Corporation has remained stable despite the fact that the company has increased the amount of its dividend. Under these conditions, what would happen to the stock’s current yield?
It would increase
Which of the following statements is NOT TRUE regarding a SEP IRA?
Employees are permitted to make contributions to the account
A registered representative opens an option account for a customer on October 1 and buys 5 ABC November 30 calls at 4. On October 16, the premium of the calls has decreased to 2 and the registered representative has not received a signed options agreement. The registered representative may:
Accept an order to sell the 5 ABC November 30 calls that were previously purchased
Foreign currency spot transactions normally settle in:
Two business days
A Treasury bond has increased in value from 98.4 to 98.8. The bond has increased by:
$1.25 per $1,000 par value

Treasury bonds are quoted in 32nds of a point, and are then calculated as a percentage of the par value ($1,000). The difference between 98.4 and 98.8 is 4/32. One point equals $10, so 4/32 or 1/8 of a point equals $1.25.

Which of the following choices makes a financial commitment in the distribution of a new issue of securities?
The underwriting syndicate
What securities are based on the credit rating of the issuer?
An exchange traded note (ETN)
Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer’s financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs
Which of the following securities is exempt from state taxes?
a.Corporate stock
b. Convertible bonds
c.Federal National Mortgage Association (FNMA) bonds
d. Treasury notes
d. Treasury notes
On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. What is the dollar amount of accrued interest that the investor is required to pay?

$75.55
$208.88
$213.33
$1008.88

b. $208.88

Accrued Interest Formula = (Principal x Rate x Days of Interest) / 360

= ($20,000 x 8% x 47) / 360

= $208.88

Mr. Jones has a margin account in which there is activity each month. The firm sends Mr. Jones an account statement:
Each month when there is activity during the month

Brokerage firms send customer statements monthly for accounts with activity during that month. For inactive accounts, statements must be sent at least quarterly

Which of the following statements is NOT TRUE of treasury stock?
a.It is listed on the company’s balance sheet
b. Treasury stock has no voting rights and does not receive dividends
c. It is outstanding stock that has been repurchased by the corporation
d. Treasury stock has been issued by the U.S. Treasury and was purchased by a corporation
d. Treasury stock has been issued by the U.S. Treasury and was purchased by a corporation

Treasury stock is stock that has been issued and was outstanding but has been repurchased by the company. Treasury stock does not have voting rights nor the right to receive dividends.

On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer: (TWO)
I. Has engaged in a debit spread
II. Has engaged in a credit spread
III. Wants the spread to widen
IV. Wants the spread to narrow
I. Has engaged in a debit spread
III. Wants the spread to widen
A clause in an underwriting agreement that allows an underwriting syndicate to purchase additional shares from the issuer for sale to the public is a(n):
Greenshoe Clause
A customer opens a new margin account and buys 100 shares of XYZ Corporation at $40 per share. She then writes a call option against the position and receives a $2 premium. The customer must deposit cash in the account of:
$1,800
$1,900
$2,000
$2,100
$1,800

The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000). Since the call is covered, there is no margin requirement. The customer received $200 in premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of $1,800.

An investor takes the following position.
Long 1 GHI Nov 65 put
Short 1 GHI Nov 55 put

Which TWO of the following statements are TRUE regarding this position?

I. The investor paid money to create the position
II. The investor received money to create the position
III. The investor is bullish
IV. The investor is bearish

I. The investor paid money to create the position

IV. The investor is bearish

Buyers of municipal bonds would normally NOT include:
Insurance companies
Banks
Defined benefit plans
Mutual funds
Defines benefit plans

A defined benefit plan is a type of pension fund. Pension funds and other tax-deferred accounts would not benefit from the tax exemption provided by municipal bonds. As a result, unless the bonds are taxable and offer yields equivalent to other taxable bonds, pension funds would not include municipal bonds in their portfolio. The exception would be Build America Bonds (BABs), which are taxable municipal bonds.

A sales breakpoint of a mutual fund is:
The minimum dollar amount of a purchase of a mutual fund where a volume discount is given
A NYSE-listed stock closed at $72. The next day the stock is ex-dividend 60 cents. To determine if the stock increased or decreased from the close of trading, the price is based on:
71.40
71.70
72.60
72
71.40

The stock will be reduced by 60 cents. The stock must be reduced in price to entirely cover the dividend. Therefore, the stock will open at 71.40 (72 – .60 = 71.40). If the stock closed at 72.50 that day, it will be quoted as an increase of $1.10 (72.50 – 71.40).

The term marking-to-the-market refers to:
a. A market maker and the securities he trades
b. Adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required
c. The comparison of the market value of an investor’s stock portfolio to the stock market
d. The pledge of securities for the purpose of obtaining a loan
b. Adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required
The penny stock rules would apply under which of the following circumstances?
The stock is quoted on the OTC Bulletin Board

A penny stock, according to SEC rules, is a stock that sells for less than $5.00, that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions.

The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks)
In nonrecommended or unsolicited transactions
In transactions by a broker-dealer that is not a market maker in that security
In transactions by an institutional accredited investor

An investor has sold a stock short. If the present market value is $2.00 per share, the minimum maintenance requirement will be:
50%
$2.50 per share
$2.00 per share
30%
2.50 per share

When selling short securities that have a market value less than $5 per share, a minimum maintenance requirement of $2.50 per share or 100% of the market value, whichever is greater, applies. Since $2.50 a share is greater than $2.00 per share, this is the correct answer.

If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be: (TWO)
An increase in current assets
A decrease in total liabilities
A decrease in stockholders’ equity
An increase in stockholders’ equity
A decrease in total liabilities
An increase in stockholders’ equity
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:
Moderate
Which of the following choices BEST describes Eurodollars?
U.S. dollars on deposit in foreign banks

Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.

A customer sells short 1,000 shares of stock. A few weeks later the company declares a 5% stock dividend. When the customer covers the short sale, the customer will be required to deliver:
50 shares
1,000 shares
1,050 shares
950 shares
1,050 Shares

When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declared a 5% stock dividend. Therefore, a customer who sold short 1,000 shares would be required to deliver 1,050 shares (1,000 shares x 5% = 50 additional shares) when covering the short sale.

Charlene contacts her registered representative to buy an OTC stock. Rather than buying it directly from a market maker, Charlene’s broker-dealer contacts another broker-dealer, who buys it from a market maker creating two levels of transaction fees. This is known as:
Interpositioning
A registered options principal (ROP) must review:
I. Retail communication concerning options
II. General options prospecting letters
III. Option seminar transcripts
IV. Allocation of exercise notices
All
Which of the following terms are synonymous?

Net asset value and offering price
Selling price and bid price
Net asset value and redemption price
Bid price and management fee

Net asset value and redemption price
Which of the following short positions violates SEC rules?
1.A customer short stock that he borrowed from the brokerage firm
2. A customer short and long the same stock at the same time
3. A customer borrowing stock in order to profit from a tender offer
4. A customer short stock while owning bonds convertible into that stock
3. A customer borrowing stock in order to profit from a tender offer
The major disadvantage to a limited partner in a DPP is:
Lack of liquidity
The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered:
At par
At a premium
At a discount
To yield 5 1/2%
At a discount

Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.

An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive:
$10,000
$10,200
$10,300
$10,500
$10,200

When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond x 10 bonds). If the investor were able to sell the bonds at the current price, she would receive $10,300 ($1,030 x 10 bonds). However, the question states that the bonds are called, which means the market price of the bond will gravitate to the call value of $10,200.

An investor owns stock that has increased in value. To protect his profit, he can:
Enter a buy stop order
Enter a sell stop order
Buy put options on the stock
Buy call options on the stock
Enter a sell stop order
Buy put options on the stock
Which of the following bonds has the most interest-rate risk?
30- year treasury STRIP

The bond with the most interest-rate risk or price volatility is the one with the longest maturity and lowest coupon. Zero-coupon bonds would have the most interest-rate risk and a STRIP is a type of zero-coupon bond.

An announcement in The Wall Street Journal states that New York State plans an advance refunding of its 7 1/2% Dormitory Bonds through the issuance of a special $50,000,000 bond issue. This means that:
1.Existing bondholders will receive a new bond with a lower rate of interest
2. Existing bondholders will receive a new bond with a higher rate of interest
3. Proceeds from the sale of a new bond issue will be put in an escrow account to retire the existing bond issue
4. The Dormitory bonds will be convertible into Treasury bonds
3. Proceeds from the sale of a new bond issue will be put in an escrow account to retire the existing bond issue
Which TWO of the following time limitations must be complied with regarding the delivery of a risk disclosure document?
1. A brokerage firm must deliver a risk disclosure document to a customer at the time the account has been approved for options trading
2. A brokerage firm must deliver a risk disclosure document to a customer prior to the time the account has been approved for options trading
3. A brokerage firm must deliver a risk disclosure document to a customer after the account has been approved for options trading
4. A brokerage firm must deliver a risk disclosure document to a customer after the first order has been entered
1.A brokerage firm must deliver a risk disclosure document to a customer at the time the account has been approved for options trading
2. A brokerage firm must deliver a risk disclosure document to a customer prior to the time the account has been approved for options trading
Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded?
5 1/2% callable in 2024 @ 103
6 1/2% callable in 2023 @ 100
7% callable in 2024 @ 103
7 1/2% callable in 2023 @ 100
7 1/2% callable in 2023 @ 100

The most common reason for a municipality to refund an outstanding issue is to save interest costs. If a municipality can borrow money at a lower rate than the outstanding issue, it can use this money to refund the outstanding issue and thus save interest cost. The bonds are selling at a 7.00% yield. The municipality can then expect to borrow new monies at a 7.00% interest rate. The municipality can only save money by refunding an issue with a higher interest rate, 7 1/2%.

To determine what would happen to the coverage of revenue bonds when more bonds are going to be issued in the future, one should examine:
The rate covenants of the bond
Feasibility studies
The refunding procedure of the bond
The additional bonds test
The additional bonds test
The purchase of a new issue prior to settlement with the issuer can BEST be described as a:
1. Subject or workout transaction
2. When-issued transaction
3. Seller’s option contract
4. Violation of the Securities Act of 1933
2. When-issued transaction
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?
Short XYZ stock
Purchase an XYZ put
Purchase an XYZ straddle
Establish an XYZ debit put spread
Purchase an XYZ put

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.

A secondary market exists for:
1. Dealer-placed commercial paper
2. Federal funds
3. Repurchase agreements
4. U.S. savings bonds
dealer-placed commercial paper

A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds

Which of the following advantages is NOT a benefit of owning a real estate investment trust?
1. Stable dividend income
2. The ability to buy and sell shares easily
3. Diversification
4. Protection against rising interest rates
Protection against rising interest rates

Real estate investment trusts (REITs) offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange, offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income earnings securities become more attractive.

A mutual fund buys stock from the portfolio of an insurance company. This is a trade executed in the:
Over-the-counter market
Exchange market
Third market
Fourth market
The fourth market
An individual’s home has a resale value of $500,000 and an assessed value of $200,000. If the tax rate is 10 mills, the property tax is:
$2,000
$5,000
$20,000
$50,000
2,000

Property tax is computed by multiplying the assessed value by the millage rate. A mill equals 0.001 or $1 per $1,000 assessed value. The tax is $2,000 ($200,000 x .001 x 10 mills).

A customer has 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:
$1,000
$2,000
$4,000
$10,000
4,000

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 purchased 10 straddles and paid $400 per straddle for a total of $4,000. (10 straddles x $400 = $4,000.)

A Swiss company that is expecting payment from a customer in U.S. dollars is concerned that the dollar will decline in value. To hedge against a decline in the U.S. dollar, the Swiss company should:
1. Buy Swiss franc puts
2. Buy Swiss franc calls
3.Write Swiss franc calls
4. Write Swiss franc straddles
2. buy swiss franc calls

If the value of the U.S. dollar declines, the value of the Swiss franc will increase. The company should buy Swiss franc calls since it will profit on the calls if the U.S. dollar declines, leading to a Swiss franc increase. The profit on the call could help to offset the loss on the U.S. dollars it is expecting to receive as payment.

When pricing a bond, what information is NOT required?
The coupon rate
The maturity date
The settlement date
The number of bond years
The number of bond yeard
If an ABC July 40 put option is exercised, the writer:
1. Is obligated to deliver 100 shares of ABC stock
2. Is obligated to purchase 100 shares of ABC stock
3.Pays the in-the-money amount
4. Receives the in-the-money amount
2. Is obligated to purchase 100 shares of ABC stock
Which of the following settlement dates does not conform to standard industry procedures?
1. Preferred stock settling in 3 business days
2. Government securities settling the next business day
2. Municipal bonds settling in 3 business days
4. Options settling in 3 business days
4. Options settling in 3 business days
Which of the following positions exposes an investor to the most risk?
A bullish call spread
A bullish put spread
Owning put options
A short straddle
A Short Straddle

A short straddle consists of a short call and a short put, on the same underlying stock, with the same strike price and expiration month. The investor has an unlimited loss potential on the short call leg of the straddle.

An investor writes an uncovered RST May 25 put for a premium of 4. The maximum loss the investor could sustain is:
$2,100
$2,500
$2,900
$3,500
2,100

If RST Corporation’s market price declines to pennies per share, the owner of the put could buy the RST stock for pennies and put it to the writer for $25 per share, or $2,500. This is the price that the writer would be required to pay for the stock. However, since the writer received $400 in premium, the maximum loss he could have will be $2,100 ($2,500 loss – $400 premium = $2,100 loss).

T-bills purchased at the weekly auction will have a settlement date on the:
Next business day
Fifth business day
Monday following the auction
Thursday following the auction
Thursday following the auction
A registered representative receives an order from the president of XYZ Corporation to sell unregistered XYZ shares. The client purchased the shares in a private placement 90 days ago. This order:
1. Will require the filing of Form 144 with the SEC
2. May be executed without any restrictions
3. Must be approved by a principal prior to execution
4. Is a violation of Rule 144 if executed
4. Is a violation of Rule 144 if executed
A customer has a nondiscretionary account at a broker-dealer. The customer received a research report and instructs the registered representative to purchase 500 shares of a specific stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take?
1. Contact the customer and ask her to place a limit order to buy the security
2. Purchase the stock no later than the end of that business day
3. Purchase the stock any day that you think is best
4. Have the order preapproved by a principal and then purchase the stock
2. Purchase the stock no later than the end of that business day
Relative to stock index options, which of the following statements is NOT TRUE?
1. There are options expiring each month
2. If traded, settlement is the next business day
3. If exercised, settlement is in cash in three business days
4. The settlement amount is based on the closing index price on the day of exercise
3. If exercised, settlement is in cash in three business days

When exercised, a stock index option settles in cash on the next business day. (Equity options, if exercised, would settle in three business days.)

A type of order that becomes a market order when a round-lot trades at or through a particular price is called a:
Market order
Limit order
Stop order
Stop-limit order
Stop Order
To diversify a corporate bond portfolio, which of the following factors is NOT a concern?
Coupon
Maturity
Price
Geographic location
Price

To diversify a corporate bond portfolio, which of the following factors is NOT a concern?
Coupon
Maturity
Price
Geographic location

The Federal Reserve Board’s Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims?
Treasury bills
Treasury notes
Treasury bonds
Agency bonds
Treasury Bills

The Federal Reserve Board’s Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board’s aims of influencing the money supply. The securities most often used are Treasury bills.

Rising inflation tends to:
I.Negatively impact the stock market
II.Positively impact the stock market
III.Negatively impact the bond market
IV. Positively impact the bond market
I.Negatively impact the stock market
III.Negatively impact the bond market
A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2038 at 99 1/2% of par value. The yield to maturity on the bonds is:
1. 8%
2. Less than 8 1/2%
3. 8 1/2%
4. Greater than 8 1/2%
4. Greater than 8 1/2%

The 8 1/2% bonds are being offered at a discount at 99 1/2% of their $1,000 par value. An investor who purchased the bonds at the offering (at $995) and held the bonds to maturity will receive the par value of $1,000. The investor will, therefore, have a yield to maturity that is greater than the coupon rate (nominal yield) of 8 1/2%.

A broker-dealer owns 100 shares of ABCO stock, which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base a markup on:
1. The inventory cost of 28
2. The highest bid on the Nasdaq system
3. The lowest offer on the Nasdaq system
4.A price that is fair and reasonable
3. The lowest offer on the Nasdaq system

When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer’s inventory cost).

A buyer of a call option is subject to which TWO of the following choices?
I. Unlimited risk
II. Protection for a short position
III. A position that provides leverage
IV. An obligation to buy stock
II. Protection for a short position
III. A position that provides leverage
Bergen County has issued Build America Bonds to improve its transportation system. Which TWO of the following statements are TRUE concerning these bonds?
I. The bonds are federally tax-free
II. The bonds are federally taxable
III. The issuer will receive a federal tax credit
IV. The issuer will receive a federal reimbursement
II. The bonds are federally taxable
IV. The issuer will receive a federal reimbursement

These are an example of Direct Pay Build America Bonds (BABs). BABs are a type of municipal bond that pays taxable interest but the Treasury will reimburse 35% of the interest paid on the bonds to the issuer, which reduces the cost of borrowing. This would allow municipal issuers to compete with corporate issuers when raising capital.

What is the margin requirement when purchasing options?
20%
30%
50%
100%
100%

When purchasing options, the margin requirement is 100% of the premium.

Which of the following transactions may be executed in a cash account?
Short 100 shares of XYZ stock
Long 500 shares of ABC stock and short 500 shares of ABC stock
Short 10 DEF May 50 call options
Long 5 GHI Jan 15 put options
Long 5 GHI Jan 15 put options

A purchase of options may be transacted in a cash or margin account. Selling short stock and short option positions must be executed in a margin account.

Which TWO of the following taxes would best describe income taxes and estate taxes?
Flat taxes
Graduated taxes
Regressive taxes
Progressive taxes
Graduated Taxes
Progressive Taxes
All of the following groups issue securities, EXCEPT the:
Government National Mortgage Association
Federal National Mortgage Association
Federal Reserve Board
Federal Farm Credit System
The Federal Reserve Board
Your client is president of XYZ Corporation and is selling XYZ shares pursuant to Rule 144. A filing must be made with the SEC:
15 days before the sale
At the time of the sale
30 days after the sale
90 days after the sale
At the time of the sale

The filing must be made at the time of the sale and is effective for 90 days.

James Hendricks wants to open a Coverdell Education IRA for his three-year-old son. Which of the following statements is TRUE?
1. James may contribute up to $2,000 per year
2. At least 50% of the investments in the account must be conservative
3. The account becomes the property of the child upon reaching the age of majority
4. Only parents or grandparents may contribute for the benefit of the minor child up to the age of majority
1. James may contribute up to $2,000 per year
When opening a custodian account for a minor, whose Social Security number should be on the account?
The minors
The minimum equity requirement for a pattern day trader is:
1. $25,000, which the client has five business days to deposit
2. $25,000, which must be deposited before the client may continue day trading
3. Four times the maintenance requirement for the account
4. $2,000 or 100% of the short market value
2. $25,000, which must be deposited before the client may continue day trading
Bud Jones purchased 100 shares of DEF at 20 on June 16 and passed away on July 27 when the market value of DEF was 25. If the 100 shares of DEF are inherited by Mr. Jones’s daughter Mary, what are the tax implications?
1. Mary assumes a cost basis of 20
2. Mary assumes a cost basis of 25
3. The holding period for the stock is short-term
4. The holding period for the stock is long-term
2. Mary assumes a cost basis of 25
4. The holding period for the stock is long-term
A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if:
Interest rates are falling
Interest rates are rising
Interest rates are stable
The yield curve slopes downward
Interest rates are falling
An investor purchases 1 XYZ October 40 put when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum profit the investor can have?
$300
$3,700
$3,800
Unlimited
3,700

XYZ shares could possibly become worthless. The investor can then buy 100 shares for pennies and put (sell) it to the writer for the $40 per share strike price. This equals $4,000 ($40 x 100 shares). The investor’s profit is $4,000 minus the $300 premium paid for the put, which equals $3,700. The $3,700 is the maximum profit the investor can have since the share’s price cannot go lower than zero.

The tax treatment of a business development company is similar to which TWO of the following securities?
A municipal bond
A real estate investment trust
A closed-end investment company
A variable annuity
A real estate investment trust
A closed-end investment company
A customer enters an order for 150 shares of OTC stock. The order:
Must be entered on two separate tickets
Can be entered on one order ticket
Must be entered as a round-lot and an odd-lot
Must be executed through the odd-lot firm
Can be entered on one order ticket
Which of the following persons is normally compensated by receiving a fee based on a percentage of the assets under management?
A broker’s broker
An investment adviser
A designated market maker
An order book officia
An investment advisor
An investor wishes to buy a limited partnership investment that has the goal of capital appreciation without producing currently taxable cash flow. Which of the following choices BEST suits the investor’s needs?
Low income housing
Oil and gas income program
Raw land
Equipment leasing
Raw Land
In a rights offering, an underwriter offers to purchase all the shares the issuing corporation may not be able to sell. This is known as a(n):
Firm-commitment underwriting
Best-efforts underwriting
Standby underwriting
All-or-none underwriting
Standby underwriting
A fidelity bond is:
1. A noncallable municipal bond
2. A nonconvertible corporate bond
3. Insurance purchased by broker-dealers to protect them against fraud
4. Insurance protecting customers in the event of a broker-dealer bankruptcy
3. Insurance purchased by broker-dealers to protect them against fraud
Which TWO of the following statements concerning convertible bonds are TRUE?
1. Coupon rates are usually higher than nonconvertible bonds of the same issuer
2. Convertible bondholders are considered creditors of the corporation
3. Convertible bonds are usually issued by companies with strong credit ratings
4. It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond
2. Convertible bondholders are considered creditors of the corporation
4. It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond
All of the following statements are TRUE concerning private activity bonds, EXCEPT:
1. The interest on these bonds might not be tax-exempt for some investors
2. The interest on these bonds might be subject to the alternative minimum tax
3. The possibility that the bonds might be subject to taxation would be reflected in the yield at which the bond trades
4. These types of municipal bonds are generally GOs
4. These types of municipal bonds are generally GOs
A municipal securities principal must review and approve municipal transactions made with:
-Individuals
-Trust departments
-Commercial bank portfolios
-Casualty insurance companies
All
A limited partner is considered accepted into a limited partnership when the:
– Limited partner submits a completed subscription agreement
-General partner signs and approves the subscription agreement
-Limited partner submits a check to the general partner
-General partner deposits the limited partner’s check in the escrow account
General partner signs and approves the subscription agreement
An investor purchases an ABC Corporation October 50 put and pays a premium of $7. The underlying security declines to $40 per share. For tax purposes, the proceeds of the sale are:
$4,000
$4,300
$4,700
$5,700
4,300

The proceeds of the sale for tax purposes are $4,300 ($5,000 strike price minus the $700 premium paid for the option equals the proceeds of the sale). The cost basis of the stock purchased is $4,000. The customer’s profit is then $300.

Ralph, a New York City resident, sold his apartment for $250,000. He is contemplating purchasing another property within the next 2 to 6 months, but wants to keep the proceeds invested while he is looking. Ralph’s primary goals are preservation of capital, liquidity, and limiting his tax liability. Which of the following securities best meets his objectives?
-A corporate bond fund rated AA
-MBIA-insured revenue bonds
-High-grade preferred stock
-A U.S. government money-market fund
-A U.S. government money-market fund

A U.S. government money-market fund is not only safe, but the income received by Ralph is exempt from state and local taxes. This is not to be confused with a U.S. government bond fund, which may experience loss of capital if interests rates were to rise sharply. The other investments can result in a loss of capital if interest rates rise.

A municipal revenue bond is secured by the revenues of a toll road system showing the following information.
Annual Debt Service $3,000,000
Annual Gross Revenues $6,000,000
Annual Operating and Maintenance Expenses $2,000,000
Based on this information, the annual debt service coverage ratio is:

.667 to 1
1.33 to 1
2 to 1
3 to 1

1.33 to 1

Step 1: Calculate the net revenue for the municipal revenue bond.
Annual Gross Revenues $6,000,000
– Annual O/M Expenses $2,000,000
Net Revenue $4,000,000
Step 2: Divide net revenue of $4,000,000 by the debt service of $3,000,000 to calculate the annual debt service coverage ratio which is 1.33 to 1.

Which of the following formulae is used to determine the total equity in a combined margin account?
LMV + DR – CR – SMV
LMV – DR + SMV – CR
LMV + CR – DR – SMV
LMV – CR – DR + SMV
LMV + CR – DR – SMV

To determine the equity in a combined margin account, take the long market value (LMV) plus the credit balance (CR), then subtract the debit balance (DR) and the short market value (SMV).

MSRB rules require that a municipal securities principal must approve all of the following choices, EXCEPT:

All municipal transactions
Municipal advertising
An official statement sent to customers
Correspondence sent to customers

An official statement sent to customers
An investor reading the newspaper sees that yesterday’s effective federal funds rate was 3.47%. On the previous day, the rate was 3.41%. This information indicates:

1. The average rate charged on overnight loans throughout the country increased
2. The Federal Reserve took measures to inject money into the banking system
3. The Federal Reserve increased the federal funds rate
4. Member banks that needed to obtain overnight loans from the Federal Reserve paid more than the previous day

1. The average rate charged on overnight loans throughout the country increased

The effective federal funds rate is the daily average rate that commercial banks charge throughout the country for overnight loans. It is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate normally signifies that the Fed has taken money out of the banking system

The NYSE Composite Index is composed of:

The common and preferred stocks listed on the NYSE
The common stocks, preferred stocks, and bonds listed on the NYSE
Only the common stocks listed on the NYSE
Preferred stocks and bonds listed on the NYSE

Only the common stocks
An increase in which of the following factors does NOT indicate credit conditions are deteriorating for a municipality?
Bankruptcies
Consumer debt
Bond defaults
Assessed valuations
Consumer Debt
Which one of the following events will NOT result in a profit to an uncovered call writer?

-The price of the underlying security falls below and remains below the exercise price of the option
-The call is exercised and the underlying security price is greater than the exercise price plus the premium received
-The price of the option contract declines
-The option contract expires without being exercised

The call is exercised and the underlying security price is greater than the exercise price plus the premium received
A variable life insurance policy has an AIR of 5%. The separate account recently performed at a 4% rate of return. Which of the following statements BEST describes the effect of this rate of return on the death benefit of the policy?

-The death benefit will increase as long as the rate of return is positive
-The death benefit will decrease to a determined level
-The death benefit will decrease, but not below the guaranteed minimum
-The rate of return of the separate account affects only the cash value, not the death benefit

-The death benefit will decrease, but not below the guaranteed minimum

If the return of the separate account exceeds the AIR, the death benefit will increase. If the return of the separate account is less than the AIR, the death benefit will decrease. However, the death benefit may not decrease below the initial face value of the policy.

The largest deduction generated by a DPP in real estate is:

Depreciation
Depletion
Recapture
Tax credit

Depreciation
An XYZ Corporation convertible bond is selling in the market at $1,248.75. It is convertible at $30. XYZ common stock’s market price is 37.50. The bond has been called at 103. Which of the following activities is the LEAST attractive alternative for a holder of the bond?

-Sell the bond
-Convert to common and sell the common
-Allow the bond to be called
-Convert common stock to a bond

Allow the bond to be called

The holder could sell the bond and receive $1,248.75. If he converted, he would receive 33 1/3 shares ($1,000 par divided by $30 per share conversion feature) with a total value of $1,249.88 (33 1/3 x $37.50). The least attractive a

All of the following government agencies are involved in the housing market, EXCEPT:

FNMA
FHLMC
SBA
GNMA

SBA

The SBA is the Small Business Administration and is not involved in the housing market. The SBA is a federal agency involved in providing financial assistance to small businesses.

A charge to a customer for the collection of dividends, holding of securities, and other services must be:

-Reasonably fair and not discriminate between customers
-No more than 1/2 of 1% of the customer’s free credit balance
-No more than 5% of the value of the securities
-At least 1% of the value of the securities

-Reasonably fair and not discriminate between customers
A broker-dealer has failed because it has a net capital deficiency. Which of the following parties is NOT covered by SIPC?

-A margin account with $300,000 of securities being held in street name
-A customer account with a $70,000 cash balance
-An IRA with securities valued at $400,000 and $100,000 of cash
-A creditor of the broker-dealer who is owed $40,000

-A creditor of the broker-dealer who is owed $40,000
A customer has a significant gain in shares of LRR that she has held for 10 months. If she buys a put option on LRR, which TWO of the following statements are TRUE?

-The customer still has upside potential in the stock
-The holding period on the stock is not affected
-The customer can achieve a long-term gain by holding the put and stock for three months
-The customer has created a position that could reduce a loss

-The customer still has upside potential in the stock
-The customer has created a position that could reduce a loss
Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds?

-To qualify, the municipality may only issue up to $10,000,000 annually
-To qualify, the municipality must issue more than $10,000,000 annually
-Commercial banks are not permitted to purchase this type of security
-Commercial banks are permitted to purchase this type of security

-To qualify, the municipality may only issue up to $10,000,000 annually
-Commercial banks are permitted to purchase this type of security
Broker-dealers are permitted to take part in which TWO of the following actions regarding the sale of mutual fund shares?

-Tell investors to buy mutual funds shortly before a dividend or capital gains distribution is to be paid
-Assign loan value to fully paid shares that have been owned for more than 30 days
-Provide a discount to nonmember broker-dealers when selling them investment company shares
-Continue to compensate retired registered representatives for prior sales if a contract was signed with the registered representative who has retired

-Assign loan value to fully paid shares that have been owned for more than 30 days
-Continue to compensate retired registered representatives for prior sales if a contract was signed with the registered representative who has retired
A customer sells an XYZ April 30 put for $5 and an XYZ April 30 call for $3. If the put is repurchased at $4 and the call is repurchased for $1, the customer will have:

A profit of $300
A loss of $300
A profit of $800
A loss of $800

A profit of $300
An investor owns 280 shares of XYZ Corporation. XYZ Corporation pays a 15-cent quarterly dividend. XYZ Corporation announces a 5-for-4 split. The dividend per share is adjusted to reflect the split. How much will the investor receive in dividends each quarter after the split?

$40.00
$42.00
$52.50
$80.00

$42.00

After the split, the investor owns 350 shares (280 x 5/4 = 1,400, 1,400/4 = 350) and receives $42.00 each quarter (350 shares x $0.12 = $42.00) in dividends. To find the adjusted dividend per share, multiply the inverse of the split by the original dividend of $0.15. Since the dividend is adjusted for the split, the investor receives the same total dividends after the split as before. (280 shares x $0.15 per share = $42.)

During a meeting with a customer away from the broker-dealer, a customer hands a registered representative a handwritten note that objects to the price she received when redeeming mutual fund shares. The customer believes she submitted her redemption request early enough to receive the NAV calculated the same day. Instead, she received the NAV calculated the next business day, which was lower. Which of the following statements is TRUE?

-Since the note was received away from the broker-dealer’s office, it is not considered official business and it can be ignored
-The note is considered a complaint and the RR must give it to his supervisor
-The note is a complaint about an action in which the mutual fund is responsible and should be forwarded directly to the fund
-The RR is responsible for trying to satisfy the customer and should not attempt to make this the responsibility of the broker-dealer by giving the note to a supervisor

-The note is considered a complaint and the RR must give it to his supervisor
What information would NOT be found on a municipal bond confirmation?

-Whether the bonds are subject to the alternative minimum tax (AMT)
-Whether the bonds are subject to state income tax
-Whether the bonds were issued as original issue discount securities
-Whether the bonds are subject to federal income tax

-Whether the bonds are subject to state income tax
An investor purchases stock on Monday, September 15. The settlement date on the purchase is:

Monday, September 15
Thursday, September 18
Monday, September 22
Wednesday, September 24

Thursday, September 18
The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The conversion ratio of the bonds is approximately:

75 to 1
85 to 1
95 to 1
100 to 1

95 to 1

The conversion price is given as $10.50. To find the conversion ratio, divide the par value ($1,000) of the bond by the conversion price of $10.50. This equals a conversion ratio of 95 to 1 ($1,000 divided by $10.50 equals 95).

Regulation NMS modernized the U.S. markets for trading equity securities and prohibited:

-Trading exchange-listed securities over-the-counter
-A broker-dealer from selling a security to a customer from its own inventory
-The execution of a buy order at one market center at a price above the lowest ask price in another market center
-Trading ADRs on U.S. exchanges

-The execution of a buy order at one market center at a price above the lowest ask price in another market center
The department of a brokerage firm that advises a corporation regarding the structure and timing of a future issue of stock, and assists in the underwriting of the securities is the:

-Purchase and sales department
-Reorganization department
-Investment banking department
-Sales and trading department

Investment banking department
ABC Corporation has net income of $10,000,000 and 5,000,000 common shares outstanding. ABC Corporation pays out $1,000,000 in dividends annually. ABC Corporation pays an annual dividend per share of:

$0.10
$0.20
$5.00
$10.00

$0.20

To determine the dividend being paid per share, divide the $1,000,000 in dividends by the 5,000,000 shares of common stock outstanding. $1,000,000 dividends divided by 5,000,000 shares equals $0.20.

Which of the following choices is not a typical characteristic of a 401(k) plan?

Employee contributions are fully and immediately vested
Employers must match employee contributions
An employee’s taxable income is reduced by employee contributions
Employee contributions grow on a tax-deferred basis

Employers must match employee contributions
If an issue of commercial paper is rated P-1 by Moody’s, it is considered:

Speculative
Highest quality
Intermediate quality
On credit watch

Highest quality
A municipal bond is currently trading at 92 and is callable in 10 years at par. What is the effective yield that must be disclosed on a customer’s confirmation?

Yield to call
Yield to maturity
Fixed yield
Current yield

Yield do maturity

The MSRB regulates the yield that must be disclosed on a client’s confirmation. The yield disclosed is the lower of the yield to maturity or yield to call. In other words, the yield to worst. If a bond is callable and trading at a discount, the lower of the two would be the yield to maturity.

An investor who sells a July 50 put and buys a July 60 put on the same stock is establishing a:

Bull spread
Bear spread
Long straddle
Short straddle

Bear Spread

A bear spread always involves buying the higher exercise price and selling the lower exercise price. This applies to both call spreads and put spreads. A bull spread always involves buying the lower exercise price and selling the higher exercise price. This applies to both call spreads and put spreads.

An American company has provided its services to a British consulting firm and is expecting payment from a customer in British pounds. To hedge against an increase in the U.S. dollar, the American company should:

Buy British pound puts
Buy British pound calls
Write British pound calls
Write British pound straddles

Buy British pound puts

If the value of the U.S. dollar increases, the value of the British pound will decrease. The American company should buy British pound puts since it would profit on the puts if the U.S. dollar increased, leading to a decrease in the British pound. The profit on the put could help to offset the loss on the British pounds the American company is expecting to receive as payment.

A customer purchases 10 M Dade Co. Florida 7.50% G.O. bonds at a 9.50 basis. How much interest will she collect each year?

$75
$95
$750
$950

$750

10 M equal’s $10,000 par value of bonds (the symbol M refers to thousands). The coupon rate is 7.50%. Therefore, the annual interest is $750 ($10,000 x 7.50%).

A narrow-based index option may be used to hedge a portfolio of:

Treasury bonds
Money-market securities
Oil company stocks
Diversified blue-chip stocks

Oil company stock
When engaging in a 1035 exchange an individual should be aware that:

-The exchange is a taxable event
-The exchange is not a taxable event but the new annuity may come with additional restrictions
-The exchange is not a taxable event and the policies of the old annuity are remain in place
-The exchange is only permitted if it is unsolicited

-The exchange is not a taxable event but the new annuity may come with additional restrictions
A bond with an 11% coupon is purchased at 103. The maturity of the bond is 20 years. The bond is callable in 10 years at par. The yield will be:

Higher if called
Higher if held to maturity
The same if called or if held to maturity
Determined by the issuer

Higher if held to maturity

If the bond is held to maturity, the investor will be able to amortize the premium over a longer period, thereby realizing a higher yield. If the bond is called in ten years, the premium is amortized over half the time, resulting in a lower yield. A bond purchased at a premium and callable at par will always have a lower yield to call than to maturity. The opposite is true for a bond purchased as a discount callable at par. The yield to maturity will be lower than the yield to call.

All of the following derivatives are created by an issuer of securities, EXCEPT:

Call options
Warrants
Rights
Convertible preferred stock

Call options
A client wants to make sure she does not pay more than $3,000 to execute a spread transaction. The RR should:

-Submit two limit orders
-Submit one limit for the buy side of the transaction and a market order for the sell side
-Submit one order for a net debit of $3,000
-Submit one order for a net credit of $3,000

-Submit one order for a net debit of $3,000

Advanced option strategies such as spreads and straddles should be executed on one order ticket. In order to enable the investor to ensure the total cost, the order should be entered as a net debit, since the client does not want to pay more than $3,000. If both sides of the spread order are entered separately, market volatility may make it impossible to ensure the transaction will be executed at a net debit or credit. The client has the risk that the order will not be executed since it is possible that both sides of the transaction were not able to be filled at the net debit or credit.

Which of the following organizations enforces municipal securities regulations for broker-dealers?
The FRB
The FDIC
FINRA
The MSRB
FINRA
Which of the following indexes or averages is made up of the largest number of stocks?

The Dow Jones Composite Index
The S&P 500 Index
The NYSE Index
The Wilshire Associates Equity Index

The Wilshire Associates Equity Index
A firm that is planning an offering of common stock has not filed a registration statement. Which of the following actions on the part of a registered representative are NOT a violation of the Securities Act of 1933?

-Having the registered representative contact an investment banker at the firm
-Informing a customer that he may receive as many shares as he desires
-Accepting orders for the shares to be offered
-Attempting to obtain indications of interest for the shares to be offered

-Having the registered representative contact an investment banker at the firm
A 65-year-old individual is in need of immediate cash to pay for repairs on his house and takes a lump-sum distribution from a nonqualified variable annuity. This withdrawal will be:

-Partially treated as ordinary income
-Partially treated as capital gain
-Taxed at the investor’s tax bracket
-Taxed at a reduced tax rate

-Partially treated as ordinary income
-Taxed at the investor’s tax bracket
An investor is in the 28% tax bracket. Which of the following investments affords him the BEST tax advantage?

A 5% municipal bond
A 5 3/4% corporate bond
A 6 1/2% preferred stock
A 6 3/4% convertible bond

A 5% municipal bond
A designated market maker places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The designated market maker should adjust the order when the stock sells ex-dividend to:

1,000 shares at $20
1,000 shares at $30
1,500 shares at $20
1,500 shares at $30

1,500 shares at $20

The order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000).

A registered representative is the custodian of a UTMA account, which will be held at another member firm. Which TWO of the following statements are TRUE?

-There is no requirement for the RR to notify the employing firm before opening the account
-There is a requirement for the RR to notify the employing firm before opening the account
-The RR is required to notify the executing firm before opening the account
-The RR is not required to notify the executing firm before opening the account

-There is a requirement for the RR to notify the employing firm before opening the account
-The RR is required to notify the executing firm before opening the account
Which of the following information does NOT have an effect on the credit quality of an airport revenue bond?

Tourism
Debt per capita
Airport traffic
Energy costs

Debt per capita

is used when analyzing a general obligation bond and would not be considered for a revenue issue

A municipal securities principal must approve:

-Memos in response to customer complaints
-The opening of accounts
-Advertisements to be used for a seminar
-Correspondence to customers

All
An investor has the following gains and losses on securities transactions.
20XX . . .
$15,000 loss
$ 6,000 gain

How much of the loss can the investor carry forward into the next year?

$3,000
$4,000
$5,000
$6,000

6,000

The net loss sustained last year was $9,000. Since the investor can deduct $3,000 from ordinary income in one tax year, the remaining $6,000 must be carried forward into the next year.

According to MSRB rules, which of the following situations will cause a broker-dealer to reject the delivery of municipal bonds?

-A legal opinion is attached to, rather than imprinted on, the bonds
-Registered bonds are expected and delivered with proper endorsement
-Bearer bonds are delivered in $5,000 denominations
-The bonds have been called by the issuer

-The bonds have been called by the issuer

Good delivery for municipal bonds, unless otherwise specified, requires delivery of bonds that have not been called and have an imprinted or attached legal opinion

A transaction for a stock that is not DTCC eligible, settles on a regular-way basis. This means that settlement occurs:

In three business days
In five business days
At the buyer’s premises
At the seller’s premises

In three business days
At the buyer’s premises
ABC Corporation has issued two $1,000 par value bonds with the same coupon rate, one paying interest annually and the other paying interest semiannually. If both bonds are held to maturity in 10 years, the bond paying interest annually will have a total return that is:

-Less than the bond paying interest semiannually
-More than the bond paying interest semiannually
-The same as the bond paying interest semiannually
-Two times greater than the bond paying interest semiannually

-Less than the bond paying interest semiannually
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT:

-Interest rates are set at specified intervals
-They are often issued by municipalities
-They are long-term securities with short-term trading features
-They have a put feature allowing the holder to redeem the security at par

-They have a put feature allowing the holder to redeem the security at par

Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.

Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of:

$66
$660
$91.88
$918.75

$660

A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.

A customer has a restricted margin account with a debit balance of $7,500. The account is credited with $1,600 in cash dividends and debited with interest charges of $50. The debit balance after the adjustments is:

$5,900
$5,950
$6,000
$6,050

$5,950

The debit balance is reduced from $7,500 to $5,900 when the cash dividends of $1,600 are credited to the account ($7,500 – $1,600 = $5,900). Adding interest charges of $50 to the debit balance results in a final debit balance after adjustments of $5,950 ($5,900 + $50 interest charges = $5,950).

In easy money periods, bonds of similar quality generally will have:

– Short-term yields lower than long-term yields
– Long-term yields lower than short-term yields
– Both short-term and long-term yields below normal
– Both short-term and long-term yields higher than normal

– Short-term yields lower than long-term yields
– Both short-term and long-term yields below normal
Which of the following indicators is bullish?

-A breakout below a support level
-The bottom of a saucer pattern
-The top of an inverse saucer pattern
-A decrease in the amount of short interest

-The bottom of a saucer pattern

A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator

Stagflation is best defined as a period where the economy is experiencing which TWO of the following events?

Inflation for a long period
Deflation for a long period
Low unemployment
High unemployment

Inflation for a long period
High unemployment
Which of the following statements is NOT TRUE about exchange-traded notes (ETNs)?

-ETNs generally pay a fixed coupon rate
-ETNs may be sold at any time in the secondary markets or held until maturity
-ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note
-If the issuer’s financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs

-ETNs generally pay a fixed coupon rate
Which of the following corporations will be LEAST affected by an increase in interest rates?

A manufacturing company
A utility company
A cosmetics company
An automotive company

A cosmetics company
XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates are not attractive from its viewpoint, the company knows that interest rates could drop suddenly. The company would like to be ready to sell the bonds quickly. It would also like the bonds to be as liquid as possible in order to attract investors. Which of the following choices is most appropriate for its needs?

-A private placement under Regulation D
-An intrastate offering under Rule 147
-A traditional registration statement
-A shelf registration under Rule 415

-A shelf registration under Rule 415
A customer entered a GTC sell stop order for GM at $35. GM was selling at $38 when the order was entered. GM sells ex-dividend by the amount of the dividend which is $1.60. The customer’s order will appear on the designated market maker’s book after the stock goes ex-dividend as:

33.40
35
36.40
38

33.40

All GTC orders that are entered below the current market on the designated market maker’s (DMM) book (buy limit, sell stop, and sell stop-limit orders) will be reduced by the amount of the dividend when the stock sells ex-dividend. The stock will always be reduced by an amount to cover the dividend entirely. The dividend is $1.60, so the order will be reduced 1.60, which will reduce the stop price on the order to 33.40.

A municipal bond backed by an insurance company has gone into default. The insurance carrier will provide:

-Immediate payment of interest and principal
-Principal payment at maturity only
-Timely payment of principal and interest
-Accelerated principal only

-Timely payment of principal and interest
In August, an investor sells an uncovered listed option and receives a $1,100 premium. The following February, the customer makes a closing purchase transaction at 3. The result of the transaction is:

A capital gain of $800
A capital loss of $800
Ordinary income of $800
A nontaxable event

A capital gain of $800

The investor made an $800 profit on the closing transaction (sale at $1,100 and purchase at $300). The profit is treated as a capital gain in the year the transaction is closed out.

Joanna, a client of yours, anticipates that the value of the U.S. dollar is weakening in relation to the euro and decides to purchase 10 March 115 euro call options at 1.30 when the spot price is 115.55. The contract size of each euro contract is 10,000. The total time value paid by Joanna for the 10 contracts is:

$130
$550
$750
$955

$750

Time value is calculated by taking the difference between an option’s premium and its intrinsic value. The euro call has a premium of 1.30 and an intrinsic value of .55. (The intrinsic value is the difference between the higher spot price [115.55] and the lower strike price of the call [115]). This results in a .75 time value. The total time value is: $.0075 x 10,000 x 10 options = $750

Which of the following statements is TRUE concerning reverse convertible securities?

-An investor will receive a coupon rate below prevailing market rates
-An investor is anticipating a decrease in the value of the underlying asset
-They would be suitable for an investor who wants to own shares of the underlying asset
-The investor is anticipating that the price of the underlying asset would be above the knock-in value

-The investor is anticipating that the price of the underlying asset would be above the knock-in value

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 her principal (the most beneficial option).

A corporation purchases new machinery using cash. Which of the following choices are results of this transaction?

Working capital is reduced
Working capital remains the same
Total assets are reduced
Total assets remain the same

Working capital is reduced
Total assets remain the same

-When purchasing machinery with cash, current assets (cash) are reduced and fixed assets (machinery) are increased by the same amount. Overall, total assets do not change. Since total assets (TA) and total liabilities (TL) remain the same, stockholders’ equity (TA – TL) does not change. Working capital (current assets minus current liabilities) is reduced since current assets are reduced.

An investor purchased a $10,000 Treasury bond that has an 8% coupon and matures 11-1-36. He purchased the bond on Monday, September 10, 201X for regular-way settlement. He sold the bonds on February 11 of the next year for a cash settlement. What amount of interest income was taxable in 201X?

$108.50
$245.50
$335.34
$400.00

$108.50

When the investor purchased the bond on September 10, he paid the seller accrued interest from the last interest payment date, up to but not including the settlement date of September 11. The last interest payment date was May 1. The buyer, therefore, owed the seller for a total of 133 days of accrued interest (May = 31 days, June = 30 days, July = 31 days, August = 31 days, September = 10 days). To determine the dollar amount paid, multiply the annual interest payment of $800 by the portion of the year in question:

$800 x 133/365 = $291.50

This means that when the buyer received his $400 semiannual interest payment on November 1, $291.50 represented the amount he paid to the seller and $108.50 represented interest income. Only the interest income of $108.50 received that year is taxable to the investor.

An investor is expecting a sharp decline in interest rates in the near future. To capitalize on this situation, the investor should buy:

Premium bonds with short maturities
Premium bonds with long maturities
Discount bonds with short maturities
Discount bonds with long maturities

Discount bonds with long maturities

Long-term bond prices are more volatile than short-term bond prices. Discount bond prices are more volatile than premium bond prices. If the investor expects interest rates (yields) to decline, she is anticipating rising bond prices. The bonds that will rise (fluctuate) the most are long-term, discount bonds.

XYZ Corporation has 2,000,000 shares of common stock authorized. The company has issued 1,000,000 common shares of which 200,000 shares are treasury stock. The company has earnings of $2.00 per share. The XYZ Corporation has repurchased:

200,000 shares
500,000 shares
800,000 shares
1,000,000 shares

200,000 shares

XYZ corporation has repurchased 200,000 shares. This is known as treasury stock. Treasury stock is previously outstanding stock that has been repurchased by a corporation.

A registered representative who fraudulently violates an MSRB rule can be disciplined by which TWO of the following entities?

The MSRB
FINRA
Nasdaq
The SEC

FINRA
The SEC
Relative to a convertible bond, which of the following choices will produce a desirable arbitrage situation?

-The stock is at parity with the bond
-The stock is at a premium to parity and the bond is trading at par
-The stock is at a discount to parity and the bond is trading at par
-The yield on the bond equals the yield on the stock

-The stock is at a premium to parity and the bond is trading at par

An arbitrage situation occurs when there is a price difference in comparable securities. If the stock is selling above parity, the value of the stock received from converting the bond is more than the value of the bond. An investor could sell the stock short and buy the bond, and then convert the bond and use the stock to cover the short position. For example, a bond convertible into 25 shares is trading at 104 and the stock is selling at $42. If an investor sold 25 shares short at $42 (equaling $1,050), that would be worth more than the value of the bond ($1,040).

The economic theory stating that government intervention in the marketplace is necessary for controlling economic growth is known as:

Supply-side economics
Monetary theory
Keynesian theory
The Dow Theory

Keynesian theory
All of the following choices are benefits of a limited partnership, EXCEPT:

Limited liability
Recapture
Flow-through of income and expense
Tax credits

Recapture

Recapture is a situation where tax benefits previously taken should be paid back to the government. This is obviously not a benefit of a limited partnership.

Which of the following municipal entities would NOT issue overlapping debt?

A park district
A library district
A school district
A turnpike authority

A turnpike authority

Overlapping debt involves only general obligation borrowing. A turnpike authority would typically issue only revenue bonds

Volume and holding-period restrictions do NOT apply to the resale of private placements when:

-Purchasers’ representatives assist investors
-Both parties are accredited investors
-The transaction is initiated by a registered principal
-The purchaser is a qualified institutional buyer

-The purchaser is a qualified institutional buyer

Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets.

SPDR is considered a type of:

-Exchange-traded fund
-Index option
-World currency option
-Mutual fund

-Exchange-traded fund

Standard & Poor’s Depositary Receipt (SPDR) is a type of exchange-traded fund (ETF). It can be used to refer to a specific exchange-traded fund that tracks the S&P 500 or a group of ETFs.

The Daily Bond Buyer’s 30-Day Visible Supply includes:

-Competitive municipal bond issues
-Auction rate securities
-Negotiated municipal bond issues
-Tax anticipation notes

-Competitive municipal bond issues
-Negotiated municipal bond issues
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 growth fund
An income fund
A sector fund
A no-load fund

An income fund

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

All of the following documents are needed to open a new discretionary margin account, EXCEPT a:

New account form
Basic customer margin agreement
Trust agreement
Power of attorney

Trust agreement
A customer wishes to establish a tax loss and sells 100 shares of XYZ Corporation. The loss would not be allowed if the customer, within 30 days:

Bought an XYZ Corporation put
Sold an XYZ Corporation straddle
Bought an XYZ Corporation call
Sold an XYZ Corporation call

Bought an XYZ Corporation call

The IRS will not allow the loss if the same security or any security convertible into the same security is repurchased within 30 days of the sale. The customer must wait until the 31st day to buy back the security or its equivalent. In this example, the only choice given that could be converted into 100 shares of XYZ Corporation would be a call on XYZ Corporation. The loss would not be allowed if the customer, within 30 days, bought an XYZ Corporation call. This is known as a wash sale

Alan and Marie Johnson have one child and have just purchased a home. The Johnsons count on Marie’s regular income from her medical practice to pay their mortgage and other regular bills. Alan’s irregular income from the sale of his sculptures provides investment and discretionary income. The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan’s income. Which of the following types of insurance is MOST appropriate for the Johnsons?

Whole life insurance
Variable life insurance
Universal life insurance
Variable universal life insurance

Variable universal life insurance

Universal life insurance will allow the Johnsons to vary their premiums based on current income levels and insurance requirements, while variable life insurance will provide returns based on the performance of a separate account. A combination of the two types, called variable universal life or flexible premium variable life, is most appropriate.

A customer’s margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. The equity in the account is:

$6,000
$7,000
$8,000
$14,000

$7,000

The equity in a long margin account equals market value minus the debit balance. The equity equals $7,000 ($15,000 – $8,000). SMA does not enter into the calculation of equity.

An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should NOT recommend which of the following municipal securities?

A variable-rate demand obligation (VRDO)
An auction-rate security (ARS)
A tax-anticipation note (TAN)
A bond anticipation note (BAN)

An auction-rate security (ARS)

A VRDO and an ARS are both long-term securities with short-term trading features. A VRDO has a put feature that permits the holder to sell the securities back to the issuer or third party. An auction rate security (ARS) does not have this feature and, if the auction fails, the investor may not have immediate access to his funds. TANs and BANs are short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market

A 4.65% New York City GO bond matures in 20 years. The bond is callable in 8 years at 103. Which of the following statements is TRUE?

-The investor has 3 years of call protection
-The issuer must pay investors an 8-point call premium to exercise the call privilege on the bonds
-The investor will receive less for the bond if it is called versus holding the bond to maturity
-The issuer may exercise the call provision anytime after the 8th year

-The issuer may exercise the call provision anytime after the 8th year

The call premium of 3 points ($30 per bond) refers to the amount above par value which the issuer must pay the owner of the bond when the bond is called. Issuers usually call outstanding bonds when interest rates decline, and they are able to issue new bonds at lower rates of interest. The bond has 8 years of call protection. The issuer would need to make an outlay of cash to call back the bonds, but would save money because of the lower rate of interest the issuer would pay on the new bonds. A call provision is exercised by an issuer and not the bondholder.

The 5% Markup Policy applies to:
-A primary distribution (new issue)
-A registered secondary distribution requiring a prospectus
-Securities quoted on Nasdaq
-Municipal securities
-Securities quoted on Nasdaq

The 5% Markup Policy does not apply when a security is being issued with a prospectus or for municipal securities. In this example, a prospectus would be required for a primary distribution as well as a registered secondary distribution. Securities quoted on Nasdaq would be the only choice given for which the 5% guideline would apply.

A designated market maker (DMM) may not accept which of the following orders?

-Not-held order
-Market order
-Good-’til-cancelled (open) order
-Day order

-Not-held order

A designated market maker (formerly known as a specialist) may accept all of the orders listed except a not-held order, which allows a floor broker to use discretion in executing an order. If the question asked which orders may be accepted and placed on his book, the answer would be open (GTC) and day orders only. A DMM may accept a market order but must execute it immediately and may not place it in his book.

In the Interbank market, foreign currency transactions:

-May settle on a spot or forward basis
-Occur on exchanges throughout the world
-Are regulated by the SEC
-Are reported on the Nasdaq system

-May settle on a spot or forward basis

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.

A high put/call ratio would MOST likely be associated with a(n):

-Bullish indicator
-Bearish indicator
-Indicator that the market will trade within a narrow range
-Indicator that the trading volume will be increasing

Bullish Indicator

The put/call ratio is a technical market indicator and is found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course and turn bullish. The opposite is true for a low put/call ratio, which is viewed as a bearish indicator.

On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor’s cost basis for the stock purchased on March 10 is:

24
27
30
31

30

When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor’s cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.

Who may not trade on the floor of the NYSE?

An independent broker
A designated market maker
An institutional block trader
A floor trader

An institutional block trader
An investor is short 100 shares of QRS stock at $25 per share, and sells one QRS July 25 put at 2. The investor will make money in all of the following situations, EXCEPT:

-The price of QRS stock remains at $25 per share
-The price of QRS stock rises to $30 per share
-QRS files for bankruptcy and the stock is now worthless
-The July 25 put expires worthless

-The price of QRS stock rises to $30 per share

The investor is bearish on the stock, and has taken in additional income by selling a put. By selling the stock and the put, the investor has taken in a total of $27 per share. A profit will be realized as long as the stock price remains below $27 per share. But, since the hedge is limited to the amount of the premium, the investor’s maximum loss is still unlimited.

An investor sells short 1,000 shares of JonCo stock at 3.50. The customer must deposit:

$1,750
$2,000
$2,500
$3,500

$3,500

The required equity for a short sale where the stock is less than $5 per share is the greater of $2.50 per share or 100% of the market value. An investor selling 1,000 shares of JonCo stock short must deposit $3,500 because the market value (1,000 shares x $3.50) is greater than $2.50 per share (1,000 shares x $2.50).

Relative to a sales tax, which TWO of the following statements are TRUE?

It is a progressive tax
It is a regressive tax
It affects low income individuals the most
It affects all individuals equally

It is a regressive tax
It affects low income individuals the most
Who enacts fiscal policy?

The Federal Reserve Board
The Comptroller of the Currency
The FDIC
Congress

Congress
A customer without a discretionary account gives a registered representative the following verbal instructions: Buy 1,000 shares of General Electric whenever you think the price is right. Under current regulations:

-The order may be executed by the RR only on the same trading day
-The order must be marked discretionary and approved by a branch manager
-The order may be executed by the RR on any trading day
-The RR is not permitted to accept this type of order

-The order may be executed by the RR only on the same trading day
Which TWO of the following statements are TRUE relating to the notes issued by the Federal Farm Credit Banks Consolidated System?

They are issued at a discount
They are issued at par
They are interest-bearing
They are non-interest-bearing

They are issued at a discount
They are non-interest-bearing
The tranche with the longest maturity and, therefore, the last to receive interest and principal payments within a CMO, is known as the:

PAC tranche
Z-tranche
Supersinker
Companion tranche

Z-tranche

The separate classes of a CMO are known as tranches. The longest maturity is frequently called the Z-tranche or the accrual bond, and does not receive interest or principal payments until the shorter maturing tranches have been retired.

By buying a put option, an investor:

I. Can avoid selling a security for a large capital gain and yet participate in additional gains if the security continues to increase in price
II. Can avoid selling a security for a large capital gain and be assured of selling the security at the strike price during the term of the option
III. Can protect a profit on his current stock position

All

If investors are long stock, they can lock in an existing profit, or protect themselves against a market decline, by buying a put. If the market price continues to rise, investors will realize an additional profit, minus the premium paid for the put. For example, an investor owns stock that has a current market value of $60 and buys a July 60 put for 3. If the market price advances to $70, there will be an additional profit of $700 ($1,000 increase in profit minus $300 premium).

The investor can provide protection against a loss by using a put. For example, if the stock in the preceding example dropped to $40, the investor would exercise the put and sell stock at $60. The entire cost would be the premium of $300.

Before accepting a DVP order from a customer, a broker-dealer must:

-Notify FINRA
-Obtain the name of the customer’s agent from the customer
-Receive approval for the trade from the contrabroker
-Notify the appropriate banking regulator

-Obtain the name of the customer’s agent from the customer

Before accepting a DVP (delivery versus payment) or RVP (receipt versus payment) order from a customer, a broker-dealer must receive the name of the customer’s agent and the customer’s account number. The order ticket must be marked DVP or RVP.

Which TWO of the following statements are TRUE about a divided account?

-It is called a Western account
-It is called an Eastern account
-Each member is responsible for the unsold bonds based on the member’s original participation
-Each member is liable only for its own participation in the syndicate

-It is called a Western account
-Each member is liable only for its own participation in the syndicate

In a divided account (Western account), the member is responsible for its own participation in the syndicate. If any bonds remain unsold, it is the responsibility of that member. In an undivided or Eastern account, any unsold bonds are the responsibility of the entire syndicate. Each member would then be liable for the same proportion as his original participation.

Why is the maturity of commercial paper 270 days or less?

-It coincides with the historical 9-month business cycle
-It is an attractive alternative to 6-month Treasury bills
-Short-term corporate debt of 270 days or less is exempt from registration
-It may be purchased by noninstitutional investors

-Short-term corporate debt of 270 days or less is exempt from registration
Mr. Blue’s margin account has a market value of $20,000 and a debit balance of $9,000. If he purchases $2,000 of options, he will need to deposit:

0
$1,000
$2,000
$3,000

$1,000

The margin requirement when purchasing options is 100% of the purchase price (premium). Since the purchase price of the options is $2,000, Mr. Blue may use the $1,000 SMA and will be required to deposit an additional $1,000. The SMA is found by subtracting the required equity, $10,000 ($20,000 x 50%) from the current equity in the account ($11,000).

If a customer is short RST call options, what other position would be considered when examining position limits?

Long RST calls
Long RST puts
Short RST puts
Long ABC puts

Long RST puts

If the customer is short RST calls, he anticipates that the market price of RST stock will decline. Since he is bearish on the stock, he could also be long puts on RST. This is considered on the same side of the market.

Someone who wishes to hedge a portfolio of preferred stocks will:

Buy yield-based puts
Buy yield-based calls
Write a yield-based straddle
Write a yield-based combination

Buy yield-based calls

The prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. Therefore, if the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based calls (which are yield-based options) increase in value when interest rates rise, also creating a viable hedge.

A corporation’s shareholders must vote for:

Cash dividends
Stock dividends
Stock splits
Stopping dividends

Stock Splits
Which of the following institutions does NOT issue securities?

The Federal Home Loan Bank
The Federal Farm Credit Bank
The Federal Reserve Board
The Federal National Mortgage Association

The Federal Reserve Board
Which TWO of the following choices are methods of underwriting municipal securities?

Standby
Negotiated
Competitive
Fill-or-kill

Negotiated
Competitive
Which TWO of the following securities are typically sold at a discount?

TIPS
Treasury bills
Bankers’ acceptances
Collateralized mortgage obligations

Treasury bills
Bankers’ acceptances
An underwriting syndicate that offered a new issue at $21 could stabilize the offering at which TWO of the following prices?

$20.90
$21.01
$21.20
$20.20

$20.90
$20.20
Which TWO of the following choices are found in a municipality’s official statement?

Project feasibility
Amount of good faith deposit
Financial statements and audits
Expenses to be borne by the purchaser or issuer

Project feasibility
Financial statements and audits
Which TWO of the following statements are TRUE concerning a company that becomes delisted from the NYSE or Nasdaq?

-It may be quoted on the OTC Bulletin Board
-It may only be quoted in the OTC Pink market
-Firm quotes would no longer be available
-Firm quotes may still be available

-It may be quoted on the OTC Bulletin Board
-Firm quotes may still be available

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.

The market value of a margin account is $12,000. The debit balance is $6,000. A cash dividend of $100 is credited to the account. What is the new debit balance?

$5,900
$5,950
$6,000
$6,100

$5,900

When a cash dividend is paid, it reduces the debit balance. The entire cash dividend of $100 will be allocated to reduce the debit balance of $6,000. The new debit balance is $5,900.

How to find the sales charge of a fund
The sales charge of the OCEAN Fund is the difference between the bid price of $5.25 and the offer price of $5.50, equals $.25 ($5.50 – $5.25 = $.25). The sales charge is always expressed as a percentage of the offering price. The sales charge divided by the offering price of $5.50 equals a sales charge for OCEAN Fund of 4.5% ($.25 sales charge divided by the $5.50 offering price).
A client sells short 1,000 shares of KPL at $46 a share. Fourteen months later the client covers the short and on the same day delivers the stock to close out the short position at $35 a share. For tax purposes, the client will report:

-A short-term capital gain
-A long-term capital gain
-Neither a gain nor a loss since the trade involved a short sale
-A short-term capital loss

-A short-term capital gain

The gain or loss on a short sale is typically treated as a short-term capital gain or loss, since a holding period for the security is not established. The customer closed out the short position the same day, so the holding period was less than one day. In this example, the client has a short-term capital gain taxable in the year the short sale was covered and the stock was delivered.

The market price of which of the following types of stock is most affected by swings in the interest-rate cycle?

Software companies
Financial service companies
Clothing retailing companies
Soft drink companies

Financial service companies
A customer owns stock of a corporation that has declared a $1 dividend to holders of record Monday, December 22. If the customer wishes to sell the stock but still be entitled to the dividend, he should sell the stock on:

-Wednesday, December 17, regular-way settlement
-Thursday, December 18, regular-way settlement
-Monday, December 22, cash settlement
-Tuesday, December 23, cash settlement

-Thursday, December 18, regular-way settlement
-Tuesday, December 23, cash settlement
A corporation will be considered in default if it does not pay interest on all of the following bonds, EXCEPT a(n):

Second mortgage bond
Debenture
Subordinated debenture
Income bond

Income Bond
A customer wishes to open an account with a brokerage firm to trade options. The customer provides all the necessary new account information required but refuses to provide financial information. The brokerage firm:

-May not open the account under any circumstances

-Must record the customer’s refusal on its records and may open the account with the approval of the Options Clearing Corporation only

-Must record the customer’s refusal on its records and use whatever information it can obtain on its own in determining whether it should accept the account for options trading

-May open the account without restrictions but requires the customer to sign a waiver

-Must record the customer’s refusal on its records and use whatever information it can obtain on its own in determining whether it should accept the account for options trading
A common shareholder is not entitled to:

Vote for the board of directors
Receive dividends if voted for by the board of directors
Give or sell shares to anyone she wishes
Appoint officers of the corporation

Appoint officers of the corporation
A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should:

Buy 5 bonds
Buy 100 shares of stock
Sell 5 bonds short
Sell 100 shares of stock short

Buy 5 bonds
Sell 100 shares of stock short
When purchasing stock, a customer will pay the ___ price. A customer selling stock will receive the ___price.
When purchasing stock, a customer will pay the ask (offer) price. A customer selling stock will receive the bid price.
Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds?

User charges
Rental and lease payments
The federal funds rate
Concessions and fees

The federal funds rate
XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates are not attractive from its viewpoint, the company knows that interest rates could drop suddenly. The company would like to be ready to sell the bonds quickly. It would also like the bonds to be as liquid as possible in order to attract investors. Which of the following choices is most appropriate for its needs?

-A private placement under Regulation D
-An intrastate offering under Rule 147
-A traditional registration statement
-A shelf registration under Rule 415

-A shelf registration under Rule 415
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.
A sell stop order most likely will be entered by a technical analyst or chartist:

Below a support level for the stock
Above a resistance level for the stock
Below a previous low for the stock
To take advantage of a rising market

Below a support level for the stock

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.

An investor is a limited partner in a direct participation program that the IRS has determined to be abusive. This investor:

-Will lose his entire investment
-May be subject to pay back taxes as well as penalties and interest
-Will escape all adverse tax consequences due to his limited status
-Will be forbidden by the IRS to invest in any other limited partnerships

-May be subject to pay back taxes as well as penalties and interest
Which of the following statements is TRUE concerning periodic payment variable annuities?

A client’s number of annuity units never changes
A client’s number of accumulation units never changes
Annuity contracts never have a beneficiary
The monthly payout is fixed by the inflation index

A client’s number of annuity units never changes
A municipal securities broker’s broker will complete transactions for a:(TWO)
Retail customer
Dealer bank
Municipality
Municipal broker-dealer
Dealer bank
Municipal broker-dealer
Municipal term bond quotes are based on:

Yield to maturity
Current yield
Nominal yield
Dollar price

Dollar Price
Which of the following political contributions made by a municipal finance professional will NOT violate the provisions of the MSRB Rule G-37?

$100 to a candidate for whom you may vote
$100 to a candidate for whom you may not vote
$500 to a candidate for whom you may vote
$500 to a candidate for whom you may not vote

$100 to a candidate for whom you may vote
When purchasing a straddle, an investor’s maximum profit is:
The premium
The strike price minus the premium
Limited to the narrowing of the spread
Unlimited
Unlimited
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:

Cancel the trade
Pay for the stock himself with a principal’s approval
Transfer the order to a margin account
Request an extension

Request an extension
Taxable income normally includes:

The interest on municipal bonds issued in the state in which the taxpayer lives
The taxpayer’s annual 401(k) contributions
Reinvested dividends paid on a mutual fund investment
Any unrealized capital appreciation on stocks that the taxpayer owns

Reinvested dividends paid on a mutual fund investment
In a direct participation program, the point at which revenues begin to exceed deductions is known as:

The cash-on-cash return
The maximum cash flow
The crossover point
Phantom income

The crossover point
Which of the following objectives is the least suitable reason for investing in a mutual fund?

Diversification
Professional management
Short-term trading
Liquidity

Short-term trading
A high net worth investor seeking safety of principal would MOST likely invest in which of the following securities?

High-grade general obligation bonds
High-yield corporate bonds
Low-grade general obligation bonds
High-yield revenue bonds

High-grade general obligation bonds
Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend?

A GTC order to sell 100 XYZ at $50 stop
A GTC order to sell 100 XYZ at $50 stop-limit
A GTC order to buy 100 XYZ at $50 stop
A GTC order to buy 100 XYZ at $50 stop-limit

A GTC order to sell 100 XYZ at $50 stop
A GTC order to sell 100 XYZ at $50 stop-limit
MSRB rules state that subject or nominal quotes may be given for:

Revenue bonds only
General obligation bonds only
Informational purposes
Municipal notes only

Informational purposes
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?

The dividend received is treated as a return of capital
The taxes paid may be used as a credit
The dividend paid is exempt from taxes
The taxes paid may be used as a deduction

The taxes paid may be used as a credit
The taxes paid may be used as a deduction
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:

$90,000,000
$7,000,000
$5,000,000
$4,500,000

$90,000,000

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.

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?

80% stocks, 20% bonds
60% stocks, 40% bonds
50% stocks, 50% bonds
30% stocks, 70% bonds

80% stocks, 20% bonds
According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?

-The name of the beneficiary for the customer’s account
-Whether the customer is subject to IRS backup withholding rules
-A written acknowledgment that the customer has received the fund’s prospectus
-The name of the RR responsible for the account and the manager who approved the account

-The name of the RR responsible for the account and the manager who approved the account

Under industry rules, the following items MUST be obtained when opening an account.

The customer’s name and residence
Whether the customer is of legal age
The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account
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.

An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT:

Runway maintenance expenses
Debt service expenses
Hanger expenses
Air traffic control salaries

Debt service expenses
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:

After-tax yield
Discount rate
Real interest rate
LIBOR

Real interest rate
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?

$24.00
$25.00
$26.40
$38.40

$24.00

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.

The term fast market is characterized by which TWO of the following descriptions?

An imbalance of orders
A very low number of trades
Highly volatile prices
The quotes of market makers being updated very quickly

An imbalance of orders
Highly volatile prices
A registered representative has limited discretion over a customer’s account. The registered representative may:

Remove money freely from the account
Place orders before the order has been approved by a principal
Not enter buy stop orders
Have all confirmations of transactions sent only to himself

Place orders before the order has been approved by a principal
Which of the following statements does NOT describe an equity-indexed annuity?

It offer a guaranteed minimum rate of return
It provides a return based on the performance of a stock market index
It is considered a security
It provides tax-deferred growth

It is considered a security
An individual considering the purchase of an equity-indexed annuity should understand that:

-The return over long periods of time will equal the underlying index
-These products tend to outperform the stock market over long periods of time
-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
-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

-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
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:

Stop trading for 15 minutes
Stop trading for 30 minutes
Stop trading for the remainder of the day
Continue to trade

Stop trading for 15 minutes

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% declin

In order to implement a portfolio margin program, the firm must obtain approval from:

The options exchange
FINRA
The SEC
The OCC

FINRA
Which of the following securities is an example of a collateralized time draft?

Commercial paper
American Depositary Receipts
Bankers’ acceptances
Eurodollars

Bankers’ acceptances
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?

Short XYZ stock
Purchase an XYZ put
Purchase an XYZ straddle
Establish an XYZ debit put spread

Purchase an XYZ put
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?

-The annual interest payments are found on the balance sheet
-The annual interest payments are found on the income statement
-The interest payment is deducted from net income
-The interest payment is deducted from EBIT

-The annual interest payments are found on the income statement
-The interest payment is deducted from EBIT
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?

.83%
1.25%
3.33%
4.00%

3.33%

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%.

If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would:

Increase
Decrease
Remain the same
Decrease temporarily but remain stable over a period

Increase

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.

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:

The value of the securities declines
The value of the securities increases
Cash is withdrawn from the account
The buying power of the accounts used

The value of the securities declines

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.

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:

No gain or loss
A 3-point capital gain
A 3-point capital loss
Interest income of 3 points

No gain or loss
Regulation T applies to which TWO?
Cash accounts
Margin accounts
Commodity accounts
Municipal bond margin accounts
Cash accounts
Margin accounts
Which of the following securities are guaranteed by the federal government?

Fannie Mae securities
Ginnie Mae securities
Freddie Mac securities
Federal Home Loan Bank securities

Ginnie Mae securities
An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:

10
7
3
0

3

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.

All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT:

They are based on the S&P 500 Index
The levels are calculated on a monthly basis
A trading halt on one exchange applies to all exchanges
A 7% decline will halt trading for 15 minutes

The levels are calculated on a monthly basis (they are calculated daily)
Which TWO of the following activities are normally functions of the investment banking department of a broker-dealer?

Working with issuers to raise capital
Selling securities to institutional investors
Assisting companies with mergers and acquisitions
Making a secondary market for new issues

Working with issuers to raise capital
Assisting companies with mergers and acquisitions
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:

$500 profit
$500 loss
$1,000 profit
$1,000 loss

$500 loss

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).

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?

She still has upside potential in the stock
She can achieve a long-term gain by holding the put and stock for three months
She terminates the holding period
She cannot suffer a loss on the investment

She still has upside potential in the stock
She terminates the holding period
A customer of a member firm goes on vacation and notifies the member firm in writing as to what should be done with his mail. Which of the following statements is NOT TRUE?

-The member firm may hold the customer’s mail for a period of two months if the customer is traveling in the U.S.
-The member firm may hold the customer’s mail for a period of three months if the customer is traveling abroad
-The member firm may forward the customer’s mail to a general P.O. Box
-The mail may be forwarded to the registered representative

-The mail may be forwarded to the registered representative
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:

The spread narrows
Both options expire
The Jan 50 put is closed out at 10 and the Jan 40 put is closed out at 4
The spread widens

The spread widens

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.

In the Interbank market, foreign currency transactions:

May settle on a spot or forward basis
Occur on exchanges throughout the world
Are regulated by the SEC
Are reported on the Nasdaq system

May settle on a spot or forward basis
The payout on a variable annuity is based on a:

-Fixed number of accumulation units with a fluctuating value per unit
-Fixed number of annuity units with a fluctuating value per unit
-Fixed value per unit with a fluctuating number of annuity units
-Fixed number of annuity units with a fixed value per unit

Fixed number of annuity units with a fluctuating value per unit
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?

-Purchase 5 GHI Jan 25 puts and sell 5 GHI Jan 30 calls
-Sell 5 GHI Jan 25 puts and sell 5 GHI Jan 25 calls
-Purchase 5 GHI Jan 25 puts and purchase 5 GHI Jan 30 calls
-Sell 5 GHI Jan 25 puts and purchase 5 GHI Jan 25 calls

-Purchase 5 GHI Jan 25 puts and sell 5 GHI Jan 30 calls

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.

Which of the following securities would be LEAST suitable for an investor interested in preservation of capital?

Long-term CDs
Reverse convertible bonds
A corporate bond fund
A floating rate bond maturing in five years

Reverse convertible bonds
You discover that one of your clients is on the OFAC list. You must:

Contact federal law enforcement authorities immediately
Call the client to see if a mistake has been made
Investigate the matter further to see if there is evidence of suspicious activity
Notify FINRA

Contact federal law enforcement authorities immediately
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:

The investor is short 100 shares of ABC against the box
The wash sale rule has been violated
The investor has a $200 short-term capital gain
The investor has an $800 short-term capital loss

The wash sale rule has been violated
Variable annuities sold by insurance companies must be registered with:

The SEC
The FRB
FINRA
The State Insurance Commission

The SEC
The State Insurance Commission
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:

$1,000
$2,000
$4,000
$10,000

$4,000

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).

Which of the following securities has prepayment risk?

Mortgage bonds issued by a utility company
Bonds issued by Freddie Mac
Collateralized mortgage obligations
Commercial paper

Collateralized mortgage obligations (CMO)
Which of the following retirement plans has the lowest annual contribution limit?

A 457 plan
A 401(k) plan
A Roth IRA
A 403(b) plan

A Roth IRA
An RR sees that a CMO is yielding 5.95% while the comparable Treasury is yielding 5.10%. This means that:

The CMO is rated below investment-grade
The yield pick-up on the CMO is 85 basis points
The annual cash flow from the CMO is $85 greater than the Treasury
The yield curve is inverted

The yield pick-up on the CMO is 85 basis points
A municipal securities principal must review and approve municipal transactions made with:

Individuals
Trust departments
Commercial bank portfolios
Casualty insurance companies

All
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?

-This is permitted provided the client maintains a P.O. Box in New York
-This is permitted since the account was opened in New York prior to the client’s move to Montana
-The client can maintain the brokerage account if the firm registers as an investment adviser in Montana
-The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana

-The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana
All of the following statements are TRUE regarding yield curves, EXCEPT:

In an ascending curve, short-term rates are lower than long-term rates
They are fixed and may only be changed by the Federal Reserve Board
In a descending curve, short-term rates are greater than long-term rates
In a flat yield curve, both short-term and long-term rates are equal

They are fixed and may only be changed by the Federal Reserve Board
Which TWO of the following statements are TRUE about a divided account?

-It is called a Western account
-It is called an Eastern account
-Each member is responsible for the unsold bonds based on the member’s original participation
-Each member is liable only for its own participation in the syndicate

It is called a Western account
Each member is liable only for its own participation in the syndicate
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?

The minimum sales load should be stated in the ad
The maximum sales load should be stated in the ad
Sales charges may not be reflected in performance data
Sales charges may be reflected in performance data

The maximum sales load should be stated in the ad
Sales charges may be reflected in performance data
Which of the following funds is the least suitable for investors mainly seeking income?

A mortgage-backed securities fund
A municipal bond fund
A balanced fund
A sector fund

A sector fund

A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.

The bid price of a Treasury bond is $875. The bid price as quoted in The Wall Street Journal appears as:

87.12
87.16
87.5
87.8

87.16

U.S. Treasury bonds are quoted in 32nds of a point. If the bid price of a Treasury bond is stated at a dollar value of $875, it means that the bond is 87 1/2% of its par value of $1,000. Since 1/2 point in 32nds is 16/32nds, the bid price as quoted in the paper is 87.16. This is the same as 87 1/2 or $875. In this question, we need to work backward from the dollar value to the quote. In most other examples, you are given the quoted price of corporate or government bonds and are asked to find the dollar value.

The Securities Exchange Act of 1934:

Created the SEC
Provided for the regulation of credit
Provided for the regulation of exchanges
Provided for the regulation of new issues

Created the SEC
Provided for the regulation of credit
Provided for the regulation of exchanges
An investor purchases a Canadian dollar September 80 call and writes a Canadian dollar September 82 call. This position is a:

Bullish spread
Bearish spread
Long straddle
Credit combination

Bullish spread

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.

Which of the following choices makes a financial commitment in the distribution of a new issue of securities?

The selling group
The underwriting syndicate
A customer who provides an indication of interest
The exchange on which the security will be listed

The underwriting syndicate
All of the following actions create a conflict of interest for a general partner, EXCEPT if the general partner:

Accepting a payment not to compete with the program
Holding partnership monies in his personal bank account
Selling property that he owns to the partnership
Lending money to the partnership at prevailing interest rates

Lending money to the partnership at prevailing interest rates
A high net worth investor seeking safety of principal would MOST likely invest in:

Corporate convertible bonds
Non-investment-grade corporate bonds
An investment-grade corporate bond fund
A variable annuity

An investment-grade corporate bond fund
Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)?

-They offer investors the same amount of liquidity are exchange-traded REITs
-They are not required to distribute the same percentage of taxable income as exchange-traded REITs
-They are not required to make periodic disclosures that are required of exchange-traded REITs
-They are not suitable for the same investors as exchange-traded REITs

-They are not suitable for the same investors as exchange-traded REITs
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?

-If Dedicated fails to sell its allotment, it will be liable for twice its normal commitment
-If Dedicated fails to solicit a certain number of indications of interest, it will be required to pay a fee to the syndicate manager
-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
-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 pric

-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
Which of the following money-market securities assists in financing importing and exporting operations?

Bankers’ acceptances
Treasury bills
Eurodollar CDs
Revenue anticipation notes

Bankers’ acceptances
Which of the following choices may write calls covered by XYZ stock?

The president of XYZ Corporation
The trustee of XYZ Corporation’s pension fund
XYZ Corporation
ABC Corporation

The president of XYZ Corporation
The trustee of XYZ Corporation’s pension fund
ABC Corporation
When looking at a newspaper listing for foreign currency options, the spot prices for the underlying foreign currencies are quoted in:

European terms
U.S. terms
1/32 of a point
1/8 of a point

U.S. terms
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:

Obtain a written statement from the customer for each trade
Have the customer sign a suitability statement for each trade
Have the trades preapproved by a principal
Be sure that the recommendations take into account the customer’s investment objectives

Be sure that the recommendations take into account the customer’s investment objectives
Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer?

An exchange-traded fund (ETF)
An equipment leasing direct participation program (DPP)
A private activity municipal revenue bond
The PAC tranche of a collateralized mortgage obligation

An equipment leasing direct participation program (DPP)
An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option?

European style, next business day settlement
European style, three business days’ settlement
American style, next business day settlement
American style, three business days’ settlement

American style, three business days’ settlement
The federal tax exemption for interest earned on an industrial revenue bond is NOT available if the:

Holder of the bond is a substantial user of the facility
Issuer does not subscribe to equal opportunity employer standards
Bonds are not approved by the MSRB
Underwriter has a control relationship with the issuer

Holder of the bond is a substantial user of the facility
Recently, the federal funds rate has been rising. This may indicate all of the following situations, EXCEPT:

-Rates for short-term loans have been increasing
-The Federal Reserve may be engaging in matched sales to absorb reserves from the banking system
-Banks will find it more expensive to obtain overnight loans to satisfy a minor deficit in their reserve accounts
-The Federal Reserve is easing credit

-The Federal Reserve is easing credit
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?

This would be defined as a correspondence
This would be defined as an institutional communication
This would be defined as both a retail and an institutional communication
This would be defined only as a retail communication

This would be defined only as a retail communication
Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules?

-An employee of a municipal securities firm may open a new account with another municipal securities firm without the employer being notified
-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
-A bond attorney may open a new account without restriction
-An officer of a municipal issuer may open a new account without restriction

-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
-A bond attorney may open a new account without restriction
-An officer of a municipal issuer may open a new account without restriction
Which TWO of the following types of municipal securities does NOT require voter approval?

A general obligation bond backed by income taxes
A special tax bond
A bond backed by ad valorem taxes
A certificate of participation

A special tax bond
A certificate of participation
Which of the following is NOT considered a don’t know (DK) trade?

There is a disagreement on the price of the trade
There is a mismatch on the size of the trade
There is no record of the trade at one of the firms
The buyer is suspicious of insider trading

The buyer is suspicious of insider trading
Which of the following choices helps the U.S. balance of payments?

U.S. corporations building plants abroad
Lending money to foreigners at high interest rates
U.S. investment in foreign securities
Foreign investment in the U.S.

Foreign investment in the U.S.
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?

Redeem the bonds
Sell the bonds at the current market price
Do nothing and hope for a takeover bid from another company
Hold the bonds to maturity and continue to earn interest

Redeem the bonds
Which of the following securities will probably have the greatest fluctuation in price when interest rates move up or down?

Commercial paper
Treasury bills
Treasury notes
Treasury bonds

Treasury bonds

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.

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:

Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes
Dealer B may call Dealer A within the one-hour period and demand a decision of Dealer A in five minutes
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
Dealer A may cancel its quote within the one-hour period by recalling Dealer B within the first five minutes

Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes
If an investor had cash and securities in his account, why would the investor write call options against the securities?

To hedge his position
To engage in an arbitrage
To increase the overall rate of return of the portfolio
To postpone paying taxes

To increase the overall rate of return of the portfolio
If an investor was primarily interested in safety of principal, which of the following securities would you LEAST likely recommend?

State GO bond
GNMA security
Railroad equipment trust bond
Industrial development revenue bond

Industrial development revenue bond
When opening a new account, what is the order in which the following actions should take place?

Obtain approval from the ROP
Obtain essential facts from the customer
Obtain a signed options agreement
Enter the initial order

Obtain essential facts from the customer
Obtain approval from the ROP
Enter the initial order
Obtain a signed options agreement

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.

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:

$5,000
$10,000
$15,000
$20,000

$15,000

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

When considering the credit strength of a municipal issuer, which TWO of the following choices are the MOST important?

The condition of the local economy
The current financial status of the U.S. economy
Money supply figures
The general capability of the fiscal officers of the municipality

The condition of the local economy
The general capability of the fiscal officers of the municipality
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:

$4,700
$5,000
$5,300
$6,000

$5,300

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.

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?

$29.33
$30.27
$31.20
$60.53

$29.33

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

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:

March 60 put
March 30 put
March 50 call
March 60 call

March 60 put

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.

An investor who sells 1 GE Dec 50 call and sells 1 GE Dec 40 put has:

Created a vertical spread
Created a horizontal spread
Sold a straddle
Sold a combination

Sold a combination

Selling a call and put on the same security with different strike prices, or different expiration dates, is a short combination.

Which of the following choices is NOT taxable to the owner of mutual fund shares?

-Dividends that were reinvested at net asset value
-Fund shares that appreciated which are exchanged for other shares in the same family of funds
-Fund shares held by the investor, which have appreciated but have not yet been sold
-A capital gains distribution that was reinvested at net asset value

-Fund shares held by the investor, which have appreciated but have not yet been sold
Decisions of the District Business Conduct Committee regarding complaints:

Are final if the complaints are between members
Are final if the complaints are between member firms and their employees
Can be appealed to the National Adjudicatory Council
Can be appealed to a Federal District Court

Can be appealed to the National Adjudicatory Council
An investor is in the 35% tax bracket. Which of the following investments would afford him the BEST after-tax yield?

A 3.50% general obligation bond
A 4.10% Treasury bond
A 5.25% investment-grade corporate bond
A 5.75% non-investment-grade corporate bond

A 5.75% non-investment-grade corporate bond
Which of the following securities will MOST likely be subject to a withholding tax?

A Eurodollar bond
A Yankee bond
A banker’s acceptance (BA)
An exchange-traded note (ETN)

A Yankee bond
All of the following choices are characteristics of a Health Savings Account (HSA), EXCEPT:

The amount a person may contribute each year is limited
It is not open to individuals who are enrolled in their company’s health insurance plan
The funds may be invested in mutual funds
The funds must be used each year and may not be carried over

The funds must be used each year and may not be carried over
All of the following municipal bond transactions take place in the secondary market, EXCEPT:

Submitting an offer to sell bonds to a sinking fund
A tax swap
Two municipal securities broker-dealers purchasing a block of bonds jointly
The placing of a designated order

The placing of a designated order
Which TWO of the following statements are TRUE regarding REITs?

-They may invest in both commercial and residential real estate
-They may retain a majority of their income
-Dividends paid are taxed as ordinary income
-They may be sold only to retail investors

-They may invest in both commercial and residential real estate
-Dividends paid are taxed as ordinary income
An individual purchased a British pound June 160 call at 0.80. If the contract size is 10,000 British pounds, what is the individual’s total cost?

$8
$80
$800
$8,000

$80

Premiums for British pound options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $0.0080), which equals $80.

Which TWO of the following new issues may be purchased by an employee of a broker-dealer under the New Issue Rule?

-An exchange-traded fund
-An initial public offering in which the RR’s firm is not an underwriter
-A new issue of common stock in which the broker-dealer is the managing underwriter
-Convertible debt

-An exchange-traded fund
-Convertible debt
If a customer wishes to open an account to trade options, the account must be approved:

-15 days prior to the time an initial order is accepted
-Prior to the time an initial order is accepted
-No later than the time the confirmation is mailed to the customer for his initial transaction
-Within 15 days of the acceptance of the initial order

-Prior to the time an initial order is accepted
An investor has been saving for her child’s college education using a 529 plan. If the child will be attending college this year, which of the following investments is the MOST suitable?

50% equities, 50% bonds
30% equities, 60% bonds, 10% money-market funds
20% bonds, 80% money-market funds
80% bonds, 20% money-market funds

20% bonds, 80% money-market funds
A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will:

-Treat the discount as ordinary income
-Treat part of the discount as a capital gain and part as ordinary income
-Treat the discount as a capital gain
-Not have to pay tax on the amount of the discount

-Treat the discount as a capital gain
A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The common stock ratio is:

21%
26%
74%
79%

79%

The common stock ratio is found by dividing total shareholder equity by a company’s total capital. Shareholder equity is equal to the par value of the common stock + paid-in capital + retained earnings, and the total capital is found by adding the debt to shareholder equity. The common stock ratio is 79% [par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million / $1,085 million ($225 million + $860 million)]. The common stock ratio is used to analyze the capital structure of a company.

The bonds included in The Bond Buyer 20-Bond Index have an average rating of:

Aa1
Aa2
A1
A2

Aa2
As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power?

Fixed annuities
Variable annuities
Corporate bonds
Mortgage-backed securities

Variable annuities
What information would an analyst be MOST concerned with when evaluating a revenue bond?

The population growth of the municipality
Debt to assessed valuation
A rate covenant
Property taxes

A rate covenant

An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.

An investor has the following gains and losses on securities transactions.

20XX . . .

$15,000 loss
$ 6,000 gain
How much of the loss can the investor carry forward into the next year?

$3,000
$4,000
$5,000
$6,000

$6,000

The net loss sustained last year was $9,000. Since the investor can deduct $3,000 from ordinary income in one tax year, the remaining $6,000 must be carried forward into the next year.

Net Asset Value Offer Price Net Change
Dreyfus 11.55 12.67 -.05
Wellington 12.70 13.85 +.07
Lenox 5.14 5.14 +.09
Sentry 13.42 14.63 -.08

Lenox fund is most likely a:

No-load fund
Closed-end fund
Balanced fund
Growth fund

No-load fund

The Lenox fund is a no-load fund. The net asset value (bid price) and offering price (asked price) of a no-load fund are the same. There is no sales charge.

Which of the following activities does NOT take place during the cooling-off period?

The due diligence meeting
Issuing a red herring
Stabilizing the issue
Blue-Skying the issue

Stabilizing the issue
Which of the following securities has the LEAST credit risk?

Preferred stock issued by a company in the DJIA
Mortgage bonds
Treasury notes
Revenue bonds

Treasury notes
An investor purchases 1 XYZ October 40 put when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum profit the investor can have?

$300
$3,700
$3,800
Unlimited

$3,700

XYZ shares could possibly become worthless. The investor can then buy 100 shares for pennies and put (sell) it to the writer for the $40 per share strike price. This equals $4,000 ($40 x 100 shares). The investor’s profit is $4,000 minus the $300 premium paid for the put, which equals $3,700. The $3,700 is the maximum profit the investor can have since the share’s price cannot go lower than zero.

A municipal bond pays interest on February 1 and August 1. A customer purchasing the bond on Monday, April 30 will need to pay the seller the purchase price plus accrued interest for:

91 days
92 days
93 days
96 days

92 days

The trade date is Monday, April 30. The bond pays interest on February 1 and August 1. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Thursday, May 3. The following calculation illustrates the answer.

A registered representative is sending an e-mail to 20 individual investors. This is defined as a(n):

Correspondence
Institutional communication
Retail communication
Public appearance

Correspondence

Since the e-mail is being sent to 25 or fewer individual (retail) investors, it is defined as a correspondence. It makes no difference whether the investors have an account with the RR or the member firm.

Which of the following securities have a regular-way settlement indicated as T + 3?

Convertible bonds
Mutual fund shares
U.S. Treasury bills
Options

Convertible bonds

Corporate and municipal securities settle regular-way three business days after the trade date (T + 3). Mutual fund shares typically settle the same day, while U.S. Treasury securities and option contracts settle T + 1. Keep in mind that an exercised stock option involves the purchase and sale of a corporate security, and, therefore, settles T + 3.

Which of the following securities are NOT backed by the credit of the U.S. government?

Treasury bills
Treasury notes
Government National Mortgage Association (GNMA) bonds
Federal National Mortgage Association (FNMA) bonds

Federal National Mortgage Association (FNMA) bonds
Which of the following securities would NOT be found on the Consolidated Quotation System (CQS)?

An NYSE MKT stock
An NYSE MKT warrant
An NYSE-listed bond
A non-Nasdaq stock

A non-Nasdaq stock
Your customer is bullish on U.S. equities and wants to participate in an upward movement of the S&P 500 Index. Which of the following investments would you recommend?

Diamonds
ADRs
SPDRs
VRDOs

SPDRs

Spiders (SPDRs) is an investment that replicates the S&P 500 Index. The product is organized as a unit investment trust and is classified as an exchange-traded fund (ETF). Diamonds are an exchange-traded fund that mirrors the performance of the DJIA. ADRs are American Depositary Receipts, which may be issued as proxies for many different types of individual foreign shares. VRDOs are variable-rate demand obligations that are a type of municipal security structured for tax-free money-market and high-net-worth investors.

The call feature on callable bonds is most relevant when the economy is:

Experiencing a slowdown and the FRB is trying to stimulate growth
Experiencing a slowdown and inflation is increasing
Growing and the FRB is trying to slow down the economy
Growing and inflation is stable

Experiencing a slowdown and the FRB is trying to stimulate growth
Which TWO of the following statements are TRUE regarding Eurodollar bonds?

They are denominated in U.S. dollars only
They are denominated in foreign currencies only
They are traded only outside the U.S.
They are traded in the U.S. and in international markets

They are denominated in U.S. dollars only
They are traded in the U.S. and in international markets
According to MSRB rules, the delivery of a mutilated certificate is considered a good delivery:

-Under no circumstances
-If the seller informs the buyer about the mutilation in writing
-If the certificate is authenticated by the issuer or transfer agent
-If the certificate is authenticated by the MSRB

-If the certificate is authenticated by the issuer or transfer agent
With no other securities position, a customer sells short 100 shares of ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at:

$35
$50
$45
$40

$45

An individual who sells short risks a loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss will be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale plus the premium.

Self-regulatory organizations generally have rules that:

-Mandate commission schedules that brokerage firms must charge
-Are designed to maintain a fair and orderly market
-Mandate all brokerage firms stand ready to buy or sell securities from their own account to maintain liquidity
-Require brokerage firms to use reasonable diligence to provide customers with best execution

-Are designed to maintain a fair and orderly market
-Require brokerage firms to use reasonable diligence to provide customers with best execution
A mutual fund shareholder is NOT required to report which of the following events for tax purposes?

-Receiving a dividend that is subsequently reinvested in the fund at the net asset value
-Appreciation in the value of the shares
-Exchanging shares of one fund for another fund within the same family of funds
-Receiving a capital gains distribution that was not reinvested in the fund

-Appreciation in the value of the shares
The Bond Buyer Municipal Bond Index is based on:

A 40-Bond Index
Noncallable long-term bonds
A cross section of zero-coupon bonds
Diversified bonds with approximately 40 years to maturity

A 40-Bond Index
Which TWO of the following metrics may be calculated by examining the income statement of a company?

The debt-to-equity ratio
The operating profit margin
The bond coverage ratio
The current ratio

The operating profit margin
The bond coverage ratio
Which of the following statements about municipal revenue bonds is NOT TRUE?

-There is no debt limitation set by the issuing municipality
-The maturity of the revenue bond usually coincides with the useful life of the facility being built
-They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities
-The interest and principal are paid from the revenue received from the facility

-The maturity of the revenue bond usually coincides with the useful life of the facility being built
n May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. Near expiration, STC is selling at $39. The 40 call expires and the customer closes out the 30 call at its intrinsic value. The net result is a:

$100 loss
$100 profit
$500 profit
$500 loss

$500 profit

When the market price of STC is at $39, the July 30 call has an intrinsic value of 9 points. Since the investor paid a debit of $400, this will result in a profit of $500 ($900 intrinsic value – $400 debit).

An investor must pay accrued interest for a secondary market purchase of:

Zero-coupon bonds
Series EE savings bonds
Tax anticipation notes
Treasury bills

Tax anticipation notes
When an investor sells an interest in a limited partnership, her cost basis for tax purposes is the:

Original investment
Adjusted basis
Accredited value
Original investment plus accretion

Adjusted basis
A customer’s account is currently frozen. A registered representative is NOT permitted to accept:

-An order in a cash account if all the money is in the account before the order is entered
-An order in a margin account if the total dollar amount of the purchase is in the account before the order is entered
-A sell order for a security in a cash account if the security is in the cash account before the order is entered
-A sell order for a security in a cash account if the security is not in the account before the order is entered

-A sell order for a security in a cash account if the security is not in the account before the order is entered
A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield?

A 6.40% in-state municipal bond
A 7.10% out-of-state municipal bond
A 10.95% investment-grade corporate bond
A 11.50% mortgage bond

A 11.50% mortgage bond
A municipality is issuing 50,000 bonds at a public offerings price of $1,000. The manager of the underwriting syndicate receives $1.25 per bond. The total takedown is $8.75 per bond and the selling concession is $5.00 per bond.

What amount will the issuer receive?

$991.25 per bond for a total of $49,562,500
$990.00 per bond for a total of $49,500,000
$985.00 per bond for a total of $49,250,000
$1,000.00 per bond for a total of $50,000,000

$990.00 per bond for a total of $49,500,000

In a new municipal bond offering, the underwriting syndicate assumes the risk and is, therefore, entitled to make a profit on all bonds sold. Members of the selling group do not assume any risk and make a profit on only the bonds they sell (selling concession). The members of the underwriting syndicate receive $8.75 for bonds they sell. This is the total takedown which is composed of a selling concession of $5.00 per bond and an additional takedown of $3.75 per bond for their risk. The total spread is $10.00 ($1.25 manager’s fee plus $3.75 to the syndicate for risk plus a $5.00 profit for the sale of the bonds). The issuer will receive $990 per bond ($1,000 offering price minus $10.00 underwriting spread) for a total of $49,500,000 ($990 x 50,000 bonds).

XYZ Corporation has $20 million of convertible bonds outstanding. Each bond is convertible into 20 shares of common stock. If all the bonds were converted into common stock, how many additional shares of common stock would be outstanding?

100,000
200,000
300,000
400,000

400,000

$20 million par value ($1,000) bonds, which equals 20,000 bonds ($20,000,000 divided by $1,000 equals 20,000), multiplied by the 20-to-1 conversion ratio results in 400,000 shares of additional common stock outstanding (20,000 bonds x 20 = 400,000).

Investors may receive disclosure and secondary market information concerning municipal securities:

Through the EMMA system
Through the TRACE system
Directly from the issuer
From the OATS system

Through the EMMA system
A technical analyst does NOT review:

The advance-decline theory
The price-earnings ratio of the Dow Jones stocks
Short interest
The trendline theory

The price-earnings ratio of the Dow Jones stocks

The price-earnings ratio of the Dow Jones stocks is an indicator that a fundamental analyst will examine. A technical analyst will review the advance-decline theory, short interest, and the trendline theory.

The FRB initial margin requirement is 50%. A customer’s initial transaction in a margin account is a purchase of 100 shares of XYZ at $15 per share. The customer would need to deposit what amount in this new account?

$375
$750
$1,500
$2,000

$1,500

Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase.

If the Fed’s open market trading desk enters into a repurchase agreement, which TWO of the following statements are TRUE?

The money supply will be increased
The money supply will be decreased
Interest rates will tend higher
Interest rates will tend lower

The money supply will be increased
Interest rates will tend lower
A stop order will NOT be used to:

-Protect a gain when a long stock position appreciates
-Limit a loss if the market price of a short position increases
-Receive a specific price when buying or selling
-Limit a loss if the market price of a long stock position decreases

-Receive a specific price when buying or selling
An employee of a municipal securities firm would like to open an account with another municipal securities firm. Which of the following statements regarding the employee and the account is NOT TRUE?

-The employer must receive duplicate copies of all transactions made in the account
-The employee must abide by all trading instructions from the employer regarding the account
-The employer must be notified in writing of the employee’s intention to open the account
-The employee may not purchase new issues offered on a negotiated basis

-The employee may not purchase new issues offered on a negotiated basis

MSRB member firm employees may open an account with a competing firm, provided they abide by the requirements addressed in choices (a), (b), and (c). The employee may purchase new issues or any other type of municipal security.

Which of the following statements is TRUE regarding TRACE?

It is a reporting system for corporate bonds
It is a reporting system for U.S. government bonds
It is a reporting system for stocks listed on Nasdaq
It is a reporting system for municipal bonds

It is a reporting system for corporate bonds
A market maker has displayed a firm quote of 15 – 15.50, 5 x 8 for a stock. If a broker-dealer contacts the market maker and wants to purchase 1,000 shares, how many shares is the market maker obligated to sell at 15.50?

800 shares
500 shares
1,000 shares
Whatever amount the market maker decides to sell

800 shares
An investment in which of the following securities requires a customer to sign a statement attesting to her annual income and net worth?

A variable annuity
A collateralized mortgage obligation
A variable-rate demand obligation
A direct participation program

A direct participation program
Mr. Jones is a small business owner who has purchased Treasury bills and other short-term securities during times when he has excess funds available in the business. He likes the aspects of liquidity and safety. A friend has told him he can get higher rates from auction rate securities. He wants to know why you have not recommended this investment to him. Which TWO of the following explanations would you cite as your reasons?

Auction rate securities are long-term investments
Interest or dividend rates are reset at established intervals based on a Dutch auction
If the auction fails, the client may not have immediate access to his funds
The interest or dividend rate is set as the lowest rate to match supply and demand at the auction

Auction rate securities are long-term investments
If the auction fails, the client may not have immediate access to his funds
The number of times the earnings of a municipal facility exceeds the interest charges and principal payments of a revenue bond for a period is called the:

Working capital ratio
EBITDA ratio
Debt service coverage ratio
Price-earnings ratio

Debt service coverage ratio
There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks is:

According to Rule 144, Mr. Smith would need to file with the SEC a notice of intent to sell which is valid for:

Four weeks
90 days
6 months
Whatever amount of time is necessary to complete the offering

90 days

The notice of offering for a Rule 144 sale is valid for 90 days.

Closing spot prices for foreign currencies are disseminated daily by the:

NYSE
IMM
FRB
FINRA

FRB

The Federal Reserve Board disseminates closing spot prices of foreign currencies daily.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual’s maximum loss is:

$2,000
$3,000
$4,000
$6,000

$2,000

This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

The purpose of a sinking fund is to redeem a corporation’s:

Common stock
Warrants
Rights
Bonds

Bonds
A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE?

-The bid price is equal to the net asset value
-The bid price is equal to the net asset value plus the redemption fee
-The offer price is equal to the net asset value plus the sales charge
-The offer price is equal to the net asset value minus the sales charge

-The bid price is equal to the net asset value
-The offer price is equal to the net asset value plus the sales charge
Stock index options will stop trading on?
All options stop trading on the third Friday of the month
The dated date of a municipal bond is January 1, 2014. The first coupon date is August 1, 2014. The first coupon will represent how many months of interest?

5 months
6 months
7 months
Cannot be determined

7 months

The first coupon will be paid in 7 months. This is known as an odd (in this case, long) first coupon payment. The interest will begin to accrue from the dated date but will be paid on the first coupon date.

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)?

It issues securities that can be redeemed to pay for college education
It issues securities that are not backed by the U.S. government
It purchases federally sponsored student loans
It provides loans to educational institutions

It issues securities that can be redeemed to pay for college education
Mr. Smith, a self-employed computer analyst, earned $125,000 during 20XX. What is the maximum permissible deductible contribution to his Keogh plan for 20XX?

$2,000
$5,500
$25,000
$51,000

$25,000

A Keogh plan allows a maximum annual contribution of 100% of compensation or $51,000, whichever is less. This question is asking the amount deductible. The amount deductible is limited to the lesser of 20% of compensation or $51,000. A self-employed individual may make a deductible contribution of 20% of self-employed income, up to a maximum of $51,000, to a Keogh account. Twenty percent of Mr. Smith’s income ($125,000) is $25,000.

If a municipal bond has a basis of 4.35 and a coupon rate of 4.95%, the bond is selling at:

A discount
Par value
A premium
A price that cannot be determined from the information given

A premium
A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE?

-The director is permitted to sell the shares if the trade is reported
-The director is permitted to sell the shares only if they are held for three additional months and the trade is reported
-The director is permitted to sell the shares and no report is required
-The director is permitted to sell the shares only if the transaction will result in a loss

The director is permitted to sell the shares if the trade is reported
The theory that states that the small investor is usually wrong, buying at market peaks and selling at market bottoms, is called the:

Dow theory
Odd-lot theory
Short interest theory
Advance-decline theory

Odd-lot theory

The theory that states that the small investor is usually wrong because he is uninformed, buying at market peaks and selling at market bottoms, is called the odd-lot theory. According to this theory, the small investor can afford only to buy an odd-lot (less than 100 shares of stock). Odd-lot buying on balance (more buying than selling) is bearish and odd-lot selling on balance (more selling than buying) is bullish.

Mrs. Jones is interested in selling 500 shares of her REIT. The sale will be handled in a manner similar to the:

Redemption of an open-end fund
Sale of a closed-end fund listed on the NYSE
Liquidation of a real estate limited partnership
Redemption of EE bonds

Sale of a closed-end fund listed on the NYSE

There is a secondary market for REITs (real estate investment trusts). The vast majority of REITs trade on the NYSE with prices determined by supply and demand. Closed-end funds are funds that are often bought and sold on the NYSE that trade in a similar manner.

An investor writes an uncovered RST May 25 put for a premium of 4. The maximum loss the investor could sustain is:

$2,100
$2,500
$2,900
$3,500

$2,100

If RST Corporation’s market price declines to pennies per share, the owner of the put could buy the RST stock for pennies and put it to the writer for $25 per share, or $2,500. This is the price that the writer would be required to pay for the stock. However, since the writer received $400 in premium, the maximum loss he could have will be $2,100 ($2,500 loss – $400 premium = $2,100 loss).

All of the following choices are part of the Federal Farm Credit System, EXCEPT:

Banks for Cooperatives
Federal Intermediate Credit Banks
Federal Land Banks
Federal National Mortgage Association

Federal National Mortgage Association
On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer:

Has engaged in a debit spread
Has engaged in a credit spread
Wants the spread to widen
Wants the spread to narrow

I and III only
I and IVonly
II and III only
II and IV only

I and III only

Has engaged in a debit spread
Wants the spread to widen

A customer wishes to make a purchase based on his belief that interest rates will decline over the next 15 years. The recommendation of which TWO of the following securities is NOT consistent with the customer’s belief?

A 5-year noncallable bond
A tax anticipation note (TAN)
Floating rate notes
A 15-year bond with a 5-year put feature

A tax anticipation note (TAN)
Floating rate notes
A corporation calls for the redemption of 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock are $2.50 per share. The common stock is selling at 35.75.

If all shares are converted, how many shares of common stock will be outstanding?

500,000
2,000,000
2,500,000
3,000,000

2,500,000

If all of the preferred stock were converted into common stock, there will be an additional 500,000 shares of common stock outstanding, (1/2 of 1,000,000 = 500,000.) This, added to the 2,000,000 shares outstanding, equals 2,500,000 shares of common stock.

On December 16, a Mr. Smith purchased 2 listed XYZ May 70 calls and paid a $4 premium for each call when the current market price of XYZ Corporation was $69 per share. If, in May, the market price of XYZ Corporation is $67 and the calls expire, Mr. Smith loses:

$400
$700
$800
$1,400

$800

Mr. Smith will not exercise the call options. At expiration, the market price of XYZ is $67, which is less than the exercise price. Therefore, the options expire worthless. Mr. Smith loses $800 ($400 per contract times 2), the entire amount of the premium paid.

Under the partnership democracy provisions of a limited partnership, the limited partners are NOT permitted to:

Petition the court to have the general partner removed
Petition the court to have the partnership dissolved
Sell assets owned by the partnership
Sue the general partner

Sell assets owned by the partnership
Which of the following statements is NOT TRUE regarding a firm’s anti-money laundering program?

The program must comply with a blueprint or template supplied by the SEC
The program requires an ongoing employee training program
The program must provide for annual testing of the system
The firm must designate a specific individual responsible for implementing the firm’s anti-money laundering program and must identify the person to FINRA

The program must comply with a blueprint or template supplied by the SEC
Mrs. Jones owns stock from which she received $3,000 in cash dividends. Mr. Jones owns stock from which he received $400 in cash dividends. How much of the cash dividends received are Mr. and Mrs. Jones liable for when filing their joint return?

0
$400
$2,600
$3,400

$3,400
If an analyst wanted to determine a company’s ability to pay those debts that will be maturing in one year, he will be most interested in the:

Current ratio
Acid-test ratio
Inventory turnover
Debt-to-equity ratio

Current ratio

The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes the inventories and usually is for a one- to three-month period.

Which of the following expenditures is a violation under industry rules concerning gifts and gratuities?

Taking a client to a dinner valued at $80 per person
Attending a concert with your client valued at $105 per ticket
Giving a $300 wedding gift to your brother who is employed at a member firm
Giving two tickets to your client to attend a basketball game valued at $65 per ticket

Giving two tickets to your client to attend a basketball game valued at $65 per ticket
Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following statements is TRUE?

The account would be liquidated as soon as the brokerage firm learns of Seena’s death
Lyle and Molly must change the arrangement to a Joint Tenants with Right of Survivorship
Seena’s estate has a claim on her portion of the account’s assets
Seena’s share of the assets in the account are automatically transferred to Lyle and Molly

Seena’s estate has a claim on her portion of the account’s assets
Which of the following persons are entitled to participate in a Keogh plan?

A self-employed doctor
A security analyst who made $2,000 giving public lectures on technical analysis
An engineer of a corporation who made $5,000 making public speeches on his specialization
An executive of a corporation who received $5,000 in stock options from his corporation

I and II only
II and III only
I, II, and III only
I, II, III, and IV

I, II, and III only

A self-employed doctor
A security analyst who made $2,000 giving public lectures on technical analysis
An engineer of a corporation who made $5,000 making public speeches on his specialization

A secondary market exists for:

Dealer-placed commercial paper
Federal funds
Repurchase agreements
U.S. savings bonds

Dealer-placed commercial paper

A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds.

An investor’s account shows:

Long 10 ABC June 50 Calls
Long 10 ABC July 55 Puts
This options position is known as a:

Diagonal spread
Long straddle
Calendar (horizontal) spread
Long combination

Long combination

The purchase of a call and put on the same stock with different expirations and/or strike prices is a long combination. If the expirations and strike prices are the same, it is a long straddle.

Historically, a decline in the Real GDP for two consecutive quarters is an indication that the economy is in a(n):

Expansion
Depression
Recession
Recovery

Recession
A mutual fund buys stock from the portfolio of an insurance company. This is a trade executed in the:

Over-the-counter market
Exchange market
Third market
Fourth market

Fourth market
When opening a custodian account for a minor, whose Social Security number should be on the account?

The custodian’s
The parent’s
The donor’s
The minor’s

The minor’s
Collateralized mortgage obligations (CMOs) make interest payments to investors:

Daily
Weekly
Monthly
Quarterly

Monthly
Preferred stock generally has which TWO of the following characteristics?

The dividend received is taxable
The dividend received is not taxable if the proceeds are reinvested in additional shares of the same security
The dividend is paid in after-tax dollars
The dividend is paid in pretax dollars

The dividend received is taxable
The dividend is paid in after-tax dollars
Short-term municipal obligations payable from funds that usually are received from the federal government are:

Bond anticipation notes
Revenue bonds
Grant anticipation notes
Tax anticipation notes

Grant anticipation notes
Emily and her sister Lucy have the following accounts at a brokerage firm.

Emily has a cash account with $420,000 of securities.
Lucy has a margin account with $665,000 of securities and a debit balance of $365,000.
A cash account for Emily and Lucy as JTWROS with $290,000 in securities.
If the brokerage firm were to go bankrupt, SIPC would provide a maximum of:

$500,000 coverage for all the accounts combined
$1,000,000 coverage for all the accounts combined
$1,010,000 coverage for all the accounts combined
$1,210,000 coverage for all the accounts combined

$1,010,000 coverage for all the accounts combined

SIPC provides protection of $500,000 for each customer (different account title). Since each account has a different title, each would receive coverage of $500,000 of securities. Emily’s cash account would receive $420,000 and the joint account would receive $290,000. SIPC will cover Lucy’s current equity in a margin account of $300,000. The total coverage is $1,010,000 ($420,000 + $300,000 + $290,000).

Listed options are issued and guaranteed by:

FINRA
The company whose stock underlies the contract
The exchange where the options trade
The Options Clearing Corporation

The Options Clearing Corporation
A customer has a cash account that has securities valued at $320,000 and $180,000 in cash. The customer and a spouse also have a joint account with securities valued at $120,000 and $270,000 in cash. If the member firm were to become bankrupt, the coverage under SIPC would be:

Full coverage of cash and securities for both accounts
$500,000 for the individual account and $290,000 for the joint account
$500,000 for the individual account and $390,000 for the joint account
$500,000 for the individual account and $370,000 for the joint account

$500,000 for the individual account and $370,000 for the joint account

Both the individual account and the joint account are considered separate customers and will each receive independent coverage of $500,000, of which no more than $250,000 may be for cash. In the individual account, full coverage will be provided of $500,000 ($320,000 of securities and $180,000 in cash). In the joint account, the full value of the securities is covered. However, only $250,000 of the cash in the account is covered. The total coverage for the joint account would be $370,000 ($120,000 + $250,000). For the balance of $20,000 cash, the customer will become a general creditor of the broker-dealer.

A customer is willing to accept a partial execution on an order to buy up to 800 shares of XYZ stock at 30. If the client does not want the unexecuted portion to be left open, this order should be entered as:

Buy 800 XYZ NH
Buy 800 XYZ at 30 IOC
Buy 800 XYZ at 30 Day Order
Buy 800 XYZ at 30 GTC

Buy 800 XYZ at 30 IOC

An immediate-or-cancel (IOC) order must be executed immediately but does not need to be executed in its entirety. Part of the order may be executed. The unexecuted portion of a day order or a GTC order is placed on the designated market maker’s book. A not-held (NH) order gives the floor broker discretion as to when to execute the order.

A buy stop order is entered:

Below a support level
Above a resistance level
To limit a loss on a long stock position
To limit a loss on a short stock position

I and III
I and IV
II and III
II and IV

II and IV

Above a resistance level
To limit a loss on a short stock position

The Founders Income Fund has declared a dividend payable to stockholders of record Friday, May 29. This mutual fund would typically sell ex-dividend on:

Monday, May 25
Tuesday, May 26
Wednesday, May 27
The date set by the fund or its principal underwriter (sponsor)

The date set by the fund or its principal underwriter (sponsor)

Mutual funds sell ex-dividend whenever the fund or its principal underwriter (sponsor) determines. The ex-dividend date for a mutual fund is usually the same day as the record date.

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond’s yield to maturity increases by 40 basis points, the yield to maturity is:

5.60%
6.40%
6.80%
7.60%

7.60%

The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond’s basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account. Only the MFP signs the check. According to the MSRB political contribution rules, the contribution would be viewed as a:

$200 contribution from each party
$400 contribution from the MFP
$400 contribution from the spouse
$200 contribution from each party, but it must be reported to the MSRB

$400 contribution from the MFP

If the MFP is the only party who signs the check, the entire amount of the contribution is allocated to the MFP. In this case, the underwriting ban would be triggered since the amount exceeds $250. When both the MFP and her spouse sign the contribution check, the contribution is viewed as being split equally between the contributors. There is no limit if the spouse writes a check from his personal account, rather than the joint checking account.

A corporation has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?

$680,000
$686,800
$690,200
$714,000

$690,200

If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company will have to add $30,000 (30% of $100,000) to its taxable income. The total taxable income will, therefore, be $2,030,000. The tax liability will be $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

An employee of a corporation is enrolled in a noncontributory pension plan. Relative to the plan, which of the following statements are TRUE?

Earnings in the plan accrue tax-deferred
Earnings in the plan are taxed each year
Benefits are taxed as a capital gain when received
Benefits are taxed as ordinary income when received

I and III
I and IV
II and III
II and IV

I and IV

Earnings in the plan accrue tax-deferred
Benefits are taxed as ordinary income when received

A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond.

Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales.

$2.50 per bond for a total of $50,000
$2.50 per bond for a total of $100,000
$4.00 per bond for a total of $80,000
$4.00 per bond for a total of $160,000

$2.50 per bond for a total of $50,000

The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).

What information would NOT be found in a subscription agreement in a direct participation program (DPP)?

The name of the limited partner’s certified public accountant
The suitability standards
The signature of the limited partner
To whom the check is made payable to

The name of the limited partner’s certified public accountant
A put option may be written in a cash account if the investor:

Is long the underlying security in the account
Is short the underlying security in the account
Has cash in the account equal to the exercise price
Is long a call option on the same underlying security

Has cash in the account equal to the exercise price
When engaging in a 1035 exchange an individual should be aware that:

The exchange is a taxable event
The exchange is not a taxable event but the new annuity may come with additional restrictions
The exchange is not a taxable event and the policies of the old annuity are remain in place
The exchange is only permitted if it is unsolicited

The exchange is not a taxable event but the new annuity may come with additional restrictions
XYZ corporation has income before taxes of $2 million and received $100,000 in preferred dividends from a company in which it owns 25% of the outstanding shares. If XYZ corporation is in the 34% tax bracket, it will pay taxes of:

$686,800
$926,900
$966,000
$1,050,000

$686,800

Since XYZ corporation owns 25% of the outstanding shares, it is exempt from paying taxes on 80% of dividends received from the stock. The corporation would need to pay taxes on only $20,000 of the dividends received (20% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $686,800. (34% of $2,020,000 = $686,800.)

Which of the following transactions qualifies a customer as a pattern day trader?

3 day trades executed in one week
3 day trades executed in one day
4 day trades executed in one week
10 day trades executed in one month

4 day trades executed in one week
What is the acronym associated with the process of a client instructing his bank to deliver securities against payment by the clearing firm?

RVP
COD
DVP
POA

RVP

DVP (delivery versus payment) and COD (cash on Delivery) are general acronyms used to describe a relationship in which a client uses a bank to settle trades with executing firms. The firm delivers securities against the bank payment and pays against the bank delivery of securities. When discussing a given transaction, a DVP occurs when the dealer delivers securities to the bank in return for a cash payment from the bank. An RVP (receive versus payment) occurs when the dealer receives securities from the bank and makes a cash payment to the bank. The transaction described in the question is an example of an RVP transaction in which the customer’s bank is delivering securities in return for payment by the broker-dealer. It is important to remember that clients (usually institutions) set up brokerage accounts and place orders at these firms. However, trades settle through custodian banks designated by the clients. The broker-dealer will contact the bank, which will send payment or receive securities on behalf of the clients. The broker-dealer will not hold the client funds or securities

Which of the following requirements exists when a client is considering exchanging one variable annuity for another?

The customer must be asked if he engaged in an exchange within the previous 36 months
The customer must be asked if he engaged in an exchange within the previous 24 months
The customer is not permitted to make an exchange within a 36-month period
The inquiry and the customer’s response must be documented in writing and filed with FINRA’s 1035 Exchange Review Committee within 30 days

The customer must be asked if he engaged in an exchange within the previous 36 months
A customer has an existing margin account with equity of $36,000. If the FRB requirement is 50% and the customer sells short 100 shares at $15.00 a share, the required deposit is:

$450
$750
$1,500
$2,000

$750

The FRB requirement is 50%, which is the same for purchases as it is for short sales. Therefore, the required deposit is $750 (50% x $1,500). Since this trade is executed in an existing account, the only requirement is the FRB’s. If this had been the initial trade in the account, the required deposit under industry rules would be $2,000.

List from last to first the order of payments if a limited partnership declares bankruptcy.

Secured creditors
General partners
Limited partners
General creditors

I, II, III, IV
IV, III, II, I
II, III, IV, I
I, IV, III, II

II, III, IV, I

If a limited partnership declares bankruptcy, state law provides a priority for settling accounts. The order for settling accounts is secured creditors, general or unsecured creditors, limited partners, and last, general partners. Remember that this question is asking for the order from last to first.

Regulation AC (Analyst Certification) does NOT apply to:

Brokers
Dealers
Issuers
Research analysts

Issuers
An investor purchases 200 shares of STC at $35 and subsequently purchases 2 STC Jan 35 puts at 2. At what market price must STC trade for the investor to have a profit?

32
34
36
38

38

If an investor is long stock and long a put, he will have a profit if the market price exceeds the cost of his stock plus the premium for the option. The stock must trade above 37 (35 cost + 2 premium).

An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. What is the individual’s basis?

$0
$30,000
$50,000
$80,000

$80,000

Under the IRS at-risk rule, an investor may include in his basis those monies for which he is in fact liable. Since the loan is a recourse loan, the investor is liable for its repayment. The investor’s basis is, therefore, $80,000 ($30,000 investment + $50,000 recourse loan).

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. If the customer had sold the option at $8 instead of exercising the option, the profit would have been taxable as:

A $500 capital gain
An $800 capital gain
An ordinary gain of $700
An ordinary loss of $500

A $500 capital gain

If the customer had sold the option at $8 instead of exercising it, the $5 profit per share ($8 sale minus $3 cost equals $5 profit) would be taxable as a capital gain.

The Bond Buyer contains a 20-Bond Index and an 11-Bond Index. The bonds included in the 11-Bond Index have an average rating of:

AAA-
AA
AA+
A+

AA+
Penny stock rules apply under which TWO of the following conditions?

The stock is priced below $5.00 per share
The customer is an active trader of penny stocks
The broker-dealer is a market maker in the security
The customer is an institutional investor

I and III
I and IV
II and III
II and IV

I and III

The stock is priced below $5.00 per share
The broker-dealer is a market maker in the security

Which TWO of the following statements are characteristics of REITs?

They are formed as a limited partnership
They provide limited liability for shareholders
They invest only in mortgages
They are required to distribute a minimum percentage of their income

I and III
I and IV
II and III
II and IV

II and IV

They provide limited liability for shareholders
They are required to distribute a minimum percentage of their income

Which of the following choices does NOT delegate power of attorney to a third party for the purpose of making securities transactions?

A husband
A wife
A corporation
A custodian

A custodian
According to Regulation T, when purchasing an option contract the transaction must be paid for within:

1 business day
3 business days
5 business days
7 business days

5 business days
Wireless Communications is offering 2,000,000 common shares (par value $.10) at $15. Which TWO of the following choices describe the financial impact on the company?

An increase in paid-in capital
A reduction in the long-term debt ratio
A reduction in liquidity
An increase in fixed assets by $30,000,000

I and II
I and IV
II and III
III and IV

I and II

An increase in paid-in capital
A reduction in the long-term debt ratio

A customer has 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’s breakeven points are:

$46
$48
$52
$54

I and III
I and IV
II and III
II and IV

I and IV

$46
$54

The customer has the right to call the stock at $50. He has paid a $400 premium per straddle. The breakeven point on the call is determined by adding the 50 strike price to the premium of 4. This equals a breakeven of $54. The customer also has the right to put or sell the stock to the writer at $50, but has paid a $400 premium. The breakeven point on the put is four points below the strike price of $50, which equals $46. The buyer’s breakeven points will, therefore, be $46 and $54.

A firm that is planning an offering of common stock has not filed a registration statement. Which of the following actions on the part of a registered representative are NOT a violation of the Securities Act of 1933?

Having the registered representative contact an investment banker at the firm
Informing a customer that he may receive as many shares as he desires
Accepting orders for the shares to be offered
Attempting to obtain indications of interest for the shares to be offered

Having the registered representative contact an investment banker at the firm
Regulation FD applies to:

Retail customers
Issuers of securities
Institutional investors
Broker-dealers

Issuers of securities

Regulation FD applies to issuers of securities. Regulation FD requires that material, nonpublic information disclosed to analysts or other investors be made public. If the disclosure is intentional, the information must be simultaneously disclosed to the public. If the disclosure is unintentional, the public disclosure must be made within 24 hours. Form 8-K, filed with the SEC, is one method of meeting the public disclosure requirement.

On September 22, a customer purchases 2 listed XYZ May 70 calls and pays a $4 premium for each call. The current market price of XYZ Corporation is $69 per share. What is the customer’s breakeven point?

66
73
74
78

74

The strike price plus the premium equals the breakeven point for the buyer of a call. The breakeven point is $74 (the $70 strike price + the $4 premium = $74). The fact that the investor bought multiple contracts is not relevant since the breakeven point is a price per share.

Co. A Co. B Co. C Co. D
Earnings per Share $2.00 $6.50 $5.20 $7.80
Dividends $0.10 $2.50 $2.60 $6.00
Percentage of
Retained Earnings 95% 62% 50% 23%

An investor has decided to diversify her portfolio into a more defensive position by including utility stocks. Which of the above companies is probably a utility?

Company A
Company B
Company C
Company D

Company D

Company D is probably a utility since utility companies usually have a high dividend payout ratio and a low percentage of retained earnings.

A customer purchases $15,000 in convertible bonds (15 bonds at $1,000 par). The Federal Reserve Board margin requirement is 50% and the customer deposits $7,500. If the bonds increase in value to 108 ($16,200), how much excess equity will the customer have in the account?

$300
$600
$1,200
$8,700

$600

If the bonds increase in value to $16,200, the equity in the account will be $8,700 (market value of $16,200 – $7,500 debit balance). The initial FRB requirement on $16,200 market value is $8,100 (50% x $16,200). Since there is $8,700 of equity, there is $600 of excess ($8,700 equity – $8,100 requirement).

The Federal Reserve will normally:

Buy securities in the open market during inflationary times
Sell securities in the open market during inflationary times
Buy securities in the open market during deflationary times
Sell securities in the open market during deflationary times

I and III only
I and IV only
II and III only
II and IV only

II and III only

Sell securities in the open market during inflationary times
Buy securities in the open market during deflationary times

An open-end investment company has increased in value because of a rise in the market. This is best characterized as:

A capital gain
A profit
Appreciation
Ordinary income

Appreciation
On June 21, 2011, a municipal securities salesperson decided to leave his job and try his hand at real estate sales. Although able to earn a good living, he decided that he liked municipal sales and rejoined the municipal securities firm on July 15, 2013. Which of the following statements is TRUE?

He may resume selling municipal securities immediately
He must wait 90 calendar days before he may sell municipal securities
He must wait until he passes the MSRB examination for municipal representatives before he may sell municipal securities
He must pass the MSRB examination for municipal securities representative and must wait a minimum of 90 calendar days

He must wait until he passes the MSRB examination for municipal representatives before he may sell municipal securities
The investment banking department of a broker-dealer usually does NOT perform which of the following activities?

Underwrite new issues
Provide financing for industrial corporations
Distribute large blocks of already outstanding securities
Make a secondary market for new issues

Make a secondary market for new issues

The investment banking department does not make a secondary market for new issues. This is a function of the equity trading department known as market making.

The quarterly dividend of ABC company is 32 1/2 cents. The market price is $24.00 a share. What is the current yield?

1.35%
2.38%
4.82%
5.41%

5.41%

The formula for computing current yield (also known as the dividend yield) is: Annual Dividend / Market Price of the Stock

Since the quarterly dividend is 32 1/2 cents, the annual dividend is $1.30 (32 1/2 x 4 = $1.30). $1.30 divided by the $24 market price equals 5.41%.

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. If the client is using the convertible bonds as a hedge, the maintenance requirement is:

$4,400
$4,600
$11,500
$13,200

$4,600

If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. This is an industry rule, not a Regulation T requirement. Each bond is convertible into 50 shares (the par value of $1,000 divided by the conversion price of $20). The client may convert the 40 bonds into a total of 2,000 shares (50 shares x 40 bonds), which is equal to the number of shares the client is short. The maintenance requirement is 10% of the long position, which is equal to $4,600 ($1,150 x 40 bonds x 10%).

Which TWO of the following securities will enable an investor to both receive interest income and have a maturity date allowing their principal to be returned in one lump sum?

A municipal bond fund containing mostly revenue bonds
Municipal bonds that are subject to the alternative minimum tax
A closed-end fund containing municipal bonds of one state
A portfolio of municipal bonds, some which have call provisions

I and III
I and IV
II and III
II and IV

II and IV

Municipal bonds that are subject to the alternative minimum tax
A portfolio of municipal bonds, some which have call provisions

An investor who expects an increase in volatility in the equity markets would MOST likely adopt which TWO of the following strategies?

Long VIX call options
Establish a VIX call credit spread
Establish a VIX put credit spread
Long VIX put options

I and III
I and IV
II and III
II and IV

I and III

Long VIX call options
Establish a VIX put credit spread

The official statement for a revenue bond issue states that the bonds are backed by a pledge of the project’s net revenues. This means that the:

Debt service is the first item paid after operating and maintenance expenses
Debt service is paid after the replacement and renewal fund
Operating and maintenance expenses are paid after debt service
Debt service is the last item paid in the flow of funds

Debt service is the first item paid after operating and maintenance expenses
The federal funds rate may be described as:

A money-market rate
A long-term rate
The most stable rate
The most volatile rate

I and III
I and IV
II and III
II and IV

I and IV

A money-market rate
The most volatile rate

A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are used?

High-quality commercial paper
Long-term municipal zero-coupon bonds
U.S. Treasury bonds
High-quality preferred stocks

High-quality commercial paper

The corporation intends to use the money in a short period and does not want to assume undue investment risks. Of the choices given, the most suitable investment is high-quality commercial paper since it is extremely safe and can be purchased with a short maturity to match the corporation’s needs.

A woman wishes to open an account at a municipal securities firm. She identifies herself as the spouse of a trader at another municipal securities firm. Which TWO of the following are TRUE?

The representative must follow all instructions from the trader’s employer
The MSRB must be notified
The carrying broker-dealer must send written notification of each transaction to the trader’s employer
The trader’s employer must approve all transactions of the spouse

I and II
I and IV
I and III
III and IV

I and III

The representative must follow all instructions from the trader’s employer
The carrying broker-dealer must send written notification of each transaction to the trader’s employer

An investor believes that the U.S. dollar will strengthen in the coming months. Which of the following option strategies provides the greatest potential gain?

Buying U.S. dollar calls
Buying euro puts
Writing euro straddles
Buying euro calls

Buying euro puts

If the U.S. dollar strengthens, the euro will typically fall. Buying euro puts provides the greatest potential gain. There are no listed options on the U.S. dollar. Selling options provides a maximum gain that is limited to the total premium. Short straddles are profitable only if the underlying investment remains stable in price.

An individual sells investment company products after passing the General Securities Representative Examination (Series 7). According to MSRB rules, if this individual will be selling municipal securities:

There is a 90-day apprenticeship period along with an examination requirement
No apprenticeship period is required but there is an examination requirement
Nothing more is required
A 90-day apprenticeship period is required but the individual is exempt from the examination

Nothing more is required

Passing the General Securities Representative Examination (Series 7) satisfies the MSRB examination requirement for municipal securities sales limited representatives. This registration allows a person to engage in sales to, or purchases from, customers in municipal securities. In this case, the individual need not complete an apprenticeship period due to prior experience. Experience as a general securities representative, mutual fund salesperson, or government securities representative would fulfill the apprenticeship requirement.

An investor is short 100 shares of QRS stock at $25 per share, and sells one QRS July 25 put at 2. The investor will make money in all of the following situations, EXCEPT:

The price of QRS stock remains at $25 per share
The price of QRS stock rises to $30 per share
QRS files for bankruptcy and the stock is now worthless
The July 25 put expires worthless

The price of QRS stock rises to $30 per share

The investor is bearish on the stock, and has taken in additional income by selling a put. By selling the stock and the put, the investor has taken in a total of $27 per share. A profit will be realized as long as the stock price remains below $27 per share. But, since the hedge is limited to the amount of the premium, the investor’s maximum loss is still unlimited.

A corporation with an excellent earnings record has several issues of bonds outstanding. During a period of stable interest rates, which of the following securities are expected to fluctuate the most?

Mortgage bonds
Commercial paper
Debenture bonds
Convertible bonds

Convertible bonds

The convertible bonds will fluctuate the most because they are convertible into common stock. The price fluctuates with the price movements of the common stock. The fact that interest rates are stable is another reason why convertible bonds is the best answer. If the question had stated that interest rates were moving sharply upward or downward, then all other bonds would fluctuate sharply in price to bring yields in line with interest rates. However, the question asks what will happen in a period of stable interest rates. Given that statement, the best answer is that convertible bonds will fluctuate the most.

On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. How many days of accrued interest is the investor required to pay?

17
47
48
227

47

Since the bonds mature on Nov. 1, we know the semiannual interest payments are made on Nov. 1 and May 1. The bonds were purchased in June, so accrued interest must be calculated from the last interest payment date, (May 1, up to but not including settlement.) Since the transaction will settle on June 18, we count 17 days in June. So the total number of days of accrued interest is 30 days for May (remember, in calculating accrued interest for municipal bonds, a 30-day month and 360-day year are used) and 17 days for June. Accrued interest of 47 days is owed to the seller.

Which TWO of the following statements are TRUE about contributions made to an IRA?

They must be in the form of cash
They may be in the form of securities
They are permitted regardless of whether the individual is covered by an employer’s plan
They are permitted only for individuals not covered by an employer’s plan

I and III
I and IV
II and III
III and IV

I and III

They must be in the form of cash
They are permitted regardless of whether the individual is covered by an employer’s plan

A bond swap is done for all of the following reasons, EXCEPT to:

Increase the overall yield of the bond portfolio
Increase the current income of a bond portfolio
Establish a tax loss to offset income
Take advantage of a large amount of accrued interest

Take advantage of a large amount of accrued interest
Which investment company does NOT charge a management fee?

An open-end investment company
A closed-end investment company
A unit investment trust
An exchange-traded fund

A unit investment trust
Which TWO of the following choices BEST describe a gasoline tax?

Graduated taxes
Flat taxes
Progressive taxes
Regressive taxes

I and III
I and IV
II and III
II and IV

II and IV

Flat taxes
Regressive taxes

A client owns 400 shares of stock in a European company. The client receives a cash dividend and tax is withheld by the European country. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client?

The taxes paid may be used as a credit
The dividends are considered a return of capital
The taxes paid may be used as a deduction
The dividend paid is exempt from taxes

I and III
I and IV
II and III
II and IV

I and III

The taxes paid may be used as a credit
The taxes paid may be used as a deduction

If a customer enters an order that is good for one month only, who is responsible for cancelling the order at the end of the month if the order is not executed?

The designated market maker
The customer
The NYSE
The brokerage firm that entered the order

The brokerage firm that entered the order
A registered representative who previously was the CEO of a cosmetics company wants to send a report to clients. She will include detailed information concerning individual equity securities of cosmetics companies she feels are good investments. Although the report analyzes different stocks she feels are attractive investments, it does not contain a recommendation. Which of the following statements is TRUE?

This is not a research report since the report does not contain a recommendation
This is a research report and requires approval
This is not a research report since the RR does not hold the title of a research analyst
This is a research report but does not need to be approved

This is a research report and requires approval
A broker-dealer is preparing sales literature on CMOs. Which TWO of the following statements must be disclosed?

The term collateralized mortgage obligation must be included within the name of the product
The basis point spread above a comparable Treasury security the client will receive in interest must be included
The lower of the yield to call or yield to maturity must be included
The government agency backing only applies to the face value of the securities

I and III
I and IV
II and III
II and IV

I and IV

The term collateralized mortgage obligation must be included within the name of the product
The government agency backing only applies to the face value of the securities

The value of an investor’s interest in a variable annuity during the accumulation period is subject to fluctuation according to the:

AIR
Amount of money deposited
Performance of the separate account

I and II only
I and III only
II and III only
I, II, and III

II and III only

Amount of money deposited
Performance of the separate account

An article in The Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This indicates that:

Buyers of new bills paid more than buyers paid the previous month
Buyers of new bills paid less than buyers paid the previous month
Interest rates are increasing
Buyers of new bills purchased the bills above par

Buyers of new bills paid more than buyers paid the previous month
If the FOMC enters into a repurchase agreement, what is the immediate effect on the amount of money in the banking system?

It has no effect on the amount
It decreases the amount
It increases the amount
It may increase or decrease the amount

It increases the amount
In a limited partnership, a general partner’s minimum participation in profits and losses is:

1%
5%
10%
15%

1%
A bank or brokerage firm is applying to become a primary dealer in government securities. Which government body appoints the financial institution as a primary dealer?

The Treasury Department
The SEC
FINRA
The Federal Reserve Board

The Federal Reserve Board
Regarding a company’s financial statements, total assets are equal to:

Total Liabilities + Stockholders’ Equity
Total Liabilities – Stockholders’ Equity
Total Liabilities + Stockholders’ Equity – Depreciation
Stockholders’ Equity + Goodwill

Total Liabilities + Stockholders’ Equity
Which TWO of the following statements are TRUE regarding brokered CDs sold by registered representatives?

These instruments are insured by the FDIC if the issuer declares bankruptcy
These instruments are covered by SIPC if the issuer declares bankruptcy
These instruments are insured by the FDIC if the broker-dealer declares bankruptcy
These instruments are covered by SIPC if the broker-dealer declares bankruptcy

I and III
I and IV
II and III
II and IV

I and IV

These instruments are insured by the FDIC if the issuer declares bankruptcy
These instruments are covered by SIPC if the broker-dealer declares bankruptcy

The additional bonds covenant for a revenue bond is found normally in the:

Official notice of sale
Prospectus
Bond indenture
Syndicate agreement

Bond indenture
Which TWO of the following statements are TRUE concerning a Health Savings Account?

The contribution is made in pretax dollars
The contribution is made in after-tax dollars
The funds grow tax-free if used to pay qualified medical expenses
The funds grow tax-deferred if used to pay qualified medical expenses

I and III
I and IV
II and III
II and IV

I and III

The contribution is made in pretax dollars
The funds grow tax-free if used to pay qualified medical expenses

A customer in his late twenties wants capital appreciation and is willing to take a moderate degree of risk in his initial investment. The customer is also concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable?

Equities
Corporate debt
Municipal debt
Variable annuities

Equities

Since the investor is concerned about inflationary risk, and is willing to accept a moderate degree of risk to his initial investment, equities would be the most appropriate investment. If the investor wanted a tax-deferred investment with the same investment objectives, variable annuities would be the most suitable choice.

A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover her short position. The customer instructs her registered representative to cover the short position at the market on the close. The order will be executed at:

Or as near as possible to the closing price
The closing price of the day
The closing bid price
The closing offer price

The closing price of the day
Evelyn has established the following position.

Long 1 DEF May 50 call at 2
Short 1 DEF May 40 call at 6

She expects to profit in which TWO of the following situations?

Both options expire unexercised
Both options are exercised
DEF rises in value
DEF falls in value

I and III
I and IV
II and III
II and IV

I and IV

Both options expire unexercised
DEF falls in value

The Taft Food Company intends to distribute shares of its grocery business to existing stockholders. The shares of this company will be traded separately from Taft. This is an example of a(n):

Stock dividend
Reverse merger
Spinoff
IPO

Spinoff
A municipal bond issue with an inverted yield scale has:

Lower yields on the shorter maturities than on the longer maturities
Higher yields on the shorter maturities than on the longer maturities
The same yields on all maturities
Prices higher on the shorter maturities than on the longer maturities

Higher yields on the shorter maturities than on the longer maturities
A registered representative’s broker-dealer is an underwriter of an initial public offering of stock. The RR’s father-in-law may purchase:

The IPO from a different broker-dealer
The IPO from the RR’s broker-dealer
Only a limited quantity of the IPO from any broker-dealer
The IPO but only from a member of the selling group

The IPO from a different broker-dealer
When selling a security for a customer, all of the following items MUST be included on the sell ticket, EXCEPT:

The number of shares or par value
The location of the security
The customer’s Social Security number
The customer’s account number

The customer’s Social Security number
An exercise notice for a European style stock index option may be entered on:
European style options may be exercised only on the day prior to expiration. Since index options expire on the Saturday following the third Friday of the month, European style contracts may be exercised on Friday, February 21.
Which of the following formulae is used to determine the total equity in a combined margin account?

LMV + DR – CR – SMV
LMV – DR + SMV – CR
LMV + CR – DR – SMV
LMV – CR – DR + SMV

LMV + CR – DR – SMV

To determine the equity in a combined margin account, take the long market value (LMV) plus the credit balance (CR), then subtract the debit balance (DR) and the short market value (SMV).

Which TWO of the following choices are characteristics of GNMA pass-through certificates?

Interest and principal payments are received monthly
The investor will receive her principal back at maturity
Timely payment of interest and principal is guaranteed by the U.S. government
Interest is subject to federal tax but exempt from state and local tax

I and III
I and IV
II and III
II and IV

I and III

Interest and principal payments are received monthly
Timely payment of interest and principal is guaranteed by the U.S. government

Which of the following descriptions best defines a tax swap?

The purchase and sale of bonds to incur commissions
The exchange of convertible bonds for stock to avoid the receipt of taxable interest income
The purchase and sale of bonds to realize a capital loss to offset against a capital gain for tax purposes
Exercising the exchange privilege of a mutual fund

The purchase and sale of bonds to realize a capital loss to offset against a capital gain for tax purposes
Money received by a corporation when it sells its stock above its par value is called:

Excess capital
Earned surplus
Paid-in capital
Stockholders’ capital

Paid-in capital
Which of the following securities are based on the credit rating of the issuer?

An exchange-traded fund (ETF)
A mutual fund that contains only non-investment-grade securities
A closed-end bond fund
An exchange-traded note (ETN)

An exchange-traded note (ETN)
Which of the following statements is TRUE concerning the tax treatment of municipal bonds?

-If the bond was purchased at a premium, it will be accreted based on the constant yield method
-If the bond was purchased as an original issue discount (OID), the discount will be accreted based on a constant yield method
-The premium will not be amortized if the bond was purchased at a premium
-The discount will be amortized if the bond was purchased as an original issue discount (OID)

If the bond was purchased as an original issue discount (OID), the discount will be accreted based on a constant yield method
A registered representative is discussing the investment merits of ABC stock with a customer. The registered representative may say:

“Let’s buy ABC stock because we expect it to go up 4 points in the next two weeks.”
“Our mergers department is working on a leveraged buyout for ABC Corporation, so let’s buy it now before it is announced to the public”
“One of our analysts just issued a favorable research report for public use on ABC stock, which estimates a 10% growth in earnings over the next three years and it appears to be a good situation for you.”
“Let’s buy ABC stock because we are in a bull market and all stocks go up in a bull market.”

“One of our analysts just issued a favorable research report for public use on ABC stock, which estimates a 10% growth in earnings over the next three years and it appears to be a good situation for you.”
A person age 63 has an IRA with total assets of $275,000. The maximum amount this person can withdraw from this account without incurring a penalty is:

$275,000
10%
50%
$14,000

$275,000
A customer has a restricted margin account. The customer sells $7,000 worth of securities and on the same day buys $5,000 worth of other securities. The Regulation T margin requirement is 50%. The customer may:

Withdraw cash equal to the margin requirement on the net amount
Not withdraw anything because the account is restricted
Withdraw the entire $2,000 net amount
Withdraw 50% of $7,000

Withdraw cash equal to the margin requirement on the net amount
A registered representative has purchased two tickets to a football game for which he paid $85 per ticket. If the face value of the tickets is $45 per ticket, the RR may take which TWO of the following actions?

Give one ticket to a customer
Give two tickets to a customer
Purchase two additional tickets and have two customers attend the game with their spouses
Give the two tickets to two different customers of the same firm

I and III
I and IV
II and III
II and IV

I and IV

Give one ticket to a customer
Give the two tickets to two different customers of the same firm

When a registered representative makes a recommendation to a customer involving a leveraged exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST important?

The security may be recommended to at least some investors
The security may be able to produce a profit over a long period
The security may be able to be sold quickly
The security may a good investment for a specific customer

I and III
I and IV
II and III
II and IV

I and IV

The security may be recommended to at least some investors
The security may a good investment for a specific customer

A floor broker goes to a trading post to execute an order. When told of the floor broker’s order, the designated market maker replies, “you’re stopped at 21.” This means:

The floor broker cannot trade the stock until it hits 21
The floor broker is guaranteed a price of 21
The stock stopped trading at 21
The floor broker will enter a limit order at 21

The floor broker is guaranteed a price of 21
An investor does not expect the price of XYZ stock to change in the immediate future and wishes to generate income. The best strategy is:

Sell a call
Sell a put
Sell a straddle
Buy a straddle

Sell a straddle

If the market price does not change, neither side of the straddle will be exercised. The premium on both the put and the call will be income to the investor.

All of the following statements are TRUE concerning a municipal bond issue having a serial maturity, EXCEPT:

All of the bonds mature on one date in the future
The bonds are priced on a yield-to-maturity basis
The issue has a decreasing outstanding principal
The issue has decreasing total interest payments

All of the bonds mature on one date in the future
John Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:

-10 rights plus $10.50 are required to subscribe to one new share of stock
-Fractional shares become whole shares
-The record date is Friday, October 17
-JPMorgan Chase and Bank of America are the transfer agents
-Goldman Sachs and Morgan Stanley are the standby underwriters
-John chose to subscribe to the rights offering and purchased additional XYZ Corporation common stock on October 16.

Based on his latest stock purchase, he will:

-Be permitted to subscribe
-Be permitted to subscribe provided that the trade was executed regular-way
-Not be permitted to subscribe because the stock traded ex-rights on October 15
-Be permitted to subscribe because the record date has no bearing on when the stock trades ex-rights

Not be permitted to subscribe because the stock traded ex-rights on October 15

John would not be permitted to subscribe to the rights offering for the new shares because he purchased the stock on October 16. The stock sold ex-rights on October 15. Therefore, he would not be a stockholder of record for these shares on the record date of October 17.

A REIT is NOT used for a tax shelter because it does NOT:

Allow flow-through of losses
Allow flow-through of income
Provide limited liability
Offer income potential

Allow flow-through of losses
An investor purchases an ABC Corporation October 50 put and pays a premium of $7. The underlying security declines to $40 per share. For tax purposes, the proceeds of the sale are:

$4,000
$4,300
$4,700
$5,700

$4,300

The proceeds of the sale for tax purposes are $4,300 ($5,000 strike price minus the $700 premium paid for the option equals the proceeds of the sale). The cost basis of the stock purchased is $4,000. The customer’s profit is then $300.

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:

Current market value
Par value
Par value plus accrued interest
Par value less accrued interest

Par value plus accrued interest

A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.

An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:

$122.50
$1,225.00
$12,250.00
$122,500.00

$12,250.00

The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of 10 puts quoted at 12.25 is, therefore, $12,250 (12.25 x $100 x 10 = $12,250).

Which of the following securities would you LEAST likely recommend to an investor requiring a fixed sum of funds to be received in 10 years?

A zero-coupon municipal bond
A high-yield corporate bond
Collateralized mortgage obligations (CMOs)
Treasury Inflation-Protected Securities (TIPS)

Collateralized mortgage obligations (CMOs)

The risk that an investor will receive her principal earlier than projected instead of at one time (i.e., prepayment risk) is the most important risk pertaining to mortgage-backed securities such as CMOs. Since the investor wants to receive a fixed amount of funds in 10 years, a CMO would be the least suitable of the securities listed.

An investor purchases Swiss francs in the spot market at 61. As a hedge, the investor buys a Swiss franc June 60 put at 0.50. This strategy will be profitable if:

The U.S. dollar weakens
The U.S. dollar strengthens
The spot price for the Swiss franc is 61.75
The spot price for the Swiss franc is 59.25

I and III only
I and IV only
II and III only
II and IV only

I and III only

The U.S. dollar weakens
The spot price for the Swiss franc is 61.75

An investor is a limited partner in a direct participation program that the IRS has determined to be abusive. This investor:

Will lose his entire investment
May be subject to pay back taxes as well as penalties and interest
Will escape all adverse tax consequences due to his limited status
Will be forbidden by the IRS to invest in any other limited partnerships

May be subject to pay back taxes as well as penalties and interest
Municipal term bond quotes are based on:

Yield to maturity
Current yield
Nominal yield
Dollar price

Dollar price
Taxable income normally includes:

The interest on municipal bonds issued in the state in which the taxpayer lives
The taxpayer’s annual 401(k) contributions
Reinvested dividends paid on a mutual fund investment
Any unrealized capital appreciation on stocks that the taxpayer owns

Reinvested dividends paid on a mutual fund investment
Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend?

A GTC order to sell 100 XYZ at $50 stop
A GTC order to sell 100 XYZ at $50 stop-limit
A GTC order to buy 100 XYZ at $50 stop
A GTC order to buy 100 XYZ at $50 stop-limit

I and II
II and III
II and IV
III and IV

I and II

A GTC order to sell 100 XYZ at $50 stop
A GTC order to sell 100 XYZ at $50 stop-limit

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?

The dividend received is treated as a return of capital
The taxes paid may be used as a credit
The dividend paid is exempt from taxes
The taxes paid may be used as a deduction

I and III
I and IV
II and III
II and IV

II and IV

The taxes paid may be used as a credit
The taxes paid may be used as a deduction

According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?

The name of the beneficiary for the customer’s account
Whether the customer is subject to IRS backup withholding rules
A written acknowledgment that the customer has received the fund’s prospectus
The name of the RR responsible for the account and the manager who approved the account

The name of the RR responsible for the account and the manager who approved the account
n 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:

After-tax yield
Discount rate
Real interest rate
LIBOR

Real interest rate

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.

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?

The annual interest payments are found on the balance sheet
The annual interest payments are found on the income statement
The interest payment is deducted from net income
The interest payment is deducted from EBIT

I and III
I and IV
II and III
II and IV

II and IV

The annual interest payments are found on the income statement
The interest payment is deducted from EBIT

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