Chapter Test Questions Flashcards

Question

Settlement for government securities is: A. Same day. B. Next day. C. 4 business days. D. 7 business days.

Answer 1

B. Next day. Government trades settle the next business day, or T.

Answer 2

C. To improve marketability. An attached warrant increases the attractiveness of a bond, enhancing its marketability. Consequently, the issuer can structure the bond with a lower nominal yield (stated interest rate). Investors will accept a lower stated interest rate in exchange for the warrant.

Answer 3

D. Outstanding stock. "Outstanding stock" is the term for issued stock less any treasury stock reacquired by the corporation.

Answer 4

C. Declaration date. The dividend is authorized on the declaration date.

Answer 5

D. 1,000 The number of votes controlled by the shareholder is always calculated using the same formula: number of shares × number of vacancies. Under the cumulative method, the shareholder may allocate those votes among the vacancies in any way he desires. In this example, the investor might choose to concentrate all 1,000 of his votes on one vacancy. Consequently, he would forfeit any vote on the remaining four vacancies.

Answer 6

D. 20% To qualify for the corporate dividend exclusion, the shareholding corporation must own less than 20% of the dividend-paying corporation's outstanding stock.

Answer 7

D. High debt/equity ratio A corporation with more debt has a higher debt/equity ratio and is more vulnerable to interest rate increases.

Answer 8

A. Inform the client of the consequences and refuse the order This question is about a prohibited practice known as “selling dividends”. Registered representatives are prohibited from advising an investor to purchase a stock for the sole purpose of receiving the dividend. The registered representative must inform the client of the consequences of buying a stock just before a dividend is paid. If the client were to purchase the stock just before the ex-dividend date, he would have an unrealized loss on the stock when the price drops on that date and he would have a tax liability because dividends are taxable.

Answer 9

D. I, II and III All dividend payments must be made to owners of all classes of preferred stock before common shareholders may receive a dividend. The cumulative feature also entitles the owner to any dividends in arrears.

Answer 10

A. Participating preferred offers the investor the potential to receive dividends in addition to the stated dividend. Participating preferred offers the stock the potential to receive a larger dividend in a year with exceptional corporate earnings.

Answer 11

B. Preferred stock is cumulative for past dividends and allows for a dividend catch up at some point in the future. Although most preferred stock is cumulative, the cumulative feature is optional. Straight preferred (or noncumulative) also pays a stated dividend but does not “catch up” dividends which may have gone unpaid during any prior period.

Answer 12

D. Bonds, in order to secure a lower interest rate Warrants are generally sweeteners attached to bonds to lower the interest rate the issuing corporation has to pay. But primarily, the warrants increase the marketability of the bond.

Answer 13

B. Convertible preferred The convertible preferred provision allows a shareholder to exchange preferred stock for common stock. The conversion price is determined at the time of issue.

Answer 14

C. Depreciation and amortization Amortization and depreciation are noncash deductions which are added back to net income to determine cash flow.

Answer 15

C. Callable preferred The call feature of a stock allows the issuing corporation to repurchase the stock in the future at a specified price. The call price is established at issuance and is usually above par to make the stock more attractive to investors.

Answer 16

A. Registrar It is the registrar’s job to make sure that the number of shares printed on the certificates is equal to the number of shares outstanding for the corporation. The transfer agent's job is to physically transfer the ownership of the shares.

Answer 17

D. Net revenue This balance sheet formula (also known as the balance sheet equation) is expressed as "Assets = Liabilities + Net Worth." Revenue and expense items are found on the income statement.

Answer 18

A. Increase the number of shares the investor owns to 1,060 shares, but will not impact the total value of the stock holding. A stock dividend is used by the company to gradually lower the price of the stock in the marketplace and save cash for future growth. It does this by paying dividends in shares rather than in cash. In this scenario, the investor will have more shares, but at a lower price. Therefore, the market value of the stock holding remains the same.

Answer 19

B. The customer pays for the securities on trade date. For cash settlement trades, trade date and settlement date are the same. The entire transaction takes place on the same day.

Answer 20

C. Short term. Stock rights are short-term instruments issued with a subscription price below the stock’s current market value. Because they enable the holder to purchase stock at a discount, rights have value. They trade briefly in the secondary market, because they expire in 30 to 60 days. Rights can be left to lapse or expire.

Answer 21

B. $2.16 $4,000,000 (profit) minus $350,000 (interest 7% X $5 million) = $3,650,000 (pre-tax profit) X .66 (converse of 34% tax bracket) = $2,409,000 (post-tax profit) minus $250,000 (preferred dividends) = $2,159,000 earnings divided by 1,000,000 shares = $2.16 EPS

Answer 22

A. A declaration of the dividend A declaration of a dividend has nothing to do with income per share. A dividend is the portion of earnings that the board of directors decides to distribute to the shareholders. The remainder is retained by the corporation in retained earnings.

Answer 23

B. 10.2% Net income = $1,500,000 gross earnings – $280,000 bond interest (7% x $4m) = $1,220,000 x 50% tax = $610,000 net income. Common shareholder equity = $5,000,000 retained earnings + $800,000 capital excess par + $200,000 par value outstanding shares = $6,000,000 total common equity. $610,000 / $6,000,000 = 10.16%

Answer 24

D. $1.59 The convertible bonds all converted ($5,000,000/$10 = 500,000 shares of common). More shares are created, but interest cannot be deducted. Therefore, taxable earnings increase and net income also increases; however, because the number of shares outstanding goes up, the earnings-per-share goes down or dilutes. $4,000,000 (profit) X .66 (converse of 34% tax) = $2,640,000 (post-tax profit) minus $250,000 (preferred dividends) = $2,390,000 earnings divided by 1,500,000 shares = $1.59 EPS.

Answer 25

A. Retained earnings will decrease. When a corporation declares a dividend, it becomes a current liability and must be paid. Retained earnings will decrease and current liabilities will increase by the total dollar amount of the dividend to all stockholders. An increase in current liabilities result in a decrease in working capital (which is equal to current assets minus current liabilities).

Answer 26

A. Treasury stock has voting rights. Owners of treasury stock have no voting rights and do not receive dividends.

Answer 27

D. Cumulative preferred Cumulative preferred stocks give the best assurance of dividend income because no dividends can be paid to common stockholders if any preferred stock dividends are in arrears (not paid).

Answer 28

C. Dividend payout ratio The dividend payout ratio expresses the portion of earnings which the board chooses to distribute to the shares.

Answer 29

B. Accounts payable Accounts payable includes short-term (30- to 60-day) liabilities. It is not part of a corporation’s long-term capital structure.

Answer 30

A. The opportunity to purchase new shares before the shares are offered to the public. Preemptive rights allow current shareholders the first opportunity to purchase a sufficient number of the new shares to maintain their current percentage of ownership in the company. The stock is offered to the general public only after current shareholders exercise their preemptive rights.

Answer 31

C. II and III When a corporation declares a dividend, it is deducted from retained earnings in the equity section of the balance sheet and added to current liabilities in the liabilities section.

Answer 32

C. It can be called by the corporation. Only callable preferred stock can be called by the corporation.

Answer 33

D. Balance sheet equation. The balance sheet equation works much the same for businesses as a net worth statement does for individuals. In both instances, net worth is calculated by subtracting liabilities from assets. One key difference is that companies often have inventory as an asset and bond obligations as a liability while individuals do not.

Answer 34

A. Issued shares minus outstanding shares Treasury stock was previously outstanding. It has been bought back by the corporation and placed in the corporate treasury. Total shares issued minus shares currently outstanding equals the number of shares bought back by the corporation.

Answer 35

C. Statutory and cumulative There are two types of voting processes used by corporations: statutory voting and cumulative voting. With statutory voting, shareholders are permitted one vote for each share owned to be voted for each director. With cumulative voting, shareholders can multiply the number of shares owned by the number of directorships and cast the votes in any manner desired.

Answer 36

B. Profit ratio The profit ratio measures how much of each revenue dollar is net income (Net income ÷ revenue).

Answer 37

D. The investor would be entitled to receive the dividend because the stock was purchased using cash settlement. An investor that purchases the shares on the record date for cash settlement is the owner of record as of that date. The investor is therefore entitled to the dividend. For cash transactions, the ex-dividend date is the day after, not the day before, the record date. The way to remember this is to remember the acronym DREP (Declaration, Record, Ex-date, Payable).

Answer 38

B. Current assets ÷ current liabilities. Current ratio measures the entity’s ability to pay its short-term debts. A number less than one means that the entity has insufficient funds to meet current liabilities.

Answer 39

B. Income statement An income statement shows a company’s performance over a specific period of time in terms of the company’s profits and losses.

Answer 40

B. Dividends from common and preferred stock of another domestic corporation Under current tax law, corporations may exclude from taxation 50% of common and/or preferred dividends they receive from stock owned in a U.S. corporation. In order to qualify, they must own less than 20% of the dividend-paying corporation’s outstanding stock.

Answer 41

A. Unissued shares. Unissued shares are authorized but have not been sold or distributed. Treasury stock has been issued and repurchased by the corporation.

Answer 42

C. Trading volume A fundamentalist looks at the company, not the market. Trading volume is a market characteristic and is examined by a technical analyst.

Answer 43

A. Cash, company stock and stock of another corporation. Dividends may be distributed as cash, company stock, or stock in a related or subsidiary corporation.

Answer 44

D. $500,000 Here is how to work through these transactions to see how they affect the investor's net worth. First, by moving $2,500 out of savings to invest in an IRA, the investor has simply moved a current asset to a long-term asset, so total assets remain unchanged. Second, when the investor uses $3,000 from savings to pay off a credit card, he has reduced both current assets and current liabilities by the same amount so net worth remains unchanged. Third, when the investor buys a $5,000 stereo on credit, both assets and liabilities have increased by the same amount; therefore, after all of this, the total net worth remains unchanged at $500,000. Remember, the formula for calculating net worth is total assets minus total liabilities.

Answer 45

C. Inspect the financials of Ajax Corporation. As a common shareholder of Ajax Corporation, Tim would have the right to inspect the books, meaning Ajax financial statements. Tim would have access to these financial statements through Ajax filings of their 10K annual reports and 10Q quarterly reports.

Answer 46

B. The acid test The acid test is the same as quick ratio: current assets minus only inventory divided by current liabilities.

Answer 47

B. 550,000 shares The formula to calculate the number of outstanding shares is as follows: Total issued shares - Treasury stock = Number of outstanding shares (or in this scenario, 600,000 - 50,000 = 550,000 outstanding shares).

Answer 48

A. Lower earnings yield lower dividends. Those holding shares of common stock have the right to participate in the earnings of the issuing company in the form of stock dividends. Dividends are usually paid quarterly by the issuing company, and as earnings fluctuate, so does the amount of payout per share issued by the company.

Answer 49

C. Maintain proportionate interest in the company. Preemptive rights allow the stockholder to maintain proportionate ownership in the company by having the first opportunity to buy new shares.

Answer 50

A. I and II Working capital is reduced because the heavy equipment is purchased with cash, a current asset. Fixed assets are affected because the value of long-term assets increases. (Heavy equipment is increased.) Total assets, however, do not change.

Answer 51

C. Interest coverage ratio The interest coverage ratio measures how easily the entity can pay interest on its outstanding bonds. A higher number is better.

Answer 52

B. 1,200 shares at $41.67 When a corporation declares a stock dividend, the number of shares goes up while the price per share goes down. The aggregate or total value of the investment stays the same. In the case of ABC Corp. declaring a 20% stock dividend, an investor who owned 1,000 shares will now own 1,200 shares. However, the value of $50 per share will be reduced to $41.67 per share (50/1.20). The total value of the investment remains $50,000.

Answer 53

B. Authorized stock. Authorized stock is specified in the corporate charter and is the total number of shares that the corporation may ultimately issue to the public.

Answer 54

A. The first date on which the stock trades without the dividend. The ex-date is the first day that the stock trades without the legal right to receive the dividend. On the ex-date, the stock price drops by the amount of the dividend.

Answer 55

A. The customer has entered into a legally binding contract and is obligated to pay for the stock. On trade date, the terms of the trade are set, and the customer has entered into a legally binding contract.

Answer 56

D. More vulnerable to interest rate changes. A low ratio indicates a large portion of the corporation’s capitalization is debt; it is highly leveraged. This makes the corporation vulnerable to rate changes. A low ratio indicates aggressive, not conservative financial management.

Answer 57

A. Common stock issued by another U.S. corporation Of these choices, a U.S. corporation would achieve the best tax relief by purchasing shares in another U.S. corporation. Dividends received from another domestic corporation qualify for the 50% exclusion from taxes. The investing corporation would only pay taxes on 50% of the dividend distribution.

Answer 58

D. Buys XYZ Friday, March 20 in a regular way trade If Monday, March 23 is the ex-date, then Tuesday, March 24 is the record date. Therefore, a regular-way purchase on Friday, March 20 would buy (or receive) the dividend because settlement occurs on Tuesday, March 24 (or T+2) meeting the requirement that settlement must occur on or before the record date.

Answer 59

D. Paid in capital surplus. When a corporation first issues stock to the public, any amount the investor pays for the new shares above par value is called "paid in capital surplus."

Answer 60

B. $3.05 Corporate profit of $1,500,000 minus $280,000 interest (7% X 4 million) = $1,220,000 X 50% = $610,000 divided by 200,000 shares = $3.05.

Answer 61

D. The amount of corporate capitalization that comes from long-term debt. The bond ratio equals total bond par value ÷ total long-term capitalization.

Answer 62

A. Working capital Working capital = current assets - current liabilities. It measures a corporation’s ability to meet current debt obligations.

Answer 63

A. Return on common equity. Return on common equity measures the return which management achieves on common stockholders’ equity. A higher ratio is better.

Answer 64

C. $9,940 Revenue minus the total of all expenses, including interest and taxes = $5,940. Then add depreciation, a non-cash expense for $9,940.

Answer 65

B. It summarizes what the company owns and owes. A balance sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time; in other words, it demonstrates what the company owns and owes.

Answer 66

C. Issued shares minus treasury stock. Outstanding Stock = Issued Shares – Treasury Stock. Remember that treasury stock, which is stock that has been issued (sold to the public) and subsequently bought back by the corporation, must be subtracted from the shares that have been issued.

Answer 67

D. Common shareholders Common shareholders are said to have a residual claim to assets. This means that common shareholders are the last to be paid per the order of bankruptcy liquidation. As owners, common shareholders take the most risk and also receive the greatest benefit if the company prospers.

Answer 68

B. Treasury stock. Treasury stock has no voting rights and does not receive dividends since the corporation holds these shares.

Answer 69

C. 200 Statutory voting rights allow for one vote per share per vacancy. No matter what the number of vacancies is, the maximum limit of votes per vacancy is one per share. In this case, 200 shares owned = 200 votes per vacancy.

Answer 70

A. Payment of a cash dividend to common shareholders Payment of a dividend affects shareholder income but is after-tax to the corporation, having no effect on its net income.

Answer 71

B. Shareholders' equity Receipt of cash from sale of bonds increases assets, working capital (current assets vs. current liabilities), and liabilities. There is no effect on a shareholder's equity.

Answer 72

B. Earnings available to common stockholders. EPS is net income available to common stock after the preferred dividend is paid.

Answer 73

A. P/E ratio. The P/E ratio measures the value of a stock at its current price, and is one of the most commonly used tools when comparing similar stocks.

Answer 74

C. III and IV A stock dividend reduces retained earnings and increases shares outstanding proportionately.

Answer 75

A. 200 shares at $25. 200 shares at $25 a share is what the investor would own after the two-for-one split. It is important to remember that the aggregate value remains the same; however, the number of shares goes up and the price per share goes down proportionately. In this case, 2/1 × 100 shares before = 200 share after ½ × $50 per share before = $25 price per share after.

Answer 76

D. Is a smaller number than EPS. Fully diluted EPS is a theoretical number. It is the earnings which would be available to commons shares if all convertible securities were converted to common stock. Fully diluted EPS assumes interest and dividends on convertible bonds and convertible preferred stock has NOT been paid. Because the total number of common shares significantly increases, fully diluted EPS is a smaller number than EPS.

Answer 77

C. Assets The declaration of a dividend increases current liabilities and reduces retained earnings. There is no impact on cash (assets) until the dividend is paid. When current assets are unchanged and current liabilities increase, working capital decreases.

Answer 78

A. Issued stock. Issued shares are the amount of stock that has been sold to the public.

Answer 79

C. They grant limited power of attorney to someone to vote on their behalf. Because attendance is usually inconvenient, most stockholders vote by proxy. A proxy is a limited power of attorney that the stockholder grants to someone to vote the stock either at his or her own discretion or at the instruction of the stockholder.

Answer 80

B. T+1 Government notes and bonds, including treasury bonds, settle regular way, which is the next business day (also known as T+1).

Answer 81

A. Ex-dividend date The ex-dividend date is dictated by the SRO. The other three dates are chosen by the corporation’s board of directors.

Answer 82

A. Book value per share The book value per share is the residual value of assets left after all other parties are paid, including preferred stock.

Answer 83

C. Decrease. If a client does not subscribe to the shares entitled by his preemptive rights during a stock rights issue, his proportionate ownership will decrease because there will be an increase in outstanding shares owned by others after the offer.

Answer 84

C. Goodwill Goodwill appears in the intangible assets section, below fixed assets.

Answer 85

A. Rights Corporations issue rights to allow shareholders to maintain their same ownership percentage in a corporation when new shares are issued. These shares are purchased at a fixed price (subscription price), which is lower than the public offering price.

Answer 86

B. Adjustable rate Adjustable rate preferred stock has a dividend that changes based on the performance of a benchmark security, and typically adjusts quarterly. Participating preferred stock might occasionally receive a dividend in excess of the normal stated divided, but this is an infrequent occurrence. Both participating and convertible preferred stock have fixed dividends.

Answer 87

D. A group of 40 individuals with annual incomes of $100,000 to $150,000 a year for 5 consecutive years. Two of the 40 investors have a net worth in excess of $1,000,000. Choice D is incorrect because under Regulation D, the company may sell securities to up to 35 non-accredited investors, and 38 investors in this example are non-accredited. All 40 have incomes less than $200,000 a year. Two of the 40 are accredited regardless of their incomes because they have a net worth of $1,000,000 or more.

Answer 88

B. Look at the number of outstanding shares of ABC And the average trading volumes for the previous 4 weeks. The officer would be able to sell the greater of 1% of the outstanding shares or the average trading volume for the previous four weeks. Form 144 is filed concurrently with the sale and the volume limitation applies during a 90-day period applicable to the Form 144.

Answer 89

A. Firm commitment underwriting In a firm commitment underwriting, the investment banker pays the issuer the value of all the shares, less the agreed upon compensation to the underwriting syndicate. If the issue is slow to sell or doesn’t sell, the investment banker selling the issue assumes the risk.

Answer 90

D. Alert the SEC that a control person is offering securities for sale. Rule 144 is a filing with the SEC concerning the sale of controlled securities.

Answer 91

B. II and IV During the 20-day cooling-off period, deposits may not be accepted, and customers are not obligated to buy.

Answer 92

B. Stock splits or stock dividends. Rule 145 does not require the filing of a registration statement when a company declares a stock dividend or engages in a stock split.

Answer 93

D. Blue Sky laws. State securities laws are known as Blue Sky laws. These laws are tested under the Series 63 examination.

Answer 94

C. $0.80 By definition, the "underwriting spread" is the difference between the public offering price per share ($10) and the proceeds to the issuer (9.20).

Answer 95

B. An issue of 5-year Treasury notes Treasuries are an exempt security. The other three are exempt transactions.

Answer 96

A. Is an agreement between participating broker/dealers who assume liability for any unsold shares and specifies the underwriters’ responsibilities and participation percentages. The agreement among underwriters, also known as the syndicate letter, is between the broker/dealers who have formed the underwriting syndicate. It spells out the responsibilities of each syndicate member and each member’s percentage liability. It is important to differentiate the agreement among underwriters from the underwriting agreement. The agreement among underwriters is between syndicate members. The underwriting agreement is between the managing underwriter and the issuer.

Answer 97

A. 3 days from the effective date The quiet period for a subsequent primary or add-on offering is 3 days from the effective date. This is the time period during which no research may be published on XYZ to prevent influencing the market value of XYZ outstanding stock.

Answer 98

B. An associated person whose limited registration permits selling only investment company products An associated person with a limited registration is not a restricted person. The other associated persons are restricted. Whether an associated person plans to sell the IPO and whether the member firm is involved with the offering is irrelevant.

Answer 99

D. Guaranteeing the offering price of the issue to the customer. Since the offering price has not yet been determined, it cannot be guaranteed. The word “guarantee” should always be treated cautiously on the Series 7 exam.

Answer 100

A. Securities Act of 1933 The ’33 act requires SEC registration and prospectus disclosure.

Answer 101

B. $9.2 million. The proceeds to the issuer will be $9.20 per share for 1 million shares.

Answer 102

C. I and IV I and IV are the answers to this question (note the word "EXCEPT") since indications are binding on neither the customer nor the underwriter.

Answer 103

C. ABC Bank Corp 6% debenture Securities issued by bank holding companies are not exempt.

Answer 104

A. Rule 147. SEC Rule 147 is the intrastate offering exemption. Certain requirements must be met with regard to the company's assets, revenues, and proceeds. Also, 100% of the purchasers must be principal residents of the state.

Answer 105

C. At least $100 million in assets under discretionary management. A QIB has at least $100 million in assets under discretionary management.

Answer 106

D. During the offering period, the analyst may include this company but give it no special recognition. The analyst may include the company if it is not highlighted or if past recommendations about the company are not changed.

Answer 107

D. The Securities Act of 1933 The primary purpose of the Securities Act of 1933 is to provide purchasers of new issues fraud prevention in the sale of securities.

Answer 108

A. An offer to buy stock at a price above current market value. A tender offer is a formal offer made by the corporation to existing shareholders to purchase their shares at a price above current market value.

Answer 109

A. The underwriter must have done at least three offerings in the last 3 years. These three offerings must have been at least 50% of the size and type of ABC’s offering. When ABC goes public, it must employ at least one qualified independent underwriter. The qualification of this underwriter is that it has done at least three offerings of this type that are at least 50% of this offering’s size in the last 3 years. The independent underwriter’s function is to help price the security.

Answer 110

C. Within 25 days of the effective date. In a sale of IPO securities, the final prospectus must be delivered to any customer within 25 days of the effective date if it qualifies to be listed on the exchange. If the IPO does NOT qualify for listing, the prospectus delivery requirement is 90 days.

Answer 111

C. Spinoff. When a company decides to separate a division into its own entity, the process is called a spinoff. Sometimes it is advantageous for a division to operate independently.

Answer 112

D. All of the above are correct statements. All of the statements are correct regarding Regulation D conditions.

Answer 113

B. II and III FINRA Rule 5130 states that broker/dealers and associated persons are not allowed to purchase IPOs from a syndicate. The broker/dealer’s involvement in the syndicate is irrelevant. This restriction extends to a registered representative’s in-laws, siblings, children, parents and spouses. Aunts, uncles, cousins and grandparents are excluded. Additionally, anyone financially supported by the registered representative or associated person is also a restricted person.

Answer 114

C. Securities and Exchange Commission. SEC stands for Securities and Exchange Commission.

Answer 115

A. 0 days. Issuers with a public float of at least $150 million and an average daily trading volume of $1 million would have no restrictions prior to the effective date. Issuers with an average daily trading volume of at least $100,000 and $25 million in public float are subject to a restricted period of 1 day before the effective date. Tier 3 companies – companies that do not qualify for Tier 1 or Tier 2 (smaller companies) – have a 5-day restricted period.

Answer 116

A. U.S. government bond Only the U.S. government bond is an exempt security; the rest are considered nonexempt securities and must be registered under the Securities Act of 1933.

Answer 117

D. Issue a deficiency letter or a stop order. The SEC will issue a deficiency letter, which suspends the cooling-off period until the deficiency is corrected, or a stop order, to prohibit sale until the deficiency is corrected.

Answer 118

D. The purchase must be paid for in its entirety. If a selling company is subject to the SEC reporting requirements, the securities must be held at least 6 months. Otherwise, they must be held at least 1 year. The holding period begins when the securities are bought and fully paid for. A broker/dealer can act as an agent, but restricted stock is not registered with the SEC.

Answer 119

B. If the sale involves more than 5,000 shares If the sale involves more than 5,000 shares, or if the aggregate dollar amount is greater than $50,000 in any 90-day period, affiliates must file a notice with the SEC.

Answer 120

C. Permissible if the meeting is attended by a compliance officer. An employee from the legal or compliance department must be present if the analyst is speaking with the investment banking department.

Answer 121

C. If the bonds are not convertible. Because the bond is a different security than the stock, including it in the newsletter is permissible if it is not convertible into stock.

Answer 122

B. 6 months Before restricted securities may be sold in the marketplace, they must be held for a specified period of time. If a selling company is subject to the SEC reporting requirements, the securities must be held at least 6 months; otherwise, at least 1 year.

Answer 123

A. $200,000. An individual natural person is an accredited investor if his or her income in each of the past 2 years exceeded $200,000 and it is reasonable to expect the same income level in the current year. If it is a joint account, the income test increases to $300,000.

Answer 124

C. Deliver one round lot of the stock A shareholder who sells into a tender offer must deliver shares net long. This means that the actual shares must be delivered. Options and warrants must be exercised first, then the resulting shares may be delivered into the tender. An investor may not sell short into the tender.

Answer 125

A. 1 day prior to the effective date For issuers offering additional shares who currently have an average daily trading volume of at least $100,000 and $25 million in public float, the restriction for offering participants is 1 day prior to the effective date.

Answer 126

A. It includes the price of the security. The red herring does not include the price of the security. The red herring, or preliminary prospectus, is often used to gauge subsequent market interest on the effective date.

Answer 127

D. 2 years In general, shelf registration gives the issuer 2 years to complete the issue. It may be as long as 3 years for seasoned (SIs) and well-known seasoned investors (WKSIs).

Answer 128

B. Application The three methods used to “blue sky” a security are notification, coordination, and qualification.

Answer 129

D. An unlimited amount Under Reg D rule 506, there is an unlimited amount of money that can be raised.

Answer 130

A. $0.20 The syndicate underwriter's allowance (take-down) is $0.70, but on sales made by the selling group, the syndicate members are conceding $0.50 of the $0.70 to the selling group. The syndicate is, in effect, receiving a $0.20 override on sales made by the selling group.

Answer 131

A. Spinoff. Selling or separating a portion of a corporation is called a spinoff.

Answer 132

D. None of the above. No one requires an underwriter to publish a tombstone ad.

Answer 133

B. $5 million Under Reg D rule 504, the maximum amount that can be raised in any 12 months would equal $5 million. Additionally, all investors must be accredited investors.

Answer 134

D. A shelf offering The best answer is a shelf offering, since the issuer will need the money in stages over the next 2 years. Because the issuer is small, it only qualifies for a 2-year offering period. IPO is not the answer because an issuer only has one initial public offering. In a registered secondary offering, the offering proceeds go to a party other than the issuer. An immediate offering at the market is a possible choice. However, since the issuer will need the capital in stages, shelf offering is the better answer.

Answer 135

D. Regulation D. Private placement conditions are covered under Regulation D.

Answer 136

C. Spinoff A spinoff occurs when a division of the company is separated into a new entity. Often this new entity will issue bonds that are guaranteed by the company it was formerly associated with to reduce interest costs. The spinoff entity is sometimes held as a subsidiary. In other instances, it is sold to another company.

Answer 137

C. A separation between investment banking and the other functions inside a broker/dealer. The Chinese Wall separates the investment banking department (also called the underwriting department), which handles inside information, from other departments of the broker/dealer.

Answer 138

B. Reg A+ Regulation A+ or small issue exemptions, use an offering circular for disclosure instead of a prospectus. It must be sent to the prospective buyer either 48 hours prior to the purchase, or at the time of purchase, with a 5-day right of rescission.

Answer 139

A. Private placement Unregistered securities purchased through a private placement are governed by Reg D. These securities are restricted from resale for 6 months for SEC-reporting companies, or for 1 year for nonreporting companies. Securities accumulated through Reg A are not restricted securities.

Answer 140

D. It must be disclosed in the prospectus. The right of the managing underwriter to enter a stabilizing bid in association with a primary offering must be disclosed in the prospectus.

Answer 141

B. Include the stock in a quarterly research report only if it has been included previously The stock may be included if it has previously been included in a list with several similar companies and the recommendation is not more favorable than it had been previously. Additionally, the company cannot be given any special recognition.

Answer 142

B. 40 days of the effective date. Non-NASDAQ OTC issuers must deliver a prospectus for 90 days after the effective date in an IPO, and 40 days from the effective date for APOs.

Answer 143

C. II, III, I The correct answer must show II (spread) as first in order, so the first and last answer choices can be eliminated. The reallowance is the smallest part of underwriting compensation; it is paid to another member whose only interest in the underwriting is filling a few customer orders.

Answer 144

C. $50 million with no more than $15 million by affiliates Under Reg A+ Tier 2, the maximum amount of money that can be raised is $50 million with no more than $15 million by affiliated persons. This is to allow emerging growth companies to raise money. Under Reg A+ Tier 1, the maximum amount of money that can be raised is $20 million with no more than $6 million by affiliated persons.

Answer 145

C. Three years from the effective date of the shelf offering Because XYZ is a WKSI, it may spread the offering over a 3-year period through a shelf offering. If XYZ was an unseasoned issuer (a smaller company), the shelf offering period would last only 2 years.

Answer 146

B. Private placement Private placements are more commonly used to acquire restricted stock. Rights offerings (registered offerings), Employee Stock Ownership Plans (ESOP), and mergers are less common.

Answer 147

A. An offering memorandum. The announcement that must be filed in connection with a Regulation D offering is an offering memorandum.

Answer 148

A. Free-writing prospectus. WKSIs may use a free-writing prospectus for additional primary offerings (APOs) or add-on offerings.

Answer 149

C. 90 days A filing for sale under Rule 144 has a 90-day time restriction. If the security is not sold within 90 days of filing the Form, the affiliate must file an amended notice.

Answer 150

B. In response to an SEC deficiency letter Additional information is required when responding to SEC deficiency letters. The SEC verifies that full and proper disclosure is made to the investors or potential investors. If something is inherently fraudulent or missing in the registration documents, the SEC will send out a deficiency letter and issue a stop order. The registration process will continue once the issuer provides the additional information to the security and exchange commission.

Answer 151

C. 100% of the proceeds must be invested in the state. Under Rule 147, 80% of the proceeds must be invested in the state.

Answer 152

C. The issuer and the managing underwriter The underwriting agreement is between the issuer and the managing underwriter. It is the document that spells out the duties and responsibilities of each party, including who has liability for any unsold shares.

Answer 153

C. A security offered for sale in only one state. Offering all the securities in one state is an exempt transaction (Rule 147). The security offered through the exempt transaction is NOT an exempt security. The other securities listed are exempt securities. Municipal securities are also exempt.

Answer 154

C. Domestic purchase of foreign securities. Rule 144A allows domestic QIBs to purchase securities outside the US if done through a broker/dealer.

Answer 155

B. Testing the waters Testing the waters is a term that is used when the issuer is gauging marketability of their offering. A preliminary offering circular is sent to prospective investors to determine the viability of the offering. This is done prior to the offering statement being filed. The other three statements are incorrect because a prospectus is used for a public offering and an omitting prospectus and statement of additional information are both used for an open-end investment company.

Answer 156

D. Add-on offering In an add-on, or subsequent primary offering, a publicly traded company increases its capitalization by issuing additional shares in the primary market. In a registered secondary offering, a party other than the issuer (usually a large shareholder) sells unregistered shares through a process of registration. In a registered secondary offering, the issuer does not receive the sale proceeds.

Answer 157

A. Off-shore sales of restricted stock. Regulation S addresses off-shore sales of restricted stock and requires a 1-year holding period. Debt instruments sold under Reg S have a holding period of 40 days. Regulation M requires that broker/dealers establish a Chinese wall between underwriting and sales/trading departments. Regulation D relates to the issuance of unregistered, nonexempt securities. Regulation T governs the extension of credit from a broker/dealer to its customers.

Answer 158

D. Is permitted if reported in the prospectus of the new stock issue. Stabilization is a one-sided bid by the underwriter to stop the decline in the price of a new issue of stock. If the syndicate has the ability to utilize stabilization, it must be disclosed in the prospectus.

Answer 159

D. I, II and III All three are governed by that state. Generally, all three must be registered in that state. The Blue Sky laws under the Uniform Securities Act are tested in the Series 63 exam.

Answer 160

C. II and III The resale in the secondary market of Reg S offerings is restricted for U.S. investors for a period of 1 year or 12 months for equities and 40 days for debt securities.

Answer 161

D. There was no resulting trade for the customer. The sell stop was placed at $45, so once the stock price hit $44.32, the stop was erased, then the limit order was in effect at $43. So the customer was only willing to sell at a price of $43 or better, which would be higher. However, the next trade was at $42.98, which was below the limit price of $43. Therefore, the customer's trade did not occur.

Answer 162

C. On the spread between the bid and the ask OTC market makers make a profit on the spread between the bid and the ask in the securities that they trade.

Answer 163

A. TRACE Trade Reporting and Compliance Engine is used by broker/dealers to report corporate bond trades. OATS is used to monitor for front running and best execution. RTRS tracks municipal bonds. All three systems are TRFs, or Trade Reporting Facilities.

Answer 164

B. Markups/markdowns and commissions should be fair under the circumstances and should probably not exceed 5%. The policy applies to markups, markdowns, and commissions. Five Percent is a guideline, not a firm maximum.

Answer 165

D. All of the above. All three are required so that there is an audit trail for the trade.

Answer 166

A. Bearish. A short position is an open, not a closed, position. Accredited and non-accredited investors may establish short positions. Long positions are bullish; short positions are bearish.

Answer 167

A. Arbitration arbitrage. Arbitration arbitrage is not a form of arbitrage. Arbitration is used for dispute resolution.

Answer 168

D. I, II, III, and IV Level 2 is the trading desk and sees all quotes entered. Level 3 is where the market maker enters quotes, while Level 1 is where the R/R and/or customer can see inside asked and bid, or lowest asked and highest bid.

Answer 169

D. II, IV, I, III After the RR receives the order from the customer, it is submitted it to the wire room. The order is "wired" to the floor of the NYSE, where the firm's commission broker executes the trade. The execution is reported to the P&S (purchase and sales) department; from there it goes to the margin department, where the required margin is calculated; the last step in the sequence is the cashiering department, which is responsible for sending out the "bill."

Answer 170

D. 13 The market order was filled at 13, and the customer will receive this price in spite of the confirmation error.

Answer 171

A. 15.50 plus markup. Since the price is above the ask, it must be a customer purchase including a markup, because customer purchases are executed at the ask plus a markup. Conversely, customer sales are executed at the bid (in this case 15) less a markdown.

Answer 172

D. The stock with the more narrow spread is more active. Generally, the more actively traded stock will have a narrower spread between the bid and ask price.

Answer 173

C. Sell stop at 54.88 When an investor is long stock and wishes to protect against a loss or to lock in a profit on the position, the investor enters a sell stop order below the current market. The current market value of the stock is at 55 and the client wishes to protect the profit, so a sell stop order at 54.88 could be entered. If an investor has a short position in the stock and wishes to protect or lock-in a profit, a buy stop order would be entered above the market.

Answer 174

D. I, II, III and IV The first three of these are principal transactions (as a dealer). The last is an agent or broker transaction.

Answer 175

A. Ask price The asked, or offering price, is the lowest price that a seller is willing to accept for a security from a customer.

Answer 176

B. Investors. The purpose of any trade or quote reporting system is to provide current information to investors, not regulators, and not just institutional investors.

Answer 177

C. The broker/dealer, client, and clearing firm are restricted from transacting in that security until the securities that are sold short are delivered in good delivery form. A short sale is the sale of an asset that the seller does not own. Short sale securities are securities that are borrowed. The original owner of the securities has every right to transact anytime they deem appropriate for their account. If securities are not returned, the original owner may also be in breach of failure to deliver. For this reason and others, FINRA has established delivery requirements and since amended the rules to include this amendment which places strong performance requirements and responsibilities on the broker/dealer and the clearing firm. Also included in the rule is the declaration that the broker/dealer effecting the short sell transaction and the client are restricted from transacting in the securities until the shorted securities are delivered in good delivery form.

Answer 178

A. Charges must be fair and reasonable. The Five Percent Policy is a guideline for determining fair and reasonable markups, markdowns and commissions. It states that such charges must always be reasonable given the circumstances. It is not a rule establishing 5% as a maximum.

Answer 179

A. Handling the execution of a customer's orders. A cashier handles money and securities for the firm and does not handle the execution of a customer's orders.

Answer 180

D. 21 Sell short 20 stop 20.50 (limit) is triggered or elected at 20 or below, and executed at or above 20.50. The order is triggered at 19 (20 or below), and execution occurs at 21 (the next price that is 20.50 or above).

Answer 181

C. The order is triggered at or above 20 and filled at 19 or lower. Buy stop limit order: stop at 20 or above, execute at 19 or below.

Answer 182

A. Dealer. A firm transacting trades for its own account is acting in the capacity of a dealer.

Answer 183

A. An agent. A firm that brokers and charges a commission is acting as an agent.

Answer 184

B. Long position. A bullish investor establishes a long position in (buys) a stock. A bearish investor establishes a short position in (sells) a stock. Spreads and straddles may be bullish or bearish, depending on whether they are net debit or credit positions.

Answer 185

D. No price is set, and the order is to be filled at the best available market price. A market order has no specified price and is filled at the best available market price when executed.

Answer 186

D. These trades are neither reported nor visible to the public. Because of the lack of transparency with dark pool trades, they are considered unfair by some because the true volume and price of the security being traded is not displayed to the public.

Answer 187

C. No later than settlement date The confirmation must be sent no later than completion of the trade or settlement date.

Answer 188

A. Nonexempt securities Nonexempt (corporate) securities in secondary trades are under the policy.

Answer 189

B. Bid price. A customer selling a secondary market security will receive the bid price, which is the highest price a dealer is willing to pay.

Answer 190

D. Priority, precedence and parity Priority (time), precedence (size) and parity (coin toss). Priority means orders that get there first get filled first. Precedence means the larger order will get filled first. If the orders are entered at the same time and the orders are the same size, the exchange will toss a coin; this is called parity.

Answer 191

B. A dealer makes a profit by charging a commission on the security transaction. Dealers do not profit by charging a commission; they make their profit by charging markups on sales and markdowns on purchases.

Answer 192

C. Your client can buy up to 200 shares at $54.17 or sell up to 500 shares of the stock at $54 to the market maker. First, an explanation of the quote provided: The market maker is willing to sell up to 200 shares at $54.17 or buy up to 500 shares at the price of $54. Those are the market maker’s positions; your client is on the other side of the trade. Your client is not obligated to buy or sell the full amount of shares. The quote is simply stating the market maker’s trade limits at that price. The market maker’s BID is what the client will receive if the client sells and the ASK is what the client will pay if the client buys.

Answer 193

A. 34.50 A buy stop limit is placed above current market value. This order was triggered on 35.50, and executed at 34.50.

Answer 194

A. Buy stop limit order. This is a buy stop limit. The first price is the stop or trigger price, and the second is the price limit. Therefore, the order will be triggered at 35, and then become a live limit order to buy at 36 or better (less).

Answer 195

A. Limit A specialist can hold limits, stops, and stop limits away from the market, but not market orders (whether public or private). A "not held" is a market order.

Answer 196

B. Send a DK notice to the contra broker DK stands for Don’t Know and is used when the member firm does not recognize the trade or when the terms of the transaction were not what the member firm agreed to.

Answer 197

A. Special offer A "special offer" is an attempt to stabilize a declining stock. It appears prior to execution.

Answer 198

A. Operations department. The operations department is back office and issues, confirms, but does not receive order tickets, which are front office.

Answer 199

C. Bid price. The highest price a buyer will pay for a security is the bid price, which is the price the seller (customer) will receive.

Answer 200

B. An auction market The OTC is negotiated and competitive, involving dealers and traders processing orders and automatic quotes. Shares of the largest corporations trade OTC. The stock exchange, like the NYSE, is an auction market.

Answer 201

A. 25.12 Customers buy at the offer and sell at the bid.

Answer 202

B. Interdealer quotes. "Pink Sheets" are compilations of all OTC common stocks with inter-dealer quotes (if available). An interdealer quotation system (IQS) is a system for organizing the dissemination of price quotes and other securities information by broker and dealer firms. IQSs are intended to provide investors with timely and relevant information on which to base their investment decisions.

Answer 203

D. CUSIP CUSIP is not required on the trade ticket or confirmation. CUSIP refers to the Committee on Uniform Securities Identification Procedures which oversees the entire CUSIP system. The CUSIP number is a unique identification number assigned to all stocks and registered bonds in the United States and Canada, and it is used to create a concrete distinction between securities that are traded on public markets.

Answer 204

B. The combined proceeds to the broker/dealer on the sale and purchase should not exceed the 5% guideline based on the inside ask on the buy side. A proceeds transaction is one in which the proceeds of a sale are used to make an immediate purchase. FINRA states that the fairness of the markup is based on the combined proceeds to the broker/dealer divided by the inside ask on the buy side, and the broker/dealer should NOT consider these as separate trades but as one combined trade.

Answer 205

A. Listed stocks traded over the counter. When stocks that are listed on any exchange are traded away from that exchange in the OTC market, such trading is described as third market.

Answer 206

C. 20.13 Sell stop limits are placed below current market value. Therefore, XYZ must be currently trading above 20. The sell stop limit will be triggered when XYZ declines to or below 20. Therefore, at 19 the order is triggered and becomes a live limit order to sell at 20 or better; the first tic or trade at or above 20 is 20.13.

Answer 207

B. Arbitrage. Arbitragers make their money by buying on one exchange and simultaneously selling on another exchange taking advantage of small price deviations. It’s important to remember that arbitragers need to move large blocks of securities in order for arbitrage to be profitable.

Answer 208

C. Reclamation. Reclamation means literally "to reclaim or take back," as the question describes. When a security is refused at settlement, it is known as a "rejection."

Answer 209

B. 10 While many regulations also state immediately, the required deadline is stated as 10 seconds. It is a reasonable time after the trade.

Answer 210

B. By contacting her broker/dealer STAT Investments; she will get the bid price of $3.15. While it would be advantageous for the investor to contact Donaldson directly, this can only be done with LEVEL III Nasdaq access, which her broker/dealer has. So, she needs to contact her broker. She will get the $3.15 price less a commission charge. The investor has access to Level I Nasdaq, which shows the best pricing, but not the name and contact information.

Answer 211

B. Exchange distribution. A "stock cross" is an exchange distribution, crossing a huge buy order with a sell order, the specialist acting as a broker's broker. A "secondary" is a spin-off distribution with a prospectus filed with the SEC, the largest of the blocks. A "special order" is a stabilizing bid reported on the tape prior to execution to support a falling stock. The "specialist block" is done quietly in the Third Market.

Answer 212

D. A stop order. With a stop order, when the specified price level (trigger) is reached, it is triggered. Then it becomes a live market order, executed immediately at the next price.

Answer 213

C. I and II Only orders that are placed at or below current market price are adjusted: these include buy limits, sell stops, and sell stop limits. On the other hand, sell limits, buy stops and buy stop limits are placed ABOVE the current market value, and therefore are not adjusted.

Answer 214

B. Third Market. A listed stock trading in the OTC market is referred to as the Third Market. These trades are reported to FINRA, and quotes can be found on the Consolidated Quote System (CQS).

Answer 215

C. A specialist block. Only one specialist is involved; the order is booked and taken off the floor, hence the term "specialist block."

Answer 216

B. Trader or dealer A trader can be a market-maker, a dealer, a firm acting as principal, or a taker of long or short positions, but not an agent or broker.

Answer 217

C. I and II The Fed regulates OTC margin, FINRA regulates OTC trading, and the SEC has an overview of FINRA, whether a trade was done for cash or on margin. The FRB does not regulate trade practices.

Answer 218

C. 35.13 Sell stop and sell stop limit orders are triggered (elected) when the stock price trades at or through (below) the trigger price, which is 35.50 in this example. This stop limit order then becomes a live limit order to sell at 35.50 or better. This order is triggered at 35.13. Then it becomes a live limit order to sell at 35.50 or better. Therefore, it would be executed at 35.62.

Answer 219

A. Is held in the specialist's book. The order is guaranteed to be executed at $36.50. Awaiting execution, the order is held in the specialist's book.

Answer 220

D. I and III The designated market maker (DMM) may guarantee a floor broker a price for one of the broker's public orders, as long as, in the DMM's judgment, it would not adversely affect the market in the stock.

Answer 221

A. NBBO. The NBBO, which stands for the National Best Bid and Offer, will be determined by looking at all the different markets where the security trades to determine the highest bid and the lowest ask price.

Answer 222

D. OTC Municipal bonds trade in the OTC market, which is a negotiated market.

Answer 223

D. A firm can act in both the capacity of a broker and a dealer when selling securities from its own inventory. Acting as broker and acting as dealer are mutually exclusive. In each trade, the firm acts as one or the other, but never both. When a firm acts as a broker, it is acting in an agent capacity and does not use its inventory account.

Answer 224

D. OTCBB. OTCBB consists of unlisted over-the-counter stocks. The OTCBB is not an exchange. The Consolidated Quotation System (CQS) is the electronic service that provides quotation information for stock traded on the American Stock Exchange, New York Stock Exchange, and other regional stock exchanges in the United States and also includes issues traded by FINRA member firms in the third market. ``` BSE = Bombay Stock Exchange (India) NYSE = New York Stock Exchange CSE = Canada's New Stock Exchange ```

Answer 225

B. Firm. When a member firm accepts an order of this type, it accepts ultimate responsibility for follow-through. The firm's commission broker is commonly known as the "floor broker" and is on the floor of the exchange. The specialist has no responsibility in this case because the specialist doesn't know that the order was only good until the end of the month.

Answer 226

C. Limit order. When there are many limit orders entered at the same price, they are filled in the order in which they are entered, a time priority. It is possible that those orders entered last are not executed because the other orders (stock ahead) may not be executed before the stock price moves beyond the stipulated limit price.

Answer 227

D. Last-sale price information is available on OTC transactions in the National Market System. Last-sale information is available for OTC transactions in NASDAQ National Market System, not on NASDAQ small caps or emerging companies.

Answer 228

B. II and IV Buy limits, sell stops, and sell stop limits are placed below current market value. Sell limits, buy stops, and buy stop limits are placed above current market value.

Answer 229

A. Underwriter. A broker is an agent. The DMM is also a principal but does not underwrite new issues.

Answer 230

B. Your execution will be 38.50 or better. A DMM stopping the stock guarantees a price that is equal to or better (usually subject to only one attempt by a broker to get a better price).

Answer 231

D. Not held A “not held” order is held by the floor broker until the floor broker judges the best time to submit the order to the specialist. Market public orders are executed without delay unless specifically designated as "not held" ("hold for a better time or price") or "not public" ("execute away from the trading pit").

Answer 232

D. Agency cross The broker would act as an agent (not principal) and cross both customers at one price (usually between bid and asked) with the commission due from each customer.

Answer 233

A. Only the specialist.

Answer 234

A. Floor broker. A public order that is transmitted to the New York Stock Exchange Floor is represented on the floor by a floor broker who competes for execution of the order.

Answer 235

D. Convert the bond and sell the stock in the market. The investor should convert the bond and sell the stock in the open market. This is a form of convertible securities arbitrage. Both the conversion price and conversion ratio are based on the par value. Because we know the conversion price is $25, we simply take the par value of $1,000 divided by $25 and we get the ratio of 40:1. The bond is currently trading at $1,050. To come up with the parity of the common stock, take the $1,050 divided by 40 which would equal a parity price of $26.25. The stock is currently trading at $26.50 so therefore, if the investor purchased the bond and converted it at $26.25 and simultaneously sold in the market, it would make $0.25 per share or $1,060 per bond (which would be $26.50 times 40 equals $1,060). If the investor allowed the bond to be called, they would only make $1,030 and if they sold it in the market, they’d only make $1,050. The investor would not be allowed to keep the bond and continue to receive interest after it’s been called.

Answer 236

B. 5.50 Dealers must sell to customers at a price based upon current market value. Because the question identifies this transaction as a sale (the dealer is figuring MARK-UP), the mark-up will be based upon the best available ASK price, which is 5.50.

Answer 237

A. ECNs cannot execute mutual fund trades. Institutional investors, including mutual funds, use ECNs to execute trades on an agency cross basis.

Answer 238

D. The DMM has guaranteed the broker a price of 31. The DMM stopping the stock is guaranteeing a price. The broker now has one chance of doing better. The DMM will only stop the order for public orders, not for institutional orders.

Answer 239

C. Cost of the security held in inventory The dealer's cost cannot be considered since every trade must be based on current market price at the time of that trade.

Answer 240

A. A limit may never be executed. Because a limit order is dependent on market movement in a certain direction, it may never be executed. Buy limits are placed below, and sell limits above, current market value. Market orders are executed immediately; limit orders are left with the specialist for possible future execution.

Answer 241

A. Sell side reports through TRACE within 10 seconds. Corporate Bond transactions are reported through TRACE. Both the buy side and the sell side are required to report within 15 minutes of the transaction. Once the trade report is in from both the buy side and the sell side, FINRA is required to release the information to the public immediately.

Answer 242

B. The bond was purchased at a discount. This is not a correct statement; the bond's purchase price is higher than par, so it was purchased at a premium, not a discount.

Answer 243

C. Nominal rate of 6% with a basis of 5.5% The basis of 5.5 is lower than the stated or nominal rate of 6%, so therefore the bond is trading at a premium. If we follow the YMCA technique, this would indicate that the lowest rate is yield to call on a premium bond.

Answer 244

D. They require voter approval. Voter approval is only required for general obligation bonds because they are backed by the full faith and credit of the state or local taxing authorities.

Answer 245

D. $150,000. Ted and Carol could make an accelerated gift of $150,000 ($75,000 each) without paying gift tax. They would not be able to make another contribution for 5 years.

Answer 246

C. That it locks in a price for a specified period of time and the period of time can be accelerated by the recall. An outfirm quote with a 5-minute recall locks in a price at which the bonds can be purchased for a specific period of time. This way, the other firm is able to market those bonds without having to purchase them first and placing them in their inventory. The recall will accelerate the period of time in which the quote is out firm.

Answer 247

C. The convertible bond will have a lower stated interest rate. Because the convertible feature is attractive to investors, they will accept a lower yield than on comparable bonds without this feature. Because callable bonds carry more risk, investors demand a higher yield than similar noncallable bonds. Because bonds are always sold on a “yield-to-worst” basis, a premium-priced callable bond would be sold on a yield-to-call basis. However, a discount-priced callable bond is sold on a yield-to-maturity, never a yield-to-call basis.

Answer 248

A. New Orleans Convention Center bonds Convention center bonds are not designated for a public purpose; therefore, they are not tax exempt.

Answer 249

A. Eurodollar CDs There is no secondary market for fed funds. There is not much of a secondary market for commercial paper or repurchase agreements, but there's an active secondary market in Eurodollar CDs, especially in New York and London.

Answer 250

D. $1.75 million The takedown or member's profit is selling concession (including re-allowance) plus additional takedown. The total takedown is 1.75 points or percent of $100 million or $1.75 million (times the member's bracket). "99.75 net" simply indicates a dealer/syndicate re-offering or no commission charged.

Answer 251

C. They are equity positions. All money market instruments are debt, not equity securities. All money market securities share three characteristics: They are short-term, safe, and liquid.

Answer 252

C. Debentures. Debentures are unsecured corporate debt offerings, or nonsecured bonds.

Answer 253

A. Certificates of deposit Only negotiable CDs pay interest. The rest of these instruments just pay par at maturity.

Answer 254

C. AAA-rated unsecured bond The rating takes into account all information about the bond. Even though this bond is unsecured, it is considered safer than bonds that are fully secured from other issuers.

Answer 255

A. Likely bid. A workable quote is a likely bid.

Answer 256

C. Assets held in an escrow account Every bond is backed by the full faith and credit of the issuer, which is simply the issuer’s promise to repay. In addition, a secured bond is also backed by assets held for the bondholders.

Answer 257

B. Limitation on future bond issues The additional bonds test is a requirement of a secured bond issue having an open end indenture. If the corporation issues additional bonds, both the original and the new bondholders have equal claim to the collateral. To protect the original bondholders, the number of bonds issued using the same collateral is limited. This total number of permissible bonds is calculated using the additional bonds test. This test is used for net lien municipal revenue bonds.

Answer 258

A. 54 Governments notes and bonds use “actual over actual” (days in month over days in the year) and settle next day. 31 days in January plus 23 in February = 54 days. The settlement date does not count.

Answer 259

D. I, II, III, and IV "Double-barreled" means general obligation, and GO Bonds can be backed by all of the taxes mentioned in addition to fines.

Answer 260

D. Step coupon bond An ETN’s accreted interest is based on an underlying index, and is only paid at maturity. VRNs have a fluctuating rate; not a one-time increasing rate. CMOs are not structured as step-ups.

Answer 261

A. I and II An "out firm" is a bid price guaranteed to a dealer by another dealer for a period of time. All or none (AON) is a directive used on a buy or sell order that instructs the broker to fill the order completely or not at all.

Answer 262

A. Short-term loans on credit cards or automobiles. Asset-backed securities are backed by short-term loans on assets other than real estate, such as autos or credit cards.

Answer 263

B. Yield-to-maturity, current yield, nominal yield On a discount bond, the highest yield is the yield-to-maturity, followed by the current yield. The nominal yield, or coupon rate, is the lowest yield.

Answer 264

B. Convertible bond Because it converts into the common stock, the convertible bond’s price is affected by the price of the common stock.

Answer 265

B. Payment of interest and principal may be made in U.S. dollars or designated foreign currencies, at the option of the issuer. Payment is made only in U.S. dollars, not foreign currencies.

Answer 266

B. To have high credit risk. A C rating is the lowest speculative rating before a bond has defaulted.

Answer 267

B. Unsecured. Debentures (the most common type of bond issued) are issues that are not secured by a pledged asset, but secured only by the good faith of the issuer.

Answer 268

A. A regional airline An equipment trust certificate is issued by the owner/operator of the equipment, not the manufacturer. The correct answer is the regional airline, which actually flies the planes and will use the airplanes as collateral for the equipment trust certificate.

Answer 269

C. Treasury note. T-Notes mature in 2 to 10 years and pay a stated rate of interest.

Answer 270

B. Commercial paper. This is just a fact you need to know.

Answer 271

B. SLMA. Sallie Mae is Student Loan Marketing Association (SLMA) and does not deal in mortgages. The rest do.

Answer 272

A. STRIPs STRIPs are issued by the U.S. Treasury and are full faith and credit of the U.S. government. The others are different treasury receipts, which are broker/dealer products and are AAA-rated. Liquid yield option notes (LYONs), introduced by Merrill Lynch in 1985, are a form of zero-coupon convertible bonds with a predetermined conversion feature that allows either the holder or issuer to convert them to a fixed number of shares of common stock. Treasury Investment Growth Receipts (TIGRs), issued from 1982 until 1986, were zero-coupon bonds based on U.S. Treasury bonds held by Merrill Lynch. Certificates of Accrual on Treasury Securities (CATS) were a type of bond invented by the bank Salomon Brothers. Issued by private banks from 1982 – 1986, these bonds were backed by the U.S. Treasury through the creation of special purpose entities (SPV/SPEs).

Answer 273

B. II and III Commercial paper is issued to dealers only and matures in less than 270 days. It also trades and, if issued by nonfinancial corporations, is sold at discount.

Answer 274

D. Long-term loans. "Funded debt" refers to long-term debt or bonds.

Answer 275

A. General assets A debenture is full faith + credit or general, NOT particular assets.

Answer 276

B. TIPS TIPS, or Treasury Inflation Protected Securities, are issued and backed by the U.S. Treasury. The other debt instruments are proprietary names of various treasury receipts, which are issued and backed by broker/dealers. A Certificate of Government Receipts (COUGR) is a U.S. Treasury bond that was marketed by A.G. Becker Paribas stripped of its coupon payments. COUGRs only pay an investor their face value at maturity. Liquid yield option notes (LYONs), introduced by Merrill Lynch in 1985, are a form of zero-coupon convertible bonds with a predetermined conversion feature that allows either the holder or issuer to convert them to a fixed number of shares of common stock.

Answer 277

B. $40 twice a year An 8% bond pays $80 each year (1,000 x 8%). Bonds pay interest semi-annually, so the bond pays $40 twice a year.

Answer 278

D. Noncompetitive bid Non-competitive bids, which are submitted to the Federal Reserve prior to a government yield auction of U.S. Treasury bills, are certain to be filled because T-bills in the amount of the order have been set aside for the non-competitive bidder prior to the auction market. The noncompetitive bidder is guaranteed to receive the designated amount of T-bills at the average yield (the average price) of the actual auction market.

Answer 279

B. For the benefit of the syndicate account as a whole in proportion to each member's bracket. Group net orders are for the benefit of the syndicate as a whole and normally have highest priority, unless the manager allows presale.

Answer 280

A. Accretion. Bond premiums are amortized down to par. Bond discounts are accreted up to par. The original issue discount (OID) is the difference between the original face value amount and the discounted price paid for a bond. OID bonds have the potential for gains since investors can buy the bonds for a lower price than their face value.

Answer 281

B. I and III A step coupon, or step-up bond, has a fixed coupon rate which increases to another fixed rate at a specified year during its life. Step-ups pay periodic interest; they are not OIDs.

Answer 282

D. Interim financing. Municipalities use short-term municipal notes to provide interim financing in anticipation of receiving money from taxes, revenues collected from a municipal facility, or new bonds being issued.

Answer 283

A. Subject to federal income tax but exempt from state income tax. U.S. government bonds are taxable by their issuing entity, the federal government, but exempt from state taxation.

Answer 284

D. Nominal yield is the highest yield. The nominal yield will always be the highest yield on a premium bond. The nominal yield is the same as the coupon rate.

Answer 285

A. Nominal yield, current yield, yield-to-maturity On a discount bond, the lowest yield is nominal yield, followed by current yield, then yield-to-maturity.

Answer 286

B. SLMA. SLMA, or Sallie Mae, is the Student Loan Marketing Association (SLMA) and does not deal in mortgages. The rest do.

Answer 287

B. I and IV Denominations of a negotiated CD are $100,000 minimum, and they are too short-term to be callable.

Answer 288

D. I, II, III and IV All of these entities can issue Eurodollar bonds. The U.S. government, however, cannot.

Answer 289

B. Series EE bond. A Series EE savings bond is a non-marketable savings bond issued by the Treasury. It is not traded in the secondary market and must be redeemed by the issuer. T-bills, T-notes, and T-bonds are all marketable securities.

Answer 290

C. There is no interest rate risk. An overnight repo is still debt, and all debt has interest rate risk.

Answer 291

D. Inflation risk. Inflation risk is also known as "purchasing power risk." As inflation erodes money’s purchasing power, the value of a bond’s fixed interest payments will decline, reducing the market value of the bond. All fixed income securities are subject to inflation risk.

Answer 292

B. I and III A new bond has been issued and the resulting funds have been escrowed for calling a prerefunded bond on its next call date. This bond is said to be defeased and will trade on a YTC basis.

Answer 293

D. GNMA T-bonds and notes pay semiannually, as does a General Obligation municipal bond. GNMA is a monthly pass-through of interest and principal with payment that is government-guaranteed.

Answer 294

D. Standardized yield reporting. Standardized yield (SEC yield) is the measure of the current net market yields on a mutual fund's investment portfolio. It is based on the net investment income for the 30-day period ending on the last day of the previous month divided by the highest offering price on that last day. It helps make it easier for investors to compare fund performance.

Answer 295

B. $946.25. Bonds are quoted at $1,000 par in 32nds, with each point worth $10. The bid price (the first price listed) would be $940 + (20/32 X $10), which converts to $940 + $6.25 for a price of $946.25.

Answer 296

B. T-Notes are issued with maturities of less than 10 years. The only difference between a T-note and a T-bond is the length of the maturity of the original issue. T-Notes have maturities ranging from 2 to 10 years while T-Bonds have maturities of 30 years. Both have a starting denomination of $1,000 and can be purchased at a discount or a premium depending on the interest rate environment in the market.

Answer 297

C. In American dollars Eurodollar securities, whether notes, bonds, or CDs, are based on U.S. dollars in foreign repositories, mostly European.

Answer 298

A. Alicia has physical possession of the bond itself, so she can sell it to anybody for any price. Since 1986, all securities issued by the Treasury Department have been book-entry, meaning they exist only as electronic records in computers.

Answer 299

C. Guaranteed bond A guaranteed bond is a debenture (unsecured). It is backed not only by the issuer’s promise, but by an additional promise, usually from a parent or affiliate.

Answer 300

C. They may only be redeemed by the Treasury. Series bonds are savings bonds that offer stability and low risk. Series bonds are issued by the Treasury and may only be redeemed by the Treasury. They do not trade in the secondary market.

Answer 301

A. Serial bonds. Serial bonds are issued together but mature in increments over a series of years. Term bonds are issued together and all mature at the same time. A laddered portfolio of bonds is a portfolio of various bonds from different issuers that mature at intervals to match an investor’s cash flow needs.

Answer 302

D. Refinance Refinance risk is a threat only when bonds are trading at a premium. CMO refinancing risk occurs when rates are falling. Extended maturity, resale, and loss of principal occur when rates are rising.

Answer 303

C. T bills EE, HH, and II savings bonds do NOT trade in the secondary market. They must be redeemed by the U.S. Treasury.

Answer 304

D. Corporate lessee. The corporate lessee pays debt service on a facility lease from the municipality.

Answer 305

A. The 30-day visible supply looks forward and the placement ratio records historical information. The 30-day visible supply reports the total number of municipal bonds coming to market in the next month. The placement ratio reports the number of bonds sold compared to total bonds offered for the previous week.

Answer 306

A. Long-term bonds are usually more liquid than short-term bonds. In a positive yield curve, which is normal, long-term bonds have higher yields than short-term bonds. Generally speaking, issuers attach call provisions to long-term bonds more frequently than short-term bonds. When interest rates fluctuate, long-term bonds experience a greater price change than short-term bonds. But short-term bonds are generally considered to be more liquid than long-term maturities.

Answer 307

D. Divide the annualized dollar yield by the current market value. The current yield is the annualized dollar yield (also called interest rate or coupon rate) expressed as a percentage of the current market value of the bond.

Answer 308

C. A discount. This bond is selling at a discount or less than par ($1,000). Multiply the quoted price of 98 by 10 to calculate the price ($980).

Answer 309

C. TAN A TAN (Tax Anticipation Note) is GO, anticipates property tax proceeds, and is short-term. It is the safest of the Muni notes.

Answer 310

A. GNMA, FNMA, and FHLMC are all fully backed by the federal government. Only GNMA is fully backed by the full faith and credit of the U.S government guaranteed agency. FNMA and FHLMC are government-sponsored enterprises that may borrow from the Treasury.

Answer 311

D. The investor would have a yield on the bond based on the call premium at the time that the bond is called. The yield that this investor would realize in the event that the bond was redeemed by the issuer on the next available call date would be the yield-to-call. This yield would be based on the call premium paid by the issuer.

Answer 312

C. Nominal yield is the highest yield. The nominal yield will always be the highest yield on a premium bond. The nominal yield is the same as the coupon rate.

Answer 313

C. Semiannually. Treasury notes pay interest semiannually.

Answer 314

A. Guaranteed bond Unlike the other debentures, a guaranteed bond is backed by not just one, but two promises.

Answer 315

A. Marketability risk. Marketability risk is the risk of not being able to sell the investment in a timely manner.

Answer 316

D. GNMA Government National Mortgage Association (also known as Ginnie Mae, or GNMA) is the only U.S. government agency fully backed by the U.S. Government. The others are quasi-governmental agencies that have an implied backing in the form of a line of credit from the U.S. Treasury, but not full backing.

Answer 317

A. A premium Bonds are always quoted on a “yield-to-worst” basis. This means that discount bonds are sold on a yield-to-maturity basis and premium bonds are sold on a yield-to-call basis. When a bond is issued at par, all yields are the same.

Answer 318

B. Property taxes Only local subdivisions, such as cities and counties, levy property taxes. Thus, GO bonds issued by the state will not be secured by property taxes.

Answer 319

A. I and II ADRs facilitate domestic investment in foreign securities. Because the dividends and principal are denominated in a currency of the foreign issuer, ADRs have currency risk, even though the custodial bank performs all currency exchange services.

Answer 320

B. Debenture A debenture is a bond secured only by the full faith and credit of the corporation.

Answer 321

D. The unsecured bond’s yield will be higher than the secured bond. Because the debenture is riskier than the secured bond, investors will demand a higher yield. Income (adjustment) bonds are very risky and therefore trade at a significant discount, resulting in a higher potential yield than a secured bond.

Answer 322

A. Purchasing power risk. Sustained inflation will erode the value of a dollar causing a decline in the purchasing power of future dollars.

Answer 323

C. Government National Mortgage Associations (Ginnie Maes). Of these issues, Ginnie Maes are the only ones with both principal and interest payments fully guaranteed by the U.S. government.

Answer 324

D. A person selling a security at an inappropriate time sustains a loss. Marketability or redeemability risk is the risk of selling or redeeming a security at an inappropriate time, thus sustaining a loss or mitigating a profit.

Answer 325

C. II and III TIPS have a CPI-adjusted, fluctuating principal and a fixed interest rate. Because this fixed rate is applied to a fluctuating principal each semiannual interest period, the interest payment fluctuates.

Answer 326

C. 12.2%. The nominal yield is 10%; the face value of the bond is $1,000. The annual interest is $100 (10% of $1,000). Therefore, the current yield is $100 / $820 = 12.2%.

Answer 327

A. Assessed valuation of property An increase in assessed valuation indicates that the value of local property is rising which will result in higher tax collections.

Answer 328

C. $30 gain Only municipal OIDs are accreted. The discount on a conventional interest paying municipal bond purchased in the secondary market is not accreted. 99 points x $10/point = $990 96 points x $10/point = $960 $990 (sold) - $960 (bought) = $30

Answer 329

B. Suitability requirements for buying CMOs Brokers who sell CMOs to retail clients are required to offer educational materials to retail buyers, which must a glossary, a discussion of the characteristics and risks involved, and a discussion stating that two CMOs with the same collateral backing may be retired on different dates. Although a broker must always consider suitability when recommending an investment to a client, this is not an educational materials requirement for selling a CMO. However, the required discussion about the characteristics and risks associated with CMOs will serve to educate the investor about this type of security.

Answer 330

D. Aaa 5 years to maturity Moody’s Aaa or S&P's AAA is top investment grade.

Answer 331

D. Ginnie Mae The best answer is the GNMA certificate which pays monthly interest. Fannie Mae also issues stock.

Answer 332

A. Is backed by the full faith and credit of another entity. All bonds are backed by the faith and credit of the issuer. In addition, the guaranteed bond is also backed by the promise of a second entity, usually a parent corporation or subsidiary. Consequently, it has a lower coupon than comparable debentures which are not guaranteed. A guaranteed bond is not a secured bond. Like all other debentures, a guaranteed bond is subordinate to secured bonds in bankruptcy priority.

Answer 333

C. $982.50. Bond prices are quoted at par in 32nds. The quote of 98.08 means $980.00 + 8/32, which equals $2.50, making the bond price $982.50.

Answer 334

B. I and III Income (adjustment) bonds result from a debt renegotiation. The issuer will not pay interest again unless it returns to profitable financial condition. Because they may not return 100% of principal they are very risky and not suitable for most investors. The other answer choices are distractors.

Answer 335

A. School district Overlapping debt is general obligation debt. Of these municipal issuers only the school district debt is general obligation. It is backed by taxes.

Answer 336

A. Regulatory risk. Regulatory risk is associated with changes in law that can potentially affect a security, an industry or a country. This issue may also be referred to as legislative or political risk.

Answer 337

C. Yield-to-maturity. The yield to maturity is a rate of return measuring the total performance of a bond (coupon payments as well as capital gain or loss) from the time of purchase until maturity.

Answer 338

B. Changes in law that can potentially affect a security Regulatory risk, also known as legislative or political risk, is associated with changes in law that can potentially affect a security, an industry or a country.

Answer 339

A. It issues $25,000 bonds. GNMA is a serial, pass-through certificate making monthly payments of principal and interest. It is also a government agency which buys only government-guaranteed mortgages.

Answer 340

D. Registration is required by the SEC. Commercial paper that matures in 270 days or less is exempt from SEC registration.

Answer 341

A. Mortgage bond Mortgage bonds are backed or secured by real estate so if the corporation defaults on the bonds the real estate will be sold to satisfy the bond holder’s claims.

Answer 342

A. Income bond An income bond is the product of a bankruptcy proceeding or debt renegotiation. It is very speculative and not suitable for an investor with a low risk tolerance.

Answer 343

D. State The state has no direct role in the property tax.

Answer 344

A. General obligation A double-barreled bond is a general obligation bond, but it possesses a revenue source which may or may not be adequate for debt service payments.

Answer 345

D. Increasing interest rates. Increasing interest rates affect all long-term debt negatively and can’t be diversified away by investing in municipal bond issues in different regions.

Answer 346

C. A pre-refunded bond A pre-refunded bond is AAA and trades to an established call date. It is the best of the four choices. Airport and toll road bonds are revenue bonds which are generally not as safe as G.O.s. A rising tax rate is viewed negatively since it can result from falling assessed values, rising delinquency rates, or municipal budget deficits. Therefore, a G.O. issued by a city with a rising tax rate is not the best choice for this retired conservative investor.

Answer 347

A. High investment returns. LGIPs are established by state or local governmental entities to invest public funds for their own benefit. Among the benefits they offer are cash management, liquidity and protection of principal. Designed to satisfy short-term cash needs, they offer low volatility and modest returns.

Answer 348

A. Member An order for its own (retail) account would be a member order.

Answer 349

A. High or medium investment grade. Medium investment grade is A. Aaa and AAA are highest investment grade.

Answer 350

C. Market values of fixed income securities. Interest rates fluctuate constantly and directly affect the market value of fixed income securities. The threat of suffering a loss due to a change in the interest rate is called interest rate risk. All fixed income securities are subject to interest rate risk.

Answer 351

C. $1,092.81. Bond prices are quoted at $1,000 par in 32nds, with each point worth $10. The ask price (the last price quoted) would be $1,090 + (9/32 X $10) for a price of $1,092.81.

Answer 352

D. Call premium value When a bond is called, the issuer often pays a call premium for the privilege of calling the bonds early.

Answer 353

C. U.S. government The U.S. government cannot issue Eurodollar bonds; however, local and state governments may.

Answer 354

A. Commercial paper Of the choices listed, only commercial paper would meet the low volatility and short-term liquidity requirements of a Local Government Investment Fund. Technology sector funds and international mutual funds would be too volatile and risky to meet the everyday cash needs of the participating government entities. Private equity funds are also not appropriate; they are illiquid, long-term investments with a high degree of risk.

Answer 355

B. Bond anticipation notes MIG or Moody's Investment Grade applies only to municipal notes. It does not apply to project notes which have not been issued since 1984 and were not rated.

Answer 356

D. Business/credit risk Business/credit risk is the risk that an issuer may not be able to meet interest or principal payments on fixed income securities.

Answer 357

B. I and III A bond purchase premium is amortized and a bond purchase discount is accreted. These are mathematical calculations used to systematically recognize the premium or discount over the life of the bond. The other choices are distractors.

Answer 358

D. Liquidity risk An investment of low liquidity could expose an investor to a risk of loss should the security need to be liquidated quickly.

Answer 359

C. Catastrophic call under the insurance covenant The insurance covenant in the bond indenture requires that the project is insured against future catastrophe. In this event, the insurance proceeds are used to call the bonds.

Answer 360

D. Notes are repaid from general tax collections and direct government obligations. Bond anticipation notes, or BANSs, are interim financing that is repaid from the proceeds of an upcoming bond issue.

Answer 361

B. Overlapping debt. If a city and county are coterminous, this would mean that they have overlapping boundaries. In such cases, a portion of the county's debt would be overlapping on the city.

Answer 362

A. For the benefit of the syndicate as a whole. Group net benefits each member of the syndicate according to bracket.

Answer 363

D. Business risk. Business risk is the risk associated with the specific circumstances of any particular company. It includes many influences associated with business success or failure such as competitive pressures, market share and competence of management. Business risk is usually managed with a long-term focus.

Answer 364

C. Nominal yield, or stated rate, is less than YTC. If a bond is selling at a discount, the current yield (CY) will be higher than the nominal (coupon) yield. The yield-to-maturity (YTM) will be even higher than the current yield, since the discount represents a profit earned at maturity. The yield-to-call (YTC) is the highest yield on a callable bond traded at a discount.

Answer 365

C. 20 year TIPs are issued in 5-, 10-, and 30-year maturities only.

Answer 366

C. Business risks are those relating to the operational success of the particular business in question as opposed to the influence of trends in the broad securities markets. Business risk is tied to the fortunes of the particular business. Market risk is the influence that general market sentiments and pressures can have on the value of even the more prosperous business operation.

Answer 367

C. Dated date to settlement date. New issue municipals calculate interest from the dated date up to but not including the settlement date. This interest accrues to the issuer and is factored into the re-offered price of the bond. The dated date is the date on which interest begins to accrue on a fixed-income security.

Answer 368

B. Trust indenture A trust indenture is a contract between the issuer and the trustee who acts on behalf of the bond holder. It is designed to protect the bond holder and the indenture will often have covenants that will protect the bondholders’ interest. Further, the indenture will either be open-end or closed-end.

Answer 369

D. II and IV ARSs may have limited marketability, and cannot be presented as money market securities. They have regularly resetting interest rates and are issued by certain government agencies, corporations and municipalities.

Answer 370

B. I and III The relationship between bond prices and interest rates is inverse. As interest rates trend down, bond prices will generally go up.

Answer 371

D. The bond will fluctuate with interest rates, but less than a similar bond with a longer maturity. It is important to remember that the value of a marketable debt security is affected by changes in interest rates. As interest rates go down, for example, the market value of an existing debt security increases. Also, the shorter the maturity, the less volatile a bond is to current interest rate fluctuations.

Answer 372

B. Baa. "Bank-qualified" bonds are investment grade. The lowest investment grade rating is Baa (Moody’s) or BBB (Standard and Poor’s).

Answer 373

B. $50 The key here is that the question is asking for DIRECT DEBT PER CAPITA, which includes ONLY the debt of Atlanta, not including any of the Fulton County debt. $100 million divided by 2 million = $50 of direct debt per capita. The overlapping debt is $6 ($12 million divided by 2 million people). The net overall debt for the city is $112 million (the direct debt of $100 million plus the overlapping debt of $12 million), or $56 per capita.

Answer 374

A. Agreement among underwriters. The agreement among underwriters conveyed through the syndicate letter or account summary specifies over-allocation priority.

Answer 375

A. U.S. government bonds and notes Treasury notes and Treasury bonds are issued with specified or fixed interest rates. Treasury bills are dependent on the amount purchased, as they are always purchased at discount. T-Notes and T-Bonds can be purchased at a discount and/or a premium.

Answer 376

A. I and III BABs are issued by municipalities to finance public projects, such as bridges and highways. BAB interest is taxable. Capital gains on ALL municipal bonds, including BABs, are taxable.

Answer 377

A. The 30-day visible supply. The 30-day visible supply indicates how much competition a bond issue will have in the next 30 days. This influences an underwriter’s pricing decision on a new bond offering. The other three are information sources for the secondary market.

Answer 378

D. 4% corporate bond trading at a premium, callable at par Generally, bonds with higher stated interest rates are more likely to be called than those with lower stated rates because the issuer has more incentive to eliminate high semiannual interest payments. Also, bonds callable at par are more likely to be called than bonds with a premium call price, because there is less call cost to the issuer.

Answer 379

D. College textbooks for a sibling. Qualified disability-related expenses for an ABLE account must be related to satisfying the needs of the disabled person and include expenses for education, housing, transportation, assistive technology, employment training and support, financial management and health care.

Answer 380

D. PAC. The PAC has the lowest prepayment and extension risk, and therefore the lowest yield. The Z-tranche is the riskiest tranche. Consequently, the Z-tranche has the highest potential yield.

Answer 381

C. YTC basis. Because the bond will definitely be called on the next available call date, it is quoted and traded on a YTC basis.

Answer 382

B. Dated date The dated date, first day of interest accrual, would affect price only on new issues, not on secondary market transactions.

Answer 383

B. I and IV In an undivided syndicate, each member is liable for unsold securities regardless of its sales performance in the issue.

Answer 384

A. Inflation risk. Inflation reduces purchasing power over time.

Answer 385

C. Legislative risk. Legislative risk, also known as regulatory or political risk, comes from the actions of foreign governments as well as the U.S. government.

Answer 386

A. Nonsecured bond. Debentures are corporate issues of unsecured debt; they are backed only by the good faith of the issuer.

Answer 387

B. 6%, 30-year callable, rated Baa The 30-year has lowest coupon and is lowest of the investment grade rating. Although the rating is equal to the rating of the 7%, 15-year noncallable BBB bond, the bond with the lower coupon/higher price has greater market risk.

Answer 388

D. Overlapping debt. Overlapping debt is for GO (general obligation), not revenue bonds.

Answer 389

A. Reinvestment risk Reinvestment risk occurs when interest rates have fallen and bond interest income must be reinvested at lower rates. The income produced by the currently available bond yields may be much less.

Answer 390

A. The last payment date up to but not including settlement date. The bond purchaser owes part of the next semiannual interest payment (accrued interest) to the bond seller. The seller is entitled to the first portion of the interest payment (from the last payment date up to but not including settlement date) and the buyer will earn the second portion (from settlement date until the next semiannual payment date).

Answer 391

D. $1,400 An increase from $50 to $70 is 40% per share. To be at parity, the bond must also rise 40%. Therefore, the parity price of the bond is $1,400. $1,000 (par) / $50 (convertible price) = 20 conversion ratio $70 stock price x 20 conversion ratio = $1,400

Answer 392

A. Decrease. Bond prices are inversely proportionate to interest rates; therefore, a rise in the prime rate will generally cause high-grade bond prices to fall.

Answer 393

D. They have a high liquidity risk. Liquidity Risk is the risk that an asset may not quickly convert to cash at a fair price. Illiquid investments might not sell quickly or at a fair price due to low trading activity in the secondary market.

Answer 394

C. The most recent annualized dollar amount of income divided by the security’s current market value and expressed as a percentage. The term “current” always implies a yield figure based on current market value rather than the price paid for a security or its anticipated value at maturity. For a bond, annualized dollar yield is always the same because it is the nominal yield expressed in dollars. For a stock or mutual fund, the most recent annualized dollar yield is the sum of the most recent four dividends.

Answer 395

C. Exchange rate risk Because Eurodollar bonds are traded in, and pay interest in U.S. dollars, they do not have currency or exchange rate risk. Like other bonds, Eurodollar bonds are subject to the other listed risks.

Answer 396

C. Serial bonds Serial bonds are priced at a yield percentage or in basis points. Term bonds are priced in points as a percentage of par value (a dollar price). Convertible bonds are typically term bonds. Adjustment bonds are a result of a debt renegotiation.

Answer 397

C. II and III Interest on BABs is taxable, and capital gains from trading ALL bonds is taxable.

Answer 398

C. Current price of the bond. The factors taken into account when calculating yield-to-maturity of a bond are annual coupon payment in dollars; number of years to maturity; par (or face) value realized at maturity; initial price paid. The current price of the bond is not taken into account.

Answer 399

B. Yield-to-maturity Since the yield-to-maturity represents the overall yield received on a bond, it is the highest yield on a discount bond. The calculation incorporates the coupon rate plus the par value received at maturity, which is greater than the discounted price paid.

Answer 400

A. Higher than the nominal yield. On a discount bond, YTM is higher than nominal yield. In addition to earning interest, the investor pays less than par value for the bond and receives full par value at maturity.

Answer 401

D. Whether the investment can be sold quickly at a fair price. To liquidate is to sell an investment and turn it into cash. A security is liquid if it can be quickly converted to cash at a fair price.

Answer 402

B. Turnpike authority The turnpike authority issues self-supporting revenue debt, not general obligation.

Answer 403

B. Falling interest rates Reinvestment risk is the risk that, upon maturity, if interest rates have fallen, the investor must reinvest the bond principal at a lower yield. Also, in a falling rate environment, bond holders must reinvest the bond interest income they receive at lower rates.

Answer 404

C. A premium. This bond is quoted at 103, which is equal to a price of $1,030. (Remember to multiply 103 x 10 to arrive at the price of the bond). The bond is selling at a premium because the price of $1,030 is greater than its par value (or $1,000).

Answer 405

B. Qualified withdrawals are taxed as ordinary income. Qualified withdrawals are not taxed as ordinary income. Rather, withdrawals are tax-free when used for qualified education expenses. 529 plans are state-specific, and some rules may vary. Most plans allow for a 5-year "accelerated gift" equal to five times the allowable annual amount per donor with no gift tax liability if no other contributions are made for 5 years. This amount increases periodically for inflation. Contributions grow tax-deferred.

Answer 406

D. A notice that the conversion price of his bonds has been reduced to $22.73. A debenture convertible at 25 would convert into 40 shares ($1,000/25 = 40). A 10% stock dividend would adjust the number of shares to 44. $1,000/44 = 22.73, the new conversion price.

Answer 407

C. The funds may be transferred to a sibling without penalty. With 529 plans, the donor may roll over the money and transfer it at any time, without penalty, to any beneficiary in the same family as long as it will be used for qualified educational expenses.

Answer 408

D. Owns 2,000 of the unsold bonds. In an eastern syndicate, each member is liable for any unsold bonds according to its original commitment percentage. The member’s performance is irrelevant. In this case, though Smith exceeded its commitment by 12,000 shares, it is still liable for 25% of any unsold shares. If this were a western syndicate, it would have fulfilled its commitment in the offering and would have no further obligation.

Answer 409

C. Dated date The dated date is relevant only on a new issue bond. It is not relevant to the accrued interest calculation on a bond traded in the secondary market.

Answer 410

A. GO Only GO bonds (general obligation) require voter referendums. IDB = Industrial Revenue Bond

Answer 411

A. Replacement and renewal fund. Of the common funds that are found in the indenture of revenue bond, an operations and maintenance fund provides for monies to operate and maintain the facility. A debt service fund provides for service of the principal and interest payments. A replacement and renewal fund provides monies for additions, improvements, or expansions to the current facility if these would be considered beneficial.

Answer 412

C. The total return of a bond from the time of purchase until maturity The yield-to-maturity measures the total return of a bond from the time of purchase until maturity. The return of an investment in relation to the degree of risk taken is called the risk-adjusted return. The current yield measures the interest rate that a security with a fixed income is generating to the holder based on its current market value. The yield-to-call measures the return on a bond similar to the yield-to-maturity, except that the ending period is not the maturity date but the call date.

Answer 413

B. AAA. An advance-refunded bond has been called and therefore trades on a YTC basis. The issuer pre-refunded this bond by issuing a new bond (with a lower interest rate). The issuer places this refund money into an escrow account to retire the advance-refunded bonds at their next call date. Since money is safely escrowed to retire the old bonds on their next call date, they are automatically reclassified as AAA and they trade to this known call date.

Answer 414

C. Member Customers of member dealers are given member priority.

Answer 415

C. The possible tax consequences of investing in an out-of-state plan When an investor establishes a 529 plan outside of his or her state, there could be tax consequences that would make the plan less attractive, including the loss of state income tax deductions. 529 plans do not limit a student’s choice of universities. If the child for whom a 529 plan is established decides not to attend college, the beneficiary can be changed to another person in the same family. Tax consequences are of no concern since earnings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses. In fact, establishing a plan when a child is very young allows funds to grow for a longer period of time.

Answer 416

B. $29 loss The investor reduces bond cost basis by $7 per year ($70 premium / 10 years) After 3 years, the investor’s cost basis is $1,049 (1,070 – 21) Cost basis minus sale price = 1,049 – 1,020 = $29 loss

Answer 417

B. $10,000 in tuition In addition to specified expenses for postsecondary schools (colleges and universities), qualified higher education expenses also include $10,000 in annual expenses for tuition for elementary and secondary public, private, and religious schools.

Answer 418

B. Certain municipal bonds where a taxing authority guarantees debt service payments in the event that pledged revenues are insufficient "Double-barreled" refers to general obligation municipal debt that has a possible unstable revenue source. The final backing if revenues fall short is the general tax revenues of the issuer.

Answer 419

B. Catastrophe call provision. Protective covenants in revenue bonds include the Insurance Covenant. In the event the facility becomes condemned or damaged to the extent that it cannot generate revenues, an insurance policy enables the issuer to call in the bonds. This is known as a "catastrophe call."

Answer 420

C. BB. Bonds with a rating of BBB and higher are considered to be "investment grade," while bonds rated BB or lower are speculative or high yield, also known as junk bonds.

Answer 421

A. 20 GO bonds with 20 year maturities. The GO index contains 20 GOs with 20 year maturities.

Answer 422

D. IDR IDRs are subject to the alternative minimum tax (AMT). Since very wealthy investors are generally subject to the AMT, the other three choices are probably better for this investor.

Answer 423

B. 10% penalty and ordinary income taxes on earnings This is not a qualified higher education expense. Therefore, there would be a 10% penalty on the earnings portion of the withdrawal, which would also be subject to ordinary income taxes at the state and federal levels.

Answer 424

B. Agreement among underwriters. The order priority of a municipal underwriting may be found in the agreement among underwriters. It would not be in the official statement.

Answer 425

A. I and III The dealer has received an out firm bid, which is a stated price for a fixed time subject to fill or kill recall. The dealer can sell the bonds prior to buying them. No renegotiate is available, and the dealer is not obligated to buy.

Answer 426

B. II and III II and III are correct. A "competitive bid" process is often required for GO bonds; revenue bond issues are typically negotiated.

Answer 427

C. Corporate guarantor. The corporation is the guarantor of industrial development revenue bonds. The corporation guaranteeing the IDR must be disclosed on the municipal bond confirmation.

Answer 428

A. I and III Amortizing the bond’s premium systematically reduces the investor’s cost basis to par at maturity. It also reduces the yield realized by the investor.

Answer 429

B. Yield to call Because these bonds have been advance refunded to the call date, the investor will receive yield to call and that is what must be quoted on the investor confirmation. Under normal circumstances the investor confirmation must show yield to maturity or yield to call whichever is lower. But because the bond has been advance refunded, we know that the bond will be called at the first call date. Therefore, in this situation, yield to call is required to be on the confirmation because it will be the effective yield for the investor.

Answer 430

B. Extracurricular activity fees. This is an EXCEPT question. Qualified higher education expenses do not include extracurricular activity fees. They are limited to tuition, mandatory fees, room and board, computers (and related equipment), and required books and supplies.

Answer 431

A. Issuing new debt to extinguish old debt at the first opportunity. Advance refunding is issuing a new, lower coupon bond to lock in a low interest rate, escrowing the funds, and using them to pay off an outstanding, higher coupon bond at the next call date.

Answer 432

D. EMMA EMMA (Electronic Municipal Market Access) is an electronic system which provides muni bond issuer information to the public and to professionals.

Answer 433

A. Hospital revenue bond An engineering report or feasibility study would only be used in the analysis of a municipal revenue bond issue. School bonds, general obligation bonds, and project notes do not require feasibility studies.

Answer 434

B. Future tuition can be secured at current prices. Prepaid tuition plans allow the purchase of units or credits at participating colleges/universities for future tuition at current prices. They offer a significant benefit considering the escalating costs associated with college tuition. Room and board are not covered , nor is tuition for elementary and secondary schools. Most prepaid tuition plans are sponsored by state governments and have residency requirements.

Answer 435

B. Daily Bond Buyer The Revdex is found in the Daily Bond Buyer. It is relevant to the primary municipal market. The other three sources service the secondary municipal market.

Answer 436

A. $625 Treasury notes and bonds are quoted in 32nds. Therefore, .20 = 20/32 (.625) of 1% of $100,000 (1 point) or $625.

Answer 437

D. At 11:59 p.m. ET on the third Friday of the month. Equity options expire on the third Friday of the month at 11:59 p.m. ET.

Answer 438

A. Buy one call on the stock Buying 100 shares of the stock and buying one call on the stock offer theoretically unlimited upside potential. However, a call is cheaper than 100 stock shares and therefore offers the same unlimited upside for a smaller investment. This is the concept of leverage. Selling a put offers a finite, not a theoretically unlimited, potential gain. Shorting stock is a bearish move and is contrary to this investor’s bullish opinion.

Answer 439

C. Put option. A put option contract gives the holder of the contract the right to sell the underlying security at the strike price.

Answer 440

A. Capital gains. Any income derived from writing options is considered to be capital gain. Therefore, any distributions (Remember: a regulated investment company distributes at least 98% of its net capital gains.) would be considered to be capital gains to the shareholder of the fund. However, interest received on the bonds in the portfolio would be distributed (after expenses) to the shareholder in the form of dividends, taxed as ordinary income.

Answer 441

D. II and III Rates declining would favor a T-Bond yield put, which follows declining yields and a T-Bond call, which appreciates along with bond prices.

Answer 442

B. $1,500 loss Credit: ($34 - $30) (call buy) Debit: $2.00 (premium), $3.50 (premium) $34 - $30 - $2.00 - $3.50 = -$1.50 x 1,000 shares = -$1,500 The investor purchased 10 calls at $2 for a total cost of $2,000 and 10 puts at $3.50 for a total cost of $3,500. At expiration, ABC is $34, so the Oct 30 calls are in-the-money by four points and the investor’s calls have intrinsic value of $4,000 ($4 x 100 x 10 = $4,000). The Oct 30 puts are out-of-the-money and have zero intrinsic value. The investor made $2,000 profit on the calls but lost $3,500 (the entire premium paid) on the puts; $2,000 - $3,500 = $1,500 loss.

Answer 443

D. $25 gain Credit: $4.50 (premium), $2.00 (premium) Debit: $2.50, $3.75 (closing purchases) $4.50 + $2.00 - $2.50 - $3.75 = $0.25 The position is a short combination. Bob wrote the put and call for a combined premium of $6.50 ($4.50 + $2). He purchased them back for a combined premium of $6.25 ($2.50 + $3.75 = $6.25. $6.50 - $6.25 = $0.25 X 100 = $25.

Answer 444

D. Sell 100 shares of the underlying security at the strike price. Call holders have the right to buy. Therefore, the writer of the call option would be obligated to sell 100 shares at the strike price if the contract was exercised.

Answer 445

D. 39 months. LEAPS can run as long as 39 months. However, when leaps are in the last 9 months prior to expiration, they are considered regular options.

Answer 446

A. I and III Short-term and closing sale.

Answer 447

D. The call holder has the right to buy at the strike price. A call option is a contract that gives the call holder the right to purchase 100 shares of the underlying security, at the strike price (also called the exercise price), until expiration. The call writer has the obligation to sell 100 shares of the underlying security at the strike price. Long call – right to buy. Short call – obligation to sell.

Answer 448

C. Opening sell order. Opening sell, the investor is establishing a short position.

Answer 449

C. Buying T-note puts. If interest rates go up as expected, the T-note portfolio will decline in price. The purchase of T-note puts would offset this unrealized loss, since their value would increase as prices decrease.

Answer 450

C. $800 gain Credit: $3 (premium), $55 (short call) Debit: $50 (long stock) $3 + $55 - $50 = $8 x 100 shares = $800 The investor bought stock at $50 (debit), sold a call @$3 (credit) and sold stock at $55 (credit). Total credits $58 - $50 debit = $8 X 100 = $800.

Answer 451

B. A closing buy order. This is a closing buy order. The investor is reducing an existing options position.

Answer 452

B. Sell 100 shares of the underlying security at the strike price. Call holders have the right to buy. Therefore, the writer of the call option would be obligated to sell 100 shares at the strike price if the contract was exercised.

Answer 453

A. Face amount of the underlying bonds. The par value, or face amount of T-bonds, is basis for bond and option quotes.

Answer 454

B. $50 $0.50 (premium) x 100 shares = $50 When you write a put, your maximum gain is the premium you received - $50 or .50 point X 100.

Answer 455

C. II and III The buyer or holder of a call will profit, EXCEPT when yields increase and prices decrease. Under this circumstance the holder will lose.

Answer 456

D. Buy Swiss franc calls Remember that “importers buy calls.” An easy way to remember this is EPIC: Exporters buy Puts, Importers buy Calls.

Answer 457

B. Returns are enhanced by the gradual erosion of the option’s time value. Both strategies allow investors to capitalize on a stock’s decline, but with very different risk/reward profiles. Short sales have an unlimited loss potential in a rising market, while the maximum loss on a long put is limited to the premium paid. Short sales must be done in a margin account, and 50% of the short market value is required to be deposited by the investor. Long puts require a much smaller capital outlay - the option premium. Short sales can also be more cumbersome since the securities to be borrowed must be located. The eroding time value of options does not constitute an advantage, however, because it works to reduce premiums over time, thereby inhibiting options returns.

Answer 458

B. Position will be closed for a loss. If you buy a T-bond and a T-bond put, then interest rates rise; you cut your losses in bond price by exercise. Your loss becomes mostly premium.

Answer 459

A. 10 shares of the underlying stock. The contract size for equity mini-options is 10 shares of the underlying stock.

Answer 460

D. Buy euro puts The U.S. exporter would buy puts. An easy way to remember this is EPIC, meaning Exporters buy Puts, Importers buy Calls.

Answer 461

C. Call writer The call writer is short the call and has the obligation to sell the underlying security at the strike price if the options contract is exercised by the call holder. The call writer collects the premium.

Answer 462

B. It must be preceded or accompanied by an OCC disclosure document. Sales literature in options may portray past performance of representative and B/D and may project future performance if hedged and currency dates are given, but it must be preceded or accompanied by a disclosure document.

Answer 463

C. II and III Equities don't expire; therefore, any choices containing "I" are incorrect. "Triple witching" is the expiration of options on equities, equity indexes, and equity index futures, but futures are for another test; not covered here on the Series 7.

Answer 464

A. Premiums widen. The position is credit; the July being sold is more valuable. Credit will gain, except if premiums widen.

Answer 465

B. He must accept the exercise notice and buy the underlying stock. The exercise of options contracts is backed by the Options Clearing Corp., which is the clearing agent for listed options contracts and is responsible for standardizing, issuing and guaranteeing the performance of these contracts. If the holder of an option wishes to exercise, his broker/dealer notifies the OCC, which, in turn, randomly assigns the exercise notice to a broker/dealer that can fulfill the notice. That broker/dealer then assigns the exercise notice to a short customer on a random, first in/first out or any other basis that is fair and reasonable. Once a customer receives an exercise notice, he must fulfill his obligations under the contract. If a customer defaults on this obligation (which is rare), the OCC, as the guarantor of last resort, stands ready to fulfill it.

Answer 466

B. $400 profit. [ $50 - $43.50 - $2.50 ] x 100 shares = $400 profit The customer purchases the put for $2.50 (a debit). He exercises the put and sells stock at $50 (a credit) and purchases the stock at $43.50 (a debit). $6.50 profit on stock - $2.50 premium paid= $4 X 100 = $400 profit

Answer 467

C. Uncovered call. Short calls have unlimited risk. Naked or uncovered calls are short calls.

Answer 468

D. Write calls. If an investor is long Treasury securities, writing T-Bond calls would increase income through receiving premiums.

Answer 469

C. Approval of the ROP Approval of the ROP is always required, whether the material is sales literature, advertising, or personal correspondence. Approval of the CBOE is required for any but blind ads. This is a blind ad. A Registered Options Principal (ROP) designation qualifies the holder to supervise options trading activities.

Answer 470

C. II and III Write a 30 call, buy a 40 call is a vertical (price) spread. The short call with lower strike price will have the higher premium, so the spread is established for a credit. You make money on this position if the spread narrows (becomes less expensive) if it widens (becomes more expensive) you lose money. This is a bear call spread.

Answer 471

D. Buy a Japanese yen call If the U.S. company wishes to protect its payroll, it would buy Japanese yen calls to hedge against the currency.

Answer 472

A. S & P 100 The S & P 100, or OEX, has the greatest volume by far.

Answer 473

A. 5 business days The option position limits apply every 5 business days.

Answer 474

C. $3,000 The maximum gain in writing/selling options is the premium received.

Answer 475

D. $400 loss Premium is -3 (200). Market is a long position hedge. -54 + 55 = +1 - 3 = -2 X 200 = $400 loss. Note that the market value (market at 52) is irrelevant for this calculation. Credit: $55 (put) Debit: $54 (own), $3 (put premium) $55 - $54 - $3 = -2 x 200 = -$400

Answer 476

B. $43. Price paid for stock $47 - $4 premium received = $43.

Answer 477

B. $24,750 Credit: $2.50 (premium) Debit: $250 (strike) $2.50 - $250 = -$247.50 * 1000 = -$24,750 The maximum loss is the strike price of 250 minus 2.50 X 100 = 24,750.

Answer 478

B. $4,750 $50 - $2.50 = $47.50 x 100 = $4,750 50 strike price - $2.50 premium= 47.50 X 100 = $4,750 gain

Answer 479

C. Sell puts A short stock position is bearish. You would sell puts, which is bullish and would give a partial hedge and income.

Answer 480

C. Buy 60,000 XYZ Mar 60 calls. Bob is short puts, a bullish position. If he buys 60,000 calls, he will have 210,000 contracts on the same side of the market. Buying 60,000 XYZ Dec 50 puts will reduce his position. Writing calls and buying puts are bearish positions.

Answer 481

C. Long 1,000 shares ABC A put writer has the duty to buy stock at the strike price. George already owned 500 shares and had to buy another 500 shares of ABC at the 40 strike price.

Answer 482

C. Buy T-Bond puts A rise in interest rates would cause bond values to fall. Therefore, a hedge would involve buying puts on long bond positions.

Answer 483

C. XYZ July 25 call The July 25 call is in the money by 2.50. A call is in the money when the price of the underlying security is higher than the strike price. A put is in the money when the price of the underlying security is lower than the strike price.

Answer 484

B. Buy 2 puts. $44,000 (portfolio) / [ 220 (strike) x 100 (contract multiplier) ] = 2 puts 2 puts x 1.00 (beta) = 2 puts The best way to hedge a portfolio of stocks is to purchase a put option. Since the investor wishes the use OEX 220's and since each option has a multiplier of 100, the market value of the OEX 220 is 100 X 220, or $22,000. Hedging a portfolio of $44,000 would require two puts.

Answer 485

B. $11,800. $120 (strike) x 100 = $12,000, if stock goes to zero. $12,000 - $200 (premium) = $11,800 loss The maximum loss for a short put occurs if the stock goes to zero. The writer is exercised, and is forced to buy worthless stock for $120 per share. Keeping the $200 premium, the maximum loss is $11,800.

Answer 486

B. OSS. The CBOE’s Order Support System is an automated execution system that allows member firms to transmit option orders directly to the trading post.

Answer 487

C. II and III For short stock, selling puts provides a partial hedge (and income) and buying calls is a hedge.

Answer 488

A. 111 and 129 $120 + $9 = $129 $120 - $9 = $111 Breakeven is 111 and 129. Call strike price + total premium on the upside. Put strike price – total premium on the downside. Your client makes a profit if XYZ falls below 111 or rises above 129. He loses money at expiration if XYZ closes between 111 and 129.

Answer 489

B. Buy ABC Sept 50 call A straddle is either buying or selling a call and put on the same underlying security, with the same strike price and expiration date. You buy/hold an ABC Sept 50 put, so to create a straddle, you buy/hold an ABC Sept 50 call.

Answer 490

D. Registered options principal The registered options principal must approve both the opening and closing of discretionary accounts in options and closely review their transactions.

Answer 491

B. Collecting dividends on the underlying stock. Call holders don’t collect dividends; they don’t own the stock.

Answer 492

B. I and IV This is a debit spread, since the customer purchased one put for 10 and sold the other for 3, which resulted in a debit of $700. Further, this is a bear spread, since the customer bought a put with the high strike of 160 and sold a put with a strike price of 150. If the investor had sold the option with the lower strike price, it would have been a bull spread and credit.

Answer 493

B. Breakeven at 24, maximum profit of $600 $27 - $3 = $24 breakeven $30 - $27 = $3 x 100 = $300 from sale $3 x 100 = $300 from premium Since the investor purchased 100 shares for $27 a share and sold the call for $300, the investor is out a net of $2,400; therefore, the breakeven point is $2,400 or $24 per share. If the market increases and the option is exercised, the owner of the stock makes the maximum profit of $600. Premium = +3; Market = -27 + 30 = +3 = -24 breakeven = +6 X 100 = $600

Answer 494

C. Buy S&P 500 Index puts Given the nature of the fund, the most effective hedge is to buy puts on a broad U.S. market index whose composition closely resembles that of the portfolio. The S&P 500 Index is a better match for the fund portfolio than the Russell 2000 Index, which tracks small- and medium-cap U.S. stocks. Long puts would provide a good hedge because they will increase in value if the market, and therefore the fund, declines in value. Selling calls on the S&P 500 Index is a less effective hedge than buying puts because it would limit the portfolio’s downside protection to the premiums collected. Buying puts on the fund’s major holdings would be costly and, in any event, would not succeed in protecting the portfolio as a whole.

Answer 495

A. $3,800 If stock goes to zero, customer would lose [ $40 (purchase price) + $2 (premium) ] x 100 shares = $3,800 Premium = +2 Market = -40 (stock price) = 38 breakeven X 100 = $3,800

Answer 496

B. Sell T-bond calls Because the manager wishes to generate income and have the income protect against temporary declines in bond prices, he should sell calls, not buy puts.

Answer 497

B. LEAPS Unlike conventional options and which expire nine months after issue, LEAPS are issued with expirations out to 39 months and might appeal to this investor. Mini-options represent an underlying 10 shares (instead of 100) but still have nine month expirations. “STAGS” is a distractor.

Answer 498

B. $63 Premium = -6 + 3 = -3 Market = -60 (call = right to buy) = 63

Answer 499

B. $7,050 [ $75 (strike) - $4.50 (premium) ] x 100 shares = $7,050 Maximum gain is $7,050, 75 strike price - $4.50 premium paid = $70.50 X 100 shares. The put holder will realize the maximum gain if XYZ is 0 at May expiration.

Answer 500

C. $12,300 Credit: $2 (premium), $1.50 (premium) Debit: $35 (purchase), $30 (short put) The position should be treated as a covered call, long the stock, short the call, and a short put X 200. Long the stock at 35 = -35. Duty to buy on short put = -30 Market = -65. Premium received = +3 1/2 Breakeven is -61.50 X 200 = $12,300 loss

Answer 501

B. $463 Credit: $68.38 Debit: $62.25, $1.50 $68.38 - $62.25 - $1.50 = $463 Paid $6,225 for the long position in XYZ (100 X 62.25), also paid $150 for the put option, for a total of $6,375 paid. Put option expires unexercised, and receives $6,838 for the sale of XYZ (100 X 68.38). $6,838 – $6,375 = $463 profit.

Answer 502

C. II and III The hypothecation (margin) agreement must be completed prior to the first margin trade, and writing an option is a short sale on margin. The options disclosure document must also be sent. The options agreement needs to be signed only after 15 days of account opening, and margin disclosure is with the opening of the margin account, not the first trade.

Answer 503

D. $900 After a 3:2 split, the new contract size is 150 shares. $3 X 150 = $450 X 2 contracts = $900.

Answer 504

C. Closing purchase. If the investor is the writer of an option, which is the same as being short, he can close his position by buying an options contract.

Answer 505

A. Can be exercised at any time. Unlike American style options, European style options can only be exercised during a specific time period, usually the last trading day before expiration, making them less risky. Options on stock indexes are generally European style.

Answer 506

B. $4,750 Maximum gain for an option writer is the premium received. Therefore, 4.75 X 100 = 475 X 10 = $4,750.

Answer 507

A. $350 The maximum gain when selling options is the premium received.

Answer 508

D. Unlimited The gain is up and unlimited.

Answer 509

D. II and IV Long calls and short puts (II) are both on the upside of the market (bullish) while short calls and long puts (IV) are both on the downside of the market (bearish).

Answer 510

D. Is out of the money. The ABC June 20 call is out of the money. The market price of the stock is lower than the strike price. Calls are in the money when the market price is above the strike price.

Answer 511

B. X-dividend date. The covered call writer is long the stock and entitled to the dividend if ownership continues up through the x-dividend date. Exercise would call the stock away.

Answer 512

A. Decreasing time value. Decreasing time value is not an advantage for premium buyers. Loss for the purchase of a put is limited to the premium paid.

Answer 513

B. 60 At 60, this credit spread reaches maximum loss. The gain is narrowing around 55 with a maximum loss at 60.

Answer 514

A. $600 gain Credit: $1, $13 Debit: $5, $3 Premium Open: -5 and +1 = -4 Close: +13 and -3 = +10 +6 gain X 100 = $600 gain

Answer 515

A. $500 loss $5 - $10 = -$5 x 100 = -$500 He wrote/sold the call for $500 (credit) and made a closing purchase for $1,000 (debit), for a loss of $500.

Answer 516

A. $0.90. $20 - $18.30 = $1.70 intrinsic value $2.60 (premium) - $1.70 (intrinsic) = $0.90 (time value) The June 20 put is in the money. To determine the time value, you have to determine how much of the premium is intrinsic value (in the money), 20 (strike price) – 18.30(market price of ABC) = $1.70 (intrinsic value). Premium – intrinsic value = time value, so $2.60 - $1.70 = .90.

Answer 517

C. 2 July 48 calls with 125 shares each. The number of contracts stays the same with a stock dividend, but the shares increase and the strike price declines. The calculation for the stock would be taking the initial 100 shares X 1.25 = 125 shares. The calculation for the adjusted strike-price would be taking the initial 60 / 1.25 = 48.

Answer 518

D. 53.50. Premium is -1.50 and market is -52. Therefore, breakeven is 53.50. Customer bought at $52 and paid $1.50 for the put. $52 + $1.50 = $53.50, which is upside breakeven. The put is not exercised. Downside, I think would be $50 (strike price) - $2 (net between purchase price and strike price) - $1.50 (premium) = $46.50, which is not an answer.

Answer 519

B. Gain of $1,200. Intrinsic value for a call is stock price – strike price = 15. You paid $3 (a debit) for the call and sold it for $15 (a credit) for a gain of $1,200.

Answer 520

B. I and III Buying the lower strike price on a call spread means that your position is debit. You pay more premium than you receive. Debit call is bullish.

Answer 521

B. Today. The customer may immediately trade once his margin account is approved.

Answer 522

B. II and III II and III are both bearish. II is a credit call and III a debit put spread.

Answer 523

A. Contract size will increase and strike prices will be adjusted lower. Fractional stock splits and stock dividends increase contract size. Strike prices are adjusted proportionately lower.

Answer 524

B. Loss of $100 Credit: $2, $12 Debit: $15 The market price of XYZ is $12. The put was exercised and the customer has to buy 100 shares of stock at $15 (debit) that was sold for $12 (credit), so $300 was lost on the stock. However, the premium of $200 (credit) was received when the put was written, so the loss is $100.

Answer 525

D. Loss $100 Credit: $5 (premium), $3 (premium), $20 (call strike) Debit: $29 (purchase) $5 + $3 + $20 - $29 = -$1 x 100 = -$100

Answer 526

B. $300 gain Credit: $4 (premium) Debit: $1 (premium) $4 - $1 = $3 x 100 = $300 If the market price remains at 62, the options should expire since they're both out-of-money. This would give the customer a $300 profit.

Answer 527

A. A covered write An investor who buys stock and then writes a call option on those shares is writing a covered call option. This position is known as a covered write.

Answer 528

C. III only The position limit rules were developed to prevent investors from putting an excessive "bet" on a specific directional move in the market price of a security. Investors bet that market prices will either rise or fall. Here the investor with a long call position is betting that the market price will go up. An investor who takes a short position in XYZ puts also stands to benefit if the market price goes up since the put will expire and he will keep his premium.

Answer 529

A. This couple’s current options positions are in violation of the position limit rules. The options exchanges impose limits on the maximum number of puts and calls on a given security that may be held or written on the same side of the market by a single investor or group of investors acting in concert or under common control. These limits apply to all investors, including institutions. Married couples are viewed as acting in concert or under common control, and as such are subject to the limits even if they maintain options accounts at different brokerage firms. In this case, a violation would occur if the couple exceeded the 60,000 contract position limit for VVV stock with combined positions on the same side of the market - that is, on the bull or bear side of the market. The long calls and short puts they own are both bullish. And since they have a combined 62,000 contracts on the bull side of the market, they are in violation of the position limit rules.

Answer 530

A. Send an options disclosure document Suitability is already determined at account opening, and the ROP (registered options principal), upon approving the account, would instruct you to send out the options disclosure document.

Answer 531

C. Buy a put on ABC This is a classic hedging question. It is important to remember that hedges always have the opposite market attitude of the underlying primary investment position. In this case, the client’s primary investment position is that she owns the stock, which means she is bullish on the stock. To hedge that long position, she must use options positions that are bearish. Of the four potential answers, buying a call and selling a put can immediately be eliminated because they are bullish in nature. By contrast, long puts and short calls are both bearish in nature, and both could be used to hedge a long stock position. However, only the long put position would allow the client to achieve both objectives noted in the question. If the stock declines, she can exercise her right to sell it and preserve her gain, or the gain in the option’s value will offset the losses on her stock position; if the stock goes up, she is out her put premium but will fully participate in the price gain. If, on the other hand, she sells a call on the stock, her downside protection is limited to the premium she collects, and on the upside, the stock could be called away from her, preventing her from benefiting from further appreciation.

Answer 532

D. Long 50,000 ABC June 60 calls, Long 25,000 ABC Sept 55 calls, and Short 10,000 ABC June 50 puts Long calls and short puts are on the same side of the market (bullish). Different expiration dates and strike prices are irrelevant.

Answer 533

A. Write a put at $35. The two responses that have the investor exercising the option can immediately be eliminated because the investor is looking to generate (collect) premium income, not pay it out by buying options. Writing a call and writing a put would both generate premium income, but only the short put position would achieve the additional objective of potentially enabling him to acquire the stock below its current market price of $38. The reason: If the stock does indeed decline in price near-term, the put would likely be exercised, allowing the put writer (the investor) to buy the stock at $35 per share. Writing a call, by contrast, would obligate the investor to sell, not to buy, the stock, and since he does not own the stock, would expose him to potentially unlimited losses if the stock rose in value. Another clue to correctly choosing between the writing a call and writing a put answers is to look at the market attitude of the two strategies. Put writing is a bullish strategy that is in keeping with the investor’s long-term view of the stock, while call writing is a bearish strategy that conflicts with that view.

Answer 534

B. Put writer In an options contract, the put writer collects the premium and is obligated to buy the underlying security at the strike price. Remember that the option writer – for calls or puts – always has the obligation to sell or buy the underlying security and receives the premium.

Answer 535

D. Trading rotation. The specialist/order book official always starts the taking of orders, in the series of options assigned to him, with an opening rotation. When the market closes, the system implemented to take orders is the closing rotation.

Answer 536

B. Straddle. A straddle involves the purchase or sale of a call and a put (different types of options) that are on the opposite sides of the market.

Answer 537

D. 5.50 The maximum gain is total premium received is 3.25 + 2.25 = 5.50.

Answer 538

D. III only Selling a put uncovered gain is premium; loss is breakeven down to zero. The position is bullish because there is downside risk.

Answer 539

C. II and III Credit calls and debit puts are on the same side of the market (bearish). Debit calls and credit puts are on the same side of the market (bullish).

Answer 540

C. $300, $700, 53 Credit: $1, $60-$50=$10 Debit: $8 The position is a debit put spread. Premium (max loss -7(00), max gain +3(00) and 60 minus 50 strike price equals 10. Breakeven is net premium of 7 subtracted from the higher strike price.

Answer 541

A. The ABC call will be adjusted to contain 150 shares with an exercise price of 20. Options contracts are adjusted in response to corporate actions or events such as even and uneven stock splits, reverse stock splits, stock dividends, rights offerings, mergers and acquisitions and spin-offs. Specifically, the underlying terms of the contract are adjusted to ensure that the valuation and total equity/obligation of the contract remain unchanged. When a company pays a stock dividend, the number of contracts remains the same, but the number of shares represented by the contract rises. In addition, the strike price is adjusted down so that the total exercise value remains unchanged. In this example, the exercise value of the original contract was $3,000 (100 shares x $30 strike price). After the 50% stock dividend payout, the contract is adjusted to contain 50% more shares, or 150 shares in total, and the strike price is reduced to $20 so that the total exercise price remains $3,000. It is important to note that options contracts are typically not adjusted for ordinary cash dividends.

Answer 542

D. Unlimited A naked call has unlimited loss.

Answer 543

D. II or III The position of debit will profit if options are exercised and premiums widen.

Answer 544

D. Unsolicited. A customer giving the representative an order is unsolicited.

Answer 545

C. $1,300 Premium is -2, and market is -15 = -13 X 100 = $1,300. Strike price 15 minus – 2 premium received = 13 X 100 = $1,300

Answer 546

B. A loss of $1,500 $0.75 - $2.25 = -$1.50 x 10 x 100 = -$1,500 Jan paid $2.25 (a debit) and sold for $0.75 (a credit) = ($1.50) X 100 X 10 contracts = $1,500 loss

Answer 547

B. At or prior to the first trade approval. The disclosure document of the options clearing corporation must be sent to the customer prior to the account approval by a registered option principal, or ROP.

Answer 548

D. At or before account approval A client receives an option's disclosure document at or before account approval.

Answer 549

A. The strike price is the value at which the option can be exercised throughout the option period. An option denotes the right (but not the obligation) to buy or sell an underlying security at a designated price, known as the strike or exercise price, at any time throughout the option period. Option contracts are written with a definite start and expiration time.

Answer 550

A. $775 gain $8 - $0.25 = $7.75 The answer is $775 gain, calculated as $800 (credit received by the writer) minus $25 (debit paid by the writer when the position is closed out).

Answer 551

B. $700 profit Credit: $59, $1 Debit: $48, $5 $59 + $1 - $48 - $5 = $7 x 100 = $700 If premium is -5 and stock/strike price is -48 = -53. If premium is +1 and stock/strike price is +59 = +60. Profit is -53 + 60 = +7(00)

Answer 552

A. $300 loss Credit: $46 Debit: $4, $45 $46 - $4 - $45 = -$3 x 100 = -$300 Paid premium of $400, then paid $4,500 when call exercised, $4,900 total paid. Received $4,600 when sold stock. So $4,600 received minus $4,900 paid = $300 loss

Answer 553

C. Below 44 Loss is in the stock market price going down below the purchase price of the long stock, so below 44 is the price point there could be a loss, depending on the premium received for the 45 call.

Answer 554

A. $250. The buyers of options lose only their premium (2.50 X 100 = $250).

Answer 555

A. $250 The customer bought a put. Maximum loss when buying options = premium, $250.

Answer 556

A. The Options Clearing Corporation decides which broker/dealer will deliver the securities. Then the broker/dealer will assign one of their clients by random selection. The client might not be assigned. The process of assignment for options is random on the part of both the Options Clearing Corporation (OCC and the broker/dealer. When an investor wishes to exercise his option, he notifies the broker/dealer. The broker/dealer notifies the OCC and then the OCC randomly selects a broker/dealer that has an open position to be exercised. That broker/dealer then randomly selects one of their clients to deliver securities to or to buy the securities when assigned a put option. FINRA is not involved.

Answer 557

B. 40 call with a $3 premium and the current market value of the underlying stock is trading at $43 Parity exists when the underlying stock is trading at the same value as the breakeven of the option. If the stock’s current market value is $43, a $40 call with a premium of $3 is at parity. This usually happens just prior to expiration because there's no longer any time value associated with the option.

Answer 558

C. $4,630 gain Credit: $4.75 Debit: $0.12 $4.75 - $0.12 = $4,630 The customer wrote 10 puts @ 4.75 (credit), for a total of 4.75 X 100 (shares per option contract) X 10 (put contracts) = $4,750. The customer then purchased them back @ .12 (debit), for a total of .12 X 100 X 10 = $120. $4,750 – $120 = $4,630 gain.

Answer 559

C. The options exchange The options exchange, by agreement with the stock exchange, honors trading halts.

Answer 560

B. Maximum gain is $4,125 and maximum loss is unlimited. On a short straddle, the maximum gain is the premium received, $8.25 X 100 = $825 X 5 = $4,125, and the maximum loss is unlimited.

Answer 561

D. The put holder has the right to sell at the strike price. A put option is a contract that gives the put holder the right to sell 100 shares of the underlying security at the strike price (also called the exercise price), until expiration. Long put – right to sell. Short put – obligation to buy.

Answer 562

A. $100 loss Credit: $1, ($60 - $56 = $4) Debit: $6 $4 + $1 - $6 = -$1 x 100 = -$100 Premium is -5 Market is +60 minus premium = +55 and -56 = +4 -5 (premium) +4 (market) = -1 X 100 = $100 loss

Answer 563

D. II and IV The spread is debit (buy the higher put) and vertical (difference in strike price).

Answer 564

B. At or prior to the time the client receives the letter The options disclosure document must be sent prior to or upon sales literature being sent.

Answer 565

D. Unlimited Since the customer owns stock and the stock may rise infinitely, there is an unlimited gain potential.

Answer 566

D. Receiving a signed options agreement from the customer. The customer has a 15-day free look on the account agreement beginning on the date the agreement is given.

Answer 567

A. Long puts and short calls Position limits place restrictions on the number of positions on the same side of the market, either both bullish or both bearish. Both long puts and short calls are bearish.

Answer 568

D. At least $0.01 in-the-money. If a long option expires, the client will lose the full premium paid. To help minimize these losses, if an option is in-the-money by 0.01 or more the option will be automatically exercised by the OCC, unless the holder instructs the OCC to let it expire unexercised.

Answer 569

A. $3,575 profit Credit: $6.15, $35 Debit: $34 Randy’s profit is $3,575. At expiration, he was assigned and had to sell his long stock @ 35 for a one point profit plus the premium received for the short straddle. $1 + $6.15 = $7.15 X 100 = $715 X 5 (straddles & stock) = $3,575.

Answer 570

A. Premium paid When you are long you are the buyer. In a straddle, you buy both a put and a call. The maximum loss is the premium paid. In this case, both options expire worthless, which occurs if the straddle expires with the market price at the strike price.

Answer 571

C. II and III You buy the higher, more valuable strike price of the put spread, so you establish the spread for a debit. A debit put spread is bearish.

Answer 572

A. 3 XYZ May 10 calls Remember: Whenever you have a stock split that is even, such as a 3-for-1, the number of contracts goes up and the strike price goes down, accordingly. In this case, Rich owns one contract with the strike price at 30. After a three-for-one stock split, Rich will own three contracts with the strike price of $10. It's important to remember that the aggregate value and exercise will remain at $3,000.

Answer 573

B. $200 $65 - $70 = -$5 (net spread @ $70 CMV) + $4 (put premium) - $1 (call premium) = -$2 x 100 shares = -$200 On this credit spread, if the option is exercised, the customer will lose $200. This is equal to the difference in the strike prices minus the net premiums. BUY 70 call for 1 minus SELL 65 call for 4 = 5 market minus 3 premium = 2 OR Premium = +4 minus 1 = +3 Market = +65 minus 70 = -5 = -2 loss

Answer 574

D. Diminishing time. Long a call can benefit from all except diminishing time because that is a disadvantage to long options positions. Long positions need time for the stock to be able to move in their favor in order for them to benefit.

Answer 575

A. At any time up to the expiration cut-off time. American style options can be exercised any time up to the cut-off time on expiration day. European style options can only be exercised during a specific time period, usually the last trading day before expiration.

Answer 576

A. Loss of $100 Premium is +2 and market is -15 = -13 plus 12 = -1 X 100 = $100 loss. When the option is exercised, the investor is forced to purchase stock at $15 when it is trading at $12. This $3 loss is offset by the $2 premium received = $1 loss X 100 = $100.

Answer 577

A. Writing an equal number of puts and calls with the same strike price and expiration date, on the same underlying security. Writing a straddle involves writing an equal number of puts and calls with the same strike price and expiration date, on the same underlying security. Investors who write straddles are anticipating low volatility in the underlying security.

Answer 578

A. $300 profit. Credit: $10, $88 Debit: $85, $10 $10 + $88 - $85 - $10 = $3 x 100 = $300 Situation 1: Premium is +10 and strike price is -85 = -75 breakeven. Situation 2: Premium is -10 and strike price is +88 = +78 close out. This equals a +3 gain X 100 shares = $300 profit.

Answer 579

D. 100% of the premium The customer buying an option can only lose the premium.

Answer 580

B. 75 Since the investor purchased 100 shares of stock for $85 a share and has sold a call option for a premium of 10, the client is actually out only $75 per share.

Answer 581

B. $9,575 If the stock should fall to zero, the investor has lost his entire investment, less the premium received on the call. Maximum loss is therefore $9,575. $10,000- $425 = $9,575.

Answer 582

C. II and III Buy a 35 put and write a 25 put is a debit put spread. A higher strike price put is more expensive than the lower strike price put so the investor established the spread for a debit; the investor loses money if the spread narrows (goes down in value).

Answer 583

B. Income and a partial hedge A covered write provides a stock investor with a partial hedge and income. The tradeoff is limited capital appreciation. The investor still has most downside risk associated with stock ownership because only a small part of the risk is offset by the premium received from selling calls.

Answer 584

B. I and IV Long calls and short puts are both bullish positions. If the underlying security goes higher, calls will increase in value and puts will go down in value. If call holders exercise their calls, they will be long stock. If put writers are assigned, they will be long stock.

Answer 585

D. 70 At 70, gains are maximized. At 70, the customer has a duty to sell as an offset to the right to buy at 60.

Answer 586

B. $3,500 Price paid for stock $40 – premium received $5 = $35 x 100 = $3,500

Answer 587

A. Out of the money. A call option is out of the money when the market price is below the strike price. The option premium price does not matter. The call option gives the investor the right to buy the stock at the strike price before expiration. In this scenario, the option is out of the money because the investor can buy the stock in the marketplace now at a lower price. It does not make sense for the investor to exercise this option now.

Answer 588

C. $600 gain. $41 - $34 - $1 = $6 x 100 shares = $600 If the market price moved to 41, the put would expire (worthless as it is) out-of-the-money by 11 points. The customer could then sell the stock in the market for the current price of $41 a share, resulting in a net profit of $600. Premium is -1; Market is -34; This equals -35 + 41 (current stock price) = +6 = $600

Answer 589

D. Unlimited Call writers maximum loss is unlimited.

Answer 590

A. $1,000 loss Opens at -8 + 3 = -5 Closes at +5 minus 1 = +4 -5 + 4 = -1 X 100 X 10 = $1,000 loss

Answer 591

A. Have a limited maximum loss. Both short calls and short call spreads generate premium income, and both are bearish strategies in which the seller wins when the price of the underlying stock remains flat or declines. Moreover, all call writing strategies have a limited upside that, at most, is equal to the premium collected. The key difference between the two strategies lies in their risk. If an investor writes a “naked” short call in which he does not own the underlying stock, he faces a potentially unlimited loss if the stock price heads north and the option is exercised against him. This will force him to buy the stock in the open market and sell it for a loss at the agreed upon strike price. In a short call spread, by contrast, the investor simultaneously buys and sells a call on the stock, collecting more premium on the short side than he pays on the long side. This limits his potential loss in an up market, but also reduces his maximum gain to the difference between the premium collected and the premium paid.

Answer 592

D. Your gain is premium.

Answer 593

B. Gain of $350 Premium is -3 + 1.50 = -1.50; Market is +55 minus 50 = +5; -1.50 + 5 = +3.50 X 100 = $350 gain. -$1.50 (net premium) -$5.00 (short put) +$10.00 (long put)

Answer 594

C. Buy 100 shares of ABC stock and buy 1 ABC put In hedging, the most effective protection always comes from buying calls and puts. In other words, it is always best to buy. Long option positions are highly protective because, if properly constructed, they can completely offset the losses on a long stock position if the stock price falls, or on a short stock position if the stock price rises. Depending on the strike price they select, investors can use long option positions to fine tune the degree of protection they wish to achieve. Short calls and puts are less effective hedges because they afford protection only to the extent of the premium collected. Remember: Long options provide full protection, while short options provide partial protection.

Answer 595

A. Gain of $300 Credit: $2, $25 Debit: $24 $2 + $25 - $24 = $3 x 100 shares = $300 If the stock is trading at 30, the call would be exercised, and the investor would sell stock at 25 for $100 dollar profit plus the $200 ($2 X 100 = $200) premium received for the short call.

Answer 596

B. $350 $2 + $1.50 = $3.50 x 100 = $350 This is a hedged position. If the stock falls below 50, the customer can exercise the put and sell the stock at $50 for a $200 loss. The $150 premium paid for the put is also loss.

Answer 597

C. Conservative. When writing a long stock, this is a covered call, and is considered a conservative strategy.

Answer 598

B. $5,375 Credit: ($70 - $52 = $18) Debit: $7.25 $18 - $7.25 = $10.75 x 5 x 100 = $5,375 The profit is $5,375. If ABC is 52, the Nov 70 put has an intrinsic value of 18, the call is out of the money, so it has zero intrinsic value. $18 - $7.25 (premium paid) = $10.75 X 100 = $1,075 X 5 straddles = $5,375

Answer 599

A. Call option. A call option contract gives the buyer of the contract the right to purchase 100 shares of the underlying security at the strike price.

Answer 600

B. 10 The premium multiplier is 10. A mini-option contract with a premium of $2 would cost $20 ($2 x 10).

Answer 601

B. Options are halted if the stock is halted. Stock halts are honored by options exchanges on equity options (but not on index options).

Answer 602

B. Writing 1 ABC March 40 call Writing uncovered calls has unlimited risk: it is equivalent to a short stock position.

Answer 603

D. $1,000 profit. Premium = +10 Market is -60 +60 Therefore, $10 = $1,000 profit. His profit is the call premium received.

Answer 604

D. Unlimited The maximum loss of a covered put is unlimited, due to the short sale of the stock.

Answer 605

A. 13 Strike price – premium received = 13

Answer 606

C. II and III

Answer 607

D. $70 At 70, gain is capped by the duty to sell.

Answer 608

C. II and III II. The ABC June 17.50 put is worth more than the June 15 put. III. The ABC June 25 put is the most valuable put in this options series. The ABC June 17.50 put has the higher strike price (sell high) so it's worth more than the ABC June 15 put. The ABC June 25 put has the highest strike price in this series, so it is the most valuable put.

Answer 609

A. ABC June 25 call and the ABC June 15 put The price of the stock is irrelevant. The call with the highest strike price will always be the cheapest call in the series. The put with the lowest strike price will always be the cheapest put in the series.

Answer 610

B. Write 10 XYZ call This is an example of cover called writing. By writing 10 XYZ call, the investor will receive the premium. This position is called "covered call writing" and is the first option position that any new investor is able to take. The reason is the investor owns the underlying stock, so when the option is exercised, the investor will be able to deliver the shares.

Answer 611

B. I and III For buyers of options, low volatility and the passing of time erode option premiums. An at-the-money put has no intrinsic value, so if the stock remains at or near the strike price, the premium will erode. At expiration, if it is at the money, it will expire worthless. Straddle holders need large moves in the underlying stock to make a profit, because they paid two premiums for the straddle.

Answer 612

C. $500 loss. Credit: $30 Debit: $1, $34 Since the investor was out $3,400 on the stock plus the $100 on the put, the investor is originally out $3,500. If the stock moves to 22 and the long put is exercised and the stock is delivered against the exercise, the customer will receive the strike price of $3,000 for a net loss of $500.

Answer 613

A. $350 loss Credit: $65 Debit: $66, $2.50 $65 - $66 - $2.50 = -$3.50 x 100 = -$350 The breakeven is 68.50 or 66, plus put premium. When the stock is at 60, the 60 put has intrinsic value of $5, the $6 dollar of loss in the stock will be offset by a $2.50 gain in the put.

Answer 614

A. $300 If the options expire, the customer will make $300 on this credit spread. The maximum gain on a credit spread is always the net premium.

Answer 615

C. $700 Premium = -3 Market = -60 (call = right to buy) + 70 (call = duty to sell) = +10 minus 3 = 7 X 100 = $700 gain.

Answer 616

C. Widens. The option position is a calendar or horizontal spread. As in all spreads, one option leg is important and is netted against the other, less important leg. July has more time value than April. The April leg was sold. The spread is debit. Debit spreads benefit from premium widening.

Answer 617

A. $3,000 loss $3 (premium) x 10 x 100 = $3,000 If XYZ is 40 at May expiration, both the May 40 puts and calls will expire worthless and Josie will lose the entire premium she paid for the straddles. $3 X 100 = $300 X 10 straddles = $3,000

Answer 618

D. Covered sale. If a customer buys 100 shares of stock and sells a call against that stock, this creates an opening covered sale.

Answer 619

C. $700. Credit: $2, $45 Debit: $40 $2 + $45 - $40 = $7 x 100 = $700

Answer 620

D. Buy an XYZ 35 call The XYZ 35 call is the best protection; the most Jan can lose is $550. If the stock goes above 35, then Jan can exercise the call at 35 for a $200 loss on the stock and she will lose the $350 premium she paid for the call for a total loss of $550. If she writes an XYZ 35 put, she still has the potential for unlimited upside loss. Both selling the XYZ 35 call and buying the XYZ put are bearish positions. To hedge a short stock position (bearish), you have to establish a bullish position in options.

Answer 621

B. Covered call writing. To establish a covered call write, an investor writes call options share for share against a long stock position and collects the premium.

Answer 622

D. I and III The position is a debit put spread. Debit profits from exercise and premiums widening.

Answer 623

C. Loss of $700 Credit: $35 Debit: $36, $2.50 $35 - $36 - $2.50 = -$3.50 x 200 = -$700 The investor lost $700. The investor bought stock at $36, and when the puts were exercised, the stock was sold at 35 for a $200 loss plus and the cost of the premium paid for the puts ($2.50 X 100 = $250 X 2 contracts= $500).

Answer 624

D. $35 When an investor purchases 100 shares of stock for $34 a share and purchases a put for another $100, the customer is out a total of $3,500. Therefore, the customer must receive at least $35 a share to break even on the transaction.

Answer 625

A. $3,800 Purchase price of stock $40 - $2 premium received = $38 X 100 = $3,800.

Answer 626

C. $488 gain Credit: $6, $0.12 Debit: $1, $0.12 $6 - $0.12 - $1 = $4.88 x 100 = $488 gain The spread is credit; both options are out of the money. Your gain is the premium you received $5 (6 - 1) or $500 less .12 (what you paid to buy back the short call) or $12 = $488 gain.

Answer 627

D. November The May quarterly cycle contains August and November.

Answer 628

D. $500 loss Credit: $3, $4 Debit: $11, $1 $3 + $4 - $11 - $1 = -$5 x 100 = -$500 A net debit of 800 is closed out by a net sale of 300, resulting in a loss of $500.

Answer 629

A. Unlimited The maximum loss is unlimited. Bob is short stock. His short put will only give him a partial hedge.

Answer 630

A. $42 Breakeven is the price paid for the stock less the premium received. $50- $8 = $42.

Answer 631

D. $500 profit. Credit: $10, $80 Debit: $85 $10 + $80 - $85 = $5 Premium is $1,000, paid to investor. Stock is purchased by investor for $8,500. Call exercises at 80, investor sells and receives $8,000. $1,000 received + $8,000 received = $9,000 received – $8,500 paid = $500 profit.

Answer 632

B. Limited profit and limited loss. An investor who is long stock establishes a covered write by writing calls on a stock position. The calls are "covered" because the investor owns the underlying security. Writing calls provides income to the investor and creates a partial downside hedge, but limits the investor's potential profit on the stock.

Answer 633

C. $650 gain Premium Open - 1.50. Market: -50 = -51.50. Close: +58. Market: +6.50 X 100 = $650 gain

Answer 634

D. $4,200 The maximum gain is the short sale price of the stock less the premium paid for the call. 46 – 4 = 42 X 100 = $4,200.

Answer 635

C. 42.50 and 47.50 Credit: $4.50, $3 Debit: $4.50 + $3 = $7.50 - X = $5 X = $2.50 The total premium is 7.50, so at 42.50 and 47.50, the profit would be $500.

Answer 636

B. Gain of $200 Credit: $25, $1 Debit: $4, $20 $25 + $1 - $4 - $20 = $2 x 100 = $200 Premium is -4 and market is +25 = +21. Call Premium is +1 and market is -20 = -19 +21 minus 19 = +2 X 100 shares = $200 gain

Answer 637

D. Credit and debit spreads, long straddles and covered call writing Long call and put positions always have a maximum loss that is limited to the premium paid. Long straddles - the simultaneous purchase of a call and put - always have a maximum loss that is limited to the two premiums paid. Whether they are debit or credit, put and call spreads always have a maximum loss that is limited to a portion of the differential between the two strike prices. Short puts always have a limited maximum loss because stock prices cannot fall infinitely; in other words, they can fall to zero, but no further. Covered call writing has a limited loss potential because the underlying stock is owned by the investor. However, naked call writing has an unlimited loss potential because stock prices can rise infinitely (at least in theory). The same holds true for short straddles, which involve the simultaneous sale of a call and put. Credit and debit spreads, long straddles and covered call writing are all limited-loss strategies.

Answer 638

B. I and IV Shares were purchased at 65, but sale proceeds include a premium of 4, plus a strike price of 70 or 74 total.

Answer 639

C. Sell short 100 shares of ABC stock and sell 1 ABC put Long stock positions have a limited maximum loss because stock prices cannot fall infinitely; in other words, they can fall to zero, but no further. By contrast, short stock positions have unlimited risk potential because stock prices can rise to an infinite degree. Buying a call to hedge a short stock position holds the potential to completely offset the losses that would be incurred if the stock price rises. But selling a put to hedge a short stock position would only afford protection to the extent of the premium collected. So it is the riskier of the two types of short sale hedges and the riskiest of the four answers given.

Answer 640

A. Sell calls on the Canadian dollar Options on the U.S. dollar are not available for trading on U.S. exchanges. Selling calls is a bearish strategy and would not make sense in this scenario. If the investor is right and the Canadian dollar does appreciate, buying calls on it could be profitable since this strategy is bullish. ANSWER COMMENTS DO NOT MATCH ANSWER

Answer 641

B. $24,750 The maximum loss is the strike price of 250 minus 2.50 X 100 = 24,750.

Answer 642

B. $50 When you write a put, your maximum gain is the premium you received - $50 or .50 point X 100.

Answer 643

A. Under FINRA rules, the carrying B/D has 1 day to validate and 3 days to complete the transfer. However, if there are options in the account that are expiring within 7 days, these option contracts will not transfer. MSRB rules the carrying B/D has 3 days to validate and 4 days to transfer.

Answer 644

C. This is a discretionary trade and requires prior written authorization from the customer. This is not a discretionary trade because the registered representative did not choose the asset, the action, or the amount of the trade. Merely choosing the timing of a trade is not considered discretion.

Answer 645

B. Inform his supervisor of the situation. Because the registered representative did not have written discretionary authority, the registered representative cannot do anything at this point except inform his supervisor.

Answer 646

B. $2,500 Regulation Tis 50% of the purchase price.

Answer 647

C. $2,000 $2,000 is required since this is the minimum deposit, and not $1,500, which would be Reg T 50%.

Answer 648

C. $1,800 This is the fully paid price. This is an example of the exception when the deposit is less than the $2,000 minimum.

Answer 649

D. $2,000 This is due to the fact that the minimum deposit to open a short sale is $2,000.

Answer 650

C. II and III Interest received reduces debit and increases equity. Withdrawal of securities means sale; half of the proceeds reduce debit.

Answer 651

C. $3,000 Minimum equity in a long account is 25% of the long market value (LMV).

Answer 652

C. $1,000,000 SIPC provides $500,000 coverage for each "separate customer." The individual account and joint account are two separate customers, providing her with a maximum of $1,000,000 coverage.

Answer 653

B. An individual’s cash and margin accounts. An individual’s cash and margin account are combined for SIPC coverage. The SIPC coverage limit is $500,000 for each separate customer, the maximum of which $250,000 can be in cash.

Answer 654

A. $30,000 LMV - DB - SMV + CB = $80 - $54 - $6 + $10 = $30 Equity Long Market value of 80,000, minus short market value of 6,000 = 74,000, minus debit of 54,000 = 20,000, plus credit of 10,000 = 30,000 Ignore SMA.

Answer 655

B. Account ownership transfers directly to the designated beneficiary. The account transfers directly to the beneficiary, bypassing probate. TOD (Transfer on Death) accounts are always individual accounts.

Answer 656

B. II and III A sale "against the box" is opening a short position against a corresponding long position to capture a gain but delay taxes. Arbitrage is simultaneously short and long, taking advantage of a market inefficiency.

Answer 657

B. $500,000 per separate customer, with a limit of $250,000 of coverage for cash. SIPC maximum coverage is $500,000 for each separate customer. A limit of $250,000 of that coverage may be in cash.

Answer 658

A. I, II, and III only I. New account form II. Corporate charter III. Corporate resolution; All are needed to open a corporate margin account except power of attorney.

Answer 659

D. 90 days. A violation of Regulation T for nonpayment of a transaction will cause the account to be frozen for a period of 90 days.

Answer 660

C. II and IV SMA: "You never lose it unless you use it." Market declines (unless in a short account) and interest charges do not decrease SMA.

Answer 661

B. $10,000 25% x 1,000 x 20 = $5,000 30% x 1,000 x 10 OR $5/share x 1,000 shares = $3,000 OR $5,000 (whichever is greater) Long 1,000 shares at 20 or 20,000 with maintenance at 25% or $5,000. For shares sold short, the minimum maintenance is the greater of 30% of the short market value or $5.00 per share. Because the short sale was at $10 per share, both the required deposit and the minimum maintenance are $5 per-share or $5,000. Therefore, the answer is $10,000 ($20,000 X .25 = $5,000; and 1,000 shares short at $5 = $5,000).

Answer 662

A. Failed to deliver payment within 4 business days of purchase. This is a Reg T violation. Not paying within 4 business days involves a 90-day account freeze. During this 90-day period, the customer must have cash in the account before making a purchase.

Answer 663

C. II and IV If the rep controls at least one of the “three As,” the rep is exercising discretion. The three As are asset (which security), activity (buy or sell), and amount (number of shares).

Answer 664

A. $3,000 SMA of $1 can buy $2 of stock but only $1 of options premium (which have no loan value and must be fully paid). Therefore, $4,000 of option premium, less $1,000 of SMA equals $3,000 deposit.

Answer 665

B. $1,000 SMA is $500 (equity is $6,000 exceeding 1/2 of $11,000 by $500). Buying power is $1,000, or twice the SMA amount.

Answer 666

B. It names the individual authorized to trade for the partnership. The partnership agreement identifies the individual who trades on behalf of the partnership.

Answer 667

D. The receiving firm must promptly return the securities to the selling firm. FINRA Rule 11860 does not provide additional time to pay for the securities. The transaction, including price, is agreed upon in advance based on an understanding that the seller will be paid immediately once securities are delivered. Arrangements by the buyer and seller must be made along with the proper documentation before such a trade may occur. However, no additional terms are available, such as T+2 or an extension. Therefore, the receiving firm must promptly return the securities to the selling firm.

Answer 668

D. Complete the transfer within 4 days. Upon receipt of the ACATS, the broker/dealer must cancel open orders, freeze the account, verify positions within 1 day, and transfer positions within an additional 3 days.

Answer 669

C. FINRA and the transacting exchange. Only the FINRA and the exchange where the stock was transacted may grant extensions to investors.

Answer 670

C. 6 years. After a customer’s account is closed, the account information must be maintained for 6 years.

Answer 671

B. $250,000. SIPC insures unreturned cash up to $250,000.

Answer 672

D. Lower volatility with a lower overall return. Investors with fixed income needs will accept less potential return for reduced volatility since the need for fixed income is the primary objective of the investment.

Answer 673

C. 90 days. Ninety days is the penalty for not paying for a margined security within the required 4 business day period for settlement of the purchase.

Answer 674

C. $3,000 equity, SMA $500 SMA is created in the account when the market value of the stock increases to $55. When the stock declines to $40, equity drops to $3,000, but SMA is not affected. Remember: With SMA, you never lose it unless you use it. $10,000 LMV - $5,000 DB = $5,000 E $8,000 LMV - $5,000 LMV = $3,000 E $55/share x 200 shares x 50% = $5,500 $5,500 - $5,000 = $500 SMA

Answer 675

C. $3,000 For stocks between $5 and $17.50 per share, the Rule is $5 per share; for stocks between $2.50 and $5 per share, the Rule is 100%. The deposit for short 300 shares of ABC @ $9 is 300 X $5 = $1,500 and the deposit for short 500 XYZ at $300 is 100% or $1,500, for a total of $3,000. 300 shares x $5/share (between $5 and $17.50 per share) = $1,500 500 shares x $3/share (between $2.50 and $5 per share = 100%) = $1,500 $1,500 + $1,500 = $3,000

Answer 676

C. $2,500 An initial deposit of $2,000 is required since the initial sale is short. The resulting credit balance is $5,000 or short sale proceeds ($3,000) plus Reg T ($2,000). As the short market value share price declines to 25, equity increases to $2,500 or CB ($5,000) – SMV ($2,500) = E ($2,500).

Answer 677

A. Same stock in a cash account without having first fully paid for the purchase. Cash account purchases must be fully paid by the fifth business day, or the account will be subject to day restriction and the position will be liquidated.

Answer 678

D. $5,000 Minimum requirement for a stock valued at $2.50 per share or lower is $2.50 per share. 2,000 shares x $2.50= $5,000.

Answer 679

C. 4 business days. A security purchased on margin must be settled in 4 business days, which is different than the 2 business settlement date for securities settling regular-way.

Answer 680

A. $0 There are no interest charges on short sales. Money is not borrowed, only stock.

Answer 681

A. The suspension terminates the When-Issued basis and now orders taken must be delivered on regular way settlement and delivery basis. The client can place the order at his convenience. At the point at which a When-Issued/When-Distributed Order has been suspended per NYSE Rule 63, the client can place an order whenever he wishes and the issuer is required to deliver securities based on regular way delivery and settlement.

Answer 682

A. The investor must sign a statement that he or she understands the risks. The broker usually will require the investor to sign a statement that he or she understands and acknowledges the risks associated with derivative instruments when trying to open an option account or with a penny stock account, not a cash account. All the other statements are true.

Answer 683

D. $15,000 If you give someone money or property during your life, you may be subject to federal gift tax. Currently, the annual exclusion for gifts is $15,000 per gift recipient.

Answer 684

A. Government debt. Government securities are exempt from Regulation T.

Answer 685

A. The representative must update client suitability. The rep must complete client suitability forms and update them.

Answer 686

D. The client would be reimbursed $40,000. $90,000 securities minus $50,000 debit equals $40,000 equity, and only equity is reimbursed when the BD is in receivership. A receivership is a court-appointed tool that can assist creditors to recover funds in default and can help troubled companies to avoid bankruptcy.

Answer 687

B. Cancel the trade and sell off the purchased securities. The firm is to immediately cancel the order and sell the securities. After the trade is completed, the customer account becomes frozen for 90 days in accordance with Regulation T.

Answer 688

D. $95,000 Treasuries have a maintenance requirement of only 5% of the face value. Therefore, $100,000 market value (and par value) minus 5% = $95,000 can be withdrawn as a loan.

Answer 689

D. Must cancel or liquidate the order by immediately selling the securities. The member firm must cancel or liquidate the transaction by promptly selling the securities because an extension has been refused.

Answer 690

B. Securities are registered in the name of the minor. In an Uniform Gifts to Minor Account (UGMA) account, securities are registered in the name of the custodian for the benefit of the minor. Only one custodian and one minor may be named per account. Gifts made to the minor are irrevocable. Margin accounts are not permissible for UGMA accounts.

Answer 691

A. $500 cash. Equity is only $2,000 (MV $10,000 minus debit of $8,000). Maintenance is 25%, or $2,500. Therefore, a $500 cash deposit is required. SMA is pure leverage, not equity, and can never be used to meet maintenance. SMA is a credit extension, and maintenance call is a bankruptcy summons.

Answer 692

B. The customer receives $400,000 value in securities and cash. SIPC covers only margin and cash account equity, and will reimburse each customer in cash for total account equity of $500,000 in cash and securities. In this case, it's $400,000.

Answer 693

C. Explain the characteristics of that type of account. The best answer is to explain the characteristics of this type of account, especially as it pertains to an unmarried couple. In a JTWROS account, 100% of the assets in the account pass to the surviving account owner should one die. A tenants in common account might be more suitable because in the event of the death of one of the owners, the deceased owner’s portion of the account will pass to their designated beneficiaries or to their estate. A tenancy by the entirety account is not correct because it is only available to married couples.

Answer 694

C. $1,000 A customer wanting to buy $4,000 of stock needs $2,000 of cash and/or SMA (cash and SMA have the same buying power). With $1,000 of SMA, the customer needs only $1,000 of cash.

Answer 695

B. 30 days. Form CRS (Customer Relationship Summary) must be updated within 30 days of any material changes in customer information. Changing the account registration is significant.

Answer 696

B. Minor. Tax liabilities belong to the minor in a custodian account.

Answer 697

C. Treasury bills Based on the criteria mentioned, Treasury bills would be most suitable because of their high liquidity and low principal risk.

Answer 698

C. The client’s investment objectives, financial situation and needs as well as their investment experience and risk tolerance Suitable recommendations should involve inquiring about a client’s investment objectives, financial situation and needs as well as their investment experience and risk tolerance.

Answer 699

A. Tenancy by the Entirety Tenancy by the Entirety is a type of joint account specifically designed for legally married couples and contains the right of survivorship.

Answer 700

B. $250,000 for each separate customer. SIPC coverage for cash claims is limited to $250,000 for each separate customer.

Answer 701

D. FINRA. The FINRA determines minimum margin, but the broker/dealer may require a higher margin. Municipals are exempt from SEC and Federal Reserve Board jurisdiction.

Answer 702

B. $9,000 equity, 1,000 SMA. 500 x 40 = $20,000 $20,000 LMV - $10,000 DB = $10,000 E $22,000 LMV x 50% = $11,000 - $10,000 = $1,000 SMA $19,000 LMV - $10,000 DB = $9,000 E Equity based on current market is 38 X $500 or $19,000. However, when the market rose to 44, equity was at $22,000 and $1,000 of SMA was created ($22,000 vs. $21,000 equals $1,000 SMA). SMA is never lost unless used, so the decline to $38,000 did not wipe out or affect SMA.

Answer 703

C. May make purchases if the full purchase price is in the account before the order is transacted. A customer with a frozen account may continue to make purchases, provided the full purchase price is in the account prior to the execution of the order.

Answer 704

A. A portion is taxed at the minor's rate and a portion is taxed at the rate applied to trusts. Until the minor reaches 19 (or 24 if a full-time student), the portion of unearned income up to the IRS ceiling is taxed at the minor's rate, and the remainder is taxed at the rate applied to trusts. Once the minor reaches the age threshold, the entire amount is taxed at the minor's rate.

Answer 705

C. $500,000. SIPC insures unreturned securities up to $500,000.

Answer 706

A. $0 Interest is not charged on short positions. Stock, not money, is borrowed. This is like borrowing your neighbor's tools. There is no interest, but watch out for the demand that they be returned.

Answer 707

D. This is a freeriding violation. This is a freeriding violation because the customer did not pay for the security prior to selling it.

Answer 708

C. Cash liquidation. This is an example of a cash or trade liquidation, also called a late sale. It is considered a violation because the customer did not have sufficient cash to pay for the purchase. The ABC purchase on Monday settles on Wednesday. However, the sale of XYZ on Thursday will not settle until the following Monday.

Answer 709

B. An affidavit of domicile. The corporate charter identifies the state of account residence. The affidavit of domicile is used for state identification of a person who died with a joint account.

Answer 710

C. Be approved by a designated ROP for uncovered option writing; and customer must receive a copy of and sign the risk disclosure document at the time of application or earlier This type of account must pass the scrutiny of both the Branch Manager and a Registered Options Principal (ROP). The disclosure must be presented to the client and acknowledged by the client in writing. There is no approval required by the CBOE or FINRA. That is the responsibility of the ROP.

Answer 711

C. Commodities account Commodities are not defined as securities and are exempt from SIPC coverage.

Answer 712

D. Give an unlimited amount of cash. There are no restrictions on the amount of cash that may be given to a minor under the Act; however, gift taxes may apply if the contribution exceeds a specified annual amount. All gifts are irrevocable.

Answer 713

D. No one at the broker/dealer may discuss the account with the husband. This is an individual account. Without the account owner’s prior written permission, no one at the broker/dealer may discuss her account with another party, except for IRS and subpoena inquiries. This rule includes spouses.

Answer 714

B. 2,500 The required Reg T deposit for selling stock short between $2.50 and $5 per share is 100%; $10,000/$4 = 2,500 shares.

Answer 715

D. II, III, and IV Under progressive taxation, individuals and families with low incomes are taxed at a lower rate than those that earn higher income. The federal marginal tax rate increases in the United States as income rises.

Answer 716

C. Close out the transaction. Once the extension is denied, the transaction should be reversed, and the account should immediately be frozen for 90 days.

Answer 717

A. Creates a disruption and may have his account restricted. A customer who buys and sells the same mutual fund on a frequent basis creates a difficult situation for the fund manager. The trading activity creates volatility in the fund’s cash position and the manager is not able to gauge the amount of cash available for new purchases. In addition, the fund manager may have to liquidate securities unexpectedly and in an ill-timed manner in order to meet the redemptions. Fund companies monitor this type of activity on the part of investors and may elect to close such an account.

Answer 718

C. The account can hold margined securities. The question asks which of the statements is false. Margin is not permitted in a custodial account. Neither Uniform Gift to Minors Act (UGMA) nor Uniform Transfer to Minor Act (UTMA) accounts can hold street-named securities, and margin account securities are in street name; all securities in a margin account must be registered.

Answer 719

B. The customer’s business address. A home address is required, not a business address.

Answer 720

C. Short against the box. "Short against the box" is shorting a position which you currently own. This has no upside risk, since the long can be delivered against the short if the stock rises in value.

Answer 721

D. The broker/dealer evaluates the equity in the account to determine if maintenance must be met. At $38, the client’s market value is $19,000. His original debt balance of $12,500 is subtracted to arrive at $6,500 in equity. The client need not be concerned about the margin call here. The $19,000 market value is then evaluated; Reg T is $9500 and maintenance is half that at $4,750. The client does not have excess equity, but he is $1,750 above the margin call level. 500 x 50 = $25,000 LMV $25,000 LMV - $12,500 DB = $12,500 E $19,000 LMV - $12,500 DB = $6,500 E 25% x $19,000 LMV = $4,750 (min maintenance) At the end of the day, the broker/dealer does a mark to the market to determine if there is a need for a margin call. This evaluation can be done anytime during the day if price volatility is significant. After the drop-in price, the new account value is $19,000. The debt is still $12,500, leaving $6,500 in equity, down from $12,500. To determine if there is a margin call, use Reg T (50%) on the new market value and half of that is the minimum maintenance or the margin call level. This makes Reg T $9,500 and the call level $4,750. No excess equity exists because the equity is below Reg T.

Answer 722

A. I and III Short sales have upside (unlimited) risk and dividend responsibilities on the borrowed stock. There are no margin interest charges, and profit is downside.

Answer 723

B. $18,000 $48,000 LMV - $27,000 DB + $15,000 - $18,000 = $18,000 E Long MV ($48,000) minus Short MV ($18,000) equals $30,000 minus debit $27,000 equals $3,000 plus credit ($15,000) equals $18,000.

Answer 724

A. A large percentage should be in cash if stocks have been weak the past 12 months. Suitability issue here is an appropriate balance and not going in and out of the various markets to generate trades within a senior’s portfolio. Such activities are tactical and not appropriate. A high cash investment would leave the senior subject to inflation (purchasing power) risk.

Answer 725

C. $10,000 With Reg T at 50%, the customer could have deposited only $10,000 to buy the $20,000 of stock. Because the full amount was deposited, SMA is credited $10,000.

Answer 726

A. Sell out enough to cover the remainder, and freeze the account for 90 days. The firm should sell out enough to cover the remainder and freeze the account for 90 days.

Answer 727

D. The member firm must be able to obtain required information and verify a prospective customer’s identity and creditworthiness. KYC is the acronym for FINRA’s Know Your Customer Rule, which requires member firms and associated persons to obtain and verify customer information. At a minimum, the customer’s name, date of birth, address and identification number (either social security number) are required. Information must current, accurate, true and complete.

Answer 728

D. $2,500 CB = 100 x $30 + $2,000 (min equity) = $5,000 SMV = 100 x $25 = $2,500 $5,000 CB - $2,500 SMV = $2,500 In shorting stock at 30, you must deposit $2,000 under the minimum equity rule. As the market value drops from $3,000 to $2,500, your equity rises from $2,000 (initial deposit) to $2,500.

Answer 729

D. $25,000 For stocks under $2.50 per share, the Rule is $2.50 per share. 10,000 x 2.50 = $25,000.

Answer 730

A. Stock dividends. Stock dividends do not affect corporate capitalization, are not taxable, and do not affect debit balance in a margin account.

Answer 731

D. The custodian may open a margin account for the minor. UGMA accounts are permitted to have only one custodian and one minor per account. There are no requirements of relationship or guardianship between the minor and custodian. Purchases in an UGMA account may take advantage of reduced sales charges through rights of accumulation from other accounts held by the custodian and immediate family members. UGMA accounts cannot be margin accounts.

Answer 732

A. Next day. Government trades settle next day.

Answer 733

A. Purchasing a municipal bond Because margin interest on a municipal bond purchase is NOT deductible, the RR should not recommend purchasing a municipal bond on margin.

Answer 734

C. Higher yields generally carry a higher degree of risk and price volatility. Long term bonds and “high-yield” (low credit quality) bonds are inherently more volatile than “investment grade” (high credit quality) bonds and those with short-term maturities.

Answer 735

C. Customer specific suitability Customer specific suitability requires the broker to have a reasonable basis for believing that a recommendation is suitable for a particular customer based on the investment profile provided by the customer.

Answer 736

B. $500,000 The maximum protection under SIPC is $500,000 for each separate customer. Because these accounts are both listed in his name only, they are treated as one customer, with a maximum total coverage of $500,000.

Answer 737

A. CIP. CIP, or Customer Identification Program, is a provision of the USA PATRIOT Act, an anti-terrorism law enacted in 2001 in the aftermath of the 2001 terrorist attack on the World Trade Center. CIP requires financial institutions to verify the identity of individuals who want to conduct financial transactions with them, which assists in identifying attempts to fund terrorism and money laundering activities. KYC stands for Know Your Customer; IRS is the Internal Revenue Service; and SAR is a suspicious activity report.

Answer 738

C. Recommends that a customer open an IRA rollover account for assets currently held in a former employer’s retirement plan. Any recommendations related to rolling over assets from a retirement account into a new or existing account or investment require that a Customer Relationship Summary (Form CRS) be provided to the customer.

Answer 739

A. $1,000 Market value of $11,000 minus Debit of $4,500 = $6,500 of equity. Current regulation T is $5,500 (50% of 11,000). Therefore, excess equity is $1,000.

Answer 740

D. Son A custodial account, such as a Uniform Transfers to Minors Act (UTMA) account, must be opened with the tax ID (Social Security number) of the minor. All securities are registered in the name of the custodian for the benefit of the minor.

Answer 741

A. A principal of the broker/dealer FINRA requires a principal to sign new account forms.

Answer 742

B. II and III Cash dividend and cash from the sale of securities lower the account’s debit balance.

Answer 743

B. I and III One broker/dealer performs safekeeping, and record-keeping services. Trades may be executed by several additional broker/dealers, including the primary broker/dealer.

Answer 744

C. $1,000. Because one-half of every sale can be withdrawn and was not, one-half of the sale amount is credited to SMA. This applies even if the account is restricted below Regulation T.

Answer 745

A. $1,000 $12,000 LMV - $5,500 DB = $6,500 E 50% x $12,000 LMV = $6,000, $6,500 E - $6,500 = $500 SMA, $500 SMA x 2 = $1,000 Buying Power Market Value: $12,000; Debt: $5,500; Equity: $6,500; SMA: $500 SMA is the amount by which equity exceeds the Reg T requirement ($6,000). SMA times 2 equals the buying power in the account.

Answer 746

A. Corporate charter and the corporate resolution The corporate resolution identifies the individual within the corporation who is authorized to trade on its behalf and the corporate charter states that the firm may engage in margin activity. Corporate by-laws are of no significance to the firm and FINRA and do not address the specific individuals and types of trading authorized.

Answer 747

B. $50,000 $100 (LMV) - $54 (DB) + $10 (CB) - $6 (SMV) = $2 E Long market value ($100,000) minus short market value ($6,000) = $94,000 minus debit ($54,000) = $40,000 plus credit ($10,000) = $50,000. Ignore SMA.

Answer 748

B. Up to 35 calendar days. While settlement usually occurs quickly, the parties have up to 35 calendar days. Delivery versus payment (DVP) is a settlement method that requires that securities are delivered to a particular recipient only after payment is made. Receive versus payment (RVP) is a settlement method where the delivery of the securities and delivery of the payment must happen simultaneously.

Answer 749

C. Pattern day trader Since pattern day traders do not hold their positions overnight, the broker/dealer and the Federal Reserve permit significantly higher leverage in these accounts than those of typical retail margin clients.

Answer 750

C. II and III Short sales have upside or technically unlimited risk. There are also dividend payment responsibilities to street-named stock owners, but there are no interest charges.

Answer 751

A. The donor can be the custodian. UGMA/UTMA permits one donor, one custodian, and all gifts are irrevocable. The donor can be the custodian.

Answer 752

B. 18 years old and of full legal age in the state of residence In order to open an account, a customer must be at least 18 years of age. In addition, the customer must be the full legal age in the state in which he or she lives. The full legal age, also known as the age of majority, is the age at which a person is considered an adult, with all of the attendant rights and responsibilities of adulthood.

Answer 753

D. A capital preservation fund Investors who expect to use their funds within the next 5 years or who simply have a very low tolerance for risk will typically sacrifice growth of principal for this level of liquidity. Capital preservation funds generally have low risk.

Answer 754

B. Securities must be in good delivery status including a signature on the back for ease of transfer of ownership, not be physically damaged, and meet the 100 share rule with the exact number of shares presented. Timely delivery, signatures with stock power, and the proper amount in 100 share divisible round lots are required since these shares are in the possession of the client and not street name. This status needs to be defined by the broker before placing the order; otherwise, the broker/dealer may be guilty of failure to deliver.

Answer 755

A. Zero-coupon bonds. Zero-coupon bonds do not generate current income; interest accumulates within the bond and is payable upon maturity.

Answer 756

D. The check must be payable to both owners jointly. Any disbursement must be made out jointly, and the check must be sent in both names.

Answer 757

B. Federal Reserve Board The Federal Reserve Board (Fed or FRB) controls monetary policy (regulates the U.S. money supply). It presides over a 12-member system of regional Federal Reserve banks and uses various tools to tighten or ease the domestic money supply. The Fed does NOT issue securities. The TVA, Federal National Mortgage Association (Fanny Mae), and FHLB all issue securities.

Answer 758

A. Time and price Time and price are nondiscretionary elements of an order. Quantity, security, and action (buy or sell) require special authority, power of attorney.

Answer 759

D. The Securities Investor Protection Act of 1970. The Securities Investor Protection Act of 1970 (SIPA) established procedures for the protection of customer funds and securities in the event that a broker/dealer becomes insolvent. This act created the Securities Investor Protection Corporation (SIPC). The SIPC collects assessments from broker/dealers to protect customers from loss due to a failed broker/dealer.

Answer 760

A. $4,000 SIPC only insures equity: MV minus debit balance = equity.

Answer 761

C. II, III, and IV Equity is affected only by cash withdrawal or receipt (market value rise or fall). "Sale without cash" (50% could be withdrawn) means that market value and debit both fall equally, and SMA rises by half of the sale.

Answer 762

A. The risks of investing in individual real estate properties are often higher than investing in a public REIT. Investing in a group of securities backed by real estate reduces the overall risk for an investor through diversification than investing in an individual property.

Answer 763

C. Exchange rights. Exchange rights are a convenience privilege and are not required by the Act. All of the other rights must be made available to investors in order to collect the maximum sales charges.

Answer 764

B. Outlined in the prospectus. The actual offering price is the net asset value (NAV), plus any sales charges, but the method used to determine the fund's pricing can be found in the prospectus.

Answer 765

B. Value fund. Value funds seek to buy undervalued stocks and make money when the stocks appreciate.

Answer 766

B. I, II and IV Exchange Traded Funds (ETFs) allow intraday liquidity, and have a very low or no minimum investment requirement.

Answer 767

D. Principal at maturity is based on an index. Principal at maturity is based on the underlying index at that time, minus fees. ETNs are unsecured debt; they are backed by the credit of the issuing bank. ETNs have no principal protection. They do not pay periodic interest.

Answer 768

B. ELKs ELKS are hybrid debt instruments linked to an equity or equity index.

Answer 769

A. HOLDRs HOLDRs trade on the NYSE AMEX and allow investors to trade one security representing a bucket of stocks in one sector.

Answer 770

A. The individual securities that make up the portfolio. A prospectus must contain, among other requirements, the sales charges and fees, an expense table, and the per share income and capital changes. The fund’s portfolio holdings are not found in a prospectus.

Answer 771

C. A security with no secondary trading. A redeemable security is non-negotiable (i.e., nonmarketable) and must be redeemed by the issuer. Unit Investment Trusts (UITs), face amount certificates (FACs) and open-end mutual funds are all examples of redeemable securities.

Answer 772

C. I and IV I. Institutional communications IV. Correspondence Neither correspondence nor institutional communications must be filed with FINRA. Investment analysis tools made available to retail investors and most retail communications must be filed, even if approved by a principal.

Answer 773

C. Mortgages. Hybrid REITS invest in both mortgages and real property.

Answer 774

D. All withdrawal plans involve uncertainty. Withdrawal plans offer no guarantees. All withdrawal plans involve uncertainty, and the investor might consume her balance faster than planned. The other options concern an investor who is purchasing; not redeeming.

Answer 775

C. Face amount certificate Face amount certificate holders are entitled to redeem their certificates for a fixed amount on a specific date.

Answer 776

C. ETNs Exchange-Traded Notes (ETNs) mirror market indexes. Bond Anticipation Notes (BANs), Tax and Revenue Anticipation Notes (TRANs) and Revenue Anticipation Notes (RANs) are short-term municipal notes.

Answer 777

D. 24 months. Face amount certificates (FACs) have maturities of at least 24 months.

Answer 778

A. Fund of funds A fund of funds invests in other mutual funds. With a small investment, an investor gains exposure to several different mutual funds with different investment objectives. Alternately, the investor would need more money to invest the required minimum in several different funds to achieve the same exposure.

Answer 779

D. ETNs pay periodic interest. ETNs do not pay periodic interest. At maturity, the investor receives a principal amount based on an underlying market index.

Answer 780

B. Russell 2000 Index Fund The Russell 2000 index is a broad index of 2000 small cap stocks. This provides this investor with the exposure he seeks. The S&P 500 index is an index of 500 large cap stocks. The Wilshire 5000 is a broad market-capitalization-weighted index of the market value of all stocks actively traded in the United States. While the growth stocks contained in a growth and income equity fund might be small cap, the income stocks are generally large cap.

Answer 781

B. II and III Precious metals mutual funds are used as inflation protection. Inverse ETFs are structured to benefit from market declines.

Answer 782

B. Achieve wide diversification with a relatively small investment. Use of an investment company does not assure greater returns. Taxes on distributions are not deferred unless the account is registered as a retirement account. Economies of scale allow the investor to achieve wide diversification and professional management at very low cost. No single shareholder has any right or claim that exceeds the rights or claims of other shareholders; they all have an undivided interest.

Answer 783

D. Unit Investment Trusts The portfolio of a Unit Investment Trust (UIT) is fixed and does not require an investment adviser. The portfolio is supervised, not managed.

Answer 784

A. Unit Investment Trust The Unit Investment Trust (UIT) portfolio remains fixed for the life of the trust.

Answer 785

D. Automatic reinvestment of dividends and capital gains at NAV. The automatic reinvestment of dividends and capital gains with no additional sales charge is a benefit to the mutual fund investor. However, the IRS does charge taxes on the distribution, whether the investor receives the money or reinvests it.

Answer 786

A. Less diversified Because it invests in real property and mortgages, a hybrid REIT is more diversified. It provides both potential appreciation and income.

Answer 787

A. They continuously offer new shares. A closed-end investment company does not continuously issue new shares. A closed-end company issues a fixed number of shares in a public offering. The shares are then traded at a premium or discount on the secondary market.

Answer 788

A. Professional management and diversification. Although all answers have some merit, the major advantages of utilizing an investment company are diversification and professional management.

Answer 789

D. A mortgage REIT. Rental properties such as shopping centers provide immediate income, as do mortgage REITS. Developing land provides long-term appreciation, not immediate income. A hybrid REIT sacrifices some income for appreciation, since it is invested for a combination of both.

Answer 790

D. Face amount certificate Face amount certificate holders own debt instruments that offer a predetermined rate of interest. They can be redeemed for a fixed amount on a specified date.

Answer 791

B. Aggressive growth fund Aggressive growth funds traditionally have the highest turnover ratios because the fund manager is constantly buying or selling issues to attempt to meet investor expectations.

Answer 792

D. It is a form of sales charge. Redemption fees discourage short term trading and offset costs associated with processing frequent trades in fund shares. Unlike CDSCs, the fee is based on the current NAV, rather than the lower of the NAV or cost basis.

Answer 793

B. $4,080. Shares are redeemed at net asset value (bid price). 300 shares at $13.60 = $4,080.00.

Answer 794

B. $9.84 The investor owns 305 total shares with an investment of $3,000. $3,000 divided by 305 shares equals a per share cost basis of $9.84.

Answer 795

B. Leveraged ETFs Leveraged ETFs are subject to higher margin requirements.

Answer 796

A. High-yield corporate securities. Securities with high yields would most likely produce the best results for this investor. Companies that earn above average income do not necessarily distribute the earnings to shareholders.

Answer 797

D. Net asset value. Mutual funds redeem at net asset value (NAV). If there is a redemption fee, the funds would redeem at NAV minus the redemption fee.

Answer 798

A. I, II and IV A statement that FINRA has approved the investment analysis tool is incorrect because it is improper to state or imply that FINRA has approved or endorsed the investment analysis tool.

Answer 799

B. Real estate. An equity REIT invests in real estate for income or capital appreciation.

Answer 800

D. Balanced fund A balanced fund will hold both stocks and bonds with the objective of risk stabilization through diversification.

Answer 801

C. Maximum sales charges. Published performance charts reflect maximum sales charges.

Answer 802

A. Money market fund. A money market fund invests in short-term, liquid, safe debt instruments, such as T-bills, negotiable CDs and commercial paper. Other bond (income) funds invest in various bonds which may be long term and/or higher risk. Growth funds invest in equities.

Answer 803

A. I and II Dollar cost averaging is a voluntary investment plan with systematic investments at fixed intervals, usually monthly or quarterly. There is a minimum investment required with each deposit. There is no penalty to the investor for failure to make additional investments. The investor’s person cost is lower than the average public price per share over time.

Answer 804

D. The holdings in the portfolio are fixed for the life of the trust. The portfolio of a Unit Investment Trust (UIT) is usually fixed for the life of the trust. As such, it is referred to as a “supervised” (as opposed to an actively “managed”) portfolio.

Answer 805

D. Mortgage-backed securities fund. Mortgage-backed securities are issued by government agencies such as GNMA, FHLMC, and FNMA. Mortgage-backed securities provide monthly income. The income from a mortgage-backed securities fund is taxable.

Answer 806

A. An operating expense of the fund. The investment adviser fee is the largest single operating expense of a mutual fund.

Answer 807

D. FINRA within 10 business days of its first use by the public. The analysis tool must be made available to FINRA within 10 business days of its first use, as well as reports that the tool generates and any other retail communicates related to the investment tool.

Answer 808

C. Face amount certificate. Face amount certificates (FACs) are purchased on installments and mature on a specified date at fixed dollar amounts.

Answer 809

D. Growth stock Growth companies generally retain all or most of their earnings for research and expansion and therefore pay little or no dividends to shareholders.

Answer 810

B. The fund's current portfolio of securities. The current holdings in a portfolio are included in the fund's semi-annual reports to shareholders, not in the prospectus. Funds must send annual and semi-annual reports to shareholders.

Answer 811

B. Both in the over-the-counter market and on exchanges. REITs are closed-end or publicly traded. Many are listed, and some are on NASDAQ. Some REITs are non-traded and are redeemable after a certain time or event.

Answer 812

B. Business risk. A broad market index ETN carries all of the above risks except business risk, which refers to risks associated with a particular business rather than an index or other benchmark.

Answer 813

D. Exchanging shares of one mutual fund for those of another mutual fund within the same family of funds with no additional sales charge. Investors are allowed to exchange shares of one mutual fund for shares in another mutual fund in the same family of funds without paying any additional sales charge. However, the IRS does consider this transaction a sale and a purchase and any capital gain or loss rules would apply.

Answer 814

D. Actively managed portfolio. Unit Investment Trusts (UITs) are not actively managed. UITs consist of a fixed portfolio that, in most cases, remains unchanged for the life of the trust.

Answer 815

D. 40% On a registered investment company's board, 40% of the directors are required to be unaffiliated with the company.

Answer 816

D. Mortgage An equity REIT invests in real estate. Mortgage REITs invest in mortgages. Hybrid REITs invest in both.

Answer 817

D. It is not available to large investors. Dollar cost averaging is available to both small and large investors.

Answer 818

C. Are not redeemable. Shares from closed-end companies are not redeemable. The other characteristics listed represent shares of open-end investment companies.

Answer 819

D. Safeguards fund cash and securities. The custodian safeguards the mutual fund’s portfolio assets. The transfer agent processes shares and disburses dividends. The investment adviser maintains portfolio records.

Answer 820

A. Balanced fund. Balanced funds invest in both stocks and bonds and capital preservation is a priority. Because the fund holds stocks, there is potential for growth.

Answer 821

B. Approve portfolio changes when recommended by the investment adviser. Remember that this is an EXCEPT question. Portfolio changes are at the sole discretion of the investment adviser, consistent with established policy and objective. However, changes in investment objective or policy must be approved by shareholders.

Answer 822

D. Interest is based on rates of the short-term investments in the fund. A money market fund is a continuous primary offering and consequently a prospectus is required. The interest earned is based on the interest provided by the short-term investments held in the portfolio. Money market funds are no-load (purchased and redeemed at the NAV) and there are no redemption fees.

Answer 823

A. An experienced investor looking for a simple way to gain exposure to a portfolio of emerging market currencies An Emerging Market Currency ETN may be a simple and cost-effective way for this investor to gain exposure to a basket of emerging market currencies.

Answer 824

D. Dividends are distributed quarterly, while capital gains are distributed once a year, usually at the end of the year. Long-term capital gains must be paid no more frequently than on an annual basis. Dividends are distributed quarterly.

Answer 825

B. $240. This is an example of fixed-percentage periodic payments, where an investor requests that a fixed percentage of shares be liquidated at fixed intervals. The 8½% sales charge has no effect on the amount the investor receives in monthly payment. $48,000 x 6%=$2,880 annual amount ($2,880/12=$240 monthly payment).

Answer 826

C. Sale in the open market. Closed-end investment companies do not redeem their own shares. Once issued, shares are disposed of by sale in the open market at either a premium or discount, depending on market conditions. Shares of open-end investment companies are redeemed at NAV by the issuing fund company.

Answer 827

C. II, III and IV only Mutual funds are appropriate for long-term investment objectives; therefore, it is not advisable to concentrate on the short-term trends of the fund.

Answer 828

B. Appoint officers of the investment company The board is elected by the shareholders, but the board has the authority to appoint officers to perform the company's activities.

Answer 829

B. Closed-end investment company shares Closed-end shares are purchased at market price plus a sales commission, which differs from open-end shares, which are purchased at the NAV plus a sales charge.

Answer 830

D. I, II, III and IV All of these factors are useful during a comparison of mutual funds, and allowable for use with a client.

Answer 831

B. Exchange Traded Fund Exchange Traded Funds are investment companies whose objective is to achieve the same return as a particular market index and who primarily invest in the securities of companies included in a selected market index.

Answer 832

D. Agricultural sector total return ETN An agricultural sector total return ETN would provide exposure to price increases in a range of agricultural products.

Answer 833

B. 1 year, 5 years and the lesser of 10 years or life of the investment. FINRA guidelines recommend that total return illustrations be provided for a minimum of 10 years or the lifetime of the investment, but also include the 1- and 5-year intervals for the sake of full disclosure.

Answer 834

B. Utilize industry and asset class diversification Asset allocation funds reduce risk by investing in a wide array of industries and asset classes. A specialized or sector funds offers higher risk since it is vulnerable to that one market sector.

Answer 835

C. High-yield bond fund Bond funds are suitable for investors with income-oriented investment portfolio. High-yield fixed income funds could supplement a well-diversified portfolio, but are mostly suitable for aggressive long-term investors. These securities include above-average price fluctuation in return for the potentially higher yield. An aggressive growth fund is an equity fund used for long-term appreciation. A balanced fund generally offers a lower yield because it contains stocks in addition to bonds. A government bond fund offers a low yield in exchange for a low level of default risk.

Answer 836

D. Appointing the officers of the fund. Note that this is an EXCEPT question. The board of directors, not an investment adviser, appoints the officers of the fund.

Answer 837

D. No-load funds may not charge a 12b-1 fee that is greater than 25 basis points. Mutual funds with loads may charge a higher 12b-1 fee, whereas the 12b-1 fee for a no-load fund cannot be greater than 25 basis points. Otherwise, they lose their “no-load” status. Remember that a 12b-1 fee is a distribution fee that mutual funds charge to cover the cost of marketing and distributing fund shares. It is included in the expenses of the fund, thereby impacting the expense ratio. Do not be confused by the sales charges associated with load funds. They are not included in the expense ratio calculation but, rather, are added to the NAV to determine the sales price. Remember, NAV + SC = POP.

Answer 838

C. The portfolio sells securities and retains the cash. When the portfolio sells securities, the value goes down. However, if the portfolio retains the cash, the value of the portfolio goes up by the same amount and the NAV does not change.

Answer 839

B. Income fund An income fund’s objective is to pay a high rate of dividend income to shareholders.

Answer 840

D. 8½% of the public offering price The maximum front-end sales charge for a mutual fund is 8½% of the public offering price.

Answer 841

B. DCA is a way to reduce risk. DCA is a method to reduce risk because more shares will be purchased in a down market, and fewer shares are purchased with the same amount of money in a rising market. This practice will level out the cost basis of the shares over time, which minimizes overall investor risk. DCA cannot protect the investor from a loss in a steadily declining market.

Answer 842

C. Index fund An index fund will always mirror the performance of the index it mirrors, so the investor has no worries of over- or underperforming the market. Index funds also have lower expenses, due to passive portfolio management. An ETF also has low expenses, but is actively managed and therefore does not address the investor’s performance concern.

Answer 843

A. Mortgage-backed security fund. Because the mortgage-backed securities fund pays monthly principal and interest, it provides the best regular income.

Answer 844

A. II and III Specialized or sector funds concentrate their investments in companies in certain geographic regions or specific industries. Below average growth with high dividends characterizes an income fund. Sector funds are riskier than nonspecialized funds because they are dependent on one industry or market sector.

Answer 845

D. 16 months. A prospectus must contain current information about the investment company, and therefore, a prospectus that includes financial information more than 16 months old can no longer be sent out to prospective customers.

Answer 846

C. A high-yield bond fund A high-yield bond fund would most likely provide the highest current income although it may be volatile especially if interest rates go up. Fixed annuities normally provide smaller payments in return for the guaranteed payments. A balanced fund balances growth and income, and zero coupon bonds do not make interest payments.

Answer 847

A. The capital gain is reported to Jimmy on a 1099 form. When the fund realizes gains on investments in the portfolio, they are reported to shareholders on Form 1099.

Answer 848

B. Growth fund Growth funds include both blue chips and stock of less established companies and are most subject to overall market declines.

Answer 849

A. Dividends Payments are first made from dividends, then capital gains. If there is not enough to make the payments from these sources, then payments from the principal will be made.

Answer 850

A. Comparison of funds of a dissimilar objective When comparing mutual funds, it is important to restrict the comparison to funds of a similar nature.

Answer 851

D. III and IV Dollar cost averaging utilizes fixed dollar amounts, not fixed share amounts and is more effective than market timing over the long term. Loss is always a possibility in a steadily declining market.

Answer 852

D. Fixed dollar periodic payments A fixed dollar payout option provides the investor with a specific dollar amount each payment.

Answer 853

B. Aggressive growth fund The bond (income) fund is probably most appropriate for a retired investor who needs income. Retired investors generally keep a portion of their portfolios in equities to provide continuing appreciation through their retirement years, and the blue chip fund is a relatively conservative equity fund for this purpose. Retired investors generally maintain a portion of their portfolios in cash equivalents like money market funds. An aggressive growth fund has high volatility and risk, and is best for risk-tolerant investors.

Answer 854

D. Total return. A fund's total return is the statistical analysis that considers the fund's net return after sales charges and expenses. It includes the effect of reinvested distributions and share price appreciation during the period in question.

Answer 855

B. Transfer agent The transfer agent is in charge of issuing new shares, cancelling redeemed shares, as well as disbursing dividends and capital gains.

Answer 856

D. Growth and income fund James is looking for some potential income as well as growth. Based on the choices given the only one that will provide both growth and income would be the growth and income fund.

Answer 857

B. Management fee The management fee is generally the largest expense item of the fund itself. Please note the sales charge goes to the underwriter and not the fund itself.

Answer 858

D. It is a taxable event because it is a purchase and sale. The exchange privilege of a family of mutual funds normally permits the sale of the shares of one fund and the purchase of the shares of another fund to occur at net asset value. The tax consequence results from the sale of fund shares compared with their original purchase price.

Answer 859

B. Informing a customer that a larger amount invested in one fund would be less expensive than dividing the investment between two funds A registered representative is required to inform a customer that a larger investment in one fund above a breakpoint is more cost effective than smaller investments in two or more funds that fall below the breakpoint level. All of the other choices reflect breakpoint violations. Remember that whether the purchase order is solicited or unsolicited, the registered representative must inform the customer of the breakpoint sales discount.

Answer 860

A. I and II A signature guarantee is usually required for wire transfers, redemptions to addresses different than the address of record on the account, or for dollar amounts above certain limits.

Answer 861

D. Treasury bills. The returns on money markets will fluctuate in relation to the yields of the fund's underlying securities. Money markets invest in short term maturity securities such as Treasury bills, commercial paper, bank certificates of deposit, and banker's acceptances. They do NOT invest in longer term U.S. government bonds nor do they invest in non-negotiable Series EE savings bonds. Passbook savings rates offered by banks on savings account deposits are unrelated to money market investment portfolios.

Answer 862

C. Within 1 year Investment companies have 1 year to advise existing shareholders of changes to breakpoint schedules.

Answer 863

C. Expense ratio of the fund Newer funds with lower total assets under management will typically have higher expense ratios than similar funds with more assets and longer tenure.

Answer 864

B. $1.88 If a mutual fund does not offer all of the following privileges – breakpoints, rights of accumulation, and dividend reinvestment at NAV – its maximum sales charge is 6.25%. ($30 x 6.25% = $1.88)

Answer 865

C. Custodian. The custodian holds the assets of the company but does not perform any management or supervisory activities.

Answer 866

A. Gold fund Precious metals funds are used as protection against inflation. Bond funds suffer during inflationary periods because of rising interest rates.

Answer 867

B. Tax-free capital gain distributions. The investor may reinvest capital gains with no additional sales charge; however, the investor would still be required to pay taxes on the capital gain distribution whether they receive the money or reinvest it. All the other statements are benefits of mutual fund ownership.

Answer 868

D. They reduce the amount of the initial investment. Contingent deferred sales charges (CDSCs) are back-end loaded. They do not reduce the amount of the initial investment.

Answer 869

D. An individual account holder. Sales breakpoints are available to individuals, custodian accounts for minor children, joint accounts with spouse and dependents, and trustees for corporate pension plans. Other joint accounts, investment clubs and partnerships are not eligible accounts for breakpoint sales.

Answer 870

C. Income fund. The income fund will most likely provide the investor with the highest income of these choices. Income funds invest in blue chip and other dividend-paying stocks.

Answer 871

A. Automatic reinvestment of dividends and capital gains at NAV Mutual funds typically offer reinvestment of capital gains and dividends at net asset value (meaning without a sales charge). This feature makes a significant difference in portfolio accumulation value due to the compounding effect and will help him in achieving growth in his retirement account.

Answer 872

A. International fund International funds are subject to foreign as well as domestic legislative risk. In addition, they carry currency exchange risk.

Answer 873

D. Debt securities and preferred stocks Fixed income securities are those with a specific consistent yield such as debt securities and preferred stocks. They generally hold both short- and long-term fixed income securities, but no common stocks since common stocks pose the risk of a loss of principal. A money market fund would hold treasury bills and commercial paper.

Answer 874

D. Money market fund These are typical characteristics of a money market fund. Other bond (income) funds offer higher yields. Growth funds are equity funds and have historically offered appreciation which exceeds inflation.

Answer 875

A. A young couple with a high tolerance for risk who are saving for a down payment to purchase a home in 2 years. It is an incorrect statement because 2 years is not enough time to invest in an equity fund, especially a volatile one. The fact that the couple has a high tolerance for risk doesn't change the reality that they need their money soon. They should invest in a fund where their principal will be secure and relatively stable.

Answer 876

B. A rapidly expanding restaurant chain with a high P/E ratio Value managers typically favor stocks with low P/E ratio.

Answer 877

A. S&P 500 Index Fund This index fund will give the investor exposure to large cap U.S. stocks, and the investor will not have to guess which fund manager will keep up with or outperform the S&P 500.

Answer 878

D. Cancel redeemed shares The transfer agent issues and redeems fund shares for individual investors. Deliver 20,000 shares of ABC stock sold from the fund's portfolio is incorrect because this is a function of the custodian. The custodian holds the stock on behalf of the fund's shareholders and is responsible for delivering and receiving securities for the fund's portfolio.

Answer 879

B. II and III II. Robert paid a 3% sales charge on his initial investment of $40,000. III. The sales charge for the $2,000 purchase of ABC Small Cap fund for the Coverdell Education Account was 2%. Robert paid 3% sales charge on his initial purchase because he could combine his purchase with his wife's purchase for the purpose of reaching a breakpoint. Their total investment of $65,000 qualified them for the 3% breakpoint for investments of $50,000 - $100,000. The purchase of $2,000 worth of ABC Small Cap Fund qualified for a 2% sales charge for investments of $100,000 -$250,000. This is because the current value of Robert's and his wife's account could be combined with the son's purchase for the purpose of reaching a breakpoint. The current value of their combined accounts is $99,000 + $2,000purchase of ABC Small Cap Fund = $101,000.

Answer 880

D. I, II, III and IV Mutual fund shares may be redeemed by written request, via telephone (if appropriate documentation is on file to do so), and through check-writing privileges, if such privileges exist on the account.

Answer 881

B. I and III A geographic fund allows a sophisticated, diversified investor to concentrate a portion of their portfolio in one region.

Answer 882

A. I and II The SEC is a governing body and does not handle customer transaction. A fund may be redeemed through the dealer or the transfer agent.

Answer 883

A. Growth stock Growth companies typically reinvest their earnings instead of distributing these earnings as dividends. The other three are known for paying regular dividends.

Answer 884

D. Income fund. An income fund's primary investment objective is current yield.

Answer 885

D. High expense ratio Because a fund of funds invests in other mutual funds, it has a “double layer” of expenses, which typically means a higher expense ratio than other funds. By investing in a fund of funds, the investor gains exposure to several different investment objectives and a diverse range of securities. A fund of funds is a liquid as a conventional mutual fund.

Answer 886

B. Daily. A mutual fund’s net asset value (NAV) is computed once a day, usually at the close of the New York Stock Exchange.

Answer 887

B. None; this is a no-load fund. The "NL" designates this as a no-load fund. The $18.50 is the net asset value and public offering price of the fund.

Answer 888

D. $1.16 The sales charge is the difference of the public offering price ($21.41) from the net asset value (NAV) ($20.25) for a total of $1.16.

Answer 889

D. Tax-free money market fund. Because Howard’s investment horizon is short, he needs the capital safety of a money market fund. As a “successful” lawyer, Howard is in a high tax bracket and is better served in a tax-free money market fund. Howard’s interest in tech stocks is irrelevant to the question because his short time horizon overrides all other factors.

Answer 890

B. The investor may outlive his or her income. Investors need to be aware that systematic withdrawal plans have potential to exhaust their principal. There is no guarantee on how long the plan will last.

Answer 891

B. She will receive reduced sales charges on $15,000 worth of shares. Letters of intent are valid for 13 months and can be backdated up to 90 days prior to their signing. She will receive the reduced sales charges on the entire $15,000 worth of shares.

Answer 892

C. Every 12 months A prospectus is required to be updated no less than every 12 months.

Answer 893

D. NAV computed after the order is received. When a customer redeems or sells shares, the redemption value of an open-end investment company’s shares is based on the NAV computed after the order is received. The NAV is computed once a day at the close of the New York Stock Exchange. Buy and sell orders are based on the next price to be computed (forward pricing), so the customer selling shares will receive the NAV computed after the order is received at the close of the NYSE on that day.

Answer 894

B. The longer the fund shares are held, the lower the sales charge percentage.

Answer 895

A. II and III II. The redemption price is the next computed NAV. III. If the fund charges a redemption fee, the fee will be based on a percentage of the NAV. A fund's redemption fee is based on the next calculated NAV after the end of the trading day. Redemption fees are based on a percentage of the NAV. A shares are assessed a load at time of purchase; B shares are assessed a load at time of redemption.

Answer 896

B. I and III I. May be taken in cash. III. Are taxable whether taken in cash or reinvested. Mutual fund investors may choose to take distributions in cash or reinvest them at NAV. In either case, distributions are currently taxable. The only way to defer tax on distributions is to own fund shares in a tax-deferred account such as an IRA.

Answer 897

D. 1,075 To find the answer, divide the share price each month into the invested amount to find how many shares were purchased each month, then add them together. She has purchased 200 shares ($1,000 / $5), 250 shares ($1,000 / $4), 500 shares ($1,000 / $2) and 125 shares ($1,000 / $8) for a total of 1,075 shares.

Answer 898

A. NAV. Class A shares are redeemed at the NAV.

Answer 899

A. Asset allocation fund Asset allocation funds hold a diversified portfolio of stocks, bonds and money market securities. The fund managers frequently use computer models to change the make-up of the portfolio in relation to current and projected market conditions.

Answer 900

B. Equity fund. A money market fund offers not growth but preservation of capital. A fixed income (bond) fund offers income; not growth.

Answer 901

B. Information concerning scheduled breakpoints is given to shareholders and prospective investors. The fund's NAV price is not a consideration for the sales charge reduction schedule. Breakpoints must apply uniformly to all offerees. 12b-1 fees are never required.

Answer 902

C. Aggressive growth fund This is the basic definition and objective of an aggressive growth fund.

Answer 903

B. Expense ratio. The fund's expense ratio is important in evaluating the operating efficiency of the fund.

Answer 904

B. Breakpoints uniformly apply to all offerees. The prospectus must be revised if the breakpoint schedules change.

Answer 905

B. 1,536 To find the answer, first calculate the sales charge. $40,000 at 4% means $1,600 will be used for sales charges, leaving $38,400 left to purchase shares. $38,400 divided by the net asset value (NAV) of $25 will purchase 1,536 shares.

Answer 906

C. $1.70 The maximum sales charge allowed is 8.5% expressed as a percentage of the offering price. The correct answer would, therefore, be $1.70 (i.e. $20.00 X .085 = $1.70).

Answer 907

A. A specialized fund investing in emerging markets in South America A specialized fund in emerging markets is very high risk and not suitable for retired investors looking for capital preservation and income.

Answer 908

A. Specialized fund Specialized or sector funds concentrate a major portion of their assets in specific industries, market sectors, or geographic regions.

Answer 909

C. II and IV A geographic fund carries more risk due to geographic concentration, and is most suitable to a sophisticated investor who wishes to concentrate a portion of their portfolio.

Answer 910

D. Income and bond funds Income and bond funds have an emphasis on current income with preservation of principal. These are the most important objectives for this situation.

Answer 911

B. Balanced fund A balanced fund holds both stocks and bonds, and therefore, suits this investor's interest. An asset allocation fund’s portfolio is allocated among all asset classes: stocks, bonds, and money market instruments. An income fund invests primarily in bonds (it may or may not contain preferred stocks). A blended fund contains a blend of growth stocks and value stocks.

Answer 912

C. Municipal bond funds Municipal fixed income investments generate federally tax-exempt interest income and may be exempt from state tax if the holder is a resident of the issuing state.

Answer 913

A. Mortgage-backed security fund The MBS fund has less credit risk than a corporate bond fund because it generally invests in mortgage-backed securities, issued by a government agency. The other three funds have significantly more risk than the MBS fund.

Answer 914

B. Next computed bid price as of the day the shares are received. The Forward Pricing Rule states that all purchases and liquidations will take place at the 4 p.m. EST Net Asset Value per share AFTER receipt of the order to purchase or sell. In this question, the liquidation sale of shares back to the fund takes place at the next computed bid (which means NAV).

Answer 915

B. Income fund The primary objective of an income fund is to generate current income. This is accomplished by investing in preferred stock and the common stock of companies with a history of paying high dividends in relation to their market value. Income funds will generally have public utilities in their portfolios for this reason.

Answer 916

D. 51% unaffiliated directors. When a fund charges a 12b-1 fee, the majority of the board (51%) must be made up of unaffiliated or outside directors.

Answer 917

B. 7 calendar days. The Investment Company Act of 1940 specifies that fund redemptions be paid within 7 calendar days.

Answer 918

B. Statement of additional information. The detailed financial information can be found in the statement of additional information, which can be obtained by calling or writing the fund company.

Answer 919

C. Total net assets by the number of outstanding shares. Dividing the total net assets of a mutual fund by the number of outstanding shares will give you the fund's net asset value (NAV).

Answer 920

C. The method of computing sales charges The “A” and “B” designate the class of shares used for calculating sales charges. Class A shares are offered at net asset value (NAV) plus an up-front load, while Class B shares are offered at NAV with a contingent deferred sales charge (CDSC). Class B shares will almost always have a higher 12b-1 fee. Customers have the choice of which type of fees will better suit their time horizons and objectives.

Answer 921

B. A safe investment vehicle to park the money while looking for a long-term investment A municipal securities money market fund provides federal tax-free interest income and seeks to maintain a stable principal. It is a suitable short-term investment for a high-income investor. Tax-free securities should not be purchased for a retirement account.

Answer 922

D. $19.58 To find the offering price, divide the NAV by the complement of the sales charge. Offer Price = NAV / (100%-Sales Charge %). In this case: Offer Price = $18.60 / (100% - 5%).

Answer 923

A. Appointment of the investment adviser. The investment adviser is chosen by the directors. Shareholders vote to approve the investment advisory agreement.

Answer 924

C. Short-term U.S. government bond fund Government fixed income funds, offer safety, generally less volatility, and preservation of capital. In return, they offer lower yields. A gold fund is used as an inflation hedge. Stock funds are used for appreciation rather than current income.

Answer 925

C. Even though shares are redeemed, it is not a taxable event because the shareholder does not receive the proceeds. When shares are redeemed in the currently owned fund, a capital gain or loss is realized. Therefore, the IRS defines an exchange as a sale even though the proceeds are reinvested in another fund. Some funds charge a modest exchange fee.

Answer 926

C. International fund An international fund would provide diversification and exposure to overseas companies in a variety of countries. Geographic funds invest in one specific region.

Answer 927

D. Specialized funds. Specialized funds concentrate a major portion of their assets on specific industries, market sectors, or geographic regions.

Answer 928

C. Value fund Value investing is a conservative long-term strategy of investing in undervalued equities. Growth investing is an aggressive strategy of choosing young, unproven companies. Asset allocation funds and balanced funds hold bonds along with stocks, and the investor has not expressed interest in bonds.

Answer 929

B. RTC Balanced with NAV of $12.50 and NAV of $12.50 The RTC Balanced can be an open-end fund or mutual fund. It is selling at the net asset value (NAV), so it is either a no-load mutual fund or a closed-end fund. XYZ and CBC are selling below the NAV of the fund, which means they cannot be open-end funds; however, they could be closed-end funds. ABC is selling with a difference between POP and NAV above 8.5%, which is a violation for an open-end fund. Therefore, ABC must be a closed-end fund.

Answer 930

C. Specialized fund. A specialized fund will invest a large percentage of its assets in a particular industry or geographic region.

Answer 931

D. Give the investor a reduced sales charge. Breakpoints give the investor a reduced sales charge for investments that exceed a predetermined level. This includes investments made after the initial purchase with a letter of intent.

Answer 932

C. Redemptions are not allowed during the period. Redemptions are allowed during the period of the letter. If breakpoint levels are not met during the period, additional sales charges may be due from the investor.

Answer 933

B. Asset allocation fund An asset allocation fund follows a specified allocation model. Alice can choose from various mutual funds following different investment allocation models and select a fund that is appropriate for her circumstances.

Answer 934

B. $3,350 Redemption is done at net asset value (NAV), which is the bid price. 200 shares at $16.75 per share will redeem for $3,350.

Answer 935

C. The next calculated public offering price after purchase An investor will pay the next calculated public offering price, which is the net asset value plus any sales charges, after the time of purchase. Remember that mutual fund investors buy at the public offering price (POP) and redeem at net asset value (NAV) based on the next price to be computed at the close of the trading day. This is called forward pricing.

Answer 936

B. They must be deposited into the account and re-evaluated by the fund company. Most fund companies will permit shareholders to actually request evidence of their ownership by an actual certificate, similar to a stock. Because of the increased sensitivity of this request, a signature guarantee of the owner is often required. It is important to note that before those shares can be redeemed, they must be deposited to the account and re-evaluated by the fund company.

Answer 937

B. Costs associated with each share class are fully disclosed in the prospectus. Each share class has associated costs that vary with the holding period of the shares. These costs, including contingent deferred sales charges (CDSCs), are presented in tabular form in the prospectus so the investor can fully evaluate them.

Answer 938

A. Holding customers’ securities for safekeeping. Transfer agents are contracted by the fund to perform basic clerical functions, including keeping track of the individuals and entities that own their stocks and bonds, issuing new shares, and canceling redeemed shares. Holding customers’ securities for safekeeping is a function of the custodian.

Answer 939

D. Specialized funds Specialized funds concentrate a large percentage of their portfolio in a specific industry or market sector, such as energy, pharmaceuticals, or business machinery.

Answer 940

C. They are good funds to start an investment portfolio. International funds are good for further diversifying an established domestic portfolio. An international fund is probably not the best choice for the first fund in a beginning portfolio.

Answer 941

B. 7%. To find the percentage of the sales charge for a fund, divide the amount of the sales charge ($18.11 - $16.84 = $1.27) by the offering price ($18.11). $1.27 divided by $18.11 equals a charge of 7%.

Answer 942

C. $16.30. To calculate the POP, use this formula: NAV/(100% - sales charge); $15/(100%-8%); $15/.92 = $16.30.

Answer 943

B. 40%. The board of directors is elected by fund shareholders and 40% of these board members must be unaffiliated with the fund. The remaining 60% may be employees, underwriters or advisers of the fund.

Answer 944

B. Class B shares have a lower expense ratio than Class A shares. Class B shares have a higher expense ratio than Class A shares.

Answer 945

D. The Investment Company Act of 1940 Most of the legislation pertaining to mutual funds can be found in the Investment Company Act of 1940.

Answer 946

B. Preservation of capital. Preservation of capital is pursued by investing in high quality, short-term debt, such as T-bills.

Answer 947

A. S&P index fund The S&P index fund offers a diversified portfolio with moderate risk and, at age 40, the investor has a relatively long time horizon and is in a better position to weather any volatility over the long term. While high-yield municipal securities also offer a moderate risk option, there is no mention of the individual being in a higher tax bracket which would have made this an appropriate choice. Both U.S. Treasury notes and short-term bond funds are conservative investments.

Answer 948

C. They hold growth stocks and bonds that are deemed to be undervalued in price. Value funds primarily hold value stocks that are deemed to be undervalued in price for any number of reasons and thus have significant upside potential. However these funds do not hold bonds.

Answer 949

D. An S&P 500 Index fund. The best answer is the index fund. Its performance will mirror the S&P 500 Index, which is an index of large domestic corporations. Index funds have low expense ratios because they are passively managed. The other three funds are actively managed, which results in a higher expense ratio.

Answer 950

A. Distributes capital gains. When a mutual fund distributes capital gains, the NAV per share decreases. None of the other activities would cause a change in the NAV per share.

Answer 951

D. A fund of funds A fund of funds is a mutual fund that invests in several mutual funds giving the investor exposure to several investment styles and goals.

Answer 952

A. If he fails to deposit the additional money, he will pay no additional charges. A fund will normally hold enough shares from an initial deposit in escrow to cover additional sales charges due if the letter of intent is not fulfilled.

Answer 953

D. Existing stock holding pays dividends A mutual fund’s NAV per share increases when an existing security holding pays dividends and interest. It will also increase when the market value of the securities in the fund rises. All of the other choices result in a decrease in NAV. Note that the actual distribution of dividends will cause NAV to decrease.

Answer 954

A. A letter of intent can be backdated 6 months. The letter of intent can only be backdated for 3 months to include previous investments and will allow another 10 months of investments.

Answer 955

B. T-bonds All four choices are liquid investments; however, T-bonds are long-term bonds, and therefore, more subject to price volatility than the other 3 choices, making them the least suitable for an 18-month time horizon.

Answer 956

C. Securities cannot exist as electronic records on computers. Book entry (electronic records) is the conventional method of accounting for share ownership. In cases where certificates do exist, in order to redeem shares, they must be surrendered in good order.

Answer 957

B. Long-term appreciation. Growth funds offer long-term appreciation potential. They do not provide significant present income. They carry high market risk, not capital safety. They are not necessarily invested in one market sector.

Answer 958

B. 8½%. Sales charges must not be excessive and are limited to 8½%.

Answer 959

B. 7 days. Mutual fund companies must send payments to the investor within 7 days.

Answer 960

B. 90 days Letters of intent may be backdated up to 90 days to qualify for sales discounts.

Answer 961

B. Approval authority for the company's annual report. This is an EXCEPT question. Mutual fund shareholders have the right to receive annual/semiannual reports; however, the company itself has approval authority for its publication. The shareholders approve the investment advisory agreement, have voting rights regarding company issues and elect board members. Additionally, they approve changes in investment objectives, policies, and fees, and ratify the selection of independent auditors.

Answer 962

B. I and III Fixed dollar, fixed percentage, and fixed shares periodic payments are the withdrawal plan payout options. Dollar cost averaging is a plan of systematic investing into a fund. Life with period certain is a variable annuity payout option.

Answer 963

A. $19.89 Mutual funds redeem at net asset value (NAV) less any contingent deferred charges and/or redemption fees. Her funds will be redeemed at $20.50 minus the 3% CDSC for a share price of $19.89. CDSC is the abbreviation used for Contingent Deferred Sales Charges, which is a declining scale of back-end sales charges for class B shares.

Answer 964

B. A value fund. A value fund is not an income investment. Value funds seek capital appreciation by purchasing undervalued securities and waiting for them to appreciate. Any of the other three may be suitable choices: a bond fund pays income from bond interest; an income fund pays income from stock dividends and bonds, and a Ginnie Mae fund pays income from interest and return of principal.

Answer 965

A. Government bond fund The government bond fund is the most conservative choice, and is suitable for an investor whose primary objective is principal protection. A Ginnie Mae fund offers a slightly higher yield but with less safety. Value funds and principal-guaranteed funds hold stocks, which are riskier than bonds.

Answer 966

D. Charter members of an investment co-op Investment co-ops and investment clubs are specifically excluded. If allowed in the fund’s prospectus, accounts may be combined with other bona fide dependents.

Answer 967

B. 12b-1 fee Mutual funds may charge a 12b-1 fee to recover expenses associated with promoting and distributing the fund. This fee is in addition to the normal operating expenses of the fund and covers such items as printing prospectuses and sales materials.

Answer 968

D. An online investment analysis tool available to the public Investment analysis tools are considered retail communications. A form letter sent to 100 insurance companies is an institutional communication. An email sent to one customer regarding adding a beneficiary and a communication sent to 25 or fewer investors within a 30-calendar-day period are correspondences if they don’t contain investment recommendations or offers of services.

Answer 969

C. I, II and III only I. Entities such as participants in a company retirement plan II. A trust account III. A company's 401(k) plan Funds attract large investments by granting ROA to pension funds, 401(k)s and other formal entities. Informal groups such as investment clubs or co-ops do not qualify.

Answer 970

C. The prospectus The prospectus is the document that provides the most detailed information about the mutual fund. Although a preliminary prospectus is a disclosure document, it is not a complete disclosure. Red herring is another name for a preliminary prospectus. A Morningstar report is an independent source, but it does not provide the details that would be in the prospectus.

Answer 971

C. Another limited partnership with passive income. Passive activity losses may be deducted against passive income.

Answer 972

D. Cross-over Cross-over in DPPs (direct participation programs) is the point at which losses in taxable income exceed benefits.

Answer 973

C. Land Land cannot be depreciated. A farm residence cannot be depreciated, but operating costs can be deducted for conducting a business in a home, carefully. Out buildings can be depreciated, as can pasture land (off-season use).

Answer 974

B. The organizer of the partnership responsible for securities registration. The "syndicator" is the organizer who handles securities registration.

Answer 975

A. The general partner signs the subscription. The general partner must approve the limited partner as suitable for net worth and annual income standards.

Answer 976

D. I, II, III, and IV I. Nonliquid aspects of the investment II. Risk of audit III. Loss of partnership status IV. Conflicts of interest with the sponsor DPPs are generally nonliquid. The IRS audits a very high percentage of them, and they occasionally fail to meet the technical IRS guidelines in order to avoid being taxed as an association (a corporation). If a DPP loses its categorization as a limited partnership, the advantages that pertain to being a limited partnership are also lost. Often the general partner is the sponsor of numerous programs at the same time, creating potential conflicts of interest.

Answer 977

A. Developmental partnership. Depletion is the cost recovery method for natural resources. It is most likely available in an oil and gas developmental partnership. Depletion is not used in real estate or equipment leasing partnerships.

Answer 978

D. Buy and sell property Receiving a fee and borrowing money are questionable selections at best and can be eliminated.

Answer 979

A. Master limited partnership UITs and REITs are only redeemable back to the trust. Limited partnerships are very illiquid. An MLP is a former limited partnership which has been restructured and now trades freely in the secondary market.

Answer 980

D. Depletion Depletion of a natural resource is not a factor in real estate, commercial or residential.

Answer 981

D. $200,000 In a limited partnership, the limited partner may only deduct losses to the extent of the basis. Ten limited partners had invested $800,000 or $80,000 each, which was the initial basis per person. Later, when the partnership established a non-recourse loan of $1.2 million, each limited partner's basis was increased by 10% of the $1.2 million, or $120,000. This raised each limited partner's basis to $200,000, the maximum possible write-off amount.

Answer 982

C. $5,000 loss $300,000 minus $200,000, minus $90,000, minus $60,000 equals $50,000 loss of which 10% is $5,000.

Answer 983

A. A participant. In a corporation, an investor is a shareholder and a partner in a partnership, but in a direct participation program, an investor is a participant who directly shares in gains or losses if the program results in either loss or gain.

Answer 984

A. I, II, and IV I. High initial write-offs due to depreciation. II. Phantom income. IV. Dangers of equipment obsolescence. When equipment is depreciated, high write-offs result. As the equipment becomes fully depreciated, the write-offs shrink, while the revenues from leasing continue. The expenses no longer exceed the revenues, and there may be income which is taxable (the crossover point). However, to conserve cash, the program will distribute little if any of this income. This is phantom income because you are paying income tax on income that you don't physically receive. Tax credits and appreciation apply to real estate programs, not equipment leasing programs. Obsolescence occurs when equipment is no longer used; it some cases, it is outdate.

Answer 985

D. Real estate. Real estate can use non-recourse (secured) loans in order to increase investor basis without the investor being legally at risk.

Answer 986

B. Syndicator. Syndicators handle state registration. Managers are appointed supervisors.

Answer 987

C. $50,000 Cost basis includes at risk debt only for all programs except real estate (the only program permitted to use non-recourse loans from a qualified lender in order to increase cost basis).

Answer 988

B. A real estate investment trust. The REIT is not a tax shelter or DPP requiring a signed subscription agreement.

Answer 989

C. I, II and IV I. Depletion II. Depreciation IV. Passive loss Passive gain raises basis. The other three lower basis.

Answer 990

D. Each have an effect on basis but in opposite ways. Non-recourse debt through a qualified lender increases investor basis (e.g. a bank mortgage) in a real estate program, while a cash distribution reduces basis.

Answer 991

D. I, II, and III Abusive tax shelters are like fraudulent sales, penalized, illegal, and painful if discovered.

Answer 992

A. I and II I. Drilling takes place only in proven areas. II. Return potential is not as great as it is in exploratory drilling. "Developmental" means drilling in areas that have proven to have oil and gas reserves; therefore, the risk of a dry hole is much less than drilling in totally unproven areas (called exploratory or wildcat drilling). But, because the drilling is being done in an area with less risk, the return potential is less than exploratory drilling. Depletion is just as allowable here as in any oil/gas program.

Answer 993

A. I & III Limited Partners must vote for the roll up and General Partners must disclose any conflicts of interest.

Answer 994

B. I and II Limited partners have only the right to inspect the books and to sue for breach of contract or fiduciary duty by the general partner. The GP establishes the GP’s compensation when structuring the limited partnership and this is disclosed in the offering memorandum or prospectus. LPs split the tax benefits with the GP, as outlined in the partnership agreement.

Answer 995

C. II, I, IV, III Secured before general creditors, creditors before partners, limited before general partners.

Answer 996

B. Profit motive and economic viability. IRS rules require that a limited partnership should be established with profit motive and economic substance as the major concerns. Continuity of life is usually avoided due to the restriction on corporate characteristics. Deductions and tax benefits may result in such investments but should not be the prime motives.

Answer 997

A. $0 The K-1 (tax shelter version of a 1099) shows a $50,000 passive loss, calculated as follows: $300,000 minus the total of $200,000 plus $95,000 plus $55,000. A passive loss can be deducted only against passive income.

Answer 998

B. $20,000 $200,000 less operating costs ($90,000) minus depreciation ($50,000) minus $40,000 mortgage of interest equals $180,000. $20,000 is taxable income. Amortized principal on the mortgage is not deductible.

Answer 999

A. Growth Growth. None of the others apply.

Answer 1000

B. I and III Both DPPs and REITs are professionally managed and have passthrough of gain. A DPP is structured as a tax shelter; a REIT is a Subchapter M Corp.

Answer 1001

D. Cash flow is greater than taxable income. Taxable Income: Revenue - Operating Expense - Interest - Management Expense = $134,000 Cash Flow: Revenue - Operating Expense - Interest - Loan Payment = $110,000 This limited partnership has taxable income of $134,000 ($200,000 minus $50,000 minus $10,000 minus $6,000 = $134,000), and cash flow of $110,000 ($200,000 minus $50,000 minus $10,000 minus $30,000 = $110,000). It has passed the crossover point - the point where the cash flow is equal to the taxable income.

Answer 1002

A. $0 The K-1 (tax shelter version of a 1099) shows a $50,000 passive loss. $300,000 minus the total of $200,000(operating expenses) plus $95,000 plus $55,000. A passive loss can be deducted only against passive income.

Answer 1003

D. $50,000 loss A $40,000 recourse note means that the limited partner is at full risk, in addition to the $10,000 investment. Thus, the loss is $50,000. Tax liability cannot be computed without more information.

Answer 1004

A. Operating losses do not pass through. A REIT is organized under subchapter M for tax purposes, as are investment companies. Subchapter M permits pass through of gains only to shareholders, but not pass through of operating losses.

Answer 1005

C. Economic viability First, is the program any good? If so, what are its tax benefits?

Answer 1006

B. Taxable as ordinary income, only to the extent that it exceeds the basis. Upon the dissolution of a limited partnership, the amount of money received by the limited partner is taxable as ordinary income, only to the extent that it exceeds the limited partner's basis.

Answer 1007

C. Depreciation deductions. Land cannot be depreciated unless it is pasture land.

Answer 1008

A. $5,000 loss $300,000 minus $200,000, minus $90,000, minus $60,000 equals $50,000 loss of which 10% is $5,000. The $5000 of principal repayment in the total $95,000 debt service is not a deduction.

Answer 1009

A. I and III only I. The limited partner assumes responsibility for the loan's repayment. III. Any principal repayment lowers the limited partner's basis. The limited partner is liable for the repayment of a recourse loan. Recourse debt increases a customer's basis in any limited partnership. Any repayment of principal on the debt, therefore, decreases the limited partner's basis.

Answer 1010

A. $500 Passive loss, cash, and depletion all reduce basis. $20,000 - 19,500 = $500.

Answer 1011

C. Centralized management No business can operate without some type of centralized management. The general partner structures a limited partnership, and is the centralized management of the DPP.

Answer 1012

D. A more sophisticated investor who seeks pass through income and potential tax benefits DPPs are Direct Partnership Programs. They are passive investments that are concentrated in real estate and oil and gas development programs. These partnerships offer pass through investment income and depreciation or depletion right offs. While they have lost some of their attractiveness due to tax reform, they still offer opportunities, but to a more sophisticated investor who can accept losses.

Answer 1013

C. Central records keeping Central records or professional management is common to both tax shelter and REIT programs. REITs do not have recourse debt or loss passthroughs. DPPs generally are not liquid.

Answer 1014

A. $2,000 Both cash distributions and depletion lower basis. $20,000 minus $18,000 ($6,000 depletion plus $12,000 cash) = $2,000.

Answer 1015

D. IDCs IDCs, or intangible drilling costs, are the most beneficial deductions in oil and gas. Depletion, although also a difference, does not typically offer as much financial benefit.

Answer 1016

C. $100,000 $10,000 is 10% of $100,000, so we assume the LP is a 10% owner. $90,000 is 10% of the $900,000 recourse debt. $10,000 +$90,000 = $100,000.

Answer 1017

B. Internal rate of return IRR (internal rate of return) accounts for present value, tax deductions, and cash flow.

Answer 1018

D. Self-directed IRA. An IRA is simply an account, not an investment.

Answer 1019

A. Equipment leasing Land is not depreciated. Developmental and wildcatting energy partnerships use depletion, which applies to natural resources.

Answer 1020

C. 10% FINRA rules permit sales and underwriting compensation to a maximum of 10%. Any undefined fee and charge will be considered sales and underwriting.

Answer 1021

D. $60,000 $200 - $90 - $40 - $10 = $60 The $200,000 of revenue is reduced by all payments made. $200,000 less operating costs ($90,000) minus interest ($40,000) minus amortized principal ($10,000) equals $60,000 cash flow. Depreciation reduces taxable income, not cash flow.

Answer 1022

D. Appreciation Appreciation is not a form of oil and gas program; it is a type of real estate LP objective.

Answer 1023

A. Cash flow and tax benefits have declined to equality with taxable income. After this crossover point, taxable income begins to exceed cash flow and tax benefits.

Answer 1024

A. $0 Passive loss from partnerships may not be offset against earned income or capital gain, only against passive income from other sources.

Answer 1025

B. Real estate partnership Limited partnerships, equipment leasing trusts, and REITs are business forms in which the investors' liability is limited to their investment in the enterprise. On the other hand, a “partnership” is assumed to be a general partnership unless specifically designated as a limited partnership. General partnerships expose the partners to unlimited liability.

Answer 1026

C. Syndicator. When a general partner in a limited partnership is organizing and establishing a partnership itself, the term that applies is the "syndicator." Later, if the general partner is selecting the property in which to be invested and managed, the general partner acts as the partnership manager. When performing the functions of the actual management of the property selected, the technical term is the "property manager."

Answer 1027

A. Limited liability could be jeopardized. An LP acting in a management or decision-making capacity could become a GP for liability purposes.

Answer 1028

B. $500 $300,000 minus $200,000, minus $95,000 equals $5,000 of which 10% is $500. Depreciation is a non-cash expense.

Answer 1029

A. Accelerated depreciation. Straight line depreciation deducts an equal amount each year. Depletion is used for natural resources and amortization is used for intangibles.

Answer 1030

C. $1,620,000 loss. Total expenses = $3,600,000 ($2,700,000 plus $500,000, plus $300,000, plus $100,000). $3,600,000 minus $1,980,000 = $1,620,000 loss.

Answer 1031

A. I and III I. Well in an unproven area III. Well is a primary site Exploratory wells are in unproven areas and are primary sites. Developmental wells are in proven areas. Secondary sites use supplemental means of surfacing the oil, secondary drilling is water and steam, and tertiary is chemicals and gas.

Answer 1032

C. A REIT has flow through of gain only, a DPP of loss and gain. REITs, under subchapter M, pass through gain only, while DPPs, under subchapter K, pass through gain or loss.

Answer 1033

A. Taxable income exceeds deductions. If income exceeds deductions, tax liability occurs which may equal and then exceed all benefits from the program.

Answer 1034

A. I & II I. Limited partners will have "phantom income." II. The limited partnership is experiencing the crossover point. The limited partners will have "phantom income." Phantom income is reportable taxable income in excess of cash flow that limited partners do not receive but are taxed on. When a limited partnership’s taxable income exceeds cash flow, it has passed the crossover point.

Answer 1035

D. II and IV II. Cost basis is $50,000. IV. Tax deduction limit is $50,000. When the client invests $10,000 in the partnership, basis is $10,000. When the client later signs the recourse loan for $40,000, which adds $40,000 of liability if the partnership ever defaulted on the loan, the basis is adjusted to $50,000. According to the at risk limitation, the IRS stipulates that you may only deduct up to the amount of your basis, so the client’s tax deduction limit is $50,000.

Answer 1036

C. Intent to make money. This is just another version of the questions that are basically asking, "Do you know that the IRS wants to make sure that the DPP is established as a program to make a profit?" This program should seek profit, or economic viability, not just tax benefits.

Answer 1037

A. I only I. Vacant land. Only vacant land cannot be depreciated, but buildings can be depreciated. Straightline depreciation can be used for non-residential real estate, which is depreciated over 31.5 years, while non-commercial real estate can be depreciated on a straight line basis over 27.5 years. Tangible property uses ACRS.

Answer 1038

A. Increased cost basis. Recourse debt increases each LP’s cost basis.

Answer 1039

C. "At risk" provisions are not applicable to the exploration and exploitation of gas and oil. Most answers are extremely good definitions and statements from which you can learn about the "at risk" provisions of the Tax Reform Act of 1976. However, it is incorrect to say that "at risk" provisions are not applicable to the exploration and exploitation of gas and oil. Gas and oil are subject to these provisions.

Answer 1040

A. Depletion Only mineral or resource programs have depletion.

Answer 1041

D. Accepting $20,000 for a covenant not to compete with the limited partnership. A conflict of interest is not involved when the GP is paid not to compete. All other choices are conflicts.

Answer 1042

C. $100,000 Because the debt is non-recourse, the LP cannot lose more than the amount invested ($100,000).

Answer 1043

D. II and IV II. The basis is $100,000. IV. The maximum risk is $100,000. Since the loan is recourse (at risk), basis and risk are the same: $100,000.

Answer 1044

A. Component depreciation. ACRS systems typically allow for the full cost of an asset to be depreciated. In other words, there is no salvage, or residual value. In fact, certain ACRS systems allow the owner to depreciate more than the cost of certain equipment. Component depreciation is a distractor and not an advantage of ACRS systems.

Answer 1045

D. An oil and gas income program Oil and gas income, although not the best tax shelter, is conservative for an investor 2 years from retirement.

Answer 1046

D. The general partner self-dealing to insure profits without regard to the limited partners The general partner has a fiduciary responsibility for the limited partner and cannot act without considering the LP's interests.

Answer 1047

A. 2%. When a broker/dealer is involved in a roll up of a limited partnership, the maximum fee the broker/dealer can charge is 2%.

Answer 1048

C. Real estate investment trusts. Depreciation and other deductions are available write-offs in most limited partnerships, whether real estate, equipment leasing, or oil and gas programs. REITs do not allow for the flow-through of the tax expenses; only the net income flows through on a REIT.

Answer 1049

B. $1,080,000. Depreciation is a non-cash expense. $1,980,000 minus $900,000 (operating expenses, interest expense and management fees) = $1,080,000 cash flow.

Answer 1050

A. II and IV II. Investment tax credits IV. Capital appreciation Investment tax credits and capital appreciation are benefits/objectives of real estate programs, not equipment leasing programs.

Answer 1051

A. One who has limited liability status. General partners do not have limited liability, but as key executives, they buy and sell, appoint managers, and have general liability.

Answer 1052

A. The general partner signs the subscription agreement. When the general partner signs the subscription agreement, the partnership is effective.

Answer 1053

A. Income Income programs are based on producing wells.

Answer 1054

D. I, II and IV I. Depreciation II. Depletion IV. Passive loss Depletion, depreciation and passive loss lower investor basis Passive gain raises investor basis.

Answer 1055

D. “A variable annuity can be surrendered, but it may be subject to deferred sales loads, substantial surrender charges and tax penalties.” This answer is correct because it does not imply that a variable annuity is a liquid short-term investment and it makes the investor aware of the pitfalls of early surrender.

Answer 1056

B. Variable annuities Variable annuities are an insurance product with a separate account. The separate account is considered a security, and is registered under the Investment Company Act of1940 as either a unit investment trust or a managed investment company, such as a mutual fund.

Answer 1057

C. Immediate annuities may be funded with periodic payments. This statement is incorrect because immediate annuities may ONLY be funded with a lump sum payment. Individuals cannot make payments into an annuity once the payout period begins.

Answer 1058

B. The separate account underperformed the AIR. AIR is the interest rate the insurance company assigns to the separate account as a projection of future returns. If the separate account underperforms the AIR, the next monthly payment is reduced accordingly.

Answer 1059

B. A bonus credit is a good reason to exchange an annuity. A bonus credit is a good reason to exchange an annuity. There are other important considerations, such as surrender charges, surrender period, or mortality expenses that can outweigh the benefits of bonus interest credits.

Answer 1060

A. 9% over a period of up to 20 years. The maximum sales charge on a variable life insurance policy is 9% over the life of the policy. The life of the policy is considered the lesser of 20 years or the life expectancy of the insured.

Answer 1061

A. Investment Investment risk is the annuitant's separate account performance risk. Contract performance is the risk that the insurance company will perform contractual obligations.

Answer 1062

D. The death benefit will be smaller. If an insured withdraws a portion of the death benefit by the use of this rider, the benefit payable at death will be reduced by that amount, plus the amount of earnings lost by the insurance company in interest income.

Answer 1063

D. A 55-year old-who has fully funded his IRA and 401(k) plan and has additional money available to save for retirement A variable annuity may be an appropriate investment for retirement savings for a client who has fully funded their IRA and their employer’s retirement plans and has additional money available to invest for retirement. A variable annuity is usually not recommended for an 80-year-old because of potential surrender charges during the accumulation period. Both the 30- and 35-year-old need to access the funds before reaching age 59 ½ and may be subject to tax penalties.

Answer 1064

C. II and III II. Single premium deferred annuity III. Periodic payment deferred annuity Immediate annuities do not have accumulation units, since payments begin immediately. There is no accumulation phase and therefore no accumulation units. Deferred annuities track accumulation units for the increase in value in the separate account from the realization of reinvested capital gains, interest, and dividends.

Answer 1065

B. T must stop investing before he can annuitize the contract and start receiving monthly payments. T would not be allowed to pay into a variable annuity and take out money, or annuitize the contract, at the same time.

Answer 1066

A. Universal life insurance Universal life policies afford the owner flexibility in determining premium payment options.

Answer 1067

B. Combination annuity A combination annuity is a good hedge against inflation and deflation because a portion of the contract pays fixed interest, while the remaining portion could be placed in a variable annuity, which offers inflation protection.

Answer 1068

C. III and IV III. Variable life IV. Variable annuities The separate account only applies to the funds invested in a variable life or variable annuity contract.

Answer 1069

B. Provide the consumer with complete information in order to make an informed decision. The main purpose of a prospectus with respect to a variable contract is to provide the consumer with complete and detailed information in an effort to assist them in making an informed decision.

Answer 1070

D. He has 31 days to pay back enough of the loan to bring the cash value positive. If poor performance causes the cash value to go negative, the policyowner has 31 days to pay back enough of the loan to bring the cash value positive again.

Answer 1071

D. Is deducted during the last 5 years of the accumulation period. A deferred sales charge is usually contingent on the length of time that the annuity is held and is assessed at withdrawal. It must be fair and reasonable.

Answer 1072

B. They are considered to be securities. Fixed annuities are not considered to be securities. The insurance company, rather than the owner, assumes all of the investment risk. The premiums or payments made by the owner are invested in the insurance company’s general account for all fixed insurance products. The annuitant is guaranteed a certain amount of income that is based on the purchase payments deposited.

Answer 1073

B. An insurance license and a securities registration To sell variable annuities, an individual needs both an insurance license and a securities registration because variable annuities are both insurance products and securities products.

Answer 1074

A. Diagnosis must indicate that death is expected within 3 years. The Living Needs Rider provides for the payment of part of the policy death benefit if the insured is diagnosed with a terminal illness that will result in death within 2 years.

Answer 1075

B. A single premium deferred annuity. Accumulation units are obtained in the premium paying period. Immediate annuities begin distribution to the investor upon purchase and pay out in annuity units.

Answer 1076

B. Investment management. The investment management fee is the largest cost incurred by an insurance company with regard to variable life insurance policies.

Answer 1077

C. To allow investors to obtain additional benefit Annuity riders are features that allow annuity investors to obtain additional benefit not offered with the original annuity product.

Answer 1078

B. $220,000 At the death of the owner of a variable contract, the beneficiary will receive the death benefit less any outstanding loans, which in this case would be $220,000 ($250,000 death benefit less the $30,000 loan).

Answer 1079

B. The maximum charge is 9% calculated over a 20-year period. Maximum charges are: 9% calculated over 20 years, 50% of premium during first policy year. Charges in excess of 30% for first year and 10% second year must be refunded if policy is surrendered within first 24 months.

Answer 1080

B. Accelerated Benefit provision. The accelerated payment can be made in a lump sum or in monthly installments over a special period of time. This provision is given without an increase in premium. Some companies, however, deduct an interest charge from the proceeds paid out to make up for their loss earnings.

Answer 1081

D. It establishes the maximum the annuity company may charge the contract. The expense guarantee establishes a maximum the insurance company may charge the annuitant for administrative expenses.

Answer 1082

B. Capital gains tax A 1035 exchange allows the policy holder to defer recognition and tax of any capital gain on the original product, so taxes are not a concern.

Answer 1083

A. Death benefit only Cash value can fluctuate depending on how the investment performs. However, even if the market tumbles and the cash value drops to zero, the policyowner of a variable life insurance policy is still entitled to the death benefit as long as the premium is paid. If the contract owner dies during the accumulation period, the beneficiary will receive the greater of the gross payments made into the contract or the accumulated value at the time of the owner’s death.

Answer 1084

A. Have voting rights similar to shareholders in mutual funds. Contract owners have voting rights proportional to the number of units they own, similar to the rights of mutual fund shareholders.

Answer 1085

B. By multiplying the number of annuity units by the current redemption value of a unit. The redemption value of an annuity unit changes with the performance of the separate account compared to the Assumed Interest Rate. For example, if the separate account outperforms in a given month, the resulting increase in redemption value will increase the amount of the next month’s payment.

Answer 1086

B. Section 1035 Policy Exchange IRC Section 1035 allows for a tax-free exchange between certain insurance policies and/or annuities. The policy holder defers any gain on the exchange into the cost basis of the new product.

Answer 1087

D. An accounting measure that is created at the beginning of the annuity period and is used to determine the amount of future annuity payments. During the annuity period, the current value of a fixed number of annuity units will determine the amount of each payment. The number of units is fixed at the time of annuitization.

Answer 1088

C. Loans against a percentage of the policy’s cash value. The payment of a death benefit is not required if the insured commits suicide within the first 2 years of the policy. Variable policies may be converted to another type of permanent policy such as whole life or universal life, but not a term policy. Changes in investment alternatives within the separate account are not taxable events. Loans are permitted against a minimum of 75% of the cash value after the policy has been in place for 3 years.

Answer 1089

A. Cash value on a variable life insurance policy The cash value in a variable life policy is contingent on the investment performance of the separate account.

Answer 1090

B. Returns the premiums paid into the policy. Suicide within 2 years of a policy issue date does not require the insurance company to pay the death benefit. The company will return the premiums paid to the beneficiary. This rule can be state-specific. Some states do not allow the company to contest suicide and are required to pay the death benefit.

Answer 1091

A. Periodic premium immediate annuity. An immediate annuity cannot have a periodic premium because immediate annuities begin paying out as soon as they are issued by the insurance company.

Answer 1092

A. Fluctuates based on the performance of the securities in the separate account. Variable life policies have guaranteed minimum death benefits, but the cash values are not guaranteed. Cash values increase as premiums are paid and must be calculated at least monthly.

Answer 1093

D. Mortality guarantee The annuity company guarantees that it will make payments as long as the annuitant lives through a mortality guarantee.

Answer 1094

A. Entitles the policyowner to the cash value less any outstanding loan amount if the policy is terminated. Nonforfeiture provisions protect against the loss of any accumulated cash value should the policyholder surrender the policy. The policy holder would receive the surrender value which is equal to the cash value less outstanding loans and unpaid interest charges.

Answer 1095

C. Life annuity with period certain. An annuitant who is guaranteed to receive payments for a minimum of 15 years has a life annuity with period certain. Payments are guaranteed for the life of the annuitant or for 15 years, whichever is greater.

Answer 1096

B. The death benefit will decrease but not below the face amount of the policy. The death benefit decreases if the rate of return falls below the AIR, but cannot fall below the minimum, which is the face amount of the policy.

Answer 1097

D. Becomes terminally ill. The accelerated benefits provisions allow the owner to be advanced a significant portion of the death benefit when the insured is terminally ill.

Answer 1098

B. Age 100. Mortality tables show that few people are alive at age 100, at which point they are considered to be statistically dead. Therefore, an insurance policy still in force for a person who reaches age 100 will pay the death benefit, even if the insured is still living.

Answer 1099

B. Joint and last survivor The joint and last survivor annuity would make payments to the son and then the granddaughter as long as one of them survives.

Answer 1100

B. Annual rate of return assumed by the insurance company as a reference point to make annuity payments. The assumed interest rate (AIR) is the rate that the insurance company assumes the separate account will earn during the payout period. If the company is wrong, the monthly payments are adjusted accordingly. If the separate account actually earns more than the AIR, the monthly payment is increased. If the account earns less than the AIR, the monthly payment is reduced.

Answer 1101

B. 10 Policyowners’ voting rights are in proportion to the cash value in the separate account. For every $100 of cash value, the policyowner has one vote.

Answer 1102

D. It provides the maximum cash flow of all annuity options. The straight life payment option allows the greatest cash flow to the annuitant. The investor will receive payments for life, but at death, all payments stop. This option has the greatest risk to the investor.

Answer 1103

D. Immediate With an immediate annuity, payments to the annuitant begin one payment period after a lump sum deposit into the contract.

Answer 1104

A. I and IV I. Right to vote on proposed changes in an investment policy IV. Right to vote for the board of directors Variable annuity contract owners do not vote for the portfolio manager. Voting privileges are for election of members of the board, changes in investment policies of the separate account, and other issues as defined in the Investment Company Act of 1940.

Answer 1105

C. Requires the insurance company to pay administrative expenses above the maximum charges stated in the policy. Any administrative expenses above the contractually stated maximum charges are the responsibility of the insurance company.

Answer 1106

B. Current and minimum guaranteed cash value. Variable life policies do not guarantee cash values. All the other choices are charges and expenses detailed in a variable life policy.

Answer 1107

C. I, II and IV I. The value is expressed in units, similar to mutual fund shares. II. Units are revalued daily similar to mutual fund shares. IV. The value of a unit varies with the performance of the separate account. Units are valued daily similar to mutual funds and vary with the performance of the portfolio in the separate account. In the accumulation phase, units are referred to as accumulation units. A fixed number of annuity units are determined upon the annuitization of the contract.

Answer 1108

D. The number of annuity units After the amount of the first payment is calculated, the number of annuity units is determined by dividing the amount of the first payment by the current value of an annuity unit. This fixes the number of annuity units that will be used in calculating the amount of future payments.

Answer 1109

A. Remain the same. Fixed annuity benefit payments have a minimum interest rate guaranteed.

Answer 1110

B. I and II I. Is based on the greater of the gross payments to date or the value of the account at the time of death. II. Is not payable after annuity payments have started. The death benefit during the accumulation period protects the beneficiary in case the annuity owner dies before receiving annuity payments. After payments have begun, the annuity option chosen will determine what, if any, payments are made to the beneficiary upon the death of the annuitant.

Answer 1111

B. The Investment Company Act of 1940 The variable annuity separate account is considered an investment company under the Investment Company Act of 1940. The Trust Indenture Act of 1939 governs corporate bonds. The Securities Exchange Act of 1934 governs the people involved in the broker/dealer registered routes as well as the exchanges and the secondary markets. Dodd Frank is a recent act dealing with financial reform and does not address the variable annuities separate account.

Answer 1112

A. The annuitant will receive surrender value. The annuitant will receive current account value (cost basis plus growth) less any surrender charges, which equals surrender value.

Answer 1113

A. $6,000 P isn’t required to pay taxes on the original $10,000 she invested. The original $10,000 investment was paid with after-tax dollars; she would not be required to pay taxes on that portion again. P will, however, have to pay taxes on the gain of $6,000. With variable annuities, the money grows tax-deferred and is not taxed until the money is withdrawn from the annuity.

Answer 1114

C. Monthly. Although the cash value of a variable life insurance polity is usually calculated daily, it is required to be calculated at least monthly.

Answer 1115

C. Protect the insurance company by offsetting unexpected costs. These fees are deducted from the separate account to protect the insurance company against unexpected increases in operating costs and against annuitants who outlive their expected mortality.

Answer 1116

D. None of the above None of these answers are true. If the performance in the separate account does well over time and the annuitant lives long enough, the owner may come out much better than from a fixed annuity, but there are no guarantees this will occur.

Answer 1117

C. Each deposit made into the annuity contract. Variable annuities can be sold on a level sales charge, or level load, basis. Level sales charges are deducted from each installment or deposit made into the contract.

Answer 1118

A. Variable unit refund annuity. When a beneficiary receives a lump-sum payment, the annuity was a unit refund annuity. If the beneficiary had received the payment in installments, this would have been an installment refund annuity.

Answer 1119

D. Surrender charges 1035 exchanges allow investors to exchange one annuity contract for another without a tax liability. However, the investor should look at all the different expenses or penalties prior to effecting the exchange. It may not be economically feasible based on the amount of the surrender charges from the existing contract or starting a new surrender charge period with a new contract.

Answer 1120

D. I, II, III and IV All annuity products feature tax-deferred growth.

Answer 1121

A. Have one vote for every share. Voting is based on the cash value of the separate account, not shares. Policyowners have one vote per $100 of cash value. Owners are entitled to the same rights as investment company shareholders. Issues requiring policyholder approval include changes in investment objectives of the separate account.

Answer 1122

D. It will decrease the benefits paid to the beneficiary. Accelerated Benefit provision allows the early payment of some portion of the death benefit if the insured becomes terminally ill or is confined to a long-term care facility. The face amount of insurance is therefore reduced, which will decrease the benefits paid to the beneficiary.

Answer 1123

D. During the accumulation period A variable annuity can only be redeemed (surrendered) during the accumulation period. Once a settlement option is selected and the contract is annuitized (the annuity period), the choice is irrevocable.

Answer 1124

A. A fair and reasonable amount over the life of the contract. Variable annuity maximum sales charge must be fair and reasonable over the life of the contract.

Answer 1125

C. Straight life The straight-life annuity option gives the annuitant the highest periodic payment but carries the most risk. The annuitant receives payments as long as he or she lives. Upon the annuitant’s death, all payments end.

Answer 1126

C. An insured is diagnosed with cancer and needs help paying for her medical treatment. Accelerated benefits are paid when insureds endure financial hardship due to severe illness. They may request immediate payment of some portion of the policy's death benefit, usually 50-100%, depending on the insurer. Benefits are not taxable.

Answer 1127

C. It is conservatively invested because it holds assets associated with guaranteed insurance products. Because the general account holds assets invested in guaranteed products such as whole life policies and fixed annuities, it is typically invested conservatively in long-term debt. A securities license is not required to sell guaranteed products.

Answer 1128

C. 2 years. A policyholder may cancel a variable life contract within the first 2 years and must receive a partial refund of the sales charges.

Answer 1129

C. Are paid in fixed amounts at specified intervals. Premiums for variable and whole life policies are paid in fixed amounts at specified intervals. The amount of the premiums will differ between variable and whole life because of the distinct nature of each policy type.

Answer 1130

D. Expense guarantee Annuity companies are required to project their administrative expenses for annuity contracts. The expense guarantee establishes the maximum they can charge the contract. The annuity company is responsible for any increase in expenses beyond the amount guaranteed in the contract.

Answer 1131

C. Market risk Market risk is the greatest investment risk associated with a variable life insurance policy because the value of the separate account depends on the performance of the market.

Answer 1132

C. If performance in the separate account is negative, the policy may have no cash value. Poor performance could cause the cash value in a variable policy to be zero, but the death benefit may not fall below the face amount of the policy. Variable policy premiums are fixed, and contract expense clauses prevent the company from raising administrative fees.

Answer 1133

D. All of the above. These charges are not included in the sales charge. Depending upon the contract, all are possible expenses or ongoing charges that are deducted from the separate account.

Answer 1134

A. Taxation on accumulation. Taxation on accumulation is deferred in both types of plans. The rest of the characteristics differ.

Answer 1135

B. Self-employed individuals A Simplified Employee Pension is a type of qualified plan suited for the self-employed or small self-employed groups. A SEP is an arrangement whereby an employee establishes and maintains an individual retirement account to which the employer contributes. Employer contributions are not included in the employee’s gross income.

Answer 1136

D. 100% Employees are always 100% vested in their own contributions.

Answer 1137

D. An individual not covered by an employer-sponsored plan Any eligible person not participating in a qualified retirement plan can make a fully deductible contribution to an IRA. In addition, individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level. Individuals who are covered by an employer-sponsored plan are subject to income limitations.

Answer 1138

D. To purchase an investment property Withdrawing funds for an investment property is not one of the conditions that will waive the 10% early withdrawal penalty.

Answer 1139

C. Contributions are made with after-tax dollars and grow tax-deferred. Contributions to a Coverdell are made with after-tax dollars and grow tax-deferred. Withdrawals are tax-free when used for qualified education expenses. Contributions are not permitted once the beneficiary turns 18 and the money must be used by age 30 or rolled over to a Coverdell for another qualified family member. Unused funds cannot be rolled into an IRA.

Answer 1140

B. May be transferred into an IRA. Once transferred, the funds become subject to a 10% penalty for early withdrawal. Funds from a 457(b) plan may be transferred to an IRA or other qualified plan; however once transferred the funds lose the exemption from the 10% penalty for early withdrawal.

Answer 1141

B. Employer The employer defines the benefits by the use of a formula that applies to all employees.

Answer 1142

A. $6,000 each in two separate accounts Currently, the spousal IRA allows for up to $6,000 for each in separate accounts, for a total deduction of $12,000. However, each account is limited to $6,000 per year.

Answer 1143

A. There are liberal loan provisions for hardships. SIMPLE plans are available to employers with 100 or fewer employees. Loans are not permitted with SIMPLE plans.

Answer 1144

B. The contributions are not included as income for the employee, but are taxable upon distribution. Funds contributed are excluded from the employee's current taxable income, but are taxable at ordinary income tax rates upon withdrawal.

Answer 1145

D. High-salaried employees with only a few years until retirement receive the highest contribution. Defined benefit plans favor owners and key employees nearing retirement. The contribution formula is weighted toward these employees.

Answer 1146

C. Contributions are tax deductible. Roth IRA contributions are NOT tax-deductible. Because the contributions are made with after-tax dollars, qualified distributions are not income taxable. In order to contribute to an IRA, the individual must be working and must have earned income. Distributions (RMD) do not have to begin at age 72.

Answer 1147

B. Allows an employee to purchase company stock in the future at a predetermined price. Employee Stock Option Plans allow an employee to purchase company stock at a future at a predetermined price. They are given to employees (usually executives and members of management) and nonemployees who are important to the company (e.g., suppliers and attorneys) as an incentive, making it possible for these individuals to share in the growth of the company.

Answer 1148

D. Income eligibility limits Only the Roth has income eligibility limits. Anyone with earned income may contribute to a conventional IRA. However, the contribution may not be deductible, based on participation in an employer-sponsored retirement plan and the individual’s income level.

Answer 1149

B. The withdrawals will be taxed as ordinary income and subject to a 10% early withdrawal penalty. If withdrawals from an IRA are made prior to age 59½, the IRS will assess a 10% early withdrawal penalty, unless the withdrawals meet certain qualifications. The amount of the premature withdrawal from a traditional IRA is also taxed as ordinary income to the recipient when received.

Answer 1150

B. Employer may discriminate among employees. Deferred compensation plans are nonqualified (do not require IRS approval); contributions are not tax deductible; funds in the plan grow tax deferred, and any excess over the cost basis is taxed when received. Employers may discriminate among employees without regard to years of service, salary level, or any other criteria.

Answer 1151

A. The parents can roll the money over to another qualified family member for his or her education without penalty. Coverdell Education Savings Accounts can be used for kindergarten through college. However, the money must be used before the individual turns 30. In this situation, the parents will need to transfer or roll over the Coverdell to another qualified family member (related by blood, marriage or adoption). There will be a 10% penalty if the parents withdraw the money and don’t use it for qualified education purposes.

Answer 1152

C. Any investments grow on a tax-free basis. Nonqualified deferred compensation plans may be discretionary and therefore do not require IRS approval. These plans are contractual agreements between employees and employers for the deferral of constructive receipt of a portion of their earnings.

Answer 1153

C. Potential risk. ERISA regulations apply to retirement accounts, and conservation of principal is a primary account objective. Employee Retirement Income Security Act (ERISA)

Answer 1154

B. 3% of employee annual salary. Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer must then contribute 3% of the annual compensation for those employees who participate. Alternately, the employer may contribute 2% for ALL employees regardless of their contribution. Contributions and earnings are both tax-deferred until funds are withdrawn.

Answer 1155

C. A first-time home purchase. Premature distribution will result in penalties, unless made because of death or disability, purchase of a first home, or higher education for the individual, or the individual’s spouse, children, or grandchildren.

Answer 1156

D. Married individuals must contribute into one account for both spouses, up to a specified amount for each person. A married couple, under age 50, who file a joint tax return can contribute the maximum amount (currently $12,000) into two separate accounts, even if only one spouse had earned income. Each account contribution cannot exceed a specified amount for individuals (currently $6,000) in any 1 year.

Answer 1157

D. 403(b) Plan (TSA). Under a 403(b) Plan, tax-sheltered annuities (TSAs) are established for the employees of specified nonprofit charitable, educational, religious, and other 501(c)(3) organizations, including teachers in public school systems. Such plans generally are not available to other kinds of employees.

Answer 1158

B. A contract holder who is 55½ and has no hardship Any nonqualified withdrawal made before the annuitant reaches age 59½ is termed a premature distribution and subject to a 10% penalty tax. The withdrawal amount is added to the individual's ordinary income for that taxable year.

Answer 1159

D. It needs IRS approval. Nonqualified retirement plans do not meet the IRS requirements for favorable tax treatment of deductions and contributions; therefore, they do not need IRS approval.

Answer 1160

C. Contributions can be deducted from that year's taxable income. Cost basis has already been taxed and will not be taxed again upon withdrawal. Premature withdrawals are taxed and penalized unless withdrawn for a qualified exemption. A traditional IRA is a top choice for immediate tax savings because contributions can be deducted from that year's taxable income.

Answer 1161

B. Contributions are tied to the company profits. Defined benefit plans are not tied to the employing company’s profit; however, the employer is obligated to provide a certain, specified retirement benefit to an employee. The benefit is based upon a percent of salary multiplied by the number of years of service.

Answer 1162

B. To accumulate retirement savings A 401(k) is a qualified retirement plan that allows employees to take a reduction in their current salaries and earn tax-deferred growth on retirement savings.

Answer 1163

D. Simplified employee pension plan The simplified employee pension plan (SEP) allows flexibility of contributions and still provides immediate vesting.

Answer 1164

D. The employer with 100 or fewer eligible employees who desires an alternative to the 401(k) that includes employee deferrals, flexible employer matching features, and low administrative cost The SIMPLE is available to employers with 100 or fewer eligible employees and provides a low cost alternative to the 401(k) with some flexibility regarding the employer match. Since it is a qualified plan, discrimination is not permitted.

Answer 1165

B. Fully tax-deductible. Individuals who are not covered by an employer-sponsored plan may deduct the full amount of their IRA contributions regardless of their income level.

Answer 1166

A. Self-employed individuals and their employees SEPs are IRA plans established for self-employed individuals. The employer must contribute the same percentages for each qualified employee under the SEP plan.

Answer 1167

C. He must pay income tax. He must pay income tax. There is no 10% penalty on early withdrawal from a 457(b) plan.

Answer 1168

B. Must be made in cash. IRA contributions are limited to cash. The cash can then be used to purchase securities in the account. Individuals covered by qualified employer plans may also make IRA contributions but may be limited to after-tax dollars. Only persons with earned income and nonworking spouses of persons with earned income may make IRA contributions.

Answer 1169

B. When the contributor reaches the age of 50 Taxpayers who are age 50 or older are entitled to make additional "catch-up" contributions.

Answer 1170

B. 59½ Roth IRA distributions made after the age of 59½ are considered qualified distributions. Other distributions can be labeled as qualified before the age of 59½ if they are made to the beneficiary at the owner’s death, if the owner is disabled, or if the distribution is for the first-time purchase of a home or for higher education. Qualified distributions are desirable because there is no 10% penalty imposed for early withdrawals.

Answer 1171

A. Ordinary income that will be taxed as ordinary income rates Since the employer made all contributions to the plan, the employee will report all payouts as ordinary income and will have no cost basis.

Answer 1172

C. 100 A SIMPLE (Savings Incentive Match Plan for Employees) plan is available to small businesses that employ not more than 100 employees receiving a specified minimum in compensation from the employer during the previous year. In addition, to establish a SIMPLE plan, the employer must not have a qualified plan in place.

Answer 1173

D. $10,000, no tax consequence During an IRA custodian-to-custodian transfer, the full amount is moved from one plan to the other, and there is no tax consequence.

Answer 1174

C. Employees of nonprofit, educational, and religious organizations. A 403(b) plan is a special tax-favored retirement plan available only to certain groups of employees (nonprofit charitable, educational, religious, and other 501(c)(3) organizations, including all employees in public education).

Answer 1175

C. Roth IRA A Roth IRA does not force distributions to start at age 72.

Answer 1176

B. A defined contribution plan for a small business. A SEP is an employer-sponsored IRA with an expanded contribution rate up to 25% of compensation or a specified limit. SEPs are available to the self-employed and small employers.

Answer 1177

B. 10%. The tax penalty for a premature distribution from a qualified plan is 10%, unless it falls into one of the categories for a penalty-free premature distribution. Income taxes on the distribution also apply.

Answer 1178

B. II and IV II. A SEP-IRA is a qualified plan. IV. The maximum allowable deductible contribution is greater than a personal IRA account. A SEP-IRA is a Simplified Employee Plan for the self-employed and for small employers. A SEP-IRA is a qualified retirement plan in which all contributions are made by the employer and are tax deductible. The employee is immediately vested in the program. An additional benefit of a SEP-IRA is that the maximum allowable deductible contribution to the plan is greater than in a normal IRA.

Answer 1179

A. $0 The teacher has contributed to a qualified retirement plan; therefore, all the money she has invested is pre-tax. She has not paid taxes on any of the money yet, so her cost basis is $0, and she will be required to pay ordinary income taxes on the entire amount she withdraws.

Answer 1180

C. Roth IRA Roth IRAs have several distinguishing features. Unlike traditional IRAs, distributions do not have to begin at age 72. The contributions are not tax-deductible.

Answer 1181

A. It is the movement of assets to an IRA without distribution to the account owner. A transfer describes the movement of assets between IRA trustees or custodians without distribution to the account owner, resulting in no tax forms being generated by either trustee or custodian.

Answer 1182

A. The entire amount will be taxed as ordinary income. Withdrawals from a traditional IRA are subject to regular taxation. In addition, a 10% premature withdrawal penalty is assessed on anyone withdrawing the money under age 59½. However, the penalty will be waived if the distribution is due to the owner's death or disability, for medical or education expenses and first-time home ownership. The withdrawal is still subject to taxes as ordinary income.

Answer 1183

D. A 45-year-old man currently on disability Taxpayers who are age 50 or older will be entitled to make additional “catch-up” contributions to their IRA or spousal IRA accounts. A 401(k) plan can also permit participants who are age 50 or older at the end of the calendar year to make catch-up contributions.

Answer 1184

C. Subject to taxes but not penalties. At an IRA owner's death, a beneficiary can choose to cash in the IRA. Taxes will be due, but the 10% penalty for early withdrawal will NOT apply.

Answer 1185

B. $6,000 If the couple is not covered by a pension plan, they can each contribute and deduct $6,000.

Answer 1186

C. The plan must be nondiscriminatory. In a profit-sharing plan, employers allow their employees to share in the profitability of the company. The company, however, does not need profits in order to make contributions to a profit-sharing plan. All qualified plans must be nondiscriminatory. Plan benefits are usually paid at age 65, or in some cases earlier, but not at age 67. The company is only required to contribute if the company made a profit that year.

Answer 1187

C. 60 days. Rollovers are subject to 20% withholding and must be completed within 60 days, or they are classified as permanent withdrawals, and income taxes apply. Only one rollover per year is permitted. There is no annual limit on custodian-to-custodian transfers.

Answer 1188

D. ERISA. ERISA sets the standards for private pension plans.

Answer 1189

A. The investor will pay a tax penalty. There is a specified maximum contribution that can be made to Roth IRAs, as with traditional IRAs. If a taxpayer contributes more than the maximum amount, a 6% tax penalty will be imposed.

Answer 1190

D. II and III II. An employee with an annual salary above a specified limit. III. An employee who worked for the company for 3 of the last 5 years. An employee is eligible for a SEP plan is he/she has reached age 21, has worked for the same employer in at least 3 of the last 5 years, and has received a specified minimum in compensation from the employer for the year.

Answer 1191

D. May continue to make IRA contributions and deductions. The taxpayer can continue fully deductible IRA contributions while under a qualified plan as long as the payer's income does not exceed certain thresholds.

Answer 1192

C. 401(k) In 401(k) plans, employee salary reduction contributions and employer matching contributions are contributed to the plan trust.

Answer 1193

B. Not included as income for the employee, but are taxable as income upon distribution Funds contributed to tax-sheltered annuities are excluded from the employee's current taxable income, but are taxable upon withdrawal.

Answer 1194

A. Up to $6,000 for the husband and $6,000 for the wife The maximum amount an individual can contribute annually to an IRA is up to 100% of earned income not to exceed $6,000. The same amount can be contributed for a nonworking spouse in a separate account, called a spousal IRA.

Answer 1195

D. 72 Upon reaching age 72, a traditional IRA owner must begin taking annual required minimum distributions (RMDs). They must be taken no later than April 1 of the year following the year in which the participant turns 72. Failure to take an RMD results in a 50% tax penalty levied on the amount of the required distribution that was not taken.

Answer 1196

C. Teachers and employees of not-for-profit organizations. Tax-sheltered annuities, commonly referred to as 403(b) plans, are designed for teachers and employees of not-for-profit organizations, defined under code 501(c)(3).

Answer 1197

D. 30 years of service with the company. Lump-sum distributions cannot be made to a person for continuous service with a company, unless the person is also 59½ or older. Separation of service, death, retirement, disability, and attainment of age 59½ are the qualifying events eligible for lump sum distributions.

Answer 1198

D. An employee who is 21 years old and has worked for the company for the past 18 months Employees who are age 21 years or older and have worked at least 1 year and 1,000 hours must be included in the employer’s retirement plan according to ERISA

Answer 1199

B. Age 59½ Normal distributions from a traditional IRA can occur at any point after the account holder reaches the age of 59½.

Answer 1200

A. 3% Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer must then contribute up to 3% of the participating employees’ annual compensation as a matching contribution. Alternately, the employer may contribute 2% for ALL employees regardless of their participation. All contributions and earnings accumulate tax-deferred until funds are withdrawn.

Answer 1201

D. All of the above are correct. All of these statements correctly state tax advantages available through qualified retirement plans.

Answer 1202

B. $8,000, 60 days Because the employee has requested a distribution check, there will be a 20% withholding, and the participant has 60 days to reinvest it in an IRA to qualify as a tax-free rollover. The full amount of $10,000 must be reinvested, or the withheld amount of 20% will be considered a taxable distribution.

Answer 1203

B. Her 403(b) plan is not portable. 403(b) plans are portable; they may be transferred to a new employer’s 403(b) plan or, upon termination of employment, into a qualified plan.

Answer 1204

C. They must meet IRS requirements. In qualified annuities, IRS approval is required; contributions are tax deductible; accumulations are tax-deferred and withdrawals are taxed. Qualified annuities cannot discriminate among policyowners.

Answer 1205

C. Roll that child's Coverdell account tax-free into an account for the investor’s next child for education purposes. Generally, the responsible individual is permitted to change the beneficiary to another member of the family (related by blood, marriage or adoption) without triggering income tax and penalty provided the new beneficiary is under the age of 30. Once transferred, those funds must be used for qualified expenses for that person's benefit.

Answer 1206

A. Will not be subject to any penalties or taxation. There is no penalty or taxation for the transfer of an IRA from one trustee to another. Also, there is no limit on the number of trustee-to-trustee transfers that may be done in any time period. If the distribution was made payable to the IRA owner (a rollover), then 20% withholding and the 60-day reinvestment rule applies. Rollovers are limited to one time per year.

Answer 1207

B. Traditional and Roth IRAs. This hardship provision is available to owners of both traditional and Roth IRA accounts, without penalty.

Answer 1208

B. "Prudent Man" rules in the state where the fund operates. When investing pension fund money, pension fund managers must follow the Prudent Man rules in the state where they operate.

Answer 1209

C. File quarterly reports with FINRA. ERISA requires qualified pension plan administrators to communicate plan financial information to plan participants, allow participants to name beneficiaries and file an annual report with the Department of Labor.

Answer 1210

A. More money can be contributed to a SEP. The primary difference between a SEP (Simplified Employee Pension) plan and an IRA is the much larger amount that can be contributed each year to a SEP plan (25% of the employee’s compensation up to a specified limit). Additionally, in a SEP, the contributions are made by the employer on behalf of the employee.

Answer 1211

D. 30 days The funds must be withdrawn from a Coverdell account within 30 days after the beneficiary attains the age of 30. Alternatively, the account could be transferred to another qualified family member. If the funds are not withdrawn, the capital gains on the account become taxable and subject to a 10% penalty.

Answer 1212

C. A security’s value, considering its beta and a risk-free rate of return. The CAPM considers the security’s beta, the time value of money, and a theoretical risk-free rate of return.

Answer 1213

A. Repurchases the same securities within 30 days. Wash sale rules apply for replacing the sold security within 30 days of the sale. This would include substantially similar investments such as call options for the same security.

Answer 1214

A. Increase in stock prices Investor sentiment can be bullish or bearish. An increase in stock prices is bullish. An increase in interest rates and a decrease in short interest (investors will not be buying to cover short positions) are bearish. An increase in trading volume is neutral without more information.

Answer 1215

C. Reversal of a downward trend. A reverse head and shoulders formation is believed to be the reversal of a downward trend.

Answer 1216

D. Her cost basis is 21 and the holding period is long-term. The cost basis on inherited securities is the market value at the time of death and the holding period is always long-term, no matter how long the securities were actually owned.

Answer 1217

A. Consumer Price Index. The Consumer Price Index is a monthly coincident indicator of inflation, not a leading indicator.

Answer 1218

A. Consumer Price Index. The CAPM considers the security’s beta, the time value of money, and the risk-free rate of return on a theoretical investment.

Answer 1219

B. A $7,500 deduction is allowed. The value of a charitable gift that is deductible by the donor is the appreciated value of the securities.

Answer 1220

D. Keynesian Theory Keynesian Theory is the economic theory that advocates stimulating economic growth through government intervention.

Answer 1221

D. Sideways. Consolidating markets move sideways, with many trades all in a narrow price range, not up (bullish) or down (bearish).

Answer 1222

B. Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days. Section 1035 of the Internal Revenue Code does not give a specific time limit to complete such an exchange.

Answer 1223

A. Industrial production GDP (industrial production) is a coincident indicator. Inventories are a lagging indicator, while orders for durable goods and machines are leading indicators.

Answer 1224

A. The investor is allowed to specify which shares are being sold to minimize his capital gain. The investor can specify the security identification method of particular shares sold, or, in the absence of choice, the IRS will use FIFO. Therefore, security the identification method is most common.

Answer 1225

B. I, II, and III I. 200-day moving average II. Put/call ratio III. Short interest All are technical indicators, EXCEPT the confidence index.

Answer 1226

B. First-In, First-Out. IRS assumes the First-In, First-Out accounting method when shares cannot be specifically identified.

Answer 1227

A. Reversal of an upward trend. A technician is a "tic hopper" or "trend grabber", and neither bull nor bear. "Head and shoulders" means that every upward move is meeting greater resistance, not downside pressure. A good technician would sell calls, not buy puts.

Answer 1228

B. $2,050,000 Remember the 50% dividend exclusion that a corporation has on dividends received from stock that it owns in other corporations. Therefore, 50% of the $100,000 preferred dividend is excluded from income. The firm will only pay tax on the remaining $50,000 (in addition to their operating income of $2,000,000, of course).

Answer 1229

B. Sells a put Sell a put, and if unexercised, collect premium for a gain while attempting to deduct a capital loss.

Answer 1230

C. The amount of loans made available by banks. If rates increase, banks tighten credit, and the amount of loans decreases.

Answer 1231

B. Index of industrial production. The index of industrial production is coincident. Leading indicators include housing starts, as measured by building permits and new private housing units, average weekly initial claims for unemployment insurance, and machine tool orders as measured by manufacturers’ new orders.

Answer 1232

A. Large scale movement from the short to the long end of the yield curve. Disintermediation occurs when investors leave the uncertainty of short term rates and lock in long term rates when the yield curve is inverted.

Answer 1233

B. Market index volatility. Beta of "1" indicates coincidence with the volatility of a particular index.

Answer 1234

D. $27 Since George did not wait at least 31 days to repurchase the same shares that he sold, wash sale rules apply and the loss is not recognized. He must add the loss into the new shares, making his cost basis $27. If he would have waited 31 days before purchasing the new shares, he could have recognized the loss and the new cost basis would have been $22.

Answer 1235

A. Index of industrial production The Index of Industrial Production (GDP) is a coincident indicator. The rest are leading indicators.

Answer 1236

D. Automobile production Auto production is a big-ticket consumer item, and is cyclical, not defensive. In other words, it follows the economic cycle.

Answer 1237

D. Short-term rates move more sharply. Short-term interest rates are more volatile; they move more sharply (quickly). However, long-term bond prices change more.

Answer 1238

A. Breadth of the market The advance/decline ratio is used to determine the overall movement of the market. For example, although the Dow Jones Industrial Average may go up by 50 points today, if we found that advancing issues were outnumbered by declining issues by a 2-to-1 ratio, that tells us that the market is overall not bullish. In fact, in this example, the market would be considered to be bearish.

Answer 1239

D. The daughter will have a tax liability if she sells the shares at the current market price. The recipient (daughter) has the tax liability if she sells any shares following the gift, and the basis is the donor’s original cost basis or $40 a share, unless the current market price of the shares at the time of the gift are less than the donor’s original cost basis.

Answer 1240

A. I and II I. Major users are banks and large multi-national corporations. II. The foreign currencies are usually traded in blocks of $1,000,000 to $5,000,000. The major participants in the interbank market are central banks and large multi-national corporations. Although they are negotiable, foreign currencies are usually traded in blocks of $1-$5 million. There is no systematic reporting system for last sale information. Spot transactions are 1 or 2 days; forward transactions are for a time period longer than 2 days, generally, 1, 2, 6, 9, 12, or 18 months.

Answer 1241

C. $3,000 Securities losses are normally capital and can be deducted up to $3,000.

Answer 1242

B. $697,000 The corporate dividend exclusion is 50%. Therefore, $50,000 of the $100,000 dividends can be excluded from reported income. Such a dividend exclusion applies to common and preferred dividends received by one U.S. corporation from another. For tax purposes, pre-tax income of $2,000,000 plus the $50,000 taxable dividend total $2,050,000 multiplied by the tax bracket 34% ($2,050,000 x 34% = $697,000).

Answer 1243

B. Dow Jones Industrial Average The Dow Jones Industrial Average consists of only 30 equities. Value-line has about 1,650 and the NYSE about 2,500.

Answer 1244

B. $3,000 The rule is that no more than $3,000 net capital loss can be deducted in any 1 year by a taxpayer.

Answer 1245

D. Is bearish. A growing number of puts compared to calls indicates bearish investor sentiment.

Answer 1246

B. Purchase a call option on the security within 30 days prior to and after the sale. Purchasing a call represents the purchase of a substantially identical security, especially when exercised. (Long calls when exercised are long the stock.)

Answer 1247

A. Home appliances Home appliances are big-ticket consumer items, and their purchases and sales rise and fall with the economic cycle.

Answer 1248

B. I and III I. Allows the comparison of rates of return as maturities are extended III. Is useful in determining the market expectations for interest rates Yield curves are used to compare yields at different maturities and to examine market rate expectations (normal - stable to low rates; inverted - high or rising rates). They are not used to compare, judge market demand, or predict interest rates.

Answer 1249

B. No loss deduction is permitted. No loss deduction is permitted under these circumstances.

Answer 1250

A. Timing Price and time are technically determined. Security, ratios, and EPS are fundamental.

Answer 1251

A. Systematic risk. Market risk is systematic, not company-specific, inflation (purchasing power), default (credit), or rate risk.

Answer 1252

B. A whole life insurance policy can be exchanged for a term insurance policy. Only cash value life to cash value life policy, endowment contract or annuity, endowment to endowment or annuity, or annuity to annuity are allowed. Using life insurance or annuity surrender values to purchase term insurance does not qualify under Section 1035 as a nontaxable event.

Answer 1253

D. The IRS will disallow the loss for tax purposes. The sale for a loss, with a repurchase within 30 days of a substantially identical security, is a wash sale, and no deduction of loss is allowed.

Answer 1254

A. Demand deposits, NOW accounts, and money in circulation have decreased. Demand deposits, NOW accounts and money in circulation are the definition of M1.

Answer 1255

D. Nothing. The loss will be deferred. By writing a put within 30 days of a sale for a loss, she committed a wash violation, since writing a put with its duty to buy is repurchase of the substantially identical security.

Answer 1256

A. Selling a put or buying a call within 30 days of sale of stock A wash sale involving a sale for a capital loss ends a capital loss deduction if the customer buys a call or sells a put on the same stock, because both are substantially identical long market positions.

Answer 1257

C. Banks are having trouble meeting reserve requirements. Federal Reserve member banks charge each other the Fed funds rate for overnight loans to meet their reserve requirement. If this rate is rising, it indicates greater loan demand among Fed member banks to satisfy the reserve requirement.

Answer 1258

C. The yield curve is inverted. An inverted yield curve means that short-term rates are high and long-term rates are lower. So to maximize current income, the investor will buy short-term debt and sell long-term bonds.

Answer 1259

C. Alpha. Alpha is the difference between a stock’s beta and its actual return.

Answer 1260

B. Index of industrial production. Coincident indicators are current indices (that show the current phase of the cycle), and the more current the index, the more coincident. The Index of Industrial Production is a coincident indicator, not leading.

Answer 1261

C. Average prime rate Lagging indicators include average duration of unemployment, labor costs, commercial and industrial loans, and average prime rate. Industrial production is a coincident indicator, and housing starts and S&P 500 are leading indicators.

Answer 1262

D. The same cost basis that the investor had for the shares. When a security is received as a gift, the cost basis depends on the relationship of the market value of the securities to the donor’s cost basis. If the market value is higher than the donor’s basis, the recipient’s cost basis is equal to the donor's. If the market value is lower than the donor’s cost basis, the recipient’s basis is equal to the market value of the securities at the time of the gift.

Answer 1263

C. Section 1035 Policy Exchange IRC Section 1035 allows for a tax-free exchange between certain insurance policies and/or annuities.

Answer 1264

D. $47 This is a question regarding the Wash Sale Rule. Since the investor sold the stock at a $3 a share loss but then re-acquired the same stock two weeks later, the loss is not usable on the customer's tax return. However, the $3 loss is reflected on the basis of the new stock by adding the $3 a share loss to the price of $44 a share; the basis is $47 a share. If the stock were sold later at, say, $52 a share, the investor would show a $5 a share capital gain.

Answer 1265

C. Rising interest rates/lowering prices Rising interest rates support the dollar and cause the prices of bonds and stocks to decline. Import/export levels are a consequence of the relative strength of the two currencies.

Answer 1266

D. $495 $2,500 proceeds - $1,000 cost = $1,500 short-term gain. This is a short-term gain since the long-term holding period is more than 12 months for securities purchased after 12/31/87. 33% x $1,500 = $495 tax.

Answer 1267

B. II only II. Not regulated The interbank market is not regulated; therefore, it is not centralized. However, the Federal Reserve Board does act as a central bank.

Answer 1268

B. $50 When a security is inherited, the beneficiary’s cost basis is the fair market value (in this case, the NAV) of the security on the day of the deceased’s death. This is called a “stepped up” basis.

Answer 1269

B. Housing permits. Housing permits are leading indicators because they are the first in a series of events. After housing permits are issued, materials are purchased, construction begins, etc. When houses are sold, the buyers typically purchase durable goods such as major appliances. Appliance, employment, and automobile sales are lagging because they measure past activity.

Answer 1270

A. I and II The T-Bill and the Fed Funds rates will decline. The prime rate may not, and lending levels increase when rates are lower.

Answer 1271

C. Rate banks charge broker/dealers for loans secured by securities. The broker call rate is based on the rate banks charge broker/dealers for customer debit balance funding. The rate broker/dealers charge customers is the purpose loan rate.

Answer 1272

A. Assets in excess of a specified amount at the time of the owner’s death. Estate tax is based on the amount of assets that a person owns at the time of their death. Assets in excess of a specified amount set by the IRS and subject to change are taxed.

Answer 1273

D. Unemployment Lagging indicators include average duration of unemployment, labor costs, commercial and industrial loans, and average prime rate. Housing starts (new housing permits) and consumer expectations for business and economic conditions are leading indicators. Personal income is a coincident indicator.

Answer 1274

D. Personal income. Leading indicators predict future economic activity in a business cycle. Coincident indicators show the current phase of the cycle. Personal income is considered a coincident indicator.

Answer 1275

B. Daily average of reserve member banks The Federal Funds Rate is overnight (daily) borrowings by Fed reserve member banks.

Answer 1276

A. $3,000 capital loss for the current year and then $3,000 can be claimed as capital loss for the next tax year. Capital losses can be netted against capital gains to reduce taxes on capital gains. Excess capital losses can be deducted in any given tax year up to a maximum of $3,000 per year. However, if total losses exceed gains by more than $3,000, the remaining losses can be deducted in future years.

Answer 1277

D. 1035 exchange. In accordance with Section 1035 of the Internal Revenue Code, certain exchanges of life insurance policies and annuities may occur as nontaxable exchanges.

Answer 1278

A. The Beta. The Beta measures the reaction of a particular fund in relation to the movements of the market. The higher the beta on a fund, the more there is potential for volatility. A Beta of 2 means twice the volatility in comparison to a Beta of 1.

Answer 1279

A. The taxes paid on dividend and capital gain reinvestments made for additional shares. To be calculated correctly, investors must also take into account all taxes previously paid on shares that have been purchased through dividend or capital gains reinvestment programs.

Answer 1280

B. Do not apply at all. The wash sale rules do not apply because the investor did not purchase substantially the same property. These are different companies even though they are in the same industry.

Answer 1281

C. The redemption will fall under IRS wash sale rules. If an investor buys substantially identical shares within 30 days after selling them at a loss, IRS wash sales rules will apply and the loss will disallowed on the amount of shares repurchased.

Answer 1282

B. $3,000 The maximum annual capital loss deduction is $3,000. The remainder may be carried over to the next year.

Answer 1283

A. Sell off. By definition, the "support level" is the established historical price level, below which a particular stock is considered to be undervalued; therefore, buying pressure could be expected. The "resistance level" is the price level at which a stock is considered to be overvalued and selling pressure would be expected. A "breakout" occurs when a stock moves beyond either the support or resistance levels. A climax is when a peak occurs in the market or a security. Large and increasing volumes of sales create a sell off.

Answer 1284

B. Keynesianism. Both taxes and spending are Keynesianism, embracing the idea that the government should actively intervene in the economy to produce desired outcomes.

Answer 1285

B. I, II, and III I. Breakout at 93 II. Breakout at 85 III. Support is 86 Support is at 86, the low end of the trading range, breakout is at 85 given decline below the support level of 86, and breakout is also at 93 given increase above the resistance level of 92.

Answer 1286

C. The sum of all goods and services produced in the U.S., computed in real dollars. GDP is the sum of all goods and services of the U.S. in real dollars.

Answer 1287

A. $500 loss is deferred This is a short wash sale, an opening short, purchase for a loss, and another short sale. Therefore, the loss cannot be deducted.

Answer 1288

C. Long-term bonds Switching to easy money means that money supply increases, pushing interest rates down and bond prices up. The rule of thumb here is that the bonds with the longest term to maturity (in this case, the long-term bonds) will change the most in price as measured in dollars.

Answer 1289

C. II and III II. Weakening dollar III. Balance of payment deficits If the dollar is weak (lower-priced than the foreign currency) and the balance of payments are in deficit, then exports should suffer less restraint.

Answer 1290

D. $60,000 The husband and wife can each gift $15,000 per recipient. As a couple, they can gift: $30,000 x 2 children = $60,000.

Answer 1291

A. Government bonds Rates are rising, a recession is threatening, and an investor flight to quality is happening.

Answer 1292

B. Supply side. "Supply side" economics is defined by this question. It is considered the opposite of the Keynesian theory.

Answer 1293

B. Bond prices increasing, yields decreasing When the Fed purchases securities, it injects money into the money supply, which expands it. This loosens credit, lowers interest rates and yields, and raises prices.

Answer 1294

D. M1. M1 is part of the money supply that the Fed regulates through buying or selling governments and government agencies.

Answer 1295

C. Building materials. Building materials are “big ticket” items related to construction and housing, which are very cyclical. Defensive industries include consumable goods, such as food, alcohol, tobacco, drugs, cosmetics, and clothing.

Answer 1296

A. The donor will have a $5,000 income tax deduction. Subject to certain restrictions, charitable donations of stock are tax deductible at their market value at the time of the donation, in this case, $5,000. The donor is not subject to capital gains tax on the appreciation. The recipient’s cost basis is $5,000.

Answer 1297

D. A cost basis of $38. The heir received the shares at a stepped-up cost basis of fair market value at the time of the grandmother’s death. Inherited shares are always long-term, regardless of the deceased’s holding period.

Answer 1298

A. Advance/decline line The advance/decline line is the best of these measures. The Dow Jones Industrial Average is too narrow.

Answer 1299

D. Premium bonds will appreciate faster than discount bonds. Premium bonds appreciate faster if rates are falling. High coupon bonds appreciate the most as new rates and existing yields fall. Low coupons depreciate the most if new rates and existing yields rise.

Answer 1300

A. Short and long maturities show approximately the same yield. An inverted yield curve indicates short-term rates above long-term rates. A normal curve shows short-term below long-term rates. A flat curve indicates that long and short-term yields are equal.

Answer 1301

C. II and IV II. Buy the foreign currency IV. Sell U.S. dollars To support the foreign currency, the strategy would be to buy the foreign currency and sell U. S. dollars.

Answer 1302

D. Cash Value Life Insurance Policy to a Cash Value Life Insurance Policy Section 1035 allows for the following exchanges: Life to Life, Life to Annuity, Annuity to Annuity, NOT Annuity to Life or a Cash Value Life Insurance Policy to a Term Life Insurance Policy.

Answer 1303

C. Wilshire Wilshire has 7,000 stocks, Value-line has 1,700, and the NYSE composite has approximately 3,000.

Answer 1304

C. II and III In an inverted curve, short-term rates are temporarily higher than long-term rates. Because of the inverted curve’s uncertainty, investors move from short-term to long-term yields. ?????

Answer 1305

A. Share Identification method Under this method, the investor keeps track of the cost of each share purchased and identifies the specific shares to be liquidated (i.e., the shares purchased on a given date at a given cost).

Answer 1306

B. I and III I. Long-term III. Capital gain One year and one day (or longer) is long term. Gain on the sale is taxed.

Answer 1307

C. $3,000 A capital loss (securities-related) can mean as much as $3,000 deducted against non-passive income.

Answer 1308

A. The Alpha. Alpha is the difference between the beta and the actual return obtained from an investment. The point of reference for the alpha is the beta; therefore, a negative alpha indicates underperformance while a positive one represents a better than expected return.

Answer 1309

B. Member firms administer the Regulatory Element. The Regulatory Element is administered by FINRA, not the member. If the registered person fails to complete the Regulatory Element in the 120 days, the registered person will have their registration deemed inactive until the requirement has been met. After the second anniversary and the completion of the Regulatory Element, the clock is set to within 120 days of their anniversary date every 3 years. The Firm Element requires that members develop a formal written training plan on at least an annual basis.

Answer 1310

B. The securities are covered under SIPC. Although B is a true statement, "securities are covered under SIPC," it is not a required disclosure for a registered representative located in a bank. "The securities are not FDIC insured" is a correct disclosure that is required because FDIC covers bank assets, not investments made under the broker/dealer. "The securities are not an obligation of the bank" is also a correct statement and a required disclosure. It is important not to confuse a customer of the bank who is also a customer of the broker/dealer. Customers may assume that they are making the same type of investment, but they are not. The securities of the broker/dealer have investment risks, while deposits at a commercial bank do not.

Answer 1311

D. No, any communications between the investment banking rep and the analyst must be in the presence of legal and/or compliance. The analyst may talk to the client to provide information and/or answer questions as long as the investment banking representative is not present.

Answer 1312

D. A copy of a magazine article on retirement planning issued by a publisher that is not affiliated with the member Independently prepared reprint means any reprint of an article or its excerpt issued by a publisher not affiliated with the member using the reprint.

Answer 1313

A. At minimum, the SRO would open an investigation on the $20,000 error. The broker/dealer would report the settlement of the $20,000 dispute, and the appropriate SRO would investigate.

Answer 1314

A. The Investment Advisers Act of 1940. The Investment Advisers Act of 1940 was established to regulate investment advisory activities and define requirements for registration of such individuals.

Answer 1315

B. Within 30 days of initial discovery Relevant SAR reports must be filed with FinCEN within 30 days of initial discovery of a suspicious transaction.

Answer 1316

A. If the fine exceeds $2,500. MSRB rules require that all disciplinary events resulting in a fine exceeding $2,500 be reported to the SRO, which will initiate an investigation.

Answer 1317

B. I, II, III, and IV I. Censure II. Fine III. Suspension of FINRA registration IV. Revocation of FINRA registration Both the Department of Enforcement and the National Adjudicatory Council have the authorization to impose any and all of these penalties upon a FINRA member.

Answer 1318

D. II, III and IV II. May not receive any salary, credits or commissions that might accrue during a suspension period. III. May not remain associated with the member in any capacity. IV. May be paid monies that were earned prior to the disciplinary action. The person may not be associated with the member in any capacity and may not be paid any earnings that might accrue after the disassociation. However, monies earned prior to the disciplinary event may be paid.

Answer 1319

A. Refer to the Department of Enforcement. Arbitration is only for civil actions. The Department of Enforcement handles punishment and disciplinary actions.

Answer 1320

A. Anti-money laundering programs are designed to monitor the member’s compliance with the requirement of the Regulation S-P: Privacy of Consumer Financial Information. Anti-money laundering programs are designed to achieve and monitor the member's compliance with the requirements of the Bank Secrecy Act.

Answer 1321

B. I, II, and IV A registered representative can sell (issue) a put. The rest are not allowed.

Answer 1322

D. Research report Only the research report by NYSE rules requires a supervisory analyst's review. The rest do not involve analysis skills; they require presentation efforts.

Answer 1323

B. I and IV I. Investment objectives IV. Tax status Address is not needed for suitability. Age is needed only to ensure that the customer is not a minor or too old for 30-year bonds.

Answer 1324

C. II and IV II. Giving a $125 bottle of wine to the employee of another broker/dealer. IV. Giving the employee of another broker/dealer season tickets to the opera. The $100 limit applies to gifts and gratuities only. Mutual consumption is not subject to a dollar limit.

Answer 1325

A. Arbitration. The parties must settle the dispute through arbitration.

Answer 1326

D. A securities professional executing a trade in his own account prior to the client’s to achieve a more profitable trade Front-running clients’ account is a practice where a securities professional executes personal trades prior to the client’s trade to achieve a more profitable trade for a personal account.

Answer 1327

A. Yes; the registered representative is guilty of front running and unethical behavior and will be subject to disciplinary action by FINRA. While the registered representative’s intentions were in the interest of the client, the registered representative ran a trade in front of a large block of stock that the registered representative knew would push the price of the stock higher. This is referred to as front running, a clear ethics violation. The fact that the registered representative had discretionary authority in the account has no bearing on the situation. If the trade had been done without knowledge of the soon-to-be posted large block order, then the RR would be compliant and the trade could go through.

Answer 1328

A. A dealer makes a profit by charging a commission on the security transaction. Dealers do not profit by charging a commission; they make their profit by marking up the security over the market price.

Answer 1329

B. Censure, fine, expel, suspend or bar only FINRA can impose all of these sanctions; however, it does not have arrest authority. Matters reaching a criminal level are referred to the SEC, who does have arrest authority.

Answer 1330

A. A written letter. It is too cumbersome to ask a customer to write a letter requesting to opt out of allowing the broker/dealer to send their personal nonpublic information to nonaffiliated third parties. The other choices are appropriate.

Answer 1331

A. Public appearances. Public appearances refer to participation in seminars, radio or television interviews, or other public speaking activities and are included in the definition of retail communications.

Answer 1332

D. 6 years. The statute of limitations is six years from the date of occurrence.

Answer 1333

D. The underwriter Obtaining the CUSIP is the responsibility of the underwriter. The CUSIP number is a unique identification number assigned to all stocks and registered bonds in the United States and Canada, and it is used to create a concrete distinction between securities that are traded on public markets.

Answer 1334

B. I and III I. Fine, censure, suspension of membership or barring from association with a member firm. III. Expulsion from membership or revocation of registration. In addition to fines, censure, membership suspension or revocation, FINRA may impose any other sanction "deemed appropriate."

Answer 1335

D. III and IV Neither the cash nor the margin accounts of a bank officer require permission.

Answer 1336

B. The 10 largest investment holdings in the fund. FINRA does not require retail communications containing a mutual fund ranking to disclose the fund’s 10 largest holdings.

Answer 1337

A. $100,000, imprisonment for 5 years, or both. The maximum penalty for bribing a foreign official is a $100,000 fine, imprisonment for 5 years, or both.

Answer 1338

D. I, II, and III I. It must be furnished to the customer before any transactions are done in the account. II. The customer must fully complete the form with all financial information and then return it to the broker/dealer. III. The broker/dealer must indicate why the customer is suitable to buy "designated securities." Regarding penny stocks and their suitability requirements, a formal Suitability Statement must be furnished to the customer before any transactions are made. The customer must then complete the form and mail it back to the firm, and the broker/dealer must indicate why it concluded that the customer is suitable to buy these securities.

Answer 1339

C. There are no exceptions. There are no exemptions under the insider trading laws for the misuse of nonpublic information.

Answer 1340

A. I and II In addition, the procedures must contain features to detect suspicious activity and money laundering activity as well as customer identification procedures.

Answer 1341

C. A cash gift of $100 Only gifts valued at $100 or less are acceptable. The $100 in cash is the only allowable gift according to FINRA Rules.

Answer 1342

C. Not do so without the approval of a supervisory analyst. The supervisory analyst is the principal responsible for all of the firm's research reports, and approval before made available to the public. R/R is a common reference to Registered Representative or Agent.

Answer 1343

C. II and III II. 5.8, less 1/2 III. 101 If the dealer bought 6% bonds at par, he would re-offer at a slight premium. 5.80 basis is only 20 basis points premium (20 basis points below 6%), and the price would be 101, the smallest premium price.

Answer 1344

C. The SEC. The Act requires investment companies, unless exempt, to register with the SEC.

Answer 1345

D. On corporate bonds. The Trust Indenture Act of 1939 requires a trust indenture on corporate bonds over $5 million. This is commonly used but not required on municipal revenue bonds.

Answer 1346

C. I, III and IV only I. A bank trust officer purchasing for a trust account III. An investment adviser handling accounts for his clients IV. An issuer buying a security in the secondary market A customer is any entity not engaged in the sale of securities in a professional capacity. Answer choice II is a municipal securities dealer; therefore, it is a sales professional.

Answer 1347

D. All of the above. The FINRA Code of Arbitration states that any of the mentioned entities may initiate arbitration against a registered representative.

Answer 1348

B. Written approval from a registered principal of the firm. When a registered representative decides to place a mutual fund advertisement, he must first get written approval from a registered principal of his firm. If the member firm has not previously filed the retail communication, it must file the initial one with FINRA at least 10 business days prior to use. These materials must be kept on file for 3 years.

Answer 1349

C. Investment adviser. A person who receives compensation for investment advice is classified as an investment adviser. However, if providing advice is incidental to an accountant’s business and he does not charge a fee for the advice, the accountant would not be required to register as an investment advisor.

Answer 1350

D. Partner or principal. NYSE rules ascribe account approval to the partner and principal. FINRA rules ascribe account approval to the Branch Manager and order ticket approval to the principal.

Answer 1351

A. I and II A limited representative for municipal bonds is not authorized to sell investment companies without a Series 6 or 7 registration.

Answer 1352

B. Entering triathlons. FINRA member firms are to be notified of any outside business activities. Triathlons are done as hobbies and not for monetary gain and therefore are exempt from notification requirements.

Answer 1353

A. Designate an AML compliance officer. As part of a broker/dealer’s responsibility to comply with AML initiatives, it is required to appoint a qualified AML compliance officer who must administer the AML program and ensure that all employees are aware of their duties. In addition, the broker/dealer must establish policies, procedures and internal controls based on an in-house risk assessment, provide ongoing training for employees, and have the program independently tested on a regular basis.

Answer 1354

C. II, III and IV only Financial status establishes suitability, whereas registered representative and principal signatures are required for any trade, whether cash or margin account. A customer signature is only required for a margin account.

Answer 1355

A. I and II I. An individual can be subject to a $100,000 fine, imprisonment for 5 years, or both. II. A business entity can be subject to a $2,000,000 fine. Any fine or penalty imposed on a person cannot be paid by the company. An individual who was unaware of the regulation can be fined but not imprisoned.

Answer 1356

A. I and III The MSRB’s confirm disclosure requirements are the same as FINRA’s but also include the broker/dealer’s phone number. Current yield and yield to partial call are never disclosed on the confirmation.

Answer 1357

A. Single transaction involving $11,000 of currency Broker/dealers are required to file the Currency Transaction Report (CTR) for single transactions involving currency that exceed $10,000, or multiple transactions during any one business day that total more than $10,000.

Answer 1358

D. Binding on all parties involved. Parties to arbitration must agree to accept the board's decisions prior to the arbitration, and decisions are binding on all involved.

Answer 1359

D. $50,000. Simplified arbitration is available for disputes not in excess of $50,000. Otherwise, a full panel of arbitrators will hear the case.

Answer 1360

B. 3 years. Approved retail communication must be kept on file for 3 years.

Answer 1361

D. III and IV The SEC writes the laws that govern the financial markets. The Commission can revoke the registration of a broker/dealer, but it has few punitive powers. It cannot fine or imprison; it refers criminal cases to the judicial system.

Answer 1362

C. The customer has not elected to opt out of the disclosure. A broker/dealer may not share nonpublic personal information of consumers with nonaffiliated third parties, except when a joint marketer or service provider delivers certain information to the consumer, and if the consumer has not elected to opt out of the disclosure.

Answer 1363

D. I and III I. A customer with an account opened and funded more than a year within the prior year. III. A customer who has done 3 penny stock trades with the same firm. 15c2-6 defines an "experienced customer" as one who has opened and funded an account more than one year, or has done three penny stock trades with the same firm within the past year.

Answer 1364

A. Tax-free unit investment trusts Of all the answers, only "tax-free unit investment trusts" represents a product other than municipal or government bonds. Trust units are NOT municipal bonds. They are broker/dealer-created investment companies. A municipal securities license does not allow a registered representative to sell shares or units of any investment company, including municipal bond mutual funds or UITs.

Answer 1365

D. 2 years Any MFP who violates the contribution rules would trigger a two-year prohibit for the firm in which the firm would not be able to be involved with a negotiated underwriting.

Answer 1366

A. The firm would be unable to enter into a negotiated underwriting with that municipality for two years The municipal firm is not allowed to contribute money to any candidate who would have influence over the municipality, regardless if located in their district or not. One way to remember this is you, the MSP, who is an individual, can only give money to a candidate they can vote for. Since the firm itself has no ability to vote for a candidate, it is prohibited from giving any money.

Answer 1367

B. Statutory disqualification. Filing false, inaccurate and/or misleading information may result in statutory disqualification. Statutory disqualification can prevent a person or firm from becoming registered, or can result in a revocation of registered status.

Answer 1368

A. Place a temporary hold on disbursements from the customer’s account. A member firm that suspects that a senior customer is being financially exploited may place a temporary hold on the disbursement of funds or securities from the customer’s account.

Answer 1369

B. The maximum award is $50,000. $50,000 is the maximum award under simple arbitration, but there are no limitations to the awards available from a full arbitration hearing.

Answer 1370

D. Preliminary official statement. Preliminary official statements are as good as final official statements and constitute prospectus-like risk disclosure.

Answer 1371

C. II and III II. In a principal capacity buying or selling out of its own inventory. III. In an agency capacity buying or selling on behalf of others. A firm can act as a broker or a dealer in a transaction. As a broker, the firm acts in an agent capacity and charges a commission. As a dealer the firm buys or sells out of inventory and acts in a principal capacity for profit.

Answer 1372

D. An amount up to 3 times the profit gained or loss avoided. When the insider trading violations are subject to civil but not criminal penalties, the maximum fine cannot exceed three times the profit gained or loss avoided.

Answer 1373

D. $1,000,000 fine, imprisonment for 10 years, or both. The penalties are severe for SEC violations, with the maximum penalty for an individual being $1,000,000 fine, imprisonment for 10 years, or both.

Answer 1374

A. National Adjudicatory Council. If a respondent appeals the decision by the Department of Enforcement, his first level of appeal will be heard by National Adjudicatory Council.

Answer 1375

B. I and IV I. The firm would be required to send an investor brochure to the customer. IV. The registered representatives immediately tell their supervising principal. The broker/dealer would be required to send the customer out an investor brochure to inform the customer of what actions they can take against the firm or the register rep. Once they receive a written customer complaint, the registered rep must immediately forward the complaint to their supervising principal. There is no need to inform the MSRB and await instructions because the MSRB does not enforce their own regulations.

Answer 1376

B. When employed by the firm Only employment places a representative under the NYSE rules, not passing the test. A NYSE apprenticeship lasts 120 days.

Answer 1377

A. Arbitration. Arbitration is automatic between B/Ds.

Answer 1378

A. Summary suspension or expulsion of a member notice in writing. After written notice, failure to pay a monetary sanction that has become due and payable will result in summary suspension or expulsion of a member firm.

Answer 1379

A. Conduct Rules. Equitable principals of trade and business between member firms and the public are provided for in the Conduct Rules.

Answer 1380

C. II and III II. They must be maintained in a central file in the home office. III. Both written and oral complaints must be maintained. Both oral and written customer complaints must be maintained in a central file at the home office. Resolution must be monitored by a Series 14-qualified principal.

Answer 1381

D. Under no circumstances Dealers may not share in profits or losses of customer accounts.

Answer 1382

D. Regulation S-P. SEC Regulation S-P addresses consumer privacy and requires firms to send privacy and opt-out notices to customers annually. These notices must detail the firm’s policies to protect consumer nonpublic information and allow customers to opt out of sharing with nonaffiliated third parties.

Answer 1383

B. The non-member. Whereas member firms must submit disputes among themselves to FINRA arbitration, a non-member cannot be forced to do so. If the non-member wishes arbitration, however, an FINRA member cannot refuse to arbitrate.

Answer 1384

D. Marital status. Age, financial status, and tax status must always be obtained.

Answer 1385

A. $100. The maximum employee gift by a broker/dealer is $100 per year.

Answer 1386

B. 30 days "Correspondence" refers to any written or electronic mail messages distributed to either existing customers or to 25 or fewer prospective customers within any 30 calendar-day period.

Answer 1387

A. Censure, suspension or revocation of registration, expulsion, fine, barring, and any other fitting sanction. Only civil penalties are imposed under the Code. Violators are subject to imprisonment only in criminal proceedings.

Answer 1388

B. Corporate bonds have attached a trust indenture indicating security for the bond. Trust indentures indicate whether a bond is secured (debenture/subordinate debenture) and, if secured, whether it is an open end indenture (Every issue has parity claim, subject to additional bonds test limitation on the number of issues) or closed end indenture (priority of claim). The trust indenture applies only to corporate bonds, since legal opinion is only on municipal bonds.

Answer 1389

D. A municipal securities principal A Series 53-licensed municipal principal supervises municipal activity at a broker/dealer. Municipal fund securities must be supervised by a Series 51-licensed principal.

Answer 1390

D. All of the above All are prohibited activities.

Answer 1391

A. Net worth. The broker/dealer needs customer net worth but does not need to disclose his own.

Answer 1392

C. Interpositioning with a broker’s broker Interpositioning is permissible only when using a broker’s broker. Pegging, spreading rumors, and paying market makers to make markets in specific stocks are always prohibited practices. Interpositioning refers to the illegal practice of using an unneeded third party, usually another broker-dealer, between the customer and the best available market price, with the sole purpose being to generate extra commissions. Pegging is controlling a country's currency rate by tying it to another country's currency or steering an asset's price prior to option expiration.

Answer 1393

C. Persons associated with an investment advisor whose functions are clerical or ministerial in nature The term "person associated with an investment advisor" means any partner, officer, or director of an investment advisor (or any person performing similar functions), or any person directly or indirectly controlling or controlled by an investment advisor, including any employee of an investment advisor, except for persons associated with an investment advisor whose functions are clerical or ministerial in nature.

Answer 1394

D. $120,000 Insider trading laws allow a maximum penalty of 3 times the profit gained (or loss avoided).

Answer 1395

C. Official statements According to MSRB rules, any written communication is considered advertising except the official statement. An "official statement" is the offering document and technically comes from the issuer as a prospectus-like statement.

Answer 1396

D. Information is available only via written inquiry. The Public Disclosure Program permits release of information contained in the Central Registration Depository via written, electronic and telephone inquiry. The free service that provides this information is called BrokerCheck.

Answer 1397

A. Investment experience. MSRB rules require a registered representative to obtain information regarding the investor's tax status, investment objectives, and financial background. Rules also require the registered representative to determine if the investor is of legal age. There is no specific requirement to obtain information concerning the client's investment experience.

Answer 1398

B. I, IV, and VI only I. Listings of offerings. IV. Preliminary official statements. VI. Final official statements. According to MSRB rules, an advertisement would include any published material or any promotional literature which is made available to the public. However, official statements (preliminary and final) and listings of offerings would not be included within the scope of an advertisement. Examples of an advertisement, as cited by the MSRB, are notices, circulars, reports, market letters, form letters, and abstracts or summaries of official statements.

Answer 1399

D. Inside bid and offer quotation, number of shares the quote is good for, and the dealer’s bid/offer if no inside bid/offer quotation is available SEC Rule 15g-3 applies and requires the inside quotations and a B/D’s quotes if the inside quotation is not available. It also requires the parties to disclose the number of shares that can be bought or sold with the quote. There is no disclosure requirement for the volume being traded in a penny stock.

Answer 1400

B. Dealer. A firm transacting trades for its own account is acting in the capacity of a dealer.

Answer 1401

A. An economics professor who occasionally advises other faculty members on their portfolios as a favor. The key word here is “occasional.” An economics professor who provides occasional investment advice to colleagues is not an investment adviser. The professor is also providing investment advice as a favor, which implies that there is no compensation involved, further confirming that this is not a business. Professionals, such as lawyers, accountants, teachers, and engineers, whose investment advice is an incidental portion of their business practice, are excluded from the definition of an investment adviser. In addition, a publisher is not exempt from registration if the investment advice is tailored to specific clients or if promoting particular securities.

Answer 1402

C. An individual who has a continuing relationship with a financial institution. Consumer normally has no further contact with that institution other than the one-time delivery of products or services to be used for personal or family purposes. Customer is an individual or entity with which a financial institution expects to have a continuing relationship.

Answer 1403

D. I, II, III and IV I. When the transaction involves the sale of a new issue. II. When the transaction occurs in the secondary market. III. When the broker/dealer is acting as agent IV. When the broker/dealer is acting as principal Control relationships must be disclosed in the official statement and on the confirm.

Answer 1404

A. A broker/dealer who charges a fee for analyzing client portfolios Investment advisers are paid for providing customer-specific investment advice. This does not include professionals, such as lawyers or accountants, whose advice is incidental to their primary profession and who are not paid specifically for such advice. Attorneys may work with their clients on Chapter 11 reorganization and are not considered investment advisers in this capacity. Publishers are not considered investment advisers if they do not provide investment advice specific to the needs of a particular client.

Answer 1405

D. I, II, III, and IV I. Investment experience II. Tax status III. Investment objective IV. Financial capacity All are necessary.

Answer 1406

A. FINRA fines. FINRA fines can only be assessed against FINRA members and their associates. All other violators may be subjected to any of the other penalties listed.

Answer 1407

B. Securities and Exchange Act of 1934. The Securities Exchange Act of 1934 requires that broker/dealers establish, maintain, and enforce procedures to prevent the misuse of nonpublic information by any person associated with the firm.

Answer 1408

D. Tombstone ads Specific communications with individuals, internal memorandums, tombstone ads, routine announcements discussing member firm personnel changes and prospectuses are excluded from the scope of FINRA approval rule.

Answer 1409

C Chinese walls. "Chinese walls" are internal procedures which limit and control the passing of sensitive, potentially nonpublic information between the departments of a firm.

Answer 1410

B. A drastic fluctuation downward in the market price since the purchase of the bond. A customer can refuse to accept a bad delivery of bonds, which is what is described by the mutilated coupons, missing legal opinion and lack of signature answers. A drastic downward fluctuation is not a reason to refuse the bonds. Remember that the terms of the trade, including price, are set on trade date and are legally binding from that date forward.

Answer 1411

C. Arbitration. The key is the word "dispute." In the securities industry, disputes are always settled through arbitration. In order for the registered representative to litigate (go to court), the rep would have to terminate FINRA registration and then sue in civil court.

Answer 1412

B. SHORT. The Short-term Obligation Rate Transparency System reports muni trades in the secondary market.

Answer 1413

A. A company insider profits on a stock trade after holding the stock for a 5-month period Short-swing profits result from trades or sales of securities held by the insider for less than 6 months. These profits must be paid back to the corporation.

Answer 1414

C. Code of Conduct. Equitable principals of trade and business between member firms and the public are provided for in the Code of Conduct.

Answer 1415

B. No one from the broker/dealer may call the individual again. If the individual is an established customer, the rep may call the individual to verify account information. Otherwise, no one from the broker/dealer may call the prospective customer under the Do Not Call or Telemarketing Rules.

Answer 1416

B. Official statements. An "official statement" is the offering document and technically comes from the issuer as a prospectus-like statement.

Answer 1417

A. An investor with a net worth in excess of $5,000,000 (exclusive of primary residence) The short swing profit rule applies to insiders (officers and directors) and owners of 10% or more of the outstanding shares; net worth is not a consideration.

Answer 1418

D. Three business days following trade date. MSRB uniform practice rules regulate its member firms, not the securities themselves. Regular way settlement on municipal bonds and corporate bonds is T +3. Regular way settlement on treasury bonds is T + 1.

Answer 1419

C. Annually. Consumers must be provided with an initial privacy notice at account opening; those who become customers should receive annual privacy notices.

Answer 1420

D. 30 days FINRA requires member firms to notify them within 30 days if a complaint is filed against a member or associate for theft or misappropriation of funds or securities, or forgery.

Answer 1421

D. I, II, III and IV I. Fines II. Suspension III. Censure IV. Expulsion All of the above could be penalties for violation of the Codes of Procedure.

Answer 1422

D. A written notice on each transaction. In the case where a series of related transactions without compensation are involved, an associated person needs to provide only a single written notice.

Answer 1423

B. I, II and III only I. They must be approved by a person’s member firm. II. They must be recorded on the member firm’s books. III. The member firm must supervise the person’s participation. The member firm must approve the transaction, record it on their books, and supervise the person's participation in the transaction as if it is executed on behalf of the member. If the member disapproves a person's participation in a private transaction, the person may not participate in the transaction in any manner, directly or indirectly.

Answer 1424

D. Principal of another firm An employee of another MSRB dealer firm opening an account requires prior notice and duplicate confirmations to the employer dealer.

Answer 1425

A. No more than 25 "Correspondence" refers to any written or electronic mail messages distributed to either existing customers or to 25 or fewer prospective customers within any 30-calendar-day period.

Answer 1426

B. The sale of new issues. The sale of new issues of securities is covered by the Securities Act of 1933.

Answer 1427

D. A single arbitrator conducts a hearing and renders a decision. There is no hearing under simplified arbitration, only written submissions from both parties which are reviewed by the single arbitrator.

Answer 1428

D. $2,500,000. The maximum fine for a business entity that is found guilty of violations of The Act of 1934 or SEC rules is $2,500,000. One million is the maximum fine for any person for the same activity. For a bribe, a person will be fined $100,000, and a business entity - $2 million.

Answer 1429

D. 10 days Retail communication relating to investment companies must be filed with FINRA within 10 days after initial use.

Answer 1430

B. Publisher of reports used to promote particular securities In this case, a publisher would fall under the definition of an investment adviser because it is promoting specific securities. Lawyers and broker/dealers whose advice is incidental to their business, and do not receive fees solely for the advice given, are not considered investment advisers.

Answer 1431

D. $5,000,000 and/or 20 years imprisonment. Maximum civil penalties are limited to three times the amount of the gain or loss avoided. Maximum criminal penalties are limited to $5,000,000 and/or 20 years imprisonment.

Answer 1432

B. II and III II. Nominal quotes distributed as bids. III. Nominal quotes distributed as offers. Bona fide quotes are equivalent to firm (binding) quotes and are allowed as bids or offers. Nominal quotes are subject to confirmation, or nonbinding. They are given as “workouts” between traders, or are information-only and are not allowed as either binding bids or offers.

Answer 1433

D. 30 days Correspondence refers to any written or e-mail messages distributed to either existing customers or to 25 or fewer prospective customers within any 30 calendar day period.

Answer 1434

B. I, II and III I. MSRB, DC II. FINRA III. CBOE FINRA, the MSRB, and CBOE are all self-regulatory organizations for securities offering and trading. The SEC is not an SRO.

Answer 1435

B. I, II and III only I. Self-regulation for the over-the-counter market II. Self-regulation for national exchanges III. Monitor compliance with rules of ethical practice FINRA regulates only the over-the-counter and national exchanges; additionally, market and monitors compliance with ethical practices. The SEC monitors FINRA, not the other way around.

Answer 1436

C. The publisher of an investment newsletter that promotes specific investments for a fee. An investment adviser advises clients on investment selections for compensation. The lawyer's advice and the general circulation newspaper column are examples of incidental business practices; they are not compensated for the advice and therefore do not fall under the Act's definition of investment advisers. Trust companies are also excluded from the definition of an investment adviser.

Answer 1437

B. A suspension Any suspension, termination, withholding of commissions, or fines in excess of $2,500 would be required to be reported to FINRA.

Answer 1438

D. In-whole Only in-whole or refunding provisions must be cited as lowest yields on premium bond confirms.

Answer 1439

C. Existing retail customer. An "existing retail customer" is any person for whom the member carries an account, or who has an account with any registered investment company for which the member serves as principal underwriter, and who is not an institutional investor. A "prospective retail customer" is any person who has not opened such an account and is not an institutional investor.

Answer 1440

D. Code of Procedure. The Code of Procedure is concerned with methods of handling disciplinary procedures against member firms and registered personnel. Remember: COPs handle complaints!

Answer 1441

B. The Securities Amendment Act of 1975. The Securities Investors Amendment Act of 1975 created the MSRB.

Answer 1442

D. I, II, III, and IV I. Distribution of bids. II. Distribution of offers. III. Requests for bids. IV. Requests for offers. Quotations, whether bids or offers, requests or distributions, must be fair, reasonable, and not misleading.

Answer 1443

D. FINRA FINRA is the SRO which enforces MSRB rules. The MSRB does not enforce its rules, and municipals are not exchange-traded.

Answer 1444

C. The dealer selling the bonds to the customer with an oral guarantee to buy the bonds back at any time with no loss to the customer. Repurchase agreements are legal only if written and at a price; otherwise, the bonds are not genuinely offered for sale.

Answer 1445

D. A single currency transaction in excess of $10,000 Broker/dealers are required to file Currency Transaction Report (CTR) for single transactions involving currency that exceed $10,000, or multiple transactions during any single business day that total more than $10,000.

Answer 1446

B. I, II and III I. The issue must have a trust document stating whether the bond is secured or unsecured. II. The bond is secured and the collateral cannot be used against another form of security. III. The bond will have priority over all other ownership claims if the company is liquidated. The Trust Indenture Act provides, as amended, that every corporate bond of more than $5 M and 5 years maturity or longer must have a trust document stating whether the bond is secured or unsecured. If the bond is secured, the trust indenture must specify the kind of property and if the indenture is open-end or closed-end. Closed-end means that the bond is secured and that the collateral cannot be used against another form of security. The bond is senior to all other debts based on a secured collateral.

Answer 1447

A. Department of Enforcement. A complaint will first be filed with the Department of Enforcement. The Board of Governors may also file a complaint with the Committee.

Answer 1448

D. Nonbinding request for a likely bid. A bid wanted is entered to get information on the bond; a likely bid. It is nonbinding.

Answer 1449

A. While you cannot transact without the proper trading authority, you have an obligation to contact the client. Whether successful or not, you can place a hold on trading and funds transfers. For seniors age 65 or older who have physical or mental disabilities, FINRA permits the registered representative to place a temporary hold on the disbursement of funds or securities from the customer’s account. In addition, with written authorization from the client, the registered representative may contact a previously designated trusted contact person to discuss the account.

Answer 1450

B. Contact enough dealers to obtain a price that is fair, reasonable, and non-discriminatory. According to MSRB rules, in affecting transactions on a client's behalf, a registered representative should execute a trade at a price that is fair and reasonable. There is no requirement for the registered representative to obtain the very best price in the market for the customer or to contract a specific number of dealers.

Answer 1451

B. Code of Arbitration. FINRA requires that disputes be submitted to arbitration.

Answer 1452

A. 3 years The following documentation must be maintained on file for 3 years: all correspondence, retail and institutional communication, information about the sources of any statistical tables, charts, graphs or illustrations used in retail communications, as well as evidence of a principal's approval of these materials.

Answer 1453

A. I and II I. Information backup and storage plans. II. Contact information for at least two principals available on a website. In addition, this plan must be updated annually and approved by senior management.

Answer 1454

A. Institutional sales material. "Institutional sales material" is any communication with the following institutional investors: government entity or subdivision, employee benefit plan with at least 100 participants, qualified plan with at least 100 participants, FINRA member, or registered associated person or person acting solely on behalf of any such institutional investor.

Answer 1455

A. I and II I. It is also known as “selling away.” II. It is a violation of FINRA’s Conduct Rules. Private securities transactions are defined as transactions effected outside the normal business of the member firm and are not recorded on the firm's books and records. This is known as “Selling Away,” and is a violation of FINRA Conduct Rules. No person associated with a member shall participate in any manner in a private securities transaction unless specific requirements of Rule 3040 are met.

Answer 1456

A. A mutual fund research company that provides general information to the public that is paid for by subscribers Ranking entities must be in the business of providing general information about investment companies to the public, be independent from the investment company and its affiliates, and cannot accept payment from investment company or its affiliates for a ranking.

Answer 1457

A. I and III I. Three days to verify account positions. III. Four days to complete transfer of account positions. MSRB time requirements for verifying and transferring positions are more generous than FINRA time requirements. Remember that municipal bonds are more unique and thinly traded than equities, and often more time is necessary to price or locate municipal bonds.

Answer 1458

C. Institutional communications must be reviewed or approved by a registered principal. Institutional communications must be reviewed or approved by a registered principal. This review or approval may be executed after the first use of the material as long as the firm has training in place for their associated persons.

Answer 1459

A. I and II I. The employing firm may be summarily suspended or expelled for failure to immediately terminate the rep. II. The representative’s registration may be summarily revoked. In such a circumstance, the association may suspend or expel the member for failure to terminate the rep and/or may revoke the rep’s registration. Injunction: an authoritative warning or order.

Answer 1460

A. Protect the privacy of consumers. The Bank Secrecy Act was designed to help identify the source, volume, and movement of currency transported into or out of the United States, or deposited in financial institutions, and to maintain records of financial transactions and to report any suspicious transactions.

Answer 1461

D. $100 per person per year. A gift may not exceed $100 per person per year.

Answer 1462

B. I, III, and IV I. Director or officer of a corporation. III. Clerical personnel. IV. Outside attorneys and auditors. Owners of 10% or more of a corporation stock are insiders. All other persons listed are defined as insiders due to their access to company information.

Answer 1463

B. I, II and III only I. Lying on the U4. II. Any felony in the last 10 years. III. Being barred by another SRO. Only securities-related or theft-related misdemeanors are grounds for statutory disqualification.

Answer 1464

A. Simplified arbitration is available and one arbitrator is appointed, hears the case from both parties, and renders a decision, which is final. Simplified arbitration is available for disputes involving amounts of $50,000 or less. One arbitrator renders a decision on the case based on a review of written submissions by both parties. There is no opportunity for a hearing; decisions are final.

Answer 1465

A. The CUSIP number. The CUSIP number is the least-significant of these answers in terms of good delivery. CUSIP is basically an issuer identification number. The other answers represent information that is vital for a purchaser to know in order to ascertain that the correct bonds have been delivered.

Answer 1466

B. An associated person offering securities that are not registered with the Commission. Private securities transactions are defined as transactions effected outside the normal business of an associated person's employment with a member firm and that are not recorded on the firm's books and records. This is known as “Selling Away,” and is a violation of FINRA Conduct Rules. Private securities transactions may include (but are not limited to) new offerings of securities which are not registered with the Commission.

Answer 1467

B. Regulates exchanges and over-the-counter markets. The Securities Exchange Act of 1934 regulates exchanges and over-the-counter markets.

Answer 1468

B. Is selling away. A private securities transaction, or selling away, exists when a representative is involved in the sale of securities that are not sponsored by the firm.

Answer 1469

A. Only upon the client's written request. Only upon written request can a broker/dealer hold mail, confirmations, etc., for a client who leaves the country.