Exam #1 Missed Questions

Question 1

PDQ Corporation has declared a rights offering to stockholders of record. The company has 5,000,000 shares outstanding and is selling an additional 1,000,000 shares via the rights offer. Which statements are TRUE regarding a customer who owns 500 shares of PDQ stock?

Answer 1

The customer will receive 500 rights. The customer may buy 100 shares.

Question 2

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of the ex date, the stock is trading at $24. The value of the right is:

Answer 2

$.50

$24 - $19 = $5 = $.50 Value “Ex Rights”

Question 3

XYZZ ADR represents 10% of the value of an XYZZ ordinary share. The ordinary shares trade on the London Stock Exchange, where the current price is 400 British Pounds (BP). The current exchange rate for the British Pound against the U.S. Dollar is $1.40. The ordinary share pays an annualized dividend of 12 BP, with payment made semi-annually. The XYZZ ADR is listed on the NYSE. If a customer places an order to buy $560,000 of the ADR on the NYSE, how much will the customer receive in each dividend payment?

Answer 3

$8,400

Question 4

A Moody’s MIG rating is used for:

Answer 4

Municipal short term debt

Question 5

A 20-year 3 1/2% Treasury Bond is quoted at 99-4 - 99-8. The note pays interest on Jan 1st and Jul 1st. If a customer buys 5 T-Bonds on Friday, Jan 13th in a regular way trade, how many days of accrued interest are owed to the seller? (It is not a leap year.)

Answer 5

15

Question 6

Treasury bonds:
I are issued in minimum $100 denominations
II are issued in minimum $10,000 denominations
III mature at par
IV mature at par plus accrued interest

Answer 6

I and III. Treasury bonds are issued at par in minimum denominations of $100 each, and pay interest semi-annually. At maturity, the bondholder receives par.

Question 7

Which of the following would NOT purchase STRIPS?
I Pension fund
II Money market fund
III Individual seeking current income
IV Individual wishing to avoid reinvestment risk

Answer 7

II and III. Pension funds and retirement accounts are the large purchasers of STRIPS. These zero-coupon bonds are purchased at a deep discount and are held to maturity to fund future retirement liabilities. There is little credit risk, because the U.S. Treasury is a top credit. There is no current income because they don’t pay until maturity. They have a huge amount of purchasing power risk as a long-term zero coupon obligation, but this is not an issue if they are held to maturity. Retirement plan managers like STRIPS because they don’t have to worry about reinvestment risk - there are no semi-annual interest payments to reinvest! It is an investment that can be “tucked away” for 20 or 30 years, with no further work or worry on the part of the retirement fund manager.

Question 8

A municipal variable rate demand note:
I is considered to be a short term issue
II is considered to be a long term issue
III gives the issuer the right to call the bond from the holder on pre-set dates
IV gives the holder the right to put the bond to the issuer on pre-set dates

Answer 8

II and IV. A municipal variable rate demand note is a long-term municipal security because it has no stated maturity, but it is issued at short-term (lower) interest rates, because the holder has the right to “put” the bond to the issuer at par at each interest payment date. The interest rate is reset, usually weekly at the interest payment date, to an indexed rate for the next week. Thus, the interest rate will vary. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.

Question 9

Interest income from which of the following bonds is most likely to be considered a “tax preference item” in the Alternative Minimum Tax calculation?
A Airport revenue bond
B Hospital revenue bond
C Water revenue bond
D General obligation bond

Answer 9

Airport revenue bond. Municipal “Private Activity Bonds” are taxable – the interest income is subject to federal income tax. If the PAB is “qualified,” then the interest income is not subject to regular income tax, but it is a tax preference item included in the AMT calculation (which typically only hits higher income taxpayers who take a lot of deductions).

Qualified PABs include bonds where the proceeds go to finance the activities of a private entity, including airports, docks, residential rental projects that are privately owned, waste disposal projects, water and sewer facilities that are privately owned and enterprise zones. Note that if any of these activities were being done by public entities, the bonds would be tax-free.

Question 10

An investor in the 28% tax bracket buys a 7% municipal bond quoted on an 7.25 basis. To calculate the equivalent taxable yield:
A divide 7% by 28%
B divide 7% by 72%
C divide 7.25% by 28%
D divide 7.25% by 72%

Answer 10

divide 7.25% by 72%. The best answer is D.
The formula for the equivalent taxable yield is:

7.25% = 7.25% = 10.07%
(100% - 28%) .72

Question 11

A husband has a brokered CD titled in his name in the amount of $500,000 held at Bank A. Both the husband and his wife have a brokered CD in the amount of $500,000 titled in both their names held at Bank B. Additionally, the wife has a brokered CD in the amount of $500,000 titled in her name held at Bank “B.” What is the total coverage offered by FDIC on all of these CDs?

Answer 11

$750,000. FDIC (Federal Deposit Insurance Corporation) insures bank deposits if the bank fails. The maximum coverage is $250,000 at each bank, based on each depositor’s social security number.

The husband’s CD at Bank A is covered for $250,000.
The jointly held CD at Bank B is covered $250,000 for the husband and $250,000 for the wife (2 different social security numbers).
The wife’s CD at Bank B gets no coverage because she already reached the maximum coverage limit with the jointly held CD at Bank B.
The total coverage is $750,000.

Question 12

Eurodollars are:
I European currency deposits
II U.S. dollar deposits
III held in foreign branches of U.S. banks
IV held in U.S. branches of foreign banks

Answer 12

II and III. Eurodollars are U.S. dollar deposits held in foreign branches of U.S. banks or foreign banks. Eurodollar deposits are used to finance international trade.

Question 13

REITs can invest in all of the following EXCEPT:
A mortgages
B real estate
C government securities
D limited partnerships

Answer 13

D.

Question 14

Which statements are TRUE?
I Orders and quotes for NMS stocks can only be accepted or posted in penny increments in exchange display books
II Orders and quotes for NMS stocks can be accepted or posted in sub-penny increments in exchange display books
III Trade executions of NMS stocks can only occur in penny increments
IV Trade executions of NMS stocks can occur in sub-penny increments

Answer 14

I and IV. The best answer is B.
Rule 612 of Regulation NMS does not allow sub-penny orders to be entered for NMS (NYSE, NYSE American (AMEX) or NASDAQ) stocks. However, trade executions are permitted in sub-penny increments, since this makes the market more competitive.

Question 15

When the Standard and Poor’s 500 Index is at 2,460 on a given day, the U.S. listed equities markets will close its market for the rest of the day if the index declines by a total of:
A 124 points
B 172 points
C 320 points
D 492 points

Answer 15

D 492 points. Under the circuit breaker rule, if the Standard and Poor’s 500 Index falls by a cumulative 20% in a given trading day, the market will be shut for the balance of the day. 20% of 2,460 = 492 points.

Question 16

In riskless principal transaction, the dealer:
I buys a security into inventory in advance of filling a customer order to buy that security
II buys a security into inventory after receiving a customer order to buy that security
III charges a mark-up to the customer
IV does not charge a mark-up to the customer

Answer 16

C II and III. A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn’t holding the security when the order was received, so there is no “risk” to the dealer of falling prices giving the dealer an inventory loss. The dealer has no risk in the transaction and the mark-up charged must be disclosed to each customer.

Question 17

Which of the following statements are TRUE regarding quotes provided on NASDAQ Level II?
I Quotes are shown for round and mixed lots
II Quotes are shown for up to 999,999 shares
III Bid and ask quotes are shown
IV The minimum quote size is 100 shares

Answer 17

D I, II, III, IV. NASDAQ Level II shows all bid and ask quotes for NASDAQ stocks with the size of the quote. The minimum quote size is 100 shares (1 round lot). Quotes for odd lots (less than 100 shares) can be entered into the system, but are not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or over. A mixed lot is an order that has both a round lot and an odd lot component (such as an order for 143 shares - which is composed of a 100 share round lot and a 43 share odd lot). Just like odd lots, any portion of the order that is less than 100 shares is not displayed until there are other odd lot orders at the same price that aggregate to 100 shares or more. The maximum quote that can be entered and displayed is for 999,999 shares.

Question 18

Which of the following statements are TRUE about a stock trade effected “for cash” in a cash account?
I Payment is required in part
II Payment is required in full
III Settlement occurs the same business day
IV Settlement occurs in 2 business days

Answer 18

C II and III. Trades effected for cash settle the same day. If the trade is effected in a cash account, payment is required in full on settlement. If the trade is effected in a margin account, partial payment is required on settlement.

Question 19

Which of the following create a straddle?
I Short 1 ABC Jan 50 Call
Short 1 ABC Jan 50 Put
II Short 1 ABC Apr 50 Call
Short 1 ABC Oct 50 Put
III Short 1 ABC Jan 50 Call
Long 1 ABC Jan 50 Put
IV Long 1 ABC Jan 50 Call
Long 1 ABC Jan 60 Put

Answer 19

I only

Question 20

The long leg of a bear put spread:

Answer 20

provides potential gain.An example of a bear put spread is:
Buy 1 ABC Jan 60 Put
Sell 1 ABC Jan 50 Put
The long 60 put allows the customer to sell the stock at $60 per share in a falling market. Thus, if the market falls below $60, this position gives increasing gain. However, if the market falls below $50, the short 50 put will be exercised, obligating the customer to buy the stock at $50. Thus, the short position limits potential gain. The maximum gain is limited to 10 points (Sell at $60; Buy at $50).

Question 21

A put is assigned prior to the ex date for a cash dividend. The customer:
A will receive the dividend
B will not receive the dividend
C must pay the dividend
D is not required to pay the dividend

Answer 21

The best answer is A.
If the put is “assigned,” it means that the OCC (Options Clearing Corporation) has selected that put writer to receive the exercise notice (because a holder of that contract has chosen to exercise), obligating the writer of the put to buy the stock in a regular way trade. Because the writer of the put is assigned prior to the ex date, the writer is buying the stock in time to get the dividend. If the put is assigned on the ex date or after, the writer would not get the dividend.

Question 22

If it is now the beginning of January, the maximum maturity on the longest available January equity LEAP contract is:
A 18 months
B 24 months
C 38 months
D 40 months

Answer 22

The best answer is B.
Equity LEAPs expire each January on the same date as the regular options expiration (the 3rd Friday of the month).

The CBOE issues equity LEAPs as follows;

Cycle 1 companies have LEAPs issued after the September expiration for the January that is 28 months later;
Cycle 2 companies have LEAPs issued after the October expiration for the January that is 27 months later; and
Cycle 3 companies have LEAPs issued after the November expiration for the January that is 26 months later.
If it is now the beginning of January 2022, the January ‘22 options are still trading, as are the January ‘23 and January ‘24 options. Starting after the September 2022 expiration, LEAPs will now be issued for January 2025. Thus, at the beginning of January 2022, the longest available equity LEAP option is the January 2024. This contract has 24 months to expiration.

Question 23

A customer purchases $100,000 of municipal bonds at 80% in a margin account. The customer must deposit:
A $7,000
B $12,000
C $20,000
D $40,000

Answer 23

The best answer is B.
There is no Regulation T. requirement for municipal bonds because they are exempt securities. The only margins are the minimums set by the exchanges. The minimum maintenance requirement set by FINRA is the greater of 7% of face amount or 15% of market value. The bonds are purchased at 80% of $100,000 par = $80,000. 15% of $80,000 = $12,000. 7% of $100,000 face = $7,000. The greater amount is $12,000.

Question 24

The formula for equity in a combined margin account is:
A long market value plus short market value minus credit balance minus debit balance
B long market value plus short market value plus credit balance minus debit balance
C long market value minus short market value plus credit balance minus debit balance
D long market value minus short market value minus credit balance plus debit balance

Answer 24

The best answer is C.

Question 25

A variable annuity prospectus includes an AIR illustration using a 5% rate. This means that the:
A purchaser is guaranteed a minimum 5% annual return
B annuity payment is guaranteed to grow at a minimum of 5% per year
C return could be less than 5%
D sales charge will be no higher than 5%

Answer 25

The best answer is C.
The AIR in a variable annuity prospectus is the “Assumed Interest Rate.” It is a conservative illustration of how much the contract holder will receive in payments if the separate account grows at the AIR. If the account grows faster than the AIR, the payments increase. If the account grows slower than the AIR, the payments will decrease.

Question 26

In order to recommend a variable annuity to a customer, which statements are TRUE?
I The customer must be informed, in general terms, of the material features of the product
II The representative must believe that the customer would benefit from the product’s features
III The representative must believe that the variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable
IV The representative must sign a statement that all required representations and determinations were completed
A I and II only
B III and IV only
C I, II, III only
D I, II, III, IV

Answer 26

The best answer is D.
Consider this to be a learning question. All of the statements are true. In order to recommend a variable annuity to a customer, the representative must have a reasonable basis to believe that the:
customer has been informed, in general terms, of the material features of the product;
customer would benefit from one or more of the product’s features; and
particular variable product as a whole, the underlying separate accounts to which funds are allocated, and riders to the policy, are suitable.
The representative must sign a statement that all required representations and determinations were completed.

Question 27

Distributions from a Coverdell Education Savings Account must cease when the beneficiary reaches the age of:
A 16
B 18
C 21
D 30

Answer 27

The best answer is D.
Distributions from Coverdell Education Savings Accounts must stop when the beneficiary reaches age 30. Any unexpended funds can be transferred to another related beneficiary (under age 18) for his or her qualified education expenses.

Question 28

Corporation “A” wishes to acquire the publicly held stock of Corporation “B,” a company with a market capitalization of $300 million. Corporation “A” does not have the cash necessary to complete the purchase since it only has a free cash balance of $100 million. To finance the additional $200 million needed for the acquisition via a leveraged buy out:
A the assets of Corporation “A” would be pledged as collateral for the purchase of Corporation “B”
B the assets of Corporation “B” would be pledged as collateral for the purchase of Corporation “B”
C Corporation “A” would borrow from a large financial institution
D Corporation “B” would borrow from a large financial institution

Answer 28

The best answer is C.
Leverage is the use of debt to finance a purchase. Corporation A needs an additional $200 million to buy the stock of Corporation B. To do so, it would borrow the money from a large bank. Note that the loan from the bank might be collateralized, or it might not, so Choices A and B could be correct answers, but Choice C is clearly the best of the choices offered.

Question 29

The Bond Buyer 11 Bond Index contains:
A revenue bonds rated A or better
B revenue bonds rated AA or better
C general obligation bonds rated A or better
D general obligation bonds rated AA or better

Answer 29

The best answer is D.
The Bond Buyer 11 Bond index contains 11 G.O. bonds rated AA or better. The other indexes contain lower rated (A) issues.

Question 30

A waste disposal revenue bond issue is being underwritten on a negotiated basis. The offering consists of $10,000,000 par value of term bonds. The underwriter has agreed to a spread of $40.00 for each $5,000 bond. The manager has set the additional takedown at $15.00 per bond and the selling concession at $20.00 per bond. If a selling group member sells a $5,000 par value bond, the syndicate member earns:
A $0.00
B $15.00
C $20.00
D $35.00

Answer 30

The best answer is B.
When a municipal syndicate member sells to the public, he earns the “total takedown,” which is the total of the selling concession plus the additional takedown. In this case, the syndicate member does not earn the total takedown because the bonds were sold through a selling group member. Out of the total takedown of $35, a selling concession of $20 is given up to the selling group member, leaving the syndicate with the additional takedown of $15.

Question 31

A Series 7 licensed individual wishes to sell “wrap” accounts. Which statements are TRUE?
I This individual must be State-registered
II This individual must be Federal-registered
III This individual must pass either the Series 65 exam or the Series 66 exam
IV This individual is not required to take any additional licensing exams
A I and III
B I and IV
C II and III
D II and IV

Answer 31

The best answer is A.
A “wrap” account is not defined as a brokerage product. Any flat annual fee account is defined as an “advisory product” and the firm must be a registered investment adviser to sell them. The representative that sells them, in addition to being registered as an agent of the broker-dealer, must also register as an agent of the investment adviser firm. There is no Federal registration of investment adviser representatives. Only the investment adviser firm may be required to register with the SEC (and only if its assets under management exceed $100 million). Any investment adviser representative is State-registered and must pass either the Series 65 or Series 66 exam.

Question 32

A registered representative is approached by the president of an investment club to buy an IPO being offered by the representative’s firm. Which statement is TRUE?
A The investment club is a restricted purchaser and cannot buy the IPO
B The investment club is not a restricted purchaser and may buy the IPO
C The investment club is only permitted to buy the issue if it buys an insubstantial amount
D The investment club is only permitted to buy the issue if its members certify that they are not restricted

Answer 32

The best answer is B.
The FINRA IPO rule lists “restricted purchasers” that cannot buy common stock IPOs from underwriters. These are basically industry insiders, including member firms, their officers and employees, fiduciaries to member firms such as outside attorneys retained by broker-dealers, and institutional portfolio managers that are buying for their personal accounts. Investment clubs are not on the restricted list - they can buy common stock IPOs. One could argue that an “investment club” could be formed by industry insiders to get around the rule, but FINRA addresses this by stating that any account in which an industry insider has a greater than 10% ownership interest is restricted.

Question 33

All of the following would be considered when determining a fair and reasonable commission or mark-up under the FINRA 5% Policy EXCEPT the:
A difficulty of executing the transaction
B level of service provided to the customer
C dollar amount of the transaction
D cost of the security to the broker-dealer

Answer 33

The best answer is D.
Under the FINRA 5% Policy, commissions and mark-ups in exchange and over-the-counter transactions must be fair and reasonable, with 5% being a guide, not a rule. Among the things considered in determining the amount to charge are the difficulty of the trade; the level of service provided to the customer; and the dollar amount of the transaction. All commissions or mark-ups are based on the current market value of the security; not the cost of the security to the dealer.

Question 34

When advertising the availability of a municipal security at a “yield,” a municipal firm:
I must own the security
II does not have to own the security
III must disclose whether the yield is the coupon rate or yield to maturity
IV must disclose whether the yield is the coupon rate or current yield
A I and III
B I and IV
C II and III
D II and IV

Answer 34

The best answer is C.
Under MSRB rules, a municipal firm is permitted to offer a security that it does not own as long as the firm is prepared to sell that security at the quoted price (the MSRB states that the dealer must know that the bond can be acquired - this is the equivalent of a car dealer selling you a new car that the dealer does not have on the lot. As long as the car dealer knows where the car can be purchased, say from another dealer, then it can be sold to you). Any yield quoted must state whether the yield is the coupon rate, yield to maturity, or yield to call date. Current yield is thought by the MSRB to be somewhat misleading and may not be shown unless the yield to maturity is also shown.

Question 35

A municipal securities firm is hosting an event in its suite at a football game in the city where the firm is headquartered. A registered representative wants to invite an individual to join him in the suite to watch the game. The individual works for the municipality, and has worked with the registered representative on previous bond underwriting deals for the municipality. The ticket to the game is worth $250. Which statement is TRUE about this?
A Giving the ticket to the game to this individual violates the MSRB $100 gift limit
B This individual can be given the ticket because it has a de minimis value under the MSRB Political Contribution rule
C This individual can be given the ticket because the firm is hosting the event and it is acceptable to invite a business client
D This individual cannot be given the ticket because it is a conflict of interest

Answer 35

The best answer is C.
This question is trying to confuse the MSRB gift limit with the MSRB Political Contribution Rule - and neither one applies in this scenario!

The Political Contribution rule prohibits MFPs (Municipal Finance Professionals) from making a contribution of more than $250 to an elected official’s campaign in which the MFP is entitled to vote. If this occurs, the municipal firm is banned from doing municipal securities business with that municipal issuer for 2 years. This situation is not a campaign contribution.

The MSRB gift limit of $100 does not apply to business entertainment - which is what this is. The requirement here is that the registered representative be with the client during the period of entertainment (which is the case here) and the entertainment can not be too excessive nor too frequent. Finally, the entertainment must comply with the firm’s policies and procedures - which is the case here because the firm is hosting the event.

Question 36

When using straight line amortization on premium bonds:
A the same interest income is reported each year
B decreasing interest income is reported each year
C increasing interest income is reported each year
D the reported interest income is determined by the current market price of the bond

Answer 36

The best answer is A.
Straight line amortization is an equal annual “write-off” of the bond premium over the life of the bond. The annual amortization amount reduces taxable interest income on corporate bonds and non-taxable interest income on municipal bonds. Each year, the amortization amount reduces the cost basis of the bond; so that at maturity, the bond is valued at cost and no tax deductible capital loss results. For bonds with a fixed coupon rate, since the annual amortization amount is the same, the annual reported interest income is the same each year.

Question 37

Which of the following statements are TRUE?
I Accrued interest is added to the buyer’s confirmation
II Accrued interest is added to the seller’s confirmation
III Accrued interest is included in the buyer’s cost basis
IV Accrued interest is included in the seller’s sale proceeds
A I and II
B I and III
C II and III
D III and IV

Answer 37

The best answer is A.
The accrued interest is added to the amount that the buyer must pay on the confirm; accrued interest is added to the amount that the seller will receive on the confirm. Accrued interest is not included in the cost basis or sale proceeds for tax purposes. It is an offset to the buyer’s interest income received for that year; it is an addition to the seller’s interest income received for that year for tax purposes.

Question 38

The manager of a pension plan would invest in which of the following?
I Corporate Bonds
II Municipal Bonds
III Government Bonds
A I only
B I and III only
C II and III only
D I, II, III

Answer 38

The best answer is B.
Pension plans are “tax qualified” retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher rates because their interest income is taxable by the Federal government.

Question 39

A customer buys a 6.5% municipal bond with 20 years left to maturity in the secondary market priced at 120 to yield 5.00%. After taking taxes into consideration, the customer’s yield will be:
A less than 5.00%
B 5.00%
C between 5.00% and 6.50%
D more than 6.50%

Answer 39

The best answer is B.
The premium on municipal premium bonds must be amortized over the bond’s life, but is not deductible for tax purposes. The yield on this bond consists of 2 components: the annual 6.50% coupon rate and the annual 1% loss of the premium (20 point premium amortized over 20 years = 1 point loss per year). Since there is no tax deduction for the annual loss, the net return each year, after tax, is 5.50% (6.50% coupon - 1.00% annual loss = $55 per year). The bond’s average value over its life is $1,100 ($1,200 purchase price + $1,000 redemption price / 2). The after-tax yield to maturity is: $55 / $1,100 = 5.00%.

Thus, after considering all taxes, the basis quoted for a municipal premium bond will be the return received by the investor. In contrast, for a municipal discount bond, after considering all taxes, the return received by the investor will be lower than the stated basis because the portion of the investment return attributable to the market discount is taxable.

Question 40

A customer buys 100 shares of XYZ stock at $36 and buys 1 XYZ Jan 35 Put @ $6 on the same day. For tax purposes, what is the cost basis of the stock?
A $30
B $36
C $41
D $42

Answer 40

The best answer is D.
When a put is purchased on a stock on the same day that the stock is bought, the put is said to be “married” to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a “married” put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock’s cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor. The cost of the stock is $36 + $6 premium = $42 per share. When the stock is sold the customer reports a capital gain or loss based on the sale price of the stock.

Question 41

Which statements are TRUE regarding the Federal taxation of investments in foreign government bonds?
I Interest is taxable in the year received
II Interest is exempt from Federal taxation
III Capital gains are taxable in the year realized
IV Capital gains are exempt from Federal taxation
A I and III
B I and IV
C II and III
D II and IV

Answer 41

The best answer is A.
The interest earned by holders of foreign government securities who reside in the United States; and any capital gains on these holdings; are subject to both Federal Income tax and to state and local income tax.

Question 42

Which statements are TRUE regarding the Federal taxation of investments in foreign government bonds?
I Interest is taxable in the year received
II Interest is exempt from Federal taxation
III Capital gains are taxable in the year realized
IV Capital gains are exempt from Federal taxation
A I and III
B I and IV
C II and III
D II and IV

Answer 42

The best answer is A.
The interest earned by holders of foreign government securities who reside in the United States; and any capital gains on these holdings; are subject to both Federal Income tax and to state and local income tax.

Question 43

Diversification among multiple asset classes reduces the:
I market risk of the portfolio
II marketability risk of the portfolio
III standard deviation of portfolio returns
A I only
B II and III only
C I and III only
D I, II, III

Answer 43

The best answer is C.
Diversification of a portfolio reduces market risk; and also reduces the variability of investment returns. It does not affect marketability risk - that is, how difficult is it to liquidate given position in the portfolio.

Question 44

All of the following are sources for analysis and rating of individual stocks EXCEPT:
A Value Line
B Standard and Poor’s
C Morningstar
D Member Firm In-House Research Reports

Answer 44

The best answer is C.
The Value Line Investment Survey rates 1,700 stock issues that it follows. Standard and Poor’s rates both bonds and individual stock issues. Member firm research departments produce reports that rate individual stock issues. Morningstar is a ratings service that rates mutual fund performance. As a minor part of its business, it rates some individual stocks, but does not cover nearly as many as the other choices listed.

Question 45

In an environment of rapid deflation, which inventory method would report the lowest net income?
A LIFO
B FIFO
C Average Cost
D FISH

Answer 45

The best answer is B.
When prices are rapidly falling, “first-in, first-out” accounting for inventory will result in the lowest reported profit. This occurs because the “older” more expensive inventory is the first to be taken out of inventory and matched to sales revenue when a sale occurs, while the “newer” less expensive inventory stays in inventory and is taken out and matched to revenue after the older (more expensive) items are depleted.

(For those of you with a sense of humor, FISH stands for “First In, Still Here” - a jokey term for inventory that is slow to move.)

Question 46

In a period of inflation, which of the following corporate actions is likely to occur?
I Issuers are more likely to sell fixed income securities
II Issuers are less likely to sell fixed income securities
III If debt securities are sold, callable issues are likely
IV If debt securities are sold, non-callable issues are likely
A I and III
B I and IV
C II and III
D II and IV

Answer 46

The best answer is C.
In inflationary periods, interest rates rise. As interest rates rise, issuers are less likely to sell fixed income securities - it costs them more to finance. If issues are sold, issuers are likely to sell callable issues. Callable issues are generally sold in periods of high interest rates, so the issuer can call in the securities if interest rates fall subsequently.

Question 47

A technical analyst would consider which of the following?
A Price / Earnings ratios
B Efficient Market Theory
C Consumer Confidence Index
D Advance / Decline Theory

Answer 47

The best answer is D.
The Advance / Decline Theory measures the relative strength of the market by comparing the number of issues advanced to the number of issues declined and is a technical indicator.

The Price / Earnings ratio measures how many times the market price of a stock is relative to its earnings. This is a fundamental factor.

The “Efficient Market” Theory holds that prices of securities in the market fully reflect all publicly available information, so that undervalued or overvalued securities should not exist. Thus, securities selection based on any type of analytical method is irrelevant.

The Confidence Index is not a technical indicator - rather it is a fundamental indicator of consumer sentiment.