Exam Flashcards

Question

An investor has experienced substantial losses in the stock market and is looking to place residual assets in a conservative investment. It is recommended by a RR to invest the remaining capital in Treasury Receipts. Which of the following statements are correct concerning these instruments? I. These securities are a direct obligation to the U.S. Government II. These securities are NOT a direct obligation to the U.S. Government III. These securities pay interest semiannually IV. These securities are noninterest bearing A. I and IV B. I and III C. II and III D. II and IV

Answer 1

D. II and IV Broker-dealers create treasury receipts by depositing Treasury securities with a trustee and selling securities that are backed by this collateral. These receipts are not direct obligations of the U.S. Government. Conversely, Treasury STRIPS, which are directly issued by the U.S. Treasury Department, are considered to be direct obligations of the federal government. Both are zero-coupon securities.

Answer 2

A. I, III, and IV

Answer 3

A. Principal

Answer 4

D. I and IV A customer can force a firm into arbitration but a firm cannot force a customer into arbitration. Firms must settle their disputes in arbitration. Once a dispute goes to arbitration, neither party can appeal the decision.

Answer 5

B. There is no maximum

Answer 6

C. An employee of the firm conducts sales training seminars for registered representatives of the firm, but is paid a monthly salary.

Answer 7

D. The value of your mutual fund account may vary at different times with the market

Answer 8

B. Reductions in the discount rate

Answer 9

B. II and III In a principal transaction, a broker-dealer purchases stock for its own account or sells stocks from its own account. In a standby underwriting, a broker-dealer agrees to buy stock, for its own acct, from an issuer is the issuer fails to sell all of the stocks available to exiting shareholders in a rights offering. This would, therefore, be a principal transactions. Likewise, a broker-dealer selling stock from its inventory is selling stock from its own account (acting as a principal)

Answer 10

A. $110,000,000

Answer 11

C. At least 80% of its assets invested in a specified country or region

Answer 12

B. II and III Regulation D limits nonaccredited investors to whom securities may be sold to maximum of 35. The private may include an unlimited number of accredited purchases--those who are considered sophisticated or wealthy investors.

Answer 13

D. The issuer

Answer 14

D. They represent an ownership position in the issuer

Answer 15

D. Standby

Answer 16

A. Establishes the registration effective date

Answer 17

C. Double taxation

Answer 18

B. 9 million

Answer 19

D. Par value

Answer 20

C. To give current shareholders more money right away

Answer 21

D. Premium

Answer 22

D. Subordinated debentures

Answer 23

D. Investors

Answer 24

B. The value of their investment in the company

Answer 25

B. A debenture An equipment trust certificate is a bond secured by a corporation's equipment such as railroad cars, airplanes, etc. A collateral trust certificate (bond) is a bond secured by stocks and bonds of other corporations. A debenture is an unsecured loan. It is only backed by the corporation's credit, not its assets. A mortgage bond is backed by real estate of the issuer.

Answer 26

B. Assessments paid by its member firms The Securities Investor Protection Corporation is funded by assessments paid by its member broker-dealers.

Answer 27

B. General obligation bond G.O. bonds are backed by full taxing power of municipality. Revenue bonds are backed by user fees generated by the facility. Industrial development bonds are repaid through a corporation's lease payments. Agency bonds are issued by government agencies, such as GNMA.

Answer 28

C. A broker-dealer sells to a real estate agent A real estate agent is a member of the public and can buy new issues. People and firms involved in the sale of new issues, including family members or employees, and certain officers of financial institutions, are prohibited from buying new issues.

Answer 29

B. II and III Loans may NOT be taken out against variable annuities or Coverdell Savings accounts. Both variable life and 401(k) plans include loan provisions.

Answer 30

C. Monetary Policy Monetary policy refers to the decisions and actions of the Fed that influence the amount of money and credit in the U.S. economy.

Answer 31

A. Semiannually

Answer 32

C. Taxes on $10,000 and a $1,000 penalty The IRS treats this distribution as LIFO, so her withdrawal is considered 100% earnings for tax purposes. She will owe taxes on the full $10,000 and she also will have to pay a penalty of 10% ($1,000 in this case) on the amount withdrawn since she is younger than age 59 1/2.

Answer 33

D. Treasury

Answer 34

C. Does not approve securities registered with it and offered for sale

Answer 35

A. Tax free distributions may be postponed to begin beyond reaching the age of 70 1/2 The age 70 1/2 minimum distribution rules ensure that qualified plan covered individuals take some taxable income in retirement. Because Roth IRA distributions normally are tax free, there is no need for such rules.

Answer 36

C. $50,000 Disputes involving $50,000 or less are handled through the simplified arbitration process. In this process, there is one arbitrator who renders a binding decision. Binding means no appeal.

Answer 37

D. Put option A put option gives the buyer the right to sell stock at a stated price, while a call option gives the buyer the right to buy stock at a stated price. Rights are short-term options to buy and warrants are long-term options to buy.

Answer 38

D. The Maloney Act The Maloney act, an amendment to the Act of 1934, paved the road for the creation of the Financial Industry Regulatory Authority (FINRA). FINRA has jurisdiction over the majority of securities transactions including variable product sales. The Glass-Steagall separated banking from investment banking activities. Regulation T set the amount of collateral that was necessary in order to buy securities on margin as well as when the deadline was to pay for investment purchases. The Investment Company Act of 1940 defined and classified investment companies.

Answer 39

D. An entity who trades for its own account A dealer is an entity trading for its own account, acting in a principal capacity, which involves risk. The other three choices describe a broker, and a broker does not take risk. It earns a commission for matching up buyers and sellers.

Answer 40

D. $9.30 $10 x 7% = $.70. $10 - $.70 = $9.30. NAV + sales charge= POP

Answer 41

D. A mother and her 40-year-old daughter

Answer 42

D. It engages in forward pricing

Answer 43

C. The next business day after the record date The ex-dividend date is the first day a mutual fund trades without the amount of its pending distribution reflected in the share price. For mutual funds, this is the business day after the record date. The record date is the day used to determine who will receive the distribution. If you are a shareholder as of the close of business on the record date, you will receive the distribution. Notice that this is different than the ex-dividend date for stock, which is two business days before the record date.

Answer 44

B. The increase in the public's demand for the shares is greater than the fund's increase in NAV per share

Answer 45

D. The greater of the annuity balance or the amount paid into the plan Should an annuitant die during the accumulation period, the beneficiary is assured of receiving the annuity balance or the cost basis, whichever is greater.

Answer 46

D. Determining the fund's objectives

Answer 47

B. Political risk

Answer 48

A. $988.75 Government bonds are quoted in points and in 32nds of points. The period in the quote denotes 32nds of points, so the quote is 98 whole points and 28/32 of a point. One bond point equals $10. $980 + (28/32 x $10) = $980 + $8.75 = $988.75

Answer 49

C. A customer wishes to buy a variable annuity from a company with which their registered rep's BD does not have a selling agreement, the rep contacts the insurance company directly and makes the sale A private securities transaction occurs when a representative sells securities to customers without going through the rep's employing BD.

Answer 50

C. Six years

Answer 51

D. Money market fund

Answer 52

B. The employer may discriminate and the plan itself does not receive IRS approval

Answer 53

D. I and III

Answer 54

B. An owner of 3% of the investment company's shares The first three would be interested parties. The last person would be non-interested until his share of the voting stock in the investment company (the shares) rose to 5%.

Answer 55

B. Shares need not be equal. Each tenant holds fractional interest.

Answer 56

B. The selling price for Nancy's fund is the highest bid price Mary's shares are in an open-end company. Her pricing is based on the NAV plus an applicable sales charge. Nancy's share price is based on public demand. Mary's sales price is the next calculated NAV; not the bid price since open-end shares are not auctioned. Closed-End shares are sold at the highest bid price.

Answer 57

C. No one other than the broker-dealer may have written authorization over the account

Answer 58

B. II and IV

Answer 59

B. This action is acceptable only if the transaction is suitable for the client Exchanging a client from one annuity account into another is a permissible event, however there must be valid reasons for an RR to recommend a change. Valid reasons may include better performance and/or lower costs associated with a new contract. A Section 1035 Exchange is often utilized to move funds from one VA to another without incurring a current tax liability.

Answer 60

A. Exempt from interest rate risk

Answer 61

A. On or before the settlement date

Answer 62

B. Variable universal life All the mentioned policies are permanent insurance. Whole life has fixed premiums and any cash value is invested in the insurance company's general account. Universal life has flexible premium options but the cash value must also go to the general account. Variable life offers investment choices, but again has fixed premiums. Variable Universal Life (VUL) would provide the greatest flexibility in terms of both premium payments and investment choices. Many VUL policies even have a conversion privilege which would allow the policy holder to convert to a traditional whole life policy if they felt it was better for them.

Answer 63

A. Firm commitment In a firm commitment offering the underwriter acts as a principal; they purchase all of the shares from the issuer and attempt resell them at their own risk. Underwriters act as agents or brokers in best efforts underwritings and their variations, including all-or-none and mini-max offerings. They are paid a commission for any shares sold but have no capital risk for any unsold shares.

Answer 64

A. A customer wants to exchange a whole life insurance policy for a variable life insurance policy of a different insurer

Answer 65

B. It is sold at face value and pays interest quarterly

Answer 66

C. II and IV An investor who owns an 8% bond will receive $80 per year in interest (8% x $1,000 par), regardless of the current market price of the bond. However, the current price of the bond will affect the bond's current yield, which is the bond's coupon payment divided by its current market value. Since this bond pays an $80 annual coupon, the only way for it to show a current yield of more than 8% is to have a price of less than $1,000 par. Since most bonds are originally issued at par, this means the bond's price must have fallen since it was issued.

Answer 67

C. Common stock

Answer 68

A. Mutual fund share purchases are always new issues and are ineligible for margin according to the Exchange Act Open-end funds are in continuous issuance, which is a fancy way of saying they're always in IPO mode. The Exchange Act forbids underwriters, including mutual fund dealers, from selling new issues on margin until 30 days have elapsed from the end of the offering. Since mutual fund offerings never end, they are always subject to this restriction.

Answer 69

B. Outstanding loans will decrease the amount of death benefit paid to the named beneficiary

Answer 70

A. Unit Investment Trust

Answer 71

A. Less than $2700

Answer 72

C. Impact of recurring sales charges that reduce the potential for profit

Answer 73

D. Establish an independent audit testing for compliance to be conducted by member personnel or a qualified outside party

Answer 74

A. II II A majority of the fund's outstanding shares must approve of the change

Answer 75

B. Growth Fund

Answer 76

B. The RR may be trying to churn the account If an RR suggests that a client move his assets from one class B fund into another class B fund in a different family; the motive must be questioned, especially since the investment holdings are similar. The client must now effectively start over with the new fund and may be forced to hold the new investment for several years or incur a CDSC. The RR meanwhile has been paid up-front by the new fund family. Form SA-4B are fictitious.

Answer 77

B. The President and Congress

Answer 78

A. Shares must be in lots of 100

Answer 79

A. Annually

Answer 80

B. Regional fund

Answer 81

A. The delivery of stock certificates or other securities in good physical condition in the correct denomination with the right signatures Oops! The correct answer was A. The customer must sign/endorse the certificate exactly the same way as it appears on the face of the certificate. The certificate must be in the proper denomination and in good physical condition. It would be good delivery if a mutilated certificate is properly authenticated. The other three choices are distractors. Receiving stock dividends on the payable date is an unlikely event since it is when the transfer agent is to pay them which is not necessarily the date the investor will receive them. Completing an investing account's holdings transfer in a timely manner from one broker-dealer to another is conducted through the ACATS system. Purchasing stock by exercising a call option results in a regular investment transaction except for the quantity and dollar amount per share are predetermined in the option contract.

Answer 82

C. Increase Nice try! The correct answer was C. The yield on common stock is computed by dividing the market price of common stock into the dividend. If the common stock price has not changed, but the dividend continues to increase, the yield will increase. For example, if the stock costs $14.90 and the dividend is $1, the yield is 6.7% ($1 divided by $14.90). If the stock stays at $14.90 and the dividend increases to $1.50, the yield is 10% ($1.50 divided by $14.90).

Answer 83

A. CDs offered by banks to their depositors

Answer 84

C. $12 THREE BONDS

Answer 85

D. Record the request to be placed on the do-not-call list immediately and honor the request before 30 days elapse from the time of the request

Answer 86

A. I, III, and IV Oops! The correct answer was A. Tax-exempt funds invest in municipal securities that are exempt from federal income tax and, for shareholders who are residents of the issuing state, are usually exempt from state and local income tax. Such investments give current income but little potential for capital appreciation. Since the shareholders receive a tax advantage, yields on those funds are generally lower than yields on funds invested in corporate bonds (which offer no tax advantages). At least 80% of the portfolio income must come from tax-free issues.

Answer 87

D. Taxable at ordinary income rates and subject to a 10% penalty Oops! The correct answer was D. A modified endowment contract (MEC) is an overfunded life insurance contract. Money taken from a MEC in the form of loans, partial surrenders, or withdrawals, is subject to ordinary income tax plus, typically, a 10% IRS penalty, if the withdrawal is taken prior to age 59 1/2

Answer 88

an overfunded life insurance contract. Money taken from a MEC in the form of loans, partial surrenders, or withdrawals, is subject to ordinary income tax plus, typically, a 10% IRS penalty, if the withdrawal is taken prior to age 59 1/2.

Answer 89

A. The customer is the representative's father-in-law Excluded from the prohibition are the representative's immediate family, defined as the representative's parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the registered representative contributes directly or indirectly.

Answer 90

B. Long-term corporate bonds Interest rate risk pertains to the sensitivity of a bond's price to fluctuations of interest rates. The longer the bond's maturity, the greater its uncertainty and therefore volatility. T-bills are short-term. Common stock and growth (equity) funds are equities, not debt (bonds).

Answer 91

D. 15 In the secondary market, the customer sells at the bid price which is the lower of the two prices shown. The broker-dealer pays the bid price to the seller. If the investor were purchasing they would pay the ask price which is the higher of the two prices shown. The difference between the bid and ask is the spread. The narrower the spread the greater the number of shares are being traded. The larger the spread indicates a much more thinly trading market in that securities. One way to remember the bid and ask price is to realize that broker-dealers make money by buying low and selling high.

Answer 92

A. A decrease in the level of the PPI The PPI, otherwise known as the producer price index, measures inflation at the wholesale level. A decrease would signal either disinflation or deflation but never inflation.

Answer 93

C. U.S. savings bond with 4 weeks until maturity Money market securities are always short term, investment grade, and liquid. Savings bonds are NOT short term when issued and they are illiquid because they must be redeemed by the U.S. government; there is no secondary market for savings bonds. Treasury bills, commercial paper and negotiable CDs are money market instruments. When T-Bonds and T-Notes are less than 1 year to maturity they are considered money market securities.

Answer 94

B. $60,000 Nice try! The correct answer was B. If George were to die during the accumulation period, George's beneficiary will receive the greater of the contributions into the account or the date of death value. We know George is still in the accumulation period because the question refers to his holdings as accumulation units. George invested $30,000, but the units are worth $60,000 (5,000 units x NAV of $12) and, therefore, his beneficiary will receive $60,000.

Answer 95

C. Older investors at some point need to live off their investment earnings, and therefore need a more stable principal account value to generate enough income for their needs Oops! The correct answer was C. Typically, the average investor is saving for a number of goals; the greatest being retirement. The purpose of this is to create enough of a nest egg that can generate a monthly income that the investor can live off. As investors near or enter retirement, they typically have an idea of how much money they will need to live comfortably. Sudden changes in income due to a loss of that nest egg can be catastrophic for older investors and, therefore, the majority of an older investor's portfolio should be in lower risk securities that can meet the demands of income with minimum fluctuations.

Answer 96

C. Purchasing Power Risk Sorry! The correct answer was C. Purchasing power risk is the risk of inflation eroding purchasing power. Market risk is the risk that the entire market declines. Timing risk is the risk of buying a security just before it declines or selling it just before it appreciates. Business risk is the risk that a particular company will not have enough cash flow to cover its operating expenses.

Answer 97

A. I, II, and III Oops! The correct answer was A. Switching from one fund family to another may be justified based on a customer's tax situation or the relative merits of each family's offerings. The additional compensation earned by the RR never justifies this action. Be careful; if the switch cannot be justified, it may be considered churning, which is prohibited according to FIRNA.

Answer 98

B. Net asset value multiplied by the number of shares, minus any redemption fee Sorry! The correct answer was B. When an investor liquidates shares of his fund, he may have to pay a redemption fee. The amount of such a fee varies based on the fund. In order to calculate this, we must first know the gross redemption amount. Start with the net asset value and multiply it by the number of shares being redeemed. Then subtract any redemption amount from that number. The result is the net redemption amount that will be paid to the investor.

Answer 99

B. An annuity with a variable stream of income Oops! The correct answer was B. Any product whose description includes the word "variable" is considered a security. Variable product investments are held in the separate account and could fluctuate in value based on market conditions. The SEC requires that this be disclosed and a prospectus must accompany any offering of a variable product.

Answer 100

C. A broker-dealer that trades only in investment grade bonds on an agency basis Oops! The correct answer was C. Firms exempt from SIPC membership include broker-dealers whose transactions are based exclusively on mutual funds, variable annuities, variable insurance, or unit investment trusts. Investment advisers are also exempt.

Answer 101

B. To receive a fixed portion of the corporation's earnings in the form of dividends Nice try! The correct answer was B. Dividends on common stock are never guaranteed; they are paid only when and if declared by the board of directors. Pre-emptive right is the right to subscribe to any new shares to protect percentage of ownership. Common stockholders vote on big issues, including capitalization issues and the board of directors. Common stock is called the junior security because it has the lowest (residual) claim to assets at bankruptcy.

Answer 102

D. These funds are often used by investors seeking a defensive investment posture Nice try! The correct answer was D. Due to the conservative nature of their portfolios, money market funds are suitable for investors that have capital preservation as their primary investment objective, also described as a defensive investment posture. While most funds do maintain a $1.00 NAV, this is not guaranteed. The prospectus delivery rule applies to the sale of money market mutual funds as it would for any other type of mutual fund sale. Most money market funds are offered on a no-load basis.

Answer 103

C. 8-year B-rated corporate bond Oops! The correct answer was C. On a maturity scale of 1 year to 30 years, all of the bonds described are about the same maturity. Therefore, the primary factor affecting their current yields will be the credit quality of the bonds. The lower the credit quality, the higher the yield. The T-bond is of the highest credit quality, while the AA-rated corporate is considered of very good quality. The B-rated corporate bond is a "junk" bond, which pays out a higher yield when compared to other bonds with a better credit quality.

Answer 104

B. Common stock and preferred stock Sorry! The correct answer was B. All stockholders collectively own the firm regardless of the type of stock they own. Therefore ownership in a corporation is represented by both common and preferred stock. Bondholders are creditors of the corporation, as are parties to whom the corporation owes short-term debt.

Answer 105

D National Adjudicatory Council If membership has been denied or granted subject to restrictions, the applicant has 25 days after service of the decision to appeal to FINRA's National Adjudicatory Council.

Answer 106

Nice try! The correct answer was C. A person who is bearish on the stock market believes that stocks, in general, will decline in value. An investor could profit in a bear market by buying puts or selling calls. C II and IV

Answer 107

A An economic recession lasts at least 2 consecutive quarters and a depression lasts at least 6 consecutive quarters Oops! The correct answer was A. An economic recession is defined as a real decline in GDP lasting 2 consecutive quarters or longer and a depression is a real decline in GDP lasting 6 consecutive quarters or longer.

Answer 108

B | The operating expenses of the fund

Answer 109

D. customer specific suitability Oops! The correct answer was D. It is the duty of the RR to make sure that the security is suitable for an investor based on her specific investment goals. Without performing any suitability measure for Jane, John violated the customer specific suitability requirement under FINRA regulation.

Answer 110

A. yield to maturity Oops! The correct answer was A. The yield to maturity, or rate of return a current purchaser would receive if he held the bond to maturity is the lowest of the yields for a bond trading at a premium. Current yield would be in the middle and the nominal yield (coupon rate) would be the highest yield.

Answer 111

D Small cap emerging company stock Nice try! The correct answer was D. Blue chip stocks are seasoned, large-size companies with a good track record. They are generally more stable. Fluctuations in interest rates could change the price of a debenture, but it wouldn't NECESSARILY change as often as the value of small cap emerging company stock. These stocks in younger, relatively smaller companies generally have more risk. A slight change in management, products, sales, etc. could make a substantial difference in the price movement of the stock. Fluctuations in interest rates could change the price of a U.S. Treasury bill, but it wouldn't change as often as the value of a penny stock.

Answer 112

A. financial hardship Nice try! The correct answer was A. Money held in retirement plans cannot be withdrawn prior to age 59 1/2 without penalty except for death, disability, purchase of first home (with a $10,000 lifetime limit), or to pay certain medical expenses or qualifying medical insurance premiums. While the penalty is waived in these cases, any taxable portion of the distribution is still subject to regular income tax. Financial hardship does not release the taxpayer from the penalty associated with a premature withdrawal.

Answer 113

B The Federal Reserve Board (FRB) Nice try! The correct answer was B. The Federal Reserve Board (FRB) is responsible for the nation's monetary policy.

Answer 114

B. Business risk Nice try! The correct answer was B. Business risk occurs when the issuer is unprofitable or fails and the investor loses his money. Interest rate risk applies to outstanding bond prices versus interest rates. Market or systematic risk is the risk that the entire market declines.

Answer 115

A. to protect a customer assets in the case of broker-dealer Oops! The correct answer was A. The Securities Investor Protection Corporation (SIPC) is a non-profit organization that insures customer assets lost due to the financial failure of a broker-dealer. When a broker-dealer becomes financially insolvent, SIPC will go in and attempt to recover customers' securities positions. For those that cannot be located, SIPC has a fund to protect those customers.

Answer 116

D. The issuer Sorry! The correct answer was D. The broker-dealer may charge the issuer. The broker-dealer is not permitted to charge the customer. The other two choices are distracters.

Answer 117

C II The customer has owned the shares for 30 days or more Sorry! The correct answer was C. Credit may be extended on mutual fund shares held more than 30 days. However, credit may not be extended on the purchase of new mutual fund shares though a broker-dealer, and the broker-dealer may not try to get around the restrictions by arranging for loans by others.

Answer 118

D. Commodity future contracts Sorry! The correct answer was D. Futures contracts are speculative instruments which are not defined as securities. UGMAs must be funded with securities and/or cash. Risky activity, such as margin, short selling, and uncovered options is not permitted.

Answer 119

A. GNMA fund (FUND!!!!!!) Sorry! The correct answer was A. Of the choices provided, only a GNMA fund is not backed by the U.S. Government. Ginnie Mae (Government National Mortgage Association) pass-through certificates and all securities directly issued by the Treasury, are considered to be backed by the full faith and credit of the Federal government. Remember, the U.S. Government does not guarantee any mutual fund, regardless of its holdings.

Answer 120

C $1084.69 Nice try! The correct answer was C. A government bond is priced in points (one point = $10) and 32nds of points. A bond selling at 108.15 is selling at 108 15/32% of the par value of $1000. 15/32 = .4689. $108.469% of $1000 = $1084.69.

Answer 121

B. The liquidation price is always higher than the fund's NAV Sorry! The correct answer was B. This question does not specify whether the management company is open or closed end. Therefore, all of the answers are true regarding both open and closed end funds, except for the answer choice "the liquidation price is always higher than the current NAV." The market price of the shares in their portfolio is determined by supply and demand for the shares, but the price for mutual fund shares is not determined by supply and demand. A mutual fund's NAV per share is determined by dividing the fund's NAV by the number of shares outstanding. Remember that for a mutual fund, the liquidation price is ALWAYS the NAV.

Answer 122

D. TOD A Transfer on Death (TOD) account is an individual account with a named beneficiary. Upon the death of the account holder, the assets in the account transfer directly to the beneficiary; in this way, the probate process is avoided.

Answer 123

D. it is sold at face value and pays interest quarterly Excellent! T-bills are issued in maturities ranging from 4 weeks to one year. They do NOT have a coupon rate and do NOT pay periodic interest. They are purchased at a discount and mature at face amount. They are issued by the U.S. government through a weekly auction and trade in the secondary market.

Answer 124

A. the national adjudicatory council Sorry! The correct answer was A. A Hearing Panel decision can be appealed within 25 days of the decision to the National Adjudicatory Council (NAC). Appeals of NAC decisions may be made to the SEC, and the Commission's decision may be appealed to a federal court.

Answer 125

B. the employer is not required to make contributions Nice try! The correct answer was C. The employer is not legally required to make any contributions. Keoghs are for self-employed individuals. Face amount certificates are no longer issued.

Answer 126

C. an investment grade short-term bond fund Sorry! The correct answer was C. Maria will only own this investment for a number of months, which is far too short of a time horizon to invest in equities. The volatility associated with a high-yield bond fund also makes it an inappropriate choice for an investor with an abbreviated time horizon.

Answer 127

D. taxable at ordinary income rates and subject to a 10% penalty Nice try! The correct answer was D. A modified endowment contract (MEC) is an overfunded life insurance contract. Money taken from a MEC in the form of loans, partial surrenders, or withdrawals, is subject to ordinary income tax plus, typically, a 10% IRS penalty, if the withdrawal is taken prior to age 59 1/2.

Answer 128

false c. a corporation has limited liability Nice try! The correct answer was C. The corporation has unlimited liability but its owners (stockholders) have limited liability. The most that an equity holder can lose is the amount of their investment. In a limited partnership, the general partner has unlimited liability, while the limited partners have limited liability.

Answer 129

B. a telephone number or website from which the investor may obtain current performance information, if performance as of the most recent month-end is not the ad Nice try! The correct answer was B. Material published that contains performance information must either include total return information current to the most recent month, ending seven business days prior to the date of use, or provide a phone number or a website address where an investor may obtain performance date current to the most recent month-end. If total return information is included in the ad, total returns for the most recent one-, five-, and ten-year periods (or the life of the fund, if shorter) must also be shown.

Answer 130

C. investment banker Oops! The correct answer was C. An investment banker assists in the process of underwriting and registering the securities offering with the SEC, as required by the Securities Act of 1933. An investment banker may be a broker dealer. Syndicate and selling group members are part of the underwriting team. Registered representatives work for broker-dealers.

Answer 131

A. cost of sales literature Sorry! The correct answer was A. The underwriter pays for marketing expenses. The investment adviser, custodian, transfer agent, and BOD are all operating expenses of the fund.

Answer 132

C. BONDS Nice try! The correct answer was C. Leverage is the using of another entity's or person's money to make money. When a corporation issues bonds it is engaging in leverage financing. The corporation must earn more than the cost of the loan. If not, and unable to pay interest on a timely basis or pay off principal at maturity, the corporation will be in default and perhaps forced into bankruptcy. The investor, lender, takes on this risk.

Answer 133

D using market timing for which it charges a separate fee Nice try! The correct answer was D. Any entity in the business of giving investment advice for a fee must register as an investment adviser. The newspaper column and advisory letter are not customer-specific. BDs conducting their normal business are exempt from the requirement to register as investment advisers.

Answer 134

B it includes a reference to the location(s) where an associated person may obtain instructions on appealing the decision of a FINRA arbitration panel Sorry! The correct answer was B. The Form U4 filed by each applicant for registration as an associated person of a member firm includes a predispute arbitration clause. By signing the U4, the applicant is agreeing to arbitrate, rather than litigate, in almost all disputes between the individual and their member firm. FINRA requires that member firms provide written disclosures about this clause and its provisions to each applicant at or before the time they submit their U4. Among other disclosures, the member firm must disclose that associated persons are not bound to arbitration for disputes involving discrimination or sexual harassment.

Answer 135

A. the securities purchased by the managers are sent to the investors Sorry! The correct answer was A. Mutual funds hold all purchased securities in their investment portfolio. Investors own an undivided interest (a pro rata ownership) in the value of all those securities, not the securities themselves. The actual securities, if not in book-entry form, are held by a custodian for safekeeping.

Answer 136

D | 90% is taxed as ordinary income while the remainder is considered a return of capital and therefore is not taxed

Answer 137

D reduce the $400 per month contractual plan investment by $250 and send the amount directly to the daughter if the parent send $250 directly to the student, it is the least expensive method. sending $150 monthly continues the investment plan.

Answer 138

D SIPC coverage is for cash, securities, commodities, and future contracts SIPC reimburses customer losses on cash and securities only, not on commodities or futures

Answer 139

C The IRS sets distribution standards which qualify a fund as regulated under the U.S. tax code Sorry! The correct answer was C. The taxation of mutual funds is covered under Subchapter M of the Internal Revenue Code. Exchanges within a family of funds is considered a taxable event and mutual fund holdings do not grow tax-deferred. Mutual fund dividends are considered taxable, even if reinvested by the shareholder.

Answer 140

B Purchasing power risk Nice try! The correct answer was B. Purchasing power risk is the risk of inflation eroding purchasing power. Market risk is the risk that the entire market declines. Timing risk is the risk of buying a security just before it declines or selling it just before it appreciates. Business risk is the risk that a particular company will not have enough cash flow to cover its operating expenses.

Answer 141

C I, II, and III Oops! The correct answer was C. Electronic media must have equivalent material and all required information as required in paper-based media. If the information in the paper-based media is required to be in a certain order, then the electronic-based media must follow the same order. Broker-Dealers must have policies and procedures in place to make sure that the delivery requirements under the federal securities laws are met. The broker-dealer must show evidence of delivery through electronic media and may obtain client's consent to deliver required information through electronic-based media or require client to provide notice that the information was received, such as, electronic mail (E-mail), or confirmation that the material is accessed, downloaded or printed. Broker-Dealers in order to show evidence of delivery through electronic media may disseminate required information by fax or facsimile methods.

Answer 142

C Growth Sorry! The correct answer was C. This is the essence of compounding, or money making more money on money, and value increasing. Continuous investing and reinvesting of profits do not relate to income, safety, or liquidity. Continuous investing and reinvesting for profit relates to capital appreciation.

Answer 143

A 6.09% Nice try! The correct answer was A. To find the taxable equivalent yield, we take the municipal yield and divide it by 100% - the investor's tax bracket. 4.2%/100% - 31% = 4.2%/69% or .609. The taxable equivalent yield is 6.09%. This is the yield that should be used when comparing this municipal bond to taxable investment alternatives.

Answer 144

D HR-10 Oops! The correct answer was D. Keogh HR-10s (and also SEPs) are for self-employed such as sole proprietorships and partnerships. 401(k)s are for corporations. 457s are for governmental employees. 403(b)s are for schools and nonprofits.

Answer 145

B II and III Excellent! When the fund receives new money, they simply issue more shares to equal the new investments, so there is no change in NAV per share. When investors redeem shares, the fund sends them the NAV per share and cancels their shares. The fund has less assets and fewer shares outstanding. The net result is no change in the NAV per share. When the fund distributes a dividend, it has fewer assets and the same number of shares outstanding, so the fund's NAV decreases and the NAV per share decreases. Note: If investors choose to reinvest a dividend, the fund has more assets but issued more shares on the reinvestment, so the NAV remains the same, similar to a new purchase

Answer 146

C Critique the effectiveness of the firm's test prep program with a training manager Oops! The correct answer was C. Candidates are not permitted to discuss exam content with anyone, including a principal. The test taker may evaluate the effectiveness of the firm's training program.

Answer 147

B Legislative risk Sorry! The correct answer was B. Earl is susceptible to legislative risk. This is the risk that a law change or any act of Congress will damage the value of a business into which someone is invested.

Answer 148

C Ordinary income Oops! The correct answer was C. Withdrawals from qualified plans funded by deductible contributions are taxed as ordinary income. Cost basis is zero.

Answer 149

C Put option CORRECT! A put option gives the buyer the right to sell stock at a stated price, while a call option gives the buyer the right to buy stock at a stated price. Rights are short-term options to buy and warrants are long-term options to buy.

Answer 150

C A percentage of the average net assets of the fund Nice try! The correct answer was C. The investment adviser's management fee is based upon a percentage of net assets under management. The adviser's compensation is a direct operating expense (included in the NAV calculation) while the underwriter's concession is a marketing expense included in the sales charge.

Answer 151

A Reduced Nice try! The correct answer was A. The number of a stockholder's shares divided by the total number of shares outstanding equals the stockholder's percentage ownership of the company. Since this stockholder's number of shares will remain the same, but the total number of outstanding shares will increase, this stockholder's percentage of company ownership will decrease.

Answer 152

C A precious metals fund Nice try! The correct answer was C. Traditionally, precious metals have been a haven for investors seeking refuge from inflation. Over the course of history, when inflation has gone up, so has the price of precious metals. For example, in the early 1980s inflation was in the double digits and gold increased to approximately $900 an ounce. In the late 1990s, when inflation was around 1.5% percent, gold was roughly $250 an ounce. An investor who wishes to have some inflation protection in his portfolio may purchase a precious metals fund specifically for this reason. The fixed income securities in the other three choices all have some degree of inflation risk.

Answer 153

C III and IV Oops! The correct answer was C. Since mutual fund shares, are a continuous new issue, they may not be purchased on margin. NASDAQ securities and NYSE securities are marginable securities. New issues, including closed end funds, are not marginable.

Answer 154

D Fund A is a closed-end investment company and fund B is either open-end or closed-end Sorry! The correct answer was D. If there is greater than an 8-1/2% spread between the bid (NAV) and ask (POP), the company can only be closed-end since an open-end company has a maximum sales charge of 8-1/2%. If there is less than an 8-1/2% spread, the company could be either open-end or closed-end. Fund A's ask price of $10 minus a bid of $9 equals a $1 difference. The $1 divided by the ask price of $10 equals 10%. Fund B's ask is $4.30 minus its bid of $4 equals a sales charge of $.30 cents. The sales charge of $.30 divided by the ask of $4.30 equals a sales charge of 7%. If the ask is less than the NAV, it could only be closed-end since open-end companies do not sell below their NAV. Any quote could be closed-end, but a company could be open-end only if the sales charge is 8-1/2% or less.

Answer 155

C FINRA Oops! The correct answer was C. FINRA is the leading SRO (self-regulatory organization) that oversees its member broker-dealers. In July of 2007, the NYSE and the NASD regulatory bodies merged to create FINRA (Financial Industry Regulatory Authority). The OCC is the options clearing corporation which is an equities derivative clearing organization. The CBOE is the Chicago Board Options Exchange. The SEC is the Securities Exchange Commission which oversees securities exchanges, securities brokers and dealers, investment advisers, and mutual funds.

Answer 156

C I and IV Nice try! The correct answer was C. Broker-dealers use the Account Confirmation and Transaction System (ACATS) to facilitate transferring a customer's account from one member firm to another. The receiving broker-dealer has the customer fill out and sign a form listing all of their positions at the current (carrying) firm. The BD then submits the request through ACATS to the carrying firm. The carrying firm has one business day from receipt to either validate that the account information and positions are correct or to notify the requesting firm of any discrepancy. Once the account has been validated, the carrying firm must transfer the assets to the new firm. Some positions, such as shares of proprietary funds of the carrying firm, may not be transferrable. The carrying firm must notify the requesting firm of these positions and must complete transfer of all transferrable assets within 3 business days of validation.

Answer 157

A Broker-dealer Nice try! The correct answer was A. Wholesaler, distributor, underwriter, and sponsor are all terms used to describe the same entity. This is the "person" who is a conduit between the fund and the broker-dealer community and/or individual customers. All four of these designations may be used to designate the same "person."

Answer 158

D Participating Sorry! The correct answer was D. In a cumulative preferred, dividends that are not paid will accumulate and could be paid later. Participating preferred stock may pay an extra dividend along with the fixed dividend. The fixed dividend is the minimum. Convertible preferred converts into a set number of common stock. Straight preferred has no extra features.