Practice Exam 5

Question 1

For tax-reporting purposes, qualified dividends are considered to be what type of income?

A) Passive.
B) Phantom.
C) Portfolio.
D) Earned.

Answer 1

Portfolio;

Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities.

Question 2

Which of the following orders may be used to acquire a security at a specific price or better?

I. A buy stop limit.
II. A buy limit.
III. A sell stop.
IV. A sell limit.

Answer 2

I. A buy stop limit.
II. A buy limit;

Only buy orders can acquire stock. Only buy limit orders can acquire stock at a specific price or better.

Question 3

Which of the following responsibilities did the MSRB receive through the Securities Acts Amendments of 1975?

I. Regulation of municipal issuers.
II. Establishment of recordkeeping requirements for municipal broker/dealers.
III. Enforcement of any municipal regulations it adopts.
IV. Creation of regulations for participants in the municipal securities secondary market.

Answer 3

I. Regulation of municipal issuers.
III. Enforcement of any municipal regulations it adopts;

The MSRB creates rules for municipal trading and issues interpretations of its rules. It does not regulate issuers or have any enforcement capability. For broker/dealers, MSRB rules are enforced by FINRA.

Question 4

All of the following communications are exempt from filing with FINRA EXCEPT

A) communications that refer to an investment solely as part of a listing of products offered by the member
B) retail communications that make a financial or investment recommendation
C) retail communications previously filed with FINRA
D) prospectuses and preliminary prospectuses
.

Answer 4

retail communications that make a financial or investment recommendation

Question 5

Which of the following regarding a Roth IRA are TRUE?

I.The contributions are nondeductible.
II.Contributions must cease at age 70½.
III.Withdrawals must begin at age 70½.
IV.Withdrawals after age 59½ can be tax free.

Answer 5

I and IV;

With a Roth IRA, the contributions are not deductible from current income. Withdrawals after age 59½ are tax free, provided the account has been open for at least 5 years. There is no age at which withdrawals must begin or contributions must cease.

Question 6

Stock prices in the over-the-counter market are determined by:

A) negotiation.
B) a competitive bid.
C) the 5% markup policy.
D) an auction.

Answer 6

negotiation;

The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market. The 5% markup policy regulates commissions and markups, not prices and competitive bids are a type of underwriting agreement for new issues.

Question 7

Which of the following statements regarding transactions in the different securities markets are TRUE?

I. Transactions in listed securities occur mainly in the OTC market.
II. Transactions in unlisted securities occur in the OTC market.
III. Transactions in listed securities that occur in the OTC market are said to take place in the fourth market.
IV. Transactions in listed securities that occur directly between institutions without the use of broker/dealers as intermediaries are said to take place in the fourth market.

Answer 7

II. Transactions in unlisted securities occur in the OTC market.
IV. Transactions in listed securities that occur directly between institutions without the use of broker/dealers as intermediaries are said to take place in the fourth market;

Listed securities traded on exchanges constitute the exchange market. Unlisted securities traded over the counter (OTC) make up the OTC market. Listed securities traded OTC compose the third market. Securities traded directly between institutions constitute the fourth market.

Question 8

Minimum distributions from a traditional

A) a year after the owner turns 59½.
B) as soon as the owner turns 70½.
C) once the owner retires.
D) by April 1, the year after the owner turns 70½.

Answer 8

Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 70½.

Question 9

Which statements are TRUE regarding funding for education?

I. Distributions from a Coverdell ESA may be used for college only.
II. Distributions from a Coverdell ESA may be used for both college and secondary education.
III. Distributions from a Section 529 plan may be used for college only.
IV. Distributions from a Section 529 plan may be used for both college and secondary education.

Answer 9

II. Distributions from a Coverdell ESA may be used for both college and secondary education.
III. Distributions from a Section 529 plan may be used for college only;

Under Coverdell rules, an eligible educational institution includes colleges as well as elementary or secondary schools. Distributions from Section 529 plans are limited to higher education only.

Question 10

Which of the following listed option orders can be combined to form a spread order?

I. Buy 1 XYZ Jul 30 put.
II. Sell 1 XYZ Jul 35 call.
III. Sell 1 XYZ Jul 35 put.
IV. Buy 1 ABC Jul 30 call.

Answer 10

I. Buy 1 XYZ Jul 30 put.
III. Sell 1 XYZ Jul 35 put;

Spreads are deemed to be of the same class; class is defined as the same underlying security and the same type of option. Choices II and III would be a short straddle. The ABC call cannot be combined with anything, since you’d be combining ABC stock with XYZ stock.

Question 11

Which of the following investments would be most suitable for an IRA?

A) Technology company whose stock shows a high beta.
B) Highly rated GO bond.
C) Short sale of a stock which has just started what is expected to be a prolonged decrease in price.
D) Uncovered call on a stock whose price is extremely stable.

Answer 11

Technology company whose stock shows a high beta;

Short sales, uncovered calls, and municipal bonds are all inappropriate for individual retirement accounts.

Question 12

All retail communications should be retained by the member firm for at least a period of

A) four years and be readily accessible for that period
B) three years and for the first six months be in a readily accessible location
C) three years and for the first two years be in a readily accessible location
D) four years and for the first year be in a readily accessible location

Answer 12

three years and for the first two years be in a readily accessible location

Question 13

Which of the following is NOT considered a short-term investment vehicle?

A) Repurchase agreements.
B) Negotiable CDs.
C) Treasury bonds.
D) Commercial paper.

Answer 13

Treasury bonds are long-term investment vehicles having maturities of ten years or more.

Question 14

All of the following are regulated by the MSRB EXCEPT:

A) dealers.
B) issuers.
C) quotes.
D) sales representatives.

Answer 14

issuers;

Quotes, dealers, and sales representatives are regulated by the MSRB; issuers are not.

Question 15

All of the following would be included in a penny stock risk disclosure statement EXCEPT

A) investors’ legal rights
B) risks of investing in penny stock
C) definition of penny stock
D) broker/dealer’s statement of guarantee

Answer 15

broker/dealer’s statement of guarantee;

Penny stock disclosure statements must be furnished to all buyers of unlisted, non-Nasdaq stocks of less than $5 per share. The disclosure must include the risks of penny stock investing, the rights of the investors, and the responsibilities of the broker/dealer to the investor. There would be no statements regarding guarantees either implied or expressly written.

Question 16

Regarding Regulation D (Private Placement) offerings, which of the following statements is TRUE?

A) The amount of capital that can be raised via a private placement is limited.
B) The SEC requires no filings be made by the issuer.
C) Purchasers need not be provided or have access to offering information normally provided by a prospectus.
D) Registration with the SEC is not required.

Answer 16

Registration with the SEC is not required;

Regulation D offerings are exempt transactions and therefore no SEC registration is required. However, issuers must still file information with the SEC on Form D regarding the issue. This filing will contain all of the information a potential investor might want to know, similar to the information contained on a prospectus. There is no limit to the amount of capital that can be raised via a Regulation D private placement transaction.

Question 17

All of the following information is included in a municipal bond resolution EXCEPT:

A) restrictive covenants that are binding on the issuer.
B) any call provisions that allow the issuer to redeem the bonds before their scheduled maturity.
C) compensation paid to the underwriters.
D) an authorization to sell the securities

Answer 17

compensation paid to the underwriters;

The bond resolution is the document in which the issuer authorizes the issuance of municipal securities. Among other things, the resolution describes the characteristics of the proposed issue and the issuer’s duties to the bondholders. Compensation paid to the underwriters would be found in the official statement.

Question 18

All of the following are required by limited partnerships EXCEPT:

A) subscription agreement.
B) certificate of limited partnership.
C) SEC approval.
D) partnership agreement.

Answer 18

SEC approval;

The SEC does not approve limited partnerships or any other securities. In public offerings of limited partnerships (as opposed to private placements), federal registration and a prospectus are required.

Question 19

Which of the following describes the position in a call option on a Swiss franc with a strike price of 120, a premium of 7, and a current market of 126?

A) At the money.
B) In-the-money.
C) At parity.
D) Out-of-the-money.

Answer 19

In-the-money.

In this case, the strike price is less than the market price so a call option would be in-the-money by the difference between the strike price and the market price (6 points, in this case). At-the-money means the strike price and the market price are the same; at parity means the premium equals the intrinsic value.

Question 20

All of the following might affect the credit rating of a municipal revenue issue EXCEPT:

A) the debt service coverage ratio.
B) the rate covenants set forth in the indenture.
C) the quality of the facilities management.
D) the tax rates of nearby municipalities.

Answer 20

the tax rates of nearby municipalities;

The credit rating of a revenue issue would not be affected by tax rates in surrounding municipalities.

Question 21

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend?

A) Treasury bond.
B) Industrial revenue bond.
C) General obligation bond.
D) Corporate bond.

Answer 21

General obligation bond;

Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.

Question 22

Under SEC rules, which of the following events require a broker/dealer to furnish a copy of the account record to a customer?

I. Change of broker/dealers address
II. Change of customer’s name or address
III. Change of customer’s investment objectives
IV. Change in registered representative assigned to the account

Answer 22

II. Change of customer’s name or address
III. Change of customer’s investment objectives;

Any change in a customer’s status, particularly those that may impact the suitability of recommendations, requires a broker/dealer to update the customer account record and furnish it to the customer within 30 days of receipt of the change notice.

Question 23

On the basis of a major decline occurring within a few minutes of the close, trading is halted on all markets for the remainder of the trading day. Under the market wide circuit breaker (MWCB) rules, market-on-close (MOC) orders pending at the time trading is halted

A) should be held for execution on the following trading day unless canceled by the customer
B) are converted to market orders and executed at the opening on the following trading day
C) must be canceled
D) should be held for execution on the following trading day

Answer 23

must be canceled;

During shorter market-wide trading halts that will allow trading to resume on that same trading day, pending and new incoming orders should be forwarded to the appropriate market for execution upon the resumption of trading. If a halt closes the market for the remainder of the trading day, market-on-close (MOC) orders pending at the time trading is halted should be canceled. MOC orders received after trading is halted should be declined.