Practice Test 7

Question 1

All of the following are types of oil and gas direct participation programs EXCEPT:

A) minimum guarantee wildcat.
B) combination.
C) income.
D) developmental.

Answer 1

minimum guarantee wildcat;
Exploratory programs drill wildcat wells in areas where there are no proven reserves of oil and gas. The chances of success are relatively slim, so there are no guarantees. The other three choices describe types of oil and gas programs.

Question 2

Each of the following would be disclosed to potential municipal bond buyers in the official statement of a new municipal bond issue EXCEPT:

A) the issues purpose.
B) the creditworthiness of the issue.
C) the source from which interest and principal will be paid.
D) the disclosure that it was prepared by the underwriters.

Answer 2

the disclosure that it was prepared by the underwriters;

While a broker/dealer acting in an underwriting capacity or in an advisory capacity may assist in preparing the official statement, it is considered to be the responsibility of, and prepared by, the issuer. The official statement identifies the issue’s purpose, the source from which the interest and principal will be repaid, information regarding the issuer’s financial and economic background and information relating to the issue’s creditworthiness.

Question 3

If a member firm suspends a registered representative, the member firm must report the suspension to the:

A) designated examining authority.
B) SEC.
C) news media.
D) state securities Commissioner.

Answer 3

designated examining authority.

If a member firm suspends a registered representative, the firm must report the suspension to its designated examining authority (DEA), which typically is FINRA or the exchanges where the firm is a member. Each DEA is a self-regulatory organization. The notice must be made within 10 business days of the suspension.

Question 4

Any branch office employee who refers customers to municipal securities registered representatives and is compensated for any transactions that result must be a:

A) registered representative.
B) financial and operations principal.
C) municipal securities dealer employee.
D) general securities principal.

Answer 4

An employee who receives compensation based on sales must be registered as a sales representative.

Question 5

A corporate offering of 200,000 additional shares to existing stockholders may be made through a:

A) warrant.
B) rights offering.
C) secondary offering.
D) tender offer.

Answer 5

A rights offering is an offering of additional shares of stock to existing shareholders.

Question 6

An order designated FOK means that the order must be executed:

A) immediately and in its entirety .
B) at the opening of trading.
C) immediately but not necessarily entirely.
D) in its entirety but not immediately.

Answer 6

Fill-or-kill (FOK) orders must be executed immediately in their entirety or they are canceled.

Question 7

Which of the following is the FINRA approved trade reporting system for corporate bonds trading in the OTC secondary market?

A) SDBK
B) TRACE
C) Nasdaq
D) SIPC

Answer 7

TRACE;
TRACE (Trade Reporting and Compliance Engine) is the FINRA approved trade reporting system for corporate bonds trading in the OTC secondary market. TRACE purpose is to add market transparency by disseminating trade details immediately to the investing public.

Question 8

All of the following securities are exempt from the registration provisions of the Securities Act of 1933 EXCEPT:

A) commercial bank holding company securities.
B) state and municipal bonds.
C) commercial paper and bankers’ acceptances that have maturities of no more than 270 days.
D) national and state bank securities.

Answer 8

commercial bank holding company securities.

Question 9

The call provisions of a municipal issue would be detailed most completely in the:

A) legal opinion.
B) “Bond Buyer”.
C) official notice of sale.
D) bond resolution.

Answer 9

bond resolution.

Question 10

Smith and Co., Inc. has 1 million shares of common stock outstanding and plans to sell 200,000 new shares via a rights offering. Joe Wilson, a common stockholder, owns 200 shares of the company. How many rights will he receive in the mail, and how many rights will it take to purchase one of the new shares?

A) 200 rights, 20 per share.
B) 200 rights, 5 per share.
C) 100 rights, 5 per share.
D) 100 rights, 20 per share.

Answer 10

200 rights, 5 per share;
Stockholders receive one right per share owned. Hence, Joe receives 200 rights. The purpose is to maintain shareholders’ proportionate interest in the company. Since the number of shares outstanding will increase by 20%, Joe needs to purchase 40 new shares (200 / 40 = 5 rights per share).

Question 11

Interest paid on I bonds is:
A) Exempt from state and local taxation.
B) Exempt at all levels.
C) Taxable at all levels.
D) Exempt at the federal level only.

Answer 11

Exempt from state and local taxation.

Question 12

A municipality is allocating the revenues from an industrial revenue bond under a net revenue pledge. The first priority is:
A) sinking fund payment.
B) reserve funds.
C) bond interest.
D) operation and maintenance.

Answer 12

operation and maintenance;
Under a net revenue pledge, operations and maintenance are paid first, with debt service following. In a gross revenue pledge, debt service is paid before operations and maintenance.

Question 13

Under the rules regarding the sales of new equity issues, which of the following are restricted purchasers?

Aunts and uncles.
In-laws.
Supported persons.
Grandparents.

Answer 13

In-laws.
Supported persons;
Restricted purchasers include spouses, parents, children, siblings, and in-laws. Aunts and uncles, as well as grandparents, are excluded. A person supported by an employee of a member can never buy a new equity issue.

Question 14

Under MSRB rules regarding municipal securities, a control relationship exists when

officers or employees of a broker/dealer hold positions of authority over the municipal issuer.
officials of the municipal issuer hold policymaking positions at the broker/dealer.
the municipal issuer is a public finance client of the broker/dealer.
an employee of the broker/dealer lives in the issuer’s municipality.

Answer 14

officers or employees of a broker/dealer hold positions of authority over the municipal issuer.
officials of the municipal issuer hold policymaking positions at the broker/dealer.

Question 15

Which of the following items appears on the confirmation statement for a when-issued trade of municipal bonds?
A) Accrued interest.
B) Settlement date.
C) Principal or agency trade.
D) Total contract price.

Answer 15

Principal or agency trade.

Question 16

A customer purchases an XYZ municipal bond at 108. It is scheduled to mature in 16 years. After owning the bond for 10 years, he sells the bond at 102. What capital gain or loss must he report for tax purposes at the time of the sale?

$10 Loss
$20 Gain
$10 Gain
$60 Loss

Answer 16

If a municipal bond is purchased at a premium, the premium must be amortized over the time until maturity. An $80 premium on a 16-year municipal bond indicates that $5 will be amortized each year ($80 divided by 16 = $5). After 10 years, the tax basis would be 103 ($1,030). Since the sale was for 102 ($1,020), the customer has a $10 loss on one bond.

Question 17

Which of the following is the computation for the coverage ratio for a municipal revenue bond issue?
A) Annual interest and principal expense divided by revenues collected.
B) Revenues collected divided by annual principal expense.
C) Net revenue divided by annual interest and principal expense.
D) Revenues collected divided by annual interest expense.

Answer 17

Net revenue divided by annual interest and principal expense.

Question 18

Rank the following from first to last in order of payment at liquidation of a corporation.

General creditors.
Preferred stock.
Subordinated debentures.
Accrued taxes.

Answer 18

IV, I, III, II.
The complete order of liquidation is as follows: wages, taxes, secured debt, debentures and general creditors, subordinated debentures, preferred stock, common stock.

Question 19

Difference between qualified vs non-qualified plans

Answer 19

Tax treatment is the main difference between qualified and non-qualified retirement plans. Contributions to a non-qualified plan are not deductible to the employer until the employee takes a withdrawal and is taxed on the income. Employer contributions to a qualified plan may be deducted immediately.

Question 20

A customer, long 100 shares of ABC at 73, writes 1 ABC Apr 75 call at 2 to generate additional income. ABC stock subsequently moves higher at which time the customer is exercised. For tax purposes, which of the following statements are TRUE?
Cost basis is $73 per share.
Cost basis is $71 per share.
Sales proceeds are $75 per share.
Sales proceeds are $77 per share.

Answer 20

Cost basis is $73 per share.

Sales proceeds are $77 per share.