Qbank 1

Question 1

If a customer of your firm receives stock from the estate of her mother, the stock’s cost basis in the hands of the customer is the:

Answer 1

market value at date of death; When securities are inherited, the heir receives a cost basis calculated as of the deceased party’s date of death.

Question 2

Which index represents the thinnest selection of stocks?

1. Wilshire
2. S&P 500
3. Value line index
4. Dow Jones Industrial Average

Answer 2

Of those listed, the DJIA represents the fewest stocks (30).

Question 3

A quotation on a municipal security between dealers is assumed to be a(n):

1. workable quote
2. bona fide quote
3. nominal quote
4. indication of interest

Answer 3

Municipal bond quotations between dealers are required to be bona fide, or firm, quotes. They are required to be fair and reasonably related to the current market.

Question 4

The Federal Reserve sets which of the following? I.The reserve requirement
II.The federal funds rate
III.The prime rate
IV.Initial margin requirements for nonexempt securities

Answer 4

The Fed is responsible for setting the reserve requirement, the discount rate, and the initial margin requirement for nonexempt securities. The federal funds rate, charged in bank-to-bank borrowing, is a market rate of interest. While it is heavily influenced by Fed action, it is not set by the Fed. and neither is the prime rate, which is the rate large banks charge their most creditworthy customers for unsecured loans.

Question 5

Your customer asks you to help evaluate several companies she is considering adding to her portfolio. One of the tools you are using is the asset coverage ratio to assess

Answer 5

The asset coverage ratio measures the tangible and monetary assets of a company in relation to its outstanding debt obligations. It is but one tool that can be utilized to assess the overall strength or weakness of a company’s financial health.

Question 6

If the customers of a selling-group member sell into a penalty stabilizing bid, the selling-group member must pay back to the underwriter the:

1. spread
2. give up
3. reallowance
4. concession

Answer 6

If selling-group members liquidate into the stabilizing bid, they may be required to return the concession they were originally paid.

Question 7

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above:

1. $125/share
2. $200/share
3. $150/share
4. $175/share

Answer 7

175

Question 8

The risk of a bond decreasing in value during periods of inflation is known as:

1. marketability risk
2. credit risk
3. interest rate risk
4. reinvestment risk

Answer 8

Interest rate risk is the possibility that interest rates might rise, causing bond prices to fall. Periods of inflation are accompanied by rising interest rates.

Question 9

A municipality that has issued GANs, short-term municipal notes, does so in expectation that the debt service will be paid by the receipt of funds attained:

1. from future tax revenue
2. via grants from the fed gov
3. both tax and other anticipated revenue
4. the issue of long term bonds

Answer 9

Grant anticipation notes (GANs) are short-term municipal notes issued in anticipation of funds via grants that the municipality is expecting from the federal government.

Question 10

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?

Answer 10

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 11

The primary tax benefit of an income oil and gas program is:

1. intangible drilling costs
2. depreciation
3. depletion
4. tangible drilling costs

Answer 11

3; In an income program, the partnership is buying producing oil and gas wells. There are no drilling costs involved in these programs. While there may be a small amount of depreciation as a tax benefit, the primary benefit is depletion which is taken once the oil and gas have been sold.

Question 12

If an investor buys 300 shares of FLB, and one month later buys 1 FLB Jul 50 put, how does this affect the holding period on his or her stock?

1. stops the holding period on 100 shares
2. it has no impact
3. stops the holding period on 300 shares
4. ends the holding period on the put

Answer 12

1; The put purchase ends the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns 1 put, this stops the holding period on 100 shares owned. The other 200 shares are unaffected.

Question 13

XYZ Corporation has a market price of $45 per share and earnings per share of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings ratio of XYZ will be:

1. 5
2. 15
3. 45
4. 3

Answer 13

2; Before the split, the company had a P/E ratio of 15 ($45 per share / $3). After the split, the price per share and the EPS drop in the same proportion, leaving the PE ratio unchanged (new price = $15, new EPS = $1).

Question 14

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 14

2 & 3; 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 15

Under SEC Rule 134, a tombstone advertisement includes all of the following EXCEPT:

1. number of shares to be sold
2. public offering price
3. net proceeds to the issuer
4. names of the syndicate members

Answer 15

3; Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering’s effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.

Question 16

An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the NAV was $11.08. If the current POP is $12.50 and the NAV is $11.80, the investor receives:

Answer 16

Shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).

Question 17

SEC Rule 145 exempts which of the following from registration?I. Stock resulting from a stock split.
II. Stock resulting from a stock dividend.
III. Stock issued in connection with an acquisition.
IV. IPO in which the entire amount is being sold by officers.

Answer 17

1 & 2; Rule 145 exempts (from registration) additional shares resulting from stock splits or stock dividends. Stock issued in connection with an acquisition must be registered, as must stock in an IPO.

Question 18

If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are TRUE?
I. The corporation will be subject to currency risk.
II. The corporation will not be subject to currency risk.
III. The issue must be filed with the SEC.
IV. The issue need not be filed with the SEC.

Answer 18

2 & 4; Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the U.S., the issue is not registered with the SEC.

Question 19

Net overall debt of a municipality is:

Answer 19

Net overall debt of a municipality is defined as net direct debt plus overlapping debt.

Question 20

A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be:

Answer 20

To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1010 / 40 = $25.25).

Question 21

A customer buys 1 XYZ Dec 30 call at 7 and sells 1 XYZ Dec 40 call at 1. Two months later, if the customer closes the positions when the spread is trading at 9 points, the customer has

Answer 21

The investor established a debit spread and paid a net premium of $600 (7 − 1). The spread widened to 9, giving the investor a profit of $300 (9 − 6). Debit spreads are profitable if the spread between the premiums widens.

Question 22

A joint life with last survivor annuity: I.covers more than one person.
II.continues payments as long as one annuitant is alive.
III.continues payments only as long as all annuitants are still alive.
IV.guarantees payments for a certain period of time.

Answer 22

1 & 2; A joint life with last survivor contract covers multiple annuitants and ceases payments at the death of the last surviving annuitant.

Question 23

Underwriters and selling group members violate rules regarding sales of new equity issues to restricted persons when they do which of the following? I.Sell a new issue to one of their own customers.
II.Sell blocks of the new issue to accounts of partners or officers of the member firm.
III.Sell to member firms that deal only in investment company products.
IV.Sell to brokers and dealers outside the selling group who position the securities for later resale at higher prices.

Answer 23

2 & 4; Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules.

Question 24

Which of the following does the MSRB require on customer confirmations? I.Name and telephone number of the broker/dealer
II.Amount of markdown or markup on a principal transaction
III.Amount of any commission received on an agency transaction
IV.The current credit rating of the issuer

Answer 24

1 & 3; MSRB rules require that customer confirmations provide the name, address, and telephone number of the broker/dealer and the capacity of the firm in the trade (agent or principal). Amount of commission is required if the firm acted as agent, but the markup or markdown is not required if the firm acted as principal. Issuer credit ratings are not required information on a confirmation.

Question 25

A margin account customer buys 100 shares of HEX at $70 and writes a HEX Oct 70 call for a premium of 8. What must he deposit? (Regulation T is 50%.)

Answer 25

$2,700; The normal call would be 50% of $7,000 or $3,500. In this example, subtract the premium of $800 that the customer received. (Remember, in a covered call situation, no margin is required for the call.)

Question 26

For dividends to be taxed as qualified dividends, the dividend paying investment must be held for

1. at least 45 days
2. at least 30 days
3. more than 120 days
4. more than 60 days

Answer 26

In order to be taxed as qualified dividends, the investment must have been held for more than 60 days (at least 61 days).

Question 27

Payments received by the owner of a 403(b) plan are:

1. 100% taxable
2. taxable only to extent of earnings
3. taxable only to extent of the owner’s cost basis
4. not taxable

Answer 27

When TSA funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.

Question 28

A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a nonprofit corporation, how much can he claim as a tax deduction for this donation?

Answer 28

Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than 1 year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000.

Question 29

If an investor has an established margin account with a current market value of $4,400, and a debit balance of $1,750 with Regulation T at 50%, how much buying power does the investor have in the account?

Answer 29

The Regulation T requirement is 50% of the current market value of $4,400, which equals $2,200. Equity equals the current market value of $4,400 minus the debit balance of $1,750, which equals $2,650. Excess equity is calculated by subtracting the Regulation T requirement of $2,200 from the current equity of $2,650, which equals $450. Buying power is then calculated by multiplying the excess equity of $450 by 2, which equals $900.

Question 30

Rule 144A regulates:

1. sale of restricted stock by control persons
2. companies traded in the Nasdaq global select
3. sale of restricted stock to institutional investors
4. personal trading by research analysts

Answer 30

Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs).

Question 31

Freddie Mac does which of the following?
I. Issues pass-through securities.
II. Purchases student loans.
III. Purchases conventional residential mortgages from financial institutions.
IV. Issues securities backed directly by the full faith and credit of the U.S. government.

Answer 31

1 & 3; Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.

Question 32

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE?
I. She will receive the annuity’s entire value in a lump-sum payment.
II. She may choose to receive monthly payments for the rest of her life.
III. The accumulation unit’s value is used to calculate the total value of the account.
IV. The annuity unit’s value represents a guaranteed return.

Answer 32

2 & 3; When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account’s current value. An annuity factor is taken from the annuity table, which considers, for example, the investor’s sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account’s performance.

Question 33

Variable rate municipal bonds are subject to all of the following risks EXCEPT:

1. default
2. interest rate
3. liquidity
4. market

Answer 33

A variable rate bond is one whose coupon is adjusted periodically (semiannually or annually) to reflect current interest rates. Therefore, if rates rise, forcing prices down, the coupon on a variable rate bond will be adjusted upward, thereby tending to keep the bond’s price at or near par. Therefore, no interest rate risk is associated with these bonds. However, if rates fall, the coupon will be adjusted downward, keeping the bond’s price at or around par. Normally, a fall in rates will force prices up, but not with variable rate bonds.

Question 34

An unfunded pension liability is generally associated with which type of corporate retirement plan?

1. defined benefit
2. defined contribution
3. profit sharing
4. 401k

Answer 34

An unfunded liability is one that has been incurred but does not have to be paid until a future date, and for which sufficient money to meet the obligation has not been set aside. Defined benefit plans guarantee a specific payout in the future and require an actuary to determine the monies that must be set aside today to meet this future obligation. If sufficient monies are not set aside or if poor investment performance wipes out a portion of these funds, an unfunded liability results.

Question 35

Under which of the following circumstances may a member firm sell a new equity issue to one of its nonregistered employees?

1. under no circumstances
2. amount purchased is small
3. transaction is consistent with normal investment practice
4. permission of a principal is obtained

Answer 35

Member firms and employees of members (registered and nonregistered) are prohibited from buying a new equity issue at the public offering price.

Question 36

Which of the following would be characterized as a coincident indicator?

1. new housing starts
2. industrial production
3. prime rate
4. first time unemployment claims

Answer 36

Housing starts and unemployment claims are leading indicators, whereas prime rate is a lagging indicator. Only industrial production is coincident to the current economy.

Question 37

Which of the following would be considered in analyzing the credit worthiness of a revenue bond issuer?I. Per capita debt.
II. Debt service coverage.
III. Management.
IV. Debt to assessed valuation.

Answer 37

2 & 3; Revenue bonds are paid out of revenues from a particular project or facility, not from tax revenue. Therefore, debt service coverage and the personnel in charge of managing the facility are important. Overall debt of the issuer would be important in analyzing a general obligation bond backed by the issuer’s full faith and credit.

Question 38

Under SEC Rule 145, which of the following events require(s) a corporation to receive the approval of its stockholders?I. Merger.
II. Consolidation.
III. Acquisition.
IV. Transfer of assets.

Answer 38

all of the above; Rule 145 requires that a corporation have its stockholders’ consent in the event of a merger, consolidation, acquisition, reclassification, or transfer of corporate assets.

Question 39

An affiliate of an issuer sells shares using a Form 144. This form is valid for how many days?

Answer 39

Form 144, which is used for the sale of restricted and control stock, is valid for 90 days from the date of filing.

Question 40

If an investor purchases a bond anticipation note (BAN) that matures in one year, when will the investor collect the interest?

Answer 40

Bond anticipation notes are short-term money market instruments. Interest is paid at maturity.

Question 41

Which of the following are TRUE regarding the two tiers of securities offerings under Regulation A+?

1. both tiers specify maximum investment limits per offering
2. neither tier requires public investors to be accredited
3. both tiers are open to the public for investing
4. both tiers require that public investors be accredited

Answer 41

3; While both tiers under Regulation A+ are open to the public with general solicitation permitted, investors wanting to invest in Tier 2 securities offerings must be “qualified” not accredited. Tier 1 offerings have no investment limits for investors but tier 2 offerings do. The maximum investment allowed for a Tier 2 offering is the greater of 10% of the investors net worth or 10% of their net income per offering.

Question 42

If a customer sells $5,000 worth of stock in a restricted margin account, the SMA will be:

1. credited by $5k
2. debited by $5k
3. credited by $2.5k
4. debited by $2.5k

Answer 42

3; When securities are sold in a restricted account, 50% of the proceeds are credited to SMA. In other words, the customer is permitted to remove 50% of the proceeds from the account, but the balance must remain in the account to reduce the debit balance.

Question 43

Which of the following balance sheet items is NOT a current liability?

1. accounts payable
2. accrued taxes
3. mortgages
4. long term debt maturing in < 1 year

Answer 43

Short-term or current liabilities are those entries on a balance sheet that are due in 1 year or less. Accounts payable, accrued taxes, and that portion of long-term debt due within the year are all current liabilities. Mortgages are generally long-term liabilities, although that portion of a mortgage that is due within the year would be classified on the balance sheet as a current liability.

Question 44

The trust indenture of a revenue bond includes a statement explaining rates will be maintained at a level sufficient to cover the debt service and operating expenses. This statement would be found in that part of the indenture dealing with the:

1. bond covenants
2. flow of funds
3. feasibility study
4. official statement

Answer 44

The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue.

Question 45

An investor has an established margin account with a long market value of $6,500 and a debit balance of $3,750, with Regulation T at 50%. A maintenance call would be triggered if the long market value decreased below:

1. 8666.67
2. 4875
3. 2812.5
4. 5000

Answer 45

To determine long market value at maintenance, divide the debit balance of $3,750 by 75% ($5,000).

Question 46

A registered representative is explaining a particular market theory that maintains that the direction of a single stock or any general market is unpredictable. Which theory is he speaking of?

1. random walk
2. modern portfolio
3. odd-lot
4. dow

Answer 46

The random walk theory maintains that the direction of any stock, sector, or market in general is unpredictable. The theory is based on the “efficient market” theory, which holds that the stock market is perfectly efficient with prices reflecting all known information at any given time.

Question 47

If an investor has an established margin account with a short market value of $24,000 and a credit balance of $30,000, the maintenance call will be for

1. 7200
2. 2000
3. 6000
4. 1200

Answer 47

Minimum maintenance requirement in a short margin account is 30% of the current market value. In this case, 30% of $24,000 is $7,200. The equity in the account is currently $6,000 ($30,000 − $24,000). Therefore, the amount of the maintenance call is $1,200.

Question 48

An investor, age 36, has a net worth of $650,000 with an annual income of $65,000. Wanting to add to an existing portfolio the investor is not concerned about generating more income as that seems to be adequate already. However the investor does note that keeping taxes to a minimum is an objective. Which of the following funds would be the most suitable given the investors objectives?

1. fund investing in preferred shares; turnover ratio of 50%
2. fund investing in utility companies; turnover ratio of 25%
3. fund investing in companies with long term growth potential; turnover ratio of 25%
4. fund investing in companies with capital appreciation potential; turnover ratio of 100%

Answer 48

3; This investor is not concerned about income. This would eliminate both the utility fund and the preferred share fund, which are associated with income due to the dividends one would expect. Of the remaining 2 funds, growth and appreciation oriented, the one with the lower turnover ratio would generate less tax liability. The portfolio turnover ratio reflects a funds holding period of securities being bought and sold by the fund manager. If a fund has a turnover ratio of 100%, the entire portfolio is likely to turnover in a year and capital gains distributions are likely to be short term and subject to the maximum tax rate, increasing the tax liability and therefore, not the best option. By contrast a 25% turnover ratio means the average holding period of the securities in the portfolio is 4 years. This would mean that any capital gains distributions are more likely to be long term and subject to a lower tax rate.

Question 49

A recession is defined as a drop in GDP for:

1. 6 consecutive quarters
2. 2 consecutive quarters
3. 4 consecutive
4. 3 consecutive

Answer 49

A recession is a drop in GDP for 2 consecutive quarters.

Question 50

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are:

1. partially tax free return of capital and partially taxable
2. 100% tax deferred
3. 100% taxable
4. 100% tax free

Answer 50

1; The investor has already paid tax on the contributions but the earnings have grown tax-deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.

Question 51

The investor has already paid tax on the contributions but the earnings have grown tax-deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.

Answer 51

2 & 3; Each member’s written and electronic communications may be subject to a spot-check procedure by FINRA. Upon written request from FINRA, each member must submit the material requested within the time frame specified by FINRA.

Question 52

The bond placement ratio, as shown in the Daily Bond Buyer, is found by which of the following?

1. dollar value of new issues sold divided by dollar value of the new issues offered
2. # of new issues divided by the 30 day visible supply
3. dollar amount of new issues sold divided by the dollar amount of new issues unsold
4. number of new issues unsold divided by the number of new issues offered

Answer 52

1; The bond placement ratio is the percentage of new municipal bonds offered last week that were sold last week.

Question 53

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 53

1 & 4; 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 54

A young first time investor wants to put $10,000 savings in an investment that she wants to see grow over many years. She intends to add to it in small amounts whenever able. A balanced mutual fund and an equity growth fund are chosen. Which would be the most suitable share class for this initial investment?

1. D shares
2. A shares
3. B shares
4. C shares

Answer 54

3; B class shares have a back-end load (sales charge) only payable when the shares are redeemed and those sales charges dissipate typically over the first 5 to 7 years. Until they disappear completely, the investment is help beyond that time. This is why B shares are generally most suitable for smaller investments (where taking advantage of breakpoints would not be a factor) made with a longer investment time horizon such as this one.

Question 55

A customer sells 3 ABC Feb 25 puts at 4 when ABC is at 24. If the contracts are closed out at intrinsic value when ABC is at 19, the customer has a:

1. $200 loss
2. $600 gain
3. $200 gain
4. $600 loss

Answer 55

Because the investor sold the puts for a total of $1,200 to open his position, he must buy the options to close out his position. If he buys back the puts when ABC is at 19, the intrinsic value at that time is 6 because puts are in-the-money when the market price is below the strike price (25 − 19 = 6). He pays a total of $1,800 to close out his 3 contracts and, because he paid more than he received, incurs a loss of $600.

Question 56

All of the following are purchasers of Treasury securities in the primary market EXCEPT:

1. financial institutions
2. investment companies
3. FRB
4. commercial banks

Answer 56

The FRB trades in governments in the secondary market; they are not primary purchasers.

Question 57

Your customer tells you that she sees the exchange rate for the British pound in the spot market is listed at 148.47. What do you tell her when she asks you what this means?

1. $1 equals 14.847 pounds
2. one pound equals $1.4847
3. $1 equals 1.4847 pounds
4. one pound equals 14.847 US cents

Answer 57

2; The exchange rate refers to U.S. cents per British pound; 148.47 equals $1.4847.

Question 58

Treasury STRIPS and Treasury receipts are quoted based on

1. amortization of premiums
2. 1/8 of a point in dollars
3. YTM
4. 1/32 of a point in dollars

Answer 58

3; Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

Question 59

Which of the following types of retirement plans would be most beneficial to a young employee of a corporation?

1. profit sharing plan
2. defined benefit
3. defined contribution
4. Keogh plan

Answer 59

The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years to go in the workforce, so the investments made with the defined contributions will have a maximum time period to grow.

Question 60

A customer requests that their broker/dealer hold their fully paid for stock. Which of the following are required? I.A written stock power from the customer
II.Full power of attorney from the customer to the broker/dealer
III.The securities must be segregated from those of the firm and other customers.
IV.The customer must be informed that the securities may be withdrawn by him at any time.

Answer 60

3 & 4; The broker/dealer is required to segregate customer fully paid for securities and inform the customer that the securities can be withdrawn at any time.

Question 61

Under OCC rules regarding options communications with the public, if an educational piece making no projected performance figures or recommendations is distributed to customers it:

1. doesn’t need to be preceded by an options disclosure doc
2. can only be distributed to retail customers
3. doesn’t need to be approved by a registered options principal
4. can only be distributed to institutional customers

Answer 61

1; OCC communications rules do not distinguish between retail and institutional customers. Therefore their communications rules apply to all customers. All communications pieces must be approved by a registered options principal (ROP). If the educational piece makes no recommendations or performance projections it need not be preceded by an options disclosure document (ODD) but it must be accompanied by a notice containing a name and address where the ODD can be obtained.

Question 62

When conducting a discussion with a client about the merits of investing in a DPP, all of the following could be tax advantages EXCEPT:I. accelerated depreciation.
II. depletion allowances.
III. recapture of depreciation.
IV. tangible drilling expenses.

Answer 62

3 & 4; Depreciation is the deduction against income representing the cost recovery of certain fixed assets. When one of those assets is sold for more than the straight-line depreciated value, the excess is recaptured as ordinary income. Only intangible drilling expenses benefit the limited partner.

Question 63

Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with

1. losses on options positions
2. capital losses
3. tax preference items
4. gains associated with variable annuity portfolios

Answer 63

3; Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private-purpose municipal revenue bonds. These types of items are known as tax preference items. For investors who are subject to the alternative minimum tax (AMT), the benefits normally associated with tax preference items are lost, because these items must be added back into the investor’s taxable income.

Question 64

An arbitration proceeding involving a customer in an amount over $100,000 has been agreed to. In such an arbitration dispute, which of the following is TRUE?
1, both parties must agree before three arbitrators can be used in disputes involving amounts > $100k
2. the customer can request that all 3 of the arbitrators selected be from the public sector
3. only nonpublic arbitrators can be used in disputes in amounts > $100k
4. disputes > $100k are always hear by a single arbitrator

Answer 64

2; In disputes involving a customer for amounts greater than $100,000 three arbitrators will be used unless both parties agree to one. In the case where three arbitrators are used, the customer can request that all three arbitrators be selected from the public sector.

Question 65

A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an NAV of $12 and a POP of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that:

1. ABC is an open end fund and GEM is a closed end fund
2. both are open end
3. GEM may be an open or closed end fund and ABC is a closed end fund
4. ABC and GEM are both UITs

Answer 65

3; The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have a POP less than its NAV, therefore ABC cannot be an open-end fund.

Question 66

A customer sells securities and uses the proceeds to buy more securities at the same cost. Under the 5% markup policy, the markup is calculated on:

1. the buy side only
2. total of both sides
3. sell side
4. each side separately

Answer 66

The firm must consider the entire transaction (a proceeds transaction) when calculating the markup.

Question 67

Which of the following is true regarding a “summary section” and a “statement of additional information” for management investment companies?

1. a summary section isn’t required in the prospectus of a mutual fund
2. neither are required to be in the prospectus of a mutual fund
3. a statement of additional info doesn’t need to be in the prospectus of a management company
4. both must be included

Answer 67

A statement of additional information (SAI) need not be in a prospectus but available for both open and closed-end investment companies. It consists of information not necessarily needed to make an informed purchase decision but still useful to the investor. The SEC however mandates that “enhanced disclosure” in the form of a summary section be included in the prospectus of open-end investment companies (mutual funds). It must be written in plain language and the SEC mandates the order of, and the items to be addressed in the summary.

Question 68

Which of the following is the most stringent test of liquidity?

1. (current assets - inventory) / current liabilities
2. (cash + cash equivalents) / current liabilities
3. current assets / current liabilities
4. assets / current liabilities

Answer 68

2; Of the answers given, the cash assets ratio is the most stringent because it excludes inventories and accounts receivable.

Question 69

A customer wants to buy $12,000 worth of stock using other marginable securities owned as collateral for the purchase. With Regulation T at 50%, what must the current market value (CMV) of the securities deposited be?
1, 18k
2. 6k
3. 12k 
4. 24k

Answer 69

3; Stock buys stock dollar for dollar. With $12,000 worth of fully paid marginable securities, the customer can borrow $6,000 against them. The $6,000 can be the 50% initial requirement for the additional $12,000 purchase.

Question 70

Which of the following statement(s) regarding gift taxes are TRUE? I.Gifts per person per year up to an IRS specified dollar limit can be given without a tax liability.
II.Gifts per person per year in excess of the IRS specified dollar limit for that year may be subject to tax.
III.The donor, not the recipient, is responsible for any tax liability.
IV.The tax rate increases with the size of the gift.

Answer 70

all of the above; In accordance with gift tax regulations as mandated by the IRS, an individual may give a gift of up to a specified dollar limit per person in one year with no gift tax liability. If the gift exceeds the IRS specified dollar limit it is the donor who is responsible for any tax. The gift tax is a progressive tax, which means that as the size of the gift increases, the percentage of applicable tax will also increase. The IRS specified gift tax limit is subject to change from year to year.

Question 71

Investment clubs: I.can take advantage of breakpoints on mutual fund purchases.
II.cannot take advantage of breakpoints on mutual fund purchases.
III.are permitted to purchase new equity issues at the POP.
IV.are not permitted to purchase new equity issues at the POP.

Answer 71

2 & 3; Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases.

Question 72

An investor wishes to purchase a new issue municipal bond. Which two of the following terms describe the form of the bond?I. Bearer.
II. Registered as to principal only.
III. Fully registered.
IV. Book entry.

Answer 72

All new municipal bonds are issued either in fully registered or book entry form.

Question 73

Members of a syndicate receive notice of their share of the offering through the:

1. prospectus
2. due diligence meeting
3. syndicate letter
4. official statement

Answer 73

3; The syndicate letter is sent by a municipal dealer to prospective members, inviting them to join the syndicate and setting forth the conditions of the syndicate. Such conditions include who the manager will be, the percentage participation (each member’s share), and the amount of good faith deposit required.

Question 74

Which of the following statements are TRUE of Ginnie Maes? I.They are quoted in 1/8ths.
II.They are quoted in 1/32nds.
III.They are traded with an accrued interest computed on an actual day basis.
IV.They are traded with an accrued interest computed on a 30/360 basis.

Answer 74

2 & 4; Like governments, Ginnie Maes are quoted in 32nds, but, like corporates, Ginnie Maes compute accrued interest on a 30/360 day basis.

Question 75

All of the following may be used to service special tax bond issues EXCEPT:

1. gasoline taxes
2. business license taxes
3. real estate taxes
4. excise taxes

Answer 75

Special tax bonds are sometimes included in the larger and more general category of revenue bonds. Bonds supported from the proceeds of specified income generators, such as gasoline, cigarettes, liquor, and business licenses are special tax bonds. Ad valorem (real estate) taxes never service special tax bonds.

Question 76

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE?I. For gift-tax purposes, the value of the gift is $3,000.
II. For gift-tax purposes, the value of the gift is $7,000.
III. The son’s cost basis on the stock is $3,000.
IV. The son’s cost basis on the stock is $7,000.

Answer 76

When making a gift of securities, the market value at date of gift is used to determine if any gift taxes are due. However, when making a noncharitable gift of securities, the donor’s cost basis is passed to the recipient.

Question 77

State securities laws address the:I. regulation of securities exchanges within the state.
II. laws of each state governing the sale of new issues.
III. revocation of the broker/dealer’s registration.
IV. registration of regional exchanges.

Answer 77

2 & 3; State securities laws (blue-sky laws) address registration of securities, broker/dealers, and registered representatives at the state level. The Securities Exchange Act of 1934 addresses the regulation of securities exchanges.

Question 78

XYZ Corp. owns 18% of the voting common stock of ABCD Enterprises. In the current tax year, XYZ receives $250,000 in dividend income from its investment in ABCD. If XYZ has a marginal tax rate of 34%, what is its tax liability on the dividend income received?

Answer 78

Under the inter-corporate dividend exclusion rule, if a corporation owns stock in another corporation, 50% of the dividends received is excluded from taxation. Therefore, only 50% of the $250,000 received is subject to tax (50% × $250,000 = $125,000). Applying a tax rate of 34% to $125,000 results in a tax liability of $42,500.

Question 79

If an individual is convicted of a money- or securities-related fraud, FINRA will deny registration to that individual for how many years from the conviction date?

Answer 79

Conviction within the past 10 years for any felony or securities-/money-related misdemeanor will lead to statutory disqualification of an applicant for registration with a FINRA member firm.

Question 80

A customer of your broker/dealer is bullish on US equity securities across a broad spectrum of industries. He would like to participate in an anticipated upward movement of an equity stock index. Which of the following investments would you recommend as being closely related to the movement of equities in general?

1. REITs
2. SPDRs
3. ADRs
4. Variable rate demand obligations (VRDOs)

Answer 80

The spider (SPDR) is an index fund designed to replicate and track the performance of the S&P 500, a broad based equity index.

Question 81

Super Display Book (SDBK) is the electronic order processing system used by which of the following markets for trading common stocks?

1. NYSE
2. CBOE
3. OTC
4. Philadelphia Stock Exchange

Answer 81

The NYSE uses the Super Display Book system for processing orders.

Question 82

A customer bought 100 ABC at 60 in January of 1998. In February 2000, the stock is worth $100 per share and the customer donated it to charity. The consequences are:I. a $6,000 deduction.
II. a $10,000 deduction.
III. no tax is due on appreciation.
IV. tax is due on appreciation.

Answer 82

2 & 3; When an investor donates appreciated securities to charity, the investor will receive a tax deduction based on their value as of the donation date. There will be no tax due on the amount of appreciation as long as the stock was held long-term as of the date of the charitable donation.

Question 83

A customer’s restricted margin account shows the following:

LMV $30,000
DB $16,000
SMA $0

If the customer sells $2,000 of securities, how much could be withdrawn from the account?

Answer 83

$1,000; In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to SMA. Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account.

Question 84

A customer invests $20,000 in a DPP and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution from the partnership of $15,000. At year end, the customer receives a K-1 statement reporting his share of partnership losses of $75,000. How much of the loss may the customer deduct from passive income?

Answer 84

A limited partner can only deduct partnership losses to the extent of his basis. To determine basis, add the original investment ($20,000). to any recourse debt assumed by the investor ($50,000). Recourse debt adds to basis as the partner is liable for this amount. Cash distributions received reduce basis ($15,000). At year end, the investor’s basis and the amount he can deduct from passive income is $55,000.

Question 85

A customer has a margin account which shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has SMA of $5,000. The long market value at maintenance is:

1. 150k
2. 120k
3. 115k
4. 95k

Answer 85

2; Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by .75 ($90,000 / .75 = $120,000). If the market value were to fall to $120,000, the account would look like this: $120,000 − $90,000 = $30,000 (25%) (MV − DB = EQ).

Question 86

The primary purpose for creating ERISA was to:

1. promote a retirement fund for gov employees
2. protect EEs from the mishandling of retirement funds by corporations and unions
3. provide all employees with additional source of retirement income in the event that the social security system defaults
4. establish a means for self employed persons to provide for their own retirement

Answer 86

2; ERISA was created to protect the retirement funds of union members and employees of large corporations. ERISA guidelines state that all qualified retirement plans must be in writing, segregate funds from corporate or union assets, make prudent investments, report to participants annually, and not be discriminatory. All of these activities are audited under ERISA.

Question 87

A primary dealer has its bid on Treasury bills filled at the weekly auction. Settlement between the dealer and the Treasury will be:

1. regular way
2. same day
3. next biz day
4. Thursday of that week

Answer 87

Settlement for the weekly Treasury bill auction normally occurs on the Thursday of the same week as the auction.

Question 88

Yield-based options expire on the

1. last day of trading
2. third Wednesday of the month
3. day after the last day of trading
4. day following the third Friday of the month

Answer 88

Yield-based options expire like stock options; on the third Friday of the expiration month which is the last day of trading.

Question 89

A father opens 4 custodial accounts for each of his children with the same mutual fund company. He invests $15,000 in each account. The fund company has breakpoints at $50,000, $100,000, and $200,000. The sales charge is:

1. ineligible for a breakpoint b/c they are custodial accounts
2. based on the total $60k investment and qualifies for the $50k breakpoint
3. based on the total $50k investment and qualifies for the $100k breakpoint
4. based on a $15k investment and is charged for each account

Answer 89

2; An investment made by one person in 4 custodial accounts for his children at the same fund company would qualify for the breakpoint that is applicable to the total amount invested. In this case, $60,000 was invested, so the applicable breakpoint is at $50,000.

Question 90

A customer must present a signed representation letter stating that he is not a restricted purchaser prior to buying a new issue of:

1. common stock
2. corporate bonds
3. US gov bonds
4. muni bonds

Answer 90

New issues of common stock may not be sold at the public offering price to any account in which a restricted person has a beneficial interest. Prior to buying an IPO, a customer must present a representation letter stating they are not a restricted person.

Question 91

A broker/dealer that is a financial advisor to a municipal issuer: I.cannot act as an underwriter of the issuers bonds in a negotiated underwriting and receive compensation for both services.
II.cannot act as an underwriter of the issuers bonds in a competitive bid underwriting and receive compensation for both services.
III.may always act as an underwriter of the issuers bonds in a negotiated underwriting and receive compensation for both services.
IV.may always act as an underwriter of the issuers bonds in a competitive bid underwriting and receive compensation for both service.

Answer 91

1 & 2; Broker/dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by MSRB Rule G-23 to also act as underwriters for the same issue regardless of whether the underwriting process has been done by competitive bid or was negotiated. In the event that an exception is allowed, or the broker dealer performs an advisory function specifically associated with the underwriting, the broker/dealer would be limited to accepting fees for the advisory service only and not be allowed to accept fees for any underwriting services.

Question 92

If an investor is anticipating that the yield spread between U.S. government and BBB-rated corporate bonds will widen, the investor is expecting the U.S. economy to:

Answer 92

enter a recession; If investors anticipate a recession, they tend to flee to quality. In this case, they would likely sell lower quality corporate bonds (forcing prices down and yields up) and use the proceeds to buy higher quality U.S. government bonds (forcing prices up and yields down). Thus, the yield spread would widen between corporate and government bonds. Yields on corporate bonds are higher than yields on U.S. government bonds to begin with. If yields on corporate bonds go up and yields on government bonds decline, the spread will widen.

Question 93

Stock of which of the following companies trades on equity?

1. car manufacturer
2. steel manufacturer
3. drug manufacturer
4. public utility

Answer 93

4; Trading on equity relates to a highly leveraged company. Utility companies are normally highly leveraged.

Question 94

A customer wanting to invest in an oil and gas limited partnership wants to know what her cost basis would be for tax purposes. While there can be a number of variables, cost basis for a limited partner is best defined as

1. cash investment made - distributions
2. cash investment made + recourse debt - distributions
3. recourse debt - cash distributions
4. noncash contribution + nonrecourse debt - recourse debt

Answer 94

2; Cost basis for a limited partner is defined as investment made (cash contributions) + recourse debt (debt the LP is responsible for) – distributions. Nonrecourse debt would only be included for real estate programs. Real estate programs are the only types where LPs can be responsible for both recourse and nonrecourse debt.

Question 95

An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year?

1. $2.5k
2. $5k
3. $0
4. $3k

Answer 95

The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year.

Question 96

An investor wanting to know about the tax consequences of a direct participation program (DPP) should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated EXCEPT:

1. crops
2. buildings
3. gas
4. oil

Answer 96

Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered to be renewable assets.

Question 97

Which of the following is a leading indicator of the economic future?

1. unemployment stats
2. machine tool orders
3. CPI
4. GNP

Answer 97

Machine tool orders anticipate the business cycle, because they come first in the manufacturing process.

Question 98

Which of the following documents would include information about the issuer’s financial condition?

1. official statement
2. trust indenture
3. bond resolution
4. notice of sale

Answer 98

The official statement is used to disclose all material information about the issuer an investor would need to know to make a decision regarding issue purchase.

Question 99

Listed options expire at?

Answer 99

Options expire on the third Friday of the expiration month at 11:59 pm ET.

Question 100

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered?

1. spread order
2. 2 stop orders
3. straddle order
4. 2 limit orders

Answer 100

1; A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less (this is one order, not two).

Question 101

A highly leveraged company has the smallest percentage of its total capitalization in:

1. long term debt
2. preferred stock
3. common stock
4. short term debt

Answer 101

Explanation

Common stock, which represents ownership, would account for the smallest amount of capitalization of a highly leveraged company. Highly leveraged companies have the largest amount of their capitalization in debt instruments. Preferred stock, although an equity, is more like a debt instrument because of the stated dividend rate

Question 102

A customer wishes to buy 1 XYZ Jan 40 call and write 1 XYZ Jan 45 call. At the time the order is placed, the options are trading as follows:

Jan. 40 calls - 4.30 bid, 4.35 ask
Jan. 45 calls - 2.25 bid, 2.30 ask

If the transaction is effected at the market, the spread will be established at a:

Answer 102

The investor establishes a debit spread by purchasing the 40 call at the ask price of 4.35 and selling the 45 call at the bid price of 2.25; the difference is 2.10.

Question 103

All of the following are suitable objectives for a covered call writer EXCEPT:

1. providing downside protection for a long stock position
2. profiting from an increase in the price of stock
3. increasing return on a long stock position
4. speculating that a stock will not rise in price

Answer 103

2; Covered call writers sell stock at the strike price if exercised. This strategy provides downside protection to the extent of the premium received, increases the rate of return on a long stock position (because of the premium collected).

Question 104

Freddie Mac does which of the following?I. Issues pass-through securities.
II. Purchases student loans.
III. Purchases conventional residential mortgages from financial institutions.
IV. Issues securities backed directly by the full faith and credit of the U.S. government.

Answer 104

1 & 3; Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.

Question 105

A city waterworks publishes a tombstone offering a $20 million new issue of bonds priced at 100.65%. The bonds are priced above par because the:

1. amount exceeding par represents the underwriter’s spread
2. amount exceeding par includes accrued interest
3. muni has applied the standard muni bond servicing charge to the issue price
4. price reflects the fact that the coupon rate for the bonds at issuance is more than the rates of similar newly issued bonds available in the market

Answer 105

4; If a bond issue is priced above par, it is usually because the coupon rate at which the bonds were issued is more than the prevailing rate for other newly issued bonds.

Question 106

The document attesting to the formation of a limited partnership, filed with designated authorities, is called:

1. offering memorandum
2. registration statement
3. certification of LP
4. subscription agreement

Answer 106

The Uniform Limited Partnership Act requires that two or more persons sign and swear to a certificate of limited partnership. It is filed with the state and is a public document available for review.

Question 107

Four of the best-known indexes and averages are listed below. How do they rank on the scale of most to fewest issues in the index? I.Dow Jones Industrial Average
II.NYSE Composite Index
III.Standard & Poor’s 500
IV.Wilshire

Answer 107

4, 2, 3, 1

Question 108

Variable annuities must be registered with:I. the state banking commission.
II. the state insurance commission.
III. the SEC.
IV. FINRA.

Answer 108

2 & 3; A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. Therefore, variable annuities must be registered with the state insurance commission and the Securities and Exchange Commission.

Question 109

The economic theory that says economic growth results from lower tax rates and lower government spending is:

1. Keynesian
2. monetary theory
3. demand side
4. supply side

Answer 109

4; Supply-side economics is the theory of Arthur Laffer, who believed that heavy taxing and government intervention have a negative effect on the economy.

Question 110

GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of 1 right?

Answer 110

Since the stock is selling ex (after ex-rights), the formula is ($70 − $55) / 5. ($70 − $55 = $15) ($15 / 5 = $3).

Question 111

During a period of suspension, a suspended member must:

1. have no securities dealings of any kind
2. restrict its securities activities to investment banking
3. restrict its securities activities to mutual funds
4. be treated as a nonmember by other members

Answer 111

A member firm under suspension is essentially a nonmember during the period of suspension. Accordingly, during that time period, other FINRA members must treat the suspended firm as a nonmember. For example, during the period of suspension, other firms may sell new issues to the suspended firm only at the public offering price.

Question 112

The doctrine of reciprocal immunity most accurately describes:

Answer 112

The principle that neither the states nor the federal government may tax income received from securities issued by the other is known as the doctrine of reciprocal immunity. States may, however, tax the interest on debt securities of other states. This doctrine provides the original basis for the federal income tax exemption on interest paid on municipal debt securities.

Question 113

Which of the following statements regarding a shelf offering are TRUE?I. It can be used to distribute an initial public offering only.
II. It can be used to distribute an additional offering only.
III. Its maximum duration is 90 days.
IV. Its maximum duration is 3 years.

Answer 113

2 & 4; Shelf offerings are used by publicly traded companies to issue additional equity or debt securities. The issuer must sell the securities within 3 years after the registration is declared effective.

Question 114

Which term describes the following position?

Write 1 DOH Jan 30 call.
Write 1 DOH Jan 40 put

Answer 114

A combination is composed of a long call and long put, or a short call and a short put each having different strike prices and/or expiration months on the same underlying security.

Question 115

The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of:

Answer 115

1 mill = $.001. 10 mills = .01 (10 X .001). $100 million × 50% assessment rate = $50 million. $50,000,000 X .01 = $500,000.

Question 116

All of the following are primary objectives in a DPP EXCEPT:

1. long term capital gains
2. deferment of taxes
3. deductions against other income
4. short term capital gains

Answer 116

4; DPPs are used to defer present income into the future and take advantage of time.

Question 117

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?

Answer 117

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 118

As an initial transaction in a margin account, a customer sells short 1,000 shares of a capital market stock at $2 per share. If Regulation T is 50%, how much money will the customer be required to deposit?

1. 2500
2. 2000
3. 3000
4. 1000

Answer 118

1; The industry requirement to short stocks below $5 per share is 100% of market value or $2.50 per share (whichever is greater).

Question 119

A prospectus must be delivered to customers in the sale of all of the following transactions EXCEPT

1. new issues of registered common stock
2. mutual funds
3. ETFs trading in the secondary market
4. unit investment trusts

Answer 119

3; Exchange traded funds trading in the secondary market, like other securities that are already trading in the secondary market, do not require the delivery of a prospectus.

Question 120

When investing in a foreign bond fund, a customer will profit if:I. the U.S. dollar strengthens.
II. the U.S. dollar weakens.
III. foreign currencies strengthen.
IV. foreign currencies weaken.

Answer 120

Since the fund is purchasing bonds denominated in foreign currencies, a weakening of the U.S. dollar or strengthening of foreign currencies will be beneficial.

Question 121

Each of the following is a characteristic of money market funds EXCEPT:

1. stable NAV
2. high beta
3. offered without a sales load
4. portfolio of short term debt instruments

Answer 121

2; Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share). Beta is a measure of volatility; money market funds have low betas.

Question 122

Which of the following two are TRUE of a leveraged exchange traded fund (ETF)? I.The leveraged ETF may be purchased on margin.
II.Securities within the leveraged fund portfolio may be purchased on margin.
III.The leveraged ETF may never be purchased on margin.
IV.Securities within the leveraged fund portfolio may never be purchased on margin.

Answer 122

1 & 2; Because an exchange traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products such as purchasing them on margin, would apply. Leveraged funds can use a number of different securities types including derivative products, and trading techniques such as trading on margin as a means of attaining the leveraged returns they promise.

Question 123

Moody’s Investment Grade (MIG) rating would be applicable to:

1. a NY State revenue anticipation note
2. NY State university bond
3. NY State GO bond
4. NY state revenue bond

Answer 123

A MIG rating is provided for short-term municipal debt commonly referred to as notes (revenue anticipation notes).

Question 124

Which of the following are TRUE of municipal securities quotations? I.A quotation can be an indication of interest.
II.A quotation cannot be an indication of interest.
III.A quotation can be a one-sided request for a bid or offer (bids wanted and offers wanted).
IV.A quotation cannot be a one-sided request for a bid or offer (bids wanted and offers wanted).

Answer 124

1 & 3; MSRB rules pertaining to quotations cover all bona fide bids and offers including one-sided requests for bids wanted and offers wanted which are considered indications of interest.

Question 125

Which of the following transactions is subject to the 5% markup policy on markups and markdowns?

1. muni bond transactions
2. new issue corporate equity securities sold in a public offering
3. mutual fund shares sold to the public
4. NYSE listed stock traded in the third market

Answer 125

The 5% policy applies to all exchange and OTC transactions in nonexempt securities. It does not apply to prospectus offerings (new issues and mutual funds). It does, however, apply to third-market trades.

Question 126

A corporation with a single outstanding bond issue chooses to refund this debt. This means that the corporation:

Answer 126

Refunding is synonymous with refinancing. When we refinance, we take out a new debt and use the proceeds of that debt to pay off the old one.

Question 127

A registered representative who leaves the industry must requalify by examination to return to the industry if he is unaffiliated with a broker/dealer for more than how many years?

Answer 127

All securities licenses become null and void once an individual is unaffiliated for more than 2 years

Question 128

Bond laddering is intended to

1. increase diversification in equity portfolios
2. maximize return through selective timing when purchasing bonds
3. add diversification and decrease reinvestment risk in fixed income portfolios
4. lessen diversification and liquidity in fixed income portfolios

Answer 128

Bond laddering is intended to increase diversification, maintain steady cash flow, and decrease reinvestment risk by spreading maturities of smaller face value bonds over greater periods of time.

Question 129

Regarding rules addressing acting in concert, each of the following must observe position and exercise limits EXCEPT:

1. an investment adviser placing exercise orders for his discretionary accounts.
2. two or more individuals who have an agreement to act together.
3. a registered representative accepting unsolicited orders to exercise options.
4. an individual with accounts at several brokerage firms.

Answer 129

3; An individual investor or a group of investors acting in concert must observe position and exercise limits. These limits apply to an individual adviser acting for a group of discretionary accounts and to an individual who has accounts with several firms. Acting in concert does not apply to a registered representative (RR) simply accepting exercise order instructions from customers.

Question 130

A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request?

Answer 130

Upon receiving a customer request for a copy of the signed predispute arbitration agreement, the member firm has 10 business days to supply it.

Question 131

In a contested proxy (proxy contest) solicitation, all those soliciting proxies from shareholders must register with

1. FINRA
2. FRB
3. NSCC
4. SEC

Answer 131

In a contested proxy solicitation all those soliciting proxies from shareholders must register with the Securities Exchange Commission (SEC).

Question 132

If a customer has a margin account with a long market value of $140,000 and a debit balance of $60,000, what is the buying power in the account?

1. 20k
2. 5k
3. 0
4. 10k

Answer 132

The buying power of a margin account is twice the amount of SMA. This account has equity of $80,000, and the Regulation T requirement is $70,000. Therefore, the excess equity is $10,000 or SMA purchasing power equal to $20,000.

Question 133

All of the following may be cited to justify a markup on a stock sold from a broker/dealer’s inventory EXCEPT:

1. dealer’s cost
2. security’s price
3. availability
4. overall value of the transaction

Answer 133

The dealer’s cost is not a legitimate factor in determining the markup on a stock.

Question 134

A quotation on a municipal security between dealers is assumed to be a(n):

1. indication of interest
2. nominal quote
3. bona fide quote
4. workable quote

Answer 134

Municipal bond quotations between dealers are required to be bona fide, or firm, quotes. They are required to be fair and reasonably related to the current market.

Question 135

Which of the following statements about a Coverdell Education Savings Account (ESA) is NOT true?

1. Contributions are tax deductible, subject to a modified AGI phaseout.
2. The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free.
3. Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary.
4. Contributions of $2,000 per child per year are allowed.

Answer 135

1; Contributions to an ESA are not tax deductible.

Question 136

For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 70 ½, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as I.required beginning date (RBD)
II.required minimum distribution (RMD)
III.lock-up provisions
IV.vesting

Answer 136

1 & 2; For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 70 ½. This is known as the “required beginning date” (RBD). The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the “required minimum distribution” (RMD).

Question 137

ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend?

1. Monday,
2. Thursday
3. Tuesday
4. Wednesday

Answer 137

In order to receive a cash dividend, an investor must be owner of record as of the close of business on record date. Because regular way settlement is 2 business days, the customer must purchase the stock no later than Tuesday, May 15.

Question 138

All of the following regarding the official statement for a new municipal issue are true EXCEPT that it:
1. must include information about the offering’s call provisions.

2. can be used to review the issuer’s creditworthiness.
3. meets disclosure requirements for purchasers of the new issue.
4. is also called a prospectus.

Answer 138

4; The official statement is the disclosure document for each new issue of exempt municipal bonds. Although it is similar to a prospectus, these terms are not synonymous. The official statement commonly includes information about the call provisions of the bond, creditworthiness of the issuer, and other information potential purchasers should know before investing.

Question 139

Under FINRA’s rules governing the activities of broker/dealer firms, prior notification to the employing firm and prior written consent from the employing firm would be required in order to open a cash account for all of the following EXCEPT

1. a bank officer
2. employee of another member
3. registered rep of another member
4. exchange employee

Answer 139

1; FINRA requires prior written notification be made, and prior written consent be received before associated persons can open margin or cash accounts with other members or financial institutions. By virtue of being a bank officer alone, one couldn’t definitively say that this rule is applicable.

Question 140

An investment adviser’s contract must be approved by:

1. SEC
2. FINRA’s NAC
3. FINRA district committee
4. fund’s BOD or outstanding shares

Answer 140

Explanation

An investment adviser’s contract is approved annually by the board of directors or by a majority vote of the outstanding shares.

Question 141

A customer has a margin account with RTQ Securities, Inc. in which he has securities with a market value of $400,000 and a debit balance of $110,000. In the event of the bankruptcy of RTQ, SIPC covers:

1. $290k
2. $400k
3. $100k
4. $500k

Answer 141

1; SIPC protects each separate customer to a maximum of $500,000 in equity. This account has equity of $290,000 ($400,000 LMV minus $110,000 Dr).

Question 142

An investor purchases $10,000 worth of Treasury bills on November 27 and holds them until they mature on March 30 of the following year. For purposes of taxation, the interest from those Treasury bills is treated as:

1. partially ordinary income and partially capital gain
2. short term gain
3. tax free income
4. ordinary income subject to federal income tax

Answer 142

Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation.

Question 143

A company is offering a private placement with the intent of selling shares to nonaccredited investors up to the 35 allowed for in Regulation D. Which of the following is TRUE?

1. While the offering can be advertised to anyone, only accredited investors could be solicited to purchase shares
2. The offering may not be advertised
3. Anyone may be solicited
4. , The offering can be advertised to all except the 35 nonaccredited investors

Answer 143

2; Advertising private placements is considered a solicitation to sell. If the securities are advertised, all purchasers must be accredited or the company must reasonably believe they are. In this instance, the intent is to sell to up to 35 allowable nonaccredited investors and with that intent clearly stated the offering could not be advertised to anyone.

Question 144

All of the following would flow through as a loss to limited partners EXCEPT:

1. accelerated depreciation.
2. principal repayment on recourse debt.
3. interest payments on recourse debt.
4. depletion.

Answer 144

Principal repayments are not deductible for tax purposes. The interest is deductible.

Question 145

Which of the following statements regarding fixed municipal unit trusts are TRUE? I.The trust is managed.
II.The trust is not managed.
III.The portfolio can be traded.
IV.The portfolio cannot be traded.

Answer 145

2 & 4; Fixed unit trusts are not managed; the portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed pro rata to the unit holders. These units are redeemable by the issuer or its agent.

Question 146

A mother makes a gift of appreciated securities to her 10-year-old son. The son’s cost basis in the stock is the:

Answer 146

When a gift of securities is made while the donor is alive, the original cost of the securities is the cost basis, not the value of the security on the date of the gift. Market value at date of gift is used to determine if gift taxes are applicable.

Question 147

Debt service on an industrial revenue bond is secured by:

1. special assessments
2. ad valorem taxes
3. lease payments paid by a corporation
4. sales taxes

Answer 147

3; Industrial revenue bonds are issued by a municipality or an authority established by a municipality. No municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the only source of revenue for debt service.

Question 148

The letter of intent in a corporate underwriting is typically signed by which of the following parties?I. Issuer.
II. Managing underwriter.
III. Syndicate members.
IV. Selling group members.

Answer 148

The letter of intent initiates the underwriting process and is signed by the issuer and managing underwriter.

Question 149

The amount paid into a defined contribution plan is set by the:

1. employer’s profits
2. employee’s age
3. trust agreement
4. ERISA defined contribution requirements

Answer 149

3; A defined contribution plan’s trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.

Question 150

On January 18, your customer sold 500 shares of MNO for a loss of $5 per share. If on March 1 he bought 3 MNO calls, how much of the loss could he declare for tax purposes?

Answer 150

Since the purchase of the calls took place more than 30 days after the sale, the transaction is not a wash sale. He may therefore declare the entire $2,500 as a loss.

Question 151

A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as

1. all return of cost basis and nontaxable
2. exempt from taxes
3. part earnings and part cost basis
4. earnings only and taxable

Answer 151

Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable but the cost basis is returned tax free.

Question 152

All of the following might be used to measure the marketability of a new municipal GO issue EXCEPT:

1. placement ratio
2. visible supply
3. Revdex
4. S&P ratings

Answer 152

3; Revdex is an index of yields on 25 revenue bonds with 30-year maturities that are traded in the secondary market.

Question 153

KPT, Inc. is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? I.Tax rate.
II.Cash dividend.
III.Allowance for bad debts.
IV.Retained earnings.

Answer 153

1 & 3; Higher taxes mean less net income. The allowance for bad debts is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings which have no effect on the net income the company reports.

Question 154

If a customer fails to return a proxy statement to a member firm by the 10th day before the annual meeting, the member may vote the shares:

1. under no circumstances
2. w/o restriction
3. provided the matters to be voted on are of minor importance
4. with the permission of the issuer

Answer 154

3; If a customer signs and returns a proxy statement and fails to indicate how the shares are to be voted, the member must vote the shares as recommended by management of the issuer. If, however, the customer does not return the proxy by the 10th day before the annual meeting, the member may vote the shares as it sees fit as long as the matters to be voted on are of minor importance. If the matters are of major importance (e.g., a merger or the issuance of additional shares), the member may never vote the shares.

Question 155

An investment company share purchased at its NAV that can always be redeemed later at its then-current NAV is a:

Class A, B, C or D share?

Answer 155

Class C; Class A shares are purchased at NAV plus sales charge. Class B shares pay the sales charge upon redemption. Class D shares have a level load plus a redemption fee. Class C shares have only a level load (a 12b-1 fee) which is taken from net assets during the year.

Question 156

All of the following are regulated by the MSRB EXCEPT:

1. quotes
2. issuers
3. dealers
4. sales reps

Answer 156

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

Question 157

In what order are distributions paid under a net revenue pledge? I.The surplus fund.
II.The debt service account.
III.The operations and maintenance fund.
IV.The debt service reserve account.

Answer 157

3, 2, 4, 1; Under a net revenue pledge operations and maintenance expenses are paid before all debt service. Therefore payments go out to cover expenses in the following order: (1) operating and maintenance expenses, (2) debt service, (3) debt service reserve, and (4) surplus.

Question 158

Variable annuities must be registered with:I. the state banking commission.
II. the state insurance commission.
III. the SEC.
IV. FINRA.

Answer 158

2 & 3; A variable annuity is a combination of 2 products: an insurance contract and a mutual fund. Therefore, variable annuities must be registered with the state insurance commission and the Securities and Exchange Commission.

Question 159

BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM?

Answer 159

When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, it is the remaining 50% of the dividends received that are taxable.

Question 160

Which of the following statements regarding warrants are TRUE? I.They pay dividends.
II.They represent ownership in the issuing corporation.
III.They allow for the purchase of common stock at a fixed price.
IV.They do not give holders voting rights.

Answer 160

3 & 4; Holders of warrants have the right to buy stock from the issuer at a stated price for a specific time period. They do not pay dividends which are only paid to stockholders, nor do they give holders voting rights. The owner of the warrant does not own the stock until the warrant is exercised.

Question 161

SEC regulation SHO mandates a locate requirement for short sales that is applicable toI. corporate bonds.
II. NYSE issues.
III. Nasdaq securities.
IV. Municipal bonds.

Answer 161

2 & 3; This regulation mandates a locate requirement: before the short sale of any equity security, firms must locate the securities for borrowing to ensure that delivery will be made on settlement date.

Question 162

The transfer agent of a mutual fund:I. redeems shares.
II. sells shares.
III. holds custody of fund securities.
IV. handles name changes of mutual fund ownership.

Answer 162

1 & 4; The transfer agent redeems shares of a mutual fund at the price calculated after receiving a request for redemption. The transfer agent also handles the transfer of account ownership for such transactions as an inheritance or gift.

Question 163

Which of the following individuals normally trade on the floor of an exchange? I.Two-dollar broker.
II.Registered market maker.
III.Allied member.
IV.Stock lending representative.

Answer 163

2 & 4; Only bona fide traders such as two-dollar brokers, registered market makers, and specialists (designated market maker) may trade on the floor.