Random

Question 1

Long Straddle

Answer 1

A long straddle consists of a put and a call on the same security with the same strike price and the same expiration date. Should the stock increase, the call will increase in value. If the stock declines, the put will increase in value, making the position profitable if the stock moves in either direction.

Question 2

Rule 144 Trading Rules for Affiliates

Answer 2

The affiliate who has held the restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last four weeks’ average trading volume (30,000).

LO 20.f

Question 3

A customer’s confirmation of a municipal securities transaction must include

Answer 3

Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

LO 6.h

Question 4

When an analyst adds back the current year’s depreciation to the net income, she is computing the company’s

Answer 4

Cash flow from operations is computed by adding the year’s depreciation deduction to the net income.

Question 5

Which items would change if a company buys equipment for cash?

I. The working capital
II. The total assets
III. The total liabilities
IV. The shareholders’ equity

Answer 5

I only

The general balance sheet formula is assets = liabilities + shareholders’ equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity.

LO 13.d

Question 6

Auction Rate Securities

Answer 6

ARS are long-term securities, typically issued by municipalities that are tied to short-term interest rates. A Dutch auction method is used to reset a new rate, known as the clearing rate, at predetermined short-term intervals. Failed auctions—ones where no bids are received to reset the rates—are an inherent risk with ARS.

Question 7

FINRA’s Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for

Answer 7

trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.

Question 8

FINRA’s Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for

Answer 8

trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.

Question 9

The OCC must receive exercise instructions for equity options no later than

Answer 9

5:30 pm ET on the third Friday of the expiration month.

Explanation: Although trading stops at 4:00 pm ET on the third Friday of the expiration month, the final exercise deadline is 5:30 pm ET (4:30 pm CT) that same day.

LO 10.j

Question 10

A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be

Answer 10

no tax is due. Because Investors in variable annuities are only taxed on the earnings of the account. This account lost money—there were no earnings to be taxed.

LO 9.d

Question 11

One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed?

Answer 11

The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. Because this is a nonqualified annuity, there are no contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment.

LO 9.d

Question 12

An immediate dilution to earnings per share (EPS) would be least likely to occur from

A)a 2:1 stock split.
B)conversion of debentures.
C)refunding a bond at par.
D)a 10% stock dividend.

Answer 12

C)refunding a bond at par.

When a bond is refunded at par, the cash used is equal to the reduction in the liability resulting in no immediate corporate EPS (the number of shares remains the same). A stock split, a stock dividend, and conversion of a debenture increase the number of shares outstanding. Because the earnings haven’t changed and there are more shares, the EPS is lower (diluted).

LO 13.d

Question 13

Circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty.

Answer 13

Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following: death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.

LO 1.g

Question 14

Municipal finance professional (MFP)

Answer 14

An MFP is an associate of a broker-dealer engaged in municipal securities representative activities, other than retail sales. Those activities can include the solicitation of municipal bond business. Though someone employed by a broker-dealer is not prohibited from being an elected official of a municipality, there is no requirement that an MFP must be. Being employed by a broker-dealer dealing in municipal bonds and the MSRB simultaneously would be prohibited as a conflict of interest.

LO 6.h

Question 15

The preliminary prospectus will contain

Answer 15

The preliminary prospectus will include an overview and history of the business as well as any risks associated with it. The preliminary prospectus cannot include the effective date or public offering price (POP) because they have yet to be determined.

LO 20.c

Question 16

A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should
A)sell yen calls.
B)sell yen puts.
C)buy yen puts.
D)buy yen calls.

Answer 16

D)buy yen calls.
If the dollar was to weaken against the yen, then the yen would increase in value. If one wished to gain as the result of an asset’s increased value, the appropriate option strategy is the purchase of a call. As a general rule, to hedge, importers buy calls on the foreign currency, whereas exporters buy puts.

LO 10.g

Question 17

Hedge Funds are generally structed as a…

Answer 17

partnership with the general partner as investment manager and the investors as limited partners. In general, hedge funds are exempt from registration with the SEC. Hedge funds are actively and aggressively managed, seeking superior returns—and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.

LO 12.a

Question 18

Time value of each contract

Answer 18

Time value is the premium minus the intrinsic value

Question 19

Mini max Underwriting

Answer 19

A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.

LO 20.b

Question 20

Horizontal or Time spreads

Answer 20

Time or horizontal spreads have contracts that expire in different months, not the same time.

LO 10.h

Question 21

T-bills

Answer 21

T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.

LO 7.a

Question 22

Warrants

Answer 22

Warrants are corporate issues typically attached to debt offerings as a sweetener. They generally have a life of two to five years and are therefore considered long-term, giving the holder the right to purchase shares in the future at a price that is usually higher than the price of the shares when the warrants were first issued. Warrant holders have no voting rights.

LO 3.f

Question 23

Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk?

A)Z-tranche

B)PACs

C)Companion

D)TACs

Answer 23

B) PACs have targeted maturity dates. They are retired first, and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) because changes in prepayments are transferred to companion tranches, also called support tranches.

LO 12.d

Question 24

ELNs

Answer 24

ELNs are debt instruments. Their final payment at maturity is based on the performance of a single stock, a basket of stocks, or an equity index. These notes can be traded OTC or on listed exchanges. ETFs trade on listed exchanges and have many of the same trading characteristics as stocks. Their portfolios can hold assets such as equity securities, debt securities, or commodities, and many ETF portfolios are structured to track the performance of a specific index.

LO 4.g

Question 25

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? **A)**AAA rated municipal bonds maturing in 18 years **B)**U.S. Treasury STRIPS maturing in 18 years **C)**U.S. Treasury bonds with 18 years to maturity date **D)**Blue-chip stocks

Answer 25

B)STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, **but there is no growth potential.** The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future. ## Footnote LO 7.a

Question 26

Roth IRA: 4 Exceptions where Earnings are subject to tax but no 10% penalty

Answer 26

* Ruly 72t - Substianally equal payments for life * Qualified medical expenses * Medical Expenses * Health insurance for the unemployed

Question 27

Bond See Saw

Answer 27

Question 28

When buying a bond at a premium what must be disclosed as the “yield to worst”

Answer 28

If its selling at a premium then it is yield to call. Rationale: If you pay a premium ($1100) and its called early that'd suck because you would get $1000 back and your interest payments cease. You want it to mature (best case)

Question 29

When buying a bond at a discount what must be disclosed as the “yield to worst”

Answer 29

If its selling at a discount then it is yield to maturity. Rationale: If you pay a discount ($900) and it goes to maturity that is crappy because you have to wait so long to get the $1000 par value. You would want the bond to be called early so you get the $100 back sooner.

Question 30

Investment Company 75-5-10 Rule

Answer 30

In order for an investment company to be considered Diversified (open or closed) then it must follow this rule: Atleast 75% of the assets are invested The 75% must be invested in such a way that: * no more than 5% of the fund's total assets are in the securities of one issuer * The fund owns no more than 10% of the outstanding shares of any one issuer There are no restrictions on the remaining 25% (LOOK UP EXAMPLES)

Question 31

**Debit Call Spread** Objective / attitude Breakeven Max Gain and Loss

Answer 31

Objective / attitude: If you are net out of pocket then you are a debit. We want the spread to narrow. Buy Low Sell High = Bullish Breakeven for calls: Add the net premium to the lower strike Maximum gain: Difference between the two strike minus the net debit Maximum loss: Net debit the most you can lose is your debit

Question 32

**Credit Call Spread** ## Footnote Objective / attitude Breakeven Max Gain and Loss

Answer 32

Objective / attitude: If you are net in bringing in income then you are a credit. We want the spread to widen i.e. we keep the premium. Buy High Sell Low = Bearish Breakeven for calls: CALLS ADD to the LOWER STRIKE (CALS) Maximum gain: The net premium Maximum loss: The difference between the two strikes minus the net credit

Question 33

Debit Put Spread ## Footnote Objective / attitude Breakeven Max Gain and Loss

Answer 33

Objective / attitude: If you are net out of pocket then you are a debit. We want the spread to narrow. Buy High Sell Low = Bearish Breakeven for Puts (PSHS): Subtract the net premium to the Higher strike Maximum gain: Difference between the two strike minus the net debit Maximum loss: Net debit the most you can lose is your debit

Question 34

Green Shoe Clause

Answer 34

If the syndicate manager, based on anticipated demand, wants to sell more shares than initially registered with the SEC, the manager can invoke the green shoe clause on short selling. A green shoe clause, negotiated with and agreed to by the issuer, allows the syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. The additional shares are made available to the syndicate by the issuer. To be effective, a green shoe clause must be disclosed in both the registration statement filed with the SEC and the prospectus. LO 20.c

Question 35

Green Shoe Clause

Answer 35

A greenshoe option is an over-allotment option. In the context of an initial public offering (IPO), it is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than initially planned by the issuer if the demand for a security issue proves higher than expected.

Question 36

Vertical Option Spread

Answer 36

A vertical spread involves the simultaneous buying and selling of [_options_](https://www.investopedia.com/terms/o/option.asp) of the same type (i.e., either puts or calls) and expiry, but at different [_strike prices_](https://www.investopedia.com/terms/s/strikeprice.asp). The term 'vertical' comes from the position of the strike prices.

Question 37

Horizontal Option Spread

Answer 37

A horizontal spread (more commonly known as a [_calendar spread_](https://www.investopedia.com/terms/c/calendarspread.asp)) is an options or futures strategy created with simultaneous long and short positions in the derivative on the same underlying asset and the same [_strike price_](https://www.investopedia.com/terms/s/strikeprice.asp), but with different expiration months.

Question 38

Regulation SHO

Answer 38

Regulation SHO is a set of rules from the [_Securities and Exchange Commission_](https://www.investopedia.com/terms/s/sec.asp) (SEC) implemented in 2005 that regulates [_short sale_](https://www.investopedia.com/terms/s/shortsale.asp) practices. Regulation SHO established "locate" and "close-out" requirements aimed at curtailing [_naked short selling_](https://www.investopedia.com/terms/n/nakedshorting.asp) and other practices. Naked shorting takes place when investors sell short shares that they do not possess and have not confirmed their ability to possess.

Question 39

Term bonds * Also called * How they are quoted

Answer 39

Term bonds are often called dollar bonds because they are quoted in a dollar price. That price is a percentage of par. While Serial bonds are quoted on their basis (yield to maturity).

Question 40

Options account agreement must be returned within

Answer 40

15 days… certainly not after a trade has been made

Question 41

When does a customer have to receive the options disclosure document?

Answer 41

No member or person associated with a member shall accept an order from a customer to purchase or write an option contract, or approve the customer's account for the trading of options unless the broker-dealer furnishes or has furnished to the customer the ODD, and the customer's account has been approved for options trading.

Question 42

POs and IOs Asset Backed Securities

Answer 42

Principal Only are a stream of payments that consist of the principal portion of the underlying mortgages. A PO sells at a discount to par like a Zr-bond. It is valuable when these bonds are paid early (when interest rates decline) Interest Only are sold at discount and its cash flow declines over time. These move opposite of how POs move with interest rates. It is bad when interest rates decline these decrease in value because investors want a long time of interest payments. Because of their positive correlation to interest rates they can be used to hedge against interest rate risk. Page 337

Question 43

Planned Amortization Class CMOs (PACs)

Answer 43

These have targeted maturity dates; they are retired first and **_offer protection from prepayment risk and extension risk._** Prepayments are transferred to other tranches so these are also called Support Tranches. Page 337

Question 44

Target Amortization Class CMOs (TACs)

Answer 44

A TAC structure **_transfers prepayment risk only to a companion tranche and does not offer protection from extension risk._** They get a higher interest rate than PACs because they accept the extension risk.

Question 45

Zero-Tranche (Z-Tranche)

Answer 45

This tranche recieves no payment until all preceding CMO trances are retired. These are the most volatile. **These are not suitable for an investor needing funds in a specified period of time** because they are unpredictable.

Question 46

Joint Account

Answer 46

A joint account has two or more adults named on the account as co-owners. They must sign a joint account agreement. The owners are called tenants. The check must be endorsed by all parties (mail only sent to one address). This account needs authorization from all parties.

Question 47

Joint Tenants with Rights of Survivorship (JTWROS)

Answer 47

A deceased tenant's interest in the account passes to the surviving tenant(s). This is most common for spouses. Ownership is equal and undivided, UNLIKE TIC which has ownership broken down by percentages.

Question 48

Tenants in Common (TIC)

Answer 48

A deceased tenant's interest fractional share in the account goes to the tenant's estate. Most common for friends or non-spousal relatives (I would imagine this would've been common for LGBT individuals before marriage was legalized). Ownership is divided as percents.

Question 49

Community Property

Answer 49

this is a martial property, and it is not uniform across every state, so it is likely that if it is a choice in a question this it is the incorrect one. When an individual gets married and they open an account usually it is a Joint ownership account and all the property acquired during the marriage is split at divorce or death… However, there are some exceptions for inheritances, gifts, or any property that is owned by one spouse before marriage. That is considered separate property of that spouse. Usually, gifts to, and inherited assets of, one spouse are not considered community property. Assets acquired before the marriage are not considered community property (although in some jurisdictions, these assets can be commuted to community property). Debts acquired during the marriage can be considered community property.

Question 50

S Corporation

Answer 50

Taxed like a partnership (so there is flow through of losses), but also has limited liability like corporations. LLCs also have this structure, however S corps can only have 100 members.

Question 51

C Corporation

Answer 51

This is a business structure that designates itself as a separate entity. This is great for raising large sums of cash (where a partnership wouldn't be). The officers and directors (and shareholders) are shielded from personal liability for the debts and liabilities of the company. However, there is a corporate income tax, which isnt present in any other business structure.

Question 52

Placement Ratio

Answer 52

Placement Ratio= ( Municipal Bonds Available / Municipal Bonds Sold​​ ) Placement Ratio The **dollar amount of new issues of bonds that underwriters have placed with investors**, expressed as a percentage of all new issues. The placement ratio is published in Bond Buyer.

Question 53

MSRB: Lifetime Records to be held by a firm:

Answer 53

* - Articles of incorporation of the broker-dealer or partnership agreement (if the B-D is a partnership) * - Minutes of board or partnership meetings * - Records of stock certificates (if the B-D is a corporation) *

Question 54

MSRB: Six-year Records that must be held by a firm:

Answer 54

* Blotters (records of original entry) * General Ledger (account information such as income and expense and asset and liabilities) * Customer Ledgers (statement's of the customer accounts) * Customer account records (six years after the account is closed) * Customer complains (only written complains… emails are considered written) * Principal designation record (which supervisor supervises what)

Question 55

MSRB record keeping requirement for complaints

Answer 55

MSRB rules list customer complains as a six-year record. FINRA is 4 years and SEC is 3.

Question 56

SEP IRAs

Answer 56

SEP IRAs have higher annual contribution limits than standard IRAs. Fundamentally, a SEP IRA can be considered a traditional IRA with the ability to receive employer contributions. One major benefit of a SEP IRA is that employer's contributions are [_vested_](https://www.investopedia.com/terms/v/vesting.asp) immediately.

Question 57

Eligibility to participate

Answer 57

Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.

Question 58

Customer account information must be updated atleast every

Answer 58

36 months

Question 59

What is a required to be on a customer confirmation by the MSRB

Answer 59

Because the settlement date on a when issued security is unknown, it is impossible to compute the accrued interest. MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade must be disclosed. The commission on an agency trade must be disclosed.

Question 60

A customer of a member transfers his account to another member firm. Under SEC rules, the transferring member must maintain copies of the customer's account records for how many years following the transfer?

Answer 60

Six years after the account is closed

Question 61

How long much blotters, general ledger, customer ledgers, stock records, and customer account records be kept?

Answer 61

Six years

Question 62

How long must Bank statements and trial balances and customer correspondence and order tickets be held?

Answer 62

3 years

Question 63

When customers receive their account statements, they will generally **not** include ## Footnote **A)** trade dates of all transactions during the statement period. **B)** **interest charged on debit balances in margin accounts during the statement period.** **C)** security positions at the end of the statement period. **D)** total cost of purchases and net proceeds of sales made during the statement period.

Question 64

Form 112

Answer 64

Form 112 is the currency transaction report. It is filed when currency, is deposited, withdrawn, or transferred in an amount exceeding $10,000 in a single day. Currency includes cash, postal money orders, and traveler's checks. LO 15.f

Question 65

Long Margin Deposit Trick

Answer 65

Question 66

Classical Long Margin equation

Answer 66

LMV - DR = Equity Reg T (.5\*LMV) Excess equity / SMA = Equity - (Reg T (.5\*LMV))

Question 67

If a customer wishes to withdraw cash dividends, the customer must do so within how many days….

Answer 67

If a customer wishes to withdraw cash dividends, the customer must do so within **30 days of receipt**. **_Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account._** As the debit balance falls, equity in the account goes up dollar for dollar.

Question 68

Classical Short Margin equation

Answer 68

CR - SMV = EQ Reg T (.5\*SMV) Excess equity / SMA = Equity - (Reg T (.5\*SMV))

Question 69

Interpositioning

Answer 69

Placing a third party between the BD and the best available quote, which results invariably in a less favorable execution for the customer.

Question 70

Sell order tickets must be marked…

Answer 70

marked as either long OR short

Question 71

An investor enters a day order to buy 200 shares of GGZ at 63. Three hours later, with GGZ trading above that price, he calls his registered representative wanting to change the order to a good-til-canceled order. The registered representative should 1. immediately cancel the existing order. 2. leave the existing order on the order book. 3. immediately enter a new limit order to buy 200 shares of GGZ at 63 good til canceled (GTC). 4. enter a new limit order to buy 200 shares of GGZ at 63 GTC before the next day's opening if the day order was unexecuted.

Answer 71

The representative should not cancel the existing order because it would lose priority on the order book. However, the representative should not enter a good-til-canceled order that day because it could be filled twice. Instead, the representative should let the order stay for the day, when it would be canceled automatically if not executed. Then, the representative could enter a good-til-canceled order the next morning.

Question 72

For a selling a stock trading under $5 per share, a customer must maintain…

Answer 72

For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater.

Question 73

When an investor sells stock short on the **_ex_-dividend date**, the dividend belongs to

Answer 73

The lender of the stock. The key here is that the sale is taking place on the ex-dividend date. That means that the buyer is not entitled to the dividend. Rather, it belongs to the seller. However, in this question, the seller does not own the stock because this is a short sale. Who is the owner of the stock? Whose name will be on the records? That would be the lender of the stock, and that is who will receive the dividend. This is one of those cases where a due bill is sometimes required to get the dividend to the proper party.

Question 74

SLoBS/BLiSS

Answer 74

Sell limits or Buy Stops are placed above the market price While Buy limit and Sell stops are placed below the market price

Question 75

When would a technical trader use a buy stop and a sell stop if resistance was at 30 and support was at 20

Answer 75

The TA would place a buy stop at 30.50 if he thought that when it breaks through resistance it will take off. The TA would place a sell stop at 19.50 if he thought that when it breaks through support it will keep going.

Question 76

Reducing offers

Answer 76

Certain orders on the DMM order book are reduced when a stock goes ex-dividend. All orders entered below the market are reduced on the ex-dividend date (or ex-date) - the first date in which the new owner (purchaser) does not qualify for the current dividend. On the ex-date the stock price opens lower by the amount of the dividend. **_Orders reduced include buy limits and sell stops (BLiSS)_** SLoBS over BLiSS (SLoBS are BLiSS)

Question 77

Advertising relating to municipal securities must be approved by which of the following?

Answer 77

**A general securities principal or municipal securities principal** According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal. LO 19.c

Question 78

Participation in a tender offer (an offer to buy your shares) requires that investors must have engaged in an irrevocable action to acquire the common stock by the time of the cutoff for the tender offer.

Answer 78

Question 79

What are current assets?

Answer 79

Current assets are those that are either cash to expected to generate cash within the next year. Warehouse are fixed assets used for many years 13.c

Question 80

What do we want debit option spreads to do?

Answer 80

We want the debit to widen and exercise the option

Question 81

What do we want credit option spreads to do?

Answer 81

We want them to narrow and expire (so we keep the premium)

Question 82

Call option spreads

Answer 82

Debit spread = bullish… Buy LOW Sell HIGH… widen and exercise Credit spread = bearish … Buy HIGH Sell LOW… narrow and expire

Question 83

Put option spreads

Answer 83

Debit spread = Buy Low Sell HIGH… bearish… widen and exercise Credit spread = Buy HIGH Sell LOW.. bullish… narrow and expire

Question 84

A customer purchases $100,000 of original issue discount municipal bonds. How will this trade be considered for tax purposes when the bonds mature?

Answer 84

Original issue discount profit at maturity is treated as part of the tax-free interest on a municipal bond. **_However, for a municipal bond bought at a discount in the secondary market, the discount is considered ordinary income subject to tax._** LO 6.f

Question 85

A corporate bond pays interest on a J/J 15 schedule. An investor purchasing these bonds on Friday, April 17, would pay accrued interest for **A) 92 days.** **B)** 91 days. **C)** 95 days. **D)** 96 days.

Answer 85

Question 86

Six year recordkeeping

Answer 86

Six-year records include; 1. blotters 2. the general ledger 3. the stock record 4. customer statements 5. Customer account information

Question 87

Which of the following statements regarding a bond trading flat is **not** true? **A)** It may be an income bond. **B)** It may be a bond in default. **C )** It may be traded with accrued interest. **D)** It may have interest in arrears.

Answer 87

C ## Footnote A municipal or corporate bond trading flat is trading without accrued interest. The bond may be an income bond, which normally pays no interest, or it may be a bond currently paying no interest because it is in default. LO 6.e

Question 88

Code of arbitration: How long is the claim eligible for submission to arbitration from the time of the event giving rise to the claim?

Answer 88

Under the Code of Arbitration Procedure, no claim is eligible for submission to arbitration if six years or more have elapsed from the time of the event giving rise to the claim.

Question 89

A prospectus must be delivered to customers who purchase which of the following new issues? 1. U.S. government bonds 2. Corporate bonds 3. Fixed annuities 4. Variable annuities

Answer 89

2 & 4 U.S. government bonds are exempt securities under the Securities Act of 1933 and are not subject to the act's registration and prospectus delivery requirements. Fixed annuities are not considered securities, as the risk is borne by the insurance company issuer. Corporate bonds and variable annuities, however, are nonexempt securities and are subject to prospectus delivery requirements. LO 20.c

Question 90

What are STRIPS

Answer 90

Treasury STRIPs are zero-coupon bonds, backed in full by the U.S. government. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated future expenses, such as college tuition.

Question 91

Collateralized mortgage obligations (CMOs) are a type of asset-backed security. What type of securities are frequently the assets behind a CMO?

Answer 91

CMOs usually bundle Ginnie Mae, Fannie Mae, and Freddie Mac products into a single product that passes through monthly payments from these investments to investors. They have been highly rated historically and are good income producers.

Question 92

When must a new options customer return a signed option agreement? **A)** Within 15 days of the account approval **B)** Before the first order is entered **C)** At the time or before the customer receives the options disclosure document **D)** Before the account is approved by a registered options principal

Answer 92

The option agreement must be signed and returned within 15 days of account approval. This agreement states the customer will abide by the rules of the options exchange and the OCC and will not violate position or exercise limits. If it has not been returned, the customer can only close out existing positions. No new positions may be opened. LO 10.j

Question 93

A bond resolution is most likely found in what?

Answer 93

A municipal bond

Question 94

LEAPs held longer than a year are considered what type of gain

Answer 94

Long-term capital gain if held longer than a year.

Question 95

Which of the following is an automated system of delivering information relating to the market for municipal securities? **A)** *The Bond Buyer* **B)** Thomson's Muni News or Muni Market Monitor (Munifacts) **C)** *The Blue List* **D)** INSTINET

Answer 95

Thomson's Muni News or Muni Market Monitor (formerly Munifacts) supplies up-to-the-minute information to its subscribers. LO 13.f

Question 96

Abbreviations allowed in a corporate signer

Answer 96

Corporate signers are the exception to the general rule that endorsement of a certificate must match exactly the name on the front. The word *and* may be substituted with an ampersand (&) and the word *company* may be abbreviated. LO 17.d

Question 97

Which of the following actions would cause a corporation's earnings per share (EPS) to increase? **A)**The exercise of outstanding warrants **B)**An increase in cost of goods sold (COGS) **C)** A 3:2 stock split **D)** A reduction in the number of shares outstanding

Answer 97

D. There are two primary ways to increase EPS. The most obvious is to increase the company's earnings. That is accomplished either by increasing revenue or reducing costs. The second is to reduce the number of outstanding shares. The math behind the EPS formula is net income divided by the total number of common shares outstanding. If the denominator (the number of shares) is reduced, the EPS increases. A stock split and the exercise of warrants have the opposite effect because there are now more shares outstanding. An increase to COGS reduces the net income. LO 13.d

Question 98

The difference between the syndicate bid and the reoffering price on a competitive bid of a new municipal underwriting is

Answer 98

The spread, or underwriter's compensation, on a competitive bid underwriting is the difference between the bid to the issuer and the dollar price at which the underwriter reoffers the bonds to the public. LO 20.b

Question 99

In most cases, a mutual fund is structured as a corporation. Because of certain tax regulations, it is important for the fund to compute its net investment income. That computation is

Answer 99

**interest plus dividends received on portfolio securities, minus the operating expenses of the fund.** **Interest + Dividends - Operating expenses = NET INVESTMENT INCOME**

Question 100

In the case of a real estate direct participation limited partnership program, nonrecourse financing will **A)** be added to a limited partner's sales proceeds at the time the partnership is dissolved. **B)** decrease a limited partner's original cost basis **C)** have no effect on a limited partner's original cost basis **D)** increase a limited partner's original cost basis.

Answer 100

For real estate limited partnerships, nonrecourse loans are included in the limited partner's cost basis. In this way, the loans increase the partner's original cost basis by the amount of the partner's debt liability for the loan. LO 11.f **NONRECOURSE LOANS FOR Real Estate LPs are included in the limited partner's cost basis.**

Question 101

The minimum maintenance requirement on short stock selling above $5 is

Answer 101

The minimum maintenance in a short account is 30% of the market value or $5 per share (whichever is greater) for stocks trading above $5. For stocks trading below $5, the minimum maintenance is $2.50 per share or 100% of market value (whichever is greater). LO 16.d

Question 102

Which of the different sharing arrangements for limited partnerships between the general partners (GPs) and the limited partners (LPs) is generally considered the most common?

Answer 102

While both LPs and GPs share equally in the revenues with a functional allocation arrangement, it is most commonly used because it gives the best tax benefits to each. The LPs receive the immediate tax write-offs from the intangible drilling costs, whereas the GPs receive continued write-offs from the tangible costs over the course of several years. LO 11.f

Question 103

Which of the following would **least** likely occur when a corporation engages in a rights offering? ## Footnote **A)** The number of outstanding shares would increase. **B)** The corporation would use a standby underwriter. **C)** After successful completion of the offering, the market price would decline slightly **D)** After successful completion of the offering, the market price would rise slightly.

Answer 103

Successful completion of a rights offering generally results in a slight decline in the market price of the stock. This is because the subscribers were able to purchase at a price below the current market. This would have a small dilutive effect, causing a slight reduction in the market price. The rights offering is of additional shares, so the number outstanding would increase. Most corporations use a standby underwriter who will buy any shares that were not exercised. Please note: From a test-taking skill point of view, when you have two answer choices that are the opposite of each other (the price would **rise** slightly or the price would **decline** slightly), in almost all cases, one of those two must be the correct answer. LO 3.f

Question 104

What is paid-in surplus?

Answer 104

Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase. LO 13.c

Question 105

An insured municipal bond is purchased by your client in the secondary market. After the sale, Municipal Securities Rulemaking Board rules would require you to

Answer 105

make delivery of the certificates accompanied by evidence of insurance, either on the face of the certificates or in a separate document. Although it is likely that the confirmation would include a statement that the bonds are insured, it is also necessary to provide the client with some proof of that insurance, either on the bond itself or, in the case of book entry delivery, as a separate document. LO 6.d

Question 106

The manager will credit each syndicate member based on sales of that particular maturity allotted to the member, and such credits shall extinguish liability based only on such securities that are sold by the member. This statement describes an agreement among underwriters that is **A)** a divided account. **B)** an Eastern account. **C)** a proportionate underwriting **D)** an undivided account.

Answer 106

a divided account. ## Footnote This is part of an agreement for a Western (divided) syndicate. LO 20.b

Question 107

Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners **not** be required?

Answer 107

A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners. Can you imagine a well-known publicly traded corporation with several million shareholders opening an account where the registered representative would have to obtain suitability information on all of them?

Question 108

A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $300,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct?

Answer 108

They are ineligible to deduct any contribution made. It is important to recognize that FINRA does not expect you to know the income level at which deductible contributions for those covered under employer-sponsored plans begins to phase out. The question uses numbers that are so much higher than current law just to remind you that such a regulation exists. While each are eligible to make the maximum contribution, at this income level, neither spouse—both of whom are covered under employer-sponsored plans—would be eligible to deduct their contributions to their respective IRAs. LO 1.g

Question 109

A customer opens an account, and payment and delivery instructions are established. Beyond the opening of the account, these instructions may

Answer 109

be changed for individual transactions, or going forward, for all transactions. It is normal for new customers to establish payment and delivery instructions at the time the account is opened. An example would be "transfer and ship" where the investor's instructions are to have stock that is purchased transferred into their name and then sent to them. These instructions can be changed for any individual transaction or for all transactions going forward. LO 1.a

Question 110

As such, any retail communications (and a communication to more than 25 existing and/or potential clients within a 30-day period is retail communications) must be filed with FINRA at least 10 business days before first use. IF…..

Answer 110

**IF the Brokerage firm is within its first 1 year of membership.** After the first year of membership, retail communications must be filed with FINRA **within 10 business days of first use or publication.**

Question 111

Primary differences between UTMA and UGMA

Answer 111

One of the primary differences between UTMA and UGMA is the investment flexibility. Real property can be transferred into an UTMA, while no such provision exists with UGMA.

Question 112

If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold for

Answer 112

**15 _business_ days.**

Question 113

Three specific obligations under Rule 2111.

Answer 113

1. reasonable-basis suitability, 2. customer-specific suitability 3. quantitative suitability. Complying with the first of the three means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors.

Question 114

A registered representative of a FINRA member firm specializes in handling business accounts. In which of the following accounts are the business owners subject to double taxation?

Answer 114

**_It is the C corporation_** whose owners are subject to double taxation. First, the corporation pays income tax on its earnings. Then, any dividends paid from the after-tax income are taxed again, this time to the shareholders.

Question 115

When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period?

Answer 115

Because the securities were received in a public offering, they are registered securities (not restricted), and therefore, there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a six-month holding period in addition to volume limitations. LO 20.f

Question 116

Transfer and ship

Answer 116

A type of delivery instructions for purchased securities. The securities are registered in the customer's name by the brokerage firm then shipped to the customer's address of record.

Question 117

Designating a beneficiary with a transfer on death (TOD) provision may be done in which of the following accounts?

Answer 117

The TOD designation is limited to the individual account and the JTWROS account. LO 1.b TOD CANNOT BE PUT ON TIC ACCOUNT

Question 118

Within a firm commitment underwriting, which document details the responsibilities and liabilities of each firm?

Answer 118

The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly issued securities. LO 20.b

Question 119

One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer's own name. This can be done only

Answer 119

Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate her approval of such change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. One of those facts is approval of the other tenant, but that approval goes to the principal, not to you, the registered representative. Even in the case of death of the other tenant, the principal needs to see the proper documentation, such as a death certificate. LO 1.e

Question 120

Municipal securities advertisements must be approved by

Answer 120

Municipal security advertisements can be approved by a general or a municipal securities principal. LO 19.c

Question 121

An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is

Answer 121

The **S corporation**, the general partnership, and the limited partnership are business models where all income or loss flows through to the owners. This avoids the double taxation on the business level and owner level, as is the case with the C corporation. With C corporations, corporate earnings taxed once at the business level and again when they are paid out to shareholders as dividends. Because the question is asking about the incorporated business model, the correct choice is the S corporation. LO 1.c S corp is like C corp, but with flow through business models of income or loss flows

Question 122

The terms of municipal general obligation (GO) and revenue bond offerings may be set by the issuer as

Answer 122

Municipal bond underwriting terms may be set by the issuer as either competitive bid or negotiated for both GO and revenue bond issues. LO 20.b

Question 123

**Components of the Underwriting Spread**

Answer 123

**Concession** **Additional Takedown** **Manager’s Fee**

Question 124

Concession

Answer 124

The “Concession” is typically the largest component of the underwriting spread. Often this portion of the fee is what goes to compensate the sales associates that help sell the securities of the new issue. The fee comes from the fact that the investment bank (e.g., the underwriter) may purchase the securities from the issuer at a discount, and then sell them to investors at full price. **_It can help to sometimes think of this part of the underwriting spread as similar to a commission._**

Question 125

**Additional Takedown:**

Answer 125

The “Additional Takedown” can be thought of as a fee paid to the underwriter for taking on the risk of buying the securities from the issuer. Imagine a situation where the investment bank pays an issuer for its securities with the intention of selling these securities the next day to its clients (e.g., hedge funds, pension funds, etc.) via an IPO. If there is some major market meltdown overnight, and the next day the securities cannot be sold, then the investment bank is stuck “holding the bag.” **_The fee for this additional risk can sometimes be know as a fee paid for “liability.”_**

Question 126

**Manager’s Fee:**

Answer 126

The “Manager’s Fee” is the fee paid to the “lead underwriter.” In other words, the one investment bank that is chosen among a group of investment banks to manage the deal. Often when a deal is being taken to market multiple investment banks will be involved with the transaction. **_One will be designated as the lead. This investment bank is paid a fee above and beyond the concession and additional takedown for the simple fact that they may be in charge of organizing and/or helping manage the deal. They may also be tasked with managing the other investment banks in the deal._**

Question 127

*Underwriting Spread Formula:*

Answer 127

*Concession + Additional Takedown + Manager’s Fee*

Question 128

*Total Takedown formula*

Answer 128

*Concession + Additional Takedown*

Question 129

*Net Proceeds to Issuer formula*

Answer 129

*Amount Issued – Underwriting Spread*

Question 130

What is a competitive bid underwriting?

Answer 130

With a competitive bid underwriting, a municipality publishes invitations to bid in The Bond Buyer or another municipal bond publication. Investment bankers and broker-dealers interested in underwriting the new municipal issue would respond to the invitation to bid. the securities offered by each differs within the offering.

Question 131

What is an investment constraint?

Answer 131

Investment constraints are obstacles or restrictions that must be met in order to meet goals.

Question 132

Popular Investment Securities, a FINRA member firm, produces short videos describing the general characteristics of different types of securities. Periodically, an interstitial appears during the video. Under FINRA's rules on communications with the public,

Answer 132

**A) the appearance of the interstitial defines the video as retail communication requiring filing.** ## Footnote Probably the best example of an interstitial is the pop-up ad. Sometimes it is a full-page ad causing the viewer to see the advertisement before being able to see the rest of the content. Without the interstitial, a generic video describing general characteristics of a type of security would not require filing. But, once that advertisement pops up, it is now retail communication and must be filed. LO 19.c

Question 133

When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include **A)** a tabular comparison of the nature and amount of the fees charged by each fund. **B)** a description of the objectives of the new fund and its prospectus. **C)** a detailed explanation of the reason for the change. **D)** a statement that the change will not take place until at least 45 days after the communication was sent.

Answer 133

B ## Footnote The only one of these meeting FINRA's requirement when a negative response letter is sent is the tabular comparison. While a description of the new fund and its prospectus is required, the communication must also include a comparison of the objectives of the two funds. The minimum time is 30 days (not 45) and there is no requirement to include an explanation. LO 1.e

Question 134

Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement?

Answer 134

Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken. LO 14.b

Question 135

Immediate or Cancel (IOC) is a what

Answer 135

It is a **_limit order_** requiring immediate execution or cancellation. A partial fill is permitted.

Question 136

Treasury Notes are issued with what maturities

Answer 136

2 , 3 ,5 , 7, and 10 years.

Question 137

In a short margin account how much SMA is created per $1 of market value decrease?

Answer 137

For every $1 decrease in market value in a short account, $1.50 of SMA is created. Therefore, if the market value falls by $5,000, the SMA balance would be $7,500. LO 16.d

Question 138

Which of the following actions by a corporate would raise additional capital? 1. Issue callable preferred stock 2. Declare a stock dividend 3. Make a rights offering 4. Encourage convertible bondholders to convert to common stock

Answer 138

1 and 3. ## Footnote Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another, and no money is raised. LO 3.i

Question 139

What is a qualified opinion on a municipal bond?

Answer 139

A qualified opinion is one where the bond counsel to the municipality places certain legal restrictions (qualifications) on the issue that must be disclosed to purchasers. An unqualified opinion has no restrictions. LO 6.a

Question 140

The 30-day visible supply published in *The Bond Buyer* contains

Answer 140

The 30-day visible supply consists of **_new issue GO and revenue municipal bonds expected to be offered in the next 30 days._** It does not include short-term anticipation notes. LO 13.f

Question 141

Cash dividends from a REIT are

Answer 141

**_Cash dividends from REITs are taxed as ordinary income._** A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs. LO 11.b

Question 142

A bond's current yield is calculated by

Answer 142

Dividing its annual interest by its current market price Annual interest/Current market price = Current yield

Question 143

EMMA

Answer 143

EMMA, the electronic municipal market access, carries information about municipal fund securities (Section 529 plans)

Question 144

What are Municipal fund securities?

Answer 144

Section 529 plans

Question 145

Tax equivalent yield formula:

Answer 145

Coupon rate of the municipal bond / (100-Tax bracket) Example: 4.17% ÷ (100% - 37%) = 4.17% ÷ 63%. That equals 6.62%

Question 146

You receive a not-held order from a customer who wants you to buy 1,000 shares of ABC when the price is right. Under NYSE rules, this order is

Answer 146

**a day order.** Unless the customer instructs you otherwise, not-held orders must be executed on the day received. LO 16.a * A not-held order refers to an order that gives a floor trader the discretion to find the best possible price on a stock. * “Its like giving a floor trade price and time discretion for the day only”

Question 147

!!!!! 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?

Answer 147

The industry requirement to short stocks below $5 per share is 100% of market value or $2.50 per share (whichever is greater). LO 16.d

Question 148

What is a Eurodollar bond?

Answer 148

The key to a Eurodollar bond is that everything is in U.S. dollars. The issuer is either a non-U.S. corporation or government, and the security is not issued in the United States. LO 4.d

Question 149

What is a Eurobond?

Answer 149

A Eurobond is a debt instrument that's denominated in a currency other than the home currency of the country or market in which it is issued. 4.d

Question 150

A quote of 2.20 bid 2.18 offered would **most** likely be a quote on

Answer 150

**_Discounted instruments (such as T-bills) are quoted on a discount yield basis._** Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price. LO 7.b

Question 151

A municipal bond bought at a premium must be…

Answer 151

The premium on the municipal bonds must be **_amortized_**. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year.

Question 152

At what maturity is something considered a money market instrument or not?

Answer 152

hen the note is within one year of maturity, it is considered a money market instrument. LO 7.a

Question 153

Which of the following would be considered improper by FINRA? **A)** A registered representative giving a $500 wedding gift to her brother who is one of her clients. **B)** A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of any mutual funds the firm has sales agreements with **C)** A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of the company’s proprietary mutual fund **D)** A mutual fund distributor offering a member firm a free training seminar held at the distributor’s home office for up to two representatives selected by the member firm.

Answer 153

C. No compensation, especially in the form of a bonus, may be conditioned on the sale of a specific product. **This is particularly egregious behavior when the product is proprietary.** Paying a $1,000 bonus for reaching a sales goal is fine, **as long as no specific product is targeted.** Training seminars, even with all expenses paid by a fund distributor, are fine as long as the firm selects the attendees based on other considerations than sales of that distributor's funds and the location is appropriate. It would be hard for FINRA to fault this wedding gift to a brother in spite of the client relationship. LO 8.i

Question 154

Shareholder approval is required for all of the following corporate events

Answer 154

Stock splits, issuance of convertible bonds (because of possible dilution), the acceptance of a tender offer from a nonaffiliated firm. Shareholder approval is not required for the payment of dividends but is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval. LO 14.b

Question 155

Intangible drilling costs (IDCs)

Answer 155

Intangible drilling costs (IDCs) would be the largest deduction in an oil and gas exploratory drilling program. These are also known as a wildcat program. This type of program attempts to discover oil or gas in an area where proven reserves have yet to be discovered. IDCs are deductible in the year incurred. The unpredictability and huge costs associated with drilling for oil and gas make this the largest deduction in an oil and gas wildcat program.

Question 156

Interest generated from a Municipal public purpose bond is exempt from what

Answer 156

Interest from public purpose municipal bonds is exempt from federal income tax, and most states have chosen to make interest on their municipal bonds exempt from state income tax to residents of their states. LO 6.f

Question 157

Mill rate formula

Answer 157

One mil equals $1 of tax per year for each $1000 of assessed value. .001 \* assessed value A shortcut method is as follows: take the assessed value, remove the last three 0s, and multiply by the number of mills of tax ($40 × 5 mills = $200).

Question 158

Interest begins accruing

Answer 158

**Interest started accruing from the dated date of the bond. Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due.** The customer's first interest payment the following August will represent interest that has accrued from the dated date. LO 6.e

Question 159

Equity options if exercised settle when? Index options if exercised settle when?

Answer 159

**Listed equity options, if exercised, settle in two business days** (regular way settlement for equities). **Index options, if exercised, settle on the next business day—and in cash.** LO 10.g

Question 160

Zero coupon bond risk

Answer 160

Zero-coupon bonds do not expose investors to reinvestment risk of interest. The risk is that as periodic income is received from an investment, such as bond interest, the investor cannot find another investment to reinvest into offering the same rate of return for the same level of risk. **_Because zero-coupon bonds do not pay periodic interest, (the return of the face value at maturity is the income), there is nothing to reinvest._**

Question 161

The Uniform Practice Code rules regarding good delivery requires delivery of certificates

Answer 161

The Uniform Practice Code rules regarding good delivery requires delivery of certificates in units of 100, multiples of 100, or in smaller certificate amounts that, when added together, make a stack of 100 shares.

Question 162

You received a signed broker-to-broker **_transfer initiation form (TIF)_** from an established customer desiring to transfer a specifically designated part of his account to your firm, which is eligible to use the Automated Customer Account Transfer Service (ACATS). Your firm is obligated to submit the transfer instruction to the carrying member by establishing the instruction in the ACATS

Answer 162

FINRA's Uniform Practice Code requires that the receiving member firms immediately forward the TIF to the firm currently carrying the account. A customer may transfer all or part of the securities held in the account. LO 15.d

Question 163

Which of the following factors will affect the special memorandum account (SMA) in a **_long_** account? 1. Sale of securities in the account 2. Decline in market value of securities 3. Cash deposited by the customers 4. Interest charged on debit balances

Answer 163

1 and 3. ## Footnote Whenever stock is sold, half of the sales proceeds are credited to SMA. Nonrequired cash deposits are credited to SMA in full. SMA only declines when a customer uses it to borrow from the account or to purchase securities; it is not affected by declines in market value or by interest charges. LO 16.d

Question 164

If your client has a certificate registered in his own name, to be a good delivery, the certificate must be accompanied by

Answer 164

If the certificate is registered in your client's name, a stock power or a properly executed assignment to the brokerage firm must appear on the reverse side of the certificate. LO 17.d

Question 165

Interval fund

Answer 165

Interval funds do not trade in the secondary market. Shares may only be redeemed at the specified intervals and, even then, only a portion of the holding will be repurchased by the issuer. These are not liquid.

Question 166

Tactical asset Allocation

Answer 166

Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy. LO 13.a

Question 167

One broker-dealer receives a don't know (DK) notice from another. Which of the following would be a reason for a DK to be sent?

Answer 167

**The broker-dealer who sent the DK was expecting 200 shares of ABC common stock and received 200 shares of ABC preferred shares.** DKs are sent between brokers when a delivery is made that is not expected or when the specifications of the delivery do not match what was expected. LO 17.c

Question 168

Which of the following securities underlies a yield-based option? ## Footnote **A)**Treasury securities **B)**Debentures **C)**Income bonds **D)**Revenue bonds

Answer 168

A Yield-based interest rate options are based on the yields of Treasury bills, notes, and bonds. LO 10.g

Question 169

Which of the following factors does not affect the marketability of a municipal bond? **A)**Call protection **B)**Block size **C)Commissions** **D)**Rating

Answer 169

C ## Footnote The beginning of the MSRB's definition of marketability says "the ease or difficulty with which securities can be sold in the market." **_The amount of commissions charged by a specific broker-dealer has no impact on the ability to sell the security._** LO 6.d

Question 170

Consequence for freeriding

Answer 170

1. If the customer pays for the buy side in full on or before the fourth business day following trade date, status as a frozen account is lifted. Selling before paying is called freeriding and is prohibited. The penalty for freeriding in a cash account is that the account will be frozen for 90 days, and orders will not be accepted without cash or securities on deposit in advance. Transactions in margin accounts are subject to the same basic rule. LO 16.d

Question 171

When we are calculating accrued interest 1. Treasury bonds settle when? How many days in the year do they use? 2. Corporate/Munis settle when? How many days in the year do they use? 1. Do we include the settlement day?

Answer 171

1. Treasury bonds settle T+1. They use an actual calendar so 365 days in a year. 2. Corporate / Munis settle T+2. They use 30 days per month so 360 days per year 3. When you are calculating accrued interest you take the Day the bond was purchased and add the settlement then subtract 1 day because the bond is technically the owners on settlement day. 1. Be careful with bonds that are settling over the weekend

Question 172

If a customer purchased a bond from your firm the confirmation must disclose

Answer 172

Whether your firm acted as agent or principal and your firm's address ## Footnote Customer trade confirmations must make explicit disclosures regarding the terms of the transaction and the parties involved. The broker-dealer must always disclose the capacity in which it acted (i.e., principal or agent.) The confirmation must show the name of the person for whom the trade was executed (i.e., the customer). The name, address, and telephone number of the broker-dealer must be shown so a customer may contact the firm easily. The settlement date is also required, but the broker-dealer is not required to disclose where it acquired the bonds or the price it paid. LO 15.a

Question 173

Functional allocation

Answer 173

Functional allocation is a sharing arrangement in which the general partner pays for all tangible drilling costs (capitalized costs), and the limited partners pay for all intangible drilling costs (deductible costs). LO 11.f

Question 174

The following would be disclosed to potential municipal bond buyers in the **official statement** of a new municipal bond issue

Answer 174

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 175

Types of Revenue bonds include:

Answer 175

Revenue bonds include industrial development revenue bonds, special tax bonds, special assessment bonds, new housing authority bonds, and moral obligation bonds.

Question 176

Characteristics of VIX

Answer 176

1. It is a measure of implied expectations of market volatility 2. It is often referred to as the fear index. **The VIX is a measure of investors' expectations regarding market volatility.** High or low readings are neither bullish nor bearish, but instead, reflect expectations of volatility in the S&P 500 over the next 30 days. This index is referred to as the fear index, and VIX options are traded on the CBOE. LO 10.g

Question 177

In a municipal underwriting, the scale is

Answer 177

The scale, or reoffering scale, represents the prices and/or yields at which new issue securities are offered for sale to the public by the underwriter. The syndicate uses this scale to determine its bid on the issue. LO 20.b

Question 178

Under FINRA rules, if a member wants to have the terms of a clearly erroneous trade adjusted, it must notify Nasdaq Market Operations

Answer 178

If a member wants to have a clearly erroneous trade adjusted or nullified, the member must make the request of Nasdaq Market Operations within 30 minutes of the execution. LO 18.d

Question 179

The virtual meeting is defined as a public appearance requires…

Answer 179

Prior approval of a broker-dealer is not mandated by FINRA but may be required by the broker-dealer.

Question 180

Does Government National Mortgage Association (GNMA) originate loans?

Answer 180

GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities. LO 7.c

Question 181

Yield based options are American or European style options?

Answer 181

Yield-based debt options are European-style contracts, meaning that they can only be exercised on the last day of trading. All yield-based contracts, when exercised, are settled in cash. There is no delivery of debt instruments when these contracts are exercised. All strike prices reflect yield.(35 strike price represents 3.5% yield.) Yield-based options are a bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).

Question 182

Finding Minimum margin requirement on Long and Short Margin accounts

Answer 182

The maintenance requirement on the long position is 25% of the current market value The maintenance requirement on the short position is 30% of the current market value

Question 183

The difference between State and Local/County GO bonds

Answer 183

State-issued municipals are backed by state revenues, including sales and income taxes, as well as fees for state-issued licenses and permits. States do not normally levy property (real estate) taxes. Real estate taxes—known as ad valorem taxes—are typically levied by local municipalities such as cities and counties. LO 6.b

Question 184

How often can a mutual fund distribute gains to its shareholders

Answer 184

Section 19 of the Investment Company Act of 1940 states that "it shall be unlawful for any registered investment company to distribute long-term capital gains more often than once every twelve months." Dividends do not have any restriction on frequency. LO 8.f

Question 185

Does a stock dividend impact; the number of shares per contract, the strike price or the number of contracts

Answer 185

A stock dividend affects the shares per contract and the strike price When a company pays a stock dividend or effects a fractional stock split, the underlying option is adjusted by increasing the number of shares the contract covers. The number of contracts owned remains the same, and the effective exercise price is adjusted so that the position value before and after the adjustment remains the same.

Question 186

A chartist would believe that a head and shoulders formation means that

Answer 186

**A reversal of an uptrend is coming… Bearish**

Question 187

A chartist would believe that an **inverted head and shoulders** would mean

Answer 187

**A reversal of a downtrend is coming… Bullish**

Question 188

The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which, $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Due to obsolescence, Acme sells the lathe for $6 million. The impact of this sale on the company's financials would be that **A)** paid-in capital would decrease. **B)** long-term debt would increase. **C)** working capital would decrease **D)** retained earnings would decrease.

Answer 188

Acme's net worth is currently $47 million. Net worth is total assets ($72 million minus total liabilities of $25 million equals $47 million. Or, add together the stock and surplus ($18 + $7 + $22 = $47 million). When the lathe is sold for $2 million less than its value on the books, total assets drop to $70 million, causing a $2 million decrease to net worth. Nothing has changed with the stock, so it is the retained earnings that, so to speak, take the hit. Working capital goes up because we have replaced a fixed asset with cash (the $6 million proceeds from the sale). LO 13.d

Question 189

Is the Federal National Mortgage Association (FNMA) a publicly traded corporation?

Answer 189

Yes.

Question 190

Passive income results from DPPs and what else?

Answer 190

Passive income results from DPPs and personal real estate rentals

Question 191

What is considered when determining whether a tax swap of municipal bonds will result in a wash sale?

Answer 191

In judging whether bonds purchased are **_substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate._** _If at least two of the three are different, a wash sale will generally not result._ LO 13.h

Question 192

Which of the following statements about municipal brokers' brokers is **not** true? **A)**They perform specialized trades for institutions. **B)**They do not maintain inventories. **C)**They perform trades on a principal basis only. **D)**They do not perform retail trades with individual investors.

Answer 192

**_A broker's broker does not maintain an inventory of bonds._** Therefore, they do not act as principals; they act as agents only in trades between dealers or institutions. They do not do retail business. LO 6.d

Question 193

What is the profit to a syndicate member if a syndicate is offering an 8.5% bond at 100, the syndicate manager is giving a 0.75 concession and a 1-point total takedown, and the syndicate member sells 1,000 bonds?

Answer 193

**_When a member of the syndicate sells a bond, the member is entitled to the total takedown._** In this case, one point ($10) per bond (1,000 bonds sold × $10 per bond = $10,000 profit). Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead. LO 20.b

Question 194

If a registered representative hosts an investment seminar intending to discuss general investment concepts and a specific mutual fund for which she has performance charts, which of the following statements are **true**? 1. She may discuss the investment returns of the mutual fund in general, provided she does not use a specific time frame. 2. She may discuss the investment returns of the mutual fund using a specific time frame. 3. She must disclose to the audience all material facts regarding the mutual fund. 4. She may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details.

Answer 194

2 & 3 **_She may discuss the investment returns of the mutual fund, as long as she uses a specific time frame. When discussing an investment, she must disclose all material facts pertaining to the investment—both negative and positive._** LO 19.b

Question 195

The name of the FINRA system that tracks both NYSE and NASDAQ transactions is

Answer 195

The TRF is the only FINRA system that tracks transactions on the NYSE and Nasdaq, including OTC (over-the-counter) transactions.

Question 196

ECNs (Electronic Communications Networks) do what?

Answer 196

ECNs are electronic trading systems that automatically match buy and sell orders at specified prices; they are not a tracking system.

Question 197

DMM (Designated Market Maker) does what?

Answer 197

DMM's are the specialists who work at each of the trading posts on the NYSE. They are responsible for maintaining a liquid and orderly market for stocks.

Question 198

**TRACE (Trade Reporting and Compliance Engine) does what?**

Answer 198

TRACE tracks corporate and government agency bond transaction in the OTC market.

Question 199

When a person is calculating cost basis for a nonqualified variable annuity, the person is using

Answer 199

For a nonqualified variable annuity, cost basis for the annuitant would use the after-tax dollars contributed. LO 9.d

Question 200

A customer has a short margin account. In it, there is one stock currently trading at $14 per share. The minimum maintenance requirement for this account is

Answer 200

**_When it comes to short margin, for stock trading at $5 per share and above, the minimum requirement is the greater of $5 per share or 30% of the short market value._** $5 is more than 30% of $14 ($4.20). LO 16.d

Question 201

In compliance with the Securities Act of 1933, a prospectus is always required when selling interests in

Answer 201

A unit investment trust has a one-time offering of its securities. After that, there is no public secondary market trading (the sponsor may engage in secondary trading solely to redeem units). Therefore, as a public offering of a new security, a prospectus is required when attempting to make a sale. For a Closed end investment company: Closed-end funds only require a prospectus on their initial offering. Once that is completed, all transactions are in the secondary market and no prospectus is used.

Question 202

Bonds issued by the virgin islands are

Answer 202

Bond issued by U. S. Territories, such as the Virgin Islands, are triple tax-exempt. That is, investors do not have to pay federal, state, or local income taxes on the interest. LO 7.e

Question 203

Is preferred stock considered substantially identical to other securities for the purpose of wash sales?

Answer 203

Preferred stock is not substantially identical because it cannot be converted or exchanged into the common shares that were sold. All the other securities could be converted or exchanged into the common stock sold. That makes them considered substantially identical. Please note: Preferred stock is not convertible unless something in the question says it is. LO 13.h

Question 204

Which of the following municipal issues would **least** likely involve overlapping debt? **A) A** park district **B)** An airport district **C)** A library district **D)** A school district

Answer 204

Overlapping debt refers to property tax districts (areas). **_Airport issues are usually revenue issues of an authority that has no property taxing powers._** LO 6.b

Question 205

Rule 144 Mnemonic device

Answer 205

**1**% of the outstanding shares or average of the last…. **4** weeks trading volume whichever is greater up to **4** times a year. Every 90 days (1+4+4 = 9 )

Question 206

Rule 144 Mnemonic device

Answer 206

**1**% of the outstanding shares or average of the last…. **4** weeks trading volume whichever is greater up to **4** times a year. Every 90 days (1+4+4 = 9 )

Question 207

DERP (secondary trading)

Answer 207

Declared Date **_Ex date_** When is it? **_One business day prior to record_** What is it? **_First date on which the stock no longer trades with the dividend_** Ex date is not set by BOD… it is set by Uniform practice code Record Date Payable date

Question 208

DREP (primary trading)

Answer 208

Declared Date Record date Ex Date When is it? **One Business day _AFTER_ record date** What is it? **_First date on which the stock no longer trades with the dividend_** Payable Date **All dates in an open end mutual fund set by the board of directions**

Question 209

Selling Dividends

Answer 209

This is a violation of the practice code where you create an artificial urgency by using the impending ex date as a way to make a client purchase stock

Question 210

D.I.E. 90 mnemonic device

Answer 210

**D**ividends on the stock plus **I**nterest on the bonds minus **E**xpenses equals Net investment income Atleast 90% pass through

Question 211

Other people monies count mnemonic device

Answer 211

**O**rder Department **P**urchase and sale department **M**argin Department **C**ash**i**ering department This means that if we do not have one of these we are not a clearing firm and we hire someone to do the clearing for us.

Question 212

DEW Mnemonic device

Answer 212

Debit Exercise Widen You want your debit card balance to widen

Question 213

CEN mnemonic device

Answer 213

Credit Expire Narrow You want your credit card balance to narrow

Question 214

The USA patriot act requires that information gathered to verify a customer's identity must be maintained for how many years?

Answer 214

5 years LO 15.c

Question 215

LEAP contracts held for more than one year classify as what type of tax

Answer 215

A LEAPS contract has an expiration of more than one year. Upon expiration, the buyer incurs a long-term capital loss equal to the amount of the premium paid. LO 10.i

Question 216

An individual owns Class A shares of the KAPCO Growth Fund with a total value at the current offering price of $20,000. KAPCO has a sales charge of 8% that reduces to 5% at $25,000. If the fund offers a right of accumulation, the sales charge on an additional investment of $10,000 will be

Answer 216

Because of rights of accumulation…. **_If that total reaches or exceeds the breakpoint, the entire purchase is made with the lower sales charge._** In this question, adding the $10,000 purchase to the existing $20,000 takes the customer's account past the $25,000 breakpoint. Therefore, the entire new purchase is charged 5%. So, $10,000 times 5% equals $500. LO 8.d

Question 217

An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be

Answer 217

This is a wash sale situation. **_Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock._** Thus, $44 plus $3 equals a new cost basis of $47 per share. LO 13.h

Question 218

Random withdrawals from a variable annuity are taxed as

Answer 218

LIFO

Question 219

Random withdrawals from a variable life insurance policy are taxed as

Answer 219

One advantage to withdrawing cash value from a variable life insurance policy is that it receives **_FIFO treatment._** That means there is no tax until the withdrawal reaches the cost basis (premiums paid) of the policy

Question 220

Raw land is considered how risky in regards to Real estate limited partnerships?

Answer 220

Because there is no income and the potential of a long wait, most consider raw land to be the riskiest of the real estate limited partnership programs. LO 11.e

Question 221

All of the following statements regarding negotiable jumbo certificates of deposit are true **except** **A)**they are readily marketable. **B)**they are **_fully_** insured in any denomination by the FDIC. **C)**they usually have maturities of less than one year **D)**they are usually issued in denominations of $100,000 to $1,000,000.

Answer 221

The FDIC insures only up to $250,000. LO 4.c

Question 222

Does buying a long put on stock held for longer than 1 year reset the holding period?

Answer 222

Because the customer already held the stock long term when he purchased the put, he was not trying to stretch a short-term gain into a long-term gain. There is no effect on his established holding period. Whenever a put is exercised, the stock's sale price (exercise price) is reduced by the premium paid for buying the put. LO 10.i

Question 223

Stock powers or bond powers represent

Answer 223

Stock powers are substitute forms for signatures on the back of actual certificates. A person can sign this separate document to satisfy transfer rules. LO 17.d

Question 224

Selling group members earn the what?

Answer 224

the concession.

Question 225

Selling syndicate members who have a commitment to sell the bonds allocated to them earn the…

Answer 225

On each bond the member sells, **_the total takedown (the takedown plus the additional takedown) is earned._**

Question 226

The syndicate manager earns the…

Answer 226

The syndicate manager earns the entire spread on any bonds it sells.

Question 227

Customers must receive their confirmation no later than…

Answer 227

no later than the completion of the transaction (on or before the settlement date)

Question 228

How are Build America Bonds (BABs) taxed?

Answer 228

Taxable municipal securities

Question 229

Direct-payment BABs provide the municipal issuer with…

Answer 229

payments from the U.S. treasury

Question 230

Tax credit or issuer BABs provide the municipal bondholder with…

Answer 230

federal income tax credits

Question 231

Which of the following risk factors would be **least** important to disclose in recommending collateralized mortgage obligation (CMO) securities to public customers? **A)**Extended payment risk **B)**Prepayment risk **C)**Interest rate risk **D)**Credit risk

Answer 231

**Most CMOs offered to the public are backed by mortgages held by government-sponsored corporations like Fannie Mae, Ginnie Mae, Freddie Mac, et cetera. _Credit risk would be a minimal consideration._** The other risks are inherent to mortgage-backed securities. LO 12.d

Question 232

The definition of any person includes

Answer 232

Family units, **_but only minor children are included._** Adults, other than spouses, are separate persons. Purchases made by trustees or other fiduciaries may be combined with purchases in the accounts of the beneficiary of the fiduciary account.

Question 233

Municipal bonds are considered notes if they have a maturity longer than

Answer 233

Municipal notes have a maximum maturity of less than three years. Once the municipal security is issued with a maturity of 3 years or longer, it is considered a municipal bond. LO 6.b

Question 234

The underwriting spread is

Answer 234

A spread is the difference between the public offering price and the price an underwriter pays an issuer. LO 20.b

Question 235

For even stock splits, how is a option contract affected?

Answer 235

For even splits (i.e., 2 for 1 or 3 for 1), the number of contracts owned will increase proportionately. The number of shares per contract will remain unchanged, and the strike price will decrease proportionately. LO 10.j

Question 236

Does the MSRB enforce bank dealers that deal in municipal securities?

Answer 236

**_The MSRB makes rules but is not the one who enforces them._** When it comes to bank dealers, those MSRB rules are enforced by these banking agencies. For securities firms, enforcement is in the hands of FINRA. LO 6.h

Question 237

How is accrued interest handled when you purchase a bond?

Answer 237

**_Accrued interest is always added to the price of a bond._** When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest.

Question 238

The holder of a variable annuity receives the largest monthly payments under which of the following payout options? **A)**Joint tenants annuity **B)**Life annuity **C)** Life annuity with period certain **D)**Joint and last survivor annuity

Answer 238

Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies. LO 9.b

Question 239

What levels are Ginne Maes taxed?

Answer 239

Ginne Maes are taxed at all levels, as they are treated like corporate bonds in many ways. Ginne Maes settle T+2. Accrued interest is calculated on a 30 day month/360 day year. They are quoted in 32nds like T notes.

Question 240

An offering of securities to no more than **_35 nonaccredited investors_** would be associated with

Answer 240

Reg D is a private placement and it has special exclusions to who can use be issued to… **_Under Rule 506(b) of Regulation D of the Securities Act of 1933, a private placement transaction exemption applies if the offering is limited to a maximum of 35 nonaccredited investors._** It is the Rule 506(c) provision that requires 100% of the investors to be accredited. LO 20.e

Question 241

Formula to find the POP of a mutual fund with a sales charge

Answer 241

**_We take our NAV and DIVIDE it by (100% - the sales charge)_**

Question 242

T bills are quoted on

Answer 242

T-bills do not bear interest. T-bills trade and are quoted on an **_annualized discount yield basis._** LO 7.b

Question 243

The FINRA rule on communications would consider communications that are posted on an online interactive electronic forum (i.e., a chat room) to be **A)** a public appearance. **B)** institutional communications. **C)** correspondence. **D)** retail communications.

Answer 243

**_This type of communication is included in the definition of retail communications.**_ FINRA Rule 2210 treats interactive electronic forum posts, such as social media status updates, as retail communications rather than public appearances. However, unlike most retail communications (and similar to public appearances), _**the rule specifically excludes these posts from both the principal pre-use approval requirements and the filing requirements._** That does not mean member firms should not monitor the activities of their associated persons, but that is a real world situation and we're sticking with what the test covers. LO 19.a

Question 244

A control relationship exists if

Answer 244

A control relationship exists if someone represents both an issuer and municipal securities dealer. LO 6.h

Question 245

Fill or Kill order

Answer 245

The commission hose broker is instructed to fill an ENTIRE fill or kill (FOK) order immediately at the limit price or better. If it cannot be filled in its entirety then it is cancelled and the originating broker is notfifed.

Question 246

Immediate or Cancel (IOC)

Answer 246

This is like a FOK order, but a partial order can be filled immediately. The portion not filled is cancelled.

Question 247

All or none

Answer 247

This must be filled in its ENTIRETY like a FOK order, but it can be day or GTC. They do not need to be filled immediately.

Question 248

One Cancels the Other order OCO

Answer 248

Assume a customer is long a stock at $50 that was purchased 6 months ago at $30. To protect the gain, he might enter a sell stop at $48. Alternatively, if the stock continues to rise, he wants out at $53. What he might do is enter both orders with the notation, One Cancels the other. If one of the orders is executed the other is cancelled.

Question 249

To find the minimum maintenance level in a short margin account.

Answer 249

**_Divide the credit balance by 1.3 (130%)**_. _**Then we divide that by how many shares we have and that is the highest price the stock can go._** Anything above that will trigger a maintenance call.

Question 250

Things that would affect a customer's equity balance

Answer 250

**Stock dividends do not affect total equity in an account,** only the number of shares contained (but at a lower per-share price). **_Cash dividends increase equity, while withdrawal of SMA and interest charges assessed against the account decrease equity._** LO 16.d

Question 251

Which of the following factors will affect the special memorandum account (SMA) in a long account? 1. Sale of securities in the account 2. Decline in market value of securities 3. Cash deposited by the customers 4. Interest charged on debit balances

Answer 251

1 and 3 ## Footnote **_Whenever stock is sold, half of the sales proceeds are credited to SMA. Nonrequired cash deposits are credited to SMA in full_**. SMA only declines when a customer uses it to borrow from the account or to purchase securities; it is not affected by declines in market value or by interest charges. LO 16.d

Question 252

If a customer purchases stock in an existing margin account and fails to make payment within the time period specified under Regulation T, the broker-dealer carrying the account can take all of the following actions

Answer 252

If a customer does not meet a Fed call, **the firm can use existing SMA to meet the call**, **request an extension of time from its DEA**, or l**iquidate the unpaid portion**. **The firm would not close out the account.**

Question 253

For stock trading under $5, in a short margin account what must they maintain?

Answer 253

**_a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500_**

Question 254

Computing the minimum maintenance requirement for a long account

Answer 254

Computing the point to which an account's value can decline before reaching the minimum maintenance level is done by dividing the debit balance by 0.75. For example, if the DR balance was then $6,000 divided by 0.75 = $8,000. With 100 shares, that is $80 per share. LO 16.d

Question 255

Last week, your customer's margin account showed SMA of $5,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $45,000. This client now has

Answer 255

During the past week, the long market value has dropped to the point where this client is subject to a maintenance call. With only $5,000 of equity ($50,000 minus $45,000) and LMV of $50,000, the equity is only 10% of the LMV, well below the 25% minimum. **_When a margin account goes below the minimum maintenance level, the SMA is wiped out._** This is the only exception to the "use it or lose it" rule because once the account is at the point where the investor must contribute additional funds, there is nothing that can be borrowed; your "line of credit," so to speak, no longer exists.

Question 256

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

Answer 256

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 0.75 ($90,000 / 0.75 = $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). LO 16.d

Question 257

To find the minimum maintenance requirement for a short account formula

Answer 257

Minimum maintenance requirement in a short margin account is 30% of the current market value. So we are going to take .3 \* Debit balance. That is the minimum equity, so if our equity is below that then we need to deposit an amount that brings us to that minimum maintenance.

Question 258

If a municipal bond rated BBB is prerefunded, all of the following statements are true

Answer 258

When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities. LO 6.b

Question 259

tax-free equivalent yield formula

Answer 259

the tax-free equivalent yield formula: **_(taxable yield)_** × (100% – tax bracket) = (tax-free equivalent yield).

Question 260

Which of the following statements regarding Section 529 education savings plans are **true**? 1. Contributions are considered gifts under federal law. 2. Contributions are tax deductible under federal law. 3. Earnings generated are taxable each year. 4. Earnings generated are tax deferred.

Answer 260

1 and 4 ## Footnote Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level—if used for qualified education expenses. LO 6.g

Question 261

Municipal brokers' brokers deal with all of the following

Answer 261

Institutions, Bank dealers, and municipal dealers NOT retail customers or the general public

Question 262

An investor who wants a long-term tax-free bond with the highest possible safety should invest in **A)** a New Housing Authority bond. **B)** a AAA-rated general obligation bond. **C)** a Aaa-rated revenue bond. **D)** a double-barreled bond.

Answer 262

**_The one advantage that NHA bonds (sometimes called PHAs) have is that they are the only municipal bonds with the full backing of the U.S. government._** Even a GO or revenue bond with the highest S&P or Moody's rating doesn't have that safety. LO 6.b

Question 263

If a moral obligation bond goes into default, the only way bondholders can be repaid is

Answer 263

A moral obligation bond is a state- or local-issued, or state- or local-agency issued, bond. I**_f revenues or tax collections backing the bond are not sufficient to pay the debt service, the state legislature has the authority to appropriate funds to make payments._** That is the only way the bondholders can be repaid. The legislature rarely reneges on its moral obligation. LO 6.b

Question 264

Open-end covenant on a Revenue bond means that

Answer 264

The additional bonds test must be met under the provisions of a revenue bond indenture before additional bonds with an equal lien on project revenues can be issued. The conditions under which additional bonds may be issued are specified in the bond indenture. This is an open-end covenant. LO 6.b

Question 265

Sinking or surplus fund applies to

Answer 265

Sinking or surplus funds force revenue bond issuers to set aside a portion of their revenue for debt retirement. LO 6.a

Question 266

Industrial revenue bonds are special because

Answer 266

Industrial development revenue bonds (IDRs) are municipal bonds generally backed by a lease or similar obligation entered into by a corporation. That is the backing and defines the risk level. **_The IRS defines interest received from industrial development revenue bonds (IDRs) as a tax preference item. As such, the income received might be subject to taxation under the alternative minimum tax._** This tax usually applies to individuals who are in the higher tax brackets and would be an important determinant when evaluating the suitability of the investment. LO 6.f

Question 267

The bond resolution includes all covenants between

Answer 267

The bond resolution describes not only the characteristics of the proposed offering, **_but also the obligations the issuer has to its bondholders._** LO 6.a

Question 268

True or False The number of **_annuity**_ units becomes fixed when the contract is _**annuitized._**

Answer 268

True The number of annuity units becomes fixed when the contract is annuitized; **_it is the value of each unit that fluctuates._**

Question 269

Your client owns a variable annuity contract with an annual interest rate (AIR) of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would her April payment compare to her March payment?

Answer 269

If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment. LO 9.c

Question 270

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

Answer 270

partially a tax-free return of capital and partially taxable. ## Footnote 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. LO 9.d

Question 271

Level 1 service of Nasdaq

Answer 271

Level 1 only indicates the highest bid and the lowest offer, known as an inside quote. ## Footnote The Nasdaq Level 1 service shows the inside market. That quote is the highest bid and the lowest offer of all of the current market makers in the stock. Traders generally refer to that as the NBBO (national best bid and offer). Firm quotes are only available on Levels 2 and 3. Level 1 will display the most recent trade, but that is not a quote because it only shows one side, not a bid and ask. LO 17.b

Question 272

One of your customers mentions that she heard a friend say that whenever she buys stock, she has her registered representative use the DRS program. When the customer asks you for an explanation, you would reply that the DRS is

Answer 272

the Direct Registration System, where the customer's name as owner is recorded in book-entry form **_at the issuer or its transfer agent._** Like street name, DRS is based on electronic bookkeeping. In direct registration, a stock is registered in an investor's name, but the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form, instead of a broker-dealer. All the other choices are made-up distractors.

Question 273

It would generally be considered unsuitable for a registered representative to recommend a Section 1035 exchange of a deferred variable annuity contract if there had been one in the previous

Answer 273

**_36 months._** Among other requirements, FINRA Rule 2330 covers the suitability of a deferred annuity exchange under Section 1035 for a particular customer. Suitability considerations include, among other factors, whether the customer would incur a surrender charge, be subject to a new surrender period, lose existing benefits, be subject to increased fees or charges, and if the customer has had another exchange within the preceding _36_ _months._

Question 274

Electronic communications networks are most likely to be categorized as being part of which type of market?

Answer 274

The fourth market ## Footnote Electronic communication systems are considered part of the fourth market because they are primarily used for transactions between institutional investors. Yes, the fourth market is a secondary market, (trading in outstanding issues), but always choose the most specific answer. The primary market is the trading of a new issue. LO 17.b

Question 275

Registered as to principal only means

Answer 275

Registered as to principal only (with the interest being paid by detachable coupons). These are no longer permitted but they still exist.

Question 276

A customer holding 450 shares of XYZ common stock in registered form turns in a sell order on Monday for regular way delivery. Who has the initial responsibility to ensure that the security is in good deliverable form?

Answer 276

The registered representative ## Footnote Although the final arbiter of deciding the good delivery status of certificates is that of the transfer agent, it **_is the registered representative's responsibility to communicate the requirements to the customer._** Those include a reasonable expectation that the certificates will be delivered on time and in the proper form. LO 17.c

Question 277

A virtual meeting is defined as what type of communication and how is it regulated

Answer 277

The virtual meeting is defined as a public appearance. Prior approval of a broker-dealer is not mandated by FINRA but may be required by the broker-dealer.

Question 278

Regular standardized option

Answer 278

Regular standardized options have a maximum expiration of 9 months, so a gain on these types of contracts can only be short term for tax purposes.

Question 279

The Code of Arbitration Procedure would be mandatory to settle disputes between which of these? 1. A member and a registered clearing corporation 2. A member and one of its associated persons 3. An associated person with a **statutory discrimination claim against a member** 4. A member and a client who has signed a predispute arbitration clause

Answer 279

1 2 and 3… Disputes between anyone in the industry, including registered clearing corporations, must go to arbitration, with the exception of statutory discrimination claims, which are claims alleging sexual harassment or discrimination on the basis of, among other things, age, sex, or ethnicity. Such claims may be taken to court instead of arbitration. When a client has signed a predispute arbitration agreement, arbitration is mandatory. LO 18.c

Question 280

Short interest means this is a Bearish or bullish sign

Answer 280

BULLISH — Game stop situation ## Footnote Even though short interest represents the number of shares sold short, many investors consider it a bullish indicator when this number is high. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks. LO 13.e

Question 281

When are exceptions allowed when FINRA requires prior written notification be made and prior written consent be received before any employee can open a brokerage account with other members or financial institution?

Answer 281

Exceptions include accounts where the only activity will be in 529 plans, mutual funds, or variable annuities. LO 1.d

Question 282

The result of declining inflation on outstanding bonds would be higher prices or lower prices higher yields or lower yielder

Answer 282

higher prices and lower yields ## Footnote Declining inflation means declining interest rates. If interest rates decline, bond prices rise. LO 14.a

Question 283

A customer of your broker-dealer is questioning the timeliness in which one of her equity orders for a stock listed on Nasdaq was handled and executed. A source providing the most complete order entry and execution details for the customer's order could be found

Answer 283

**in the Consolidated Audit Trail (CAT).** ## Footnote The CAT tracks orders throughout their life cycle and identifies the broker-dealers handling them, thus allowing regulators to efficiently track activity in eligible securities throughout the U.S. markets. Please note that the former reporting system (OATS) was replaced by CAT on September 1, 2021 LO 17.b

Question 284

Allowable soft-dollar compensation paid by a broker-dealer to an investment adviser under Section 28(e) of the Securities Exchange Act of 1934

Answer 284

Payment for **travel expenses**, **furniture**, or **equipment** is not allowable under Section 28(e) of the Securities Exchange Act of 1934. Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e). LO 14.d

Question 285

What is a notice of sale?

Answer 285

A notice of sale is published to provide syndicates with information on proposed new (primary market) issues.

Question 286

Do retail communications concerning public DPPs need to be prefiled with FINRA?

Answer 286

No. Retail communications concerning public DPPs do not need to be prefiled.

Question 287

What is the NASDAQ PHLX?

Answer 287

The Nasdaq PHLX (Philadelphia) is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on the floor. LO 10.j

Question 288

The syndicate manager in a firm commitment underwriting takes which of the following actions in a divided municipal syndicate account that does not sell out?

Answer 288

Confirms the bonds to the member that did not sell its share ## Footnote Because this offer is a divided, or Western, syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory. LO 20.b

Question 289

What is the Bond Buyer 20? What does it include and how often is it computer?

Answer 289

The Bond Buyer 20 includes ONLY market yields of 20 GO bonds with 20 years to maturity. The index is updated each week.

Question 290

All of the following will cover a short call **except** **A)** an escrow receipt for the stock. **B)** a long position in the underlying stock. **C)** a long call with a lower strike price and later expiration. **D)** cash equal to the aggregate exercise value.

Answer 290

cash equal to the aggregate exercise value. ## Footnote Cash never covers a short call because the cost to purchase the stock in the market for delivery at the strike price is unknown. If assigned, the customer must sell (deliver) at the strike price. LO 10.d

Question 291

Covered call writing normally occurs in

Answer 291

a stable market. Covered call writing normally occurs in a stable market. In a rising market, writing calls against a long stock position limits upside potential. In a falling market, the calls only provide downside protection to the extent of the premium received. LO 10.d

Question 292

The maximum allowed 12-b fee on a no-load fund

Answer 292

The 12b-1 charge maximum is 0.25%.

Question 293

Can limited partners assist general partners in soliciting new members

Answer 293

NO. ## Footnote If limited partners—either individually or as a group—become too involved with the business of the partnership, they could be considered general partners and lose their limited liability. LO 11.d

Question 294

Although investing in mutual funds has many advantages, there are some risks. One risk that is generally greater with a bond fund than a portfolio of individual bonds is

Answer 294

**interest rate risk.** ## Footnote One disadvantage a bond mutual fund has is that there is no maturity date. At maturity, a bond returns the principal, regardless of what current market interest rates are. That is why as the bond approaches maturity, the interest rate risk declines (bonds with a shorter duration have less interest rate risk). The bond fund itself does not have that advantage because the fund does not mature. The risk of default is probably less with a bond fund because of the greater diversification than most individual portfolios can attain. The redemption at NAV feature of the mutual fund offers a liquidity that may not be available with some inactively traded individual bonds. Purchasing power risk would likely be similar in both cases. LO 8.i

Question 295

Rate covenant in a trust indenture

Answer 295

The rate covenant requires the issuer to **_maintain the user fee_** for a revenue bond at a level sufficient to service the debt. LO 6.b

Question 296

Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must

Answer 296

**obtain a representation from the bank that the purchaser is not restricted.** ## Footnote If a member receives an order from a conduit such as a bank, the member must make an inquiry as to whether the ultimate purchaser is restricted. It is not necessary to determine the identity and business affiliations of the purchaser. LO 20.f

Question 297

Holders of yield-based call options profit if rates do what?

Answer 297

Rise.

Question 298

Holders of yield-based put options profit if rates do what?

Answer 298

Drop

Question 299

Who handles registering the securities and packages the program for a limited partnership?

Answer 299

A syndicator handles the registration of the limited partnership units. LO 11.c

Question 300

MSRB rule G-37

Answer 300

* This refers to campaign contributions. * If I cannot vote then I can't make a donation * If I can vote then I can make a $250 donation per election cycle * If I break this rule because there will be a 2 year prohibition on me conducting business

Question 301

MSRB rule G-20

Answer 301

Maximum gift or gratuity that an associated person of firm A can give to an associated person of Firm B is $100

Question 302

How many syndicates are involved in a negotiated underwriting?

Answer 302

There is only 1 syndicate

Question 303

What is the smallest part of the spread in a municipal underwriting?

Answer 303

The Management fee