Unit 15

Question 1

When determining whether a tax swap of municipal bonds will result in a wash sale, each of the following are considered EXCEPT:

Answer 1

principal amount.

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.
Reference: 15.5.6.3 in the License Exam Manual

Question 2

In a rising market, which of the following is least volatile?

Answer 2

A stock with a beta of 0.5.

Beta is a measure of a stock’s volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market.
Reference: 15.3.3.1 in the License Exam Manual

Question 3

By which government is the income from eurodollar bonds always taxed?

Answer 3

Government of the country in which the investor pays taxes.

The income from a foreign investment is taxable to the investor under the rules of the country in which he pays taxes. The income may also be taxable in the country of issuance. In this case, the investor would receive a tax credit in order to avoid dual liability.
Reference: 15.5.4.3 in the License Exam Manual

Question 4

A couple in a high tax bracket is interested in minimizing its tax liability while diversifying its portfolio. Which of the following best fits its investment objectives?

Answer 4

Tax-exempt unit trusts.

Question 5

If your customer bought an original-issue discount bond from the Mt. Vernon Port Authority, how is the discount on this bond taxed?

Answer 5

Accreted during the life of the bond and not taxed.

Question 6

Which of the following provides a measurement of the volatility of a particular stock or portfolio as compared to the volatility of the market as a whole?

Answer 6

Beta

Question 7

The income from all of the following securities is taxable on the federal, state, and local income tax levels EXCEPT:

Answer 7

Treasury bonds.

The interest on U.S. government securities (such as Treasury bonds) is exempt from state and local income taxes, but not federal income taxes. Dividends (whether reinvested or not), Ginnie Maes, and corporate bonds of all types and/or ratings are taxable on all levels.

Question 8

Regarding a bonds duration, which measures the time it takes for a bond to pay for itself which of the following statements is TRUE?

Answer 8

A zero coupon bonds duration is equal to its maturity. For interest bearing bonds duration is less than the bond’s maturity.

Question 9

An investor has accumulated 3000 shares of XYZ common stock over several years via several separate purchases. If the investor sells 1000 shares and chooses to identify the specific shares sold for tax purposes, he must:

Answer 9

Notify the broker dealer who handled the sell transaction within 3 business days of the trade date.

Question 10

Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer’s account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative.

Answer 10

granting of discretionary authority to a new registered representative.

Question 11

A customer is selling inherited stock. The decedent originally paid $50 per share and on the date of the decedent’s death, the stock was worth $60 per share. On the day the customer sells the stock, the price per share is $62. What is the investor’s cost basis in the stock?

Answer 11

60.

The IRS allows a step-up in basis for inherited stock. The customer’s cost basis is the fair market value of the stock on the date that the decedent died.

Question 12

Diversification helps protect against which of the following types of risk?

Answer 12

Nonsystematic

Question 13

A municipal securities registered representative may be allowed to share in a customer’s account if which of the following is TRUE?

Answer 13

I.He shares in the losses as well as the profits.

II.The sharing is proportionate to his investment in the account.

Question 14

Mr. and Mrs. Smith, both nearing retirement, want to reallocate $200,000 of their $500,000 portfolio currently consisting of blue-chip stocks to an investment that would add to their monthly income after retirement. Of the possible investment choices below, which would be the most suitable recommendation given their investment objective?

Answer 14

GNMA securities

Of the answer choices given, only Ginnie Mae (GNMA) securities would offer monthly income. Additionally, GNMAs are backed by the US government, which adds to their suitability for this couple nearing retirement. None of the remaining answer choices offer monthly income, and 2 of them (high-yield corporate bonds and exchange-traded notes) have unique risk associated with them, making them unsuitable for those near or in retirement

Question 15

Under the Conduct Rules and the concept of “fair dealing” with customers, which of the following is NOT prohibited?

Answer 15

Short sales of securities in investment accounts

Question 16

If a registered representative purchases a limited partnership unit without providing prior written notice to his employing firm, the representative

Answer 16

is in compliance with FINRA rules because the partnership is a passive investment

Question 17

When interest rates are changing, an investor might expect which of the following to be the most volatile?

Answer 17

Treasury STRIPS with 20 years to maturity

When interest rates are changing, bonds with more years remaining to maturity will have greater volatility. Because zero-coupon bonds, such as treasury receipts and STRIPS, do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds.

Question 18

A registered representative knows that a large block trade order to buy shares of XYZ stock for one of his institutional accounts has been entered and will be executed shortly. The RR enters small orders to buy 100 shares of XYZ for each of his retail discretionary accounts prior to the block trade. This action is

Answer 18

a violation known as front-running

Question 19

Under FINRA rules, the annual limit for gifts received from customers or other firms is

Answer 19

$100

Question 20

Which of the following states that the pricing of a stock should take into account systematic risk as well as the expected return of a theoretical risk-free asset?

Answer 20

Capital asset pricing model (CAPM)

Question 21

A registered representative wishes to lend money to a customer. Under which of the following circumstances would written notice to the broker/dealer be required?

Answer 21

Written notice to the broker/dealer would be required for a loan from the RR to a friend or someone with whom he has a business relationship. It is not required for loans to immediate family members such as spouses or parents.

Question 22

A married couple in their early 40s is willing to accept some risk and wants to keep pace with inflation. Which of the following investment choices would be most suitable for them?

Answer 22

A diversified common stock portfolio

Question 23

Regarding research reports delivered to a member firm’s clients, which of the following statements is CORRECT?

Answer 23

A member firm may present, and base recommendations on, reports and analysis prepared by another member firm when its source is disclosed.

Question 24

When a FINRA member places a third party between it and the best available market, it is a violation known as

Answer 24

interpositioning

Question 25

It is determined that a customer’s portfolio has an alpha, which is a measure that adjusts for risk, of minus 2. This would indicate that the portfolio

Answer 25

underperforms a predictable benchmark by 2%

Alpha is a measure of performance that adjusts for risk, relative to a known benchmark. It can be positive or negative. With a minus 2 alpha, a portfolio would be expected to underperform the predictable benchmark by 2%.

Question 26

If a registered representative wishes to open a joint account with his brother, who is a client of his, which of the following rules would NOT apply?

Answer 26

If a registered representative is opening a joint account with an immediate family member, the sharing of profits and losses need not be proportional to each party’s investment in the account.

Question 27

If a registered representative perceives that unethical trading practices are occurring at his firm or another firm, the RR would be expected to report this information to

Answer 27

the FINRA regulatory tip line in Washington DC