Term
Interest rates had been very high. During the past three years rates have decreased dramatically, reaching historically normal level. The present yield curve would most likely be:
I) Ascending
II) Inverted
III) Positive sloping
IV) Negative sloping
I and III
I and IV
II and III
II and IV |
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Definition
I and III
If rates have declined for the past three years and reached a normal level, the present yield curve would most likely be ascending, which is also referred to as positive or upward sloping. This type of curve would have short-term rates lower than long-term rates, which is the way interest rates usually are. It is also referred to as a normal yield curve. |
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Term
Which of the following issues will most likely have a mandatory sinking fund?
Serial issues
Balloon issues
Term issues
Convertible issues |
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Definition
| A term issue is one in which all the bonds mature in one specific year. To accumulate monies to help retire the bonds, the issuer will deposit monies (above the amount to pay interest) in a sinking fund. These monies will generally be used to retire some of the bonds prior to maturity. A serial issue is one in which a portion of the bond issue is paid off each year, versus all being paid in one specific year as with a term bond issue. |
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Term
Which of the following statements does NOT describe an equity-indexed annuity?
It offer a guaranteed minimum rate of return
It provides a return based on the performance of a stock market index
It is considered a security
It provides tax-deferred growth |
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Definition
It is considered a security.
Equity-indexed annuities (EIAs) are annuities that provide a guaranteed minimum rate of return (unlike variable annuities), but can yield a greater rate of return based on the performance of a linked stock market index. They also provide tax-deferred growth. Currently, EIAs are not considered securities. |
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Term
According to suitability rules, 1035 exchanges should occur not more frequently than once every:
12 months
24 months
36 months
48 months |
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Definition
1035 exchanges which occur within 36 months of previous exchanges may be considered churning and unsuitable. In order for an exchange of one variable annuity for another to be suitable, an adequate analysis of the investor's situation should include:
Age
Annual income
Financial situation and needs
Investment experience and objectives
Intended use of the deferred variable annuity
Investment time horizon (not intended for senior citizens)
Existing assets
Liquidity needs
Liquid net worth
Risk tolerance
Tax status |
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Term
Your firm is the managing underwriter of an initial public offering. How many days must the firm's research analyst wait before issuing a research report on this IPO?
There is no waiting period and research may begin anytime after the effective date
10 days
40 days
90 days |
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Definition
40 days
If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 40 days following an IPO or 10 days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 25 days |
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Term
The most detailed financial information regarding a municipal securities issuer is found in the:
Official statement
Prospectus
Notice of sale
Registration statement |
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Definition
Official Statement.
Municipal securities are exempt from the registration provisions of the SEC. Therefore, a registration statement and prospectus are not required. Municipal issuers voluntarily provide the same financial information that would be found in a prospectus. This detailed financial information is found in the official statement. The notice of sale contains information pertaining to a competitive offering of bonds such as the time, place, date of sale, and type of offering. |
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Term
Many investors prefer to receive variable annuity payments under the straight-life payout option because this option:
Is the most conservative method for receiving payments
Allows for a beneficiary for the entire payout period
Provides the maximum cash flow of all payout options
Provides an equal payment each month for the investor's lifetime |
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Definition
Provides the maximum cash flow of all payout options
Annuitants will receive the greatest cash flow from the straight-life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout. |
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Term
Under Rule 144A, a registered representative is NOT permitted to sell unregistered securities to which of the following?
A trust fund
An insurance company
An accredited investor
An investment adviser |
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Definition
An accredited investor
Under Rule 144A of the Securities Act of 1933, unregistered securities may be resold only to qualified institutional buyers (QIBs). Qualified institutional buyers are entities that have at least $100 million of investable assets. The term institution includes insurance companies, trust funds, investment advisers, investment companies, employee benefit plans, or other types of institutional investors. Individual investors, even if they are deemed to be accredited investors, are not considered to be QIBs. |
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Term
Which of the following CMOs has the LEAST prepayment risk?
Sequential pay tranches
Accrual or Z tranches
Planned amortization class (PAC) tranches
Support or companion tranches |
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Definition
| The planned amortization class (PAC) is a type of CMO that is designed for more risk-averse investors and provides a predetermined schedule of principal repayment, as long as mortgage prepayment speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking-fund type of schedule. The PAC tranche has top priority and receives principal payments up to a specified amount. Any excess principal goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields. |
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Term
A client is long and short 1,000 shares of the same security. If the current market value is $80,000, the client is permitted to borrow up to:
$4,000
$20,000
$40,000
$76,000 |
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Definition
| If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. The maintenance requirement is equal to $4,000 (5% of $80,000). Therefore, the client is permitted to borrow 95% of $80,000, or $76,000. |
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Term
Upon written request, duplicate account statements would be required under which TWO of the following circumstances?
The customer is an employee of a member firm and is opening a brokerage account at a bank
The customer is an employee of a mutual fund and is on the board of directors
The customer is an employee of a bank and is opening an account at a broker-dealer
The customer is an employee of a member firm and is opening a brokerage account at a financial institution
I and III
I and IV
II and III
II and IV |
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Definition
I & IV
Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens a brokerage account at another member, investment adviser, bank, or other financial institution. There is no requirement to send duplicate statements if the customer is an employee at a financial institution. |
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Term
An investor enters an order to buy 400 shares of HRJ @ 56 on the NYSE. Which of the following statements are TRUE regarding this order?
The designated market maker may hold this order in his book
The order may only be executed at 56
A portion of the 400 shares may be purchased
The order must be executed immediately
I and III only
II and III only
II and IV only
I, II, III, and IV |
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Definition
I and III only
Since a price is specified, it is a limit order. A limit order may be executed at the limit price or better (lower for a buy order). It does not need to be executed at exactly the limit price. A designated market maker is permitted to hold a stop, limit, and stop-limit order. A portion of the order may be executed since the order was not marked AON (all or none). It does not need to be executed immediately since it was not marked IOC (immediate-or-cancel). |
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Term
Which TWO of the following statements are TRUE concerning the death benefit on a variable annuity?
The benefit skips the probate process
The benefit must go through probate prior to distribution
The beneficiary receives the proceeds tax-free
The beneficiary may have a tax liability when receiving the proceeds
I and III
I and IV
II and III
II and IV |
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Definition
I and IV
The death benefit on a variable annuity skips the probate process. Probate is a lengthy legal process in which the decedent's bills are paid and remaining assets distributed based on instructions generally left in a will. The recipient of a death benefit from a variable annuity may need to pay taxes on any amount above the contract's cost basis. For example, if a client invested $100,000 and died when the contract was worth $150,000, a nonspouse beneficiary may be required to pay taxes on the $50,000 above the decedent's contributions. |
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Term
A registered representative is sending an e-mail to banks and investment advisers in anticipation of a new product being offered by the firm. This is defined as a(n):
Correspondence
Institutional communication
Retail communication
Public appearance |
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Definition
FINRA's Communications with the Public Rule defines different types of communication.
Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.
Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer.
Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period.
Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn).
An institutional investor under this rule is any bank, S&L, insurance company, registered investment adviser or investment company (mutual fund), any person with total assets of at least $50 million, government entity, employee benefit plan, any member firm or registered person of the firm, and any person acting solely for any institutional investor.
Since the e-mail is being sent only to institutional investors, it is defined as an institutional communication. |
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Term
An individual invested $100,000 in a real estate limited partnership. The individual's portion of the income and expenses are as follows.
Gross revenue $ 220,000
Operating expenses $ 150,000
Interest on mortgage $ 35,000
Depreciation $ 50,000
The cash flow of the real estate program is:
+$15,000
- $15,000
+$35,000
- $35,000 |
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Definition
The income or loss on the project would be calculated as follows.
Gross revenue
$
220,000
- Operating expenses - 150,000
- Interest on mortgage - 35,000
- Depreciation - 50,000
Loss ($15,000)
After reducing the gross revenue by all of the expenses listed above you determine the net loss which is $15,000. From the loss you would add back any depreciation expense to determine the cash flow. Depreciation is a non-cash expense and it is added to cash flow. So the $15,000 loss plus the $50,000 in depreciation expense would equal $35,000. Cash flow = Net Income or Loss + Depreciation Expense. |
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Term
A corporation wishes to open a cash account. Which of the following documents is required?
A corporate resolution
A copy of the corporate charter
A hypothecation agreement
A risk disclosure document |
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Definition
| A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account. |
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Term
A broker-dealer is underwriting an initial public offering (IPO) for a company that will be listed on the NYSE. The broker-dealer is required to deliver prospectuses:
Only on purchases made, at the public offering price
For 25 days after the effective date
For 40 days after the effective date
For 90 days after the effective date |
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Definition
| When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus delivery requirement for an IPO that will not be listed on an exchange continues for 90 days after the deal closes. |
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Term
Which TWO of the following choices are characteristics of reverse convertible securities?
They are short-term securities
They are usually long-term securities
The investor is guaranteed to receive his original principal back at maturity
The investor may receive less than the value of his original principal back at maturity
I and III
I and IV
II and III
II and IV |
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Definition
I and IV
Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. |
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Term
Which of the following option positions is an example of a combination?
Buy an XYZ June 60 call and sell an XYZ June 65 call
Buy an XYZ June 60 call and buy an XYZ June 60 put
Sell an XYZ June 60 call and sell an XYZ June 60 put
Buy an XYZ June 60 call and buy an XYZ June 65 put |
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Definition
Buy an XYZ June 60 call and buy an XYZ June 65 put
A long straddle is defined as the simultaneous purchase of two options that have the same expiration and strike price, but consist of one call and one put. A short straddle is defined as the simultaneous sale of two options that have the same expiration and strike price, but consist of one call and one put. Choice (b) is a long straddle and choice (c) is a short straddle. A combination is similar to a straddle, however, the strike prices and/or expirations must be different. Choice (d) is a long combination. A spread is defined as the simultaneous sale and purchase of two options of the same class (same stock and same type of option), but it will have different strike prices and/or expirations. Choice (a) is a spread. |
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Term
Which of the following lists assists a broker-dealer in making a reasonable determination that a security is available to be borrowed from another broker-dealer in order to effect a short sale transaction?
An Easy-to-Borrow List
A Hard-to-Borrow List
A Threshold Security List
A Restricted Stock List |
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Definition
| In order to aid in the process of locating securities, the SEC has accepted the use of Easy-to-Borrow lists. These lists, which must be less than 24 hours old, provide reasonable grounds for belief that a security on the list will be available to be borrowed. The securities on the list must be readily available to avoid fails to deliver. Use of an Easy-to-Borrow list expedites the fulfillment of the locate provision. A Hard-to-Borrow list refers to securities that a clearing broker-dealer may have difficulty in borrowing. |
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Term
Which investment company does NOT charge a management fee?
An open-end investment company
A closed-end investment company
A unit investment trust
An exchange-traded fund |
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Definition
| A unit investment trust does not charge a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed. |
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Term
An investor has taken the following gains and losses during the tax year: a $19,000 capital gain on stock positions and a $24,000 loss on option positions. What amount of ordinary income may the investor offset this year?
0
$2,000
$3,000
$5,000 |
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Definition
$3,000
Capital gains may be offset against capital losses regardless of whether they are from stocks or options. The maximum capital loss an investor may write off against ordinary income in one tax year is $3,000. The balance of the $2,000 capital loss must be carried forward to the next year. |
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Term
In a direct participation program, the point at which revenues begin to exceed deductions is known as:
The cash-on-cash return
The maximum cash flow
The crossover point
Phantom income |
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Definition
| The crossover point is reached when the project's revenues exceed expenses and net income is produced. |
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Term
Treasury arbitrage restrictions generally prohibit issuers of municipal securities from:
Selling municipal securities with coupon rates that are lower than Treasury securities
Selling municipal securities with coupon rates that are higher than Treasury securities
Investing bond proceeds in higher-yielding Treasury securities
Investing bond proceeds in lower-yielding Treasury securities |
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Definition
Investing bond proceeds in higher-yielding Treasury securities
Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption. |
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Term
The federal tax exemption for interest earned on an industrial revenue bond is NOT available if the:
Holder of the bond is a substantial user of the facility
Issuer does not subscribe to equal opportunity employer standards
Bonds are not approved by the MSRB
Underwriter has a control relationship with the issuer |
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Definition
| If the holder of an industrial revenue bond is a substantial user of the facility, then the federal tax exemption on the interest earned does not apply. |
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Term
Recently, the federal funds rate has been rising. This may indicate all of the following situations, EXCEPT:
Rates for short-term loans have been increasing
The Federal Reserve may be engaging in matched sales to absorb reserves from the banking system
Banks will find it more expensive to obtain overnight loans to satisfy a minor deficit in their reserve accounts
The Federal Reserve is easing credit |
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Definition
| The federal funds rate is the rate that one bank charges another bank for overnight borrowing. This borrowing is done when a bank is in need of reserves. If the fed funds rate is steadily rising, it indicates that the Federal Reserve is tightening credit. Therefore, banks may find difficulty in obtaining overnight loans to meet reserve requirements. |
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Term
The Barge Towing Corporation has announced in a tombstone ad that it will issue $5,000,000 of 10% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2030 and are being issued at their $1,000 par value. Which of the following statements is TRUE?
The bonds are being issued at a premium
The bonds are being issued at a discount
The bonds can be redeemed by holders before November 2030
If the company should go bankrupt, the subordinated debenture holders would be paid after all other bondholders and general creditors but before common stockholders |
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Definition
| The bonds are subordinated debenture bonds and are issued at par value. If the company should go bankrupt, the subordinated debenture holders will be paid after all other bondholders and general creditors, but before common stockholders. |
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Term
The net borrowing cost to a municipal issuer of a Direct Pay Build America Bond (BAB) with a 7% interest rate is:
0%
2.45%
4.55%
7.00% |
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Definition
| The Treasury will reimburse 35% of the interest payment, which results in a net borrowing cost of 4.55% (7.00% x [100% - 35%]). These bonds may be suitable for taxable, fixed-income investors. BABs allow a municipality to issue a bond with a higher interest rate, but pay an equivalent tax-free rate. |
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Term
What is the maximum allowable percentage that may be sold above the original size of the offering through a Green Shoe option?
10%
15%
20%
25% |
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Definition
| The overallotment provision of an underwriting agreement may contain a Green Shoe clause that allows the syndicate to increase the number of shares sold by 15% over the original number of shares in the offering. |
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Term
Under the Investment Company Act of 1940, which TWO of the following choices are considered investment companies?
A bank holding company
A face-amount certificate
An insurance company
A management company
I and II
I and IV
II and III
II and IV |
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Definition
| A face-amount certificate and a management company are two types of investment companies. The third type is a unit investment trust. The Investment Company Act of 1940 does not consider holding companies and insurance companies to be investment companies. |
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Term
A customer has a federal tax rate of 35% and a state tax rate of 5%. Which of the following investments would afford him the BEST after-tax yield?
A 6.40% in-state municipal bond
A 7.05% out-of-state municipal bond
A 10.45% investment-grade corporate bond
A 10.25% real estate investment trust (REIT) |
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Definition
The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The investment-grade corporate bond and REIT are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 40% for the in-state bond and the federal rate of 35% for the out-of- state bond. The formula is:
Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield
The customer is in the 40% combined tax rate. The municipal bond has a yield of 6.40%.
6.40% (Municipal Bond Yield) / 60% (100% - 40%) = 10.67% Equivalent Taxable Yield
The out-of-state municipal bond has a yield of 7.05% and the equivalent taxable yield is 10.85% (7.05% / 65%). The out-of-state municipal bond has the best or highest after-tax yield. |
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Term
A customer purchases 10 MMS May 20 puts at 2 in a cash account when the market price of MMS is 24. Which TWO of the following statements are TRUE regarding this transaction?
The settlement date for the transaction is one business day
The settlement date for the transaction is three business days
The Regulation T payment date is three business days
The Regulation T payment date is five business days
I and III
I and IV
II and III
II and IV |
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Definition
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Term
Six percent XYZ debentures are trading for $1,200. Other similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures?
A) 6%.
B) 5%.
C) 7.5%.
D) 1.5%. |
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Definition
| Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price. Accordingly, $60 / $1,200 = .05 × 100 = 5%. The current yield will be lower than the coupon rate when the bond is trading at a premium. |
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Term
An investor has an established margin account with a short market value of $8,000 and a credit balance of $13,000, with Regulation T at 50%. A maintenance call would be triggered if the short market value increased above:
A) 13000.
B) 8000.
C) 10000.
D) 9000. |
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Definition
| To find short market value at maintenance, divide the credit balance of $13,000 by 1.3 ($10,000). |
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Term
ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend?
A) Wednesday, May 16.
B) Tuesday, May 15.
C) Thursday, May 17.
D) Monday, May 14. |
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Definition
| In order to receive a cash dividend, an investor must be owner of record as of the close of business on record date. Because regular way settlement is 3 business days, the customer must purchase the stock no later than Monday, May 14. |
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Term
Your customer is interested in a variable annuity but is unclear on some of the details regarding different specifications and riders that can be attached to the contract. He makes the following four statements, all of which are true EXCEPT
A) with guaranteed minimum withdrawal benefits (GMWBs) the periodic payments can be monthly, quarterly or annually
B) a lifetime withdrawal benefit (LWB) or lifetime income benefit is generally in the form of a rider attached to the contract which will come at a cost to the annuitant
C) a lifetime withdrawal benefit (LWB) or lifetime income benefit will make a periodic payment even if the account balance falls to zero
D) with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed |
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Definition
| With guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is not guaranteed because payments stop when the annuitant has received an amount equal to the principal account value or the contract term ends. Each of the remaining statements are true. |
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Term
Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with
A) tax preference items
B) gains associated with variable annuity portfolios
C) capital losses
D) losses on options positions |
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Definition
| Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private-purpose municipal revenue bonds. These types of items are known as tax preference items. For investors who are subject to the alternative minimum tax (AMT), the benefits normally associated with tax preference items are lost, because these items must be added back into the investor's taxable income. |
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Term
A municipal security legal opinion covers which of the following?
Feasibility of public works projects.
Creditworthiness of the issuing municipality.
Tax status of the municipal debt.
The constitutionality and legality of the municipal debt.
A) III and IV.
B) I and II.
C) I and IV.
D) II and III. |
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Definition
| Municipal securities are reviewed by specialized lawyers who render a legal opinion. The opinion covers two main issues: constitutionality (i.e., it ensures that the bonds are legal, valid, and binding obligations of the issuer) and verification of the tax status of the debt (i.e., interest on the bonds is exempt from federal income taxes as well as state and local taxes in some cases). |
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Term
All of the following events would cause FINRA to terminate quotations in a SmallCap stock EXCEPT
A) the issuer's independent auditor rendering a disclaimer opinion
B) having only 2 broker/dealers making a market in the stock
C) the issuer declaring bankruptcy
D) FINRA deeming termination to be in the public's best interest |
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Definition
| Although 3 market makers are required initially for an issue to be included on Nasdaq, only 2 market makers are needed to continue being quoted on the system. The other answers, bankruptcy, a disclaimer opinion being rendered by auditors, or any reason FINRA deems termination to be in the general publics interest, are sufficient reason for termination of quotations. |
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Term
Crossover refunding, which is a type of advance refunding, is best described by which of the following statements?
A) The revenue stream is halted completely from the project until the new bonds are issued.
B) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called.
C) Revenues can never cross over to fund a new issue.
D) The new issue will not be funded by the revenue stream from the project that funded the initial bond offering. |
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Definition
| Crossover refunding is a method of advance refunding in which the revenue stream originally pledged to secure the refunded bonds continues to be used to pay debt service on those bonds until they mature or are called in by the issuer. |
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Term
All of the following are regulated by the MSRB EXCEPT:
A) issuers.
B) quotes.
C) sales representatives.
D) dealers. |
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Definition
| Quotes, dealers, and sales representatives are regulated by the MSRB; issuers are not. |
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Term
A New Jersey client in the highest tax bracket wants to minimize his tax burden. The interest on which of the following securities is exempt from federal, state, and local taxes?
A) Bonds issued by the Commonwealth of Puerto Rico.
B) Treasury bills.
C) City of New York general obligation bonds.
D) GNMA pass-through certificates. |
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Definition
| Bond issues by protectorates of the United States (Guam, Puerto Rico, and the U.S. Virgin Islands) are triple tax exempt: federal, state, and local. Interest income from municipal bonds is federal tax exempt, but is not state tax exempt unless the bondholder is a resident of the state where the bonds are issued. Interest from Treasury bills and most other government and agency securities is state tax exempt, but is subject to federal taxes. Exceptions are GNMA and FNMA securities, which are taxed on all levels. |
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Term
Two $1,000 par bonds are issued with coupons of 5.2% and 5.4%, respectively. The 20-basis-point difference is:
A) $100.00.
B) $2.00.
C) $20.00.
D) $10.00. |
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Definition
| One basis point is .01%. The difference between 5.20% and 5.40% is .20%, which is equal to 20 basis points. The bond with a 5.2% coupon rate pays interest of $52. The bond with a 5.4% coupon rate pays interest of $54. The difference is $2. |
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Term
A customer is long 10 XYZ Jan 60 calls, and XYZ declares a 20% stock dividend. On the ex-date, the customer will have:
A) 10 XYZ Jan 50 calls (120 shares per contract).
B) 10 XYZ Jan 60 calls (100 shares per contract).
C) 10 XYZ Jan 50 calls (100 shares per contract).
D) 12 XYZ Jan 60 calls (120 shares per contract). |
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Definition
| When adjusting options contracts for stock dividends and fractional splits, the number of contracts held will not change. The number of shares covered by each contract is increased (100 shares × 120%) so that in this example each adjusted contract now represents 120 shares. The effective exercise price is adjusted so that the position value remains the same before and after the adjustment. Therefore the new strike price will be 50 ($6,000 / 120 shares = $50). |
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Term
To stimulate a sluggish economy using fiscal policy measures, policymakers would:
A) increase the money supply.
B) increase income taxes.
C) reduce the money supply.
D) reduce income taxes. |
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Definition
| Reducing income taxes is a fiscal policy tool intended to increase overall demand for goods and services. Adjusting the money supply is a monetary policy tool. |
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Term
A project that was funded with a revenue issue has been condemned by the state under an eminent domain proceeding. The outstanding bonds would be subject to which of the following call provisions?
A) Refunding call.
B) Defeasance call.
C) Catastrophe call.
D) Prerefunding call. |
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Definition
| If a revenue project was condemned under eminent domain, the bonds would be subject to a catastrophe call. |
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Term
If an investor has an established margin account with a current market value of $4,400, and a debit balance of $1,750 with Regulation T at 50%, how much buying power does the investor have in the account?
A) 900.
B) 4400.
C) 2200.
D) 2650 |
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Definition
| The Regulation T requirement is 50% of the current market value of $4,400, which equals $2,200. Equity equals the current market value of $4,400 minus the debit balance of $1,750, which equals $2,650. Excess equity is calculated by subtracting the Regulation T requirement of $2,200 from the current equity of $2,650, which equals $450. Buying power is then calculated by multiplying the excess equity of $450 by 2, which equals $900. |
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Term
Which of the following statements regarding U.S. government agency obligations are TRUE?
They are direct obligations of the U.S. government.
They generally have higher yields than direct U.S. obligations.
The Federal National Mortgage Association (FNMA) is a publicly traded corporation.
Securities issued by the Government National Mortgage Association (GNMA) trade on the NYSE floor |
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Definition
A) I and III.
B) I and II.
C) II and IV.
D) II and III. |
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Term
Which of the following characteristics describe Treasury bills?
Issued at face value.
Issued at a discount.
Pay semiannual interest.
Pay all interest on maturity.
A) I and IV.
B) II and III.
C) I and III.
D) II and IV. |
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Definition
| Treasury bills are issued at a discount and pay all interest at maturity. |
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Term
A customer sells short 1,000 XYZ at 60. Three months later, XYZ is at 44. Which of the following strategies might the customer employ to protect his unrealized gain?
Sell 1,000 XYZ 45 stop.
Buy 1,000 XYZ 45 stop.
Buy 10 XYZ Mar 45 calls.
Buy 1,000 XYZ 45 stop limit.
A) I and III.
B) II and III.
C) I and IV.
D) II and IV. |
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Definition
| In this short position, the customer currently has an unrealized gain of 16. He stands to see his unrealized gain begin to erode if the stock price rises, so he could enter a buy stop order above 44 to allow him to buy and cover his position if a price rise occurs. Purchasing calls would also be effective, since the right to exercise would allow the investor to buy stock at 45 and protect a gain of 15 points less the premium paid. |
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Term
Included in the working capital computation of a corporation are all of the following EXCEPT:
A) cash.
B) accounts receivable.
C) convertible bonds it has issued.
D) marketable securities of other companies. |
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Definition
| The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital. |
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Term
After receiving securities from another firm, a broker/dealer discovers that the securities received were not in good deliverable form. His recourse is to:
A) file a reclamation.
B) sell out.
C) buy in.
D) cancel the trade and file a complaint. |
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Definition
| After receiving the securities, the broker/dealer can file a reclamation and demand good delivery. |
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Term
An official statement has a dated date of March 1, but the first interest payment is October 15. This most likely reflects:
A) a long coupon.
B) a misprint in the official statement.
C) a when-issued transaction.
D) a normal payment cycle on the bond of 7-½ months. |
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Definition
| This is a long coupon, and, after the first payment, subsequent payments will be made every 6 months. |
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Term
Which of the following balance sheet items is NOT a current liability?
A) Mortgages.
B) Long-term debt amount that is due within 1 year.
C) Accounts payable.
D) Accrued taxes. |
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Definition
| Short-term or current liabilities are those entries on a balance sheet that are due in 1 year or less. Accounts payable, accrued taxes, and that portion of long-term debt due within the year are all current liabilities. Mortgages are generally long-term liabilities, although that portion of a mortgage that is due within the year would be classified on the balance sheet as a current liability. |
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Term
Which of the following govern the sale of a publicly offered direct participation program?
FINRA
Securities Act of 1933
The Investment Company Act of 1940
The Internal Revenue Service
A) I and II
B) II and IV
C) III and IV
D) II and III |
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Definition
| The sale of a publicly registered DPP, like any other newly issued nonexempt security, is governed by the Securities Act of 1933, FINRA, and any applicable blue-sky (state) securities laws. While IRS tax code is applicable to DPPs, the IRS does not govern the sale of the securities. |
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Term
If a customer buys a Mt. Vernon Port Authority municipal bond in the secondary market at 109 and holds the bond to maturity what are the tax consequences?
A) Capital gain of $9.
B) No capital gain or loss.
C) Capital loss of $9.
D) Capital loss of $90. |
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Definition
| The investor's cost basis of bonds purchased at a premium is adjusted by amortization of the premium. In this case, there is a $90 premium that will have been completely amortized at maturity. At maturity the adjusted cost basis equals the face value and no loss or gain is realized. |
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Term
Which of the following interest rates is NOT market driven?
A) Broker call loan rate.
B) Prime rate.
C) Federal funds rate.
D) Discount rate. |
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Definition
| The discount rate is set by vote of the Federal Reserve Board. The remaining interest rates are directly or indirectly set by their markets. |
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Term
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is:
18.25
18.38
18.50
18.63 |
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Definition
| After the order was activated by the round-lot sale of 18.25 (which is at or lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and is the execution price. |
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Term
The Taft Food Company intends to distribute shares of its grocery business to existing stockholders. The shares of this company will be traded separately from Taft. This is an example of a(n):
Stock dividend
Reverse merger
Spinoff
Initial public offering |
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Definition
| Spinoff transactions occur when a company is seeking to divest a division. In a spinoff, each shareholder of the parent retains her original shares, but is also given shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers in the hopes that the combined valuation assigned by the market to the two (now) separate companies will be greater than that of the single combined entity. A stock dividend is a situation where each shareholder is given additional shares of the existing company. When a company with no shares currently trading publicly begins trading in the public market, it is an initial public offering (IPO). In a reverse merger, a private company buys a public company with the acquirer's shareholders swapping their shares for a majority stake in the publicly traded shell corporation. This technique allows a private company to obtain publicly listed status quickly, and to avoid much of the regulatory expense incurred with an IPO. |
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Term
Upon written request, duplicate account statements would be required in all of the following circumstances, EXCEPT:
The customer works in the operations area of a broker-dealer
The customer works on the trading desk of a broker-dealer
The customer is a senior executive of an investment advisory firm
The customer is a principal of a broker-dealer |
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Definition
Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens an account at another member, investment adviser, bank, or other financial institution. The rule applies to any person employed by a member firm (broker-dealer).
There is no requirement to send duplicate statements if the customer is an employee at a bank, investment adviser, or other financial institution. |
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Term
A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security. Which of the following statements is TRUE?
The shares must be placed in the RR's error account
The shares must be placed in the broker-dealer's error account
The RR must contact the client and cancel the original transaction
The firm is required to report the error to the market in which the order was executed |
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Definition
| All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original transaction immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed. |
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Term
Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield.
Current yield
Nominal yield
Yield to maturity
Yield to call
I, II, III, IV
II, I, III, IV
IV, III, I, II
II, I, IV, III |
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Definition
| A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par. |
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Term
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on:
November 28
November 29
November 30
December 1 |
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Definition
| The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on the record date, which is given in this example as December 1. |
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Term
A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity may sell the stock:
Only if sold to a qualified institutional buyer
Freely under Rule 144
After holding the stock for an additional six months, subject to the volume restrictions of Rule 144
After holding the stock for an additional six months, but not subject to the volume restrictions of Rule 144 |
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Definition
| The charity may sell the stock freely (immediately) since the required holding period for restricted stock has already been met by the director. Since the charity is a not affiliated with the issuer (a nonaffiliated person), it is not subject to the volume restrictions. However, the stock is still restricted (unregistered) and must be sold under Rule 144. Rule 144A, not Rule 144, requires the purchaser to be a qualified institutional buyer. |
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Term
A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE?
The bid price is equal to the net asset value
The bid price is equal to the net asset value minus the redemption fee
The offer price is equal to the net asset value plus a commission
The offer price is equal to the net asset value plus the sales charge
I and III
I and IV
II and III
II and IV |
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Definition
The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares.
The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund. The term commission is not used in the mutual fund industry as the term sales charge or sales load is used, and is built into the price the customer pays for the fund. |
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Term
Which of the following direct participation programs is associated with low costs to obtain the property and high up-front costs?
An oil and gas developmental program
An equipment leasing program
An exploratory oil and gas program
An income oil and gas program |
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Definition
| A wildcatting program, also called an exploratory program, searches for oil in unproven areas. This results in a lower cost of acquiring the land or mineral rights. In order to extract oil and gas, the program will incur significant start-up or up-front costs. A developmental program drills for oil in proven, surveyed sites and the cost for the land is more expensive. An income oil and gas program acquires interests in already-producing properties. These sites are acquired from oil and gas operators who have completed the drilling and prefer to sell the reserves rather than hold the property for the life of the production. These programs would have higher mineral rights costs and lower up-front costs. |
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Term
A registered representative employed by the research department of a member firm is NOT permitted to be supervised by which department of a broker-dealer?
Trading
Investment banking
Operations
Sales |
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Definition
| Current regulations require a member firm's research department to be separate from its investment banking department to avoid conflicts of interest. An RR employed by the research department is not allowed to be supervised by the investment banking department. The rules do not specify which area of a broker-dealer must supervise an RR working in research, but they do state which department is not permitted to supervise. |
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Term
When buying listed put options versus selling the underlying stock short, which of the following choices is NOT an advantage?
Buying a put would require a smaller capital commitment
Buying a put has a smaller dollar loss potential than selling the stock short
The put has a time value beyond an intrinsic value that gradually dissipates
Buying a put is not subject to Regulation SHO |
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Definition
| Choice (c) is a correct statement, but it is not an advantage for the buyer of a put. An options premium may consist of intrinsic value and/or time value. The portion of the premium represented as time value declines over time. For example, if an XYZ July 50 put is purchased for $5 when the market price is $47, the intrinsic value (in-the-money value) is $3 and the time value is $2. As the put nears expiration, the time value gradually dissipates, which is a disadvantage to the buyer. |
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Term
In which TWO of the following situations is a customer NOT considered covered when writing a put option?
The customer has cash equal to the exercise value of the contract
The customer is long a call option
The customer is short the underlying security
The customer is long the underlying security
I and III
I and IV
II and III
II and IV |
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Definition
| To write a covered put option in a cash account, the customer must have cash in the account equal to the total exercise value of the contract. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account. Since the question did not specify the type of account, both choices (I) and (III) allow the customer to be considered covered. |
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Term
If an auction for auction rate securities were to fail, the holder would:
Receive the par value of the securities
Continue to hold the securities and the interest rate would be set to the maximum rate
Continue to hold the securities and the interest rate would be set to the minimum rate
Continue to hold the securities and the interest rate would be set to a rate that cleared the auction |
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Definition
| A failed auction occurs when there are not enough bids to cover the amount of auction rate securities being sold. In this situation, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the program documents. This rate is normally higher than the rate that would have cleared a successful auction. |
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Term
| In a Rule 144A transaction, which of the following statements is NOT TRUE? The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB) The buyer must be able to establish its credentials as a QIB, through relevant documentation The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB |
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Definition
C
The SEC has provided several examples of documents that can be relied on by the seller when establishing its belief that a purchaser is a qualified institutional buyer. Audited financial statements and a certification from the issuer are common methods of demonstrating that the purchaser is a QIB. |
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Term
Rule 145 applies to a(n):
Stock split
Stock dividend
Adjustment in par value
Merger or acquisition |
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Definition
| Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145. |
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Term
The Founders Income Fund has declared a dividend payable to stockholders of record Friday, May 29. This mutual fund would typically sell ex-dividend on:
Monday, May 25
Tuesday, May 26
Wednesday, May 27
The date set by the fund or its principal underwriter (sponsor) |
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Definition
| Mutual funds sell ex-dividend whenever the fund or its principal underwriter (sponsor) determines. The ex-dividend date for a mutual fund is usually the same day as the record date. |
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Term
Regulation FD applies to:
Retail customers
Issuers of securities
Institutional investors
Broker-dealers |
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Definition
| Regulation FD applies to issuers of securities. Regulation FD requires that material, nonpublic information disclosed to analysts or other investors be made public. If the disclosure is intentional, the information must be simultaneously disclosed to the public. If the disclosure is unintentional, the public disclosure must be made within 24 hours. Form 8-K, filed with the SEC, is one method of meeting the public disclosure requirement. |
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Term
The 5% Markup Policy applies when a member firm:
Underwrites debt securities
Underwrites equity securities
Acts as a dealer in a transaction with a customer
Sells a mutual fund to a customer |
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Definition
| A broker is an agent who acts for someone else and receives a commission when a trade is executed. A dealer is a principal who acts for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% Markup Policy, which is a guide broker-dealers must follow. The 5% Markup Policy covers all transactions except municipal bonds and those requiring a prospectus (i.e., the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter, the firm would be involved in a new issue and, if acting as a sponsor would be involved in the sale of a mutual fund. Since these transactions require a prospectus, they would not be covered by the 5% Markup Policy. |
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Term
Which of the following securities is an example of a collateralized time draft?
Commercial paper
American Depositary Receipts
Bankers' acceptances
Eurodollars |
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Definition
| A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank. |
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Term
Industrial development revenue bonds are backed by:
The local municipal district in which the facility is domiciled
The state in which the facility is domiciled
The corporate guarantor
Both the corporate guarantor and municipality |
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Definition
| The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds. |
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Term
In terms of the number of stocks in each category, rank the components of the Dow Jones Composite Index from greatest to least.
Utilities
Industrials
Transportation
I, III, II
II, III, I
III, I, II
II, I, III |
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Definition
| The Dow Composite is comprised of 30 industrial stocks, 20 transportation stocks, and 15 utility stocks. |
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Term
A municipal bond trader who is looking for assistance in buying or selling a specific municipal bond issue in the secondary market will MOST likely use:
The Wall Street Journal
The Bond Buyer
The OTC Pink Market
A broker's broker |
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Definition
| A broker's broker is a primary source for a quote in the secondary market and assists the trader in finding the best price on a specific issue. The Bond Buyer and The Wall Street Journal are publications and do not provide quotes or pricing information on specific municipal bonds traded in the secondary market. The OTC Pink Market provides quotes for securities not listed on the NYSE or Nasdaq. |
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Term
When considering the credit strength of a municipal issuer, which TWO of the following choices are the MOST important?
The condition of the local economy
The current financial status of the U.S. economy
Money supply figures
The general capability of the fiscal officers of the municipality
I and III
I and IV
II and III
II and IV |
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Definition
| The state of the local economy is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt, and this must be understood in the analysis. The current financial status of the U.S. economy is not as important as the local economy in determining the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board, are irrelevant with regard to the credit strength of a municipality. |
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Term
A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client?
The customer will not be able to diversify his assets
The customer will not be able to switch mutual funds within each family
The customer will not be able to receive a single account statement
The customer will not be able to receive sales breakpoints |
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Definition
The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds.
The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer. |
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Term
Which TWO of the following choices are characteristics of GNMA pass-through certificates?
Interest and principal payments are received monthly
The investor will receive her principal back at maturity
Timely payment of interest and principal is guaranteed by the U.S. government
Interest is subject to federal tax but exempt from state and local tax
I and III
I and IV
II and III
II and IV |
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Definition
I and IV
GNMA pass-through certificates are guaranteed by the U.S. government.
Interest and principal payments are received monthly and, therefore, the investor will receive principal payments before, not at maturity.
The interest is subject to federal, state, and local taxes. |
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Term
An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25, pays a 5% annual dividend, is callable at $110, and is trading at a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, what would be the cost basis per share for the newly acquired common stock?
$27.75
$27.50
$26.50
$28.00 |
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Definition
| To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). To calculate this, the par value of the preferred stock ($100) is divided by the conversion price ($25). As a result, four shares of common stock are received upon conversion. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4). $106 ÷ 4 = $26.50. Any future gains or losses on the sale of the common stock are based on this price. |
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Term
Your client owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to:
Write covered calls
Buy calls
Write covered puts
Buy puts |
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Definition
| The most conservative strategy for the investor to achieve her objective is to write covered calls. The call premium received will increase the yield on her portfolio of stocks because it will add to the income generated by the dividends received from the stock. |
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Term
An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is:
$15,000.00
$7,500.00
$1,500.00
$750.00 |
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Definition
| British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00. |
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Term
In which of the following retirement plans is an actuarial calculation used to determine the employer's contribution?
A defined benefit plan
A defined contribution plan
A 401(k) plan
A Roth IRA |
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Definition
| A defined benefit plan promises to pay the employee a specified amount of money each year once the employee retires. This benefit payment is usually based on age, years of service, and salary history. Actuarial calculations are used to determine the amount of money that an employer must deposit each year in the plan to provide for the retirement benefit specified by the plan. |
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Term
According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within:
3 days
5 days
10 days
7 days |
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Definition
| Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days. |
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Term
A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account. Only the MFP signs the check. According to the MSRB political contribution rules, the contribution would be viewed as a:
$200 contribution from each party
$400 contribution from the MFP
$400 contribution from the spouse
$200 contribution from each party, but it must be reported to the MSRB |
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Definition
| If the MFP is the only party who signs the check, the entire amount of the contribution is allocated to the MFP. In this case, the underwriting ban would be triggered since the amount exceeds $250. When both the MFP and her spouse sign the contribution check, the contribution is viewed as being split equally between the contributors. There is no limit if the spouse writes a check from his personal account, rather than the joint checking account. |
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Term
Which TWO of the following statements are TRUE concerning the tax consequences of investing in a limited partnership or direct participation program (DPP)?
I. Tax credits will reduce a customer's taxes directly
II. Tax deductions will reduce a customer's taxes directly
III. Tax credits will reduce a customer's taxable income
IV. Tax deductions will reduce a customer's taxable income
I and III
I and IV
II and III
II and IV |
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Definition
A tax credit will reduce the amount of taxes owed by a customer directly. A tax deduction reduces the customer's taxable income. A tax credit is more beneficial and may be found in a DPP, which specialized in low income housing. An example of a tax deduction is depreciation and depletion.
TAX CREDITS REDUCE TAX OWED
TAX DEDUCTIONS REDUCE TAXABLE INCOME |
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Term
A municipality issues a bond backed by revenue from a project. If the municipality also has bonds outstanding that have the same claim against revenue, which of the following statements is TRUE?
This is a double-barreled bond
This is a parity bond
This type of bond requires voter approval
This type of bond would be taxable if the investor was subject to the alternative minimum tax |
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Definition
| This is an example of a parity bond where two or more issues of revenue bonds have the same claim against revenue or are backed by the same pledged revenues. A double-barreled bond is backed by a source of revenue and the full faith and credit of an issuer that has taxing power, i.e., a general obligation (GO) bond issuer. General obligation bonds, not revenue bonds, require voter approval. Only the interest received from certain municipal private activity bonds is taxable if an investor is subject to the alternative minimum tax. |
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Term
Which of the following choices is NOT considered a tax-preference item when calculating the alternative minimum tax (AMT)?
Accelerated depreciation in excess of straight-line depreciation
Straight-line depreciation
Excess intangible drilling costs
Excess mining, exploration, and development costs |
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Definition
| Under AMT rules, taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due are the greater of the two calculations. Tax-preference items are used in calculating the alternative minimum tax. Straight-line depreciation is not a tax-preference item. |
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Term
A broker-dealer is acting as a principal in which of the following scenarios?
Selling bonds from inventory to an individual
Selling bonds from inventory to another broker-dealer
Buying bonds from another broker-dealer for inventory
Buying 500 bonds to fill an insurance company's order for 250 bonds
I and III only
II and III only
I, II, and III only
I, II, III, and IV |
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Definition
I, II, III, and IV
A broker-dealer is acting as a principal when buying for or selling from inventory. In choice (IV), the broker-dealer is buying 500 bonds to fill an order for 250 bonds. The remaining 250 bonds will be for inventory. |
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Term
Which of the following choices may write calls covered by XYZ stock?
The president of XYZ Corporation
The trustee of XYZ Corporation's pension fund
XYZ Corporation
ABC Corporation
II and IV only
I, II, and III only
I, II, and IV only
I, III, and IV only |
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Definition
I, II, and IV only
Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock. |
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Term
Which of the following indexes is the broadest equity market indicator?
The Nasdaq Composite Index
The Major Market Index
The NYSE Index
The Wilshire Index |
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Definition
| The Wilshire 5000 Equity Index consists of more than 7,000 stocks that trade on the New York Stock Exchange and Nasdaq. The Index is referred to as the Wilshire 5,000 because, when created, it contained approximately 5,000 stocks. The Wilshire Index is considered the broadest of all indexes and averages. |
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Term
One of your clients, Kona Okemo, has a long-term objective of capital appreciation. Which of the following investment strategies will MOST closely achieve this goal?
30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund
50% in an ETF that follows the S&P 500 and 50% in a diversified bond fund
30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund
20% in an oil and gas fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund |
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Definition
| The investor is seeking long-term capital appreciation (also referred to as capital growth). The best answer is based on the asset allocation mix. An investor seeking capital appreciation would want a large percentage of his assets invested in equities. Choice (c) has a mix of 80% equities and 20% fixed-income. The largest percentage of the other choices is choice (d) with 60% equities and 40% in fixed-income. |
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Term
A project financed through revenue bonds is experiencing difficulty in that revenues are not sufficient to meet debt service payments. If, through legislative approval, the state pays interest and principal in a timely manner, the issue is most likely:
Double-barreled bonds
Moral obligation bonds
Bond anticipation notes
Limited tax bonds |
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Definition
| Moral obligation bonds are municipal revenue bonds that are payable by the state if revenues from the project do not satisfy debt service payments. However, in order for the state to service the debt, approval of the state legislature is required. Double-barreled bonds are issued as general obligations backed by the full faith and credit of the issuing municipality. |
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Term
Which of the following statements concerning a tax-qualified annuity is TRUE?
It has a zero cost basis and grows tax-free
It is not subject to contribution limits
It has a zero cost basis and grows tax-deferred
It may be subject to tax-free distributions, if qualified |
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Definition
| Tax-qualified annuities are employer-sponsored plans that are available to certain nonprofit organizations, public school, and/or state/city university/college employees. These annuities, sometimes referred to as TSAs may be placed into a 403(b) or a 501(c)(3) plan. Since these plans are funded on a pretax basis, contributions are deducted from an individual's taxable income. An investor's cost basis is considered to be zero since none of the contributions have been recognized for tax purposes. Income grows tax-deferred not tax-free. Upon distribution, every dollar is taxable as unearned ordinary income. Tax-free growth means that none of the distributions will be subject to taxation. This is not the case with these types of plans. |
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Term
An advertisement for municipal securities states the following:
"15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details."
According to MSRB rules, this advertisement should also state that:
The tax-free return is actually greater than 12% if the bond is held to maturity
A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12%
The tax-free return is actually less than 10% if the bond is held to maturity
A principal approved the advertisement |
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Definition
| According to MSRB rules, the advertisement must state that a portion of the yield to maturity for a discount bond may be subject to taxation and, therefore, does not represent a fully tax-free yield. In this question, the bond is being offered at a discount because the yield to maturity (12%) is greater than the nominal yield (coupon rate 10%). At maturity, the discount would be subject to taxation as ordinary income, causing the net yield to be between 10% and 12%. |
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Term
The turnover that a dollar experiences over a given period is known as the:
Multiplier effect
Velocity of money
Market momentum
Inflation rate |
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Definition
| The velocity of money represents the number of times that a dollar is spent over a given period. It is a measure of business activity in the marketplace. The multiplier effect, created by the reserve requirements placed on members of the Federal Reserve System, refers to the fact that small changes in bank deposits result in large changes in the money supply. |
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Term
Which choice BEST describes The Bond Buyer's Revenue Bond Index?
Average yield on a list of bonds with 30-year maturities
Average yield on a list of 11 bonds
Average yield on a list of 20 bonds
Average yield on a list of new revenue issues |
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Definition
The Bond Buyer publishes different indexes. They include:
The 20-Bond Index -- The average yield to maturity on a particular day of 20 specific GO bonds with 20-year maturities
The 11-Bond Index -- The average yield to maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index
The Revenue Bond Index (Revdex) -- The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities |
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Term
A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock?
$25.00
$30.00
$40.60
$48.00 |
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Definition
| If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant. |
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Term
According to Regulation T, when purchasing an option contract the transaction must be paid for within:
1 business day
3 business days
5 business days
7 business days |
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Definition
| According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase. |
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Term
Which item need NOT appear on a customer confirmation for a municipal bond transaction?
Existence of call features
Whether the interest paid on the bonds is subject to the alternative minimum tax
Whether the bonds are insured
The name of the bond counsel |
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Definition
| MSRB rules do not require that the name of the bond counsel be disclosed on a confirmation. The existence of call features, bond insurance, the applicability of the alternative minimum tax, or any special relationships between the issuer and the broker-dealer (such as financial advisory and control relationships) are among the numerous disclosures that must be made to customers on a confirmation. |
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Term
Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)?
They offer investors the same amount of liquidity as exchange-traded REITs
They are required to distribute the same percentage of taxable income as exchange-traded REITs
They are not required to make periodic disclosures that are required of exchange-traded REITs
They are suitable for the same investors as exchange-traded REITs |
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Definition
B
Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors. |
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Term
The minimum denomination for negotiable certificates of deposit is:
$1,000
$5,000
$10,000
$100,000 |
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Definition
| The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more. |
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Term
When must a customer sign an agreement to abide by the rules of the exchanges and the rules of the Options Clearing Corporation with regard to position limits?
Not later than one month following the approval of the account
At least five business days prior to the first transaction
Not later than 15 days following the approval of the account
Not later than the time the account is approved for option transactions |
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Definition
| The investor must sign an agreement to abide by the position limit rules of the exchanges and of the Options Clearing Corporation no later than 15 days following the approval of the account. |
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Term
Which TWO of the following choices are types of securities issued by the Federal Home Loan Bank?
Discount notes with maturities between 2 and 10 years
Discount notes with maturities of less than 1 year
Consolidated bonds with maturities of up to 30 years
Consolidated bonds with maturities ranging from 20 to 40 years
I and III
I and IV
II and III
II and IV |
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Definition
| The Federal Home Loan Bank issues two types of securities to raise capital, discount notes with maturities of less than 1 year, and consolidated bonds with maturities of up to 30 years. These funds are used to lend funds to FHLB member banks that, in turn, lend these funds to their customers. |
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Term
| An investor wishes to establish a tax loss but still wants to own the same security. The customer sells the security and repurchases it two weeks later. The tax loss is: Established Recognized Disallowed Amortized |
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Definition
| The tax loss is disallowed. The customer must wait more than 30 days before repurchasing the same security or any security convertible into the security (a right, option, warrant, or convertible bond). The customer repurchased the same security two weeks later. This is considered a wash sale for tax purposes by the IRS and the loss is disallowed. |
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Term
When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are:
Revenue bonds
General obligation bonds
Federal agency bonds
Treasury bonds |
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Definition
| Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded. |
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Term
A woman with a low income has saved $5,000 to invest for her young son's college education. Which of the following investments would be the MOST appropriate?
T-bills
Municipal bonds
Zero-coupon bonds
A real estate limited partnership |
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Definition
C
Since the woman has a low income, municipal bonds and limited partnerships would not be of benefit. Since the son is young, a long-term investment would be most appropriate. |
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Term
Which of the following persons may contribute to a 457 plan?
A computer programmer employed by IBM
A federal government employee
A local government employee
A self-employed IT consultant |
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Definition
| A Section 457 plan is a type of retirement plan used by many public sector workers (state and local, not federal). These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers. |
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Term
A floor broker goes to a trading post to execute an order. When told of the floor broker's order, the designated market maker replies, "you're stopped at 21." This means:
The floor broker cannot trade the stock until it hits 21
The floor broker is guaranteed a price of 21
The stock stopped trading at 21
The floor broker will enter a limit order at 21 |
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Definition
| When a designated market maker stops stock, the price is guaranteed. Stopping stock may be done only for a public order. |
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Term
Which of the following is considered a leading economic indicator?
New orders for consumer goods and materials
The index of industrial production
The average prime rate charged by banks
The average duration of unemployment |
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Definition
Economic indicators are classified as leading, coincident, or lagging.
Leading indicators precede the change in the economy as a whole.
Coincident indicators change with the economy as a whole, and lagging indicators change after the economy as a whole.
New orders for consumer goods and materials (also referred to as new orders for durable goods) are a leading economic indicator, and industrial production is a coincident indicator.
The average prime rate charged by banks and the average duration of unemployment are lagging indicators. |
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Term
From the issuer's perspective, when comparing term bonds and serial bonds, serial bonds have:
Declining interest payments and declining principal amounts
Increasing interest payments and increasing principal amounts
Stable interest payments and stable principal amounts
Stable interest payments and declining principal payments |
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Definition
A
Serial bonds have different maturity dates with lesser amounts of debt outstanding as time goes by. The bonds have declining interest payments and principal amounts. Term bonds, by comparison, mature at the same time and have stable interest payments with the principal paid on one maturity date. |
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Term
An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share?
$63.25
$55.00
$47.83
$47.75 |
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Definition
| A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares). |
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Term
The federal funds rate may be described as:
A money-market rate
A long-term rate
The most stable rate
The most volatile rate
I and III
I and IV
II and III
II and IV |
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Definition
| Federal funds are excess reserves that one bank loans to another (usually overnight) when the borrowing bank must make up a deficit reserve position. The rate of interest charged is called the federal funds rate. The federal funds rate fluctuates daily, making it the most volatile money-market (short-term) rate. |
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Term
A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT to:
Refund a mass transportation bond
Raise capital to expand its school system
Make a primary offering to establish a public sewer system
Raise additional capital for a government housing project |
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Definition
| A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for refundings, working capital, and private activity bonds. |
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Term
ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC?
$6.40
$7.72
$10.91
$11.80 |
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Definition
| Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share. |
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Term
A customer's account does not require approval to trade penny stocks if the:
Trade is recommended
Trade is not recommended
Account is established
Account is new
I and III only
I and IV only
II and III only
II and IV only |
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Definition
| The approval of an account to trade penny stocks is not required if the account has been in existence for more than one year or if all transactions in penny stocks are nonrecommended. |
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Term
The State of North Carolina is offering $50,000,000 of 5 1/2% sewer improvement bonds. Which TWO of the following choices apply to the bonds?
They are subject to the margin requirements of Regulation T
They are subject to the antifraud provisions of the Securities Act of 1933
They are subject to the Trust Indenture Act of 1939
They are exempt from the registration requirements of the Securities Act of 1933
I and III
I and IV
II and III
II and IV |
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Definition
| Municipal bonds are exempt from the registration provisions of the '33 Act, but are subject to the antifraud provisions. They are also exempt from Regulation T and the Trust Indenture Act of 1939. |
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Term
Structured products may:
Offer returns linked to equity securities
Not offer returns linked to commodities
Not offer returns linked to interest rates
Be formulated to provide principal protection
I and III
I and IV
II and III
II and IV |
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Definition
| Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients. |
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Term
The payout on a variable annuity is based on a:
Fixed number of accumulation units with a fluctuating value per unit
Fixed number of annuity units with a fluctuating value per unit
Fixed value per unit with a fluctuating number of annuity units
Fixed number of annuity units with a fixed value per unit |
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Definition
B
When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing the units. |
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Term
A client wants all trade confirmations sent to his investment adviser. This will require:
A written letter from the client
Approval by a partner in the firm
Approval by a branch manager
All of the above |
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Definition
| Written approval is required only from the client. |
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Term
Which TWO of the following statements are TRUE concerning revenue bonds?
Revenue bonds may be issued only with voter approval
Revenue bonds may be issued even though local debt limits have been reached
Revenue bonds usually pay higher interest than general obligation bonds
Revenue bonds are not exempt from federal income taxes
I and III
I and IV
II and III
II and IV |
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Definition
C
Revenue bonds may be issued without voter approval and may be issued even though a local debt limit has been reached. They are backed by the revenue derived from a project and not the taxing power of a municipality. They usually pay higher rates of interest than general obligation bonds since they have no taxing power as do general obligation bonds. The interest from both GO and revenue bonds is exempt from federal income taxes. |
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Term
A gain on the sale of a long equity put option is:
A) a short- or long-term capital gain.
B) always a short-term capital gain.
C) always a long-term capital gain.
D) ordinary income |
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Definition
B
Any trading in options produces only short-term gains or losses; therefore any gain on the sale of a long put option must always be a short-term capital gain. (If a question wishes you to consider LEAPS, the question will refer to them.)
(SHORT SALES ARE ALWAYS LONG TERM) |
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Term
A syndicate has won the bid for a general obligation bond of $1 million issued by a city. The syndicate has received the following orders: $500,000 net designated, $500,000 presale, and $1 million member at takedown. The orders would be filled as
A) $250,000 presale, $500,000 net designated, $250,000 to members.
B) $500,000 presale, $250,000 net designated, $250,000 to members.
C) $500,000 presale, $500,000 net designated, none to members.
D) None to presale, none to net designated, $1 million to members. |
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Definition
C
Municipal syndicate customs dictate that presale orders have first priority, with group orders, net designated orders and member orders following in that order. |
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Term
A customer wishes to invest $800,000 in the Ajax Fund, an open-end company with a long-term growth objective. In order to take advantage of breakpoints, you recommend that the customer purchase:
A) Class C shares.
B) Class A or Class C shares.
C) Class B shares.
D) Class A shares. |
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Definition
A
Class A shares come with a front-end load that can be reduced or eliminated by breakpoints. Class B shares come with a back-end load combined with 12b-1 fees. Class C shares assess 12b-1 fees. Class B or C shares cannot take advantage of breakpoint reductions. |
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Term
A customer purchases an ABC 6-½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is:
A) $16.
B) $14.
C) $12.
D) $18. |
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Definition
| The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14. |
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Term
The TIC method of evaluating municipal bids:
A) is required by the MSRB if a control relationship exists.
B) is required by the MSRB if a financial advisory relationship exists.
C) considers the time value of cash flows.
D) can only be used for term bonds. |
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Definition
TIC = True Interest Cost
The calculation of TIC (as opposed to NIC) takes the time value of money into account. MSRB has no requirement as to which method is used. |
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Term
A Municipal Finance Professional (MFP) is
A) a registered representative engaged in the sale of municipal securities to public customers.
B) an employee of the Municipal Securities Rule Making Board (MSRB) responsible for broker dealer compliance regarding MSRB rules.
C) an elected official of a municipality with decision making responsibilities regarding municipal issues.
D) an associate of a broker dealer engaged in municipal securities representative activities, other than retail sales. |
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Definition
D
A Municipal Finance Professional (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. MFPs are subject to the MSRB reporting rules regarding gifts to elected officials and political parties (MSRB Rule G-37). |
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Term
After opening a new account, how many days does a firm have to provide the customer with a copy of the account record?
A) 45
B) 90
C) 30
D) 60 |
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Definition
| Member firms must provide new customers with a copy of the account record (new account form) within 30 days of opening the account; this ensures the information the firm has on file is accurate. |
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Term
All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the:
A) bond is likely to trade at a discount in the secondary market when it is puttable.
B) owner would likely put the bond to the issuer when interest rates are rising.
C) owner will receive $1,000 from the issuer when the put option is exercised.
D) bond may be put to the issuer at the owner's discretion. |
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Definition
A
Once a bond becomes puttable, the holder has the right to put the bond to the issuer at par. As a result, the bond would not trade below par in the secondary market. This effectively insulates the holder from interest rate risk-the risk that rising rates will force prices down. |
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Term
The rights and liabilities of general and limited partners are listed in the:
A) certificate of partnership.
B) agreement of limited partnership.
C) partnership title.
D) Uniform Lim |
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Definition
B
The agreement is the contract between the general and limited partners, and contains each entity's rights and duties. |
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Term
Which of the following customers would be fully protected under SIPC?
A) A customer with municipal bonds valued at $280,000 and $320,000 in cash.
B) A customer with a cash balance of $170,000 in his cash account and a cash balance of $160,000 in his margin account.
C) A customer with $600,000 par value corporate bonds trading at 80.
D) A customer with $200,000 of a sugar futures contracts. |
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Definition
C
Coverage under SIPC is up to $500,000 per separate customer in securities and cash. Of that total, SIPC will cover no more than $250,000 in cash. Of the choices given, only the customer with $600,000 par value municipal bonds trading at 80 will be fully covered ($600,000 / $1,000 Par = 600 bonds, 600 bonds × $800 = $480,000). The customer with $320,000 cash will have $70,000 left uncovered. The customer with both a margin and a cash account will have them combined for SIPC coverage ($170,000 + $160,000 = $330,000) and will be left with $80,000 uncovered. Commodities and futures contracts are not considered securities and therefore not covered. |
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Term
A registered representative is explaining a particular market theory that maintains that the direction of a single stock or any general market is unpredictable. Which theory is he speaking of?
A) Modern portfolio
B) Odd-Lot
C) Dow
D) Random walk |
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Definition
| The random walk theory maintains that the direction of any stock, sector, or market in general is unpredictable. The theory is based on the "efficient market" theory, which holds that the stock market is perfectly efficient with prices reflecting all known information at any given time. |
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Term
A corporation with a single outstanding bond issue chooses to refund this debt. This means that the corporation:
A) issues stock to replace the bonds.
B) replaces one debt with another.
C) established a sinking fund for use in making regular open market purchases of the bonds.
D) buys back the bonds, at par, from the bondholders, using corporate profits. |
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Definition
B
Refunding is synonymous with refinancing. When we refinance, we take out a new debt and use the proceeds of that debt to pay off the old one. |
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Term
FINRA fees paid by a member firm are based on which of the following?
Number of registered representatives employed.
Number of trades carried out per year.
Annual revenue from over-the-counter securities transactions.
Number of branch offices registered with FINRA.
A) I and III.
B) I and IV.
C) II and IV.
D) II and III. |
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Definition
B
FINRA fees are determined by the number of registered representatives, principals, and branch offices registered with FINRA. Assessments are based on annual revenue from over-the-counter securities transactions. |
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Term
A balloon maturity of municipal securities is most accurately described as:
A) a serial issue of bonds on which the interest rate periodically changes over the life of the issue for all bonds remaining outstanding.
B) bonds comprising all of a particular issue which come due in a single maturity.
C) an often later maturity within a serial issue of bonds which contains a disproportionately large percentage of the principal amount of the original issue.
D) an obligation granting the bondholder the right to require the issuer to purchase the bonds at par at a certain time prior to maturity. |
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Definition
C
A balloon maturity is generally distinguished from term bonds by the presence of serial maturities in the years immediately preceding the maturity which contains a disproportionately large percentage of the principal amount of the original issue. |
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Term
In a customer’s margin account a broker/dealer must segregate:
A) 140% of the debit balance.
B) 100% of the long market value (LMV).
C) The excess securities above 140% of the accounts debit balance.
D) 50% of the equity balance. |
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Definition
C
A broker/dealer may hypothecate (pledge) 140% of a customer’s debit balance. Any customer securities in excess of 140% of the debit balance must be physically segregated. |
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Term
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are:
A) 100% tax free.
B) partially a tax-free return of capital and partially taxable.
C) 100% tax deferred.
D) 100% taxable. |
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Definition
B
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. |
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Term
Officers of XYZ Corp., a listed company, are permitted to
A) benefit from material, non-public information
B) short XYZ stock
C) write calls against unrestricted XYZ stock held long
D) benefit from short swing profits |
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Definition
C
Insiders may write calls against stock held long as long as the shares are not restricted. Under the Securities and Exchange Act of 1934, insiders are prohibited from shorting stock and from keeping short-swing profits. Any short-swing profit (a profit made from buying and selling the issuer's stock in a six month period or less) must be disgorged. |
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Term
A municipal revenue bond has a catastrophe call feature but otherwise is not callable. Which of the following statements regarding the features of this bond that must be described on a customer's confirmation is TRUE?
A) It must be designated as callable.
B) It must be designated as subject to eminent domain. .
C) It need not be designated as callable.
D) It must be designated as callable in the event of an act of God. |
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Definition
C
Catastrophe call provisions associated with municipal revenue bond issues are not included on customer confirmations. Only call provisions with specific dates are included on confirmations. |
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Term
Which of the following is the CORRECT order of the stages in a business cycle?
A) Expansion, peak, contraction, trough.
B) Peak, expansion, contraction, trough.
C) Contraction, trough, peak, expansion.
D) Trough, contraction, expansion, peak. |
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Definition
A
The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point as long as the stages are shown in the right order. |
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Term
One company is guaranteeing the debt service of another company (guaranteed bond). In which of the following scenarios is this most likely to occur?
A) In a spin-off where one company, the parent company, has divested itself of some equity and some debt to form a separate company
B) Never, because SEC rules prohibit "guaranteed" bonds
C) When a company guarantees the debt of one of its own existing creditors
D) When 2 competitors have merged |
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Definition
A
Of the scenarios listed, in a spin-off, where one company, a parent company, divests itself of some of its equity and debt to form a new separate company, it is likely that the parent company would guarantee the debt of the new company. |
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Term
A Tier 1 securities offering under Regulation A+ allows small to medium sized companies to
A) raise up to a maximum of $20 million in a 12-month period
B) raise up to a maximum of $10 million in a 12-month period
C) raise up to a maximum of $15 million in a 12-month period
D) raise up to a maximum of $5 million in a 12-month period |
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Definition
A
Tier 1 of Regulation A+ allows small to medium sized companies to raise up to a maximum of $20 million in a 12-month period |
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Term
Working capital is:
A) total assets - total liabilities.
B) current assets - current liabilities.
C) only the cash and equivalents.
D) current assets - inventory. |
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Definition
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Term
Which of the following types of municipal bonds is subject to statutory debt limits?
A) Special tax bonds.
B) Hospital bonds.
C) Industrial development revenue (IDR) bonds.
D) General obligation (GO) bonds. |
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Definition
| Only GO bonds, which are backed by the taxing authority of the issuer, are subject to statutory debt limits. |
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Term
In a bull call spread, an investor:
buys the lower exercise price and sells the higher exercise price.
buys the higher exercise price and sells the lower exercise price.
anticipates the spread will narrow.
anticipates the spread will widen.
A) II and IV.
B) I and IV.
C) II and III.
D) I and III. |
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Definition
B - I and IV
In a bull call spread (debit spread), a call with a lower strike price is purchased and a call with a higher strike price is sold. Because the long call has a lower strike price than the short call, it is more expensive, resulting in a net debit. In a bull call spread, the investor hopes the market prices rise. Maximum profit occurs if both calls are exercised, and because this is a debit spread, the spread is profitable if it widens. |
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Term
A registered representative is registered in Iowa. One of his customers moves to Texas, where neither the employing broker/dealer nor the representative are registered. Under these circumstances, which of the following statements are TRUE?
The representative may solicit trades for this customer.
The representative may not solicit trades for this customer.
The representative may accept an isolated unsolicited order from this customer.
The representative may not accept an isolated unsolicited order from this customer.
A) II and IV.
B) I and IV.
C) II and III.
D) I and III. |
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Definition
| Registered representatives may not solicit business in states in which they are not registered. However, isolated unsolicited transactions are exempt from state registration requirements, so an isolated unsolicited trade can be accepted. |
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Term
If an investor buys 300 shares of FLB, and one month later buys 1 FLB Jul 50 put, how does this affect the holding period on his or her stock?
A) It stops the holding period on 300 shares.
B) It has no impact on the holding period for any of the shares owned by the investor.
C) It ends the holding period on the put.
D) It stops the holding period on 100 shares. |
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Definition
D
The put purchase ends the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns 1 put, this stops the holding period on 100 shares owned. The other 200 shares are unaffected. |
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Term
Which of the following factors is (are) considered when determining whether underwriting compensation is fair and reasonable?
The size of the offering.
The type of underwriting commitment.
The market conditions.
The profitability of the underwriter.
A) II and III.
B) I and III.
C) II and IV.
D) I and II. |
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Definition
I and II
Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter's relationship to the issuer, and any form of potential conflicts of interest. |
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Term
Under penny stock rules, what is required for an investor to be considered an established customer?
A) Open cash account for 6 months.
B) Signed transaction agreement.
C) Signed risk disclosure statement.
D) At least 3 separate penny stock purchases. |
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Definition
D
Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least 1 year prior to the penny stock transaction, or have purchased at least 3 different penny stocks from the same broker/dealer. |
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Term
A customer buys a newly issued municipal zero-coupon original issue discount bond for 85. If the bond is held until maturity, the tax consequence:
A) cannot be calculated from the information given.
B) is $150 gain.
C) is $0.
D) is $150 loss. |
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Definition
C - $0
Municipal original issue discount bonds must be accreted. At maturity, the entire discount will have been accreted, and the cost basis will be equal to the par value. No gain or loss will occur at maturity. |
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Term
All of the following are characteristics of exchange-traded notes (ETNs) EXCEPT
A) they are issued by financial institutions such as banks
B) their value can be impacted by changes in the credit rating of the issuer
C) they can be bought or sold during normal trading hours on an exchange
D) each note is secured by a single specified asset |
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Definition
D
Exchange-traded notes (ETNs) are unsecured debt securities generally issued by financial institutions such as banks. Prices can be impacted by changes in the issuer's credit rating, even though the value of the underlying securities has not changed. Like exchange-traded funds (ETFs) or other exchange-traded products, they can be bought or sold during normal exchange trading hours. |
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Term
Which of the following are functions of an investment company's custodian bank?
Safekeeping of portfolio securities and cash.
Providing portfolio advice regarding transactions.
Maintaining asset records for the fund.
Safekeeping of customer securities.
A) II and IV.
B) I and IV.
C) II and III.
D) I and III. |
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Definition
D
The custodian bank performs bookkeeping and clerical functions and retains the fund's cash and securities for safekeeping. The adviser offers portfolio advice and management services. The custodian provides for safekeeping of fund securities, not investors' securities. |
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Term
An order ticket is marked as follows: Buy 20M GGZ 9% Debentures at 95 AON GTC. All of the following statements regarding this order are true EXCEPT:
A) the order will expire at the end of the day.
B) this is a buy limit order.
C) the trade will be filled in its entirety or not at all.
D) if executed, the customer will pay $19,000 or less for the bond |
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Definition
A
The customer has placed a limit order to buy 9% debentures issued by GGZ. The limit the customer is willing to pay is 95% of $20,000 worth of bonds, or $19,000 or lower. AON means all-or-none (either fill the order in its entirety or do not execute the order). GTC is a good-till-canceled order, not a day order. |
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Term
When using customer portfolio margining (CPM) to calculate margin, the requirements are
Based on the risk associated with the security having the highest volatility in a portfolio.
Based on the net risks associated with all the securities in a portfolio.
Higher than the margin requirements calculated conventionally.
Lower than the margin requirements calculated conventionally.
A) II and III.
B) I and III.
C) I and IV.
D) II and IV. |
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Definition
D - II and IV
Customer portfolio margining (CPM) allows margin requirements to be calculated based on the net risk of a portfolio of securities rather than applying margin calculations separately to each position. While a number of criteria must be met before offering portfolio margining to a customer, generally it will result in lower margin requirements than when margin is calculated conventionally. |
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Term
A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true EXCEPT:
A) there is no debt limitation on the issue.
B) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used.
C) the bond issue will mature within the useful life of the sewage plant.
D) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. |
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Definition
D
This must be a revenue bond because it is not backed by the full taxing authority of the city. Rather, the principal and interest are paid by the users of the facility. The public service commission has no approval power over revenue bond interest and principal payments. |
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Term
Under the rules governing the activities of broker/dealer firms, prior notification to the employing firm would be required in order to open a cash account for all of the following EXCEPT:
A) a registered representative of another member.
B) a bank officer.
C) an exchange employee.
D) an employee of another member. |
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Definition
B
SROs in the securities industry require prior notification for opening accounts of persons employed in the industry and margin accounts for employees of financial institutions. |
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Term
The order protection rule which prohibits a trade-through and the minimum increments pricing rule which addresses penny and sub-penny pricing were each enacted under a broad sweeping SEC regulation designed to bring trading and reporting uniformity to US securities markets. This regulation is known as:
A) Regulation NMS (National Market System).
B) The Bank Secrecy Act.
C) SIPA (Securities Investors Protection Act).
D) USA (Uniform Securities Act). |
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Definition
A - Reg NMS
Regulation NMS (National Market System) is the SEC regulation designed to bring trading and reporting uniformity to the US securities markets. Among the rules it encompasses are the order protection rule which prohibits a trade-through and the minimum increments pricing rule which addresses $.01 and sub-penny pricing. |
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Term
A registered representative mentions a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct?
6% is the bond's coupon.
6% is the bond's current yield.
6.5% is the bond's yield to maturity.
6.5% is the bond's current yield.
A) II and IV
B) I and IV
C) II and III
D) I and III |
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Definition
C - I and III
When a bond is referred to by a yield percentage, it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% bond currently trading with a 6.5% YTM is correct.
(BASIS = TYM) |
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Term
A brokerage firm's research department has issued a buy recommendation on XYZ Corporation common stock. The report must contain all of the following information EXCEPT:
A) that the firm was part of the selling group in a recent public offering of the stock.
B) that the firm was the managing underwriter in a recent public offering of the stock.
C) that the partners of the firm hold options to purchase the stock.
D) that the firm makes a trading market in the stock. |
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Definition
A
Disclosure of participation as a selling group member is not required. |
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Term
Which of the following are characteristics of commercial paper?
Registered with the SEC
Short-term debt instrument.
Issued by commercial banks.
Unsecured debt.
A) III and IV.
B) I and III.
C) I and II.
D) II and IV. |
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Definition
II and IV
Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Because commercial paper is issued with maturities of less than 270 days, it is exempt from SEC registration under the Act of 1933. |
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Term
Which of the following statements describe the conduit theory of taxation?
A fund is not taxed on earnings it distributes provided distributions equal 90% or more of net investment income.
Earnings distributed by a regulated investment company are taxed three times.
Dividends and interest are passed through to the investor without the fund being taxed.
Dividends and interest accumulate tax free to the shareholder.
A) II and III.
B) II and IV.
C) I and III.
D) I and IV. |
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Definition
I and III
Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level), and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder. |
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Term
In a new margin account, a customer sells short 1,000 shares of ABC at $15 per share and makes the required Regulation T deposit. If the stock drops to $12 per share, what is the equity in the account?
A) 10500.
B) 18000.
C) 12000.
D) 15000.
Your answer, 10500., was correct!. |
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Definition
$10,500
The initial equity is $7,500 (50% × $15,000). The market value of the short stock falls by $3,000, which increases equity by the same amount. Therefore, the current equity is $10,500 ($7,500 + $3,000 = $10,500). |
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Term
Which of the following statements about a Coverdell Education Savings Account (ESA) is NOT true?
A) Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary.
B) Contributions of $2,000 per child per year are allowed.
C) The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free.
D) Contributions are tax deductible, subject to a modified AGI phaseout.Which of the following statements about a Coverdell Education Savings Account (ESA) is NOT true?
A) Contributions can be made to this type of plan and a Section 529 plan in the same year for the same beneficiary.
B) Contributions of $2,000 per child per year are allowed.
C) The funds grow income tax deferred and, if used for elementary, secondary, or college educational expenses, the earnings are tax free.
D) Contributions are tax deductible, subject to a modified AGI phaseout. |
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Definition
D
Contributions to an ESA are not tax deductible. |
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Term
If a registered representative is found to have engaged in insider trading, under criminal penalties the registered representative can be fined up to 3 times the profit gained or loss avoided, or
A) $1 million, whichever is greater
B) $500,000, whichever is greater
C) $25 million, whichever is less
D) $5 million, whichever is greater |
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Definition
D - $5 mill
If a registered representative is found to have engaged in insider trading, under criminal penalties the registered representative can be fined up to 3 times the profit gained or loss avoided, or $5 million, which ever is greater. The member firm, which must have procedures in place to prevent insider trading, can be fined up to 3 times the profit gained or loss avoided, or $25 million, whichever is greater. |
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Term
Under the Code of Arbitration, all monetary awards must be paid within how many days of the decision date?
A) 15.
B) 60.
C) 30.
D) 45. |
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Definition
30
All monetary awards in a Code of Arbitration decision must be paid within 30 days of the decision date. If payment is not made, the amount of the award begins to accrue interest as of the decision date. |
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Term
Several years ago, one of your customers bought an OID municipal bond at $960. The bond has now matured. For federal income tax purposes, the discount is:
A) taxed each year as ordinary income.
B) taxed at maturity as ordinary income.
C) taxed as a long-term capital gain.
D) tax free. |
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Definition
D - tax free
When buying an original issue discount (OID) municipal bond, the discount must be accreted each year and treated as interest income. Because interest income from a municipal bond is tax free at the federal level, the discount is not taxed if the bond is held to maturity. If the customer had purchased a discount in the secondary market, the discount would have been accreted and taxed as ordinary income. |
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Term
Under FINRA rules, a registered representative must complete the regulatory element of continuing education within how many days of a registration anniversary date?
A) 30.
B) 120.
C) 60.
D) 90. |
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Definition
B - 120
The regulatory element requires that all registered persons complete a computer-based training session within 120 days of their second registration anniversary and every third anniversary thereafter. |
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Term
Regulation T requires payment from a customer in a margin account:
A) within 10 business days.
B) within 3 business days.
C) within 5 business days.
D) before purchase |
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Definition
C) 5 days
The Regulation T payment date is the fifth business day from the trade date. Regular way settlement, according to FINRA rules, is 3 business days from the trade date. |
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Term
If a registered representative owns a vacation home and wants to rent it out during the summer, which of the following statements is TRUE?
A) No notification is required, provided the vacation home is located in the state where the member firm has its principal office.
B) Prior notification must be made to the member firm under the rules on outside affiliations.
C) No notification is required.
D) Prior notification must be made to the member firm under the rules on private securities transactions. |
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Definition
C
Rental income is passive income. Passive investments are excluded from the notification requirements of the outside affiliations rule. Similarly, renting a vacation home is not a private securities transaction. |
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Term
An investment company that holds which of the following does NOT meet the definition of a diversified investment company under the 1940 Investment Company Act?
A) 8% of a given corporation's voting stock in its portfolio.
B) 33% of its assets in securities issued by a small-cap new issue.
C) 4% of its assets invested in stock of a major publicly held corporation.
D) 80% of its assets in securities of 50 health care companies. |
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Definition
B
An investment company that has invested 33% of its assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company, and no more than 10% of an outside corporation's voting securities are owned by the investment company. |
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Term
An investment company that holds which of the following does NOT meet the definition of a diversified investment company under the 1940 Investment Company Act?
A) 8% of a given corporation's voting stock in its portfolio.
B) 33% of its assets in securities issued by a small-cap new issue.
C) 4% of its assets invested in stock of a major publicly held corporation.
D) 80% of its assets in securities of 50 health care companies. |
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Definition
B
An investment company that has invested 33% of its assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company, and no more than 10% of an outside corporation's voting securities are owned by the investment company. |
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Term
On the basis of a major decline occurring within a few minutes of the close, trading is halted on all markets for the remainder of the trading day. Under the market wide circuit breaker (MWCB) rules, market-on-close (MOC) orders pending at the time trading is halted
A) must be canceled
B) should be held for execution on the following trading day
C) should be held for execution on the following trading day unless canceled by the customer
D) are converted to market orders and executed at the opening on the following trading day |
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Definition
A - must be cancelled
During shorter market-wide trading halts that will allow trading to resume on that same trading day, pending and new incoming orders should be forwarded to the appropriate market for execution upon the resumption of trading. If a halt closes the market for the remainder of the trading day, market-on-close (MOC) orders pending at the time trading is halted should be canceled. MOC orders received after trading is halted should be declined. |
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Term
Closed-end investment company shares may be:
traded in the secondary markets, including the exchanges and OTC markets.
sold in the OTC primary market only.
redeemed by the closed-end investment company.
traded by institutional investors.
A) II and III.
B) III and IV.
C) I and IV.
D) I and II. |
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Definition
I and IV
Once a closed-end investment company has distributed shares, those shares are traded in the secondary market by both individual and institutional investors. |
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Term
Which of the following is a leading indicator of the economic future?
A) The Gross National Product.
B) The Consumer Price Index.
C) Unemployment statistics.
D) Machine tool orders |
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Definition
D
Machine tool orders anticipate the business cycle, because they come first in the manufacturing process. |
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Term
A mutual fund's expense ratio is found by dividing its expenses by its:
A) public offering price.
B) average annual net assets.
C) income.
D) dividends. |
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Definition
B
A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets. |
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Term
An investor in an oil and gas limited partnership program is subject to the economic consequences of all of the following EXCEPT:
A) depreciation on tangible assets.
B) operating losses.
C) nonrecourse loans.
D) recourse loans. |
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Definition
D
Nonrecourse loans only have economic consequences for investors in real estate programs. |
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Term
A new corporation with no existing products or services has a patent pending with the U.S. government. Which of the following describes this type of company?
A) Growth.
B) Asset allocation.
C) Value.
D) Special situation. |
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Definition
D
A company with a patent pending is known as a special situation. |
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