Comprehensive Questions

Question 1

Which of the following market participants have a fiduciary responsibility to their customers?

a. Municipal Advisors
b. Broker Dealers
c. Traders
d. Market Makers

Answer 1

a. Municipal Advisors

Question 2

Which of the following takes money out of the money supply?

a. Fed’s purchase of securities
b. Moral suasion
c. Increasing the reserve requirements
d. Decreasing the discount rate

Answer 2

c. Increasing the reserve requirements

Question 3

Which type of securities offering allows existing shareholders to purchase additional shares in the company, typically in proportion to their current holdings?

a. Private placement
b. Initial public offering
c. Secondary offering
d. Stock rights offering

Answer 3

d. Stock rights offering

Question 4

A warrant gives the holder a right to purchase equity shares

a. in the secondary market
b. in the IPO
c. at a set price from the issuer
d. whenever new shares are issued

Answer 4

c. at a set price from the issuer

Question 5

Which of the following is considered zero-coupon securities?

a. Municipal bonds
b. Treasury bills
c. Treasury bonds
d. Preferred stock

Answer 5

b. Treasury bills

Question 6

Which of the following is considered a Government Sponsored Enterprise?

a. Ginnie Mae (GNMA)
b. Tennessee Valley Authority (TVA)
c. Federal National Mortgage Association (Fannie Mae)
d. Sallie Mae (SLMA)

Answer 6

c. Federal National Mortgage Association (Fannie Mae)

Question 7

In an options transaction, the premium must be paid to the _________ by ___________.

a. option writer, settlement date
b. option writer, trade date
c. option purchaser, settlement date
d. option purchaser, trade date

Answer 7

a. option writer, settlement date

Question 8

Which of the following best describes Letter of Intent:

a. A written acknowledgement signed by an investor, with the investor promising to follow all industry rules.
b. A document informing an investor about how NAV works.
c. A written indication provided by the investor to purchase a set number of mutual fund shares in the future.
d. A signed authorization by the investor promising to repay borrowed funds.

Answer 8

c. A written indication provided by the investor to purchase a set number of mutual fund shares in the future.

Question 9

To avoid penalties, assets held inside a Coverdell ESA must be used by the beneficiary’s:

a. 18th birthday
b. 25th birthday
c. 29th birthday
d. 30th birthday

Answer 9

d. 30th birthday

Question 10

A hybrid REIT combines which of the following two types of REITs?

a. Retail and Apartment
b. Mortgage and Healthcare
c. Commercial and Healthcare
d. Retail and Healthcare

Answer 10

b. Mortgage and Healthcare

Question 11

The risk that the issuer will require the bond owner to sell the bond back to the issuer at a specific date and price is referred to as:

a. Default risk
b. Call risk
c. Price risk
d. Bond risk

Answer 11

b. Call risk

Question 12

ABC equity security recently traded as follows:

100 shares @ $50.00
100 shares @ $50.04
200 shares @ $50.10

The current NBBO is $50.09 – $50.12. What is the bid-ask spread?

a. $.03
b. $.04
c. $.06
d. $.12

Answer 12

a. $.03

Question 13

13. Jane Investor has decided to sell short ABC stock. She sells 100 shares short at $78. The price of the stock decreases the next day to $75 when she buys the stock. Jane Investor has a(n) __________.

a. realized loss
b. realized gain
c. unrealized loss
d. unrealized gain

Answer 13

b. realized gain

Question 14

ABC Company has declared a 1-3 reverse stock split. You currently own 300 shares before the split, and the stock is worth $5. After the reverse stock split, what is your total position in ABC worth?

a. $0
b. $500
c. $1,500
d. $2,000

Answer 14

c. $1,500

Question 15

Under Reg T, the amount of margin that must be in the account when the account is first established is:

a. 25%
b. 40%
c. 50%
d. 75%

Answer 15

c. 50%

Question 16

Which of the following is an example of the Integration stage of money laundering?

a. Creating complex financial transactions
b. Sending cash outside the country
c. Buying a business
d. Exchanging small dominated cash bills for large denominated cash bills

Answer 16

c. Buying a business

Question 17

Which of the following is required on a customer confirmation?

a. Amount of taxable gain or loss
b. Trade capacity
c. Capital gain
d. Dividend date

Answer 17

b. Trade capacity

Question 18

When is a market maker permitted to receive compensation from an issuer?

a. Under no circumstances.
b. If the compensation is less than $1,000 per year.
c. If the compensation is connected to an investment banking transaction.
d. If the compensation is related to an issuer that is listed on a U.S. Exchange.

Answer 18

c. If the compensation is connected to an investment banking transaction.

Question 19

Which of the following would NOT make an individual be considered statutorily disqualified?

a. Findings by the CFTC that a person willfully violated commodity laws
b. Any misdemeanor conviction
c. Bar from membership in an SRO
d. State order barring association with a firm engaging in insurance or banking activities

Answer 19

b. Any misdemeanor conviction

Question 20

Tony Smith, an MFP, would like to make a political contribution to a mayoral candidate in his local town. What is the maximum amount Tony can contribute in both the primary election and general election combined?

a. $0
b. $125
c. $250
d. $500

Answer 20

d. $500

Question 21

A trade surplus results from which of the following?

(A) A country having a current account deficit.
(B) A country exporting more than it imports.
(C) A country exporting less than it imports.
(D) None of the above are correct.

Answer 21

A trade surplus results from a country exporting more than it imports.

Question 22

Which of the following agreements specify that any unsold securities are retained by the underwriters?

I. Firm commitment
II. All or none
III. Best efforts
IV. Mini-max

(A) I only
(B) II only
(C) I, II, and IV
(D) II, III, and IV

Answer 22

In a firm commitment underwriting, all securities left unsold are retained by the underwriters. All or none and mini-max are actually types of best efforts underwritings.

Question 23

William, age 56, recently retired from Epsilon Inc., and would like to take a distribution from a retirement plan to pay for medical expenses. Which of the following plans would allow William to take a penalty free withdrawal?

(A) Single premium deferred annuity
(B) Traditional IRA
(C) Money purchase plan from his employer before Epsilon Inc.
(D) 401(k) from Epsilon Inc.

Answer 23

Withdrawals from a 401(k) after separating from service are penalty free if the separation occurs at age 55 or older. The other options would result in
an early withdrawal penalty.

Question 24

William, age 56, recently retired from Epsilon Inc., and would like to take a distribution from a retirement plan to pay for medical expenses. Which of the following plans would allow William to take a penalty free withdrawal?

(A) Single premium deferred annuity
(B) Traditional IRA
(C) Money purchase plan from his employer before Epsilon Inc.
(D) 401(k) from Epsilon Inc.

Answer 24

Withdrawals from a 401(k) after separating from service are penalty free if the separation occurs at age 55 or older. The other options would result in
an early withdrawal penalty.

Question 25

All but which of the following are characteristics of a REIT?

(A) It is a publicly traded open-end investment company.
(B) A mortgage REIT is a specific type of REIT.
(C) A REIT can sell at a premium or discount to its NAV.
(D) All of the above are correct.

Answer 25

REITs are publicly traded closed-end investment companies that can sell at a premium or discount to its NAV. A mortgage REIT is a specific type of REIT.

Question 26

Which of the following can an investor sign which allows him or her to receive breakpoint discounts based upon a commitment to buy a specified number of mutual fund shares over a period of time, usually 13 months?

(A) Investment advisory contract
(B) Investment memorandum
(C) Letter of intent
(D) Prospectus

Answer 26

Answer: C, An investor can sign a letter of intent (LOI) which allows him or her to receive breakpoint discounts based upon a commitment to buy a specified number of mutual fund shares over a period of time, usually 13 months.

Question 27

All of the following are types of state securities registration EXCEPT:

(A) filing
(B) cooperation
(C) qualification
(D) coordination

Answer 27

The three types of state registration for securities are notification (filing), coordination, and qualification.

Question 28

An issuer is offering 1,000,000 shares of their common stock. 800,000 of the shares are from shares that have never been offered and 200,000 shares are treasury stock. What kind of offering is this?

(A) An IPO
(B) A primary offering
(C) A secondary offering
(D) A combined offering

Answer 28

Since the issuer has treasury stock (repurchases stock), it is not an IPO. An IPO is an initial public offering and it is the first time a corporation ever issues securities. If this company that has already issued securities is only offering shares that have not previously been sold, it would be a primary offering. However, in this case, the issuer is selling 800,000 shares that have never been sold (primary) and 200,000 shares of treasury stock (secondary), so it is considered a combined or split offering

Question 29

Which of the following is a type of exchange rate system in which a country ties its currency to a basket of other currencies or to another measure of value, such as gold?

(A) Adjustable exchange rate system
(B) Commodity exchange rate system
(C) Fixed exchange rate system
(D) Variable exchange rate system

Answer 29

In a fixed exchange rate system, a country ties its currency to a basket of other currencies or to another measure of value, such as gold.

Question 30

Which of the following will result if money distributed from a 529 plan is not used to pay for qualifying education expenses?

(A) The gain is taxed at capital gains rates, and a 10% penalty is applied.
(B) The gain is taxed at capital gains rates, and a 20% penalty is applied.
(C) The gain is taxed as ordinary income, and a 10% penalty is applied.
(D) The gain is taxed as ordinary income, and a 20% penalty is applied.

Answer 30

If money distributed from a 529 plan is not used to pay for qualifying education expenses, the gain is taxed as ordinary income and a 10% penalty is applied.

Question 31

Which of the following are exempt transactions?

I. Private placements
II. Securities issued by the US government
III. Intrastate offerings
IV. Commercial paper

(A) I and III
(B) I, II, and IV
(C) II and IV
(D) I, II, III, and IV

Answer 31

This one is tricky because they’re all exempt. Regulation D private placements and intrastate offerings are exempt based on the type of transactions. However, securities issued by the US government and commercial paper are exempt based on the type of security.

Question 32

An investor who believes that an economic recession is imminent should purchase which of the following type of stocks?

(A) Defensive stocks because they tend to underperform during economic downturns.
(B) Defensive stocks because they tend to outperform during economic downturns.
(C) Cyclical stocks because they tend to outperform during economic downturns.
(D) Cyclical stocks because they tend to underperform during economic downturns

Answer 32

An investor who believes that an economic recession is imminent should purchase defensive stocks because they tend to outperform during economic downturns.

Question 33

The trading volume for BBB Corporation for the previous 5 weeks is as follows:
March 31: 50,000 shares
March 24: 38,000 shares
March 17: 44,000 shares
March 10: 40,000 shares
March 3: 42,000 shares

BBB Corporaton is listed on an exchange and has 4,200,000 shares outstanding. What is the maximum number of shares an insider can sell under Rule 144 on April 4th of the following year?

(A) 41,000
(B) 42,000
(C) 43,000
(D) 44,000

Answer 33

Since the holding period has been met, the maximum number of shares that can be sold by an insider under rule 144 is 1 percent of the outstanding shares or the average trading volume for the previous 4 weeks, whichever is great

Question 34

Which of the following is/are correct regarding dividends paid by growth stocks and value stocks?
(1) Because they are growing and expanding, growth stocks typically do not pay large dividends.
(2) Most of the earnings generated from value stocks are reinvested back into the company.

(A) (1) only
(B) (2) only
(C) Both (1) and (2) are correct.
(D) Neither (1) or (2) are correct.

Answer 34

Because they are growing and expanding, growth stocks typically do not pay large dividends. Most of the earnings generated from growth stocks are
reinvested back into the company.

Question 35

Bullbear Broker Dealer is offering an IPO that will not be on the NYSE, NASDAQ, or any exchange. How long after the effective date must Bullbear provide a final prospectus to all purchasers of the security?

(A) 25 days
(B) 40 days
(C) 45 days
(D) 90 days

Answer 35

For IPOs (Initial Public Offerings), a final prospectus must be available to all purchasers of the IPO for 90 days after the effective date (the first day the security starts trading).

Question 36

Which of the following is a type of broker that acts as a liaison between an investor and a clearing corporation by helping to ensure that trades are settled appropriately and transactions are successfully completed?

(A) Carrying broker
(B) Clearing broker
(C) Executing broker
(D) Introducing broker

Answer 36

A clearing broker acts as a liaison between an investor and a clearing corporation by helping to ensure that trades are settled appropriately and transactions are successfully completed.

Question 37

A preliminary prospectus would include which of the following?
I. An SEC disclaimer
II. The names of the officers of the issuing corporation
III. The public offering price
IV. An explanation of what the funds raised by the offering would be used for

(A) I and IV
(B) I, II, and IV
(C) II, III, and IV
(D) I, II, III, and IV

Answer 37

All of the choices listed would be in the preliminary prospectus (red herring) except for the final offering price. The offering price at this point has not been determined. The offering price as well as the underwriting spread and the delivery date would be included in the final prospectus.

Question 38

Which of the following forms must broker-dealers, investment advisers, or issuers of securities fill out in order to terminate the registration of an individual in the appropriate jurisdiction? It is also known as the Uniform Termination Notice for Securities Industry Registration.

A. Form U4
B. Form U5
C. Form U6
D. Form U7

Answer 38

Broker-dealers, investment advisers, and issuers of securities must fill out form U5 in order to terminate the registration of an individual in the appropriate jurisdiction. It is also known as the Uniform Termination Notice for Securities Industry Registration.

Question 39

Which of the following is an order to sell a stock at a price below the current market price?

(A) Sell discount order
(B) Sell limit order
(C) Sell market order
(D) Sell stop order

Answer 39

A sell stop order is an order to sell a stock at a price below the current market price

Question 40

Which of the following was adopted to update short sale regulations and to address concerns regarding potentially abusive naked short selling?

(A) Regulation BTR
(B) Regulation HFT
(C) Regulation NMS
(D) Regulation SHO

Answer 40

Regulation SHO was adopted to update short sale regulations and to address concerns regarding potentially abusive naked short selling.

Question 41

The federal law which regulates the initial sale of stock to the public is:

(A) the Securities Act of 1933
(B) the Securities Exchange Act of 1934
(C) the Trust Indenture Act of 1939
(D) all of the above

Answer 41

The Securities Act of 1933 (Truth in Securities Act, Paper Act, Full Disclosure Act, Prospectus Act, or the New Issues Act) regulates new issues of corporate stocks and bonds. Included in the act are rules to prevent fraud and deception as well as rules about the issuer providing information about itself and the securities being offered.

Question 42

Which of the following may not be included in a tombstone advertisement?

(A) the number of securities to be sold
(B) the issuer’s name
(C) the final offering price
(D) all underwriter’s name

Answer 42

Tombstone advertisements may or may not include the offering price — it depends on whether that has been decided yet.

Question 43

Which of the following is a self-regulatory organization (SRO)?

(A) FINRA
(B) NYSE
(C) SIPC
(D) All of the above are correct

Answer 43

Answer: D, FINRA, NYSE, and SIPC are self-regulatory organizations (SRO

Question 44

Which of the following is the largest options exchange in the U.S., and focuses on options contracts for individual equities and indexes?

(A) AMEX
(B) CBOE
(C) NASDAQ
(D) NYSE

Answer 44

The CBOE (Chicago Board Options Exchange) is the largest options exchange in the U.S. and focuses on options contracts for individual equities and indexes

Question 45

The cooling-off period usually lasts about:

(A) 20 days
(B) 30 days
(C) 45 days
(D) 90 days

Answer 45

The cooling-off period is when an issuer files a registration statement with the SEC. During this time, the SEC reviews the registration statement to see if it needs to be amended or if additional information is needed. It typically takes 20 days for the SEC to review the registration statement. As a matter of fact, it is sometimes referred to as the 20-day coolingoff period.

Question 46

Which of the following is the formula to calculate an investment’s real return?

A. Real return = Nominal return – Inflation
B. Real return = Nominal return + Inflation
C. Real return = Nominal return ÷ Inflation
D. Real return = Inflation ÷ Nominal return

Answer 46

Real return = Nominal return – Inflation.

Question 47

The computation of dollar prices and accrued interest on municipal bonds is normally on what calendar basis?

A. 30/360
B. 30/365
C. Actual 360
D. Actual/365

Answer 47

A. 30/360

Question 48

Where would institutions wish to trade stocks for the cheapest transaction costs and most privacy?

The Primary Market
The Secondary Market
The Third Market
The Fourth Market

Answer 48

The Fourth Market

The Primary Market is the first issuance of shares to public buyers, the Secondary Market is the trading after the IPO in the primary. The Third Market is shares listed in exchange in the OTC market and the Fourth Market is virtually the same as the Third Market but without an intermediary and therefore more discretion.

Question 49

Which of these are structured to have a portion of the principal to mature before the entire balance has been repaid?

Term Bond
Serial Bond
Balloon Bond
Both Serial & Balloon Bond

Answer 49

Both Serial & Balloon Bond

A term bond has a set time for the bond to mature at once. A serial bond as intervals where portions of the principal are paid throughout. A balloon bond also can have part of the principal paid before the maturity date, but the majority is paid at maturity.

Question 50

Front-running refers to the practice of:

A. Trading ahead of research reports

B.Inter-positioning

C.Trading ahead of marketable customer orders

D.Trading ahead of a customer’s block order

Answer 50

D.

Front-running is the practice of trading for one’s own account in front of a large customer trade (for example a block trade of 10,000 or more shares), because you believe the order will impact the market price of the security. It is a form of insider trading.

Question 51

Registered persons must complete the regulatory element of their continuing education no later than:

A. Two years after their initial registration date

B. Three years after their initial registration date

C. The end of each year

D. Five years after their initial registration date

Answer 51

C. The end of each year

The regulatory element of continuing education requires that all registered persons complete a computer-based training session by the end of each year. The content of the regulatory element is determined and provided by FINRA and is appropriate to the class of registered representative or principal. If a person does not complete the regulatory element during the prescribed period, the person’s license will become inactive, and they will not be able to perform any of the activities that require registration, and they will not be compensated for any of those activities.

Note that prior to 2023, a registered person was required to complete the regulatory element no later than 120 days after the second anniversary of their registration date and then every three years thereafter.

Question 52

Which of the following pay interest on a semiannual basis?

A. Treasury stock

B.STRIPS

C.Treasury bonds

D.Treasury bills

Answer 52

C. Treasury bonds

Treasury bonds pay interest semiannually (twice a year). In contrast, Treasury bills are bought at a discount and redeemed for par value at maturity. STRIPS are long-term zero coupon bonds consisting of U.S. Treasury securities. As zero-coupon bonds, they are bought at a discount and then redeemed for par value at maturity. Finally, treasury stock is issued stock that is repurchased by the issuing company. It is not issued by the U.S. Treasury and pays neither dividends nor interest.

Question 53

Of the following, which is the correct definition for open market operations?

A. When the Fed buys and sells foreign bonds on the secondary market

B.When the Fed buys and sells U.S. treasury bonds on the secondary market

C.When the Fed buys and sells U.S. treasury bonds on the primary market

D.When the Fed buys and sells foreign bonds on the primary market

Answer 53

B. When the Fed buys and sells U.S. treasury bonds on the secondary market

Open market operations is when the Fed buys and sells U.S. treasury bonds on the secondary market. Open market operations (OMOs)–the purchase and sale of securities in the open market by a central bank–are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). Historically, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate–the interest rate at which depository institutions lend reserve balances to other depository institutions overnight–around the target established by the FOMC.

Question 54

Which of the following activities would probably raise investment suitability concerns?

A
A representative accepts unsolicited orders

B
A representative owns small amounts of several securities recommended to customers

C
A representative recommends the same security to all of their customers

D
A registered representative consistently recommends different types of securities to young investors and another type to retired investors

Answer 54

C
A representative recommends the same security to all of their customers

No investment is inherently suitable for all investors in all situations because suitability depends on each investor’s unique situation and circumstances. The other choices raise no concerns.

Question 55

A registered representative has a large client base of elderly customers and has noticed over the years that many clients have difficulty reading the fine print on the prospectuses and other documentation that the RR sends to them. To remedy this situation, the RR types up a large print summary version of each prospectus to send out in lieu of the original. Which of the following statements concerning this activity is correct?

A
It is only acceptable with principal approval

B
It is only acceptable if the RR gives each customer the fund company’s toll-free number

C
It is not acceptable

D
It is acceptable if no changes are made to the content

Answer 55

C
It is not acceptable

RRs may not alter or modify the contents of a prospectus. RRs can send a prospectus electronically to a customer, with a return receipt requested.

Question 56

LGIPs that are offered by broker-dealers are:

A
Investment pools available to local government entities that are like mutual funds and have investment objectives, including growth and liquidity, to maximize the returns on public funds

B
Investment pools available to local government entities that permit borrowing of funds as needed

C
Investment pools established by state or local government entities available to the general public that reside in that state

D
Investment pools available to local government entities that permit investment of public funds

Answer 56

D
Investment pools available to local government entities that permit investment of public funds

Local government investment pools (LGIPs) are investment pools that are established by state or local government entities to allow for the investment of public funds. The objectives of an LGIP are to provide a safe investment return and daily liquidity, like money market funds.

Question 57

Which of the following securities transactions would result in a realized capital gain?

A
An investor purchased 100 shares of stock at $50 per share and the current market price is $55

B
An investor purchased 100 shares of stock at $45 per share and sells the shares for $40 per share

C
An investor purchased 100 shares of stock at $55 per share and receives a dividend for $3, and sells the shares for $54 per share

D
An investor purchased 100 shares of stock at $40 per share and sells the shares for $50 per share

Answer 57

D
An investor purchased 100 shares of stock at $40 per share and sells the shares for $50 per share

When an investor sells an investment for more than its purchase price or their cost basis, they will have a realized gain. Unrealized gains, or paper gains, are the gains shown on the growth of an investment that is still held, but not sold. If the investor sells for less than their cost basis, they have a realized loss.

Question 58

An investor owns 300 shares of ABC Inc. Recently, ABC issued 10 million shares of common stock and gave current stockholders the ability to purchase some of the new shares prior to the public offering. This offering is known as:

A
Warrants

B
Preemptive rights

C
Call options

D
Stock dividends

Answer 58

B
Preemptive rights

Stockholders have the right to maintain their proportionate share of the companies in which they are part owners. This is accomplished through preemptive rights (often just called rights), which are the ability to purchase any newly issued shares before they are offered to the public. These shares are available at the subscription price. The subscription price is below the current market price of the stock to give the stockholders further incentive to exercise their rights. The percentage of the new shares that the stockholder has the right to buy is the same percentage of the company that they currently own.

Question 59

Regulation M of the Securities Exchange Act of 1934 was established to control the activities of which member firms in a follow-on offering?

A
Syndicate members and market makers

B
All investment bankers

C
Exchanges

D
Selling group members

Answer 59

A
Syndicate members and market makers

The Securities Exchange Act of 1934 contains Regulation M rules established to control the activities of syndicate members and market makers that are participants in follow-on offerings. The concern is that these firms will attempt to manipulate the price of the security by buying or selling the subject security in the secondary market prior to the effective date of the follow-on offering. This caused damage in the time period following the effective date when the security price dropped to its normal trading price and buyers of the follow-on offering were subject to large losses on that holding. Regulation M prohibits the syndicate members in a follow-on offering from aggressively trading the subject security in the secondary market and has placed time restrictions on thinly traded securities to only allow trading after the effective date. The regulation also curtailed aggressive short sales in these securities that would drive the price down before the effective date my only allowing these traders to cover their short positions at the offering price established in the days following the effective date.

Question 60

Member firms must establish, implement, and maintain a business continuity plan that:

A
Meets the specific guidelines set by FINRA

B
Ensures that clients are unaware of any business disruption

C
Must be sent to FINRA on an annual basis for review and approval

D
Is specific to their own business model and that meets the minimum requirements set by FINRA

Answer 60

D
Is specific to their own business model and that meets the minimum requirements set by FINRA

FINRA rules mandate that member firms create and maintain business continuity plans. The basis of the rule is to ensure that all customers are provided with a document that explains how a business interruption will be handled. Each firm should prepare a plan that is specific to their own business model. FINRA states the minimum requirements but allows firms to customize their BCP to meet their needs.

Question 61

What change in interest rates will cause a bond’s price to consistently drop in the secondary market?

A
Interest rates decrease

B
Interest rates remain stable

C
Interest rates increase

D
No change

Answer 61

C
Interest rates increase

Bond prices move in the opposite direction of interest rates. Rising interest rates mean falling bond prices.

Question 62

A potential customer comes in to open a new account with your firm but refuses to give their Social Security number. The individual claims that releasing this information could allow the customer’s identity to be stolen. Which of the following statements is true?

A
The account can be opened if the firm is able to verify the customer’s identity

B
The account may be opened if the supervising principal approves and signs the new account form

C
The account cannot be opened

D
The account can be opened, but all orders must be unsolicited

Answer 62

C
The account cannot be opened

To open a new account, broker-dealers are required to obtain the 4 pieces of critical information: Full legal name of each customer having access to the account, home or business street address, date of birth, and taxpayer identification (SS# or Tax ID #).

Question 63

What is a required disclosure for back-end load or class B mutual fund shares?

A
Additional deposits are prohibited

B
Upon selling your shares, you may pay a sales charge. Details on charges and fees can be found in the prospectus

C
These shares are best for short-term holding periods

D
Not paying up-front sales charges will likely result in greater net investment performance

Answer 63

B
Upon selling your shares, you may pay a sales charge. Details on charges and fees can be found in the prospectus

If a CDSC will be applied to a customer transaction, a disclosure must be made prominently on the front of the trade confirmation that states, “Upon selling your shares, you may pay a sales charge. Details on charges and fees can be found in the prospectus.”

Question 64

Which of the following investment company products is continuously offered in the primary market?

A
A unit investment trust company

B
An open-end management company

C
A round lot of ABC Corporation common stock

D
A closed-end management company

Answer 64

B
An open-end management company

Common stock only trades in the primary market during a primary offering. Once the primary offering is complete, common stock shares trade in the secondary market. A mutual fund or open-end fund is continuously offered in the primary market. A closed-end management investment company has an IPO, and the securities are not redeemable back to the company itself, rather they trade in the secondary market. UITs typically have fixed maturities where the portfolio is dissolved and are not continually offered.

Question 65

The letter of intent covers purchases made within a period of no more than:

A
6 months from the date of the letter

B
12 months from the date of the letter

C
3 months from the date of the letter

D
13 months from the date of the letter

Answer 65

D
13 months from the date of the letter

The LOI covers a maximum period of 13 months. It may be backdated 3 months, in which case the investor has 10 remaining months to complete the LOI.

Question 66

Typically, an investor with a short time horizon would be most concerned with what?

A
Capital appreciation

B
Growth

C
Taxable gains

D
Capital preservation

Answer 66

D
Capital preservation

An investor who has a short-term time horizon, such as an investor approaching retirement, might not want to risk losing investment income due to market volatility. This investor would have a low risk tolerance and would need to invest conservatively.

Question 67

Under the Uniform Securities Act, which of the following actions are not prohibited?

I Retail customers borrowing money from a broker-dealer

II Excessively trading in a discretionary account

III Executing a buy order on one exchange while simultaneously executing a sell order on another

IV Omitting material facts during a sales presentation

A
I and III

B
I and II

C
II and IV

D
I, III, and IV

Answer 67

A
I and III

In a margin account, the customer borrows money and/or securities in order to leverage the customer’s investment, and it is not prohibited under the USA. Neither is arbitrage, or taking advantage of price differentials on the same security in 2 different markets. Churning (excessive trading) is prohibited in both discretionary and nondiscretionary accounts. The omission of material facts during a sales presentation is a violation of the USA.

Question 68

All the following are considered outside business activities that must be reported to your employing firm, except:

A
Working as a professional coach for the local baseball team

B
Working for, or on the board of a start-up company

C
Selling life insurance outside of the firm

D
Working as a volunteer firefighter

Answer 68

D
Working as a volunteer firefighter

FINRA regulations require representatives to notify their firms of any outside business activities or private security transactions prior to their start. FINRA states that you may not be an employee, independent contractor, trustee, sole proprietor, officer, director, or partner of another person because of any business activity outside the scope of the relationship with your firm, unless you have provided written notice to your firm. Acting as a trustee for a trust account as a registered representative would have several potential conflicts of interest. Therefore, it is considered an OBA and must be disclosed to the firm in writing and treated as any other outside business activity. You must also disclose any offer to work with any other business or receipt of any form of compensation from a source other than your employing BD firm. Working as a volunteer firefighter would not require reporting to your firm.

Question 69

A corporation has common stock trading in the secondary market at $100 per share. It announces a 5-for-1 stock split. How will the split impact the share price?

A
It will remain the same, but the number of shares outstanding will increase 5 fold

B
It will rise to $50 per share

C
It will decrease to $20 per share

D
It will decrease to $5 per share

Answer 69

C
It will decrease to $20 per share

The reason a corporation will split its stock is to make the stock more marketable or make the price more attractive for investors trading the stock in the secondary market. The company will issue more shares based on a ratio, such as 5-for-1. This will adjust the stock’s par and market value but will not affect the total value of the stockholder’s investment. $100 / 5 = $20. The number of shares outstanding will increase 5-fold. For example, an investor that owned 50 shares had a total value before the split of 50 x $100 = $5,000. After the split the investor will own 250 shares x $20 = $5,000.

Question 70

Which of the following statements best describes a municipal variable rate demand note (VRDN)?

A
Short-term bond issued at short-term rates

B
Long-term bonds issued at short-term rates

C
Long-term bonds issued at long-term rates

D
Short-term bond issued at long-term rates

Answer 70

Long-term bonds issued at short-term rate

Variable rate demand notes are long-term municipal bonds that are created with money market funds and tied to money market rates. They are issued in $100,000 minimums and are only available to large or institutional investors. Municipal governments pay investors based on these short-term rates. The interest is adjusted frequently based on the interest rate environment, which is considered a variable or floating rate.

Question 71

The person or corporation responsible for the safekeeping of all securities owned by a mutual fund is the:

A
Custodian

B
Management team

C
Administrator

D
Trustee

Answer 71

A
Custodian

The custodian is responsible for the safekeeping of all securities owned by the fund. The custodian collects interest and dividend payments from issuers and makes payments or receives payments because of securities transactions within the portfolio.

Question 72

How many phases are in the economic business cycle?

A
4

B
6

C
8

D
12

Answer 72

A
4

The economic business cycle goes through 4 phases: expansion, peak, contraction, and trough

Question 73

Which of the following is not permitted?

A
Charging wrap fees if registered as an IA only

B
Charging wrap fees if registered as a BD only

C
Charging the same customer both commissions and advisory fees if registered as a BD and an IA

D
Charging commissions if registered as a BD only

Answer 73

Wrap accounts are considered an investment advisory product, and a person must be registered as an IA to charge wrap fees.

Question 74

A Treasury bond, which sold at a discount for 98.20, is now selling at 101.24. What is the amount of increase reflected in the current price of the bond?

A
$31.25

B
$30.12

C
$26.50

D
$30.00

Answer 74

A
$31.25

Treasury notes and bonds are quoted in points (one point =$10) and 32nds of points. The period is a place marker for 32nds. So the difference in the quotes is 101 24/32 - 98 20/32 = 3 4/32, or 3 1/8. 3 1/8% of $1,000 is $31.25.

Question 75

When must a mutual fund make payment to a customer requesting redemption?

A
Within 10 calendar days

B
Within 7 business days

C
Within 7 calendar days

D
Within 3 business days

Answer 75

C
Within 7 calendar days

An investment company is required to send payment to a customer within 7 calendar days of the redemption request.

Question 76

Which of the following is not required when opening an option account?

A
ROP approval

B
An options agreement

C
Options disclosure document (ODD)

D
A hypothecation agreement

Answer 76

D
A hypothecation agreement

Prior to opening an option account, the account must be approved by a registered options principal (ROP). At or before the time when the option account is approved, the customer must receive a copy of the disclosure document for options, called Characteristics and Risks of Standardized Options or options disclosure document (ODD). When opening an option account for a client, the client must have the risks involved with trading options explained. These risks are explained in detail in the ODD. This agreement explains the types of transactions allowed in their account. Each customer can have different restrictions on their accounts. Some will not be able to write options. The hypothecation agreement is required when opening a margin account, not an option account.

Question 77

An employee earned $85,000 working for NOP, Inc. this year. The company does not offer any kind of retirement plan for its employees. If this employee decided to contribute funds into an IRA, which of the following is true?

A
They cannot contribute due to their income level

B
They cannot deduct any of the contribution

C
They can deduct the entire contribution

D
They can deduct a portion of the contribution

Answer 77

C
They can deduct the entire contribution

All individuals with earned income can contribute to a traditional IRA. For individuals who are not active participants in a qualified retirement plan, all IRA contributions into a traditional IRA are tax deductible. For persons who are participating in a qualified plan, deductibility depends on their income level. The specific levels of income that would qualify for a deduction change each tax year. Note: Contributions into a Roth IRA are never deductible regardless of status in a work-sponsored plan.

Question 78

When comparing variable life insurance policies to variable annuities, all the following statements are true, except:

A
Variable annuities are intended to generate an income stream, variable life insurance provides a death benefit upon the death of the insured

B
Both require a FINRA Series 6 or 7 license in addition to a state insurance license to sell

C
Both are considered securities

D
Variable life insurance pays a death benefit to the named beneficiary upon death, but there is no beneficiary named in a variable annuity

Answer 78

D
Variable life insurance pays a death benefit to the named beneficiary upon death, but there is no beneficiary named in a variable annuity

Variable life insurance policies are permanent life insurance products that accumulate cash value and pay a death benefit to the named beneficiary upon the death of the insured. On the other hand, variable annuities are intended to generate an income stream, typically to supplement retirement income. They are both considered securities that require a FINRA Series 6 or 7 license in addition to a state insurance license to sell. There is a beneficiary named with an annuity contract. During the accumulation period, the death benefit on an annuity is the greater of the current market value or the owner’s cumulative premiums paid, less any withdrawals, if a death benefit option is selected. Death benefits can apply once the contract has been annuitized, depending on which settlement option is selected.

Question 79

A registered representative has discretionary authority in one of their customer’s accounts. In one day, the RR places the following orders:

Sell 100 NLD common stock @ $25 - generating $125.00 in commission

Buy 100 NLD common stock @ $25 - generating $125.00 in commission

The registered representative’s behavior would best be described as which of the following?

A
Disregarding customer’s instructions

B
Churning

C
Stirring

D
Spurring commissions

Answer 79

Churning

This action is considered churning. Churning is defined as excessive trading done in a customer’s account to generate extra commission.

Question 80

Which of the following statements is true regarding 529A plans?

A
Qualified expenses include up to $10,000 per year per beneficiary to cover tuition for private/religious K-12 education and most post-secondary education expenses

B
These are used to save funds for college education

C
Contributions to 529A plans are deductible and qualified withdrawals are tax-free

D
These are used to save funds for the ongoing care of disabled individuals

Answer 80

D
These are used to save funds for the ongoing care of disabled individuals

The ABLE (Achieving a Better Life Experience) Act established 529A plans, or ABLE accounts, and are intended to help individuals and their families living with disabilities. Like 529 plans, non-deductible contributions can be made by anyone on an after-tax basis, and qualified withdrawals are federally income tax-free. Qualified withdrawals must relate to the expenses of living with a disability, including education, housing, transportation, health care expenses, and any services needed to improve quality of

Question 81

A large producer with SDM Investments sold over $9 million of the ABC family of funds in the first 10 months of the year. ABC’s regional distributor tells this producer that if they hit the $10 million mark, they will personally send them on an all-expenses paid trip to Rome. According to FINRA rules, which of the following is correct?

A
The RR may accept the trip if they declare the value of the trip as income

B
The RR may accept the trip provided they inform their branch manager and receives clearance from SDM’s Chief Compliance Officer

C
The RR may not accept this offer because it is in violation of FINRA rules

D
The RR may accept the trip if they inform their branch manager

Answer 81

C
The RR may not accept this offer because it is in violation of FINRA rules

RRs are prohibited from accepting special deals from a distributor. Any payments made to a RR must be disclosed in the prospectus.

Question 82

What type of firm that provides advice to or on behalf of a municipal entity which may also give advice regarding municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or solicitation of a municipal entity?

A
Municipal advisor

B
Market maker

C
Broker-dealer

D
Mutual fund

Answer 82

Municipal advisor

A municipal advisor is a firm that provides advice to or on behalf of a municipal entity. The firm may also give advice regarding municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or solicitation of a municipal entity.

Question 83

If a broker-dealer files for bankruptcy, who will provide insurance protection for its customers in the event there are customer securities that cannot be located?

A
SEC

B
FDIC

C
SIPC

D
MBIA

Answer 83

C
SIPC

SIPC is a non-profit organization that is funded by its member firms. It provides insurance protection for customers of its members in case one of those member firms files for bankruptcy protection. SIPC protects up to $500,000 per customer, of which $250,000 can be for cash claims.

Question 84

At a minimum, an account statement is typically sent out for an active account:

A
Monthly

B
Semiannually

C
Annually

D
Quarterly

Answer 84

A
Monthly

While it is not required, active account statements are typically sent out monthly. According to FINRA, inactive account statements must be sent out at least quarterly. Investment companies send out annual reports to the SEC and shareholders of the fund. Investment companies are also required to send semiannual reports to shareholders only.

Question 85

Fear of a revolution in a foreign country is an example of:

A
Currency-exchange risk

B
Purchasing-power risk

C
Political risk

D
Interest-rate risk

Answer 85

C
Political risk

Political and military upheaval is a common concern for investors with foreign holdings, particularly in the emerging markets sector. This risk is referred to as political risk. Purchasing-power risk is the risk of inflation. Currency risk is the risk of the U.S. dollar moving negatively against a foreign currency. Interest-rate risk is the risk that as interest rates rise, outstanding fixed-income security prices will drop.

Question 86

A registered representative with XLR Securities has a 57-year-old client who has only recently started to invest in a retirement account. The client feels they need to make up for lost time and asks the registered representative what they should do. The registered representative recommends investing primarily in quality, proven energy stocks. One year later, the account has increased 30% in value. How would you characterize the recommendation?

A
The selection of investments is appropriate because only quality, proven energy stocks were chosen

B
The selection of investments is proper because the client gave instructions to make up for lost time

C
The advice would be unsuitable because the selection of investments was concentrated in one industry

D
The advice would be unsuitable because it does not contain any bonds

Answer 86

C
The advice would be unsuitable because the selection of investments was concentrated in one industry

All recommendations must be suitable given the circumstances of each client. Regulators look at suitability, not profitability. Investments concentrated in one industry would be speculative (high risk) and not suitable for most investors. Retirement accounts usually consist of a combination of equities (stocks) and bonds, with a higher percentage of the account invested in stocks if the client wants growth, or a higher percentage invested in bonds if the client is near retirement or does not want a lot of risk.

Question 87

The SEC rule limits the dollar amount of political contributions to $___ by an associated person that is legally entitled to vote for that constituent.

A
$750

B
$500

C
$600

D
$350

Answer 87

D
$350

The prohibition against political contributions does not apply if the only contributions to officials of issuers are made by MFPs entitled to vote for such officials, provided the contributions are not in excess of $350 by each MFP to each official, per election.

Question 88

What type of broker-dealer is typically used by hedge funds to settle trades that were executed through several different firms?

A
Prime broker

B
Clearing broker-dealer

C
Introducing broker-dealer

D
Market maker

Answer 88

A
Prime broker

A prime broker is a firm typically used by hedge funds to handle its complex needs. The hedge fund may use multiple executing brokers to handle trades, preventing a single firm from seeing the activities and duplicating the fund’s strategies. All trades are then settled through the prime broker.

Question 89

For a registered representative to be able to trade in a customer’s account without specific trade instructions for each trade, all the following must be in place, except:

A
Customer provided written authorization

B
Profit-sharing agreement

C
Initial account acceptance by the broker-dealer

D
Trades approved, and account reviewed by a principal

Answer 89

B
Profit-sharing agreement

A discretionary account gives an RR or broker-dealer trading authority in an account. A discretionary account can be established with either limited or full power of attorney (POA). No broker-dealer or registered representative will exercise any discretionary power in a customer’s account unless that customer has given prior written authorization. The account must be accepted by the broker-dealer, as evidenced in writing by a qualified principal. A discretionary trade must be approved by the broker-dealer promptly after the trade is done. All discretionary accounts must be reviewed at frequent intervals to review suitability and to detect and prevent transactions that are excessive in size or frequency.

Question 90

If a bond is issued with a put provision, under what circumstances would a bondholder exercise this provision?

A
If the investor’s investment objective changed from income to growth

B
If the bonds were declining in value due to lower credit ratings or rising interest rates in the market

C
If the bonds were increasing in value due to higher credit ratings or falling interest rates in the market

D
If the corporate common stock was a better value overall to the investor

Answer 90

B
If the bonds were declining in value due to lower credit ratings or rising interest rates in the market

Put provisions, found on some bond issues, allow the bondholder to sell the bond back to the issuer at par value on specific dates before maturity. This provision protects the bondholders from declining values of the bonds due to lower credit ratings or rising interest rates in the market.

Question 91

Once this type of trust is established, the trust and its terms cannot be changed:

A
Testate

B
Revocable

C
Irrevocable

D
Intestate

Answer 91

C
Irrevocable

Once a trust is established as an irrevocable trust, the trust and its terms cannot be changed. The assets placed in an irrevocable trust are afforded protection from creditors. The main benefit of opening an irrevocable trust is that the trust is not included in the grantor’s estate and is not subject to estate taxation. An irrevocable trust has its own tax ID, and its own tax rates.

Question 92

The Internal Revenue Code (IRC) primarily covers rules concerning all the following taxes except:

A
Property

B
Federal gift

C
Federal income

D
Federal estate

Answer 92

A
PropertY

The Internal Revenue Service (IRS) is the agency under the treasury department that is responsible for collecting taxes and enforcing tax laws. The IRS has the authority to issue monetary fines and punishment for violating the Internal Revenue Code (IRC). The IRC covers rules concerning income, gift, estate, and capital gains tax.

Question 93

A
Passive portfolio managing

B
Hedging

C
Asset allocation

D
Active portfolio managing

Sorry! The correct answer was A.

There are several ways to rebalance a portfolio. Passive rebalancing is a type of automatic rebalancing that removes dollars from the overperforming assets and reallocates them to the underperforming assets. This can be done on an annual or quarterly basis.

Answer 93

A
Passive portfolio managing

There are several ways to rebalance a portfolio. Passive rebalancing is a type of automatic rebalancing that removes dollars from the overperforming assets and reallocates them to the underperforming assets. This can be done on an annual or quarterly basis.

Question 94

A client has a cash account with a broker-dealer that currently has a cash balance of $1,000. On Monday morning, the client buys $10,000 of XYZ stock. No payment is received from the client by Wednesday and on Thursday the client sells XYZ stock for $10,750 to cover the cost of the purchase. This is an example of:

A
Freeriding

B
Painting the tape

C
Wash trading

D
Backing away

Answer 94

A
Freeriding

A cash account is an account where the transactions are paid for with cash, or cash equivalents, within a specified time. Regulation T requires payment no later than 4 business days after the trade date or T+4. Investors must pay for their purchases of securities before selling them. If a customer attempts to profit on and then sell those same securities before paying for them, it is called freeriding and is prohibited under Regulation T.

Question 95

A registered representative would like to move their new client out of their existing variable annuity and move them into a new contract that earned 15% last year. What is the most likely interpretation of this practice under FINRA rules?

A
This action is acceptable only if the transaction is suitable for the client

B
This practice requires the written approval of the client’s tax advisor

C
This practice is always unacceptable under anti-churning rules

D
Exchanging annuities never makes sense for clients below 59½ since taxes will come due at time of the replacement

Answer 95

A
This action is acceptable only if the transaction is suitable for the client

Exchanging a client from one annuity account into another is a permissible event, however there must be valid reasons for an RR to recommend a change. Valid reasons may include better performance and/or lower costs associated with a new contract. A Section 1035 exchange is often utilized to move funds from one VA to another without incurring a current tax liability

Question 96

What document can RRs use with customers to gather indications of interest for a new issue?

A
Research reports

B
Sales literature

C
Final prospectus

D
Red herring

Answer 96

D
Red herring

While sales of new issues may not occur during the cooling-off period, the registered representatives are permitted to prospect for potential customers during this time by providing potential investors with a summary of the registration statement called the preliminary prospectus, also called the red herring.

Question 97

All the following are unsecured bonds, except:

A
Collateral trust certificate

B
Subordinated debenture

C
Debenture

D
Income bond

Answer 97

A
Collateral trust certificate

Unsecured bonds are not backed by underlying assets or collateral. Debentures are backed by the general creditworthiness and reputation of the issuer. Subordinated debentures have a secondary claim to assets in the event of bankruptcy (behind straight debentures). Income bonds have no legal obligation to make interest payments and will only pay interest when the corporation earns enough income to do so. These bonds are issued by a corporation that is under reorganization and coming out of bankruptcy. The only choice in this question that is a secured bond is the collateral trust certificate, which is backed by the securities of another company.

Question 98

All the following are considered money market securities, except:

A
T-note with 1 year or less remaining to maturity

B
T-bills

C
Bankers’ acceptances (BAs)

D
Commercial paper maturing in 1 year

Answer 98

D
Commercial paper maturing in 1 year

Money market instruments are short-term debt instruments, maturing in one year or less. They are highly liquid and offer safety of principal due to their short time period to maturity, as well as typically being issued by high-creditworthy issuers. Government issues, such as T-bills, are very liquid and are backed by the U.S. government, providing them with safety of principal. T-bills have maturities that are 52 weeks or shorter, and if the T-note or T-bond has one year or less remaining to maturity, they will also be considered money market securities. Bankers’ acceptances are used to finance foreign trade. These are very short-term debt securities. Commercial paper that has a maturity of less than 270 days, in denominations of $50,000 and rated in one of the top three highest ratings, would be considered a money market security. In this question though, the commercial paper is maturing in 1 year, so it does not meet the requirements.

Question 99

Which of the following statements is not true regarding the Securities and Exchange Commission (SEC)?

A
It oversees all the self-regulatory organizations (SROs)

B
It is not responsible for protecting U.S. investors

C
All broker-dealers that do business across state lines must register with the SEC

D
It is the primary federal regulator for the securities industry

Answer 99

B
It is not responsible for protecting U.S. investor

The SEC functions as the ultimate enforcer of federal securities laws and is responsible for protecting U.S. investors.

Question 100

A registered representative is considering temporarily taking a second job until market conditions improve. According to FINRA rules, which of the following activities would not need to be reported to their employer as outside employment?

A
Working as a referee for the neighborhood soccer league

B
Working as an insurance broker during the evening

C
Working as a tax preparer on the weekends

D
Owning a limited partnership interest in a local dog racing track

Answer 100

D
Owning a limited partnership interest in a local dog racing track

RRs are required to notify their employers of any outside employment, whether securities related or not. Owning a limited partnership interest is an investment, not a job.

Question 101

During an inflationary period, which of the following would you expect concerning bond prices?

A
Bond prices to increase

B
Bond prices to move the least for long-term bonds and most for short-term bonds

C
Bond prices to remain the same

D
Bond prices to decrease

Answer 101

D
Bond prices to decrease

During an inflationary period, the Federal Reserve Board will tighten the money supply, which results in increasing interest rates. This slows down the economy to control inflation. As interest rates rise, bond prices tend to decrease, and yields will increase.

Question 102

Regulation Best Interest has 4 components that must be met for firms to meet the general obligations of the regulation. Those 4 components are:

A
Compensation, care, conflict of interest, and compliance obligations

B
Disclosure, compassion, compliance, discretion obligations

C
Care, compensation, compliance, and conflict of interest obligations

D
Disclosure, care, conflict of interest, and compliance obligations

Answer 102

D
Disclosure, care, conflict of interest, and compliance obligations

The 4 components needed to meet the general obligations of Regulation BI are disclosure, care, conflict of interest, and compliance obligations.

Question 103

Which statement is true regarding the writer of a put option?

A
The writer is bearish on the market

B
The writer is the buyer

C
The writer is obligated to buy from the buyer

D
The writer pays a premium to the buyer

Answer 103

C
The writer is obligated to buy from the buyer

The put writer receives a premium for agreeing to let the put buyer sell (put) the stock to the seller at a future date. The seller (writer) of the put is bullish on the stock and is obligated to fulfill the contract if the buyer exercises it.

Question 104

XYZ Corporation announces a stock split of 4:1 on December 16, 2020. All the following will occur as a result of this decision, except:

A
The per share price of XYZ stock is reduced

B
The market price of XYZ will increase

C
The number of shares of XYZ stock is increased

D
The earnings per share will change

Answer 104

B
The market price of XYZ will increase

When a corporation splits its stock, the number of shares is increased and the price per share is decreased proportionately. The earnings per share are now spread over more shares, so that figure will be decreased.

Question 105

XYZ Corporation announces a stock split of 4:1 on December 16, 2020. All the following will occur as a result of this decision, except:

A
The per share price of XYZ stock is reduced

B
The market price of XYZ will increase

C
The number of shares of XYZ stock is increased

D
The earnings per share will change

Answer 105

B
The market price of XYZ will increase

When a corporation splits its stock, the number of shares is increased and the price per share is decreased proportionately. The earnings per share are now spread over more shares, so that figure will be decreased.

Question 106

The amount by which the price of a municipal bond exceeds the par value, is the:

A
Premium

B
Discount

C
Exemption

D
Spread

Answer 106

A
Premium

Premium refers to a price above par. Discount refers to a bond price below par. The spread is the difference between the bid and ask. Exemption refers to taxation.

Question 107

What is the role of an investment banker?

A
To make loans and accept deposits

B
To guarantee principal and interest payments are made in timely fashion

C
To shore up the capital of issuers who are in financial difficulty to protect investors

D
To work with the issuer to help sell securities to the public

Answer 107

D
To work with the issuer to help sell securities to the public

An underwriter or investment banker is a broker-dealer that administers the public issuance and distribution of securities for a corporation or other issuing body. The underwriter works with the issuing entity to assist in determining the offering price and may buy the security from the issuer to sell to public investors through a distribution network.

Question 108

Rule 147 intrastate offering shares may not be sold outside of the state for how many months?

A
3

B
6

C
9

D
1

Answer 108

One exempt transaction is an offering made to investors in only one state. It is known as a Rule 147 Intrastate Offering. Issuers using the exemption under Rule 147 must meet one of the following requirements: 80% of the issuer’s gross revenues must come from business activities within the state, 80% of the issuer’s assets are located within the state, 80% of the net proceeds from the offering must be used within the state, or a majority of the issuer’s employee’s must be based within the state. Securities purchased under Rule 147 may not be sold outside of the state for 6 months. The appropriate disclosures must be made to purchasers on the limitations of resale. Certificates must be marked with the appropriate legend stating any restrictions. These securities still must be registered under blue-sky laws.One exempt transaction is an offering made to investors in only one state. It is known as a Rule 147 Intrastate Offering. Issuers using the exemption under Rule 147 must meet one of the following requirements: 80% of the issuer’s gross revenues must come from business activities within the state, 80% of the issuer’s assets are located within the state, 80% of the net proceeds from the offering must be used within the state, or a majority of the issuer’s employee’s must be based within the state. Securities purchased under Rule 147 may not be sold outside of the state for 6 months. The appropriate disclosures must be made to purchasers on the limitations of resale. Certificates must be marked with the appropriate legend stating any restrictions. These securities still must be registered under blue-sky laws.

Question 109

If the 1-year T-bills are currently yielding 4% while growth stocks are yielding 14%, what is the risk-adjusted rate of return for investing in growth stocks?

A
0%

B
10%

C
4%

D
14%

Answer 109

B
10%

The risk-adjusted rate of return measures the security’s return based on the amount of risk. In this scenario growth stocks are yielding 14% while the risk-free rate of return for investing in T-bills is 4%, this makes the risk-adjusted rate of return 10%.

Question 110

An investor sells 1 JKL Dec 40 put @ 3 when the underlying stock is currently trading at $36. What is the breakeven point on this contract?

A
$37

B
$47

C
$43

D
$39

Answer 110

C
$43

The breakeven point is when the investor will not make or lose any money. For a put, the breakeven is the strike price minus the premium (40 – 3 = 37).

Question 111

All the following information is included in a confirmation statement, except:

A
Gain or loss on the trade

B
Trade date

C
Settlement date

D
Quantity traded

Answer 111

A
Gain or loss on the trade

The confirmation is written documentation of a trade. It includes the trade date and the settlement date. It must be provided to the customer on or before the settlement date. The confirmation also must include: – Identity of the security – Price at which the trade was executed – Quantity of securities traded – Amount of commission paid to the broker-dealer – Identity of the selling agent, if any – Any other regulatory fees or taxes applicable to the transaction

Question 112

An investor has a long stock position and long put position. What type of strategy is this?

A
Covered call

B
Long strategy

C
Hedge strategy

D
Income strategy

Answer 112

C
Hedge strategy

Hedging is like buying insurance to protect a stock position. For hedging, an investor would buy (long) an option contract. With a long stock position, the investor is hoping the stock price will go up- if the stock price does go up the investor will let the option expire and will enjoy the gains in the stock position. The concern is that the stock price could decline, a long put can be purchased as protection. If the stock price declines below the strike price, the investor can exercise the put and sell the shares to the writer of the contract.

Question 113

Which of the following statements is false regarding a sole proprietorship?

A
The owner of the business has limited liability

B
All profits and losses are filed on the owner’s personal tax return

C
The business owner has complete control over the business

D
The sole proprietorship has a limited life

Answer 113

A
The owner of the business has limited liability

A sole proprietorship is a business owned by 1 person. While the owner has complete control over the business, they also have personal legal liability since the business and the owner are the same. All profits and losses of the operation are filed on the owner’s personal tax return. A sole proprietorship has a limited life, as it is based on the life of the owner.

Question 114

How is the funding for SIPC coverage generated?

A
Through fines collected by the SEC

B
Through assessments upon member firms

C
Through premiums paid by investors

D
Through federal taxes

Answer 114

B
Through assessments upon member firms

SIPC is not a governmental entity and receives no tax subsidies. SIPC is a private, not-for-profit organization that broker-dealers are required to join. Members are required to pay annual assessments, which are held for customer reimbursements in case of member bankruptcies.

Question 115

The type of account ownership where a person owns a portion of the account, and their portion will pass to their estate upon death is a:

A
Individual registration

B
Trust account

C
Tenants in common

D
JTWROS

Answer 115

C
Tenants in common

The purpose of a tenants in common account is to afford each investor the ability to own a portion of the account, and upon the investor’s death, have their portion transfer to their estate. Under joint tenants with rights of survivorship, the surviving owner assumes ownership and control of the entire account with no interruption. In an individual account, the account passes to the single owner’s estate, unless it is set up as “transfer on death” (TOD). Under TOD, the account immediately passes to the named beneficiary.

Question 116

A non-exempt security is one that must be:

A
Registered with the SEC

B
Sold with an offering memorandum

C
Guaranteed as to principal and interest

D
Marginable

Answer 116

A
Registered with the SEC

Certain securities are exempt from registration. Exempt securities do not need to be registered with the SEC, since it would not make sense for certain issuers to go through the time and expense of filing the registration statement. Exempt securities include U.S. government and agency issues, municipal issues, money market issues, bank issues, common carrier issues, insurance company issues, and nonprofit or religious organization issues. While an exempt issuer is not required to register its securities with the SEC, it is still subject to the anti-fraud provisions. A non-exempt security is one that must be registered with the SEC.

Question 117

What must a bond issuer pay to investors?

A
A portion of ownership in the company

B
Quarterly dividends

C
An inflation-protected lump sum at bond maturity

D
Interest on a timely basis

Answer 117

D
Interest on a timely basi

Issuers of bonds are responsible to pay interest on the money borrowed in full and on a timely basis along with repayment of loan principal at maturity.

Question 118

An individual invested $25,000 into FAM Corporation during their IPO. Now the value of the stock has almost doubled. What is the investor’s financial liability in FAM Corporation?

A
Unlimited

B
$50,000

C
$25,000

D
Zero

Answer 118

C
$25,000

A stockholder’s liability is limited to the amount of their investment. Stockholders cannot be sued for the corporation’s activities, nor must they pay additional amounts if the corporation goes bankrupt.

Question 119

Which of the following is not permitted without client approval in a limited discretionary account?

A
Redeem 300 shares of the XYZ Fund

B
Purchase a speculative growth fund

C
Buy 200 shares of the ABC Fund

D
Remove $300

Answer 119

D
Remove $300

Limited discretion (limited POA) allows the RR to authorize transactions in the account without client approval. However, those transactions must be suitable based on the customer’s financial situation, investment objectives, and risk tolerance. Limited discretion does not allow the RR to remove or add funds to the account without client approval. This activity is allowed in an account established under full discretion (full POA).

Question 120

All the following retirement plans must comply with ERISA requirements, except:

A
Profit-sharing plans

B
Government plans

C
401(k) plans

D
Simplified Employee Pension plans

Answer 120

B
Government plans

ERISA regulates private sector retirement plans. Plans established by the government, a municipality, nonprofit organizations, or individual plans are not regulated by ERISA.

Question 121

Which of the following regarding tenants in common (TIC) registrations is correct?

A
Upon the death of an owner, the interest passes to a beneficiary

B
A trade may be authorized by any account owner

C
Ownership is always equal

D
Each party’s interest is divided based on deposits

Answer 121

B
A trade may be authorized by any account owner

Ownership of the account may be equal (50/50) or unequal, but each party’s interest in the account is always specified. When 1 of the account owners dies, that owner’s portion of the account passes to their estate, not to a beneficiary. Any owner may act for the entire account and place trades.

Question 122

What offering document may be distributed to a customer during the cooling-off period?

A
Form 1099

B
A preliminary injunction

C
A red herring

D
A preliminary confirmation

Answer 122

C
A red herring

A registered representative is permitted to distribute a preliminary prospectus (red herring) during the cooling-off period. The red herring includes the most relevant information on the proposed new issue but lacks a final offering price and the SEC’s effective date. Form 1099 is the document which details the annual taxable events (capital gains and dividends) for an investor

Question 123

Which of the following regarding private placements is false?

A
There can be no more than 50 accredited investors who participate in the offering

B
Most are sold under Regulation D

C
They are exempt from registration if offered to no more than 35 non-accredited investors

D
Investors receive restricted stock prohibiting resale for 6 months

Answer 123

A
There can be no more than 50 accredited investors who participate in the offering

Most private placements are sold under Regulation D. Under Reg D, private placement transactions are exempt from registration when offered to no more than 35 non-accredited investors (persons who do not meet the definition of accredited under the Act). There are no restrictions on the number of accredited investors that can be involved in the sale. However, the total number of investors must be less than 100 or they would be forced to register as an investment company under the Investment Company Act of 1940. Through a private placement, investors purchase restricted stock. The stock is delivered with an investment letter prohibiting the resale in the secondary market for a minimum of 6 months. Restricted stock may also be referred to as letter stock

Question 124

A client is considering saving money for their child’s education. The client wants the money to grow on a tax-deferred basis but wants to retain the ability to use the investment for both private high school and college expenses. Which of the following options would be the best vehicle for this investor?

A
Coverdell savings account

B
Roth IRA

C
UGMA account

D
403(b) plan

Answer 124

A
Coverdell savings account

Coverdell savings accounts are an often overlooked education savings program. The key benefit of a Coverdell is that the money inside of the account can be used for paying the costs of private elementary and high school tuition. Money that is contributed to a Coverdell is not tax deductible. However, the growth in the account is tax deferred. Assuming that the money is used for qualified educational expenses, the withdrawals from the account will be tax-free. Up to $10,000 per year of 529 plan assets may be used for K-12 tuition with the passing of the SECURE Act, but that is not 1 of the choices.

Question 125

Which of the following statements concerning a UTMA account is correct?

A
All trades in the account must be approved, by the minor’s parent or legal guardian, within 48 hours of execution

B
Margin trading is permitted in these accounts

C
Risky investments, such as overseas aggressive growth funds or emerging market high-yield bond funds, placed in these accounts meet the fiduciary standard under the UPIA

D
Certain options strategies, like covered call writing, may be employed by the custodian

Answer 125

D
Certain options strategies, like covered call writing, may be employed by the custodian

As fiduciaries, custodians are required to protect the interests of the child. Portfolios constructed for UTMA accounts should not be overly aggressive. Most states operate under the Uniform Prudent Investors Act (UPIA) that establishes standards for fiduciaries. Under this Act, the portfolio must be invested in a prudent and diversified manner. The custodian can purchase stocks, bonds, mutual funds, unit investment trusts, and closed-end funds and can participate in covered call writing. Most other option strategies are not allowed. Since margin accounts involve borrowing money or securities, UGMA accounts cannot be margin accounts.

Question 126

To develop a suitability profile for a client, the registered representative is not required to determine the client’s:

A
Risk tolerance

B
Investment objective

C
Marital history

D
Financial status

Answer 126

C
Marital history

Marital history (not marital status) is not relevant to developing a client suitability profile. Each of the other factors directly affects client suitability.

Question 127

Which of the following is not true regarding a trustee?

A
Has the right to seize the bond issuer’s assets to protect the bondholders’ rights to their investment if the issuer becomes insolvent

B
Is appointed by the issuer to protect the bondholders’ rights

C
Works with the issuing entity to assist in determining the offering price

D
Is usually a bank or trust company

Answer 127

C
Works with the issuing entity to assist in determining the offering price

The underwriter, not the trustee, works with the issuing entity to assist in determining the offering price. The trustee is a firm, such as a trust company, commercial bank, or financial institution hired by bond issuers to protect the bondholders’ interests.

Question 128

An investor has placed 80% of their portfolio in fixed-income investments. They have repeatedly lost money in the equity markets, and this is an allocation in which they are comfortable. The investor has been advised by their RR that their investments will produce a yield of 6% this year, but because the prices of goods and services are also rising, they are not really earning 6%. What risk is this investor facing?

A
Purchasing-power risk

B
Credit risk

C
Interest-rate risk

D
Call risk

Answer 128

A
Purchasing-power risk

The RR is referring to inflation (purchasing-power) risk. Since the investor’s capital is growing at a rate of 6%, any inflation will reduce the strength of their purchasing power. If for instance, inflation is 7%, their purchasing power is reduced compared to the prior year even though the money is growing. Interest-rate risk pertains to the sensitivity of the investment to changes in interest rates.

Question 129

Which of the following securities would have the greatest taxation risk?

A
U.S. government bonds

B
Common stock

C
Preferred stock

D
Municipal bonds

Answer 129

D
Municipal bonds

A taxation risk exists when income tax laws change, causing unfavorable tax consequences to securities investors. Currently municipal bonds are not subject to federal (and in some cases state and local) taxation. A change in tax laws would have the greatest impact on municipal bonds.

Question 130

In a period of low inflation and economic recession, the federal reserve is expected to?

A) Decrease Taxes
B) Raise the federal rates fund
C) Buy Bonds in the open Market
D) Require Banks to increase reserves

Answer 130

C) Buy Bonds in the open Market

Question 131

Roth 401(k) and Roth Individual plans share which of the following features?

A) Contributions are made pretax
B) Neither account has maximum contribution limits
C) Neither account is subject to early distribution penalties
D) Qualified distributions are excluded from federal income Tax

Answer 131

D) Qualified distributions are excluded from federal income Tax

Question 132

Under the Securities Act of 1933, registration is required for which of the following securities?

A) Eurodollar bonds
B) Municipal Securites
C) American Depository Receipts (ADRs)
D) Securities issued by the federal government

Answer 132

C) American Depository Receipts (ADRs

Question 133

Which of the following should a RR explain to a customer when reccomending a 529 savings plan?

A) Deductibility of contributions from state taxes
B) Deductibility of contributions from federal taxes
C) Income eligibility restrictions to contribute to the account
D) The rights of the account beneficiary to the assets at the age of maturity.

Answer 133

A) Deductibility of contributions from state taxes

Question 134

What’s the greatest investment risk for a variable life insurance policy?

A) Credit Risk
B) Market risk
C) Inflation Risk
D) Interest rate risk

Answer 134

B) Market risk