Final 1 Flashcards
1
Q
All of the following statements about traditional IRAs are TRUE EXCEPT:
[A] Individuals earning income are eligible to contribute
[B] Withdrawals are generally permitted beginning at age 59 1/2 without penalty
[C] Tax free rollovers from a qualified plan to an IRA must be completed within 60 days
[D] An individual may contribute securities into his/her IRA account
A
[D] An individual may contribute securities into his/her IRA account
2
Q
One of your clients wants to free up some capital and decides to sell a municipal bond out of their portfolio. The bond last paid interest a couple of months ago and will not pay interest again for a few months. In this situation, who pays the accrued interest at the time of settlement?
[A] The buyer of the bond pays the accrued interest.
[B] The seller of the bond pays the accrued interest.
[C] The agent will pay the accrued interest.
[D] The issuer will pay the accrued interest.
A
[A] The buyer of the bond pays the accrued interest.
3
Q
A customer puts in an immediate or cancel order to buy 100 ABC Sept 50 calls. At the same time that the order reaches the floor, a market order also arrives to sell 50 ABC Sept 50 calls. There are no other sell orders on the book. What will happen?
[A] The entire 100 call order will go into the book.
[B] The entire 100 call order will be cancelled.
[C] 50 of the calls will be filled and the remainder will be cancelled.
[D] 50 of the calls will be filled and the remainder will go into the book.
A
[C] 50 of the calls will be filled and the remainder will be cancelled.
4
Q
A client sells a stock short in their portfolio. The client plans to cover the short sale but prior to covering, calls to ask the RR how to achieve long-term status for capital gains purposes on the short sale. How should the RR respond?
[A] The RR should inform the client that short sales do not qualify for long-term capital gains treatment, regardless of how long the position was short in the client’s account.
[B] The RR should inform the client that short sales only qualify for long-term capital gains treatment when the purpose of the short sale was to hedge a long position.
[C] The RR should inform the client that short sales only qualify for long-term capital gains treatment when the client is short the stock for over 6 months.
[D] The RR should inform the client that short sales only qualify for long-term capital gains treatment when the client is short the stock for over one year.
A
[A] The RR should inform the client that short sales do not qualify for long-term capital gains treatment, regardless of how long the position was short in the client’s account.
5
Q
A client wishes to roll over a qualified IRA into another qualified IRA. This can normally be performed on a tax-free basis without penalty, as long as a minimum of how many days have passed since the client’s last rollover of the same type?
[A] A minimum of 18 months must have passed since the last similar rollover.
[B] A minimum of 12 months must have passed since the last similar rollover.
[C] A minimum of 6 months must have passed since the last similar rollover.
[D] A minimum of 60 days must have passed since the last similar rollover
A
[B] A minimum of 12 months must have passed since the last similar rollover.
6
Q
An investor buys 100 shares of ABC stock for $35 a share and simultaneously buys 1 ABC Sept 40 put @ 5. The breakeven price for the stock at the expiration of the put is:
[A] $5
[B] $30
[C] $35
[D] $40
A
[D] $40
7
Q
Treasury STRIPS have all of the following characteristics EXCEPT:
[A] They are sold at a discount
[B] Their price is volatile
[C] They lock in a rate for a predetermined period
[D] The accrued interest is taxable at maturity
A
[D] The accrued interest is taxable at maturity
8
Q
LMN Incorporated is listed on the American Stock Exchange. Jane sits on the board of directors for LMN and wishes to buy some LMN stock. She executes a trade on the floor of the AMEX and purchases the shares. How do the provisions of Rule 144 apply to this scenario?
[A] Jane is only permitted to sell the stock if she holds it for a minimum of 3 years.
[B] Jane must keep the stock indefinitely and is not permitted to sell.
[C] Jane is permitted to sell the stock purchased on AMEX immediately, but certain restrictions may apply.
[D] Jane is permitted to sell the stock purchased on AMEX immediately and there are no restrictions with regards to the sale.
A
[C] Jane is permitted to sell the stock purchased on AMEX immediately, but certain restrictions may apply.
9
Q
An existing client in her late 20s comes to the RR’s office with her boyfriend. The couple are not married but they want to open a JTWROS (Joint Tenants with Rights of Survivorship) account. They state that they would like to invest in very speculative, small-capitalization mutual fund comprised of international companies. Under these circumstances, the RR should
[A] refuse to open the account due to the high level of risk associated with the investment and the fact that JTWROS accounts are normally established by married couples.
[B] start acquiring all of the information needed to open the account, but also discourage the couple from establishing this type of account, since normally JTWROS accounts are established by married couples.
[C] refuse to open the account due to the high level of risk, and sit down with the couple to explain the risks associated with the investment and why the RR refuses to open the account.
[D] start acquiring all of the information needed to open the account, but also sit down with the couple prior to purchasing mutual fund shares and discuss the risks associated with the investment and the couple’s risk tolerance.
A
[D] start acquiring all of the information needed to open the account, but also sit down with the couple prior to purchasing mutual fund shares and discuss the risks associated with the investment and the couple’s risk tolerance.
10
Q
All of the following statements are FALSE with regards to FHLMC Securities (Federal Home Loan Mortgage Corporation) EXCEPT:
[A] FHLMC Securities are often referred to as Sallie Maes.
[B] FHLMC Securities provide tax-free interest to investors.
[C] FHLMC Securities are fully guaranteed by the U.S. Government.
[D] FHLMC Securities are only issued in book-entry form.
A
[D] FHLMC Securities are only issued in book-entry form.
11
Q
What is the typical make-up of a balance sheet?
[A] The overall values of outstanding bonds plus outstanding stocks is equal to the total assets of the company. (Bonds + Stocks = Total Assets)
[B] The total liabilities plus the company’s net worth equals the total assets of the company. (Liabilities + Net Worth = Total Assets)
[C] The capitalization less its liabilities set equal to the assets of the company. (Capitalization - Liabilities = Assets)
[D] The current liabilities added to the fixed liabilities of the company set equal to the assets of the company. (Fixed Liabilities + Current Liabilities = Assets)
A
[B] The total liabilities plus the company’s net worth equals the total assets of the company. (Liabilities + Net Worth = Total Assets)
12
Q
A customer is investing for his child’s education. He is seeking reasonable income and growth of capital. His investment objective is best described as seeking which of the following?
[A] Capital gains only
[B] Speculative profits
[C] Maximum current income
[D] Total return (growth plus income)
A
[D] Total return (growth plus income)
13
Q
Which of the following BEST describes the money received by a corporation during an issue of equity securities that exceeds the face value of the securities being sold?
[A] This would refer to the capital that the corporation must keep on hand.
[B] This would refer to the capital that the corporation must use in relation to the intended use of funds specified with the sale of the new issue.
[C] This would refer to the paid-in capital of the corporation.
[D] This would refer to returns earned on funds invested in various securities in the corporation’s portfolio.
A
[C] This would refer to the paid-in capital of the corporation.
When looking at Shareholders Equity on a Corporate Balance Sheet we find both “Common Stock” and “Paid in Capital or Surplus” - generally “Common Stock” reflects the par value received when the common stock was sold to the public. Any excess over par that was received when the common stock was sold is carried as “Paid in Capital or Surplus”.
Chapter 19 Section 3
14
Q
If an investor anticipates a decline in interest rates over the next 15 years, the investor would be best suited by a portfolio consisting of
[A] tax anticipation notes and bonds with variable interest rates.
[B] tax anticipation notes and non-callable 15-year bonds.
[C] non-callable 15-year bonds and 30-year bonds, putable in 15 years.
[D] 30-year bonds that are putable in 15 years, as well as bonds with variable interest rates.
A
[C] non-callable 15-year bonds and 30-year bonds, putable in 15 years.
15
Q
Which of the following is a characteristic of Treasury Bills?
[A] T-Bills normally will trade at a premium to par.
[B] For taxation purposes, proceeds received upon maturity that are greater than the price paid are considered capital gains.
[C] T-Bills are medium-term securities.
[D] Interest rates are not “stated” on T-Bills.
A
[D] Interest rates are not “stated” on T-Bills.
16
Q
A municipal bond has a provision for redeeming a certain number of bonds at par in ten semi-annual installments. This type of call feature is best described as:
[A] An installment call
[B] An optional call
[C] A sinking call
[D] A catastrophic call
A
[C] A sinking call
17
Q
Which type of distribution from a corporate pension plan is eligible for rollover to an IRA or another corporate plan that accepts rollovers with no additional stipulations?
[A] After-tax employee contributions
[B] Minimum distributions after age 72
[C] A series of payments made over a 10 year period
[D] Payments representing employer contributions
A
[D] Payments representing employer contributions
Under IRS codes, minimum distributions and any payment made as a series of payments over a 10-year period or more must be treated as normal distributions for tax purposes and may not be rolled over. After-tax employee contributions require separate accounting and would be treated differently than a straight, direct rollover. The best answer here would be the payments that represent employer contributions, which can be directly rolled over to another corporate plan or to a Traditional IRA without issue.
12.1
18
Q
A registered representative suggests and then implements a strategy in a client’s portfolio. This strategy involves the RR coming up with certain determinations in relation to an appropriate distribution of investments in the client’s account and the maintenance of this mix of investments over time. Which of the following most accurately describes the strategy that has been implemented?
[A] The RR is using only a technical analysis approach to allocation.
[B] The RR is using capital asset pricing model to determine allocation.
[C] The RR is using a form of asset allocation for the client.
[D] The RR is using a strategy purely focused on diversification for the client.
A
[C] The RR is using a form of asset allocation for the client.
19
Q
Which of the following funds would be the least suitable for a retiree in need of a steady stream of income?
[A] A bond fund
[B] A sector fund
[C] A balanced fund
[D] A growth and income fund
A
[B] A sector fund
20
Q
Mr. Smith has been watching ABC common stock for several years and feels that ABC will remain neutral or stable for the next year. Based on this assumption, which of the following options positions would allow Mr. Smith to realize the MOST in terms of profits?
[A] Buying a call
[B] Buying a put
[C] Putting on a long straddle
[D] Putting on a short straddle
A
[D] Putting on a short straddle
21
Q
Excise taxes on cigarettes, alcohol, and gasoline secure certain securities issued by a municipality. Which of the following is the MOST appropriate statement regarding this type of municipal issue?
[A] These would be BABs (Build America Bonds).
[B] These would be Special or Additional Assessment Bonds.
[C] These would be Special Tax Bonds.
[D] These would be Tax or Bond Anticipation Notes.
A
[C] These would be Special Tax Bonds.
22
Q
A client has a stock that is currently valued at $40 per share. The quarterly dividend of this stock is $0.10 per share. What is the current yield of this stock?
[A] The current yield cannot be determined with the information provided.
[B] The current yield is 0.25%.
[C] The current yield is 1%.
[D] The current yield is 10%.
A
[C] The current yield is 1%.
23
Q
The secondary market price of a municipal bond would be least likely affected by which of the following?
[A] Changes in tax law
[B] Market conditions
[C] An upgrade in the credit rating of the issuer
[D] The election of new municipal leaders
A
[D] The election of new municipal leaders
24
Q
What determines the tax liability to an individual who surrenders their holding of a variable annuity that is labeled as “non-qualified”?
[A] Tax liability is determined by subtracting the amount which was invested in the annuity from the net proceeds upon surrender.
[B] Tax liability is determined by the capital gains that an investor accumulates in the separate account.
[C] Tax liability is determined by income which is accumulated in the separate account.
[D] Tax liability is determined by the holding period of securities in the separate account.
A
[A] Tax liability is determined by subtracting the amount which was invested in the annuity from the net proceeds upon surrender.
25
Transactions in which of the following would be subject to the FINRA 5% Mark-Up Policy?
[A] Outstanding securities that are not exempt and are sold OTC.
[B] A registered secondary offering of shares
[C] Open-end investment company share sales
[D] A primary offering of securities
[A] Outstanding securities that are not exempt and are sold OTC.
26
One of your clients is an experienced options trader. The client has recently established a trend of buying calls on a broad-based index. Why would this investor be performing these trades?
[A] This would indicate that the investor has a bearish sentiment toward the overall market.
[B] This would indicate that the investor has a bullish sentiment toward the overall market.
[C] This would indicate that the investor feels that interest rates are going to be going up substantially.
[D] This would indicate that the investor feels that interest rates are going to be going down substantially.
[B] This would indicate that the investor has a bullish sentiment toward the overall market.
27
A customer is long 100 shares of XYZ at $60 per share. He then sells 1 XYZ April 60 call at 3. The margin requirement on this transaction is:
[A] $0.00
[B] $250
[C] $1,500
[D] $1,800
[A] $0.00
28
One of your clients regularly trades options. The customer feels that QRS is going to remain relatively stable or have a slight downturn and he decides to sell 1 QRS May 55 call for $2.50 when QRS is at $54.50. About a month later, the customer receives an exercise notice when QRS is trading at $60.75 per share. In terms of the exercise, what price will the client report for tax purposes in relation to the price at which the stock is sold to the buyer of the call?
[A] $52.50 per share
[B] $54.50 per share
[C] $57.00 per share
[D] $57.50 per share
[D] $57.50 per share
29
Subscription warrants are usually issued as part of:
[A] A common stock offering to obtain a higher par value
[B] A preferred stock offering to obtain a lower par value
[C] A debenture offering to obtain a lower interest rate
[D] A convertible bond to obtain a higher interest rate
[C] A debenture offering to obtain a lower interest rate
30
In a leveraged buyout, the acquiring company borrows funds:
[A] using its own assets as security for the loan
[B] using the target company's assets as security for the loan
[C] using unsecured loans
[D] using unsecured and subordinated loans
[B] using the target company's assets as security for the loan
A leveraged buyout is a takeover of a company using borrowed funds. Most often, the target company's assets are used as security for the loans taken out by the acquiring company, which repays the loan out of cash flow from the acquired company.
2.3
31
Exchange Traded Notes provide which of the following to investors?
[A] Protection of the investors principal that was invested
[B] Allows investors access to market sectors that would ordinarily be unsuitable
[C] An equity position in the index
[D] Shares which represent ownership in the issuing bank
[B] Allows investors access to market sectors that would ordinarily be unsuitable
32
One of your customers owns 20 XYZ 6% debentures in their portfolio. The XYZ debentures are convertible with a conversion price of $25. The market value of the bonds is 105, and the common stock is currently trading at $29.50 per share. In this situation, what is the best advice you can give to your customer?
[A] The sale of the debentures at their current market value would be best for the client.
[B] The conversion of the debentures into common and the subsequent sale of the common at its current market price would be best for the client.
[C] The tender of the debentures back to XYZ would be best for the client.
[D] The tender of the debentures back to XYZ in exchange for non-convertible bonds of equal value would be best for the client.
[B] The conversion of the debentures into common and the subsequent sale of the common at its current market price would be best for the client.
33
```
When filing the registration statement with the SEC on an IPO the issuer can also include any securities it intends to issue in upcoming three year period. When this is done the registration of the shares that can be issued in the upcoming three years would be called a
[A] Pending distribution
[B] Shelf registration
[C] preliminary registration
[D] private placement
```
[B] Shelf registration
When securities are registered with the SEC for distribution in the upcoming three year period it is called a Shelf Registration.
6.1
34
One of your clients is an options trader. In looking over the financials and news for Company X, this client feels that Company X common stock will not fluctuate much in price over the next several months. Which options position listed below will provide the MOST PROFIT for this client with this consideration in mind?
[A] Putting on a bullish call spread
[B] Putting on a short straddle
[C] Buying a put option
[D] Buying a call option
[B] Putting on a short straddle
35
A sell order is entered by an agent at a firm with additional instructions. The instructions indicate that the order is to be executed at the opening. This order is not received in a timely fashion by the floor broker, and it cannot be executed at the opening. If this is the case, how is this order handled?
[A] The order will then become a market order
[B] The order will be cancelled
[C] The order is then entered as a limit order with the opening price as the limit.
[D] The order will be executed at the earliest time possible as a market order.
[B] The order will be cancelled
When an order is entered to executed at the "opening", and if it does not reach the floor broker in time for it to be executed at the opening the order will be canceled and the firm and RR will be informed that the order was not executed.
7.2a
36
All of the following positions have unlimited loss potential EXCEPT
[A] short stock-short put.
[B] short straddle.
[C] uncovered call.
[D] uncovered put.
[D] uncovered put.
37
Which of the following bids would be considered stabilizing bids placed by a managing underwriter during a public offering of securities?
[A] Bids at the public offering price
[B] Bids above the public offering price but within 5% of the previous bid
[C] Bids above the public offering price but within 2% of the previous bid
[D] Concurrent bids-one at the current public offering price and one slightly above that price
[A] Bids at the public offering price
Stabilization in a new issue underwriting is the intervention in the market (permitted by the SEC under Regulation M) by the managing underwriter's firm to keep the market price from falling during the offering period. The managing underwriter is permitted to place a bid to buy at or below the public offering price only. Concurrent bids are not permitted.
5.3
38
How often is interest paid on a U.S. Treasury Receipt?
[A] It is paid when the security comes due at maturity.
[B] It is paid on an annual basis.
[C] It is paid on a semi-annual basis.
[D] It is paid on a quarterly basis or four times annually.
[A] It is paid when the security comes due at maturity.
U.S. Treasury Receipts are also known as Zero Coupon Treasury Bonds. These securities function in a similar capacity to zero-coupon bonds. They are issued at a discount and pay all interest at maturity. They do not have coupon payments.
13.4
39
A self-employed middle-aged woman contributes annually to a Traditional IRA. She is unmarried, has two grown children, and has established a trust naming her two children as sole beneficiaries. The woman puts her assets in the trust and names the trust as beneficiary of the Traditional IRA. If she should die, what would happen to her IRA?
[A] IRA assets would be divided evenly between her two children.
[B] IRA assets would be included in the trust and established distributions from the trust to her children would be taxable as ordinary income.
[C] IRA assets would be included in the trust, and her children would be allowed to rollover the distributions into their own IRAs on a tax-free basis.
[D] The IRA would become the property of the Estate and would not be distributed to her children.
[B] IRA assets would be included in the trust and established distributions from the trust to her children would be taxable as ordinary income.
40
Which of the following would NOT be considered a "bullish" options strategy?
[A] An investor establishes a short straddle.
[B] An investor buys a call.
[C] An investor establishes a call spread at a net debit.
[D] An investor sells a put.
[A] An investor establishes a short straddle.
41
```
In a margin account that is restricted, a customer decides to sell stock valued at $8,000, and buy $6,000 worth of another stock on the same day. How much cash would this customer be allowed to withdraw from the account?
[A] 0
[B] $1,000
[C] $2,000
[D] $6,000
```
[B] $1,000
42
Of the following, which offers the MOST accurate description of a municipal bond that is considered "double-barreled"?
[A] These bonds are backed by the unlimited taxing power of a municipality along with the ability of State-level appropriations in the event of default.
[B] These bonds are backed by project revenues and receive additional backing in the form of the moral obligation of the State in which the municipality is located.
[C] These bonds are backed by income received from securities held in a municipality's portfolio, as well as a gross revenue pledge.
[D] These bonds are backed by specific revenues from a project along with the municipality's general obligation pledge.
[D] These bonds are backed by specific revenues from a project along with the municipality's general obligation pledge.
43
Which of the following is allowed by SEC Rule 144A?
[A] Rule 144A allows foreign corporations to buy registered securities.
[B] Rule 144A allows qualified institutional buyers to buy registered securities.
[C] Rule 144A allows qualified institutional buyers to buy unregistered securities.
[D] Rule 144A allows affiliates of the issuer to purchase registered securities.
[C] Rule 144A allows qualified institutional buyers to buy unregistered securities.
44
Which of the following transactions conducted by a member firm for its customers must abide by the FINRA 5% Markup Policy?
[A] Primary offerings of securities
[B] Mutual fund shares
[C] Secondary Offerings of securities
[D] Riskless transactions
[D] Riskless transactions
The FINRA 5% Markup Policy is a guideline for spreads in dealer transactions and commissions in brokerage transactions, including purchasing OTC securities from a client and riskless transactions. It does not apply to any transaction were the public offering price is pre-determined and requires delivery of a prospectus to buyers (e.g., new issues, secondary offerings & mutual fund shares.)
10.8
45
Equity is a term which can be used in the context of all of the following except:
[A] common stock
[B] margin accounts
[C] preferred stock
[D] debenture
[D] debenture
46
One of your new clients with little investing experience is trying to figure out their capital gains and losses for the year. They had capital gains of $6,000 for the year, but had capital losses totaling $10,000 as well. What can the client do in this situation?
[A] The client can deduct the total amount of capital losses, $10,000, from their income and carry a percentage of that forward to the following year as a capital loss.
[B] The client may make a deduction of $10,000 from gross income only.
[C] The client can offset the gains with the losses for a total deduction of $4,000.
[D] The client can deduct $3,000 from gross income and carry $1,000 forward as a capital loss.
[D] The client can deduct $3,000 from gross income and carry $1,000 forward as a capital loss.
47
An RR has identified four investment options for a customer, who is a senior. Which investment option would be considered the most appropriate?
[A] U.S. Government bonds
[B] Deferred variable annuity
[C] U.S. savings bonds
[D] Zero-coupon bonds offered at a deep discount
[A] U.S. Government bonds
48
Which of the following would be the best choice if a client has $30,000 to invest but needs monthly income?
[A] An aggressive growth fund
[B] Blue chip stocks
[C] A sector fund
[D] A money market fund
[D] A money market fund
49
A customer's margin account appears as follows:
$100,000 MV Long
$ 40,000 DB
$ 60,000 EQ
The securities in this customer's account INCREASE in value by $25,000, and the debit balance is decreased by $5,000. After these changes, what is the buying power in the account?
[A] $27,500
[B] $35,000
[C] $55,000
[D] $90,000
[C] $55,000
50
An investor purchases the following bonds, all at a premium above par value:
XYZ 5% non-callable bonds maturing in 15 years
XYZ 5.10% non-callable bonds maturing in 20 years
XYZ 5.25% non-callable bonds maturing in 25 years
Several months after these bonds are purchased, the going rates on bonds have moved an average of 20 basis points. Of this investor's purchases, which will show the largest adjustment in terms of price because of the change in the going rate?
[A] The bonds are all trading in the secondary bond market and will all be affected equally.
[B] The 25-year bonds will be affected the most.
[C] The 15-year bonds will be affected the most.
[D] The bonds are all trading in the secondary bond market and have fixed coupons, so their prices will not be affected by fluctuations in new bond rates.
[B] The 25-year bonds will be affected the most.
51
Assume an investor sells short 100 shares of ABC and while the investor has the short stock position, ABC pays a dividend. The investor:
[A] Owes the dividend to the lender of the stock.
[B] Will Receive the dividend from the lender of the stock.
[C] Will not be involved in the dividend situation in any way.
[D] Will receive the dividend from the company and also from the lender of the stock.
[A] Owes the dividend to the lender of the stock.
52
The negotiated underwriting of municipal securities usually involves all of the following EXCEPT:
[A] a bid form
[B] a legal opinion
[C] an underwriters agreement
[D] a bond purchase contract
[A] a bid form
The bid form is used in a competitive bid underwriting rather than a negotiated underwriting. General obligation (G.O.) bonds are usually awarded by competitive bid. Revenue bonds are usually negotiated.
15.3
53
All of the following accounts should be handled in a conservative manner with conservative investments in accordance with state laws and regulations EXCEPT FOR
[A] the account of a third party estate
[B] the account of a trust
[C] the account of an investment club
[D] the account of a minor handled under UGMA/UTMA guidelines
[C] the account of an investment club
54
Joe is an employee of Municipal Securities Dealer A. He intends to open an account where he wishes to maintain funds and execute transactions with Municipal Securities Dealer B. All of the following are required of Municipal Securities Dealer B, EXCEPT:
[A] Dealer B must abide by guidelines that are given by Dealer A in connection with Joe's transactions within the account at Dealer B.
[B] Dealer B must obtain approval from Dealer A for every transaction that Joe enters at Dealer B.
[C] When Dealer B receives instructions to open the account from Joe, Dealer B must send notification to Dealer A.
[D] Dealer B must send duplicate confirmations to Dealer A for all transactions in the account.
[B] Dealer B must obtain approval from Dealer A for every transaction that Joe enters at Dealer B.
55
While a client was out of town and the registered representative was not able to reach the client, the rep decided to buy a security in the customer's account even though the rep did not have discretionary authority. Later the same day, the rep sold the stock at profit. The following day the rep was able to reach the client and explain what he had done. The client was very happy and took the rep out to dinner. This practice was:
[A] a violation of the rules because the rep executed unauthorized transactions in the customer's account.
[B] acceptable since the client was happy with the profit.
[C] a violation because the client took the rep out to dinner.
[D] acceptable since the client gave the rep approval the next day.
[A] a violation of the rules because the rep executed unauthorized transactions in the customer's account.
56
Uhura is in her mid-20s and wants to open an IRA account at a broker-dealer. She has $5,000 to invest. Her investment objective is growth and her risk tolerance is moderate. She has no previous investing experience and no short-term cash needs. She asks her RR how she should invest these funds. Which of the following asset allocations would be most suitable for Uhura?
[A] 80% in a handful of individual blue chip stocks and 20% in corporate bonds
[B] 75% in diversified stocks, 25% in municipal bonds
[C] 75% in a growth fund, 25% in a balanced fund
[D] 50% stocks, 25% bonds, 25% commodities
57
An investor has a large portfolio of Blue Chip common stocks and expects the market to remain stable or decline slightly. He'd like to increase the rate of return on his portfolio. Which of the following would be the best choice for this investor?
[A] Buy Calls on the portfolio
[B] Write Covered Calls on the portfolio
[C] Establish a Call Spread
[D] Write Covered Puts on the portfolio
[B] Write Covered Calls on the portfolio
58
In analyzing a G.O. bond, which of the following factors would be most important?
[A] A feasibility study
[B] Protective covenants
[C] Budgetary practices
[D] Existing competitive facilities
[C] Budgetary practices
59
Which of the following is a benefit of a DVP/RVP account?
[A] Settlement is relatively safe as securities and cash are exchanged nearly simultaneously.
[B] It eliminates market risks.
[C] Settlement is always two calendar days after the transaction date.
[D] The type of account is readily available to retail customers.
[A] Settlement is relatively safe as securities and cash are exchanged nearly simultaneously.
A DVP/RVP account is generally used by institutional accounts to settle trades electronically (book entry form). It is the safest way to settle trades because the exchange of cash for securities generally happens simultaneously.
60
An investor who purchases a CMO (Collateralized Mortgage Obligation) can expect distributions of cash how frequently?
[A] The investor can expect distributions on a weekly basis.
[B] The investor can expect distributions on a monthly basis.
[C] The investor can expect distributions on a quarterly basis.
[D] The investor can expect distributions on a semi-annual basis.
[B] The investor can expect distributions on a monthly basis.
61
One of your fellow registered representatives wishes to send out an approved worksheet on options. The worksheet must be sent out with, or preceded by, which of the following documents?
[A] Documents including the appropriate disclaimers
[B] Documents related to opening a margin account
[C] Documents related to opening an options account
[D] Documents including the ODD (Options Disclosure Document)
[D] Documents including the ODD (Options Disclosure Document)
62
You have recommended an international mutual fund to one of your clients as a means of further diversifying her portfolio. She's uncertain if the fund meets her investment needs. In order to further support the recommendation to the client, what should you, the RR, do in this situation?
[A] Explain to the client that this type of investment strategy provides a hedge against foreign currency risks.
[B] Inform the client that you have other clients invested in the same fund.
[C] Inform the client that, in general, international funds generate higher returns than domestic funds.
[D] Explain to the client the risks and benefits of holding investments in international mutual funds.
[D] Explain to the client the risks and benefits of holding investments in international mutual funds.
63
Mr. Smith is a 50 year old client of Bob, who is a registered representative. Bob is trying to get Mr. Smith to purchase a non-qualified Deferred Variable Annuity offered by his company. In making this recommendation to Mr. Smith, Bob should first be sure that:
[A] The variable annuity has a death benefit associated with it.
[B] Mr. Smith has already made his maximum contributions into his before-tax retirement plans.
[C] Mr. Smith plans to retire prior to the completion of the surrender period.
[D] The variable annuity has a fixed annuity payment at the time Mr. Smith retires.
[B] Mr. Smith has already made his maximum contributions into his before-tax retirement plans.
Since non-qualified Variable Annuities do NOT offer the before-tax benefits that other before-tax retirement plans offer (such as 401k) the RR should be sure that the customer has made the maximum contributions possible into before-tax retirement plans.
11.3
64
A registered representative buys shares in an initial public offering for a customer. A month later, the share price has declined substantially. The customer is upset. The registered representative offers to personally buy back the shares at the original offering price. Which of the following is TRUE?
[A] This is a violation of FINRA rules against guaranteeing a customer against loss.
[B] This is not a violation of FINRA rules because it constitutes stabilization a new issue.
[C] This is not a violation of FINRA rules because the RR is taking the loss.
[D] This is a violation of FINRA rules because only the firm can buy back the shares.
[A] This is a violation of FINRA rules against guaranteeing a customer against loss.
A registered representative may NOT offer to buy shares from a customer to protect the customer from a loss. This is the same as guaranteeing a customer against a loss. Stabilizing a new issue is permitted by the managing underwriter of the new issue only.
10.9
65
The name for an order to buy or sell a particular security at a particular price in its entirety or not at all is:
[A] A market order
[B] A stop loss order
[C] A fill or kill order
[D] A stop-limit order
[C] A fill or kill order
66
A client effects the following transactions:
Buys 100 shares of QRS at $30 per share
Buys 1 QRS April 40 put at 3
The client exercises the option after substantial market declines in QRS. What is the tax consequence to the client?
[A] The client has a $300 loss.
[B] The client has a $1000 profit.
[C] The client has a $700 profit.
[D] The client has a $1,300 loss.
[C] The client has a $700 profit.
67
During a discussion with a client to determine investment objectives, a client indicates a strong desire to preserve capital. The client also would like to see some current income from their investments. Which portfolio recommendation would BEST suit this customer's stated investment objectives?
[A] The RR recommends a portfolio comprised of an equal mix of junk bonds, highly-rated municipal bonds, and 30-year corporate bonds.
[B] The RR recommends a portfolio comprised of money market funds, short-term debt instruments issued by the Treasury and federal agencies, and T-Bills.
[C] The RR recommends a portfolio comprised of equity securities such as common and preferred stock, as well as a mutual fund focused on large-cap growth stocks.
[D] The RR recommends a portfolio comprised of an international mutual fund, investments in real estate investment trusts, and individual securities issued by foreign corporations.
[B] The RR recommends a portfolio comprised of money market funds, short-term debt instruments issued by the Treasury and federal agencies, and T-Bills.
68
A customer who is about to retire wants to buy a low risk product that will provide a predictable stream of income. Which of the following products is most suitable for his needs?
[A] An immediate fixed annuity
[B] An immediate variable annuity
[C] A deferred fixed annuity
[D] A variable universal life insurance policy
[A] An immediate fixed annuity
69
```
Mr. Smith has been bearish about ABC common stock and decides to sell short 1,000 shares @40 in his margin account. The stock later declines to $35. What is Mr. Smith's equity in his margin account after the decline in the market value of the stock?
[A] $20,000
[B] $25,000
[C] $35,000
[D] $40,000
```
[B] $25,000
70
Under NYSE regulations, what is the minimum maintenance requirement for selling short a $20 marginable security?
[A] $2.50 per share
[B] $5.00 per share
[C] 30% of the market value
[D] 100% of the market value
[C] 30% of the market value
71
Throughout the process of establishing and opening an account for a client, suitability and investment objectives are a primary concern for registered representatives. In order to make determinations regarding these subjects, the RR is required to obtain certain information from the client. Which of the following fall into the category of REQUIRED information?
I. The client's federal tax bracket for the preceding year
II. The client's level of outstanding debt
III. The market value of the client's home
IV. The client's overall net worth
[A] I and II
[B] I and III
[C] II and IV
[D] III and IV
[C] II and IV
72
An investor asks an RR for his opinion on the purchase of 500 shares of a very closely held stock. The investor thinks it has good near term investment potential. He should be advised that
[A] A thin market for such a stock is a major risk factor.
[B] Closely held companies have low growth potential.
[C] He would have no voice in the company's affairs.
[D] He should not buy stock in a closely held company.
[A] A thin market for such a stock is a major risk factor.
73
An issuer can effectively force the conversion of its outstanding callable and convertible bonds by:
[A] Calling the bonds at a redemption price below parity
[B] Declaring a 2 - for- 1 stock split
[C] Decreasing the dividends on the common stock
[D] Refunding the bond with another issue with a higher coupon.
[A] Calling the bonds at a redemption price below parity
74
Which of the following is the MOST accurate description of "beta"?
[A] Beta measures the returns that a company has against the stocks of individual companies both inside and outside of the same sector.
[B] Beta measures the price-to-earnings ratio of one company in relation to the average price-to-earnings ratio of companies on a particular index.
[C] Beta measures the volatility of an individual company in comparison to the volatility of the overall market.
[D] Beta measures the volatility of one class of securities such as common stock against other classes of securities such as bonds, preferred stock, and derivatives.
[C] Beta measures the volatility of an individual company in comparison to the volatility of the overall market.
75
The following are the only account transactions in new margin accounts.
Customer A purchases 1,000 shares of ABC at $20.
Customer B purchases 500 shares of XYZ at $4.50.
What is the total Reg T deposit required for these transactions?
[A] Customer A: $10,000 - Customer B: $2,250
[B] Customer A: $5,000 - Customer B: $1,125
[C] Customer A: $10,000 - Customer B: $2,000
[D] Customer A: $2,000 - Customer B: $2,250
[C] Customer A: $10,000 - Customer B: $2,000
Reg T. is 50% of the purchase price:
Customer A: 1,000 x $20 = $20,000 x 50% = $10,000 deposit required for Customer A's ABC transaction.
Customer B: 500 x $4.50 = $2,250 x 50% = $1,125 but the minimum deposit is $2,000 per Reg T so the required deposit for Customer B's XYZ transaction is $2,000
```
*Margin acc. long:
Reg T is 50% or 2000
*Margin acc. Short:
2.50 if security < 2.50
100% if 2.50<>5
5 if 5<>10
50% if >10
```
76
Which of the following risks is NOT normally a major factor when analyzing ADRs (American Depositary Receipts)?
[A] Risks associated with changes in inflation
[B] Risks associated with changes to legislators and political climate
[C] Risks associated with the call of such securities by the issuers
[D] Risks associated with fluctuations in currency exchange rates
[C] Risks associated with the call of such securities by the issuers
77
A younger client with a moderate amount of funds is considering the purchase of a home in the near-term future. For this reason, the investor wishes to keep their assets as liquid as possible in the event that the right deal on a home comes along. As this client's registered representative, which of the following would carry the LEAST amount of liquidity and therefore be unsuitable for this client?
[A] Investment in bonds and bond funds focused on municipal securities
[B] Investment in equity securities such as preferred stock
[C] Investment in a DPP (Direct Participation Program)
[D] Investment in CDs (Certificates of Deposit) with varying short-term maturities
[C] Investment in a DPP (Direct Participation Program)
78
MSRB Rules dictate that certain aspects of a trade may be modified with the agreement of both parties, while other aspects of a trade may not be modified. Which of the following is NOT permitted to be modified, even if all persons involved in the trade agree?
[A] Determination of who will pay expenses related to shipping certificates, etc.
[B] The various factors which will determine whether or not the delivery of the securities constituted a "good delivery"
[C] The information which is provided on confirmations sent to both sides of the trade
[D] Determination as to where and when the securities will be delivered
[C] The information which is provided on confirmations sent to both sides of the trade
As long as both buyer and seller agree to modified terms, the factors associated with good delivery may be modified. These can include terms, location of delivery, time of delivery, and who pays for shipping. Confirmations are required to be uniform throughout the industry and the information contained on a confirmation is not permitted to be modified.
16.3
79
Which of the following would be considered an INAPPROPRIATE investment in an IRA account?
[A] Bonds of a municipality that carry a AAA-Rating
[B] Bonds of a corporation that carry an A-Rating
[C] Common stocks of blue-chip companies
[D] Mutual funds focused on growth
[A] Bonds of a municipality that carry a AAA-Rating
80
Which of the following is TRUE of an open-end investment company?
[A] The transfer agent selects the fund's Investment Advisor.
[B] Shareholders of a given fund can vote to list on an exchange.
[C] Capital gains must be distributed to shareholders on an annual basis.
[D] Undistributed capital gains are taxable to the investment company.
[C] Capital gains must be distributed to shareholders on an annual basis.
81
An older investor in or nearing retirement would generally want a greater percentage of their portfolio invested in which of the following?
[A] common and preferred stocks
[B] growth mutual funds
[C] equity options
[D] fixed income securities
[D] fixed income securities
82
Which of the following would be a scenario in which a Durable Power of Attorney would need to be submitted at a broker-dealer firm?
[A] When the executor of a client's estate is attempting to liquidate account assets after the death of the client.
[B] Upon the opening of any account where margin functionality is going to be permitted.
[C] In instances when a husband and wife wish to open a joint account with rights of survivorship.
[D] Where a third party is to manage and have full legal authority in relation to a client's affairs and accounts at the firm.
[D] Where a third party is to manage and have full legal authority in relation to a client's affairs and accounts at the firm.
83
If a long call option is exercised by the holder, the holding period on the acquired securities begins:
[A] on the date the call is exercised
[B] the day after the option is exercised
[C] the day the call option was acquired
[D] the day after the call option was acquired
[B] the day after the option is exercised
The holding period on stock purchased by exercising a call begins on the day after the call is exercised.
17.1
84
When determining the suitability of an investor to invest in a hedge fund, all of the following would be relevant EXCEPT
[A] the net worth of the investor.
[B] whether or not the fund's charges will be based on performance of the fund.
[C] the liquidity requirements of the customer.
[D] the historical returns produced by the hedge fund.
[D] the historical returns produced by the hedge fund.
In determining suitability for an investor, you would look at the investor's net worth. Investors require high net worth to invest in hedge funds. Also, you need to make sure the investor is comfortable with the fees charged by hedge funds. Do they want to pay the performance-based fees? Can the investor afford the fees? Lastly, you need to make sure the investor is comfortable with the lack of liquidity.
Only after you feel hedge funds are suitable, then you would look at the historical returns. This will be important when choosing a particular hedge fund, but is not part of determining the suitability of whether hedge fund investing is suitable for a given individual.
4.3
85
An analyst is evaluating a general obligation municipal bond. All of the following situations would be considered to have a negative affect on the bond EXCEPT?
[A] unfunded pension liabilities are increasing
[B] the issuance of long-term debt to satisfy current debt service on outstanding debt
[C] a diminishing tax base
[D] a stable level of outstanding debt when property values are appreciating
[D] a stable level of outstanding debt when property values are appreciating
86
If an investor is seeking capital gains and income from their investments, what type of investment would BEST suit these objectives?
[A] The purchase of a block of growth stock
[B] The deposit of funds into a money market account
[C] The purchase of a mutual fund heavily invested in equity securities.
[D] The purchase of STRIPs on U.S. Treasury Securities
[C] The purchase of a mutual fund heavily invested in equity securities.
87
All of the following are characteristics of REITs EXCEPT:
[A] They are publicly-traded securities and can be traded on an exchange or OTC.
[B] They generally own income-producing properties like apartment buildings.
[C] They distribute 90% of their income to shareholders.
[D] They must be registered under the Investment Company Act of 1940.
[D] They must be registered under the Investment Company Act of 1940.
REITs are not investment companies and do not have to be registered under the Investment Company Act of 1940.
1.8
88
One of your clients has been pleased with your recommendations and now wants to allow you, their RR, discretionary authority over their account. The client tells you that they have filled out and sent the appropriate forms to give written discretionary authority but the firm has not yet received the paperwork. An earnings report comes out on one of the securities in the customer's account and you expect a drop in price on the stock. You try to call the customer about the report, but the customer does not answer the phone. Assuming that the paperwork is in the mail, what action should you take in this situation?
[A] Since the paperwork is in the mail, you should place an unsolicited order in the account to sell the security and avoid losses.
[B] Though it may result in a loss in the customer's account, you should hold off on taking action until you reach the customer or receive the paperwork.
[C] Since the paperwork is in the mail, you should contact the nearest family member to the client and inform them of the situation to get permission to sell the security and avoid losses.
[D] You should place a discretionary order in the account and mark it as solicited so the customer avoids losses.
[B] Though it may result in a loss in the customer's account, you should hold off on taking action until you reach the customer or receive the paperwork.
89
A customer's margin account is as follows:
$20,000 Mkt SMA $1,000
16,000 DB
$ 4,000 EQ
```
The NYSE minimum maintenance call would be met with a deposit of which of the following?
[A] $10,000
[B] $6,000
[C] $1,000
[D] 0
```
[C] $1,000
90
Registered representatives are responsible for obtaining certain client information prior to allowing clients to invest in certain securities. Prior to an investor signing a limited partnership's subscription agreement, the RR should know each of the following about the customer EXCEPT:
[A] The RR needs to know the client's sentiment toward loss of invested capital.
[B] The RR needs to know the client's tax ID or SSN.
[C] The RR needs to know whether the client will be accepted into the partnership by the general partner of the limited partnership.
[D] The RR needs to determine the customer's needs related to investments with tax advantages.
[C] The RR needs to know whether the client will be accepted into the partnership by the general partner of the limited partnership.
91
A trader buys 10 OEX 300 call options at 4.50. The OEX Index is currently selling at 290. How much must the trader pay for the option?
[A] $3000
[B] $4,500
[C] $30,000
[D] $45,000
[B] $4,500
92
An individual walks into your branch and wishes to open an account. In this account, the individual wishes to trade options and indicates that she would like to be approved for the sale of uncovered puts and calls. Industry regulations dictate that this customer must receive an Options Disclosure Document in what time frame?
[A] The ODD must be provided when the margin agreement is provided and signed.
[B] The ODD must be provided no later than when the confirmation of the first transaction in the account is delivered to the client.
[C] The ODD must be provided to the new client no later than the third business day following their first transaction.
[D] The ODD must be provided to the new client before the client is approved for options trading.
[D] The ODD must be provided to the new client before the client is approved for options trading.
93
In terms of features that would limit the credit risk that would apply to a municipal bond issue, which of the following would do so most effectively?
[A] Being backed by general obligation
[B] A legal opinion that is un-qualified or non-qualified
[C] An issue which is escrowed to maturity
[D] A putable bond feature at par value at one year
[C] An issue which is escrowed to maturity
94
When a registered representative is trying to determine if a stock is a growth stock, public utility, or blue chip, they would most likely look at the:
[A] Earnings per share
[B] Current Ratio
[C] Dividend Payout ratio
[D] Advance/Decline ratio
[C] Dividend Payout ratio
95
An investor's investment objectives are related to all of the following circumstances EXCEPT:
[A] time horizon
[B] marital status
[C] level of education
[D] number of dependents
[C] level of education
96
An investor buys 100 shares of ABC at $50 per share and sells one ABC July 55 call for a premium of $2. What is the maximum possible loss for this investor?
[A] $4,500
[B] $4,800
[C] $5,000
[D] $5,500
[B] $4,800
97
A client wishes to diversify her portfolio of municipal bonds by quality. In order to perform this task, the RR's BEST approach would be to analyze what?
[A] Each bond's credit rating
[B] Each issuer's location
[C] The intended use of each bond's proceeds
[D] The type of bond being issued by the municipality
[A] Each bond's credit rating
98
One of your clients owns 500 shares of BCD stock and is concerned with tax consequences associated with their investments. BCD announces a 5% stock dividend on their common stock and your client will be receiving 25 additional shares. The client calls in and asks how this stock dividend will be treated for tax purposes. Which of the following is TRUE?
[A] The stock dividend is not a taxable event for this client at this time.
[B] The stock dividend is taxable as ordinary income, but may qualify for a reduced tax rate because of the client's long-term holding period.
[C] The stock dividend is taxable as a capital gain to the client, but may qualify for a reduced tax rate because of the client's long-term holding period.
[D] The stock dividend is fully taxable as ordinary income to the investor in the year received.
[A] The stock dividend is not a taxable event for this client at this time.
99
Which of the following would best describe the term "Mark to the Market"? The difference between the
[A] market value of a security and the sale price of the security.
[B] market value of a security and the contract value of a security.
[C] market value of a security and the Reg T requirements of a margin account.
[D] market value of a security and the minimum maintenance requirements in a margin account.
[B] market value of a security and the contract value of a security.
100
Which of the following documents would not be required when a corporation wants to open a cash account at a broker-dealer?
[A] Corporate Charter
[B] Corporate Resolution
[C] Margin Agreement
[D] Corporate By-Laws
[C] Margin Agreement
In reading the question carefully, we see that the corporation wants to open a "Cash" account, therefore a Margin Agreement would not be required in order to open the account. All other documentation is normally required when a corporation opens a new account.
101
Jimmy is a client of yours and he has some holdings in U.S. T-Bonds. Over the past year, he received $500 in interest from these bonds. His accountant has informed him that he is in the 28% tax bracket with all sources of income considered. He lives in the State of California, so his State Income Tax Rate is 9%. What kind of tax liability is Jimmy looking at in relation to the interest received from his U.S. T-Bonds?
[A] Jimmy has a tax liability of $185.00 total on the interest received.
[B] Jimmy has a tax liability of $140.00 total on the interest received.
[C] Jimmy has a tax liability of $45.00 total on the interest received.
[D] Jimmy has no tax liability on the interest received.
[B] Jimmy has a tax liability of $140.00 total on the interest received.
Here, we are discussing U.S. Treasury Bonds. Remember that these bonds ARE subject to Federal Income Tax, but are NOT subject to State and Local Taxes. For this reason, the Federal Tax Rate of 28% will apply to the $500 in interest received. $500 x 0.28 (28%) = $140.00 There is no tax liability at the State level.
102
A corporation's directors have declared a cash dividend on common stock and have specified the stock record date. Based on the above information which one of the following is incorrect?
[A] The ex-date will be set one business day prior to the stock record date.
[B] The stock record date will determine who is entitled to receive the dividend.
[C] Current liabilities of the corporation are increased by the amount of dividends declared on the declaration date.
[D] Incorrect dividend payments are adjusted with due bills.
[B] The stock record date will determine who is entitled to receive the dividend.
103
When a corporation is investing its funds, which of the following types of securities provides the best tax incentives for the corporation?
[A] Convertible fixed income debt securities
[B] Treasury securities
[C] Corporate debt securities
[D] Corporate preferred stock
[D] Corporate preferred stock
When a corporation invests in the equity securities of other corporations, the dividends from those securities are 50% excluded from taxable income. Therefore, only 50% is subject to income tax. Preferred stock provides the greatest level of income and appreciation, along with tax benefits among the choices offered.
17.1
104
A single taxpayer with an existing IRA elects to participate in his company's newly-formed pension plan. His adjusted gross income is $200,000. Which of the following is true of this employee's situation?
[A] No contributions of any kind can be made to an IRA.
[B] Contributions can continue as before on a tax-deductible basis.
[C] After-tax contributions may be made to an IRA by the taxpayer.
[D] The IRA must be closed and the entire amount withdrawn immediately.
[C] After-tax contributions may be made to an IRA by the taxpayer.
After-tax contributions up to $6,000 (2021) may be made to an IRA by the taxpayer participating in his company's pension plan. This maximum amount is unchanged from 2020.Even though you decide to participate in your company's pension plan, you can still make contributions to your own personal IRA. But you cannot take a deduction for the contribution on your tax return. The IRA contribution would have to be made "after-tax."
105
According to SEC rules, before a broker-dealer can mark a sell order "long", the customer entering the order must have:
[A] a short against the box position
[B] a net zero position
[C] a net short position
[D] a net long position
[D] a net long position
106
Mrs. Jones calls and wants to place an order in her husband's account because he is out of town and cannot make the call himself. The registered representative could accept the order
[A] under no circumstances
[B] without restriction since the couple are married
[C] only if a trading authorization was signed by Mr. Jones
[D] only if Mrs. Jones signs a letter of authorization
[C] only if a trading authorization was signed by Mr. Jones
107
Which of the following would NOT be permitted when dealing with illustrations pertaining to yields or income levels in relation to mutual funds and variable annuities?
[A] Illustrations of annualized yields
[B] Illustrations pertaining to current yields
[C] Illustrations of projected earnings and yields
[D] Illustrations of income and yields for the preceding 5-year period
[C] Illustrations of projected earnings and yields
108
Which of the following retail communications would require approval by the designated principal before it could be sent to clients?
[A] Annual Reports
[B] A company's 8-K filing
[C] Prospectus
[D] Advertising
[D] Advertising
109
All of the following would be considered to be a benefit to investors purchasing ETNs EXCEPT:
[A] No annual tax since ETNs do not pay interest or dividends
[B] Investor fees accumulate annually
[C] No tracking errors
[D] Participation in market sectors ordinarily not accessible to many investors
[B] Investor fees accumulate annually
ETNs provide investors with the ability to invest in market sectors that would ordinarily be deemed unsuitable including commodities, currencies, emerging markets, and strategies. Since the investor who owns an ETN with the issuing bank they are not subject to tracking error as with an ETF. Since ETNs do not pay annual interest or dividends there is no annual tax and the participation in the gains would later be treated as a capital gain or loss to the investor, generally long-term. Investor fees would NOT be considered a "benefit" to the investor purchasing an ETN.
110
```
MSRB rules state that the MOST a person may give in any given year to one person is?
[A] A gift or gratuity of $50
[B] A gift or gratuity of $100
[C] A gift or gratuity of $150
[D] A gift or gratuity of $500
```
[B] A gift or gratuity of $100
111
Which of the following is measured by a mutual fund's expense ratio?
[A] The mutual fund's profitability
[B] The mutual fund's operating costs
[C] The mutual fund's dividend payout percentage
[D] The mutual fund's stability
[B] The mutual fund's operating costs
112
A client decides to buy 1 ABC March 50 call @ 4 when ABC is at 46. Later ABC declines to 40 and the call expires unexercised. The client would report which of the following on his tax return?
[A] $400 capital gain on the transaction
[B] $400 capital loss on the transaction
[C] $400 ordinary income which would be fully taxable
[D] $400 ordinary loss on the transaction
[B] $400 capital loss on the transaction
113
A client is interested in investing in the real estate sector, but shows great concern about the possibility of depreciation within the sector and more specifically within certain geographic areas. What recommendation should an RR handling this client's account make in relation to achieving the HIGHEST amount of diversification in real estate-related investments?
[A] The client should invest in securities issued by the Federal National Mortgage Association (FNMA).
[B] The client should invest in ETFs that are issued on a REIT index.
[C] The client should focus investments in one REIT.
[D] The client should invest in securities issued by the Government National Mortgage Association (GNMA).
[B] The client should invest in ETFs that are issued on a REIT index.
114
The factor listed below which would have a direct impact on the alpha of a particular stock would be:
[A] Investors on a general scale have changed their minds from being pessimistic about the market to being optimistic.
[B] The company whose stock is in question has made significant changes to the management strategy for the upcoming year.
[C] With recent over-buying in the technology sector, the market has now corrected itself and technology stocks have come back to reasonable levels.
[D] The index where the company is listed has been on a downward trend.
[B] The company whose stock is in question has made significant changes to the management strategy for the upcoming year.
115
Which of the following is NOT a factor that would affect the amount of an underwriting spread in a securities offering?
[A] The profitability of the managing underwriter
[B] The size of the issue
[C] The type of security involved
[D] The business history of the issuer
[A] The profitability of the managing underwriter
116
Which of the following types of orders are always entered below the current market price of the stock?
[A] Sell Limits and Buy Stops
[B] Sell Limits and Sell Stops
[C] Buy Limits and Buy Stops
[D] Buy Limits and Sell Stops
[D] Buy Limits and Sell Stops
117
An investor who holds a variable annuity decides to annuitize and start receiving monthly annuity payments. The client is currently 65 years of age and the variable annuity is non-qualified. What can this investor expect to pay in terms of tax liability?
[A] The 10% penalty on early withdrawals will apply.
[B] The monthly payments will be partially taxable on earnings in the annuity and will be partially tax-free with regards to principal that was invested in the variable annuity.
[C] The portion of payments that was principal that was invested in the variable annuity will be fully taxable.
[D] The full amount of payout each month will be fully taxable.
[B] The monthly payments will be partially taxable on earnings in the annuity and will be partially tax-free with regards to principal that was invested in the variable annuity.
118
REITs (Real Estate Investment Trusts) have which feature?
[A] REITs pass profits and losses on to their shareholders.
[B] 90% of all investment income must be passed on to shareholders in order to ensure special tax treatment.
[C] Any profits passed on to shareholders of a REIT are not taxable until the REIT shares are sold.
[D] Income received is exempt of federal taxation.
[B] 90% of all investment income must be passed on to shareholders in order to ensure special tax treatment.
119
Which of the following communications between a registered representative and individual investors would be considered a retail communication according to FINRA?
[A] During the course of a business day, a registered representative composes a mass instant message to more than 25 prospects and sends the message on an instant messaging system.
[B] Over a 30-day period, a registered representative sends one specific prospect an email which is personalized in nature and addresses the specific client's needs.
[C] During the course of a business day, a registered representative sends one specific prospect an instant message using an instant messaging system.
[D] In one business day, a registered rep sends out a hard copy summary of investment highlights regarding a stock recommendation to fewer than 25 current customers only.
[A] During the course of a business day, a registered representative composes a mass instant message to more than 25 prospects and sends the message on an instant messaging system.
120
Which of the following BEST describes what earnings coverage means when dealing with a revenue bond for a municipality?
[A] The term describes available revenue that the issuer can use to pay debt service.
[B] The term describes the funds set aside to replace or repair the facility.
[C] The term describes the funds that an issuer sets aside in a sinking fund.
[D] The term describes the amount of insurance carried to cover catastrophic events that may damage or destroy the facility.
[A] The term describes available revenue that the issuer can use to pay debt service.
Debt Service Coverage generally comes from the municipalities earnings and includes the amount a municipality set aside to meet fixed annual charges on bonds out of revenues.
14.3
121
FINRA regulations apply to communications with the public and advertising by broker-dealer firms. Of the following communications, which would be labeled as an advertisement and would have to abide by advertising regulations?
[A] A web log (blog) which has been set up for established clients of the firm and requires a password to view pages.
[B] A listing in a local phone book which contains a description of the firm and various services provided by the firm.
[C] A letter following a specific form which is sent to a limited group of potential clients which discusses the services provided by the firm.
[D] A report prepared by the firm's research department which discusses various banks in the area and is only sent to existing clients of the firm.
[B] A listing in a local phone book which contains a description of the firm and various services provided by the firm.
Advertising is information disseminated to the public over which the broker-dealer does NOT have "control" over who sees the information. A broker-dealer would not have control over who might see the listing in the phone book, but they would be able to control each of the other forms of communication.
10.16
122
A registered representative recommends that a client purchase shares of a mutual fund today rather than tomorrow because the fund shares will go ex-dividend tomorrow. The registered representative explains that if the client waits until tomorrow to purchase the shares, the client will not receive the dividend. Such a recommendation by the registered representative is:
[A] Allowed, because shares purchased on or after ex-date do not receive dividends and are not in the client's best interest.
[B] Prohibited, because such recommendation is selling dividends and is not in the client's best interest.
[C] Not regulated because it would have no effect on the client's potential position.
[D] Acceptable, provided it is first approved in writing by the registered representative's branch manager.
[B] Prohibited, because such recommendation is selling dividends and is not in the client's best interest.
123
When a portfolio is established which consists of 50% bonds, 10% equities and 40% money market instruments it would be best suited for which of the following investors?
[A] a single 45 year old investor who owns his own small business
[B] a couple nearing retirement
[C] a young married couple investing in their 3 year old child's college fund
[D] a single 25 year old with sizeable income and assets
[B] a couple nearing retirement
124
A securities analyst or broker-dealer issuing a research report on a certain company may not provide any of the following information to the company prior to distribution of the reports EXCEPT:
[A] the stock price target
[B] the rating and recommendation
[C] the research summary
[D] factual information for verification
[D] factual information for verification
125
A married couple is interested in investing in fixed income securities primarily to save for their one-year-old's college education expenses. They are not interested in receiving current interest income. They ask their RR for recommendations. Which of the following would be the most appropriate recommendation given this objective?
[A] High-yield bonds
[B] Zero coupon bonds
[C] Blue chip stocks
[D] Equipment trust certificates
[B] Zero coupon bonds
126
A stock traded on Level 1 NASDAQ as follows:
ABCD 49 +.50 B 48.84 A 49.09 V13.000 12:00p
If your customer buys 100 shares of ABCD as an agency transaction, the customer would have paid how much per share?
[A] 48.84
[B] 48.84 plus a commission
[C] 49.09
[D] 49.09 plus a commission
[D] 49.09 plus a commission
When a customer buys a stock, they will pay the Ask price (A) plus a commission if the trade was done as an agency trade. When a customer sells a stock, they would receive the Bid (B) price.
7.5b
127
A Joint Account With Rights of Survivorship, established for a husband and wife, would have all of the following characteristics EXCEPT:
[A] Both the husband and wife may place orders to trade in the account.
[B] A Consent Agreement must be signed by both the husband and wife so that checks may be made payable to either party.
[C] A Margin Agreement would have to be signed by both the husband and wife if margin functionality was part of the account.
[D] Should either party to the account die, the surviving party would get complete control of the account.
[B] A Consent Agreement must be signed by both the husband and wife so that checks may be made payable to either party.
128
A branch office manager has instructed office personnel to clean out several storage closets and get rid of old customer documentation that no longer needs to be retained. Which of the following is TRUE regarding record retention for customer information?
[A] Broker-dealer firms are required to keep customer records for the opening of all accounts, both existing and closed, until the broker-dealer firm no longer exists.
[B] Records related to opening of accounts must be retained for 6 years from the date that the account was opened.
[C] Records related to opening of accounts must be retained for 6 years beyond the date that the account was closed.
[D] Broker-dealer firms are required to keep all customer records for 3 years, after which records may be disposed.
[C] Records related to opening of accounts must be retained for 6 years beyond the date that the account was closed.
129
A specified group of stocks is combined and a mathematical figure is used to indicate the value of this group of stocks as a whole. Collectively, what is this group of stocks called?
[A] This describes an index of securities.
[B] This describes the beta coefficient of the market.
[C] This describes the alpha of the market
[D] This describes a resistance level used for securities analysis.
[A] This describes an index of securities.
130
A single mother has savings to cover for the first two years of her child’s college education, which is expected to begin in five years. She wants to invest this money to earn a return but wants minimal risk. Which of the following would be her BEST choice?
[A] A global fund comprised mostly of equities would best suit the customer's needs.
[B] The mother should put the money into a sector fund focusing on private sector education.
[C] A sector fund focusing on technology securities would best suit the customer's needs.
[D] The mother should put the money into a corporate bond fund that contains only triple A-rated issuers.
[D] The mother should put the money into a corporate bond fund that contains only triple A-rated issuers.
131
A client purchased 200 shares of ABC for $22,500 two years ago. Over the next few years the client sold ABC call options for a total of $1,500. All the calls expired worthless. For tax purposes, the cost basis for the 200 shares of ABC is
[A] $22,500.
[B] $21,000.
[C] $23,250.
[D] $24,000.
[A] $22,500.
132
A registered representative gets an order from a husband to trade in his wife's account. The registered representative:
[A] May accept the order with the wife's verbal authorization
[B] May accept the order if it is consistent with the wife's investment objectives
[C] May not accept the order without the wife's written authorization
[D] May not accept the order under any circumstances
[C] May not accept the order without the wife's written authorization
133
Most CMO's, Collateralized Mortgage Obligations, as an investment have all of the following risks EXCEPT:
[A] The risk that mortgages will be paid off early
[B] The risk that interest rates will fluctuate and investors may be stuck with a lower return
[C] The risk that inflation will make the investment less profitable
[D] The risk that the CMOs will go into default
[D] The risk that the CMOs will go into default
134
Which of the following may a U.S. investor use to offset taxes paid on dividend income earned from owning foreign stocks?
[A] Tax-Exempt Status
[B] Foreign Tax Credit
[C] Tax Lien
[D] Residual Value
[B] Foreign Tax Credit
