Final 2 Flashcards
One of your clients is a recently-retired individual who relies heavily upon the current return on his fixed-income portfolio for living expenses, vacations, and other expenditures. Which of the following investments is LEAST suitable for this individual?
[A] US Treasury Bonds with varying maturities through the end of the client’s time horizon
[B] Non-callable, non-convertible bonds issued by a blue-chip company with maturities ranging to the end of the client’s time horizon.
[C] Callable, non-convertible bonds issued by a blue-chip company with maturities ranging to the end of the client’s time horizon, but call dates as early as this year.
[D] A balanced portfolio of non-callable, convertible bonds issued by blue-chip companies with maturities to the end of the client’s time horizon and preferred stocks from the same issuers.
[C] Callable, non-convertible bonds issued by a blue-chip company with maturities ranging to the end of the client’s time horizon, but call dates as early as this year.
All of the following statements regarding non-qualified deferred compensation plans are false EXCEPT
[A] Any deferred compensation must be held at a bank in escrow.
[B] A special bank account must be opened in which the employee will deposit any taxes that would be due when the compensation is received.
[C] Default on the deferred compensation plan could occur if the employer’s business fails.
[D] Proper documentation must be sent to the IRS for review and approval.
[C] Default on the deferred compensation plan could occur if the employer’s business fails.
If a licensed registered representative resigns from their position at a broker-dealer, how many years does that person have to reinstate their licenses without having to re-test?
[A] 6 months from the filing date of Form U-5
[B] 12 months from the filing date of Form U-5
[C] 2 years from the filing date of Form U-5
[D] 4 years from the filing date of Form U -5
[C] 2 years from the filing date of Form U-5
An investor sells short 100 shares of ABC common stock at 50 on June 5th. On December 10th of the same year, the investor buys 100 shares of ABC common stock at 40 and delivers the stock to cover the short sale. The federal income tax treatment of this transaction is:
[A] A long-term capital gain
[B] A short-term capital gain
[C] A long-term capital loss
[D] A short-term capital loss
[B] A short-term capital gain
An investor is long 1 OEX Aug 500 put @10 when the index is at 550. The index closes at 450. The investor decides to exercise his option. What will he get at settlement?
[A] $10,000
[B] $5,000
[C] $50,000
[D] 5,000 shares.
[B] $5,000
All of the following are requirements to become a registered representative of a member firm EXCEPT:
[A] Pass a qualification exam
[B] Be covered under a fidelity bond
[C] Agree in writing to allow a background check
[D] Agree in writing to settle all disputes about securities by lawsuit in the federal courts
[D] Agree in writing to settle all disputes about securities by lawsuit in the federal courts
The “beta” of a particular fund is a measure of the
[A] fund’s return that exceeds the current Treasury Bill rate.
[B] volatility of the fund in relation to a designated benchmark index such as the DJIA or the S&P 500.
[C] fund’s current performance compared to its past performance.
[D] risk of default by debt securities in the fund portfolio.
[B] volatility of the fund in relation to a designated benchmark index such as the DJIA or the S&P 500.
A net revenue pledge provision in a municipal revenue bond issue typically provides for revenue to be allocated first to which of the following?
[A] debt service
[B] sinking fund
[C] operations and maintenance
[D] reserve funds
[C] operations and maintenance
The “third market” refers to:
[A] The original issuance market.
[B] The exchanges & over the counter markets.
[C] Trading exchange listed securities over the counter.
[D] Trading large blocks of securities between institutional investor.
[C] Trading exchange listed securities over the counter.
At what time must a firm provide an Options Disclosure Document (ODD) to a customer?
[A] Within one business day of the first options trade in the account.
[B] No later than 2 business days after the first options trade in the account.
[C] No later than 15 business days after receiving the customer’s account application.
[D] At or before the approval of the account for options trading.
[D] At or before the approval of the account for options trading.
When a municipal bond is purchased at a premium, the premium is decreased each year by the same amount until the bond reaches maturity. This reduction in the premium is known as [A] double declining accretion [B] straight line amortization [C] current yield amortization [D] straight line accretion
[B] straight line amortization
Which of the following statements about market-on-close orders on the NYSE is true?
[A] They may be cancelled at any time.
[B] Once entered they may not be cancelled.
[C] They may not be cancelled after 3:58 pm EST.
[D] They must be received from the broker-dealer by 3:00 pm EST.
[C] They may not be cancelled after 3:58 pm EST.
Market-on-close orders are intended to be executed as close as possible to the close of trading for the day. The NYSE rules require that the order from the broker-dealer by 3:50pm EST and that it can’t be canceled or reduced after 3:58 p.m.
FINRA rules govern gifts and gratuities that are accepted by registered representatives and member firms. Which of the following would violate those rules?
[A] All representatives at a member firm who sell a specific mutual fund receive a mouse pad from the fund that is valued at less than $10.
[B] A mutual fund underwriter is putting on a sales seminar at their central office and offers to pay for a portion of the travel expenses of new hires at FINRA member firms in order that they may attend.
[C] A mutual fund gives away all-inclusive 7-day cruises to the location of the salesperson’s choice if the salesperson sells a specified large volume of fund shares.
[D] A fund’s wholesale representative takes a FINRA member office manager and her husband out to dinner.
[C] A mutual fund gives away all-inclusive 7-day cruises to the location of the salesperson’s choice if the salesperson sells a specified large volume of fund shares.
Using an annuity to fund a qualified retirement plan:
[A] is unsuitable under any circumstances
[B] is suitable if it is a fixed annuity but is unsuitable if it is a variable annuity
[C] is unsuitable because the earnings in both the annuity and the qualified retirement plan are tax deferred and are therefore redundant
[D] may be suitable because the annuity provides a guaranteed lifetime income during retirement and because of the death benefits provided.
[D] may be suitable because the annuity provides a guaranteed lifetime income during retirement and because of the death benefits provided.
An annuity is a permitted investment in a qualified retirement plan, whether it be a fixed annuity or a variable annuity. The redundancy of the earnings tax deferral doesn’t make an annuity unsuitable for a plan. The guaranteed lifetime income and the guaranteed death benefits may make annuities a suitable investment for the plan.
All of the following positions would provide a hedge against a decline in the market value of a common stock portfolio EXCEPT? [A] Buying Put options [B] Selling short against the box [C] Buying Call options [D] Selling covered call options
An investor with a large portfolio of equity securities wants to write covered calls against his portfolio. All of the following are true about this type of strategy EXCEPT?
[A] The tax consequences with regards to any premiums received and the cost basis of the stock should be reviewed.
[B] This strategy will work best during a Bullish market
[C] The investor’s profit on the long stock would be limited to the strike price of call options written against the portfolio of stock
[D] This is considered to be a conservative option strategy
[B] This strategy will work best during a Bullish market
Covered Call writing is generally used when a neutral or down market is expected. If the investor felt bullish about the market they should not write covered calls because they would then limit their participation in the up move their long stock positions to whatever the strike price is on the calls that they wrote.
Which of the following characteristics would be beneficial for an employer if the employer decided to use a non-qualified deferred compensation retirement plan for employees?
[A] The vesting periods for this type of plan are typically faster than for other types of plans.
[B] In the event that an employee is terminated, benefits earned up to that point may be forfeited.
[C] Such plans require inclusion of all employees.
[D] These plans place fiduciary responsibilities on employers and come along with disclosure and reporting requirements.
[B] In the event that an employee is terminated, benefits earned up to that point may be forfeited.
A benefit for employers would be the forfeit of earned benefits, which would absolve the employer of certain obligations in the event that an employee was terminated. Each of the other characteristics listed either is not a characteristic of this type of plan, or would not be beneficial to employers.
An investor has an equity portfolio consisting of domestic companies. Although the U.S. economy is stable, the economy overseas, particularly in Asia, is booming. Which of the following equity investments should be added to the investor’s portfolio to benefit from the economy overseas?
[A] Gold mining company stocks
[B] Domestic technology stocks
[C] American Depositary Receipts
[D] Domestic utility stocks
[C] American Depositary Receipts
Interest on which of the following securities is exempt from federal income tax?
[A] U.S. Treasury bills
[B] U.S. Government agency bonds
[C] Municipal bonds
[D] Commercial paper
[C] Municipal bonds
Which option is in-the-money?
[A] A put contract with a strike price that is higher than the market price of the underlying common stock.
[B] A put contract with a strike price that is lower than the market price of the underlying common stock.
[C] A call contract with a strike price that is higher than the market price of the underlying common stock
[D] A call contract with a strike price that is equal to the market price of the underlying common stock.
[A] A put contract with a strike price that is higher than the market price of the underlying common stock.
All of the following would be considered to be a plan fiduciary under ERISA except:
[A] the custodian in charge of plan assets
[B] the tax preparer for the plan
[C] the individual selecting the plan’s IA
[D] the plan’s IA
[B] the tax preparer for the plan
All of the following characteristics of the Uniform Transfers to Minor Act (formerly the Uniform Gift to Minors Act) are true EXCEPT:
[A] The donor may be the custodian
[B] Only an adult may make a gift
[C] Custodial property may only be used for the benefit of the minor
[D] Securities in a custodial account may be held in a margin account.
[D] Securities in a custodial account may be held in a margin account.
Why does the exercise of warrants cause dilution?
[A] It decreases the total number of outstanding shares.
[B] It increases EPS.
[C] It decreases total revenues.
[D] It increases the total number of outstanding shares.
[D] It increases the total number of outstanding shares.
An ABC 10% bond closed at 101 3/8, down 3/4 for the day and had a current yield of 9.87%. What would have been the current yield of this bond if it had been purchased on the previous trading day?
[A] 9.87%
[B] higher than 9.87%
[C] lower than 9.87%
[D] 10%
[C] lower than 9.87%
A trader buys an ABC June 40 call for 3 when ABC stock is trading at 35. If the stock rises to 50 and the trader exercises the call, which of the following is true:
[A] He realizes a reportable gain of $10 per share
[B] He realizes a reportable gain of $7 per share
[C] He owns a stock with a cost basis of $37 per share
[D] He owns a stock with a cost basis of $43 per share
[D] He owns a stock with a cost basis of $43 per share
Concerning e-mails, or electronic communications being sent to clients, all of the following are FALSE EXCEPT:
[A] As long as the number of clients receiving the e-mail is 25 or fewer existing clients, principal approval is not necessary.
[B] As long as the sender of the electronic communication is properly trained, review is not necessary at anytime before such communications are sent.
[C] Since e-mail is not considered a formal form of communication, no review is ever necessary.
[D] All E-mails must be reviewed prior to issuance by a principal.
[A] As long as the number of clients receiving the e-mail is 25 or fewer existing clients, principal approval is not necessary.
Which of the following types of income would NOT be considered “earned income” for federal tax purposes?
[A] A profit that results from the sale of securities
[B] An hourly wage from a construction job
[C] A salary and an annual bonus received for executive-level work
[D] Fees received by an independent contractor for consulting services
[A] A profit that results from the sale of securities
All of the following are rights of a common stockholder EXCEPT for the right to
[A] vote on important matters such as the Board of Directors.
[B] receive fixed cash dividends.
[C] inspect certain corporate books and records.
[D] receive a stock certificate.
[B] receive fixed cash dividends.
U.S. Treasury Bonds traded in the secondary market generally settle the [A] same day as trade date [B] next business day after trade date [C] second business day after trade date [D] third business day after date
[B] next business day after trade date
One of the registered reps at your firm has recently done some research on U.S. Treasury securities and wishes to mass mail his findings to all of his clients. Of the following statements, which is BEST suited for such a mailing?
[A] “Due to unusually high rates, investors should buy now to lock in profits.”
[B] “U.S. Treasury securities have zero risk with relation to principal and interest.”
[C] “All purchases of Treasury Securities are commission-free.”
[D] “The coupon rates, pricing, and yields shown are subject to change and can be affected by market conditions.”
[D] “The coupon rates, pricing, and yields shown are subject to change and can be affected by market conditions.”
Which of the following statements is TRUE of a customer who is long a listed equity option contract and decides to exercise the option?
[A] The seller of the contract in the original transaction will receive an exercise notice directly from the buyer of the contract.
[B] The buyer of the contract will notify the buyer’s broker-dealer, which will directly assign the exercise to a seller of the same option at the firm.
[C] The buyer of the contract will directly notify the Options Clearing Corporation (OCC), which will then assign and directly notify a seller of that same option.
[D] The buyer of the contract will notify the buyer’s broker-dealer, which will then notify the OCC, and the OCC then assigns the exercise to a broker-dealer that is responsible for assigning the exercise to a seller of the same option.
[D] The buyer of the contract will notify the buyer’s broker-dealer, which will then notify the OCC, and the OCC then assigns the exercise to a broker-dealer that is responsible for assigning the exercise to a seller of the same option.
One of the analysts at your firm likes to focus their analysis on comparing the total amount of securities that are appreciating in market value to the total amount of securities that are depreciating in market value. What method is this analyst using?
[A] The analyst is using the Upward Volume-to-Downward Volume theory.
[B] The analyst is using the Advance-Decline theory.
[C] The analyst is using the Dow Jones Industrial Averaging Technique.
[D] The analyst is using the Equity Consumer Indexing Technique.
[B] The analyst is using the Advance-Decline theory.
Which of the following would be the least relevant factor in determining if a municipal bond is suitable for a customer whose investment objectives are after-tax income, liquidity and marketability?
[A] Age of the customer
[B] Tax bracket of the customer
[C] The maturity of the bond
[D] The rating of the bond
[A] Age of the customer
All of the following are important factors used in assessing an investor’s risk tolerance EXCEPT the customer’s
[A] current income level
[B] level of education attained
[C] investment time horizon
[D] investment objectives
[B] level of education attained
Which of the following is NOT a type of oil and gas program? [A] A developmental program [B] An income program [C] A reversionary program [D] An exploratory program
[C] A reversionary program
When considering actions that make stock prices move up or down, which of the following statements is correct?
[A] When there are more buy orders than sell orders, it generally causes market prices to rise, and when there are more sell orders than buy orders, it causes market prices to rise.
[B] When there are more buy orders than sell orders, it generally causes market prices to rise, and when there are more sell order than buy orders, it causes market prices to decline.
[C] When there are more sell orders than buy orders, it causes market prices to rise.
[D] When there are more buy orders than sell orders, it causes market prices to fall.
[B] When there are more buy orders than sell orders, it generally causes market prices to rise, and when there are more sell order than buy orders, it causes market prices to decline.
It would be MOST important to discuss the risk of loss of principal and fluctuations in payments from investing in mutual funds with an investor who is switching to mutual funds from which of the following portfolios?
[A] An account focused in speculation in options and small-cap stocks
[B] An account focused in blue-chip stocks and bonds
[C] An account focused in corporate bonds
[D] An account focused in US Treasury Bills and Certificates of Deposit
[D] An account focused in US Treasury Bills and Certificates of Deposit
A customer who is going on vacation enters a GTC order to buy a particular stock. The order is executed. The customer tells the account executive that he wants the stock but will not return in time to pay for the security by the payment date. The customer states he will send a check a few days late. The account executive should do which of the following?
[A] Cancel the trade immediately.
[B] Pay for the stock himself with a principal’s approval.
[C] Transfer the order to a margin account.
[D] Request an extension of time for payment.
[D] Request an extension of time for payment.
The term “spread” could describe all of the following EXCEPT
[A] the difference between the bid and the ask on a common stock.
[B] the difference between the bid and the ask on a corporate bond.
[C] the difference between an investor’s cost basis and sale proceeds on preferred stock.
[D] the difference between the public offering price and the proceeds to the issuer on a new issue.
[C] the difference between an investor’s cost basis and sale proceeds on preferred stock.
The term “capital risk” is best described by which of the following statements?
[A] The customer will incur a loss if securities are purchased at the wrong time.
[B] The full amount originally invested may not be received by the customer upon disposition of the security.
[C] When the investment is liquidated, purchasing power may be less than that when the money was originally invested.
[D] It is the amount of regular income received from an investment which may or may not be the amount that was originally expected.
[B] The full amount originally invested may not be received by the customer upon disposition of the security.
A customer wants to invest in preferred stock. His key objective is to maintain consistent current income from dividends. Which of the following types of preferred stock would be most suitable for this customer?
[A] Cumulative preferred
[B] Participating preferred
[C] Callable preferred
[D] Convertible preferred
[A] Cumulative preferred
The Trust Indenture Act of 1939 is a federal law that requires a qualified trustee to
[A] represent bondholders.
[B] represent bond issuers.
[C] be appointed by an independent auditor.
[D] be elected by the bondholders.
[A] represent bondholders.
Regulations apply to certain securities with regards to the Alternative Minimum Tax (AMT), and some are considered tax-preferenced items, while other securities would not be subject to AMT. With regards to the following issues of municipal securities, which would NOT be subject to AMT?
[A] Revenue bonds associated with housing within a municipality
[B] Revenue bonds associated with industrial development within a municipality
[C] General obligation bonds issued by a school district
[D] General obligation bonds issued to finance an industrial complex within a municipality
[C] General obligation bonds issued by a school district
How would the exercise price on a foreign currency option be displayed?
[A] The price of the foreign currency per U.S. Dollar
[B] The price of the Eurodollar per foreign currency unit
[C] The spot price of the U.S. Dollar per foreign currency unit.
[D] The price of the U.S. Dollar per foreign currency unit
[D] The price of the U.S. Dollar per foreign currency unit
Foreign currency option exercise prices are displayed showing the U.S. Dollar pricing per foreign currency unit. The spot price would not be valid as an exercise price, because the spot price changes daily. A US Dollar price would be listed as the exercise price, while the spot price would be the “market price” of the dollar in that particular currency pair.
A serial bond issue is coming to market. Where should one expect to find the yields listed in relation to maturity?
[A] The coupon rates
[B] The scale of the bond issue
[C] The credit rating
[D] The notice of sale
[B] The scale of the bond issue
Several years ago and just prior to retirement, Mr. Smith purchased 500 shares of ABC. At the time of purchase, ABC was trading at $45 per share. The price increased over the past few years and was at $60 per share when the RR for Mr. Smith’s account learned that Mr. Smith had passed away in an automobile accident. Mr. Smith’s will indicated that the shares should be handed over to Mr. Smith’s adult daughter, Jane. This took place promptly after Mr. Smith’s death and Jane decided to sell the shares several months later when the price had appreciated again to $65 per share. For taxation purposes, what is Jane’s cost basis on these shares?
[A] Since Jane did not pay for the shares, there is no cost basis for her at the time of the sale.
[B] Jane’s cost basis would be the same as her father’s, $45 per share.
[C] Jane’s cost basis would be the price at the date of death of her father, $60 per share.
[D] Jane’s cost basis would be the price at the time of sale, $65 per share.
[C] Jane’s cost basis would be the price at the date of death of her father, $60 per share.
An elderly customer of an RR develops dementia and can no longer handle his own affairs. The RR becomes aware of the customer’s situation and can only take orders for trades in the customer’s account from a third party who
[A] has a power of attorney.
[B] is a court-appointed guardian or conservator of the customer’s property.
[C] has a signed letter from the customer authorizing a third party to act for him.
[D] is a close relative of the customer.
[B] is a court-appointed guardian or conservator of the customer’s property.
If a customer develops dementia and cannot handle his or her affairs, a court order is required in order to take orders from a third party. A power of attorney may only be signed by a person of sound mind. (However, a durable power of attorney signed at a time that the customer was of sound mind is acceptable documentation to take orders from a third party.) A signed letter is insufficient because the customer is not of sound mind. Also, the fact that a person is a close relative is insufficient absent statutory authorization.
A customer purchases a when-issued stock in a cash account for a total of $60,000. How much must the customer deposit in the cash account?
[A] $2,000
[B] $15,000
[C] $30,000
[D] $60,000
[B] $15,000
An equity investor is primarily concerned with preservation of capital. Currently, interest rates have been rising and are forecasted to continue to rise. Which of the following stock recommendations is most appropriate for this investor?
[A] Defensive stocks
[B] Utility stocks
[C] Cycllical stocks
[D] Emerging growth stocks
[A] Defensive stocks
Stabilization in a securities offering is performed by the
[A] SEC.
[B] managing underwriter.
[C] FINRA.
[D] issuer with oversight of the managing underwriter.
[B] managing underwriter.
Of the following client transactions, which is acceptable under FINRA rules?
[A] A couple who are expecting their first child purchase a growth fund in the child’s name.
[B] In a joint account, a wife places a buy order for a sector fund without her husband’s knowledge.
[C] In an attempt to maximize return, a client frequently buys and sells mutual fund shares.
[D] In a phone conversation, a client tells his RR to “buy the best mutual fund available” since the client cannot decide on a particular fund.
[B] In a joint account, a wife places a buy order for a sector fund without her husband’s knowledge.
A Registered Representative notices that he executed a trade for an IPO in the wrong account and asks the branch manager to correct the error. When doing the cancel and rebill the manager notices that the account with the error trade in it had a change of address recently. The manager should
[A] Not do the cancel and rebill because of the recent change in address
[B] Move the trade to the firm’s error account
[C] Approve the cancel and rebill
[D] Break the trade and have the RR start over
[C] Approve the cancel and rebill
When an RR is opening a new account for a client, which of the following would be the BEST indication of the new client’s tolerance to risk?
[A] The client’s number of dependents
[B] The client’s net worth
[C] The client’s tax bracket
[D] The client’s experience with investing
[D] The client’s experience with investing
Of the choices listed, the client’s previous experience with investing is the best indication of his risk tolerance. This will give the RR an idea of what investments the client has held in the past and the degree of risk taken historically. Note, however, all of the choices should be considerations when determining investment suitability.
Market momentum refers to:
[A] The degree of strength or weakness in various industry groups.
[B] Disintermediation
[C] Money supply
[D] The impact of fiscal and monetary policies on the market
[A] The degree of strength or weakness in various industry groups.
Market momentum is the tendency of a security to continue movement in a single direction. Momentum is one of the most important factors in trend analysis of the stock prices. It also indicates the degree of strength or weakness for industry groups.
