Final 2 Flashcards
1
Q
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.
A
[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.
2
Q
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.
A
[C] Default on the deferred compensation plan could occur if the employer’s business fails.
3
Q
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
A
[C] 2 years from the filing date of Form U-5
4
Q
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
A
[B] A short-term capital gain
5
Q
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.
A
[B] $5,000
6
Q
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
A
[D] Agree in writing to settle all disputes about securities by lawsuit in the federal courts
7
Q
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.
A
[B] volatility of the fund in relation to a designated benchmark index such as the DJIA or the S&P 500.
8
Q
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
A
[C] operations and maintenance
9
Q
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.
A
[C] Trading exchange listed securities over the counter.
10
Q
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.
A
[D] At or before the approval of the account for options trading.
11
Q
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
A
[B] straight line amortization
12
Q
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.
A
[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.
13
Q
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.
A
[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.
14
Q
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.
A
[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.
15
Q
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
A
16
Q
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
A
[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.
17
Q
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.
A
[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.
18
Q
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
A
[C] American Depositary Receipts
19
Q
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
A
[C] Municipal bonds
20
Q
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] A put contract with a strike price that is higher than the market price of the underlying common stock.
21
Q
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
A
[B] the tax preparer for the plan
22
Q
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.
A
[D] Securities in a custodial account may be held in a margin account.
23
Q
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.
A
[D] It increases the total number of outstanding shares.
24
Q
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%
A
[C] lower than 9.87%
25
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
26
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.
27
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
28
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.
29
```
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
30
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."
31
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.
32
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.
33
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
34
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
35
```
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
36
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.
37
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
38
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.
39
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.
40
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.
41
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
42
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.
43
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
44
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.
45
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
46
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.
47
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.
48
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
49
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
50
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.
51
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.
52
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
53
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.
54
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.
55
Which of the following is TRUE of collateralized debt obligations (CDOs)?
[A] They are a pool of mortgages that is packaged and sold to investors.
[B] They are backed by the U.S. government.
[C] They are considered equity securities.
[D] They are considered asset backed securities.
[D] They are considered asset backed securities.
56
John and Susan Smith are in their mid 30s and have two children, a 4-year-old and a 2-year-old. Both John and Susan work and do not currently need additional income. They have determined they want to conservatively invest so that they will have funds for their childrens' college in about 12-15 years. Which of the following investments would BEST meet their goal?
[A] Common Stocks
[B] Laddered Treasury Notes
[C] Laddered Zero-Coupon Bonds
[D] Preferred Stocks
[C] Laddered Zero-Coupon Bonds
57
A manufacturing company, located in the U.S., receives an order from a British firm for parts. The terms of the order state that payment will be made in British Pounds. What is the BEST way for the U.S. manufacturer to hedge being paid in British Pounds?
[A] The U.S. firm should write British Pound calls.
[B] The U.S. firm should write British Pound puts.
[C] The U.S. firm should purchase British Pound calls.
[D] The U.S. firm should purchase British Pound puts.
[D] The U.S. firm should purchase British Pound puts.
58
All of the following fall under the definition of a registered investment company EXCEPT
[A] a growth and income fund
[B] a separately managed account
[C] the separate account of a variable annuity
[D] a money market fund
[B] a separately managed account
A growth fund and an income fund are both mutual funds and therefore are investment companies. The sub-account of a variable annuity must register under the Investment Company Act of 1940 and is considered to be an investment company registered under the Act. A separately managed account is a professionally managed portfolio of securities but the securities are directly owned by the account owner (the customer) therefore they are NOT classified as investment companies.
59
If a preferred stock is "cumulative", it means that the stock
[A] accumulates equity growth in a similar manner to common stock.
[B] participates in additional earnings at a rate that is not fixed.
[C] must pay all dividends in arrears prior to the payment of dividends on common stock.
[D] pays dividends that increase over time with the rate of inflation.
[C] must pay all dividends in arrears prior to the payment of dividends on common stock.
60
According to FINRA good delivery rules, a mutilated corporate bond must be authenticated by:
[A] The buyer's broker-dealer
[B] The seller's broker-dealer
[C] The market maker
[D] Issuer or transfer agent
[D] Issuer or transfer agent
61
Under ERISA, plan fiduciaries generally have all of the following duties to plan participants EXCEPT:
[A] Diversify plan investments
[B] Resolve all conflicts of interest in favor of the plan participants
[C] Invest with care, skill, prudence and diligence.
[D] They may be held liable for losses to the plan but not personal fines.
[D] They may be held liable for losses to the plan but not personal fines.
Under ERISA, a plan fiduciary is defined as anyone who has the power to exercise discretionary authority or control over a plan's management or assets or is compensated for plan investment advisory services. Fiduciaries must act solely in the best interests of plan participants and their beneficiaries. Conflicts of interest must be resolved in favor of the plan participants. Prudent investing is required. Although ERISA does not require diversification of plan investments, diversification is generally considered to be prudent. Those who violate their duties may be held liable for losses to the plan and fines..
62
John is a big fan of ABC Company and has been buying shares of ABC common stock over the years. Recently, John was advised that he will have to begin to file reports with the SEC regarding his ownership of ABC common stock. This means that John is now considered an Insider and has become the owner of more than
[A] 3% of the outstanding common stock of ABC.
[B] 8% of the outstanding common stock of ABC.
[C] 10% of the outstanding common stock of ABC.
[D] 15% of the outstanding common stock of ABC.
[C] 10% of the outstanding common stock of ABC.
63
Which of the following statements related to oil and gas limited partnerships is FALSE?
[A] Developmental programs typically carry a larger amount of risk than exploratory oil and gas programs.
[B] Exploratory programs typically do not provide investors with the same level of stability when it comes to returns as that which is found in income programs.
[C] In areas of proven reserves, lease acquisition is a common practice for developmental programs.
[D] Developed wells have an inherent risk that the costs associated with operation and maintenance will be greater than the reserves held in the well.
[A] Developmental programs typically carry a larger amount of risk than exploratory oil and gas programs.
64
On the annual IRS Form 1099-B issued by broker-dealers to the IRS and its customers, all of the following information on securities sales transactions must be reported EXCEPT
[A] The applicable taxable gain or loss using the LIFO method
[B] Gross sales proceeds
[C] Cost basis of a security purchases
[D] The holding periods
[A] The applicable taxable gain or loss using the LIFO method
65
A trade on the consolidated tape display that reads: ABC.SLD 52 means that:
[A] 5,200 shares were traded
[B] ABC has been sold for $52 million
[C] 100 shares have just been traded for $52 per share
[D] 100 shares were traded earlier, but the report is delayed
[D] 100 shares were traded earlier, but the report is delayed
66
Mark-to-market adjustments of open short positions to reflect profits and losses must be made:
[A] Daily
[B] Weekly
[C] Monthly
[D] At year end
[A] Daily
67
Your firm is performing an analysis on a municipality's total debt. Of the following types of debt, which would be overlapping?
[A] The debt on a direct obligation bond
[B] The debt of the state in which the municipality is located
[C] The debt on a special assessment bond
[D] The debt of the local school district
[D] The debt of the local school district
68
All of the following are generally considered to be advantages of U.S. Treasury bonds EXCEPT:
[A] The availability of a wide range of maturities
[B] An active secondary market
[C] High loan value
[D] Interest income that is exempt from federal, state, and local taxes.
[D] Interest income that is exempt from federal, state, and local taxes.
U.S. Government bonds are exempt from state and local taxes, but not federal taxes.
69
Which of the following entities is responsible for accepting and guaranteeing the exercise of listed option contracts?
[A] The Options Clearing Corporation (OCC)
[B] The Securities and Exchange Commission (SEC)
[C] The Chicago Board Options Exchange (CBOE)
[D] The Financial Industry Regulatory Authority (FINRA)
[A] The Options Clearing Corporation (OCC)
70
The record date of mutual fund distributions
[A] is decided by the mutual fund itself
[B] always falls on the third Friday of each month
[C] is determined by the Investment Company Institute
[D] is the business day after the ex-date
[A] is decided by the mutual fund itself
Because mutual funds are not traded OTC or on an exchange, the record date and ex-date would always have to be set by the fund itself.
71
An investor purchases a corporate bond, which is not callable during the first 5 years. During year 1 of the call protection period of the bond, interest rates drop. The investor is keen on holding the bond but calls his RR asking if he should sell the bond. The RR should recommend
[A] selling the bond and reinvesting the funds in Treasury bills.
[B] buying another bond with shorter call protection.
[C] keeping the bond and take no action.
[D] waiting until year 2 of the call protection period to sell.
[C] keeping the bond and take no action.
72
An RR wants to earn additional income by selling private securities transactions. The RR submits the appropriate notification to her member firm and waits for a response. Which of the following is correct if the member firm approves this request?
[A] The member firm must supervise the RR's transactions and retain books and records of such transactions performed by the RR.
[B] All compensation from the private securities transactions must be deferred until the RR retires.
[C] Once the firm has given permission it must then notify FINRA of the arrangement within 15 business days.
[D] The RR will be subject to heightened supervision for six months.
[A] The member firm must supervise the RR's transactions and retain books and records of such transactions performed by the RR.
73
An RR recommends to a client that she invest in a mutual fund just prior to the fund's ex-dividend date. This recommendation
[A] is suitable because it ensures an immediate return on the client's investment
[B] is not suitable because the client would only be eligible to receive the dividend if shares are bought three days after ex-dividend date
[C] is not suitable because the client may be subject to additional income tax liabilities and could have bought the shares at a reduced price
[D] is suitable because fund prices usually rise shortly after the ex-dividend date
[C] is not suitable because the client may be subject to additional income tax liabilities and could have bought the shares at a reduced price
74
A put writer would be "covered" by:
[A] A long call
[B] Another short put
[C] Cash equal to the strike price multiplied by 100 shares
[D] An escrow receipt for 100 shares of the underlying stock
[C] Cash equal to the strike price multiplied by 100 shares
A covered put option gives the investors the obligation to Buy. The writer (short) needs to have sufficient cash on deposit, have long equivalent put, or have a bank guarantee letter to "cover" the put if exercised by the holder.
75
A customer's long margin account will become Restricted when the
[A] debit balance in the account is more than half of the market value of the securities in the account.
[B] equity in the account is more than half of the market value of the securities in the account.
[C] market value of securities in the account appreciate in value and the equity in the account increases.
[D] account has no SMA.
[A] debit balance in the account is more than half of the market value of the securities in the account.
76
A municipal finance professional made a $200 contribution to a candidate for Comptroller of his town. The candidate lost the election. According to MSRB rules, which of the following is TRUE?
[A] The member firm cannot underwrite an offering for that municipality for at least three years pending FINRA review.
[B] There are no restrictions as the contribution was made to a candidate not to an elected official.
[C] The MFP's member firm is prohibited from underwriting any issue for that municipality for two years.
[D] No violation has occurred and the member firm can underwrite an offering for that municipality.
[D] No violation has occurred and the member firm can underwrite an offering for that municipality.
77
What is covered by the federal government's guarantee of pass-through Ginnie Mae (GNMA) securities?
[A] The federal government's guarantee applies only to the timely payment of interest on the securities.
[B] The federal government's guarantee applies only to the timely repayment of principal on the securities.
[C] The federal government's guarantee applies to both the timely payment of interest and the timely repayment of principal on the securities.
[D] The federal government does not guarantee any GNMA securities.
[C] The federal government's guarantee applies to both the timely payment of interest and the timely repayment of principal on the securities.
78
Which of the following is NOT regulated by the Securities Exchange Act of 1934?
[A] Broker-Dealers
[B] The OTC market
[C] Corporate insiders
[D] New securities offerings
[D] New securities offerings
79
Which of the following would be most important for an RR when determining a suitable recommendation for a client?
[A] The customer's investment goals and risk tolerance
[B] How many siblings the customer has
[C] Information the RR has learned about the customer from the person who referred the customer to the RR
[D] Whether or not the customer is married and has a college education
[A] The customer's investment goals and risk tolerance
80
A rep at the firm has been working on determining appropriate investments for a client. The rep comes to the conclusion that a deferred variable annuity invested in diversified common stock funds will be the best choice for this particular client and makes that recommendation. Under FINRA Rules, it is most critical that the rep
[A] confirms the identity and ages of all potential beneficiaries to ensure that assets can be transferred freely.
[B] document the factors that brought the rep to the conclusion that the recommendations were suitable for this client and ensure that the client benefits from the tax-deferred growth that accompanies a deferred variable annuity.
[C] research all exchanges made by the customer related to variable products over the past 10 years.
[D] reviews the firm's compensation arrangements related to variable products to ensure adequate compensation for the time and firm resources dedicated to making the recommendation.
[B] document the factors that brought the rep to the conclusion that the recommendations were suitable for this client and ensure that the client benefits from the tax-deferred growth that accompanies a deferred variable annuity.
81
Contributions to a Section 529 Education Savings Plan account may be subject to federal gift taxes. All of the following are true statements about the federal gift tax rules EXCEPT.
[A] There is an annual tax exclusion for a donor.
[B] A spouse of the donor may join in the contribution to the account increasing the exclusion.
[C] Five years of future exclusions can be advanced into the current year thus permitting a larger initial exclusion as a joint gift.
[D] The federal gift tax liability falls on the donee of the account, not the donor..
[D] The federal gift tax liability falls on the donee of the account, not the donor..
82
An investor sells short 100 shares of ABC at $25 per share and simultaneously writes one ABC June 20 put at one. To break even on this position, at what price must ABC stock close on the day prior to expiration of the put.
[A] $24
[B] $25
[C] $26
[D] $27
[C] $26
sells short 100 shares of ABC at 25 +2500
writes 1 ABC June 20 put at 1 + 100
the breakeven price would be 2600/100=26
82
Under which of the following circumstances would a "buy in" or purchase of securities of like kind and quantity take place?
[A] When the seller of a call option receives an exercise notice
[B] Upon the failure to deliver of securities in relation to a sale
[C] When the managing underwriter of a syndicate wishes to stabilize the offering
[D] Upon the failure of a broker-dealer, where SIPC buys into the firm to satisfy their coverage
[B] Upon the failure to deliver of securities in relation to a sale
Broker-dealers must close out failure-to-deliver positions. Closing out a failure-to-deliver for a sale transaction would typically involve the purchase of securities of like kind and quality, also known as a "buy-in".
83
If an investment company is trading at a discount to its NAV the security must be a(n)
[A] open-end fund
[B] closed-end fund
[C] high yield bond
[D] equity options
[B] closed-end fund
84
A broker learns that one of his institutional clients is about to enter a buy order for 10,000 shares of ABC stock. The broker tells one of the principals of the broker-dealer and the broker-dealer immediately enters a proprietary buy order for 10,000 shares of ABC stock ahead of the client's order. This trade is generally prohibited as front running but would be permitted if:
[A] The firm can demonstrate that the trade is unrelated to the customer's block order
[B] The trade was made to fill or facilitate the customer's block order
[C] The trade is executed on a national stock exchange and in compliance with its rules
[D] All of the above.
[D] All of the above.
85
Which statement about Federal Farm Credit Bonds is CORRECT?
[A] These bonds are typically found in book-entry form.
[B] The U.S. Government directly issues and backs these bonds.
[C] Interest income from these bonds is not subject to Federal taxes.
[D] The bonds do not have an active secondary trading market.
[A] These bonds are typically found in book-entry form.
86
Which of the following would NOT be a reason for a municipality to issue revenue bonds versus general obligation bonds?
[A] Current legislation at the state level requires the self-sufficiency of projects of this nature.
[B] Statutory debt limitations are usually enforced on revenue bonds.
[C] User fees are expected to support the project once completed.
[D] Only certain members of the community will use the project.
[B] Statutory debt limitations are usually enforced on revenue bonds.
87
If securities are not delivered in the designated time period for settlement in relation to a sale, which of the following is TRUE?
[A] A sell-out must occur.
[B] The member firm where the sale originated will immediately have their registration suspended.
[C] A buy-in must occur.
[D] The member firm where the sale originated must cancel the trade and compensate the other party to the trade for any losses related.
[C] A buy-in must occur.
When a sale occurs and the securities are not delivered in the designated time period for settlement, a buy-in will occur. This buy-in requires the purchase of securities of like kind and quantity in relation to the unsettled trade.
88
Of the following statements, which is FALSE about mutual fund information services?
[A] Many services require a paid subscription to access the information.
[B] The performance results listed by such services will not always follow SEC and FINRA guidelines.
[C] The performance of funds is often reliably projected by these services.
[D] The information services can be a resource for investors to research funds.
Of the following statements, which is FALSE about mutual fund information services?
[A] Many services require a paid subscription to access the information.
[B] The performance results listed by such services will not always follow SEC and FINRA guidelines.
[C] The performance of funds is often reliably projected by these services.
[D] The information services can be a resource for investors to research funds.
89
When a syndicate is formed on an IPO of common stock there is a 20-day cooling period after the registration statement is filed with the SEC. During the cooling period, which of the following would a syndicate member be allowed to do?
[A] take pre-sale orders on the new issue
[B] send out research reports produced by the managing underwriter
[C] send out a preliminary prospectus to clients that request them
[D] accept a deposit with an indication of interest from an existing client
[C] send out a preliminary prospectus to clients that request them
90
An example of an "unfunded liability" of a municipality is:
[A] Short term debt that will have to be refinanced
[B] Long term debt that will have to be refunded
[C] Unsecured long term debt
[D] Future pension payments for which sufficient funds have not been set aside
[D] Future pension payments for which sufficient funds have not been set aside
Future pension payments for which sufficient funds have not been set aside is considered an unfunded liability of the municipality.
91
Which of the following would be the basis of the calculation of earnings per share when reported on a fully diluted basis?
[A] In this situation, the EPS calculation will be based on the number of shares outstanding.
[B] In this situation, the EPS calculation will be based on the number of outstanding common shares minus shares that were issued throughout the year.
[C] In this situation, the EPS calculation will be based on the number of outstanding common shares with additions for dilution due to convertibles, including bonds, preferred stocks, and warrants.
[D] In this situation, the EPS calculation will be based on the cost of operations along with other expenses.
[C] In this situation, the EPS calculation will be based on the number of outstanding common shares with additions for dilution due to convertibles, including bonds, preferred stocks, and warrants.
92
Just after the construction of a bridge, financed by a revenue bond, massive flooding causes part of the bridge to collapse. The remaining portion of the bridge is condemned and the municipality calls the revenue bonds. What type of call is this?
[A] This would be an extraordinary call.
[B] This would be a refunding call.
[C] This would be a "sinking" fund call.
[D] This would be a defeasance call.
[A] This would be an extraordinary call.
93
Using the following financial information regarding Steele Co, calculate its dividend payout ratio:
Total cash dividends paid to common shareholders: $10,000,000
Total outstanding common shares: 5,000,000
Earnings per share: $5.00
[A] 50%
[B] 100%
[C] 40%
[D] 60%
[C] 40%
94
All of the following are TRUE of commercial paper EXCEPT:
[A] Commercial paper is considered a short-term instrument.
[B] Commercial paper is generally issued by corporations.
[C] Commercial paper is used by corporations in the financing of international trade.
[D] Commercial paper is issued with maturities of up to 270 days.
[C] Commercial paper is used by corporations in the financing of international trade.
95
A new client uses the services of an Investment Adviser and has requested that duplicate copies of statements and confirmations from his account be forwarded to the IA. Which of the following is true with regard to this request?
[A] Such a request must be confirmed with each trade and the order ticket must specify that a duplicate copy is being sent.
[B] The request and the name and address of the IA should be noted on the new account form.
[C] The sales department of the firm should be informed since they will handle all paperwork.
[D] The IA must have a power of attorney to receive duplicate copies.
[B] The request and the name and address of the IA should be noted on the new account form.
96
A prospective client has around $15,000 that she would like to invest. She's in her mid 20s and is uneasy about investing in the stock market. The prospect asks the registered representative for investment recommendations. Given the scenario, all of the following are actions the RR should take EXCEPT
[A] establish investment objectives for the client.
[B] find out the prospect's net worth.
[C] inquire as to the client's current tax bracket.
[D] recommend the opening of a margin account.
[D] recommend the opening of a margin account.
97
In a serial municipal bond issue, the yields and other vital data by maturity date are referred to as:
[A] yield to maturity
[B] redemption
[C] coupons
[D] scale
[D] scale
98
A new client opens up a margin account. Their initial transaction in the account was a purchase of 100 shares of ABC at a market value of $2,750. To comply with regulations on margin accounts, what amount must the client deposit in cash?
[A] $825.
[B] $1,375.
[C] $2,000.
[D] $2,750.
[C] $2,000.
99
All of the following are functions of the transfer agent of a mutual fund EXCEPT:
[A] Sends interest payments to investors.
[B] Maintains detailed records of account holders.
[C] Maintain custody of the securities in the fund.
[D] Sends annual tax documents to investors
[C] Maintain custody of the securities in the fund.
100
If a broker-dealer executes a short sale in its investment account, it may borrow the shares from all of the following EXCEPT
[A] a customer's cash account.
[B] another broker-dealer.
[C] an insurance company.
[D] its own stock inventory.
[A] a customer's cash account.
101
You are an RR at a firm and one of your customers calls you up and informs you that she wishes to exercise a long listed option that she currently holds. To whom would your firm present such an exercise order?
[A] Your firm would present the order to the OCC (Options Clearing Corporation).
[B] Your firm would present the order to a holder of the short option in the same underlying security to be selected on a random basis.
[C] Your firm would present the order to the investor who wrote the option contract.
[D] Your firm would present the order to any broker-dealer not associated with your firm.
[A] Your firm would present the order to the OCC (Options Clearing Corporation).
102
If German exporters expect the U.S. dollar to weaken relative to the Euro, which of the following option strategies should the manufacturers use to profit from this expectation?
[A] Write calls on the Euro
[B] Buy calls on the Euro
[C] Buy S&P 500 puts
[D] Buy puts on the Euro
[B] Buy calls on the Euro
103
An RR performs a transaction via wire order in a customer's account. What is TRUE of such situations under FINRA rules?
[A] A principal of the firm is required to review and approve such transactions.
[B] This type of order is acceptable for discretionary accounts only.
[C] Prior to execution, such transactions require a written request by the customer.
[D] Wire orders under $10,000 do not require review and approval.
[A] A principal of the firm is required to review and approve such transactions.
Member firms have a duty to reasonably supervise their registered representatives. This includes the duty to review and approve all trades.
104
Collateral Mortgage Obligations are collateralized by all of the following EXCEPT:
[A] Conventional issuers.
[B] FHA mortgages.
[C] Fannie Maes.
[D] Sally Maes.
[D] Sally Maes.
105
Payout options of a variable annuity are guaranteed by which of the following?
[A] The pertinent state securities department or commission
[B] Securities and Exchange Commission (SEC)
[C] The insurance company that issued the variable annuity
[D] Securities Investor Protection Corporation (SIPC)
[C] The insurance company that issued the variable annuity
106
One of your elderly clients recently passed away. A family member is now attempting to open an account to invest the assets of the deceased. In order to open such an account, which of the following would be necessary?
[A] The individual would need to verify the deceased individual's name, address, and tax id number.
[B] The names of the beneficiaries of the deceased individual's estate would need to be presented by the individual.
[C] A certificate or court order verifying the executor status of the individual would need to be presented.
[D] The name of the deceased individual's attorney would need to be presented.
[C] A certificate or court order verifying the executor status of the individual would need to be presented.
107
All of the following are considered assets EXCEPT a
[A] closed-end fund
[B] negotiable certificate of deposit
[C] line of credit that has yet to be used
[D] convertible bond
[C] line of credit that has yet to be used
108
In a Short Margin account, a customer has the following position:
$30,000 Proceeds of the Short Sale
+ $15,000 Reg T Deposit
$45,000 Credit Balance
- $30,000 Current Market Value of Short Stock
$15,000 Equity in the account
Based on this information, how high could the market value of the short stock position appreciate before the customer will receive a minimum maintenance call?
[A] $34,615.38
[B] $45,000.00
[C] $23,076.93
[D] $11,538.46
[A] $34,615.38
109
An investor buys a call option on a common stock. Theoretically, what is the MOST that the investor could gain on this investment?
[A] The premium paid for the option.
[B] The difference between the strike price and the market value of the security at purchase.
[C] The option's strike price minus premiums paid for the call option.
[D] The potential gain is unlimited.
[D] The potential gain is unlimited.
110
An RR receives a request by a customer who has a joint account at the firm. The customer wants to transfer the account to another member firm and continue to conduct covered call writing at that firm. Given this scenario, which of the following documents would NOT be expected for this account?
[A] ACAT form
[B] Joint account agreement
[C] Margin agreement
[D] Options agreement
[C] Margin agreement
111
Which of the following would be considered "insider" information when such information is related to a publically traded company under SEC Rules?
[A] A CEO makes comments at a luncheon that are then released to the public.
[B] Proxy information distributed to the company's shareholders
[C] material information in an unreleased press report
[D] an offering circular distributed to potential investors
[C] material information in an unreleased press report
The key word here is "unreleased" - when information has not been released to the public and it is material information about a publicly traded company it would be considered to be "inside" information.
112
The balance sheet of a company will list all of the following items EXCEPT:
[A] Current assets
[B] Current liabilities
[C] Deferred assets
[D] Cash flow
[D] Cash flow
A balance sheet will list the assets, liabilities and owner's equity as of a specific date. Cash flow is the amount of net cash generated by a business during a specific period. One means of cash flow is earnings which can be found on the income statement, not the balance sheet.
113
```
Which of the following securities issued by the Federal Government does not have reinvestment risk?
[A] T-Bonds
[B] T-Notes
[C] Treasury stock
[D] T-Bills
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[D] T-Bills
114
A client has a Cash Account at a broker-dealer and one week ago was sold out of a position for failure to make prompt payment. The customer has now decided to buy 100 shares of ABC common stock @50. This client will be required to
[A] make the required Reg T 50% deposit using regular-way settlement.
[B] make the required payment in full for the purchase using regular-way settlement.
[C] make the required payment in full for the purchase prior to entering the order because the account would be frozen.
[D] wait 90 days prior to entering the order to buy the stock because the account would be frozen.
[C] make the required payment in full for the purchase prior to entering the order because the account would be frozen.
Reg T states that if a client has been sold out for failure to make prompt payment that the account must be frozen for 90 days. When an account is frozen for 90 days the client will have to deposit sufficient cash to cover the total trade amount before the order to buy is entered. Since this is a Cash account, the client would not be allowed to deposit 50% of the purchase price, as this is only allowed in a margin account. The account is frozen so the client would not be allowed to make payment using regular way settlement. When an account is frozen, clients must deposit funds prior to entering orders to buy but are not prohibited from making purchases.
115
Which of the following is a factor that need NOT be known when computing a municipal bond's accreted value?
[A] The date on which the bond was purchased.
[B] The date of the bond's maturity.
[C] The current price of the bond on the open market.
[D] The price at which the bond was purchased.
[C] The current price of the bond on the open market.
116
Limited partners have all of the following rights EXCEPT:
[A] Remove a general partner for cause
[B] Inspect the books and records of the limited partnership
[C] Sell their interests back to the limited partnership without restriction
[D] Receive complete periodic reports concerning the operations of the limited partnership
[C] Sell their interests back to the limited partnership without restriction
117
The following is the current state of a customer's margin account:
Market value: $50,000
Debit balance: $15,000
Equity value: $35,000
The customer sells $10,000 worth of securities. What is the equity value in the account after the sale?
[A] $15,000
[B] $20,000
[C] $35,000
[D] $30,000
[C] $35,000
When shares are sold and no withdrawals are made, the equity value in the account remains unchanged. However, the market value and debit balance decline by the same amount because without additional instruction, the broker-dealer will apply the proceeds of the sale to the debit balance.
In this example, the account after the sale of $10,000 of securities is:
Market value: $40,000
Debit balance: $5,000
Equity value: $35,000
118
All of the following are TRUE of mutual fund "breakpoints" EXCEPT:
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[A] Breakpoints are the dollar amounts of investment at which the investor is eligible for a lower sales charge percentage
[B] Breakpoints must be disclosed and explained in the fund prospectus.
[C] The only mutual fund class of shares that provides breakpoints are Class A shares
[D] The sales practice of "breakpoint selling" is legal and is to be encouraged
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[D] The sales practice of "breakpoint selling" is legal and is to be encouraged
119
An RR has a customer whose primary objectives are investment income and capital appreciation. Which of the following investment options would best meet the customer's objectives?
[A] A growth stock
[B] A warrant
[C] A REIT
[D] A utility stock
[C] A REIT
120
The ideal time to invest in a long-term bond fund would be when
[A] interest rates are rising
[B] interest rates are falling
[C] inflation is rising
[D] GDP has been rising sharply
[B] interest rates are falling
A long-term bond fund would benefit most if interest rates fell. As rates fall, bond prices rise. In choices A and C rates would rise or at least remain unchanged. Rising inflation leads to rates rising to fight inflation. If GDP is growing sharply there will be a concern that inflation will rise so rates will either rise or remain unchanged.
121
The owner of a non-qualified variable annuity contract has invested $100,000 in the contract. The contract is now worth $115,000. The owner elects an annuity payout option. What is the dollar amount of the contract owner's cost basis?
[A] Zero
[B] $15,000
[C] $100,000
[D] $115,000
[C] $100,000
122
Under Federal Income Tax Law, which of the following is true concerning a "wash sale"?
[A] A tax deduction is disallowed for the loss on the sale.
[B] The gain is taxed at a minimum rate of 20%.
[C] A tax deduction is allowed for the loss on the sale.
[D] The gain is deferred until the next tax year.
[A] A tax deduction is disallowed for the loss on the sale.
123
Which of the following is an index which is comprised of 30 blue-chip stocks that are actively traded?
[A] The Wilshire Index
[B] The Standard & Poor's Index
[C] The Dow Jones Composite Average
[D] The Dow Jones Industrial Average
[D] The Dow Jones Industrial Average
124
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Which of the following would NOT be considered to be advertisements under MSRB rules and regulations?
[A] Market letters
[B] a summary of an official statement
[C] preliminary official statements
[D] Research reports
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[C] preliminary official statements
125
Of the following choices, which is the BEST description of a municipal revenue bond's "indenture"?
[A] The bond indenture is an overview of the value of the bond over the life of the bond at various intervals.
[B] The bond indenture is a contractual obligation between the trustee and issuer and it includes details on necessary reserve funds and required rate schedules for the bond.
[C] The bond indenture ensures that the bond is legally binding and valid.
[D] The bond indenture is a summary of the feasibility study performed on prospective projects.
[B] The bond indenture is a contractual obligation between the trustee and issuer and it includes details on necessary reserve funds and required rate schedules for the bond.
126
All of the following are features of a tax-qualified retirement plan offered by an employer, EXCEPT:
[A] In certain types of plans, employees can contribute and deduct their contribution in the year it was contributed.
[B] In certain types of plans, employers can contribute and deduct their contribution in the year it was contributed.
[C] Typically, the contributions made by an employer are taxed to the employee in the year that contributions were made, but funds grow within the retirement plan on a tax-deferred basis.
[D] Often there are limitations placed on the amount of money that can be contributed to such plans in any given year and limitations placed on deductions for tax purposes in any given year.
[C] Typically, the contributions made by an employer are taxed to the employee in the year that contributions were made, but funds grow within the retirement plan on a tax-deferred basis.
127
A customer has a portfolio of various corporate and Treasury bonds. She tells her registered representative that she believes interest rates are going lower and she wants to maintain a portfolio of bonds. Given the customer's concern, the RR should recommend that the client
[A] begin swapping her existing bonds for bonds selling at a premium.
[B] extend the overall maturity and increase the call protection on her bond portfolio.
[C] attempt to shorten the overall maturity on her bond portfolio.
[D] sell corporate bonds and buy Treasury bonds.
[B] extend the overall maturity and increase the call protection on her bond portfolio.
The customer feels that interest rates are going to go down so she should attempt to lock in the longest maturities possible in her portfolio. This calls for extending the overall maturity of the bond portfolio. The customer should also attempt to eliminate the possibility of early calls of her bonds, so she should increase the call protection for her portfolio.
In order to achieve this, the customer should make changes to her portfolio by selling bonds with the shortest maturities and buying bonds with longer maturities. Also, she should sell bonds that are callable now or soon to be callable and buy new ones with callable dates that are much further out.
128
Which of the following features on preferred stock allows investors to receive unpaid dividends prior to the payment of dividends to common stock shareholders?
[A] A participation feature
[B] A conversion feature
[C] A call feature
[D] A cumulative feature
[D] A cumulative feature
129
An option trader writes 5 June 255 calls at 3 and 5 June 245 puts at 2. If the trader later repurchases the calls at 4 and the puts expire worthless, the trader's profit or loss will be:
[A] $100 profit
[B] $100 loss
[C] $500 profit
[D] $500 loss
[C] $500 profit
130
Who would benefit most from a par call on a high coupon municipal bond trading at a premium?
[A] the issuer
[B] the holder
[C] the dealer
[D] the trustee
[A] the issuer
131
You are talking to a client who is making a few changes to their account information. The client recently retired. The client has a need for taxable monthly income from investments and would like to keep their investments conservative in nature. Which of the following investments would NOT be appropriate for this client?
[A] The client could invest in the bonds of several conservative Blue Chip companies.
[B] The client could invest in several leveraged, closed-end funds made up entirely of bonds.
[C] The client could invest in the preferred stocks of several conservative Blue Chip companies.
[D] The client could invest in CDs (Certificates of Deposit).
[B] The client could invest in several leveraged, closed-end funds made up entirely of bonds.
Of the choices offered, the least appropriate would be "B", the leveraged bond fund because it would carry the greatest risk. All of the other choices would be appropriate for a conservative retired person. For the CD, we could own 12 CD's and have 1 CD maturing every month or something like that. For a bond, we could have one bond paying interest in Jan/July, and one bond paying interest in Feb/Aug, and one bond paying interest in March/Sept, etc.
132
The Net Asset Value of mutual fund shares is best defined as the
[A] closing market value of all the securities in the fund's portfolio plus any interest or dividend income received on the securities in the portfolio.
[B] value of fund shares based on the average price calculated over the time the shares were owned by an investor.
[C] value determined by market-makers who make a market in the fund shares.
[D] a reflection of the best prices available during that specific trading day.
[A] closing market value of all the securities in the fund's portfolio plus any interest or dividend income received on the securities in the portfolio.
133
One of your customers has narrowed his investment decision down to a mutual fund containing government bonds. The customer's primary concern is preservation of capital. What should you, the RR, do in this situation?
[A] If the client is unsatisfied with the fund, you can make an arrangement to refund any sales charges associated with the fund purchase.
[B] If the client suffers a loss in the fund, you can make an arrangement to buy the fund shares back at the price paid by the customer.
[C] If the client is unsatisfied with the fund, you can make arrangements to redeem the fund shares at the current NAV.
[D] If the client does not receive their anticipated dividend from the fund, you can agree to cover the difference to ensure a consistent return.
[C] If the client is unsatisfied with the fund, you can make arrangements to redeem the fund shares at the current NAV.
134
A corporate bond is trading at 80 and has a 6% coupon. What is the bond’s current yield?
[A] 2.4%
[B] 3.1%
[C] 4.8%
[D] 7.5%
[D] 7.5%
