Final Exam Questions

Question 1

When a carrying firm receives a transfer request from the Automated Customer Account Transfer Service (ACATS) system, it must validate or protest the transfer within:
I.) A reasonable period
II.) Three business days
III.) One business day
IV.) Two business days

Answer 1

III.) One business day

Question 2

A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels?

A.) 101 3/4
B.) A discount
C.) Par
D.) A premium

Answer 2

D.) Discount

Question 3

A customer sells 500 shares of stock to a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n):

A.) Agency capacity and charged the customer a commission
B.) Principal capacity and charged the customer a commission
C.) Agency capacity and charged the customer a markup
D.) Principal capacity and charged the customer a markdown

Answer 3

D.) Principal capacity and charged the customer a markdown

A broker-dealer that is always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and a markup when selling stock to a customer. When acting in an agency capacity, the broker-dealer will normally charge the customer a commission.

Question 4

An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE?
A.) memo must be prepared describing any action taken in response to the complaint
B.) The firm must keep a copy of the complaint for six years
C.) The principal must review the complaint and submit a written response to the customer
D.) The firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted

Answer 4

A.) memo must be prepared describing any action taken in response to the complaint

All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years.

Question 5

XYZ Corporation earned $4 per share and paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price/earnings ratio of XYZ Corporation is:

A.) 9.3 to 1
B.) 2 to 1
C.) 28 to 1
D.) 14 to 1

Answer 5

D.) 14 to 1

The price/earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price/earnings ratio of 14 to 1 ($56 divided by $4 equals 14).

Question 6

The term that's used when a company sells stock to the public above par value is:
A.) Capital excess
B.) Earned surplus
C.) Paid-in capital
D.) Extraordinary earnings

Answer 6

C.) Paid-in capital

Question 7

An investor’s goal is to buy a security that establishes a fixed return, for a long period, with no reinvestment risk. Which of the following securities BEST suits the investor’s needs?

A.) Common stock
B.) Treasury bonds
C.) Treasury STRIPS
D.) Highly rated corporate bonds

Answer 7

C.) Treasury STRIPS

The typical yield-to-maturity calculation assumes that each interest payment is reinvested at the same yield. There is no guarantee that the investor could reinvest at the same yield (reinvestment risk). Treasury STRIPS are zero-coupon bonds (long-term). Interest is automatically reinvested and compounded at the same yield and reinvestment risk is avoided.

Question 8

Which of the following choices is NOT a type of overlapping debt?

A.) Debt issued between two states
B.) The issuance of debt for an adjoining school district
C.) The issuance of debt for an adjoining road district
D.) Debt issued between two counties

Answer 8

A.) Debt issued between two states

Debt issued between two states is not considered overlapping debt. Overlapping debt is general obligation debt of other governmental units for which residents of a particular municipality are responsible. It is the debt shared by residents of a municipality for services or facilities shared by several municipalities. Examples of overlapping debt include debt for an adjoining road district or school district, or debt issued between two counties.

Question 9

A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock?

A.) $48.00
B.) $40.60
C.) $25.00
D.) $30.00

Answer 9

A.) $48

If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant.

Question 10

A firm is not permitted to accept an exercise notice from a customer for a listed equity option after:

A.) 4:30 p.m. Eastern Time on the expiration date of the option
B.) 2:30 p.m. Eastern Time on the expiration date of the option
C.) 5:30 p.m. Eastern Time on the expiration date of the option
D.) 3:30 p.m. Eastern Time on the expiration date of the option

Answer 10

C.) 5:30 p.m. Eastern Time on the expiration date of the option

According to SRO rules a firm is permitted to accept from a customer, an exercise notice for a listed equity option no later than 5:30 p.m. Eastern Time on the expiration date of the option (the third Friday of the expiration month). Brokerage firms, however, may set an earlier deadline for notification of an option holder’s intention to exercise.

Question 11

A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity?

A.) $100 capital gain
B.) $100 ordinary income
C.) $100 tax-free interest
D.) $100 capital loss

Answer 11

B.) $100 ordinary income

An investor purchasing a secondary market discount municipal bond will have ordinary income if the bond is held to maturity. Since the bond was purchased at 90 ($900) and held to maturity when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as ordinary income.

Question 12

A customer sells 1,000 shares of stock and asks for the actual time of the execution. For a branch office manager, what is the appropriate action?

A.) To send the customer a copy of the order ticket
B.) To state that the firm is able to provide this information on written request
C.) To state that it is impossible to know the time of the trade
D.) To indicate that the customer should contact the equity trading desk

Answer 12

B.) To state that the firm is able to provide this information on written request

According to the SEC’s confirmation rules, a broker-dealer must automatically disclose the time of execution or indicate that the time of execution is able to be furnished on written request by a customer.

Question 13

If a firm places a temporary hold on a customer’s account:

A.) It applies to either the entire account or specific disbursements
B.) It applies to the entire account
C.) It only applies to specific disbursements
D.) It is required to obtain the prior approval of FINRA

Answer 13

A.) It applies to either the entire account or specific disbursements

If a firm places a temporary hold on a customer’s account, it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills).

Question 14

Which of the following statements is NOT TRUE of industrial development revenue bonds?

A.) They may be used to finance the construction of commercial property that will be used by private corporations
B.) They are issued by local municipal governments
C.) Their credit rating is determined by an analysis of the municipal government issuing the bonds
D.) Interest is paid from rents received from private corporations

Answer 14

C.) Their credit rating is determined by an analysis of the municipal government issuing the bonds

Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.

Question 15

A mutual fund has the following breakpoints:

Dollar Amounts	Breakpoints
$0 to $24,999	5.50%
$25,000 to $49,999	4.50%
$50,000 to $74,999	3.50%
$75,000 to $99,999	2.50%
$100,000 and above	1.50%

A customer has signed a letter of intent for $100,000 and makes the following three investments:

$35,000 in April
$52,000 in June
$24,000 in September

What’s the sales charge percentage on each purchase?

A.) April 3.50%, June 2.50%, September 1.50%
B.) April 4.50%, June 2.50%, September 1.50%
C.) April 4.50%, June 3.50%, September 5.50%
D.) April 1.50%, June 1.50%, September 1.50%

Answer 15

D.) April 1.50%, June 1.50%, September 1.50%

When signing a letter of intent (LOI), all purchases over a 13-month period are accumulated and the sales charge on the first and subsequent purchases are based on the letter of intent amount. In this example, the purchases total $111,000 and, as a result, the sales charge will be 1.50% on each purchase.

Question 16

A bond has a 6% coupon and is trading with an 8.34% basis. The bond is trading at which of the following price levels?

A.) Cannot be determined
B.) Par
C.) A discount
D.) A premium

Answer 16

C.) A discount

Basis (or yield basis) is a different method of expressing yield to maturity. In this case, the yield to maturity is higher than the coupon rate. The only time a client’s yield to maturity is above the coupon is when the bond has been purchased at a price less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.

Question 17

A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend?

A.) A collateralized mortgage obligation (CMO)
B.) A real estate investment trust (REIT)
C.) A direct participation program (DPP)
D.) A business development company (BDC)

Answer 17

D.) A business development company (BDC)

A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

Question 18

Which of the following statements is NOT a feature of GNMA pass-through certificates?

A.) Pools consist of fixed-rate residential mortgages
B.) Interest is subject to federal tax but is exempt from state tax
C.) Interest and principal payments are made on a monthly basis
D.) They are backed by the U.S. government

Answer 18

B.) Interest is subject to federal tax but is exempt from state tax

The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.

Question 19

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term rates compared to long-term rates?

A.) There is no relationship between the fluctuations in long-term and short-term rates.
B.) Both long- and short-term rates fluctuate equally.
C.) Long-term rates fluctuate more sharply than short-term rates.
D.) Short-term rates fluctuate more sharply than long-term rates.

Answer 19

D.) Short-term rates fluctuate more sharply than long-term rates.

When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices.

Question 20

An MIG rating applies to a(n):

A.) ADR
B.) BAN
C.) Convertible bond
D.) Prerefunded utility bond

Answer 20

B.) BAN

MIG (Moody’s Investment Grade) ratings apply to municipal notes. A BAN (bond anticipation note) is the only municipal note listed.

Question 21

The prospectus for a variable annuity contract:

I.) Must be filed with the SEC
II.) May be delivered electronically
III.) Must provide full and fair disclosure
IV.) Must detail all sales charges and ongoing expenses of the contract

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

Answer 21

C.) I, II, III, and IV

Question 22

On Tuesday May 1, XYX Corporation’s Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is:

A.) Tuesday, May 1
B.) Thursday, May 24
C.) Friday, May 11
D.) Monday, May 14

Answer 22

C.) Friday, May 11

Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.

Question 23

Which of the following statements is TRUE concerning electronic communication networks (ECNs)?

A.) They can be used only by institutional investors.
B.) They can be used by clients who don’t want to use a broker-dealer.
C.) They can be used only by retail investors.
D.) They can be used by investors who want to trade anonymously.

Answer 23

D.) They can be used by investors who want to trade anonymously.

Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.

Question 24

An employee of a broker-dealer owns shares of XYZ in his personal account. His spouse is a director of XYZ Corporation. If XYZ is engaged in a secondary offering of stock, can shares be purchased in a joint account that’s owned by the employee and his spouse?

A.) Yes, but only in the personal account of the spouse who’s not a director of the issuer.
B.) No, because both are considered associated persons of the firm.
C.) No, unless there are unsold portions of the secondary offering.
D.) Yes, because secondary offerings are permitted to be sold to restricted persons.

Answer 24

D.) Yes, because secondary offerings are permitted to be sold to restricted persons.

Only the sale of initial public offerings (IPOs) of equity securities are prohibited to restricted persons. Since secondary offerings are not considered new issues, they can be sold to associated persons of broker-dealers. Since the spouse is a director of the issuer, the sale would be permitted even if it was an IPO.

Question 25

XYZ convertible debentures are convertible into 20 shares of XYZ Corporation common stock. If the bonds were selling in the market at $960, what would the common stock need to be selling for to be on parity? A.) $50 B.) $20 C.) $19.20 D.) $48

Answer 25

D.) $48 To find the stock's parity price, divide the current market price of the bond ($960) by the conversion rate (ratio) which is given as 20 shares. This equals $48.

Question 26

A customer who purchases shares of an exchange-traded fund (ETF) may be extended credit by a broker-dealer: A.) If the position has been held for at least 30 days B.) If the position has been held for at least 10 days C.) Under no circumstances D.) Immediately

Answer 26

D.) Immediately In this question, the client is purchasing shares of an ETF. ETF shares trade on an exchange and are not considered new issues; therefore, credit may be extended immediately. Some investment company securities, such as mutual fund shares, are marginable under Reg. T. However, since mutual fund shares are considered new issues, the Securities Exchange Act of 1934 prevents a broker-dealer from extending credit on them for at least 30 days. Once the mutual fund shares have been held for 30 days, they may be used as collateral for a loan in a margin account.

Question 27

A syndicate is formed on an undivided (Eastern) account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is: A.)Liable to sell all of the unsold bonds B.) Not liable to sell the unsold bonds C.) Liable to sell 10% of the unsold bonds D.) Liable to sell $1,000,000 of the unsold bonds

Answer 27

C.) Liable to sell 10% of the unsold bonds In an Eastern (undivided) account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is also responsible to sell 10% of the unsold bonds.

Question 28

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the: A.) Current market value B.) Par value plus accrued interest C.) Par value less accrued interest D.) Par value

Answer 28

B.) Par value plus accrued interest A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.

Question 29

Which TWO of the following choices are characteristics of reverse convertible securities? I.) The coupon rate is usually above prevailing market rates II.) The coupon rate is usually below prevailing market rates III.) The investor may have an obligation to purchase shares of an equity security IV.) The investor may have the right to sell shares of an equity security A.) II and IV B.) I and III C.) II and III D.) I and IV

Answer 29

B.) I and III Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

Question 30

An investor that wants to hedge a portfolio of preferred stocks can buy: A.) S&P 500 call options B.) Yield-based call options C.) S&P 500 put options D.) Yield-based put options

Answer 30

B.) Yield-based call options Yield-based options are based on the yield-to-maturity of Treasury bonds, rather than the price of Treasury bonds. Essentially, yield-based calls will increase in value as bond prices fall because of the inverse relationship between yield and price. As is true for bond prices, preferred stock prices are inversely related to the movement of interest rates. An investor who wants to hedge its preferred stocks is worried that the prices will decline and that interest rates and yield-to-maturity on bonds will rise. An investor who fears that yields will rise should buy the option that gains value due to an increase in yields. The best hedge for the investor is to buy yield-based call options.

Question 31

Two similar companies issue bonds at the same time. One company issues convertible bonds and the other issues nonconvertible bonds. Which two of the following statements are TRUE? I.) The convertible bonds will probably offer a higher coupon rate. II.) The convertible bonds will probably offer a lower coupon rate. III.) The convertible bonds will probably have a higher current yield. IV.) The nonconvertible bonds will probably have a higher yield to maturity. A.) II and IV B.) I and IV C.) I and III D.) II and III

Answer 31

A.) II and IV

Question 32

Which of the following statements is NOT TRUE concerning a structured product offered by an RR? A.) The principal that the investor would receive may be based on the value of a stock traded on an exchange B.) They are usually registered with the SEC C.) Since this product is usually sold by a bank, the principal will be protected by the FDIC D.) The principal the investor would receive may be based on the value of a foreign currency

Answer 32

C.) Since this product is usually sold by a bank, the principal will be protected by the FDIC Structured products may be linked to individual securities, commodities, foreign currencies, or indexes. These products are underwritten by most major financial services institutions and are usually registered as securities with the SEC. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

Question 33

Which of the following is an expense or charge NOT normally associated with a variable annuity? A.) Administrative expenses B.) Expense charges C.) Investment management fees D.) Redemption fees

Answer 33

D.) Redemption fees Investment management fees, expense risk charges, and administrative expenses are all charges associated with variable annuities. A redemption fee is assessed upon redemption of a mutual fund.

Question 34

Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may be described as: A.) Equal and divided B.) Unequal and undivided C.) Equal and undivided D.) Unequal and divided

Answer 34

C.) Equal and undivided

Question 35

A level debt service bond issue is one in which: A.) Annual principal payments are equal B.) Annual interest payments are equal C.) All principal is paid at the issue's final maturity D.) Combined annual interest and principal payments are equal

Answer 35

D.) Combined annual interest and principal payments are equal

Question 36

In a new municipal issue, what is a group order? A.) An order placed by three or more members B.) An order allowing all members to benefit C.) An institution purchasing bonds from a syndicate D.) A dealer buying for a group of investors

Answer 36

B.) An order allowing all members to benefit 1. ) A presale order is any order placed before the syndicate that actually purchases the issue from the issuer 2. ) A group order is a situation where all members of the syndicate share in the profit 3. ) A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale 4. ) A member order is an order placed by members for their customers

Question 37

Types of orders that can be placed with a syndicate

Answer 37

1. ) A presale order is any order placed before the syndicate that actually purchases the issue from the issuer 2. ) A group order is a situation where all members of the syndicate share in the profit 3. ) A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale 4. ) A member order is an order placed by members for their customers

Question 38

A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site? I.) The FINRA logo must be displayed II.) The registered representative's firm name must be displayed III.) A reference to FINRA membership is permitted IV.) Links to other Web sites are not permitted A.) II and IV B.) I and III C.) II and III D.) I and II

Answer 38

C.) II and III Care should be taken in the design of Web sites. The name of the member firm with whom the registered representative is associated must be displayed. While the use of the FINRA logo is NOT permitted, the registered representative's association with a FINRA member firm is allowed. However, when a reference to FINRA membership is used, the Web site must provide a hyperlink to FINRA's home page. Links to other Web sites are allowed but care should be taken that these sites do not provide fraudulent or misleading information.

Question 39

Rule 145 applies to a(n): A.) Stock dividend B.) Adjustment in par value C.) Merger or acquisition D.) Stock split

Answer 39

C.) Merger or acquisition Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

Question 40

Rule 145

Answer 40

Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

Question 41

How would preferred stock most likely be affected by an increase in interest rates? A.) Its market value would increase B.) There would be no effect C.) Its dividend would decrease D.) Its market value would decrease

Answer 41

D.) Its market value would decrease Since preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as bonds. If interest rates rise, the value of existing bonds and preferred stock will fall. If interest rates fall, the value of existing bonds and preferred stock will rise.

Question 42

The maximum underwriting compensation for selling limited partnerships in public offerings is: A.) 10% B.) 15% C.) 20% D.) 5%

Answer 42

A.) 10%

Question 43

A registered representative (RR) wants to open a new account for a client who is a resident of Mexico. Which of the following statements is TRUE? A.) The client can have either a taxpayer identification number or a passport number and country of origin. B.) Customer verification of the client's personal information is not required if the customer was referred by an existing client. C.) The client must have a taxpayer identification number to open the account. D.) Customer verification of the client's personal information is required if the name is on the Office of Foreign Assets Control (OFAC) list.

Answer 43

A.) The client can have either a taxpayer identification number or a passport number and country of origin.

Question 44

A Regulation A+ exemption is allowed for an issuer that's offering: A.) Securities being sold to only residents of one specific state B.) Securities with a value not exceeding $10,000,000 C.) 500,000 shares or less D.) Securities with a value not exceeding $50,000,000

Answer 44

D.) Securities with a value not exceeding $50,000,000

Question 45

The ABC Growth Fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for: A.) The one- and five-year periods by all ranking entities B.) At least one year C.) Since the fund has not been in existence for at least 10 years, it may not use ranking based on total return in its advertising D.) The one- and five-year periods by the same ranking entity

Answer 45

D.) The one- and five-year periods by the same ranking entity The standards set forth by the SEC and FINRA regarding mutual fund communications (advertising) are that performance statistics should cover 1-, 5- and 10-year periods. If the fund has not been in existence for 10 years, then disclosure must be made for the relevant for 1- and/or 5-year periods. In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity.

Question 46

Which of the following statements is TRUE concerning reverse convertible securities? A.) The investor is anticipating that the price of the underlying asset would be above the knock-in value. B.) An investor will receive a coupon rate below prevailing market rates. C.) An investor is anticipating a decrease in the value of the underlying asset. D.) They are suitable for an investor who wants to own shares of the underlying asset.

Answer 46

A.) The investor is anticipating that the price of the underlying asset would be above the knock-in value. Reverse convertible securities are short-term notes that are issued by banks and broker-dealers and usually pay a coupon rate that's above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security that's unrelated to the issuer, a basket of stocks, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value, which is referred to as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. Since the investor is not able to participate in any increase in the value of the underlying asset, the investor is anticipating that its price will remain stable. Reverse convertibles are unsuitable for investors who want to own the underlying asset, since being obligated to buy those securities is an undesirable outcome.

Question 47

If a bond has a basis of 4.33 and a coupon rate of 5.77%, the bond is selling at: A.) Par value B.) A premium C.) A price that cannot be determined from the information given D.) A discount

Answer 47

B.) A premium Bonds may be quoted based on their yield-to-maturity, which in this example is 4.33 (basis and YTM are synonymous). Since the bond has a yield-to-maturity (basis) of 4.33%, which is lower than the 5.77% nominal yield (coupon rate), the bond is selling at a price that is above the par value of $1,000 (i.e., a premium). On the other hand, if the yield-to-maturity was higher than the nominal yield, the bond would be selling at a discount.

Question 48

The Bond Buyer Index is based on which of the following securities? A.) Treasury bonds B.) Corporate bonds C.) Mortgage bonds D.) Municipal bonds

Answer 48

D.) Municipal bonds Municipal bond indices are created by The Bond Buyer. The Bond Buyer is a financial publication that specializes in the municipal market.

Question 49

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? A.) It issues securities that can be redeemed to pay for college education B.) It purchases federally sponsored student loans C.) It provides loans to educational institutions D.) It issues securities that are not backed by the U.S. government

Answer 49

A.) It issues securities that can be redeemed to pay for college education

Question 50

A customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share, which of the following statements is TRUE? A.) The account will be closed by the broker-dealer B.) The account will be adjusted on October 23 and no margin maintenance call will be issued C.) The account will be adjusted on October 23 and a margin maintenance call will be issued D.) The account will be adjusted on October 24 and a margin maintenance call will be issued

Answer 50

C.) The account will be adjusted on October 23 and a margin maintenance call will be issued A short margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued.

Question 51

A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale? A.) $1,000 B.) $2,000 C.) None D.) $1,500

Answer 51

D.) $1,500 This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500.

Question 52

LMV & SMV Maintenance requirement

Answer 52

LMV: 25% SMV: 30%

Question 53

The closing prices of two mutual funds on Monday, July 17th are: Bid Offer Change WORLD FUND 18.30 20.00 +.10 OCEAN FUND 5.25 5.50 +.02 The sales charge of the OCEAN Fund is: A.) 9.3% B.) 4.8% C.) 4.5% D.) 8.5%

Answer 53

C.) 4.5% The sales charge of the OCEAN Fund is the difference between the bid price of $5.25 and the offer price of $5.50, equals $.25 ($5.50 - $5.25 = $.25). The sales charge is always expressed as a percentage of the offering price. The sales charge divided by the offering price of $5.50 equals a sales charge for OCEAN Fund of 4.5% ($.25 sales charge divided by the $5.50 offering price).

Question 54

A closed-end fund's shares are listed in The Wall Street Journal with a Net Asset Value of 21.85 and a Market Price of 21.50. If a customer purchases the shares at the current market price, he will pay: A.) $21.85 plus a commission B.) $21.50 plus a commission C.) $21.50 plus a sales charge D.) $21.85 plus a sales charge

Answer 54

B.) $21.50 plus a commission The customer will pay $21.50 plus a commission. Since this is a closed-end investment company, its shares will sells at their current market value ($21.50) plus a commission. On the other hand, if these were shares of an open-end investment company, they would sell at their offering price, which is the net asset value of the shares plus any applicable sales charge.

Question 55

Which of the following positions would be considered a covered option? A.) Long the stock, short a put B.) Short the stock, short a put C.) Short the stock, long a put D.) Long the stock, long a call

Answer 55

B.) Short the stock, short a put

Question 56

A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at: A.) $28 B.) The same price as before the notice appeared C.) $55 D.) A price near $60

Answer 56

D.) A price near $60 Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).

Question 57

A high net worth individual with a significant margin portfolio employs numerous hedging strategies to hedge the risk on his investments. He will find it most beneficial to use: A.) Combined margin B.) Day trading margin C.) Portfolio-based margin D.) Strategy-based margin

Answer 57

C.) Portfolio-based margin Portfolio-based margin evaluates the total risk in the margin account by taking into consideration the long and short positions, as well as various hedging strategies put in place. The margin requirement is based on the net risk in the account.

Question 58

Priority when allocating bonds in a new municipal issue

Answer 58

Presale orders normally have first priority. This is followed by group net, designated, and then member orders.

Question 59

What capacity is reported by a member firm that has conducted a net basis transaction? A.) Principal B.) Net basis principal C.) Riskless principal D.) Agent

Answer 59

A.) Principal In a net basis transaction, a dealer holding a customer order to buy, acquires the stock on a principal basis, and executes the customer order at a different price than the dealer's acquisition price. Since both legs of a net basis transaction are at different prices, the market maker will report both sides of the transaction as principal.

Question 60

What is the basic balance sheet equation? A.) Total Assets = Total Liabilities + Stockholders' Equity B.) Total Assets + Total Liabilities = Stockholders' Equity C.) Total Liabilities = Total Assets + Stockholders' Equity D.) Total Assets = Total Liabilities - Stockholders' Equity

Answer 60

A.) Total Assets = Total Liabilities + Stockholders' Equity

Question 61

A brokerage firm erroneously confirms to a customer a purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually made at 28.75. The customer: A.) Can accept the 28.75 or cancel the order B.) Can cancel the order C.) Must pay 28.75 D.) Must pay 28.25

Answer 61

C.) Must pay 28.75

Question 62

Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident: A.) After 30 days B.) After six months C.) After three months D.) Immediately

Answer 62

B.) After six months SEC Rule 147 and Rule 147A of the Securities Act of 1933 provides an exemption from registration for securities being sold on an intrastate basis. If securities are sold only to residents of a state by an issuer that is also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of six months following the last date of sale by the issuer. If an individual intends to sell the securities prior to six months, he may do so only to a resident of the same state.

Question 63

All of the following are advantages of CMOs, EXCEPT: A.) There are a variety of bond classes available B.) They generally have AAA ratings C.) They are available in denominations as low as $1,000 D.) They produce tax-free interest

Answer 63

D.) They produce tax-free interest

Question 64

The PSA Model is used when pricing: A.) Collateralized mortgage obligations B.) Treasury notes C.) Put options D.) Preferred stock

Answer 64

A.) Collateralized mortgage obligations The cash flows, future payments that a bondholder will receive, determine the market price of the bond. Collateralized mortgage obligations (CMOs) have uncertain cash flows due to the prepayments (early retirement) of mortgages. Prepayment risk is the risk that homeowners will pay off their mortgages early and the clients who invested in the securities backed by the mortgage will receive their principal prior to maturity. The Public Securities Association (now SIFMA), an association of financial services firms, created a standard model for estimating the prepayment rate for mortgage-backed securities including CMOs. This is called the PSA Model.

Question 65

An equity security that is distributed under the provisions of Regulation S may be resold in U.S. markets: A.) After a one-year waiting period is satisfied B.) After regulatory approval is obtained from an SRO C.) Immediately D.) After a 40-day waiting period is satisfied

Answer 65

A.) After a one-year waiting period is satisfied Before a security that is sold under the provisions of Regulation S may be resold in the U.S., there is a distribution compliance period (waiting period) that must be satisfied. For debt securities, the waiting period is 40 days, but for equity securities (as referenced in this question), the waiting period is one year. However, if an overseas investor acquires securities through a Regulation S offering, she may immediately sell the securities overseas through a designated offshore securities market.

Question 66

An employee of a brokerage firm has decided to open an account with an investment company to purchase various mutual funds under the company's complex of funds. The employee: A.) Is prohibited from opening the account B.) Must provide written notice to the employing firm of the new account and written notice to the investment company of the employment with the brokerage firm C.) Must provide written notice to the employing firm of the account opening D.) May open the account without notifying either firm

Answer 66

D.) May open the account without notifying either firm Written notification is not required when opening an account with another member firm if the transactions will be limited to redeemable investment company shares, variable contracts, or unit investment trusts.

Question 67

Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I.) Current yield II.) Nominal yield III.) Yield to maturity IV.) Yield to call A.) IV, III, I, II B.) I, II, III, IV C.) II, I, IV, III D.) II, I, III, IV

Answer 67

D.) II, I, III, IV A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par.

Question 68

When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T? A.) Two business days after the settlement date B.) On the settlement date C.) Two business days after the trade date D.) When the securities are delivered

Answer 68

A.) Two business days after the settlement date

Question 69

An investor owns 12,000 shares of restricted stock. There are 1,000,000 shares outstanding and the stock's average weekly trading volume over the previous four weeks is 4,000 shares. After filing Form 144, if the client had sold 2,000 shares one month ago, how many shares could be sold today? A.) 8,000 B.) 2,000 C.) 4,000 D.) 10,000

Answer 69

A.) 8,000 After filing Form 144, an investor has 90 days to sell the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks. In this example, 1% of the 1,000,000 outstanding shares is 10,000 shares, which is greater than the average weekly trading volume for the past four weeks of 4,000 shares. As a result, the investor is able to sell an additional 8,000 shares after having sold 2,000 shares in the previous month.

Question 70

A Form 3 must be filed: A.) Within two business days of the date on which a director buys or sells securities B.) Within 10 days of the date on which a director buys or sells securities C.) Within 10 days of becoming a director D.) Within two business days of becoming a director

Answer 70

C.) Within 10 days of becoming a director

Question 71

A client is seeking a safe investment that pays interest on a monthly basis. Which of the following securities would be an appropriate recommendation? A.) Preferred stock B.) Treasury notes C.) GNMA modified pass-through certificates D.) STRIPS

Answer 71

C.) GNMA modified pass-through certificates Interest (and principal) payments on GNMA pass-through certificates are made monthly. Treasury notes and bonds pay interest semiannually. Preferred stock dividends are paid to shareholders only when declared by the corporation's board of directors. STRIPS are a zero-coupon Treasury security (non-interest-bearing).

Question 72

Collateralized mortgage obligations (CMOs) make interest payments to investors: A.) Weekly B.) Daily C.) Monthly D.) Quarterly

Answer 72

C.) Monthly CMOs are issued in minimum denominations of $1,000, are backed by pass-through securities (FNMA, GNMA, and FHLMC), and pay interest and principal monthly.

Question 73

According to industry rules, all of the following are requirements for firms executing net basis trades, EXCEPT: A.) Dealers may rely upon oral authorization from institutional customers, prior to executing a net basis trade B.) Noninstitutional customers must sign a blanket consent letter to permit dealers to act in a net basis capacity C.) Dealers may rely upon a negative consent letter provided to institutional customers to conduct net basis trades D.) Prior to executing each net basis trade, a dealer must obtain written consent from noninstitutional customers

Answer 73

B.) Noninstitutional customers must sign a blanket consent letter to permit dealers to act in a net basis capacity Written consent must be obtained from noninstitutional customers on an order-by-order basis, prior to conducting a net basis trade. For institutional customers, the firm may obtain oral or written consent prior to each net basis transaction, or depend on a negative consent letter.

Question 74

Which of the following terms is associated with the process of a customer instructing his bank to deliver securities against payment by the clearing firm? A.) Power of Attorney (POA) B.) Receipt versus Payment (RVP) C.) Delivery versus Payment (DVP) D.) Cash on Delivery (COD)

Answer 74

B.) Receipt versus Payment (RVP) DVP (Delivery versus Payment) and COD (Cash on Delivery) are general acronyms used to describe a relationship in which a customer uses a bank to settle trades with executing firms. The firm delivers securities against the bank payment and pays against the bank delivery of securities. When discussing a given transaction, a DVP occurs when the dealer delivers securities to the bank in return for a cash payment from the bank. An RVP (Receipt versus Payment) occurs when the dealer receives securities from the bank and makes a cash payment to the bank. The transaction described in the question is an example of an RVP transaction in which the customer's bank is delivering securities in return for payment by the broker-dealer. It is important to remember that customers (usually institutions) set up brokerage accounts and place orders at these firms. However, trades settle through custodian banks designated by the customers. The broker-dealer will contact the bank, which will send payment or receive securities on behalf of the customers. The broker-dealer will not hold the customer funds or securities.

Question 75

Which of the following statements is TRUE concerning the reporting of riskless principal and net basis transactions? A.) For net basis transactions, the broker-dealer is required to disclose the amount of markup to the customer. B.) Riskless principal require two separate trade reports C.) Net basis transactions may be reported as one transaction D.) For riskless principal transactions, the broker-dealer is required to disclose the amount of markup to the customer.

Answer 75

D.) For riskless principal transactions, the broker-dealer is required to disclose the amount of markup to the customer. A riskless principal transaction is a trade in which a broker-dealer executes a customer's order that it's holding by buying (or selling) a security and then simultaneously selling (or buying) that security for the customer at the same price (plus a markup, which must be disclosed to the customer). A securities transaction for a riskless principal trade is reported under a single report. A net basis transaction involves a broker-dealer filling a customer's order that it's holding by buying (or selling) a security at one price and selling (or buying) that security for a customer at a different price. (Only the net price is disclosed to the customer.) A net basis trade requires two separate reports. There are specific consent requirements for a broker-dealer to engage in net basis trading with customers. Customer consent varies depending on whether the customer is institutional or retail.

Question 76

Broker-dealers are required to send account statements to customers no less frequently than: A.) Monthly, if a transaction occurred B.) Quarterly C.) Monthly D.) Quarterly, if a transaction occurred

Answer 76

B.) Quarterly SRO rules require that broker-dealers send quarterly account statements to customers. Most broker-dealers send monthly statements if there is activity in the account, but rules do NOT require monthly statements.

Question 77

A client redeems shares of a mutual fund. According to current regulations, a check must be sent within how many days of submitting a redemption notice? A.) 5 days B.) 10 days C.) 7 days D.) 15 days

Answer 77

C.) 7 days

Question 78

Largest portion of the underwriting spread in a new municipal securities issue and what is it made up of?

Answer 78

Total takedown Made up of additional takedown plus the concession

Question 79

Which of the following choices is NOT a factor in secondary-market municipal joint accounts? A.) Members may not publish different offering prices B.) They require a good faith deposit C.) There may be an order period D.) There may be a takedown

Answer 79

B.) They require a good faith deposit

Question 80

Which TWO of the following activities are normally functions of the investment banking department of a broker-dealer? I.) Working with issuers to raise capital II.) Selling securities to institutional investors III.) Assisting companies with mergers and acquisitions IV.) Making a secondary market for new issues A.) I and III B.) II and IV C.) II and III D.) I and IV

Answer 80

A.) I and III A corporation that wishes to raise capital will typically employ the services of an investment banker and engage in an underwriting process. Investment bankers provide financing for corporations by bringing an issue, whether debt or equity, to market for the issuer. The investment banking department will also assist companies with mergers and acquisitions. Investment bankers do not make a secondary market for new issues or sell securities to institutional investors.

Question 81

Money received by a corporation when it sells its stock above its par value is called: A.) Earned surplus B.) Excess capital C.) Stockholders' capital D.) Paid-in capital

Answer 81

D.) Paid-in capital Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends.

Question 82

Which TWO of the following choices are characteristics of reverse convertible securities? I.) They are short-term securities II.) They are usually long-term securities III.) The investor is guaranteed to receive his original principal back at maturity IV.) The investor may receive less than the value of his original principal back at maturity A.) II and IV B.) I and IV C.) I and III D.) II and III

Answer 82

B.) I and IV Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

Question 83

Money put aside on a municipal revenue issue for the betterment and improvement of the facility is placed in the: A.) Sinking fund B.) Debt service fund C.) Operating and maintenance fund D.) Renewal and replacement fund

Answer 83

D.) Renewal and replacement fund

Question 84

Calculating total equity in a combined (mixed) margin account

Answer 84

Long market value, plus credit balance, minus debit balance, minus short market value

Question 85

The purchase of a new issue prior to settlement with the issuer can BEST be described as a: A.) Violation of the Securities Act of 1933 B.) Subject or workout transaction C.) When-issued transaction D.) Seller's option contract

Answer 85

C.) When-issued transaction The term when-issued covers the period of a new issue of municipal securities from the original date of sale by the issuer to the delivery of securities to the underwriter. The purchase or sale of new issue securities prior to registration may be a violation of the 1933 Act.

Question 86

The settlement date between the Options Clearing Corporation and the clearing firm for options transactions is: A.) Two business days from the settlement date B.) One business day from the trade date C.) Two business days from the trade date D.) Ten business days from the settlement date

Answer 86

B.) One business day from the trade date

Question 87

Which of the following best describes a guaranteed bond? A.) A bond on which the U.S. Treasury promises to pay interest and principal if necessary. B.) A bond for which another corporation promises to pay interest and principal if necessary. C.) A bond where the trustee pays interest and principal. D.) A bond that's insured by SIPC.

Answer 87

B.) A bond for which another corporation promises to pay interest and principal if necessary. A guaranteed bond is one that, along with its primary form of collateral, is secured by a guarantee of another corporation. The other corporation promises that it will pay interest and principal if necessary. A typical example is a parent company guaranteeing a bond that’s issued by a subsidiary company.

Question 88

A due bill is used if a trade occurs: A.) Before the ex-dividend date, with delivery made after the record date B.) After the record date C.) Before the ex-dividend date, with delivery made before the record date D.) After the ex-dividend date

Answer 88

A.) Before the ex-dividend date, with delivery made after the record date A due bill is evidence that a dividend is due to a buyer of stock, but will be paid to a seller instead. An individual who buys stock prior to the ex-dividend date is entitled to the dividend. For the buyer to receive the dividend, the transaction should settle either at or prior to the record date; therefore the transfer agent will recognize that there is a new owner of record. However, if the seller fails to deliver the stock by the record date, the transfer agent will not be aware of the identity of the new buyer and will still have the original owner listed as the holder of record. In this case, the dividend will be delivered to the seller. When the seller delivers the stock, he will attach a due bill as evidence that the dividend will be turned over to the buyer when it is paid.

Question 89

Relating to a municipal bond swap, which of the following would NOT be a consideration? A.) The maturity B.) The amount of accrued interest C.) The quality D.) The coupon rate

Answer 89

B.) The amount of accrued interest

Question 90

Regulation NMS applies to which TWO of the following choices? I.) Listed equity trades II.) Listed debt trades III.) Quotes available for manual execution IV.) Quotes available for electronic execution A.) II and IV B.) I and III C.) II and III D.) I and IV

Answer 90

D.) I and IV One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers. Reg NMS does not apply to securities subject to manual execution. Nor does it apply to debt securities, whether electronically or manually executed.

Question 91

According to MSRB rules, a municipal bond dealer will NOT consider which of the following factors when determining a markup? A.) Expenses B.) Profit C.) Total dollar amount of the transaction D.) Coupon rate

Answer 91

D.) Coupon rate

Question 92

What is the breakeven point for a short seller who writes a put

Answer 92

Market price of the short sale plus the premium

Question 93

Which of the following choices gives the best indication of current interest rates on revenue bonds? A.) List of 20 bonds B.) Visible supply C.) List of bonds with 30-year maturities D.) Placement ratio

Answer 93

C.) List of bonds with 30-year maturities The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.

Question 94

A customer has sold stock, but he has failed to complete the transaction by delivering the securities. The latest date on which the broker-dealer may buy in the securities is: A.) One business day from the trade date B.) Ten business days from the settlement date C.) Two business days from the settlement date D.) Three business days from the trade date

Answer 94

B.) Ten business days from the settlement date SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and for maintaining custody of securities. Under the custody of securities section, a brokerage firm must buy in securities within 10 business days from settlement if a customer has failed to deliver the securities that were previously sold.

Question 95

An investor sells ten 5% bonds and buys another 10 bonds with a 5 1/4% coupon rate. The investor's yearly cash flow from the bonds will have increased by: A.) $1.50 per bond B.) $2.50 per bond C.) $1.25 per bond D.) $5.00 per bond

Answer 95

B.) $2.50 per bond The investor's yearly return will have increased by $2.50 per bond. The increase is 1/4% (5% to 5 1/4%), which is 1/4 of 1% of the par value of $1,000, or $2.50.