Kaplan QBank Questions Flashcards

Question

Amortization of a municipal bond premium does which of the following? ``` Increases cost basis. Decreases cost basis. Increases reported interest income. Decreases reported interest income. A) I and IV. B) II and III. C) I and III. D) II and IV. ```

Answer 1

The correct answer was: II and IV. Tax law requires municipal bond premiums to be amortized. The effect of amortization is to decrease reported interest income and cost basis. If held to maturity, the cost basis will have been amortized down to par. Therefore, at maturity, there is no reported capital loss.

Answer 2

The correct answer was: Confirms the bonds to the member that did not sell its share. Because this offer is a divided, or Western, syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory.

Answer 3

The correct answer was: rate risk. If debt is not used by the partnership, rate risk does not exist.

Answer 4

The correct answer was: within 30 calendar days after the issuer delivers the securities to the syndicate The maximum length of time a new issue municipal bond syndicate can exist is 30 calendar days after the issuer delivers the securities to the syndicate. At that time the account must be settled and allocation of unsold bonds be determined in accordance with each members original allocation and whether the syndicate was set up as divided (western) or undivided (eastern).

Answer 5

The correct answer was: TANs. When a city needs short-term cash flow to meet ordinary operating expenses (e.g., to meet the payroll for city employees), it issues TANs. These notes are paid off when the city collects the expected tax revenues.

Answer 6

The correct answer was: I and IV Commercial paper and negotiable certificates of deposit are short-term debt securities and are considered money market securities.

Answer 7

The correct answer was: fill out an error or trade correction report and notify a principal. Documenting errors or mistakes and notifying a principal should occur immediately. Filling out an error or trade correction report would be appropriate in this case. In-house procedures for the handling of errors can then be followed once documentation and notification have occurred

Answer 8

The correct answer was: estate taxes are reduced A TOD account avoids probate, but not estate taxes. The owner of the account may change beneficiaries and their percentages as he wishes. The TOD account is an account at a specific broker/dealer and only relates to the assets in that account.

Answer 9

The correct answer was: Issuing new bonds with an equal lien on the project's revenues The additional bonds test must be met under the provisions of a revenue bond indenture before additional bonds with an equal lien on project revenues can be issued. The conditions under which additional bonds may be issued are specified in the bond indenture. This is an open-end covenant.

Answer 10

The correct answer was: An airport district. Overlapping debt refers to property tax districts (areas). Airport issues are usually revenue issues of an authority that has no property taxing powers.

Answer 11

The correct answer was: gives 1 day's written notice to the buyer In a seller's option trade, the seller may (at his option) give the buyer written notice 1 day before making delivery.

Answer 12

The correct answer was: A statement of additional information (SAI) need not be included in the prospectus of a management company. A statement of additional information (SAI) need not be in a prospectus but available for both open and closed-end investment companies. It consists of information not necessarily needed to make an informed purchase decision but still useful to the investor. The SEC however mandates that "enhanced disclosure" in the form of a summary section be included in the prospectus of open-end investment companies (mutual funds). It must be written in plain language and the SEC mandates the order of, and the items to be addressed in the summary.

Answer 13

The correct answer was: Common stock fund. A common stock fund will help the couple meet their long-term growth objective

Answer 14

The correct answer was: an individual with a net worth of $750,000. Accredited investors include institutions, individuals with a net worth of $1 million or more not to include net equity in a primary residence, individuals with annual income of $200,000 or more, and officers and directors of the issuer.

Answer 15

The correct answer was: 100% taxable When TSA funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable.

Answer 16

The correct answer was: Special situation. A company with a patent pending is known as a special situation.

Answer 17

The correct answer was: 2500. The customer has hedged his short stock position from a market advance by buying the call. If the market falls, the investor can make a maximum of $26 per share if the stock price falls to zero, less the premium of 1 paid to buy the call, for a maximum gain of $2,500 (26 − 1 = 25).

Answer 18

The correct answer was: A bond confirmation will show YTC if the bond has been called under an in-whole call provision A bond confirmation for a bond called under an in-whole call provision will show YTC as the bond being called away is certain. However, in the event of an in-part call, there is uncertainty as to whether that particular bond will be called. Therefore, the lower of the YTC or YTM would be shown on the confirmation.

Answer 19

The correct answer was: I, II, III and IV When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be pre-refunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of pre-refunded bonds is AAA, as they are now backed by U.S. government securities.

Answer 20

The correct answer was: Building permits. Increases in building permits are indicative of increased, future business activity and are therefore considered a leading economic indicator. Increases in personal income and employment levels reflect current, not future activity, and would be considered coincident indicators. Corporate profits are lagging economic indicators.

Answer 21

The correct answer was: Savings accounts Savings accounts carry no market risk, which, by definition, is the risk that an investor will experience losses due to day-to-day fluctuations in the prices of securities bought and sold in the market.

Answer 22

The correct answer was: I and III Information that does not appear on a when-issued confirmation can easily be remembered as SAT (settlement date, accrued interest, and total amount due). The trade date and price per bond are included on the when-issued confirmation.

Answer 23

The correct answer was: I only. The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets since it is an exchange of one asset (cash) for another asset of equal value (equipment). Since no loan was needed, it does not affect total liabilities, nor does it affect equity.

Answer 24

The correct answer was: the symbol "ss" on the consolidated tape The symbol "ss" does not designate "short sale." It is used to identify stocks traded in 10-share units

Answer 25

The correct answer was: I and IV The after-tax contribution limit of $2,000 can be reduced or eliminated for high-income taxpayers. However, there are no income limitations placed on individuals opening Section 529 plans.

Answer 26

The correct answer was: not allowed because Rule 144 stock may not be sold unrestricted by an affiliate. Rule 144 stock is considered to be illiquid. It cannot be sold unrestricted by an affiliate and could, therefore, not be used to cover the calls in the event the calls were exercised.

Answer 27

The correct answer was: Buy shares of different funds in the same fund family and you may qualify for a breakpoint on the total purchase Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a mutual fund includes dividends only. A group of friends is not eligible for a breakpoint (investment clubs are not eligible). "Selling dividends" is a prohibited practice because of the immediate tax liability incurred with the dividend and share price adjustment that results after the dividend distribution.

Answer 28

The correct answer was: I and IV. Treasury bills are purchased at a discount and mature at face value. This feature provides principal stability to investors who own them. The discount on bills is determined by current market interest rates and fluctuates accordingly.

Answer 29

The correct answer was: IV, I, III, II The complete order of liquidation is as follows: wages, taxes, secured debt, debentures and general creditors, subordinated debentures, preferred stock, common stock.

Answer 30

The correct answer was: I and III A good faith deposit is required when the syndicate places a bid on a competitive offering. It is generally 1% to 2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is returned by the issuer to the syndicate manager.

Answer 31

The correct answer was: I and III. Contributions to qualified plans are made with pretax dollars and earnings grow on a tax-deferred basis, so the cost basis is zero. Therefore, any distributions will be taxed as ordinary income. In addition, there is a 10% penalty on withdrawals made prior to reaching age 59-½.

Answer 32

The correct answer was: own a small financial interest in a publicly traded retail company Registered representatives must notify their employer in writing and be permitted to engage in any other business, serving as an officer or director of another business organization, or own any interests in a privately held financial services company. Publicly held shares do not require consent provided there is no control relationship (defined as 10% or more ownership).

Answer 33

The correct answer was: I, II, III and IV On an exchange floor, a customer short sale can be executed at any time in the trade sequence.

Answer 34

The correct answer was: the sale of restricted stock to institutional investors. Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs).

Answer 35

Your answer, 80%., was correct!. A bank-qualified municipal bond issue is a small issue, generally a GO issue of $10 million or less. If a bank were to purchase any part of a qualified issue, 80% of the annual costs necessary to fund the purchase would be tax deductible to the bank.

Answer 36

The correct answer was: I and III. The Trade Reporting and Compliance Engine (TRACE) is the FINRA approved trade reporting system for corporate bonds trading in the OTC secondary market. It is not an execution system. Both sides of a TRACE eligible transaction are required to report a trade when it occurs.

Answer 37

The correct answer was: daily trading volumes on the NYSE. Trading volume interests the technical analyst, who looks at fluctuations in the market, not at fundamental economic values.

Answer 38

The correct answer was: Liquidate the entire account and remit any balance to the customer. If a customer does not meet a Fed call, the firm can use existing SMA to meet the call, request an extension of time from its designated examining authority, or liquidate the unpaid portion. The firm would not close out the account.

Answer 39

The correct answer was: It is not subject to federal income tax Interest from public purpose municipal bonds is exempt from federal income tax and most states have chosen to make interest on their municipal bonds exempt from state income tax to residents of their states.

Answer 40

The correct answer was: must have specific authorization from the customer Even in a discretionary account, a registered representative may not exercise discretion when a control relationship exists between the issuer and the dealer without first receiving the customer's permission.

Answer 41

The correct answer was: Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses. Coverdell ESAs offer after-tax contributions of up to $2,000 per student per year for children under age 18. Distributions are tax free as long as the funds are used for education

Answer 42

The correct answer was: available for public evaluation. The law states that inside information is considered public information when the public has had a chance to evaluate it.

Answer 43

The correct answer was: An employee of the company selling registered shares purchased in the open market. Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.

Answer 44

The correct answer was: 4 months. Once notification of enrollment for testing has been received by the broker/dealer the candidate will have 120 days (4 months) to successfully complete (pass) the exam. This is commonly referred to as the "testing window".

Answer 45

The correct answer was: principal repayment on recourse debt. Principal repayments are not deductible for tax purposes. The interest is deductible.

Answer 46

The correct answer was: purchase FHA-insured, VA-guaranteed, and conventional mortgages. The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.

Answer 47

The correct answer was: 30 Member firms must provide new customers with a copy of the account record (new account form) within 30 days of opening the account; this ensures the information the firm has on file is accurate.

Answer 48

The correct answer was: The entire $10,000 is taxable as ordinary income. The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or LIFO). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59-½, there will be a tax penalty of an additional 10%.

Answer 49

The correct answer was: It may either halt or continue trading as it sees fit. The over-the-counter market is not bound by actions of the NYSE or other exchanges, and third-market trading may continue in the stock.

Answer 50

The correct answer was: I, II and III As with all discretionary accounts, a principal must approve transactions promptly after execution and the account must be reviewed frequently by a principal. Because this is a discretionary account which allows municipal securities to be traded in it, these functions must be performed by a municipal securities principal. Without the customers consent, the broker/dealer cannot effect transactions in the customers account for municipal securities in which a control relationship exists between the broker/dealer and the issuer. To effect such transactions the broker/dealer must make full disclosure of the relationship and obtain the customers consent, but termination of the relationship is not required.

Answer 51

The correct answer was: prohibited because FINRA rules do not allow registered representatives to guarantee customers against loss. A representative may never guarantee a customer against a loss. This is specified in the Conduct Rules, not the Uniform Practice Code.

Answer 52

The correct answer was: 5-½%, 5% basis, maturing 2010. Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a premium bond, the yield to call is the lower of the two.

Answer 53

The correct answer was: customer's name and deliver the securities to the customer. The term "transfer and ship" means to transfer the securities into the name of the customer and to ship (deliver) the securities to the customer. Hold in street name would require the securities to be transferred into the name of the broker/dealer and held in safekeeping.

Answer 54

The correct answer was: Shelf. A shelf registration with the SEC allows an issuer to sell the registered securities for up to 3 years from the effective date. This allows an issuer to time its sales with market conditions.

Answer 55

The correct answer was: 1.6 million shares and 800,000 warrants. Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains 2 shares, 1.6 million shares are being distributed. As each unit also includes 1 warrant, 800,000 warrants are being distributed.

Answer 56

The correct answer was: manager accepts and allocates orders without considering time of submission. The order period is a short period of time following the award of a municipal issue to the winning syndicate. During the order period, orders for an issue of municipal bonds are allocated in accordance with the priority defined in the syndicate letter, not on a first come-first served basis.

Answer 57

The correct answer was: 315. The gain or loss is the difference between the price paid for buying the option, which is $350, and the price received for selling the option, which is $665. This equals $315. Remember, you buy at the asked price and sell to the bid.

Answer 58

The correct answer was: designated examining authority. If a member firm suspends a registered representative, the firm must report the suspension to its designated examining authority (DEA), which typically is FINRA or the exchanges where the firm is a member. Each DEA is a self-regulatory organization. The notice must be made within 10 business days of the suspension.

Answer 59

The correct answer was: trust agreement. A defined contribution plan's trust agreement contains a section explaining the formula(s) used to determine the contributions to the retirement plan.

Answer 60

The correct answer was: file a reclamation. After receiving the securities, the broker/dealer can file a reclamation and demand good delivery.

Answer 61

The correct answer was: 6%. Excess IRA contributions are subject to a yearly penalty of 6% until they are either withdrawn together with associated growth or applied to the following year's contribution limit.

Answer 62

The correct answer was: YTC is the same as YTM. If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

Answer 63

The correct answer was: 73. The cost basis is 80 (price at which the writer must buy) minus 7 (premium the writer was paid), or $73 per share.

Answer 64

The correct answer was: A Build America Bond (BAB). Build America Bonds (BABs) are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations.

Answer 65

The correct answer was: the disbursement of principal and interest payments must be approved semiannually by the state public service commission. This must be a revenue bond because it is not backed by the full taxing authority of the city. Rather, the principal and interest are paid by the users of the facility. The public service commission has no approval power over revenue bond interest and principal payments.

Answer 66

The correct answer was: advance/decline line. The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

Answer 67

The correct answer was: obtain a representation from the conduit that the purchaser is not a restricted person. When receiving an order to buy a new equity issue from a bank, investment adviser, or other conduit, a member must obtain a representation from the conduit that all purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons).

Answer 68

The correct answer was: I and II A broker/dealer's retail communications must be approved by a principal of the firm before use or filing with FINRA when filing is required, and must be kept on file for at least three years. Pre-filing with FINRA can depend on a number of factors, such as the product. For example, pre-filing of retail communications is required for certain pieces having to do with investment companies and VAs, but not for pieces having to do with DPPs or CMOs.

Answer 69

The correct answer was: Monday. Municipal bonds, like corporate bonds, settle 3 business days after the trade date. December 25 (Christmas) is not a business day.

Answer 70

The correct answer was: TIC commodities account with son. SIPC coverage only applies to accounts holding securities; commodities accounts are not covered.

Answer 71

The correct answer was: municipal notes. Moody's Investment Grade Ratings are applied to municipal notes which are short-term municipal debts, such as bond anticipation notes (BANs).

Answer 72

The correct answer was: I and IV. If the FRB decides to attempt to curb inflation, it can raise the discount rate which in turn tightens the money supply.

Answer 73

The correct answer was: II and IV. Customer portfolio margining (CPM) allows margin requirements to be calculated based on the net risk of a portfolio of securities rather than applying margin calculations separately to each position. While a number of criteria must be met before offering portfolio margining to a customer, generally it will result in lower margin requirements than when margin is calculated conventionally.

Answer 74

The correct answer was: No, because the customer cannot make a profit on these trades. These trades are not suitable because the customer will not make a profit. In any price spread, the net debit represents maximum loss; in this case, the net debit is 5 points, or $500. Maximum loss added to maximum gain will always equal the difference between the strike prices. In this example, the difference between the strike price is 5 points, therefore maximum gain is 0.

Answer 75

The correct answer was: the report is regulated under FINRA's rules regarding communications with the public The reports are required to be supplied to IC shareholders under the Investment Company Act of 1940. They are prepared and distributed by the investment companies. Unless forwarded by broker/dealers to their customers, the semiannual reports would not be regulated under FINRA's communication with the public rules for broker/dealers.

Answer 76

The correct answer was: 5600. The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000, therefore the credit balance is $5,600 ($3,600 + $2,000 = $5,600).

Answer 77

The correct answer was: $45.45. To compute a new conversion price, divide the current conversion price by 100% plus the percent increase in shares. $50 / 110% = $45.45.

Answer 78

The correct answer was: A custodian. Assigning authorization to a third party is giving discretionary authority to someone else. The custodian of an account is the person with discretionary authority over the account. To assign the authority to someone else, unsupervised, is not allowed.

Answer 79

The correct answer was: with guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is guaranteed With guaranteed minimum withdrawal benefits (GMWBs) a lifetime of periodic payments is not guaranteed because payments stop when the annuitant has received an amount equal to the principal account value or the contract term ends. Each of the remaining statements are true.

Answer 80

The correct answer was: to protect a profit in a long position. Buying can only protect short positions, not long positions.

Answer 81

The correct answer was: could jeopardize his limited partner status. If limited partners, either individually or as a group, become too involved with the business of the partnership, they could be considered to be general partners and lose their limited liability.

Answer 82

The correct answer was: stable. The writer, or seller, of a combination expects the market to be stable. The buyer of a combination expects the market to be volatile. Combinations and straddles are never bullish or bearish, as there are always both calls and puts involved in the strategy, which are both bullish and bearish. Remember, the definition of a combination is a put and a call on the same underlying security with the strike prices and/or the expiration months being different.

Answer 83

The correct answer was: divided account. This is part of an agreement for a Western (divided) syndicate.

Answer 84

The correct answer was: is also called a prospectus. The official statement is the disclosure document for each new issue of exempt municipal bonds. Although it is similar to a prospectus, these terms are not synonymous. The official statement commonly includes information about the call provisions of the bond, creditworthiness of the issuer, and other information potential purchasers should know before investing.

Answer 85

The correct answer was: The representative should have fully explained the features, charges, price fluctuations, and other characteristics of a bond fund before having the customer make such a substantial investment commitment. This customer is used to low-risk investments. The prospectus must not only be supplied, but the risks fully explained as well.

Answer 86

The correct answer was: The death benefit cannot ever be more than the guaranteed benefit. The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company’s general account. The remainder of the premium is invested in the separate account. While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount.

Answer 87

The correct answer was: The excess securities above 140% of the accounts debit balance. A broker/dealer may hypothecate (pledge) 140% of a customer’s debit balance. Any customer securities in excess of 140% of the debit balance must be physically segregated.

Answer 88

The correct answer was: II and III. Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases.

Answer 89

The correct answer was: 79 This is a covered call writer. If the stock rises above $90, the writer will be exercised and will make $700 on the stock (buy at $83, deliver at $90) and keep the $400 received in premiums. If the stock declines, the call expires unexercised. The writer can lose $400 on the stock (the premiums earned) and still break even. This occurs at $79 ($83 − $4). Breakeven is cost of stock purchased less premiums.

Answer 90

The correct answer was: is not allowed because the BD has in-house rules prohibiting tweeting in regards to business FINRA has offered guidance on the use of electronic modes of delivering business-related content communications to the public. It does not prohibit the use of any technology or device but can offer and update guidance with regards to any specific technology or device. Within that guidance, FINRA has stated that in-house prohibitions on the use of any technology or device that have been mandated by the BD must be adhered to by all BD personnel.

Answer 91

The correct answer was: Likely bid. A municipal dealer wishing to dispose of a block of bonds will seek a workable indication from another municipal dealer. The workable indication from another municipal dealer is not a firm bid but a range.

Answer 92

The correct answer was: sell 1,500 shares at 10. This market maker has quoted a size of market of 1,300 − 1,500, which means it stands ready to buy a maximum of 1,300 shares at $10 and sell a maximum of 1,500 shares at 10.50. A sale of 1,500 shares at 10 is outside the size of this quote.

Answer 93

The correct answer was: $300 short-term capital loss. A $900 closing cost minus $600 opening proceeds equals a $300 short-term loss.

Answer 94

The correct answer was: The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment.

Answer 95

The correct answer was: I and III. Arbitration is mandatory in disputes between members. If mediation takes place and is not successful, the dispute moves on to arbitration. The person who served as mediator may not be an arbitrator in the same dispute.

Answer 96

The correct answer was: liquidate $3,000 of securities and freeze the account for 90 days. When an investor buys and sells different securities in the same account on the same day, the two transactions can be netted against each other to determine whether money is due to the client or the client owes money to the firm. In this question the client owes the firm $3,000 (an $8,000 purchase netted against a $5,000 sale). According to Regulation T, the investor has 2 business days after settlement (5 days total) to pay the amount owed. Since he has failed to do so and no extension has been obtained, the unpaid-for portion of the trade, which is $3,000, will be liquidated and, according to Regulation T, the account will be frozen for 90 days.

Answer 97

The correct answer was: Original issue discount. Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount.

Answer 98

The correct answer was: II and III. The broker/dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker/dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker/dealer is not required to disclose where it acquired the bonds or the price it paid. Reference: 3.4.5.1.2 in the License Exam Manual.

Answer 99

The correct answer was: Lowest risk of capital. Oil and gas income programs own producing wells and pass through their depletion allowances. There is little risk compared to other programs, such as exploration.

Answer 100

The correct answer was: send the proxy material to the beneficial owners at the issuing company's expense. A securities firm that is a member of FINRA must forward all proxy material to the beneficial owners for all securities held in street name, and the issuers must bear the expense of shipping the proxy material.

Answer 101

The correct answer was: II and IV. Contributions to a Coverdell Education Saving Account (ESA) are made with after- tax dollars. Distributions used for qualified educational expenses are tax free.

Answer 102

The correct answer was: FRB. The Federal Reserve Board determines whether any security is marginable.

Answer 103

The correct answer was: sentence the abuser to a prison sentence. The IRS does not have the authority to hand out prison sentences.

Answer 104

The correct answer was: a municipal bond Because the interest received from municipal bond investments is tax-free, the IRS does not allow interest paid for loans to purchase municipal bonds as a deductible item on one's tax return, as it would for other securities purchased with loans (margin).

Answer 105

The correct answer was: II and III. If 1 basis point equals .01%, 25 basis points equal .25%. .25% of $10 (which is the value of one full point for a bond) = $2.50.

Answer 106

The correct answer was: municipal bonds where a control relationship exists. Even though the representative has discretionary authority to trade the account, the MSRB requires that the representative receive customer permission prior to purchasing bonds where the firm has a control relationship with the issuer.

Answer 107

The correct answer was: insiders such as corporate employees. According to the Insider Trading and Securities Fraud Enforcement Act of 1988, contemporaneous traders are corporate outsiders who make trades at about the same time as insiders. They are granted the right to sue inside traders for damages sustained.

Answer 108

The correct answer was: inflation risk. The major risk assumed by any investor in long-term high-quality bonds is inflation or purchasing power risk. AAA rated debt securities are likely to earn a lower rate of return, which over a longer period of time might not keep up with the rate of inflation.

Answer 109

The correct answer was: I and III. Owners of variable annuities, like owners of mutual fund shares, may vote on changes in investment policy and for an investment adviser. Withdrawals from a nonqualified variable annuity are made on a LIFO basis, so the taxable earnings are considered taken out before principal.

Answer 110

The correct answer was: II and IV. A debit put spread is a bearish strategy that could realize a profit (the difference between the strike prices minus the premium paid for the spread) if the stock price fell. A long combination, which consists of both a long call and a long put, is both bullish and bearish and could also yield a profit if the stock price fell as the result of the long put. However, both a debit call spread and a long call are bullish strategies and would not be used if one is bearish on the stock. Reference: 4.4.1.4 in the License Exam Manual.

Answer 111

The correct answer was: The power of attorney must have the customer's signature. The registered representative must have prior written authority from the customer and approval from a principal before exercising discretionary authority. Although a designated principal must review the account frequently and review and approve all trades on a daily basis, prior approval of discretionary orders is not required.

Answer 112

The correct answer was: 32000. Combined equity is found with the following equation: LMV plus CR minus DR minus SMV equals combined equity, or $35,000 plus $60,000 minus $23,000 minus $40,000 equals $32,000. SMA has no impact on the combined equity.

Answer 113

The correct answer was: 80%. A bank-qualified municipal bond issue is a small issue, generally a GO issue of $10 million or less. If a bank were to purchase any part of a qualified issue, 80% of the annual costs necessary to fund the purchase would be tax deductible to the bank.

Answer 114

The correct answer was: buy shares of the target company (XYZ) and short shares of the aggressor (ABC) The most common form of risk or takeover arbitrage is to purchase the shares of the target company and short the shares of the aggressor, believing that the potential acquisition will raise the target company's share price and decrease the share price of the aggressor.

Answer 115

The correct answer was: One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds. A bank-qualified municipal issue is one that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry (issue) the bonds. An issue is qualified if it is for a public purpose and the issuer issues no more than $10 million in the calendar year of the issue. Bank qualified has no bearing on the quality of the issue.

Answer 116

The correct answer was: Near-term call. The near-term call would mean that no matter how attractive the bond's other features, the client may not have very long to enjoy them.

Answer 117

The correct answer was: Federal funds rate. The Federal Reserve Board's actions to influence the money supply are first felt on the federal funds rates.

Answer 118

The correct answer was: Variable annuities. Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.

Answer 119

The correct answer was: 23000. The investor pays $48 per share for the stock and receives $2 for selling the calls. The maximum loss is $48 per share minus the option premium collected, or ($48 − $2) × 500 shares = $23,000.

Answer 120

The correct answer was: not approve the order. Because this is a debit spread, the maximum gain occurs if both sides are exercised. If this occurs, the investor earns $5 (buy stock at 55 when the short put is exercised and sell stock at 60 by exercising the long put). Because the net premium paid for the spread is $5, there can never be any gain. This spread is not economical.

Answer 121

The correct answer was: One pound equals $1.4847. The exchange rate refers to U.S. cents per British pound; 148.47 equals $1.4847.

Answer 122

The correct answer was: Payroll deduction plan. A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

Answer 123

The correct answer was: 3 years. Mutual fund performance statistics must show results for 1, 5, and 10 years, or the life of the fund, whichever is shorter.

Answer 124

The correct answer was: buy 500 shares at 48 stop. For stock dividends, all orders on the book are adjusted and the order value must be the same before and after the adjustment. Before the adjustment 400 ABC at 60 Stop = $24,000 total value. After the adjustment total shares on the buy order will be 500 (400 × 25% = 100 new shares, 400 + 100 = 500). To arrive at the new STOP price divide the total order value by the new number of shares ($24,000 / 500 shares = 48). After the adjustment the new order will read; buy 500 shares at 48 stop.

Answer 125

The correct answer was: I, II and III. To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: past due, currently due, and subsequently due.

Answer 126

The correct answer was: dealer (or principal). A specialist (designated market maker) buying for his own account is operating as a dealer, which means he is acting as a principal in the transaction.

Answer 127

The correct answer was: property values. Increasing property values would actually have a tendency to increase the taxes paid to the municipality.

Answer 128

The correct answer was: II and III. Repurchase agreements are used by financial institutions to raise cash for short periods of time, typically overnight. Because these agreements are of such short duration, their rate (also known as the repo rate) is generally going to be lower than bank loan rates at that time.

Answer 129

The correct answer was: Nine months from the end of the distribution. In an intrastate offering, a purchaser of the issue may not sell the securities to a resident of another state for at least nine months from the end of the distribution.

Answer 130

The correct answer was: II and III Each member’s written and electronic communications may be subject to a spot-check procedure by FINRA. Upon written request from FINRA, each member must submit the material requested within the time frame specified by FINRA.

Answer 131

The correct answer was: Approximate price reflecting current market value with no bid or offer. A nominal quote is an indication of the approximate market value of a municipal bond, provided for informational purposes only. A nominal quote does not represent an actual bid or offer.

Answer 132

The correct answer was: Trade Reporting Facility (TRF) Broker/dealers acting in a dealer capacity (negotiating transactions with other broker dealers) in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor will have the post-execution data such as price and volume transmitted electronically to FINRA via the Trade Reporting Facility (TRF).

Answer 133

The correct answer was: a riskless transaction is not generally covered by the 5% markup policy. Riskless transactions are covered by the 5% markup policy.

Answer 134

The correct answer was: I, II, III and IV. The 5% policy applies to both commission charges on agency transactions and to markups and markdowns on principal transactions, including riskless principal trades.

Answer 135

The correct answer was: daily average of Federal Reserve System member banks. The effective federal funds rate is the daily average of money center banks, all of which are Federal Reserve System members. This rate is the rate charged bank to bank for overnight loans.

Answer 136

The correct answer was: 4000. The account has $12,000 of equity. If 50% of the market value is $10,000, the account has $2,000 of excess equity. When Regulation T is 50%, the purchasing power of excess equity is 2-for-1.

Answer 137

The correct answer was: Each account would be treated separately. SIPC provides coverage on a per-customer basis in the event of broker/dealer default. In this situation, there are four separate customers: the customer's individual account in his own name, his joint account, and the two custodial accounts. Each of these four customers is eligible for SIPC maximum coverage of $500,000.

Answer 138

The correct answer was: 10%. To be considered a diversified investment company, a mutual fund can own no more than 10% of a target company's voting securities. Additionally, no diversified investment company may invest more than 5% of its portfolio in a single company's securities.

Answer 139

The correct answer was: III and IV. With a progressive tax, the percentage amount increases as the taxable amount increases such as income and estate taxes. Sales and cigarette taxes are regressive because all persons pay the same percentage tax regardless of their income.

Answer 140

The correct answer was: neither gain nor loss. Converting a bond into shares of common stock does not result in tax consequences. For a taxable gain or loss to exist, the shares received as a result of the conversion must be sold.

Answer 141

The correct answer was: Rule 144. Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

Answer 142

The correct answer was: 20. These bonds are convertible into 20 shares for each $1,000, making a total of 2,000 shares. That's enough stock to cover 20 calls.

Answer 143

The correct answer was: reduce interest charges. The repurchase of common stock does not reduce interest payments; however, it does reduce total dividends paid.

Answer 144

The correct answer was: Building permits. Increases in building permits are indicative of increased, future business activity and are therefore considered a leading economic indicator. Increases in personal income and employment levels reflect current, not future activity, and would be considered coincident indicators. Corporate profits are lagging economic indicators.

Answer 145

The correct answer was: Currencies traded in the spot market settle in one or two business days. In the interbank spot market currency trades generally settle in one or two business days. The interbank market is not subject to the regulations of individual countries, nor does it have a central location.

Answer 146

The correct answer was: A stock with a beta of 0.5. Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market.

Answer 147

The correct answer was: 5-½%, 5% basis, maturing 2010. Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a premium bond, the yield to call is the lower of the two.

Answer 148

The correct answer was: $700 short-term capital gain reportable for tax year 2014. For tax purposes, any premiums earned are recognized at the expiration date. In this case the January contract purchased in July, 2013 will expire in January, 2014. Options writers always have short-term gains or losses.

Answer 149

The correct answer was: II and III. Common stockholders are entitled to dividend distributions in proportion to their ownership and to residual rights to corporate assets on dissolution. They do not vote on the payment of dividends, and they have only limited liability.

Answer 150

The correct answer was: Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence. Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, as the client might be subject to substantial additional sales charges.

Answer 151

The correct answer was: XYZ Inc., common stock. Common stock is a junior security. It is considered less safe than bonds because it has the lowest claim to assets in the event of the issuing firm's liquidation, and is paid dividends after bonds are paid interest.

Answer 152

The correct answer was: it protects against losses produced by fluctuations in the market. SIPC does not protect against losses produced by fluctuations in the market. SIPC a member funded corporation insures against broker default.

Answer 153

The correct answer was: As a retail communications piece FINRA mandates that no member may treat a communication as having been distributed to an institutional investor if the member firm has reason to believe that the communication, or any part of it, will be forwarded or made available to any retail investor.

Answer 154

The correct answer was: Breakeven. Remember that for a put option, subtract the premium from the strike price to find the breakeven point. 355 − 5 = 350. Since the S&P Index closed at 350 on the day, the customer's position is at breakeven.

Answer 155

The correct answer was: III and IV. Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock with its fixed dividend and utility stocks with their high degree of debt leverage are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

Answer 156

The correct answer was: price of a market order. Price would not be included on a ticket for a market order, but it would be on the ticket for a limit, stop, or stop limit order.

Answer 157

The correct answer was: Approval by a principal of the firm is necessary. Materials or scripts used to present information to retail investors are considered retail communications with the public, and therefore, principal approval is required. There is no requirement for a copy of the materials to to be submitted to the SEC. It is not necessary for the registered representative to be licensed as an investment adviser to engage in such an activity.

Answer 158

The correct answer was: I and III. The Bond Buyer Revdex is computed weekly just like the Bond Buyer's GO index. Revdex consists of 25 revenue bonds with 30-year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity.

Answer 159

The correct answer was: II and III Ratio call writers assume unlimited loss potential in a rising market, and limited gain potential in a falling market. Maximum gain-while limited-occurs if the stock is trading at the strike price of the short calls at expiration.

Answer 160

The correct answer was: I, II, III and IV. The requirements for a discretionary account include a written authorization from the customer, a written acceptance by the firm, and close supervision of each transaction to ensure suitable transactions in light of the customer's objectives and financial situation.

Answer 161

The correct answer was: I and III. Prior approval of the member firm's SRO is required when opening any office, including a private residence. The home address and telephone number may be advertised in any normal manner such as business cards, stationery, local newspapers, and so forth.

Answer 162

The correct answer was: I and III. Contributions to qualified plans are made with pretax dollars and earnings grow on a tax-deferred basis, so the cost basis is zero. Therefore, any distributions will be taxed as ordinary income. In addition, there is a 10% penalty on withdrawals made prior to reaching age 59-½.

Answer 163

The correct answer was: position trading. The dealer is buying for its inventory (position trading).

Answer 164

The correct answer was: 1800. If the initial transaction is less than $2,000, the investor must deposit 100% of the market value.

Answer 165

The correct answer was: Indication of whether the order is solicited, unsolicited, or discretionary. Whether the trade is solicited, unsolicited, or discretionary on the order ticket. The other items, which may not be known yet, go on the confirmation.

Answer 166

The correct answer was: Interest income is taxed at maturity. Unlike Treasury STRIPS, which are issued directly by the U.S. government, Treasury Receipts are indirect obligations of the government. Treasury Receipts are issued by investment bankers who buy Treasury securities, place them in trust at a bank, and sell separate receipts against the principal and interest payments. Like most zeroes, interest must be accreted and taxed annually even though it is not received until maturity.

Answer 167

The correct answer was: an AON order must be canceled if the whole order cannot be executed immediately. . A fill-or-kill (FOK) order must be executed immediately in its entirety or else it is canceled. An all-or-none (AON) order must be executed in its entirety but is not canceled if the whole order cannot be executed immediately.

Answer 168

The correct answer was: Sell stop. Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits.

Answer 169

The correct answer was: acceptance or placement ratio. The placement ratio also known as the acceptance ratio is compiled weekly and reflects the municipal bonds sold divided by the municipal bonds offered in the previous week.

Answer 170

The correct answer was: taxable to the beneficiary on any portion of the excess representing earnings. If a distribution exceeds education expenses, a portion representing earnings will be taxable to the beneficiary and may be subject to an additional 10% penalty tax.

Answer 171

The correct answer was: the strike price minus the premium multiplied by 100 shares. If the stock becomes worthless, the investor will be forced to buy the stock at the strike price, but still keeps the premium received when the option was written. Essentially, maximum loss is breakeven multiplied by 100 shares.

Answer 172

The correct answer was: the municipal bond market is illiquid. While there is no law or industry rule prohibiting short sale of municipal bonds, it is not a common practice. To short a security, it must be borrowed, and because most municipal securities are thinly traded, it is often difficult to locate the specific issue needed to cover the short position.

Answer 173

The correct answer was: The dollar value of new issues sold divided by dollar value of the new issues offered. The bond placement ratio is the percentage of new municipal bonds offered last week that were sold last week.

Answer 174

The correct answer was: During the accumulation period. A variable annuity may only be surrendered during the accumulation period. If the account is annuitized, the investor has chosen a payout option.

Answer 175

The correct answer was: II and IV. Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the U.S., the issue is not registered with the SEC.

Answer 176

The correct answer was: dealer's cost. The dealer's cost is not a legitimate factor in determining the markup on a stock.

Answer 177

The correct answer was: Monday. Municipal bonds, like corporate bonds, settle 3 business days after the trade date. December 25 (Christmas) is not a business day.

Answer 178

The correct answer was: He pays no estate tax. Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

Answer 179

The correct answer was: Collateralized mortgage obligation. Collateralized mortgage obligations (CMOs) are mortgage-backed securities. Because mortgages are often paid off ahead of the scheduled maturity, the exact maturity date of a CMO is uncertain.

Answer 180

The correct answer was: 25 round lots. For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.

Answer 181

The correct answer was: the third business day. Most government agencies are treated as a corporate issue. Trades of corporate securities settle regular way (in 3 business days).

Answer 182

The correct answer was: accepting a deposit from a customer to purchase the new issue. Accepting a deposit from a customer during the cooling-off period is tantamount to accepting an order, which is prohibited until the offering is effective.

Answer 183

The correct answer was: II and IV. When U.S. Treasury bonds are sold at auction, the competitive bids filled are the most favorable bids (lowest yield) submitted by the primary dealers. These bids are submitted on a yield basis and the winning bids establish the "stop out price". Noncompetitive bids, which are made by nonprimary dealers, are guaranteed to be filled at the stop out price.

Answer 184

The correct answer was: Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer. The only accurate statement is the one expressing that (ETNs) are issued by financial institutions and therefore the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks or an equity index. ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day and therefore are not forward priced like open-end mutual fund shares are.

Answer 185

The correct answer was: All-or-none. All-or-none underwritings require the underwriter to either sell the entire issue of stock or cancel the offering completely.

Answer 186

The correct answer was: 75. Breakeven for a covered call writer is the purchase price less premiums received. In this case, breakeven is 85 minus 10, or $75 per share; below $75, the customer loses money.

Answer 187

The correct answer was: Customer identification programs (CIPs) The USA PATRIOT Act requires financial institutions to maintain customer identification programs (CIPs) to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the “Specially Designated Nationals” list which financial institutions utilize to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money laundering activities.

Answer 188

The correct answer was: any advisory relationship existing between itself and the issuing municipality. MSRB rules require that if a broker/dealer has an advisory relationship with a municipality, that relationship must be disclosed to any of the broker/dealer's clients who are buying bonds issued by the municipality.

Answer 189

The correct answer was: Buy shares of different funds in the same fund family and you may qualify for a breakpoint on the total purchase. Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a mutual fund includes dividends only. A group of friends is not eligible for a breakpoint (investment clubs are not eligible). "Selling dividends" is a prohibited practice because of the immediate tax liability incurred with the dividend and share price adjustment that results after the dividend distribution.

Answer 190

The correct answer was: convertible bonds. The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.

Answer 191

The correct answer was: indenture. The indenture is the agreement between the issuer and the bond trustee that sets forth how the debt will be retired.

Answer 192

The correct answer was: additional takedown plus concession. The total takedown has two components: concession and additional takedown.

Answer 193

The correct answer was: If this strategy is consistent with the objectives of the plan As covered calls are not considered to be a speculative option strategy they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

Answer 194

The correct answer was: 55,000. A limited partner can only deduct partnership losses to the extent of his basis. To determine basis, add the original investment ($20,000). to any recourse debt assumed by the investor ($50,000). Recourse debt adds to basis as the partner is liable for this amount. Cash distributions received reduce basis ($15,000). At year end, the investor's basis and the amount he can deduct from passive income is $55,000.

Answer 195

The correct answer was: Historic rehabilitation. Raw land partnerships seek appreciation. Existing property and new construction partnerships seek passive income and tax deductions from business operations. Historic rehabilitation partnerships allow not just deductions but actual tax credits.

Answer 196

The correct answer was: Agreement among underwriters. The agreement among underwriters is a separate document and is not included in a prospectus.

Answer 197

The correct answer was: 56.5. At exercise, the premium of the contract affects the cost basis of the stock acquired. Because the premium of 3.50 was received when the put was written, the cost basis of the stock will be $60 per share less the premium, or 56.50.

Answer 198

The correct answer was: 4:00 pm ET. The official close is 4:00 pm ET on the business day before the expiration date. Expiring options may be exercised until 5:30 pm ET on the business day before the expiration date.

Answer 199

The correct answer was: accept a not-held order. A specialist (designated market maker) on the floor does not deal directly with the public. Therefore, a DMM can not accept any order that requires the exercise of discretion. A not-held order is one in which the floor broker can choose the price or time of execution.

Answer 200

The correct answer was: III and IV. Voter approval may be required for new issues of GO bonds. State prisons and public high schools are among the facilities for the public good that are built and supported by GO issues. User fees (like tolls) support revenue bond issues for construction of facilities, such as airports and turnpikes.

Answer 201

The correct answer was: I and II A broker/dealer's retail communications must be approved by a principal of the firm before use or filing with FINRA when filing is required, and must be kept on file for at least three years. Pre-filing with FINRA can depend on a number of factors, such as the product. For example, pre-filing of retail communications is required for certain pieces having to do with investment companies and VAs, but not for pieces having to do with DPPs or CMOs.

Answer 202

The correct answer was: variable annuities. Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan.

Answer 203

The correct answer was: Defined contribution pension plan. The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years to go in the workforce, so the investments made with the defined contributions will have a maximum time period to grow.

Answer 204

The correct answer was: Payroll deduction plan. A payroll deduction plan is a retirement plan not subject to eligibility, vesting, or funding standards as required by ERISA plans. A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.

Answer 205

The correct answer was: The value of the securities at the time the charitable donation is made. If a donation is made to a registered charity, the charity's cost basis is fair market value as of the date of the contribution.

Answer 206

The correct answer was: I and II A bona fide quote is one the dealer is prepared to buy or sell on, as opposed to a workable, nominal or subject quote. A bona fide quote must have a reasonable relationship to fair market value and can be made in consideration of any anticipated market movement. On the offer side of a bona fide quote a dealer may make an offer to sell bonds that it does not hold in its own inventory but must know where to obtain the bonds if they are needed to complete the transaction.

Answer 207

The correct answer was: call. MSRB rules require that, when a call date has been fixed by a prerefunding, the yield to call so fixed must be reflected on the confirmation statement. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event. Therefore, it is appropriate to price the bond to the call date. The old maturity on the bond has no further significance.

Answer 208

The correct answer was: 30. In this new issue, interest begins to accrue as of the dated date, so the customer must pay the syndicate interest from the dated date up to, but not including, the settlement date. The number of days from January 1 up to, but not including, January 31 equals 30.

Answer 209

Your answer, II and III., was correct!. This investor established a credit spread because the premium he received for the 35 call is more than he will pay for the 40 call; a call with a lower strike always carries a higher premium. As a general statement, credit spreads are bearish, and are profitable if the spread narrows between the premiums or the contracts expire unexercised (this will happen if the stock falls).

Answer 210

The correct answer was: Long June 55 put. For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration. This ensures the investor may sell the stock without financial loss if the short put is exercised and he is forced to buy.

Answer 211

The correct answer was: , I, II, III and IV GO bonds are issued by political authorities and are subject to calls prior to maturity, changes in legislation, interest rate changes (market risk), and the danger of a political body not having enough taxing power to pay off the bonds.

Answer 212

The correct answer was: $5 million, whichever is greater The member firm, which must have procedures in place to prevent insider trading, can be fined up to 3 times the profit gained or loss avoided, or $5 million, whichever is greater.

Answer 213

The correct answer was: Pre-approval by a principal of the broker dealer is required. Any piece promoting securities services and / or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be pre-approved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications.

Answer 214

The correct answer was: A variable, semi annually adjusted inflation rate, based on changes in the CPI. I bonds are nonmarketable U.S. government securities which have a variable semiannually adjusted inflation rate that is based on the Consumer Price Index (CPI). They were designed for investors wishing to protect the purchasing power of their investment. They are sold at face value and they grow in value with the addition of the inflation-adjusted interest.

Answer 215

The correct answer was: Geographic. The bonds are from different issuers from around the country and therefore offer geographic diversification. The prices of the bonds will be similar as a result of the similar quality, coupon, and maturity features.

Answer 216

The correct answer was: listed options with expirations of less than 9 months. Options with expirations of less than 9 months must be fully paid without exception. With some exceptions, warrants, stocks, and bonds may be purchased on margin.

Answer 217

The correct answer was: annually. Under the Act of 1940, investment companies may not distribute long-term capital gains more frequently than once per year.

Answer 218

The correct answer was: $5 per $1,000 of par. A concession between broker/dealers on secondary market transactions is a discount from the yield that the broker/dealer is quoting. It is common for a broker/dealer to offer bonds to other broker/dealers at a price less the concession. The net price becomes the purchase price for the buying broker/dealer. If simultaneously sold to a retail account, the markup is from the net price paid. If not simultaneously retailed but held in the broker/dealer's inventory, it is fair for the broker/dealer to market his inventory and mark up from there for retail sale.

Answer 219

The correct answer was: II and IV. Recommendations may be made only when it is suitable for the customer's needs. Therefore, he would not recommend the variable annuity to all of his clients despite the tax advantages.

Answer 220

The correct answer was: I and II. A broker's broker helps sell any bonds a syndicate has left and does not disclose the identity of the firm on whose behalf it is acting. Brokers' brokers do not charge fees for quoting a security, do not maintain inventory, and act solely as agents.

Answer 221

The correct answer was: a violation of FINRA rules.

Answer 222

The correct answer was: an unlimited number of unaccredited investors. The primary sale of a limited partnership through a private placement is covered by Regulation D. Sales of the issue may be made to 35 individuals, which need not meet any financial standards. If, however, sales are made to more than 35 individuals, any other purchasers must meet certain standards of financial accreditation, known as accredited investors. An accredited investor would include an investor with $1 million or more in net worth not including net equity in a primary residence, or an individual who has earnings of $200,000 in the current year and $200,000 in the previous 2 years, or is an officer or insider of the offering. Also, any large financial institution, such as a bank, an insurance company, a savings and loan, etc., would be considered an accredited investor

Answer 223

The correct answer was: crops. Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered to be renewable assets

Answer 224

The correct answer was: I, II, III and IV. A member firm would consider all these factors when determining suitability.

Answer 225

The correct answer was: the Dow Jones Industrial Average and Transportation Average. Charted price trends can be deceptive, so a trend must be confirmed by the Dow Jones Industrial Average and Transportation Average.

Answer 226

The correct answer was: the operating expense of the fund. The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.

Answer 227

The correct answer was: all states require that General Obligation bonds must be underwritten using a negotiated process. When a municipality appoints an underwriter, the bond issue is a negotiated underwriting. The price must be satisfactory to the issuer and still allow the underwriters to sell the bonds at a profit. There is no requirement that either municipal GO or revenue issues be underwritten as either negotiated or competitive bid. Each may be underwritten using either underwriting process.

Answer 228

The correct answer was: publicly or exchange traded fund (ETF) in the secondary market. Publicly or exchange traded funds (closed-end funds) trading in the secondary market do not require the delivery of a prospectus

Answer 229

The correct answer was: 100 shares long and 200 shares short. The customer is long 300 shares and short 200 shares of the same stock. Therefore, the customer's net long position is 100 shares. The order ticket must be marked 100 long, 200 short. In other words, the customer is long only to the extent of his net long position.

Answer 230

The correct answer was: risk. Risk is the key consideration in an IRA or other retirement plan. These accounts seek to preserve capital first and then to achieve a reasonable rate of return

Answer 231

The correct answer was: Ginnie Mae pass-through certificates. Ginnie Maes pay interest on a monthly basis, not semiannually.

Answer 232

The correct answer was: I and IV. Holders of yield-based call options profit if rates rise. Prices of debt securities fall if rates rise.

Answer 233

The correct answer was: I and IV. Penny stocks are generally defined as those with a market price below $5 per share that are not traded on any exchange or Nasdaq.

Answer 234

The correct answer was: $250,000. Brokered CDs, like other CDs issued by banks directly to customers, are FDIC insured up to $250,000.

Answer 235

The correct answer was: Comparing an equity growth fund to a money market fund with the intention of convincing an investor to purchase the growth fund. A characteristic of money market funds is that they deliberately avoid growth. Thus, for the growth investor, a comparison of a money market fund to a growth fund is an unfair comparison.

Answer 236

The correct answer was: I and III. The process must be initiated by written request on the part of the customer. Broker/dealers may abide by the written request as a courtesy extended to the customer in accordance with their own in-house rules regarding holding customer mail. There is no industry rule requiring a broker/dealer to extend this courtesy to customers. The rule only stipulates the maximum length of time a broker/dealer can hold customer mail if it chooses to, depending on if the travel is domestic or abroad.

Answer 237

The correct answer was: I, II, III and IV. Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.

Answer 238

The correct answer was: STRIPS. STRIPS are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.

Answer 239

The correct answer was: short-term instruments that become worthless after the expiration date. Warrants are commonly used to make debenture offerings more attractive and have long lives (generally 2 to 10 years). Warrants need not be exercised, but may be traded in the secondary market

Answer 240

The correct answer was: T-bills. T-bills, T-notes, and T-bonds are sold through auction. These auctions award securities to the most competitive bids. Agency securities are sold through selling groups appointed by the agency.

Answer 241

The correct answer was: a list of specially designated nationals (SDNs) maintained by the Office of Foreign Assets Control. All financial institutions are required by federal law to maintain a customer identification program and to check the identifying information supplied by new clients against the specially designated nationals (SDNs) list maintained by the Office of Foreign Assets Control (OFAC).

Answer 242

The correct answer was: A covered call writing program. The most conservative option strategy is writing covered calls. In addition to the income from the call premium, this client could receive dividends on his stock if any were paid as well. Purchasing options brings no income to the account and uncovered call writing and short straddles have unlimited risk.

Answer 243

The correct answer was: $2.5 million. Since the issuing corporation is offering 500,000 units to the public at $5 per unit, the total amount of capital to be raised by this sale will be $2.5 million (500,000 units x $5 per unit).

Answer 244

The correct answer was: depreciation. A net revenue pledge requires the issuer to pay for operating and maintenance costs before meeting debt service requirements. Depreciation does not represent a cash outflow; it is a noncash deduction.

Answer 245

The correct answer was: U.S. government bonds. Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds.

Answer 246

The correct answer was: 290000. SIPC protects each separate customer to a maximum of $500,000 in equity. This account has equity of $290,000 ($400,000 LMV minus $110,000 Dr).

Answer 247

The correct answer was: The registered representative may not effect transactions excessive in size or frequency in view of the customer's resources. A discretionary account allows the registered representative to place orders without consulting the customer. It does not relieve him of the obligation to execute only suitable orders.

Answer 248

The correct answer was: increase. Most mutual funds do not have 100% of their assets in securities and they continually receive new money from investors. Any increase in the general interest rate would allow the fund to purchase new, higher-yielding, lower-cost instruments, which would increase the fund's income

Answer 249

The correct answer was: Long-term gain or loss. The purchase of a call has no effect on a long stock position's holding period. The call only allows more stock to be purchased; it does not allow the stock to be sold. The investor held the stock for 17 months, exceeding the holding period required for long-term capital gains treatment (more than 1 year).

Answer 250

The correct answer was: Lowest ask. Markups are always based on the inside offer which is the lowest ask price in a particular security. Markdowns are based on the inside bid which is the highest bid price for a particular security.

Answer 251

The correct answer was: 85½. Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85½% of $1,000, or $855. Dollar bonds are also called term bonds.

Answer 252

The correct answer was: It is treated as a capital gain or loss. All listed options trades with resulting gains or losses are treated as capital gains or losses

Answer 253

The correct answer was: a capital gain in 2002. Investors profit on short positions when the market value of the stock falls. In this situation, the market value of the stock has fallen from 40 to 32 for a profit of $8 per share. This gain of $800 (100 shares) is reportable when the shares are delivered to cover the short position. Uncovered short sales are reported as short-term gains and losses no matter how long the holding period.

Answer 254

The correct answer was: $400 loss on the call, $250 loss on the put. In a straddle the options are treated separately for tax purposes. The investor has a $400 capital loss on the call and a $250 capital loss on the put. Both are short-term losses.

Answer 255

The correct answer was: 25. For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days. For non-listed and non-Nasdaq securities the period is 40 days. If the new issue will be specifically quoted on the OTCBB or the electronic OTC Pink, the period is 90 days.

Answer 256

The correct answer was: required to serve a 90-day apprenticeship. Serving in a clerical capacity does not eliminate or reduce the 90-day requirement. However, prior experience in the business as a Series 6 or Series 7 representative will reduce or eliminate the 90-day requirement. This person will be required to pass the Series 52 or Series 7.

Answer 257

The correct answer was: I, II and III. MSRB Rule G-13 applies to all quotations on distributed or published municipal securities. This includes both providing and requesting bids and offers. Dealers will often request and publish bids wanted and offers wanted in publications containing secondary municipal market information such as Thomson's Muni Market Monitor (formerly Munifacts).

Answer 258

The correct answer was: $4,000 net capital gains. In determining an investor's capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other. In this situation, the prior year's loss carryover of $9,000 is added to the current year's loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000 for a net capital gain of $4,000

Answer 259

The correct answer was: Variable annuities. Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, etc. In less than 4 years, your client will have to begin making withdrawals regardless of any surrender charges the annuity may impose.

Answer 260

The correct answer was: III and IV. An official statement is a document similar to a prospectus and is furnished in most cases to buyers of new issue municipal bonds. SEC Rules require that an official statement be prepared for most-but not all-new municipal issues. The MSRB has no such requirement, as it does not regulate issuers.

Answer 261

The correct answer was: It is permitted if provided for in the underlying documentation. Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement

Answer 262

The correct answer was: low PE ratios. Growth companies have high PE ratios and a low dividend payout ratio because they retain most if not all of their earnings. Investors anticipating fast growth bid up prices so PE ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income.

Answer 263

The correct answer was: CMOs are issued by government agencies. CMOs are created by broker/dealers, who buy pass-through securities from government agencies and government-sponsored corporations, place the certificates in trust, and issue participation interests in the trusts that are tied to specific maturity periods (tranches).

Answer 264

The correct answer was: sell the issue at the lowest cost to the State of Texas. The syndicate manager that offers the lowest net interest cost to the State of Texas will be awarded the bid. Once the State of Texas decides how much money it must raise, the question is how much this issue will cost in net interest during its entire life.

Answer 265

The correct answer was: take into consideration the total dollar amount of the transaction when determining the markup. Under the MSRB Rule G-30, the amount of markup charged by a dealer must take into consideration a number of relevant factors, including the total dollar amount of the transaction. In a principal transaction (out of its inventory) the markup need not be disclosed on a confirmation and because it is a principal transaction, commissions would not apply. The 5% markup policy does not cover exempt securities.

Answer 266

The correct answer was: The order is canceled. An at-the-open order is to be filled at the opening price or not at all. An at-the-open order arriving later must be canceled.

Answer 267

The correct answer was: , I and IV. The federal funds rate is computed daily, is lower than the discount rate, and is the rate charged in bank-to-bank lending. The only interest rate the Federal Reserve directly sets is the discount rate. It does not set the federal funds rate, although it heavily influences its level

Answer 268

The correct answer was: Agreement among underwriters. The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. "Cooling-off period", "registration period", and "effective date" are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements.

Answer 269

The correct answer was: The spouse is an affiliate and Rule 144 applies. Together, the client and wife own 13% of the company's stock, so the spouse is considered an affiliate and is bound by Rule 144. If there is a 10% or more ownership interest among members of an immediate family, then all members are considered control persons (affiliates) subject to Rule 144

Answer 270

The correct answer was: II and III. A security is any investment for profit with management performed by a third party. In addition, an element of risk must be present. Fixed annuities are not considered securities as return is guaranteed by the insurance company issuer. Similarly, CDs are insured, thereby eliminating risk and guaranteeing a return.

Answer 271

The correct answer was: A large denomination personal check drawn from a U.S. bank account. While all large denomination deposits should be of some concern the one of least concern is the one where the source of funds would be the easiest to track; of the choices offered a personal check from a U.S. bank account would be the easiest to check regarding the source of the funds

Answer 272

The correct answer was: II and IV. When the Federal Reserve Board purchases securities in the open market, money flows into the economy. Because there is more money available, interest rates such as the federal funds rate are likely to fall. When interest rates fall, bond prices rise.

Answer 273

The correct answer was: the third business day. Most government agencies are treated as a corporate issue. Trades of corporate securities settle regular way (in 3 business days).

Answer 274

The correct answer was: I, III, II, IV. The liquidation order is as follows: wages, taxes, secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.

Answer 275

The correct answer was: 112. Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. Therefore, July, August, and September each have 30 days of accrued interest and October has 22 days of accrued interest; this totals 112 days. Settlement date is Monday, October 23.

Answer 276

The correct answer was: the certificate of limited partnership. The Uniform Limited Partnership Act requires that two or more persons sign and swear to a certificate of limited partnership. It is filed with the state and is a public document available for review.

Answer 277

The correct answer was: offered for sale in the market that week. The placement ratio shows the relationship between the number of bonds actually placed (sold) and the total number offered for sale.

Answer 278

The correct answer was: Money market funds. Money market funds are the most liquid investment.

Answer 279

The correct answer was: state and federal income taxes. A municipal bond is generally exempt from federal and state income taxes in the state in which it was issued. The exemption, or lack thereof, applies to interest, not capital gains.

Answer 280

The correct answer was: earnings per share. While the numerical values are not tested, it is important to know that there is no minimum earnings per share requirement. However, there is a minimum earnings requirement.

Answer 281

The correct answer was: I and III. Accrued interest is part of a bond transaction's total dollar amount. To calculate the accrued interest, you must know the settlement date.

Answer 282

The correct answer was: net worth. Net worth is not affected by the issuance of long-term debt because it does not represent ownership. Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase.

Answer 283

The correct answer was: the Securities Act of 1933 and Securities Exchange Act of 1934. Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws.

Answer 284

The correct answer was: quarterly. The SEC and FINRA require member firms to send customer account statements at least once per calendar quarter.

Answer 285

The correct answer was: I and IV. The LEAPS writer's premium is taxed as a short-term gain. The LEAPS buyer took a position for longer than 12 months, so any profits are considered long-term capital gains. The writer's gain is short term because by opening with a sale, a holding period is never established

Answer 286

The correct answer was: obtain a lower average cost per share than average price per share. The result of dollar cost averaging is to obtain a lower average cost per share than the average price per share. This is accomplished by making regular investments of a fixed amount when prices are fluctuating.

Answer 287

The correct answer was: The second deposit of $3,500 Broker/dealers are required to file suspicious activity reports (SARs) involving transactions of $5,000 or more when financial behavior appears commercially illogical and serves no apparent purpose. The second deposit exceeds the $5,000 threshold. A currency transaction report (CTR) would be triggered for transactions totaling $10,000 or more within a single day

Answer 288

The correct answer was: I and II. Certificates held jointly must be signed by both parties before they can be transferred. Signatures on assignments or stock powers to transfer securities must match the names of the registered owners of the securities exactly. Certificates are never good delivery if signed by a deceased person.

Answer 289

The correct answer was: Exchange-traded notes (ETNs) are issued by financial institutions and therefore I should be concerned about the credit worthiness of the issuer. The only accurate statement is the one expressing that (ETNs) are issued by financial institutions and therefore the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks or an equity index. ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day and therefore are not forward priced like open-end mutual fund shares are.

Answer 290

The correct answer was: I and III. During the cooling-off period, the SEC reviews registration statements and can issue stop orders if the registration is not complete or was not filed properly. The SEC does not approve securities or guarantee that any information found within a prospectus is accurate; it only clears the securities for distribution (sale) to the public.

Answer 291

The correct answer was: The call has a time value beyond an intrinsic value that gradually dissipates. Call options allow greater leverage than buying the underlying stock and the capital requirements are smaller, allowing for a smaller loss potential. The fact that options expire (i.e., have a time value that erodes as the option nears expiration) is a disadvantage of options. Stock purchases have no time value component-there is no expiration and no resulting value erosion

Answer 292

The correct answer was: Listed options. The Consolidated Tape System (CTS) receives and validates the last sale price and size of listed equity securities transactions on the NYSE and other regional exchanges and FINRA. Options transactions are not reported to the CTS.

Answer 293

The correct answer was: I and III Nonqualified (ordinary) dividends are taxed at the investor’s ordinary income tax rate, while qualified dividends will be taxed at a maximum rate as specified by the IRS. Whether or not the qualified dividends are taxed at the maximum rate or a lower rate depends on the investor's income tax bracket. The higher the investor’s income tax bracket the higher the tax on qualified dividends will be, up to the maximum.

Answer 294

The correct answer was: they will get a total of $100,000 each. SIPC covers each separate customer. Each account has coverage of up to $500,000 in securities and cash (with a $250,000 maximum in cash). In margin accounts, the equity, not the market value, is used for securities coverage purpose

Answer 295

The correct answer was: Government of the country in which the investor pays taxes. The income from a foreign investment is taxable to the investor under the rules of the country in which he pays taxes. The income may also be taxable in the country of issuance. In this case, the investor would receive a tax credit in order to avoid dual liability.

Answer 296

The correct answer was: this level is used by registered representatives only. Nasdaq Level 3 is the interactive level of the Nasdaq system through which market makers enter and update their quotes. The best quote available (the inside market) is also shown on the Level 3. Registered representatives use the Nasdaq Level 1, which displays the inside market quote only.

Answer 297

The correct answer was: I and III. The wash sale rule is violated when an investor sells a security at a loss and purchases the same or a substantially identical security within 30 days of the sale date. The IRS considers a call option substantially identical to the underlying stock because it represents the right to buy the shares.

Answer 298

The correct answer was: 827 To compute the breakeven point for a call spread, add the net premium (debit or credit) to the lower strike price (a net credit of 7 plus 820 equals a breakeven point of 827). This is a bear spread. The customer will profit if the index is below 827 at expiration.

Answer 299

The correct answer was: III, I, II. A program's economic viability is the first priority in the assessment of DPPs. The IRS considers programs designed solely to generate tax benefits abusive. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority

Answer 300

The correct answer was: The power of attorney must have the customer's signature. The registered representative must have prior written authority from the customer and approval from a principal before exercising discretionary authority. Although a designated principal must review the account frequently and review and approve all trades on a daily basis, prior approval of discretionary orders is not required.

Answer 301

The correct answer was: 11000. Assuming the customer paid for the securities in full, he would generate $11,000 in SMA. Because the customer need pay only half of the securities' value ($11,000), the additional cash paid ($11,000) would be considered a nonrequired cash deposit and be credited to SMA. Another way to view the transaction is the customer has fully paid securities with a loan value of 50%, or $11,000.

Answer 302

The correct answer was: II and IV. The MSRB creates rules for municipal trading and issues interpretations of its rules. It does not regulate issuers or have any enforcement capability. For broker/dealers, MSRB rules are enforced by FINRA

Answer 303

The correct answer was: a failed auction. An inherent risk associated with Auction Rate Securities (ARS) is the potential for a failed auction. These can occur due to a lack of demand, resulting in no bids being submitted when it is time to reset the rate. Auction Rate Securities use a Dutch auction method to reset the rate paid in the upcoming period known as the "clearing rate".

Answer 304

The correct answer was: $350. The bond is a 7% bond. The total amount paid each year on 10 bonds is $700. The amount paid for a 6 month's interest is $350.

Answer 305

The correct answer was: a minimum of 10 years of variable payments, followed by additional variable payments for life. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop

Answer 306

The correct answer was: The customer can request that all three of the arbitrators selected be from the public sector. In disputes involving a customer for amounts greater than $100,000 three arbitrators will be used unless both parties agree to one. In the case where three arbitrators are used, the customer can request that all three arbitrators be selected from the public sector.

Answer 307

The correct answer was: Whether the piece will be distributed in written form or via electronic media. FINRA holds BDs to certain general standards regarding all member firm communications. Consideration must be given to whether all statements in a communication are clear and not misleading, are balanced regarding the representation of risk and reward, do not omit material facts or make exaggerated claims, and do not imply that past performance can be projected to future outcomes. These standards would apply, and be the same, whether the communication was distributed in written or electronic form.

Answer 308

The correct answer was: I and III. TRACE requires that both sides of the transaction report corporate bond trades that occur in the OTC secondary market. Municipal securities are one of the specific exclusions from the trade reporting system. Trace is not an execution system.

Answer 309

The correct answer was: Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. Retail communications for investment companies must be filed within 10 business days of first use if the communication does not include a performance ranking. For retail communications that do include a performance ranking, a 10 day pre-filing is required.

Answer 310

The correct answer was: as the fund moves closer to its target date, the portfolio holdings will be adjusted to gradually assume more and more risk Lifecycle or target date funds are managed in such a way as to lessen the amount of risk associated with the portfolio as it gets closer to its target date, which is usually the anticipated time of retirement for the fund investor.

Answer 311

The correct answer was: I and III. HOLDRs are exchange-traded investments and trade in round lots (100 shares). They are not redeemable by their issuer like mutual fund shares are. Additionally, HOLDRs distribute cash dividends generated by the companies held in the portfolio directly to the owners of the HOLDR shares. These exchange-traded products allow great flexibility in managing the tax consequences of the investment because the securities can be unbundled and traded individually, thus taking loses when advantageous and deferring gains when advantageous.

Answer 312

The correct answer was: par and the call price. The call premium represents the difference between the call price and par. The farther away a call date, the lower the call premium.

Answer 313

The correct answer was: the Federal Reserve Board. The FRB trades in governments in the secondary market; they are not primary purchasers.

Answer 314

The correct answer was: Revenue bond prices have been falling The REVDEX is a yield based index. Anytime the index rises revenue bond prices are falling.

Answer 315

The correct answer was: Though negotiation Most revenue bonds are awarded to syndicates through negotiation.

Answer 316

The correct answer was: The dealer is obligated to another party at those prices When a municipal bond trader says a quote is out firm it means that they are obligated to trade with another party at those prices.

Answer 317

The correct answer was: Issue a deficiency letter Anytime the SEC wants more information they would most likely issue a deficiency letter.

Answer 318

The correct answer was: 15% of the offering A green shoe provision allows the syndicate to purchase up to an additional 15% of the offering from the issuer.

Answer 319

The correct answer was: the view that neither the states nor the federal government may tax income received from securities issued by the other. The principle that neither the states nor the federal government may tax income received from securities issued by the other is known as the doctrine of reciprocal immunity. States may, however, tax the interest on debt securities of other states. This doctrine provides the original basis for the federal income tax exemption on interest paid on municipal debt securities.

Answer 320

Your answer, communications with the public, was correct!. Of the answer choices listed, it is important to recognize that communications with the public must be maintained on file for 3 years by a member firm, and therefore, would not fall under the 6-year record retention requirement.

Answer 321

The correct answer was: Ratio spread. In theory this position is just like ratio call writing where more calls are written (sold) than stock is owned. When a ratio spread is established a customer writes (sells) more contracts than are being purchased. In this case, the customer is buying 5 calls and selling 10 calls. In a ratio call spread, potential loss is unlimited because the additional calls sold are uncovered (naked).

Answer 322

The correct answer was: closed-end investment company. Sales charges could be paid on all types of open-end funds. Commissions are paid on securities traded in the secondary market, such as closed-end investment company shares.

Answer 323

Your answer, I and IV., was correct!. Annual compliance reviews can be done individually or in groups either in person or by Webcast. If by Webcast, the presentation may be live or recorded. In any format the participants must have the opportunity to ask questions or engage in dialogue either live or electronically or be told where they can send questions to be answered.

Answer 324

Your answer, 10., was correct!. Conviction within the past 10 years for any felony or securities-/money-related misdemeanor will lead to statutory disqualification of an applicant for registration with a FINRA member firm.

Answer 325

Your answer, Custodian., was correct!. The custodian must sign securities in a custodial account to effect good delivery.

Answer 326

Your answer, $500,000 cash and securities for his account and $480,000 cash and securities for the joint account., was correct!. There are two separate customers, each entitled to the $500,000 SIPC protection, but since SIPC only covers up to $250,000 in cash, the customer will not get full coverage for the $300,000 cash in his account. All of the securities and cash will be covered in the joint account.

Answer 327

Your answer, The dated date of the issue., was correct!. The dated date of a bond issue is merely the date on which the issue begins to accrue interest. As such it would have less to do with the marketing efforts related to a new issue than would items such as the size of the block offered, the rating of the issue (how financially strong it is), and the maturity.

Answer 328

Your answer, The quote is tentative (nominal) merely suggesting a range in which the order is likely to be filled., was correct!. The term "work out" means that the quote is approximate, or nominal. As with a subject quote, the OTC trader that supplied the quote will most likely negotiate with a number of market makers to get the customer's securities sold or bought.

Answer 329

Your answer, adjustment bonds., was correct!. Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for income (adjustment) bonds. Income, or adjustment bonds, require interest to be paid only if declared by the board of directors.

Answer 330

Your answer, Precious metals such as gold., was correct!. Historically precious metals, like gold, are counter cyclical and move opposite of the economic cycles. Utility and pharmaceutical companies are defensive or noncyclical and their movement is not tied to the economic cycles while manufactures of consumer goods move with the economic cycles

Answer 331

Your answer, handling odd-lot market orders., was incorrect. The correct answer was: preventing the stock price from falling. Although designated market makers buy and sell as principals to maintain a fair and orderly market and provide liquidity, they are not obligated nor do they have a responsibility to prevent a decline in price.

Answer 332

Your answer, in a Recession., was correct!. Recession is defined as 2 or more consecutive quarters of economic decline. It would have to be at least 6 quarters to be considered a depression.

Answer 333

Your answer, I and III., was incorrect. The correct answer was: I and IV. The spread is ½ point. In each point, which is worth $10, there are 100 basis points. Therefore, ½ point is worth $5 and represents 50 basis points.

Answer 334

Your answer, a net designated price., was incorrect. The correct answer was: a concession. Members of the syndicate buy the bonds at the offering price minus the takedown, nonmembers buy at offering price minus a concession. The basis price is the yield to maturity.

Answer 335

Your answer, the dividend must be declared by the board of directors., was correct!. All dividends, both common and preferred, must be declared by the board of directors. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt, securities.

Answer 336

Your answer, nonrecourse loans., was correct!. Nonrecourse loans only have economic consequences for investors in real estate programs.

Answer 337

Your answer, electronic OTC Pink stocks, was correct!. Last-sale information is available for listed (exchange traded) securities and for all Nasdaq securities. Although electronic OTC Pink securities are traded over the counter, they are not included in Nasdaq. Therefore, last-sale information is not always available

Answer 338

Your answer, 0.625., was incorrect. The correct answer was: 0.0625. To calculate the percentage yield of the underlying Treasury security, divide the strike price by 10 (62.50 / 10 = 6.25%).

Answer 339

Your answer, High-tech funds., was incorrect. The correct answer was: Growth-oriented mutual funds. A growth mutual fund may be appropriate for a young couple's IRA account; all other selections incur high risk that is not appropriate for a retirement account.

Answer 340

Your answer, II and III., was incorrect. The correct answer was: I and IV. Negotiable CDs are issued primarily by banks and backed by the issuing bank. The minimum denomination is $100,000. These are sometimes referred to as jumbo CDs.

Answer 341

Your answer, under no circumstances., was incorrect. The correct answer was: with the customers' written permission. A member may commingle a customer's securities with those of other customers only if all of the customers involved have given their written consent.

Answer 342

Your answer, own an interest in any other organization engaged in the securities business, was incorrect. The correct answer was: own a small financial interest in a publicly traded retail company Registered representatives must notify their employer in writing and be permitted to engage in any other business, serving as an officer or director of another business organization, or own any interests in a privately held financial services company. Publicly held shares do not require consent provided there is no control relationship (defined as 10% or more ownership).

Answer 343

Your answer, I and II, was correct!. For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 70 ½. This is known as the "required beginning date" (RBD). The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the "required minimum distribution" (RMD).

Answer 344

Your answer, 87, was incorrect. The correct answer was: 79 This is a covered call writer. If the stock rises above $90, the writer will be exercised and will make $700 on the stock (buy at $83, deliver at $90) and keep the $400 received in premiums. If the stock declines, the call expires unexercised. The writer can lose $400 on the stock (the premiums earned) and still break even. This occurs at $79 ($83 − $4). Breakeven is cost of stock purchased less premiums.

Answer 345

Your answer, Specialized., was correct!. An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.

Answer 346

Your answer, Securities Exchange Act of 1934., was correct!. The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

Answer 347

*** LOOK AT the Age **** Your answer, 10% penalty plus payment of ordinary income tax on all funds withdrawn exceeding basis., was incorrect. The correct answer was: Ordinary income tax on earnings exceeding basis.

Answer 348

Your answer, Securities in a discretionary account may not be rehypothecated., was correct!. No limits are placed on the rehypothecation of securities in an account based solely on its discretionary status. Both cash and margin accounts may be discretionary.

Answer 349

Your answer, the Supply Side Economic Theory., was incorrect. The correct answer was: the Monetarist Economic Theory. Controlling the money supply implies a hands-on theory that is referred to as the Monetarist Theory.

Answer 350

Your answer, Purchase of new issue common stock., was correct!. A customer may only borrow money or securities from a broker/dealer in a margin account. Uncovered call options must occur in a margin account and uncovered put options can only occur in a cash account when certain criteria are met. Short sales must occur in a margin account.

Answer 351

Your answer, I and III., was incorrect. The correct answer was: I and II. FICB (Federal Intermediate Credit Banks) is one of the associations in the Federal Farm Credit Bank system that issues notes and bonds. Since the bonds are not backed by the government or by any specific assets, they are considered debentures backed only by the faith and credit of the bank issuer or issuers.

Answer 352

Your answer, No gains or losses are recognized until the final redemption., was incorrect. The correct answer was: All gains and losses are recognized on the transfer date. Although a transfer within a family of funds is generally not subject to a sales charge, the customer is liable for any taxes due. The IRS considers this transaction a sale and a purchase. Any losses or gains must be declared on that year's tax form.

Answer 353

Your answer, decreased by 8.5%., was correct!. A beta coefficient of .85 means that the portfolio is considered to be .85 times as volatile as the overall market. Therefore, if the market declines by 10%, the portfolio with a beta of .85 is likely to decline by only 8.5% (.10 × .85).

Answer 354

Your answer, corporate bondholders must amortize premium bonds annually., was correct!. If an investor purchases a corporate bond at a premium, the investor has the option of whether or not to amortize the premium. Amortization reduces both reported interest income and cost basis.

Answer 355

Your answer, $7 gain., was correct!. Because the stock is purchased on exercise of the short put for $50 and is used to cover the $50 short sale, the investor incurs no gain or loss on the stock. The customer keeps the $700 collected in premiums for a profit of $7 per share.

Answer 356

Your answer, 27500., was incorrect. The correct answer was: 30500. After the move in the price of XYZ, the long market value in the account is $52,000, computed as follows: 500 XYZ at $50 per share is worth $25,000; 300 shares of ABC at $90 per share is worth $27,000. The long market value of $52,000 minus the debit balance of $21,500 results in an equity balance of $30,500. SMA is not equity.

Answer 357

**** PREFERRED PAR = $100 ****** Your answer, the conversion price to $22.72., was correct!. The stock is convertible at $25 ($100 par / 4 shares). To determine the new conversion price, $100 / 4.4 shares = $22.72, or divide $25 by 110%

Answer 358

Your answer, Enticing customers to buy mutual fund shares just before the ex-dividend date., was correct!. Selling dividends is an unethical sales practice in which a member intentionally misleads customers into believing they will receive the equivalent of a rebate on their investments because the fund will soon pay a distribution. The customers suffer out-of-pocket losses because the cash immediately coming back is dividend income subject to tax. At the same time, the NAV of the fund is reduced.

Answer 359

Your answer, corporate debt securities., was correct!. Municipal and government bonds are exempt from the trust indenture requirement of the Trust Indenture Act of 1939. Revenue bonds are frequently issued with a trust indenture, but no legal requirement to do so exists. The Trust Indenture Act of 1939 requires that corporate bond issues of $5 million or more sold interstate must be issued with a trust indenture.

Answer 360

Your answer, denominations., was correct!. The denominations of the bonds in the block will not affect its marketability. The block size is generally the reason a secondary market joint account would be formed and with rating and maturity will affect the liquidity and, hence, the marketability of a block of bonds.

Kaplan QBank Questions Flashcards

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