Series 7 Practice Exam 10 Q&A

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some o

90 days
Explanation: The notice of offering for a Rule 144 sale is valid for 90 days.

A broker-dealer appears on the Nasdaq system as a market maker for DCIR common stock. An employee of the firm responsible for maintaining the firm's inventory in DCIR is known as a:

Position trader
Explanation: A position trader is responsible for maintaining a broker-dealer's inventory as well as trading the firm's account.

An established customer has purchased penny stocks through a broker-dealer on five occasions. When making future recommendations to the customer regarding these securities, the broker-dealer must:
a. Obtain a written statement from the customer for each t

d. Be sure that the recommendations take into account the customer's investment objectives
Explanation: The account approval requirements for penny stocks under SEC Rule 15g-9 do not apply to existing customers who have maintained an account with a broker

A closed-end fund trading on the NYSE has a current bid price of $21.50 and an offer price of $21.70. A customer purchasing the fund would pay:

$21.70 plus a commission
Explanation: The customer would pay $21.70 plus a commission. A closed-end fund is purchased and sold like any other stock traded on the NYSE. The customer would pay the offer price plus a commission or receive the bid price less

A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should:
I. Buy 5 bonds
II. Buy 100 shares of stock
III. Sell 5 bonds short

I and IV
Explanation: Since the bond is convertible into 20 shares of stock ($1,000 par divided by $50) and the bond is priced at 120, the parity for the stock is $60 per share ($1,200 bond price divided by 20 shares). An arbitrage situation exists becaus

The Order Audit Trail System tracks the:

Entire life of an order that is accepted by a member firm
Explanation: The Order Audit Trail System (OATS) enables FINRA to effectively review market activity in regard to customer orders within a member firm, to conduct surveillance, and to enforce rules

An investor purchases 100 shares of XYZ at 60 and also writes an XYZ 65 call @ 3. If the call is exercised when the market price of XYZ is 70, what is the investor's profit?

$800
Explanation: If the call is exercised, the investor will be required to sell his stock at the strike price of 65 (not the market price of 70). The proceeds of the sale will be $6,800 ($6,500 strike price plus $300 premium received). Since his origina

A limited partnership would be LEAST suitable for which of the following accounts?
a. An institutional account
b. A trust account
c. A corporate account
d. A UTMA account

d. A UTMA account
Explanation: Of the choices listed, a UTMA (custodian or minor's) account would be least suitable for a limited partnership. A limited partnership generally has limited marketability and a lack of liquidity. In addition, most custodian a

An investor purchased 100 shares of ABC stock at $53 and on the same day purchased an ABC June 50 put at 2. After the put expired, the investor sold the ABC stock at $60. The investor's:
I. Cost basis for tax purposes was 53
II. Cost basis for tax purpose

II and III only
Explanation: When a married put (stock and put purchased on the same day) expires, the premium is added to the cost basis of the stock. The cost basis, therefore, will be $55 (53 + 2). The sale at $60 results in a profit of $5 per share (6

Municipal securities Dealer A quotes a price for a block of bonds to Dealer B for one hour with a five-minute recall. This means:

Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes
Explanation: When municipal bonds are offered on a firm basis to Dealer B for one hour with a five-minute recall, the offering dealer, Dealer A, may

A customer opens a margin account and signs the basic customer agreement, which consists of a credit agreement, loan consent agreement, and hypothecation agreement. If the customer's first order is to buy 100 shares of XYZ stock at a price of 36, the cust

Will pledge stock in order to receive a loan to buy the stock
Explanation: Securities in a margin account are always held at the brokerage firm in street name to allow the firm to liquidate shares if necessary. Under the hypothecation agreement, the custo

A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This most likely will be accomplished through the issuance of:

American Depositary Receipts
Explanation: American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities i

A broker-dealer is underwriting an initial public offering (IPO) for a company that is not eligible to be listed on an exchange. The broker-dealer is required to deliver prospectuses:

For 90 days after the effective date
Explanation: When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus del

Which TWO of the following choices BEST describe a gasoline tax?
I. Graduated taxes
II. Flat taxes
III. Progressive taxes
IV. Regressive taxes

II and IV
Explanation: A regressive tax is flat (i.e., the tax rate remains constant regardless of the taxable amount). Examples of regressive taxes are sales taxes and gasoline taxes. A progressive tax is graduated (i.e., the tax rate increases as the ta

Public orders on a designated market maker's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63. The size of the market would be:

100 by 300
Explanation: The amount of shares at the highest bid and the lowest offer on the designated market maker's book is called the size of the market. The size of the market is 100 shares bid for at 42.25 and 300 shares offered at 42.63 or 100 by 30

Foreign currency options:
I. Are quoted in U.S. dollars
II. Are quoted in the underlying foreign currency
III. Expire on the third Friday of the expiration month
IV. Expire on the last Friday of the expiration month

I and III only
Explanation: Foreign currency options are quoted in U.S. dollars (U.S. currency). Beginning February 15, 2015, the expiration date for foreign currency options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

When reviewing a company, a fundamental analyst will look at which TWO of the following choices?
I. Financial reports
II. Trading volume
III. Management of the corporation
IV. Short interest

I and III
Explanation: A fundamental analyst is interested in the company, not technical factors relating to the stock. He would look at financial reports and the company's management.

Which of the following methods is used by the Options Clearing Corporation in assigning exercise notices?
a. Random selection
b. First-in, first-out
c. To the member firm holding a long position that first requests an exercise
d. On the basis of the large

a. Random selection
Explanation: The OCC assigns exercise notices on a random selection basis only.

Penny stock rules apply under which TWO of the following conditions?
I. The stock is priced below $5.00 per share
II. The customer is an active trader of penny stocks
III. The broker-dealer is a market maker in the security
IV. The customer is an institut

I and III
Explanation: A penny stock, according to SEC rules, is a stock that sells for less than $5.00 that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $

If interest rates decline, which of the following securities will probably have the greatest increase in market value?
a. Treasury bills
b. Commercial paper
c. Treasury bonds
d. Treasury notes

c. Treasury bonds
Explanation: When interest rates decline, the securities with the longest maturities will most likely have the greatest price increase.

Which of the following statements is TRUE regarding dividend and capital gain distributions of mutual funds?
a. They may be combined to determine the total yield
b. The taxes may be deferred if they are invested in additional mutual fund shares
c. Dividen

d. They can be reinvested automatically in additional shares if the shareholder chooses to do so
Explanation: Of the choices listed, the only true statement regarding dividend and capital gain distributions from an open-end investment company (mutual fund

Which of the following securities will probably have the greatest fluctuation in price when interest rates move up or down?
a. Commercial paper
b. Treasury bills
c. Treasury notes
d. Treasury bonds

d. Treasury bonds
Explanation: Treasury bonds have the longest maturity of the choices listed and will have the greatest fluctuation in price. Since they have the longest maturity, they will be exposed to the risks of the marketplace for the longest perio

Which TWO of the following types of securities may a municipal securities representative sell?
I. General obligation bonds
II. Treasury notes
III. Variable-rate demand obligations (VRDOs)
IV. Municipal unit investment trusts

I and III
Explanation: A municipal securities representative may sell municipal bonds. General obligation bonds and VRDOs are types of municipal securities. The municipal securities representative, according to the MSRB, is not properly registered to sell

Under the partnership democracy provisions of a limited partnership, the limited partners are NOT permitted to:
a. Petition the court to have the general partner removed
b. Petition the court to have the partnership dissolved
c. Sell assets owned by the p

c. Sell assets owned by the partnership
Explanation: Selling assets is a management decision and is, therefore, not the role of the limited partners. Democracy provisions would permit the other choices.

Which of the following statements is TRUE concerning a customer who purchases an out-of-state original issue discount (OID) general obligation bond?
a. Each year the customer will pay both federal and state income tax
b. Each year the customer will pay on

c. Each year the customer will pay only state and local income tax
Explanation: The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or m

XYZ Corporation borrows money at a rate of interest that is one point above LIBOR. Therefore, the rate is based on:
a. A long-term bond index
b. The U.S. prime rate
c. The London Interbank Offered Rate
d. A rate established by the Federal Reserve

c. The London Interbank Offered Rate
Explanation: LIBOR is the London Interbank Offered Rate. It is the average rate that banks charge each other on loans for London deposits of Eurodollars.

Which of the following statements is NOT TRUE about defined benefit plans?
a. Contributions are based on a predetermined distribution amount
b. The employee does not know the amount her employer will contribute each year
c. These plans provide tax-free di

c. These plans provide tax-free distributions to participants
Explanation: An ERISA-qualified retirement plan is generally established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is m

An investor purchases a zero-coupon municipal bond maturing in 15 years that is callable in five years at 102. If the bond is called, the investor will receive:

102% of the compound accreted value
Explanation: The investor would receive 102% of the compound accreted value since the security is a zero-coupon bond or original issue discount (OID) bond. The compound accreted value is equal to the original value of t

A corporation with an excellent earnings record has several issues of bonds outstanding. During a period of stable interest rates, which of the following securities are expected to fluctuate the most?
a. Mortgage bonds
b. Commercial paper
c. Debenture bon

d. Convertible bonds
Explanation: The convertible bonds will fluctuate the most because they are convertible into common stock. The price fluctuates with the price movements of the common stock. The fact that interest rates are stable is another reason wh

Which of the following choices is NOT a characteristic of a HOLDR?
a. Diversification
b. The right to vote
c. The ability to control when you are taxed
d. Once-a-day pricing

d. Once-a-day pricing
Explanation: Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a certain sector (e.g., Biotech, Internet, Retail) into a trust and selling interests in the trust to investors. HOLDRs offer investors

When a corporation goes bankrupt, which of the following would be the last to be paid?
a. Internal Revenue Service
b. Debenture holders
c. Preferred stockholders
d. Holders of warrants

d. Holders of warrants
Explanation: A holder of common stock is usually the last to be paid in a bankruptcy. A holder of a warrant has the right to purchase common stock and is paid after a holder of common stock. In practical terms, the common stock is w

An employee of a corporation is enrolled in a noncontributory pension plan. Relative to the plan, which of the following statements are TRUE?
I. Earnings in the plan accrue tax-deferred
II. Earnings in the plan are taxed each year
III. Benefits are taxed

I and IV
Explanation: In a noncontributory pension plan, the employee does not make contributions. Earnings in the plan accrue tax-deferred (are not taxed until received by the employee) and benefits received are taxed as ordinary income.

An investor who owns 1,000 shares of ABC informs you that he wants to sell short against the box. Which of the following statements is TRUE?
a. This type of transaction is only permitted by institutional investors
b. This type of transaction is permitted

b. This type of transaction is permitted if the order ticket is marked short
Explanation: In certain instances, a client (institutional or retail) that is long a security may want to sell the stock, but not deliver his long position. The client must borro

The Bond Buyer Revenue Bond Index is:
I. A 30-year index
II. A 20-year index
III. A 25-bond index
IV. A 30-bond index

I and III only
Explanation: The Bond Buyer Revenue Bond Index (commonly referred to as the Revdex) is an index of the yields on 25 revenue bonds. It is compiled on a weekly basis by The Bond Buyer and contains 30-year maturity bonds with an average rating

It is most beneficial to the holder of a call if the price of the underlying security is:

Rising
Explanation: The holder (purchaser) of a call expects the market price of the underlying security to rise and, therefore, will profit from a rise in the security.

Which of the following companies is LEAST affected by changes in the business cycle?
a. A construction company
b. A machine tool company
c. An automobile manufacturer
d. A pharmaceutical company

d. A pharmaceutical company
Explanation: Changes in the business cycle will have the least effect on a defensive company (such as pharmaceuticals or utilities). The demand for the products produced by defensive companies will not be hurt by a downturn in

An investor established the following positions.
Long 100 shares of XYZ at $37 per share
Long 1 XYZ 35 put at 1.75
This investor prefers XYZ to:

Appreciate significantly
Explanation: The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a 1.75 premium (long XYZ 35 put). The investor loses money if the stock falls below the breakeven p

A 60-year-old individual has invested $30,000 in a nonqualified variable annuity. The annuity's value is currently $40,000. If the individual withdraws $20,000 and is in a 28% tax bracket, his tax liability will be:

$2,800
Explanation: The amount invested in a nonqualified variable annuity may not be deducted from income. All earnings accrue tax-deferred. A withdrawal will be taxed on a LIFO method, meaning the earnings (last in) will be considered the first to be wi

The official statement for a revenue bond issue states that the bonds are backed by a pledge of the project's net revenues. This means that the:

Debt service is the first item paid after operating and maintenance expenses
Explanation: Most municipal revenue bonds are net revenue pledge bonds. This means that bond (debt) service is paid from net revenue (revenue after operating and maintenance expe

When evaluating two CMOs backed by GNMAs, one having a 6% yield and the other having a 10% yield, which TWO of the following statements are TRUE?
I. Prepayment risk is greater for the CMO with the 10% yield
II. Prepayment risk is greater for the CMO with

I and IV
Explanation: Prepayment risk measures the possibility that homeowners will refinance (prepay) their mortgages. Historically, the speed of prepayment increases when interest rates fall. If this happens, payments will flow into the CMOs at an accel

When opening a new account, what is the order in which the following actions should take place?
I. Obtain approval from the ROP
II. Obtain essential facts from the customer
III. Obtain a signed options agreement
IV. Enter the initial order

II, I, IV, and III
Explanation: When opening an account, the first step is to obtain the essential facts regarding the investor's investment objectives and financial means. The account is then approved by the manager and the initial order can be entered.

A husband and wife with children going to college in 2, 11, and 16 years are planning to set up an account to pay for their children's college education. Which of the following investments are most suitable for this purpose?
a. Money-market funds
b. Certi

d. Investment-grade corporate bonds with maturities coinciding with the children's college attendance
Explanation: Given these choices, the investment-grade bonds with serial maturities of 2, 11, and 16 years appear to be the most suitable investment. Mon

An investor is a limited partner in a direct participation program that the IRS has determined to be abusive. This investor:

May be subject to pay back taxes as well as penalties and interest
Explanation: If the IRS deems a direct participation program abusive, deductions previously claimed may be disallowed causing investors to pay back taxes as well as interest and penalties

Which of the following statements about municipal revenue bonds is NOT TRUE?
a. There is no debt limitation set by the issuing municipality
b. The maturity of the revenue bond usually coincides with the useful life of the facility being built
c. They can

b. The maturity of the revenue bond usually coincides with the useful life of the facility being built
Explanation: Municipal revenue bonds do not have maturity schedules that coincide with the usefulness of the facility being built. They mature prior to

The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called:

Prerefunded bonds
Explanation: The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs.

Which TWO of the following activities are typically performed during the cooling-off period of an initial public offering (IPO)?
I. A preliminary prospectus is prepared by the issuer
II. The issuer will publish research on the securities to be offered
III

I and IV
Explanation: During the cooling-off period, the SEC will review the issuer's registration statement for completeness. The SEC does not evaluate (pass on) the investment merits of the issue. Also, during the cooling-off period, the issuer will blu

Which of the following option positions obligates the investor to sell shares if exercised?
a. Long a call
b. Long a put
c. Short a call
d. Short a put

c. Short a call
Explanation: A short call position obligates the investor to sell shares if the option is exercised.

A self-employed individual has total income of $120,000. If the individual wants to open a Keogh plan:
I. It must be opened by the time he files his tax return
II. It must be opened by the end of the tax year
III. A maximum deductible contribution of $24,

II and III
Explanation: A Keogh plan must be opened by the end of the tax year (December 31). However, contributions are permitted until the filing deadline for the tax return (April 15). A self-employed individual may deduct 20% of self-employed income o

A municipal bond issue is called due to an event beyond the control of the issuer that affects the use of property (e.g., earthquakes, hurricanes, condemnation of property). This is known as:

A catastrophe call
Explanation: A catastrophe call allows an issuer to call an entire issue in situations that are beyond its control, such as a condemnation.

A 60-year-old individual has been putting money in an annuity for 15 years and has been informed of another variable annuity that is offering higher returns. He is not in need of income at this time and is looking to defer income for several more years. W

c. He should maintain his existing variable annuity and not begin taking distributions until such time as he needs them
Explanation: In most situations, senior citizens should not be starting, or exchanging into, a new variable annuity since they are desi

All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT:
a. They are based on the S&P 500 Index
b. The levels are calculated on a monthly basis
c. A trading halt on one exchange applies to all exchanges
d. A 7% decline will

b. The levels are calculated on a monthly basis
Explanation: Marketwide trading halts are based on the S&P 500 Index and are calculated daily (not monthly). A trading halt on one exchange applies to all exchanges that trade the same security. A Level 1 Ma

Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being of

c. It is a combined primary and secondary offering
Explanation: Of the 500,000 shares being offered, 250,000 shares are being issued for the first time from authorized but unissued shares. This is considered a primary offering. The 250,000 shares being of

When opening an account for a customer, MSRB rules do not require the dealer to obtain the customer's:
a. Financial condition
b. Investment history
c. Investment objectives
d. Date of birth

Explanation: MSRB rules specifically state that a dealer should make every effort to obtain all of the information listed except the customer's date of birth. The dealer should determine that the customer is not a minor, but not specifically his date of b

What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF?

$500,000
Explanation: Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverag

Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT:
a. They trade in the over-the-counter market
b. All are government guaranteed
c. Short-term securities are q

b. All are government guaranteed
Explanation: Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.

How much margin must the purchaser of one RFQ Feb 60 call for a $3 premium deposit?

100%
Explanation: Options may not be purchased on margin. According to Regulation T, the full purchase price (the premium) must be deposited.

An individual who is short stock and wants protection against an upside move in the market will probably:

Buy a call option
Explanation: An individual who is short stock will buy a call option. If the market advances, the individual will exercise the call option to limit the loss if the market value of the short stock increases.

When examining an earnings report for National Corporation, a registered representative sees that earnings per share is reported on both a primary and fully diluted basis. This indicates that:
I. The company has convertible bonds or convertible preferred

I and III only
Explanation: The calculation for earnings per share on a primary basis (before the possible dilution of convertible bonds, convertible preferred stock, stock options, or warrants) is computed based on the number of outstanding common shares

An investor is in the 35% tax bracket. Which of the following investments would afford him the BEST after-tax yield?
a. A 3.50% general obligation bond
b. A 4.10% Treasury bond
c. A 5.25% investment-grade corporate bond
d. A 5.75% non-investment-grade cor

d. A 5.75% non-investment-grade corporate bond
Explanation: The 3.50% general obligation bond (municipal bond) is exempt from federal income taxes. The other investments are subject to federal income taxes and 35% of the income received would be taxable.

A bank or brokerage firm is applying to become a primary dealer in government securities. Which government body appoints the financial institution as a primary dealer?
a. The Treasury Department
b. The SEC
c. FINRA
d. The Federal Reserve Board

The Federal Reserve Board
Explanation: The Federal Reserve Board appoints primary dealers in government securities.

When determining the position limit, the member firm will aggregate which TWO of the following positions?
I. Long calls and long puts
II. Long calls and short puts
III. Short calls and short puts
IV. Short calls and long puts

II and IV
Explanation: When determining a customer's position in relation to the exchange's position limit, the member firm will consider all positions on one side of the market. The position may not exceed the limit on either the long side of the market

If a customer's objectives are safety of principal and income, you as the registered representative would NOT suggest:
a. AA-rated corporate bonds
b. High-grade preferred stocks
c. A bond fund which invests in investment-grade municipal bonds
d. An Exchan

d. An Exchange-Traded Fund that tracks the S&P 500 Index
Explanation: An ETF that tracks the S&P 500 Index invests in common stocks that will not pay a high dividend and will fluctuate in value with the general equity market. This customer wants income an

All of the following statements are TRUE of covered call option writing, EXCEPT:
a. The writer can increase the overall yield on his portfolio
b. It is considered a conservative option strategy
c. The premium received guarantees the writer cannot have a l

c. The premium received guarantees the writer cannot have a loss on the underlying security
Explanation: All of the choices listed are true except the premium received guarantees the writer cannot have a loss on the underlying security. The security can d

Dynasty Corporation is planning to acquire Regal Corporation. If a trader purchased 12,000 shares of Regal Corporation and sold short 4,000 shares of Dynasty Corporation, the trader is:

Engaging in a risk arbitrage
Explanation: When there is an acquisition or merger taking place, traders will try to take advantage of the activity between the common stocks of the two companies. The trader or risk arbitrageur will go long the company being

Accrued interest for municipal bonds is computed on:

A 30-day month and a 360-day year
Explanation: Accrued interest for municipal bonds is computed in the same manner as for corporate bonds, which is based on a 30-day month and a 360-day year. Accrued interest for U.S. government bonds is figured on a 365-

An aunt wishes to give her niece securities as a gift. The niece's parents have recently died and a court has appointed a guardian other than the aunt. The aunt:

May give the securities without the permission of the guardian
Explanation: The aunt may give securities to the minor as a gift. There are no restrictions on a donor giving a gift.

When a stock sells ex-dividend, which TWO of the following orders on a designated market maker's (DMM's or specialist's) book will be reduced?
I. Buy-limit order
II. Sell-limit order
III. Buy-stop order
IV. Sell-stop order

I and IV
Explanation: When a stock sells ex-dividend, the DMM (specialist) will reduce those orders on his book that were entered below the market. A buy-limit order and a sell-stop order will be reduced by the amount the stock sells ex-dividend since the

Which TWO of the following choices would be the most suitable purchasers of municipal zero-coupon bonds?
I. An investor who does not seek present additional cash flow
II. An investor who seeks the tax benefits of long-term capital gains
III. An investor w

I and IV
Explanation: In a custodian account, the minor is technically liable for taxes. Depending on the amount of income generated in the account and the age of the minor, taxes are calculated at the parents' rate. Therefore, parents may consider the pu

What is the SRO maintenance requirement on a $1 million short position of a 3x Inverse Gold Index ETF?

$900,000
Explanation: Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverag

A municipal securities broker's broker will complete transactions for a:
I. Retail customer
II. Dealer bank
III. Municipality
IV. Municipal broker-dealer

II and IV only
Explanation: A broker's broker works only for other professionals in the industry, executing trades for dealer banks or other broker-dealers, but not for retail customers or municipalities. The purpose of a broker's broker is to provide ano

An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option?
a. European style, next business day settlement
b. European style, three business days' settlement
c. American style, next busi

d. American style, three business days' settlement
Explanation: Long-term anticipation securities (LEAPS) may be exercised on any day prior to expiration (American style). Exercise settlement is in the underlying stock, in three business days.

Because of its multiplier effect on the economy, the Federal Reserve Board is reluctant to change:

The reserve requirement
Explanation: Changing bank reserve requirements has a multiplier effect. This means that a small change in the reserve requirement can have a large effect on the money supply and the economy. This makes the results of changing the

Co. A Co. B Co. C Co. D
Earnings per Share $2.00 $6.50 $5.20 $7.80
Dividends $0.10 $2.50 $2.60 $6.00
Percentage of
Retained Earnings 95% 62% 50% 23%
An investor has decided to diversify her portfolio into a more defensive position by including utility sto

Company D
Explanation: Company D is probably a utility since utility companies usually have a high dividend payout ratio and a low percentage of retained earnings.

Which of the following choices best describes certificates of participation?
a. A form of equity financing for a corporation.
b. A type of REIT
c. A type of bond, typically created through a lease agreement
d. A type of bond based on payments from residen

c. A type of bond, typically created through a lease agreement
Explanation: Certificates of participation (COPs) are lease financing agreements, issued typically in the form of a tax-exempt or municipal revenue bond. COPs have been used traditionally as a

A customer purchased a municipal bond with a 6.50% coupon rate that was priced at a 6.95 basis. If the bond is currently trading at $945, the current yield is:

6.88%
Explanation: The current yield is found by dividing the yearly interest payment of $65 by the market price of $945. This equals 6.88%. The fact that the bond was purchased at a 6.95 basis is not relevant.

Compared to selling short, buying a put option:

Explanation: Short selling requires the deposit of margin, whereas the premium on a put is usually substantially less than the Regulation T margin requirement. On a short sale, the seller's risk is unlimited, whereas on a put purchase, the risk is limited

A customer purchases a municipal bond for settlement on Tuesday, October 10. The bond pays interest on January 15 and July 15. The number of days of accrued interest the buyer owes to the seller is:

85 days
Explanation: Interest is figured from the last interest payment date, July 15, up to but not including the settlement date (which is given as October 10). Therefore, accrued interest is figured up to and including October 9.
The customer buying th

The tool most commonly used by the FRB to regulate the amount of money and credit in the banking system is:
a. Open market operations
b. The discount rate
c. Moral suasion
d. Reserve requirements

Open market operations
Explanation: Of all the tools of the Federal Reserve Board listed, the one most commonly used is open market operations. This is the most flexible tool and can be changed or fine-tuned very easily by buying or selling more or less U

Super Entertainment Inc., a publicly traded firm on the NYSE, spins off its domestic syndication division, creating 1,000,000 new shares. To receive the new shares, investors must exchange 25% of their old shares. Investors who receive shares of the new c

Be required to receive a prospectus under the Securities Act of 1933
Explanation: This scenario is an example of an offering regulated by Rule 145. Rule 145 defines certain types of reclassifications of securities as sales subject to the registration and

Which of the following choices does NOT delegate power of attorney to a third party for the purpose of making securities transactions?
a. A husband
b. A wife
c. A corporation
d. A custodian

d. A custodian
Explanation: Of the choices given, the only one that does not delegate power of attorney to a third party for the purpose of making securities transactions is a custodian for a minor. The custodian acts as the fiduciary for a minor's accoun

Which of the following Moody's ratings is the most speculative?
a. Aa
b. A
c. Baa
d. Ba

d. Ba
Explanation: Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.

In order to have an issuer of securities exempt from the provisions of the Securities Act of 1933 under Regulation D, which TWO of the following statements are TRUE?
I. The purchasers must sign an investment letter restricting the resale of the securities

I and III
Explanation: According to Regulation D, certain conditions must be met for the securities to be exempt from the provisions of the Securities Act of 1933. The offering must be restricted to persons who are knowledgeable and experienced in busines

The MSRB performs all of the following functions, EXCEPT:
a. Regulate municipal securities dealers
b. Regulate municipal securities representatives
c. Regulate municipal securities advertising
d. Set fixed commissions for municipal dealer agency transacti

d. Set fixed commissions for municipal dealer agency transactions
Explanation: The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be fair and reasonable and negotiated b

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

I and IV
Explanation: One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as

When comparing an Albany, New York hospital revenue bond to a Buffalo, New York hospital revenue bond, you notice that they have similar maturities but the Buffalo bond has a higher yield. A possible reason for this is:

There are more hospitals located in Buffalo than in Albany
Explanation: Competing hospitals could affect the project's revenue and, therefore, could reduce the bond's security. Each of the other choices relates to taxes, which do not secure revenue bonds.

A buy stop order is entered:
I. Below a support level
II. Above a resistance level
III. To limit a loss on a long stock position
IV. To limit a loss on a short stock position

II and IV
Explanation: A stop order may be used to limit a loss or protect a profit on an existing position. If an investor is short stock, he can enter a buy stop order which, if activated, will cover his short position and protect the profit or limit th

A woman wishes to open an account at a municipal securities firm. She identifies herself as the spouse of a trader at another municipal securities firm. Which TWO of the following are TRUE?
I. The representative must follow all instructions from the trade

I and III
Explanation: MSRB rules require that when opening an account for an employee of another municipal firm, a municipal registered representative must:
Notify the employer and follow all instructions (effectively receiving the employer's permission)

In a limited partnership, a general partner's minimum participation in profits and losses is:

1%
Explanation: According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status.

A corporate bond has increased in value by 3/4 of a point. The bond has increased by:

$7.50 per $1,000 par value
Explanation: One point equals $10. An increase of 3/4 of a point in a corporate bond is $7.50 per $1,000 of par value.

A registered representative has limited discretion over a customer's account. The registered representative may:

Place orders before the order has been approved by a principal
Explanation: Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be appr

Which of the following securities has prepayment risk?
a. Mortgage bonds issued by a utility company
b. Bonds issued by Freddie Mac
c. Collateralized mortgage obligations
d. Commercial paper

c. Collateralized mortgage obligations
Explanation: Many homeowners pay off their mortgages early. When interest rates fall, homeowners have an incentive to refinance and pay off their existing mortgages. These prepayments are passed through to the pools

A 3-month Treasury bill is issued at a discount to yield 9.5%, and a corporate bond is issued to yield 9.5%. The bond is to mature in 10 years. If both are offered on the same day on a bond equivalent yield basis, which of the following statements is TRUE

a. The bill has a greater yield than the bond
Explanation: T-bills are issued and quoted on a discount yield basis, whereas corporate bonds are quoted on a yield-to-maturity basis. These yields are calculated in different manners. The bond equivalent yiel

A customer has the following accounts with a brokerage firm.
Cash Account $20,000 securities (market value)
$10,000 cash
Long Margin Account $60,000 securities (market value)
$30,000 debit balance
$10,000 SMA
Short Margin Account $40,000 securities (marke

$20,000
Explanation: The $10,000 in cash may be withdrawn from the cash account. The $10,000 SMA in the long margin position may also be withdrawn for a total of $20,000. The short margin position does not have SMA. Therefore, in this example, nothing can

A new municipal bond issue has a total par value of $80,000,000. A member of the underwriting syndicate has sold its entire commitment of $10,000,000. If the syndicate is organized as a divided (western) account and there is an unsold balance of $2,000,00

0
Explanation: In a divided account, a member is responsible for selling only its participation. The member's responsibility ends once the firm has sold its $10,000,000 commitment. In an undivided (eastern) account, a syndicate member retains liability fo

A client is seeking a mutual fund that will maximize its return by limiting expenses. As a result, he wants to invest in a portfolio that is passively managed. Which TWO of the following choices will help achieve this goal?
I. A portfolio that invests onl

II and III
Explanation: Passive investing or management is designed to minimize transaction costs and capital gains. This is accomplished by a portfolio manager trying to mirror an index, not outperfom an index. An exchange-traded fund or mutual fund that

Which of the following actions must a municipal dealer disclose on a confirmation?
I. The municipal dealer acted as a agent
II. The municipal dealer acted as a principal
III. The municipal dealer acted as an agent for a third party
IV. The municipal deale

I, II, and III only
Explanation: The MSRB requires a municipal dealer to indicate to a customer through a written confirmation the capacity in which the dealer acted. The municipal dealer must disclose if it acted as an agent for the customer, as a princi

For variable annuities, which of the following payout options provide the highest payout?
a. Joint and last survivor life annuity
b. Life annuity with period certain
c. Life annuity
d. Unit refund life annuity

c. Life annuity
Explanation: Annuitants will receive the greatest cash flow from the life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, the

Which of the following persons may not delegate power of attorney to a third party for the purpose of making securities transactions?
a. A husband
b. A wife
c. A corporation
d. A custodian for a minor

d. A custodian for a minor
Explanation: Of the choices given, the only one that may not delegate power of attorney to a third party for the purpose of making securities transactions is a custodian for a minor.

Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)?
a. They are designed to deliver the same performance as an index or other benchmark
b. They are designed to deliver a multiple of the performance of an index or other

c. They are designed to deliver the opposite of the performance of an index or other benchmark
Explanation: An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. For example, an inverse ETF based on the DJIA

For tax purposes, corporations may exclude a portion of the dividends received from:
I. Municipal bonds
II. Corporate bonds of other corporations
III. Preferred stocks of other corporations
IV. Common stocks of other corporations

III and IV only
Explanation: Corporations may exclude a portion of the dividends received from equity investments in other corporations. This includes common stock and preferred stock.

Which of the following objectives is the least suitable reason for investing in a mutual fund?
a. Diversification
b. Professional management
c. Short-term trading
d. Liquidity

c. Short-term trading
Explanation: Investors in mutual funds usually seek all of the objectives listed except short-term trading.

The call feature on callable bonds is most relevant when the economy is:

Experiencing a slowdown and the FRB is trying to stimulate growth
Explanation: The call feature on callable bonds is most relevant when the general level of interest rates is declining. Rates will tend to decline when the FRB is trying to stimulate the ec

An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. Assuming sufficient passive income, the maximum passive losses that a limited partner may claim is:

$80,000
Explanation: The maximum amount of losses that may be deducted by a limited partner is the extent of his basis (in this question, $80,000). Assuming sufficient passive income, the limited partner may deduct $80,000.

Which of the following statements is TRUE regarding a registered representative who has not completed the Continuing Education Regulatory Element training within 120 days of his registration anniversary?
a. The representative will be placed in inactive st

a. The representative will be placed in inactive status
Explanation: FINRA will notify a representative within 30 days of the second anniversary date of initial registration, and every three years thereafter. If the representative then fails to complete t

A registered representative wants to take on a second job working part-time as a waiter in a restaurant. This is allowed as long as the individual notifies:

His employer
Explanation: Prior written notification must be provided to the registered representative's employer.

Which TWO of the following statements regarding straddles are TRUE?
I. An investor who does not anticipate that the price of the stock will change may sell a straddle
II. An investor who anticipates a substantial advance in the price of a stock will buy a

I and IV
Explanation: If investors wish to generate premium income, they will consider selling a straddle in order to generate income on both the put and the call. They will sell the straddle only if they do not anticipate significant price changes in the

Which of the following statements is TRUE concerning periodic payment variable annuities?
a. The number of a client's annuity units never changes
b. The number of a client's accumulation units never changes
c. They never have a beneficiary
d. The monthly

a. The number of a client's annuity units never changes
Explanation: During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units w

Which of the following choices is Standard and Poor's (S&P's) lowest rating for a municipal note?

SP-3
Explanation: Standard and Poor's best rating for notes is SP-1 and its worst rating is SP-3. AAA is S&P's best rating for bonds and D is its lowest rating for bonds.

A pension fund manager is holding a large portfolio of common stock. Many of these securities are represented in an index that has listed options trading. If a general market downturn is anticipated, the pension fund manager can:
I. Buy stock index call o

II and III
Explanation: The pension fund manager can hedge against a decline in the market by writing stock index call options and buying stock index put options. If the market did decline, the stock index call option will expire unexercised and the fund

A Keogh Plan is a type of retirement plan that allows self-employed individuals to contribute 20% of their income with a maximum contribution of:

$53,000
Explanation: A Keogh Plan allows self-employed individuals to contribute 20% of their income with a maximum deductible contribution of $53,000. (For 2014, the limit was $52,000.)

When the economy is peaking, what will be the expected sequence of the next three stages of the business cycle?
I. Trough
II. Expansion
III. Contraction

III, I, II
Explanation: Historically, the business cycle has moved sequentially through four stages. An expanding economy will peak once the supply of goods and services surpasses demand. As the economy contracts, demand for products decreases causing a r

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The common stock

79%
Explanation: The common stock ratio is found by dividing total shareholder equity by a company's total capital. Shareholder equity is equal to the par value of the common stock + paid-in capital + retained earnings, and the total capital is found by a

When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's:
a. Market maker
b. Principal
c. Designated market maker
d. Agent

d. Agent
Explanation: A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type

An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense may the inve

None
Explanation: The investor may not use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities may not be used as an interest expense deduction for fe

A customer, who is going on vacation, enters a GTC order to buy a stock. The order is executed. The customer tells the registered representative that he wants the stock but will not return in time to pay for the security by the payment date. The customer

Request an extension
Explanation: The customer has indicated that he wants to purchase the stock but will not be able to pay for it in time because he will be on vacation. The order was a good-until-cancelled (GTC) order, so the customer did not know if a

The 5% markup policy applies to:

Nonexempt securities
Explanation: The 5% markup policy does not apply to transactions requiring a prospectus (new issues, mutual funds, and registered secondaries) or transactions in certain exempt securities (such as municipal securities).

An investor has sold stock short at $60. The current market price of the stock is $40 and the investor believes the stock will recover somewhat before going lower. The investor should:

Buy a call
Explanation: The stock is currently trading at $40 and the investor is concerned that the price will rise. An investor who wants to limit the losses on an underlying short stock will buy a call.

FINRA disseminates bond transaction information for all these securities, EXCEPT:
a. Non-investment-grade corporate bonds
b. Rule 144A securities
c. Investment-grade corporate bonds
d. GSE bonds

b. Rule 144A securities
Explanation: TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. It is not a quotation system or an execution system. Broker-dealers provide quotes and will execute transaction

A registered representative is preparing to leave her firm. Her clients will be assigned to another representative at the same firm. To accomplish this:

The account records must be amended to reflect the change
Explanation: Account records must be amended whenever an internal transfer of an account is made. This change does not require approval of the customer, the completion of a new account form, or the

A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or someone else at her firm must notify:

The Treasury Department
Explanation: Firms are prohibited from transacting business with individuals and entities on the Office of Foreign Assets Control (OFAC) list. If a registered representative discovers that one of the owners or beneficiaries of an a

A registered representative is permitted to contact a person whose name is on the national Do Not Call List:

If the person has provided prior written consent to be contacted
Explanation: A person may register her number on the Federal Trade Commission (FTC) National Do Not Call Registry and have it remain on the list indefinitely. Broker-dealers are required to

An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options MOST likely has an investment objective of:

Speculation
Explanation: An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options most likely has an investment objective of speculation.

On February 10, an investor sold 100 shares of ABC short at $50/share. The investor covers the position on November 1 by purchasing 100 shares of ABC at $58/share, establishing an 8-point loss. If, on November 15, the investor shorts 100 shares of ABC at

The wash sale rule has been violated
Explanation: Reinstating a position within 30 days of realizing a loss is a violation of the wash sale rule. The November 15 short sale creates a new short position in ABC only 15 days after establishing a loss on an o

Warrants will most likely be issued to:

Reduce the interest rate on an issue of debentures
Explanation: Debentures may be issued with warrants attached. This allows the corporation to pay a lower interest rate on the debentures.

Ms. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:
1. 10 rights plus $10.50 are required to subscribe to one new

Preferred stockholders are not permitted to participate in a rights offering
Explanation: Preferred stockholders are not permitted to participate in a rights offering. Only the common stockholders are permitted.

An accountant earns $200,000 and wishes to make the maximum IRA contribution for himself and his nonworking spouse. He can contribute a maximum of:

$5,500 in her account plus $5,500 in his account
Explanation: An individual with earned income and a nonworking spouse may contribute a total of $11,000 for himself and his wife. However, the contribution must be made in two separate accounts, each housin

If the S&P 500 has been increasing on high volume for several days, what term would BEST define this situation?
a. Market momentum
b. An efficient market
c. Market neutral
d. A resistance level

a. Market momentum
Explanation: The term market momentum is used to describe a situation where prices are moving in a certain direction and there is a high level of trading volume. There is also an expectation that this pattern will continue in the near f

In order to sell variable annuities to clients, a person must hold which of the following?

A life insurance license and securities registration
Explanation: Variable annuities are considered both insurance products and securities. As a result, an individual must be properly registered (Series 6 or 7) and hold a life insurance license.

A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are used?
a. High-quality commercial paper
b. Long-term municipal zero-cou

a. High-quality commercial paper
Explanation: The corporation intends to use the money in a short period and does not want to assume undue investment risks. Of the choices given, the most suitable investment is high-quality commercial paper since it is ex

The French economy is on the verge of a recession. The Swiss government announces that there was another quarterly increase in its GDP figures. An investor wanting to act on this information will buy:
I. Euro calls
II. Euro puts
III. Swiss franc calls
IV.

II and III only
Explanation: An increase in the Swiss GDP is a positive situation for the Swiss economy. This may cause the value of the Swiss franc to rise. If the Swiss franc rises, the holder of a Swiss franc call will profit. A looming recession in Fr