I got this one wrong:
A client is interested in investing in the real estate sector, but shows great concern about the possibility of depreciation within the sector and more specifically within certain geographic areas. What recommendation should an RR ha
B
ETFs (Exchange Traded Funds) on an index of REITs (Real Estate Investment Trusts) provide the maximum level of diversification of the investment options. Securities issued by FNMA or GNMA are related to real estate, but are focused on the mortgage indus
I got this one wrong:
In a margin account that is restricted, a customer decides to sell stock valued at $8,000, and buy $6,000 worth of another stock on the same day. How much cash would this customer be allowed to withdraw from the account?
[A] 0
[B] $1
B
This customer's account is Restricted therefore they would be allowed to withdraw 50% of the net sale proceeds of the transactions, therefore:
$8,000 + Sale
$6,000 - Buy
$2,000 Difference X .50 = $1,000 could be withdrawn
I got this one wrong:
If a long call option is exercised by the holder, the holding period on the acquired securities begins:
[A] on the date the call is exercised
[B] the day after the option is exercised
[C] the day the call option was acquired
[D] the
B
The holding period on stock purchased by exercising a call begins on the day after the call is exercised.
I got this one wrong
ABC Corporation has issued an 8% Cumulative Preferred Stock ($100 par). In 2002 ABC paid a 4% dividend, in 2003 ABC did not pay any dividend, and in 2004 ABC wants to pay a dividend to its common stockholders. ABC would first have to
D
ABC should be paying $8 per year, in 2002 they paid $4 and had $4 to make up. In 2003 they did not pay any dividend and therefore had $8 to make up, so ABC is behind (arrears) $12 BUT ABC must allocate the full $8 for the upcoming year as well as pay wh
I got this one wrong:
One of your new clients with little investing experience is trying to figure out their capital gains and losses for the year. They had capital gains of $6,000 for the year, but had capital losses totaling $10,000 as well. What can th
D
$10,000 Capital Loss
- 6,000 Capital Gain
------------------------------
4,000 Net Loss
- 3,000 Max Deduction per Year
------------------------------
1,000 Carry Forward Loss
I got this one wrong:
Which of the following would fall under the regulation of the 5% Mark-Up Policy of the NASD?
Outstanding securities that are not exempt and are sold OTC.
A registered secondary offering of shares
Open-end investment company share sal
A
The 5% Mark-Up Policy does not apply when a prospectus is delivered. A prospectus would be delivered with both option II and III.
I got this one wrong:
A customer's margin account appears as follows:
$100,000 MV Long
$ 40,000 DB
$ 60,000 EQ
The securities in this customer's account INCREASE in value by $25,000, and the debit balance is decreased by $5,000. After these changes, what
C
Take the market value
($125,000) divided in half ($62,500) minus the debit ($35,000) leaves you with Excess Equity of $27,500. Excess Equity times 2 = $55,000 Buying Power
A client wishes to roll over a qualified IRA into another qualified IRA. This can normally be performed on a tax-free basis without penalty, as long as a minimum of how many days have passed since the client's last rollover of the same type?
[A] A minimum
B
EXPLANATION
Tax-free rollovers from one qualified IRA to another can take place without penalty but can only be done once every 12 months
Which of the following funds would be the least suitable for a retiree in need of a steady stream of income?
[A] A bond fund
[B] A sector fund
[C] A balanced fund
[D] A growth and income fund
B
A sector fund is a specialized mutual fund that concentrates on one industry. It is very risky. If a retiree were to lose money in a sector fund, he/she may not have sufficient time to recover the loss
All of the following statements are FALSE with regards to FHLMC Securities (Federal Home Loan Mortgage Corporation) EXCEPT:
[A] FHLMC Securities are often referred to as Sallie Maes.
[B] FHLMC Securities provide tax-free interest to investors.
[C] FHLMC S
D
Of the choices offered the only one that is TRUE with regard to FHLMC Securities is that they are issued in book-entry form. They are NOT guaranteed by the Federal Government, interest income is fully taxable, and they are not commonly referred to as Sa
Which of the following BEST describes the money received by a corporation during an issue of equity securities that exceeds the face value of the securities being sold?
[A] This would refer to the capital that the corporation must keep on hand.
[B] This w
C
When looking at Shareholders Equity on a Corporate Balance Sheet we find both "Common Stock" and "Paid in Capital or Surplus" - generally "Common Stock" reflects the par value received when the common stock was sold to the public. Any excess over par th
Which of the following is allowed by SEC Rule 144A?
[A] Rule 144A allows foreign corporations to buy registered securities.
[B] Rule 144A allows qualified institutional buyers to buy registered securities.
[C] Rule 144A allows qualified institutional buye
C
SEC Rule 144A allows the sale of restricted (unregistered or not fully registered) securities to Qualified Institutional Buyers (QIBs). They may purchase during the six-month restricted perioD
The factor listed below which would have a direct impact on the alpha of a particular stock would be:
[A] Investors on a general scale have changed their minds from being pessimistic about the market to being optimistic.
[B] The company whose stock is in
B
Alpha is that aspect of a company's stock which is directly affected by company-specific risks. The only item listed that is company-specific is the change to management strategy. Each of the other factors is a general market factor, rather than company
A younger client with a moderate amount of funds is considering the purchase of a home in the near-term future. For this reason, the investor wishes to keep their assets as liquid as possible in the event that the right deal on a home comes along. As this
C
Direct Participation Programs are a form of limited partnership. One of the biggest drawbacks of investing in a DPP is the lack of liquidity, since ownership interests are not always freely transferrable and require the approval of a general partner of
Of the following, which offers the MOST accurate description of a municipal bond that is considered "double-barreled"?
[A] These bonds are backed by the unlimited taxing power of a municipality along with the ability of State-level appropriations in the e
D
Double-Barreled bonds are called double-barreled because they are backed by two sources. These bonds are backed by revenues from a project along with a general obligation pledge by the issuer. Municipalities do not have "unlimited" taxing power and doub
registered representative recommends that a client purchase shares of a mutual fund today rather than tomorrow because the fund shares will go ex-dividend tomorrow. The registered representative explains that if the client waits until tomorrow to purchase
B
Selling dividends is illegal. What the registered representative has neglected to tell the investor is that while he will receive the dividend, he is paying for it. The price of the stock is reduced on ex-dividend date by the amount of the dividend. If
Which of the following BEST describes what earnings coverage means when dealing with a revenue bond for a municipality?
[A] The term describes available revenue that the issuer can use to pay debt service.
[B] The term describes the funds set aside to rep
A
Debt Service Coverage generally comes from the municipalities earnings and includes the amount a municipality set aside to meet fixed annual charges on bonds out of revenues.
How often is interest paid on a U.S. Treasury Receipt?
[A] It is paid when the security comes due at maturity.
[B] It is paid on an annual basis.
[C] It is paid on a semi-annual basis.
[D] It is paid on a quarterly basis or four times annually.
A
An investor who purchases a CMO (Collateralized Mortgage Obligation) can expect distributions of cash how frequently?
[A] The investor can expect distributions on a weekly basis.
[B] The investor can expect distributions on a monthly basis.
[C] The invest
B
Since CMOs are backed by mortgages, and home owners make mortgage payments monthly, investors owning CMOs would also receive monthly payments.
A sell order is entered by an agent at a firm with additional instructions. The instructions indicate that the order is to be executed at the opening. This order is not received in a timely fashion by the floor broker, and it cannot be executed at the ope
B
When an order is entered to executed at the "opening", and if it does not reach the floor broker in time for it to be executed at the opening the order will be canceled and the firm and RR will be informed that the order was not executed.
In a leveraged buyout, the acquiring company borrows funds:
[A] using its own assets as security for the loan
[B] using the target company's assets as security for the loan
[C] using unsecured loans
[D] using unsecured and subordinated loans
B
A leveraged buyout is a takeover of a company using borrowed funds. Most often, the target company's assets are used as security for the loans taken out by the acquiring company, which repays the loan out of cash flow from the acquired company.
An investor asks an RR for his opinion on the purchase of 500 shares of a very closely held stock. The investor thinks it has good near term investment potential. He should be advised that
[A] A thin market for such a stock is a major risk factor.
[B] Clo
A
EXPLANATION
If a customer asks a registered representative for their advice on the purchase of shares of a very closely held company, the registered representative should advise the customer that a thin market for such a stock is a major risk factor.
An issuer can effectively force the conversion of its outstanding callable and convertible bonds by:
[A] Calling the bonds at a redemption price below parity
[B] Declaring a 2 - for- 1 stock split
[C] Decreasing the dividends on the common stock
[D] Refun
A
The holder of the bond is effectively forced to convert the bond to common stock to avoid taking a loss since the bonds are being called below the parity price.
Of the choices listed, which would be considered to be the most appropriate investment choices for a Senior Investor?
U.S. Government Bonds
Deferred Variable Annuity
U.S. Savings Bond
Immediate Variable Annuity
[A] I & III
[B] I & IV
[C] II & III
[D] II &
B
A deferred Variable Annuity would not be appropriate for a Senior Investor since they are a "deferred" investment program designed for a younger or middle-aged investor. U.S. Savings Bonds would not be appropriate for Senior Investors since the owner wi
Assuming investments of similar quality and coupons, which would be most appropriate for an investor who is anticipating a decline in interest rates over the next 15 years?
Tax anticipation notes.
Noncallable 15-year bonds.
30-year bond putable in 15 year
C
Tax anticipation notes are short-term investments and would not lock-in a higher rate. Bonds with a variable rate of interest would tend to go down as interest rates declined. This would not lock-in a higher rate either. Noncallable 15-year bonds would
Assume an investor sells short 100 shares of ABC and while the investor has the short stock position, ABC pays a dividend. The investor:
[A] Owes the dividend to the lender of the stock.
[B] Will Receive the dividend from the lender of the stock.
[C] Will
A
Investors that have short positions in a stock owe any dividends that are paid while they are short
A specified group of stocks is combined and a mathematical figure is used to indicate the value of this group of stocks as a whole. Collectively, what is this group of stocks called?
[A] This describes an index of securities.
[B] This describes the beta c
A
A group or collection of securities to which a value is assigned using a mathematical figure would be referred to as an index. An index is comprised of a specified number of securities at various weightings. A mathematical value is derived from the valu
Which of the following are characteristics of T-bills?
T-bills normally will trade at a premium to par.
For taxation purposes, all proceeds received upon maturity that are greater than the price paid are considered capital gains.
Several maturities are av
D
T-bills can be issued with 1,2,3,6, and 12 month maturities. There is no stated interest rate on T-bills. T-bills are sold at auction at a discount and the yield is determined at that time. The 1-month T-bills are a relatively new addition to government
A customer is long 100 shares of XYZ at $60 per share. He then sells 1 XYZ April 60 call at 3. The margin requirement on this transaction is:
[A] $0.00
[B] $250
[C] $1,500
[D] $1,800
A
Because the customer is long the stock the option is considered to be covered. There is no margin required on covered option writing. Margin is only required on uncovered writing positions.
Which of the following would best describe the term "Mark to the Market"? The difference between the
[A] market value of a security and the sale price of the security.
[B] market value of a security and the contract value of a security.
[C] market value o
B
"Mark to the Market" is adjusting the value of securities in customer accounts to reflect the current market value. According to the Finra definition, when an investor buys a security, it is referred to as a "contract" therefore "B" is the best answer o
An analyst is evaluating a general obligation municipal bond. All of the following situations would be considered to have a negative affect on the bond EXCEPT?
[A] unfunded pension liabilities are increasing
[B] the issuance of long-term debt to satisfy c
D
All of the choices listed would be negative except for the stable level of outstanding debt while property values appreciated. In this situation, the incoming taxes from property values are increasing while the debt level is remaining stable. If anythin
A single taxpayer with an existing IRA elects to participate in his company's newly-formed pension plan. His adjusted gross income is $200,000. Which of the following is true?
[A] No contributions of any kind can be made to an IRA.
[B] Contributions can c
C
After-tax contributions up to $6,000 (2019) may be made to an IRA by the taxpayer participating in his company's pension plan.
One of your clients wants to free up some capital and decides to sell a municipal bond out of their portfolio. The bond last paid interest a couple of months ago and will not pay interest again for a few months. In this situation, who pays the accrued int
A
When a bond transaction takes place between interest payments, accrued interest is paid by the buyer of the bond to the seller of the bond for the time period which the bond was held prior to sale.
One of your customers owns 20 XYZ 6% debentures in their portfolio. The XYZ debentures are convertible with a conversion price of $25. The market value of the bonds is 105, and the common stock is currently trading at $29.50 per share. In this situation,
B
In this situation, the option which obtains the highest level of return for the client would be the conversion of the debentures to common and the subsequent sale of the common at the current market price. Nowhere in the question was it stated that the
A client has a stock that is currently valued at $40 per share. The quarterly dividend of this stock is $0.10 per share. What is the current yield of this stock?
[A] The current yield cannot be determined with the information provided.
[B] The current yie
C
Current yield is computed by dividing the annual return of the investment by the investment's current market value. Here, the stock has a quarterly return of $0.10 per share. This equates to $0.40 annually.
$0.40 / $40 per share = 0.01 or 1% current yie
One of your clients is an options trader. In looking over the financials and news for Company X, this client feels that Company X common stock will not fluctuate much in price over the next several months. Which options position listed below will provide
B
Since the client does not expect any significant move in the stock price, they would sell calls and sell puts, putting on a short straddle. This will be the most profitable of the options positions listed if the market price of Company X remains stable.
While a client was out of town and the registered representative was not able to reach the client, the rep decided to buy a security in the customer's account even though the rep did not have discretionary authority. Later the same day, the rep sold the s
A
Even though the client made a profit, it does not change the fact that the rep executed unauthorized trades in the client's account, which is a violation of sales practice rules.
Which of the following may a U.S. investor use to offset taxes paid on dividend income earned from owning foreign stocks?
[A] Tax-Exempt Status
[B] Foreign Tax Credit
[C] Tax Lien
[D] Residual Value
B
EXPLANATION
Foreign companies and governments generally withhold a percentage of U.S. investors' dividends and interest received from foreign securities to cover foreign taxes, but they do not withhold capital gains. The customer can use the amount with
REITs (Real Estate Investment Trusts) have which of the following features?
Much like limited partnerships, REITs pass profits and losses on to their shareholders.
90% of all investment income must be passed on to shareholders in order to ensure special t
C
In order to qualify for special tax treatment where profits may be passed on to shareholders and avoid taxation as a corporation, REITs must distribute 90% of income to shareholders and must invest a minimum of 75% of their assets in real-estate related
Mr. Smith has been bearish about ABC common stock and decides to sell short 1,000 shares @40 in his margin account. The stock later declines to $35. What is Mr. Smith's equity in his margin account after the decline in the market value of the stock?
[A] $
B
$40,000 Proceeds of the short sale
+20,000 Reg T Deposit
$60,000 Credit Balance
-35,000 Market value of short stock
$25,000 Equity in the Short Account
Of the following documents, which TWO require approval by the designated principal before a registered representative may send them to customers or prospects?
Annual Reports
Prospectus
Advertising
Sales literature
[A] I and II
[B] I and III
[C] II and IV
D
Advertising and sales literature must be approved by the designated principal prior to use. Neither a prospectus nor an annual report are considered to be advertising or sales literature. Both are considered to be factual disclosure documents.
When filing the registration statement with the SEC on an IPO the issuer can also include any securities it intends to issue in upcoming three year period. When this is done the registration of the shares that can be issued in the upcoming three years wou
B
When securities are registered with the SEC for distribution in the upcoming three year period it is called a Shelf Registration.
Joe is an employee of Municipal Securities Dealer A. He intends to open an account where he wishes to maintain funds and execute transactions with Municipal Securities Dealer B. All of the following are required of Municipal Securities Dealer B, EXCEPT:
[
B
When opening an account for an employee of another Municipal Securities Dealer, the dealer opening the account must provide notification to the employing dealer that the account is being opened, must follow any instructions regarding the account from th
What is the typical make-up of a balance sheet?
[A] The overall values of outstanding bonds plus outstanding stocks is equal to the total assets of the company. (Bonds + Stocks = Total Assets)
[B] The total liabilities plus the company's net worth equals
B
EXPLANATION
On a balance sheet, the total assets of the company should be equal to the company's total liabilities plus the company's net worth (shareholder's equity).
A customer who is about to retire wants to buy a low risk product that will provide a predictable stream of income. Which of the following products is most suitable for his needs?
[A] An immediate fixed annuity
[B] An immediate variable annuity
[C] A defe
A
EXPLANATION
A fixed annuity guarantees fixed payments usually for a lifetime. The insurance company- issuer bears the investment risk and the mortality risk, not the annuitant. The payments on an immediate annuity start right away. An annuity, not a lif
Which of the following would be a scenario in which a Durable Power of Attorney would need to be submitted at a broker/dealer firm?
[A] When the executor of a client's estate is attempting to liquidate account assets after the death of the client.
[B] Upo
D
A Durable Power of Attorney would be used when a third party is tasked with full legal authority to manage a client's legal and financial affairs including broker/dealer accounts at the firm. Power of Attorney is relevant while a person is still alive,
If an investor is seeking capital gains and income from their investments, what type of investment would BEST suit these objectives?
[A] The purchase of a block of growth stock
[B] The deposit of funds into a money market account
[C] The purchase of a mut
C
If the investor is looking for both capital gains AND income, then the mutual fund focused in stocks would be the best investment choice because it will provide both. Growth stocks pay little to nothing in the form of dividends, so they wouldn't provide
Which of the following is the MOST accurate description of "beta"?
[A] Beta measures the returns that a company has against the stocks of individual companies both inside and outside of the same sector.
[B] Beta measures the price-to-earnings ratio of one
C
Beta is a measure of one company's volatility in comparison to the volatility in the overall market. A company with a beta of 1.0 normally will react as the market does. A beta above 1.0 would mean higher fluctuations, while a beta below 1.0 would mean
According to SEC rules, before a broker/dealer can mark a sell order "long", the customer entering the order must have:
[A] a short against the box position
[B] a net zero position
[C] a net short position
[D] a net long position
D
Customers entering "sell long" orders must own and be long the stock.
One of your clients is a sophisticated 40 year old investor and has recently changed jobs. The client is considering rolling over his $100,000 401(k) plan with his former employer to an IRA. He invests conservatively in his personal brokerage account whic
D
As a general rule, IRA assets are for retirement and should be invested conservatively... but not "always". IRA assets should be viewed in the context of the customer's total investment portfolio and risk profile. This customer's personal account is inv
All of the following are components of the calculation to find compound accreted value (CAV) on zero-coupon bonds EXCEPT?
[A] the maturity date of the bond
[B] the dated date of the bond
[C] the bond's original yield at offering
[D] the bond's current mar
D
Compound Accreted Value (CAV) of a municipal bond is used as the starting point in determining the value of a zero coupon bond. CAV would consider the date from which interest begins to accrue on the bond (the dated date), the bond's maturity date, and
When a registered representative is trying to determine if a stock is a growth stock, public utility, or blue chip, they would most likely look at the:
[A] Earnings per share
[B] Current Ratio
[C] Dividend Payout ratio
[D] Advance/Decline ratio
C
The dividend payout ratio would help the RR determine what type of company they were looking at since most Blue Chip stocks maintain a dividend payout ratio of approximately 50%, growth stocks 25%, and public utilities 75%.
A customer is investing for his child's education. He is seeking reasonable income and growth of capital. His investment objective is best described as seeking which of the following?
[A] Capital gains only
[B] Speculative profits
[C] Maximum current inco
D
Since we are looking for an overall increase in value (both income and appreciation), we would consider the total return of the investment.
One of your clients is an experienced options trader. The client has recently established a trend of buying calls on a broad-based index. Why would this investor be performing these trades?
[A] This would indicate that the investor has a bearish sentiment
B
Remember: Call Up! In this case, the investor feels that the market is going to go up as a whole, so the investor buys calls on the index. If the market price goes up, the investor can exercise the index call and will get the difference between the inde
An investor buys 100 shares of ABC at $50 per share and sells one ABC July 55 call for a premium of $2. What is the maximum possible loss for this investor?
[A] $4,500
[B] $4,800
[C] $5,000
[D] $5,500
B
Mr. Smith has been watching ABC common stock for several years and feels that ABC will remain neutral or stable for the next year. Based on this assumption, which of the following options positions would allow Mr. Smith to realize the MOST in terms of pro
D
The investor does not feel that the market price will fluctuate. For this reason, the investor should sell options on both sides of the market in order to realize the maximum amount of profit from premiums received.
One of your clients owns 500 shares of BCD stock and is concerned with tax consequences associated with their investments. BCD announces a 5% stock dividend on their common stock and your client will be receiving 25 additional shares. The client calls in
A
When a stock dividend is paid, the cost basis of the customer's shares is adjusted, but there are no tax consequences in the year that the stock dividend is received. Were this a cash dividend, the dividend would be fully taxable as ordinary income in t
In terms of features that would limit the credit risk that would apply to a municipal bond issue, which of the following would do so most effectively?
[A] Being backed by general obligation
[B] A legal opinion that is un-qualified or non-qualified
[C] An
C
When a bond is pre-refunded it means that new bonds have been sold, the proceeds of which are invested in Government securities which can only be used to pay off the old outstanding bond issue. With this backing the outstanding bond issue is said to be
Exchange Traded Notes provide which of the following to investors?
[A] Protection of the investors principal that was invested
[B] Allows investors access to market sectors that would ordinarily be unsuitable
[C] An equity position in the index
[D] Shares
B
ETNs provide investors with the ability to invest in market sectors that would ordinarily be deemed unsuitable like commodities, currencies, emerging markets, and strategies. ETNs do not provide protection of principal and are debt securities therefore
A client purchased 200 shares of ABC for $22,500 two years ago. Over the next few years the client sold call options for a total of $1,500. All the calls expired worthless. For tax purposes, the cost basis for the 200 shares of ABC is
[A] $22,500
[B] $21,
A
The cost basis for the stock ($22,500) would remain at $22,500 since the options were NOT exercised. Had the options been exercised then the sales proceeds of the stock would be adjusted by the premiums received.
Factors that affect the amount of an underwriting spread include which of the following?
The size of the issue
The type of security involved
The business history of the issuer
[A] I only
[B] II only
[C] III only
[D] I, II and III
D
All of the choices offered would be factor that would affect the amount of spread on an underwriting. The underwriting spread is the difference between the proceeds an issuer of a new security receives and the price paid by the public. This spread repre
The name for an order to buy or sell a particular security at a particular price in its entirety or not at all is:
[A] A market order
[B] A stop loss order
[C] A fill or kill order
[D] A stop-limit order
C
A fill or kill order is an order to buy or sell a particular security at a particular price, which if it is not executed immediately is cancelled. It is often used when an institutional investor wants to buy a large block of a particular security at a p
Under NYSE regulations, what is the minimum maintenance requirement for selling short a $20 marginable security?
[A] $2.50 per share
[B] $5.00 per share
[C] 30% of the market value
[D] 100% of the market value
C
The NYSE/FINRA minimum maintenance requirement for short margin accounts is 30% of the market value
LMN Incorporated is listed on the American Stock Exchange. Jane sits on the board of directors for LMN and wishes to buy some LMN stock. She executes a trade on the floor of the AMEX and purchases the shares. How do the provisions of Rule 144 apply to thi
C
Rule 144 applies to restricted stock and control persons. In this case, Jane is a control person, so the provisions of Rule 144 will apply to her. Here, she is buying fully registered stock off of the exchange. For this reason, there is no holding perio
An investor's investment objectives are related to all of the following circumstances EXCEPT:
[A] time horizon
[B] marital status
[C] level of education
[D] number of dependents
C
The level of education would not be a determining factor in the client's investment objective, but all other choices would be a factor because they could impact the customer financially.
Equity is a term which can be used in the context of all of the following except:
[A] common stock
[B] margin accounts
[C] preferred stock
[D] debenture
D
A registered representative gets an order from a husband to trade in his wife's account. The registered representative:
[A] May accept the order with the wife's verbal authorization
[B] May accept the order if it is consistent with the wife's investment o
C
A registered representative may not accept an order from a husband to trade in his wife's account unless the RR has received written authorization from the wife.
In analyzing a G.O. bond, which of the following factors would be most important?
[A] A feasibility study
[B] Protective covenants
[C] Budgetary practices
[D] Existing competitive facilities
C
A G.O. bond is a general obligation bond. It is repaid from general tax revenues and expenditures for a specific time period. Budgetary practices would be relevant in analyzing a G.O. bond. The other three factors would be relevant in analyzing a revenu
The market price of a municipal bond may be affected by changes in:
Tax law
Market conditions
The credit rating of the issuer
[A] I only
[B] III only
[C] I and II only
[D] I, II and III
D
Any tax law change that affects municipal bonds would affect the market price (e.g.. Loss of the federal income tax exemption). Market conditions could affect prices (e.g.. Change in interest rates). Credit ratings could affect prices( e.g.. a downgrade
FINRA regulations apply to communications with the public and advertising by broker/dealer firms. Of the following communications, which would be labeled as an advertisement and would have to abide by advertising regulations?
[A] A web log (blog) which ha
B
Advertising is information disseminated to the public over which the broker/dealer does NOT have "control" over who sees the information. A broker/dealer would not have control over who might see the listing in the phone book, but they would be able to
Which of the following would NOT be considered a "bullish" options strategy?
[A] An investor establishes a short straddle.
[B] An investor buys a call.
[C] An investor establishes a call spread at a net debit.
[D] An investor sells a put.
A
EXPLANATION
A short straddle is considered a neutral options position and would be performed by an investor who anticipated little or no movement in the underlying securities market price.
One of your clients has been pleased with your recommendations and now wants to allow you, their RR, discretionary authority over their account. The client tells you that they have filled out and sent the appropriate forms to give written discretionary au
B
EXPLANATION
Regardless of the situation or losses that may be incurred by the client, you may NOT place discretionary trades in an account without FIRST receiving written discretionary authority.
A customer puts in an immediate or cancel order to buy 100 ABC Sept 50 calls. At the same time that the order reaches the floor, a market order also arrives to sell 50 ABC Sept 50 calls. There are no other sell orders on the book. What will happen?
[A] Th
C
An immediate or cancel order requires that all or part of the order be executed as soon as the broker enters a bid or offers. The portion not executed is automatically cancelled.
An existing client in her late 20s comes in with her boyfriend. The couple is not married, but they desire to open an account set up as a JTWROS (Joint Tenants with Rights of Survivorship). They specify that the money that they would like to invest should
D
In this scenario, the RR must obtain the relevant information in terms of opening the account and should discuss the risks of the investment in this type of fund. The RR should not immediately refuse to open the account due to risk and it is not the dut
A registered representative suggests and then implements a strategy in a client's portfolio. This strategy involves the RR coming up with certain determinations in relation to an appropriate distribution of investments in the client's account and the main
C
Asset allocation would be the most accurate description of what is occurring in this scenario. The RR is coming up with an appropriate distribution of where the client's money should be invested and is then maintaining those levels. No statements were m
A client sells a stock short in their portfolio. The client plans to cover the short sale but prior to covering, calls to ask the RR how to achieve long-term status for capital gains purposes on the short sale. How should the RR respond?
[A] The RR should
A
Regardless of the time period during which the stock was sold short by the customer, the capital gains rate on short sales will always be short-term.
Registered representatives are responsible for obtaining certain client information prior to allowing clients to invest in certain securities. Prior to an investor signing a limited partnership's subscription agreement, the RR should know each of the foll
C
The RR will not know whether the general partner will accept the customer until after the general partner signs, or does not sign, the subscription agreement, accepting the customer on as a limited partner. The "know your customer" regulations would req
All of the following accounts should be handled in a conservative manner with conservative investments in accordance with state laws and regulations EXCEPT FOR
[A] the account of a third party estate
[B] the account of a trust
[C] the account of an invest
C
EXPLANATION
Generally, laws and regulations are put into place to protect certain accounts and investors. Here, these accounts would include those of a third party estate, those of a trust, and those of a minor. They would NOT include the account of an
Which of the following transactions must abide by the FINRA 5% Markup Policy?
Primary offerings of securities
Mutual fund shares
A dealer buying securities traded OTC from one of their clients
A riskless transaction
[A] I and II only
[B] I and III only
[C
C
The FINRA 5% Markup Policy is a guideline for spreads in dealer transactions and commissions in brokerage transactions, including purchasing OTC securities from a client and riskless transactions. It does not apply to any transaction were the public off
Which type of distribution from a corporate pension plan is eligible for rollover to an IRA or another corporate plan that accepts rollovers with no additional stipulations?
[A] After-tax employee contributions
[B] Minimum distributions after age 70 �
[C]
D
EXPLANATION
Under IRS codes, minimum distributions and any payment made as a series of payments over a 10-year period or more must be treated as normal distributions for tax purposes and may not be rolled over. After-tax employee contributions require s
Predictions about the future performance of mutual funds and variable annuities are
[A] permitted if the basis of the prediction is provided.
[B] not permitted, regardless of the situation.
[C] permitted if prepared by an outside and unbiased analyst.
[D]
B
Predictions or guarantees about future performance of variable products and investment companies are not allowed under any circumstances.
A registered representative buys shares in an initial public offering for a customer. A month later, the share price has declined substantially. The customer is upset. The registered representative offers to personally buy back the shares at the original
A
All of the following would be considered to be a benefit to investors purchasing ETNs EXCEPT:
[A] No annual tax since ETNs do not pay interest of dividends
[B] Investor fees accumulate annually
[C] No tracking errors
[D] Participation in market sectors or
B
EXPLANATION
ETNs provide investors with the ability to invest in market sectors that would ordinarily be deemed unsuitable including commodities, currencies, emerging markets, and strategies. Since the investor who owns an ETN with the issuing bank they
A new client opens up a margin account at the firm. The client wishes to perform a short sale as their first transaction. They wish to sell short 1,000 shares of MNO corporation, which is currently trading at $2.25 per share. How much must this client dep
C
The minimum deposit required for low priced stock (0 - $5) is $2.50 per share or 100% of market value whichever is greater. In this case, the $2.50 per share is greater. Therefore 1,000 shares of MNO x $2.50 per share = $2,500.
A single mother has savings to cover for the first two years of her child's college education, which is expected to begin in five years. She wants to invest this money to earn a return but wants minimal risk. Which of the following would be her BEST choic
D
EXPLANATION
Of the choices offered, the Corporate Bond Fund is the best choice because it gives her a return and does not include stocks, which are more risky than bonds.
A stock traded on Level 1 NASDAQ is as follows
ABCD 49 +.50 B 48.84 A 49.09 V13.000 12:00p
If your customers buys 100 shares of ABCD as an agency transaction the customer would have paid how much per share?
[A] 48.84
[B] 48.84 plus a commission
[C] 49.09
D
When a customer buys a stock they will pay the Ask price (A) plus a commission of the trade was done as an agency trade. When a customer sells a stock they would receive the Bid (B) price.
Throughout the process of establishing and opening an account for a client, suitability and investment objectives are a primary concern for registered representatives. In order to make determinations regarding these subjects, the RR is required to obtain
C
When establishing objectives and suitability for a client, the client's level of debt and overall net worth are both important. If the client has a substantial amount of debt, it may not be wise for the customer to be investing large amounts of money in
A customer's margin account is as follows:
$20,000 Mkt SMA $1,000
16,000 DB
$ 4,000 EQ
The NYSE minimum maintenance call would be met with a deposit of which of the following?
[A] $10,000
[B] $6,000
[C] $1,000
[D] 0
C
$20,000 Mkt X .25 Min. Maint. = $5,000 min equity req'd
$20,000 Mkt
16,000 DB
$ 4,000 EQ
Since the current equity is $4,000 and the minimum required equity is $5,000 the call would satisfied with a deposit of $1,000. The SMA is a line of "credit" and ca
A securities analyst or broker-dealer issuing a research report on a certain company may not provide any of the following information to the company prior to distribution of the reports EXCEPT:
[A] the stock price target
[B] the rating and recommendation
D
A securities analyst or broker-dealer issuing a research report on a certain company may not divulge the contents of the report to the company prior to the report being made public. Verifying the accuracy of certain information in the report is permitte
A municipal bond has a provision for redeeming a certain number of bonds at par in ten semi-annual installments. This type of call feature is best described as:
[A] An installment call
[B] An optional call
[C] A sinking call
[D] A catastrophic call
C
A sinking fund is a separate custodial account where money is accumulated on a regular basis to redeem fixed income securities. Sinking fund provisions frequently require that a certain number of bonds be retired annually or in semi-annual installments.
Of the following types of orders, which would generally be used to protect an existing position or profit?
buy limit
sell stop
buy stop
sell limit
[A] I, III
[B] I, IV
[C] II, III
[D] II, IV
C
II and III are stop orders, and stop orders are used to "protect" existing positions or profits. Limit orders are used to obtain a specific price of execution or better.
Excise taxes on cigarettes, alcohol, and gasoline secure certain securities issued by a municipality. Which of the following is the MOST appropriate statement regarding this type of municipal issue?
[A] These would be BABs (Build America Bonds).
[B] These
C
EXPLANATION
Municipal Revenue bonds which are secured by excise (luxury), cigarette or gasoline taxes are classified as "Special Tax Bonds". Special Assessment Bonds would be repaid by assessments on those in the community benefitting from the project,
Which of the following bids may be considered stabilizing bids?
Bids at the public offering price
Bids just above the public offering price
Bids just below the public offering price
[A] I only
[B] I and III
[C] III only
[D] II and III
B
Stabilization in new issue underwriting is the intervention in the market by the managing underwriter's firm to keep the market price from falling during the offering period. The managing underwriter places bids to buy at or below the public offering pr
What determines the tax liability to an individual who surrenders their holding of a variable annuity that is labeled as "non-qualified"?
[A] Tax liability is determined by subtracting the amount which was invested in the annuity from the net proceeds upo
A
A non-qualified annuity is an annuity where after-tax dollars are contributed by the individual buying the contract. If the contract owner surrenders the contract the tax liability will be the difference between the amount that was invested and the net
A branch office manager has instructed office personnel to clean out several storage closets and get rid of old customer documentation that no longer needs to be retained. Which of the following is TRUE regarding record retention for customer information?
C
Broker/dealer firms must retain information related to the opening of a customer account for 6 years beyond when the account is closed at the firm. After that time, proper disposal is permitted. This time period is not 3 years or 6 years from the time t
All of the following are characteristics of REITs EXCEPT:
[A] They are publicly-traded securities and can be traded on an exchange or OTC.
[B] They generally own income-producing properties like apartment buildings.
[C] They distribute 90% of their income
D
REITs are not investment companies and do not have to be registered under the Investment Company Act of 1940.
Subscription warrants are usually issued as part of:
[A] A common stock offering to obtain a higher par value
[B] A preferred stock offering to obtain a lower par value
[C] A debenture offering to obtain a lower interest rate
[D] A convertible bond to obt
C
Warrants usually originate as part of a new bond issue. They are intended to be "sweeteners" to allow the issuer to pay a lower interest rate. They are separate securities from the bond. They could also be issued as part of a preferred stock offering, b
Most CMO's, Collateralized Mortgage Obligations, as an investment have all of the following risks EXCEPT:
[A] The risk that mortgages will be paid off early
[B] The risk that interest rates will fluctuate and investors may be stuck with a lower return
[C]
D
Historically, CMOs were very safe investments. Recent events and the bundling of bad loans with good loans has made this statement less than accurate in current times. For testing purposes, the least concerning of the options would be the CMO's credit r
The negotiated underwriting of municipal securities usually involves all of the following EXCEPT:
[A] a bid form
[B] a legal opinion
[C] an underwriters agreement
[D] a bond purchase contract
A
The bid form is used in a competitive bid underwriting rather than a negotiated underwriting. General obligation (G.O.) bonds are usually awarded by competitive bid. Revenue bonds are usually negotiated.
All of the following positions have unlimited loss potential except
[A] Short stock-short put
[B] short straddle
[C] uncovered call
[D] uncovered put
D
EXPLANATION
When a customer writes a put - covered or uncovered - the loss is limited to the strike price of option less the premium received for writing the option.
When determining the suitability of an investor to invest in a Hedge Fund, all of the following would be relevant EXCEPT:
[A] The net worth of the investor
[B] Whether or not the funds charges will be based on performance of the fund
[C] The liquidity req
D
When determining whether or not an "investor" should or should not invest in a fund you would look at the circumstances of the customer as to suitability. Once you determine that it is a proper investment for the investor, then you consider which fund w
Which of the following is measured by a mutual fund's expense ratio?
[A] The mutual fund's profitability
[B] The mutual fund's operating costs
[C] The mutual fund's dividend payout percentage
[D] The mutual fund's stability
B
The expense ratio of a mutual fund is used to measure the fund's operating costs or operating efficiency.
An older investor in or nearing retirement would generally want a greater percentage of their portfolio invested in which of the following?
[A] common and preferred stocks
[B] growth mutual funds
[C] equity options
[D] fixed income securities
D
An older investor would generally be most interested in preservation of capital and income which would lead to investing in fixed income securities.
An investor buys 100 shares of ABC stock for $35 a share and simultaneously buys 1 ABC Sept 40 put @ 5. The breakeven price for the stock at the expiration of the put is:
[A] $5
[B] $30
[C] $35
[D] $40
D
One of your clients regularly trades options. The customer feels that QRS is going to remain relatively stable or have a slight downturn and he decides to sell 1 QRS May 55 call for $2.50 when QRS is at $54.50. About a month later, the customer receives a
D
The premium received from the sale of the call is $2.50. This amount is added to the strike price in terms of overall proceeds on the transaction. The strike price is $55 per share, so the total sale amount will be $57.50 per share in proceeds. The cust
An investor has a large portfolio of Blue Chip common stocks and expects the market to remain stable or decline slightly. He'd like to increase the rate of return on his portfolio. Which of the following would be the best choice for this investor?
[A] Buy
B
Covered Call writing would be the best choice for the investor, who wants to increase their rate of return on large portfolio of Blue Chip Stocks when they expect the market to remain neutral or decline slightly in value.
Mr. Smith is a 50 year old client of Bob, who is a registered representative. Bob is trying to get Mr. Smith to purchase a non-qualified Deferred Variable Annuity offered by his company. In making this recommendation to Mr. Smith, Bob should first be sure
B
Since non-qualified Variable Annuities do NOT offer the before-tax benefits that other before-tax retirement plans offer (such as 401k) the RR should be sure that the customer has made the maximum contributions possible into before-tax retirement plans.
You have recommended an international mutual fund to one of your clients as a means of further diversifying her portfolio. She's uncertain if the fund meets her investment needs. In order to further support the recommendation to the client, what should yo
D
The best way for a RR to support his recommendation is to review the benefits and risks of the particular investment. The fact that the other clients own the fund is irrelevant because their needs and objectives may be different from those of this clien
An RR is explaining a Section 529 College Savings Plan to clients who are the parents of a college bound child. They are interested in making provisions for the college costs. The RR should disclose all of the following characteristics of a 529 Plan EXCEP
D
This statement is false: "The maximum contribution limit can be set at more than $300,000, depending on the state and the contribution is exempt from federal gift taxes."
Contributions to a Collage Savings Plan are not exempt from federal gift taxes. Ho
A client wishes to diversify her portfolio of municipal bonds by quality. In order to perform this task, the RR's BEST approach would be to analyze what?
[A] Each bond's credit rating
[B] Each issuer's location
[C] The intended use of each bond's proceeds
A
Diversification by quality refers to credit quality. Bond credit rating agencies rate the credit (default risk) of municipal bonds.
A client has a long position in a security that is currently trading at $50 per share. He instructs his RR to sell his shares if the market price goes to $45 or lower per share today. The RR should:
[A] Enter the order ticket, indicating the date and time
A
EXPLANATION
This is a stop order (aka a stop loss order). It's also a day order. The RR must enter the order upon receipt of the client's instructions, indicating the time and date of entry.
An investor who holds a variable annuity decides to annuitize and start receiving monthly annuity payments. The client is currently 65 years of age and the variable annuity is non-qualified. What can this investor expect to pay in terms of tax liability?
B
Because the individual is 65 and has annuitized, the 10% penalty will not apply on withdrawals. The amount paid out on a monthly basis will be split into two categories. Earnings grew in the account tax-deferred, so these earnings will be taxable to the
A corporation's directors have declared a cash dividend on common stock and have specified the stock record date. Based on the above information which one of the following is incorrect?
[A] The ex-date will be set one business day prior to the stock recor
B
The stock record date is not the date which determines who is entitled to a dividend. It is the ex-date which determines who is entitled to a dividend.
A Joint Account With Rights of Survivorship, established for a husband and wife, would have all of the following characteristics EXCEPT:
[A] Both the husband and wife may place orders to trade in the account.
[B] A Consent Agreement must be signed by both
B
Checks may only be made payable to both parties in a JTWROS account
Which of the following would NOT be permitted when dealing with illustrations pertaining to yields or income levels in relation to mutual funds and variable annuities?
[A] Illustrations of annualized yields
[B] Illustrations pertaining to current yields
[
C
Projections and predictions are NEVER allowed when using illustrations of yields or income for Variable Annuities and/or Investment Companies.
A client decides to buy 1 ABC March 50 call @ 4 when ABC is at 46. Later ABC declines to 40 and the call expires unexercised. The client would report which of the following on his tax return?
[A] $400 capital gain on the transaction
[B] $400 capital loss
B
Options are classified as capital assets and therefore any gain or loss would be treated as a capital gain or a capital loss. The customer bought a call for $400 which expired therefore the customer would end up with a capital loss of the $400 premium h
An individual walks into your branch and wishes to open an account. In this account, the individual wishes to trade options and indicates that she would like to be approved for the sale of uncovered puts and calls. Industry regulations dictate that this c
D
Options regulations dictate that an Options Disclosure Document must be provided to the customer prior to the account being approved for options transactions. This would especially be the case in relation to accounts where customers intend to perform un
An investor purchases the following bonds, all at a premium above par value:
XYZ 5% non-callable bonds maturing in 15 years
XYZ 5.10% non-callable bonds maturing in 20 years
XYZ 5.25% non-callable bonds maturing in 25 years
Several months after these bond
B
Remember that short-term bonds react the quickest while long-term bonds react the most or greatest. So in this case, the 25-year bonds will see the largest adjustment over time
MSRB Rules dictate that certain aspects of a trade may be modified with the agreement of both parties, while other aspects of a trade may not be modified. Which of the following is NOT permitted to be modified, even if all persons involved in the trade ag
C
As long as both buyer and seller agree to modified terms, the factors associated with good delivery may be modified. These can include terms, location of delivery, time of delivery, and who pays for shipping. Confirmations are required to be uniform thr
Mrs. Jones calls and wants to place an order in her husband's account because he is out of town and cannot make the call himself. The registered representative could accept the order
[A] under no circumstances
[B] without restriction since the couple are
C
Mrs. Jones could only enter orders in her husband's account if Mr. Jones signed a trading authorization allowing her to trade in his account.
A self-employed middle-aged woman contributes annually to a Traditional IRA. She is unmarried, has two grown children, and has established a trust naming her two children as sole beneficiaries. The woman puts her assets in the trust and names the trust as
B
If a person establishes a trust and names the trust as beneficiary of their IRA, IRA assets pass to the trust upon death and distributions from that trust to beneficiaries of the trust would take place according to trust documents and would be taxable t
One of your fellow registered representatives wishes to send out an approved worksheet on options. The worksheet must be sent out with, or preceded by, which of the following documents?
[A] Documents including the appropriate disclaimers
[B] Documents rel
D
Any options-related material that is sent out must be preceded or accompanied by the Options Disclosure Document (ODD).
Of the following forms of communications that may take place between a firm and individual investors, which constitutes sales literature under regulatory guidelines?
During the course of a business day, a registered representative sends one specific prosp
D
Correspondence distributed to 25 or more existing or prospective clients over a 30-day period constitutes sales literature and must abide by different rules (e.g., it will require principal approval).
Which of the following would be considered an INAPPROPRIATE investment in an IRA account?
[A] Bonds of a municipality that carry a AAA-Rating
[B] Bonds of a corporation that carry an A-Rating
[C] Common stocks of blue-chip companies
[D] Mutual funds focus
A
In an IRA account, either the funds invested are already tax-deferred, or the distributions will be tax-free (Roth). This makes investment in tax-free securities less appealing in such an account. The municipal bonds would be the least appropriate in an
A client effects the following transactions:
Buys 100 shares of QRS at $30 per share
Buys 1 QRS April 40 put at 3
The client exercises the option after substantial market declines in QRS. What is the tax consequence to the client?
[A] The client has a $30
C
A trader buys 10 OEX 300 call options at 4.50. The OEX Index is currently selling at 290. How much must the trader pay for the option?
[A] $3000
[B] $4,500
[C] $30,000
[D] $45,000
B
The "OEX" is the Standard & Poor's 100 stock index. This index has a specific multiplier ($100). Therefore, 10 x $100 = $1,000 x 4.50 = $4,500.
A client is interested in becoming a limited partner of a DPP (direct participation program). He signs a subscription agreement for the DPP. This would indicate all of the following EXCEPT:
[A] He has provided verification in relation to his net worth
[B]
D
Signing a subscription agreement means that the investor understands the risks of the investment, that the investor verifies his or her net worth, and that the investor grants a power of attorney to the general partner in relation to business matters as
When a portfolio is established which consists of 50% bonds, 10% equities and 40% money market instruments it would be best suited for which of the following investors?
[A] a single 45 year old investor who owns his own small business
[B] a couple nearing
B
A couple nearing retirement would be most interested in preservation of capital and income which would cause the portfolio to be heavily weighted in Bonds and light on equity securities
Treasury STRIPS have all of the following characteristics EXCEPT:
[A] They are sold at a discount
[B] Their price is volatile
[C] They lock in a rate for a predetermined period
[D] The accrued interest is taxable at maturity
D
Even through STRIPS and other zero-coupon bonds pay no interest, the investor is still liable for taxes on the annual gains in the value of the bonds. The investor must pay taxes on gains that have not been received. It's called "phantom" income.
During a discussion with a client to determine investment objectives, a client indicates a strong desire to preserve capital. The client also would like to see some current income from their investments. Which portfolio recommendation would BEST suit this
B
An investor that wants current income and preservation of capital would choose investments that are short and mid-term in nature and focused in government securities and money market instruments. A customer who mentions preservation of capital is intere
Which of the following risks is NOT normally a major factor when analyzing ADRs (American Depositary Receipts)?
[A] Risks associated with changes in inflation
[B] Risks associated with changes to legislators and political climate
[C] Risks associated with
C
ADRs are not normally issued in callable form, so the risk of call by the issuer would NOT normally be a major factor when analyzing ADRs. Each of the other items listed would be a consideration when considering investing in ADRs.
Which of the following documents would not be required when a corporation wants to open a cash account at a broker-dealer?
[A] Corporate Charter
[B] Corporate Resolution
[C] Margin Agreement
[D] Corporate By-Laws
C
In reading the question carefully, we see that the corporation wants to open a "Cash" account, therefore a Margin Agreement would not be required in order to open the account. All other documentation is normally required when a corporation opens a new a
MSRB rules state that the MOST a person may give in any given year to one person is?
[A] A gift or gratuity of $50
[B] A gift or gratuity of $100
[C] A gift or gratuity of $150
[D] A gift or gratuity of $500
B
The annual limitation under MSRB rules for gifts and gratuities is $100 per person.
Jimmy is a client of yours and he has some holdings in U.S. T-Bonds. Over the past year, he received $500 in interest from these bonds. His accountant has informed him that he is in the 28% tax bracket with all sources of income considered. He lives in th
B
Here, we are discussing U.S. Treasury Bonds. Remember that these bonds ARE subject to Federal Income Tax, but are NOT subject to State and Local Taxes. For this reason, the Federal Tax Rate of 28% will apply to the $500 in interest received. $500 x 0.28