Series 7 Practice Exam 9 Q&A

The MOST appropriate buyer(s) for a variable life insurance policy is/are:

a. A person who requires the discipline of forced savings
b. Parents with a modest income who have young children
c. A person who wants the assurance of a guaranteed cash value
d. A person with an understanding of investments who can tolerate market risk

A person with an understanding of investments who can tolerate market risk

Explanation: Similar to a variable annuity, the cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. A person who is knowledgeable about investments may be a candidate for variable life insurance because common stock and bonds are the foundation of the policy. As the market values of the securities fluctuate, the cash value changes and is not guaranteed. Therefore, the insured must be able to tolerate market risk. There are other methods by which an investor may achieve forced savings and the product may not be suitable for parents with a modest income who have young children.

An investor’s market order to buy 10 ABC June 45 calls is executed when the bid price was $5.10 and the offer price was $5.15. The investor later placed a market order to conduct a closing sale of the 10 contracts when the bid price was $5.20 and the offer price was $5.25. What is the investor’s capital gain on these transactions?
$50

Explanation: An investor placing a market order will normally buy at the offer and sell at the bid. In this case, the investor purchased 10 contracts at the offer price of $5.15 and then closed out that position by selling 10 contracts at the bid price of $5.20. The investor’s cost basis for 10 contracts is $5,150 (10 contracts x $515 per contract) and the investor’s sales proceeds are $5,200 (10 contracts x $520 per contract). The investor’s capital gain of $50 is based on the difference between the cost basis and sales proceeds.

Which TWO of the following investors would NOT be permitted to purchase shares of an IPO of KMF?

I. An attorney involved in the new issue of KMF
II. An investment company registered under the Act of 1940 that has some restricted persons as shareholders
III. A portfolio manager of an investment company buying for his personal account
IV. The general account of an insurance company

I and III

Explanation: Restricted persons include finders and fiduciaries (such as attorneys and accountants) involved in the new issue as well as portfolio managers who buy and sell securities on behalf of institutional investors. The New Issue Rule also provides a number of general exemptions.

The exemptions allow a new issue defined under the rule to be sold to the following accounts.

– Investment companies registered under the Investment Company Act of 1940
– The general or separate account of an insurance company
– A common trust fund
– An account in which the beneficial interest of all restricted persons does not exceed 10% of the account. (This is a de minimis exemption that allows an account owned in part by restricted persons to purchase a new issue if all restricted persons combined own 10% or less of the account.)
– Publicly traded entities other than a broker-dealer or its affiliates that engage in the public offering of new issues
– Foreign investment companies
– ERISA accounts, state and local benefit plans, and other tax-exempt plans under IRS Code 501(c)(3)

The Dow Theory states that a major trend is confirmed when which of the following indicators reach new highs or lows?

a. The S&P 500 Index and the NYSE Composite Average
b. The Dow Jones Industrial Average and the Dow Jones Transportation Average
c. The Dow Jones Industrial Average and the Dow Jones Utility Average
d. The Dow Jones Composite and the NYSE Composite Average

b. The Dow Jones Industrial Average and the Dow Jones Transportation Average

Explanation: The Dow Theory holds that a confirmation of a bullish or bearish trend is made when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction and reach new highs or new lows.

A customer asks an RR for a recommendation as to how to invest a $150,000 inheritance. The customer needs to preserve the capital since he wants to use the funds to start a new business within the next year. Which of the following funds is the LEAST suitable recommendation for this customer?

a. A taxable money-market fund
b. A tax-exempt money-market fund
c. A short-term Treasury fund
d. A balanced fund

d. A balanced fund

Explanation: While all of these funds are somewhat conservative, the balanced fund will contain some equity investments and long-term bonds, which will expose the customer to market risk. Given the customer’s short-time horizon and objective of preservation of capital, the balanced fund would be the least suitable of the choices listed.

A registered representative sends an electronic communication to 75 of her existing customers, explaining that account statements are now available online. Which TWO of the following statements are TRUE?

I. This is considered correspondence
II. This is considered a retail communication
III. This activity requires principal approval prior to use
IV. This activity should be reviewed

II and IV

Explanation: This activity is considered a retail communication since the registered representative is sending the communication to more than 25 customers. A retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it is considered correspondence. If the retail communication does not make a recommendation, or promote a product or service, prior principal approval is not required. FINRA does not consider announcing the availability of online account statements as promoting a product or service. This activity should, however, be reviewed and supervised by the broker-dealer.

We will write a custom essay sample on
Any topic specifically for you
For only $13.90/page
Order Now
A corporation declares a 2-for-1 stock split payable on November 30 to holders of record on November 1. The ex-date is December 1. The first day that the stock will trade without a due bill attached is:
December 1

Explanation: Whoever is the stockholder of record on the record date (Nov. 1) will be credited with the additional shares resulting from the split. If that person liquidates the position prior to the ex-date (Dec. 1), the buyer must receive a due bill upon settlement of that trade. This is because on Dec. 1 the value of the stock will be cut in half. If the buyer does not receive the additional shares, then the position loses half its value on the ex-dividend date. The first day that the purchaser is not entitled to the additional shares is the ex-date, and this is the first day the stock will not trade with a due bill.

Which TWO of the following new issues may be purchased by an employee of a broker-dealer under the New Issue Rule?

I. An exchange-traded fund
II. An initial public offering in which the RR’s firm is not an underwriter
III. A new issue of common stock in which the broker-dealer is the managing underwriter
IV. Convertible debt

I and IV

Explanation: An employee of a broker-dealer is considered a restricted person and may not purchase new issues under FINRA rules. New issues under the rule are defined as initial public offerings (IPOs) of equity securities sold under a registration statement. Exemptions from the definition of an IPO include all debt offerings, investment company offerings such as mutual funds and exchange-traded funds, and preferred stock. Whether the broker-dealer is participating as an underwriter does not alter the restrictions.

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. If the client is using the convertible bonds as a hedge, the maintenance requirement is:
$4,600

Explanation: If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. This is an industry rule, not a Regulation T requirement. Each bond is convertible into 50 shares (the par value of $1,000 divided by the conversion price of $20). The client may convert the 40 bonds into a total of 2,000 shares (50 shares x 40 bonds), which is equal to the number of shares the client is short. The maintenance requirement is 10% of the long position, which is equal to $4,600 ($1,150 x 40 bonds x 10%).

Which of the following statements is TRUE about variable annuities?

a. The dollar amount of payments is guaranteed
b. Participants may not vote to change objectives
c. Payout is based on a number of annuity units, which remains fixed for the duration of the payout period
d. Annuity payments are of a constant dollar amount throughout the payout period

c. Payout is based on a number of annuity units, which remains fixed for the duration of the payout period

Explanation: A variable annuity does not give an annuitant a fixed-dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.

The Federal Intermediate Credit Bank (FICB) makes:

a. Agricultural loans to farmers
b. Loans to finance residential mortgages
c. Business loans to veterans
d. Loans to utility companies

a. Agricultural loans to farmers

Explanation: The Federal Intermediate Credit Bank (FICB) makes agricultural loans to farmers.

Which of the following groups will approve an over-the-counter stock for purchase on margin?

a. A State Securities Commission
b. The Securities and Exchange Commission
c. The Federal Reserve Board
d. FINRA

c. The Federal Reserve Board

Explanation: Under Regulation T, the Federal Reserve Board is responsible not only for setting margin requirements but also for determining which securities may be sold on margin.

Discretionary accounts require:

a. Written authorization from the customer
b. Oral authorization from the customer
c. Written authorization from the client for each trade the registered representative executes
d. The registered representative to send the client a letter detailing the proposed transaction

a. Written authorization from the customer

Explanation: Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.

A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE?

a. The director is permitted to sell the shares if the trade is reported
b. The director is permitted to sell the shares only if they are held for three additional months and the trade is reported
c. The director is permitted to sell the shares and no report is required
d. The director is permitted to sell the shares only if the transaction will result in a loss

a. The director is permitted to sell the shares if the trade is reported

Explanation: An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company’s stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months’ holding.

A 6% bond is selling at a 6.25% basis. The bond will mature in 25 years and has 3 call dates. Which of the following bonds will give the investor the best return?

a. The bond is called after 10 years at 103
b. The bond is called after 15 years at 102
c. The bond is called after 20 years at 101
d. The bond is held to maturity

a. The bond is called after 10 years at 103

Explanation: The bond is selling at a discount. The first call in 10 years at 103 will give the investor the best return. The investor receives the highest call price in the shortest number of years.

A 1% increase in the federal funds rate will NOT have an effect on:

a. Short-term bond prices
b. Long-term bond prices
c. The discount rate
d. Treasury bill prices

c. The discount rate

Explanation: The federal funds rate is the rate one bank charges another bank when loaning excess reserves. It is the most sensitive of all interest rates and affects all bond prices and other interest rates except the discount rate which is set by the Federal Reserve Board.

If an options brochure containing projections is sent to a prospective customer, it must:

a. Contain the annualized rate of return
b. Disclose the representative’s trading performance for the past three years
c. Have an OCC risk disclosure document with it or be sent in advance
d. Contain a schedule of commissions and markups

c. Have an OCC risk disclosure document with it or be sent in advance

Explanation: Options retail communications containing projections that is sent to a prospective customer must be accompanied by or preceded by a risk disclosure document. An annualized rate of return may be included under certain circumstances. Trading performance, if included, must cover a one-year period. There is no requirement to include a schedule of transaction costs.

An investor does not expect the price of XYZ stock to change in the immediate future and wishes to generate income. The best strategy is:

a. Sell a call
b. Sell a put
c. Sell a straddle
d. Buy a straddle

c. Sell a straddle

Explanation: If the market price does not change, neither side of the straddle will be exercised. The premium on both the put and the call will be income to the investor.

Which of the following statements is TRUE regarding a defined contribution plan?

a. It is designed to provide employees with a fixed monthly payout at retirement
b. The employer bears all the investment risk
c. Employees may deduct all employer contributions
d. Each employee has a separate account within the plan

d. Each employee has a separate account within the plan

Explanation: A defined contribution plan is one in which the employer makes contributions on behalf of employees, and the size of the retirement benefit depends on the amount of the contributions and the investment performance of the assets in the plan. In this type of plan, the employee assumes the investment risk and only the employer may deduct employer contributions. In addition, each employee has a separate account within the plan to easily track the growth of his retirement assets.

An investor is looking for an investment that will generate deductions but also provide the potential for future cash flow. Which of the following is NOT an appropriate investment?

a. A raw land program
b. An existing properties real estate program
c. An oil and gas drilling program
d. An oil and gas exploratory program

a. A raw land program

Explanation: All of the choices provide potential for future cash flow and deductions except for a raw land program. In a raw land program, deductions are negligible and the profit potential comes in the form of capital appreciation, not cash flow.

When determining whether a CMO is suitable, an RR must offer to a client all of the following information, EXCEPT a:

a. Glossary of terms
b. Discussion on how changing interest rates may affect the prepayment rates
c. Discussion on how changing currency rates may affect the value of the securities
d. Discussion on the relationship between mortgage loans and mortgage securities

c. Discussion on how changing currency rates may affect the value of the securities

Explanation: Broker-dealers must offer customers educational material about the features of CMOs. This material must include:

A discussion of the characteristics and risks of CMOs. This includes: how changing interest rates may affect prepayment rates and the average life of the security, tax considerations, credit risk, minimum investments, liquidity, and transactions costs.
A discussion of the structure of a CMO. This includes the different types of structures, tranches, and risks associated with each type of security. It is also important to explain to a client that two CMOs with the same underlying collateral may have different prepayment risk and different interest-rate risk.
A discussion that explains the relationship between mortgage loans and mortgage securities
A glossary of terms applicable to mortgage-backed securities

Changing currency rates are not applicable to the risks associated with CMOs.

Which of the following securities has the LEAST amount of capital risk?

a. Options
b. Bonds
c. Warrants
d. Stocks

b. Bonds

Explanation: Capital risk is the risk of an investor losing her principal, the amount of funds invested in a security. When compared to the other securities, bonds have the least amount of capital risk. At maturity, the investor would receive the principal amount of the bond, thus minimizing the capital risk.

Which of the following companies would probably be MOST leveraged?

a. Software
b. Biotech
c. Consumer electronics
d. Utilities

d. Utilities

Explanation: A leveraged company has a large amount of outstanding debt (bonds) and would be the most leveraged. Of the choices given, utilities are the heaviest users of debt and have the greatest amount of interest charges (fixed charges). The percentage of debt in a utility company’s capitalization is usually greater than that of the other companies listed.

The FRB initial margin requirement is 50%. A customer’s initial transaction in a margin account is a purchase of 100 shares of XYZ at $15 per share. The customer would need to deposit what amount in this new account?
$1,500

Explanation: Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase.

A customer who has invested historically in mutual funds is considering an investment in a hedge fund for the first time. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE?

a. Mutual funds are subject to more regulatory oversight than hedge funds
b. Mutual funds pool investors’ money and manage the portfolio, whereas hedge funds manage each investor’s assets separately
c. Hedge funds often use higher degrees of leverage than mutual funds
d. Mutual funds may be suitable for many customers, whereas hedge funds are generally suitable for sophisticated, wealthy investors only

b. Mutual funds pool investors’ money and manage the portfolio, whereas hedge funds manage each investor’s assets separately

Explanation: Mutual funds and hedge funds both pool investors’ money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.

Which TWO of the following option positions combined will create a debit spread?

I. Buy an ABC June 30 call at 5
II. Buy an ABC June 30 put at 3
III. Sell an ABC June 35 call at 2
IV. Sell an ABC June 35 put at 4

I and III

Explanation: The only choice given that will create a debit spread is the purchase of an ABC June 30 call at 5 and the sale of an ABC June 35 call at 2. This spread is executed for a net debit of 3. This is a debit spread because the option being purchased has a larger premium than the option being sold.

Which of the following persons are entitled to participate in a Keogh plan?

I. A self-employed doctor
II. A security analyst who made $2,000 giving public lectures on technical analysis
III. An engineer of a corporation who made $5,000 making public speeches on his specialization
IV. An executive of a corporation who received $5,000 in stock options from his corporation

I, II, and III only

Explanation: An individual with self-employed income may establish a Keogh. Of the choices given, a doctor may participate because he is self-employed. The security analyst and the engineer could set up a plan for the income they derive from outside, self-employed activities. An executive of a corporation who received $5,000 in stock options may not participate because he is not self-employed.

If a customer is short 1,000 shares of RST stock, the customer:
Can use a buy stop order to limit losses if the stock advances

Explanation: A short position will be profitable if the market price of the security decreases. If the stock increases, the investor will have a loss. A buy stop order is placed above the market. If executed, stock will be purchased preventing further loss. There is no limit to the length of time that a short position may remain open. A portion of the short credit balance must always remain in the account to be used eventually to cover the short position. An investor who is short the stock does not receive dividends and does not have the right to vote.

U.S.-denominated currency held in foreign banks is BEST defined as:
Eurodollars

Explanation: Eurodollars are defined as U.S. dollars on deposit in all foreign banks, not just banks in Europe.

The FRB will most likely sell securities if it is attempting to:
Stop an inflationary trend

Explanation: Inflation occurs when the money supply expands faster than the supply of goods and services. To combat inflation, the Federal Reserve will most likely sell securities in order to reduce the money supply.

The Securities Exchange Act of 1934:

I. Created the SEC
II. Provided for the regulation of credit
III. Provided for the regulation of exchanges
IV. Provided for the regulation of new issues

I, II, and III only

Explanation: The Securities Exchange Act of 1934 created the SEC and provided for the regulation of credit and exchanges. The Securities Act of 1933 provided for the regulation of new issues.

A registered representative is approached by an accountant who wants to receive a finder’s fee for introducing her clients to the RR. Which of the following statements is TRUE?

a. The RR is not permitted to pay a finder’s fee to the accountant
b. The RR is permitted to pay a maximum finder’s fee of 5% to the accountant
c. The RR is permitted to pay a maximum finder’s fee of 8.5% to the accountant
d. The RR is permitted to pay an annual referral fee to the accountant based on the amount of commissions generated by the referrals

a. The RR is not permitted to pay a finder’s fee to the accountant

Explanation: A broker-dealer is not permitted to compensate nonregistered persons in exchange for introducing clients to an RR or based on the amount of commissions or fees generated by the account. This would prohibit a firm from paying a finder’s fee, rebate, or bonus based on commissions to any person who is not employed by a broker-dealer (an accountant or attorney, for example) unless that person was registered with the broker-dealer.

A customer purchases a municipal bond with 25 years remaining to maturity. The bond has been prerefunded to its first call date. The issue is callable in 7 years at 108, declining to par in 14 years. It also has a sinking fund call provision that begins in 17 years at par. For confirmation purposes, the bond should be priced to the:
First call date

Explanation: When a bond is prerefunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date.

Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules?

1. An employee of a municipal securities firm may open a new account with another municipal securities firm without the employer being notified
II. An employee of a municipal securities firm may open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual’s employer
III. A bond attorney may open a new account without restriction
IV. An officer of a municipal issuer may open a new account without restriction

II, III, and IV only

Explanation: MSRB rules only place restrictions on opening an account for an employee of another MSRB member firm. When opening an account for an employee of another MSRB member firm, the employer must be notified and duplicate confirmations of all trades must be sent to the employer.

A corporation has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?
$690,200

Explanation: If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company will have to add $30,000 (30% of $100,000) to its taxable income. The total taxable income will, therefore, be $2,030,000. The tax liability will be $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

A sell stop order most likely will be entered by a technical analyst or chartist:
Below a support level for the stock

Explanation: Sell stop orders are entered below the current market. The order will most likely be entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside. This is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.

Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income program?

a. Liquidity
b. Depreciation of equipment
c. Depletion
d. Depreciation of land

c. Depletion

Explanation: The most advantageous tax benefit that an investor will receive from an oil and gas program is the depletion deduction. These deductions normally last for as long as the program produces oil and gas. Depreciation of equipment lasts a limited number of years and land may not be depreciated.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual’s maximum loss is:
$2,000

Explanation: This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

What is meant by 4.50% less 3/4 for a municipal bond selling in the secondary market?
$1,000 bond at 4.50 yield – $7.50

Explanation: Quotes for serial municipal bonds are usually per $1,000 and on a yield to maturity basis. The less 3/4 represents the concession or discount offered to another dealer (3/4 point = $7.50).

ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer’s buy order. ABC has acted as a:
Agent

Explanation: When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent).The client is charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it is acting as a dealer (principal). The client in this case is charged a markup or markdown.

If interest rates are expected to rise over a given period, a municipality that must raise money would probably issue securities with:
Long-term maturities

Explanation: By issuing securities with long-term maturities, the municipality can lock in the rate of interest it needs to pay on the bonds. Therefore, if interest rates are expected to rise over a given period, the municipality would not be subject to these changes. This would provide the municipality with the capital it needs, without borrowing again at higher rates of interest, as it would need to do if it issued shorter-term or intermediate-term securities.

In April, an investor purchased 1,000 shares of XYZ at $47 and, in August, purchased another 1,000 shares of XYZ at $55 per share. In June of the following year, the investor sold 400 shares of XYZ at $59 per share and stipulated that the shares being sold are from the purchase that was made in August. For tax purposes, the investor will report a:
Short-term capital gain of $1,600

Explanation: In this question, the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor stipulated that the shares being sold were against the shares that were purchased in August and those shares were held for one year or less, the capital gain is short-term. The cost basis of the shares being sold is $55 and the proceeds per share on the sale is $59. Therefore, the gain of $4 per share is multiplied by the 400 share position, resulting in a $1,600 total gain.

When evaluating numerous mutual funds, what is meant by net investment income?
Interest + dividends – expenses

Explanation: Net investment income of a mutual fund is derived from the total interest plus dividends earned by the fund’s portfolio minus the expenses of the fund.

In a municipal bond transaction, T + 3 means:
The transaction will settle regular-way in 3 business days from the trade date

Explanation: T + 3 in a municipal bond transaction means the bonds will settle regular-way in 3 business days from the trade date.

An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE?

I. The investment risk is assumed by the insurance company
II. The investment risk is assumed by the customer
III. The amount of the payment to the customer is guaranteed by the insurance company
IV. The amount of the payment to the customer is not guaranteed

II and IV

Explanation: Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment may increase, decrease, or remain the same, since the amount of the payment is not guaranteed. In addition, since a straight-life settlement option was chosen, payments will stop when the investor dies, regardless of the amount left in the contract.

Which of the following choices is NOT a reason for a broker-dealer to reject delivery of a municipal bearer bond?

a. A mutilated coupon
b. Lack of a legal opinion
c. No endorsement by the owner
d. Lack of a seal on the certificate

c. No endorsement by the owner

Explanation: A municipal bearer bond does not require endorsement (signature) by the owner.

Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer?

a. An exchange-traded fund (ETF)
b. An equipment leasing direct participation program (DPP)
c. A private activity municipal revenue bond
d. The PAC tranche of a collateralized mortgage obligation

b. An equipment leasing direct participation program (DPP)
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:
A price near $60

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

Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond?

a. Approval by a majority of legal age voters
b. Approval by the state legislature
c. Approval by the bond trustee
d. Approval by the appropriate state agency

b. Approval by the state legislature

Explanation: State legislative approval is required before a municipality can begin making payments on a moral obligation bond.

A municipal tombstone advertisement must be approved by:
A municipal securities principal

Explanation: MSRB rules require that an advertisement must be approved prior to its first use by a municipal securities principal.

A convertible bond is convertible at $25. The bond is currently selling in the market at $960. What should the stock be selling at to be at parity with the bond?
$24.00

Explanation: The bond is convertible at $25. This means the conversion ratio is 40 to 1 ($1,000 par value divided by the conversion price of $25 equals the conversion ratio of 40 to 1). To find parity for the stock, divide the market value of the bond by the conversion ratio. The market value of the bond $960, divided by the conversion ratio of 40 to 1 equals the $24 parity price for the stock.

The stock of which of the following companies is most likely considered cyclical stock?

a. An oil and gas company
b. A home appliance company
c. A utility company
d. A pharmaceutical company

b. A home appliance company

Explanation: A cyclical company is one whose sales correspond to changes in the business cycle and, therefore, will be affected by a recession. Examples of cyclical stock includes the stock of household appliance companies, steel companies, and construction companies. A defensive company is one whose sales are not as affected by changes in the business cycle (i.e., it resists recession). Examples of defensive stock includes the stock of pharmaceutical, health care, tobacco, oil and gas, utility, and supermarket companies.

A customer in her late 40s, who is currently in the 15% tax bracket has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice concerning investing the inheritance. Which of the following choices would be the BEST method of investing the funds?

a. 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes
b. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes
c. 30% in-state municipal bonds, 30% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes
d. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds

b. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes

Explanation: Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor’s age as a guide to the percentage of the investor’s portfolio that should be allocated to equities. As such, a 40% allocation in equities is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return to this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds in short-term municipal securities such as tax or revenue anticipation notes. Choice (a) has only a 20% allocation in equities and a 50% allocation of funds in tax anticipation notes, offering no growth potential. Having 100% of the funds in fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best method of investing the funds.

An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within:
60 days

Explanation: When a lump-sum withdrawal from a corporate pension plan, Keogh, or IRA is deposited into an IRA, it is referred to as a rollover. If the rollover is done within 60 days, the investor will avoid a taxable event. If the distribution is from a qualified plan other than an IRA, the distributing company must withhold 20% of the distribution for the IRS. Only one rollover is permitted each year.

If the Fed’s open market trading desk enters into a repurchase agreement, which TWO of the following statements are TRUE?

I. The money supply will be increased
II. The money supply will be decreased
III. Interest rates will tend higher
IV. Interest rates will tend lower

I and IV

Explanation: On a repurchase agreement, the Fed initially purchases securities. Therefore, money is added to the banking system. This tends to loosen credit and allows interest rates to decline.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. At expiration, the individual will have a profit if the market price of ABC is:
93

Explanation: This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). Therefore, look at the purchase of a 90 call at 2 (net debit). The breakeven point when buying a call is the strike price (90) plus the premium (net debit of 2). Any market price above the breakeven point of 92 will make the position profitable.

An investor owns Treasury bonds that mature in 20 years. This investor will be exposed to:

a. Credit risk
b. Inflationary risk
c. No risk
d. Capital risk

Inflationary risk

Explanation: Credit risk is the risk that the investor will not receive interest and/or principal when it is due. Capital risk is the risk that the investor will lose his investment. Since Treasury bonds are direct obligations of the U.S. government, there is no risk that the investor will not receive interest and/or principal when due, or lose his investment. Therefore, the investor is free of credit and capital risk. All fixed-income securities expose an investor to inflationary risk (purchasing-power risk).

An investor buys a zero-coupon bond at 41. A few years later the bond’s basis has been accreted for tax purposes to 46. If the bond is sold at 45, the investor will recognize:

a. No gain or loss
b. A 1-point capital gain
c. A 4-point capital gain
d. A 1-point capital loss

d. A 1-point capital loss

Explanation: When selling a zero-coupon security, if the bond is sold above the accreted value (not the original cost), it is considered a capital gain and, if sold below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year. If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss.

A municipality issues revenue bonds for which TWO of the following reasons?

I. To finance the building of a high school
II. To finance the construction of a power plant
III. To pay the salaries of police and firefighters
IV. To pay the salaries of transit workers

II and IV

Explanation: Revenue bonds are usually issued to construct and operate some type of revenue producing facility. Examples include power plants, transit systems, turnpikes, colleges, bridges and tunnels, hospitals, sewer systems, and stadiums. General obligation bonds are issued to finance public schools (elementary school and high school) and to pay the general expenses of running a municipality (e.g., police and firefighters).

A designated market maker has an order on its book from a public customer to buy stock at $34.70 and another order from a public customer to sell stock at $34.90. The designated market maker may:

a. Buy stock for its own account at $34.65
b. Buy stock for its own account at $34.75
c. Sell stock from its own account at $34.90
d. Sell stock from its own account at $34.95

Buy stock for its own account at $34.75

Explanation: A designated market maker is not permitted to compete with public orders when trading for its own account. The DMM may buy stock at a higher price or sell stock at a lower price. In doing so, the DMM has narrowed the spread (the difference between the bid and ask). The DMM, buying stock at $34.75, is permitted since this price is higher than the price of the public order ($34.70). The other choices would result in the DMM buying lower or selling at a price equal to or higher than the public customer’s order.

Which of the following choices is NOT TRUE about buying listed put options versus selling the underlying stock short?

a. Buying a put will require a smaller capital commitment
b. Buying a put has a larger potential loss than selling the stock short
c. The put has time value that gradually dissipates
d. Buying a put is not subject to the Regulation SHO requirement to borrow shares

b. Buying a put has a larger potential loss than selling the stock short

Explanation: Choice (b) is not true. Buying a put has a smaller potential loss than selling the underlying stock short. The maximum loss when buying a put is limited to the premium paid. The loss when selling short is unlimited. All of the other statements are true. The cost for the premium of a put is substantially less than the Regulation T margin requirement for a short sale. The purchase of puts is not subject to the borrowing requirements of Regulation SHO, whereas short sales of equities are. An option’s premium consists of intrinsic value and/or time value. Time value gradually dissipates as an option nears its expiration.

Section 1035 of the Internal Revenue Code:

a. Permits the tax-free exchange of one annuity contract for another
b. Forbids the tax-free exchange of an insurance policy for a new life insurance policy
c. Forbids the tax-free exchange of an insurance policy for a new annuity contract
d. Permits the tax-free exchange of an annuity contract for a life insurance policy

a. Permits the tax-free exchange of one annuity contract for another

Explanation: 1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences.

An equity security that is distributed under Regulation S may be resold by:

a. Immediate sale within the U.S. market
b. Immediate sale in a designated offshore market
c. Regulatory approval from SROs
d. Waiting six months, then selling within the U.S. market

b. Immediate sale in a designated offshore market

Explanation: An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas immediately through a designated offshore securities market. There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year period before an equity security sold pursuant to Regulation S may be resold in the U.S.

A person age 63 has an IRA with total assets of $275,000. The maximum amount this person can withdraw from this account without incurring a penalty is:
Explanation: An investor who withdraws money from an IRA before reaching the age of 59 1/2 will pay a 10% tax penalty on the taxable amount withdrawn, and is also liable for ordinary income taxes on the withdrawal. Since this person is over the age of 59 1/2, there is no penalty for withdrawing the funds, but the taxable amount withdrawn, above cost basis, will be added to the investor’s taxable income for that year.
Someone who wants to hedge a portfolio of long-term bonds will buy:

a. Yield-based call options
b. Yield-based put options
c. VIX call options
d. VIX put options

a. Yield-based call options

Explanation: The prices of bonds are inversely related to the movement of interest rates. If the investor is concerned that rising interest rates will erode the value of the bond portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge. The VIX (volatility index) tends to move inversely with the S&P 500 Index. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy VIX call options when he expects the market to decline and volatility to increase. An investor will buy put options on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the stock market. VIX options can be used by investors who expect either an increase or a decrease in volatility. It is not used to hedge a bond portfolio.

A broker-dealer is preparing sales literature on CMOs. Which TWO of the following statements must be disclosed?

I. The term collateralized mortgage obligation must be included within the name of the product
II. The basis point spread above a comparable Treasury security the client will receive in interest must be included
III. The lower of the yield to call or yield to maturity must be included
IV. The government agency backing only applies to the face value of the securities

I and IV

Explanation: Retail communications (e.g., sales literature) and correspondence about collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the government agency backing only applies to the face value of the securities (not any premium paid). If the client paid a premium to purchase a CMO, only the par value would be backed by the entity backing the security. The actual coupon rate, not the spread above Treasuries, needs to be disclosed. Due to the prepayment risk of CMOs, the yield to average life would be disclosed, not the yield to maturity or yield to call.

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield?

a. A 6.25% in-state municipal bond
b. A 7.10% out-of-state municipal bond
c. A 11.65% investment-grade corporate bond
d. A 10.85% mortgage bond

c. A 11.65% investment-grade corporate bond

Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident’s state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is:

Municipal Bond Yield / (100% – Investor’s Tax Bracket) = Equivalent Taxable Yield

The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%.

6.25% (Municipal Bond Yield) / 58% (100% – 42%) = 10.78% Equivalent Taxable Yield

The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The investment-grade corporate bond has the best or highest after-tax yield.

Which of the following securities are considered nonexempt according to the Securities Act of 1933?

a. U.S. government and municipal securities
b. Securities of a publicly held finance company
c. Securities of a small business investment company
d. Securities of a nonprofit organization

b. Securities of a publicly held finance company

Explanation: Nonexempt securities are those that are subject to the registration requirements of the Securities Act of 1933. Securities of a publicly held finance company are the only nonexempt securities. All of the other securities listed are exempt from the registration requirements of the Securities Act of 1933.

An investor purchased a municipal bond at a discount. If the investor holds the bond to maturity, a gain will be considered:

I. Tax-free interest if the bond is an OID
II. A capital gain if the bond is an OID
III. Ordinary income if the bond is not an OID
IV. Tax-free interest if the bond is not an OID

I and III only

Explanation: For an OID (original issue discount), the discount is considered interest. Because this is a municipal bond, the interest is tax-exempt. For a non-OID (a secondary market discount), the discount is reported as ordinary income.

A municipal broker’s broker may:

I. Deal with broker-dealers
II. Deal with dealer-banks
III. Underwrite new issues
IV. Trade from its own inventory

I and II only

Explanation: A municipal broker’s broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker’s broker never deals with individual investors or establishes an inventory position, and is not involved in the underwriting of a new issue.

Which TWO of the following offerings are subject to the Trust Indenture Act of 1939?

I. An offering of municipal revenue bonds
II. An offering of convertible securities by a company listed on the NYSE
III. An offering of corporate notes with a maturity of three years
IV. A private placement of bonds issued by a corporation, sold by a broker-dealer

II and III

Explanation: The Trust Indenture Act of 1939 regulates the public issuance of corporate securities that are sold interstate. It does not cover exempt securities such as U.S. government securities, municipal securities, or private placements. A sale of corporate convertible securities and an offering of corporate notes are subject to the 1939 Act. Corporate debt with a maturity of 270 days or less (commercial paper) is exempt from the 1933 Act and the 1939 Act.

Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar need to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.)
$0.8582

Explanation: The breakeven formula for call buyers is the strike price plus the premium. The strike price is 85 (0.8500) and the premium is .82 ($0.0082). Therefore, the spot rate for the Canadian dollar would need to be $0.8582 for Mr. Jones to break even.

Which of the following choices would be found in the subscription agreement for a direct participation program (DPP)?

a. The sharing arrangement between the limited and general partners
b. The amount of money that the general partner will contribute to the program
c. The provisions for dissolving the partnership
d. Who is required to sign this document

d. Who is required to sign this document

Explanation: In order to purchase an interest in a direct participation program, the investor must complete the subscription agreement. It will specify who is required to sign the agreement. The other choices given are found in the offering documents.

A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a:
$500 loss

Explanation: The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 – $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put – $500 premium).

If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would:
Increase

Explanation: If the tax-exempt status were eliminated, yields on newly issued municipal bonds would need to increase to compete with the higher yields of non-tax-exempt bonds.

Which TWO of the following metrics can be calculated by examining the balance sheet statement of a company?

I. The earnings before interest and tax (EBIT)
II. The debt-to-equity ratio
III. The operating profit margin
IV. The amount of working capital

II and IV

Explanation: The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). Working capital is found by subtracting current liabilities from current assets. All of these numbers may be found in a company’s balance sheet. EBIT and the operating profit margin can be calculated by examining the income statement.

Municipal serial bonds are priced on the basis of:
Yield to maturity

Explanation: Municipal serial bonds are quoted on a yield-to-maturity basis. Municipal term bonds are quoted on the basis of a dollar price.

An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:
$12,250.00

Explanation: The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of 10 puts quoted at 12.25 is, therefore, $12,250 (12.25 x $100 x 10 = $12,250).

A registered representative is the owner of a marina on the North Shore of Long Island. She wants to build an apartment complex on this property in order to increase the property’s cash flow. If she receives a loan from family members, which of the following statements is TRUE?

a. Her broker-dealer is required to approve the loan
b. She is required to notify her firm of the loan
c. She is required to notify FINRA
d. She is not required to notify her firm about the loan

d. She is not required to notify her firm about the loan

Explanation: Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying one of the following provisions.

1. The customer and the registered person are immediate family members.
2. The customer is a financial institution regularly involved in the business of extending credit or providing loans.
3. Both parties are registered with the same firm.
4. The loan is based on a personal relationship between the customer and the registered person.
5. The loan is based on a business relationship independent of the customer-broker-dealer relationship.

If the loan is based on provision 1 (borrowing from family members), firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 apply, the firm must approve the lending activity prior to the execution of the loan.

During a period of stable interest rates, which bond has the most potential to show a significant change in price?
A 7 1/2%, 10-year convertible subordinated debenture

Explanation: If interest rates are stable, most bond prices will have little movement. However, a convertible debenture could show significant price appreciation or depreciation if the underlying equity changes in value because of the potential to convert. This keeps the bond price in the vicinity of conversion parity. Parity is achieved when the value of the bond equals the value of the common stock derived from conversion.

Andrew, a client of yours, anticipates that the value of the U.S. dollar is weakening in relation to the euro and decides to purchase 10 March 95 euro call options at 1.30 when the spot price is 95.55. The contract size of each euro contract is 10,000. Andrew is required to deposit:
$1,300

Explanation: In order to take advantage of the anticipated increase in the value of the euro, Andrew is purchasing 10 euro calls at a premium of 1.30. Euro options are quoted in cents per unit, so the decimal must be moved two places to the left to convert the quote to dollars ($.0130). To calculate the cost of the euro call, multiply the contract size (10,000) times the dollar value of the premium ($.0130).

10,000 x $.0130 = $130

Since Andrew is purchasing 10 options, the total cost is $1,300.

Which of the following securities assist in financing importing and exporting operations?

a. Bankers’ acceptances (BAs)
b. Treasury bills
c. Eurodollar CDs
d. American Depositary Receipts (ADRs)

a. Bankers’ acceptances (BAs)

Explanation: Of the choices given, a banker’s acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt), which facilitates the trading of foreign securities in U.S. markets. Eurodollar certificates of deposit pay interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations.

Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?
$690,200

Explanation: If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company would need to add $30,000 (30% of $100,000) to its taxable income. The total taxable income, therefore, is $2,030,000. The tax liability is $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

A customer has sold stock but has failed to complete the transaction by delivering the securities. The latest date the broker-dealer may buy in the securities is:
Ten business days from the settlement dat

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

If a cash dividend is paid, how does it affect a margin account?

a. SMA is decreased
b. The debit balance is reduced
c. The market value is increased
d. The equity is reduced

b. The debit balance is reduced

Explanation: When a cash dividend is paid, the debit balance is reduced by the amount of the dividend. The SMA is also increased by the amount of the dividend. The market value changes due to fluctuations in the price of the security.

Which of the following individuals are NOT permitted to trade on the floor of the NYSE?

a. Independent brokers
b. Registered representatives
c. Floor brokers
d. Designated market makers

b. Registered representatives

Explanation: Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE.

An investor who is currently in the 15% tax bracket receives a promotion that puts her in the 33% tax bracket. If an RR offers to sell her a 3.75% tax-free municipal bond, what yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond?
5.60%

Explanation: If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The formula is:

Municipal Bond Yield / (100% – Investor’s Tax Bracket) = Equivalent Taxable Yield

The customer is now in the 33% tax bracket. (The 15% rate is no longer relevant). The municipal bond has a yield of 3.75%.

3.75% (Municipal Bond Yield) / 67% (100% – 33%) = 5.60% Equivalent Taxable Yield

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual’s profit?
95

Explanation: The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)?

a. They offer investors the same amount of liquidity as exchange-traded REITs
b. They are not required to distribute the same percentage of taxable income as exchange-traded REITs
c. They are not required to make periodic disclosures that are required of exchange-traded REITs
d. They are not suitable for the same investors as exchange-traded REITs

d. They are not suitable for the same investors as exchange-traded REITs

Explanation: Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Mr. Jones buys an XRX October 50 put when the market price of XRX is also $50 per share, and pays a premium of $5. If XRX declines sharply and Mr. Jones exercises the put, what is the maximum profit Mr. Jones can have?
Explanation: If the stock became worthless, Mr. Jones could then buy 100 shares and put it (sell it) to the writer for the $50 per share strike price, which equals $5,000 ($50 x 100 shares = $5,000). Mr. Jones would then make a profit of $5,000 minus the $500 premium paid for the put, which would be $4,500. The $4,500 is the maximum profit Mr. Jones could have since the stock could go no lower than zero.
Which of the following securities would NOT be found on the Consolidated Quotation System (CQS)?

a. An NYSE MKT stock
b. An NYSE MKT warrant
c. An NYSE-listed bond
d. A non-Nasdaq stock

d. A non-Nasdaq stock

Explanation: The Consolidated Quotation System (CQS) displays quotations on all common stock, preferred stock, warrants, and rights that are listed on the New York Stock Exchange (NYSE) or the NYSE MKT (formally NYSE Amex), and trading in the OTC market (third market). While an NYSE MKT stock, an NYSE MKT warrant, and a NYSE-listed bond typically appear on CQS, a non-Nasdaq stock does not appear.

According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?
The name of the RR responsible for the account and the manager who approved the account

Explanation: Under industry rules, the following items MUST be obtained when opening an account.

1. The customer’s name and residence
2. Whether the customer is of legal age
3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account
4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity

The name of the beneficiary is not required when opening an account.

The dated date of a municipal bond is January 1, 2014. The first coupon date is August 1, 2014. The first coupon will represent how many months of interest?
7 months

Explanation: The first coupon will be paid in 7 months. This is known as an odd (in this case, long) first coupon payment. The interest will begin to accrue from the dated date but will be paid on the first coupon date.

Which of the following proxy rules is TRUE regarding customer securities held in street name by a brokerage firm?

a. The corporation sends the proxy to the customer
b. The corporation sends the proxy to the NYSE, which then sends it to the customer
c. The corporation sends the proxy to the SEC, which then sends it to the customer
d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer

d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer

Explanation: A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy, which is a delegation of the shareholder’s vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (i.e., in the name of the brokerage firm), the corporation sends the proxy to the brokerage firm, which is the stockholder of record on the corporate books. The brokerage firm sends the proxy to the customer and the corporation then pays the additional expenses. The SEC regulates the solicitations of proxy material.

The market price of ABC Corporation common stock is $56. The quarterly dividend is 75 cents. What is the current yield of the stock?
5.3%

Explanation: The current yield of a stock is found by dividing the yearly dividend by the market price of the stock. The market price is $56. The yearly dividend is $3 ($.75 x 4 = $3.00). Therefore, $3 divided by $56 equals 5.3%.

A customer has an existing margin account with equity of $36,000. If the FRB requirement is 50% and the customer sells short 100 shares at $15.00 a share, the required deposit is:
$750

Explanation: The FRB requirement is 50%, which is the same for purchases as it is for short sales. Therefore, the required deposit is $750 (50% x $1,500). Since this trade is executed in an existing account, the only requirement is the FRB’s. If this had been the initial trade in the account, the required deposit under industry rules would be $2,000.

A municipal bond trader does NOT:

a. Request bids
b. Accept bids
c. Commit to underwritings
d. Negotiate settlement dates in the secondary market

c. Commit to underwritings

Explanation: A municipal bond trader is not involved in underwritings of new issues.

A registered representative is using a social networking site that permits real-time communication. FINRA would BEST define this type of communication as a(n):
Public appearance

Explanation: Social media sites that permit real-time communication or interactive, electronic forums fall under the guidelines of a public appearance, according to FINRA. Examples include Facebook, Twitter, and LinkedIn. Most firms do not permit their RRs to use these types of systems to communicate with customers to conduct business because they are not able to monitor the sites. Correspondence is any oral or written communication distributed or made available to 25 or fewer retail investors.

The quarterly dividend of ABC company is 32 1/2 cents. The market price is $24.00 a share. What is the current yield?
5.41%

Explanation: The formula for computing current yield (also known as the dividend yield) is: Annual Dividend / Market Price of the Stock

Since the quarterly dividend is 32 1/2 cents, the annual dividend is $1.30 (32 1/2 x 4 = $1.30). $1.30 divided by the $24 market price equals 5.41%.

Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return?

a. CAPM
b. Efficient frontier
c. Duration
d. Alpha

b. Efficient frontier

Explanation: According to modern portfolio theory, a graph of optimal portfolios can be created known as an efficient frontier.

Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as:

a. Open-end investment companies
b. Closed-end investment companies
c. Unit investment trusts
d. Face amount certificate companies

c. Unit investment trusts

Explanation: Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as unit investment trusts (UITs). Investors can receive a reduced sales charge if they purchase a certain amount of a UIT.

A customer owns an AMF October 30 call option. If AMF should split 2 for 1, the customer will own:
2 AMF October 15 calls each for 100 shares

Explanation: When a stock splits 2 for 1 (an even split), the number of contracts increases and the strike price is reduced proportionately. The number of shares representing each listed option remains at 100 shares. The customer will now have 2 calls for 100 shares each at the adjusted strike price of $15 or 2 AMF October 15 calls for 100 shares each of AMF. Listed options are adjusted for stock splits, stock dividends, and rights offerings, but are not adjusted for cash dividends.

A customer in his early 50s who recently received a sizeable bonus has an investment objective of maximizing his tax-free income. He has two children attending college. Which of the following choices would be the BEST method of investing the funds?

a. Contribute the maximum amount allowable to a 529 plan
b. 50% equities, 20% general obligation bonds, 15% utility revenue bonds, and 15% Treasury Inflation-Protected Securities (TIPS)
c. 20% high-yield corporate bonds, 20% airport revenue bonds, 20% general obligation bonds, 20% Treasury bonds, and 20% tax anticipation notes
d. 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds

d. 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds

Explanation: This customer is seeking to maximize his tax-free income and would like to invest in different types of municipal securities. A portfolio of 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds would be suitable for this investor. There is no reason why a small percentage (20%) cannot be invested in high-yield municipal bonds. Choice (b) contains equities and Treasury Inflation-Protected Securities (TIPS), which are taxable, fixed-income securities. Choice (c) also contains taxable, fixed-income securities (corporate bonds and Treasury bonds) as well as short-term municipal securities (tax anticipation notes). Since the customer’s children are already attending college, the tax-free growth available with a 529 plan would not be advantageous or a suitable investment when seeking tax-exempt income.

A broker-dealer receives a confirmation for a trade that does not appear on its records. The broker-dealer should send a DK notice to:
The contrabroker

Explanation: A DK notice is sent to the contrabroker upon receipt of the confirmation for an uncompared trade. The broker-dealer sending the DK notice states that the trade does not appear on its records and, therefore, denies any responsibility for the settlement of the trade unless the contraparty can prove that the trade did indeed take place.

The additional bonds covenant for a revenue bond is found normally in the:

a. Official notice of sale
b. Prospectus
c. Bond indenture
d. Syndicate agreement

Bond indenture

Explanation: All protective covenants for a revenue bond are found in the bond’s indenture. Also included in the indenture are the rights and obligations of the issuer and the bondholders. The official notice of sale contains the information and procedures necessary for syndicates that wish to bid on a competitive issue of bonds. The syndicate agreement is a contract among the underwriters that defines their working relationship and addresses such items as the priority of orders and sharing of the underwriting spread. A prospectus is a disclosure document for issues that are registered under the Securities Act of 1933. Municipal revenue bonds are exempt from that Act.

When comparing variable annuities to fixed annuities, investment risk is assumed by the:

I. Investor in a variable annuity
II. Annuity company in a variable annuity
III. Investor in a fixed annuity
IV. Annuity company in a fixed annuity

I and IV only

Explanation: In a fixed annuity, the annuity company guarantees a fixed monthly payment. The company, therefore, must invest the monies and assume the investment risk. In a variable annuity, the annuity company makes no guarantee. The company will invest the investor’s money and the investor’s annuity benefits will depend on the value of the investments. The investor, therefore, assumes the investment risk.

Morris Investments is working a leveraged buyout deal to purchase Simon Entertainment Group. The fundamental financing for the deal will consist mostly of:
Debt issued using the assets of Simon Entertainment Group as collateral

Explanation: A leveraged buyout (LBO) is the acquisition of a company primarily using debt to finance the purchase. The assets of the acquired company are generally used as collateral for the borrowed funds. This type of acquisition allows the acquiring company, which is referred to as a private equity (PE) firm, to make the purchase without using much of its own equity. In many circumstances, since a large amount of borrowed funds are used to make the purchase, they are usually non-investment-grade.

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of Depaul Corporation stock at $70 per share and makes the necessary deposit. If the stock increases in value to $78 per share and later declines to $67 a share, how much SMA would the customer have in the account?
$4,000

Explanation: First, determine the amount of the debit balance. If the customer purchased $70,000 worth of stock at a 50% margin requirement and deposited $35,000, the debit balance is $35,000 ($70,000 market value – $35,000 margin requirement = $35,000 debit balance).

Depaul increased to $78 per share, making the market value $78,000. The equity increases to $43,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $39,000 (50% of $78,000) from the actual equity in the account, $43,000. The SMA is, therefore, $4,000. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increases in value can create excess equity (SMA). However, if these securities later decline in value, this will not decrease SMA.

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

a. A real estate investment trust (REIT)
b. A collateralized mortgage obligation (CMO)
c. A direct participation program (DPP)
d. A business development company (BDC)

d. A business development company (BDC)

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

A registered representative is sending an e-mail to 20 individual investors. This is defined as a(n):

a. Correspondence
b. Institutional communication
c. Retail communication
d. Public appearance

a. Correspondence

Explanation: FINRA’s Communications with the Public Rule defines different types of communication.

– Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period.
– Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer.
– Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period.
– Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn).

Since the e-mail is being sent to 25 or fewer individual (retail) investors, it is defined as a correspondence. It makes no difference whether the investors have an account with the RR or the member firm.

Place the following ratings in the proper order from highest to lowest.

I. A
II. Aa
III. Aaa
IV. Baa

III, II, I, and IV

Explanation: The highest Moody’s rating is Aaa followed by Aa, A, and Baa.

The provisions for the flow of funds of a revenue bond issue appear in the:

a. Syndicate letter
b. Account summary statement
c. Notice of sale
d. Indenture

d. Indenture

Explanation: The indenture contains all the agreements and covenants pertaining to a bond issue, and also contains the provisions for the application and allocation of funds of a revenue bond.

How long after a new issue is registered for sale will it be shown on the Nasdaq system?
On the effective date

Explanation: A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public.

A retail salesperson has helped his firm win the role as the lead underwriter in a local municipal bond issue. If the underwriting was conducted on a negotiated basis, which of the following statements is TRUE?

a. The retail salesperson would not be considered a municipal finance professional
b. The retail salesperson could not have made a $300 political contribution to a local elected official in the past two years
c. The retail salesperson is required to register as a municipal securities principal
d. The action by the retail salesperson would be a violation of MSRB rules

b. The retail salesperson could not have made a $300 political contribution to a local elected official in the past two years

Explanation: Since the retail salesperson has helped his firm obtain negotiated municipal bonds business, he is defined as a municipal finance professional (MFP). A two-year look-back period applies to municipal finance professional contributions. If an individual has made contributions to a political candidate that would have resulted in a violation of MSRB Rule G-37 (contributing more than $250 to a candidate for whom he is entitled to vote for), the firm that employs the individual is subject to the underwriting ban if the individual was employed in the role of an MFP within two years of the contribution. A retail salesperson is not required to register as a principal and is permitted to solicit elected officials of municipal bond issuers, provided the retail salesperson does not contribute more than $250 for the official for whom he is entitled to vote.

A registered representative has a dispute with his firm over compensation. This dispute will be resolved by:
An arbitration panel

Explanation: Registered representatives agree to arbitrate any disputes with their employer, with the exception of statutory discrimination and harassment claims.

When opening a new account, what is the order in which the following actions take place?

I. Determining customer suitability
II. Obtaining a signed options agreement
III. Entering the initial order
IV. Obtaining approval from the ROP

I, IV, III, II

Explanation: When opening an account, the first step is to obtain the essential facts regarding the customer’s investment objectives and financial means in order to determine suitability. The account is then approved by the ROP and the initial order is entered. The member firm has 15 days to obtain the signed options agreement.

A customer contacts his registered representative to purchase a security in a custodial account. The RR executed the transaction in the custodial account of the son, but the customer wanted to purchase the security in the account for her daughter. Which of the following actions should be taken?

a. Request a cancel and rebill without principal approval
b. Enter a new order
c. Cancel the order and take no other action
d. Request a cancel and rebill after receiving principal approval

d. Request a cancel and rebill after receiving principal approval

Explanation: If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct customer but transferred to a different account (e.g., a wrong custodial account or a joint account instead of an individual account).

A customer in her late 40s, who is currently in the 15% tax bracket, has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice in investing the inheritance. Which of the following choices would be the BEST method of investing the funds?

a. 50% in equities, 25% in-state municipal bonds, 15% in Treasury bonds, and 10% in a money- market fund
b. 100% in equities
c. 50% in-state municipal bonds, 25% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in money-market funds
d. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds

a. 50% in equities, 25% in-state municipal bonds, 15% in Treasury bonds, and 10% in a money- market fund

Explanation: Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor’s age as a guide to the percentage of the investor’s portfolio that should be allocated to equities. As such, a 50% allocation in equities is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return to this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds to a money-market fund. Having 100% of the funds in equities or fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best mix of investing the funds.

Calculate the SMA for the following margin account.

Long Account Short Account
$150,000 Market Value $45,000 Market Value
$50,000 Debit Balance $75,000 Credit Balance

$32,500

Explanation: The formula for calculating SMA is:

Actual equity – Reg T Requirement = SMA

The equity in the long account is $100,000 ($150,000 LMV
– $50,000 DR).
The equity in the short account is $30,000 ($75,000 CR
– $45,000 SMV).
Total equity is $130,000.

The Reg T requirement for the long account is $75,000 ($150,000 LMV x 50%).
The Reg T requirement for the short account is $22,500 ($45,000 SMV x 50%).
The total Reg T requirement is $97,500.

The combined SMA is, therefore, $32,500 ($130,000 Actual equity – $97,500 Reg T requirement).

An investor has recently rolled over his 401(k) into an IRA at your firm. Which of the following securities will be MOST suitable if the investor wanted diversification and a higher return?

a. A municipal revenue bond
b. A Treasury note
c. A hybrid REIT
d. An equity REIT

c. A hybrid REIT

Explanation: Since this is a tax-deferred (retirement) account, the municipal security would not be suitable and, since the investor wants a higher return, the Treasury note would not be the best choice. Although either REIT may be suitable, the hybrid REIT is a better choice since the investor wants diversification. There are three types of REITs: mortgage REITs which provide funds to real estate owners in the form of lending them funds (i.e., a mortgage), equity REITs which own and operate income producing real estate (for example, apartment buildings, commercial property, shopping malls and other types of retail property, and vacation resorts), and hybrid REITs, which invest in both of these ventures. By purchasing a hybrid REIT, the investor can take advantage of buying a security that invests in actual equity ownership of real estate as well as investing in an interest-rate-sensitive security such as a mortgage REIT.

A customer’s margin account has a market value of $800,000 and a debit balance of $375,000. He also has a commodities account that has equity of $150,000. If the firm went bankrupt, SIPC would provide coverage to this customer for:
$425,000 in the margin account and nothing for the commodities account

Explanation: SIPC will cover the customer’s equity in the margin account ($425,000). SIPC does not provide coverage for commodities or futures accounts.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE?

I. The bid price is equal to the net asset value
II. The bid price is equal to the net asset value plus the redemption fee
III. The offer price is equal to the net asset value plus the sales charge
IV. The offer price is equal to the net asset value minus the sales charge

I and III

Explanation: The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund.

If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be:
A capital loss at the time the option expires

Explanation: If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be a capital loss at the time the option expires.

Lindsay Depaul is a client seeking a balance between income and capital growth. Which of the following investment strategies MOST closely achieves this goal?

a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund
b. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund
c. 50% in an ETF that follows the S&P 500 and 50% in an equity foreign index fund
d. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund

b. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund

Explanation: An investor seeking income and capital growth would want her assets allocated evenly between equity and fixed-income investments. Choice (b) has a 60%/40% mix of equity and fixed-income. Choice (a) is 100% fixed-income, choice (c) is 100% equity, and choice (d) is 80% equity and 20% in fixed-income.

Which of the following choices would be LEAST suitable for an investor seeking liquidity?

a. Preferred stock of a financial services company
b. A mutual fund that invests in international markets
c. A real estate investment trust (REIT)
d. A hedge fund using leverage

d. A hedge fund using leverage

Explanation: Of the choices listed, the hedge fund would be the least suitable since it does not offer liquidity. Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. The preferred stock and REIT are exchange-traded and may be sold at any time.

Which of the following choices is NOT allowed under MSRB rules?

a. A gift of basketball tickets to a customer valued at $100
b. A business dinner with a client costing $135
c. Reserving a hotel room for a client at a municipal bond seminar costing $150
d. A Christmas gift to a client valued at $125

d. A Christmas gift to a client valued at $125

Explanation: MSRB rules prohibit gifts in excess of $100 per year to a person other than an employee or partner of the gifting individual, if such payments or services are in relation to the municipal securities activities of the employer or the recipient. (Therefore, a Christmas gift to the client valued at $125 would not be allowed.) However, costs incurred for business lunches or hotel accommodations for clients at business seminars are business expenses and are allowed as long as they are not frequent or excessive.

A registered representative wants to open a new account for a client who is a resident of Mexico. Which TWO of the following statements are TRUE?

I. Customer verification of the client’s personal information is not required if the customer was referred by an existing client
II. Customer verification of the client’s personal information is required under any circumstances
III. The client may have either a taxpayer identification number or a passport number and country of origin
IV. The client must have a taxpayer identification number to open the account

II and III

Explanation: If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens, the firm must obtain the client’s name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. An RR always needs to verify the client’s personal information regardless of whether the customer was referred by an existing client.

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:
Par value plus accrued interest

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

Relating to a secondary market municipal joint account, which of the following choices is NOT relevant?

a. The order period
b. An account agreement
c. A good faith deposit
d. The takedown and concession

c. A good faith deposit

Explanation: Two or more municipal securities dealers might form a joint acount in order to purchase and distribute a large block of securities and spread the risk of the transaction. Both new issue and secondary joint accounts act according to an account agreement that will contain the takedown and concession. An order period will also be used for both. Good faith deposits relate only to a new issue, since that is the amount that the syndicate gives to the issuer along with the bid.

Upon the sale of a limited partnership interest in a direct participation program, the broker-dealer should have the investor make his check payable to:
Whomever is specified in the subscription agreement

Explanation: The subscription agreement will specify the party to whom the check should be made payable.