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

Buy a call

An investor has a $4,000 long-term capital loss and a $6,000 long-term capital gain from securities transactions. The investor is in the highest tax bracket. The investor will need to pay taxes of:

$200
$400
$560
$840

$400

Currently, capital gains are taxed at a rate of 20% for investors in the highest tax bracket. After offsetting the $6,000 gain against the $4,000 loss, there is a net $2,000 long-term capital gain. Therefore, the investor will need to pay taxes of $400 ($2,000 x 20%).

Blue-Sky laws apply to which TWO of the following choices?

Registered representatives
Securities issued by the City of Chicago
Commercial paper
Securities issued by a REIT

Registered representatives

Securities issued by a REIT

REITs (real estate investment trusts) are considered nonexempt securities and are, therefore, regulated by state laws.

(Only Questions with Incorrect Answers Shown)
Which TWO of the following choices can be calculated by examining the income statement of a company?

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

The earnings before interest and tax (EBIT)

The operating profit margin

EBIT may be found by subtracting the operating expenses from the sales or revenue of a company, and the operating profit margin is found by dividing the sales by the operating expenses. All of this information can be found in the income statement.

Which of the following positions/strategies is NOT bullish?

A married put
A short put
A long 40 call and a short 50 call
Writing a straddle

Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.

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:

No gain or loss
A 1-point capital gain
A 4-point capital gain
A 1-point capital loss

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.

When evaluating two CMOs backed by GNMAs, one having a 6% yield and the other having a 10% yield, which TWO of the following statements are TRUE?

Prepayment risk is greater for the CMO with the 10% yield
Prepayment risk is greater for the CMO with the 6% yield
Credit risk is greater for the 10% CMO
Credit risk is the same for both securities

Prepayment risk is greater for the CMO with the 10% yield

Credit risk is the same for both securities

the CMO with the higher interest rate will have higher prepayment risk.

If a customer is short 1,000 shares of RST stock, the customer:

Must cover the position within six months
Can use a buy stop order to limit losses if the stock advances
May use the entire credit balance in the account to buy more stock
Is entitled to receive dividends and vote at the annual meeting

Can use a buy stop order to limit losses if the stock advances

Discretionary accounts require:

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

Written authorization from the customer

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.

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

Liquidity
Safety of principal
Tax-exempt income
Speculation

Speculation

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

An individual is in the third year of accumulating an interest in a variable annuity with a deferred sales charge. A registered representative recommends a switch to a newly created variable annuity with a larger number of subaccount choices, also offered with a deferred sales charge. Which TWO of the following statements are TRUE of this switch?

FINRA will probably consider the switch unsuitable
FINRA will probably not consider the switch unsuitable, since both annuities are offered with a deferred sales charge
The switch is taxable if it qualifies as a 1035 exchange
The switch is not taxable if it qualifies as a 1035 exchange

FINRA will probably consider the switch unsuitable
The switch is not taxable if it qualifies as a 1035 exchange

Since the investor is in the third year of accumulation, there will be a deferred sales charge incurred. By switching to another variable annuity, the individual will now be subject to the highest deferred sales charge, thus making the switch unsuitable. If a registered representative recommends that a client switch from one annuity to another within a three-year period, the representative may be considered to be churning.

A corporation intends to sell 1,000,000 shares of stock through an underwriter. The prospectus states that 500,000 shares are being sold by the corporation from authorized but unissued stock. Also, 500,000 shares are being sold by officers and directors of the corporation. Which of the following statements are TRUE?

This is a primary distribution for 1,000,000 shares
This is a combined primary and secondary distribution of 1,000,000 shares
All of the proceeds of the offering will go to the corporation
The proceeds of the offering will be divided between the corporation and selling officers and directors

This is a combined primary and secondary distribution of 1,000,000 shares

The proceeds of the offering will be divided between the corporation and selling officers and directors

A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT to:

Refund a mass transportation bond
Raise capital to expand its school system
Make a primary offering to establish a public sewer system
Raise additional capital for a government housing project

Refundings was the key here:

A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for refundings, working capital, and private activity bonds.

A limited partner is considered accepted into a limited partnership when the:

Limited partner submits a completed subscription agreement
General partner signs and approves the subscription agreement
Limited partner submits a check to the general partner
General partner deposits the limited partner's check in the escrow account

General partner signs and approves the subscription agreement


The sale of a limited partnership interest is executed by means of a subscription agreement. It is signed by the limited partner, but is not final until the general partner signs the agreement which signifies the acceptance of the limited partner.

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of XOP at $48 per share and makes the necessary deposit. If XOP increases in value to $57 per share and later declines to $45 a share, which of the following statements is TRUE?

The SMA in the account is $4,500 and the equity is $21,000
The SMA in the account is $4,500 and the equity is $33,000
There is no SMA and the equity is $21,000
The SMA is $9,000 and the equity is $33,000

The SMA in the account is $4,500 and the equity is $21,000

Which of the following statements is NOT TRUE regarding a SEP IRA?

An employer makes contributions to an employee's IRA
An employer is not required to make annual contributions
Employees are permitted to make contributions to the account
Employees are immediately vested for any contributions made to the account

Employees are permitted to make contributions to the account

A simplified employee pension plan (SEP IRA) does not allow the employee to make contributions. SEPs are funded by employer contributions only. This is different than for Keogh plans, which do allow for employees to make nondeductible contributions to their own account.

Which of the following choices BEST defines the Municipal Bond Index?

The average yield on 25 general obligation bonds with 30-year maturities
The average price on 20 selected municipal revenue bonds with 20-year maturities
An estimate of the prices of 40 long-term municipal bonds adjusted to a 6% coupon
The average yield on 11 selected municipal revenue bonds with 20-year maturities

An estimate of the prices of 40 long-term municipal bonds adjusted to a 6% coupon

Which of the following choices is LEAST important to an investor considering a bond swap?

Accrued interest
Annual income
Capital loss
Maturity dates

Accrued interest

the least important factor to consider in the swap or exchange is accrued interest since accrued interest paid will be included in the next interest payment and all accrued interest received has been earned prior to the bond being sold.

An investor enters an order to buy 400 shares of HRJ @ 56 on the NYSE. Which of the following statements are TRUE regarding this order?

The designated market maker may hold this order in his book
The order may only be executed at 56
A portion of the 400 shares may be purchased
The order must be executed immediately

The designated market maker may hold this order in his book

A portion of the 400 shares may be purchased

A designated market maker is permitted to hold a stop, limit, and stop-limit order

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?

The bond is called after 10 years at 103
The bond is called after 15 years at 102
The bond is called after 20 years at 101
The bond is held to maturity

The bond is called after 10 years at 103

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.

An investor purchases 10 XYZ October 40 puts when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum loss this investor could incur?

$3,000 (total premiums)

When opening an account for an employee of FINRA, the member firm is required to:

Send duplicate confirmations only
Send duplicate account statements only
Send both duplicate confirmations and account statements
Have the account approved by the chief compliance officer

Send duplicate account statements only

A member firm is required to send duplicate account statements to FINRA when a customer of the firm is an employee of FINRA. The member firm would need written instructions from the employee of FINRA when opening an account in order to send the duplicate account statements. There is no requirement to send duplicate confirmations or have the account approved by a chief compliance officer.

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