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Question 1 |
A client of yours with a conservative level of tolerance for systematic risk and a fairly long time horizon has indicated that she would prefer to avoid substantial portfolio turnover. Your suitable recommendation would most likely be:
a tactical strategy. | |
a passive strategy. | |
an aggressive strategy. | |
a hedged strategy. |
Question 1 Explanation:
A passive strategy is one in which there is infrequent selling of securities in the portfolio, which fits the client’s desire for low portfolio turnover.
Question 2 |
When comparing a broker-dealer and an investment advisor, which of these statements is most accurate?
Advisors are compensated based upon performance, brokers are not. | |
Advisors are compensated based upon transactions, brokers are compensated based upon assets under management. | |
Advisors are compensated based upon fees for advice, brokers are compensated based upon transactions. | |
Both are compensated based upon transactions. |
Question 2 Explanation:
Advisers are paid for their advice. Brokers are paid commissions when there are transactions, purchases or sales.
Question 3 |
An agent of a broker-dealer may borrow money from all of the below except:
a corporate affiliate of the agent’s member firm. | |
a client which is a bank. | |
a broker-dealer. | |
a mortgage broker. |
Question 3 Explanation:
A mortgage broker is not a lender of money, but rather is a person who is in the business of arranging for loans. Reps cannot borrow money from clients who are loan ‘arrangers,’ but can borrow from lenders such as banks, or broker/dealers as in margin account lending, and from their own employer or affiliates thereof.
Question 4 |
Mr. Watney has placed a buy order for 1000 shares of ABC at the market. The execution price was $42 in his cash account on Wednesday, February 4th. If he fails to make payment by Monday, February 9th, the most likely consequence will be:
an extension of time will be requested on his behalf and if granted, no liquidation will occur. | |
no extension of time is necessary under these circumstances: he has two additional business days in which to make payment. | |
the purchase will be canceled for non-payment: his account will be frozen for 90 calendar days. | |
the firm will do a sell-out, at Mr. Watney’s expense, and freeze his account for 90 calendar days. |
Question 4 Explanation:
Regulation T states that public customers are given 2 business days beyond regular way settlement to make payment. Therefore, non payment in T+3 does not result in any action.
Question 5 |
The recommended way to handle a conflict of interest between a member firm and one of its customers in a proposed transaction or set of transactions is to:
disclose the conflict of interest to the customer. | |
let the compliance and/or legal department handle the situation. | |
avoid the conflict – don’t propose transactions which involve conflicts of interest. | |
the member firm should obtain FINRA approval of the proposed transactions. |
Question 5 Explanation:
The customary practice in the financial services industry is to disclose any potential or actual conflicts of interest at the time of recommending a transaction to a customer. This approach empowers the client to decide if the conflict constitutes a reason to avoid the transaction.
Question 6 |
Mrs. Ko’s portfolio has an aggressive bias towards growth stocks. As such, its beta is 1.4 and she is concerned about downside exposure due to overall market risk over the near term. The S&P 500 Index is currently at 2000.00 and her portfolio has a current market value of $1,000,000. Which of the following recommendations would provide the best hedge?
short 5 S&P 500 Index calls | |
long 5 S&P 500 Index puts | |
long 7 S&P 500 Index puts | |
long 700 S&P 500 Index puts |
Question 6 Explanation:
The S&P 500 has a beta of 1.0. Long Index puts provide an effective hedge against downside portfolio risk. But a portfolio with a beta of 1.4, which is 40% higher than 1.0, requires 40% more put options to acquire the appropriate amount of hedging. Each S&P 500 Index option contract with a 2000 strike price provides protection for $200,000 of portfolio value, which is 2000 times the multiplier of 100. A $1,000,000 portfolio would require 5 put options if the portfolio had a beta of 1.0. This portfolio requires 40% more options: 7 long puts.
Question 7 |
A wrap account is most appropriate:
for a client who actively trades. | |
for a client who is predominantly a buy and hold investor. | |
for a client wishing to follow a dollar cost averaging approach. | |
for a client nearing retirement who will primarily be withdrawing rather than making new investments. |
Question 7 Explanation:
Brokers offering wrap accounts are not charging commissions on each trade. They are charging a fee for managing the customer’s assets. This can be a very effective alternative to commission trading for a customer who buys and sells frequently which would ordinarily generate substantial commission charges. Firms are advised by FINRA to do the math to determine which clients would benefit from the fee-based wrap account approach. Firms are advised to not recommend it to clients who would be better off on a commission basis.
Question 8 |
All member broker-dealers are required to comply with the USA Patriot Act and related protective regulations. At the time of account opening, individuals filling out a new account form must supply certain information which will enable which of the following agencies to verify they are not on the list of known money launderers, terrorists or others deemed ineligible to open an account at a financial institution?
FINRA | |
SEC | |
OFAC | |
Justice Department |
Question 8 Explanation:
The Office of Financial Asset Control keeps the list referred to in this question.
Question 9 |
Your customer Mr. Furyk has expressed an interest in adding technology stocks to his portfolio. He informs you that he likes ABC Technology, Inc. and has instructed you to buy it when you think the time and price are right and to buy as much of it as you believe is reasonable when considering his portfolio mix and investment objectives.
because his instructions are giving you limited discretion as to price and time, you do not require written discretionary power | |
you would be required to obtain branch managerial approval before entering this order | |
you may place the order as you see fit, however Mr. Furyk retains the right to break the trade if he disagrees with the execution | |
you must have written discretionary power in order to do what this client wants |
Question 9 Explanation:
Your customer wants to BUY, and he told you the name of the STOCK, but he did not tell you the AMOUNT to buy. Therefore, discretionary authority in writing is required.
Question 10 |
Which of the below statements is/are not untrue regarding a Roth IRA?
I. The maximum contribution below age 50 is $6,000
II. Withdrawals must begin by April 1 of the year after attainment of age 70½
III. Anyone with earned income may open a Roth IRA
IV. Withdrawals after age 59½ are taxable as ordinary income only to the extent they exceed the original principal/cost basis
I only | |
I and III | |
III only | |
I, II, III and IV |
Question 10 Explanation:
Warning! Double negatives such as ‘not untrue’ must be dealt with carefully. Not untrue = not false = true. Which of these Roman numeral answers is true: I only. The max contribution in 2021 for those under 50 is $6,000. For those who are 50 or over it is $7,000.
As for why the other answer choices are false: age 70½ has no significance in the Roth IRA; persons who have earned income above a Congressionally-set threshold are ineligible for a Roth IRA; post-59½ withdrawals from the Roth IRA are normally tax-free.
As for why the other answer choices are false: age 70½ has no significance in the Roth IRA; persons who have earned income above a Congressionally-set threshold are ineligible for a Roth IRA; post-59½ withdrawals from the Roth IRA are normally tax-free.
Question 11 |
The Van Buren Growth Fund has its first breakpoint at $10,000, and its second breakpoint at $25,000. You have a customer for whom this fund is suitable and has told you he would like to invest $8,000 at this time. Without further discussion, you process the client’s purchase order.
When the client invests additional money into the fund, he will be granted the reduced sales charge on that portion of his investment which exceeds the breakpoint. | |
When the client invests additional money into the fund, he will be given a retroactive sales charge reduction once his total investment equals or exceeds the breakpoint. | |
You have engaged in a breakpoint sale. | |
None of the above. |
Question 11 Explanation:
FINRA defines a ‘breakpoint sale’ as the violation which occurs when a registered rep fails to inform, or remind a mutual fund investor of the availability of reduced sales charges at breakpoints, in particular when that investor is purchasing an amount not far from a breakpoint. In this example, a client prepared to write a check for $8,000 should have been told that for an additional $2,000, they would qualify for a reduced commission on the entire $10,000 investment. By failing to discuss this, the rep has engaged in an unfair and unethical practice known as a ‘breakpoint sale.’
Question 12 |
For the customer who is seeking to hedge a short stock position, which of these strategies can provide some degree of protection?
I. buy limit order
II. long call
III. short put
IV. buy stop order
I, II, III and IV | |
II, III and IV | |
II only | |
I and IV |
Question 12 Explanation:
When shorting stock, loss results from a rise in CMV. A long call locks in the price at which the borrowed stock may be repurchased. A short put provides premium income which provides a partial or limited amount of upside hedge. A buy stop order will close out the short position once the stop order has been triggered by a rise in market price. A buy limit order is placed below CMV and as such, would not be executed in a rising market, and therefore does not provide a hedge against loss in a short sale.
Question 13 |
Trades appear on Tape A as follows:
XYZ 49……..XYZ 48.95……..XYZ 48.90…….XYZ 49.05
Your customer’s 100 share order to sell XYZ at 49 stop, GTC placed prior to the above trade reports would be executed at:
49.05 | |
49.00 | |
48.95 | |
48.90 |
Question 13 Explanation:
Sell stop orders are placed below the market. Sell stop orders must first be triggered, also called activated or elected, by a trade at or below the stop price. Once triggered, they become market orders and will be executed at the next available price. The trade at 49 triggers this order. The execution takes place at 48.95.
Question 14 |
The State of New Mexico has outstanding $100,000,000 of 5.5% general obligation debt maturing 7/1/35, callable in 2 years at 100½. If the State issues new GOs with a 4.5% coupon in sufficient quantity to retired the 5.5% bonds in 2 years when callable, and escrows the money for that specific purpose, this is referred to as:
refinancing | |
refunding | |
advance refunding | |
restructuring |
Question 14 Explanation:
Refunding is the act of selling new bonds with a lower interest rate to retire bonds with a higher interest rate. But when the new bonds are sold in advance of the callable date, it is more specifically referred to as advance refunding.
Question 15 |
One of the best ways to hedge against loss when long a listed stock is to acquire a long put position. As such, your client who had purchased 100 shares of Alpha Beta common six months ago at 12.40 takes your advice and buys 1 Alpha Beta May 20 put at 3 with the stock trading at 22.40 to protect against erosion of the 10 point unrealized capital gain. Which of the below statements is correct?
your client will break-even with the stock at 25.40 | |
your client will break-even with the stock at 19.40 | |
your client’s holding period on the stock is erased | |
your client’s potential profit has been capped by purchasing the option |
Question 15 Explanation:
The Internal Revenue Code states that buying a put option to protect a long stock position showing an unrealized short term capital gain wipes out the holding period that has accumulated to that point in time. In this case, there is a $10 unrealized gain on a stock position held only six months (short term). Buying the put will erase the six month holding period. The holding period on the stock will begin again from scratch once the put has been disposed of or has expired.
Question 16 |
On December 30th, with no other gains or losses for the year, Mr. Mickelson liquidated 300 shares of Ford common at $10 in which he had a cost basis of $20. Because of his long-term bullish belief in Ford, he acquired 300 shares of Ford at $11 on January 10th. His year-end loss of $3,000 is:
partially tax deductible in the year of sale | |
fully tax deductible in the year of sale | |
not deductible in the year of sale | |
not enough information to determine |
Question 16 Explanation:
The 30-day wash sale rule states that a sale at a loss, though normally permitted to be included on a taxpayer’s year-end computation of net gains or losses for that year, will be disallowed from current deductibility if the investor buys that same security or one substantially identical to it within 30 days after, or 30 days before the date of the sale that generated the loss. Buying 300 shares of Ford on January 10th took place within 30 days after the December 30th sale at a loss. As a result of purchasing the Ford stock in early January, the December 30th loss cannot be deducted in the year of sale.
Question 17 |
Gamma Medical, a domestic NASDAQ listed company, has each of the below investments in its corporate investment portfolio. Identify the one with the best after-tax yield, assuming a 21% corporate tax bracket.
4% State of Ohio GO | |
5% US Treasury Bond | |
6% IBM debenture | |
5.4% Ford preferred stock |
Question 17 Explanation:
The 50% corporate dividend exclusion rule exempts 50% of the dividends received, by domestic (US) corporations on their investments in stocks of other domestic corporations, from tax — so 50% of the Ford dividend is tax-free. The remaining 50% of the dividend is taxed at 21%. This leaves us with an after-tax return on the 5.4% preferred of just over 4.8%... which is a higher after-tax return than the other three choices.
Question 18 |
With the Fed engaging in a policy of tightening the money supply, interest rates are on the rise. The market price of which of the following issues would likely decline the greatest dollar amount?
T-bill | |
T-note | |
T-bond | |
all of the above would tend to decline at about the same rate |
Question 18 Explanation:
The greatest decline in market price is found in the longer term debt instruments, in this case the T-bonds. Short term instruments will react the quickest, but by very small dollar amounts.
Question 19 |
During normal trading hours, trades in listed stocks must be reported to the appropriate ‘tape’
within 2 seconds | |
within 10 seconds | |
within 30 seconds | |
within 15 minutes |
Question 19 Explanation:
Transactions are reported within 10 seconds of execution to the appropriate reporting medium, a/k/a the ‘tape.’
Question 20 |
Prior to the execution of a short sale of stock, it is the responsibility of the member firm handling the order to obtain an appropriate level of certainty that the shares are available for borrowing and within a time frame which will allow regular way delivery. the regulation which requires this is:
Regulation T | |
Regulation U | |
Regulation X | |
Regulation SHO |
Question 20 Explanation:
Regulation SHO contains the ‘locate rule’ requiring the order dept. to know the shares being sold short can be borrowed, or at a minimum to have no reason to believe the shares are not readily available for borrowing.
Question 21 |
An option trader who simultaneously goes long an XYZ Oct 40 put and short an XYZ Nov 40 put will profit if:
both options expire unexercised | |
the difference in premiums widens | |
the market price of XYZ falls below 40 and remains there | |
none of these – this is an uneconomic trade |
Question 21 Explanation:
This strategy is a calendar spread, a/k/a a time or a horizontal spread. The months are different; the strike prices are the same. The option with the longer duration (more distant expiration month) will have a larger premium, due to its additional time value. This investor sold the November and bought the October. Because the November contract will have a larger premium, this spread is a Credit Spread. Credit spreads profit when both options expire (the investor keeps the credit).
Question 22 |
Mr. Poulter is a high risk tolerant high net worth client who enjoys trading options and shorting the market. As such, he places an order to short 1000 shares of Citigroup common at $2.25 per share. His deposit requirement with Reg. T at 50% would be:
$1,125 | |
$2,000 | |
$2,250 | |
$2,500 |
Question 22 Explanation:
The NYSE and FINRA require that short sales of ‘cheap’ stocks have substantially higher deposit and maintenance requirements than traditional margin transactions. In this case, the ‘cheap stock rule’ dictates that a minimum of $2.50 per share is required when shorting stock priced at $2.50 or below. For a 1000 share short sale, the deposit requirement is $2,500.
Question 23 |
The S&P 500 Index is currently at 1862.42. The S&P 500 Index March 1850 put just traded at 14.40. Pick from the below the answer which correctly states the intrinsic value and the time value of this option.
insufficient data to compute | |
0.00; 14.40 | |
14.40; 0.00 | |
12.42; 1.98 |
Question 23 Explanation:
Put options have intrinsic value when the market value of the underlying instrument is below the option’s strike price. In this case, the S&P 500 Index at 1862.42 is NOT below the strike price of the put, which is 1850. This put option has NO intrinsic value. Therefore, the option premium of 14.40 is entirely comprised of time value:
0.00 intrinsic value; 14.40 time value.
0.00 intrinsic value; 14.40 time value.
Question 24 |
Registered reps often recommend US T-bonds to their clients looking for stability of income and the safety of government paper. However, T-bonds are not immune from investment risk. To which of the following risks is a T-bond most exposed in the early years of ownership?
interest rate risk | |
liquidity risk | |
credit risk | |
inflation risk |
Question 24 Explanation:
If interest rates rise, long term debt will decline in market value, which is referred to as interest rate risk. Liquidity is normally not a concern, since there are always buyers for US T-bonds. Credit risk is essentially non-existent with United States bonds. Inflation risk can be a factor, but in the early years of owning the bond, inflation normally is a small factor.
Question 25 |
A publicly-traded NYSE issuer has made a decision to raise capital abroad. The offering will be $150,000,000 of 7% 10 year debentures with warrants attached and will be offered only to investors outside the United States.
This offering is required to registered with the SEC as the company is listed in the NYSE. | |
This offering would require shareholder approval by a majority of stockholders. | |
This offering is exempt from SEC registration under Regulation S of the ’33 Act. | |
An offering of this type is a violation of SEC regulations. |
Question 25 Explanation:
Regulation S is one of several registration exemptions found in the Act of 1933. So long as no initial sales of the bonds are directed into the US, registration with SEC is not required. Resale into the US is permitted, but restricted in accordance with specific requirements under SEC Rule 144.
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