STC Series 7 Final Exam 2

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

Approval by the state legislature

A registered representative is looking to sell a client Class B shares with a 7-year contingent deferred sales charge (CDSC). Which of the following representations is appropriate?

"All of your money goes to work since there is no up-front sales charge."

Real estate investment trusts (REITs) invest in all of the following, EXCEPT:

Undeveloped land

On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered:

Institutional communication

A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive:

$50,000 plus the last interest payment

At maturity, the holder of the bonds will receive the par value, which in this example is $50,000, plus the last interest payment.

A registered representative is taking over the business of another RR who is leaving the firm. Upon examining the accounts, the RR notices that the variable annuities owned by many of the clients have high expenses, mediocre performance, and few investment options. The RR decides that her first action will be to recommend that these customers redeem the old annuities and invest in the new Platinum One variable annuity that has substantially lower expenses, higher long-term performance, and many more subaccounts with varying investment strategies. This activity is:

Potentially acceptable if the benefits of the new annuity outweigh the possible taxes and additional sales charges the client might incur

A facility is created by the issuance of industrial development revenue bonds. The bonds are backed by:

The corporation that leases the facility

A bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield-to-maturity increases by 40 basis points, the yield would be:

7.6%

A client buys 100 shares of XYZ Corporation at $27 per share and writes an XYZ October 30 call at a $3 premium.The XYZ Corporation 30 call option will expire on:

The third Friday of October

An account has $140,000 in fully paid marginable securities, $50,000 in non-marginable securities, and $80,000 of cash. What's the total amount of stock that can be purchased on margin?

$300,000

Customers can buy two times the amount of cash they have in their account (e.g., Buy $160,000 stock, pay cash for $80,000 and create a debit of $80,000 in margin account). Marginable securities have a loan value of 50%, which means the customer can use 50% of the marginable securities' market value instead of a cash deposit. This means a customer could use 100% of the marginable securities' value to buy another stock on margin. For example, a customer could buy $140,000 of XYZ stock on margin; using $140,000 of marginable ABC stock. The customer would get credit for 50% of ABC's market value for $70,000 (i.e., $140,000 ABC x 50% loan value). The customer could then borrow the remaining $70,000 and increase their debit balance to acquire the $140,000 of XYZ stock. In this question the customer could buy a total of $300,000 on margin ($160,000 using cash + $140,000 loan value from marginable securities). Non-marginable securities don't provide customers with any loan value.

An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:

3

If a company pays a cash dividend, which of the following is TRUE?

Current assets decrease

The Board of Directors of a corporation is responsible for establishing all of the following dates, EXCEPT the:

Ex-date

Regulation SHO requires which of the following actions?

A broker-dealer must satisfy the locate requirement before allowing a customer to execute a short sale.

A municipality borrowing for a short-term period to finance a capital project would issue:

Bond anticipation notes

Which of the following statements is NOT TRUE regarding the purchaser of a put option?

The only way to realize a profit is to exercise the option

A brokerage firm erroneously confirms to a customer a purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually made at 28.75. The customer:

Must pay 28.75

Which of the following choices represent a profitable strategy for a technical analyst?

Buying calls when a stock breaks through a resistance level and buying puts when a stock breaks through a support level

LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio?

10.9

The price/earnings ratio is found by dividing the market price of $48 by the annual earnings per share. The annual EPS is $1.10 x 4 = $4.40., The price/earnings ratio is 10.9 ($48 / $4.40 = 10.9). The amount of the dividend is not relevant in calculating the price/earnings ratio.

A client wants to invest $250 per month and have broad exposure to the U.S. equity market. Which of the following recommendations is the MOST suitable for this client?

An S&P 500 Index mutual fund

In a Delivery Versus Payment (DVP) and Receive Versus Payment (RVP) account, which of the following is required?

A form which identifies the third-party agent for the client

Which of the following statements is TRUE about real estate investment trusts (REITs)?

They must distribute 90% of their earnings to shareholders.

A website is being designed for a registered representative of a member firm. Which of the following statements is TRUE regarding the design of this website?

The registered representative may reference his FINRA membership.

ABC Corporation has issued a call notice on its 5% convertible preferred stock. The preferred stock, which is convertible at $20, is being called at $110 and is currently trading at $111. If ABC's common stock is currently trading at $23, what should an RR recommend to an investor who holds the preferred stock?

Convert the preferred stock into common stock and sell the common stock

By converting and selling the common stock, the investor will be provided with the greatest amount of proceeds.

A broker-dealer has established a page on a social media site which allows customers to post comments. The firm’s responses to these comments are considered:

Retail communications

An issuer currently has an S&P A- rating. If the ratings service notifies the firm that it has been upgraded by two notches, its new rating would be:

A+

If a bond is currently selling for less than par value, then:

The current yield is higher than the nominal yield

On December 16, a Mr. Smith purchased 2 listed XYZ May 70 calls and paid a $4 premium for each call when the current market price of XYZ Corporation was $69 per share. If, in May, the market price of XYZ Corporation is $67 and the calls expire, Mr. Smith loses:

$800

A broker-dealer is NOT acting as a principal in which of the following scenarios?

Buying 500 bonds to fill an insurance company's order for 500 bonds

An investor purchases an ABC Corporation October 50 put and pays a premium of $7. The underlying security declines to $40 per share and the investor exercises the option. For tax purposes, the proceeds of the sale are:

$4,300

For tax purposes, the proceeds of the sale are $4,300 ($5,000 strike price minus the $700 premium paid for the option). Since the customer purchased the stock at $40, her cost basis is $4,000. Although it's not being asked in this question, the customer's ultimate profit is $300.

A municipal bond with 10 years to maturity was purchased at 105. If an investor sold the bond six years later at 103, which of the following is TRUE regarding the tax result?

The investor has a $10 long-term capital gain.

For municipal bonds that are purchased at a premium, their cost basis must be amortized (reduced) to par value over their maturity. In this example, the bond is purchased at a $50 premium and it has 10 years to maturity. This means that the bond's basis will be amortized by $5 per year ($50 ÷ 10 years). After six years, the bond's basis will have been reduced by $30 ($5 x 6 years), which would bring the adjusted cost basis to $1,020 ($1,050 - $30). When the bond is sold for $1,030, the customer realized a $10 long-term capital gain ($1,030 - $1,020).

Under Regulation T, which of the following securities is NOT marginable?

Securities quoted on the OTCBB

A U.S. importer needs to purchase British pounds to pay for a shipment of goods. The exchange of U.S. dollars for British pounds would occur:

In the Interbank market

A customer wants to purchase an investment that will allow him to profit from his belief that interest rates will decline over the next 15 years. The recommendation of which of the following securities is NOT consistent with the customer's belief?

A floating rate note

Which of the following choices is another way of expressing the earnings multiple?

Price-earnings ratio

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

The Treasury Department

A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of:

$5,300

The customer paid $300 for the call option plus $5,000 when he exercised the option at the $50 strike price. The customer's cost basis is, therefore, $5,300. The strike price plus the premium equals the cost basis for a buyer of a call who is exercising the option.

A closed-end fund's shares are listed in The Wall Street Journal with a Net Asset Value of 21.85 and a Market Price of 21.50. If a customer purchases the shares at the current market price, he will pay:

$21.50 plus a commission

An investor purchased a fixed annuity twenty years ago from a top-rated insurance company. The investor is now considering whether to annuitize on a straight life basis, or to take a lump-sum settlement and invest it elsewhere. If economists are now forecasting an extended period of significant inflation, which of the following is the greatest risk facing the investor if she chooses to annuitize?

Purchasing-power risk

For the following size transactions, ABC mutual fund has a bid price of $8.50 and an asked price of $9.26. Which of the following sales is allowed under the Conduct Rules?

A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients

Which of the following formulas is used to calculate the current yield on a bond?

Annual interest ÷ Current market value

Which of the following statements is NOT TRUE concerning a structured product offered by an RR?

Since this product is usually sold by a bank, the principal will be protected by the FDIC

A municipal bond trader does NOT:

commit to underwritings

An investor purchases the following bonds: State of Florida 8% bond due 2028, State of California 8 1/2% bond due 2028, State of New York Housing Finance Agency 9% Revenue bond due 2035, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2035. This portfolio offers:

Geographical diversification

Which of the following choices BEST describes Eurodollars?

U.S. dollars on deposit in foreign banks

A state agency revenue bond does not have sufficient revenue to meet debt service. A provision of the indenture allows the agency to request funds from the state legislature. The legislature has the option of providing or not providing the additional funds. This is a:

Moral obligation bond

Which of the following securities will provide an investor with protection against purchasing-power risk?

TIPS

How can an individual move the securities from a retirement account to a regular brokerage account at the same broker-dealer?

Rollover

Which of the following issues will most likely have a mandatory sinking fund?

Term issues

The spouse of a brokerage firm employee wants to open a brokerage account in order to invest in bonds. If this account is opened at a firm that does not employ her spouse, the employee of the firm is required to:

Obtain the prior written consent of the employing firm in order to open the account

Your client owns a convertible bond that has been called at 104. The bond is convertible at 40 and is selling in the market at 107. The common stock is selling in the market at 41. Which of the following choices is the LEAST attractive alternative to the client?

Convert the bond to common stock and sell the common stock

You are the portfolio manager for Home Fund, Inc., a mortgage-backed securities mutual fund. Which type of risk concerns you in a falling interest rate environment?

Prepayment risk

How would preferred stock most likely be affected by an increase in interest rates?

Its market value would decrease

What is the basic balance sheet equation?

Total Assets = Total Liabilities + Stockholders' Equity

A municipal securities broker-dealer has a control relationship with an issuer. When selling the bonds that are subject to the control relationship, the broker-dealer must disclose this relationship:

For all accounts and for all types of transactions

Which of the following is an expense or charge NOT normally associated with a variable annuity?

Redemption fees

A breakpoint sale is best defined as:

The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions

Which of the following annuity settlement options will provide the longest stream of income over the lives of two individuals?

Joint and last survivor annuity

A customer owns a JRF October 50 listed call option. JRF has declared a $1.00 cash dividend. When JRF sells ex-dividend, which of the following choices will reflect the price and the number of shares of the JRF October 50 option?

$50 strike price, 100 shares

Listed call options are not reduced for cash dividends. The strike price and the number of shares of the JRF October 50 option will remain the same after it sells ex-dividend.

A corporation is NOT considered to be in default if it fails to pay interest on which of the following bonds?

Income bond

Which of the following positions/strategies is NOT bullish?

Writing a straddle

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

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).

A customer would like to open an individual account and would like his confirmations sent to a P.O. Box. What other information is needed to comply with the client's request?

The client's primary residential address

A registered person is concerned that his boss is making inappropriate advances. This allegation must be settled by:

Any method of the registered person's choosing, including remediation through the court system

Which of the following statements is TRUE regarding spreads?

A put spread created for a net debit is bearish

Mike is long a yield-based put option in his account. Mike would like to see interest rates:

Fall

Which of the following Moody's ratings is the most speculative?

Ba

A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy?

The LP is considered a limited partner for the capital contribution and a creditor for the loan

A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations?

The reallocation of assets among subaccounts after the initial purchase

If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact?

There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates

An investor owns a $100 convertible preferred stock that is convertible into 2 shares of common stock. The common is selling at $52 and the preferred is selling at $104. The preferred stock is called at 105. What should the investor do?

Allow the preferred to be called

The PSA Model is used when pricing:

Collateralized Mortgage Obligations

On June 5, 2021, an investor purchased 100 shares of ABC at $20. On November 10, 2021, he purchased an additional 100 shares of ABC at $12. On January 20, 2022, he sold 100 shares of ABC at $15. For tax purposes, he will report a:

$500 capital loss in 2022

Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may be described as:

Equal and undivided

Which of the following will not offer protection in the event of a municipal bond declining in value due to rising interest rates or financial difficulties of the issuer?

Call provisions

When the market price of ABC stock is $49 per share, a customer buys 10 ABC January 50 calls paying a premium of $3 and 10 ABC January 50 puts also paying a premium of $3. The buyer's TWO breakeven points are:

$44 and $56

The customer paid a combined premium of $600 ($3 per call + $3 per put) for each straddle position. The breakeven point on the call is determined by adding the combined premium of $6 to the $50 strike price, which equals $56. The breakeven point on the put is determined by subtracting the combined premium of $6 from the $50 strike price, which equals $44. Therefore, the buyer's breakeven points are $44 and $56. The buyer of a straddle anticipates that the underlying stock's price will be volatile (i.e., it will go way up or way down). (25011)

Which of the following customers is the MOST suitable for a municipal zero-coupon bond?

An investor who is not seeking immediate additional cash flow.

Which of the following choices makes a financial commitment in the distribution of a new issue of securities?

The underwriting syndicate

Which of the following statements is TRUE concerning reverse convertible securities?

The investor is anticipating that the price of the underlying asset would be above the knock-in value.

As a customer's tax bracket increases, an RR is likely to allocate more of a customer's portfolio to:

Tax-exempt funds

Under Regulation BI, which of the following forms is required for a broker-dealer to disclose the relationship it maintains with its clients?

Form CRS

In a direct participation program, which party is the last to be paid in a liquidation?

General partner

Which of the following is a requirement for a company's securities to be listed and trade on the OTCQX?

The issuer must have audited financial statements.

A REIT is NOT used for a tax shelter because it does NOT:

Allow flow-through of losses

Which of the following choices is a feature of the Nasdaq Level II System?

Firm quotes of all the market makers in a stock

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

The client can have either a taxpayer identification number or a passport number and country of origin.

A level debt service bond issue is one in which:

Combined annual interest and principal payments are equal

All of the following are advantages of CMOs, EXCEPT:

They produce tax-free interest

Rule 145 applies to a(n):

Merger or acquisition

In a large private placement, an investment banking firm has purchased securities directly from an oil and gas company based in Houston, Texas. These securities may be resold immediately to:

Only qualified institutional buyers (QIBs)

Municipal notes are used for:

interim financing

All of the following information must be disclosed to a customer on a confirmation, EXCEPT:

Whether the order was solicited or unsolicited

Ms. Green buys 300 shares of RSW at $15 per share. She then writes 3 RSW July 20 calls at 1 and writes 3 RSW July 10 puts at 50 cents. Ms. Green's maximum potential loss on the entire position is:

$7,050

How is an individual's net worth calculated?

The individual's total assets minus the individual's total liabilities

A registered representative enters an order for a client. In error, the registered representative (RR) purchases shares of the wrong security. Which of the following statements is TRUE?

The shares must be placed in the broker-dealer's error account.

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

Efficient frontier

On Thursday, October 1, a customer purchases 1,000 shares of a stock that's listed on the NYSE. The trade will settle on:

October 5

An elderly woman never chose to participate in her work-sponsored, tax-advantaged retirement plan. She's now interested in investing for her retirement, but doesn't want to be obligated to take a required minimum distribution (RMD). She also needs a plan into which she's able to continue contributing even after she turns age 73. Which of the following is the MOST suitable?

Fixed Annuity

A customer is moderately aggressive and has a long-term investment horizon. If the customer is also looking for tax-advantaged savings, in what should she invest?

Variable annuity

If interest rates increase, which of the following securities has the LARGEST price change?

A Treasury bond trading at a discount

A bond with a high coupon will tend to trade at a premium, while a bond with a low coupon will tend to trade at a discount. The bond with the high coupon will repay an investor sooner than a bond with a low coupon since the investor will be earning more money from the higher coupon. Therefore, bonds that have longer maturities and/or lower coupon rates will have a higher degree of interest rate risk. Ultimately, if interest rates increase, a long-term bond that's selling at a discount will decrease (in percentage terms) more than a long-term bond that's selling at a premium.