Series 7 Practice Exam 2

This is our second free practice test with Series 7 exam questions. As part of your exam prep you should work through as many practice questions as possible. Our questions are designed to be challenging, and they include detailed explanations to help you learn as you go. Continue your exam prep now with our Series 7 sample questions.

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Question 1
When discussing a corporation’s capitalization, each of the below would be included except:

A
non-voting class B preferred stock
B
subordinated debentures rated BB+ by Standard & Poor’s
C
earned surplus
D
plant & equipment
Question 1 Explanation: 
Capitalization includes Stockholders’ Equity and Long-term Debt. Plant & Equipment are Fixed Assets, which are assets purchased with the Capital raised by the business but are not themselves considered Capital.
Question 2
Miami-Dade County currently has the following four GOs outstanding. All issues possess a call feature and have coupons and maturities as shown below. Assume all issues have similar principal amounts outstanding. In the event interest rates decline, and the County plans to do a refunding of only one of the four outstanding GOs, which issue would most likely be called?

A
6.25s31 callable at 100
B
5.50s33 callable at 100½
C
4.65s34 callable at 101
D
Zr29 callable at 100
Question 2 Explanation: 
If you were in charge of finances for the county and you were considering paying off only one of your debts, wouldn’t it be the debt that’s costing the county the most (the highest interest rate)? In this scenario, the county will retire/call the 6.25% callable bonds because those are costing the county the most every year. Also notice that those bonds have an added advantage – they are callable at 100, which means at Par, meaning there is no call ‘premium’ required to retire them.
Question 3
When viewing the latest quotes on T-bills, you note that the current quote on the new 3 month Bills, 0.50 − 0.55, is somewhat higher than the quote on new 3 month Bills at the previous auction.

A
T-bill prices have risen
B
The yield curve is inverting
C
The Fed is easing money supply
D
T-bill discounts have increased
Question 3 Explanation: 
T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes represent the percentage of Discount from Par Value at which banks and dealers purchase T-bills at the Fed Auction. If you’re told that this week’s quotes, which are discounts from par, are HIGHER than the discounts from last week, that means T-Bill purchase prices have gotten LOWER -----we all know that when department stores increase the DISCOUNT, the price in dollars gets cheaper. It’s the same with T-bills. For any of you who put answer A, it is wrong because it says prices have gone up. When a discount gets higher/bigger, the sale price goes down.
Question 4
CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures outstanding with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are above parity, CPU common must be trading:

A
at 27.50
B
at 27.49 or below
C
at 27.51 or above
D
at 44.00
Question 4 Explanation: 
Solving this problem involves a number of steps. Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is $1,100. The bond is convertible into 40 shares: that’s the 40 to 1 conversion ratio given in the question. By dividing $1,100 by 40 shares, one gets $27.50. That is the price the stock should be trading at, in order to be exactly equal to the current market value of the bond: therefore, $27.50 is the parity price of the stock. However, you are specifically being told that the bond is ‘trading above parity.’ In plain English, this means that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the stock can’t be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49 (or below) is less than $1,100.
Question 5
All of the below represent bond sweeteners with the exception of:

A
a put option
B
cum-warrants
C
a call feature
D
convertibility
Question 5 Explanation: 
A sweetener is a feature that is good for investors. Owning a callable bond exposes one to call risk, which is not considered desirable by bond investors. Call risk is the risk of having one’s portfolio altered when the issuer chooses to call the bonds. Having a put feature, a conversion feature, or warrants attached to a bond can be desirable and even highly profitable.
Question 6
Stabilizing a new stock issue

I.      may occur once the S-1 has been filed with the SEC

II.     may only occur if disclosed in the final prospectus

IIII.   may not occur at or above the POP

IV.    if necessary, is normally a function performed by a syndicate manager

A
I and III
B
II and IV
C
III and IV
D
I, II, III and IV
Question 6 Explanation: 
Stabilizing a new issue can only be done once the effective date of the new issue has arrived. It isn’t done during the cooling off period, which is prior to the effective date. Stabilizing is normally done by the managing underwriting either at, or just below, the POP (public offering price). It cannot be done above the POP.
Question 7
Lyon Technology is being quoted by 3 market makers as follows:

Market Maker A           42.22 – 42.72      10 by 15

Market Maker B           42.28 – 42.75      15 by 10

Market Maker C           42.20 – 42.68       5 by 5

If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech common, the mark-up or mark-down would be based upon:

A
42.68
B
42.75
C
42.20
D
42.28
Question 7 Explanation: 
The key words in this question are ‘customer sell order.’ Your client is selling TO your firm. Your firm will give the client the BEST BID price available at this time, then charge a fair reasonable mark-down in accordance with the FINRA 5% policy. The best bid is the HIGHEST of all the bids on the NASDAQ screen, which in this case is $42.28, the bid of Market Maker B.
Question 8
Your firm is the lead underwriter of a $100,000,000 municipal general obligation offering of New York City. One of the key elements in the list of disclosures to prospective investors is the legal opinion. Pick from the below who prepares and issues the legal opinion for this bond issue?

A
the City Attorney for NYC
B
the Attorney General for NY State
C
the lead underwriter’s chief counsel
D
independent bond counsel
Question 8 Explanation: 
No lawyer connected in any way to the issuer or the underwriter can issue the legal opinion on a municipal bond. The law firm rendering the opinion must be ‘independent.’
Question 9
As an RR, you’ve determined that investment companies would be a suitable product for several of your customers. In your research, you’ve located two companies and their NAV and Offer Prices respectively are shown below:

Company A:  18.45  −  20.25

Company B:  8.79  −  8.15

Which of these companies could be an open-end management investment company?

A
Company A only
B
Company B only
C
Both A & B
D
Neither A nor B
Question 9 Explanation: 
The rules regarding mutual funds (open-end investment companies) require that the purchase price be no less than the Net Asset Value. That eliminates Company B whose purchase price/offer price is LESS than the NAV. What is wrong with Company A? The spread between the NAV and the Offer price is so large it violates the maximum sales charge permitted by the regulators, which is set at 8.5% of POP. Company A has a spread of $1.80. Dividing $1.80 by the POP of $20.25 gives us 8.89%. Therefore, Company A cannot be a mutual fund. Neither of these 2 investment companies could be open-end mutual funds. They are most likely closed-end investment companies, listed for trading on a stock exchange, and trading every day at prices based upon supply & demand, not NAV.
Question 10
Among the most popular features of mutual funds is the availability of reinvestment of dividend and capital gains distributions into full and fractional shares of the fund. None of the following statements about this reinvestment privilege is untrue except:

A
reinvestment will enable the shareholder to defer taxes on the distributions until such time as the newly acquired shares are liquidated
B
reinvestment can be done at NAV
C
reinvested dollars can count towards a breakpoint under the right of accumulation
D
none of these is untrue
Question 10 Explanation: 
Reinvesting dividend and capital gains distributions is a wonderful investment practice, but it does not defer taxation.
Question 11
Mr. and Mrs. Smith, a couple roughly 15 years from retirement, have inquired about the availability of a product you might recommend to them which accommodates their investment objective, which is a hedge against both inflation and deflation. Which of the below would be most suitable?

A
a Roth IRA
B
a combination annuity
C
a variable annuity
D
an S&P Index Fund
Question 11 Explanation: 
A combination annuity involves placing some of one’s money into a fixed annuity (hedge against Deflation) while also investing money in a variable annuity (hedge against Inflation).
Question 12
Each member firm must provide firm element continuing education training which is appropriate to the type and size of the member. However, FINRA rules mandate Regulatory Element CE testing on a specific periodic schedule. For an associated person who has just reached his or her 6th anniversary as a registered rep, in how many years will they be required to perform the regulatory element CE testing?

A
this year
B
next year
C
two years from now
D
three years from now
Question 12 Explanation: 
The day you pass your registered reps test is your anniversary date for the rest of your career. Two years later, you have your first Regulatory Element CE test. Every 3 years thereafter you are required to undergo the Regulatory CE testing. Therefore, your test dates will be your 2nd anniversary, your 5th, your 8th, your 11th, your 14th, etc., until your retire. If you’ve just celebrated your 6th year in the business, you have 2 more years before your next Regulatory CE test, which is required at your 8th anniversary.
Question 13
In the course of opening a new margin account, an individual customer is required to sign a number of documents provided by the member firm. Choose from the below which documents, if any, require the customer’s signature.

I.     loan consent agreement

II.    hypothecation agreement

III.   credit agreement

A
none of these are required
B
II and III only
C
I and II only
D
I, II and III
Question 13 Explanation: 
The hypothecation and credit agreements, as well as a margin agreement, all require the customer’s signature to open a margin account. The loan consent agreement is not a requirement, though the client does have the option of signing it. Should the client choose to allow the firm to lend out the client’s excess margin securities to others who, for example, wish to borrow the shares to engage in short sales, the client would sign the loan consent agreement. The firm cannot force the client to sign the Loan Consent agreement.
Question 14
Mr. Woods, an existing cash account customer of yours, has spoken with you regarding his travel plans for the upcoming 3 months. He’s indicated he does not want to receive the regular monthly customer statements and confirmations of transactions while he’s out of town for this extended period of time. As his registered rep, you inform Mr. Woods:

A
that your firm is required to send the confirmations, but can hold the monthly statements for up to 3 months if he’s traveling abroad.
B
that your firm can hold mail for up to 3 months if he’s traveling abroad.
C
that your firm is required to send both the confirmations and the monthly statements and cannot hold the mail under these circumstances.
D
that you will inform your firm’s operations department to send the confirms and statements to your home address until Mr. Woods completes his travel.
Question 14 Explanation: 
The firm may hold mail for 90 days for customers traveling abroad, 60 days if traveling domestically.
Question 15
Each of the below will have no impact upon the NAV per share of an open-end management investment company with the exception of:

A
shareholder redemptions
B
investors purchasing fund shares at the POP
C
investors reinvesting distributions at the NAV
D
none of the above
Question 15 Explanation: 
Since all purchases and redemptions of mutual fund shares take place based upon the Net Asset Value, purchases and redemptions don’t change the NAV per share of the fund. One example of an event that does change NAV per share would be day to day changes in the market prices of the investment securities inside the fund’s portfolio.
Question 16
As a financial advisor, your client has asked which form of business enterprise would provide limited liability and not be subject to internal revenue code taxation. Though you point out to the client that you are neither an attorney nor an accountant, you could inform the client that each of the below generally satisfy those conditions except:

A
an LLC
B
a C Corp.
C
an S Corp.
D
a DPP
Question 16 Explanation: 
The regular corporation, called a ‘C’ Corp., does offer limited liability for its shareholders, however it is considered a taxable entity. The other 3 choices are not taxable entities, and the owners have limited liability.
Question 17
A United States Treasury Note with a $5,000 par value is quoted 106.10 – 106.15. A customer sell order would be executed, disregarding commissions, at which of the following prices assuming no change in the quote?

A
$ 1,061.00
B
$ 1,061.50
C
$ 5,315.63
D
$ 5,307.50
Question 17 Explanation: 
Government bonds are quoted in 32nds. Since the client has placed a sell order, the client is selling TO the firm. The firm buys FROM its clients at the bid price, which is 106.10, which is 106 and 10/32nds percent of par which in decimal format is 106.3125% times $5,000 par. This gives us answer C.
Question 18
In accordance with the latest FINRA rules, under what circumstances may associated persons buy common shares of an IPO on the offering in their own account?

A
under no circumstances
B
when the purchase is consistent with their normal investment practice and is not disproportionate in size to the overall offering.
C
when the purchase is being made in an account held at a brokerage firm other than their own.
D
both b. and c.
Question 18 Explanation: 
FINRA rules prohibit personnel working in the brokerage industry from purchasing equity IPOs on the offering. There are some extremely narrowly-defined exceptions, however it is unlikely you would find those showing up on a registered rep examination.
Question 19
SEC Rule 15c2-1 mandates that the maximum rehypothecation permissible by a member firm is:

A
50% of the purchase price in a margin account
B
100% of the customer debit balance
C
140% of the customer debit balance
D
25% of the current market value in a long margin account
Question 19 Explanation: 
The member firm may use margin securities worth up to 140% of the customer’s debit balance in order to secure the margin loan to the customer.
Question 20
Which of the below investments trades on an exchange at a price which is unrelated to its underlying value?

A
private hedge fund
B
closed-end investment company shares
C
open-end investment company shares
D
forward contracts
Question 20 Explanation: 
Closed end investment companies have a market price which is determined by supply & demand, in the same way that listed and NASDAQ stock prices are determined by investor supply & demand. Therefore, the price of a closed-end share is not based upon, nor is it related to, the net asset value of the closed end fund. Private hedge funds don’t trade on an exchange: open end funds are priced each day AT the 4 pm NAV and don’t trade on an exchange: forward contracts are private commodities contracts, and don’t trade on an exchange.
Question 21
Research indicates that the stock of BNM Corp. is in an inverted head and shoulders formation. This most likely signals:

A
a reversal of a downward trend
B
continued bearishness ahead
C
the stock is approaching the resistance level
D
the company’s latest earnings report missed Wall St. expectations
Question 21 Explanation: 
Inverted head and shoulders formation is a diagram which looks like a headstand. It indicates the stock is approaching or is at a bottom and suggests that the stock’s downward move is ending, referred to as the reversal of the downward trend. This also suggests it may be time to engage in bullish strategies in the stock.
Question 22
According to FINRA rules, the best approach when investigating allegations of churning a customer’s account is to focus on:

A
the frequency of trades
B
the size of the trades
C
the investment objectives of the customer
D
the amount of time that the customer allowed to elapse between the questionable trades and the filing of the complaint
Question 22 Explanation: 
Though one could argue that any of these answers could provide evidence that a churning violation has occurred, FINRA’s interpretation states that #1 on the list of considerations is the investment objective of the customer. Case in point: a day trader would have a very difficult time claiming churning for excessive frequency of trades – constant in and out trading is, by definition, the day trader’s investment objective!
Question 23
Which of the portfolio positions described below has the greatest risk exposure?

A
long stock
B
short put
C
short stock/short put
D
short stock/long call
Question 23 Explanation: 
In this type of question, you have to evaluate all four answers to determine the maximum potential loss of each one in order to know the one with the greatest risk of loss. Shorting stock has unlimited risk of loss. Even when selling a put option to go with the short sale of stock, the risk of unlimited loss remains in place. Why answer D is not correct is that when one shorts stock, one can buy a call option to provide a hedge which serves to eliminate the risk of unlimited loss.
Question 24
In the opening of a new options account, certain procedures must be followed in accordance with CBOE and/or other SRO requirements. Which of the following represents the final step in the options account procedures?

A
furnish a copy of the options disclosure document (ODD)
B
branch manager approval of account opening
C
the client’s first options trade
D
the special options agreement is signed and in the firm’s files
Question 24 Explanation: 
The special option agreement form is required to be reviewed and signed by the new options account customer and returned to the firm within 15 days of account opening. One can actually engage in trading in the account during those 15 days, but if this agreement is not returned to the firm in time, no further opening transactions are permitted until this agreement has been returned to the firm.
Question 25
Mrs. Couples has been referred to you by one of your long-time clients. It seems Mrs. C has an account at another B/D and would like to make a change. After speaking with you, she has decided to do an account transfer. Which of the following most accurately describes the time requirements upon her soon-to-be former firm to complete the transfer process?

A
1 business day in which to validate the transfer request/instructions; 3 business days in which to effect the transfer of the account assets
B
1 business day in which to validate the transfer request/instructions; 5 business days in which to effect the transfer of the account assets
C
3 business days in which to validate the transfer request/instructions; 4 business days in which to effect the transfer of the account assets
D
No transfer can be effected until a Clearance Letter has been received from Homeland Security that there is no evidence of money laundering and no Suspicious Activity Report has been filed by her current firm
Question 25 Explanation: 
This is the account transfer rule: 1 day to validate; 3 days to transfer.
Question 26
The phase of the business cycle preceding the trough is best described as:

A
peak
B
contraction
C
recovery
D
expansion
Question 26 Explanation: 
The key word in this question is ‘preceding.’ The phase of the cycle which comes immediately before hitting the trough is contraction.
Question 27
You take note of the dividend payout ratios and earnings growth of a number of listed companies whose stock may be suitable for several of your customers. The data you’ve gleaned from the Continental Consolidated Corporation (CCC) shows latest reported EPS of $5.00/share with a dividend distribution of $2.50, while the data from the Bergen Fairfield Company (BFC) has EPS of $1.15 and no dividend distribution. Which of the following conclusions might be drawn from these data, in the absence of any other information?

A
CCC is defensive; BFC is cyclical
B
CCC is cyclical; BFC is defensive
C
CCC and BFC are growth
D
CCC is defensive; BFC is growth
Question 27 Explanation: 
Analysts may debate this issue, but as a general rule, defensive industries tend to pay large dividends as a percentage of their earnings. CCC is paying out 50% of earnings in the form of dividends. That’s a large dividend payout ratio. CCC would appear to be defensive. On the other hand, in the growth-oriented industries, paying dividends is often deferred for years, even decades, until some level of stability is reached. They tend to plow back whatever earnings they have into research and development, and expansion/growth. BFC pays no dividends, and is most likely a growth company.
Question 28
The Green Shoe option found in many stock prospectuses:

A
enables the company to engage in a shelf offering
B
enables the company to sell a limited number of additional shares beyond the amount initially registered with SEC, without filing a new registration statement
C
may only be activated when the managing underwriter is engaged in stabilizing the new issue
D
is also referred to as the underallotment provision
Question 28 Explanation: 
A company is permitted to sell up to 15% more shares than initially registered without having to file a whole new registration statement. This is the ‘overallotment’ provision of SEC rules, also called the ‘Green Shoe’ option.
Question 29
Non-recourse loans used to finance direct participation programs:

A
do not increase investor basis under any circumstances
B
increase investor basis only if the Subscription Agreement calls for non-recourse loans to be utilized
C
increase investor basis in real estate DPPs only
D
increase investor basis in all DPPs
Question 29 Explanation: 
In DPP/limited partnership securities offerings, reference is made to the types of borrowing in which the General Partner may engage on behalf of the partnership. Non-recourse debt does not put the limited partners at risk, as the lender has no recourse to the limited liability investors (your client) in the event the partnership defaults on the loan. Since the investor is not at risk, this type of lending does not increase your client’s tax basis in the program. However, for real estate programs, IRS rules provide a special exception to the ‘at risk’ rules, resulting in a situation in which investor basis may be increased by the use of non-recourse financing in the program. Non-recourse loans do not increase investor basis in DPPs, except real estate DPPs.
Question 30
Mr. Palmer, a high risk tolerant high net worth client of yours, has the following position in his margin account:

Short 1000 shares XYZ at $50/sh.

Cr. Bal.   $ 75,000

Two weeks later, XYZ is trading at $40/sh. Assuming Palmer has not yet closed out his short position, his Cr. Bal. will now be:

A
$ 75,000
B
$ 40,000
C
$ 35,000
D
$ 85,000
Question 30 Explanation: 
When CMV changes, either up or down, equity changes, but Credit Balance does not change – it remains constant.
Question 31
In presenting an array of debt investments for your customer’s consideration, various investment risks are a major part of your presentation. When reinvestment risk is being discussed, which of the below instruments is least exposed to it?

A
15 year zero coupon bond
B
5 year T-note
C
20 year T-bond
D
25 year municipal GO callable in 5 years
Question 31 Explanation: 
Bonds that have no coupon, no interest payments each year, by definition have no reinvestment risk. Reinvestment risk exists in those debt instruments that have coupon payments. With zeroes, there is nothing to reinvest each year.
Question 32
At option expiration with CMV at the strike price, which account with no other positions beyond the following option positions will always experience profit?

A
long straddle
B
vertical spread
C
horizontal spread
D
short put
Question 32 Explanation: 
Option writers receive premium income. If the option expires, their profit is the premium. The option will expire if the CMV is equal to the Strike Price at expiration. The problem with the other choices is that with a long straddle, both options will expire and there will be total loss of straddle premium; and in the horizontal spread, there is no way to know if CMV at the Strike price will result in a profit or a loss – it could be either. In the case of the vertical spread, which strike price is the CMV equal to – the lower one or the higher one? The question doesn’t say, so you can’t know if it’s profitable. Short put will always be profitable when the option expires.
Question 33
In financial planning discussions with Mr. Nicklaus, a customer of yours who has experience in real estate investing, he inquires about finding a securities investment through your firm which will provide upside potential from improvement in the real estate market while also providing liquidity in the event a quick exit is necessary. The most suitable investment meeting his criteria is:

A
real estate limited partnerships investing in fully-leased office buildings
B
real estate investment trusts
C
non-traded REITs
D
a raw land deal
Question 33 Explanation: 
REITs are traded at bid and ask prices every day on exchanges, providing liquidity to the investor who may wish to purchase more or to sell out at any point in time. Non-traded REITs don’t have that sort of liquidity, and the other investments likewise lack liquidity. Raw land of course provides no cash flow/income and is unsuitable on its face. DPPs provide tax advantages but this client hasn’t requested tax sheltered investing.
Question 34
Select from the below metrics the best test of corporate liquidity.

A
working capital
B
current ratio
C
acid test
D
book value
Question 34 Explanation: 
Answers A, B and C are all very similar, but the quick test, also called the acid test, is the toughest test of liquidity from among these three choices. Book value says nothing about liquidity.
Question 35
Variable annuities are subject to which of the following?

I.    State blue sky regulations

II.   SEC regulations

III.  FINRA rules

IV.  State insurance regulations

A
II and III
B
II, III and IV
C
I and IV
D
I, II, III and IV
Question 35 Explanation: 
Variable annuities are an insurance product, and are subject to insurance regulations. Variable annuities are also a securities product, regulated by the SEC, the state securities regulators (blue sky rules) and FINRA.
Question 36
The FINRA 5% policy applies to which of the following?

A
registered secondary distribution
B
IPO
C
3rd market transaction
D
municipal bond trades
Question 36 Explanation: 
The 5% policy applies to retail trades in the secondary market where there is no prospectus in use (new issues). Since the MSRB has its own policy, FINRA’s 5% policy does not apply to municipal securities. That leaves 3rd market transaction as the only possible choice. Recall that a 3rd market trade is the purchase or sale of a stock exchange listed security in a marketplace other than the exchange on which the security is listed. Example: purchasing an NYSE listed stock out of the inventory of a broker-dealer rather than on the floor of the NYSE.
Question 37
Your B/D is not a market maker in the stock of LANG Enterprises (ticker symbol: LANG), a NASDAQ listed stock. You receive, and accept, a customer buy order for 500 shares of LANG at the market. To fill this order, your order room purchases the shares from a market maker to fill the customer order. Which term below best describes this situation:

A
a simultaneous riskless trade
B
a principal transaction
C
a 3rd market transaction
D
an agency cross
Question 37 Explanation: 
When a broker-dealer purchases a security from a market maker to fill an already-received customer buy order, this is defined as a simultaneous riskless transaction. Your firm has no risk because you’ve got the stock already sold.
Question 38
Mr. Haas goes long 5.5% ABC debentures at 94 with 10 years until maturity. Five years later, due to a change in interest rates, credit quality and approaching maturity, the market value of his bonds has risen to 96. If he were to liquidate his bond position at this price, the most likely tax consequence in the year of sale would be:

A
$10 per bond capital loss
B
$20 per bond capital gain
C
$20 taxable accretion per bond and no capital gain
D
No gain, no loss
Question 38 Explanation: 
You must first compute the accretion. He bought the bonds at $940, they mature at $1,000 par value in 10 years, the $60 discount is spread out over 10 years at the rate of $6 per year, called accretion. After 5 years, the accretion is 5 years x $6 = $30. The cost basis of the bonds is now $940 plus $30 = $970. Since he sold the bonds at a market price of only $960, tax law says he has a loss of $10 per bond. Had he sold them for greater than his cost basis of $970, he would have had a taxable capital gain.
Question 39
One of the most notable risks which must be disclosed to your customer when recommending CMOs is that as interest rates in the US economy fall:

A
the liquidation market value of CMO interests will fall.
B
refinancing by homeowners may result in pre-payments to CMO holders due to mortgage pay-offs.
C
new money investments will slow down.
D
default risk will increase.
Question 39 Explanation: 
Accelerated payment risk, pre-payment risk, or early repayment risk, are the various terms used to describe the risk that an owner of mortgage-backed securities is exposed to if the portfolio experiences an unplanned increase in mortgage pay-offs, primarily due to homeowners refinancing when rates drop. The risk to the investor is that his or her money isn’t earning the same high interest rate as it was when he or she first bought the CMO investment.
Question 40
ETNs are:

A
equity tradable instruments
B
equity traded notes
C
exchange traded notes
D
government sponsored notes designed to provide liquidity to businesses
Question 40 Explanation: 
ETNs are unsecured debt instruments (notes) traded on an exchange, thus the name ‘exchange-traded notes.’
Question 41
You have been approached by a long–time friend who has begun to package Reg. D offerings of real estate developments. His mission is to locate accredited investors and has asked you to provide him leads from your client list. He will pay you a finder’s fee for each lead which turns into a sale. If you wish to participate in this arrangement:

A
you must get your firm’s approval of this arrangement or you will be held in violation of the private securities transactions rules of the FINRA Code of Conduct.
B
you do not require your firm’s approval, but you do need to notify your firm of your intent to participate.
C
you may not participate under any circumstances since this is not a product approved by your firm.
D
you would have to resign your license using Form U-5 before participating in your friend’s deal.
Question 41 Explanation: 
A private securities transaction, also called ‘selling away,’ is the violation that occurs if a registered rep engages in securities transactions ‘outside the scope of his or her firm’s business.’ If your firm reviews these real estate deals and finds them compliant with FINRA and SEC rules and regulations, your firm might add the product to your firm’s approved list. In that case, and only in that case, your participation in the deals would NOT be a violation.
Question 42
A 40 year-old customer invested $10,000 in a nonqualified variable annuity. Ten years later she has a financial emergency and wishes to withdraw some of the current account value, which has grown to $18,000. She is concerned about the tax consequences of such a withdrawal. You explain to her that:

A
she may withdraw up to $10,000 tax free and without penalty.
B
all withdrawn monies will be subject to ordinary income tax plus a 10% penalty.
C
the first $8,000 of withdrawal will be taxed as ordinary income plus a 10% tax penalty.
D
the first $8,000 of withdrawal will be taxed partly as ordinary income and partly as capital gains, plus a 10% tax penalty for premature withdrawal.
Question 42 Explanation: 
The key language in this question is the term ‘non-qualified.’ This VA product is funded by the client with after-tax (already-taxed income) dollars. Withdrawals prior to age 59½ will be on a LIFO basis, meaning the last-in money (the $8,000 of account earnings) is the first money to come out. Because she is 40 and her reason for the withdrawal does not qualify for a waiver of the 10% penalty, the earnings will be penalized 10% under the premature withdrawal rules. After the full $8,000 is withdrawn, she would then be withdrawing her original principal (her cost basis) on which there would be no tax or penalty.
Question 43
Stopping stock by a designated market maker on the floor of the NYSE is:

A
prohibited.
B
permitted so long as it is for a public order.
C
permitted whether for a public or a member firm order.
D
an order which will be triggered by a trade at or below the stop price if a sell stop order, or at or above the stop price if a buy stop order.
Question 43 Explanation: 
Stopping stock is a practice performed by an exchange Specialist in which a Floor Broker is given a guarantee of an execution price by the Specialist, so long as it is an order being placed on behalf of a public customer. Specialists are now referred to as DMMs, designated market makers.
Question 44
Compute the number of days of accrued interest payable by the purchaser of the J-J1 State of Virginia 4.75s42 bought on Wednesday, February 25th.

A
54 days
B
59 days
C
60 days
D
61 days
Question 44 Explanation: 
These are municipal bonds. The 30/360 rule applies. The issuer pays semi-annual interest each January and July 1st (J-J1 is how you know that). Muni’s settle regular way 3 business days after the trade date (T+3). A trade on Wed. 2/25 will settle the following Monday, March 2nd. Accrued interest is computed up to but not including the settlement date. Accrued interest is due for the months of January and February, plus 1 day in March. Therefore, 2 months of interest is 60 days, plus 1 = 61 days of accrued interest.
Question 45
Dealer to dealer good delivery of 580 shares of listed common stock, in accordance with the Uniform Practice Code of FINRA, would include each of the following deliveries except:

A
a stock certificate for 500 shares and a certificate for 80 shares
B
a stock certificate for 580 shares
C
580 certificates – 1 share each
D
5 certificates for 75 shares each; 9 certificates for 20 shares each; 5 certificates for 5 shares each
Question 45 Explanation: 
A single certificate for 580 shares is unacceptable under the good delivery rules because it is a round lot odd lot combination in one certificate. As unusual as answer D appears, here is why it meets the good delivery rule. There are 19 certificates in this delivery. As long as you can combine them into SINGLE 100-share ‘piles,’ it’s good. You take each cert. for 75, you add a cert. for 20, you then add a cert. for 5 and you have a total of 100 shares represented by these 3 certificates. That is considered good delivery. You can make five such ‘piles’ to make good delivery of 500 of the shares in this order. What you’re left with are 4 certificates for 20 shares each…and they represent the odd lot of 80 additional shares, which is good delivery of those 80 shares.
Question 46
The most significant distinction between a selling syndicate member and a selling group member is:

A
motivation
B
reputation
C
commitment
D
compensation
Question 46 Explanation: 
Selling group members have a ‘best efforts commitment’ in the underwriting. Syndicate members have a ‘firm commitment.’
Question 47
A FINRA member firm has become insolvent. A SIPC Trustee has just been appointed by the Court. Liquidation proceedings are imminent. Which of the following statements is inaccurate with regard to SIPC coverage?

A
All cash and securities that can be located, identified and attributed to specific customers will be returned to those customers without limit.
B
Up to $500,000 in cash and securities insurance coverage is provided to each ‘separate customer’ of the bankrupt broker/dealer.
C
Cash claims in excess of $250,000 are uninsured by SIPC, creating a general creditor status for claimants with claims for cash above that figure.
D
Up to $250,000 in cash in separate commodities accounts at the bankrupt B/D is covered by SIPC insurance.
Question 47 Explanation: 
Commodities are not covered by the Securities Investor Protection Corporation. Commodities are not securities.
Question 48
Christina Fauntleroy, a 78 year old widow and long time client of yours, wishes to open a joint account with her grand-niece Alison, who is about to enter high school. The purpose of the account is to teach Alison how to invest in the markets while also saving for college which will begin in 4 years.

A
you recommend the account be opened as JTWROS
B
you recommend the account be opened as TIC
C
you recommend the account be opened as joint tenants in their entireties
D
you cannot open this joint account
Question 48 Explanation: 
The grand-niece is a minor. A minor cannot be a joint account holder. There are alternatives, such as UGMA or UTMA in which there is a Custodianship for the benefit of the minor.
Question 49
In the business of underwriting new issues, the term Western Account is most often associated with:

A
undivided liability
B
several liability
C
joint & several liability
D
offerings of technology stocks
Question 49 Explanation: 
Several liability is the legal term used when the members of the syndicate are solely responsible for selling their individual allocations, and have no continuing responsibility for the failed sales efforts of other syndicate members. Joint & several would refer to an Eastern syndicate, in which members have a continuing responsibility for the unsold shares of other members.
Question 50
The State of Wyoming has outstanding $250,000,000 in 5.5% GOs which are callable at par one year out. The financial officials of the state are concerned that today’s 4% rates won’t be available to the state a year from now when the state will be permitted to call the 5.5% issue. To avail itself of today’s 4% rates, the state issues 4% GO bonds today in sufficient quantity to afford the call a year from now, escrowing the proceeds of this new issue in short term government securities for one year, at which time it will use those funds to call in the 5.5% issue.

A
this is not permitted – the state must wait until the call date to issue the new bonds
B
this is most often referred to as advance refunding
C
this is not permitted – it is considered Treasury arbitrage, a violation of the law
D
this is permitted only so long as the holders of the 5.5% issue are given a right of first refusal on the new 4% GOs
Question 50 Explanation: 
Selling new bonds in order to raise capital to call in older high interest bonds is called refunding. When the issuer sells the new bonds months or years in advance of the call date, such as in this question, it is called advance refunding.
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