Quick facts

Adjustment bonds require the payment of interest only if the corporation has earnings to pay the
interest.

If the market price rises above the exercise price by an amount exceeding the premium, the
difference in prices will represent the loss to the writer. For example, if an individual writes 1 XYZ
July 50 call for 5 and the market price rises to 60, the stock will be called away. The writer will be
required to buy the stock at 60. Since the investor received only 55 (exercise price of 50 plus
premium of 5), there will be a 5-point loss.

The purpose of writing calls against securities owned is to increase the overall rate of return of
the portfolio

Options cannot be purchased on margin. According to Regulation T, the full purchase price (the
premium) must be deposited. (16-5)

The Federal Reserve needs to buy secrurites and decrease the discount rate in order to make
money easy

A municipal broker's broker is a broker (agent) that deals only with other municipal securities
brokers or dealers. The broker's broker would never deal with individual investors, establish an
inventory position, or be involved in the underwriting of a new issue. (12-25)

There is no requirement to receive written approval prior to giving a recommendation to a client.

IUnlimited risk if you short a put

Since the option is exercised in a cash account, a deposit of cash is required even though the
stock is sold on the same day.

The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000).
Since the call is covered, there is no margin requirement. The customer received $200 in
premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of
$1,800. (16-6)

DATED DATE (S7)

The date from which interest begins accruing on a newly issued bond.

30 day visible supply municipal secrurities refers to the face amount of new municipal bons that
wwill be sold in the next 30 days through competitive and negotiated sales of egenearal
obliagation and revenue bonds

Municipal Securities Rulemaking Board (MSRB) rules apply to all of the parties listed except
municipal bond issuers. The MSRB does not have the power to regulate municipal bond issuers.
(10-9)

GNMA pass-through certificates subject to federal local and state taxes

Debt per capita is used when analyzing a general obligation bond and would not be considered
for a revenue issue. (8-12, 8-3)
Over-the-counter traded options are adjusted for cash dividends as well as the other distributions
listed. (16-10)
\
\If the firm confirms the market order price but executes at a higher price the customer must still
pay the price\\

Easy money interest rates are lower because there is more money available… both short and
long term yields are below normal

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

A level debt service bond issue is one in which combined annual interest and principal payments
are equal. (8-2)

All traded secrurities can be traded Over the Counter

Closed investment companies- pay market price plus commission

Open investment companies- Net asset value plus sales charge

Cash and SMA can be withdram as cash

You can refund debt by reducing interest costs, changing the maturity schedule of the
corporations debt as well as removing restrictinve provisions from the indenture

The interest paid on special sassessment bonds is derived from the Charges on the benefited
property

Three month and six month tresasure bills are sold at public auctions each Monday

An investment banker does not make a secondary market for new issues

A call option would be sondiedred covered if it was written again the underlying common stock
held in a cash account, bank, and trust company

A written letter from the firm is trequired if a customer wishes to have all trade confirmations sent
to his investment advisor

Money received by a coroptiatio nwhen it sells stock above its par value is called paid in capital

The notice eof sale for SEC Rule 144, must be filled within 90 days

Net Yield is 7.2%

Treasury strips are zero coupon bonds

Rights offerings – preferred stock holders do not have the right ot subscribe to rights offerings but
common stockholders do…

Bond attornies can opena new account without restriction

The issuance of bonds does not increase stockholder equity

The owner of a call option and the writer of a put option would be entitiled to the dividend
payment on the preclusion that it was excerisezed prior to the ex-dividend date

Wildcat programsa are the riskest programs while income programs are the safest

The maximum passive loan is equal to the basis

The electronicn communication network has two risks, limited ability to execute transactions as
well as the system only excepting certain types of orders

ECF exchange traded funds are allowed to be sold shirt as well as traded on margin

ROTH IRA --- ualified distributions are not subject ot 10% early withdramwel fee, you may
contribute up to 5000 dollars per year…contributions are NOT tax-deductible

…qualified distributions are not included in an indivividuals gross income

The securities exchange act of 1934 created the SEC and provided for the regulation of credit
and exchanfges… the securities act of 1933 provided the regulation of new issues..

A general parter has limited liability

Variable annutities must be registered with finra and the state insurance commission

The first step in opening an options account is to obtain financial information from the customer to
determine suitability The account must then be aprprobed for options trading by an registered
options principal… a signed options agreement must be obtained within 15 days of the approval
of the account

The spot prices are quoted in US terms, the cost in us dollars to purchase one nits of the foreign
currency

Debenture bonds are backed by the full faith and credit of

Divide the marketprice by the conversion ratio to get the price at parity

Convertible bonds havecoupon rates that are usually lower than nonconvertible bonds..

Convertible bond holders are reditors of the corporation…it is possible that a convertible bond will
ssee at a price based solely on its inherent value as a bond..

Outstanding municipal bons are most likely to be called when interest rates fall below the bond’s
nominal yield

A bond is usually called when the eoonomy is experiencing a slowdown and the Fed reserve
board is trying to stimulate rowth by injectinv money into theeconomy….by doing this you would
then bring downinterest rates to allow the economy to grow..

Warrants are perpetual and long term in their duration and allow a conversion iof the warrant into
common stock

A unit investment trust company is something similar to an insurance company..

Face amount certificiates and management companies are considered investment companies

The corioprtate didvidien exclusion allows the corporation to exclude from taxation 70% of the
dividends it receives from other cporoations

The MSRB requires that the effective yield must be disclosed on a clients confirmation…the
effective yield on a bond trading at a discount is the Yield to Maturity

Options expire at 5:30pm eastern on the third Friday of the month

The maintence requirement for shorting a stock @ 2.00 per hshare is 2.50 per share, when
shorting a stock that is between 2.50 and 5, it is 100% o the market value..

Exempt securities of the act of 1933 are us and goenrmetn and municiapal securities securities of
small business investment companies, securities of a non profit organization

The federal reserve board opens market comittie buys and sells treasure bills to tighten and
loosen the money supply

The 3-month treasury ill bond equivalent yield of a t-nill is always higher than its discount yield…

If a client signs a letter of intent and contributes he is then given the right to pay the lower sales
charge

A corpotaiton is exempy from paing taxes on 80% of divdiencs received from common and
preferred stock of another coroptation if it owns at least 20% of the distributing corporation. The
coronation would only have to pay taxes on 20,000 of the dividends received …

You take the 20% of dividends away from the 80% exclusion and you add that on to the
coropation income and muiltuiply it by yhe tax bracket..

An investor will buy a call and sell a put and therefore acquire stock either ay

If the put is excerized AGAINST he will acquire stock of 100 shares, if the call is excerzied he will
aqcquire stock as well

The corporate guarantor backs a industrial development revenue bond

An individual insider is not allowed to sell stocks that are held for less than six months, this would
be classified as shor-swing profits…

Acclerated depreciation allows the company to take a larger amount of the cost of an asset as a
deduction in the early years and less in the later years as a result earnings are understated in the
early yerasr and overstated in the later years since there will be smaller dieductions

When the governemtn buys US govenremtn secutirities in the open market it increases deposits
and reserves as a result it increases deposits as well as reserves

The bond paying interestanually will have a lower yield to maturity as a result of a decrease in the
amount of compounding that exists….The more interstte payments year the high the yield and
therefore a higher overall return..
Optiosn can not be br

ough on margin and therefore requires 100% on margin

A corporation intends to raise additional funds from its eixxsiting shareholder than rather than
using the sevieces of anunderwriteir the coroptaiton would be engaging in a rights offering.. it will
isusue right all exixstin shareholders enabling htem to subscribe to stock below the current
market price of the outtandingsecruities theryb saving the rocropation the costs involved in using
an underwrit

US Government guarantees treasury notes, treasury bills, governemtn national mortgage

association (ginniemae) certificates…fedreeal national mortgage association bonds

The dealer must do the quote at par

Debt service is the tyearly amount of interest and principal payable on a bond issue

Debt service consists of interest and principal due…IN order to solves subtract operatin and
matintence expenses away from the total revenue and you are left with the amount aviable for
debt srrcce\\\\

Comeriacaial paaper is unsecured debt and has a maxiumum matrutiy of 270 days

The placement ratio is a published weeklu in the bond buyer and credit markets

Municipal Assessed valuations indicate the property values that are used for tax purposes,
increases properties mean an increasing tax base

A diversitified bond portfolio will provide protection form a variety of risks, but acannot protect
against fluctuating interest rates. All onds, regardless of the maturity or the issuers location are
subject o interest rate risk

The term open interst refers to call options contracts would mean the number of contracts that
have no been closed out through a sale or by expiration

To write a put in a cash account, the customer must have cash in the account equal t othe
exccersize price.. if the writer is hsort the unlying stock the put is considered covered for margin
purposes, bu this transaction cannot be written in a cash account, only in a margin account.

The cost bassi of the stock is the call premuium plus the strike price

Municipal revenue bonds do not have maturity schedules that coincide with the usefulness of the
facility being built. They mature prior to the useful life of the facility. Municipal revenue bonds do
not have debt limitations as do general obligation bonds. A debt limitation is the statutory or
constitutional maximum debt that an issuer can legally incur. Revenue bonds can be issued by
states, political subdivisions (such as counties or townships), interstate authorities and intrastate
authorities. The interest and principal are paid from the revenue received from the facility. (8-10)

A part of the Federal Farm Credit System that provides intermediate-term loans for
agricultural purposes.
A position trader is responsible for maintaining a broker-dealer's inventory as well as trading the
firm's account. (12-1)

To qualify as an accredited investor, an individual must have $1,000,000 net worth or $200,000
annual income with the anticipation that income will continue at that level. (9-20)

The upward adjustment in the purchase price of an original issue discount bond is called
accretion. If the bond is sold before its final maturity date, the bondholder must determine his
adjusted cost basis. If the bond is bought at an original issue discount and held to maturity, the
discount is considered to be interest and, for municipal bonds, exempt from taxes. (21-11)

Unit investment trusts tend to not have ocoupons are be in bearer form

Fiscal policy is enacted by Congress wihle Monetary polic s enacted by the federal reserve

Credit balance is solvesd by adding the re T requirement plus the shro tsales proceeds

Pharmeceuticals and utilities are considdred defense companies and therefore are not very
effected by thebusiness cycle

Bidding proceduces as well as the intent

What does "8s09" mean? 8% coupon bonds due in 2009

The redemtption of a bond will not effect any dividends aid to stock holders

Easing money and credit in the economy would be a result of deceaseing the discount rate as
well as decreaseing the reserve requirements

Narrow based indexs will hedge sector based stocks

Broad based indexs will hedge diversified basd stocks

When interest rates decline bond prices rise, the longer maturieis will rise more than shorter
maturities due to market risk. Bonds selling at a discount will rise more sharply than those selling
at a premium

In the Interbank Market, foreign currency transactions: May settle on a spot or forward basis

If an investor owns a 100000 face value of a t-bnd and writes a covered t-bond call, at
expieriation if hterrets rates have risen, the call most likely will expire since thebond price will
delicdne and thus cancel out th call option

Options contracts cannot be used a scollateral in a margin account.. LEAPS are requity options
that can have a mxuum life of 39 months

The strike price, expiration date, contract size are all fixed by the exchange on hwihc the option
trades at

The preimumu is determined by asupply and demand o nthe flor of the exchange

When a cash account is opened oi nthe name of a cporoation a new account form must be
copllteetd in addition a corporate resoltuon must be filed.. this identifies those officers
authorixzzed to buy an sell c securities on behalf o fhte corporation and it must signed by the
screcit tof the wcr=oraption
If you have an opening purchase you are establishing a long postions, if oyu have a opening
selling you are establishing a short position…if you have a closing purchase you are liquidiating a
short position and if you have a closing sale you are liquidiating long postion\\T

The dfed fund rate are excess reserves one bnk loans ot another when the borriwing bamnk
must maek a dficit reserve postion.. The rate of interstcharged is called the fed funds rate..the fed
funds rate fluctatuates daily making it the most volatile mony market rate

Reveneu issues are enerally brought to the market as negoaited issues

When issued confirmation are rcieved when buying shares of a new issue

Neogitated is when the issuer appoints an underwriter rather than having htem compete for oen
another

Foreign Currecy option are quoted in US dollars (US currency) they expire on the SAT following
the third Friday of the expieration month

A long stock position indicates the bullish nature of the investor, in addition selling call options
agsint this option is very conservative

During the registrationg period a registered rpesntative cannot send resaevh reports to clients or
accept orders and payments for nw issues form clients. The registered representative can send a
preliminary prospectus and receive indications of interest from his clients

A securities firm may harge customers a fee for the collecting dividends and or interests/appraisal
of securities/ holding securities in safe keeping/ transgerfs or exchanges

Whenever a lump sum withdrawl is made fomr a qualified retirement plan, you have 60 days to
compeltel the roll over or you will be charged 20%

A term issue will ususlaly most likely have a sinking fund that will be used to pay interest for the
account

Once the trade has been purchase the reg T requires 50% of that amount not matter what price
chage is within the time period

Adjustment bonds need only to be paid if the corporation has sufficient income. Interest on all
other debt securities mus income st be paid regardless of the coprotaion

The cost bsasi will be based on the strike price minus th premum of 4.50..since the market price
si 84.50 liqudiation would result on a 100$ loss

The coupon trate on a convertible bonds will be lower than on a similar convertible bond

The market price of preferred stock is influenced by its ddividen payout ratio as well as currentl
interest trate levels.

Blue chip company has a long history of paying dividence

A growth company nomrall has a low didvdend payout ratio

The allocation of bonds will be listed in the account summary

A 401 K plan allows an employees table income is reduced by employee contributions, but
employers are obligated to match employee contributions

A pension fund does not pay tax on its investments, therefore it would not find municapl bonds as
attractive an investment asi t would other higher yielding investment instruments

A call protection provision prohibits the callin of the bonds during the early years/would be
characteristic of a call protection provision

Recapture probison would nto be favorable for the investor who is invested in oild and gast
limited partnerships…on the other hand,

An arbitrage situation occurs when there is aprice difference in comparable securities. If the stock
is ellign above pariy the calue o the stock received from converting thebond would be more than
the value of the bond. An investor could

The synidicate may change the provisions and allocation of the sgareemetn if it is in the best
interest and the client and he lets the syndicate mebers know

THE FEDERAL FUNDS RATE IS INCFLUENCED NOT SET BY THE FED RESERVE
BOARD..AN INCREASE IN THIS RATE SUGGEST THAT THE FED HAS TAKEN MONEY OUT
OF THE BANKING SYSTEM

If a bond is called at par it will be held at the nonominal coupon value and therefore the ytm will
be equal to that number

When part of an issue of long term spelculatinve onds is called the effect of the mreimian
outstandi bonds will be an improvement in their quality the issue will hve less debt outstanding
and there will be less interst chargest to pay which improves th quality of the issue

The debt service covereage ratio is te number of times the earnings of a revneu bond of a miucap
favcltiy exceed the interst charges and principal paryments for a period of time is called the debt
service coverage.

A miunicipality would refund a bodn issue for all of the following reasons such as reducing the
interst charges, issueing ne bonds at a lower interest rate, eliminate restrictions in the bodn
resultion…..

The market value of the outstanding bonds will be determined by the supply and demand and b
the general level of interest rates

Hwo ever much the otion is in the money is the intrinsic value, the time value is threfor e the
balance remaining of the premium

The SIPC is a nonprofit organization that only broker dealers may join, it provides insurance for
scustomer accounts in the vent of bankruptcy by a broker dealer

A broker dealer is acting a principal when buying for or selling from invesntory

MSRB rules require that when opening an account of an employee of anothermuniciapl firm, a
municipal registered representative must: notify the mployer and ollfow all instructions
(interpretation is to get the employers permission, send duplicate confirmations to the employer

Dividend and capital gain distributions of mutal funds can automatically be reinvested in
additional shares if the shareholder chooses to do so.
Stagnation is a period of no economic growth or economic decline.

Stageflation is a combination of inflation and stagnation

Subscription agreement contains the sutiatbiltiy standards for the program, specefiy who must
sign the agreement, specify to whom the check must be made payable, and make inquiries of the
purchaser to make sure that he or she understandsthe remifications of the investment

Priority provision are found in the certificate of limited partnership

30 days must pass before a member of a synidicate can extend credit for acustomer ona new
issue

Serial bonds have difernt maturity dates with less maoutns of debt outstanding as time goes by.
The bonds will have declining interst payments and principal amounts. Term bonds mature at the
same time with stable interst payments

Advertisements must be submitte dot the exchange for approval at least10 days prior to initial
use. .Al adveritsments must be mainted on filed by the member for three years

An investmentin a direct participation program usually in longterm investments which peovide tax
benefits . the invest should be aware of the risks in volved and have liquidity in other investment
since themoenywill be tied up for along time..

Securities registered in the names of customers are not part of SIPC coverage and are returned
ot the appropriate individuals

The transfer agent keeps a record of eah stockholders name and shares owned, issues and
acanels stucks, handles probelsm that about in ases of missing lost stolen or mutiliated
securities…the registrat makes sure that outstanding shres do not exceed authorize shares

A notice of offering is valid for 90 days

An individual that sells in=dex straddles or combination is anticipating the market to be Neutral

The revenue bond index is the average yield to maturity on a particular day of 25 specefic revneu
bonds with 30 year maturiries

A sepcialish can stop stock if it is for a public order and the specialist is guaranteeing a price

When a stock has sa market value of less than 5$, industry rules erquire a minium maitnence
margin of $2.50 per share or 100% of the value of the securities whichever is ggreater. IN this
example 2.50 per share is greater and the customer would have to deposit 2500 into the account
to meet the requirement

The Sales breakpoint of amutal fund is the minimum dollar amount of a purchase of a mutal fund
where a volume discount is given

Closed end investment companies ar ebrough and sold in the same manner as common stock,
the number of shares outstanding is constant, they may be listed on the NYSE, and thare usually
sold at the current market price…..NOT the asset value
An increase in the market price of an open end investment company or other security form the
purchase price is appreciation.. .there is only a capital gain whenthe security is dodl and the
appreciation is realized..

Governmetn bonds are subject to federal income tax but exempt from state income tax…munis
are exempt form federal tax but subject to state tax

A custodian account, the tax liability on interest and dividends received is paid by the minor…
margin transactions are not permitted I the account, a minor’s signature is not valid

MIG ratings apply to BAN Bond anticipation notes

The bonds are municipal revenue bonds which are exempt from all federal acts and regulations
except antifraud provisions. (8-1)

Munipal revenue bonds are exempt form all federal accts and regualtiosn except antifraud
provisions

Securrities traded on NASDAQ would be the only choice given for which the 5% guideline would
apply

FDIC insurance may not apply to long –term CDs sold by broker dealers if the face amount is in
exces fo 250000

Margina requirements established by the FRB can be: increased by broker dealers in the form of
in-house rules,

FRB rules apply to both retail and instuaitiutional and may not be repleaced by SRO rules

To profit form the underwiringt the sydxcae must be able to seell the bonds to the public…the
syndicate willfirst determine the yields it belvies will ebnesseacry to sell the bonds..

FNMA is government sponsored and is not a direct obligation of the US government

BULL SPREAD involve buy thsize price and selling the higher excerisize price, the call spread the
lower excere lower excersize price will have ht eigher premium

An investors is always bullish if they long the option with the lower strike price

This will get the correct answer every time:

buy + call = opportunity to buy (bullish); cost basis, unlimited gain; protect short position
buy + put = opportunity to sell (bearish); sale proceeds, strike gain; protect long position
-----------------------------------------------------------------------------------------------------
sell + call = forced to sell (bearish); unlimited loss; sale proceeds
sell + put = forced to buy (bullish); cost basis

Top two always pays the premium; bottom two always earns the premium

Breakeven for a covered call is the stock price minus the options premium
A head shoulder formation indicates th reversal of anupward trend. A head and shoulder
bottom formation indicates a bullsh reversal of a downward formation

A mutual fund investor who redeems (sells) his fund shares will receive the next computed bid
price on the day the shares are sold. (18-23)

A client is entitled to a reduced sales charge (breakpoint) based upon the value of the accounts of
other family members within the same fund family. Examples would include joint accounts, minors
accounts and certain retirement accounts. The accounts can be held at multiple broker-dealers.
(18-23)

The Pink Sheets list market makers and their bid and asked quotations for over-the-counter
stocks which are not listed on Nasdaq. These securities are also known as non-Nasdaq stocks.
(12-8)

The closed-end investment company is definitely Fund C (net asset value $28.14 - asked price
$27.75) because the net asset value is higher than the asked price. This can only occur in a
closed-end investment company. In all of the other choices, the net asset value is lower than the
asked price. This is typical of an open-end investment company or mutual fund. A no-load open-
end investment company has the bid price or net asset value and the asked price equal. (18-2)

<atching orders is a form of manipulation and is prohibited,

Due diliegence meeting, stablitization and blue sky laws are all in the underwriting of a new issue

Examples of overlapping debt would be for an adjoining road district or school district, or debt
issued between two counties. (8-4)

American Telephone Company of Ohio is a corporation. Therefore, interest paid on its debt
obligations is subject to federal and state income tax. (6-15)

All order tickets must contain the customer's account number and whether the registered
representative solicited the order or it was unsolicited. A sell ticket must indicate if it is a short
sale or a sale of securities owned by the client. The location of the securities must be indicated
(long in the customer's account or held by the customer). (11-17)

The price need not be on the order ticket

The Consumer Price Index measures the average change in prices for selected goods and
services purchased by consumers in certain cities. The CPI measures the change from a
previous base period and is computed monthly. (22-1)

The bond counsel is not concerned with MSRB regulations on dealer disclosures

Most money market funds will declare dividends daily and pay, credit, or reinvest the dividends on
a monthly basis. This information is usually found in the prospectus of the money market fund.
(18-8)

Industry rules allow a maximum total compensation of 10% of the gross proceeds of the offering
in a limited partnership. (20-3)

ERISA provides private sector employers with guidelines for proper investments in employee
pension plans. This provides protection for employees against improper investments by their
employer. ERISA does not apply to public sector (government) plans. (17-9)
A collateralized Ttime draft is a bankers acceptane

Federal regulation requires that an individual receive payment for the redemption of a mutual fund
within seven days. (18-23)

According to tax law a general partner must have at least 1% participation in profits and losses for
a business to maintain lmited partnership status

Listed equity options expire on the Saturday following the third Friday of the month at 11:59 p.m.
Eastern Time. (16-2)

REITS allow the flow xthrough of income not losses

Whenever an investor sells shares in a mutual fund he will receive the bid price or net asset
value. The sentry funds net asset value is listed being $13.42

If the fed funds rate is steadily rising it indicxates the federal reserve is tightening credit

Banks amy

Sell long is you own more shares than you intend on selling

Interset earned on which of the following would be added ot inocome when calculating the
alternative minimum tax ANSWER –private activity bonds

If you short stocks the margin requirement is 2000 miumhum, if you purhase it is 2000 or 100% of
the purchase price whichever is less

A specialist may not accept market ordes and not held orders…it would accept open orders and
day orders

The company would pay the same amount ($500,000) whether it was interest on the
subordinated debentures or dividends on the preferred stock. However, interest is deducted
before taxes while dividends are taken from net income. (22-23)

Lower grade bonds have higher yields and lower market prices
Higher grade bonds have lower yields and higher market prices

Mutual funds sell ex-divdiend whenver the fund or its pricincipal udnerwirter determines..the ex
dividend date of a mutal fund is primarily the same day as the record date

Foreign exhange rates are estblishin th interbank marget the interbmarket invoves the purchase
and sales of feigen curriecnies between commeircial banks…the phili stock exchange is where
foreign currency options transactions take place..

It is a violation of federal law for anyone to tender the stock that a customer borrowed in a short
margin account. The stock has been temporarily borrowed and does not belong to the customer
and cannot be tendered. (9-7)

Duration MEASURES PRICE SNESITITIVITY FOR FIXED IN COME SECURITIES GIVEN

CHANGES IN INTEREST RATES

The maximum civil fine is 3 times the profit gained or loss avoided
Tombstone ad states tha the bonds are first morgrage bonds which means they are secured by a
lienon prorerty owned by the southern California gas company…they are publicatly traded they
for not secured by property owned by the sate of California

CMOs can be backed by securities issued by FNMA, GNMA, and FHLMC.

CMOS do not have tax free interest…interest payments from a CMO re fully taxable..

CMO’’s have various bonds classs tax free interest AAA ratings 1000 denominations

When the proceeds of the sale of one stock are used to purchase another stock from the same
broker-dealer, the transaction is called a proceeds transaction. In determining the markup the
broker-dealer will charge, industry rules state that the firm should consider only the amount of
money involved in the sale to the customer. (12-4)

If the federal tax exemption for munuiciapl bond interest were eliminated on woul expect yields
on newly issued municipal bonds to increase

Commercial; paper is not backed by a pledge of corporations specific assets

Revenue bonds can be issued without voter approval, revenue bons can be issued even though
local debt limits have been erached, revenue bonds usually pay higher rates of interst and
therefore much more risky than general oblisgation bonds…revenue bonds are also exempt from
federal taxes as well as GO bonds

A tax swap would be the sale and purchase of bonds (or other securities) to realize a capital loss
that can be offset against a capital gain. (21-17)

The type of securities is the least important factor when it comes analyze whether or not the RR
churned a clients account.. What is important is the amount of commissions the client paid, the
amount of portfolio turnover, the clients investment objectives

Mortgage amortization may not be deducted form real estate prgoragras, whiel depreciation
maitnence and property tax are

The premium of a new issue of bonds is adde othe total interst cost to the issuer

On the day prior toe he exdiddend date for an ordinary cash dividend a holder of a call tenders an
excerize notice…the investor will eb entitled ot the dividend if the optio is excersized prior to eh
ex-divdend date

Municpal bonds are exempt fom the 5% markeup policy…it will take into account dollar amount
involved in the transaction, availibitiy of the securities and expenses incurred doing the trade

IF ther are two bonds,, one is bought at a doucnt the other is bought at a premium the discout will
be taxed as ordinary income , while there will be no cap loss allowed for bond B since it was
bought a ta premium

When the wash sale rule is activated the investor must add the loss to the new cost of the stock
regardless of whert her stock is repurchased a price that is higher or lower than the orginal cost
Currency values are established by a supply and demand of the currency…supply and demand
for a currency may be influenced by the countrys rate of inflation level of interestrates gold
reserves and trade defecit

A buy stop order limits the losses if the stock advances on a customer who shorts 1000 shares

An investor is a limited partner in a d irect participation program that the irs has determined to be
abusive the investor may be subject to pay back taxes as well as penalities and interest

If an individual wishes to utilze a municipal bond swap he may be executed to establish a loss for
tax xpurposees , increasieis, improve yieldse cash flow, imporove mat

A closed-end provision in a bond indenture means that additional borrowing against a particular
source of revenue is prohibited. An open-end provision means additional borrowing against a
revenue source is permitted. (6-1)

A municipality's debt limit is the maximum amount of debt a municipality can incur. (8-2)

The discount rate moves proportionately with the interest rate, and therefore an increase in the
discount rate increases the interests rates and decreases the price and dollar value of the bond

Moral obligation bonds are municipal revenue bonds which are payable by the state if revenues
from the project do not satisfy debt service payments. However, in order for the state to service
the debt, approval of the state legislature is required. Double-barreled bonds are issued as
general obligations backed by the full faith and credit of the issuing municipality. (8-11)

The indenture contns all the agreements and covenants pertaining to a bond issue, and would
contain the provisiosn for the application and allocation of funds of a revenue bond

When a specialist stops an order she is guaranteeing a price

Long-term anticipation securities (LEAPs) may be exercised on any day prior to expiration
(American style). Exercise settlement is in the underlying stock, in three business days. (16-3)

The bond counsel writes the legal opinion. It states that the interest is exempt from federal
taxation and that the issue is valid and legal. Prior to giving an opinion as to the validity and tax
exemption of the issue, the bond counsel would examine all federal, state, and local legislation to
be sure that the issue meets all requirements. (10-3)

Reclamation is the process of returning securities that were previously accepted on the
settlement date. Rejection is when the brokerage firm refuses delivery of the securities on the
settlement date. (12-29)

Short calls and long puts are the same side of the market

When a customer gives a registered representative the follow instructions… buy 000 share of
general electric “whevern you thin kthe price is , the order can be executed bby the RR only on
the same tradin day

MSRB rules require that a confirmation be sent to a customer at or before the completion of the
transaction (settlement date). The confirmation must include whether the customer purchased or
sold, the par amount, and a complete description of the securities, including coupon and maturity
date. Any pertinent call feature must be shown as well as the principal amount, accrued interest,
and total amount of the transaction. The broker-dealer must disclose if it acted as principal or
agent, and if acting as an agent, the amount of the commission must be disclosed. Ratings and
denominations are not included on the confirmation. (12-30)

Dealer A gives bonds firm to Dealer B with a recall. What does this mean?

I. Dealer B has the right to sell the bonds before anyone else.
II. The price of the bonds has been set.
III. A time to sell the bonds has been set.
IV. A recall time has been established.

When a mutual fund buys stock from the portfolio of an insurance company, it would be considred
a trade executed in the fourth market. This market is done where institutions trade with other
institutions.

Fed funds are not secondary markets

The curnt ratio is a comparison of current assests to current liabilities and is used to determine a
companys ability to pay those debts that would be maturing in one year

Official statement must contain, the amoutb of underwriting spread, the amount of any fee
received by the broker dealer as agent for the issuer. The initial reoffering price for each maturity
in the issueyou

A registered options principal must approve a customer who has an existing account at a broker
dealer and now ishes to trade options (ROP)

A municipal securities principal must review and approve municipal transactions made with
individual. Trust departments commercial bank portfolios causauality insurance companies

Higher rated bonds, have higher markets prices and lower yields…Lowere rated bods have lower
market prices and higher yields

Real interst rate is yield-inflation rate

Subscription agreement needed in order to purchase an interst in a direct paticiplation program..it

will specefity suitability standards a well as the amotn the individual will contribute

When pricing a bond only a call feature that allows the issuer to call the entire issue is used

Treasuury bills are issued one month., three months, six months, and twelve months, not 9

REITS must distribute 90% of their earnings to shareholders, their profits are derived form the
difference between the payments made on outstanding mortgages and the amount received in
rental income, REITS allow the flow xthrough of income not losses

Individuals that pursue market timein g strategy are frre uent users of ETFs

Reoffering yieldsd relate to eh sale of bondsby the iwinning syndicate..they do not relate to
theissuer and ned not be included on the bidform

An options premium is deterined by the volatitility o the underlying stock, the current market price
of the underlying stock and the period of time remaining until the option expieres
The optiosn clearing coropation selects a member firm on a random slection basis only. Members
firms can select customers with open short postions on a first-in-first out basis, a random
selection basis or any method that is fair and equitable..

Exempt secrurites include: securities issued by a state chartered banks, municipal bonds, federal
governemtn securities, securities issued by small business investment companies

The dividend payout ratio is not a factor when it comes to listing on an exchange

WWhen a memberfirm issues a research report it must be approved by a supervisory analyst… A

supervisory analyst must be registere as such with FINRA and is required to pass a separate
exminiation…

If a company declares a forward to split, a decrease in par value will occur, as the number of
shares increase

Defnse stocks such as brewery tobacoo insurance companies are not directly influenced by
changes in the conomy..wherre as luxury items like leisure heavy equipment and autobiles are

SIPC provides protection for customer accounts in the event of a broker-dealer's failure. Each
account is covered for up to $500,000, of which $100,000 may be cash. SIPC does not insure
creditors of the broker-dealer or the failed firm's own inventory account. (3-8)

The most important factor for any DPP is whether it is a good investment. The tax related aspects
are only of benefit if the program is economically sound. (20-18)

The principal must approve all adveristing prior to use

The dividend payout ratio is the percentage of earnings per share that is being paid out in the
form of dividends. The EPS is $2.00 ($10,000,000 divided by 5,000,000 shares). ABC pays a
$0.20 dividend per share ($1,000,0000 dividends divided by 5,000,000 shares). The $0.20
dividend divided by the $2.00 EPS equals a 10% dividend payout ratio. (22-29)

All of the choices given regarding customer confirmations are true under MSRB rules except that
they need not disclose if the dealer is acting as a principal or agent in the transaction. This is not
true since the broker-dealer must disclose the capacity in which it acted. In addition, the dealer is
required to disclose the commission on agency transactions and the third party if there is a third
party to the transaction.

However, the markup charged on a principal transaction does not need to be disclosed. (12-30)

The account approval requirements for penny stocks under SEC Rule 15g-9 do not apply to
existing customers who have maintained an account with a broker-dealer for more than one year
or have previously engaged in three or more transactions involving penny stocks. Any
recommendation to a customer should take into account the customer's investment objectives.
(12-20)

State governemtns receive the most amotun of revenue form sales taxes gasoline taxes excise
taxaes and license fees. Local municipalities raise most of their funds form property taxes

Refudnign would occur when intesst rates are lower than when the issue was originally sold..the
net result would be a reduction in the aount of interst being paid by the issuer..
The CQS consolidated quotation system would display qutations on cmmon stock preferred stock
warrants rights which are registered on the american stock exchange or the new york stock
exchange….nd the traiding in the OTC market.. A NON NASDAQ stock would not appear on the
listing

When opening an options account for a customer

Sutitability
Risk disclosure
ROP approval
Begin trading
Sign options agreement account within 15 days of account approval

Mutual funds settle same day, while convertible bonds settle T+3

Ok
Pre-sale orders receive the highest priority and a period of time must be allowed for the
accumulation of orders. Member orders do not receive priority over designated orders and
syndicate procedures do not have to be disclosed to potential purchasers. (10-9)

 Current financial information must be made available to prospective purchasers

 The sale must conform to the provisions of SEC Rule 144
 A brokerage firm can act as an agent or principal in the transaction
All of the statements regarding restricted securities are true except the sale must be at the bid
price as determined by the current quote of the outstanding securities. The sale can be made at
whatever price is agreed upon between the buyer and seller. (9-20)

Credit rating will NOT always be lower than GO bond

The minuicipality agree t okeep rates high enough to cover debt service obligations

FNMA is governemntsponsored and not backed by the faith and credit of the government

An investor purchasing a secondary market discount municipal bond will have ordinary income if
the bond is held to maturity. Since the bond was purchased at 90 ($900) and held to maturity
when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as
ordinary income. (21-11)

The accretionf oa discount bond OID is based on a constant yield method which uses the bond’s
yield to maturity

Industrial development revenue bonds are issued by local municipal governments to build
factories or other commercial properties. The plant or property is leased by the municipality to a
corporation. The interest on the bonds is paid from the lease rental payments made by the
corporation. The credit rating of the bond is based upon the credit rating of the corporation and
not by an analysis of the credit rating of the municipal government issuing the bonds. (8-10)

Joint Tenants with Right of Survivorship (JTWROS), and Tenants in Common are two types of
joint accounts. Transfer on Death (TOD) is an individual account used to avoid probate if the
account owner dies. Uniform Transfers to Minors Act (UTMA) accounts are established by a
custodian for the benefit of a single minor child. (2-7)
When a bond is pre-refunded, the only applicable date is the first call feature. Therefore, the bond
must be priced to the first call date. (5-18)

The company will receive cash from the sale of the stock, so liquidity will increase. The common
stock account and the paid-in capital account, which are part of stockholders' equity, will also
increase. The long-term debt ratio will fall as the equity capital rises and since the company is
raising cash, current assets will increase. Finally, fixed assets will be unchanged. (22-26, 22-30)

A 5 % markup trade applies to proceeds transactions

The ex dividend date is standardized in the securite industry

The selling of shares within a reit is imiliar to that shares sold on the NYSE

A bear spread always involves buying the higher excerisize price and a bull speread always
involves buying the lower excersize price

Uniforma transfers to minors do not require supplemental documaentation

Money market funds are noload funds, dividends are computed daily and credited monthly

Beta measures performance as it relates to the over all market

Alpha measure a stocks return

When a bond is purchased at a premium (above par value), the premium must be amortized
(reduced) over its life. The premium in this example is six points which must be amortized over its
eight-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity).
After six years, it would be reduced by 4 1/2 points (3/4 x 6). Its cost basis would therefore be 101
1/2 (106 original cost - 4 1/2 points amortized premium). (21-12)

The underwriting is being done best-efforts, since no guarantee to raise the $10 million has been
made by Winco Securities. Winco is acting as an agent in the transaction because any unsold
shares will be retained by Fred's Auto Centers. Winco will be compensated only for the shares it
sells and assumes no liability in the deal. (9-2)

Unrealized capital gains on stocks are not included in taxable income.

The reorganization department handles the exchange of one security for another, tender offers or
converting rights into stock

The P&S department normall handles function of computeting and comparing trades
Margin department handles the enforcement of regulation T,

the cashiers department is concerned with the handleing and protection of securities…

Interest + divididends – expenses = net investment income

Bond most likely to be refunding is to save interest costs, and can be doen by refuding an issue
at a higher interest rate

When giving a seminar a registered representative must make a record of the date. Topic and
sponsor othe seminar..the names and addresses are not needed
A limited partnership has no resetrictions as to the amount of partners that there are, only that the
partnership does not pay income tax, and the owenership passes its profits and losses
throughout its participants

Equipment leasing programs are approtiate for computer systems, aircraft oild and railroad
locomotives….they are NOT appropriate for oil and gas pipes

MOrtgagebacked securities are subject to prepayment risk

If an individual dies in a join tenenats with rights of survivorship, then the broker dealer of the
account must receive a death certificate as proof of death befor ei may mark an account
deceased or change the account title in a joint account..

All options stop trading on the third Friday of the month

Equity options expire on the SAT following the third Friday of the month

Europena style stock index option may be excersize on ly on the day prior to expieration so index
options expire on SAT then the option must expxire on Friday

Sectors stock portfolio will be hedged by narrow based index puts

If an idndivdudal wishes to open an account to trade options , th account msut be approbed: prior
to the time an initial order is accepted

IF thebond is selling at a discount, it will receive the highest call price sellini in the shortest
number of years 5-17, 5-9, 5-10)

A stock is overbought at its resistance level and oversold at its support level 22-39

Selling short can only take place in a margin account

The Bond Buyer is new issue oriented and would not have secondary market offerings. (12-26)

The earnings multiple is called the price-earnings ratio. (22-28)

Buy stop orders and sell stop orders can do all of the following
Provide price protection for a short positions and long position
Cause a pronounced fluctuation in market price of a stock when the order is activated///

IT can not give a broker discretion when order is activated…

If an employee of a member firms oopens an option account another members firm, th employee
needs wirten permidssion form his employer prior to opening the account as well as duplicate
confirmations sent to his employer…. It is NOT necc for the empyler to get permission for each
time a trade is executed

The Federal Reserve Board appoints primary dealers in government securities. (22-10)

XYZ Corporation has a 6 1/2% convertible bond outstanding which is convertible into 40 shares
of common stock. The bond is currently selling in the market at 85 ($850) and the common stock
is selling at 21. The XYZ Corporation is offering its existing bondholders a new straight
(nonconvertible) bond paying 6 1/2% which matures at the same time as the convertible bond.
The effect of the successful completion of the proposal would be to:

I. Reduce interest costs

II. Reduce potential dilution
III. Have no effect on interest costs
IV. Increase dilution

a. I and II
b. I and IV
c. II and III
d. III and IV

Explanation:
Correct.
Prior to the refunding, if all of the bonds were converted into common stock, outstanding shares
would increase causing earnings per share to decrease (dilute). The effect of the successful
completion of the proposal (refunding) would be to reduce potential dilution because the
conversion provision is being eliminated. There would be no reduction in interest costs since the
new bonds are paying the same rate of interest as the old bonds (6 1/2%). (6-8)

The velocity of money represents the number of times that a dollar is spent over a given period. It
is a measure of business activity in the marketplace.

State legislative approval is required before a municipality can begin making payments on a
moral obligation bond. (8-11)

Zero coupon bonds eliminate reinvestment risk

If a company wishes to create a division and ceate adidtioanl sales in order for a reclassification
to occur, the sales subject to the registration and prospectus requirements of the securites act
1933 I this also includes transactiosn done through mergers, consolidations spinoffs incvolving
exchanges of stock are all covered under the rule..

The Bond Buyer New Issue Worksheets are a service of the Bond Buyer and show details of the
issue and bidding requirements. The Official Statement is prepared after the issue is sold and
contains a description of the issue and financial information of the issuer. (12-26)

ON a new municipal issue a dealer must provide the customer with a final confirmation with the
toal money amount, a copy of the official statement if published

IT IS NOT NECC FOR A COPY OF UDNERWTING AGREEMENT AS WELL AS THE NAMES

OF THE SYNDICATE MEMBERSR

A UNIT INVESTMETN TRUST DOES NOT CHARGE A MANGEMENT FEE

A MINOR MAY NOT ENDORSE A STOCK CERTIFICATE

Investment Advisors are normally compensated by receiving a fee based upon a percentage of
the asstes under management

The placement ratio represents the percentage of new municipal bond issues of $5,000,000 or
more that has been sold in a particular week. The Bond Buyer compiles this ratio. (12-26)

The bond with most interest risk or price volatility is the one with lowest coupon longest maturity
A hypothecation agreement is needed to open a margin account, and gives the brokerage firm
the right to pledge customer securities to a bank as collateral for a loan

In order to caluculate the SMA you take the market value sof the long account subtract the debit
balance..take the market value of the short account subtract the credit balance…take 50% of both
add together and you have your SMA

A special tax bond is financed by a tax on certain items such as cigarettes, liquor, or gasoline. (8-
10)

The priority provisions Presale group net designate dand member orders are all written in the
underwriters agreement

Abond purchased at a premium and callable at par will always have a lower yield to call than to
maturity 8-24

An investor purchases a $100m face value municipal bond with a 5-year maturity at 105. After
two years, the bond is sold at 95. For tax purposes, the investor has a(n):

a. $2,000 loss
b. $4,000 loss
c. $8,000 loss
d. $10,000 loss

Explanation:
Incorrect.
When a municipal bond is purchased at a premium, the bond's premium must be amortized to
find an adjusted cost basis. If the bond is sold above the adjusted cost basis, the result is a
capital gain. If the bond is sold below the adjusted cost basis, the result is a capital loss. If the
bond is held to maturity, there is neither a loss nor a gain for tax purposes. This is because the
adjusted basis would equal the par value after the premium is amortized.

This bond is purchased at $105,000 with a 5-year maturity. The premium of $5,000 ($105,000 -
$100,000 = $5,000) must be amortized over a 5-year period ($5,000 divided by 5 years equals
$1,000 per year). Therefore, each year the original cost of the bond is reduced by $1,000.

If the bond is sold after 2 years, the adjusted cost basis is $103,000 ($105,000 - $2,000 =
$103,000). Since the bond is sold at $95,000, there is a capital loss of $8,000 ($103,000 -
$95,000). (21-12)

INCOME BOND (S7)

A corporate debt issue that pays interest only when, and if, the company has iincome.
Also called an Adjustment Bond.

Debenture bond- corporate bond backed by the general credit of a company and not
secured by a mortgage or lien on any specific property.

Purchasing several AA or better rated bonds with various matrity dates would be more
advantageous than purchasing just one municipal bond

Treasury bills do not trade with accrued interest they are issued at a discount and mature
at a par (7-3)
Bank qualified municipal bonds allow banks to deduct 80% of the intest paid to depositers
on the funds used to purchase bonds, a municipality may only issue up to 10million
annually

The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue
bonds with 30-year maturities. (12-27)

When there is an acquisition or merger taking place, traders will try to take advantage of the
activity between the common stocks of the two companies. The trader or risk arbitrageur will go
long the company being acquired and sell short the shares of the acquiring company. This
process is known as risk arbitrage. If the acquisition is successful, Regal Corporation's stock will
increase and Dynasty Corporation's stock will decline. (6-9)

Options sales literature must be accompanied by or preceded by a risk disclosure document. An

annualized rate of return may be included under certain circumstances. Trading performance, if
included, must cover a one-year period. There is no requirement to include a schedule of
transaction costs. (16-12)

When investing in a DPP the customer must verify that e metts all suitability standards. This can
be accompllishe dby furnishing documents such as past tax returns and a statement of net worth

A call option may be wirten in a cash account if it is covered. The option is covered if the
underlying secriryity is long in the account

Rule 144 requires that restricted (unregistered) stock be held for six months before it can be
resold. Control stock (registered stock purchased by insiders) is not subject to a holding period
requirement under Rule 144. Both restricted and control stock are subject to the volume
limitations under the Rule. (9-21)

Private placements under reg D, intrastate offerings conducted under Rule 147 and treasury bills
sold thorugh the federal reservebanks, govt securities municipal securitesare all EXEMPT from
fed regulation… but they still msut oblige to the antifraud probisions

PUBLIC offerings of coprate securities and limited partnerships intest are subject to federal
registration

An order ticket must include the customer's account number, number of shares or par value (for a
bond), name of the security, limitations (limit, stop, etc.), and whether it is a buy or sell.

A customers social security number is not nEcc on a ticket order

If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss.

When a variable annuity contract holder dies during the accumulation period, the proceeds in
excess of cost are taxable to the beneficiary as ordinary income. (19-8)

In order to protect a short position profit should the market price increase, you must enter a buy
stop order so that it may be activated as a market order when the price is right

All advertising sale literature and education material must be approved by a ROP prior to being
sent to a customer, since ther are no speicefic recommendations, the OCC disclosure document
does nto need to precede or acconmpany the letter

Under the Code of Arbitration, if a public customer takes a member firm to arbitration to resolve a
dispute, the majority of the panel must come from outside of the securities industry unless the
customer requests a panel with a majority of industry arbitrators. Neither the broker-dealer nor the
customer may actually pick the arbitrators and arbitrators do not have to be attorneys. (1-14)

A majority of the arbitration panal must ocme from outside the securities industry, uness the
customer requests panal with a majority of industry arbitrators

When the investor bought the bond, he established a yield-to-maturity of 7.20%. This will remain
the same over the life of his investment. The coupon rate was established when the bonds were
issued and will never change. However, when yields in the market in

Communications concerning CMOs may not make comparisons between CMOs and other
products. Also, all such communications must offer educational material describing CMOs. (7-
19)crease, the market price of outstanding bonds will decrease. (5-7)

REITs invest in many different types of residential and commercial income-producing real estate
such as apartment buildings, hotels, shopping centers, office complexes, storage facilities,
hospitals and nursing homes. Income is received from the rental income paid by the tenant
leasing the real estate owned by the REIT. REITs must pay out a minimum of 90% of its taxable
income and the dividends received by investors are taxed as ordinary income. The dividends paid
to shareholders of REITs do not qualify for the lower 15% tax rate given other types of common
and preferred stock. They can be suitable for both retail and institutional investors. (18-30)

Mr. Blue's margin account has a market value of $20,000 and a debit balance of $9,000.

If Mr. Blue purchases $2,000 of options, he would have to deposit:

a. 0
b. $1,000
c. $2,000
d. $3,000

Explanation:
Incorrect.
The margin requirement when purchasing options is 100% of the purchase price (premium).
Since the purchase price of the options is $2,000, Mr. Blue may use the $1,000 SMA and would
be required to deposit an additional $1,000. The SMA is found by subtracting the required equity,
$10,000 ($20,000 x 50%) from the current equity in the account ($11,000). (13-20, 16-5)

The number of clients annuity untis never change

When purchasing machinery with cash, current assets (cash) are reduced and fixed assets
(machinery) are increased by the same amount. Overall, total assets do not change. Since total
assets (TA) and total liabilities (TL) remain the same, stockholders' equity (TA - TL) does not
change. Working capital (current assets minus current liabilities) is reduced since current assets
are reduced. (22-29)

According to Rule 144, an affiliated person (e.g., the president of a company) must hold
unregistered (restricted) stock for at least six months before it may be sold. Since the President of
XYZ Corporation only owned the stock for 90 days, the order to sell would violate Rule 144 if
executed. (9-20)

The approval of an account to trade penny stocks is not required if the account has been in
existence for more than one year or if all transactions in penny stocks are non-recommended.
(12-21)
When computing a competitive bid, the broker-dealer must calculate the total interest cost to the
issuer. To calculate total interest cost, the coupon (interest rate), par value, maturity schedule,
amount of any discount or premium, and dated date are required. (10-7)

Interest (and principal) payments on GNMA pass-through certificates are made monthly

Debentures may be issued with warrants attached. This allows the corporation to pay a lower
interest rate on the debentures. (4-11)

Debentures may be issued with warrants attached this allows the coraoption to pay a lower interst
rate on the debtnrues

When a bond is called the bondholder receives the call price plus accrured interst

Brokerage firms send customer statements monthly for accounts with activity during that month.
For inactive accounts, statements must be sent at least quarterly. (3-3)

Only individuals are permitted to have joint accounts. The account may be established as tenants
in common or tenants with right of survivorship. A custodian account may be established for the
benefit of only one minor. An account for an investment club would not be a joint account. (2-7)

Both options and warrants have a strike price --if exercised, the transactions for the underlying
security will occur at that set price. It is in the case of convertible bonds or convertible preferred
stock that investors can convert the security into the underlying stock with no additional payment
of money. (14-1, 4-11, 4-15, 6-6)

A client may sell short or buy a put to profit from a decline in the value of a security is anticipated.
In order to sell short, the broker-dealer is required to borrow the security. Although short sales
may only be executed in a margin account, if an issue is thinly traded, it may be difficult or
impossible to borrow the security. A put option may be an attractive alternative to selling short;
however, put options are unlikely to be available on a thinly traded security. (11-4, 12-15, 13-14,
14-15)

Sales charges are not considered expenses of the fund.

The underwriting syndicate makes a commitnemetn to the issuer to purchase the entire offering,
the syndicate cannon resell the offering at the public offering price

The distributions from the GNMA securities are generally derived from interest and are therefore
taxed as ordinary income. Distributions from profits on the option positions are capital gains. (21-
17, 7-12)

The distrubtion form th GNMA secruties ar generally derived form interst and are therefore taxed
as ordinary income…distribution from profits on the options oppositions are capital gains

Which of the following would be an important factor when considering an investor's suitability for a
direct participation program? (20-18)

ALL OF THEM

I. Investor's ability to commit a large amount of money for a long period of time in a
relatively non-liquid investment
II. Investor's current and future need for tax benefits
III. Investor's ability to meet financial needs should the amount invested be lost
IV. Investor's ability to meet applicable state requirements for these type of investments
The term payment for order flow refers to the payment to a broker dealer by a market make in
return for routing order to that market maker

When aggregating an ddeterming the position limit a member firm will long calls and short puts
as well as short calls and long puts

signs the basic customer agreement which consists of a credit agreement, loan consent
agreement, and hypothecation agreement. I

Securities in a margin account would always be held at the brokerage firm in street name to allow
the firm to liquidate shares if necessary. Under the hypothecation agreement, the customer
pledges securities as collateral for the loan. The loan consent agreement permits the firm to lend
the securities to other customers or other broker-dealers. The credit agreement establishes the
customer's responsibility to pay interest on the debit balance. Since the initial trade was for
$3,600, industry rules require that the customer must deposit at least $2,000 and may borrow up
to $1,600. (13-2, 13-6)

The legislature does not have a legal obligation to provide funds but is considered to have a
moral obligation. Funds would become available after legislative approval. (8-11)

In a disproportionate sharing arrangement, the sponsor (general partner) shares in the costs of
the program and receives a portion of the profits. It is disproportionate because the percentage
share of profits is much larger than the percentage share of costs. (20-17)

A Keogh plan must be opened by the end of the tax year (December 31st). However,
contributions are permitted until the filing deadline for the tax return (April 15th). A self-employed
individual may deduct 20% of self-employed income or $49,000, whichever is less, to a Keogh.
20% of $120,000 is $24,000 and would be the maximum allowable deductible contribution. (17-
10)

Beta measures systematic risk or credit risk

If Mr. Smith died, the firm would freeze the assets of the account because the death of a partner
terminates the partnership. The firm would then await the proper legal documents needed to
release the assets. (3-3)

The convertible bonds would fluctuate the most because they are convertible into common stock.
The price would fluctuate with the price movements of the common stock. The fact that interest
rates are stable is another reason why convertible bonds is the best answer. If the question had
stated that interest rates were moving sharply upward or downward, then all other bonds would
fluctuate sharply in price to bring yields in line with interest rates. However, the question asks
what would happen in a period of stable interest rates. Given that statement, the best answer
would be that convertible bonds would fluctuate the most. (6-8)

Issuer-directed securities provide an exemption for certain individuals under the New Issue Rule.
Under this provision issuers may direct securities to the parent company of an issuer, the
subsidary of an issuer, and employees and directors of an issuer. The issuer-directed provision
also permits immediate family members to participate in the offering, provided they are
employees or directors of the issuer. Registered representatives are also allowed to purchase
shares of an equity IPO if the issuer is that person's employing broker-dealer or is the parent or
subsidary of the broker-dealer.
An attorney hired to assist in the IPO has a restricted status because he is not employed by the
broker-dealer. A portfolio manager of a fund may not purchase for his personal account. A
purchase could be made on behalf of the fund. (9-7)

The Trust Indenture Act of 1939 regulates the public issuance of corporate securities that are sold
interstate. It does not cover U.S. government securities or private placements. A $20,000,000
sale of corporate bonds sold interstate and a sale by a brokerage firm throughout the country
(also interstate) of $25,000,000 of corporate debentures would be covered under the Trust
Indenture Act of 1939. (6-1)

A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market
price of the bond is 120. To profit from this arbitrage opportunity, an investor should:

I. Buy 5 bonds
II. Buy 100 shares of stock
III. Sell 5 bonds short
IV. Sell 100 shares of stock short

a. I and III
b. I and IV
c. II and III
d. II and IV

Explanation:
Correct.
Since the bond is convertible into 20 shares of stock ($1,000 par divided by 50) and the bond is
priced at 120, the parity for the stock is $60 per share ($1,200 bond price divided by 20 shares).
An arbitrage situation exists because the stock is selling at a 5-point premium to parity (65 market
price - 60 parity price).

An investor would profit from this situation by purchasing bonds at 120 and shorting the stock at
65. Each bond may be converted into 20 shares of stock at a cost of $60 per share. These shares
may then be used to cover the short sale, establishing a 5-point profit (65 short sale price - 60
cost). (6-6)

Communications concerning CMOs may not make comparisons between CMOs and other
products. Also, all such communications must offer educational material describing CMOs. (7-19)

Tax value is computed by multiplying the assessed value by the mil

Upon learning of Seena's death, the brokerage firm would freeze the account. Seena's executor
would then provide documentation to establish authority to act on behalf of the estate. Typically,
Seena's estate would become the third joint owner in the existing Tenants in Common
arrangement. (3-3, 2-7)

Immediate or cancel

A discount bond will always be priced to maturity

SEC rules require that the broker-dealer must receive the stock (or, if necessary, buy it in) within
10 business days after settlement. (11-3)
Bankers acceptance: helps to finance foreign trade between importers and exporters

The minimum request for dealer placed commercial paper is normally 100000

ShareHOLDERS vote on stock splits and irectro elections they do not vote on cash dividends nor
sotck dividends..these are controlled by the boardd

A mutilted certificate may be authenticated by the issuer or an agentn of the isser (transfer agent
or paying agent), if authenticated it is considered a good delivery. A mutilatedcoupon may be
guaranteed by any commercial bank as well as the issuer or its agent

Auction rate securities are usually sold as an alternative to other short-term securities….the
registered representative also is required to disclose any material relating ot speceic features of
the autiction..the investment may not be suitable for liquidity

An order book official is only able to accept Limit orders

The Trust Indenture Act relates to the issuance of corporate debt instruments. It requires that a
trustee be appointed to act in the bondholders' interest. (6-1)

A call premiumis best described as the amount the idsuerpays above 100 to retire bonds prior to
maturity

Indexx options move in the same direction as the market as a whoel and therefore provide a
better hedge than individual stock options

When purchasing a straddle the investors maximum profit is unlimited since it has a call and a put

When selling stock to a customer a markup should be based upon the lowest offer on the
NASDAQ system not the price th dealer paid to purchase the stock

The issuer appoints the bond counsel

The registere representative and office manager msut always ign the ne account form…

The customers signature would be reuired for a margin account but NOT a cash account

If a dealer acts on an agency basis, the customers order mus be exectured at a price that is fair
and reasonable

When an investor sells an interest in a limited partner ship his or her cost bassi fo tax purposes is
the adjusted basis

Price does not diversify corporate bond portfolios

THE MSRB formulate and interprets rules, whiel the SEXC and FINRA enforce and inspect the
rules

REITs are regulated as securities under the Securities Act of 1933. An investor purchasing a
REIT in the primary market must receive a prospectus. (18-30, 9-12)\\

Both the strike price and premium for a tbond option are expressed as a percentage fo the face
value of the underlying bond
A coincident ) enonomic indicator is the industrial production index. Coincident indicators change
with the eonomy as a whole and since industrial production comprises a large amount of the
economy and therefore changes at the sam tiem as the whole ecnomy

Copies of official statements need not be retained since the MSRB does not have the authority to
regulate issuers and therefore cannot require the preparation of an official statement. (10-9)

Cash flow is net income plus depreciation,

A trader is responsible for postioning (carryin inventory) secondary market municiap bonds
(control positions)

Options and CMO adversiting must filed 10 days prior to use

Mutual funds and unit investment trust must be filed 10 days following initial use

Insiders are not permitted to sell short

Investors must pay accrued intesst for a secondary market purchase of tax anticipation notes

Which of the following is not used to determine the winning bid in a competitive bond offering?

a. Reoffering Yields
b. Bond years
c. NIC
d. TIC

Explanation:
Correct.
Reoffering yields are based on the price paid by purchasers and are not a part of the underwriters
bid. Bond years are calculated by multiplying the number of $1,000 par value bonds by the years
to maturity. When the bond years of each maturity are multiplied by the respective coupon rate
and then totaled, the result is the net interest cost for this issue. NIC and TIC are used to
determine the cost of the bid to the issuer. (10-7)

Since the bond has been called, the yield to the call must be shown because the maturity is no
longer of importance. Taxable equivalent yield and after tax yield are never shown since the
investor's tax bracket and/or capital gains rate cannot be accurately predicted. (12-31)

When pricing a bond (dtermingi the yield when price is known or determing theprice when yield is
known , the coupon dettlement date and matrity are required and NOT bond years

A sell stop order can be used to protect a profit or limit a loss on an existing long position. It is not
activated until the market declines to or below the stop price. By purchasing put options, the
investor would have the right to sell his stock at a set price (strike price) and would establish a
specific sales price. (15-4, 11-23)

For an OID the scount is considred interst, because this is a muni bond thi intest is tax empt..for a
non-OID, the discount is reported as ordinary income

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.
(17-12)
In a noncontributory pension plan, the employee does not make contributions. Earnings in the
plan accrue tax-deferred (are not taxed until received by the employee) and any benefits received
are taxed as ordinary income. (17-13)
A total withdrawal from a nonqualified annuity results in two separate tax treatments. The original
amount invested is treated as a return of capital and the earnings in the account (amount above
the original investment) is treated as ordinary income. (19-8)

AMBAC insures new municipal issues

A young woman of low income that has 5K to ptu for her young sons college education shoud
luse a zero coupon bond

An investment in an oil and gas drillingporgram would generate the largest decuction from
intangible drilling costs

Exercise limits relate to the maximum number of contracts that an individual may exercise during
a five business day period for each underlying stock on each side of the market. Exercise and
position limits apply cumulatively to all accounts that a customer maintains at all brokerage firms,
not for each account at each firm. (16-8)

Random lot selection is the method used to call term bonds

A long margin account must maintain an equity equal to 25% of the market value. The account is
$500 below the minimum ($2,500 required minus $2,000 equity). Using SMA will increase the
debit balance and therefore reduce equity. (13-7)

A bearer bond does not require endorsement by the owner

BEARER BOND (S7)

A bond which does not have the owner's name registered

on the books of the issuer. Interest is paid by means of
attached coupons. Interest and principal, when due, are
payable to the holder. (vs. Registered) See also:
Certificate.

The erroneous report rule states that should a discrepancy exist between the reported execution
price and the actual execution price, the actual execution price shall prevail. Therefore, the
customer must accept the actual execution price of 39.25. (11-32)

Upon exercise, Mr. Hedge is obligated to purchase 100 shares of DOG. For tax purposes, his
cost is $83 per share (90 strike price - 7 premium). His sale at $94 per share results in a profit of
$1,100 ([$94 sale price - $83 cost] x 100 shares). (21-18)

A stocks portfolios volatility compared to the market as a whole is the BETA

Although they are both long-term securities with short-term trading features, only VRDOs have a
put feature that permits the holder to sell the securities back to the issuer or third party. Auction
rate securities (ARSs) do not have this feature, and if the auction fails the investor may not have
immediate access to their funds. In addition, ARSs use an auction process to reset the interest
rate on the securities, whereas the reset interest rate on a VRDO is set by the dealer at a rate
that allows the securities to be sold at par value. (8-19)

If the initial transaction in a margin account is a short sale, industry rules require a minimum
equity (deposit) of $2,000. For a purchase, the minimum equity requirement is the lesser of
$2,000 or 100% of the purchase price. (13-14)