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Series 7 Addendum

This Addendum addresses revisions to the study outline for the Series 7 Examination, effective November 7, 2011.
The number of questions (250) and time allocated (six hours) remains unchanged. However, the minimum
required passing score increases from 70% to 72% (180 questions correct). Each Series 7 Examination
includes 10 additional, unidentified pretest questions that do not contribute toward a candidates score.
Therefore, the examination actually consists of 260 questions, 250 of which are scored. The 10 pretest
questions are randomly distributed throughout the examination. Additionally, FINRA will be reducing the
number of questions on municipal securities.

The following table from the revised outline details the number of test questions on the Series 7 Examination by
the job function of a registered representative (RR).


Major Job Functions

Percentage of Test Questions

Number of Questions
1. Seeks Business for the Broker-Dealer through
Customers and Potential Customers
27%

68

2. Evaluate Customers Other Security Holdings,
Financial Situation and Needs, Financial Status,
Tax Status, and Investment Objectives
11%

27

3. Opens Accounts, Transfers Assets, and Maintains
Appropriate Account Records
11%

27

4. Provides Customers with Information on
Investments and Makes Suitable
Recommendations
28%

70

5. Obtains and Verifies Customers Purchase and Sales
Instructions, Enters Orders, and Follow Up
23%

58

TOTAL 100%

250


This Addendum should be used only after you have completed reading the Study Manual and taking our
existing exams. Since STC has kept its material current by keeping abreast of changing securities rules
and new products, the current version (40th Edition) of the Study Manual as printed contains most of the
major changes made to the outline. This Addendum includes any major additions to our Study Manual.
There are questions to test your understanding of the material at the end of the Addendum as well as
questions on a variety of material covered on the Series 7 Examination. To aid in your understanding of
how the new information is applied, we have referenced the topics and pages in the Study Manual where
the original topic is discussed.






Copyright Securities Training Corporation. All Rights Reserved. 1
* Add the following to the bottom of page 2-9

A durable power of attorney gives someone else the power to manage the grantor's financial affairs if
that individual becomes incapacitated. A regular power of attorney terminates if the grantor becomes
incapacitated. An RR would need to have a durable power of attorney in order to exercise discretion if
the client becomes incapacitated.


* Add the following on page 3-2, as additional information on Account Instructions

DVP (Delivery versus Payment) and COD (Cash on delivery) are general acronyms used to describe a
relationship in which a client uses a bank to settle trades with executing firms (broker-dealers). The firm
delivers securities against the bank payment and pays against the bank delivery of securities. When
discussing a given transaction, a DVP occurs when the dealer delivers securities to the bank in return
for a cash payment from the bank. An RVP (Receive versus Payment) occurs when the dealer receives
securities from the bank and makes a cash payment to the bank. To summarize, an institutional client is
buying securities in a DVP transaction and selling securities in an RVP transaction. It is important to
remember that clients (usually institutions) set up brokerage accounts and place orders at these firms.
However, trades settle through custodian banks designated by the clients. The broker-dealer will
contact the bank, which will send payment or receive securities on behalf of the clients. The broker-
dealer will not hold the client funds or securities.


* Add the following on page 3-4, as additional information on Transferring Accounts

Securities are typically transferred by the National Securities Clearing Corporation (NSCC) using the
Automated Customer Account Transfer Service (ACATS).


* Add the following on page 6-12, as additional information on Other Types of Corporate Bonds

Structured Products Structured products are derivative securities that may be linked to any of the
following underlying (reference) assets: a stock index, foreign currency, commodity, basket of securities,
change in spread between asset classes, single security, or an interest-rate and inflation-linked product.
A structured product is typically built around a fixed-income instrument (a note) and a derivative
product. The note pays a specified rate of interest to the investor at defined intervals. The derivative
component establishes the amount of payment at maturity.

These products are a type of corporate debt that is usually created by most major financial services
institutions and usually registered as securities with the SEC. Structured products are not bank deposits
and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed
by an RR when offering this product to clients.




Copyright Securities Training Corporation. All Rights Reserved. 2
* Add the following on page 7-20, before Money-Market Securities

CDOs A Collateralized Debt Obligation (CDO) is a type of asset-backed security. A CDO is issued as a
bond that is backed (collateralized) by a pool of bonds, loans, and various other assets. Ownership of
this type of security is typically in the form of a tranche (slice), with any given tranche from the CDO
carrying a different maturity and risk level. The return an investor can expect from this type of investment is
based on the credit quality of the underlying assets contained in the pool. CDOs are similar in structure
to collateralized mortgage obligations (CMOs). Due to their highly complex nature, CDOs are generally
not suitable for retail investors.


* Add the following on page 8-11, as additional information on Types of Revenue Bonds

Build America Bonds (BABs) Build America Bonds (BABs) are municipal bonds issued under the
American Recovery and Reinvestment Act of 2009 (ARRA). They are designed to assist municipal issuers
in raising funds for certain infrastructure projects. They are issued for capital expenditures, not for
working capital. The interest on these bonds is taxable, but the Treasury offers a tax incentive to either
the issuer or the bondholder depending on whether the bond is a direct pay or tax credit bond. (A
municipality receives a federal tax credit.) The objective is to broaden the appeal (increase the demand)
of municipal securities to taxable fixed-income investors.

Direct pay bonds may be issued by municipalities to raise capital for all the traditional purposes except
for the issuance of private activity bonds or to facilitate refundings. The Treasury will reimburse 35% of
the interest paid on the bonds to the issuer, which helps to defray the costs of borrowing. For example,
if a municipality issues a BAB at a taxable rate of 6.25%, the issuer will receive 2.19% (6.25% 35%)
annually from the U.S. Treasury. The net amount of interest the issuer would pay is equal to 4.06%
(6.25% - 2.19%).

While Build America Bonds are taxable, they are issued by municipal governments and subject to MSRB
rules. Broker-dealers involved in the underwriting of these bonds must provide official statements, and
all sales activities must be supervised by a municipal securities principal.

Certificates of Participation (COPs) A Certificate of Participation (COP) is a type of lease financing
agreement, typically issued in the form of a tax-exempt or municipal revenue bond. COPs have been
traditionally used as a method of monetizing existing surplus real estate. This financing technique
provides long-term funding through a lease that does not legally constitute a loan, thus eliminating the
need for a public referendum or vote.


* Add the following on page 9-21, as additional information on Exempt Offerings

Regulation S When foreign companies issue securities in their home country, they are of course
subject to any laws that country has in place. However, they would clearly not be subject to U.S.
regulations. What was not so clear for many years was whether and how U.S. laws applied to U.S.
companies issuing securities outside the country. The SEC clarified this situation by issuing Regulation
S. If a company issues securities according to Regulation S, the offering does not need to be registered
under the Securities Act of 1933.

According to Regulation S, a U.S. company may (quickly) issue an unlimited amount of securities outside
the country without filing documentation with the SEC. There are no restrictions as to the type of non-
U.S. investors who may purchase the security.


Copyright Securities Training Corporation. All Rights Reserved. 3

Only a non-U.S. person may buy an overseas offering sold under Regulation S. The investor must not be
defined as a U.S. person. A U.S. citizen who is traveling, or who resides outside the U.S. for a significant
part of the year, would still be classified as a U.S. investor. A U.S. person is defined as any individual
who is a resident of the U.S. as well as any partnership, estate, or account held for the benefit of a U.S.
resident.

An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas
immediately through a designated offshore securities market (for example, The London Stock Exchange).
There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year
period before an equity security sold pursuant to Regulation S may be resold in the U.S.


* Add the following on page 10-9, as additional information on MSRB Rules

Regulation Regarding Political Contributions (G-37)
The MSRB created rules to deal with the practice known as pay-to-play. This term refers to the practice
of municipal securities dealers making political contributions in order to curry favor with politicians
who might, in return, steer municipal securities underwriting business their way. A political contribution
means any gift, subscription, loan, advance, or deposit of money, or anything of value. Any reimbursement
of debt incurred in a political campaign or payment for transition or inaugural expenses of a successful
candidate is also considered a contribution. The MSRB believes that this practice undermines not just
the integrity of the municipal securities market, but investor confidence in the market as well. Investor
confidence is essential to ensure a healthy, liquid market.

This rule applies to a municipal finance professional (MFP). An MFP is defined as any associated person
of a broker-dealer primarily engaged in municipal underwriting, trading, sales, financial advisory and
consulting services, and research or investment advice on municipal securities. Registered representatives
who recommend municipal securities to retail investors are generally excluded from the definition. An
exception is solicitation of municipal securities business from issuers. Any amount of this activity will
result in the classification of an associated person as an MFP.

Municipal securities firms are prohibited from engaging in specified municipal securities business with
issuers for two years if certain political contributions are made to officials of those issuers. MFPs may
make certain contributions without triggering the two-year ban. If (1) the representative is entitled to
vote for the official and (2) the contributions do not exceed $250 per election, there is no violation.

Interpretations
Since many questions have been raised by municipal securities dealers concerning the application of
this rule, the MSRB has provided firms with guidance by issuing an interpretative notice.

An MFP contributes more than $250 and the ban is triggered. If the MFP leaves the firm, the ban is
still in place. If that MFP is hired at a new firm and is still defined as an MFP, the new firm will also
be prohibited from engaging in negotiated municipal securities business based on the date of the
contribution. If the MFP is hired at a new firm and is not defined as an MFP, the two-year ban
would not apply to the new firm.
A person contributes $200 while employed as an MFP at Dealer A. Three months later the same
person contributes another $200 to the same candidate while now employed as an MFP at Dealer B.
The two-year ban would apply only to Dealer B.


Copyright Securities Training Corporation. All Rights Reserved. 4
A two-year look-back period applies to municipal finance professional contributions. If an individual is
not an MFP and has made contributions to a political candidate that would have resulted in a
violation, the firm that employs the individual would be subject to the underwriting ban if the
individual is employed in the role of an MFP within two years of the contribution.
If the contribution to the political candidate is made from a joint checking account, the contribution
would be viewed as split evenly by the contributors, and the contribution limit would apply.
Therefore, if the check from the joint account exceeds $500, a violation would occur. If the check is
signed only by the MFP, the entire amount is attributable to the MFP. If the spouse of an MFP made
a contribution by writing a check from a personal (rather than joint) account, the contribution
would not be viewed as originating from the MFP. In this case, there is no limit on the amount the
spouse may contribute under this MSRB rule.


* Add the following on page 12-3, as additional information on the Inside Market

The SEC Order Handling Rules require that a customer's limit order be displayed in a market maker's
quote if it improves that quote. Improving the quote is defined as either a buy order higher than the
market makers bid or a sell order lower than the market makers offer. This is true even if the customer's
order does not improve the inside market. For example, if the market makers quote is 20.25 20.85 and
the market maker receives an order from a client who wants to buy stock at 20.35, the market maker
must display the customers limit order price in its quote.


* Add the following on page 12-7, as additional information on Regulation NMS

According to Regulation NMS, broker-dealers are prohibited from accepting bids, offers, or indications
of interest for NMS stocks priced at $1.00 or more, in increments smaller than $0.01 and, for NMS stock
less than $1.00, in increments smaller than $0.0001 (a hundredth of a penny). The RR is not permitted to
accept an order to buy or sell in sub-pennies (more than two decimal places) if the stock is trading at or
above $1.00.


* Add the following on page 12-8, as additional information after The Fourth Market

Dark Pool A dark pool is a source of liquidity for large institutional investors and high-frequency
traders and this system would not disseminate quotes. The system can be operated by broker-dealers or
exchanges, and allows these investors to buy and sell large blocks of stock anonymously. The objective
is to allow these investors to trade with the least amount of market impact, with low transaction costs.
Some dark pools provide matching systems and can also allow for participants to negotiate prices.


* Add the following to the bottom of page 12-9

OATS The Order Audit Trail System (OATS) enables FINRA to effectively review market activity in
regard to customer orders within a member firm, to conduct surveillance, and to enforce rules. OATS
records the life of an order from receipt, to routing, to modification if applicable, and then to either
cancellation or execution.



Copyright Securities Training Corporation. All Rights Reserved. 5
TRACE TRACE is a reporting system that was created to provide greater transparency in the corporate
bond market. It is not a quotation or an execution system. Broker-dealers provide quotes and will
execute transactions in corporate bonds. FINRA disseminates bond transaction information for
publicly traded, TRACE-eligible securities (which include investment-grade, non-investment-grade
bonds, and debt securities issued by a government-sponsored enterprise). Although transactions for
securities issued under Rule 144A are reported to TRACE, the information is not disseminated. There is
no regulatory quote or execution system as there is for equity securities.


* Add the following on page 12-14, as additional information on Industry Rules and Regulations

Business Continuity Plan FINRA requires that members have plans in place if the unexpected occurs.
Broker-dealers must establish a written business continuity plan that will identify procedures to be
followed in the event of an emergency or significant business disruption. These procedures must
provide that all customer obligations be met, and must address the firms existing relationship with
other broker-dealers and counterparties. The plan must be reviewed annually in light of any changes in
the firms business structure, general operations, or location.

FINRA also requires each member firm to provide to the regulator by means of an electronic process, or
other means as FINRA may specify, prescribed emergency contact information, which must include the
designation of two emergency contact persons. At least one of these individuals must be a member of senior
management and a registered principal of the member firm. If the second contact person is not a registered
principal, she must be a member of senior management who has knowledge of the firm's business
operations. The rule also specifies that both emergency contact persons must be associated persons of the
member firm. In the case of a small firm with only one associated person (e.g., a sole proprietorship
without any other associated persons), the second emergency contact person may be either a registered
or nonregistered person with another firm who has knowledge of the member firm's business operations.
Possible candidates for this role include the firm's attorney, accountant, or a clearing firm contact.


* Add the following on page 12-18, as additional information on Research Reports

Under Regulation AC, a research analyst must certify that her research report accurately reflects her
personal views. The analyst must also disclose whether she received compensation for her specific
recommendation. Under this rule, broker-dealers are also required to obtain periodic certifications by
research analysts regarding public appearances (attesting that a statement was made regarding the
views she expressed being her own and a written certification documenting that she did not receive
compensation to make positive comments).


* Add the following to the bottom of page 12-19

Borrowing and Lending Practices with Customers
Registered individuals may not borrow money from, or lend money to, a customer unless certain
conditions are met. These conditions include implementing written procedures permitting such
activity and satisfying any one of the following provisions.

1. The customer and the registered person are immediate family members.
2. The customer is a financial institution regularly involved in the business of extending credit or
providing loans.
3. Both parties are registered with the same firm.


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4. The loan is based on a personal relationship between the customer and the registered person.
5. The loan is based on a business relationship independent of the customer-broker relationship.

If the conditions indicated in provisions 3, 4, or 5 prevail, the firm must approve the lending activity prior to
the execution of the loan.


* Add the following on page 12-27, as additional information on Secondary Market Trading of
Municipal Securities

RTRS The Real-Time Transaction Reporting System (RTRS) is operated by the MSRB and is open each
business day from 7:30 a.m. to 6:30 p.m. Unless an exception is available, all transactions in municipal
securities must be reported within 15 minutes of the time of the trade. Any transaction effected outside
the hours that RTRS is open must be reported no later than 15 minutes after the beginning of the next
business day.

EMMA The MSRB has established the Electronic Municipal Market Access (EMMA) system as the primary
market disclosure service for official statements, other related primary market documents, and
information. The EMMA Web site can receive documents from issuers and underwriters and provides
access free of charge to the public. The EMMA system also contains information related to the continuing
disclosure requirements submitted by municipal issuers and secondary market transactions submitted
by municipal securities dealers. EMMA receives transactional information from the MSRBs Real-Time
Transaction Reporting System.


* Add the following on page 12-29, as additional information on Bond Buyer Indexes

The Bond Buyer Municipal Bond Index is based on the prices of 40 recently issued long-term general
obligation and revenue bonds. The index is calculated by taking the price estimates and adjusting them
to a 6.00% coupon. The index is published daily and serves as the basis for a futures contract (which is
no longer traded).


* Add the following to the end of Chapter 13 (Margin Chapter)

Portfolio Margin
Chapter 13 of the Series 7 Study Manual discusses strategy-based margin where the margin requirement is
based on the type of investment strategy pursued by the client. Portfolio-based margin (when compared to
strategy-based margin) is a more accurate way to evaluate risk since it is based on the total portfolio of
the client. This approach takes into consideration both long and short positions held in the clients
account. For example, in a strategy-based margin account, a stock bought at $30 that is hedged by the
purchase of a put with a $25 strike price would be evaluated as two separate strategies. The amount at
risk (the maximum loss) is calculated for each strategy. The clients net margin requirement would not
be based on the reduced loss potential of the hedged position. Portfolio margining takes this simple
hedging concept one step further by evaluating the net risk of all the positions held in a given account.

Margin is calculated based on the net risks of the eligible instruments in a customers account. This is a
more sophisticated way of gauging the clients position, based on the overall level of risk in the account.
It permits a better alignment of margin requirements based on the net risk of the entire portfolio. For
that reason, portfolio margining is sometimes referred to as risk-based margining.


Copyright Securities Training Corporation. All Rights Reserved. 7
Eligible Participants Portfolio margin is not available to small retail clients. The following entities are
permitted to engage in portfolio margining.

1. Any broker or dealer registered with the SEC under the Exchange Act
2. Any member of a national futures exchange to the extent that listed index options, unlisted
derivatives, ETF options, index warrants, or underlying instruments hedge the members index
futures
3. Any person approved to engage in uncovered option contracts. If a customer wants to trade
unlisted derivatives, the customer must maintain equity of at least $5,000,000 at all times. Prior to
offering a portfolio margining methodology, a broker-dealer must develop a profile of customers
who will be eligible to use it. The broker-dealer must put in place an approval process and
implement minimum equity requirements for customers eligible to use portfolio margining.

Risks of Portfolio Margining and Disclosure The benefit of portfolio margining is that clients
typically have lower margin requirements. Nevertheless, portfolio margining may expose them to
unexpected risks, due to the greater leverage afforded. If an account falls below the minimum
maintenance margin, all calls must be met within three business days. FINRA requires that customers
using a portfolio margin account receive a disclosure statement and sign an acknowledgement form
prior to their initial transaction.

This statement must describe the special risks associated with portfolio margin accounts that include
the following liabilities.

Portfolio margining normally allows for greater leverage in an account that may lead to larger losses
in the event of adverse market movements.
Because the maximum time for meeting a margin deficiency is shorter than in a standard margin
account, the risk is greater that a customers portfolio margin account will be liquidated involuntarily.


* Add the following on page 13-20, as additional information on Margin Requirements for
Other Securities

Special Maintenance Requirements on Leveraged ETFs Exchange-Traded Funds (ETFs) are securities
that resemble index mutual funds but trade throughout the day. Some of these products are constructed to
employ leverage with performance double or triple the underlying index. Due to this inherent leverage,
these products have special maintenance requirements in excess of the typical SRO thresholds of 25% on
long positions and 30% on short positions. The margin requirement on these securities can be computed
by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. For example, a
double long portfolio would have a requirement of 2 25% (SRO long maintenance) or 50%. A triple
short portfolio would have a requirement of 3 30% (SRO short maintenance) or 90%.


* Add the following on page 15-39, as additional information on Index Option Strategies

VIX Options VIX is the CBOE's Volatility Market Index option. It is a broad-based index option and is
calculated using the S&P 500 Index option bid and ask quotes. The VIX or volatility index is often
referred to as a gauge of investors fears. The index tends to move inversely with the S&P 500 Index. The
VIX usually rises when the S&P 500 Index falls and will fall when the S&P 500 Index rises. An investor
will buy calls when she expects the market to decline and volatility to increase. An investor will buy puts
on the VIX if she expects the market to rise and volatility to decrease. Many investors will buy VIX call
options as a hedge against a possible decline in the market. The VIX option can be used by investors
that expect either an increase or a decrease in volatility.


Copyright Securities Training Corporation. All Rights Reserved. 8
* Add the following on page 17-4, as additional information on Section 529 Plans

A 529 College Savings Plan is a type of municipal fund security. If sales loads are depicted in municipal
fund securities advertising, the maximum amount of the sales charge should be indicated. Additionally,
sales charges may be reflected in the performance data of the investment and, if they are not, a statement to
that effect should be provided.


* Add the following on page 17-13

Health Savings Account (HSA) A Health Savings Account (HSA) is a tax-advantaged account that can
be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is
generally open only to persons who are not enrolled in any type of health plan other than a qualified
high deductible health plan. Contributions are made in pretax dollars (which are limited under IRS
guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. The
funds may be invested in mutual funds, although the types of funds may be limited by an HSA trustee (a
financial institution).

Any funds withdrawn that are used for nonqualified medical expenses are taxable and subject to a 20%
IRS tax penalty. The funds do not need to be used each year and may be carried over to be used in the
future. Once reaching age 65, funds can be withdrawn at any time and are subject only to ordinary
income tax. (You avoid the 20% IRS penalty.) However, you may avoid any tax by continuing to use the
funds for qualified medical expenses.


* Add the following on page 18-8, after Exchange-Traded Funds

HOLDRs Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a
certain sector (e.g., Biotech, Internet, Retail) into a trust and selling interests in the trust to investors.
HOLDRs offer investors diversification similar to an Exchange-Traded Fund (ETF). Unlike ETFs, the
owner of a HOLDR has an ownership interest in the shares of the companies that the HOLDR is
invested in and would retain the right to vote. Once the portfolio has been created, the makeup of the
portfolio will typically not change, although if a company included in the portfolio goes bankrupt or
merges with another company, the makeup of the HOLDR may be altered.

Investors have the ability to control when they are taxed, since they determine when to hold or sell the
HOLDR. An investor in a mutual fund does not have that benefit since the portfolio manager would
determine when to hold or sell the securities in the fund. Benefits also include liquidity and pricing
throughout the day (i.e., they are exchange-traded) as compared to an index or sector mutual fund,
which has daily pricing and is purchased directly from the fund. HOLDRs have no management fees
and are considered low-cost since there are only small transaction costs and custodian fees.

Exchange-Traded Notes (ETNs) An Exchange-Traded Note (ETN) is a type of unsecured debt security.
This type of debt security differs from other types of fixed-income securities since ETN returns are
linked to the performance of a commodity, currency, or index minus applicable fees. ETNs do not
usually pay an annual coupon or specified dividend. All gains are paid at maturity. These securities are
traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors
may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the
creditworthiness of the financial institution backing the note. If the issuer's financial condition
deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index
performs.



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* Add the following on page 18-15, as additional information on an Investment Adviser

Soft Dollars Soft dollars are products and services that an investment adviser receives from a broker-
dealer in exchange for customer order flow. Under a soft-dollar arrangement, a broker-dealer may provide
an investment adviser with services and information that assist the adviser in making investment
decisions on behalf of clients (research reports). If the service or product primarily benefits the adviser
rather than the client, it may not be purchased with soft dollars. Providing office equipment and supplies
does not meet the standards for soft-dollar compensation as determined by the SEC. Attending a
research seminar would be acceptable, but not reimbursement of the travel expenses entailed to attend
the conference.


* Add the following on page 19-10

Variable Life Insurance
The key difference between variable life insurance and the other types of permanent life insurance is
that variable life insurance gives the policyholder choices about the way premium payments are
invested. In traditional life insurance policies, the insurance company makes all the investment
decisions and bears all the risks, similar to a fixed annuity. In a variable life policy, the policyholder, not
the insurance company, assumes the investment risk. She may also lose all her cash value if
performance is substandard, although her death benefit generally may not decrease below a certain
guaranteed minimum.

A variable life insurance investment is not appropriate for everyone. The investor must be knowledgeable
and sophisticated enough to understand the consequences of the investment options available to her.
She must also be able to tolerate the fact that the policy!s cash value may fluctuate greatly. Most variable life
insurance policies are sold with a fixed death benefit. But the death benefit may increase if the money
that the policyholder has invested in the subaccounts of the separate account performs better than the
policy!s Assumed Interest Rate (AIR). Generally, the death benefit cannot fall below a certain floorthe
face value of the policy. The insurance company guarantees that the beneficiary will receive the
minimum death benefit as long as the policyholder makes all the required premium payments and does
not take out loans against the policy.

The cash value of a variable life policy depends on the performance of the subaccounts in which the
policyholder invests her net premiums and, therefore, could theoretically decline to zero if these
investments perform poorly. The tax implication of a variable insurance policy is that there are no tax
consequences to the beneficiaries of the policy, but the death benefit is included in the deceaseds
estate for tax purposes.


* Add the following to the bottom of page 22-37

The put/call ratio is a technical market indicator and is found by dividing the volume of all put
transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call
ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the
probability that the market will reverse course and turn bullish. The opposite is true for a low put/call
ratio, which is viewed as a bearish indicator.



Copyright Securities Training Corporation. All Rights Reserved. 10
Questions


1. Which TWO of the following statements are TRUE concerning a company that becomes delisted
from the NYSE or Nasdaq?

I. It may be quoted on the OTC Bulletin Board.
II. It may only be quoted in the OTC Pink market.
III. Firm quotes would no longer be available.
IV. Firm quotes may still be available.

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

2. A business that is traded on an exchange, owns properties in its portfolio, and makes mortgage
loans to developers is an example of a:

a. Closed-end investment company
b. Exchange-traded notes
c. Hybrid REIT
d. A direct participation program

3. Which of the following statements BEST describes Exchange-Traded Notes (ETNs)?

a. ETNs are debt instruments linked to the performance of a commodity, currency, or index.
b. ETNs are equity securities that pay a large dividend.
c. ETNs are mutual funds that invest in debt instruments.
d. ETNs are equity securities that represent ownership of a securities exchange.

4. The IPO of Symphony Music Inc. was registered on July 1, 20XX. If the manager of the new issue
wants to publish a research report on Symphony Music, what would be the earliest date that it
could publish the report?

a. July 11, 20XX
b. August 1, 20XX
c. August 11, 20XX
d. September 1, 20XX

5. A municipal finance professional (MFP) residing in New Jersey would be permitted to make which
of the following political contributions?

a. A $350 contribution to a New Jersey gubernatorial candidate
b. A $200 contribution to a Philadelphia, PA mayoral fund raiser
c. A $250 contribution to the mayor's reelection committee in her hometown
d. None of the above



Copyright Securities Training Corporation. All Rights Reserved. 11
6. When an investor purchases a municipal fund security, she will pay a sales load that is stated in the
official statement. Which TWO of the following statements are TRUE regarding an advertisement
for this municipal fund security?

I. The minimum sales load should be stated in the ad.
II. The maximum sales load should be stated in the ad.
III. Sales charges may not be reflected in performance data.
IV. Sales charges may be reflected in performance data.

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

7. Which of the following political contributions made by a municipal finance professional would
NOT violate the provisions of MSRB Rule G-37?

a. $100 to a candidate for whom you may vote
b. $100 to a candidate for whom you may not vote
c. $500 to a candidate for whom you may vote
d. $500 to a candidate for whom you may not vote

8. Which TWO of the following choices would be the most suitable purchasers of municipal zero-
coupon bonds?

I. An investor who does not seek present additional cash flow
II. An investor who seeks the tax benefits of long-term capital gains
III. An investor who needs cash for living expenses
IV. A custodian account where the parent of the minor child is in the highest tax bracket

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

9. Which of the following employees of a municipal securities firm would be considered a municipal
finance professional?

a. A municipal bond trader
b. An investment banker specializing in corporate bonds
c. A retail representative who recommends municipal securities
d. A file clerk working in the firm's municipal finance library

10. A variable annuity would be MOST suitable for which of the following customers?

a. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs
b. A client in a high tax bracket who is purchasing the annuity for short-term liquidity needs
c. A client who is purchasing the annuity in a 401(k) for his retirement needs
d. A client who is purchasing the annuity in order to have the funds available by the age of 50



Copyright Securities Training Corporation. All Rights Reserved. 12
11. Which TWO of the following activities would require special disclosure documents?

I. Penny stock trading
II. Trading in high-yield bonds
III. Day trading
IV. Online trading

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

12. Advertising for municipal fund securities investments must be approved prior to its official use by:

a. The Municipal Securities Rulemaking Board
b. The state sponsoring the municipal fund securities investment program
c. A principal of the firm who is selling the program
d. The portfolio manager of the municipal fund security investment

13. The correct order for the transfer of an account from one firm to another is:

I. The carrying firm validates the transfer instructions
II. The customer is informed of any nontransferable securities
III. The carrying firm sends the customers securities to the receiving firm
IV. The customer provides a written transfer request to the receiving firm

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

14. Which of the following statements is NOT TRUE regarding a firm's anti-money laundering
program?

a. The program must comply with a blueprint or template supplied by the SEC.
b. The program must be designed to comply with the Bank Secrecy Act.
c. The program must provide for annual testing of the system.
d. The firm must designate a specific individual responsible for implementing the firm's anti-
money laundering program and must identify the person to FINRA.

15. Portfolio margin permits an investor to:

a. Avoid margin deficiencies
b. Assume greater leverage
c. Trade directly with market makers
d. Trade without depositing funds until the securities decline in value

16. In order to implement a portfolio margin program, the firm must obtain approval from:

a. The options exchange
b. FINRA
c. The SEC
d. The OCC



Copyright Securities Training Corporation. All Rights Reserved. 13
17. When a margin requirement is designed to consider that the risk of one position is offset by another
position, i.e., having a long S&P 400 position offset by a short S&P 100 position, this approach to
calculating a margin requirement would be considered:

a. Portfolio-based
b. Strategy-based
c. Derivative-based
d. Inversely correlated

18. The minimum equity requirement for a pattern day trader is:

a. $25,000, which the client has five business days to deposit
b. $25,000, which must be deposited before the client may continue day trading
c. Four times the maintenance requirement for the account
d. $2,000 or 100% of the short market value

19. Investors may receive disclosure and secondary market information concerning municipal
securities:

a. Through the EMMA system
b. Through the TRACE system
c. Directly from the issuer
d. From the OATS system

20. FINRA disseminates bond transaction information for all these securities, EXCEPT:

a. Noninvestment-grade corporate bonds
b. Rule 144A securities
c. Investment-grade corporate bonds
d. GSE bonds

21. Which TWO of the following statements are TRUE concerning Trade Reporting and Compliance
Engine (TRACE) reports?

I. Only the seller is required to report the transaction.
II. Both the buyer and the seller involved in the transactions are required to report the transaction.
III. The system is used for corporate debt.
IV. The system is used for municipal debt.

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



Copyright Securities Training Corporation. All Rights Reserved. 14
22. An investor would like to trade exchange-traded funds (ETFs) in her brokerage account. Which
TWO of the following statements are TRUE concerning purchasing and selling short ETF shares?

I. Purchases may be executed in a cash or margin account.
II. Short sales may be executed in a cash or margin account.
III. Short sales may only be executed in a margin account.
IV. Leveraged ETFs can only be purchased in a margin account.

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

23. In mutual fund advertising, it is NOT permissible to state that:

a. A fund does not charge a 12b-1 fee
b. Dollar cost averaging assures long-term growth
c. Funds of competitors have higher expense ratios
d. The investment adviser has 20 years experience

24. The system used to report municipal securities transactions is called the:

a. Trade Reporting and Compliance System
b. Order Audit Trail System
c. Trade Reporting and Compliance Engine
d. Real-Time Transaction Reporting System

25. The term fast market is characterized by which TWO of the following descriptions?

I. An imbalance of orders
II. A very low number of trades
III. Highly volatile prices
IV. The quotes of market makers being updated very quickly

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

26. Which of the following lists assists a broker-dealer in making a reasonable determination that a
security is available to be borrowed from another broker-dealer in order to effect a short sale
transaction?

a. An Easy to Borrow List
b. A Hard to Borrow List
c. A Threshold Security List
d. A Restricted Stock List

27. In a soft-dollar arrangement between an investment adviser and a broker-dealer, the broker-dealer
would be permitted to pay:

a. The cost of a coach flight for a portfolio manager to attend a conference
b. The cost of a conference concerning the future of the computer software industry
c. The cost of computer terminals used to deliver market data services
d. A percentage of the salaries of the adviser's internal research staff


Copyright Securities Training Corporation. All Rights Reserved. 15
28. A registered representative wants to place an advertisement for a mutual fund in his local paper.
According to FINRA, prior approval for the advertisement must be given by:

a. A registered principal
b. The SEC
c. The sponsor of the mutual fund
d. A compliance officer

29. What is the acronym associated with the process of a client instructing his bank to deliver securities
against payment by the clearing firm?

a. RVP
b. COD
c. DVP
d. POA

30. Selling away takes place when a registered representative:

a. Sells his firm's client list to nonaffiliated broker-dealers without his firm's permission
b. Engages in private securities transactions outside his regular scope of employment without his
firm's permission
c. Sells securities through his firm in a financial product not created by his firm
d. Purchases speculative securities for his own account

31. Which TWO of the following situations would require written notification to an employer?

I. A registered person is leaving the country on a business trip for more than three months.
II. A registered principal is serving on the board of directors of a private company.
III. A registered person wants to act as a consultant for a private placement of a security that is not
being offered by her broker-dealer.
IV. A registered principal intends to purchase corporate securities in a personal account
established at her employing broker-dealer.

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

32. The Order Audit Trail System tracks the:

a. Execution of an order only
b. Cancellation of an order only
c. Time an attempt was made to place an order
d. Entire life of an order that is accepted by a member firm

33. According to SRO rules, an e-mail message complaining about excessive commissions sent to an
RR's personal electronic device:

a. Does not constitute an official complaint since the electronic device is not an official broker-
dealer contact channel and its use for business is typically prohibited
b. Is a complaint and must be maintained by the broker-dealer
c. Is a complaint and must be forwarded to the appropriate SRO
d. Must be followed up within 10 business days by a written document from the client to be
considered an official complaint


Copyright Securities Training Corporation. All Rights Reserved. 16
34. Under SRO rules, the carrying firm must complete the transfer of a customer account:

a. Within one business day of receipt of the transfer instructions
b. Within three business days of validation of the transfer instructions
c. Immediately upon receipt of the transfer instructions
d. Immediately upon validation of the transfer instructions

35. A broker-dealer must include all the following components in its business continuity plan, EXCEPT:

a. The impact of a disruption of the firm's counterparties
b. The home addresses and phone numbers of key employees
c. Regulatory reporting
d. Alternative locations for employees

36. Dedicated Securities has been invited to join a syndicate selling a new offering of common stock.
The head of the firm's syndicate department notices that the agreement among underwriters
mentions a penalty bid. Which of the following choices is an example of a penalty bid?

a. If Dedicated fails to sell its allotment, it will be liable for twice its normal commitment.
b. If Dedicated fails to solicit a certain number of indications of interest, it will be required to pay a
fee to the syndicate manager.
c. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate
at the stabilizing bid, Dedicated will forfeit the concession on those shares.
d. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate
at the stabilizing bid, Dedicated could be penalized for failure to maintain the public offering price.

37. XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates
are not attractive from its viewpoint, the company knows that interest rates could drop suddenly.
The company would like to be ready to sell the bonds quickly. It would also like the bonds to be as
liquid as possible in order to attract investors. Which of the following choices would be most
appropriate for its needs?

a. A private placement under Regulation D
b. An intrastate offering under Rule 147
c. A traditional registration statement
d. A shelf registration under Rule 415

38. An equity security that is distributed under Regulation S may be resold by:

a. Immediate sale within the U.S. market
b. Immediate sale in a designated offshore market
c. Regulatory approval from SROs
d. Waiting six months, then selling within the U.S. market

39. Pickette Financial Services is participating in the IPO of Swank Tanks, Inc., as the managing
underwriter. If a research analyst at Pickette wants to initiate coverage on Swank Tanks, she:

a. Must wait 10 calendar days after the offering date
b. Must wait 25 calendar days after the offering date
c. Must wait 40 calendar days after the offering date
d. May not issue a research report due to a conflict of interest


Copyright Securities Training Corporation. All Rights Reserved. 17
40. A U.S. issuer conducts an offering of corporate bonds in China. How long is the holding period if a
broker-dealer wants to offer the securities to an investor in the U.S.?

a. 25 days
b. 40 days
c. 90 days
d. One year

41. A designated market maker/specialist has an order on its book from a public customer to buy stock
at $34.70 and another order from a public customer to sell stock at $34.95. The DMM may:

a. Buy stock for its own account at $34.71
b. Buy stock for its own account at $34.69
c. Sell stock from its own account at $34.96
d. Sell stock from its own account at $35.01

42. A customer at your firm has an online trading account. If the customer places a limit order for a
Nasdaq-listed stock and your firm is a market maker in this security, which of the following
statements is TRUE?

a. The order will be executed automatically.
b. The order will be sent to an ECN.
c. The order will be displayed only if it improves the inside market.
d. The order will be displayed only if it improves the market makers quote.

43. Relevant to trading equity securities, the term dark pool is BEST defined as:

a. Trading prior to an exchanges normal market hours
b. Trading after an exchange ends its normal market hours
c. Trading between investors, allowing them to buy and sell securities anonymously without
quotes being displayed
d. Trading between investors, allowing them to buy and sell securities anonymously with quotes
being displayed

44. Of the following factors, which would be the MOST important to consider when analyzing the
investment portfolio of a client who has retirement as her primary investment objective?

a. Age
b. Net worth
c. Education level
d. Previous investment history

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

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



Copyright Securities Training Corporation. All Rights Reserved. 18
46. Regarding a companys financial statements, total assets are equal to:

a. Total Liabilities + Stockholders Equity
b. Total Liabilities - Stockholders Equity
c. Total Liabilities + Stockholders Equity - Depreciation
d. Stockholders Equity + Goodwill

47. A registered representative is reviewing a corporations financial statements. Which TWO of the
following statements are TRUE concerning an issuers bond interest expense?

I. The annual interest payments are found on the balance sheet.
II. The annual interest payments are found on the income statement.
III. The interest payment is deducted from net income.
IV. The interest payment is deducted from EBIT.

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

48. A client contacts an RR after reviewing the financial statements of the S-Works Carbon Company.
The client is confused since the company paid a cash dividend but had a loss for the last fiscal year.
Which of the following statements is TRUE?

a. The company is permitted to pay a cash dividend even though it had a loss.
b. The company is not permitted to pay a cash dividend if it had a loss.
c. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior
approval from shareholders.
d. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior
approval from the SEC.

49. The Taft Food Company intends to distribute to existing stockholders shares of its grocery
business. The shares of this company will be traded separately from Taft. This is an example of a:

a. Stock dividend
b. Reverse merger
c. Spinoff
d. Initial public offering

50. Which of the following statements is TRUE concerning VIX options?

a. An investor will buy puts if she expects the S&P 500 Index to fall.
b. An investor will buy calls if she expects the S&P 500 Index to rise.
c. An investor will buy calls as a hedge if she expects the S&P 500 Index to fall.
d. An investor will only buy options on the VIX if she expects an increase in the volatility on the
S&P 500 Index.



Copyright Securities Training Corporation. All Rights Reserved. 19
51. An investor who expects an increase in volatility in the equity markets would MOST likely adopt
which TWO of the following strategies?

I. Long VIX call options
II. Short VIX call credit spread
III. Short VIX put credit spread
IV. Long VIX put options

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

52. An individual owns 800 shares of stock at an original cost of $55 per share. If the company
distributes a 15% stock dividend, what is the client's cost basis per share?

a. $63.25
b. $55.00
c. $47.83
d. $47.75

53. When a client buys a bond above par, the confirmations must indicate the:

a. Rating
b. Contra-party
c. Lower of yield to call or yield to maturity
d. Catastrophe call provisions

54. Which of the following choices best describes Certificates of Participation?

a. They are a form of equity financing for a corporation.
b. They are a type of REIT.
c. They are a type of bond, typically created through a lease agreement.
d. They are a type of bond based on payments from residential mortgages.

55. Which TWO of the following types of municipal securities would NOT require voter approval?

I. A general obligation bond backed by income taxes
II. A special tax bond
III. A bond backed by ad valorem taxes
IV. A certificate of participation

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



Copyright Securities Training Corporation. All Rights Reserved. 20
56. Bergen County has issued Build America Bonds to improve its transportation system. Which TWO
of the following statements are TRUE concerning these bonds?

I. The bonds are federally tax-free.
II. The bonds are federally taxable.
III. The issuer will receive a federal tax credit.
IV. The issuer will receive a federal reimbursement.

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

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

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

58. The net borrowing cost to a municipal issuer of a Direct Pay Build America Bond (BAB) with a 7%
interest rate is:

a. 0%
b. 2.45%
c. 4.55%
d. 7.00%

59. Which TWO of the following choices are differences between Exchange-Traded Funds (ETFs) and
Exchange-Traded Notes (ETNs)?

I. ETFs may be traded in the secondary market and ETNs cannot.
II. ETNs carry issuer risk which is tied to the creditworthiness of the financial institution backing
the note and ETFs do not have issuer credit risk.
III. ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate.
IV. ETNs have a maturity date and ETFs do not.

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

60. A Collateralized Debt Obligation or CDO is BEST defined as a:

a. Type of REIT
b. Type of asset-backed security
c. Type of closed-end investment company
d. Type of municipal revenue bond



Copyright Securities Training Corporation. All Rights Reserved. 21
61. Which of the following investors is LEAST likely to purchase a Collateralized Debt Obligation
(CDO)?

a. Agawam Commercial Bank & Trust Company
b. Oakdale Pension Fund
c. Robert & Susan Abramowitz, JTWROS
d. Lincolnshire Hedge Fund

62. An investor places an order to buy shares of a mutual fund after that investment company has
determined its net asset value for the day. The RR instructs the fund company to purchase the
shares at that days NAV for the investor. Which of the following statements concerning this
potential trade is TRUE?

a. This is a sales practice violation known as late trading.
b. This is an acceptable practice known as market timing.
c. The RR would need to have prior written approval by a principal of the firm to execute this
order.
d. The investor may only purchase Class B shares in this case, since Class A shares are not
available under this arrangement.

63. Structured products are typically comprised of two components including:

a. A fixed-income note and common stock
b. A fixed-income note and a derivative product
c. A fixed-income note and a fixed-equity contract
d. Two different types of derivative products

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

a. They are usually registered with the SEC.
b. The principal that the investor would receive may be based on the value of a stock traded on an
exchange.
c. The principal the investor would receive may be based on the value of foreign currency.
d. Since this product is usually sold by a bank, the principal will be protected by the FDIC.

65. Structured products may:

I. Offer returns linked to equity securities
II. Not offer returns linked to commodities
III. Not offer returns linked to interest rates
IV. Be formulated to provide principal protection

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

66. Regulation AC (Analyst Certification) does NOT apply to:

a. Brokers
b. Dealers
c. Issuers
d. Research analysts



Copyright Securities Training Corporation. All Rights Reserved. 22
67. Regulation FD applies to:

a. Retail customers
b. Issuers of securities
c. Institutional investors
d. Broker-dealers

68. A registered representative is permitted to borrow from, or lend funds to, customers in all of the
following situations, EXCEPT:

a. The customer is an immediate family member of the registered representative
b. The customer is an accredited investor
c. The loan is based on a business relationship independent from the member firm customer
relationship
d. The customer has a personal relationship with the registered representative

69. A registered representative is the owner of a marina on the North Shore of Long Island. She wants to
build an apartment complex on this property in order to increase the property's cash flow. If she
receives a loan from family members, which of the following statements is TRUE?

a. Her broker-dealer is required to approve the loan.
b. She is required to notify her firm of the loan.
c. She is required to notify FINRA.
d. She is not required to notify her firm about the loan.

70. Which TWO of the following statements are TRUE concerning a Health Savings Account?

I. The contribution is made in pretax dollars.
II. The contribution is made in after-tax dollars.
III. The funds grow tax-free if used to pay qualified medical expenses.
IV. The funds grow tax-deferred if used to pay qualified medical expenses.

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

71. All of the following choices are characteristics of a Health Savings Account (HSA), EXCEPT:

a. The amount a person can contribute each year is limited
b. It is not open to individuals who are enrolled in their companys health insurance plan
c. The funds may be invested in mutual funds
d. The funds must be used each year and may not be carried over

72. One of your clients, Kona Okemo, has a long-term objective of capital appreciation. Which of the
following investment strategies would MOST closely achieve this goal?

a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund
b. 50% in an ETF that follows the S&P 500 and 50% in a diversified bond fund
c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund,
15% in a biotechnology fund, and 20% in a U.S. government bond fund
d. 20% in an oil and gas fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in
a municipal bond fund, and 20% in a U.S. government bond fund


Copyright Securities Training Corporation. All Rights Reserved. 23
73. Lindsay Depaul is a client seeking a balance between income and capital growth. Which of the
following investment strategies would MOST closely achieve this goal?

a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund
b. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a
municipal bond fund, and 20% in a U.S. government bond fund
c. 50% in an ETF that follows the S&P 500 and 50% in an equity foreign index fund
d. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund,
15% in a biotechnology fund, and 20% in a U.S. government bond fund

74. An investor has an equity portfolio that consists mainly of domestic companies. If an RR wants to
diversify the clients portfolio to include foreign companies, which of the following investment
products would MOST closely achieve this goal?

a. A mutual fund that tracks the FTSE Index
b. A mutual fund that tracks the EAFE Index
c. An ETF that tracks the S&P 500 Index
d. A mutual fund that tracks the Wilshire Index

75. Randy Cervello has a variable life insurance policy. Which of the following statements BEST
describes the tax consequences of his variable life insurance policy upon his death?

a. There are no tax consequences to his beneficiary and the death benefit is not included in his
taxable estate.
b. There are gift taxes due from his beneficiary in the year he dies.
c. The value of the policy will be included in Randys estate for tax purposes.
d. The policy proceeds are federally taxable to the beneficiary.

76. The purchaser of a variable life insurance policy bears which of the following risks?

a. The death benefit may fall to zero due to poor market performance.
b. The policy may have no cash value if the separate account performance is negative.
c. The insurance company may increase the premiums if the investment performance of the
separate account is poor.
d. The increasing cost of doing business may force the insurance company to raise expense
charges against the separate account.

77. The MOST appropriate buyer(s) for a variable life insurance policy is/are:

a. A person who requires the discipline of forced savings
b. Parents with a modest income who have young children
c. A person who wants the assurance of a guaranteed cash value
d. A person with an understanding of investments who can tolerate market risk

78. A durable power of attorney:

a. Gives someone else the authority to manage the grantor's finances if that person becomes
incapacitated
b. Generally may not be revoked by the grantor
c. May take the place of a will in many states
d. Is automatically revoked if the grantor is declared incompetent


Copyright Securities Training Corporation. All Rights Reserved. 24
79. A municipal finance professional (MFP) and her spouse make a political contribution of $400 from
a joint account. Only the MFP signs the check. According to the MSRB political contribution rules,
the contribution would be viewed as a:

a. $200 contribution from each party
b. $400 contribution from the MFP
c. $400 contribution from the spouse
d. $200 contribution from each party, but it must be reported to the MSRB

80. What is a clients maximum gain if she is long XAM stock and short an XAM call?

a. The difference between the market price and the strike price plus the premium
b. The difference between the market price and the strike price minus the premium
c. The market price minus the premium
d. Unlimited

81. What is a clients maximum loss if he is short KNP stock and short a KNP put?

a. The difference between the market price and the strike price plus the premium
b. The market price plus the premium
c. The market price minus the premium
d. Unlimited

82. Which of the following statements is TRUE regarding TRACE?

a. It is a reporting system for corporate bonds.
b. It is a reporting system for U.S government bonds.
c. It is a reporting system for stocks listed on Nasdaq.
d. It is a reporting system for municipal bonds.

83. An American company has sold its services to a British consulting firm and is expecting payment
from a customer in British pounds. To hedge against an increase in the U.S. dollar, the American
company should:

a. Buy British pound puts
b. Buy British pound calls
c. Write British pound calls
d. Write British pound straddles

84. A retail sales person has helped his firm win the role as the lead underwriter in a local municipal
bond issue. If the underwriting was conducted on a negotiated basis, which of the following
statements is TRUE?

a. As long as the control relationship is disclosed, there are no other restrictions.
b. The retail sales person could not have made political contributions to elected officials in the
past two years.
c. The retail sales person would be required to register as a municipal securities principal.
d. The action by the retail sales person would be a violation of MSRB rules.



Copyright Securities Training Corporation. All Rights Reserved. 25
85. Which of the following direct participation programs would be associated with low costs to obtain
the property and high up-front costs?

a. An oil and gas developmental program
b. An equipment leasing program
c. An exploratory oil and gas program
d. An income oil and gas program

86. An investor purchases a zero-coupon municipal bond maturing in 15 years that is callable in five
years at 102. If the bond is called, the investor would receive:

a. Par value
b. 102% of the par value
c. 102% of the original cost
d. 102% of the compound accreted value

87. A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR.
Which of the following actions would be BEST for the RR to take?

a. Instruct the client to obtain the information from FINRA
b. Refer the client to the funds sponsor since the RR may not be authorized to release this
information
c. Instruct the client to obtain that information from the SEC database of mutual fund
prospectuses
d. Inform the client that this information may be obtained by reviewing the front of the funds
prospectus

88. Sipcar is a stock listed on Nasdaq and the inside market is $3.40 - $3.45. A client contacts an RR and
wants to place an order to buy the stock at $3.425. The BEST course of action for the RR is to:

a. Accept the order
b. Accept the order and have it approved in advance by a principal
c. Not accept the order
c. Accept the order and request that it be routed to an ECN

89. You discover that one of your clients is on the OFAC list. You must:

a. Contact federal law enforcement authorities immediately
b. Call the client to see if a mistake has been made
c. Investigate the matter further to see if there is evidence of suspicious activity
d. Notify FINRA

90. A client wants to make sure she does not pay more than $3,000 to execute a spread transaction. The
RR should:

a. Submit two limit orders
b. Submit one limit for the buy side of the transaction and a market order for the sell side
c. Submit one order for a net debit of $3,000
d. Submit one order for a net credit or $3,000



Copyright Securities Training Corporation. All Rights Reserved. 26
91. Which of the following choices is NOT a characteristic of a HOLDR?

a. Diversification
b. The right to vote
c. The ability to control when you are taxed
d. Once-a-day pricing

92. What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF?

a. $1,000,000, since these securities are not eligible for additional margin
b. $500,000
c. $250,000
d. $125,000

93. What is the SRO maintenance requirement on a $1 million purchase of a 3x Short Gold Index ETF?

a. $3,000,000
b. $1,000,000
c. $900,000
d. $300,000

94. White Shoe Securities sells a Nasdaq-listed stock at 4:15 p.m. What is the reporting requirement on
the TRF?

a. There is no reporting requirement since Nasdaq transactions do not need to be reported to the
TRF.
b. It must be reported before the opening on the next day.
c. It must be reported within one hour to the TRF.
d. It must be reported within 30 seconds to the TRF.

95. Which of the following statements is NOT TRUE about Exchange-Traded Notes (ETNs)?

a. ETNs generally pay a fixed coupon rate.
b. ETNs may be sold at any time in the secondary markets or held until maturity.
c. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the
note.
d. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN,
regardless of how its underlying index performs.

96. A customer asks an RR for assistance in investing a $150,000 inheritance. The customer would like
to use the funds to start a new business within the next year. Which of the following choices would
be the LEAST suitable investment recommendation for this customer?

a. Taxable money-market funds
b. Tax-exempt money-market funds
c. Short-term U.S. government funds
d. Balanced funds

97. Before accepting a DVP order from a customer, a broker-dealer must:

a. Notify FINRA
b. Obtain the name of the customer's agent from the customer
c. Receive approval of the trade from the contra broker
d. Notify the appropriate banking regulator


Copyright Securities Training Corporation. All Rights Reserved. 27
98. What is a clients maximum loss if she is long XAM stock and short an XAM call?

a. The difference between the market price and the strike price plus the premium
b. The market price plus the premium
c. The market price minus the premium
d. Unlimited

99. A high put/call ratio would MOST likely be associated with a(n):

a. Bullish indicator
b. Bearish indicator
c. Indicator that the market will trade within a narrow range
d. Indicator that the trading volume will be increasing

100. In order to be eligible for portfolio margin, a client must:

a. Be an accredited investor
b. Have at least $500,000 of investable assets at a firm
c. Be approved for uncovered writing
d. Have a minimum five years' experience in derivatives investing



Copyright Securities Training Corporation. All Rights Reserved. 28
Explanations


1. (B) A company that fails to meet the maintenance requirements of securities listed on the NYSE or
Nasdaq will become delisted. When this occurs, the company may be quoted (but not listed) on
the OTC Bulletin Board or in the OTC Pink market (also called the Pink Sheets). Quotes on the
OTCBB or the electronic Pink Sheets generally are firm quotes. Firm quotes obligate the offering
dealer to buy or sell the amount quoted.

2. (C) A Real Estate Investment Trust (REIT) that owns properties (office buildings) and also makes
loans to real estate developers is a Hybrid REIT. These business structures are a combination of
an equity REIT and a mortgage REIT.

3. (A) Exchange-Traded Notes (ETNs) are a type of unsecured debt security. This type of debt security
differs from other types of fixed-income securities since ETN returns are linked to the
performance of a commodity, currency, or index minus applicable fees. Similar to ETFs, ETNs
are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short.
Investors may also choose to hold the debt security until maturity.

4. (C) The earliest date on which a manager or comanager of Symphony Music could publish a
research report after the IPO (on July 1, 20XX) is August 11, 20XX. FINRA rules incorporate quiet
periods that follow an initial public offering and a secondary offering, during which time the
investment banking client may not be the subject of a research report nor may a research
analyst make a public appearance regarding securities that are covered by the quiet period. The
quiet period that must be adhered to by managers and comanagers for initial public offerings is
40 calendar days. Other distribution participants must wait 25 days. The restriction for a
member firm preparing a research report on a security it recently managed or comanaged
(quiet period) for secondary offerings is 10 calendar days.

5. (C) Municipal finance professionals are limited to a maximum contribution of $250 per official, per
election in which they are entitled to vote. An MFP would trigger the ban by making contributions
in localities where she is not eligible to vote.

6. (D) A 529 College Savings Plan is a type of municipal fund security. If sales loads are depicted in
municipal fund securities advertising, the maximum amount of the sales charge should be
stated. Additionally, sales charges may be reflected in the performance data of the investment
and, if they are not, a statement to that effect should be made.

7. (A) Municipal finance professionals (MFPs) are allowed to make political contributions of up to
$250 per person to candidates for whom they are permitted to vote. Any contribution made to a
candidate for whom they are not entitled to vote would be a violation. For example, if you are
an MFP and a resident of New Jersey, you may not contribute to an election campaign for the
governor of New York without triggering the ban.



Copyright Securities Training Corporation. All Rights Reserved. 29
8. (B) In a custodian account, the minor is technically liable for taxes. Depending on the amount of
income generated in the account and the age of the minor, taxes are calculated at the parents'
rate. Therefore, parents may consider the purchase of municipal bonds in the custodian
account for tax advantages. The zero-coupon bond will not produce cash flow during the
holding period. This would be desirable for those who do not need cash income. (Funds are
needed at a later date in the custodian account.) The zero-coupon municipal bond would be
suitable for other accounts besides the custodian account, such as upper tax bracket earners
during their peak earning years. Zero-coupon bonds are subject to annual accretion of the
investor's cost basis. As such, at maturity, the investor's cost basis equals the par value of the
bond. (There are no capital gains.) The accretion of the municipal bond is treated as interest
income which, in the case of the municipal bond, is federally tax-free. This is a tax advantage,
but it is not a long-term capital gain.

9. (A) An MFP is defined as any associated person primarily engaged in municipal underwriting,
trading, sales, financial advisory and consulting services, and research or investment advice on
municipal securities. Registered representatives who recommend municipal securities to retail
investors generally are excluded from the definition. An exception is solicitation of municipal
securities business from issuers. Any amount of this activity will result in the classification of an
associated person as an MFP. A file clerk would not be considered an associated person.

10. (A) A variable annuity is most suitable for an investor seeking long-term, tax-deferred income for
retirement. A tax-deferred investment, as with a variable annuity, becomes more advantageous
for an investor with a higher tax bracket. A variable annuity is unsuitable for customers that
have short-term needs since the insurance company may impose surrender charges if the
annuity proceeds are withdrawn early. It would also be unsuitable for a client purchasing the
annuity in a tax-qualified account such as a 401(k) or IRA, since these accounts already have the
benefits of tax-deferred growth. If a client withdraws the proceeds of a variable annuity prior to
age 59 1/2, a 10% tax penalty applies.

11. (A) Regulators have singled out penny stock investing and day trading as presenting significant
risks that warrant providing special risk disclosure documents.

12. (C) A 529 College Savings Plan is a type of municipal fund security. All advertising regarding
municipal securities and municipal fund securities must be approved by a municipal securities
principal of the firm prior to its initial use.

13. (A) If a customer wishes to transfer an account from one member firm (the carrying firm) to
another member firm (the receiving firm), the customer must give written instructions to the
receiving firm. The receiving firm must submit the transfer request to the carrying firm
immediately upon receipt from the customer, and the carrying firm must either validate the
instructions or take exception to the transfer within one business day. For any assets that are
not transferable, the carrying firm must request from the customer instructions as to what
course of action to take, such as liquidation or retention by the carrying firm. Within three
business days following the validation of a transfer instruction, the carrying member must
complete the transfer of the account to the receiving member. Securities are typically
transferred by the National Securities Clearing Corporation (NSCC) using the Automated
Customer Account Transfer Service (ACATS).



Copyright Securities Training Corporation. All Rights Reserved. 30
14. (A) There is no anti-money laundering blueprint or template supplied by either the SEC or FINRA
to broker-dealers. However, any program implemented by the broker-dealer must be designed
to comply with the provisions of the Bank Secrecy Act and must provide for annual testing of
the systems. Broker-dealers must appoint a compliance person to oversee anti-money
laundering regulation compliance, and must identify that person to FINRA.

15. (B) Portfolio margin produces significantly lower margin requirements than strategy-based margin,
affording an investor greater leverage.

16. (B) Firms establishing a portfolio margin program are required to obtain approval from FINRA.

17. (A) Portfolio margin produces significantly lower margin requirements than strategy-based margin,
affording an investor greater leverage. In a strategy-based margin account, directly hedged
positions such as long stock and long puts are considered separately. In portfolio management
these hedges are considered as well as the interrelationship between existing positions. For
example, a client could be long S&P 500 and short S&P 500 futures. These positions would be
viewed as interrelated. Using a portfolio-based rationale, margin allows a broker-dealer to align
the amount of margin money required to be maintained in the account to the risk of the
portfolio as a whole. This approach considers simulated market activity and considers
offsetting positions in an account that are positively correlated. Portfolio margining examines
the net risk to the entire portfolio.

18. (B) The minimum equity requirement for a pattern day trader is $25,000. This amount must be
deposited in the account before the customer may continue day trading and must be
maintained in the customer's account at all times. Day-trading buying power is limited to four
times the trader's maintenance margin excess, determined as of the close of the previous day.

19. (A) The MSRB has established the Electronic Municipal Market Access (EMMA) system as the
primary market disclosure service for official statements, other related primary market
documents, and information. The EMMA system also contains information related to the
continuing disclosure requirements submitted by municipal issuers and secondary market
transactions submitted by municipal securities dealers. EMMA receives transactional
information from the MSRBs Real-Time Transaction Reporting System (RTRS).

20. (B) TRACE is a reporting system that was created to provide greater transparency in the corporate
bond market. It is not a quotation or an execution system. Broker-dealers provide quotes and
will execute transactions in corporate bonds. There is no regulatory quote or execution system
as there is for equity securities. FINRA disseminates bond transaction information for publicly
traded, TRACE-eligible securities (which include investment-grade and noninvestment-grade
bonds, and debt securities issued by a government-sponsored enterprise). Although transactions
for securities issued under Rule 144A are reported to TRACE, the information is not disseminated.

21. (C) TRACE was created to provide greater transparency in the corporate bond market. Every FINRA
member that is party to a transaction in TRACE-eligible securities must report its side of the
transaction to FINRA. Transactions in municipal securities must be reported to the Real-Time
Transaction Reporting System (RTRS), which is operated by the MSRB.


Copyright Securities Training Corporation. All Rights Reserved. 31
22. (B) ETFs may be purchased in a cash or margin account. This applies to long positions in regular
ETFs, inverse ETFs, or leveraged ETFs. If an investor sells short an ETF, this transaction must be
executed in a margin account similar to selling short any equity security.

23. (B) Mutual fund advertising may not state that any systematic method of investing will assure a
profit or a specific rate of return. Historical rates of return may be disclosed. The other
statements are acceptable.

24. (D) Broker-dealers are required to report transactions in municipal securities to the Real-Time
Transaction Reporting System (RTRS), which is operated by the MSRB.

25. (A) The term fast market is characterized by very heavy trading, fast moving prices, and high
volatility. There also may be an imbalance in the number or shares clients are willing to buy or
sell. For example, there are 500,000 shares to buy and only 100,000 shares to sell. Quotes may
take a long time to update since prices and trades are moving so quickly. A clients order may
take a longer time to execute, and if a market order is entered by a client, the price received may
be significantly higher or lower than the quoted price.

26. (A) In order to aid in the process of locating securities, the SEC has accepted the use of Easy to
Borrow lists. These lists, which must be less than 24 hours old, provide reasonable grounds for
belief that a security on the list will be available to be borrowed. The securities on the list must
be readily available to avoid fails to deliver. Use of an Easy to Borrow list expedites the
fulfillment of the locate provision. A Hard to Borrow list refers to securities that a clearing
broker-dealer may have difficulty in borrowing.

27. (B) Soft dollars are products and services that an investment adviser receives from a broker-dealer
in exchange for customer order flow. It is a means of paying brokerage firms for their services
through trade commissions. The key here is that the services that the adviser receives as part of
a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the
cost of the conference that an adviser attends concerning securities within an industry in which
the adviser will be invested. Travel costs and any costs that should be paid by the adviser (e.g.,
salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement.
Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of
the data services would be covered by soft dollars.

28. (A) According to FINRA rules, a registered principal must approve advertising before it is used.
Mutual fund advertising and sales literature not only must be approved by a principal of the
broker-dealer, but it also must be submitted to FINRA for review within 10 days of first use.



Copyright Securities Training Corporation. All Rights Reserved. 32
29. (A) DVP (Delivery versus Payment) and COD (Cash on delivery) are general acronyms used to
describe a relationship in which a client uses a bank to settle trades with executing firms. The
firm delivers securities against the bank payment and pays against the bank delivery of
securities. When discussing a given transaction, a DVP occurs when the dealer delivers
securities to the bank in return for a cash payment from the bank. An RVP (Receive versus
Payment) occurs when the dealer receives securities from the bank and makes a cash payment
to the bank. The transaction described in the question is an example of an RVP transaction in
which the customer's bank is delivering securities in return for payment by the broker-dealer. It
is important to remember that clients (usually institutions) set up brokerage accounts and place
orders at these firms. However, trades settle through custodian banks designated by the clients.
The broker-dealer will contact the bank, which will send payment or receive securities on
behalf of the clients. The broker-dealer will not hold the client funds or securities.

30. (B) A private securities transaction is defined as one outside the representative's regular scope of
business. The representative must provide written notice to the employing member and receive
written approval from the member if he expects to receive selling compensation for these
services. The member must also supervise the representative as if the transaction were
executed on behalf of the member. Selling away occurs when a registered representative
engages in private securities transactions, selling securities outside his regular scope of
employment without his firm's approval.

31. (C) Registered personnel who pursue outside business interests and who will be compensated, or
who participate in private securities transactions, must provide their employers with prior
written notification. The employer may then approve or disapprove the participation. A
registered person who has an existing account at her firm does not need to provide written
notification to her employer for each transaction.

32. (D) The Order Audit Trail System (OATS) enables FINRA to effectively review market activity in
regard to customer orders within a member firm, to conduct surveillance, and to enforce rules.
OATS records the life of an order from receipt, to routing, to modification if applicable, and
cancellation or execution.

33. (B) Records of customer complaints must be maintained according to SRO record-keeping rules.
Complaints may be delivered in any written format, including letters, e-mail, IMs, and text
messages. There is no requirement to follow up an electronic communication with a paper
document or to send the complaint to the appropriate SRO.

34. (B) If a customer wants to transfer an account to another broker-dealer, she must sign a transfer
request. The firm where the client has the existing account is known as the carrying firm and
the new firm is known as the receiving firm. According to SRO rules, the transfer of a customer
account must be completed by the carrying party within three business days of validation of the
transfer instructions. The carrying firm must either validate the instructions or take exception
within one business day.



Copyright Securities Training Corporation. All Rights Reserved. 33
35. (B) A firm's business continuity plan should discuss the impact of a significant disruption on the
firm's counterparties, banks, and business constituents (i.e., businesses with which it has an
ongoing commercial relationship). The plan should also provide for regulatory reporting and
alternative physical locations from which employees may continue working. FINRA also
requires each member firm to provide to the regulator by electronic means, or other means as
FINRA may specify, prescribed emergency contact information, which must include the
designation of two emergency contact persons. The plan does not need to state the home
addresses of any of its employees.

36. (C) A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling
concession from a syndicate member when securities originally sold are repurchased by the
syndicate in stabilizing transactions.

37. (D) While the sales described in choices (a), (b), and (d) would usually be faster than a full
registration, both Regulation D and Rule 147 place various restrictions on resales, reducing the
liquidity of the issue. A shelf registration under Rule 415 would satisfy all of XYZ Corporation's
needs.

38. (B) An overseas investor who acquires securities pursuant to Regulation S may sell the securities
overseas immediately through a designated offshore securities market. There is a distribution
compliance period (holding period) of 40 days for debt securities and a one-year period before
an equity security sold pursuant to Regulation S may be resold in the U.S.

39. (C) A research analyst of Pickette Financial Services must wait 40 days after the date of the offering
to publish a research report, or make a public appearance. This quiet period is applied to
members that have agreed to participate as a manager or comanager of the IPO. Other
participants, such as syndicate and selling group members must wait 25 days to publish a
research report, or make a public appearance after the IPO date.

40. (B) An overseas investor who acquires securities pursuant to Regulation S may sell the securities
overseas immediately through a designated offshore securities market. There is a distribution
compliance period of 40 days for debt securities and a one-year period before an equity security
sold pursuant to Regulation S may be resold in the U.S.

41. (A) The specialist on an exchange is also referred to as a designated market maker (DMM). A DMM
is not permitted to compete with public orders when trading for its own account. The DMM
may buy stock at a higher price or sell stock at a lower price. In doing so, the DMM has
narrowed the spread (the difference between the bid and ask). The DMM is permitted to buy
stock at $34.71 since this price is higher than the price of the public order ($34.70). The other
choices would result in the DMM buying lower or selling at a price equal to or higher than the
public customer's order.

42. (D) The SEC Order Handling Rules require that a customer's limit order be displayed in a market
maker's quote if it improves that quote. This is true even if the customer's order does not
improve the inside market. The order may (not will) be sent to an electronic communication
network (ECN). The order will be executed automatically only if the price and size of the order
can be matched in the Nasdaq trading system.



Copyright Securities Training Corporation. All Rights Reserved. 34
43. (C) A dark pool is a source of liquidity for large institutional investors and high-frequency traders,
and this system would not disseminate quotes. The system can be operated by broker-dealers
or exchanges, and allows these investors to buy and sell large blocks of stock anonymously. The
objective is to allow these investors to trade with the least amount of market impact, with low
transaction costs. Some dark pools provide matching systems and can also allow for
participants to negotiate prices. Normal market hours are 9:30 a.m. to 4:00 p.m. and trading
outside these times is referred to as extended-hours trading.

44. (A) When analyzing a client's existing portfolio to determine how it affects recommendations you
might make, it is important to consider a client's investment objectives and the length of time
available to try to meet those objectives. When retirement is the primary objective, it is very
important to know the client's age. The other items mentioned are also valuable for an RR to
know, but they are not as critical as knowing the client's age.

45. (C) The Bond Buyer Municipal Bond Index is based on the prices of 40 recently issued long-term
general obligation and revenue bonds. The index is calculated by taking the price estimates and
adjusting them to a 6.00% coupon. The index is published daily and serves as the basis for a
futures contract (which is no longer traded). The other three choices refer to other Bond Buyer
indices which estimate yields, not prices.

46. (A) The balance sheet formula is Total Assets = Total Liabilities + Stockholders' Equity. Total Assets
is therefore equal to Total Liabilities + Stockholders Equity.

47. (D) The annual interest payment or bond interest expense may be found on a companys income
statement. The amount of debt or bonds outstanding may be found on the balance sheet. The
annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond
interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-
tax dollars.

48. (A) A company is permitted to pay cash dividends in excess of its net income even if it had a loss. In
terms of financial accounting, cash dividends are paid out of retained earnings that are part of
shareholders' equity. Therefore, cash dividends paid will reduce shareholders' equity. The
company could have paid the cash dividend easily based on retained earnings from previous
years.

49. (C) Spin-off transactions occur when a company is seeking to divest a division. In a spinoff, each
shareholder of the parent retains her original shares, but is also given shares in the newly
created entity. There are no immediate tax consequences to the recipient of the new shares.
Spinoffs are used by sellers in the hopes that the combined valuation assigned by the market to
the two (now) separate companies will be greater than that of the single combined entity. A
stock dividend is a situation where each shareholder is given additional shares of the existing
company. When a company with no shares currently trading publically begins trading in the
public market, it is defined as an initial public offering (IPO). In a reverse merger, a private
company buys a public company with the acquirers shareholders swapping their shares for a
majority stake in the publicly traded shell corporation. This technique allows a private
company to obtain publicly listed status quickly, and to forgo much of the regulatory expense
incurred with an IPO.



Copyright Securities Training Corporation. All Rights Reserved. 35
50. (C) VIX is the CBOE's Volatility Market Index option. It is a broad-based index option and is
calculated using the S&P 500 Index option bid and ask quotes. The VIX or volatility index is
often referred to as a gauge of investors' fears. The index tends to move inversely with the S&P
500 Index. The VIX usually rises when the S&P 500 Index falls and will fall when the S&P 500
Index rises. An investor will buy calls when she expects the market to decline and volatility to
increase. An investor will buy puts on the VIX if she expects the market to rise and volatility to
decrease. Many investors will buy VIX call options as a hedge against a possible decline in the
market. The VIX option can be used by investors who expect either an increase or a decrease in
volatility.

51. (A) VIX is the CBOE's Volatility Market Index option. It is a broad-based index option and is
calculated using the S&P 500 Index option bid and ask quotes. The VIX or volatility index is
often referred to as a gauge of investors' fears. The index increases or decreases based on the
expected volatility of the market. If an investor expects volatility to rise, she would be bullish on
the VIX. A bullish option strategy such as long calls, short put credit spreads (executed for a net
credit), or long call debit spreads (executed for a net debit) would enable the investor to profit if
the VIX increases. Many investors will buy VIX call options as a hedge against a possible decline
in the market since the VIX usually moves inversely with the equity market.

52. (C) A stock dividend is not a taxable event when received. The investor must adjust her cost basis.
The investor would now own 920 shares (800 shares $1.15). The new cost basis would be
$47.83 (total cost of $44,000 divided by 920 shares).

53. (C) A bond's confirmation must disclose the lower of the yield to maturity or the yield to call. This is
sometimes referred to as the yield to the worst.

54. (C) Certificates of Participation (COPs) are lease financing agreements, typically issued in the form
of a tax-exempt or municipal revenue bond. COPs have been traditionally used as a method of
monetizing existing surplus real estate. This financing technique provides long-term funding
through a lease that does not legally constitute a loan, thus eliminating the need for a public
referendum or vote.

55. (D) A general obligation bond would require voter approval since it is backed by the full faith and
credit of the issuing municipality. A bond backed by ad valorem or real estate taxes would be a
type of general obligation bond. A special tax bond is financed by a tax other than an ad
valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter
approval. A certificate of participation (COP) is a revenue bond backed by a lease payment that
would not require voter approval.

56. (D) These are an example of Direct Pay Build America Bonds (BABs). BABs are a type of municipal
bond that pays taxable interest but the Treasury will reimburse 35% of the interest paid on the
bonds to the issuer, which reduces the cost of borrowing. This would allow municipal issuers to
compete with corporate issuers when raising capital.

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



Copyright Securities Training Corporation. All Rights Reserved. 36
58. (C) The Treasury will reimburse 35% of the interest payment, which results in a net borrowing cost
of 4.55% (7.00% x [100% less 35%]). These bonds may be suitable for taxable, fixed-income
investors. BABs allow a municipality to issue a bond with a higher interest rate, but pay an
equivalent tax-free rate.

59. (D) ETNs are a type of unsecured debt security. This type of debt security differs from other types of
bonds and notes because ETN returns are linked to the performance of a commodity, currency,
or index minus applicable fees. ETNs do not usually pay an annual coupon or specified
dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE and may be
purchased on margin or sold short. Investors may also choose to hold the debt security until
maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution
backing the note. If the issuer's financial condition deteriorates, it could negatively impact the
value of the ETN, regardless of how its underlying index performs.

60. (B) A Collateralized Debt Obligation (CDO) is a type of asset-backed security. A CDO is issued as a
bond, which is backed (collateralized) by a pool of bonds, loans, and various other assets.
Ownership of this type of security is typically in the form of a tranche (slice), with any given
tranche from the CDO carrying a different maturity and risk level. The return an investor can
expect from this type of investment is based on the credit quality of the underlying assets
contained in the pool. CDOs are similar in structure to collateralized mortgage obligations
(CMOs). These investment vehicles are broadly categorized as asset-backed securities.

61. (C) Due to their highly complex nature, CDOs are generally not suitable for retail investors. A CDO
(Collateralized Debt Obligation) is a sophisticated financial instrument that begins with an
individual loan (such as a mortgage or corporate debt). These loans are placed in a pool, and
investors then purchase a security (bond, tranche, slice) that represents an interest in that pool.
Each of these securities has a different maturity and credit risk, depending on the nature of the
collateral behind it. This type of investment carries many risks and considerations that make it
largely unsuitable for a typical retail investor.

62. (A) This activity would constitute a sales practice known as late trading, which is prohibited under
federal securities laws. According to securities law, orders placed after the close of trading for
the day (and after the determination of the closing NAV) must be filled at the next calculated
NAV, which is usually the price at the end of the next business day. Investors placing orders
after the close of the market (based on information that they have learned after the close), and
seeking to purchase shares at prices determined before the close, are engaging in late trading,
which clearly places other investors in that mutual fund at a clear disadvantage. The investor
must receive the price as calculated by the fund company at the NAV on the following day.

63. (B) A structured product is typically built around a fixed-income instrument and a derivative
product. The note pays a specified rate of interest to the investor at defined intervals. The
derivative component establishes the amount of payment at maturity.

64. (D) Structured products may be linked to individual securities, commodities, foreign currencies, or
indexes. These products are underwritten by most major financial services institutions and are
usually registered as securities with the SEC. Structured products are not bank deposits and are
not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed
by an RR when offering this product to clients.



Copyright Securities Training Corporation. All Rights Reserved. 37
65. (B) Structured products are prepackaged securities that often combine securities, such as a bond
with a derivative. The structured security may be linked to equity securities, commodities, or
interest rates. The products may also be structured to provide principal protection. Structured
products are not bank deposits and are not insured by the Federal Deposit Insurance
Corporation (FDIC). This fact should be disclosed by an RR when offering this product to
clients.

66. (C) Under Regulation AC, a research analyst must certify that her research report accurately reflects
her personal views. The analyst must also disclose whether she received compensation for her
specific recommendation. Under this rule, broker-dealers are also required to obtain periodic
certifications by research analysts regarding public appearances (attesting that a statement was
made regarding the views he expressed being his own and a written certification documenting
that he did not receive compensation to make positive comments). Issuers are not regulated
under Regulation AC.

67. (B) Regulation FD applies to issuers of securities. Regulation FD requires that material, nonpublic
information disclosed to analysts or other investors be made public. If the disclosure is
intentional, the information must be simultaneously disclosed to the public. If the disclosure is
unintentional, the public disclosure must be made within 24 hours. Form 8-K, filed with the
SEC, is one method of meeting the public disclosure requirement.

68. (B) Registered personnel of a member firm are generally prohibited from borrowing money from,
or lending money to, any customer. However, if the firm has written rules and procedures that
allow borrowing and lending between registered personnel and their customers that meet the
following conditions, the activities are permissible.

" The customer is an immediate family member of the registered person.
" The customer is a financial institution or other entity that engages in the business of
providing credit, financing, or loans in the course of its business.
" The customer and the registered person are both registered with the same member firm.
" The customer has a personal relationship with the registered person wherein the loan
would not have been solicited, offered, or given if the relationship did not exist.
" The loan is based on a business relationship other than that of a member firm customer.

There is no exception based on the type of customer, for example, an accredited investor.

69. (D) Registered individuals may not borrow money from, or lend money to, a customer unless
certain conditions are met. These conditions include implementing written procedures
permitting such activity and satisfying one of the following provisions.

1. The customer and the registered person are immediate family members.
2. The customer is a financial institution regularly involved in the business of extending
credit or providing loans.
3. Both parties are registered with the same firm.
4. The loan is based on a personal relationship between the customer and the registered
person.
5. The loan is based on a business relationship independent of the customer-BD
relationship.

If the loan is based on provision 1 (borrowing from family members), firm notification or firm
approval is not required. If the conditions indicated in provisions 3, 4, or 5 prevail, the firm
must approve the lending activity prior to the execution of the loan.



Copyright Securities Training Corporation. All Rights Reserved. 38
70. (A) A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to
pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open
only to those persons who are not enrolled in any type of health plan other than a qualified
high-deductible health plan. Contributions are made in pretax dollars (which are limited under
IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical
expenses. All funds withdrawn that are used for nonqualified medical expenses are taxable and
subject to a 20% IRS tax penalty.

71. (D) A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to
pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open
only to persons who are not enrolled in any type of health plan other than a qualified high-
deductible health plan. Contributions are made in pretax dollars (which are limited under IRS
guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical
expenses. The funds may be invested in mutual funds, although the types of funds may be
limited by a HSA trustee (a financial institution). The funds do not need to be used each year
and may be carried over to be used in the future. Once you reach age 65, your funds can be
withdrawn at any time and are subject only to ordinary income tax. (You avoid the 20% IRS
penalty.) However, you may avoid any tax by continuing to use the funds for qualified medical
expenses.

72. (C) The investor is seeking long-term capital appreciation (also referred to as capital growth). The
best answer would be based on the asset allocation mix. An investor seeking capital
appreciation would want a large percentage of his assets invested in equities. Choice (c) has a
mix of 80% equities and 20% fixed income. The largest percentage of the other choices is choice
(d) with 60% equities and 40% in fixed income.

73. (B) An investor seeking income and capital growth would want her assets allocated evenly between
equity and fixed-income investments. Choice (b) has a 60%/40% mix of equity and fixed
income. Choice (a) is 100% fixed income, choice (c) is 100% equity, and choice (d) is 80% equity
and 20% in fixed income.

74. (B) The MSCI EAFE (Morgan Stanley Capital International Europe, Australasia, and Far East) Index
follows the equity performance of the developed markets but excludes the U.S. and Canada.
The FTSE Index mostly follows the stocks of companies trading on the London Stock Exchange.

75. (C) Although there are no tax consequences to Randys beneficiary, the death benefit is included in
his estate for tax purposes.

76. (B) The cash value of a variable life insurance policy increases or decreases in relation to the
performance of the separate account. Poor performance could cause the cash value to decline
to zero. Although the death benefit can also increase or decrease, it may never fall below a set
minimum. The premiums for variable life policies are fixed for the life of the policy. An expense
guarantee clause in life insurance contracts prevents the insurance company from raising
expense charges for the administration of the policy.



Copyright Securities Training Corporation. All Rights Reserved. 39
77. (D) Similar to a variable annuity, the cash value of a variable life insurance policy increases or decreases
in relation to the performance of the separate account. A person who is knowledgeable about
investments may be a candidate for variable life insurance because common stock and bonds
are the foundation of the policy. As the market values of the securities fluctuate, the cash value
changes and is not guaranteed. Therefore, the insured must be able to tolerate market risk.
There are other methods by which an investor may achieve forced savings and the product may
not be suitable for parents with a modest income who have young children.

78. (A) A durable power of attorney gives someone else the power to manage the grantor's financial
affairs if that individual becomes incapacitated. A regular power of attorney terminates if the
grantor becomes incapacitated. An RR would need to have a durable power of attorney in order
to exercise discretion if the client becomes incapacitated.

79. (B) If the MFP is the only party who signs the check, the entire amount of the contribution is
allocated to the MFP. In this case, the underwriting ban would be triggered since the amount
exceeds $250. When both the MFP and her spouse sign the contribution check, the contribution
is viewed as being split equally between the contributors. There is no limit if the spouse writes a
check from his personal, rather than the joint checking account.

80. (A) This is an example of a covered call (long stock + short call). The clients maximum gain is the
difference between the market price and the strike price plus the premium. For example, if a
client buys stock at $34 a share and writes a $40 call for a premium of 2, the maximum profit is
$8. If the stock price rises above the option's strike price, the call will be exercised. The investor
still retains the premium plus the difference from selling the stock at its strike price, but that is
the clients maximum gain.

81. (D) This is an example of a covered put (short stock + short put). The maximum loss is unlimited
since there is no limit as to how high the stock price can rise. For example, if a client sells short
at $46 and writes a $40 put for a premium of $3 and the put expired unexercised the client
would have a $3 profit. If the market price of KNP rises, the put option would expire unexercised but
the client would still need to cover the short sale (short stock). The maximum loss on a short
sale is unlimited, since there is no limit on how high the stock price may rise.

82. (A) TRACE is a reporting system that was created to provide greater transparency in the corporate
bond market. RTRS is the reporting system for municipal bonds and the TRF is the reporting
system for stocks listed on Nasdaq. There is no reporting system for U.S government bonds.

83. (A) If the value of the U.S. dollar increases, the value of the British pound will decrease. The
American company should buy British pound puts since it would profit on the puts if the U.S.
dollar increased, leading to a decrease in the British pound. The profit on the put could help to
offset the loss on the British pounds the American company is expecting to receive as payment.



Copyright Securities Training Corporation. All Rights Reserved. 40
84. (B) Since the retail sales person has helped his firm obtain negotiated municipal bonds business,
he would be defined as a municipal finance professional (MFP). A two-year look-back period
applies to municipal finance professional contributions. If an individual has made contributions to
a political candidate that would have resulted in a violation of MSRB Rule G-37, the firm that
employs the individual would be subject to the underwriting ban if the individual is employed
in the role of an MFP within two years of the contribution. A retail sales person is not required
to register as a principal and is permitted to solicit elected officials of municipal bond issuers,
provided the retail sales person does not contribute more than $250 for the official he is entitled
to vote for.

85. (C) A wildcatting program, also called an exploratory program, searches for oil in unproven areas.
This results in a lower cost of acquiring the land or mineral rights. In order to extract oil and gas,
the program will incur significant start-up or up-front costs. A developmental program drills for
oil in proven, surveyed sites and the cost for the land is more expensive. An income oil and gas
program acquires interests in already-producing properties. These sites are acquired from oil
and gas operators who have completed the drilling and prefer to sell the reserves rather than
hold the property for the life of the production. These programs would have higher mineral
rights costs and lower up-front costs.

86. (D) The investor would receive 102% of the compound accreted value since the security is a zero-
coupon bond or original issue discount (OID) bond. The compound accreted value is equal to
the original value of the bond plus the annual accretion as of the call date. If the bond was not
an OID bond and was called, the investor would receive 102% of par or $1,020.

87. (D) Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all
its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets
that is used to pay its operating costs. It is determined by dividing total expenses by the average
net assets in the portfolio.

88. (C) According to Regulation NMS, broker-dealers are prohibited from accepting bids, offers, or
indications of interest for NMS stocks priced at $1.00 or more, in increments smaller than $0.01,
and for NMS stock less than $1.00, in increments smaller than $0.0001 (a hundredth of a
penny). The RR is not permitted to accept an order to buy or sell in sub-pennies (more than two
decimal places) if the stock is trading at or above $1.00. The RR is not permitted to accept this
order.

89. (A) You must contact the federal law enforcement authorities immediately if you discover that a
client is on the list of suspicious persons and entities maintained by the Office of Foreign Assets
Control (OFAC). You must also freeze the account and block further transactions.

90. (C) Advanced option strategies such as spreads and straddles should be executed on one order
ticket. In order to enable the investor to ensure the total cost, the order should be entered as a
net debit, since the client does not want to pay more than $3,000. If both sides of the spread
order were entered separately, market volatility may make it impossible to ensure the
transaction will be executed at a net debit or credit. The client has the risk that the order will not
be executed since it is possible that both sides of the transaction were not able to be filled at the
net debit or credit.



Copyright Securities Training Corporation. All Rights Reserved. 41
91. (D) Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a
certain sector (e.g., Biotech, Internet, Retail) into a trust and selling interests in the trust to
investors. HOLDRs offer investors diversification similar to an Exchange-Traded Fund (ETF).
Unlike ETFs, the owner of a HOLDR has an ownership interest in the shares of the companies
that the HOLDR is invested in and would retain the right to vote. Once the portfolio has been
created, the makeup of the portfolio will typically not change, although if a company included
in the portfolio goes bankrupt or merges with another company, the makeup of the HOLDR
may be altered.

Investors have the ability to control when they are taxed, since they determine when to hold or
sell the HOLDR. An investor in a mutual fund does not have that benefit since the portfolio
manager would determine when to hold or sell the securities in the fund. Benefits also include
liquidity and pricing throughout the day (i.e., they are exchange-traded) as compared to an
index or sector mutual fund, which has daily pricing and is purchased directly from the fund.
HOLDRs have no management fees and are considered low-cost since there are only small
transaction costs and custodian fees.

92. (B) Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25%
on long positions and 30% on short positions. The margin requirement on these securities can
be computed by multiplying the portfolio leverage factor by the standard SRO maintenance
requirement. In this case, the standard long requirement is 25% multiplied by a factor of 2, so
the client must maintain a 50% margin. $1,000,000 25% = $250,000 2 = $500,000.

93. (C) Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25%
on long positions and 30% on short positions. The margin requirement on these securities can
be computed by multiplying the portfolio leverage factor by the standard SRO maintenance
requirement. In this case, the standard short requirement is 30% multiplied by a factor of 3, so
the client must maintain a 90% margin. $1,000,000 30% = $300,000 3 = $900,000.

94. (D) Transactions in Nasdaq-listed securities executed between 8:00 a.m. and 8:00 p.m. must be
reported to the Trade Reporting Facility (TRF) within 30 seconds of execution.

95. (A) All of the statements about ETNs are true except ETNs pay a fixed coupon rate. ETNs do not
usually pay an annual coupon or specified dividend. They are a type of unsecured debt security.
This type of debt security differs from other types of bonds and notes since ETN returns are
linked to the performance of a commodity, currency, or index minus applicable fees. Similar to
ETFs, ETNs are traded on an exchange, such as the NYSE and may be purchased on margin or
sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer
risk that is tied to the creditworthiness of the financial institution backing the note. If the
issuer's financial condition deteriorates, it could negatively impact the value of the ETN,
regardless of how its underlying index performs.

96. (D) Given the customer's short time horizon, i.e., his goal of starting a new business within a year,
his objective must be preservation of capital. While all of these funds are somewhat
conservative, the balanced fund contains equity investments, which exposes the customer
to market risk. This means the balanced fund would be the least suitable of the choices listed.

97. (B) Before accepting a DVP (Delivery versus Payment) or RVP (Receipt versus Payment) order from
a customer, a broker-dealer must receive the name of the customer's agent and the customer's
account number. The order ticket must be marked DVP or RVP.



Copyright Securities Training Corporation. All Rights Reserved. 42
98. (C) This is an example of a covered call (long stock + short call). The maximum loss is equal to the
market price minus the premium. For example, if a client buys stock at $34 a share and writes a
$40 call for a premium of 2, the maximum loss is $32. The investor's maximum loss would be
incurred if the stock became worthless and the stock price went to zero. Without the hedge, the
investor would lose the entire $34 per share. However, with the covered call, she at least has the
premium of $200. That is why covered call writing is considered a partial hedge. The investor's
only protection is the amount of the premium.

99. (A) The put/call ratio is a technical market indicator and is found by dividing the volume of all put
transactions by the volume of all call transactions on a daily basis. Technical analysts view the
put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and
the higher the probability that the market will reverse course and turn bullish. The opposite is
true for a low put/call ratio, which is viewed as a bearish indicator.

100. (C) A portfolio margin client must be approved for uncovered writing. There are no specific
financial standards nor is there an experience level that must be met. If a customer wants to
trade unlisted derivatives, the customer must maintain equity of at least $5,000,000 at all times.






Suitability Examination

Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-1
1. Which TWO of the following statements are
TRUE concerning hedge funds?
I. They might be suitable for investors
seeking exposure to distressed or
bankrupt companies
II. They are permitted only to sell short
securities with prior regulatory approval
III. They may charge both an annual fee
and a fee based on the funds' profits
IV. They are subject to the same rules as
mutual funds
a. I and III
b. I and IV
c. II and III
d. II and IV
2. Which of the following choices would be
LEAST suitable for an investor seeking
liquidity?
a. Preferred stock of a financial services
company
b. A mutual fund that invests in
international markets
c. A real estate investment trust (REIT)
d. A hedge fund using leverage
3. A 28-year-old single investor has funds
saved at a bank. He contacts an RR and
wants to begin allocating funds to a
retirement account. Which of the following
choices is the most appropriate asset
allocation?
a. 80% stocks, 20% bonds
b. 60% stocks, 40% bonds
c. 50% stocks, 50% bonds
d. 30% stocks, 70% bonds
4. A customer in his late twenties wants
capital appreciation and tax-deferred
growth. He is willing to take a moderate
degree of risk in his initial investment. The
customer is also concerned about the
inflationary risk to his portfolio. Which of
the following investments is MOST suitable?
a. Equities
b. Corporate debt
c. Municipal debt
d. Variable annuities
5. When determining whether a CMO is
suitable, an RR must offer to a client all of
the following information, EXCEPT a:
a. Glossary of terms
b. Discussion on how changing interest
rates may affect the prepayment rates
c. Discussion on how changing currency
rates may affect the value of the
securities
d. Discussion on the relationship between
mortgage loans and mortgage securities
6. Pete and Danielle, a married couple, are in
their 20s. They both have jobs that pay well
and they have begun to think about
investing for retirement. Which of the
following portfolio allocations is MOST
appropriate for them?
a. 10% bonds, 90% stock
b. 100% common stocks
c. 80% bonds, 10% common stocks, 10%
money-market
d. 50% bonds, 50% common stocks
7. Which of the following risks for an agency-
backed CMO is LEAST important to an
investor in a rising interest-rate
environment?
a. Prepayment risk
b. Credit risk
c. Interest-rate risk
d. Extension risk
8. A married couple with a three-year-old
child would like to purchase an investment
that will be suitable to help pay for the
child's college education. Which TWO of
the following choices are the most suitable
alternatives?
I. A CMO tranche scheduled to mature in
15 years
II. A STRIP scheduled to mature in 15
years
III. An ETF based on the S&P 500 Index
IV. A money-market fund
a. I and III
b. I and IV
c. II and III
d. II and IV
Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-2
9. Which of the following interest-rate
environments makes call protection MOST
valuable to a purchaser of bonds?
a. Increasing interest rates
b. Stable interest rates
c. Volatile interest rates
d. Decreasing interest rates
10. A high net worth investor seeking safety of
principal would MOST likely invest in:
a. Corporate convertible bonds
b. Non-investment-grade corporate bonds
c. An investment-grade corporate bond
fund
d. A variable annuity
11. Which of the following securities would you
LEAST likely recommend to an investor
requiring a fixed sum of funds to be
received in 10 years?
a. A zero-coupon municipal bond
b. A high-yield corporate bond
c. Collateralized mortgage obligations
(CMOs)
d. Treasury Inflation-Protected Securities
(TIPS)
12. Which of the following option strategies is
most suitable in a retirement account under
ERISA guidelines?
a. A long straddle
b. Covered call writing
c. A credit spread
d. No strategies, since options are not
permitted in retirement plans
13. An investor is convinced that a stock will
decline in value. If the investor wishes to act
on that conviction, which investment
strategy will allow him to take advantage of
a decline with the smallest amount of cash
outlay?
a. The investor should sell the stock short
b. The investor should buy a call
c. The investor should buy a put
d. The investor should sell a put
14. Which of the following investors would
purchase an inverse exchange-traded note?
a. An investor seeking current income
b. An investor seeking long-term capital
gains
c. A buy-and-hold investor
d. An investor seeking to trade quickly
15. When engaging in a 1035 exchange an
individual should be aware that:
a. The exchange is a taxable event
b. The exchange is not a taxable event but
the new annuity may come with
additional restrictions
c. The exchange is not a taxable event and
the policies of the old annuity are
remain in place
d. The exchange is only permitted if it is
unsolicited
16. Buyers of municipal bonds would normally
NOT include:
a. Insurance companies
b. Banks
c. Defined benefit plans
d. Mutual funds
17. Which of the following securities may NOT
be purchased in a discretionary account
without prior written approval by the
customer?
a. An exchange-traded note
b. A variable-rate demand obligation
c. A direct participation program
d. A collateralized mortgage obligation
Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-3
18. Mr. Jones is a small business owner who has
purchased Treasury bills and other short-
term securities during times when he has
excess funds available in the business. He
likes the aspects of liquidity and safety. A
friend has told him he can get higher rates
from auction rate securities. He wants to
know why you have not recommended this
investment to him. Which TWO of the
following explanations would you cite as
your reasons?
I. Auction rate securities are long-term
investments
II. Interest or dividend rates are reset at
established intervals based on a Dutch
auction
III. If the auction fails, the client may not
have immediate access to his funds
IV. The interest or dividend rate is set as
the lowest rate to match supply and
demand at the auction
a. I and III
b. I and IV
c. II and III
d. II and IV
19. A registered representative is required to
certify which TWO of the following choices
when a customer is purchasing a limited
partnership?
I. That the customer has been advised by
an accountant
II. That the customer is in a financial
position to be investing in this type of
product
III. That the customer has a sufficient net
worth to lose his entire investment
IV. That the customer will not be investing
in this type of product for a retirement
account
a. I and III
b. I and IV
c. II and III
d. II and IV
20. An investment in which of the following
securities requires a customer to sign a
statement attesting to her annual income
and net worth?
a. A variable annuity
b. A collateralized mortgage obligation
c. A variable-rate demand obligation
d. A direct participation program
21. An investor wishes to buy a limited
partnership investment that has the goal of
capital appreciation without producing
currently taxable cash flow. Which of the
following choices BEST suits the investor's
needs?
a. Low Income Housing
b. Oil and Gas Income Program
c. Raw Land
d. Equipment Leasing
22. Which TWO of the following statements are
TRUE under the Uniform Transfers to
Minors Act (UTMA) regarding a custodian
account in which an individual is custodian
for her son?
I. The securities purchased must be
suitable for the minor
II. The mother's Social Security number is
used for purposes of reporting and
paying taxes
III. The custodial relationship is terminated
when the son reaches majority
IV. The securities will be registered in the
mother's name until the son reaches
the age of majority
a. I and III
b. I and IV
c. II and III
d. II and IV
Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-4
23. An investor has been saving for her child's
college education using a 529 plan. If the
child will be attending college this year,
which of the following investments is the
MOST suitable?
a. 50% equities, 50% bonds
b. 30% equities, 60% bonds, 10% money-
market funds
c. 20% bonds, 80% money-market funds
d. 80% bonds, 20% money-market funds
24. Which TWO of the following choices would
NOT be included in a subscription
agreement for a direct participation
program (DPP)?
I. A statement indicating the purchaser
understands the risks of this investment
II. The priority provisions if the
partnership is liquidated
III. A statement listing the amount of tax
credits or deductions the investor will
receive
IV. A statement that attests to the investor's
ability to meet the financial
requirements of this investment
a. I and III
b. I and IV
c. II and III
d. II and IV
25. Which TWO of the following option
strategies will be suitable recommendations
for an investor who thinks interest rates will
rise?
I. Buying yield-based calls
II. Buying yield-based puts
III. Selling yield-based calls
IV. Selling yield-based puts
a. I and II
b. I and IV
c. II and III
d. III and IV
26. Which of the following positions best
enables an investor to take advantage of a
significant appreciation in DEF stock?
a. A debit DEF call spread
b. A credit DEF put spread
c. Long a DEF straddle
d. Short a DEF straddle
27. Which of the following statements is TRUE
concerning exchange-traded funds (ETFs)
and exchange-traded notes (ETNs)?
a. Only exchange-traded notes may be
purchased on margin
b. Only exchange-traded funds may be
sold short
c. Only exchange-traded notes have issuer
credit risk
d. Only exchange-traded funds have
market risk
28. A husband and wife with children going to
college in 2, 11, and 16 years are planning to
set up an account to pay for their children's
college education. Which of the following
investments are most suitable for this
purpose?
a. Money-market funds
b. Certificates of deposit maturing every
12 months
c. Junk bonds with serial maturities
coinciding with the children's college
attendance
d. Investment-grade corporate bonds with
maturities coinciding with the
children's college attendance
Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-5
29. A customer in her late 40s, who is currently
in the 15% tax bracket, has recently
inherited $6,000,000. She informs you that
she considers herself a conservative
investor and wants your advice in investing
the inheritance. Which of the following
choices would be the BEST method of
investing the funds?
a. 50% in equities, 25% in-state municipal
bonds, 15% in Treasury bonds, and 10%
in a money- market fund
b. 100% in equities
c. 50% in-state municipal bonds, 25% in
out-of-state municipal bonds, 15% in
Treasury bonds, 10% in money-market
funds
d. 25% in-state municipal bonds, 25% in
out-of-state municipal bonds, 25% in
corporate bonds, and 25% in Treasury
bonds
30. A customer is considering an investment in
a hedge fund since many of his business
associates have been receiving high returns
over the last few years. A registered
representative may make which of the
following statements?
a. Mutual funds are subject to less
regulatory oversight than hedge funds
b. Mutual funds pool investors' money
and manage the portfolio, whereas
hedge funds manage each investor's
assets separately
c. Hedge funds often use higher degrees of
leverage than mutual funds
d. Hedge funds may be suitable for many
customers, whereas mutual funds are
generally suitable for sophisticated,
wealthy investors only
31. A customer contacts a registered
representative and indicates her risk
tolerance is to accept some risk to her initial
principal in exchange for higher returns.
The RR asks the customer if she
understands that the account may lose
value but may keep pace with or exceed
inflation, and the customer agrees to these
conditions. This customer's risk tolerance
would BEST be defined as:
a. Conservative
b. Moderate
c. Moderate conservative
d. Moderate aggressive
32. A corporation calls for the redemption of
1,000,000 shares of convertible preferred
stock. The corporation announces that the
convertible preferred will be redeemed at a
price of $20 plus an accumulated dividend
of 12 cents. Each share of preferred can be
converted into 1/2 share of common. The
preferred stock is selling at $19. There are
2,000,000 shares of common outstanding.
Earnings for the common stock are $2.50
per share. The common stock is selling at
35.75.
Which of the following alternatives is the
LEAST attractive for a preferred
stockholder?
a. Redeem the shares
b. Sell the shares
c. Convert the shares
d. All alternatives are equally attractive
33. A company in Japan will be importing
California wines. The company must pay in
U.S. dollars and is, therefore, concerned
that the U.S. dollar will appreciate in value.
To provide protection in the event that the
U.S. dollar does appreciate, the company
can buy:
a. U.S. dollar calls
b. U.S. dollar puts
c. Yen calls
d. Yen puts
Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-6
34. A customer contacts a registered
representative and wants to invest a large
sum of money in four different mutual fund
families. Which of the following statements
is the MOST important disclosure the RR
should make to the client?
a. The customer will not be able to
diversify his assets
b. The customer will not be able to switch
mutual funds within each family
c. The customer will not be able to receive
a single account statement
d. The customer will not be able to receive
sales breakpoints
35. A customer in her late 40s, who is currently
in the 15% tax bracket has recently
inherited $6,000,000. She informs you that
she considers herself a conservative
investor and wants your advice concerning
investing the inheritance. Which of the
following choices would be the BEST
method of investing the funds?
a. 20% in equities, 30% in Treasury bonds,
and 50% in tax anticipation notes
b. 40% in equities, a 30% mixture of in-
state and out-of-state municipal bonds,
15% in Treasury bonds, 15% in revenue
anticipation notes
c. 30% in-state municipal bonds, 30% in
out-of-state municipal bonds, 15% in
Treasury bonds, 10% in revenue
anticipation notes
d. 25% in-state municipal bonds, 25% in
out-of-state municipal bonds, 25% in
corporate bonds, and 25% in Treasury
bonds
36. Which of following investments would the
BEST recommendation for a customer with
a medium or moderate risk tolerance?
a. 10% large-cap equity funds, 5%
international equity mutual funds, 55%
bond funds, and 30% cash
b. 15% large-cap equity funds, 5% small-
cap equity funds, 10% international
equity funds, 40% bond funds, and 20%
cash
c. 35% large-cap equity funds, 15% small-
cap equity funds, 15% international
equity funds, 30% bond funds, and 5%
cash
d. 50% large-cap equity funds, 20% small-
cap equity funds, 20% international
equity funds, 5% bond funds, and 5%
cash
37. A customer has a federal tax rate of 35% and
a state tax rate of 7%. Which of the following
investments would afford him the BEST
after-tax yield?
a. A 6.25% in-state municipal bond
b. A 7.10% out-of-state municipal bond
c. A 11.65% investment-grade corporate
bond
d. A 10.85% mortgage bond
38. While examining a customer's investment
profile, a registered representative
determines that the customer is able to
tolerate a high degree of risk and does not
anticipate the need to access invested funds
for the next 25 years. What would be the
BEST asset allocation for the portfolio?
a. 45% debt, 45% equities, and 10%
money-market instruments
b. 90% equities and 10% money-market
instruments
c. 25% bonds, 25% equities, 25% money-
market instruments, and 25% real
estate
d. 65% bonds and 35% equities
Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-7
39. A customer contacts a registered
representative and indicates his risk
tolerance is to preserve his initial principal
with minimal or no risk. The RR asks the
customer if he understands that the
account value may not keep pace with
inflation or generate significant income,
and the customer agrees to these
conditions. This customer's risk tolerance
would BEST be defined as:
a. Conservative
b. Moderate
c. Moderate conservative
d. Moderate aggressive
40. The French economy is on the verge of a
recession. The Swiss government
announces that there was another quarterly
increase in its GDP figures. An investor
wanting to act on this information will buy:
I. Euro calls
II. Euro puts
III. Swiss franc calls
IV. Swiss franc puts
a. I and III only
b. I and IV only
c. II and III only
d. II and IV only
41. Your customer is bullish on U.S. equities
and wants to participate in an upward
movement of the S&P 500 Index. Which of
the following investments would you
recommend?
a. Diamonds
b. ADRs
c. SPDRs
d. VRDOs
42. A registered representative's customers are
a husband and wife in their 70s who are
retired. They live on a small pension and
collect Social Security benefits. They have
assets of $225,000 to invest and are in the
lowest tax bracket. Which of the following
portfolio allocations is most suitable for the
customer?
a. 30% domestic equities, 30% bonds, 10%
cash, 30% international equities
b. 10% domestic equities, 40% bonds, 5%
cash, 45% international equities
c. 50% domestic equities, 0% bonds, 0%
cash, 50% international equities
d. 25% domestic equities, 60% bonds, 10%
cash, 5% international equities
43. An established customer has purchased
penny stocks through a broker-dealer on
five occasions. When making future
recommendations to the customer
regarding these securities, the broker-dealer
must:
a. Obtain a written statement from the
customer for each trade
b. Have the customer sign a suitability
statement for each trade
c. Have the trades preapproved by a
principal
d. Be sure that the recommendations take
into account the customer's investment
objectives
44. A high net worth investor seeking safety of
principal would MOST likely invest in:
a. Non-investment-grade municipal
revenue bonds
b. Non-investment-grade corporate bonds
c. The maximum amount allowable in a
529 plan
d. Investment-grade municipal revenue
bonds
45. An advantage of a Coverdell account over a
529 plan is:
a. Higher annual contributions
b. Stronger tax incentives
c. More educational options
d. No income limit on contributors
Copyright Securities Training Corporation. All Rights Reserved. Suitability Examination-8
46. A customer in his early 50s who recently
received a sizeable bonus has an
investment objective of maximizing his tax-
free income. He has two children attending
college. Which of the following choices
would be the BEST method of investing the
funds?
a. Contribute the maximum amount
allowable to a 529 plan
b. 50% equities, 20% general obligation
bonds, 15% utility revenue bonds, and
15% Treasury Inflation-Protected
Securities (TIPS)
c. 20% high-yield corporate bonds, 20%
airport revenue bonds, 20% general
obligation bonds, 20% Treasury bonds,
and 20% tax anticipation notes
d. 30% general obligation bonds, 20%
high-yield municipal bonds, 20%
hospital revenue bonds, 20% special tax
bonds, and 10% housing revenue bonds
47. Which TWO of the following choices are
differences between exchange-traded funds
(ETFs) and exchange-traded notes (ETNs)?
I. ETNs carry issuer risk that is tied to the
creditworthiness of the financial
institution backing the note and ETFs
do not have issuer credit risk
II. ETFs may be sold short and ETNs may
not
III. ETF returns are based on the
performance of an index and ETNs pay
a fixed coupon rate.
IV. ETNs have a maturity date and ETFs do
not
a. I and III
b. I and IV
c. II and III
d. II and IV
48. An investor with an investment objective of
tax-exempt income will need access to the
funds in four months. An RR should NOT
recommend which of the following
municipal securities?
a. A variable-rate demand obligation
(VRDO)
b. An auction-rate security (ARS)
c. A tax-anticipation note (TAN)
d. A bond anticipation note (BAN)
49. A limited partnership would be LEAST
suitable for which of the following
accounts?
a. An institutional account
b. A trust account
c. A corporate account
d. A UTMA account
50. A customer in his late twenties wants
capital appreciation and is willing to take a
moderate degree of risk in his initial
investment. The customer is also concerned
about the inflationary risk to his portfolio.
Which of the following investments is
MOST suitable?
a. Equities
b. Corporate debt
c. Municipal debt
d. Variable annuities



Suitability Explanations


Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-1
1. (A) A hedge fund is an investment fund that pools investors' money. Hedge funds might be
suitable for investors seeking exposure to distressed or bankrupt companies since many of
the restrictions placed on mutual funds are not applicable to hedge funds. They are
permitted to sell short, invest in privately issued securities, and invest in other types of risky
strategies without regulatory approval. Hedge funds often have higher fees than mutual
funds, and their fees may include a percentage of assets under management and a
percentage of the gains (for example, a 2% management fee plus 20% of the gains). (73611)
2. (D) Of the choices listed, the hedge fund would be the least suitable since it does not offer
liquidity. Hedge funds are not subject to the same regulations for requiring access to their
funds as are mutual funds. The shares are not redeemable on a daily basis and are not
suitable for an investor requiring a certain degree of liquidity. The preferred stock and REIT
are exchange-traded and may be sold at any time. (73614)
3. (A) Long-term, risk-tolerant investors, such as those saving for retirement, are usually looking
for growth of capital as an objective. They are also usually concerned about the effects of
inflation. Over long periods, stocks usually keep pace or offer higher returns as measured
against inflation. Inflationary risk is also referred to as purchasing-power risk. Since the
investor is many years from retirement, a large percentage of his portfolio should be
allocated to stocks. (72515)
4. (D) Since the investor is concerned about inflationary risk, wants tax-deferred growth, and is
willing to accept a moderate degree of risk to his initial investment, variable annuities are
the most appropriate investment. If the investor did not want a tax-deferred investment
with the same objectives, equities would be the most suitable choice. (73693)
5. (C) Broker-dealers must offer customers educational material about the features of CMOs. This
material must include:
A discussion of the characteristics and risks of CMOs. This includes: how changing
interest rates may affect prepayment rates and the average life of the security, tax
considerations, credit risk, minimum investments, liquidity, and transactions costs.
A discussion of the structure of a CMO. This includes the different types of structures,
tranches, and risks associated with each type of security. It is also important to explain
to a client that two CMOs with the same underlying collateral may have different
prepayment risk and different interest-rate risk.
A discussion that explains the relationship between mortgage loans and mortgage
securities
A glossary of terms applicable to mortgage-backed securities
Changing currency rates are not applicable to the risks associated with CMOs. (72865)
6. (A) To accumulate the assets they will need at retirement, Pete and Danielle should include
common stocks in their portfolio. A portfolio that is predominately bonds, choice (c), will
not likely produce the required long-term returns. However, a portfolio that mixes stocks
and bonds, choice (d), is probably a better choice for the couple than one that is exclusively
common stock, choice (b). However, given their long time horizon (they are still in their
20s), Pete and Danielle can probably tolerate additional investment risk, so they can put the
majority of their savings in stocks to increase their potential return. Choice (a) would be
most appropriate, given their goals and risk tolerance. (73686)
Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-2
7. (A) Prepayment risk is associated with a falling interest-rate environment in which mortgage
holders refinance or repay their mortgages at a faster rate. The holder of a CMO, therefore,
receives a larger portion of the principal earlier than anticipated and is forced to reinvest at
lower rates. Many CMOs are created from government agency mortgage-backed securities
(MBS), which have a minimal amount of credit risk. Some CMOs are constructed without
this backing and, therefore, credit risk is a greater concern. CMOs, as with most fixed-
income securities, carry interest-rate risk. Extension risk is the opposite of prepayment risk,
where interest rates are rising and the CMO holder receives a smaller portion of her
principal back. (72866)
8. (C) Since the child will attend college in approximately 15 years, a STRIP (zero-coupon bond)
would be suitable. There is no need for current income. The CMO pays monthly income
and, therefore, is not suitable. It can also offer a return of principal much earlier than 15
years due to the prepayment risk of this type of security. An exchange-traded fund (ETF)
that tracks the S&P 500 may be suitable since the funds are not required for 15 years and the
value of this security offers the investor a hedge against the rising price of college tuition.
With this time horizon, a money-market is not suitable since it will not keep pace with
inflation. (72134)
9. (D) Call protection would be most valuable to a purchaser of bonds when interest rates decline.
If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call
bonds when interest rates decline so it can issue new bonds with lower rates of interest.
Although bonds may be callable at a small premium above par value, if the bonds are not
callable, the investor may realize the full benefit of an increase in the market price of the
bonds. (72722)
10. (C) Safety of principal refers to a customer being able to preserve or retain the initial amount of
the investment over its life. Many bonds and bond funds offer investors this feature. The
higher the rating, the greater the likelihood the investor will achieve safety of principal. An
investment-grade corporate bond fund would offer more safety of principal than non-
investment- grade and convertible corporate bonds. A variable annuity may fluctuate in
value based on the subaccounts chosen by the investor. (73678)
11. (C) The risk that an investor will receive her principal earlier than projected instead of at one
time (i.e., prepayment risk) is the most important risk pertaining to mortgage-backed
securities such as CMOs. Since the investor wants to receive a fixed amount of funds in 10
years, a CMO would be the least suitable of the securities listed. (73556)
12. (B) Options may be used in the investment strategies of retirement plans subject to ERISA
provisions, but they tend to be limited to the most conservative approaches, such as the
sale of covered call options. (72047)
13. (C) The investor should buy a put. By buying a put, the investor could go into the market if the
stock declined and buy the stock at a lower price. He would exercise the put and sell the
stock to the writer at the exercise price. Buying a put costs less money than selling short
because the short position requires a 50% deposit with a minimum margin deposit of
$2,000. The investor will not sell (write) a put because the writer of a put option would profit
if the market price increased above the strike price and the put expired worthless. The
purchaser of a call anticipates an increase in market prices and, in this example, there is an
anticipation of a decrease in market prices. (71732)
Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-3
14. (D) Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk
that is tied to the creditworthiness of the financial institution backing the note. These
securities are not like traditional fixed-income securities since they typically do not make
interest payments to investors. The returns are linked to the performance of an index,
currency, or commodity and would be suitable for investors who want to speculate on the
value of an index. An inverse ETN would pay the opposite of the benchmark that is being
tracked and would be suitable for a person interested in short-term trading. Most ETNs are
traded on a national exchange (e.g., the NYSE) and, therefore, an investor can quickly sell
the security to earn a short-term gain. (73607)
15. (B) The primary benefit of a 1035 exchange is that it is not taxable. However, the new annuity
may come with new restrictions making it unsuitable for the investor. (73799)
16. (C) A defined benefit plan is a type of pension fund. Pension funds and other tax-deferred
accounts would not benefit from the tax exemption provided by municipal bonds. As a
result, unless the bonds are taxable and offer yields equivalent to other taxable bonds,
pension funds would not include municipal bonds in their portfolio. The exception would
be Build America Bonds (BABs), which are taxable municipal bonds. (73509)
17. (C) A registered representative may not purchase a direct participation program in a
discretionary account without prior written approval by the customer. (73599)
18. (A) Although auction rate securities are usually sold as an alternative to other short-term
securities, they are long-term securities. An RR must disclose to a client that, if the auction
fails, the client may not have immediate access to his funds. The RR also has a duty to
disclose to clients any material fact relating to the specific features of the auction rate
securities and the customer's need for a liquid investment when recommending this type of
product. The fact that the interest or dividend rate is reset at specified intervals is a material
fact, but is not a reason to avoid recommending the investment. The same reasoning
applies to the fact that the rate is set at the lowest rate that matches supply and demand.
These investments may not be suitable for investors who have a need for liquidity. (72972)
19. (C) A registered representative would be required to certify that she informed the customer of
all relevant facts relating to the lack of marketability and liquidity of the limited partnership.
In addition, after obtaining information about the customer's investment objectives,
financial and tax status, other investments, and future financial needs, the RR must have
reasonable grounds to believe the customer has sufficient net worth and income to lose his
entire investment, or has other liquid assets. The RR must certify that the customer is
suitable, and is in a financial position to be investing in this limited partnership. There is no
requirement to certify that the customer has been advised by an accountant or an attorney.
A limited partnership is permitted to be sold to a retirement account. (73590)
20. (D) An investor purchasing a limited partnership or DPP is required to sign a subscription
agreement. As part of this agreement a customer would be required to sign a statement
attesting to her annual income and net worth. In order to be suitable for this type of
investment, the customer must meet minimum annual income and net worth
requirements. By signing this statement, the customer has acknowledged the information
she disclosed is accurate. The other investments do not require this type of statement
signed by the customer. (73598)
Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-4
21. (C) Raw land will satisfy an investor's need for an investment that has the potential for capital
appreciation without producing currently taxable income. However, raw land is not eligible
for depreciation deductions or tax credits. Due to the limited benefits, an investment in raw
land is considered speculative. (72230)
22. (A) A custodian under the Uniform Transfers to Minors Act is required to act under the Prudent
Man Rule in the handling of the account. The custodian may make any transactions that a
prudent man or woman would make for her own account. The transaction, however, must
be suitable for the minor.
All stock in the account must be registered in the name of the custodian as custodian for the
minor. The account would be registered, for example, as "Mary Jones as custodian for
Robert Jones under the New York Uniform Transfers to Minors Act." The custodial
relationship is terminated when the minor reaches the age of majority. (73481)
23. (C) As a child approaches college age, a suitable investment strategy is to move from growth-
oriented securities, such as equities, to income-oriented securities, such as bonds and
money-market funds. Once a child begins to attend college, most of the funds should be
invested in money-market funds or other types of short-term investments that are liquid
with very little risk of capital. (73695)
24. (C) The subscription agreement will normally state the suitability standards for the program,
specify 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 understands the
ramifications of the investment and can meet the financial requirements of this investment.
Priority provisions for liquidating a limited partnership, and the tax implications, would be
found in the offering documents. (73586)
25. (B) Yield-based options are cash-settled options based on a particular Treasury security's
movement in yield. If an investor expects yields (interest rates) to rise, he will buy yield-
based calls or sell yield-based puts. (73727)
26. (C) The long straddle offers an investor the ability to realize unlimited gains since the client is
long a call option. The gains are determined by the amount the stock appreciates. While a
debit call spread is bullish, the gain is limited to the difference between the strike price on
the long call and the strike price on the short call. The credit put spread is also bullish, but
the gain is limited to the net premium received. The short straddle exposes an investor to
unlimited risk if the stock rises. (71903)
27. (C) ETNs are a type of unsecured debt security. This type of debt security differs from other
types of bonds and notes because ETN returns are linked to the performance of a
commodity, currency, or index, minus applicable fees. Both ETFs and ETNs have market
risk, are traded on an exchange, such as the NYSE, and may be purchased on margin or sold
short. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial
institution backing the note. If the issuer's financial condition deteriorates, it can impact
the value of the ETN negatively, regardless of how its underlying index performs. (73609)
Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-5
28. (D) Given these choices, the investment-grade bonds with serial maturities of 2, 11, and 16
years appear to be the most suitable investment. Money-market funds are used more as a
parking place for funds until an investment decision can be made. CDs may be used, but
are not as attractive as choice (d) since the CDs mature in 12 months. Junk bonds carry too
much risk for their intended purpose. (72509)
29. (A) Although this investor is in her late 40s and considers herself a conservative investor,
equities should be a part of her asset allocation. Many strategists recommend taking 100%
and subtracting the investor's age as a guide to the percentage of the investor's portfolio
that should be allocated to equities. As such, a 50% allocation in equities is reasonable with
the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she
would not have been a suitable candidate for tax-exempt or municipal securities due to her
low tax rate. After investing in these funds, the income/dividends/potential capital gains
would have the effect of increasing her tax rate, so that municipal bonds would be an
attractive investment. In-state municipal bonds would offer a higher after-tax return to this
investor. Due to the potential of credit risk with municipal bonds, having a portion of the
funds in Treasury securities would be a good recommendation. In addition, the investor
should invest a portion of the funds in cash or cash alternatives. This is satisfied by
allocating a portion of the funds to a money-market fund. Having 100% of the funds in
equities or fixed-income investments does not offer the customer a balanced approach and,
therefore, the other choices would not be the best mix of investing the funds. (73674)
30. (C) Mutual funds and hedge funds both pool investors' money to manage assets. Unlike mutual
funds, hedge funds are often exempt from regulatory oversight, use leverage, and often
employ aggressive financial strategies such as short selling and placing large bets on
individual companies or sectors of the market. Hedge funds typically have high minimum
investment requirements that make them suitable only for professional and wealthy
investors. (73612)
31. (B) An investment risk tolerance in which the customer is willing to accept some risk to her
initial principal, with some volatility and a possible loss of the funds invested in exchange
for higher returns, is best defined as moderate. Moderate conservative includes low risk
with an understanding there may be some volatility in exchange for a small amount of
portfolio returns. Moderate or medium aggressive is a situation where the customer is
willing to accept high risk and high volatility with a possible loss to her initial principal in
exchange for high returns. (73689)
32. (C) The least attractive alternative for a preferred stockholder is to convert the shares into
common stock. If an investor redeemed the shares, the preferred stockholder can receive
$20 + $0.12 of accrued dividends, which would amount to $20.12. If the investor sells the
preferred stock at the current market price, the investor will receive $19.00 per share. If the
preferred stock is converted into common stock, it will have a market price of $17.88,
making the conversion the least attractive alternative. (72589)
33. (D) If the U.S. dollar appreciates, the value of the yen declines. Therefore, the company should
buy puts on the yen. The company cannot buy U.S. dollar calls since there are no options
on the U.S. dollar (trading on an options exchange in the United States). If the expectation
is that the U.S. dollar will decline, the company could buy yen calls. (71914)
Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-6
34. (D) The term fund family or fund complex is used to define a single investment company or
mutual fund company with many different types of mutual funds that a customer may
choose to purchase. The objective is to provide a large number of mutual funds providing a
broad range of suitability for investors. A customer may be able to invest a large sum of
money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his
assets, and have the ability to switch between mutual funds. The most important disclosure
that should be made to the client is that there is no advantage to allocating his investment
in four different fund families, thereby losing the possibility of receiving a reduced sales
charge (sales breakpoints). The ability to receive a single account statement is not an
important disclosure and this information is usually provided to clients that have different
fund families with a single broker-dealer. (72133)
35. (B) Although this investor is in her late 40s and considers herself a conservative investor,
equities should be a part of her asset allocation. Many strategists recommend taking 100%
and subtracting the investor's age as a guide to the percentage of the investor's portfolio
that should be allocated to equities. As such, a 40% allocation in equities is reasonable with
the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she
would not have been a suitable candidate for tax-exempt or municipal securities due to her
low tax rate. After investing in these funds, the income/dividends/potential capital gains
would have the effect of increasing her tax rate, so that municipal bonds would be an
attractive investment. In-state municipal bonds would offer a higher after-tax return to this
investor. Due to the potential of credit risk with municipal bonds, having a portion of the
funds in Treasury securities would be a good recommendation. In addition, the investor
should invest a portion of the funds in cash or cash alternatives. This is satisfied by
allocating a portion of the funds in short-term municipal securities such as tax or revenue
anticipation notes. Choice (a) has only a 20% allocation in equities and a 50% allocation of
funds in tax anticipation notes, offering no growth potential. Having 100% of the funds in
fixed-income investments does not offer the customer a balanced approach and, therefore,
the other choices would not be the best method of investing the funds. (73675)
36. (C) An investment risk tolerance in which the customer is willing to accept some risk to her
initial principal, with some volatility and a possible loss of the funds invested in exchange
for higher returns, is best defined as moderate. Choices (a) and (b) offer too small of an
allocation in equities, and choice (d) is too heavily weighted in equities. (73690)
37. (C) The major advantage of municipal bonds for most investors is that the interest received
from the bond is exempt from federal taxes. In addition, most states also exempt interest
from bonds issued within their state from a resident's state and local income taxes.
However, if a state resident earns interest from an out-of-state municipal security, that
interest is usually subject to state and local taxation. If an investor in a particular tax bracket
would like to compare the benefit of tax-free interest income to after-tax income of a
taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a
type of corporate bond and both are fully taxable. Since the investor can purchase an in-
state municipal bond and out-of-state municipal bond, we use the combined rate of 42%
for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is:
Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield
The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%.
6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield
The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is
10.92% (7.10% / 65%). The investment-grade corporate bond has the best or highest after-
tax yield. (73503)
Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-7
38. (B) An investor who has a long time horizon and is willing to tolerate high levels of risk may
allocate a large percentage of her portfolio in stocks. Choice (b) is the only one that
allocates more than 50% of the portfolio in equities. (73684)
39. (A) An investment risk tolerance in which the customer wants to preserve his initial principal
with minimal or no risk, with an understanding that the account may not keep pace with
inflation or generate significant income, is best defined as conservative. Moderate
conservative would include low risk with an understanding that there may be some
volatility in exchange for a small amount of portfolio returns. (73688)
40. (C) An increase in the Swiss GDP is a positive situation for the Swiss economy. This may cause
the value of the Swiss franc to rise. If the Swiss franc rises, the holder of a Swiss franc call
will profit. A looming recession in France may cause the euro to decrease in value. If the
euro decreases, the holder of a euro put will profit. (71915)
41. (C) Spiders (SPDRs) is an investment that replicates the S&P 500 Index. The product is
organized as a unit investment trust and is classified as an exchange-traded fund (ETF).
Diamonds are an exchange-traded fund that mirrors the performance of the DJIA. ADRs are
American Depositary Receipts, which may be issued as proxies for many different types of
individual foreign shares. VRDOs are variable-rate demand obligations that are a type of
municipal security structured for tax-free money-market and high-net-worth investors.
(73629)
42. (D) Considering the customers' ages and limited incomes, investing a greater portion of their
assets in bonds would provide additional income, and the assets invested in equities would
provide the potential for growth. One rule of thumb used by many professionals is to
subtract a client's age from 100 to determine the percentage of assets that should be
invested in stocks. Thus, a general assumption is that the older the client, the less the risk
tolerance and the less money that should be invested in equities. Only a small percentage of
a client's assets should be allocated in the international marketplace. (73685)
43. (D) 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.
All recommendations to a customer should take into account the customer's investment
objectives. (71598)
44. (D) Safety of principal refers to a customer being able to preserve or retain the initial amount of
the investment over its life. Many bonds will offer investors this feature. The higher the
rating, the greater the likelihood the investor will achieve safety of principal. Investment-
grade municipal revenue bonds will offer safety of principal and will also offer a high net
worth investor tax-exempt income. A 529 plan would be beneficial if the investor's objective
were tax- advantaged funding for a child's college education. (73677)
Copyright Securities Training Corporation. All Rights Reserved. Suitability Explanations-8
45. (C) The maximum annual contribution to a Coverdell IRA is $2,000. Contributions to a 529 plan
are substantially higher. Although there is no annual limit on a 529 plan, contributions
exceeding the annual gift limits of $14,000 per year may be subject to the payment of gift
taxes. Lump-sum contributions of up to $70,000 over a five-year period are permitted by
single individuals and up to $140,000 if the contribution is made from joint property.
Qualified distributions from the account are tax-free in both cases. Funds in the Coverdell
may be used for elementary school as well as for higher education, whereas distributions
from a 529 plan may be used only for higher education. Income limits apply to Coverdell
contributors, but do not apply to 529 plans. (72045)
46. (D) This customer is seeking to maximize his tax-free income and would like to invest in
different types of municipal securities. A portfolio of 30% general obligation bonds, 20%
high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10%
housing revenue bonds would be suitable for this investor. There is no reason why a small
percentage (20%) cannot be invested in high-yield municipal bonds. Choice (b) contains
equities and Treasury Inflation-Protected Securities (TIPS), which are taxable, fixed-income
securities. Choice (c) also contains taxable, fixed-income securities (corporate bonds and
Treasury bonds) as well as short-term municipal securities (tax anticipation notes). Since
the customer's children are already attending college, the tax-free growth available with a
529 plan would not be advantageous or a suitable investment when seeking tax-exempt
income. (73682)
47. (B) ETNs are a type of unsecured debt security. This type of debt security differs from other
types of bonds and notes because ETN returns are linked to the performance of a
commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual
coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the
NYSE, and may be purchased on margin or sold short. Investors may also choose to hold
the debt security until maturity. Only ETNs carry issuer risk that is tied to the
creditworthiness of the financial institution backing the note. If the issuer's financial
condition deteriorates, it can impact the value of the ETN negatively, regardless of how its
underlying index performs. (73608)
48. (B) A VRDO and an ARS are both long-term securities with short-term trading features. A VRDO
has a put feature that permits the holder to sell the securities back to the issuer or third
party. An auction rate security (ARS) does not have this feature and, if the auction fails, the
investor may not have immediate access to his funds. TANs and BANs are short-term
municipal notes and, if their maturities extend four months, these securities can easily be
sold in the secondary market. (73681)
49. (D) Of the choices listed, a UTMA (custodian or minor's) account would be least suitable for a
limited partnership. A limited partnership generally has limited marketability and a lack of
liquidity. In addition, most custodian accounts would not be in a position to benefit from
the tax advantages of a limited partnership or a DPP. (73592)
50. (A) Since the investor is concerned about inflationary risk, and is willing to accept a moderate
degree of risk to his initial investment, equities would be the most appropriate investment.
If the investor wanted a tax-deferred investment with the same investment objectives,
variable annuities would be the most suitable choice. (73692)