FINRA Series 7 — All Questions

An investor sells 1 XYZ 30 put for a premium of 2. What is the maximum gain and the breakeven point?

• a.Maximum gain unlimited; breakeven $32
• b.Maximum gain $200; breakeven $28✓
• c.Maximum gain $2,800; breakeven $28
• d.Maximum gain $200; breakeven $32

A short (written) put's maximum gain is the premium received, $200, kept if the stock stays at or above the 30 strike. Breakeven is the strike minus the premium, 30 - 2 = $28, and the maximum loss occurs if the stock falls toward zero.

Preferred stock is generally considered more sensitive to interest rate changes than common stock because preferred:

• a.Represents only a residual ownership claim on the issuer's assets after creditors are paid
• b.Pays a fixed dividend, causing it to behave like a fixed-income security✓
• c.Has voting rights
• d.Pays cash dividends that automatically grow along with the issuing company's earnings

Because most preferred stock pays a fixed dividend, its price moves inversely with interest rates much like a bond. When rates rise, the fixed dividend becomes less attractive and preferred prices fall. Common stock dividends can vary with earnings, so common is less directly tied to rate movements.

A collateralized mortgage obligation (CMO) is structured into tranches primarily to:

• a.Redistribute prepayment and maturity risk among classes with different priorities✓
• b.Guarantee that investors in every single tranche can never lose any principal under any scenario
• c.Convert debt into equity
• d.Eliminate all interest rate risk

A CMO divides the cash flows from a pool of mortgages into tranches that receive principal in a set order, redistributing prepayment and average-life risk. Earlier tranches receive principal first and have shorter, more predictable lives, while later tranches bear more extension or prepayment uncertainty.

An investor establishes a short straddle by selling 1 XYZ 50 call for 3 and selling 1 XYZ 50 put for 2. The maximum gain is:

• a.$300, the premium on the short call alone
• b.Unlimited, because the short call exposes the seller to a rising stock price
• c.$500, if the stock closes exactly at 50 at expiration✓
• d.$5,000, the 50 strike times 100 shares

A short straddle's maximum gain is the total premium received, 3 + 2 = 5 points, or $500, earned only if the stock closes exactly at the 50 strike so both options expire worthless. The $300 figure counts the call premium alone and ignores the put premium. Unlimited describes the short call's loss potential if the stock rises, not the gain. The $5,000 figure is the strike times 100 shares, a number tied to the put's downside rather than the premium kept.

An accredited or sophisticated investor is often required for a hedge fund because hedge funds:

• a.Must distribute all income annually by law
• b.Are typically sold as private placements with limited liquidity, leverage, and higher risk✓
• c.Are the same as money market funds
• d.Are guaranteed by the federal government

Hedge funds are generally offered as private placements to accredited or qualified investors, use strategies involving leverage, derivatives, and illiquid holdings, and impose lock-up and redemption restrictions. Their higher risk and limited regulation make suitability and investor qualification especially important.

In a joint tenants with rights of survivorship (JTWROS) account, when one owner dies:

• a.The estate must immediately sell every security in the account and distribute the cash
• b.The deceased owner's interest passes automatically to the surviving owner(s)✓
• c.The account converts to a corporate account
• d.The account is frozen permanently

In a JTWROS account, the surviving owner automatically inherits the deceased owner's interest in the account, bypassing probate. This contrasts with tenants in common, where a deceased owner's share passes to that owner's estate according to their will or state law.

A custodial account established under the Uniform Transfers to Minors Act (UTMA) has which feature?

• a.There is one custodian and one minor, and the assets belong to the minor✓
• b.Two or more minors may be named together as equal co-owners of the single account
• c.The account may be opened and funded only by the minor's grandparent or other ancestor
• d.The custodian owns the assets personally

A UTMA account has a single custodian managing assets for a single minor, and the assets legally belong to the minor. The custodian manages the account for the minor's benefit and must act prudently; control transfers to the minor upon reaching the age of majority set by state law.

To exercise discretion in a customer's account, a registered representative must first obtain:

• a.Approval from the OCC
• b.A margin agreement
• c.Only a spoken verbal instruction from the customer for each individual trade beforehand
• d.Prior written authorization from the customer and firm approval of the account✓

Discretionary authority (choosing the security, the amount, or whether to buy or sell without consulting the client on each order) requires the customer's prior written authorization and the firm's written acceptance of the account. Each discretionary order must be marked as such and the account must be reviewed frequently by a principal.

Under Regulation T, the initial margin requirement for a purchase of marginable common stock is currently:

• a.25% of the purchase price
• b.50% of the purchase price✓
• c.100% of the purchase price
• d.10% of the purchase price

Regulation T, set by the Federal Reserve Board under the Securities Exchange Act of 1934, currently requires an initial margin deposit of 50% of the purchase price for marginable equity securities. The remaining amount may be borrowed from the broker-dealer through the margin account.Securities Exchange Act of 1934

A customer buys $20,000 of marginable stock in a margin account. Under Regulation T at 50%, how much must the customer deposit?

• a.$10,000✓
• b.$5,000
• c.$2,000
• d.$20,000

The Regulation T initial requirement of 50% applies to the $20,000 purchase, so the customer must deposit $10,000. The broker-dealer may lend the remaining $10,000, which becomes the debit balance in the margin account.Securities Exchange Act of 1934

FINRA's minimum maintenance margin requirement for a long stock position is:

• a.30% of the current market value, the requirement that applies to short stock positions
• b.50% of the current market value, the same percentage required at the initial purchase
• c.25% of the current market value✓
• d.100% of the current market value, as with a cash account purchase

FINRA Rule 4210 requires equity in a long margin account to stay at or above 25% of the current market value of the securities, and falling below it triggers a maintenance call. Fifty percent is the initial Regulation T deposit, not the maintenance level. One hundred percent is the full payment required in a cash account. Thirty percent is the maintenance level for short stock positions, not long ones.

A customer holds long stock with a current market value of $40,000 and a debit balance of $32,000. Using the 25% maintenance requirement, what is the status of the account?

• a.A maintenance call is triggered because equity of $8,000 is below the $10,000 required✓
• b.No call; equity of $8,000 equals 25% of the $32,000 debit balance
• c.A $12,000 call, because equity is below the 50% Regulation T requirement
• d.No call; equity of $8,000 is well above the $2,000 minimum equity

Equity equals market value minus the debit balance: $40,000 - $32,000 = $8,000. The 25% maintenance requirement is measured on the $40,000 market value, so $10,000 is required. Equity of $8,000 is $2,000 short, and a maintenance call is triggered. Taking 25% of the debit balance uses the wrong base, which would give exactly $8,000 and no call. The 50% figure is the initial Regulation T requirement, not the maintenance requirement, so a $12,000 call is wrong. The $2,000 minimum equity is a separate minimum and does not replace the 25% maintenance test.

In a short margin account, the customer profits when:

• a.The price of the borrowed and sold security declines✓
• b.The shorted stock pays a cash dividend while the position is open
• c.The shorted stock rises above the sale price
• d.A long position held in the account increases

A short seller borrows shares, sells them, and hopes to buy them back later at a lower price, so the position profits when the security's price declines. A rise above the sale price produces a loss, and because a price can rise without limit the potential loss is unlimited. A dividend paid while the position is open is a cost to the short seller, who must reimburse the lender. A gain on a long position in the account does nothing for the short position.

A traditional Individual Retirement Account (IRA) offers which primary tax feature?

• a.After-tax contributions that grow tax-deferred, with tax-free withdrawals of both contributions and earnings
• b.Potentially tax-deductible contributions with tax-deferred growth until withdrawal✓
• c.Tax-deductible contributions with no annual dollar limit, as long as the owner has earned income
• d.Tax-deferred growth with penalty-free withdrawals at any age and no required minimum distributions

Traditional IRA contributions may be deductible depending on income and workplace plan coverage, and earnings grow tax-deferred until withdrawal, when they are taxed as ordinary income. After-tax funding with tax-free qualified withdrawals describes a Roth IRA. A traditional IRA has an annual contribution limit, so deductible contributions are not unlimited. Required minimum distributions apply and early withdrawals before age 59 1/2 are generally penalized, so penalty-free access at any age with no required distributions is wrong.26 U.S.C. 219 and 408(a)

A Roth IRA differs from a traditional IRA primarily because a Roth:

• a.Requires the original owner to begin required minimum distributions at age 73 or later
• b.Has a higher annual contribution limit than a traditional IRA
• c.Is funded with after-tax dollars, and qualified withdrawals are tax-free✓
• d.Allows contributions to be deducted from income in the year they are made

Roth IRA contributions are made with after-tax dollars and are not deductible, but qualified distributions of contributions and earnings are tax-free if the five-year holding period is met and the owner is at least 59 1/2. A Roth IRA is not subject to required minimum distributions during the original owner's lifetime, so a starting age such as 73 does not apply. The annual limit is not higher for a Roth, because it is shared with traditional IRAs. Deducting contributions is the traditional IRA's feature, and none is allowed for a Roth.26 U.S.C. 408A

A withdrawal from a traditional IRA before age 59 1/2 is generally subject to:

• a.Ordinary income tax plus a 10% early withdrawal penalty, unless an exception applies✓
• b.A 10% additional tax only, with no ordinary income tax due on the amount
• c.Ordinary income tax only, because the 10% additional tax applies just to Roth IRAs
• d.Long-term capital gains rates plus a 25% additional tax on the amount withdrawn

Early distributions from a traditional IRA taken before age 59 1/2 are generally taxed as ordinary income and also carry a 10% additional tax under Section 72(t), unless an exception applies. The 10% tax is added to ordinary income tax, not substituted for it, and it is not limited to Roth IRAs. Capital gains rates do not apply to IRA distributions, and the 25% rate is limited to certain SIMPLE IRA withdrawals made soon after joining. Exceptions such as qualified first-home purchases, higher education or disability may waive the penalty but not the ordinary income tax.26 U.S.C. 72(t)

A 401(k) plan is a type of:

• a.Employer-sponsored defined benefit plan insured by the PBGC
• b.IRA opened and funded by the employee alone
• c.Tax-sheltered annuity plan for public school employees
• d.Employer-sponsored defined contribution retirement plan✓

A 401(k) is an employer-sponsored defined contribution plan in which employees defer part of their salary, often with an employer match, and the benefit depends on contributions and investment results. A defined benefit plan promises a set payout and is the type insured by the PBGC. An IRA opened and funded by the employee alone has no employer sponsor. A tax-sheltered annuity plan for public school employees is a Section 403(b) plan, a different plan type. ERISA governs these workplace plans.26 U.S.C. 401(k)

Under Regulation Best Interest (Reg BI), when a broker-dealer makes a recommendation to a retail customer, it must:

• a.Act as an Advisers Act fiduciary and monitor the account continuously
• b.Recommend the lowest-cost product available in every case
• c.Act in the retail customer's best interest and not place its own interests ahead of the customer's✓
• d.Satisfy FINRA's suitability test alone, since matching the stated objective is enough

Rule 15l-1(a)(1) requires a broker-dealer, when recommending a securities transaction or strategy to a retail customer, to act in the customer's best interest at the time the recommendation is made, without placing its own financial or other interest ahead of the customer's. This is satisfied through the disclosure, care, conflict-of-interest and compliance obligations. It is not the Advisers Act fiduciary duty and does not by itself create a continuing duty to monitor the account. It does not require the cheapest product, because cost is one factor weighed with the customer's investment profile, and matching a stated objective is not enough on its own.17 CFR 240.15l-1(a)(1)

When determining whether a recommendation is suitable, a registered representative must consider the customer's:

• a.Investment objectives, financial situation, risk tolerance, and time horizon✓
• b.Favorite industries only
• c.Zip code and gender
• d.The firm's current inventory needs and its goal of reducing unwanted proprietary positions

Suitability and the care obligation under Reg BI require the representative to understand the customer's investment profile, including objectives, financial situation and needs, risk tolerance, time horizon, liquidity needs, and experience. Recommendations must fit that profile rather than the firm's interests.

Before a customer may trade options, the firm must:

• a.Obtain the customer's signed options agreement before approval and mail the options disclosure document with the first trade confirmation
• b.Obtain approval from a designated options principal and deliver the options disclosure document (ODD) at or before account approval✓
• c.Obtain approval from the customer's registered representative alone and deliver the options disclosure document within 15 days of approval
• d.Verify $2,000 of account equity and send the ODD after approval

Opening an options account requires approval by a Registered Options Principal based on the customer's suitability information, and the options disclosure document must be furnished at or before approval. The signed options agreement is due within 15 days after approval, so it need not come first, and disclosure with the first confirmation is too late. Approval by the representative alone is not enough. A $2,000 equity figure is a margin-account minimum, not an options approval test, and the firm can never guarantee a customer against loss.

A tenants in common (TIC) account differs from JTWROS because in a TIC account:

• a.The account cannot hold securities
• b.Both owners must have equal percentage interests
• c.Only one owner may enter orders
• d.A deceased owner's fractional interest passes to that owner's estate, not automatically to the co-owner✓

In tenants in common, each owner holds a divided fractional interest, which need not be equal, and upon death that interest passes to the owner's estate rather than automatically to the surviving co-owner. JTWROS, by contrast, provides automatic survivorship to the surviving owner.

A customer buys stock in a cash account for $10,000 with the intent to pay for it by selling the same securities before paying. This practice is known as and prohibited as:

• a.Freeriding, which violates Regulation T✓
• b.Trading on margin, which Regulation T bars for cash accounts
• c.Churning, which violates the antifraud provisions of the Exchange Act
• d.A short sale against the box, which violates Regulation SHO

Freeriding occurs when a customer buys securities in a cash account and sells them without paying for the purchase, using sale proceeds to cover it. Regulation T answers with a 90-day freeze on the privilege of delaying payment, so purchases must be paid in full up front. Trading on margin is not what is described, because the customer is not borrowing from the firm. Churning is excessive trading to generate commissions and has nothing to do with payment. A short sale against the box involves an existing long position and is not about paying for a purchase.12 CFR 220.8(c)

A Coverdell Education Savings Account (ESA) is designed primarily to:

• a.Allow after-tax contributions to grow tax-free for qualified education expenses✓
• b.Allow deductible contributions to reduce taxable income for education costs
• c.Allow after-tax contributions of up to $20,000 per year for education
• d.Provide tax-free growth through a state-run plan open to any adult donor

A Coverdell ESA lets contributors make nondeductible (after-tax) contributions that grow tax-free, with tax-free withdrawals when used for qualified education expenses. Contributions are not deductible, so the deduction description fails. The annual limit is $2,000 per beneficiary, far below $20,000. A state-run plan that any adult can fund describes a 529 plan, not a Coverdell account, which has income phase-outs for contributors.26 U.S.C. 530

A 529 college savings plan offers which key tax advantage?

• a.Tax-deferred growth and tax-free withdrawals when used for qualified education expenses✓
• b.A federal income tax deduction for every contribution, up to the annual gift tax exclusion
• c.A state guarantee against loss of principal
• d.Tax-free withdrawals for any purpose after five years

A 529 plan provides tax-deferred growth and federal-tax-free withdrawals when funds are used for qualified education expenses; some states also offer a state tax deduction. There is no federal deduction for contributions. The plan carries market risk and no one guarantees against loss of principal. Earnings withdrawn for other purposes are taxed and generally face an additional penalty, so withdrawals are not tax-free for any purpose.26 U.S.C. 529

When a customer opens a new account, the registered representative is generally required to:

• a.Verify the customer's identity and have the registered representative alone approve the account
• b.Collect the customer's tax returns and obtain approval of the account from FINRA staff
• c.Obtain essential facts about the customer and have a principal approve the account✓
• d.Collect essential facts only when the customer intends to trade on margin or sell short

Firms must gather essential facts about each customer at account opening, including identity, financial background and investment objectives, and a principal must review and approve the new account. The representative cannot approve the account alone, and approval comes from the firm's principal rather than FINRA staff. The facts are required for every account, not only margin or short-selling accounts, because they support suitability, Reg BI and know-your-customer duties.

In a margin account, the credit agreement, hypothecation agreement, and (optionally) the loan consent form together permit the firm to:

• a.Extend credit, take a lien on the customer's securities, and (with consent) lend out those securities✓
• b.Extend credit, lend out the customer's fully paid securities, and pledge them without any further consent
• c.Take a lien on the customer's securities, lend them out (with consent), and waive the Regulation T initial requirement
• d.Extend credit, reduce the maintenance requirement to 15%, and pledge only fully paid securities

The credit (margin) agreement sets the terms of the loan, the hypothecation agreement lets the firm pledge the customer's securities as collateral, and the optional loan consent allows the firm to lend them to others. Together they let the firm extend credit, take a lien and, with consent, lend. They do not allow lending or pledging fully paid securities without further consent, they do not waive the Regulation T initial requirement, and they do not cut the maintenance requirement to 15%.

A pattern day trader is generally required to maintain minimum equity in a margin account of at least:

• a.$25,000✓
• b.$10,000
• c.$2,000
• d.$100,000

FINRA rules require an account designated as a pattern day trading account (four or more day trades within five business days meeting the threshold) to maintain minimum equity of at least $25,000. This amount must be in the account before day trading may continue and provides an added cushion for the frequent intraday activity.Securities Exchange Act of 1934

A required minimum distribution (RMD) from a traditional IRA generally must begin:

• a.At age 59 1/2, when penalty-free withdrawals from the account first become available
• b.At age 70 1/2, the starting age that applied before the SECURE Act
• c.At the RMD age set by current tax law, after which annual distributions are required✓
• d.At retirement from the owner's last employer, whatever the owner's age

Traditional IRAs require the owner to begin required minimum distributions at the RMD age set by current tax law, which is 73 or 75 depending on birth year under SECURE 2.0. Failing to take the full RMD results in a tax penalty on the shortfall. Age 59 1/2 only ends the early-withdrawal penalty and forces nothing. Age 70 1/2 was the starting age before the SECURE Act. Retirement can delay distributions from an employer plan but has no effect on an IRA. Roth IRAs are not subject to RMDs during the original owner's lifetime.26 U.S.C. 408(a)(6) and 401(a)(9)

A customer's investment objective of 'capital preservation' would best be served by recommending:

• a.Highly leveraged limited partnerships and speculative oil-and-gas drilling programs
• b.Uncovered option writing
• c.Speculative small-capitalization growth stocks that carry high price volatility
• d.High-quality short-term debt instruments and money market securities✓

A capital preservation objective prioritizes protecting principal over growth, favoring high-quality, short-term, liquid instruments such as Treasury bills and money market securities. Speculative equities and leveraged or uncovered option strategies carry too much risk of loss for this objective.

A customer with a long-term retirement horizon and a growth objective, comfortable with volatility, would most suitably be recommended:

• a.A diversified portfolio weighted toward equities✓
• b.All of the account's assets placed into one single speculative growth stock
• c.Only short-term U.S. Treasury bills held all the way to their maturity dates
• d.Only short-term bank certificates of deposit held until they fully mature

A long time horizon combined with a growth objective and tolerance for volatility supports an equity-weighted, diversified portfolio, which historically offers higher long-term returns. Concentrating in a single stock violates diversification principles, while holding only short-term instruments would not meet the growth objective.

A market order to buy is an instruction to:

• a.Buy at the closing price only
• b.Buy only at a specified price or lower
• c.Buy immediately at the best available current price✓
• d.Buy only when the stock trades through a stop price

A market order is executed promptly at the best available price when it reaches the market, prioritizing speed of execution over price. It provides no price protection, so in fast-moving or thin markets the execution price may differ from the last quote.

A customer places a limit order to buy 100 shares at $25. This order:

• a.Will be executed only at $25 or higher
• b.Guarantees immediate execution at the market
• c.Will be executed only at $25 or lower✓
• d.Becomes a market order once the stock reaches $25

A buy limit order sets the maximum price the buyer is willing to pay, so it executes only at the limit price or lower. It provides price protection but no guarantee of execution; if the stock never trades at or below the limit, the order goes unfilled.

A sell stop order becomes a market order to sell when the stock:

• a.Pays a regular quarterly cash dividend to each of its common shareholders
• b.Rises to or through the designated stop price on the upside during trading
• c.Reaches a brand-new fifty-two-week intraday high price on heavy volume
• d.Trades at or through the stop price on the downside✓

A sell stop is placed below the current market and is triggered when the stock trades at or through the stop price, at which point it becomes a market order to sell. Investors often use sell stops to limit losses or protect gains on a long position.

A sell stop limit order differs from a sell stop order because, once triggered, the stop limit order:

• a.Executes immediately at whatever prevailing market price then happens to be available
• b.Converts to a buy order
• c.Is automatically canceled the very instant that the designated stop price is touched
• d.Becomes a limit order that executes only at the limit price or better✓

When a stop limit order is triggered at the stop price, it becomes a limit order rather than a market order, so it will execute only at the specified limit price or better. This adds price protection but risks non-execution if the market moves past the limit before filling.

In a securities quote, the bid and ask represent:

• a.The dividend and the coupon
• b.Two different settlement dates
• c.The highest price a buyer will pay (bid) and the lowest price a seller will accept (ask)✓
• d.The opening and closing prices

The bid is the highest price buyers are currently willing to pay, and the ask (offer) is the lowest price sellers will accept. The difference between them is the spread, which reflects liquidity and is a cost of trading; investors generally buy at the ask and sell at the bid.

Regular-way settlement for most corporate stocks and bonds currently occurs on:

• a.Two business days after the trade date (T+2), the cycle used before May 2024
• b.Three business days after the trade date (T+3), the cycle used before 2017
• c.One business day after the trade date (T+1)✓
• d.The same business day as the trade date (T+0) for all transactions

Under SEC Rule 15c6-1(a), regular-way settlement for most broker-dealer securities transactions, including stocks and corporate bonds, occurs no later than one business day after the trade date (T+1), a shortening from T+2 that took effect May 28, 2024. T+2 was the cycle before that date and T+3 the cycle before 2017, so both are out of date. Same-day settlement is not required for regular-way trades.SEC Rule 15c6-1(a) (17 CFR 240.15c6-1)

The ex-dividend date is significant because an investor who buys the stock on or after that date:

• a.Is not entitled to the upcoming declared dividend✓
• b.Is entitled to the dividend only if the purchase settles by the payable date
• c.Gets it, since the record date is a day later
• d.Gets it if bought before the declaration date

The ex-dividend date is the cutoff for dividend eligibility; buyers on or after this date are not entitled to the declared dividend, which goes to the seller. Under T+1 settlement the ex-dividend date and the record date fall on the same day, so a record date one day later describes the old T+2 cycle. Settling by the payable date does not matter, because entitlement is fixed by the ex-date, and buying before the declaration date is not the test either. To account for the payout, the stock's opening price is typically reduced by the dividend amount on the ex-date.

A specialist or designated market maker (DMM) on an exchange is responsible for:

• a.Acting only as an agent, never for its own account
• b.Underwriting new issues of the securities assigned to it
• c.Maintaining a fair and orderly market in assigned securities✓
• d.Guaranteeing a minimum price for each assigned security

A designated market maker (formerly specialist) is charged with maintaining a fair and orderly market in assigned securities, providing liquidity by buying and selling for its own account when needed and facilitating price discovery at the open and close. A DMM therefore does not act solely as an agent. Underwriting new issues is an investment banking function, and no DMM guarantees a price floor for a security.

The primary market is where:

• a.Options are exercised
• b.Investors trade previously issued securities among themselves
• c.Issuers sell new securities to investors and raise capital✓
• d.Only government bonds are traded

The primary market is where new securities are issued and sold by the issuer, with proceeds going to the company through an underwriting. Once issued, those securities trade among investors in the secondary market, where the issuer is no longer a party to the transactions.

A stock trading 'ex-rights' means the stock:

• a.Trades without the value of the subscription rights, which now trade separately✓
• b.Still includes the full value of the subscription rights within its current quoted price
• c.Cannot be sold
• d.Has been delisted

When a stock trades ex-rights, buyers no longer receive the subscription rights associated with a rights offering, and those rights trade separately in the market. The stock price typically adjusts downward to reflect the removed value of the rights.

A 'fill-or-kill' (FOK) order instructs the broker to:

• a.Execute the entire order immediately and completely, or cancel it entirely✓
• b.Fill part of the order and cancel the rest
• c.Fill the order over the course of the day
• d.Hold the order open until a materially better price happens to appear later in the session

A fill-or-kill order must be executed in its entirety immediately, or it is canceled outright; partial fills are not permitted. It differs from an immediate-or-cancel order, which allows partial execution, and from an all-or-none order, which does not require immediate execution.

A reverse stock split (for example, 1-for-5) results in a shareholder holding:

• a.A larger total number of shares outstanding for the holder at a proportionally lower price
• b.The same number of shares at a higher price
• c.Fewer shares at a proportionally higher price, with total value roughly unchanged✓
• d.More shares at the same price

In a 1-for-5 reverse split, every five shares become one, so the shareholder holds one-fifth as many shares at roughly five times the price, leaving total market value approximately unchanged. Companies often use reverse splits to raise the per-share price, sometimes to meet exchange listing requirements.

A tender offer is:

• a.A public offer to buy shares from existing shareholders, usually at a premium✓
• b.A type of bond call
• c.An offer to lend an investor's securities out to short sellers in exchange for a periodic fee
• d.A dividend paid in additional shares

A tender offer is a public bid to purchase some or all shareholders' shares, typically at a premium to the market price and within a set period, often as part of a takeover attempt. Shareholders decide whether to tender their shares under the stated terms.

When a company pays a cash dividend, on the ex-dividend date the opening stock price is typically:

• a.Unchanged
• b.Reduced by the amount of the dividend✓
• c.Increased by the amount of the dividend
• d.Doubled

On the ex-dividend date the stock's opening price is generally reduced by the dividend amount because new buyers will not receive that dividend. This adjustment keeps the market value consistent for buyers before and after the dividend right is removed.

The third market refers to:

• a.Exchange-listed securities traded over-the-counter, often between institutions✓
• b.The trading of major foreign currencies between large international banking institutions
• c.Trading of new issues
• d.Options traded on an exchange

The third market is the trading of exchange-listed securities in the over-the-counter market, frequently involving institutional investors and market makers away from the primary exchange. The fourth market, by contrast, refers to direct institution-to-institution trading, often through electronic networks.

A good-till-canceled (GTC) order:

• a.Remains active until it is executed or the customer cancels it, subject to firm and exchange time limits✓
• b.Can never be canceled
• c.Must be executed within one hour
• d.Expires at the end of the trading day if unfilled

A GTC (open) order stays in effect until it is executed or canceled, rather than expiring at the day's close like a day order. Firms and exchanges may impose periodic expiration or confirmation requirements, so GTC orders are typically reviewed or refreshed periodically.

A dealer (principal) transaction differs from an agency (broker) transaction because in a principal trade the firm:

• a.Only matches buyers with sellers and earns a fixed commission for arranging the trade
• b.Acts solely as a fiduciary adviser
• c.Cannot profit from the trade
• d.Buys or sells from its own inventory and may charge a markup or markdown✓

Acting as a dealer or principal, a firm trades from its own account and earns compensation through a markup (on sales to customers) or markdown (on purchases from customers). Acting as a broker or agent, the firm arranges the trade between parties and charges a commission instead.

The National Best Bid and Offer (NBBO) represents:

• a.The highest bid and lowest offer available across all market centers✓
• b.Only quotes from one exchange
• c.The simple arithmetic average of every bid and offer quote reported during the day
• d.The single opening auction price that is established at the start of the session

The NBBO consolidates quotes across all market centers to show the highest available bid and the lowest available offer at a given moment. Firms handling customer orders must seek to execute at prices consistent with the NBBO as part of their best execution obligations.

When an investor sells stock short, the shares delivered to the buyer are:

• a.Borrowed, typically through the broker-dealer✓
• b.Newly issued directly by the underlying company specifically for delivery
• c.Created and issued brand-new by the listing exchange for the transaction
• d.Already owned outright by the short seller before the sale was entered

A short sale involves selling securities the investor does not own by borrowing them, usually through the broker-dealer's securities lending arrangements. The short seller must later buy shares to return the borrowed stock (cover), and is responsible for any dividends paid while the position is open.

A stock dividend (as opposed to a cash dividend) results in:

• a.A reduction in the number of shares outstanding
• b.An increase in the company's total equity
• c.Additional shares to shareholders, lowering the per-share cost basis while total basis stays the same✓
• d.A cash payment to shareholders

A stock dividend distributes additional shares rather than cash, increasing the share count while proportionally lowering the per-share cost basis; the shareholder's total cost basis and total value are unchanged. It does not by itself increase the company's total equity, merely reclassifying amounts within equity.