FINRA Series 7 — All Questions

An 'all-or-none' (AON) order instructs that:

• a.The entire order must be filled, though not necessarily immediately or in one transaction✓
• b.Partial fills are always acceptable
• c.The order executes only at the close
• d.The order must be filled immediately or canceled

An all-or-none order requires that the full quantity be executed, but unlike fill-or-kill it does not demand immediate execution and can be worked over time. If the full size cannot ultimately be filled, none of it is executed.

The role of a transfer agent for a corporation includes:

• a.Setting the market price of the stock
• b.Providing margin loans
• c.Underwriting new securities
• d.Issuing and canceling certificates and maintaining records of registered shareholders✓

A transfer agent handles the issuance and cancellation of share certificates, records changes in ownership, and maintains the register of shareholders, often coordinating with a registrar to prevent over-issuance. It also processes name and address changes and helps distribute dividends and proxies.

When a bond is quoted at '98', the price the investor pays (excluding accrued interest) on a $1,000 par bond is:

• a.$9,800
• b.$98
• c.$980✓
• d.$1,098

Corporate bonds are quoted as a percentage of par, so a quote of 98 means 98% of $1,000 par, or $980. The investor would also pay any accrued interest since the last coupon date in a regular-way purchase.

A buy stop order is typically used by:

• a.An investor protecting a short position or seeking to buy on upside momentum✓
• b.A dividend-focused investor
• c.A bond issuer
• d.An income investor seeking to buy the stock at a specified price below the current market

A buy stop is placed above the current market and triggers when the stock rises to or through the stop price. Short sellers use buy stops to limit losses if the stock rises, and momentum buyers use them to enter once a resistance level is broken.

A trade executed at a price between the current bid and ask is said to occur:

• a.Inside the spread (price improvement for the customer)✓
• b.Only within a private dark pool away from the publicly displayed markets
• c.Entirely outside the prevailing market on the far away side of the quote
• d.Exactly at the prior trading session's official closing print price

An execution between the prevailing bid and ask occurs inside the spread and represents price improvement compared with paying the full ask or receiving only the bid. Achieving price improvement is one way firms meet their best execution responsibilities to customers.

The primary purpose of the Securities Act of 1933 is to:

• a.Regulate secondary market trading and exchanges
• b.Create the Federal Reserve
• c.Set margin requirements
• d.Require full and fair disclosure of material information for new securities offered to the public✓

The Securities Act of 1933 governs the primary market, requiring issuers to register new public offerings and provide a prospectus with full and fair disclosure of material facts so investors can make informed decisions. It focuses on disclosure at issuance rather than regulating ongoing trading, which is the domain of the 1934 Act.Securities Act of 1933

During the cooling-off period of a registered offering, a broker-dealer may:

• a.Accept binding purchase orders and payment from existing customers
• b.Sell the securities to customers who have received the preliminary prospectus
• c.Collect non-binding indications of interest✓
• d.Confirm indications of interest as sales once the preliminary prospectus is delivered

During the cooling-off period (after the registration statement is filed but before it is effective), sales and binding orders are prohibited. Firms may distribute a preliminary prospectus (red herring) and gather non-binding indications of interest. Accepting binding orders or payment, selling to customers who hold the preliminary prospectus, and confirming indications of interest as sales are all barred until the registration is effective.Securities Act of 1933 Section 5 (15 U.S.C. 77e)

A preliminary prospectus (red herring) used before a registration is effective:

• a.Carries the SEC's approval that its disclosures are accurate and complete
• b.Contains the final public offering price and effective date
• c.May be used to accept orders and customer payments before the effective date
• d.Omits the final offering price and effective date and is used to gauge investor interest✓

A red herring is a preliminary prospectus circulated before the registration statement is effective. Under Securities Act Rule 430 it may omit the offering price and other information that depends on it, and because the registration is not yet effective there is no final price or effective date to print. Its use is to gauge non-binding investor interest. It cannot carry final terms, and no sales, orders or payments can be accepted until the registration becomes effective. The SEC does not approve or vouch for the accuracy of a prospectus.Securities Act Rule 430 (17 CFR 230.430)

In a firm commitment underwriting, the underwriter:

• a.Guarantees the securities will rise in price
• b.Purchases the entire issue from the issuer and assumes the risk of reselling it to the public✓
• c.Acts only as an agent and bears no risk
• d.Is exempt from delivering a prospectus

In a firm commitment underwriting, the underwriting syndicate buys the whole issue from the issuer and resells it to the public, assuming the risk of any unsold shares. This differs from a best efforts underwriting, where the underwriter acts as agent and only sells what it can without buying the issue outright.Securities Act of 1933

A private placement conducted under Regulation D of the Securities Act of 1933 is:

• a.A registered public offering that is sold to the general public with a full prospectus delivered
• b.An intrastate offering exempt only if sold to residents of one state
• c.A registered shelf offering sold only to institutional buyers
• d.An exempt offering sold primarily to accredited investors without full SEC registration✓

Regulation D provides exemptions from full registration for private placements sold mainly to accredited investors, with limits on general solicitation and on the number of non-accredited purchasers depending on the rule used. A registered public offering with a full prospectus is the opposite. An intrastate offering is a separate exemption tied to residents of one state, and a shelf offering is itself registered. Regulation D securities are typically restricted and cannot be freely resold without meeting conditions.17 CFR 230.506

The Securities Exchange Act of 1934 is best known for:

• a.Creating the SEC and regulating secondary market trading, exchanges, and broker-dealers✓
• b.Setting federal income tax rates
• c.Exempting all trading from regulation
• d.Registering new issues only

The Securities Exchange Act of 1934 created the Securities and Exchange Commission and governs the secondary market, including exchanges, broker-dealers, reporting by public companies, proxy rules, and antifraud and anti-manipulation provisions. It complements the 1933 Act, which focuses on new issues.Securities Exchange Act of 1934

Trading securities on the basis of material, nonpublic information is prohibited as:

• a.A permissible informational research edge that skilled analysts may lawfully act upon
• b.A form of best execution
• c.Legitimate market making
• d.Insider trading, which violates the antifraud provisions of the Exchange Act✓

Using material nonpublic information to trade, or tipping others who trade, is insider trading and violates the antifraud provisions of the Securities Exchange Act of 1934 and related rules. Penalties can include disgorgement, civil penalties, and criminal prosecution.Securities Exchange Act of 1934

Under FINRA rules, communications with the public are generally categorized as:

• a.Advertisements, sales literature, and correspondence
• b.Written communications and oral communications, with each type reviewed by a principal before first use
• c.Retail communications, correspondence, and institutional communications✓
• d.Communications to customers and communications to non-customers, each filed with FINRA before use

Rule 2210(a) groups member communications with the public into three categories: correspondence (written or electronic communications distributed to 25 or fewer retail investors within 30 calendar days), retail communications (more than 25 retail investors within 30 days), and institutional communications (distributed only to institutional investors). Each carries different approval, review and recordkeeping requirements. The older advertisement and sales literature categories were replaced by this scheme. Splitting by medium or by customer status is not how the rule classifies them.FINRA Rule 2210(a)

A registered representative's communications with the public must be:

• a.Pre-approved by a principal and filed with FINRA in every case
• b.Fair, balanced, and not misleading, presenting risks along with benefits✓
• c.Accurate in every statement of fact, with no duty to present risks alongside the benefits
• d.Approved by a principal within 30 days after first use, for all retail communications

Rule 2210(d)(1) requires communications to be based on fair dealing and good faith, to be fair and balanced, and to provide a sound basis for evaluating the facts, with balanced treatment of risks and potential benefits and no omission of a material fact that would make them misleading. Accuracy of individual statements is not enough. A principal must approve a retail communication before its use, not after, and FINRA filing before use is required only for certain communications, not in every case.FINRA Rule 2210(d)(1)

Under anti-money laundering (AML) rules, a Currency Transaction Report (CTR) must generally be filed for cash transactions exceeding:

• a.$3,000, the threshold for funds-transfer recordkeeping
• b.$5,000, the threshold for filing a suspicious activity report
• c.$10,000 in a single business day✓
• d.$10,000 in cash aggregated over a calendar month

Under the Bank Secrecy Act, financial institutions must file a Currency Transaction Report for cash transactions of more than $10,000 in a single business day, aggregating multiple related transactions. The $3,000 figure is a funds-transfer recordkeeping threshold and $5,000 is the threshold for a broker-dealer's suspicious activity report, so neither triggers a CTR. The aggregation period is one business day, not a calendar month. Structuring transactions to evade the reporting threshold is itself illegal.31 CFR 1010.311 and 1010.313

A Suspicious Activity Report (SAR) is filed by a firm when:

• a.A transaction appears to involve possible money laundering or has no apparent lawful purpose✓
• b.A dividend is paid
• c.A customer earns a large profit
• d.A customer opens a retirement account

Firms must file a Suspicious Activity Report when they detect transactions that appear to involve funds from illegal activity, are designed to evade reporting requirements, or have no apparent business or lawful purpose. Firms generally may not notify the customer that a SAR has been filed (no tipping off).Bank Secrecy Act

Which of the following is a prohibited practice for a registered representative?

• a.Fully disclosing every material risk to the customer before making the trade
• b.Recommending a broadly diversified portfolio suited to the client's objectives
• c.Filing accurate and complete books and records exactly as regulations require
• d.Guaranteeing a customer against loss in a securities account✓

It is prohibited to guarantee a customer against loss or to promise a specific investment result; investment returns cannot be assured. Other prohibited practices include churning, unauthorized trading, commingling customer funds with firm funds, and making unsuitable recommendations.

'Churning' refers to:

• a.Reinvesting dividends automatically
• b.Excessive trading in a customer's account primarily to generate commissions✓
• c.Diversifying a client's portfolio broadly across many different market sectors and assets
• d.Rebalancing once per year

Churning is excessive trading in a customer's account that is driven by the representative's interest in generating commissions rather than the customer's investment objectives. It violates suitability and Reg BI obligations and is a prohibited practice regardless of whether the account gains or loses value.

Commingling a customer's funds or securities with the firm's own assets is:

• a.Permitted whenever the customer provides advance verbal consent to the firm
• b.Prohibited; customer assets must be properly segregated✓
• c.Allowed only within customer margin accounts and not in any other account
• d.Affirmatively required of every member firm under current FINRA rules

Firms must keep customer funds and fully paid securities segregated from the firm's own assets to protect customers, particularly in the event of firm insolvency. Commingling customer property with firm property is a prohibited practice and violates customer protection rules.

The Securities Investor Protection Corporation (SIPC) protects customers by:

• a.Guaranteeing against market losses on investments
• b.Providing limited coverage of customer cash and securities if a member broker-dealer fails✓
• c.Setting margin requirements
• d.Insuring bond issuers against default

SIPC, established under the Securities Investor Protection Act, provides limited protection for customers' cash and securities if a member broker-dealer becomes insolvent, up to statutory limits. It does not protect against ordinary market losses or the decline in value of investments.Securities Investor Protection Act

Under FINRA rules, most customer account records and communications must generally be:

• a.Preserved for specified retention periods, often several years, and made available to regulators✓
• b.Kept for one year and then destroyed, unless the customer asks the firm in writing to retain them
• c.Preserved only while the customer's account remains open, and then destroyed once the account is closed
• d.Stored only in paper form, with no electronic copies permitted

FINRA and SEC recordkeeping rules require firms to preserve books, records and communications for specified periods, commonly several years, and to make them available for regulatory examination. The periods do not depend on a customer's request, and a one-year destroy rule is not the standard. Customer account records are kept after an account closes rather than discarded when it does. Electronic storage is permitted when it meets the rules' format requirements, so records need not be on paper.

A registered representative who wishes to engage in an outside business activity must:

• a.Obtain prior written approval directly from the federal Securities and Exchange Commission
• b.Provide written notice to the firm within 30 days after the activity has begun
• c.Amend Form U4 and wait for FINRA staff to approve the activity before starting it
• d.Provide prior written notice to the employing firm as required by FINRA rules✓

FINRA rules require a registered person to give the member firm prior written notice before engaging in an outside business activity, which lets the firm assess conflicts and supervisory duties. The SEC does not approve individual outside activities, and waiting on a FINRA decision after a Form U4 amendment is not the process. Notice given after the activity has begun is too late. Private securities transactions ('selling away') are a separate matter that require prior written notice and, if compensated, firm approval.

'Selling away,' or participating in private securities transactions without the firm's knowledge and approval, is:

• a.Permitted if the representative receives no compensation from the transaction
• b.Permitted as long as the affected customer signs a written liability waiver first
• c.Prohibited without prior written notice to and approval from the firm✓
• d.Permitted whenever only accredited investors participate

Selling away occurs when a representative participates in securities transactions outside the scope of employment without notifying and obtaining approval from the firm. FINRA rules prohibit this unless the representative gives prior written notice and, for compensated transactions, receives the firm's approval and supervision. Lack of compensation does not remove the notice requirement. A customer's liability waiver cannot replace the firm's knowledge and approval, and the accredited status of other participants does not change the rule.Securities Exchange Act of 1934

The Investment Company Act of 1940 primarily regulates:

• a.Bank deposits
• b.Investment companies such as mutual funds, closed-end funds, and unit investment trusts✓
• c.The issuance of municipal bonds
• d.Commodity futures

The Investment Company Act of 1940 governs the organization and operation of investment companies, including open-end funds (mutual funds), closed-end funds, and unit investment trusts. It addresses disclosure, governance, capital structure, and restrictions on transactions to protect fund investors.Investment Company Act of 1940

A firm's written supervisory procedures and designation of principals are intended to:

• a.Shift legal responsibility for violations from the firm to the individual representative who committed them
• b.Replace the suitability and best-interest obligations that apply to each recommendation
• c.Ensure the firm supervises its associated persons and business for compliance with securities laws and rules✓
• d.Allow the firm to register as a broker-dealer and become a FINRA member

FINRA rules require firms to establish and maintain a supervisory system, including written supervisory procedures and qualified principals, reasonably designed to achieve compliance with applicable securities laws and rules. Effective supervision helps detect and prevent violations such as unsuitable recommendations, unauthorized trading and churning. It does not move responsibility to the individual representative, because the firm remains responsible for supervision. It does not replace suitability or best-interest obligations, and broker-dealer registration and FINRA membership are separate steps.

Accrued interest on municipal and corporate bonds is calculated using which day-count convention?

• a.Actual days in the period over actual days in the year (actual/actual)
• b.A 30-day month and a 360-day year (30/360)✓
• c.Actual days over a 360-day year (actual/360)
• d.Actual days over a 365-day year (actual/365)

Municipal and corporate bonds accrue interest on a 30/360 basis: every month is treated as 30 days and the year as 360 days. U.S. Treasury notes and bonds use actual/actual, and money-market instruments use actual/360. Trap: actual/actual (choice a) is the government-bond method, not the corporate/muni method.MSRB Rule G-33

In analyzing a general obligation (GO) municipal bond, an analyst focuses primarily on:

• a.The revenues and debt-service coverage ratio of one single specific revenue-producing project
• b.The dividend payment history of the municipality
• c.The credit rating of the U.S. federal government
• d.The issuer's assessed property values, debt per capita, and tax collection record✓

GO bonds are backed by the issuer's full faith, credit, and taxing power, so analysts examine the tax base (assessed valuations), debt per capita, debt-to-assessed-value ratios, and tax collection rates. Revenue and debt-service-coverage analysis (choice a) applies to revenue bonds, which are backed by a project's income rather than taxes.

Under the more common 'net revenue pledge' on a municipal revenue bond, bondholders are paid:

• a.Before the facility's operating and maintenance expenses are paid
• b.Only from statewide ad valorem property taxes
• c.After operating and maintenance expenses, out of net revenues✓
• d.Only if the state legislature votes to appropriate funds

Under a net revenue pledge, the flow of funds pays operation and maintenance (O&M) expenses first, then services the debt from net revenues. A gross revenue pledge (rare) pays debt service before O&M. Choice d describes a moral obligation/appropriation bond, and choice a reverses the standard net-revenue flow of funds.

The Municipal Securities Rulemaking Board (MSRB):

• a.Regulates the borrowing and issuance decisions of state and local governments
• b.Writes rules for municipal securities dealers but relies on FINRA and the SEC to enforce them✓
• c.Provides bond insurance that covers a missed interest or principal payment
• d.Decides which municipal bond interest is exempt from federal income tax

The MSRB is the rulemaking body for the municipal securities market, but it has no examination or enforcement authority of its own; FINRA and the SEC enforce its rules. Under the Tower Amendment it cannot regulate issuers before an offering, so it does not regulate the borrowing or issuance decisions of governments. It does not provide bond insurance, which private insurers sell, and it does not decide the tax status of municipal bond interest, which is set by federal tax law.Securities Exchange Act of 1934 Section 15B(b) (15 U.S.C. 78o-4)

Under MSRB Rule G-37, if a municipal finance professional makes a non-exempt political contribution to an official who can influence the award of municipal securities business, the dealer is generally:

• a.Required to double the size of the contribution
• b.Fined a flat $100 per violation
• c.Free to proceed with the negotiated municipal securities business without any restriction at all
• d.Barred from negotiated municipal securities business with that issuer for two years✓

Rule G-37 imposes a two-year ban on negotiated municipal securities business with an issuer when a covered municipal finance professional makes a non-exempt contribution to an official of that issuer. A de minimis exception permits up to $250 per election to officials the professional can personally vote for. The rule targets pay-to-play; the other choices have no basis in the rule.MSRB Rule G-37

MSRB Rule G-20 generally limits gifts given in connection with municipal securities business to a maximum of:

• a.$25 per recipient per year
• b.$500 per recipient per year
• c.$300 per recipient per year✓
• d.$100 per recipient per year

MSRB Rule G-20, mirroring FINRA Rule 3220, caps gifts and gratuities in connection with municipal securities business at $300 per person per year — the limit was raised from $100 in 2026 (FINRA effective March 30, 2026; MSRB operative June 1, 2026). Ordinary, occasional business entertainment and de minimis promotional items are excluded. The $100 figure is the pre-2026 amount (older exam prep still shows it, and the live item bank may lag during the phase-in), and $25/$500 have no basis in the rule.MSRB Rule G-20

A 529 college savings plan is classified for regulatory purposes as:

• a.A registered open-end investment company (mutual fund)
• b.A municipal fund security regulated under MSRB rules✓
• c.A direct participation program
• d.A federal agency security

529 savings plans are municipal fund securities and are sold under MSRB rules using an official statement rather than a prospectus. Although the plan invests in mutual-fund-like portfolios, it is not itself a registered investment company. Earnings grow tax-deferred and qualified education withdrawals are federal-tax-free.MSRB

An investor buys a municipal bond in the secondary market and later sells it for more than the purchase price. The gain on the sale is:

• a.Exempt from tax, just like the bond's interest
• b.Taxed as a nondeductible gift
• c.Never taxable under any circumstances
• d.Taxable as a capital gain✓

Only the interest on municipal bonds is federally tax-exempt; a capital gain from selling a muni above cost is taxable like any other capital gain (and a market discount is generally taxed as ordinary income at sale or maturity). The trap is assuming the tax exemption covers trading gains as well as interest.

A taxable corporate bond yields 6%. For an investor in the 24% federal tax bracket, the approximate after-tax yield is:

• a.4.56%✓
• b.7.89%
• c.6.00%
• d.1.44%

After-tax yield = taxable yield x (1 - tax rate) = 6% x (1 - 0.24) = 6% x 0.76 = 4.56%. This is compared with a municipal yield to see which is better after taxes. Trap: 7.89% is the taxable-equivalent yield of a 6% muni (6% / 0.76), the reverse computation; 1.44% is just the tax portion.

The disclosure document delivered to investors in a new municipal bond offering is called the:

• a.Red herring preliminary prospectus
• b.Official statement✓
• c.Statutory prospectus filed with the SEC
• d.Trust indenture

Municipal offerings use an official statement for disclosure because municipal securities are exempt from Securities Act of 1933 registration and its prospectus requirement. A prospectus and red herring belong to registered corporate offerings, and the trust indenture is the bond contract (munis are also exempt from the Trust Indenture Act of 1939).Securities Act of 1933

An investor sells 1 XYZ 50 put for 4 and buys 1 XYZ 45 put for 1. What are the maximum gain and maximum loss?

• a.Maximum gain $200; maximum loss $300
• b.Maximum gain unlimited; maximum loss $300
• c.Maximum gain $500; maximum loss $500
• d.Maximum gain $300; maximum loss $200✓

This is a bull (credit) put spread. Net credit = 4 - 1 = 3 points = $300, the maximum gain, kept if both puts expire worthless (stock at or above 50). Maximum loss = difference in strikes minus net credit = (50 - 45) - 3 = 2 points = $200. Breakeven = higher strike minus net credit = 50 - 3 = 47. Trap: reversing the gain and loss (choice a).

An investor buys 1 XYZ 60 put and sells 1 XYZ 50 put. This position is best described as:

• a.A bullish position that profits as the stock rises
• b.A bearish debit put spread that profits as the stock falls✓
• c.A long straddle
• d.A covered call

Buying the higher-strike (60) put and selling the lower-strike (50) put is a debit put spread. Because the more valuable higher-strike put is owned, it costs a net debit and is bearish: it gains maximum value if the stock falls to or below 50. Trap: assuming any put spread is bullish; the direction depends on which strike is bought.

An investor buys 100 shares of XYZ at $48 and sells 1 XYZ 50 call for a premium of 2 (a covered call). What is the maximum gain?

• a.Unlimited
• b.$200
• c.$400✓
• d.$4,800

If the stock is called away at the 50 strike, the gain equals the stock appreciation plus the premium: (50 - 48) + 2 = 4 points = $400. Breakeven is 48 - 2 = 46. The written call caps upside at $400 no matter how high the stock climbs; 'unlimited' (choice a) would apply to owning stock alone, not to a covered call.

An investor who has sold stock short is best protected against a sharp rise in the stock's price by:

• a.Buying a put on the stock
• b.Selling a call on the stock
• c.Selling a put on the stock
• d.Buying a call on the stock✓

A short seller loses as the stock rises, with theoretically unlimited risk. Buying a call caps that risk by locking in a price to buy back (cover) the shares. A protective put hedges a long position, not a short one (the trap). Selling options brings in only limited premium and provides no protection against a large adverse move.

An XYZ 40 call trades at a premium of 6 while the stock is at 43. The option's intrinsic value and time value are:

• a.Intrinsic value $6, time value $0
• b.Intrinsic value $3, time value $3✓
• c.Intrinsic value $0, time value $6
• d.Intrinsic value $4, time value $2

A call's intrinsic value equals stock price minus strike when in the money: 43 - 40 = 3. Time value = premium minus intrinsic value = 6 - 3 = 3. The call is in the money by 3 points. Trap: treating the entire 6-point premium as intrinsic value (choice a) ignores the time value component.

A put option is 'in the money' when:

• a.The stock's market price is above the strike price
• b.The option's premium has fallen to zero
• c.The underlying stock pays no dividend
• d.The stock's market price is below the strike price✓

A put grants the right to sell at the strike, so it has intrinsic value (is in the money) when the stock trades below the strike, letting the holder sell higher than the market. A call is in the money when the stock is above the strike, which is what choice a describes: the classic buyer/seller reversal trap.

The writer (seller) of a put option is obligated to:

• a.Sell the underlying stock to the option holder at the strike price on demand
• b.Pay a periodic cash dividend directly to the holder of the put option
• c.Buy the underlying stock at the strike price if assigned✓
• d.Do nothing at all, because the writer of the put option holds only rights

A put writer sells someone the right to 'put' (sell) stock to them, so upon assignment the writer must buy the stock at the strike price. A call writer, by contrast, must sell/deliver stock. The writer receives premium but takes on an obligation, not a right; choice d reverses the buyer/seller roles.

An investor writes 1 XYZ 30 put for a premium of 2. What is the maximum possible loss?

• a.$200
• b.$2,800✓
• c.Unlimited
• d.$3,000

The worst case for a short put is the stock falling to zero: the writer must buy at 30 while the shares are worthless, losing 30 points offset by the 2-point premium = 28 points = $2,800. Trap: 'unlimited' loss applies to a naked short call, not a short put, because a stock's price cannot fall below zero.

Fundamental analysis of a common stock focuses primarily on:

• a.Chart patterns, trading volume trends, and various historical price momentum indicators
• b.The ratio of advancing to declining stocks
• c.Historical price support and resistance levels
• d.The company's financial statements, earnings, management, and economic outlook✓

Fundamental analysis estimates a security's intrinsic value from financial statements (earnings, balance sheet, cash flow), management quality, and industry and economic conditions. Chart patterns, volume, and advance/decline data (choices a, b, c) are tools of technical analysis, which studies price action rather than business fundamentals.

A technical analyst who says a stock has 'broken through resistance' means:

• a.The company reported sharply higher quarterly earnings per share and simultaneously raised its full-year guidance
• b.The price has risen above a prior ceiling where selling had capped advances, often read as bullish✓
• c.The company increased its dividend
• d.The bond's credit rating was upgraded

Resistance is a price level where selling has historically halted advances; a breakout above it is a bullish technical signal. Support is the mirror image, a floor where buying tends to emerge. Technical analysis studies price and volume, not fundamentals like earnings, dividends, or credit ratings (the distractors).

The four phases of the business cycle, in typical order, are:

• a.Trough, contraction, peak, expansion
• b.Inflation, deflation, stagflation, recovery
• c.Bull, bear, correction, rally
• d.Expansion, peak, contraction, trough✓

The business cycle moves through expansion (growth), a peak, contraction/recession (decline), and a trough (bottom), then repeats. A recession is commonly defined as two consecutive quarters of declining real GDP. Choices b and c mix in unrelated price-level or market-sentiment terms.

If the Federal Reserve sells securities through open market operations, the likely effect is to:

• a.Drain reserves from the banking system, tending to push interest rates up✓
• b.Add new reserves into the banking system, which tends to lower short-term interest rates
• c.Change federal income tax rates
• d.Directly set the level of stock prices

Open market operations are the Fed's primary tool. Selling securities removes cash (reserves) from the banking system, tightening money and tending to raise short-term rates; buying securities adds reserves and lowers rates. Taxation (choice c) is fiscal policy set by Congress, not a Fed function.

Fiscal policy, as distinguished from monetary policy, is carried out through:

• a.The Federal Reserve's open market operations
• b.Government taxing and spending decisions✓
• c.Changes to the Federal Reserve's discount rate
• d.Adjustments to bank reserve requirements

Fiscal policy is the government's use of taxation and spending to influence the economy, controlled by Congress and the President. The open market operations, discount rate, and reserve requirements in the other choices are all monetary policy tools of the Federal Reserve.

An inverted (negative) yield curve exists when:

• a.Long-term interest rates clearly exceed short-term rates all along the curve
• b.Every maturity along the yield curve happens to carry exactly the same yield
• c.Municipal bond yields broadly exceed the yields on comparable corporate bonds
• d.Short-term interest rates are higher than long-term rates✓

Normally the yield curve slopes upward, with longer maturities yielding more. An inverted curve, where short-term yields exceed long-term yields, often reflects tight monetary policy and can signal an expected slowdown. Choice a describes a normal curve and choice b a flat curve.

Losses generated by a direct participation program (limited partnership) are generally treated as:

• a.Ordinary losses deductible against salary and wages
• b.Passive losses deductible only against passive income✓
• c.Capital losses limited to $3,000 per year
• d.Portfolio losses usable only against dividend income

Under the passive activity rules, DPP losses are passive and may offset only passive income, not earned income (salary) or portfolio income (dividends and interest). Unused passive losses carry forward and can be used when passive income arises or the interest is disposed of. They cannot shelter a client's wages, they are not capital losses subject to the $3,000 annual limit, and they are not portfolio losses that can be applied against dividends or interest.26 U.S.C. 469