Your FREE Series 7 Flashcards 2026 – 300+ Cards

The most junior equity security, representing residual ownership in a corporation. Common holders are paid last in liquidation but have voting rights and the greatest growth potential.

Dead last — after secured creditors, general creditors (including bondholders), subordinated debt, and preferred stockholders. In exchange for this residual position they get the greatest upside.

The right to vote (electing the board and approving major matters like mergers or issuing senior securities) and a residual claim on assets/earnings, plus the greatest growth potential.

A voting method that caps votes per candidate at the number of shares owned. Votes cannot be concentrated, so it favors large/majority shareholders.

A method letting a holder pool all votes (shares x board seats) onto one or more candidates. It favors small/minority shareholders by letting them concentrate votes.

Votes = shares x seats = 1,000 x 9 = 9,000 votes, all of which can be cast for a single candidate under cumulative voting.

1,000 — statutory voting caps votes per candidate at the number of shares owned, no matter how many seats are open.

A common shareholder's right to buy enough newly issued shares to maintain their proportional ownership percentage, protecting against dilution. It is honored through a rights offering.

A shareholder's maximum loss is capped at the amount invested. Personal assets are not at risk for the corporation's debts.

Authorized = max in the charter. Issued = authorized shares actually sold. Outstanding = issued minus treasury. Only outstanding shares vote and receive dividends.

Previously issued shares that the company has repurchased. Treasury stock carries no voting rights and receives no dividends, and is excluded from shares outstanding.

Outstanding = Issued shares − Treasury shares. Outstanding shares are the ones held by investors that vote and receive dividends.

An equity security paying a fixed dividend (a % of $100 par or a dollar amount). It is senior to common for dividends and liquidation, junior to all debt, and usually non-voting.

Interest rates. Because it pays a fixed dividend, preferred behaves like a fixed-income instrument and its price moves inversely with rates, not with company growth.

Senior to common (for dividends and liquidation) but junior to all debt (bonds and other creditors). Preferred sits between debt and common.

Pays a fixed dividend with no extra features. If a dividend is skipped, it is gone forever — missed dividends do not accrue.

Skipped (omitted) dividends accrue as 'dividends in arrears' and must be paid in full before common shareholders receive any dividend.

Annual dividend = 6% x $100 = $6. Two years in arrears ($12) plus the current year ($6) = $18 per share must be paid before any common dividend.

Preferred that can receive dividends ABOVE its stated rate when the company performs well, participating in extra profits alongside common.

Preferred the issuer can redeem (call), usually at a premium. It typically carries a higher dividend rate to compensate holders for call risk.

Preferred exchangeable into a fixed number of common shares. Its market price is linked to the common stock, giving upside potential.

Preferred whose dividend resets to a benchmark rate. This reduces price volatility, but the lower volatility usually means a lower yield than fixed-rate preferred.

No. Preferred stock generally carries no voting rights, trading the vote for its senior, fixed-income-like dividend priority.

Common stock — it has the greatest growth potential. Preferred, being fixed-income-like, suits income-oriented clients seeking stable dividends instead.

A short-term instrument (typically 30-45 days) issued to existing shareholders, honoring the preemptive right, allowing purchase of new shares at a subscription price BELOW current market.

A long-term instrument (years or perpetual) to buy stock at a fixed price set ABOVE market at issuance. Often attached to a bond/preferred as a sweetener; has no initial intrinsic value.

A right's subscription price is BELOW market (in-the-money at issue). A warrant's exercise price is ABOVE market at issuance (out-of-the-money), so no immediate intrinsic value.

Rights go to existing shareholders and are short-term (30-45 days). Warrants are issued to bond/preferred buyers as sweeteners and are long-term (years or perpetual).

No. Neither pays dividends nor carries voting rights — they are not stock until exercised. Both trade separately in the secondary market.

As a 'sweetener' to make the offering more attractive, letting the issuer offer a lower coupon. The warrant gives bondholders potential equity upside.

Rights are a Reward to current owners (short-term, in-the-money). Warrants are a long-term Wager (issued out-of-the-money as a sweetener).

American Depositary Receipt — a negotiable receipt issued by a U.S. bank representing a set number of shares of a foreign company held on deposit abroad, trading/settling in U.S. dollars.

They let U.S. investors buy foreign equity in U.S. dollars and trade/settle it like a domestic stock, without dealing directly on foreign exchanges.

Because the underlying shares are priced in a foreign currency, exchange-rate swings affect the ADR's value and its dollar-converted dividend, independent of the company's performance.

Generally no. The depositary bank holds and votes the underlying shares. ADR holders typically lack voting and preemptive rights but still receive dividends in dollars.

Dividends may be subject to foreign tax withholding, which is often recoverable by the U.S. investor as a foreign tax credit.

A client wanting international diversification and foreign equity exposure without trading directly on foreign exchanges — accepting currency and political risk in exchange.

Declaration, Ex-dividend, Record, Payable. The board declares; the ex-date sets who qualifies; record date identifies holders on the books; payable date is when cash is paid.

You must own (have purchased before) the stock before the ex-dividend date. Buyers on or after the ex-date do NOT receive that dividend.

The stock typically opens lower by the dividend amount, reflecting that new buyers are no longer entitled to the upcoming dividend.

The date the board of directors announces the dividend, including the amount, the record date, and the payable date.

The date on which a shareholder must be on the company's books to be entitled to the declared dividend.

The date the declared dividend is actually paid out to the shareholders entitled to it (those who owned before the ex-date / on the record date).

Dividends from common and most preferred stock that meet IRS holding-period and source rules. They are taxed at the favorable long-term capital-gains rate.

At the investor's regular ordinary income tax rate, which is higher than the long-term capital-gains rate applied to qualified dividends.

No. A stock dividend/split is not currently taxable. Instead, the investor's total cost basis is spread over more shares, lowering the per-share basis.

Stock held more than 12 months produces a long-term capital gain (favorable rate). Held one year or less produces a short-term gain, taxed as ordinary income.

Inherited shares receive a basis stepped up to fair market value at the date of the decedent's death, often eliminating prior appreciation from taxation when sold.

An IRS rule disallowing a capital loss if a substantially identical security is bought within 30 days before or after the sale — a 61-day window total.

An arbitrary accounting value, typically $100 for preferred. It is the base on which the fixed dividend percentage is calculated (e.g., 6% of $100 = $6).

6% x $100 par = $6.00 per share per year. Preferred dividends are calculated on par value, not market price.

A security (bonds and preferred stock) that ranks ahead of common stock for income and in liquidation. Common shareholders vote to approve issuing additional senior securities.

1) Secured creditors/IRS/unpaid wages, 2) general creditors (incl. unsecured bondholders), 3) subordinated debt, 4) preferred stock, 5) common stock (last).

Because it can be exchanged into common shares, its price tracks the common's upside. Strong common performance pulls the convertible's value above a comparable straight preferred.

Callable preferred. The issuer's right to redeem (usually at a premium) is a disadvantage to holders, so it carries a higher dividend rate to compensate for call risk.

No. Treasury stock receives no dividends and has no vote. Dividends are paid only on outstanding shares (issued minus treasury).

The minority (smaller) shareholder, who can pool all votes onto one candidate. A question mentioning a minority holder, shares, and board seats is testing cumulative voting.

The majority (large) shareholder, because votes per candidate are capped at shares owned and cannot be concentrated, preventing small holders from gaining board representation.

In-the-money. A right's subscription price is set BELOW the current market price, giving it immediate intrinsic value — unlike a warrant, which is issued above market.

When market interest rates rise, existing bond prices fall, and when rates fall, prices rise. Outstanding fixed coupons become relatively less or more attractive.

95% of par. With $1,000 par, that is $950, a discount. A quote of 105 means $1,050, a premium.

The fixed stated interest rate of a bond as a percent of par. A 6% bond pays $60 per year per $1,000 bond regardless of market price.

Current yield = annual coupon / current market price. A $60 coupon bond priced at $900 yields $60/$900 = 6.67%.

The total annualized return if held to maturity, factoring in the coupon plus any gain (discount) or loss (premium) versus par at maturity.

The annualized return if a callable bond is redeemed at its call date instead of maturity, factoring in the coupon and price difference to the call price.

Nominal < Current Yield < YTM < YTC. As price drops below par, each successively forward-looking yield is higher.

YTC < YTM < Current Yield < Nominal. Above par, the call (earliest redemption) gives the lowest yield because of the larger loss to par.

Nominal = Current Yield = YTM = YTC. When a bond trades exactly at par, all four yields are equal.

0.01% (one one-hundredth of a percent). 100 basis points equals 1%.

Zero-coupon bonds and Treasury STRIPS. With no interim coupons, their prices swing the most when interest rates move.

Fully taxable at the federal, state, and local levels. This contrasts with Treasury (state/local exempt) and muni (federal exempt) interest.

Secured bonds (mortgage bonds, equipment trust certificates) are backed by specific pledged assets. A debenture is unsecured, backed only by the issuer's general credit and earning power.

A secured corporate bond backed by specific equipment (e.g., railcars, aircraft). The collateral makes it safer than an unsecured debenture.

The issuer can redeem early, benefiting the issuer when rates fall (it refinances cheaper). It is a reinvestment risk to the investor.

A bond that lets the holder (investor) redeem early at a set price, benefiting the investor when rates rise. The opposite of a callable bond.

Money an issuer sets aside over time to retire bonds before or at maturity. It improves creditworthiness and bondholder safety.

A corporate bond exchangeable for a fixed number of the issuer's common shares. It typically pays a lower coupon in exchange for the equity upside.

Conversion ratio = $1,000 par / conversion price. A $25 conversion price gives $1,000/$25 = 40 shares per bond.

Bond parity = stock price x conversion ratio. If stock is $27 and ratio is 40, parity = $1,080. Above that, the bond trades at a conversion premium.

Ratio = 40 shares; share value = 40 x $27 = $1,080. Bond costs $1,100 but shares worth only $1,080, so converting loses $20. No profitable arbitrage.

FINRA's Trade Reporting and Compliance Engine, used to report secondary-market corporate and agency debt trades for price transparency.

30/360: every month counts as 30 days and the year as 360 days. Municipal bonds use the same convention.

The full faith and credit of the U.S. government, making them the credit-risk-free benchmark for all other debt.

Matures in one year or less (up to 52 weeks). Issued at a discount with no coupon; the investor's return is par minus purchase price.

T-notes mature in 2 to 10 years; T-bonds mature in 10 to 30 years. Both pay semiannual coupon interest.

Zero-coupon Treasury securities created by separating a bond's interest and principal payments. They are sold at a discount and have high duration.

Treasury Inflation-Protected Securities. The principal adjusts with the Consumer Price Index (CPI), so both principal and interest rise with inflation.

Annually taxed income that the investor never receives in cash — the accreted discount on STRIPS or the inflation principal adjustment on TIPS is taxed each year.

Taxable at the federal level but exempt from state and local income tax. Useful for investors in high-tax states.

Actual/actual — uses the real number of days in each month and year. Corporate and muni bonds instead use 30/360.

GNMA carries the full faith and credit of the U.S. government. FNMA and FHLMC are government-sponsored enterprises (GSEs), not directly guaranteed.

A collateralized mortgage obligation slices pooled mortgage cash flows into tranches with different maturities and risk/prepayment profiles.

Subject to prepayment risk: when rates fall, homeowners refinance, returning principal early so investors reinvest at lower rates.

Exempt from federal income tax. For in-state residents it may be triple-tax-exempt (also state and local). Capital gains on munis remain fully taxable.

Muni interest is federally tax-exempt, but capital gains from selling a muni at a profit are still fully taxable. Tax-free applies to interest, not gains.

Backed by the issuer's full faith, credit, and taxing power. Usually requires voter approval since it is repaid from tax revenue.

Backed only by the income of a specific project or facility (e.g., toll road, stadium). Analyze the feasibility study and debt-service coverage, not taxing power.

A muni that benefits a private entity; its otherwise tax-exempt interest may be subject to the alternative minimum tax (AMT).

No. Build America Bonds (BABs) are fully taxable, and private-activity bond interest can trigger AMT. Never assume every muni is tax-exempt.

TEY = muni yield / (1 - tax bracket). It converts a tax-free muni yield into the taxable yield needed to match it.

TEY = 4% / (1 - 0.32) = 4% / 0.68 = 5.88%. The client should prefer the muni over any comparable taxable bond yielding less than 5.88%.

High-tax-bracket investors, because the federal (and possibly state/local) exemption is worth more the higher the investor's marginal tax rate.

The Municipal Securities Rulemaking Board writes rules for the municipal securities market. It does not enforce them directly (FINRA/SEC enforce).

Electronic Municipal Market Access — the MSRB's official system for municipal securities disclosure and trade-price reporting.

Short-term munis issued in anticipation of future revenue: Tax (TAN), Revenue (RAN), and Bond (BAN) Anticipation Notes. Rated on the MIG scale (MIG 1-3).

Moody's Investment Grade rating for short-term municipal notes, MIG 1 (best) to MIG 3, reflecting near-term credit quality and liquidity.

High-quality debt maturing in one year or less, used for liquidity and capital preservation — suited to conservative, cash-management needs, not growth.

Short-term unsecured corporate debt maturing in up to 270 days, issued at a discount. The 270-day limit keeps it exempt from SEC registration.

A certificate of deposit of $100,000 or more that can be traded in the secondary market before maturity, unlike a standard bank CD.

A short-term time draft guaranteed by a bank, used to finance foreign trade (imports/exports). Trades at a discount in the money market.

A short-term, often overnight, collateralized loan in which a dealer sells securities and agrees to repurchase them at a slightly higher price.

Money market funds aim to maintain a stable $1.00 net asset value per share, providing liquidity and capital preservation for cash holdings.

When a bond trades between coupon dates, the buyer pays the seller the interest earned but not yet paid. It is added to the price on the confirmation.

Corporate and municipal bonds use 30/360; U.S. government securities use actual/actual. Corp/Muni cheat with 30; Governments use the Actual calendar.

From the last coupon date up to but NOT including the settlement date. The settlement day itself is excluded from the seller's accrued interest.

T+1 (trade date plus one business day) for stocks, corporate, municipal, and Treasury securities, effective May 28, 2024.

Accrued = par x annual coupon rate x (days / 360), counting from the last coupon up to (not including) settlement, then added to the purchase price.

100 shares. Dollar value always equals quoted points x 100, so a premium of 3 = $300 and a 5-point move = $500.

Premium = intrinsic value + time value. The premium is the price the buyer pays and the writer receives, and it is always built into the breakeven.

max(market price - strike, 0). A call has intrinsic value only when the stock is above the strike (in the money); it can never be negative.

max(strike - market price, 0). A put has intrinsic value only when the stock is below the strike (in the money); never below zero.

The portion of premium above intrinsic value, reflecting time to expiration and volatility. Time value = premium - intrinsic value, and it decays toward zero at expiration.

Bullish. Max gain is unlimited (stock can rise indefinitely); max loss is limited to the premium paid.

Bearish/neutral. Max gain is limited to the premium received; max loss is UNLIMITED because the stock can rise without limit.

Bearish. Max gain = strike - premium (stock can only fall to $0); max loss is limited to the premium paid.

Bullish/neutral. Max gain is the premium received; max loss = strike - premium. If assigned, the writer must buy stock at the strike.

Strike + premium ('call up'). Same formula whether you are long or short the call.

Strike - premium ('put down'). Same formula whether you are long or short the put.

BUY the stock at the strike price. The put writer is obligated to purchase shares put to them - the single most-flipped fact on the exam.

SELL (deliver) the stock at the strike price. The call writer is obligated to sell shares at the strike when assigned.

Long call and short put are bullish. Long put and short call are bearish. (Owning/wanting upside = long call, short put.)

One long and one short option of the SAME type (both calls or both puts) with different strike prices. It caps both gain and loss.

A debit spread costs net premium to establish (you pay more than you receive). A credit spread produces net premium (you receive more than you pay).

Max loss = net debit paid. Max gain = difference in strikes - net debit. You want it to widen and exercise (DEW).

Max gain = net credit received. Max loss = difference in strikes - net credit. You want it to narrow and expire (CEN).

DEW = Debit spreads want the spread to EXERCISE and WIDEN. Max loss is the net debit; you profit as the spread widens.

CEN = Credit spreads want the spread to EXPIRE and NARROW. Max gain is the net credit; you profit as the spread narrows toward zero.

Add the net premium to the LOWER strike. (CAL: Call spreads Add to Lower.)

Subtract the net premium from the HIGHER strike. (PUSH: Put spreads Use the Subtraction from the Higher strike.)

Net debit = 5 - 2 = 3 ($300). It's a debit (bull) call spread since you paid more for the long lower-strike call.

Max gain = strike difference - net debit = (60-50) - 3 = 7 ($700). Achieved if the stock is at or above 60 at expiration.

Lower strike + net premium = 50 + 3 = $53. The bull call spread breaks even at $53.

Buying a call AND a put at the same strike and expiration. It bets on a big move (high volatility) in EITHER direction.

Max loss = total premiums paid, occurring if the stock closes exactly at the strike at expiration (both options expire worthless).

Upper breakeven = strike + total premium; lower breakeven = strike - total premium. The straddle profits only OUTSIDE these points.

Total premium = 5. Upper breakeven = 40+5 = $45; lower breakeven = 40-5 = $35. Profits only above $45 or below $35.

Sells a call and a put at the same strike; collects both premiums and profits if the stock stays near the strike (INSIDE breakevens). Carries unlimited loss (short call leg).

SILO = Short Inside, Long Outside. A short straddle profits INSIDE the breakevens; a long straddle profits OUTSIDE them.

Long stock plus a short call written against it - a neutral-to-bullish income strategy. The premium received provides limited downside cushion and caps upside.

Breakeven = stock cost - premium received. Max gain = (strike - stock cost) + premium received.

Long stock plus a long put used as insurance (a 'married put'). Bullish with downside protection: the put sets a floor at the strike.

Breakeven = stock cost + premium. Max loss = (stock cost - strike) + premium. Upside is unlimited because you still own the stock.

Buy a call. A long call caps the loss on a short stock position by locking a maximum repurchase price at the strike.

Buy a protective put (insurance) or sell a covered call (income). The put protects against decline; the covered call generates income with limited downside cushion.

No. To hedge dollar exposure you trade options on the FOREIGN currency instead (e.g., euro options).

Buy euro CALLS. If the euro rises (dollar weakens), the calls gain and offset the higher cost of paying in euros.

Buy euro PUTS. If the euro falls (dollar strengthens), the puts gain and offset the lower dollar value of euros received.

The Options Clearing Corporation - the central counterparty that issues, guarantees, and settles all listed options, standing on the other side of every trade.

American-style options (standard equity options) can be exercised any business day up to expiration. European-style can be exercised only at expiration.

The OCC assigns to a member firm randomly; the firm then allocates to a customer either randomly or by FIFO (first-in, first-out), per disclosed procedure.

The OCC booklet 'Characteristics and Risks of Standardized Options.' It must be delivered at or before approval of an options account.

Never when paid/received - tax is triggered only at sale, expiration, or exercise of the option.

The holder takes a capital LOSS equal to the premium. The writer takes a short-term capital GAIN equal to the premium received.

The call buyer ADDS the premium to the strike to set the stock's cost basis (raising basis). This defers the premium into the stock gain/loss.

The put writer SUBTRACTS the premium from the strike to set the purchase cost basis (lowering basis), since the premium reduced the effective price paid.

The stock's holding period starts the day AFTER exercise - not when the option was originally bought.

Buying a protective put can SUSPEND the holding period on the underlying stock, potentially affecting long-term vs. short-term capital gain treatment.

The option's strike price equals the current market price of the underlying. Intrinsic value is zero; the entire premium is time value.

When premiums aren't given: for call spreads the LOWER strike dominates; for put spreads the HIGHER strike dominates. This tells you debit vs. credit and bullish vs. bearish.

Strike - premium. The put writer is obligated to buy at the strike, and the stock can fall only to $0, so loss is large but limited.

Its max loss is UNLIMITED - the writer must deliver stock at the strike, but the market price can rise without any ceiling.

A call is in the money when the stock is ABOVE the strike; a put is in the money when the stock is BELOW the strike. It then has intrinsic value.

Draw a T-chart: money OUT on the left, money IN on the right. It prevents sign errors and reveals max gain, max loss, and breakeven directly.

About 73% of the 125 scored questions fall under Major Job Function 3, which contains the heavily tested options material.

Long straddle profits OUTSIDE the two breakevens (big move needed); short straddle profits INSIDE them (stock stays near strike). SILO: Short Inside, Long Outside.

The Investment Company Act of 1940. It defines open-end funds (mutual funds), closed-end funds, and unit investment trusts (UITs).

A mutual fund continuously issues and redeems an unlimited number of shares at NAV. Shares trade only with the fund, never in the secondary market.

It issues a fixed number of shares in an IPO, then trades on an exchange at a market price set by supply and demand — which can be a premium or discount to NAV.

Yes. Its exchange market price can be above NAV (premium) or below NAV (discount), unlike an open-end fund which always transacts at NAV.

A unit investment trust holds a fixed, unmanaged portfolio of securities, issues redeemable units, and has a stated termination date.

No. A UIT holds a fixed, unmanaged portfolio. Open-end and closed-end funds are actively managed; UITs are not.

A mutual fund order fills at the next NAV computed after the order is received, not the last published price. It blocks late trading (SEC Rule 22c-1).

Open-end mutual funds. An order is executed at the next calculated NAV, not at a prior published price.

NAV = (total fund assets minus liabilities) divided by shares outstanding. It is the per-share value at which mutual fund shares are redeemed.

Public offering price — what the investor pays: NAV plus the front-end sales charge. POP = NAV / (1 − sales-charge %).

POP = NAV / (1 − sales-charge %). Divide NAV by one minus the charge — do not multiply; multiplying is the planted wrong answer.

POP = $9.20 / (1 − 0.08) = $9.20 / 0.92 = $10.00. The $0.80 difference is the sales charge.

Sales charge % = (POP − NAV) / POP. The sales charge is always measured as a percentage of the POP, not of the NAV.

8.5% of the POP under FINRA Rule 2341. It applies only to funds offering breakpoints, rights of accumulation, and reinvestment of dividends at NAV.

Breakpoints, rights of accumulation, and reinvestment of dividends at NAV. Without all three, the maximum sales charge is reduced below 8.5%.

A reduced sales charge a mutual fund grants at specified higher levels of investment. Larger purchases earn lower percentage loads.

A prohibited practice of selling shares just below a breakpoint to earn a higher commission, denying the client the reduced sales charge.

A statement letting an investor get the breakpoint sales charge by promising to invest a set amount within 13 months; it may be backdated up to 90 days.

They let an investor qualify for breakpoints based on the total accumulated value of holdings, not just the current purchase — and have no time limit.

Class A charges a front-end load but lower ongoing fees. Best for large, long-term investments that reach breakpoints.

Class B charges a back-end CDSC (contingent deferred sales charge) that declines yearly to zero, after which B shares often convert to A shares.

A contingent deferred sales charge — a back-end load on Class B shares that declines over the holding period and eventually reaches zero.

Class C has no front-end load but a higher ongoing 12b-1 fee. Best for short investment horizons; costly to hold long term.

An annual asset-based fee deducted from fund assets to pay for distribution and marketing. Reviewed at least quarterly by the board.

A fund cannot call itself no-load if its 12b-1 fee exceeds 0.25% of average annual net assets.

A fund distributing at least 90% of net investment income qualifies as a regulated investment company, passing income to shareholders without fund-level tax.

At least 90% of its net investment income. This lets it act as a conduit/pipeline and avoid taxation at the fund level on distributed income.

An ETF trades intraday on an exchange at market prices like a stock, while mutual funds price once daily at NAV via forward pricing.

Yes. Unlike mutual funds, ETFs can be bought on margin and sold short, and they carry brokerage commissions rather than sales loads.

In-kind creation/redemption limits capital-gains distributions, so ETFs typically generate fewer taxable distributions than mutual funds.

The creation/redemption (arbitrage) mechanism. Authorized participants exchange baskets of shares for ETF units, keeping price close to NAV.

ETFs suit cost-conscious, trading-oriented investors wanting intraday liquidity. Mutual funds suit dollar-cost averaging and automatic reinvestment.

A dual license — both a securities (FINRA) registration and a state insurance license — because a VA is an SEC-registered security requiring a prospectus.

Accumulation (pay-in), where premiums buy accumulation units, and the payout (annuitization) phase, where units convert to a fixed number of annuity units.

A unit measuring the investor's interest in a variable annuity's separate account during the pay-in (accumulation) phase; its value varies with the account.

A fixed number of units set at annuitization; each unit's dollar value fluctuates with separate-account performance relative to the AIR.

The investment account, distinct from the insurer's general account, that holds VA assets; the contract owner bears the investment risk.

Assumed interest rate — a benchmark, not a guarantee, used to set variable-annuity payments. It determines whether the next payment rises, holds, or falls.

The next annuity payment increases. The payment rises only when actual performance exceeds the assumed interest rate.

The next annuity payment stays the same. Equal-to-AIR performance means no change.

The next annuity payment decreases. Underperforming the AIR lowers the payout.

Earnings grow tax-deferred and are taxed as ordinary income on withdrawal, using LIFO — earnings come out first. No step-up at death, no capital-gains rate.

A tax-free exchange under IRC Section 1035 of one annuity or life policy for another comparable contract, deferring tax on the gain.

It is redundant — the IRA already provides tax deferral, so wrapping a tax-deferred VA inside it adds cost without added tax benefit.

Neither. A REIT is its own structure; it passes through income but NOT losses, unlike a DPP, and is not an Investment Company Act entity.

It must distribute at least 90% of taxable income, invest at least 75% of assets in real estate, and derive at least 75% of income from real estate.

No. REITs pass through income to shareholders but never losses. Only DPPs (flow-through entities) pass through losses.

Exchange-traded REITs are liquid; non-traded REITs are illiquid and unsuitable for clients who need access to cash.

A direct participation program (limited partnership) — a flow-through entity whose income, gains, losses, and credits pass directly to investors, avoiding entity tax.

The entity pays no tax; items of income and loss pass directly to investors' personal returns. DPPs are flow-through; corporations are not.

Passive losses (e.g., from a DPP) can offset only passive income — never wages (earned income) or portfolio income like dividends and interest.

A general partner has unlimited liability and manages the program; limited partners have liability capped at their investment plus any recourse debt.

At-risk basis — cash contributed plus recourse debt. Deductible losses cannot exceed the amount the investor can actually lose.

The amount an investor can actually lose: capital contributed plus recourse debt. Nonrecourse debt generally does not add to at-risk basis.

A program with no economic substance (profit motive) is unsuitable. Economic viability must come first; tax benefits are secondary.

Confirm economic viability — there must be a profit motive, not just tax write-offs — before assessing liquidity, horizon, and suitability.

High net worth, able to bear loss and illiquidity, long horizon, and ideally has passive income to offset passive losses.

Non-traded REITs and DPPs are illiquid and unsuitable for investors with near-term cash needs, regardless of attractive yields or tax benefits.

Regulation Best Interest, SEC Rule 15l-1, requires firms to act in a retail customer's best interest at the time of a recommendation. It layers on top of FINRA suitability.

Care, Disclosure, Conflict-of-Interest, and Compliance. A firm must satisfy all four when recommending securities to a retail customer.

The Client Relationship Summary delivered to retail customers. It discloses the relationship, services, fees, conflicts, and standard of conduct.

Reasonable-basis (suitable for someone), customer-specific (suitable for this client), and quantitative (trading volume not excessive — anti-churning).

The requirement that a product is suitable for at least some investors, based on the rep's understanding of its risks and rewards. It is product-level, not client-specific.

The prong of Rule 2111 ensuring the volume of trading is not excessive given the account — the anti-churning rule. Even individually suitable trades can violate it in aggregate.

The Know Your Customer rule requires using reasonable diligence to know the essential facts about every customer and account at opening and throughout the relationship.

Age, income, net worth, objectives, risk tolerance, time horizon, liquidity needs, tax status, and investment experience. When narrowing answers, weigh risk tolerance and time horizon first.

Match the entire profile, not just the stated objective. A 70-year-old saying 'growth' usually needs capital preservation; short horizon or high liquidity need implies lower risk tolerance.

Municipal bonds. Their tax-exempt interest benefits high-bracket investors most. A low-bracket client should hold taxable bonds instead.

The IRA already shelters income from tax, so the muni's tax exemption is wasted. Munis are also unsuitable in UGMA/UTMA accounts for the same reason.

Government securities, money-market instruments, and fixed annuities. These emphasize safety of principal and stable income over growth.

Small-cap stocks, emerging markets, and options. These offer higher potential return with higher risk, fitting high risk tolerance and long horizons.

Avoid illiquid investments like DPPs (direct participation programs) and non-traded REITs. A near-term liquidity need rules out products that cannot be readily sold.

Customer's name, address, date of birth, SSN/TIN, employment, and financial profile. A reasonable effort to obtain a trusted contact person is also required under Rule 4512.

Rule 4512 requires reasonable effort to obtain a trusted contact: an adult the firm may contact about suspected exploitation, health issues, or to confirm information. Senior-protection focused.

In Joint Tenants With Right of Survivorship, the deceased owner's interest passes automatically to the surviving owner(s), bypassing the estate.

The decedent's fractional share passes to that owner's estate and heirs, not to the co-owners. TIC allows unequal ownership shares.

Each owner can act for (trade) the whole account, but checks/distributions must be made payable to all parties (all names on the account).

Irrevocable gift with one custodian for one minor; the minor owns the assets and is taxed on income under kiddie-tax rules. The minor gains control at the age of transfer.

UTMA permits a broader range of assets (e.g., real estate) and a later age of transfer to the minor than UGMA. Both are irrevocable custodial gifts.

Requires prior written customer authorization and account designation before exercising discretion in a non-institutional account. Each discretionary order is marked and reviewed by a principal.

No. Selecting only the time or price of an otherwise-specified order is NOT discretion, so no written authorization is needed for that limited choice.

A Registered Options Principal (ROP) must approve the account. Approval levels are keyed to the risk of the strategies the customer intends to use.

Lowest: covered/protective writing. Then long options and spreads. Then short uncovered puts and straddles. Highest: naked (uncovered) calls.

The Options Disclosure Document must be delivered at or before options account approval. It is the standardized risk-disclosure booklet for listed options.

The OAA must be signed and returned within 15 days of account approval. Trading may begin before it is returned, but the signed form is still required.

The hypothecation agreement (customer pledges securities as collateral) and the credit agreement (terms of the loan). Both are required to open a margin account.

It is the optional margin document that permits the firm to lend the customer's securities to other parties (e.g., for short selling). It is not required to open the account.

$2,000, or 100% of the purchase price if the purchase is less than $2,000. A firm never requires more equity than the cost of the securities.

50% of the purchase price for marginable securities. Reg T is set by the Federal Reserve Board and governs the initial credit a broker may extend.

The core anti-money-laundering law requiring recordkeeping and reporting. It is administered by FinCEN and obligates firms to maintain a written AML program.

The Financial Crimes Enforcement Network, a U.S. Treasury bureau that administers the BSA and receives CTR and SAR filings.

A designated AML compliance officer, ongoing employee training, and independent testing. The program must be in writing under the BSA.

It added the Customer Identification Program (CIP) and OFAC sanctions screening to the BSA framework, strengthening identity verification at account opening.

A Currency Transaction Report (FinCEN Form 112) filed for cash transactions exceeding $10,000 in a single day, aggregated per customer.

A Suspicious Activity Report filed for suspicious activity at or above $5,000. It is filed confidentially with FinCEN.

No. SAR filings are strictly confidential; notifying (tipping off) the customer that a SAR was filed is itself a violation.

Breaking up cash transactions to stay below the $10,000 CTR threshold is itself reportable suspicious activity — a SAR trigger, not a way to avoid reporting.

Name, address, date of birth, and a taxpayer ID, collected before or shortly after the account opens. Identity is then verified against government and OFAC lists.

The Office of Foreign Assets Control. Firms screen customers against its sanctions and Specially Designated Nationals (SDN) lists before opening accounts.

A Taxpayer Identification Number (often the Social Security number) required to open and identify a customer account.

Scenario-driven. They ask what you should DO given a client's full profile, not what a term means. Tax status and liquidity often break ties between two plausible answers.

Short-term investment-grade taxable bonds. Low bracket rules out munis, the 2-year liquidity need rules out non-traded REITs, and 'income' rules out a growth fund.

Transfer-on-death designation passes the account directly to the named beneficiary at death, bypassing probate. Without TOD, an individual account passes to the estate.

To the minor, under kiddie-tax rules — not to the custodian or donor. The account is registered under the minor's Social Security number.

One custodian for one minor per account. A custodial account cannot have joint custodians or multiple minor beneficiaries.

Reg BI sets a best-interest standard for retail recommendations and sits on top of Rule 2111 suitability and Rule 2090 KYC; together they govern recommendations to retail customers.

Excessive trading in a customer's account primarily to generate commissions. It violates the quantitative suitability prong of FINRA Rule 2111.

Recommend municipal bonds. The tax-equivalent yield advantage is greatest for high-bracket investors seeking income.

Recommend taxable bonds (e.g., corporates or governments). A low-bracket client gains little from a muni's tax exemption.

The customer's financial profile: income, net worth, and investment objectives — supporting suitability and Reg BI analysis under Rules 2111 and 2090.

Yes. Trading may begin once the account is approved and the ODD delivered, but the signed OAA must still be returned within 15 days.

It lets the customer pledge securities as collateral for the margin loan. It is mandatory to open a margin account.

Collect CIP data, verify the customer's identity, and screen against OFAC sanctions lists before or shortly after opening the account.

No. A CTR is triggered when cash EXCEEDS $10,000 in a single day; exactly $10,000 is below the threshold. Watch for aggregation across the day per customer.

Not on threshold alone — the SAR threshold is $5,000 or more in suspicious activity. However, patterns or structuring may still warrant a discretionary SAR filing.

A best-interest standard at the time of recommendation, applied to retail customers. It cannot be satisfied by disclosure alone — Care and Conflict obligations also apply.

An order to buy or sell immediately at the best available price. It is guaranteed to fill but the exact execution price is not guaranteed.

An order setting a price ceiling to buy or a floor to sell. It protects the price but may never fill if the market doesn't reach the limit.

ABOVE the current market. It activates as the price rises and is commonly used to protect a short position (limit losses on a short).

BELOW the current market. It activates as the price falls and is commonly used to protect a long position (limit a loss).

BLiSS/SBL: Buy Stops and Sell Limits go ABOVE the market. Buy limits and sell stops go BELOW.

A market order, so it is guaranteed to fill at the next available price (though not at a guaranteed price).

A limit order. It may not fill if the price runs past the limit, so execution is not guaranteed.

Below the current price. The goal is to buy cheaper than the current market.

Above the current price. The goal is to sell richer than the current market.

All Or None: the entire order must be executed, but not necessarily immediately. It can remain open until fully filled or canceled.

Fill Or Kill: execute the entire order immediately and completely, or cancel it entirely. No partial fills.

Immediate Or Cancel: fill as much as possible right away; cancel any unfilled portion. Partial fills are allowed.

GTC (good til canceled) stays open until filled or canceled, though firms periodically purge them. A day order dies at the market close if not filled.

These qualifiers flip the correct answer and are the number-one source of careless errors on long, wordy stems. Always identify them before answering.

T+1 (trade date plus one business day), effective May 28, 2024, for equities, corporate and muni bonds, Treasuries, ETFs, and UITs. Any T+2/T+3 material is stale.

T+0 settlement, occurring the same day as the trade. It is used when a transaction must settle immediately.

The chronological order of dividend dates: Declaration, Ex-dividend, Record, Payable.

The board of directors announces the dividend, including the amount, the record date, and the payable date.

The first day the stock trades WITHOUT the right to the upcoming dividend. You must own the stock before this date to receive the dividend.

Before the ex-dividend date. If you buy on or after the ex-date, you are too late and the seller keeps the dividend.

The date on which holders on the company's books are entitled to receive the dividend.

It opens lower by roughly the dividend amount, since new buyers are no longer entitled to that dividend.

Interest earned but not yet paid that the buyer pays the seller. It covers interest from the last coupon date up to but NOT including settlement.

Corporate AND municipal bonds. It assumes 30-day months and a 360-day year (mnemonic: Corp and Muni cheat with 30).

U.S. government bonds (Treasury notes and bonds), counting the real number of calendar days in months and the year.

T-bills (issued at a discount, no coupon), zero-coupon bonds, and bonds in default. The buyer pays no accrued interest on these.

At 30/360, $60/yr $\div$ 360 = ~$0.1667/day. 40 $\times$ $0.1667 $\approx$ $6.67 of accrued interest added to price, paid by buyer to seller.

By whether they turn before (leading), with (coincident), or after (lagging) the broad economy.

The stock market (S&P 500), new building permits, new orders for consumer goods, and the money supply. They help forecast the economy's direction.

Industrial production, capacity utilization, and non-farm payroll employment. They move together with the broad economy.

Corporate profits, the average duration of unemployment, and the prime rate. They confirm a trend after it has already turned.

Two consecutive quarters of declining GDP.

More than 12 months. Such gains are taxed at preferential rates; 12 months or less is short-term, taxed as ordinary income.

It is not lost forever. The disallowed loss is added to the cost basis of the replacement shares.

Wash sale: the $500 loss is disallowed (within 30 days). The loss is added to the new basis: $4,000 + $500 = $4,500 cost basis.

FIFO (first in, first out), unless the client elects specific identification. Mutual funds may also use average cost.

They receive a step-up in basis to the fair market value on the decedent's date of death.

The recipient keeps the donor's carryover basis (the donor's original cost basis), not a stepped-up value.

Taxable at the federal level but exempt from state and local taxes.

Federally tax-exempt (and often state-exempt for in-state residents). However, capital gains on a muni are still fully taxable, a classic trap.

Accreted interest (or inflation adjustment) is taxed annually even though no cash is received until maturity.

Traditional: potential pretax (deductible) contributions, taxable withdrawals. Roth: after-tax contributions, tax-free qualified withdrawals.

$7,500, plus a $1,100 catch-up contribution for those age 50 and older.

$24,500, with an $8,000 catch-up at age 50+, and a higher $11,250 catch-up for those ages 60 to 63.

Age 73 under SECURE 2.0, rising to age 75 for those born in 1960 or later.

No. A Roth IRA has NO required minimum distributions during the owner's lifetime.

Municipal interest is already tax-exempt, so placing it in a tax-deferred IRA wastes the tax advantage and may convert it to taxable withdrawals.

A Simplified Employee Pension IRA used by small employers and self-employed individuals, funded by employer contributions, with higher limits than a traditional IRA.

A Savings Incentive Match Plan for Employees, a retirement plan for small employers allowing employee deferrals plus required employer matching or contributions.

Earnings grow tax-free, and qualified withdrawals for education expenses are tax-free. They are state-sponsored education savings plans.

$2,000 per year per beneficiary. It is an education savings account with tax-free growth for qualified education expenses.

Obtaining and verifying instructions and processing, completing, and confirming transactions (order handling and settlement) — about 11% of scored questions.

A triggered stop becomes a market order and WILL fill. A triggered stop-limit becomes a limit order and MAY NOT fill if price moves past the limit.

From the last coupon date up to but NOT including the settlement date. Forgetting the exclusion causes a common off-by-one error.

A leading indicator. The S&P 500 is the classic example of an indicator that turns before the broad economy.

Short-term gains (held 12 months or less) are taxed as ordinary income, not at the preferential long-term capital gains rate.