Series-7 Sample Questions Answers

a money market comprised of short-term debt and equity issues. This is the statement that is “incorrect”. Equity issues are not traded in the money market, which consists only of high-quality short-term debt securities.

short-term cash needs. Notes are generally used for short-term needs.

premium. The price of closed-end investment companies is determined by trading of their shares in the open market. The price may be a discount to net asset value or a “premium” above net asset value.

takedown. The takedown is an additional allowance on bonds sold by a member.

the certificate is validated by the transfer agent. A mutilated bond must be validated before it can be a good delivery. The validation can be made by the issuer or the transfer agent.

the amount of municipal bonds distributed weekly as a percentage of each week’s new issue accounts of more than $1 million. This is the definition of the ratio.

none of the above. No broker/dealer is exempt. Reg T covers cash accounts as well as margin accounts.

over-the-counter. The OTC market is much larger than any listed markets.

the 11-bond index. This index is the highest quality index and thus reflects the lowest average yield.

the purchase of one fund would probably be made at a break point allowing more dollars to be invested in fund shares. There is nothing inherently unsuitable about recommending three different funds. However, in most cases, a single fund offers satisfactory diversification and can be purchased with a reduction in sales charge.

transfer of ownership of a limited partnership interest. Transfer of ownership does “not” result in automatic termination.

one-tenth of one cent. A point equals $10 and a basis point equals ten cents.

both B and C. Buying in the open market injects funds into the economy. Lowering reserve requirements provides banks with more funds for lending.

general obligation. A limited tax bond is generally classified as general obligation.

120%. The toll facility usually sets rates to cover 120% of maintenance and debt service.

it was never executed. The first transaction at 38.75 elected the order, but since it was both a stop order and a limit order, there was never another transaction at 38.75. Consequently, Bubba’s order was never executed.

premium. That’s the term for the option cost.

the $600 premium is capital gain. That’s simply how the tax law works.

a guaranteed corporate bond. All of the other securities are obligations of the US government, which is considered to have minimal or no risk.

it includes a markup. A market-maker acts as principal. Therefore, Bubba pays a markup but not a commission.

27.50. Anytime there is qualifying language attached to a quotation it is not considered firm.

open-end investment companies. Open-end mutual funds are a continuous offering of new securities that are not traded on an exchange. They trade only in the over-the-counter market. The other choices may trade over-the-counter or on exchanges.

the daily Bond Buyer. News is covered in the daily Bond Buyer as well as Munifacts, which is operated by the daily Bond Buyer. The Blue List shows only current offerings, not prospective ones.

$6,600. The NYSE maintenance requirement on short margin accounts is 30%. Multiplying the short market value of $22,000 by 30% equals $6,600.

0.7435. The put protects against a decline in the exchange rate for Canadian dollars. However, the cost of the put raises the breakeven point to 0.7435 (0.7400 + 0.0035).

tombstone ad. Tombstone ads are used to announce new issues. They do not offer to buy or sell securities. They are informational only.

the specific bid and offering terms of the issue. The bid and offering terms are determined after the syndicate letter to underwriters.

the Saturday following the third Friday of the expiration month. It is NOT the third Saturday. The final day to trade options is the third Friday of the expiration month. The options expire the next da y.

face value. The price is 100.00 if the yield is the same as the coupon rate. A price of less than 100.00 means the yield is higher than the coupon rate. A price of more than 100.00 means the yield is lower than the coupon rate. The prices are a percentage of 100.00. However, treasury bonds and municipal bonds are not quoted in this way.

Federal Reserve Banks. Debt securities are not issued by Federal Reserve Banks. All of the other entities do issue debt securities.

agency sales OTC. Markup policy applies to basically all securities other than government and municipal offerings expect where the security is offered under a current prospectus. Choices C and D are offered under a prospectus. Choice B involves municipal securities. Therefore, choice A is the only correct answer.

the management group. The management group is actually comprised of the management company (including the underwriter) and the investment advisor.

regulation of new issues of securities. The first two choices are covered in the Securities and Exchange Act of 1934.

according to their percentage participation in the account. For example, if the group net order produces $3,000 in fees and a syndicate member has a 10% overall participation, that member receives $300 in fees.

a balanced fund. A balanced fund varies its investments among these categories of holdings.

balanced. These funds invest for growth with stock and income with bonds.

take no action as a result of the tax increase. Excise taxes normally are not important to the typical investor. They generally have little relative effect on securities prices.

pledging securities as collateral. To hypothecate securities is to pledge them.

a normally higher yield than non-convertible bonds of the same issuer. Remember that the question says “except” for this feature. Convertible bonds normally do NOT have a higher yield than non-convertible bonds of the same issuer. Convertibles usually have a lower yield than non -convertible sisters.

60 days. ERISA permits 60 days for rollovers.

stay the same. The SMA does not decline as the market value declines.

money spread. Since the strike prices are different, but not the expiration date, this is a money spread (sometimes called a “price spread” or a “vertical spread”).

$3,800. If the stock declined to $0, Bubba would lose $4,000 from having purchased the stock less the $200 premium he received from selling the call option.

borrowing at 6% and investing the funds at 10%. Leverage is all about using money obtained at a lower cost than what can be earned deploying the funds elsewhere. It is unrelated to arbitrage.

a private placement. Normally, private placements are conducted with an investment letter.

270 days. A characteristic of commercial paper is relatively short duration, normally not exceeding 270 days.

the holders of common stock and the holders of preferred stock. The holders of all classes of stock are the owners. Each stock class has separate privileges, but all represent ownership. Even if the government is an owner, it holds shares of stock.

$400,000. In an Eastern account, liability remains open until the entire syndication is closed. Therefore, Big Easy has a liability for 10% of the unsold portion. Since the unsold portion is $6 million, the liability for Big Easy is 10% of that amount, which is $400,000.

predictions of recession in the economy. All of the other choices are technical market indicators. An economic forecast is “fundamental” market data.

a merger. Rule 145 basically applies to mergers, consolidations, and acquisitions.

sponsor. Also called the “distributor”, these terms are interchangeable for an open -end investment company.

The market theory stating that the small investor is usually wrong is called the odd-lot theory. The concept behind this theory is that when small lot sales are high, it is a good time to buy, as a high ratio of small business sales is a contrary indicator of market direction.

the names of the underwriting syndicate members. At the time the notice of sale is published, the syndicate has generally not been formed. All the other information is required.

operation and maintenance fund. This receives the top priority followed by debt service, maintenance reserves, and lastly renewal and replacement.

Regulation U. Regulation T is the extension of credit by broker/dealers. Reg U relates to the extension of credit by banks on securities.

margin account. A margin account is required for short sales.

income. With an income program, the well is already producing. The risk is associated with the commodity price.

25. The conversion ratio is how many shares of common stock Bubba obtains by converting. Divide the bond price - $1,000 for a single bond - by the $40 conversion price.

preemptive rights. Holders of ADRs do not have preemptive rights, although they have most other rights of shareholders, including the right to vote for board members-even a mother-in-law

agreement among underwriters. This agreement authorizes the manager to handle the offering. The final contract between the manager and the issuer is the “underwriting agreement”.

90 days. To avoid a forced sale, stock many be sold under Rule 144 over a 90-day period.

deductions from gross income to offset lower value of equipment. Depreciation is the deduction of costs for capital assets as their value declines.

all of these. In the OTC market, all of these orders are possible. A mutual fund is considered OTC.

providing short-term capital needs to client companies. The short-term capital needs of companies are normally the function of commercial bankers, not investment bankers.

one specific municipal project plus the full financial strength of the issuer. Double -barreled bonds are first payable from a specific project, but are further guaranteed by the issuing municipality.

their shares are traded at prices determined in the open market. The other choices describe open-end investment companies.

$5,500. The NYSE maintenance requirements on obligations of the US treasury vary depending upon the term of the instrument. For 20-year bonds, the requirement is 6% of the market value. Multiplying the market value of $92,500 by 6% equals $5,500.

enter orders for the account at the representative’s discretion. A limited trading authorization only allows for entering of orders. A full trading authorization would also permit withdrawals from the account.

give Bubba its latest available statement. Bubba, like any customer, must be provided with the most recent available information.

a majority of the shareholders. Any factors that materially affect the interests of shareholders must be approved by a majority vote of the shareholders.

expense ratio. Custodial fees are negligible and the sales charge is a one-time expense. The “best” reflection of mutual fund costs is the expense ratio.

ascertains that extensions had been obtained under Reg T. If valid reasons exist, extension of time for payment may be obtained.

granting of power of attorney to the limited partners. The other three choices are in the subscription agreement. Power of attorney is granted to the general partner, not the limited partners.

tax anticipation bill. These obligations pay no interest and their maturity comes after corporate tax payment dates. They are accepted for redemption at face value prior to maturity on corporate tax payment dates to encourage purchase by corporations.

bylaws. The bylaws of a condominium association provide general details about management.

all of the above. A transaction that is simultaneous and thus riskless calls for a smaller than usual markup under FINRA guidelines.

US treasury notes. A maintenance call requires cash or negotiable securities. Only the treasury notes meet this standard.

net income from dividend and interest paid on securities in the fund portfolio. This is the definition of net investment income, which excludes gains on sales of securities.

in-whole calls. Price to call computations are based upon in-whole calls only. These calls will result in all bondholders being called simultaneously, thus guaranteeing a minimum yield to all.

the tax collector. Taxes always have preference over any other creditors.

revenue bonds. The security for a revenue bond depends on the revenue produced by the specific facility. Engineering estimates of constructions costs and potential traffic flow are critical.

when interest rates fall. Homeowners are most likely to refinance when rates are lower than the past.

special tax. The other categories are not revenue bonds. Special tax is the only type that fits the general grouping.

selling the security he already owns. A “covered” call is written on stock already owned.

a broker/dealer firm. A broker/dealer cannot use Rule 144 when selling stock.

US treasury notes. Savings bank deposits have no risk. The short duration of treasury bills and certificates embodies less market risk than longer-term treasury notes.

$9,000. Since the required cash to deposit is $4,500 and Reg T is 50%, Bubba may deposit $9,000 of securities.

moral obligation. The lack of a legally binding obligation removes the issue from the general obligation category. Although defaults are possible, it is usually held that no state legislature would allow a moral obligation issue to default.

90 days. Interest accrues from the coupon date to the settlement date. A regular way purchase on April 12 will settle on April 15. corporate bonds are figures on 30-day months, regardless of the actual number of days in the month. The year is considered 360 days. Therefore, interest is calculated for 16 days in January plus 30 each for February and March plus 14 for April.

riskless transactions. The markup policy applies to everything except securities sold under a prospectus, which is the case with the other choices.

sell stop-limit order. A sell stop-limit order specifies a price, but will not turn into a market order. This order will only get executed at the price or better. Stop orders, although quicker in execution, will turn into market orders and the customer will not be guaranteed a specific price. Stop -limit orders are risky, in that the order may or may not get executed, but in this situation, it is the best choice.

$180,000. Subtract current liabilities from current assets. Current liabilities are $170,000 ($460,000 - $290,000).

the buyer is given one-day notice in writing. A contract made on a “seller’s option” may be terminated by the seller at an earlier date, provided that he gives the buyer one-day notice.

a holding company dealing in mineral leaseholds. The other choices are the three classifications of investment companies under the 1940 act.

restricted stock acquired via open market purchase. The two-year holding period does not apply when the security is acquired in the open market. However, if the security is owned by a control person, the other provisions of Rule 144 do apply.

up to but not including the settlement date. Accrued bond interest is always calculated up to but not including the settlement date. The interest accrual begins on the coupon date.

both A and C. Choice A is discretionary because the customer did not specify a quantity to purchase. Choice B only provides discretion about timing and thus is not discretionary. Choice C is clearly discretionary.

long two XYZ July 15 calls. Double the number of contracts and half the strike price. This is similar to XYZ shareholders doubling the number of shares they hold at the lower price.

change the bid. A workable bid indicates a price level where a dealer is willing to negotiate business. It is not a firm bid and may be changed before becoming firm.

the general partner’s personal assets. When a partnership no longer has assets, but does have debts, creditors may look to the personal property of the general partner.

they are not secured by collateral. Equity is ownership, which has no collateral security…or any other kind of security such as a guaranteed return, maturity, or marketability.

secured lenders, general creditors, limited partners, general partners. Creditors first, in order of their security, then partners. General partners are last.

5.78 - 5.73. Prices for treasury bills are quoted as percentage yields. A quotation in yield means the first price in the spread - the bid price - should be higher than the offer price. A higher yield means a lower price.

all are registered. All are registered with the SEC.

five years. The five-year holding period begins on the first day of the year for which contributions were made.

$9,333. If Bubba were depositing cash, he would need $2,800 (70% x $4,000). Since he is depositing stock, he would have to deposit enough with loan value of $2,800. To arrive at this, divide $2,800 by the 30% loan value to obtain $9,333.

all of the above. A profit sharing plan has tax deductible contributions and is designed to provide a retirement plan for participants. Income in the plan is tax-free until withdrawn.

cannot be determined. Bubba can put away the calculator. The warrant is “perpetual” so the value is not determinable from today’s price of the common stock.

5.00% net. The other quotes indicate moderate markups over cost. A quote of 5% net indicates a large markup and a price not “reasonably related to the market”. The dollar price would be about $125, a 25% markup over the dealer’s cost.

the custodian may perform an essential clerical service for the fund and its shareholders. The custodian holds the cash and securities of the investment company and performs the bookkeeping functions. It does not have a supervisory role.

cannot be determined. Since Bubba has not yet sold the stock, a profit cannot be determined on the stock. He has a $400 profit on the option.

acts as an agent for the issuer. In a best efforts offering the investment banker acts as an agent for the issuer and makes no guarantee about selling the securities.

a public school. Schools are typically financed by general obligation bonds. The other choices are examples of revenue bonds.

$10. Interest rates increased by 20 basis points. One basis point is 10 cents. So 20 basis points is $2. But…since there are five bonds, that $2 x 5 = $10.

Series EE bonds. All the other securities may be traded. Series EE bonds are purchased and held to maturity. They are not tradable.

$1,000,000. In a Western account, each underwriter has divided liability and each is responsibility only for his respective part. In this case, Big Easy is responsible for 10% of $10,000,000 - or $1,000,000.

a $1,000 gain. There is a $1,000 gain on the stock. The option is a separate capital asset.