Series 7 Facts
You have a client who is an active trader in his margin account. Wishing to take advantage of the tax benefits of the Roth IRA, he asks for the form to open the Roth. While attempting to complete the form, he calls to ask, "How do I indicate margin trading on this form." You would respond,
"IRAs, traditional or Roth, can only be opened as cash accounts."...IRAs, and other retirement accounts, cannot be opened in margin accounts. They are limited to cash accounts only.
1 Mill is
$1 of tax per year for each $1,000 of assessed value.
If an investor has an established margin account with a current market value of $6,000 and a debit balance of $2,500, with Regulation T at 50%, how much buying power does the investor have?
$1,000...The Regulation T requirement is 50% of the current market value of $6,000 ($3,000). Equity is equal to the current market value of $6,000 minus the debit balance of $2,500 ($3,500). Excess equity is calculated by subtracting the Regulation T requirement of $3,000 from the current equity of $3,500 ($500). Buying power is calculated by multiplying the excess equity of $500 by 2 ($1,000).
Many years ago, an investor bought a bond with a 5% coupon. At that time, the yield to maturity of the bond was 6.5%. When the bond matures, the investor will receive
$1,025...Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.
A couple's home has an assessed value of $40,000 and a market value of $100,000. What will the tax be if a rate of 5 mills is used?
$200...Real property tax is based on the assessed value assigned to the property by the municipality's tax assessor (in this case, $40,000). Property tax rates use the mill as a base unit. One mill equals $1 of tax per year for each $1,000 of assessed value. Five mills would equal $5 for each $1,000 of assessed value. Because there are 40 thousands, 40 × $5 equals $200 in annual tax. A shortcut method is as follows: take the assessed value, remove the last three 0s, and multiply by the number of mills of tax ($40 × 5 mills = $200).
An options trader goes long 1 XYZ Oct 60 put at 6 and purchases 1 XYZ Oct 60 call for 6. If XYZ is at 68 at expiration, what is the investor's gain or loss?
$400 loss...If the market price of XYZ is at $68 per share, the put is out of the money and will expire worthless. The call could be sold for the intrinsic value of 8. (There is no time value because the option is at the expiration date.) Because the investor originally spent $1,200 (a premium of $600 was paid for each option), the net result is a loss of $400.
At the birth of a grandchild, your customers, the child's grandparents, purchased 1,000 shares of XYZ stock at $10 per share in their JTWROS account. The child is now an adult and the grandparents gift all the shares to their grandchild when the stock price is $50 per share. If the donee sold all the shares at $55 per share, the tax consequences would be a capital gain of
$45,000...The capital gain would be $45,000 ($55,000 - $10,000). If a gift is made of securities, the donee must use the original cost basis of the donor to calculate the gain or loss on a sale. In this case, the original cost basis for the grandparents was $10,000. The difference between that and the proceeds of $55,000 is a capital gain of $45,000. If the shares were inherited from the grandparents, the grandchild would have received the stock at a stepped-up cost basis, the price of the stock on the decedent's death. Using our numbers, that would be a capital gain of $5,000, the difference between the stepped-up basis of $50,000 and the proceeds of $55,000.
A dealer that quotes a concession of half to another dealer means
$5 per $1,000 of par...A concession between broker-dealers on secondary market transactions is a discount from the yield that the broker-dealer is quoting. It is common for a broker-dealer to offer bonds to other broker-dealers at a price, less the concession. The net price becomes the purchase price for the buying broker-dealer. If simultaneously sold to a retail account, the markup is from the net price paid. If not simultaneously retailed but held in the broker-dealer's inventory, it is fair for the broker-dealer to market her inventory and mark up from there for retail sale.
An investor purchased one unit of a real estate limited partnership. The cost of the unit was $20,000. The investor's allocable share of nonrecourse debt was $50,000. During the first year, the investor received an income distribution of $5,000. What is the investor's current tax basis?
$65,000...The $20,000 purchase price of the unit is basis. Because this is a RELP, nonrecourse debt increases basis. That addition of $50,000 increases the basis to $70,000. Distributions reduce basis, and there was one of $5,000 bringing the basis down to $65,000. Remember, it is only real estate where nonrecourse debt increases basis. Recourse debt increases basis in any DPP.
Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement?
10 Business Days
A customer buys XYZ stock at $60 per share. The stock is currently trading at a 10:1 price-to-earnings (P/E) ratio. The firm declares a 3:1 stock split. What will the P/E ratio be after the split if earnings remain unchanged?
10:1...If earnings remain unchanged, the P/E ratio remains the same: 10:1. Earnings are currently $6 per share ($60 / 10). After a 3:1 split, each share will be valued at $20. If earnings are unchanged, the same $6 of earnings is now applicable to three shares, or $2 per share. Price divided by earnings equals P/E ratio ($20 / $2 = 10:1 P/E ratio).
Class A shares of the JILCO Fund are offered to the public at net asset value per share plus a sales charge of 4.25%. If the next computed net asset value per share is $39.39, an investment of $10,000 will acquire
243.072 shares...The first step is computing the public offering price (POP). When the NAV and sales charge percentage are given, the computation is: NAV divided by (100% - sales charge %). The numbers are $39.39 ÷ 95.75% which equals $41.14 per share. Then, divide the $10,000 purchase by the POP of $41.14 to arrive at 243.072 shares. The key point to remember is that the sales charge is always a percentage of the POP, not the NAV.
Minimum maintenance on a long margin account is...
25%
Any stock that comes out as a new issue in ineligible for margin for how many days?
30
The minimum maintenance for a short margin account is...?
30%
An abstract of a municipal securities issue official statement must be maintained on file for how long?
4 years...The Municipal Securities Rulemaking Board requires firms to retain abstracts of official statements for four years—the same as all pieces intended to communicate with the public.
United States Treasury notes are intermediate length securities. Treasury notes are not issued with maturities of
4 years...U.S. Treasury notes are issued with maturities of 2, 3, 5, 7, and 10 years.
An individual purchases a variable life insurance policy. Under federal law, the individual is entitled to a complete refund of all premiums paid if the request is made within
45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer....The Investment Company Act of 1940 specifies a free-look period for the purchaser of a variable life insurance policy. That period is the longer of 45 days after the execution of the application or 10 days after the actual policy is delivered to the owner. The 24 months is the minimum time limit for the exchange of the variable policy into another form of permanent insurance.
Minimum requirement of cash for Reg T is...
50% of purchase
A corporate bond pays interest on a J/J 15 schedule. An investor purchasing these bonds on Friday, April 17, would pay accrued interest for
96 days...A J/J 15 schedule means the bond pays interest on January and July 15. Corporate (and municipal) bonds count each month as 30 days. As with all bonds, the accrued interest is paid from the previous interest payment date up to but not including the settlement date. A trade made on Friday the 17th settles the following Tuesday (T+2), April 21. The previous interest payment was January 15. Do the following simple calculation: Settlement date of 4/21 Minus last interest - 1/15 Result is 3/06, or 3 months plus 6 days With each month being 30 days, the answer is 90 + 6 or 96 days. LO 6.e
What is a debenture?
A debenture is unsecured corporate debt.
Describe a subordinated bond
A subordinated bond has other debt holders ahead of it in the event of liquidation.
How are hedge funds structured?
For a number of legal reasons, one of those being avoiding the need to register with the SEC, hedge funds are generally structured as limited partnerships with a maximum of 100 investors.
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has a net asset value (NAV) of $12 and a public offering price (POP) of $12.50, and that the ABC Fund has an NAV of $11.50 and a POP of $10.98. The customer should conclude that
GEM may be an open- or closed-end fund, and ABC is a closed-end fund...The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have a POP less than its NAV; therefore, ABC cannot be an open-end fund.
Which of the following would make an employee ineligible to participate in a company's qualified retirement plan?
He is only 20 years old.
Mandatory documents for margin are...
Hypothecation agreement and Credit agreement
If LEAPS options positions are maintained for more than 12 months, which of the following statements are true? The LEAPS writer's gains are taxed as short-term gains. The LEAPS writer's gains are taxed as long-term gains. The LEAPS buyer's gains are taxed as short-term gains. The LEAPS buyer's gains are taxed as long-term gains.
I and IV...The LEAPS writer's premium is taxed as a short-term gain. The LEAPS buyer took a position for longer than 12 months, so any profits are considered long-term capital gains. The writer's gain is short term because by opening with a sale, a holding period is never established.
A customer buys 100 shares of ABC at 56.50 and writes 1 ABC Aug 60 call at 2. If the call is exercised, the consequences are a cost basis of $56.50 per share. a cost basis of $58.50 per share. sales proceeds of $60 per share. sales proceeds of $62 per share.
I and IV...The premium of the option affects the basis of the stock (bought or sold) as a result of exercise, adding the premium per share ($2) to the price per share ($60), for total sales proceeds of $62. The original cost basis is not affected by the exercise, so it remains $56.50.
A legal opinion evaluates which of the following features of a municipal issue? Marketability Legality Tax-exempt status Economic feasibility
II and III...A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality. The marketability of the new issue of bonds is dealt with by the syndicate. Economic feasibility relates to revenue bond issues and is performed by independent consultants.
A customer writes 1 ABC Jan 65 put at 6 and 1 ABC Jan 55 call at 7 when ABC is trading at 60. This position will be profitable if, at expiration, ABC is above $68. at $60. below $52. between $52 and $68.
II and IV...This is a short combination where both contracts are in the money. Short combinations are like short straddles, except the strike prices and/or the expirations are different. The breakeven points are computed by adding the combined premiums to the strike price of the call (strike price + premium) and subtracting the combined premiums from the strike price of the put (strike price − premium). The breakeven points, therefore, are 52 (65 − 13) and 68 (55 + 13). With a short combination, the investor makes money if the stock stays inside the breakeven points.
If interest rates are rising, which statements regarding collateralized mortgage obligations are true?
If rates are rising, homeowners are less likely to refinance. Therefore, prepayment risk will decrease. Similarly, if prepayments are declining, the estimated life of the underlying mortgages should increase.
If a mutual fund's objective is income, it would not hold which of the following securities in its portfolio?
Income bonds
Bondholders may not take action against the corporation if it fails to make interest payments for
Income bonds...Income bonds pay interest only if earnings are sufficient and declared by the board of directors. This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds).
Which of the following investors may not take advantage of breakpoints?
Investment club...Breakpoint discounts are available only to legal persons. An investment club is not considered a legal person, but trusts and corporations are.
Which of the following orders is reduced on the order book on the ex-dividend date for a cash dividend?
Limit order to buy...Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price.
Which of the following records is to be kept for the life of the firm?
Minutes of the directors' meetings...The stock certificate book, articles of incorporation or partnership agreement, and minutes of the directors' meetings are to be kept on file and accessible for the life of the firm.
An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions?
Never with a nonqualified annuity...On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.
Is converting a bond into common stock a taxable event?
No
Income from which of the following investments is passive income?
Passive income results from DPPs and personal real estate rentals. REITs and CMOs are securities, and income from securities is considered portfolio income.
An investor has researched XYZ Corporation and is convinced the company's stock will soon decline in value. If the investor wishes to act on that conviction, which investment strategy will allow the investor to take advantage of the anticipated decline in share value with the smallest cash investment?
Purchase a put option...Buying a put is a basic option strategy used when one is bearish on a stock. If the stock declines as anticipated, the investor could exercise the put, which allows the stock to be sold at the strike price and then repurchase it at its lower current market price for a profit. The premium paid to buy the put costs less than the margin required if one were to sell the stock short. Purchasing a call or a call spread are bullish options strategies.
Any time equity is less than 50% of market value, the account is defined as...
Restricted
Which of the following are on the same side of the market?
Short 1 XYZ call and long 1 XYZ put...Long calls and short puts are on the same side (bullish), and long puts and short calls are on the same side (bearish). The number of contracts on the same side of the market are used to calculate whether or not position limits have been violated.
Which of the following securities would have a Moody's MIG rating?
TANs...TANs are tax anticipation notes. These are short-term municipal securities and that is what Moody's MIG ratings represent. MIG stands for Municipal Investment Grade. GOs are rated with the normal letter ratings and BAs (bankers' acceptances) and T-bills are not municipal securities.
Which of the following organizations determines which over-the-counter securities are eligible for purchase on margin?
The Federal Reserve Board determines whether any security is marginable.
The provisions of the Securities Act of 1933 include all of the following except
The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.
The portion of a municipal bond underwriting spread that remains after the syndicate manager subtracts the management fee is
The total takedown... is that portion of the municipal underwriting spread that remains after the underwriting manager takes the management fee. The total takedown consists of the additional takedown and the concession.
Seventy-five basis points are equal to which of the following? 0.75% 7.5% $7.50 $75.00
There are 100 basis points in each point. One point represents 1% of a bond's value; therefore, one basis point represents 0.01%, and 75 basis points would represent 0.75%. Because each point is worth $10, 75 basis points represents $7.50.
What is the usual use of a stop order?
To protect the profit on a long position and to prevent loss on a short position.
Minimum requirement of Stock for Reg T is..
Twice the amount of cash with stock
A money market mutual fund would be least likely to invest in which of the following assets?
U.S. Treasury notes...A money market mutual fund typically invests in money market instruments or those with a maturity date not exceeding 397 days. Treasury notes have maturity dates of 2-10 years.
A customer owns a 7.5% ABC convertible bond currently trading at 115. The conversion price is $40. What is the parity price of the common?
We are told that the bond has a conversion price of $40. That means you can get 25 shares if you wish to convert. That is because the issuer is basically saying, "We owe you $1,000 and will let you spend it on our stock at $40 per share." Now that we know we can get 25 shares, what does each share have to be worth to equal $1,150? If you divide $1,150 by 25 shares, the result is $46.
Lambda Corporation has received a donation of 100,000 shares of its common stock from the spouse of the deceased founder of the company. This would appear on the company's books as
When a corporation reacquires shares of outstanding stock, whether through open market purchase or, as in this case, donation, the stock is treasury stock.
All short sales must be done in what type of account...?
a Margin Account
What constitutes a long coupon?
a period longer than 6 months
If you heard a portfolio manager bragging that the portfolio generated excess returns, it means that there was
a positive alpha...The term "excess returns" is used to describe when an investment has a positive alpha. It means that this manager's portfolio generated returns in excess of what would have been the expected rate of return. A positive alpha means that the manager is doing a good job. Beta measures the extent to which a portfolio is more or less volatile than a stated benchmark. It can be positive or negative, but does not reflect returns. In general terms, this portfolio would have a return in excess of the risk-free rate, but that is not nearly specific enough to answer the question.
SEC Regulation FD is best described as a rule requiring disclosure by
an issuer of securities....Regulation FD (Fair Disclosure) is an issuer disclosure rule (all issuers) that addresses selective disclosure such as may be given to securities market professionals and others that may trade on the basis of the information. If the disclosure of information is intentional, the issuer must make a simultaneous disclosure to the public. If the disclosure was unintentional, the issuer must make disclosure promptly. Promptly means under the regulation not later than 24 hours or the commencement of the next day's trading on the New York Stock Exchange, whichever is later (which accommodates for weekends and holidays) after a senior official of the issuer learns of the disclosure.
An issuer may engage in a primary offering
as often as it chooses...There is no limit to how often a company may issue shares in a primary offering. There will be regulatory requirements for each offering, depending on the offering and the type of issuer; however, they may be as common as daily (i.e., mutual funds).
A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest its total assets, such that
at least 75% of its assets meet stated diversification requirements....The Investment Company Act of 1940 requires that a minimum of 75% of the assets of the diversified company meet stated requirements. Those requirements include the following: At least 75% of the fund's total assets must be invested in cash and securities that are not issued by the fund or any of its affiliates. Within that 75%, no more than 5% of the fund's total assets can be in a single stock. Within that 75%, no holding can represent more than 10% of the voting control of a single company. Please note that there are no restrictions on the nondiversified 25%. It can all be in a single stock. That means 30% of the fund's total assets can be in one company. Likewise, that 25% can be used to purchase a controlling interest in companies.
In performing their natural job functions, all of the following may act in a principal capacity in a transaction with customers except
branch managers of FINRA member firms....When acting as a principal in a transaction, you are buying for or selling from inventory. Although branch managers of member firms are generally required to be registered as principals, that is different from acting in a principal capacity in a transaction. DMMs facilitate trading on the floor of the NYSE. Doing that sometimes requires them to buy or sell as principals. OTC market makers, by definition, act as principals. The term broker-dealer means that the firm can act either as a broker or a dealer. There are a number of words used in this exam than can have multiple meanings. Principal is one of those
A technical analyst is least concerned with
declaration of increased dividends....A technical analyst is interested in statistics about market or price performance, not the fundamental factors, the market, or the company's dividend policy. Technical analysts are interested in trading volume as a market statistic, new highs and lows, and open short positions, which could indicate future buying potential in the security.
Flag Mountain Floating Rate Capital, a business development company (BDC), has the majority of its assets invested in debt securities. Income distributions are made in the form of
dividends...Business development companies (BDCs) are closed-end investment companies registered under the Investment Company Act of 1940. In addition, they are regulated investment companies (RICs) under the Internal Revenue Code, meaning that BDCs must distribute at least 90% of their net investment income (NII) as dividends to shareholders. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
a bonds current yield is found by...
dividing its annual interest by its market price.
Corporate bonds that are guaranteed are
guaranteed as to payment of principal and interest by another corporation.
A customer buys 300 LMN at $45 per share and writes 3 LMN Aug 45 calls at 4. The customer will profit under all of the following circumstances except
if LMN is below $41 at expiration...Breakeven is $41 ($45 − $4). The stock price must be above breakeven for the investor to make a profit.
An open-end investment company may do all of the following except
issue bonds...A mutual fund may not issue any senior securities, although it may purchase almost any type of security for its portfolio.
An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be
ten ABC 6s of 2045 with a conversion price of $41.67...This question deals with the anti-dilution provisions of a convertible security. When there is a stock dividend or a stock split, the holder of the convertible maintains the same equity proportion as before. With a conversion price of $50, the debenture is convertible into 20 shares ($1,000 ÷ $50). After a 20% stock dividend, the holder should be able to acquire 20% more shares. That makes the security convertible into 24 shares. Divide the $1,000 par value by 24 shares and the conversion price is now $41.67.
If a registered representative is suspended by FINRA's Department of Enforcement, his first appeal would be to
the National Adjudicatory Council....A registered representative may appeal decisions of the DOE to FINRA's National Adjudicatory Council. Appeals may then go to the SEC and finally to the federal appellate court system.
Your customer's margin account currently has SMA of $7,000. When asked for an explanation of what that means, you could respond that...
the account has buying power equal to 200% of the SMA.
The Current Ration is?
the current assets divided by the current liabilities. The higher the ratio, the more liquid the company.
If an investor is long 5 Dec puts on the Canadian dollar, these options will expire in December on
the third Friday of the expiry month.
The legal contract stating the issuer's obligation to pay back a specific amount of money on a specific date to its bondholders is best described as
the trust indenture
When a client calls you and says they have some "lettered" stock, you know this stock
was acquired in a private placement.
Under SEC rules, all of the following information must be on a customer confirmation except
whether the member has a control relationship with the issuer....Under SEC Rule 10b-10, a customer trade confirmation must include whether the member acted as agent or principal, if the member is a market maker in the security, if a control relationship exists between the member and the issuer. Whether the trade was solicited or unsolicited is not a required disclosure (although many firms do disclose this information). Confusing fact: This information must be on the order ticket, but not on the confirmation.
