Series 7 Practice Questions
Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2015. The maturity date of the bonds is July 1, 2035. What is the number of days of accrued interest on the 10-bond trade? A) 30 B) 31 C) 29 D) 37
A) 30 The maturity month and day will always match one of the two semiannual coupon dates. Because maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 up to, but not including, settlement (30 days).
For which of the following would the net revenue-to-debt service ratio be applicable? A) Hospital bonds B) General obligation bonds C) Tax anticipation notes D) School bonds
A) Hospital bonds This is the coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built with the proceeds of revenue bond issues.
The purchaser of a general obligation (GO) municipal bond should be concerned with I. property tax assessments. II. the maintenance covenant. III. market risk. IV. feasibility studies. A) I and III B) I and IV C) II and IV D) II and III
A) I and III GO bonds are issued by municipalities and, like all debt instruments, are subject to interest rate changes (market risk). Ad valorem (property taxes) are the primary source of debt funding for municipal GO bonds and are based on property assessments. Feasibility studies and maintenance covenants are associated with municipal revenue bonds where user fees from municipal projects and facilities are used to fund the debt. LO 6.b
In the analysis of a general obligation bond issued by a county, negative factors would include I. an increase in assessed property values. II. an increase in the county's unemployment rate. III. an increase in the percentage of tax payment delinquencies. IV. an increase in the number of office buildings being rehabilitated. A) II and III B) I and II C) I and IV D) III and IV
A) II and III Because general obligation bonds are backed by taxes, an increase in tax delinquencies is negative. When unemployment rates increase, it could lead to an inability of the residents to keep current with their taxes.
Which of the following legislative acts exclusively regulates debt securities? A) Trust Indenture Act of 1939 B) Securities Exchange Act of 1934 C) Securities Act of 1933 D) Investment Advisers Act of 1940
A) Trust Indenture Act of 1939 The Trust Indenture Act of 1939 protects investors in corporate bonds should the issuing company default. While the Securities Act of 1933 and the Securities Exchange Act of 1934 both have provisions dealing with corporate debt securities, the Trust Indenture Act of 1939 is the only act that affects them exclusively.
A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show A) a per share estimated value of the securities. B) no valuation for the unlisted REITS and the original investment made in the DPP interest. C) the amount shown on Tape B the business day before the account statement closing date. D) an exact per share value as calculated on the last business day of the month.
A) a per share estimated value of the securities. A general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, in a manner reasonably designed to ensure that the per share estimated value is reliable.
The Trust Indenture Act of 1939 covers all of the following securities transactions except A) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2025. B) a corporate bond issue worth $55 million sold interstate. C) a public issue of debentures worth $60 million sold by a single member firm throughout the United States. D) a sale of an equipment trust bond issue worth $62 million.
A) a sale of an issue of $5 billion worth of Treasury bonds maturing in 2025. The Trust Indenture Act of 1939 requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture. U.S. governments are exempt.
Bond trust indentures are required for A) corporate debt securities. B) Treasury securities. C) municipal revenue bonds. D) municipal general obligation bonds.
A) corporate debt securities.
Variable-rate municipal bonds are subject to all of the following risks except A) interest rate. B) default. C) liquidity. D) market.
A) interest rate.
Debt service on an industrial revenue bond is secured by A) lease payments paid by a corporation. B) ad valorem taxes. C) special assessments. D) sales taxes.
A) lease payments paid by a corporation. Industrial revenue bonds are issued by a municipality or an authority established by a municipality. No municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the only source of revenue for debt service.
All of the following would be found in a bond resolution for a new municipal issue except A) the costs to be incurred by the issuer in connection with the offering. B) a description of the issue. C) the issuer's obligations to bondholders. D) covenants to which the issuer must adhere.
A) the costs to be incurred by the issuer in connection with the offering. The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer's responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere. Costs to be incurred by the issuer have no impact on bondholders.
Under SEC Rule 134, a tombstone advertisement includes all of the following except A) the net proceeds to the issuer. B) the number of shares to be sold. C) the names of the syndicate members. D) the public offering price.
A) the net proceeds to the issuer.
Broker-to-broker confirmations must be sent no later than A) the next business day. B) the regular way settlement date. C) the end of day on the date of the trade. D) the trade date plus two business days.
A) the next business day.
A registered primary offering of common stock differs from a registered secondary offering of common stock in that A) the proceeds of the primary offering are received by the issuing company, while the issuer receives none of the funds from a secondary offering. B) only the primary offering is sold by prospectus. C) the primary offering must be registered with the SEC, while the secondary offering is already registered. D) the proceeds of the primary offering are received by the issuing company, while the proceeds of the secondary offering are received by the underwriting syndicate.
A) the proceeds of the primary offering are received by the issuing company, while the issuer receives none of the funds from a secondary offering. A primary offering is always the sale of new shares. Therefore, the proceeds of the offering always go to the issuer. In the case of a registered secondary, the seller is generally a large stockholder, such as an institution or perhaps a founder of the company. That means the proceeds go to that seller.
A new offering has a green shoe option. This means A) the syndicate can oversell by up to 15% of the offering. B) the syndicate members have purchased put options to protect against a decline in the price of the stock. C) the syndicate is obligated to purchase up to 15% of the offering. D) the issuer has purchased put options to protect itself against a decline in the price of the stock.
A) the syndicate can oversell by up to 15% of the offering. A green shoe clause, negotiated with and agreed to by the issuer, allows the syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. The additional shares are made available to the syndicate by the issuer. To be effective, a green shoe clause must be disclosed in both the registration statement filed with the SEC and the prospectus.
Which of the following may only be accomplished after applying the additional bonds test for a revenue bond? A. Issuing new bonds with an equal lien on the project's revenues B) Spending revenues already allocated for project expansion C) Increasing the project's user charges D) Prerefunding an outstanding bond issue
A. Issuing new bonds with an equal lien on the project's revenues The additional bonds test must be met under the provisions of a revenue bond indenture before additional bonds with an equal lien on project revenues can be issued. The conditions under which additional bonds may be issued are specified in the bond indenture. This is an open-end covenant.
What options trading program would be most appropriate for a retired customer with a portfolio of low-cost basis blue-chip stocks who is seeking income from his portfolio? A) Selling straddles B) A covered call writing program C) An uncovered call writing program D) An option purchasing program
B) A covered call writing program The most conservative option strategy is writing covered calls. In addition to the income from the call premium, this client could also receive dividends on his stock if any were paid. Purchasing options brings no income to the account, and uncovered call writing and short straddles have unlimited risk.
Which of the following would not be found in the underwriting of a new corporate bond issue? A) The holding of a due diligence meeting B) A legal opinion C) A stabilization clause D) A market out clause relieving the underwriter of his responsibility
B) A legal opinion Municipal securities are the only ones requiring a legal opinion.
A new client, age 25, earning $41,000 annually has saved $20,000 to allocate to an investment portfolio for the first time. The client conveys that while he would like to see some growth, an investment with moderate risk and some downside protection are important objectives for his first time investing. Aligning with the client's investment experience and objectives, which of the following would be the most suitable? A) Municipal bond fund B) Balanced fund C) Equities index fund D) Money market fund
B) Balanced fund A balanced fund, which consists of both equities and debt instruments, not only aligns with the growth objective but also offers some downside protection against falls in market due to the debt portion of its portfolio. Equity index funds move with the markets and offer no downside protection.
The ratio of taxes collected to taxes levied might be used in the analysis of which of the following bonds? A) Pollution control B) General obligation C) Water control D) Industrial development revenue
B) General obligation General obligation bonds are mainly supported by taxes. Collection of these taxes is a factor in the issuer's ability to pay the debt service on the issue.
A prospectus must be delivered to customers who purchase which of the following new issues? I. U.S. government bonds II. Corporate bonds III. Fixed annuities IV. Unit investment trusts (UITs) A) I and IV B) II and IV C) II and III D) I and III
B) II and IV U.S. government bonds are exempt securities under the Securities Act of 1933 and are not subject to the act's registration and prospectus delivery requirements. Fixed annuities are not considered securities, as the risk is borne by the insurance company issuer. Corporate bonds and UITs, however, are nonexempt securities and are subject to prospectus delivery requirements.
Which of the following is always affected by a change in the market value of securities in a long margin account? A) Special memorandum account (SMA) B) Maintenance requirement C) Credit balance D) Debit balance
B) Maintenance requirement SMA is only affected if the current market value (CMV) increases. In terms of dollars, the maintenance requirement will continuously fluctuate with the market value because it is a percentage of the CMV.
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? A) At age 59½ B) Never with a nonqualified annuity C) At age 72 D) At age 72 or when no longer working, whichever is later
B) 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.
In addition to their tax advantages, municipal bonds are often purchased for their safety. Your client wishing to purchase municipal bonds with the utmost in safety should buy A) general obligation bonds. B) New Housing Authority bonds. C) moral obligation bonds. D) double-barreled bonds.
B) New Housing Authority bonds. NHAs, sometimes called Public Housing Authority or PHA bonds, have the backing of the federal government. As such, they are the safest of all municipal securities.
A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a long-term government bond fund. B) an intermediate-term, high-grade corporate bond fund. C) an intermediate-term government bond fund. D) a large-cap growth fund.
B) an intermediate-term, high-grade corporate bond fund. In all these cases, liquidity should not be a problem because mutual funds have a seven-day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolios offer that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection.
The Securities Act of 1933 covers all of the following except A) full and fair disclosure. B) blue-sky laws. C) prospectus requirements. D) liabilities for misleading filings.
B) blue-sky laws. The purpose of the Securities Act of 1933 is to provide investors with full disclosure about a new securities issue. The act is federal in scope, whereas blue-sky laws refer to state securities regulations.
With bonds subject to a gross revenue pledge, the first priority will be to pay A) the first lien on the property. B) bond interest and principal. C) the sinking or surplus fund. D) operation and maintenance.
B) bond interest and principal.
The rate on an adjustable preferred stock may be indexed to A) the Consumer Price Index. B) the Treasury bill rate. C) the Dow Jones Industrial Average. D) the Producer Price Index.
B) the Treasury bill rate. The dividend on an adjustable rate preferred stock is tied to a particular interest rate, and the Treasury bill rate is a common benchmark.
Under SEC Rule 134, a tombstone advertisement includes all of the following except A) the public offering price. B) the net proceeds to the issuer. C) the number of shares to be sold. D) the names of the syndicate members.
B) the net proceeds to the issuer. Under SEC Rule 134, a tombstone advertisement may be placed by the syndicate manager on or before the offering's effective date and is limited to the name of the issuer, type of security being offered, number of shares to be sold, public offering price, and names of the syndicate members.
The Securities Act of 1933 applies to all of the following except A) prospectus preparation. B) the regulation of insider trading. C) full and fair disclosure. D) the registration of new issues.
B) the regulation of insider trading. The regulation of insider trading is covered under the Securities Exchange Act of 1934. The 1933 act deals with new issues and related disclosures.
Typically, general obligation bonds are not sold short because A) they trade over the counter. B) thin markets may make it difficult to cover a short municipal position. C) they are backed by the full faith and credit of the issuing authority. D) Municipal Securities Rulemaking Board regulations prohibit short selling.
B) thin markets may make it difficult to cover a short municipal position. Because the municipal trading market is thin, it is often difficult to cover (buy back) a municipal security that has been sold short.
An investor has an established margin account with a short market value (SMV) of $4,000 and a credit balance of $6,750, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $2,750 B) $1,500 C) $750 D) $2,000
C) $750 The Regulation T requirement and equity must be calculated before excess equity can be determined. The Regulation T requirement is 50% of the SMV of $4,000 ($2,000). Equity is calculated by subtracting the SMV of $4,000 from the credit balance of $6,750 ($2,750). Excess equity is calculated by subtracting the Regulation T requirement of $2,000 from the equity of $2,750 ($750).
Congress passed the Trust Indenture Act of 1939 to protect bondholders. It requires that issuers of eligible bonds appoint a trustee to ensure that promises (covenants) between the issuer and the trustee who acts solely for the benefit of the bondholders are carried out. The Trust Indenture Act of 1939 applies to which of the following issues offered on an interstate basis? A) A municipal general obligation bond in the amount of $200 million with a maturity of 20 years B) A corporate bond in the amount of $500 million with a maturity of 8 months C) A corporate bond in the amount of $200 million with a maturity of 20 years D) A corporate bond in the amount of $38 million with a maturity of 10 years
C) A corporate bond in the amount of $200 million with a maturity of 20 years There are four basic elements qualifying a bond issue for coverage under the Trust Indenture Act of 1939. Those are as follows: -It is a corporate issue, -The issue size is more than $50 million within 12 months. -The maturity is 9 months or more. -It is offered interstate.
Which of the following characteristics describes a final prospectus? A) Filed with the SEC semiannually B) Filed with the SEC and not available to the general public C) Complies with the full and fair disclosure requirements of the Securities Act of 1933 D) Used to solicit indications of interest in a new issue
C) Complies with the full and fair disclosure requirements of the Securities Act of 1933 A prospectus is a disclosure document meant for distribution to the public. It must constitute full and fair disclosure of all material facts about the issuer and the security.
Which of the following is a double-barreled bond? A) Anticipation note B) General obligation bond to construct a new grade school C) Hospital bond backed by revenues and taxes D) New Housing Authority (NHA) bond
C) Hospital bond backed by revenues and taxes A double-barreled bond is backed by a defined source of revenue other than property taxes, as well as the full faith and credit of an issuer with taxing authority. NHA bonds are not double-barreled. If rental income from the housing cannot meet servicing costs, the shortfall is covered by the federal government. To be double-barreled, the issue must be backed by more than one municipal source.
Which of the following acts requires full and fair disclosure of all material information about nonexempt securities and debt securities offered to the public for the first time? A) Securities Investor Protection Act of 1970 B) Trust Indenture Act of 1939 C) Securities Act of 1933 D) Securities Exchange Act of 1934
C) Securities Act of 1933
Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) County governments B) School districts C) State governments D) Municipalities
C) State governments State governments generally do not assess property (ad valorem) taxes. These are assessed by local governments. Generally, state governments receive most of their income from sales and income taxes.
One of your clients has appointed his daughter as the trusted contact person per FINRA Rule 2165. She contacts you to explain that her father's cognitive abilities are declining. Because of that, before it gets too late, she wants to know what can be done to give her control over the account. It is likely that the best suggestion would be to have her father sign A) the discretionary power authorization. B) a limited power of attorney. C) a durable power of attorney. D) a full power of attorney.
C) a durable power of attorney. A durable power of attorney is used when the account owner has diminished physical or mental capacity. It is durable because it survives the client becoming legally incompetent (but does not survive death).
All of the following items of information must be included in a municipal securities confirmation except A) whether the securities are fully registered or book entry. B) the capacity in which the broker-dealer acted. C) an extraordinary call provision. D) the date of maturity that has been fixed by a call notice.
C) an extraordinary call provision. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.
You are asked to read the prospectus for a new issue of common stock for a client. You would expect the prospectus to include A) the date the registration statement was filed with the appropriate regulatory body. B) the FINRA disclaimer statement on the front cover. C) an overview and history of the issuer's business and any risks associated with the offering. D) the legal opinion.
C) an overview and history of the issuer's business and any risks associated with the offering. The prospectus will include an overview and history of the business, as well as any risks associated with it. It is the SEC disclaimer that is on the front cover and it is the effective date, not the date of filing that is shown. A legal opinion does not apply to common stock.
If a municipal bond rated BBB is prerefunded, all of the following statements are true except A) the rating of the issue will increase. B) the issue is now backed by U.S. government securities. C) the marketability of the issue will decrease. D) funds required to meet debt servicing have been set aside in escrow.
C) the marketability of the issue will decrease. When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities.
In the case of an unsolicited order, a prospectus must be delivered to the purchaser of a unit investment trust A) before the month's end. B) before the purchase. C) with the purchase confirmation. D) between 45 days and 18 months following the initial deposit.
C) with the purchase confirmation. A purchaser of newly issued securities must receive a prospectus no later than by receipt of the purchase confirmation. However, any solicitation must be preceded or accompanied by a prospectus.
Regulation T requires payment from a customer in a margin account A) business 10 days. B) within three business days. C) within four business days. D) before purchase.
C) within four business days. The Regulation T payment date is the fourth business day from the trade date. Regular way settlement, according to FINRA rules, is two business days from the trade date, and Regulation T allows for two additional business days after settlement date—four business days total.
Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners not be required? A) An S corporation B) A sole proprietorship C) An LLC D) A C corporation
D) A C corporation A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners.
Which of the following municipal issues would least likely involve overlapping debt? A) A park district B) A school district C) A library district D) An airport district
D) An airport district Overlapping debt refers to property tax districts (areas). Airport issues are usually revenue issues of an authority that has no property taxing powers.
Which of the following would have the least market risk? A) AAA corporate debentures B) Fannie Maes C) Corporate or municipal bonds with long-term maturities D) Revenue anticipation notes
D) Revenue anticipation notes Anticipation notes are the shortest term, which gives them the least market risk (the risk that price will fluctuate during the time left to maturity).
Which of the following best describes how a syndicate determines the amount to bid for a new municipal issue? A) The average reoffering price plus the takedown B) The average sales price divided by the interest cost C) The gross spread minus the takedown D) The average reoffering price minus the spread
D) The average reoffering price minus the spread A spread is analogous to the gross profit margin in other businesses. A syndicate's bid is based on the average reoffering price (the price the public will pay) less the syndicate's spread (the amount the syndicate will charge for bringing the issue to market).
The holder of a foreign currency call option has the right to A) sell the specified foreign currency for a fixed U.S. dollar amount. B) buy U.S. dollars for a fixed amount of the specified foreign currency. C) sell U.S. dollars for a fixed amount of the specified foreign currency. D) buy the specified foreign currency for a fixed U.S. dollar amount.
D) buy the specified foreign currency for a fixed U.S. dollar amount. The holder of a call option has the right to buy the underlying asset.
The terminology guaranteed full faith and credit is most applicable to A) interest only on a U.S. government-issued bond. B) interest and principal on a municipal revenue bond. C) interest and principal on a corporate bond. D) interest and principal on a U.S. government-issued bond.
D) interest and principal on a U.S. government-issued bond.
The trust indenture of a revenue bond includes a statement explaining rates will be maintained at a level sufficient to cover the debt service and operating expenses. This statement would be found in that part of the indenture dealing with A) the flow of funds. B) the official statement. C) the feasibility study. D) the bond covenants.
D) the bond covenants. The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant, which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue.
All of the following statements regarding industrial revenue bonds (IRBs) are true except A) they can be issued by municipalities to provide local industries with funds for expansion. B) interest is paid from rental payments received from corporations that have leased the property or equipment from the municipality. C) they can be issued by municipalities to build facilities that will be owned by the municipality but leased to a local corporation. D) the credit rating of the bonds is dependent on the credit rating of the municipality.
D) the credit rating of the bonds is dependent on the credit rating of the municipality. The debt service for IRBs is derived from the lease payments made by the leasing corporation to the issuing municipality. Therefore, the credit rating of the bonds is dependent on the credit worthiness of the leasing corporation, not the issuing municipality.
The trust indenture of a revenue bond will show all of the following except A) the revenue pledge. B) the application of flow of funds. C) the rate covenant. D) the reoffering yields.
D) the reoffering yields. Reoffering yields are unrelated to trust indentures. However, the trust indenture for a revenue bond issue does include covenants (or promises) between the issuer and the trustee for the bondholders' benefit. Among these covenants are the flow of funds and the rate covenant.
All of the following sources of revenue could be used to service general obligation debt except A) ad valorem taxes. B) sales taxes. C) fines. D) user charges.
D) user charges Historically, municipalities get most of their revenues from property taxes (ad valorem taxes). Other sources of revenue include sales taxes, income taxes, gasoline taxes, license fees, fines, and assessments. User charges would be used to service revenue bonds.
What kind of information does the bond resolution include?
The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer's responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere.
From first to last, in what order would claimants receive payment in the event of bankruptcy?
The liquidation order is as follows: secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.
