Series 7 Test Questions 7

Equity options that are in-the-money by what amount will be automatically exercised at expiration absence any other instructions from the customer?

$.01 ****At expiration, unless the customer instructs not to, equity options that are in-the-money by $.01 or more will be automatically exercised. This rule is applicable to both retail and institutional customers.****

A customer has a margin account which shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has SMA of $5,000. The long market value at maintenance is:

$120,000 ****Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by .75 ($90,000 / .75 = $120,000). If the market value were to fall to $120,000, the account would look like this: $120,000 − $90,000 = $30,000 (25%) (MV − DB = EQ).****

Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year?

$2,500 ****He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward.****

A margin account customer buys 100 shares of HEX at $70 and writes a HEX Oct 70 call for a premium of 8. What must he deposit? (Regulation T is 50%.)

$2,700 ****The normal call would be 50% of $7,000 or $3,500. In this example, subtract the premium of $800 that the customer received. (Remember, in a covered call situation, no margin is required for the call.)****

A customer purchased 100 shares of SNP at $38. At the time of purchase, the PE ratio was 12. Approximately what are the earnings per share of SNP?

$3.16 ****The PE ratio is a comparison of the current market price at the close to the earnings of the company. $38 (CMV) / 12 (PE ratio) = $3.16 approximate EPS.****

What is the breakeven point on the following position? Buy 1 QRS Jan 40 call at 2.35 Write 1 QRS Jan 45 call at .85

41.50 ****Because this is a call spread, the breakeven point is calculated by adding the net premium of 1.50 to the lower strike price (40 + 1.50 = 41.50).****

A customer wishes to redeem 1,000 shares of a mutual fund. The NAV and POP are $10, and a redemption fee of 0.5% will be charged. How much will the customer pay in redemption fees?

50 ****The question did not ask how much he would receive upon redemption, but how much he would pay in redemption fees. Mutual fund shares are redeemed at the NAV (bid): 1,000 shares × $10 each = $10,000. $10,000 × .005 (.5% redemption fee) = $50.****

Which of the following would best describe, "Bought 1 Jan 55 call at 3 and sold 1 Jan 60 call at 1"?

A bull vertical spread ****The client paid 2 points out-of-pocket for a call spread. Break even here is 57. Your client wants the stock to go up; hence, a bull spread. Because the exercise prices are different, it is also a vertical spread.****

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered?

A spread order ****A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less (this is one order, not two).****

The 5% markup policy applies to which of the following?

Agency transactions. Principal secondary market trade. ****The 5% markup policy applies to all secondary market transactions. It does not apply to exempt transactions, transactions requiring the delivery of a prospectus, or issues sold at a fixed offering price.****

Which of the following municipal bond investors would be allowed to deduct margin interest on an income tax return that had been charged to borrow funds used to purchase the bonds?

Banks purchasing certain general obligation (GO) issues ****Margin interest charged for loans to purchase municipal bonds is generally not deductible on a tax return. However, for certain GO municipal issues (known as bank qualified municipal issues) the IRS allows a bank to deduct up to 80% of the margin interest charged for funds borrowed to purchase the bonds.****

Which of the following is the CORRECT order of the stages in a business cycle?

Expansion, peak, contraction, trough ****The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point as long as the stages are shown in the right order.****

A resident of Minnesota is in the 28% federal tax bracket and the 4% state tax bracket. This person must pay both federal and state taxes on:

Federal National Mortgage Association pass-throughs ****The interest income from most U.S. government and agency securities is exempt from state and local, but not federal, taxes. Mortgage-backed securities (such as FNMA and GNMA obligations) are subject to federal, state, and local taxes. The interest on municipal issues (like the Minneapolis housing authority bonds) is exempt from federal taxes and, because this investor is a Minnesota resident, state taxes.****

Which of the following investment vehicles has the highest credit risk?

Industrial revenue bonds ****The industrial revenue bonds would have the highest risk because debt service is the responsibility of the corporation leasing the facility rather than the issuing municipality.****

Which of the following statements regarding the good faith deposit submitted by interested bidders are TRUE?

It is usually 1% to 2% of the total par value of the bonds offered. If the bid is unsuccessful, it is returned to the underwriting syndicate. ****A good faith deposit is required when the syndicate places a bid on a competitive offering. It is generally 1% to 2% of the par value of the bonds offered for sale. If the bid is unsuccessful, the deposit is returned by the issuer to the syndicate manager.****

Which of the following would be of least interest to a technical analyst?

PE ratio ****Technical analysts rely on price and trading trends to determine when to buy or sell stock. They are not interested in the specific financial information of an issuer; PE ratios are of greater interest to fundamental analysts.****

A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30 respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter?

Sell 100 ABC 19.50 stop ****An analyst who expects a stock to fall through support is anticipating that the stock will decline. He can take advantage of this trend by establishing a short position at the top of the decline. He will enter a sell stop order just below the support price.****

The bond placement ratio, as shown in the Daily Bond Buyer, is found by which of the following?

The dollar value of new issues sold divided by dollar value of the new issues offered. ****The bond placement ratio is the percentage of new municipal bonds offered last week that were sold last week.****

In a margin account, which of the following would be affected by a stock dividend?

The number of shares held in the account ****Stock dividends merely give an investor more shares of stock valued at less per share. The total value of the position does not change. Therefore the balances in the account remain unchanged as well.****

ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split?

The par value would decrease to $5 per share ****$10 par stated in question. 2 for 1 on all stock. Twice as many shares at half the price****

Which of the following investment activities are suitable for an individual retirement account?

Writing covered calls Buying puts on stock held long ****Writing uncovered calls and writing naked puts subject the investor to a high degree of risk and are considered unsuitable activities.****

A portfolio that invests in blue-chip stocks and growth stocks can best be described as:

a growth and income portfolio ****A growth and income portfolio typically combines conservative blue-chip securities for their stability and capital preservation with growth stocks for their appreciation potential. An aggressive portfolio contains securities of smaller companies that have the potential for significant capital appreciation. A balanced portfolio invests in both stocks and bonds.****

If your client has a certificate registered in his own name, to be a good delivery, the certificate must be accompanied by:

a properly-executed assignment to the brokerage firm on the reverse side of the certificate

A customer places an order to buy 300 DWQ at 140 stop, but not over 140.25. This is a:

buy stop limit order ****The customer has entered a stop limit order. If the stock rises to the stop price of $140, the order is elected then becomes a buy limit order at 140.25, meaning an order to buy at 140.25 or lower.****

The 5% policy applies to:

commissions charged when executing customer agency (broker) transactions. riskless and simultaneous transactions. markups on stock sold from inventory. markdowns on stocks bought for inventory. ****The 5% policy applies to both commission charges on agency transactions and to markups and markdowns on principal transactions, including riskless principal trades****

All of the following are minimum requirements for listing on the NYSE EXCEPT:

earnings per share ****While the numerical values are not tested, it is important to know that there is no minimum earnings per share requirement. However, there is a minimum earnings requirement.****

A customer is short 10 ABC Dec 50 calls at 2.50 and short 10 ABC Dec 50 puts at 3.50. Prior to expiration, ABC declines to 40.50 and the customer is assigned on his put position while his short calls expire worthless. A month later, he liquidates his long position at 45 for a:

gain of $1,000 ****The customer opens two short positions on 10 contracts each, so his account is credited with premiums of $2,500 for the calls and $3,500 for the puts. The calls expire worthless, but the short puts are exercised, so the investor is required to buy the stock at the strike price. This results in a debit of $50,000 ($5,000 per contract × 10 contracts), and the stock is then sold at a credit of $45,000.****

If the dollar price of a municipal bond is 101 and, at that price, the basis is 6.10, the nominal yield is:

greater than 6.10 ****For bonds trading at a premium, the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are: yield to call, yield to maturity, current yield, and nominal yield.****

A Treasury bond is quoted in "The Wall Street Journal" as follows: Bid 100:15 Asked 100:17 Bid Chg. -1 Yield 7.9 From this information, you know that the nominal yield is:

greater than 7.9% ****The "Bid" and "Asked" prices show that the Treasury bond is being quoted at a premium (above par), with a yield to maturity of 7.9%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.****

All of the following are types of oil and gas direct participation programs EXCEPT:

minimum guarantee wildcat ****Exploratory programs drill wildcat wells in areas where there are no proven reserves of oil and gas. The chances of success are relatively slim, so there are no guarantees. The other three choices describe types of oil and gas programs.****

During the cooling-off period, a registered representative (in order to highlight key points) marks a preliminary prospectus and sends it to a client. This action is:

prohibited ****Under no circumstances may a registered representative mark a preliminary or final prospectus.****

The trust indenture of a revenue bond will show all of the following EXCEPT 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.****

For individual retirement accounts, the IRS mandates that if distributions do not begin by April 1 of the year after the individual turns age 70 ½, a 50% insufficient distribution penalty applies. The amount to be withdrawn each year is based on IRS life expectancy tables. These IRA distribution concepts are known as

required beginning date (RBD) required minimum distribution (RMD) ****For individual retirement accounts, the IRS mandates that distributions must begin by April 1 of the year after the individual turns age 70 ½. This is known as the "required beginning date" (RBD). The amount to be withdrawn each year is based on IRS life expectancy tables. This is known as the "required minimum distribution" (RMD).****

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should:

tender the bonds ****The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share (39.50 × 25 = $987.50).****

The document attesting to the formation of a limited partnership, filed with designated authorities, is called:

the certificate of limited partnership ****The Uniform Limited Partnership Act requires that two or more persons sign and swear to a certificate of limited partnership. It is filed with the state and is a public document available for review.****

An agent has recommended investments in the XYZ fund family to his customers for 10 years. He is referred by one of his customers to a prospect who has inherited $500,000 as beneficiary of a life insurance policy. The prospect tells the agent she has never invested in the market before, is risk averse, and wants safety of principal to be the first priority with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares $200,000 XYZ large-cap growth and Income B shares $150,000 XYZ liquid reserve money market $150,000 The recommendation is:

unsuitable because it does not address the customer's two primary objectives ****The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective.****