Series 7 Exam 2023
A registered representative is looking to sell a client Class B shares with a 7-year contingent deferred sales charge (CDSC). Which of the following representations is appropriate?
"All of your money goes to work since there is no up-front sales charge."
Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar need to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.)
$0.8582 The breakeven formula for call buyers is the strike price plus the premium. The strike price is 85 (0.8500) and the premium is .82 ($0.0082). Therefore, the spot rate for the Canadian dollar would need to be $0.8582 for Mr. Jones to break even.
Mr. Jones purchases 100 shares of IBM at $116 per share and writes an IBM June 115 call option at 5. Mr. Jones' breakeven point is:
111 The writer of a covered call will have a breakeven point equal to the purchase price of the stock (116) less the premium received (5). Therefore, his breakeven point is $111 ($116 - $5 = $111).
XYZ Corporation earned $4 per share and paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price/earnings ratio of XYZ Corporation is:
14 to 1 The price/earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price/earnings ratio of 14 to 1 ($56 divided by $4 equals 14).
Listed equity options cease trading at:
4:00 p.m. Eastern Time on the expiration date. Listed equity options cease trading at 4:00 p.m. Eastern Time on the expiration date. The expiration date for listed equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.
The additional bonds covenant is:
A financial test that ensures a project's revenue is sufficient to make the debt service payments on both existing and proposed bond issues The additional bonds covenant or test is used to issue new bonds. Its purpose is to ensure a project's revenue is high enough to pay both existing bonds and bonds that are being proposed. The rate covenant ensures that rates are high enough to cover bond payments. The flow of funds pledge states whether the operational costs are paid before or after bondholders.
Which of the following municipal entities would NOT issue overlapping debt? A.) A park district B.) A library district C.) A school district D.) A turnpike authority
A turnpike authority. Overlapping debt involves only general obligation borrowing. A turnpike authority would typically issue only revenue bonds.
In a Delivery Versus Payment (DVP) and Receive Versus Payment (RVP) account, which of the following is required? A. Settlement to occur on a regular-way basis B. Approval by FINRA to open the account C. A form identifying the third-party agent for the client D. Physical delivery of securities
C. A form identifying the third-party agent for the client. In order to use DVP or RVP as a means of settlement, the broker-dealer must be notified of the identity of the third-party bank or institution that's being used to provide delivery of securities or funds. These forms of settlement are generally used by institutions through book-entry settlement. Delivery and payment can be made as late as 35 days after the trade date.
A bond swap is done for all of the following reasons, EXCEPT to: A. Increase the overall yield of the bond portfolio B. Increase the current income of a bond portfolio C. Establish a tax loss to offset income D. Take advantage of a large amount of accrued interest
D. Take advantage of a large amount of accrued interest. A bond swap occurs for all of the reasons given except to take advantage of accrued interest. The amount of accrued interest is not a factor in a municipal bond purchase or sale.
The payout from a variable annuity contract is:
Dependent on the investment returns that are earned by the annuitant The payout that an annuitant receives depends on the investor's returns in their separate account. If the returns exceed the annuity's AIR, the investor's payouts will increase (and vice versa).
What is the formula for earnings per share?
EPS = (Net Income - Preferred Dividends) ÷ Common Shares Outstanding).
Which of the following choices is a feature of the Nasdaq Level II System?
Firm quotes of all the market makers in a stock Nasdaq Level I shows the highest bid and lowest offer. This is known as the inside market. Level II shows firm quotes and the market makers who are making a market in the security. Level III allows the market makers to change their quotations in the system.
Which of the following is included on an income statement? A.) Current assets B.) Gross revenues C.) Stockholders' equity D.) Current liabilities
Gross revenues. Gross revenues (also referred to as gross sales) is found on an income statement. On the other hand, current assets, current liabilities, and stockholders' equity are all found on a balance sheet.
A corporation is NOT considered to be in default if it fails to pay interest on which of the following bonds?
Income bond
When a carrying firm receives a transfer request from the Automated Customer Account Transfer Service (ACATS) system, it must validate or protest the transfer within:
One business day A broker-dealer must cooperate in the transfer of a customer's account. If notified of a customer's intent to transfer an account through ACATS, the carrying firm must either validate or reject the request for a valid reason within one business day.
The term that's used when a company sells stock to the public above par value is:
Paid-in capital. Shares are often priced well above their par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, a company prices its IPO at $18 per share, but the par value is $10 per share. In this case, $8 is added to the Capital Surplus in the Stockholders' Equity section of the balance sheet. A more common term for this excess is Paid-in Capital. Retained earnings can also be referred to as earned surplus. (17072)
Which of the following statements is TRUE concerning Modern Portfolio Theory?
Portfolio management should focus on diversification among different classes of assets Modern Portfolio Theory creates optimal portfolios based on a client's risk tolerance and investment objectives, by allocating the portfolios among various classes of securities. It does not focus on individual securities or avoid risk. Instead, it focuses on diversifying investments across a wide spectrum of securities.
A customer sells 500 shares of stock to a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n):
Principal capacity and charged the customer a markdown A broker-dealer that is always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and a markup when selling stock to a customer. When acting in an agency capacity, the broker-dealer will normally charge the customer a commission.
All of the following government agencies are involved in the housing market, EXCEPT:
SBA The SBA is the Small Business Administration and is not involved in the housing market. The SBA is a federal agency involved in providing financial assistance to small businesses.
Which of the following provides backing for a term bond that has a required payment period at maturity?
Sinking fund. Sinking funds are savings accounts that assist issuers in paying for an outstanding bond issue. Sinking funds are often associated with a term bond offering (i.e., a bond offering that matures on a specific date). Escrow and crossover funding are terms that are associated with the refinancing of outstanding bonds.
A registered representative's customer has recently died and her son has come to the broker-dealer's office with physical securities. What's the best course of action for the registered representative (RR)?
Tell the customer's son to contact the transfer agent since the shares were registered in his mother's name. Once the owner of securities registered in their name dies, securities need to be sent to an issuer's transfer agent. Once the transfer agent reviews the appropriate legal documents (e.g., death certificate), it will register the securities in the beneficiary's name.
When analyzing a mutual fund's expenses, an analyst does NOT consider:
The sales load charged to buy fund shares When analyzing a mutual fund's expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund's expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund's custodian. Total net assets are the fund's assets minus liabilities. Sales charges are not considered expenses of the fund.
For its most recent fiscal year, ABC Corporation had $20 million in net income. The company also paid a $5 million dividend to its preferred shareholders. The corporation has 7.5 million shares outstanding, but has warrants that permit holders to buy 2.5 million shares. What's the corporation's diluted earnings per share?
$1.50 To find a company's earnings per share (EPS), start with its net income, then subtract any preferred dividends, and divided by the common shares outstanding (i.e., EPS = (Net Income - Preferred Dividends) ÷ Common Shares Outstanding). Fully diluted earnings assumes that all convertible securities, rights, and warrants have been converted or exercised. This will typically increase the shares outstanding and lower the EPS. In this question, the net income is $20 million and the company pays out $5 million in preferred dividends; therefore, earnings available to common is $15 million. After the warrants are exercised into common shares, the shares outstanding is 10 million (7.5 million + 2.5 million). The resulting diluted earnings per share $1.50 ($15 million ÷ 10 million).
A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity?
$100 ordinary income An investor purchasing a secondary market discount municipal bond will have ordinary income if the bond is held to maturity. Since the bond was purchased at 90 ($900) and held to maturity when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as ordinary income.
An account has $140,000 in fully paid marginable securities, $50,000 in non-marginable securities, and $80,000 of cash. What's the total amount of stock that can be purchased on margin?
$300,000 Customers can buy two times the amount of cash they have in their account (e.g., Buy $160,000 stock, pay cash for $80,000 and create a debit of $80,000 in margin account). Marginable securities have a loan value of 50%, which means the customer can use 50% of the marginable securities' market value instead of a cash deposit. This means a customer could use 100% of the marginable securities' value to buy another stock on margin. For example, a customer could buy $140,000 of XYZ stock on margin; using $140,000 of marginable ABC stock. The customer would get credit for 50% of ABC's market value for $70,000 (i.e., $140,000 ABC x 50% loan value). The customer could then borrow the remaining $70,000 and increase their debit balance to acquire the $140,000 of XYZ stock. In this question the customer could buy a total of $300,000 on margin ($160,000 using cash + $140,000 loan value from marginable securities). Non-marginable securities don't provide customers with any loan value.
A new issue of municipal bonds has an aggregate par value of $10,000,000. The syndicate received $5,000,000 in designated orders, $5,000,000 in group orders, and $5,000,000 in member orders. How will the issue be allocated?
$5 MM group and $5 MM designated When allocating bonds in a new municipal issue, presale orders normally have first priority. This is followed by group net, designated, and then member orders. The 5 MM in group orders and 5 MM in designated orders will be allocated. There are no bonds left for member orders.
A customer owns a JRF October 50 listed call option. JRF has declared a $1.00 cash dividend. When JRF sells ex-dividend, what will be the price and the number of shares of the JRF October 50 option?
$50 strike price, 100 shares Listed call options are not reduced for cash dividends. The strike price and the number of shares of the JRF October 50 option will remain the same after it sells ex-dividend.
A margin account with 50% equity has a long market value of $15,000. If $80 of interest is charged on the debit balance and $110 is credited in dividends, what's the revised debit balance?
$7,470 This account has equity of $7,500 ($15,000 x 50%) and, as a result, has a $7,500 debit balance ($15,000 LMV - $7,500 equity). After the interest charge of $80, the debit balance is increased to $7,580. However, when the $110 of dividends is credited, the debit balance is reduced by this full amount and is now $7,470.
XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of:
$70,000 An owner of the bonds will receive 7% of the par value yearly regardless of the cost. In this example, the investor purchased $1,000,000 face value of bonds and will, therefore, receive $70,000 (7% of $1,000,000 = $70,000) in yearly income.
An investor's portfolio has increased by 2%, while the overall market has increased by 8%. What's the beta of the investor's portfolio?
0.25 Beta is a measure of a stock or portfolio's risk compared with the risk of the overall market. The beta of the overall market is 1.0 and, if a portfolio has a beta of 1.0, it will move the same amount as the overall market (i.e., if the market is up 8%, the portfolio will also be up 8%). A portfolio that increases less than the overall market has a beta lower than 1.0 (in this case, .25). Riskier portfolios will move more than the overall market and will have betas that are greater than 1.0 (e.g., 1.5).
An investor's portfolio has increased by 10%, while the overall market has only increased by 5%. What's the beta of the investor's portfolio?
2 Beta is a measure of a stock or portfolio's risk compared with the risk of the overall market. The beta of the overall market is 1.0 and, if a portfolio also has a beta of 1.0, it will move the same amount as the overall market (i.e., if market is up 5%, the portfolio will also be up 5%). A portfolio that increases more than the overall market has a beta that's higher than 1.0. If the portfolio increases twice as much as the overall market, the beta is 2.0. More conservative portfolios will not move as much as the overall market and will have betas less than 1.0 (e.g., 0.5).
Python Industries has previously issued 5.0% bonds ($1,000 par value). The bonds mature in 12 years and are selling at a 20% discount to par. What is the current yield on the Python bonds?
6.25% The current yield is found by dividing the annual interest payment by the current market price. The bonds pay interest of $50 per year. The bonds are currently trading at a 20% discount to par; therefore, the bonds are priced at 80% of par, or $800 ($1,000 x .8). The current yield is 6.25% ($50 / $800). The fact that the bond will mature in 12 years is not necessary to find the current yield, although it is needed to find the yield to maturity.
Which of the following statements is TRUE regarding the disclosure of back-end sales charges to customers?
A confirmation should be sent disclosing that a sales charge may have to be paid upon redemption. In addition to the disclosure in the prospectus, a confirmation sent by a member firm selling a fund with a back-end load (CDSC) must include a statement that a sales charge may be assessed upon redemption.
A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels?
A discount. Basis is a different method of expressing yield-to-maturity. In this case, the yield-to-maturity is greater than the coupon rate. The only time a bond's yield-to-maturity is greater than its coupon is when the bond has been purchased at a price that's less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:
A price near $60 Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).
A municipal dealer has a customer's order to purchase bonds on an agency basis. According to MSRB rules, the customer's order must be executed at:
A price that is fair and reasonable MSRB rules require that transactions be executed at a price that is fair and reasonable.
Which of the following municipal bonds requires a feasibility study to determine the issuer's ability to pay interest when due? A.) A special tax bond B.) A general obligation bond C.) A revenue bond D.) A revenue anticipation note
A revenue bond A feasibility study is made by a qualified expert to determine if revenues of a project will be sufficient to pay interest when due. A revenue bond, which is backed by the earning power of a specific project, such as tolls from bridges, tunnels, or turnpikes, requires a feasibility study by qualified experts to determine if the revenue generated will be sufficient to pay the interest on the bonds. A special tax bond is secured by a special tax, such as a gasoline tax, and would not require a feasibility study. A general obligation bond is backed by the full faith, credit, and taxing power of the issuing municipality and would not require a feasibility study. A revenue anticipation note (short-term security) is considered a general obligation security.
A firm that is planning an offering of common stock has not filed a registration statement. Which of the following actions on the part of a registered representative are NOT a violation of the Securities Act of 1933? A. Having the registered representative contact an investment banker at the firm B. Informing a customer that he may receive as many shares as he desires C. Accepting orders for the shares to be offered D. Attempting to obtain indications of interest for the shares to be offered
A. Having the registered representative contact an investment banker at the firm. There is no prohibition restricting an RR to contact an investment banker at the firm. The other actions listed are in violation of the Securities Act of 1933, if a registration statement has not been filed with the SEC. A registered representative may not inform a customer that the customer may receive as many shares as desired. Nor may the registered representative solicit buy orders or solicit indications of interest from the customer. A registration statement needs to be filed before indications of interest may be accepted, and only indications of interest will be acceptable at this time, not orders.
Which of the following is a characteristic of a reverse convertible security? A. The coupon rate is typically above prevailing market rates. B. The coupon rate is typically below prevailing market rates. C. The investors may have an obligation to sell shares of an equity security. D. The investors may have the right to sell shares of an equity security.
A. The coupon rate is typically above prevailing market rates. Reverse convertible securities are short-term notes which are issued by banks and broker-dealers and typically pay a coupon rate that's above prevailing market rates. In addition to receiving a higher coupon rate, the investors may be forced to purchase stock (or a basket of stock) if the price falls to a certain level (referred to as the knock-in price). If the price of the underlying asset remains above the knock-in level, the investors will receive the high coupon and the principal at maturity. However, if the underlying asset falls below the knock-in level, the investors will be obligated to purchase stock and will no longer receive interest or principal. If the stock's price falls, it's likely that the investors are losing money when they're forced to buy the stock.
Which of the following statements is NOT a feature of GNMA pass-through certificates? A.) Interest is subject to federal tax but is exempt from state tax B.) Interest and principal payments are made on a monthly basis C.) Pools consist of fixed-rate residential mortgages D.) They are backed by the U.S. government
A.) Interest is subject to federal tax but is exempt from state tax The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.
Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident:
After six months SEC Rule 147 and Rule 147A of the Securities Act of 1933 provides an exemption from registration for securities being sold on an intrastate basis. If securities are sold only to residents of a state by an issuer that is also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of six months following the last date of sale by the issuer. If an individual intends to sell the securities prior to six months, he may do so only to a resident of the same state.
A client wants to invest $250 per month and have broad exposure to the U.S. equity market. Which of the following recommendations is the MOST suitable for this client?
An S&P 500 Index mutual fund Although each of these investments are suitable for a client who's seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method. The closed-end fund shares are purchased on an exchange and the client pays the current market price plus a commission. Exchange-traded funds (ETFs) also trade on an exchange. While most broker-dealers are not charging a commission on ETF trades, some still do charge a commission. Index mutual funds don't assess front-end or back-end sales charges (i.e., they're no-load funds).
An accumulation unit in a variable annuity contract is:
An accounting measure that's used to determine the contract owner's interest in the separate account An accumulation unit in a variable annuity contract is an accounting measure that's used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts that each have different objectives and portfolios.
A client with an options account takes the following position: Long GHI Nov 65 puts and Short GHI Nov 55 puts. Which of the following statements is TRUE regarding this position? A. This position subjects the client to unlimited risk B. This position will be profitable if the market price of the security declines C. This position will be profitable if the market price of the security increases in value D. This position will only be profitable if the market price of the stock is trading between 55 and 65
B. This position will be profitable if the market price of the security declines. This position is referred to as a debit put spread. It's a debit because the cost to purchase a put with a higher strike price will be more than the amount received for selling a put with a lower strike price. The investor will make money if the stock declines (bearish) in value since the long put will be exercised first (it has a higher strike price and thereby more intrinsic value). The fact that the premiums are not given is irrelevant since the cost of a put with the higher strike price will always be more valuable that a put with a lower strike price (if given the same expiration month). The position may be profitable if the stock price was trading between 65 and 55, but will also be profitable if the stock is trading below 55.
Which of following option recommendations are suitable for a sophisticated investor who expects the overall market to fall, but is bullish on mining stocks? A.) Buying narrow-based index calls and buying broad-based index calls B.) Buying narrow-based index calls and buying broad-based index puts C.) Buying narrow-based index puts and buying broad-based index calls D.) Buying narrow-based index puts and buying broad-based index puts
B.) Buying narrow-based index calls and buying broad-based index puts Since the investor is bullish on mining stocks, buying narrow-based index calls on mining stocks is appropriate. Also, since the investor expects the overall market to fall, buying broad-based index puts is appropriate.
Junius Arbor purchased stock in 2002 for $24,000. In April 20XX, Mr. Arbor passed away. His estate valued the stock at $82,000. The stock was willed in equal amounts to his daughter Cathy and his son Bob. Cathy sold her stock on September 2, 20XX for $48,000. Bob sold his stock on May 8, 20XX for $56,000. Which of the following statements is TRUE? A.) Cathy has a short-term gain of $7,000 and Bob has a short-term gain of $15,000 B.) Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 C.) Cathy has a short-term gain of $36,000 and Bob has a short-term gain of $44,000 D.) Cathy has a long-term gain of $36,000 and Bob has a long-term gain of $44,000
B.) Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000. In the case of inherited securities, the value of the securities is determined at the time of death. The heirs are always considered to have long-term holding periods.
Which of the following indicators is bullish? A.) A breakout below a support level B.) The bottom of a saucer pattern C.) The top of an inverse saucer pattern D.) A decrease in the amount of short interest
B.) The bottom of a saucer pattern A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator. A breakout below the support level is a bearish signal. The term short interest refers to the amount of a company's shares of common stock that have been sold short and have not yet been covered (closed out). An increase (not decrease) in short interest has historically been considered a bullish indicator by a technical analyst.
Which of the following Moody's ratings is the most speculative in the investment-grade category? A.) Aa B.) A C.) Baa D.) Ba
Baa The top-4 ratings in both Moody's and S&P are investment grade. The top-4 ratings are: Moody's Aaa Aa A Baa S&P AAA AA A BBB If the question had asked for the most speculative, then Ba would be the answer.
A municipality borrowing for a short-term period to finance a capital project would issue:
Bond anticipation notes A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
A broker-dealer is NOT acting as a principal in which of the following scenarios?
Buying 500 bonds to fill an insurance company's order for 500 bonds A broker-dealer is acting as a principal when buying for or selling from its inventory. However, a broker-dealer is acting in an agency capacity when it buys 500 bonds to fill an insurance company's order for 500 bonds.
An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE? A. The firm must keep a copy of the complaint for six years B. The principal must review the complaint and submit a written response to the customer C. A memo must be prepared describing any action taken in response to the complaint D. The firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted
C. A memo must be prepared describing any action taken in response to the complaint All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years.
An investor purchases a fund that has a contingent deferred sales charge. The customer has traditionally purchased load funds in which the sales charge is deducted up front. In order to clarify the sales charge procedure, the customer should be told: A. The fund meets the definition of a no-load fund B. "You pay when you exit" C. By means of a written disclosure: "On selling your shares you may pay a sales charge. For the charge and other fees, see the prospectus" D. To contact the fund distributor for more details
C. By means of a written disclosure: "On selling your shares you may pay a sales charge. For the charge and other fees, see the prospectus" Conduct Rules require the written disclosure on confirmations for purchases of investment company shares that assess a contingent deferred sales charge.
The subscription agreement for a limited partnership does NOT specify: A. Suitability standards B. Priority provisions upon liquidation C. To whom the check must be made payable D. Who must sign the agreement
C. Priority provisions upon liquidation All sales for limited partnership interests are conditioned upon acceptance by the general partner. Typically, a limited partner is considered accepted into the program once the general partner signs the subscription agreement. The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he understands the ramifications of the investment. Priority provisions for liquidating a limited partnership are found in the Certificate of Limited Partnership.
An investor must pay accrued interest for a secondary market purchase of: A. Zero-coupon bonds B. Series EE savings bonds C. Tax anticipation notes D. Treasury bills
C. Tax anticipation notes Zero-coupon bonds and Treasury bills are original issue discount securities and trade without accrued interest. While Series EE bonds are also OID securities, they do not trade in the secondary market. Tax anticipation notes (TANs) are typically interest-bearing securities and trade with accrued interest.
Which of the following statements is TRUE regarding separate accounts and general accounts? A. Both types of accounts are registered under the Investment Company Act of 1940. B. Both types of accounts pay a guaranteed minimum return. C. The subaccounts of a variable annuity may include both types of accounts. D. General accounts hold bonds, while separate accounts hold equities.
C. The subaccounts of a variable annuity may include both types of accounts. A variable annuity may allow an investor to allocate funds between several subaccounts. One of these accounts may be the general account of the insurance company, which offers a minimum guaranteed rate of return. The other subaccounts may consist of various accounts, each with a different portfolio and investment objective. Some subaccounts hold equities, some hold bonds, and some actually may hold both. The return on a subaccount is not guaranteed; therefore, the purchaser assumes the investment risk. Only separate accounts are registered under the Investment Company Act of 1940.
Which of the following statements is NOT TRUE of industrial development revenue bonds? A. They are issued by local municipal governments B. They may be used to finance the construction of commercial property that will be used by private corporations C. Their credit rating is determined by an analysis of the municipal government issuing the bonds D. Interest is paid from rents received from private corporations
C. Their credit rating is determined by an analysis of the municipal government issuing the bonds Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.
Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded? A.) 5 1/2% callable in 2024 @ 103 B.) 7% callable in 2024 @ 103 C.) 7 1/2% callable in 2023 @ 100 D.) 6 1/2% callable in 2023 @ 100
C.) 7 1/2% callable in 2023 @ 100 The most common reason for a municipality to refund an outstanding issue is to save interest costs. If a municipality can borrow money at a lower rate than the outstanding issue, it can use this money to refund the outstanding issue and thus save interest cost. The bonds are selling at a 7.00% yield. The municipality can then expect to borrow new monies at a 7.00% interest rate. The municipality can only save money by refunding an issue with a higher interest rate, 7 1/2%.
When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT: A.) Long-term bonds generally have higher yields B.) Fluctuations in the dollar price of long-term bonds are usually greater than for short-term bonds when the general level of interest rates change C.) Long-term bonds generally provide greater liquidity than short-term bonds D.) There is more purchasing power risk with long-term bonds when compared to short-term bonds
C.) Long-term bonds generally provide greater liquidity than short-term bonds. When comparing long-term bonds and short-term bonds, all of the choices listed are true except long-term bonds generally provide greater liquidity than short-term bonds. Short-term bonds do not suffer from as large a price movement as long-term bonds when interest rates are changing. Long-term bonds are open to greater market risk, interest-rate risk, and purchasing-power risk. Both individual and institutional investors alike are more willing to accept a lower return (yield) in favor of more stable principal (less severe price swings).
A registered representative (RR) sent promotional material to 20 prospective retail clients using a social media site. Then, 20 days later, the RR sends the same material to 30 institutional investors that are not existing clients of the broker-dealer. Under FINRA rules, the promotional material is:
Correspondence. Retail communication is promotional material that's sent to more than 25 retail investors in a 30-calendar-day period. Any material that's sent to 25 or fewer retail investors is considered correspondence. Since the RR only sent the communication to 20 retail investors, it's considered correspondence. In order for communication to be classified as institutional communication, it can only be sent to institutions. Material that's sent to both retail and institutional investors is either considered correspondence or retail communication based on the number of retail investors to which it's sent.
Two similar companies issue bonds at the same time. One company issues convertible bonds, while the other issues non-convertible bonds. Which of the following statements is TRUE? A. The convertible bonds will offer a higher coupon rate. B. The non-convertible bonds will offer a lower coupon rate. C. The convertible bonds will have a higher current yield. D. The non-convertible bonds will probably have a higher yield to maturity.
D. The non-convertible bonds will probably have a higher yield to maturity. Convertible bonds typically have a lower coupon rate than non-convertible securities. Since convertible bonds pay less interest, their current yield and yield-to-maturity will also be lower. Investors will accept lower interest payments and yields on a convertible bond because they're given the ability to convert their bonds into common stock whenever they want.
An investor's goal is to buy a security that establishes a fixed return, for a long period, with no reinvestment risk. Which of the following securities BEST suits the investor's needs? A. Treasury bonds, B. Common stock C. Highly rated corporate bonds D. Treasury STRIPS
D. Treasury STRIPS. The typical yield-to-maturity calculation assumes that each interest payment is reinvested at the same yield. There is no guarantee that the investor could reinvest at the same yield (reinvestment risk). Treasury STRIPS are zero-coupon bonds (long-term). Interest is automatically reinvested and compounded at the same yield and reinvestment risk is avoided. (72794)
A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate? A.) A stock with a high dividend yield and a beta of less than 1.0 B.) A stock with a low dividend yield and a beta of 1.5 C.) A stock with no dividend and a beta between 1.5 and 2.0 D.) A stock with no dividend and a beta of greater than 2.0
D.) A stock with no dividend and a beta of greater than 2.0 Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment.
If a New York resident is subject to the AMT and is considering the following bonds that have similar yields, which bond is MOST suitable? A.) A Buffalo, NY bond that's subject to the AMT B.) A triple exempt bond that's subject to the AMT C.) A corporate bond D.) An Albany, NY bond that's not subject to the AMT
D.) An Albany, NY bond that's not subject to the AMT Municipal bonds that are subject to the alternative minimum tax (AMT) will no longer offer federally tax-free interest to individuals who are subject to the AMT. As a result, the Albany, NY bond that's not subject to the AMT will provide federally tax-exempt interest. Since the yields are similar on each of these bonds, the Albany bond will provide a better yield than the corporate bond due to the corporate bond interest being subject to both federal and state tax.
Which of the following choices is NOT a type of overlapping debt? A.) The issuance of debt for an adjoining road district B.) Debt issued between two states C.) The issuance of debt for an adjoining school district D.) Debt issued between two counties
Debt issued between two states Debt issued between two states is not considered overlapping debt. Overlapping debt is general obligation debt of other governmental units for which residents of a particular municipality are responsible. It is the debt shared by residents of a municipality for services or facilities shared by several municipalities. Examples of overlapping debt include debt for an adjoining road district or school district, or debt issued between two counties.
Which of the following securities is NOT guaranteed by the U.S. government? A.) Treasury notes B.) Treasury bills C.) Government National Mortgage Association (Ginnie Mae) certificates D.) Federal National Mortgage Association (Fannie Mae) bonds
Federal National Mortgage Association (Fannie Mae) bonds Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA was created as a government-chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not directly backed by the U.S. government.
On Tuesday May 1, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is:
Friday, May 11 Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.
In an undivided (Eastern) municipal syndicate account, the remaining liability of an account member is computed:
From the number of bonds that are unsold in the account An Eastern account is undivided as to liability. As long as any bonds in the account are still unsold, each member of the account is liable for his proportionate share of the unsold amount. If the member has a 10% participation in a $10,000,000 issue, originally his liability is for $1,000,000 of those bonds. If there is a balance of bonds unsold by other members, he will still have a liability of 10%, whether he sold all or none of his bonds.
On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered:
Institutional communication Any communication that is directed only to registered representatives is defined as institutional communication. As it relates to communication, the definition of an institutional investor includes a FINRA member firm and its registered persons. On the other hand, if the audience consisted of only employees of the member firm that is providing the seminar, it would be considered internal communication.
The Dow Jones Industrial Average is considered an index of:
Large-capitalized stocks. The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.
A syndicate is formed on an undivided (Eastern) account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is:
Liable to sell 10% of the unsold bonds. In an Eastern (undivided) account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is also responsible to sell 10% of the unsold bonds.
Which of the following bonds would increase most in price if interest rates decline?
Long-term bonds selling at a discount When interest rates decline, bond prices will rise. The longer maturities will rise more than the shorter maturities due to market risk. Bonds selling at a discount will rise more sharply than those selling at a premium.
All of the following factors are of importance with regard to debt structure when analyzing a municipal bond, EXCEPT: A.) Total bonded debt B.) Total direct debt C.) Overlapping debt D.) Matured debt
Matured debt Matured debt is debt of the municipality that is no longer outstanding and, therefore, is not included in analyzing the debt structure of a municipal bond. Total bonded debt is all of the general obligation debt issued by a municipality, regardless of its purpose. Total direct debt is the sum of the total debt and any unfunded debt (i.e., short-term notes) of a municipality. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities.
Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:
Par value plus accrued interest A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.
A corporation has a significant amount of cash on hand and is seeking your advice regarding income-producing equity investments. Which of the following investments pay a dividend, but is NOT eligible for the corporate dividend exclusion? A.) Common stock B.) Preferred stock C.) Equity mutual funds D.) Real estate investment trusts (REITs)
Real estate investment trusts (REITs) Corporations are provided with an exclusion on dividends that are received from investments in common and preferred stock. Real estate investment trusts (REITs) make distributions in pre-tax dollars (i.e., flow-through) and REIT dividends are not eligible for the exemption. Corporations that invest in equity mutual funds will receive the tax exclusion for dividends as if they held the stocks directly.
In regard to recruitment advertising by member firms, which of the following statements is TRUE? A,) Recruitment advertising is not permitted B.) Recruitment advertising may not contain exaggerated claims about opportunities in the securities business C.) Recruitment advertising is subject to FINRA filing rules D.) Recruitment advertising may be published only once per month
Recruitment advertising may not contain exaggerated claims about opportunities in the securities business Advertising by a member firm falls under the definition of retail communication. A member firm's recruitment advertisements may not contain exaggerated claims about opportunities in the securities business. The advertisement is not required to be filed with FINRA since it does not promote a product or service by the broker-dealer.
A broker-dealer has established a page on a social media site which allows customers to post comments. The firm's responses to these comments are considered:
Retail communications A principal of the firm must approve the use of the social media site. Customer comments that are posted to a broker-dealer's social media page and the firm's responses are considered to be made on an interactive electronic forum. Although this is defined as retail communication, it's managed in a manner that's similar to correspondence (i.e., it's subject to review and supervision).
Which of the following agencies would NOT be used to back a CMO? A.) FNMA B.) GNMA C.) SLMA D.) FHLMC
SLMA The Student Loan Marketing Association (SLMA), also known as Sallie Mae, provides liquidity to student loan makers and financing for state student loan agencies. Securities issued by SLMA are not backed by the U.S. government. Interest earned on Sallie Mae securities is subject to federal tax, but state and local taxes vary by state. Since SLMA does not deal in mortgages, it would not be used to fund a collateralized mortgage obligation (CMO). CMOs contain mortgage-backed securities issued by GNMA, FNMA, and FHLMC.
A Regulation A exemption is allowed for an issuer that's offering:
Securities with a value not exceeding $75 million A Regulation A offering is exempt from the registration and prospectus requirements under the Securities Act of 1933. The offering is limited to the issuance of $75 million (Tier 2) of securities during a 12-month period.
An investor purchased stock at $50 per share and the stock is now trading between $75 and $77. The investor doesn't want to eliminate the position unless the stock drops significantly. Which of the following orders is the MOST suitable for her to place? A.) Buy limit at $70 B.) Sell limit at $70 C.) Sell stop at $75 D.) Sell stop at $70
Sell stop at $70 Although the customer has a significant unrealized gain, there's still the possibility that it could trend higher. If the investor wants to protect a portion of the gain, he should enter a sell stop order, which will become a market order if the stop price is hit or traded through. Entering a sell stop at $70 will serve this purpose. If he enters the sell stop at $75, it may very easily be triggered by a small decrease in the stock's price, thereby eliminating his position. For that reason, the sell stop at $70 is a better choice. A sell limit order is one that's entered above the market price (i.e., not at $70). The customer is looking for an order that will result in selling his stock in the event that it declines significantly; therefore, a buy order is of no benefit.
Logan has the following position in his account. Long 1 DEF May 35 call. Logan anticipates a slight bullish move in DEF from which he wants to benefit, but he also wants some income generated to reduce the cost of the position without adding additional risk. He could accomplish this by adding which of the following positions to his account? A. Short 1 DEF May 45 call B. Short 1 DEF May 25 call C. Short 1 DEF May 45 put D. Short 1 DEF May 25 put
Short 1 DEF May 45 call By selling (short) 1 DEF May 45 call, Logan will generate income through the premium received and reduce the overall cost of the position. While the short call allows the owner to purchase DEF from him at $45 per share until it expires in May, Logan is long a DEF call that allows him to purchase the same stock at $35 per share until May. Logan has established a debit call spread. Had Logan added 1 short DEF May 25 call, he may have been required to sell DEF at $25 per share with the risk it would have cost him $35 per share to purchase DEF. If he added either of the short puts, he may have been required to purchase DEF at $25 or $45 per share without a right to dispose of it.
Which of the following positions would be considered a covered option?
Short the stock, short a put The terms covered or uncovered (naked) refer only to the seller (writer) of an option (also known as being short the option). If the seller of an option can fulfill the obligation of the contract without additional risk, he is considered covered. For example, the seller of a put option is obligated to purchase stock if the put option is exercised against the writer. If the customer is short the stock and the put is exercised, the seller of the put option would buy the stock to cover or close out the short stock position. A call option writer is covered if he is long or owns the stock since, if the call is exercised, the seller of the call would be able to deliver the stock he is long.
As it relates to convertible bonds, which of the following provides an arbitrage opportunity? A. Stock trading at a discount to parity. B. Stock trading at a premium to parity. C. Stock trading at parity. D. Bond trading at a premium to parity.
Stock trading at a premium to parity. Parity exists when a convertible security is trading at a price that's equal to the total value of the stock into which it's convertible. If the stock is trading at a premium to the parity price, the bond can be converted into the stock and then sold at the higher price. This results in an arbitrage opportunity. Conversely, if the stock is trading at or below the parity price, nothing can be gained through conversion. Finally, if the convertible bond is trading at a premium to parity, there's no reason to convert it into the stock.
A client buys a security and receives a trade confirmation showing a price of $11.20 net. What does this mean?
That the broker-dealer sold this security to the client in a dealer capacity and the $11.20 includes a markup When a trade confirmation includes the net or net price, the broker-dealer has either bought a security from, or sold a security to, a customer in a dealer or principal capacity and the price includes a markup or markdown. On the other hand, if the gross price is shown and a commission is added to (for a buying customer) or subtracted from (for a selling customer) the price, the broker-dealer acted in an agency capacity. After receiving an order to buy from a customer, if a broker-dealer purchases the security and then sells the security to the customer at the same price with a commission or markup included, it has effected a riskless principal transaction. Conversely, if the price at which the broker-dealer sold the security to the customer is different than the price at which it purchased the security, it has effected a net basis trade. The execution of net basis trades requires prior customer approval.
Which CMO tranche provides the greatest safety of principal?
The A tranche. Tranche A (the fast-pay tranche) is the first to receive principal, while the Z tranche only receives payments after all of the other tranches are paid. The companion or support tranche is considered a very volatile tranche. A floating rate tranche simply adjusts its interest rate based on an index (e.g., LIBOR).
Which of the following factors is NOT used in determining the value of an annuity unit? A.) The assumed interest rate B.) The value of the separate account C.) Income distributions from securities held in the separate account that are reinvested D.) Capital gain distributions from securities held in the separate account that are reinvested
The assumed interest rate The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.
Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? A.) User charges B.) Rental and lease payments C.) The federal funds rate D.) Concessions and fees
The federal funds rate. Current interest rates are factors that will affect all bond issuers and would be least useful when analyzing a specific issuer of revenue bonds. The other choices are all sources of revenue to be used to pay the interest and principal on a municipal revenue bond.
How is an individual's net worth calculated?
The individual's total assets minus the individual's total liabilities An individual's net worth represents his total assets minus his total liabilities (i.e., Net Worth = Assets - Liabilities). An individual's net income represents his annual income from all sources minus his total annual expenses.
A municipal bond with 10 years to maturity was purchased at 105. If an investor sold the bond six years later at 103, which of the following is TRUE regarding the tax result?
The investor has a $10 long-term capital gain. For municipal bonds that are purchased at a premium, their cost basis must be amortized (reduced) to par value over their maturity. In this example, the bond is purchased at a $50 premium and it has 10 years to maturity. This means that the bond's basis will be amortized by $5 per year ($50 ÷ 10 years). After six years, the bond's basis will have been reduced by $30 ($5 x 6 years), which would bring the adjusted cost basis to $1,020 ($1,050 - $30). When the bond is sold for $1,030, the customer realized a $10 long-term capital gain ($1,030 - $1,020).
Which of the following is a requirement for a company's securities to be listed and trade on the OTCQX?
The issuer must have audited financial statements. Stocks that are not listed on an exchange are quoted on the OTC Markets Groups, which is a private company. The OTC Markets Group includes three different tiers which are based on certain qualitative criteria. The most stringent tier is the OTCQX. In order to trade on the OTCQX, an issuer must be an SEC-reporting company, it must follow best practices in corporate governance, it must have audited financial statements, it must demonstrate compliance with U.S. securities laws, and must have a professional third-party sponsor introduction. The sponsor is typically an investment bank or law firm that writes a Letter of Introduction to the OTC Markets Group. The companies on the OTCQX are generally large, multinational and domestic companies that are not required to be listed on any exchange. Companies in bankruptcy, shell companies, and penny stock companies cannot qualify. The other two tiers are the OTCQB (also referred to as The Venture Market), and Pink Open Market.
How are the gains and/or losses on leveraged exchange-traded fund (ETFs) calculated?
The leverage factor of the ETF multiplied by the return on the index. A leveraged ETF is designed to provide a return that's a multiple of the index. A two times (i.e., 2x) leveraged ETF will provide a return that's twice the return on an index. The formula for calculating the minimum margin requirement is the leverage factor multiplied by the SRO minimum requirement (e.g., 25% for a long), not the ETF's return.
A small, private, non-reporting firm is about to conduct a reverse merger with a publicly traded corporation. What's the most likely reason for this transaction?
The private company wants to bypass the IPO process and become public immediately. Reverse mergers are typically done when a private company buys a publicly traded company. In most mergers, the buyer survives (continues to exist), while the selling firm folds into the buying firm. However, in a reverse merger, the seller (i.e., the public company) survives. In some cases, the name of the company will change to better reflect the type of business of the new firm. By setting up the merger this way, the private company immediately becomes an SEC-reporting company and bypasses the IPO process. One of the disadvantages with this process is that no new capital is raised, which is one of the main reasons that a company pursues an IPO.
A website is being designed for a registered representative of a member firm. Which of the following statements is TRUE regarding the design of this website?
The registered representative may reference his FINRA membership.
The penny stock rules apply under which of the following circumstances?
The stock is quoted on the OTC Bulletin Board According to SEC rules, penny stock is a stock that sells for less than $5.00 and is not listed on Nasdaq or the NYSE. Instead, these low-priced stocks are quoted on the OTC Bulletin Board or OTC Pink Marketplace. However, penny stock rules don't apply under the following conditions: The customer is defined as an existing customer (i.e., a person who has maintained an account with a broker-dealer for more than one year or has previously engaged in three or more transactions involving penny stocks) The transaction is non-recommended or unsolicited The transaction is executed by a broker-dealer that's not a market maker in the security
If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact?
There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates As a general rule, if an annuitant withdraws the proceeds of his variable annuity prior to age 59 1/2, a 10% tax penalty applies. However, this penalty is waived if the annuitant dies or becomes disabled. Although there is no penalty, the difference between the amount invested and the death benefit is taxable at ordinary income tax rates.
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT:
They have a put feature allowing the holder to redeem the security at par
The securities that are deposited in an escrow account for an advance refunding of a municipal bond are:
Treasury bonds Only Treasury obligations are acceptable securities as escrow when a municipal bond is being advance refunded.
A customer is moderately aggressive and has a long-term investment horizon. If the customer is also looking for tax-advantaged savings, in what should she invest?
Variable annuity Since the investor has a long-time horizon, moderate risk tolerance, and wants a tax-advantaged account, a variable annuity is the most suitable investment. Treasury securities provide income, but are probably too conservative for this investor. Mutual funds and hedge funds would provide a better rate of return, but don't provide for the tax-deferral earnings like an annuity.
While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a:
Varying number of accumulation units When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the subaccounts will fluctuate, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.
Which of the following positions/strategies is NOT bullish?
Writing a straddle Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.
A woman with a low income has saved $5,000 to invest for her young son's college education. Which of the following investments would be the MOST appropriate? A.) T-bills B.) Municipal bonds C.) Zero-coupon bonds D.) A real estate limited partnership
Zero-coupon bonds Since the woman has a low income, municipal bonds and limited partnerships would not be of benefit. Since the son is young, a long-term investment would be most appropriate.
