Series 7 Final #2 (Answered Incorrectly) **copy**

An RR performs a transaction via wire order in a customer's account. What is TRUE of such situations under FINRA rules? [A] A principal of the firm is required to review and approve such transactions. [B] This type of order is acceptable for discretionary accounts only. [C] Prior to execution, such transactions require a written request by the customer. [D] Wire orders under $10,000 do not require review and approval.

[A] A principal of the firm is required to review and approve such transactions. Member firms have a duty to reasonably supervise their registered representatives. This includes the duty to review and approve all trades.

A customer wants to invest in preferred stock. His key objective is to maintain consistent current income from dividends. Which of the following types of preferred stock would be most suitable for this customer? [A] Cumulative preferred [B] Participating preferred [C] Callable preferred [D] Convertible preferred

[A] Cumulative preferred Given that the customer's stated objective is consistent dividend income, cumulative preferred would be the best choice as all current dividends-including any dividends that are in arrears (unpaid)—must be paid to cumulative preferred stockholders before they are paid to non-cumulative preferred stockholders and common stockholders. Should there be any disruption in dividends, the cumulative preferred stockholders are paid first.

Which of the following statements related to oil and gas limited partnerships is FALSE? [A] Developmental programs typically carry a larger amount of risk than exploratory oil and gas programs. [B] Exploratory programs typically do not provide investors with the same level of stability when it comes to returns as that which is found in income programs. [C] In areas of proven reserves, lease acquisition is a common practice for developmental programs. [D] Developed wells have an inherent risk that the costs associated with operation and maintenance will be greater than the reserves held in the well.

[A] Developmental programs typically carry a larger amount of risk than exploratory oil and gas programs. Exploratory programs are the riskiest of oil and gas programs but they also carry the largest potential for returns. Developmental programs obtain leases in areas with proven reserves. Income programs provide steady levels of income to those wishing to participate in an oil and gas program, whereas exploratory programs are unproven and only receive income when a reserve is found.

The record date of mutual fund distributions [A] is decided by the mutual fund itself [B] always falls on the third Friday of each month [C] is determined by the Investment Company Institute [D] is the business day after the ex-date

[A] is decided by the mutual fund itself Because mutual funds are not traded OTC or on an exchange, the record date and ex-date would always have to be set by the fund itself.

A customer purchases a when-issued stock in a cash account for a total of $60,000. How much must the customer deposit in the cash account? [A] $2,000 [B] $15,000 [C] $30,000 [D] $60,000

[B] $15,000 Purchasing stock on a when issued (WI) basis in either a margin or cash account requires a deposit of cash equal to 25% of the issued cost or $2,000, whichever is greater. $60,000 x 25% = $15,000.

An investor is long 1 OEX Aug 500 put @10 when the index is at 550. The index closes at 450. The investor decides to exercise his option. What will he get at settlement? [A] $10,000 [B] $5,000 [C] $50,000 [D] 5,000 shares.

[B] $5,000 Index options are always settled in cash when exercised. The cash settlement amount is the difference between the contract value ($500 x 100 multiplier = $50,000) and the index value ( $450 x 100 multiplier = $45,000) at the time of exercise. Therefore, $50,000 - $45,000 = $5,000 cash settlement. This is the in-the-money amount of the option.

An investor sells short 100 shares of ABC common stock at 50 on June 5th. On December 10th of the same year, the investor buys 100 shares of ABC common stock at 40 and delivers the stock to cover the short sale. The federal income tax treatment of this transaction is: [A] A long-term capital gain [B] A short-term capital gain [C] A long-term capital loss [D] A short-term capital loss

[B] A short-term capital gain A short-term capital gain is where the asset is held for 12 months or less. Short-term capital gains are taxed at the investor's ordinary income tax rate. In this case, it is a short-term gain because the first position put on by the customer is a "short" position and you CANNOT accumulate a holding period on a short position, even if the investor had a short position for more than one year. The holding period here is short-term because the investor was only "Long" the stock for 1 day.

Options contracts can be "in-the-money", "at-the-money", or "out-of-the-money". Of the following, which are "in-the-money"? I. A put contract with a strike price that is higher than the market price of the underlying common stock. II. A put contract with a strike price that is lower than the market price of the underlying common stock. III. A call contract with a strike price that is higher than the market price of the underlying common stock. IV. A call contract with a strike price that is lower than the market price of the underlying common stock. [A] I and III [B] I and IV [C] II and III [D] II and IV

[B] I and IV A call contract is "in-the-money" when the strike price on the contract is lower than the current market price. Another way of saying this is that a call is "in-the-money" when the market price exceeds the strike price on the contract. A put contract is "in-the-money" when the strike price on the contract is higher than the current market price. Another way of saying this is that the put is "in-the-money" when the market price is lower than the strike price on the contract. (Call up, Put down)

Of the following client transactions, which is acceptable under FINRA rules? [A] A couple who are expecting their first child purchase a growth fund in the child's name. [B] In a joint account, a wife places a buy order for a sector fund without her husband's knowledge. [C] In an attempt to maximize return, a client frequently buys and sells mutual fund shares. [D] In a phone conversation, a client tells his RR to "buy the best mutual fund available" since the client cannot decide on a particular fund..

[B] In a joint account, a wife places a buy order for a sector fund without her husband's knowledge. When a joint account is established, each party may trade in the account without restriction.

You are talking to a client who is making a few changes to their account information. The client recently retired. The client has a need for taxable monthly income from investments and would like to keep their investments conservative in nature. Which of the following investments would NOT be appropriate for this client? [A] The client could invest in the bonds of several conservative Blue Chip companies. [B] The client could invest in several leveraged, closed-end funds made up entirely of bonds. [C] The client could invest in the preferred stocks of several conservative Blue Chip companies. [D] The client could invest in CDs (Certificates of Deposit).

[B] The client could invest in several leveraged, closed-end funds made up entirely of bonds. Of the choices offered, the least appropriate would be "B", the leveraged bond fund because it would carry the greatest risk. All of the other choices would be appropriate for a conservative retired person. For the CD, we could own 12 CD's and have 1 CD maturing every month or something like that. For a bond, we could have one bond paying interest in Jan/July, and one bond paying interest in Feb/Aug, and one bond paying interest in March/Sept, etc.

The term "capital risk" is best described by which of the following statements? [A] The customer will incur a loss if securities are purchased at the wrong time. [B] The full amount originally invested may not be received by the customer upon disposition of the security. [C] When the investment is liquidated, purchasing power may be less than that when the money was originally invested. [D] It is the amount of regular income received from an investment which may or may not be the amount that was originally expected.

[B] The full amount originally invested may not be received by the customer upon disposition of the security.

A serial bond issue is coming to market. Where should one expect to find the yields listed in relation to maturity? [A] The coupon rates [B] The scale of the bond issue [C] The credit rating [D] The notice of sale

[B] The scale of the bond issue "Scale" as applied to serial bonds with staggered maturities means vital data for each of the scheduled maturities including the number of bonds, the maturity dates, the coupon rate, the offering price and the yields.

If German exporters expect the U.S. dollar to decline in value, which of the following options strategies should they use as a hedge? [A] Write calls on the Euro [B] Write puts on the Euro [C] Buy calls for a U.S. index [D] Buy puts on the Euro

[B] Write puts on the Euro A German exporter would write or sell puts on the Euro to receive the premium because he/she expects the Euro to go up in value compared to the dollar. Remember foreign currencies generally move in the opposite direction of the U.S. dollar. To hedge a falling U.S. Dollar, exporters (sellers) who expect to be paid in dollars would typically Buy Calls on the Euro.

If an investment company is trading at a discount to its NAV the security must be a(n) [A] open-end fund [B] closed-end fund [C] high yield bond [D] equity options

[B] closed-end fund Because shares of a close-end fund are not directly tied to the fund's net asset value due to supply-demand imbalances, the shares could trade at a discount to the NAV. That could not happen in an open-end fund since the share price is directly related to the NAV. The other choices are not plausible.

The following is the current state of a customer's margin account: Market value: $50,000 Debit balance: $15,000 Equity value: $35,000 The customer sells $10,000 worth of securities. What is the equity value in the account after the sale? [A] $15,000 [B] $20,000 [C] $35,000 [D] $30,000

[C] $35,000 When shares are sold and no withdrawals are made, the equity value in the account remains unchanged. However, the market value and debit balance decline by the same amount because without additional instruction, the broker/dealer will apply the proceeds of the sale to the debit balance. In this example, the account after the sale of $10,000 of securities is: Market value: $40,000 Debit balance: $5,000 Equity value: $35,000

Using the following financial information regarding Steele Co, calculate its dividend payout ratio: Total cash dividends paid to common shareholders: $10,000,000 Total outstanding common shares: 5,000,000 Earnings per share: $5.00 [A] 50% [B] 100% [C] 40% [D] 60%

[C] 40% To calculate the dividend payout ratio first calculate dividends per share: Dividends paid to common shareholders / outstanding common shares $10,000,000 / 5,000,000 = $2.00 dividend per share. Using this information now calculate the dividend payout ratio: Dividends per share / earnings per share $2.00 / $5.00 = .40 or 40%.

All of the following are functions of the transfer agent of a mutual fund EXCEPT: [A] Sends interest payments to investors. [B] Maintains detailed records of account holders. [C] Maintain custody of the securities in the fund. [D] Sends annual tax documents to investors

[C] Maintain custody of the securities in the fund. The fund's securities are held by the custodian and not the transfer agent. Securities are held separately in order to protect the shareholders.

Which of the following is a factor that need NOT be known when computing a municipal bond's accreted value? [A] The date on which the bond was purchased. [B] The date of the bond's maturity. [C] The current price of the bond on the open market. [D] The price at which the bond was purchased.

[C] The current price of the bond on the open market. To find the accreted value of a municipal bond, you would have to know the purchase price and date, and the date of the bond's maturity. This gives you the information necessary to see what the accreted value of the bond is up until this point. The current market value of the bond would be irrelevant when computing the accreted value.

Of the following statements, which is FALSE about mutual fund information services? [A] Many services require a paid subscription to access the information. [B] The performance results listed by such services will not always follow SEC and FINRA guidelines. [C] The performance of funds is often reliably projected by these services. [D] The information services can be a resource for investors to research funds.

[C] The performance of funds is often reliably projected by these services. Predictions or projections on fund performance are prohibited. Thus, even services of this kind would not be allowed to predict fund performance. Guidelines of the SEC and FINRA on funds will apply to advertisements of performance results, etc. These types of services may not always follow such guidelines (e.g., the required period of time for sales literature of 1 year may be overlooked if the individual using the service wishes to only see a shorter period of time. For example, comparisons of two funds over a 3-month period when 1 year of results is typically a requirement).

Which of the following statements about market-on-close orders on the NYSE is true? [A] They may be cancelled at any time [B] Once entered they may not be cancelled [C] They may not be cancelled after 3:58 pm EST [D] They must be received by the BD by 3:00 pm EST

[C] They may not be cancelled after 3:58 pm EST Market on close orders are intended to be executed as close as possible to the close of trading for the day. The NYSE rules require that the order be received by the BD by 3:45pm EST and that it can't be canceled or reduced after 3:58 p.m.. (Previously MOC orders could not be canceled after 3:40 p.m. - you may encounter an older question)

All of the following are features of a tax-qualified retirement plan offered by an employer, EXCEPT: [A] In certain types of plans, employees can contribute and deduct their contribution in the year it was contributed. [B] In certain types of plans, employers can contribute and deduct their contribution in the year it was contributed. [C] Typically, the contributions made by an employer are taxed to the employee in the year that contributions were made, but funds grow within the retirement plan on a tax-deferred basis. [D] Often there are limitations placed on the amount of money that can be contributed to such plans in any given year and limitations placed on deductions for tax purposes in any given year.

[C] Typically, the contributions made by an employer are taxed to the employee in the year that contributions were made, but funds grow within the retirement plan on a tax-deferred basis. Typically, contributions made by an employer are NOT taxed to the employee in the year that contributions were made and the funds grow within the retirement plan on a tax-deferred basis. All of the other statements are features of tax-qualified retirement plans.

An RR recommends to a client that she invest in a mutual fund just prior to the fund's ex-dividend date. This recommendation [A] is suitable because it ensures an immediate return on the client's investment [B] is not suitable because the client would only be eligible to receive the dividend if shares are bought three days after ex-dividend date [C] is not suitable because the client may be subject to additional income tax liabilities and could have bought the shares at a reduced price [D] is suitable because fund prices usually rise shortly after the ex-dividend date

[C] is not suitable because the client may be subject to additional income tax liabilities and could have bought the shares at a reduced price The RR is "selling dividends". This practice is unethical and illegal because it is not in the best interest of the customer. The customer incurs a tax liability and the customer could have bought the same shares at a reduced price by buying them on the ex-dividend date when the net asset value will decline by the amount of the dividend.

If ABC 10% bond closed at 101 3/8 down 3/4 for the day and would provide a current yield of 9.87%. The current yield if the bond had been purchased on the previous trading day would be: [A] 9.87% [B] higher than 9.87% [C] lower than 9.87% [D] 10%

[C] lower than 9.87% The question states the price of the bond on the previous day was higher than the current price by 3/4 (.75). Yields move in the opposite direction of bond prices. Recall the formula for current yield = annual interest rate /current market price.

A client has a Cash Account at a broker-dealer and one week ago was sold out of a position for failure to make prompt payment. The customer has now decided to buy 100 shares of ABC common stock @50. This client will be required to [A] make the required Reg T 50% deposit using regular-way settlement. [B] make the required payment in full for the purchase using regular-way settlement. [C] make the required payment in full for the purchase prior to entering the order because the account would be frozen. [D] wait 90 days prior to entering the order to buy the stock because the account would be frozen.

[C] make the required payment in full for the purchase prior to entering the order because the account would be frozen. Reg T states that if a client has been sold out for failure to make prompt payment that the account must be frozen for 90 days. When an account is frozen for 90 days the client will have to deposit sufficient cash to cover the total trade amount before the order to buy is entered. Since this is a Cash account, the client would not be allowed to deposit 50% of the purchase price, as this is only allowed in a margin account. The account is frozen so the client would not be allowed to make payment using regular way settlement. When an account is frozen, clients must deposit funds prior to entering orders to buy but are not prohibited from making purchases.

Which of the following would NOT be considered to be advertisements under MSRB rules and regulations? [A] Market letters [B] a summary of an official statement [C] preliminary official statements [D] Research reports

[C] preliminary official statements

The term "spread" could describe all of the following except: [A] the difference between the bid and the ask on a common stock [B] an option position that limits profit and loss potential [C] the difference between an investors cost basis and sale proceeds on preferred stock [D] the difference between the public offering price and the proceeds to the issuer on a new issue

[C] the difference between an investors cost basis and sale proceeds on preferred stock All choices except for C are definitions of the use of the term "spread". The difference between an investors cost basis and sale proceeds would be the amount subject to tax liability for the investor.

A trade on the consolidated tape display that reads: ABC.SLD 52 means that: [A] 5,200 shares were traded [B] ABC has been sold for $52 million [C] 100 shares have just been traded for $52 per share [D] 100 shares were traded earlier, but the report is delayed

[D] 100 shares were traded earlier, but the report is delayed "SLD" indicates a transaction that is reported out-of-sequence. For example, a transaction that occurred earlier in the day may be reported later in the day. It is a delayed report.

All of the following are generally considered to be advantages of U.S. Treasury bonds EXCEPT: [A] The availability of a wide range of maturities [B] An active secondary market [C] High loan value [D] Interest income that is exempt from federal, state, and local taxes.

[D] Interest income that is exempt from federal, state, and local taxes.

When an RR is opening a new account for a client, which of the following would be the BEST indication of the new client's tolerance to risk? [A] The client's number of dependents [B] The client's net worth [C] The client's tax bracket [D] The client's experience with investing

[D] The client's experience with investing Of the choices listed, the client's previous experience with investing is the best indication of his risk tolerance. This will give the RR an idea of what investments the client has held in the past and the degree of risk taken historically. Note, however, all of the choices should be considerations when determining investment suitability.

How would the exercise price on a foreign currency option be displayed? [A] The price of the foreign currency per U.S. Dollar [B] The price of the Eurodollar per foreign currency unit [C] The spot price of the U.S. Dollar per foreign currency unit. [D] The price of the U.S. Dollar per foreign currency unit

[D] The price of the U.S. Dollar per foreign currency unit Foreign currency option exercise prices are displayed showing the U.S. Dollar pricing per foreign currency unit. The spot price would not be valid as an exercise price, because the spot price changes daily. A US Dollar price would be listed as the exercise price, while the spot price would be the "market price" of the dollar in that particular currency pair.