Series 7 Mock Exam

If the Fed begins selling securities in the open market to tighten credit, what is the first interest rate to feel this change in the Fed policy?

Federal funds rate. The Federal Reserve Board's actions to influence the money supply are first felt on the federal funds rates.

According to the multi-tiered market making system of NYSE Euronext, a Supplemental Liquidity Provider may: I.never compete with the specialist. II.make markets in NYSE listed securities from an off-floor location. III.never receive rebates of transaction fees from the exchange. IV.make a one-sided market.

II and IV. Under the multi-tiered market maker system employed by NYSE Euronext a Supplemental Liquidity Provider may compete with the on-floor Specialist (Designated Market Maker) and receive rebates of exchange transaction fees. Unlike a Designated Market Maker the Supplemental Liquidity Provider makes markets from an off-floor location and is permitted to make a one-sided market.

A customer buys a new issue municipal bond with a dated date of January 1 for settlement on January 31. If the first interest payment date is March 1, how many days of accrued interest will the customer pay to the syndicate?

In this new issue, interest begins to accrue as of the dated date, so the customer must pay the syndicate interest from the dated date up to, but not including, the settlement date. The number of days from January 1 up to, but not including, January 31 equals 30.

Securities settled in federal funds

Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds.

The spread in a municipal competitive bid is the:

difference between the bid and production (the price at which the bonds are reoffered to the public).

In a best efforts underwriting

the underwriter serves as an agent with no financial obligation for unsold securities

A corporate profit-sharing plan must be set up under a(n):

trust. All corporate pension and profit-sharing plans must be set up under trust agreements. A plan's trustee assumes fiduciary responsibility for the plan.

The retirement plan is qualified

which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.

A quote of 104.24 for a T-bond represents a price of

$1,047.50 computed as a percentage of par in 32nds of one bond point as follows; 104.24 is 104% of par = $1,040 and 24/32nds of one bond point ($10) = $7.50. $1040 + $7.50 = $1047.50.

An Eastern account underwriting of $100 million in municipal bonds is established. ALFA Securities agrees to underwrite 10% of the issue and sells out its allotment of $10 million. However, some of the other firms participating in the deal are not as successful, and $15 million of the bonds remain unsold. What is ALFA Securities' financial obligation?

$1.5 million. Undivided liability in an Eastern account means this member is liable for 10% of the unsold bonds (10% × $15 million = $1.5 million).

Once a broker/dealer receives an enrollment notification for an employee to test for the Series 7 licensing exam, the employee will have how long to successfully complete (pass) the exam?

4 months. Once notification of enrollment for testing has been received by the broker/dealer the candidate will have 120 days (4 months) to successfully complete (pass) the exam. This is commonly referred to as the "testing window".

With no other positions, a customer sells short 100 TIP at 40 and sells 1 TIP Oct 40 put at $5. At what stock price will the customer break even?

45. On the downside, the short position fully covers the short put and the profit is the $500 premium. On the upside above 40, the short put expires and the short stock position loses money. The first 5 points of loss (40 to 45) on the short stock position are offset by the premiums received. Above 45, losses begin and are potentially unlimited.

If a customer wishes to open a new account but declines to provide all of the financial information the member firm requests

If a customer refuses to provide financial information, the member firm may use whatever information is available to decide whether to open the account. Any recommendation made to a customer must be suitable, taking into account the customer's investment objectives, financial situation, and any other relevant information. If the information is not provided, the account may be opened, but no investment recommendations may be made.

The Options Clearing Corporation uses which of the following methods to assign exercise notices?

Random selection. the OCC assigns exercise notices to member firms on a random basis; the members may choose the customers to be exercised on either a random basis or FIFO basis.

Sallie Mae is the

Student Loan Marketing Association

In a repurchase agreement (repo rate)

The original seller is buying back at a guaranteed higher price from the original buyer. In a repurchase agreement, securities are sold and then bought back or repurchased.

A blind pool offering

also known as a nonspecified program, involves an investment in a program without specific prospects or properties being identified.

Nasdaq Level I service:

displays the inside market; highest bid and lowest ask. Level I service provides subscribers with the inside market. The inside market is the highest bid price anyone is displaying and the lowest ask price anyone is displaying, via the Nasdaq quotation system.

If a customer wants to place an order for a specific municipal bond and provides the bond's issuer, coupon, maturity date, and CU.S.IP number, but has not disclosed his financial objectives or tax status, the representative must:

execute the order and mark it "unsolicited". When a customer wants to buy a specific municipal bond and possesses all of the bond's material information, MSRB Rule G-19 allows the representative to execute the order and mark it "unsolicited." The representative may not recommend any municipal bond without first knowing the customer's financial objectives and tax status.

Defined benefit plans

guarantee a specific payout in the future and require an actuary to determine the monies that must be set aside today to meet this future obligation. If sufficient monies are not set aside or if poor investment performance wipes out a portion of these funds, an unfunded liability results.

Class D shares

have a level load plus a redemption fee

Class C shares

have only a level load (a 12b-1 fee) which is taken from net assets during the year.

The result of declining inflation on outstanding bonds would be

higher prices and lower yields. Declining inflation means declining interest rates. If interest rates decline, bond prices rise.

Under MSRB rules, a broker/dealer must disclose control relationships:

in all customer transactions. MSRB rules require disclosure to clients of any control relationship that exists between the broker/dealer and the issuer. The rule applies to all customer transactions including research reports.

In a period of loose money

interest rates fall. When interest rates fall, bond prices rise

Rule 144 stock

is considered to be illiquid. It cannot be sold unrestricted by an affiliate and could, therefore, not be used to cover the calls in the event the calls were exercised.

An unfunded liability

is one that has been incurred but does not have to be paid until a future date, and for which sufficient money to meet the obligation has not been set aside.

The standard order priority for municipal bond

issue allocation as stated within the syndicate letter is: presale, group, designated, and member. Orders that benefit all syndicate members have the highest priority.

The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when:

long-term interest rates are high and beginning to decline. The best time to buy long-term bonds is when interest rates have peaked. In addition to providing a high initial return, as interest rates fall, the bonds will rise in value.

A real estate investment trust, in order to avoid tax on its income

must distribute 90% of its net investment income to investors.

The formula for computing tax equivalent yield is

nominal yield divided by (1 − federal marginal income tax rate) .045 / (1 − .27) = 6.16%

Fill-or-kill (FOK)

orders must be executed immediately in their entirety or they are canceled.

Class B shares

pay the sales charge upon redemption

The collection ratio

shows the percentage of property taxes that are actually collected. This would be relevant in evaluating GO bonds, which are backed by the taxing authority of the issuer. Revenue bonds, however, are backed by user fees, not taxes.

In an all-or-none (AON) offering

the underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold

In a standby underwriting

the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment).

Broker/dealers must report cost basis and sales proceeds

to customers and the IRS annually

A ratio write involves

writing more options than the customer has stock to cover.

An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year?

$3,000. The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year

A customer has a margin account with RTQ Securities, Inc. in which he has securities with a market value of $400,000 and a debit balance of $110,000. In the event of the bankruptcy of RTQ, SIPC covers:

290000 SIPC protects each separate customer to a maximum of $500,000 in equity. This account has equity of $290,000 ($400,000 LMV minus $110,000 Dr).

Securities not subject to 5% markup

Transactions in securities that are sold by a prospectus are not subject to the 5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule. Five percent is a guideline, and markups can exceed it.

Negotiable CDs

are issued primarily by banks and backed by the issuing bank. The minimum denomination is $100,000. These are sometimes referred to as jumbo CDs.

Regulation T applies to:

both cash and margin accounts for nonexempt securities. Regulation T controls the credit that broker/dealers extend in all types of accounts, and only applies to nonexempt securities.

Class A shares

purchased at NAV plus sales charge

The Consolidated Tape System (CTS)

receives and validates the last sale price and size of listed equity securities transactions on the NYSE and other regional exchanges and FINRA. Options transactions are not reported to the CTS.