Series 7 practice test missed answers

A technical analyst would consider which of the following indicators to be bullish? A) An increase to the short interest B) A head and shoulders top formation C) A stock trading below its 50-day moving average D) A stock reaching its resistance level

A) An increase to the short interest Although it seems counterintuitive, as the number of outstanding shares sold short increases, technical analysts consider that to be a bullish sign. One day, those short positions will have to be covered and that high demand for the stock will push the price up. When a stock reaches its resistance level, it is going to make a retreat (bearish). It is only when there is a breakout above the resistance that the feeling is bullish. A head and shoulders top indicates that the market has reached a top. Which direction does one go from the top? Down (bearish). Trading below a moving average is a bearish indicator.

Badentown is planning to raise money in three months to build a new city hall. The mayor wishes to start ground preparation immediately. How could money be raised to fund the work? A) Bond anticipation note (BAN) B) Limited tax bond C) Special assessment bond D) Construction loan note

A) Bond anticipation note (BAN) The new city hall will be funded with a bond three months from now. A three-month BAN will raise money now for ground preparation. The note's maturity will be set so that it can be paid off with proceeds from the bond sale.

If interest rates are rising, which statements regarding collateralized mortgage obligations are true? 1. Prepayment risk increases. 2. Prepayment risk decreases. 3. Extended maturity risk increases. 4. Extended maturity risk decreases. A) II and III B) I and III C) II and IV D) I and IV

A) II and III If rates are rising, homeowners are less likely to refinance. Therefore, prepayment risk will decrease. Similarly, if prepayments are declining, the estimated life of the underlying mortgages should increase.

ABC, Inc., has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $20 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-for-1 stock split? A) The par value would decrease to $5 per share. B) The market price of the stock would double. C) The retained earnings would be decreased by $10 million. D) The number of shares outstanding would decrease by 50%.

A) The par value would decrease to $5 per share. A stock split results in more outstanding shares at a lower par value per share. In the case of a 2-for-1 split, there are twice as many shares (2 million) and the par value is cut in half ($10 ÷ 2 = $5) The total par value of stock outstanding is unchanged ($2 million times $5 = the same $10 million in total par value). Remember, a 2:1 split is the same as changing a $10 bill for two $5 bills. Retained earnings are not affected by a stock split. Although not part of this question, the market value of the stock would be approximately $10 per share (half of the $20 per share before the split).

If a customer buys 1 ABC Oct call at 7 on March 10 and sells it for 3 on October 10, the customer has a capital A) loss of $400. B) gain of $700. C) gain of $400. D) loss of $700.

A) loss of $400. The investor paid $700 to buy the call and received $300 to sell the call, for a net loss of $400. Options are capital items. If a put or call on a stock expires unexercised, the amount a writer receives is a short-term capital gain. The amount a buyer pays is a capital short-term loss.

A distribution was made from a Coverdell Education Savings Account for $12,000 when the educational expenses were only $10,000. The amount distributed beyond the educational expenses will be A) taxable to the beneficiary on any portion of the excess representing earnings. B) a tax-free distribution. C) taxable to the donor on any portion of the excess representing earnings. D) completely taxable to the donor.

A) taxable to the beneficiary on any portion of the excess representing earnings. If a distribution exceeds education expenses, a portion representing earnings will be taxable to the beneficiary and may be subject to an additional 10% penalty tax.

Each of the following is true about stop orders except A) they are the same as limit orders. B) they can limit a loss in a declining stock. C) they can accelerate the advance or decline of a stock's price if executed. D) they become market orders when there is a trade at, or the market passes through, a specific price

A) they are the same as limit orders. A stop order becomes a market order once the market price reaches or passes through the stop price. An investor in a long position can use the sell stop order for protection against a market decline. When a large number of stop orders are triggered at a particular price, the advance or decline of the market at that point can be magnified.

A married couple with a two-year-old child have $25,000 to deposit towards an investment to help meet the financial obligations for the child's college education. Given the following choices, which of the following is likely the most suitable investment? A) A diversified portfolio of insured municipal bonds with an average duration of 18 years B) A treasury STRIP scheduled to mature in 16 years C) A money market mutual fund D) A collateralized mortgage obligation (CMO) tranche rated AAA and scheduled to mature in five years

B) A treasury STRIP scheduled to mature in 16 years. Treasury STRIPs are zero-coupon bonds, backed in full by the U.S. government. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated future expenses, such as college tuition. A CMO maturing in five years doesn't align with the time horizon for this child's college education and carries other unsuitable risks. A money market fund would hardly meet the growth requirement needed to meet college tuition needs. For exam purposes, municipal bonds are a suitable choice only when something in the question indicates that the investor is in a high income tax bracket.

One of your customers purchased a municipal bond at a basis of 3.35%. Several weeks later, the bond's basis is now 3.21%. Which of the following statements is true? 1. The bond's yield to maturity has fallen by 14 basis points 2. The bond's price has fallen by 14 basis points 3. Market interest rates have likely decreased 4. The bond's rating has likely fallen A) II and III B) I and III C) I and IV D) II and IV

B) I and III The basis quote is the bond's yield to maturity. The difference between a basis of 3.35% and a basis of 3.21% is 14 basis points. What is it that causes a bond's yield to fall? It is the inverse relationship between interest rates and bond prices. The price has gone up because interest rates have fallen.

Assuming ABC is subject to a 60,000-contract position limit, which of the following customer accounts are in violation of the exchange's position limits? 1. Long 35,000 ABC Jan calls, long 30,000 ABC Jan 08 LEAPS calls 2. Long 35,000 ABC Mar calls, long 30,000 ABC Mar puts 3. Long 35,000 ABC Mar calls, short 30,000 ABC Jan 08 LEAPS calls 4. Long 35,000 ABC Mar calls, short 30,000 ABC Mar puts A) I and II B) I and IV C) III and IV D) II and IV

B) I and IV When aggregating contracts to determine if the position limit has been exceeded, we add together all positions in that security on the same side of the market. That is, we look at contracts that are hoping for a move to the upside and combine them, or we look for contracts that are hoping for a move to the downside and combine them. Long calls and short puts benefit from a move to the upside. The reverse is true of long puts and short calls. Let's look at the choices: I. Both positions are long calls so they are combined. 35,000 + 30,000 = 65,000. This is above the 60,000 limit. II. Long calls and long puts are on opposite sides of the market ("call up and put down"), so they are not combined and we haven't exceeded the 60,000 limit. III. Long calls and short calls are opposite positions (long call is bullish, short call is bearish), so they're not combined and there is no violation. IV. Long calls and short puts both benefit if the market is bullish, so they are combined and that total of 65,000 exceeds the position limit. Don't be mislead by the fact that some of the positions are LEAPS (options with expirations much longer than the normal 9 months). The position limits are not based on expiration dates or strike prices. The limit is based solely on the number of contracts with the same market sentiment.

Which of the following is not a money market instrument? A) Commercial paper B) Newly issued Treasury notes C) Treasury bills D) Banker's acceptances

B) Newly issued Treasury notes. Commercial paper, Treasury bills, and banker's acceptances are debt instruments with maturities of one year or less, and therefore, are money market instruments. A newly issued Treasury note would have a maturity of 2-10 years, and therefore, would not be a money market instrument.

All of the following may be used to service special tax bond issues except A) business license taxes. B) real estate taxes. C) excise taxes. D) gasoline taxes.

B) real estate taxes. Special tax bonds are sometimes included in the larger and more general category of revenue bonds. Bonds supported from the proceeds of specified income generators, such as gasoline, cigarettes, liquor, and business licenses, are special tax bonds. Ad valorem (real estate) taxes never service special tax bonds.

An investor, age 36, has a net worth of $650,000, with an annual income of $65,000. Wanting to add to an existing portfolio, the investor is not concerned about generating more income, as that seems to be adequate already. However, the investor does note that keeping taxes to a minimum is an objective. Which of the following funds would be the most suitable, given the investor's objectives? A) Fund W: invests in utility companies; turnover ratio of 25% B) Fund Y: invests in companies that have capital appreciation potential; turnover ratio of 100% C) Fund X: invests in companies with long-term growth potential; turnover ratio of 25% D) Fund Z: invests in preferred shares; turnover ratio of 50%

C) Fund X: invests in companies with long-term growth potential; turnover ratio of 25% This investor is not concerned about income. This would eliminate the utility and preferred share funds (Fund Z and Fund W). Of the remaining two funds, Fund X and Fund Y both have the same general objective, but the one with the lower turnover ratio would generate less tax liability. The portfolio turnover ratio reflects a fund's holding period of securities being bought and sold by the fund manager. If a fund has a turnover ratio of 100%, the entire portfolio is likely to turn over in a year, and capital gains distributions are likely to be short term and subject to the maximum tax rate. That increases the tax liability, and therefore, is not the best option. By contrast, a 25% turnover ratio means the average holding period of the securities in the portfolio is four years. This would mean that any capital gains distributions are more likely to be long term and subject to a lower tax rate.

If a stock undergoes a 1-for-5 reverse split, which of the following increases? 1. Market price per share 2. Number of shares outstanding 3. Earnings per share 4.Market capitalization of the company A) II and III B) III and IV C) I and III D) I and II

C) I and III After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share will increase. Overall, the market capitalization of the company will not change.

If an investor maintaining a short equity option is assigned an exercise notice, which of the following statements is true? A) She may offset her obligation with a closing transaction within three days. B) She may offset her obligation with a closing transaction until the end of trading on the same day. C) She must accept the exercise notice. D) She may refuse exercise under certain circumstances.

C) She must accept the exercise notice. Once exercised, a contract may not be traded to another individual. The assigned party must either deliver (for a call) or buy (for a put) the stock in two business days (regular way settlement for stock transactions).

When an existing, long established publicly traded corporation issues a large block of new shares in order to expand or modernize, it is A) a secondary distribution. B) a refunding. C) a primary distribution. D) an IPO.

C) a primary distribution. New shares are always part of a primary distribution. When it is the first time, it is an initial public offering (IPO). That does not apply here because this company already has shares publicly trading.

With bonds subject to a gross revenue pledge, the first priority will be to pay A) operation and maintenance. B) the sinking or surplus fund. C) bond interest and principal. D)the first lien on the property.

C) bond interest and principal. Bonds subject to a gross revenue pledge (gross lien revenue bonds) are backed by the gross revenues of the facility (meaning revenues before expenses). In this case, the first money disbursed is for payment of interest and principal. However, most revenue bonds only pledge net revenues to pay off revenue bonds. In the more common net revenue pledge, the first priority is operation and maintenance; the second priority is interest and principal.

A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee. B) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75% 12b-1 fee. D) decline the transaction because short-term trading of funds is not allowed.

C) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75% 12b-1 fee. If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares.

If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold A) for one month. B) until the need for the hold ends. C) for a maximum of 55 calendar days. D) for a maximum of 55 business days.

C) for a maximum of 55 calendar days. FINRA Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted to place a temporary hold on the disbursement of funds or securities from the account of a specified adult customer. The maximum length of the hold is 55 business days. Do we expect the exam will ask you to choose between 55 business and 55 calendar days? No, that is not FINRA's style, but we do want you to know the correct count.

If a customer buys 1 ABC Oct call at 7 on March 10 and sells it for 3 on October 10, the customer has a capital A) loss of $400. B) gain of $700. C) gain of $400. D) loss of $700.

C) gain of $400. The investor paid $700 to buy the call and received $300 to sell the call, for a net loss of $400. Options are capital items. If a put or call on a stock expires unexercised, the amount a writer receives is a short-term capital gain. The amount a buyer pays is a capital short-term loss.

A customer purchases 10 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,015 B) $10,116 C) $10,812 D) $10,150

D) $10,150 Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 + 1/2 = $1,015; $1,015 × 10 bonds = $10,150.

An investor opens the following options position: Long 1 PKE Apr 60 put @4 and short 1 PKE Apr 55 put @2. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is $200; breakeven point is $57.00. B) Maximum gain is $200; maximum loss is $300; breakeven point is $57.00. C) Maximum gain is $200; maximum loss is $300; breakeven point is $58.00. D) Maximum gain is $300; maximum loss is $200; breakeven point is $58.00.

D) Maximum gain is $300; maximum loss is $200; breakeven point is $58.00. The first step is to identify the position. This is a debit put spread. It is a debit spread because the option purchased cost more than the one sold. The debit of $200 is the most the investor can lose. This is a bear put spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock's price to decline to the point where both options are exercised. For example, if the market price of PKE should fall below 55, the owner of the 55 put will exercise, causing the seller to purchase the stock for $5,500. The seller can then exercise the long 60 put and deliver the stock purchased at 55 for 60. That is a profit of $500 less the cost of the options (the debit of $200), or $300. The quick way to do this is to subtract the net premium (the $200 debit) from the difference in strike prices (5 points) and the result is the same $300 profit. The breakeven point follows the put-down rule. Subtract the net premium (the $2 debit) from the higher strike price, resulting in a breakeven point at $58.

If a customer wishes to change a day order to a good-til-canceled (GTC) order in the middle of the day, the registered representative should A) enter the new GTC order immediately and do nothing about the day order. B) enter the new order as GTC and immediately cancel the day order. C) enter a change notice immediately. D) allow the day order to expire at the end of the day and put in the GTC order before the next day's opening.

D) allow the day order to expire at the end of the day and put in the GTC order before the next day's opening. The GTC is treated as a new order. The registered representative should wait until the close of trading so as not to lose the time priority of the original order that day.

An analyst observes that the beta of a traded security is 1.3, and the market return is 6%. The analyst forecasts that the security will return 7% over the next year. Based on these assumptions, the security is A) undervalued, because the forecasted return exceeds the required return. B) undervalued, because the required return exceeds the forecasted return. C) overvalued, because the forecasted return exceeds the required return. D) overvalued, because the required return exceeds the forecasted return.

D) overvalued, because the required return exceeds the forecasted return. We compare the expected return, based on the security's beta, with the return of the market (a beta of 1.0). If the market is estimated to return 6% and our security has a beta of 1.3, it should return 30% more than the market. The math is: 6% ××1.3 = 7.8% expected return According to the analyst's estimates, the security is overvalued because the forecasted return (7%) is less than the required return (7.8%).

To qualify for favorable tax treatment, real estate investment trusts (REITs) must do all of the following except A) distribute at least 90% of their investment income to shareholders. B) be organized as trusts. C) invest at least 75% of their assets in real estate-related activities. D) pass through losses to shareholders.

D) pass through losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they invest at least 75% of their assets in real estate-related activities and pass through at least 90% of their net investment income to their shareholders. Although they can pass through income, they cannot pass through any losses.

Without any position in the stock, an investor wrote an ABC Jul 60 put for 6. On the expiration date, ABC is selling for 66, and the investor closes the position at the intrinsic value. For tax purposes, the investor has A) realized a short-term capital loss of $600. B) realized ordinary income of $600. C) broken even. D) realized a short-term capital gain of $600.

D) realized a short-term capital gain of $600. With the stock at 66, the put is 6 points out of the money (put-down rule). That means the option will expire unexercised, and the writer gets to keep the premium. That 6 point premium is a short-term capital gain. Aren't short-term capital gains taxed at ordinary income tax rates? Yes they are, but for IRS and test purposes, they are legally characterized as short-term capital gain. All short positions will result in short-term treatment, even when the options are LEAPS.

One of your customers owns a variable annuity. When asking about how the performance of the separate account is measured, you would respond that A) the insurance company's actuaries compute the separate account performance. B) the separate account performance is the same for all subaccounts. C) the primary determinant is the assumed interest rate (AIR). D) the separate account performance depends on the performance of the selected subaccounts.

D) the separate account performance depends on the performance of the selected subaccounts. Some insurance company separate accounts have dozens of different subaccounts. These subaccounts range from highly aggressive to highly conservative. It is the performance of the specific subaccounts selected by the investor that determines the value of their accumulation unit. The actuaries get involved when determining the payout because that depends on life expectancy. Similarly, the AIR comes into play only during the payout phase.