Series 7 Mastery Exam
A margin account has a market value of $24,000 and a debit balance of $20,000. The maintenance call will be for
$2,000. With equity of $4,000, this account is below minimum. The maintenance call will be for an amount necessary to bring the account back to minimum. Minimum is 25% of $24,000, which is $6,000. Because equity is $4,000, the call will be for $2,000.
All of the following municipal bonds are callable at par. Yield to call (YTC) must be displayed on which of the following confirmations?
5.5%, 5% YTM basis, maturing 2040. Callable bonds selling at a premium must be priced to call. Whenever a bond's basis (YTM) is less than its coupon, it is selling at a premium.
You have several clients interested in a tax sheltered annuity (TSA), but one of them is not eligible to participate. Who is it?
A student enrolled full time in the local community college. Employees of 501(c)(3) and 403(b) organizations (which include charities, religious groups, sports organizations, and school systems) qualify for tax-sheltered annuities (TSAs). Students are not employees.
Among the items shown on a customer confirmation for a bond transaction is the amount of accrued interest. The amount of accrued interest is
added on the buyer's confirmation and added on the seller's confirmation. On customer confirmations, the amount of accrued interest is added to the buyer's confirmation to show the net amount to be paid and is added to the seller's confirmation to show the net amount that is to be received.
In a direct participation program limited partnership for tax purposes,
income for the general partners is earned income, but for the limited partners it is passive income. In a direct participation program limited partnership for tax purposes, income for the general partners is earned income, but for the limited partners it is passive income.
Some information found on a municipal bond confirmation is only relevant to new issues. One example of this type of information is
the dated date. The dated date is the first day that interest begins to accrue on a new issue. Once the bond makes its first interest payment, the dated date is no longer relevant.
An investor sells 1,000 shares of DEF short at 50 and meets the initial margin requirement. If DEF falls to 45, what is the equity in the account?
$30,000. The initial margin requirement for a $50,000 short sale is $25,000. When the stock drops $5,000, equity increases by that amount.
One July 45 mini-option contract call is quoted at 3. A buyer will pay
$30. Each mini-option contract represents 10 shares of the underlying equity security instead of 100 shares as is the case for standard contracts. Therefore, the multiplier for both contract and premium for mini-contracts is 10. In this case, a single contract represents 10 shares at $45 per share and the premium of 3 represents $30. $30 is the cost to the buyer.
When the inside market (best bid and best offer) for XYZ stock was 17.30-17.60, a market maker sold 100 shares to a customer at 17.90. At the time of the trade, the market maker's quote was 17.25-17.70. What was the amount of the markup?
0.30. Markup is always based upon the inside quote. In this case, the inside offer is 17.60 and the difference between that and the 17.90 selling price represents a $.30 markup.
An appeal of an adverse Code of Procedure decision may be made by either party within
25 days of the decision date. Either party may appeal a ruling from a disciplinary hearing within 25 days of the rendering of the decision. The first appeal is to the National Adjudicatory Council.
A couple with a child 10 years away from entering college has saved $160,000 for that single purpose. Which of the following portfolio mixes would be the most suitable for meeting the investment objective?
30% T-notes, 70% zero-coupon bonds. Zero-coupon bonds, which are purchased at a discount and mature at face value, are the most suitable investment for future anticipated expenses such as college tuition. The T-notes, which are medium term U.S. government securities, would additionally be a suitable investment where risk of principal loss wouldn't be a concern as it would with equities or corporate bonds.
Your customer sells 2 IJK October 50 calls at 4 and 2 IJK Oct 50 puts at 3. The customer will break even when the price of IJK is
43 and 57. The customer sells calls and puts with the same strike price and expiration date, so the position is a straddle. The fact that the customer sold two of each has no effect on the breakeven point. Straddles have two breakeven points: the strike price plus and minus the sum of the two premiums. In this case, the sum is seven so it is plus seven and minus seven.
A customer writes 1 XYZ Feb 50 put at 1 and buys 1 XYZ Feb 60 put at 7. The breakeven point is
54. This put spread results in a net debit of six points. To calculate BE for a put spread one subtracts the net premium (6) from the higher strike price (60). (60 − 6 = 54). Breakeven on a spread can never be "outside" the spread (lower than 50 or higher than 60).
XYZ Corporation issued 7 million shares of common stock in its initial public offering. It later purchased 500,000 shares of Treasury stock. XYZ recently engaged an underwriter to raise capital by selling an additional 3 million shares through a standby rights offering. By the expiration date of the offering, only 2 million shares were sold through exercise of the rights. As a result, how many shares will XYZ have outstanding?
9.5 million. After the 500,000 issued shares were repurchased for the Treasury, there were 6.5 million outstanding. In a standby rights offering, the underwriter agrees, on a firm commitment basis, to pick up any unsold shares and bear the responsibility for selling them to the public. Therefore, all 3 million of the additional shares are now outstanding for a total of 9.5 million shares.
The dollar price used to compute the yield to call must be recorded on the confirmation of which of the following callable municipal bonds?
9s 25 quoted at 7.0. For callable premium bonds quoted on a yield basis, the yield computed to the near term in-whole call is used. The confirmation shows the call date and call price as the expected maturity. The only bond shown quoted at a premium is 9s 25 quoted at 7.0.
A customer is likely to experience the greatest purchasing power risk with which of the following investments?
A 30-year U.S. Treasury bond. Purchasing power or inflation risk is greatest with long-term fixed income investments, regardless of their investment quality. ADRs represent equities and the convertible preferred has the opportunity to convert into equity.
Which of the following choices describes the strategy most likely to be recommended to a fixed income client looking to reduce interest rate risk?
Buy variable rate bonds. Interest rate risk affects those investing in fixed income investments such as bonds or preferred stock. As interest rates rise, the value of those assets declines. When holding variable rate instruments, instead of relying on a fixed return, the interest (or dividend) rate is periodically adjusted to reflect current market rates. This has the effect of maintaining a relatively stable market price. The longer the maturity, the greater the risk. Interest rate put options are designed to benefit the investor when interest rates fall (bond prices go up)—your client is concerned about and increase to interest rates. Interest rate call options would be a solution here. The rating of a bond has a very small impact on volatility due to interest rate changes.
A new client, age 26, has a $15,000 inheritance to invest and notes that it is for long-term savings. He tells you that it won't be needed for many years and wants to simply see it grow over time. Given his age and the small amount to invest, you recommend a balanced fund, but which share class would be most suitable?
Class B shares. Class B shares are generally most suitable for smaller investments made with a longer investment time horizon such as this one. These shares have a back-end load (sales charge) known as a contingent deferred sales charge (CDSC) only payable when the shares are redeemed and those sales charges decline typically over the first six to eight years, so that eventually they disappear completely.
Individuals meeting which of the following standards meet the definition of an accredited investor?
Net worth of at least $1 million excluding net equity in a primary residence. Individuals meet the definition of an accredited investor if they have net worth of at least $1 million (excluding net equity in a primary residence) or have had annual earnings of at least $200,000 for the past two years and expect to earn as much this year. Those with net worth of at least $2.1 million are defined as qualified investors. That means they may be charged performance-based fees by investment advisers, but that is not relevant to this exam.
Stocks have statistically been in a bull market for several years. An investor that studies technical analysis is bearish on the stock market in the short term. They would like to invest $100,000 of an investment portfolio valued at $10 million and try to take advantage of the coming stock market correction. Which of the following would be the wrong thing for a registered representative to recommend?
Place buy stops on the securities in the portfolio identified as the most likely to fall. Buy stops are placed above the current market value of securities and would not benefit a customer that expects the market to fall. In addition, the buy stop would close a short stock position if a short sale is rising in value (and the short sale is losing money), or create a long stock position.
For tax purposes, a limited partner in a direct participation program will include in their cost basis, cash and property contributions to the partnership and any recourse and nonrecourse debt assumed for which of the following types of programs?
Raw land real estate. For limited partners, typically only recourse debt can be included in cost basis for tax reporting. The one exception where nonrecourse debt is allowed to be included is in real estate programs.
Jim and Pam Thomas have been married for many years. How will the estate be taxed when transferred to the remaining spouse if one of them dies?
Taxes will not be owed on the estate until the death of the surviving spouse. Married couples are allowed to transfer their entire estate to the surviving spouse at death with no tax imposed on any level; federal, state, or local. Taxes will however be owed at the death of the surviving spouse.
A registered representative intends to send the same email regarding an investment strategy and product this week to her 10 retail clients currently having the highest net worth. Which of the following accurately depicts how the email will be regulated under the Financial Industry Regulatory Authority's (FINRA's) communications with the public rule?
The email can be reviewed by a principal before or after use in accordance with the firm's written procedures regarding correspondence and need not be filed with FINRA. Under FINRA's rules regarding communications with the public, the email will be regulated as correspondence because it is being distributed to 25 retail customers or fewer within a 30 calendar-day period. Review of correspondence by a principal can occur either before or after use in accordance with the firm's written procedures and filing of correspondence with FINRA is not required.
An investor sold short 1,000 shares of LUMN at 52 on January 10. If the investor covered the short position at 43 on January 15 of the following year, which if the following statements is true?
The investor has a short term capital gain. The customer would have generated a short term capital gain of $9,000 on the position by selling short at 52 and covering (buying the stock) at 43. Although the period of time that the investor remained short exceeded one year, there is no holding period for the stock (the customer did not own the stock for more than one year. There is no wash sale because there is no loss.
What would be the impact of a 10% stock dividend on the exdate for a retail investor that owns an option contract the following option contract? 1 ABC July 40 call
The number of contracts owned will stay the same, and the strike price will be reduced. When adjusting options contracts for stock dividends and fractional splits, the number of contracts held will not change. The number of shares covered by each contract is increased (100 shares × 110%) so that in this example each adjusted contract now represents 110 shares. The effective exercise price is adjusted so that the position value remains the same before and after the adjustment. The original contract controls $4,000 of stock (100 shares x $40 strike price). Therefore the new strike price will be reduced. Here is the new contract: 1 ABC July 36.36 call (110 shares per contract) (This contract controls $4,000 of stock.)
A customer of a broker-dealer is long 1 MMS July 60 call and short 1 MMS July 70 call. Which of the following is true?
The position has a limited gain and loss potential. This is a spread position. All spreads (debit or credit), whether put or call spreads, have a limited gain and loss potential.
An investor was able to acquire 10,000 shares of RITVA common stock on its IPO at $10 per share. Today, the stock is selling for $50 per share and the investor is nervous about the future for the market. An order is turned in to sell 100 RITVA 55 calls at a premium of 2 and buy 100 RITVA 45 puts at a premium of 2. This strategy is
a cashless collar. It is cashless is because the calls are sold for 2 and the puts bought for 2. That means no out of pocket cash. The investor has "put a collar" on the long position in the stock by selling an out of the money call and buying an out of the money put.
A popular vehicle for saving for retirement is the variable annuity. A registered representative explaining the benefits of this product would probably be making an incorrect statement by claiming that variable annuities offer
a less expensive way to invest in equities than a mutual fund with similar investment objectives. In general, variable annuity expenses are higher than those of a mutual fund with similar objectives. That doesn't mean the fund is good and the variable annuity bad, it is that there are guarantees and other features offered by the variable annuity that a fund does not have and they have to be paid for.
Your customer has a discretionary trading account with your municipal firm. According to Municipal Securities Rulemaking Board (MSRB) rules, customer authorization is required for
a purchase of municipal securities in which there is a control relationship between the issuer and your firm. If a control relationship exists between the issuer and the member firm, MSRB rules require consent from the client before any transaction, even in a discretionary account. An example of a control relationship might be one where your firm acts as a financial advisor to the municipality.
Section 28(e) of the Securities Exchange Act of 1934 deals with
a safe harbor for non-cash compensation from broker-dealers to investment advisers. Section 28(e) of the Exchange Act covers noncash compensation between broker-dealers and investment advisers. It creates a safe harbor describing what is permitted, such as research and custody for the IA's client funds and securities.
A statement of additional information (SAI) is available upon request to investors in each of the following investment companies except
a unit investment trust. The SAI need not be in a prospectus but available for both open and closed-end investment companies as well as ETFs, but not UITs. It consists of information not necessarily needed to make an informed purchase decision but still useful to the investor.
When a limited partnership interest is sold, gain or loss to the partner is determined by the difference between the sales proceeds and the
adjusted cost basis. As with any item, gain or loss is determined by comparing proceeds to cost. In the case of a limited partnership program, the cost for tax purposes is usually subject to a number of adjustments and may be higher or lower than the original investment.
An investor who is considering the purchase of Mount Laurel, New Jersey, general obligation municipal bonds for an investment for his portfolio should know that the bonds
are not subject to registration with the Securities and Exchange Commission (SEC), but are required to make full disclosure by delivering an official statement. Municipal securities are exempt on both the state and federal level, meaning that they are not subject to registration with the SEC or any state, but do have a full disclosure document available to investors known as an official statement.
When one of the partners in a partnership account dies, the registered representative (RR) must
cancel any unexecuted orders and freeze the account. When a partner in a partnership account dies, all open (unexecuted) orders should be canceled and the account frozen until an amended partnership agreement is received. Freezing the account does not require the assets to be liquidated.
Your client signs a discretionary account form and tells you the signed form was mailed to your attention. Before receiving the form, you notice that one of his stocks is dropping sharply on adverse news, but you are unable to contact him. In this situation, you
cannot enter a discretionary order. Until the signed discretionary account form has been received, no discretionary order can be entered. The person who has been given the discretionary authorization is you (or your firm), but it hasn't been received yet.
When the holder (owner) of an index option exercises the contract, the account of the holder will be
credited the in-the-money amount. One will exercise an index option when it is in the money by more than the premium paid. Because exercise of an index option settles in cash, the account of the holder will be credited the in-the-money amount.
An investor is seeking tax advantages through an oil and gas direct participation program (DPP). With this type of partnership, he would expect to benefit most from
depletion and intangible drilling costs. The primary tax benefits found in oil and gas investment partnerships are the depletion allowances because of the depleting natural resource and intangible drilling costs. There is never a tax credit for oil and gas partnerships.
The alternative minimum tax (AMT) would be least likely to affect taxpayers who
earn interest from general obligation bonds. Preference items, for purposes of the AMT, do not include interest received from general obligation bonds. Private activity municipal revenue bonds are a preference item as are the other choices shown.
Your client has sold securities in a long margin account. All of the following are affected by the sale of these securities in the account except
equity. The equity does not change when a sale takes place in a margin account. Equity will be affected only if the customer elects to withdraw some or all of the proceeds. The SMA will go up; debit balance and market value will go down.
One of your clients is interested in setting up an Achieving a Better Life Experience (ABLE) account for his son who was recently diagnosed with a disability at age five and is currently receiving benefits through Social Security Disability Insurance (SSDI). Regarding these accounts, you correctly explain that
income earned by the account is not taxed, and his son is eligible to be the beneficiary of such an account. Those who are already receiving SSDI are automatically eligible to establish and be the beneficiaries of ABLE accounts where income earned is not taxed.
An exchange traded fund (ETF) differs from a mutual fund in that
it can be sold short. Exchange traded funds can be sold short or purchased on margin, much like any other listed stock. Almost all ETFs are open-end investment companies but so are mutual funds, so there is no difference. There are index mutual funds just as there are index ETFs, and just like mutual funds, an ETF's net asset value (NAV) is computed after the 4 pm market close.
A customer who had invested in a Coverdell Education Savings Account (ESA) on behalf of her 10-year-old daughter for many years may
make an investment into a Section 529 Plan in the same year for the same child. Contributions to a Coverdell ESA are made with after-tax dollars, and distributions are free of tax as long as the funds are used for qualified educational expenses. One is permitted to maintain both an ESA and a Section 529 Plan for the same beneficiary.
One way in which real estate investment trusts (REITs) differ from direct participation programs (DPPs) is that a REIT
must distribute at least 90% of its taxable income to shareholders annually in the form of dividends while all of a DPP's income flows through to the investors. There are several percentages associated with REITs. One percentage is the requirement to distribute at least 90% of its taxable income as a dividend to the shareholders. Another is the requirement that at least 75% of the REITs total assets are invested in real estate and cash (that is why the RE stands for real estate). In the case of a DPP, all income or loss flows through to the investors—nothing is actually distributed. Unlike most REITs, which are publicly traded, generally on the NYSE or the Nasdaq Stock Market, most DPPs are private placements with no active secondary market. Although REITs always invest in real estate in one form or another, the most popular of the DPPs are those investing in real estate.
The 5% markup policy applies to each of the following transactions except
new issue transactions. The 5% policy does not apply to exempt securities transactions such as municipal bond trades or new issue (primary market) transactions. The policy does apply to nonexempt securities and transactions on an exchange and in the OTC market, and it applies to transactions where the participants were acting in either an agency or principal capacity.
The flow of funds statement found within a municipal trust indenture relates to
revenue bonds only and is found within the bond resolutions. Only revenue bonds have a flow of funds statement. The order and priority of handling, depositing, and disbursing revenues taken in by the project the bond has funded is set forth in the bond resolutions.
The XYZ Growth Fund is an open-end investment company registered under the Investment Company Act of 1940. The fund's principal underwriter offers a schedule of reduced sales when certain investment levels are reached. Reinvestment of gains and dividends and share appreciation may be added to the current account value when determining if a subsequent purchase qualifies for the reduction. This feature is known as
rights of accumulation. Rights of accumulation, like breakpoints, allow an investor to qualify for reduced sales charges. Additionally, they allow the investor to use prior share appreciation and reinvestment of dividends and gains to qualify for the sales charge reduction. One cannot use appreciation or reinvestments to reach the LOI's goal—only "new" money.
A corporate offering of 1 million additional shares to existing shareholders is a
rights offering. When new shares are being offered to existing shareholders before the general public, it is done under the terms of a rights offering.
An employee has enrolled in his company's nonqualified deferred compensation plan. The benefit paid at the time of the employee's retirement is
taxable as ordinary income to the employee and can be taken as a deduction by the employer. When enrolled in a company's nonqualified deferred compensation plan, the benefit paid at the time of the employee's retirement is taxable as ordinary income to the employee and can be taken as a deduction by the employer when paid out.
For a municipal bond, the opinion rendered by the bond counsel would attest to
the legality of the issue. For all municipal bonds, revenue or general obligation, a legal opinion rendered by outside counsel, known as the bond counsel would attest to the legality of the issue. For example, do the bonds qualify as new municipal issues and will the interest they pay be exempt from tax at the federal level.
The capital asset pricing model (CAPM) states that
the pricing of a stock should take into account systematic risk only because the security-specific risk (unsystematic risk) can be diversified away. The capital asset pricing model states that the pricing of a stock should take into account systematic risk because it is the risk that cannot be removed through diversification. CAPM assumes a diversified portfolio and that removes the unsystematic risk.
The visible supply as shown in The Bond Buyer is the
the total dollar volume of municipal offerings expected to reach the market in the next 30 days. The visible supply refers to all new issue municipal bonds projected to be issued for sale within the next 30 days.
One of your clients interested in a hedge fund notes that the fund invests in blank-check companies. He seems uncertain what blank-check companies are, so you explain that they are sometimes known as special purpose acquisition companies (SPACS) and are unique in that
they have no business operations but instead raise money for the sole purpose of seeking out a business to engage in. Blank-check companies, sometimes known as special purpose acquisition companies (SPACS), are unique in that they have no business operations. Instead, they raise money for the sole purpose of seeking out a business to engage in. Once businesses are targeted, proposals will be presented to shareholders who can vote to approve or not. While a blank-check company doesn't indicate what industry or sectors might be targeted, blind-pool companies generally do.
Balance sheet items affected by the issuance of new common stock would be
total assets and net worth. Issuing stock brings in new capital in the form of cash. This raises the assets and, because stock is equity, raises the net worth by the same amount.
