Series 7 Wrong Questions

If a corporation issues stock to the public at $10 per share, and the syndicate manager's fee is $.10 per share, the underwriting fee is $.25 per share, and the selling concession is $.45 per share, what is the spread?

$.80. The spread is the sum of the manager's fee, the underwriting fee, and the selling concession.

A customer has $12,000 of capital gains, $15,000 of capital losses, and $50,000 adjusted gross income. How much unused loss is carried forward to the following tax year?

$0. After netting capital gain and losses, the customer has a net capital loss of $3000. Because $3,000 of net losses can be deducted from income in any single tax year, there is no carry forward.

Your client has a combined margin account. The value of the long stock position has increased by $5,000, and the value of the short stock position has dropped by $2,000. What is the net change to the equity in the account?

$7,000 increase. An increase in position value in a long account will increase equity, and a decrease in value of the short positions will also increase equity.

If XYZ common stock has a $4 dividend, a yield of 4.2%, a PE ratio of 12, and is trading at $96, its approximate earnings per share (EPS) is:

$8.00. The stock's PE ratio is price to earnings per share (EPS). Dividing the stock's price by the PE will give the earnings per share ($96 / 12 = $8 EPS).

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund?

$8.30. The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge.

Ifa customer has a long-margin account with a market value of $12,000, a debit balance of $8,000 and SMA of $2,000, how much can the customer withdraw from the account?

1000. SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. In this account, maintenance equity is $3,000 (25% of $12,000) and the current equity in the account is $4,000 ($12,000 MV - $8,000 DB). Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.

What is the profit to a syndicate member if a syndicate is offering an 8½% bond at 100, the syndicate manager is giving a .75 concession and a 1-point total takedown, and the syndicate member sells 1,000 bonds?

10000. When a member of the syndicate sells a bond they are entitled to the total takedown. In this case, 1 point ($10) per bond (1,000 bonds sold * $10 per bond = $10,000 profit). remember, that the concession would only go to those who are not members of the syndicate but are part of the selling group instead.

If a municipal bond maturing in 10 years is bought for 110, its cost basis at the end of the sixth year is:

104. To establish the new cost basis, determine the amount of the premium to be amortized yearly. For this bond, the $100 premium is amortized over 10 years: $100 ÷ 10 = $10. Then, multiply the annual amortization amount by the number of years the bond is held ($10 × 6 = $60). Finally, subtract the amount of the amortized premium from the original cost of the bond ($1,100 − $60 = $1,040, or 104).

A customer buys a 20-year 7% bond on a 7.35 basis. The bond is callable in 6 years at 103, in 8 years at 102, in 10 years at 101, and at par beginning in the 12th year. The customer's confirm will show yield to the:

20 year maturity. The confirmation of a bond trade must disclose the lower of yield to call or yield to maturity. This bond is being bought at a discount because the basis is higher than the coupon. Because the ytm on a discount bond is lower than the yield to call, this is the yield that will be shown on the confirmation.

An investor opens the following position:Write 1 CDE Oct 30 call at 3.30Buy 1 CDE Oct 40 call at .10.The maximum gain is:

320. The max gain on a credit spread is the net credit received (3.30-.10 = 3.20 * 100 shares = $320)

Which of the following permits the highest annual contributions? A)A traditional spousal IRA for which the contribution has been deducted. B)A SEP IRA. C)A traditional nondeductible IRA. D)A Coverdell Education Savings Account.

A SEP IRA. Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed to ESAs or traditional or Roth IRAs.

Which of the following investments would be most suitable for an IRA?

A covered Call. Short sales, uncovered calls, and municipal bonds are all inappropriate for individual retirement accounts. Covered calls are allowed.

In a variable life annuity with 10-year period certain, a contract holder receives:

A minimum of 10 years of variable payments, followed by additional variable payments for life. The owner of a life annuity with 10-year period certain will receive payments for life, subject to a minimum of 10 years. If the contract holder dies before the period expires, the remaining payments are made to the beneficiary. An example would be if a life annuity with 10-year period certain contract holder died after 5 years, payments would continue for 5 more years to the beneficiary and then stop.

Which of the following are governed by the prudent investor rule? Trustee. Executor. Custodian. Registered representative who has been granted discretionary authority.

All of them. The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. In these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.

A deferred compensation plan would be most suitable for A)an employer who wants employees to make their own set contributions to a plan as an incentive for them to remain with the firm B)an employer who wants a retirement plan to benefit the younger employees of the company C)an employer with a few highly paid employees that are near retirement age and want to reduce current taxes D)an employer who wants to provide a plan for all of the firms employees who are in lower tax brackets

An employer with a few highly paid employees that are near retirement age and want to reduce current taxes. Deferred compensation plans are non-qualified plans that allow an employer to select employees to participate in the plan. These plans are more suitable for highly compensated employees that are just a few years from retirement allowing them to defer earnings and taxation until then. Offering this type of plan to young employees is less suitable due to the risk that the business could fail, or the risk that they may leave the firm prior to retiring and thus forfeit any benefit. Defined contribution plans are considered more suitable for those further from retirement.

Muni bonds known as dollar bonds are generally quoted:

As a percentage of par. Although muni bonds are usually quoted on a yield basis, actively traded bonds known as dollar bonds are often quoted as a percentage of par (price). The term dollar bond comes from the quote being in made in dollars. Remember that a percentage of par value ($1000) equals a dollar price.

A customer opens an account and payment and delivery instructions are established. Beyond the opening of the account these instruction smay

Be changed for individual transactions, or going forward, for all transactions. Once payment and delivery instructions are established at the time the account is opened they can be changed for any individual transaction or for all transactions going forward

An investor has a portfolio valued at $200,000 invested entirely in the stock of his employer, a manufacturing company with 2 key products. He believes he has his hand on the pulse of the company regarding its financial health and tells you that he is comfortable with holding this single stock portfolio. Regarding the obvious lack of diversification, which other risks should be discussed?

Business Risk and regulatory risk. Beside the lack of diversification the other must prominent risk associated with a single stock portfolio would be business risk, the risk of losing principal due to the failure of an issuer to continue keeping the business successful. There could also be regulatory risk, the risk that changes in regulations can negatively impact a particular product or company. Timing risk has to do with trading in and out of the market and wouldn't be of much concern for a position intended to be held. Additionally, stocks are generally considered liquid. Interest rate and inflation risks are more associated with fixed-income (debt) instruments, not stocks.

A customer recently approved to trade options writes an OEX put for the account's initial transaction. If the customer fails to return the signed option agreement within 15 days of account approval, which of the following transactions is the customer permitted to make?

Closing purchase. If a customer fails to return the signed option agreement within 15 days of account approval, the customer is permitted closing transactions only. Because the customer opened a position by selling, the only transaction permitted would be a closing purchase.

Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans? Contribution amounts are fixed. Contribution amounts vary. Benefit payments are fixed. Benefit payments vary.

Contribution amounts vary and benefit payments are fixed. In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.

A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 50% of income earned on investments in

Corporate common and preferred stock. Corporate ownership of another company's stock allows the investor to exclude 50% of dividends from taxation.

A formula timing plan that consists of periodic purchases of a fixed dollar amount of stock regardless of price is known as:

Dollar cost averaging. There is no such thing as share averaging. Constant dollar and constant ratio plans do not involve periodic purchase of securities. They involve buying and selling equity and debt securities to keep either a constant dollar or constant ratio between the two. Dollar cost averaging calls for the investor to make regular purchases over a long period.

All of the following debt instruments pay interest semiannually EXCEPT:

Ginnie Maes pay interest on a monthly basis, not semiannually.

Buying stocks with high PE rations normally reflect what investment style?

Growth. The purchase of stocks with high PE rations represents a growth investment style. Growth-oriented investors will pay high PE rations. Value investment style is associated with the purchase of low PE stocks or stocks trading below their intrinsic value.

A high net worth investor with substantial annual income likes real estate as a potential investment. The investor notes that any potentially offering tax credits would be most interesting to consider first. Which of the following would be suitable investments to discuss?

Historic rehabilitation and government assisted housing direct participation programs (DPPs). Real estate investments trusts (REITs), either equity or mortgage, should be eliminated as they offer no tax credits. Given the customer's high net worth and income, a discussion of DPPs is suitable. Of those DPPs shown here, only historic rehabilitation and government assisted housing offer tax credits and either should be suitable for discussion.

Which of the following statements regarding a death in a tenants in common account are TRUE? The decedent's interest in the account goes to his estate. The decedent's interest in the account goes to the remaining tenant. The member firm must freeze both the account and acceptance of orders until the required documents are presented. The member may immediately accept orders from the remaining tenant.

I and III. If one party in a TIC account dies, the decedent's interest in the account goes to his estate, not to any other party to the account. The member firm must freeze the account and acceptance of all orders until the required documents are presented.

With ABC trading at 39, a customer buys 1 ABC March 40 call and sells 1 ABC March 35 call. A profit occurs if: the spread widens. the spread narrows. ABC declines sharply. both contracts are exercised.

II and III. Whenever there is a question where the choices are widen or narrow, you first need to determine if the spread is a debit or a credit. A debit spread is one where the option you buy costs more than what you receive for the one you sell. A credit spread is the opposite - you one you are selling has a higher price than the one you are buying.In this question, the premiums are not given so we have to figure out which is the more expensive option. We have a 35 call and a 40 call. Which of those is more valuable? The ability to buy a stock at 35 or buy that stock at 40?The lower the exercise (strike) price of a call, the greater the value so we know the premium on the 35 call will be higher than that of the 40 call.Therefore, selling the 35 and buying the 40 is going to be a credit spread because more money will come from the sale of the 35 that will go out for the purchase of the 40. Once we know it is a credit spread, we go to the answer choice NARROW. And, when we want the spread to narrow, we want the options to expire so choice IV can't be correct.That sort of backs us into knowing that choice III is true, but let's be sure. We identify spreads as bullish or bearish and the way to see that is, bulls buy low and sell high. When looking at this question, we see the option bought is the high strike price and the one sold is the low strike price so this must be a bearish position. Bears want the market price to fall so yes, choice III is accurate.

Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio?

If this strategy is consistent with the objectives of the plan. As covered calls are not considered to be a speculative option strategy they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

A respected analyst reports that last week's T-bill rate at 6% is lower than the rate for the preceding week and lower than the average for the past month. Which of the following is TRUE?

Investors are paying more for T-bills. When the rate is lower, the price has gone up; this means investors are paying more as interest rates are going down.

In February, a customer sells 1 GHI Oct 60 put for 3 and buys 1 GHI Oct 70 put for 11. If the customer closes the Oct 70 put before expiration, which of the following statements regarding the resulting profit or loss is TRUE?

It is treated as a capital gain or loss. All listed options trades with resulting gains or losses are treated as capital gains or losses.

When a company issues additional bonds, which of the following is true?

Leverage is increased. Leverage is the use of someone else's money at a fixed cost to benefit the common shareholders. Issuing additional bonds increases the company's debt (money borrowed from someone else) and therefore increases leverage for shareholders.

If the assets of a company did not change, but stockholders' equity declined, it follows that:

Liabilities increased. Stockholders' equity is assets minus liabilities. If assets stay the same, then an increase in liabilities will cause a decline in equity.

In determining a violation of position limits, short calls are aggregated with:

Long Puts. position limits are measured by the number of contracts on the same side of the market. Long calls and short puts are on the bull side; short call and long puts rae on the bear side.

A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of his securities, he will immediately face:

Marketability Risk. It is difficult to sell a large block of securities in a thinly trade stock without a substantial discount to market price. This is known as liquidity or marketability risk.

In terms of the number of issues traded, the largest secondary market for securities is the over-the counter market. Which of the following securities cannot be traded OTC?

Mutual Funds. Any security that trades in the secondary markets may be traded in the OTC market. That includes securities listed on the stock exchanges. Mutual funds ( and variable annuities) are securities for which there is no secondary market trading. Shares (or units) in these securities are bought and redeemed through the issuer.

Five years ago, the ABCD mutual fund bought 200,000 shares of Comet Industries at an average price of $42.25. After a series of accounting scandals, the shares are now trading at $6. If the fund decides to sell its shares, what will be the impact of the sale of Comet shares on the NAV of the ABCD fund? A) This depends on whether the fund can claim a tax loss on the sale. B) The NAV will rise. C) The NAV will not change. D) The NAV will fall.

NAV will not change. Portfolio holdings in a mutual fund are marked to the market each day. Therefore, the NAV of the fund already reflects the current value of each security in the portfolio, including Comet industries. When the fund sells the position, the value of the stock is replaced by an equivalent amount of cash, so net asset value does not change.

A convertible corporate bond with an 8% coupon yielding 7.1% is available, but may be called sometime this year. Which feature of this bond would probably be least attractive to your client?

Near-term Call. The near-term call would mean that no matter how attractive the bond's other features, the client may not have very long to enjoy them.

According to the U.S.A PATRIOT Act, account identification and verification procedures should be applied to which of the following? New individual accounts. New business accounts. Existing individual accounts. Existing business accounts.

New Individual accounts and new business accounts. The procedures required by the USA PATRIOT Act for the verification and identification of customer accounts should be applied to all new customers - whether individuals or businesses.

One of your clients dies. Upon notification of the death, you should immediately do all of the following EXCEPT A) mark the account Deceased until proper documents are received B) cancel all GTC orders for the account C) obtain the names of the beneficiaries of the estate for the purpose of notification D) cancel all day orders for the account

Obtain the names of the beneficiaries of the estate for the purpose of notification. The account RR should cancel all open orders and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries.

A mother makes a gift of appreciated securities to her 10-year-old sold. The son's cost basis in the stock is the:

Original cost of the securities to the mother. When a gift of securities is made while the donor is alive, the original cost of the securities is the cost basis, not the value of the security on the date of the gift. Market value at date of gift is used to determine if gift taxes are applicable.

All of the following statements regarding PAC CMOs are true EXCEPT: A) PACs have companion tranches. B) PACs have a lower than average prepayment risk. C) PACs have higher yields than comparable TACs. D) PACs have a more certain maturity date than comparable TA

PACs have higher yields than comparable TACs. PACs have two companion tranches; one to absorb prepayments and one to buffer against extension risk. Because there is less risk and a more certain maturity date, PACs tend to have lower yields than comparable TACs.

In a rising interest-rate environment which of the following risks associated with mortgage-backed securities such as a collateralized mortgage obligation (CMO) is of least consequence to a potential investor?

Prepayment risk. Prepayment risk is the risk that mortgage holders will refinance or repay their mortgages early as a result of falling interest rates. Therefore in a rising interest rate environment it would be less of a concern for a CMO investor. Extension risk is the risk that mortgage payments will be missed or slower than anticipated in a faltering economic environment. Credit and interest rate risks are always of concern with CMOs.

Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory?

Systematic Risk. Market Risk - sometimes referred to as systematic risk - cannot be diversified away. The risk of investing in a single industry or sector can be diversified away by investing in several industries with returns not correlated to each other. A general downturn in the market, however, cannot be eliminated through diversification.

A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need? The corporation's charter and bylaws. A copy of the corporation's most recent balance sheet. The corporation's last 3 profit and loss statements. The name(s) of natural persons authorized to trade the account.

The corporation's charter and bylaws and the name of the natural persons authorized to trade the account. Corporate accounts are generally those established by the officers of a corporation. Such accounts required a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any). If it is to be a margin account, a copy of the corporate charter and a signed margin agreement are also required.

A customer's sell-at-market order was reported as executed at 29.75. Later it was discovered that the report was an error; the trade actually was executed at 29.50. Which of the following is TRUE?

The customer must accept the 29.50 A market order means the customer states that he is willing to accept the best price at the time of execution. A mistake made in reporting does not alter that fact.

Which of the following does NOT participate in the syndicate (joint account) for a municipal underwriting?

The issuing municipality. A syndicate or joint account helps spread the risk of underwriting an issue among a number of underwriters. In this case, banks and broker/dealers who deal in municipal securities. The issuing municipality would not be a member of the syndicate (joint account) formed for the purpose of selling their municipal securities to the public.

All of the following are fiduciary accounts EXCEPT: A) transfer on death (TOD) accounts. B) trust accounts. C) guardian accounts. D) estate accounts.

Transfer on death (TOD) accounts. A TOD account is an individual account in which, on the death of the account owner, the assets pass to a designated beneficiary.

If an investor interested primarily in speculation does not expect the price of DWQ stock to change, he or she will:

Write an uncovered straddle. AN investor who expects prices to remain stable writes an uncovered straddle (short straddle). In selling the put and call at the same terms, the writer collects double premiums. Both expire if the price remains stable, but if the price moves, one side loses money. Short straddles carry unlimited loss potential because of the uncovered call.

Which of the following investment activities are suitable for an individual retirement account? Writing uncovered calls. Writing covered calls. Buying puts on stock held long. Writing naked puts.

Writing covered calls and buying puts on stock held long. Writing uncovered calls and writing naked puts subject the investor to a high degree of risk and are considered unsuitable activities.

Scales in a municipal bond underwriting refers to

Yields by maturity. The scale sometimes referred to as the re-offering scale, is a listing by maturity of the price or yields at which a new issue will be offered. A typical scale has earlier maturities with lower yields and later maturities with higher yields.

If a customer sells a zero-coupon bond before maturity, gain or loss will be the difference between sales proceeds and:

accreted value. Zero-coupon bonds must be accreted for tax purposes. Each year, the annual accretion is taxable to the holder. In addition, the customer may adjust the cost basis of the zero upward by the amount of the annual accretion.

If the owner of a variable annuity dies during the accumulation period, any death benefit will:

be paid to a designated beneficiary. The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased.

If a customer gives specific instructions to his registered representative to purchase a security that is clearly unsuitable in light of the customer's investment objectives, under FINRA rules, the registered representative

can enter the order. Under FINRA rules, the representative may execute the trade at the customer's request; the trade ticket should indicate that the order was unsolicited.

A limited partner assisting the general partner to solicit new investors

could jeopardize his limited partner status. If limited partners, either individually or as a group, become too involved with the business of the partnership, they could be considered to be general partners and lose their limited liability.

A customer tells a broker to buy 1,500 shares of ABCD at 33.60 immediately for the full 1,500 shares. This is a(n):

fill or kill order. In a fill-or-kill order the instruction is to fill the entire order immediately at the limit price or better. If this cannot be done, the order will be canceled (killed). An immediate-or-cancel order is similar, except that partial execution is acceptable. An all or non order must be filled in its entirety. However, it can be filled over time; it does not require immediate execution.

Corporate bonds that are guaranteed are

guaranteed as to payment of principal and interest by another corporation. A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation, and is in a control relationship with it.

Ginnie Mae pass-throughs will pay back both principal and interest

monthly . GNMA securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the GNMA investor monthly.

Your broker/dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is

required at least 10 business days prior to first use or publication. Filing with FRINA is required at least 10 business days prior to first use or publication for retail communications having to do with options.