Series 7 Mastery Exam Review

Your broker-dealer is compiling a list of investments suitable for a qualified retirement plan. The list should not include A) investment-grade corporate bond. B) Treasury bills. C) investment-grade municipal bonds. D) highly rated common stocks.

*Municipal bonds interest is tax-free, therefore, not a suitable investment for Qualified Retirement Plans.

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? A) 0.30 B) 0.20 C) 0.65 D) 0.60

A) 0.30

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 A) 36 and 64. B) 44 and 58. C) 47 and 54. D) 43 and 57.

A) 36 and 64.

JGH 6.0% bonds are convertible into 25 shares of JGH common stock and are trading at 106. Later, when the JGH common is trading at $42, the bonds are called at 104. Which of the following choices would maximize the investment value for a holder of the JGH convertible bonds, once the call is announced? A) Tender the bonds for the call. B) Convert the bonds into common stock and sell the stock. C) Continue to hold the bonds and receive 6% interest. D) Sell the bonds in the market.

B) Convert the bonds into common stock and sell the stock.

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? A) Developmental oil and gas B) Raw land real estate C) Exploratory oil and gas D) Equipment leasing

B) Raw land real estate

Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid? A) Eight percent coupon with premiums over par B) Six percent coupon with premiums over par C) Six percent coupon with no premiums over par D) Seven percent coupon with no premiums over par

B) Six percent coupon with premiums over par In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the six percent coupon on the bonds.

A customer is likely to experience the greatest purchasing power risk with which of the following investments? A) Convertible preferred stock. B) Short-term Treasury note. C) A long-term AAA rated municipal bond. D) Combination fund.

C) A long-term AAA rated municipal bond. The longer a fixed-income investment is held, the more vulnerable the investor is to purchasing power risk from inflation. Although preferred stock is also a fixed-income investment, convertible preferred will increase in value with the underlying common stock.

A registered representative interviewing a new client learns that the client has an investment objective of earning income and is willing to assume moderate risk to do so. The objective and risk tolerance of the client can be met by which of the following mutual funds? A) A money market fund B) A high-yield bond fund C) A preferred stock fund D) A U.S. government bond fund

C) A preferred stock fund *Money market fund and U.S. government bond provide income but are very safe. *High-yield provide the highest income opportunity, but is the most riskiest.

A customer wishes to transfer his account positions to another broker-dealer. After validating the positions, the carrying broker-dealer is required to complete the transfer within how many business days? A) Five B) Four C) Three D) Seven

C) Three 1 business day to validate, 3 to transfer

A source of funds used to service municipal revenue special tax bond issues might be A) income taxes. B) property taxes. C) ad valorem taxes. D) gasoline taxes.

C) ad valorem taxes.

When a limited partnership interest is sold, gain or loss to the partner is determined by the difference between the sales proceeds and the A) total of deductible losses. B) original cost basis. C) adjusted cost basis. D) original investment minus any debt assumed by the general partner(s).

C) adjusted cost basis.

An official notice of sale publicizes all of the following except A) the issuer's name. B) the amount of good faith deposit required. C) the bond's rating. D) the bond counsel's name.

C) the bond's rating. The notice of sale is the advertisement placed by a municipality soliciting bids from underwriters for an issue it wishes to sell. It does not include the bond's rating.

A technical analyst notices a head and shoulders top formation on a chart. The formation is generally an indicator of A) the reversal of a downtrend. B) a breakout below the support level. C) the reversal of an upward trend. D) a breakout above the resistance level.

C) the reversal of an upward trend.

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? A) Class A shares B) Class A or C shares C) Class C shares D) Class B shares

D) Class B shares A is not correct because it is intended for those who meet the breakpointsC is not correct because they are appropriate for investors who have short time horizons due to a lot of expenses

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? A) Taxes are due at the federal level only at the time the estate is transferred to the surviving spouse. B) There is no exclusion or deferral of estate taxes at the state or local level for a surviving spouse. C) An estate transferred to a surviving spouse is taxable at all levels at the time of transfer. D) Taxes will not be owed on the estate until the death of the surviving spouse.

D) 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. This unlimited marital deduction results in taxes being owed at the death of the survivor.

The 5% markup policy applies to each of the following transactions except A) principal transactions occurring in the OTC market. B) agency transactions in nonexempt unlisted securities. C) agency trades occurring on a listed exchange. D) new issue transactions.

D) new issue transactions.

For corporate retirement plans, which of the following characterizations is true? A) Defined benefit plans use actuaries to determine the needed contributions. The plans favor those with shorter time left to retirement. B) Defined contribution plans use a specified contribution so that the exact benefit at retirement is known well in advance. The plans favor those with longer time left to retirement. C) Defined contribution plans use actuaries to determine contribution so that the exact benefit at retirement is known well in advance. The plans favor those with longer time left to retirement. D) Defined benefit plans use a specified contribution, but the exact benefit at retirement is unknown. The plans favor those with shorter time left to retirement.

A) Defined benefit plans use actuaries to determine the needed contributions. The plans favor those with shorter time left to retirement.

Regarding the performance of a variable annuity's separate account and the assumed interest rate (AIR), which of the following is true? A) If separate account performance is less than the AIR, next month's payment is less than this month's. B) If separate account performance is more than the AIR, next month's payment is equal to this month's. C) If separate account performance is less than the AIR, but greater than last month's, the next month's payment is more than this month's. D) If separate account performance is equal to the AIR, but less than last month's, the next month's payment is less than this month's.

A) If separate account performance is less than the AIR, next month's payment is less than this month's.

Which of the following could be used to protect an equity portfolio against systematic risk? A) Index options B) Interest rate option C) Currency options D) Stock options

A) Index options Systematic risk is the market risk applied to the value of an entire portfolio instead of just one stock. Therefore, an investor would use index options to protect against systematic risk.

Your customer, divorced with two children and age 52, has a portfolio consisting of 80% equities with the remaining 20% diversified among several other products. Her annual income is $115,000. Which of the following events would most likely be cause to immediately reallocate her investments? A) She has been notified by her employer that due to corporate downsizing her position is being eliminated. B) Equities are rebounding slowly after a two-year slump. C) The father of her children has established trust funds for each of them in the amount of $50,000 each. D) She will be remarrying a person of considerable wealth next month.

A) She has been notified by her employer that due to corporate downsizing her position is being eliminated. Equities carry high risk so she would want to diversify her portfolio more.

A new registered representative is a member of your team and asks you about prospectus delivery requirements. It would be correct to state that delivery of a prospectus to a customer is not required for the purchase of A) a U.S. government bond mutual fund. B) a new issue of general obligation bonds. C) a variable annuity. D) a new issue of AAA rated corporate bonds.

A) a U.S. government bond mutual fund.

An issuer interested in reducing its interest cost can use the call provision to call in outstanding bond issues. The issuer is most likely to call bonds with A) a high coupon and low call premium. B) a low coupon and high call premium. C) a low coupon and low call premium. D) a high coupon and high call premium.

A) a high coupon and low call premium.

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? A) 20% T-bills, 10% corporate bonds, 70% equities and equity funds B) 30% T-notes, 70% zero-coupon bonds C) 30% corporate bonds, 70% equities D) 85% corporate bonds, 15% zero-coupon bonds

B) 30% T-notes, 70% zero-coupon bonds

A customer asks you for a quick, accurate definition of 12b-1 fees. A good reply would be that they are A) often referred to as asset-based distribution fees and are used to cover the costs of marketing and distributing the fund shares to investors. They can be used to compensate registered representatives with commissions for servicing an account (trailers) and therefore are considered to be a part of the sales charges. B) often referred to as asset-based distribution fees and are used to cover the costs of marketing and distributing the fund shares to investors. They can be used to compensate registered representatives with commissions for servicing an account (trailers), but are not sales charges. C) not asset-based, but are pure sales charges used to cover the costs of marketing and distributing the fund shares to investors. D) an additional sales charge added on to fund the compensation of registered representatives who receive commissions in the form of trailers.

B) often referred to as asset-based distribution fees and are used to cover the costs of marketing and distributing the fund shares to investors. They can be used to compensate registered representatives with commissions for servicing an account (trailers), but are not sales charges. *As an asset-based fee, 12b-1 fees are often called asset-based distribution fees. Named after the SEC rule that allows them, 12b-1 fees are used to cover the costs of marketing and distributing the fund to investors. These 12b-1 fees are also used to compensate registered representatives for servicing an account (trailer commissions) but shouldn't be confused with sales charges.

A registered representative is obligated to adhere to the prospectus delivery requirements of the Securities Act of 1933 when making a sale of A) shares of the XYZ closed-end investment company, a fund whose shares trade on the Nasdaq Stock Market. B) shares of the STU open-end investment company, a fund whose portfolio makeup is exclusively U.S. Treasury issues. C) a new issue of B-rated industrial revenue bonds to provide funding for a new facility for the Boomer Widgets Company. D) shares of the LMN S&P 500 index EFT, traded on the NYSE.

B) shares of the STU open-end investment company, a fund whose portfolio makeup is exclusively U.S. Treasury issues. *Because the shares are always a new issue, it is required to deliver a prospectus prior to or concurrent with the sale. As a consequence, investors in mutual funds are always purchasing a new issue.*The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934.*Issuers exempt from the 1933 Act: U.S. government, U.S. municipalities and territories.

An investor is interested in a limited partnership and asks his registered representative to explain the "crossover point" referred to in discussions about the tax consequences of the program. The best definition would be A) the point at which the program begins to generate losses instead of taxable income, which generally occurs in later years. B) the point at which the program begins to generate taxable income instead of losses, which generally occurs in later years. C) the point at which the program begins to generate losses instead of taxable income, which generally does not occur until near the time the partnership is expected to be dissolved. D) the point at which the program begins to generate taxable income instead of losses, which generally occurs quickly if not in the very first year.

B) the point at which the program begins to generate taxable income instead of losses, which generally occurs in later years.

The visible supply as shown in The Bond Buyer is the A) the percentage of new issues sold versus new issues offered for sale. B) the total dollar volume of municipal offerings expected to reach the market in the next 30 days. C) the total dollar volume of general obligation (GO) offerings expected to reach the market in the next 30 days. D) the total dollar amount of new issues offered for sale divided by dollar amount of new issues sold.

B) the total dollar volume of municipal offerings expected to reach the market in the next 30 days.

Fees can have a major impact on long-term performance of an investment. Your client interested in purchasing a periodic payment deferred annuity would not be concerned about A) death benefit fee. B) surrender charges. C) 12b-1 fees. D) M&E fees.

C) 12b-1 fees.

All of the following municipal bonds are callable at par. Yield to call (YTC) must be displayed on which of the following confirmations? A) 6%, 6.5% YTM basis, maturing 2036 B) 6%, 6.5% YTM basis, maturing 2040 C) 5.5%, 5% YTM basis, maturing 2040 D) 5.5%, at par, maturing 2036

C) 5.5%, 5% YTM basis, maturing 2040 *5.5% coupon > 5% YTM = premium bond.

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? A) 8.5 million B) 9 million C) 9.5 million D) 10 million

C) 9.5 million *Issued Stock - Treasury Stock= Outstanding Stock-Issued Stock: 7,000,000-Treasury Stock: 500,000-Rights Offering (stand by): 3,000,000*10,000,000 - 500,000 = 9,500,000 shares.

Which of the following statements regarding Sallie Mae debentures are true? 1. Interest is generally paid monthly. 2. Interest is generally paid semiannually. 3. Interest is exempt from state and local taxation. 4. Interest is not exempt from state and local taxation. A) I and IV B) II and IV C) II and III D) I and III

C) II and III As a general rule, debentures pay interest every six months. Further, interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation.

A local school district needs to invest funds short term. They do so in a trust formed specifically for this purpose, which allows the municipal entity to purchase shares or units of the trust's investment portfolio. This investment vehicle is known as A) a real estate investment trust (REIT). B) a bond anticipation note (BAN). C) a local government investment pool (LGIP). D) a unit investment trust (UIT).

C) a local government investment pool (LGIP).

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 A) are not subject to registration with the SEC, but are required to make full disclosure by delivering an offering circular. B) are subject to registration with the Municipal Securities Rulemaking Board (MSRB) and are required to make full disclosure by delivering an official statement. C) are not subject to registration with the Securities and Exchange Commission (SEC), but are required to make full disclosure by delivering an official statement. D) are not subject to registration with the SEC, but are required to register in the state of New Jersey.

C) 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 bonds provide a form of prospectus, (disclosure document), known as an official statement (OS).*Not all offerings of securities must be registered with the SEC. The most common exemptions from the registration requirements include:-Private offerings to a limited number of persons or institutions;-Offerings of limited size;-Intrastate offerings; and-Securities of municipal, state, and federal governments.

Balance sheet items affected by the issuance of new common stock would be A) total assets and net worth. B) total assets and retained earnings. C) current liabilities and net worth. D) current liabilities and retained earnings.

C) current liabilities and net worth.

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 A) market value. B) SMA. C) equity. D) debit balance.

C) equity. *Equity is only affected by changes in market prices and never by sales of securities in the account.

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 A) they carry high risk because the funds will always be invested in the best available opportunity even though it isn't immediately identified. B) they are synonymous with blind-pool companies that sell shares to investors without telling them what the specific use of the funds raised will be or what industry or sector might be targeted. C) they have no business operations but instead raise money for the sole purpose of seeking out a business to engage in. D) they carry unique risks because in a blank-check company, shareholders have no vote on any business opportunity targeted for investment.

C) they have no business operations but instead raise money for the sole purpose of seeking out a business to engage in.

Your customer tells you she is very bearish on the market and thinks she can capitalize on that view by purchasing an inverse exchange traded fund (ETF) that tracks the Dow Jones Industrial Average (DJIA). In a subsequent, discussion she explains her understanding of how the fund works and makes several comments that are all accurate except one. Which is the inaccurate statement that as her registered representative you would want to correct? A) The fund is managed to perform opposite of the DJIA, and because I'm bearish on the market owning, these fund shares align with my view. B) If I have a change of view I can pretty much expect to be able to sell these shares right away, not like mutual fund shares where I have to wait until they're priced again. C) It's like any other fund regarding potential losses in that I can't possibly lose more than I invest. D) If the DJIA decreases by 10%, this ETF is managed to increase by twice that amount.

D) If the DJIA decreases by 10%, this ETF is managed to increase by twice that amount.

The income from all of the following securities is taxable on the federal, state, and local income tax levels except A) corporate BBB bonds. B) GNMA certificates. C) reinvested mutual fund dividends. D) Treasury bonds.

D) Treasury bonds. The interest on U.S. government securities (such as Treasury bonds) is exempt from state and local income taxes but not federal income taxes. Dividends (whether reinvested or not), Ginnie Maes, and corporate bonds of all types and/or ratings are taxable on all levels.

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) a diagonal. B) a combination. C) exposing the investor to potential unlimited loss. D) a cashless collar.

D) a cashless collar. *A collar is an option strategy generally used to protect an unrealized gain on a long stock position.*A cashless collar is one where the premium received on the short call is the same amount or higher than the premium paid for the long put.

Among the items shown on a customer confirmation for a bond transaction is the amount of accrued interest. The amount of accrued interest is A) added on the buyer's confirmation and subtracted on the seller's confirmation. B) subtracted on both the buyer's and the seller's confirmations. C) subtracted on the buyer's confirmation and added to the seller's confirmation. D) added on the buyer's confirmation and added on the seller's confirmation.

D) added on the buyer's confirmation and added on the seller's confirmation.

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 A) conversion privilege. B) breakpoints. C) letter of intent (LOI). D) rights of accumulation.

D) rights of accumulation.

When compared to mutual funds, which of the following statements regarding hedge funds is least accurate? Hedge funds A) are generally only appropriate for qualified investors. B) use derivatives to a greater extent. C) can take both long and short positions. D) tend to be more diversified in order to hedge risk.

D) tend to be more diversified in order to hedge risk.

If the placement ratio found within The Bond Buyer is high, this would indicate that A) the market for municipal bonds is weak with dealers more likely to bid on new municipal issues. B) the market for municipal bonds is weak with dealers less likely to bid on new municipal issues. C) the market for municipal bonds is strong with dealers less likely to bid on new municipal issues. D) the market for municipal bonds is strong with dealers more likely to bid on new municipal issues.

D) the market for municipal bonds is strong with dealers more likely to bid on new municipal issues.

The portion of a municipal bond underwriting spread that remains after the syndicate manager subtracts the management fee is A) the additional takedown. B) the concession. C) the total spread. D) the total takedown.

D) the total takedown. The total takedown is that portion of the municipal underwriting spread that remains after the underwriting manager takes the management fee. The total takedown consists of the additional takedown and the concession.

A customer of a broker-dealer has opted to use share identification for tax reporting when selling shares of her mutual funds. With this method of tax reporting, she would want to identify the shares to be sold as those that have A)the lowest cost basis generating the least gain. B)the lowest cost basis generating the greatest gain. C)the highest cost basis generating the greatest gain. D)the highest cost basis generating the least gain

D)the highest cost basis generating the least gain