Series 7 Test Questions 21

A corporate bond is quoted at 102-5/8. A customer buying 10 bonds would pay:

$10,262.50 ****Par ($1,000) × 102% = $1,020. 5/8 of one bond point ($10) = .625 × $10 = $6.25. Therefore, the quote reading 102-5/8 = $1,026.25 per bond ($1,020 + $6.25). Because we are told the customer is buying 10 bonds, we multiply $1,026.25 × 10 bonds which equals the amount the customer will need to pay in order to make the entire purchase; $10,262.50.****

ABC Corporation is offering 500,000 units to the public at $5 per unit. Each unit consists of 2 shares of ABC preferred stock and 1 perpetual warrant for ½ common share of ABC exercisable at $5. How much capital was raised by the initial sale of the issue?

$2.5 million ****Since the issuing corporation is offering 500,000 units to the public at $5 per unit, the total amount of capital to be raised by this sale will be $2.5 million (500,000 units x $5 per unit).****

Your client who has not yet attained the age of 59 ½ wants to take a withdrawal from his traditional IRA. Not being disabled or meeting any other qualifying reason allowing for an early withdrawal you explain that the amount taken will be subject to a penalty of:

10% ****Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to one-time penalties of 10% of the gross amounts withdrawn in addition to ordinary income taxes.****

An investor has an established margin account with a current market value of $13,500 and a debit balance of $4,775 with Regulation T at 50%. How much excess equity does the investor have in the account?

1975 ****The Regulation T requirement is 50% of the current market value of $13,500 ($6,750). Equity is equal to the current market value of $13,500 minus the debit balance of $4,775 ($8,725). Excess equity is calculated by subtracting the Regulation T requirement of $6,750 from the equity of $8,725 ($1,975).****

Your customer has made a margin purchase of 100 shares of DMF at 50. Two days later, before the customer has met his call, the current market value of DMF is 60. How much must your customer now deposit? (Regulation T is 50%.)

2500 ****The investor must come up with the initial call of $2,500. The amount of margin required for a new purchase is based on the CMV of the security at the time of purchase.****

A member receives an order to buy non-Nasdaq OTC securities and sees no published quotes. To determine the prevailing market, the member must contact a minimum of

3 dealers ****A member must contact a minimum of 3 dealers (or all dealers making a market in the security if 3 or less) to determine the prevailing market. If 2 or more quotations can be found, the requirement to contact dealers is waived.****

Trade confirmations must show yield to call on which of the following bonds?

5-½%, 5% basis, maturing 2008 ****Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a premium bond, the yield to call is the lower of the two. The 5-½% bond with a 5% basis is the only bond trading at a premium because the yield to maturity (or basis) is lower than the coupon.****

If a customer buys 300 ABC at 53 and writes 3 ABC June 55 calls at 4, and the contracts expire unexercised the customer's cost basis in ABC stock at expiration is:

53 ****The cost basis in the stock remains at the original purchase price. The premium received must be declared by the investor as a capital gain for tax purposes. Premiums on options will only affect the stock's cost basis or sales proceeds if the option is exercised, or if (on the same day) a customer buys stock and buys a put.****

In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is

5600 ****The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000, therefore the credit balance is $5,600 ($3,600 + $2,000 = $5,600).****

If a customer buys 200 shares of ABC at 40 and writes 2 ABC Oct 45 calls at 2 in a cash account, the customer must deposit:

7600 ****The customer is required to deposit 100% of the stock purchase price ($8,000) in this cash account. However, the customer received $400 for writing the 2 calls at $200 each, and the calls are covered by the stock purchased. The deposit can be reduced by the premium income, which leaves a required deposit of $8,000 minus $400, or $7,600.****

A customer sells short 100 shares of XYZ Corporation at $78 per share. The support and resistance levels for XYZ are at $70 and $80, respectively. If he wishes to protect his position, which of the following is the best place to put in a buy stop order?

80.1 ****The client will want to place a buy stop a little above the resistance level to protect himself against an upside breakout. Entering a buy stop order too close to the purchase price (78.10) would not afford the client an opportunity for gain.****

In a rising market, which of the following is least volatile?

A stock with a beta of 0.5 ****Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market.****

A customer is choosing a payout option for a variable annuity. Maximizing monthly income for the rest of his life is the customer's key objective. This annuitant has no living relatives so beneficiaries are not a concern. Which of the following options available would best meet the needs of this annuitant?

A straight life payout option ****The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. Life with period certain will produce a smaller check for life because the insurance company will guarantee payments to a beneficiary for a certain period of time designated in the contract should the annuitant die within that period. But again, the need to designate beneficiaries is not an issue for this annuitant. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies.****

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and since they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers?

ATF Overseas Opportunities Fund ****Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification.****

What is the latest date that an IRA participant may make an IRA deposit for the current year?

April 15 of the following year ****Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made.****

MSRB rules for NYSE member firms are enforced by

FINRA ****The board's rules are enforced by FINRA for securities firms. The MSRB has rule-making authority but no enforcement or examination authority.****

Which of the following statements regarding the flow of funds found within a municipal trust indenture are TRUE?

It describes the disbursement of funds for revenue bond issues It is found within the bond contract ****The term "flow of funds" relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts as specified in the trust indenture found in the bond contract.****

All of the following are required by limited partnerships EXCEPT:

SEC approval ****The SEC does not approve limited partnerships or any other securities. In public offerings of limited partnerships (as opposed to private placements), federal registration and a prospectus are required.****

All of the following are used to back collateralized mortgage obligations EXCEPT:

Sallie Mae ****Sallie Mae is the Student Loan Marketing Association, which purchases student loans and packages them for the secondary market. The FNMA, GNMA, and FHLMC sell mortgage-backed securities.****

If an investment representative gave her retail customers copies of sales literature for a variable annuity she was recommending and promised to send the prospectus soon, which of the following statements are TRUE?

She should not have distributed sales literature without the prospectus She should not have recommended a specific variable annuity without having the prospectus available ****A prospectus must precede or accompany any solicitation, including distribution of sales literature to retail customers.****

A customer owns shares in ACME Income Fund and decides to exchange them for shares in ACME Growth Fund within the same family of funds. Which of the following statements is TRUE?

The exchange is a taxable event ****The IRS deems an exchange to be a sale and repurchase of shares. On any sale of securities, capital gains or losses are realized; as such, exchanges are a taxable event.****

Which of the following would be the usual use of a stop order?

To protect the profit on a long position To prevent loss on a short position ****A buy stop could be used to protect an investor who is short, and a sell stop could be used to protect an investor who is long. Stop orders never guarantee execution price.****

A couple in retirement wants to add income to their account. Which of the following would be the least suitable?

Writing uncovered calls ****It should be noted that pending other factors, engaging in options transactions may not be suitable at all for someone in retirement. All of the selections would initially add income to the account but based only on the information given, writing uncovered calls would be deemed the least suitable as it is the only strategy listed with unlimited maximum loss potential. While the other strategies listed all have risk associated with them, the risk is limited to a defined amount.****

The individual responsible for the overall supervision of all of a firm's options activities on behalf of its customers must be:

a registered options principal (ROP) ****Any firm that transacts options trades will have a registered options principal to oversee trading and a registered options principal designated to carry the ultimate responsibility of supervision and to ensure that options compliance procedures are followed.****

All of the following are allowable municipal dealer quotes EXCEPT

an unidentified nominal quote ****MSRB Rule G-13 requires municipal brokers and dealers to give bona fide bids and offers for municipal securities (bona fide quotes are those good for trading). It also allows for requests for bids (BW = bids wanted) and requests for offers (OW = offers wanted). A nominal quote (those for informational purposes only) is permissible, but only if it is identified as such.****

If a Japanese exporter wants to hedge a recent sale of stereo equipment to a U.S. buyer, and the exporter will be paid in U.S. dollars upon delivery of the goods, the best hedge would be to:

buy Japanese yen calls ****The Japanese exporter will be paid in U.S. dollars upon delivery of the equipment. He would be adversely affected if the dollar dropped in value in relation to the yen. To protect his position he should buy calls on his own currency, the yen. Then, if the yen appreciates, his loss on the dollar is offset by his gain on the calls. Exporters buy puts on foreign currency to hedge, but there are no options on the U.S. dollar. The next best strategy is to buy calls on the home currency.****

All of the following statements regarding 529 plans are true EXCEPT:

contributions are made with pretax dollars at the federal level ****Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.****

All of the following are true regarding nonqualified deferred compensation plans EXCEPT:

employees may use accumulated funds as collateral for a bank loan ****Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no rights to the money until retirement, death, or disability, and thus cannot use it as collateral.****

A customer wishing to open a numbered account must be informed that:

he must supply a written statement attesting to his ownership of the account ****Numbered, or symbol, accounts require a signed, written statement from the client, acknowledging ownership, to be kept on file.****

All of the following are call buyers' objectives EXCEPT:

hedging a long stock position against falling prices ****Long stock positions are best hedged with the purchase of a long put. Call buyers protect short stock positions, speculate on the upward movement of a stock's price, diversify their holdings, and delay the decision to buy stock because of the expiration period.****

A corporation must have stockholder approval to

issue convertible bonds ****Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholder's proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its treasury, declaration of a stock dividend, and declaration of a cash dividend.****

The 5% markup policy applies to all of the following EXCEPT:

municipal bond transactions ****The 5% policy does not apply to exempt securities transactions such as municipal bond trades The policy applies to nonexempt securities and transactions on an exchange and in the OTC market, and it applies to both agency and principal trades.****

Long an ABC Apr 60 call and short an ABC Apr 70 call is a:

net debit spread ****This is a vertical spread, not a calendar spread. To determine whether it is a net credit or debit, look at the strike prices. For call options with the same expiry month, the lower strike price will always have a higher value. In this case, the investor is long the higher valued option, which gives a net outflow of cash to enter the entire position (more money was spent on the lower strike price call than received for the higher strike price call). Therefore, the investor has a net debit for his account.****

The coupon on a bond can be described as its

nominal yield ****The coupon on a bond is also known as the nominal yield, and it indicates the annual interest paid. For example, a 4% bond pays $40 of interest per year.****

An investor in a high income tax bracket owns a number of municipal bonds and wants to add some to a 401k plan he participates in and perhaps his IRA. As a registered representative, you would advise that this is

not suitable because the interest payments from municipal bonds are tax-free already and have no place in a tax-advantaged (tax-deferred) account such as a 401k plan or IRA ****While municipal bonds can be suitable for those in higher income tax brackets, they have no place in tax-advantaged (tax-deferred) accounts such as 401k plans or IRAs because the interest paid is already tax free.****

In a rising market, all of the following strategies are appropriate EXCEPT:

short stock/short put ****Investors who short stock have sold borrowed shares, and profit when the market price declines.****

If a customer buys 1 ABC Jan 50 call at 2 and 1 ABC Jan 50 put at 4 when ABC is at 49, the maximum potential gain is:

unlimited ****Maximum gain in a long straddle is unlimited if the market moves up. If the market moves to zero, the gain is $4,400 (50 − 6 = 44).****

A variable annuity's separate account is:

used for the investment of funds paid by contract holders regulated under both securities and insurance laws. ****The separate account is used for both variable life insurance and variable annuity investments. The nature of the securities invested in-bonds and growth stocks-makes it necessary that sales representatives and their principals be licensed in securities as well as insurance.****

Treasury bills (T-bills) are auctioned by the U.S. Treasury

weekly ****Treasury bills (T-bills) are auctioned by the U.S. Treasury weekly****