Series 7 - 50 Question Quiz
Equity options that are in the money by what amount will be automatically exercised at expiration, barring any other instructions from the customer? A) $0.01 B) $0.10 C) $0.05 D) $1.00
A) $0.01 At expiration, unless the customer instructs not to, equity options that are in the money by $0.01 or more will be automatically exercised. (Key word: expiration) This rule is applicable to both retail and institutional customers. LO 10.j
Payments received by the owner of a 403(b) plan are A) 100% taxable. B) not taxable. C) taxable only to extent of earnings. D) taxable only to extent of the owner's cost basis.
A) 100% taxable When tax-sheltered annuity funds are withdrawn, they are fully taxed at ordinary income rates. Funds were contributed pretax and earnings accumulate tax deferred. Because no taxes were ever paid, the full withdrawal is taxable. LO 1.h
In light of the many cases involving variable annuities where there was failure to supervise egregious unethical behavior, FINRA's Rule 2330, Members' Responsibilities Regarding Deferred Variable Annuities, evolved. One of the specific concerns that the regulators have with deferred variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. In the case of variable annuities, these exchanges are normally done under the provisions of IRS Section 1035. One of the factors in determining if the exchange is suitable is whether the customer has had another deferred variable annuity exchange within the preceding A) 36 months. B) 30 months. C) 12 months. D) 24 months.
A) 36 months. One requirement Rule 2330 covers is the suitability of a deferred annuity exchange for a particular customer, considering whether the customer would -incur a surrender charge, -be subject to a new surrender period, -lose existing benefits, or be subject to increased fees or charges, -or if the customer has had another exchange within the preceding 36 months, in addition to other factors. LO 9.e
DJX Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. How many shares of DJX common stock are authorized but unissued? A) 5,000,000 B) 9,000,000 C) 6,000,000 D) 4,000,000
A) 5,000,000 This company has 10 million shares of common stock authorized. It has issued 5 million shares. The other 5 million are authorized, but unissued. Treasury stock is authorized and issued stock that is no longer outstanding. Authorized shares = 10,000,000 Issued shares = 5,000,000 Authorized but unissued = 5,000,000 LO 3.a
A customer is long 1 XYZ Jan 50 put. To create a bull put spread, the customer must sell a Jan A) 55 put. B) 50 call. C) 50 put. D) 45 put.
A) 55 put. In any spread, put or call, if the customer is buying the lower strike price, the spread is bullish. Therefore, to create a bull put spread, the customer (who is long the 50 put) must sell a put with a higher strike price. A bull put spread is also called a short put spread. LO 10.e
Under Municipal Securities Rulemaking Board rules, which of the following would indicate a control relationship between a municipal dealer and an issuer? A) A dealer's officer sits on the issuer's board of trustees B) The principal of the dealer lives within the municipality C) The dealer was an underwriter of the municipality's last issue D) The dealer is engaged as an underwriter for the issuer
A) A dealer's officer sits on the issuer's board of trustees A control relationship exists if someone represents both an issuer and municipal securities dealer. LO 6.h
A significant increase in which of the following types of orders may cause a bull market to accelerate? A) Buy stops B) Buy limits C) Short sales D) Sell stops
A) Buy stops If the market is rising, only those orders on the order book above the current market will be executed. Buy stops and sell limits are both entered above the prevailing market price. Of these two, only buy orders (in this case buy stops) will accelerate a rise in the market. LO 16.a
For which of the following would the net revenue-to-debt service ratio be applicable? A) Hospital bonds B) Tax anticipation notes C) School bonds D) General obligation bonds
A) Hospital bonds This is the coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built with the proceeds of revenue bond issues. LO 6.b
Which of the following securities carries the highest degree of purchasing power risk? A) Long-term, high-grade bond B) Convertible cumulative preferred stock C) Blue-chip stock D) Short-term note
A) Long-term, high-grade 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. LO 14.a
The sale of nonexempt securities may take place without an SEC registration if done in a manner that qualifies for a transactional exemption. An example of this would a sale complying with A) Rule 506(b). B) Rule 498. C) Rule 156. D) Rule 135A.
A) Rule 506(b). If the transaction is exempt, a security that would otherwise have to be registered is exempt from registration. Rule 506(b) is part of the private placement exemption under Regulation D of the Securities Act of 1933. Rule 498 deals with a summary prospectus for a mutual fund Rules 156 and 135A deal with advertising. LO 20.e
The analytical tool used to measure the variability between a particular stock's (or portfolio's) movement and that of the market in general is A) beta. B) alpha. C) the correlation coefficient. D) standard deviation.
A) beta Beta measures the systematic risk of a stock by comparing the variability between a particular stock's (or portfolio's) movement and that of the market in general. It only measures systematic risk not total risk. The beta coefficient of the market is set at 1.0. If the beta of the stock (or portfolio) is higher than 1.0, it is more volatile than the market. If it is less than 1.0, it is less volatile than the market. Alpha is the tool used to measure how a stock (or an asset manager) performed compared with the investment's expected rate of return based on its beta. Standard deviation measures the total risk of an investment (systematic risk + unsystematic risk). The correlation coefficient measures how two investments move in correlation with each other. A high correlation means they move in step with each other. A negative correlation means they move in opposite directions. LO 13.b
A general partner may do all of the following except A) borrow money from the partnership. B) make general management decisions regarding the partnership. C) sell property to the limited partnership. D) act as an agent for the partnership in managing partnership assets
A) borrow money from the partnership. All these situations offer the potential for conflicts of interest. However, the general partner is not forbidden by law to engage in any of these acts, except for borrowing money; the general partner may never borrow money from the partnership. LO 11.d
An investor purchased 100 shares of Wilmont Auto Supply Holdings (WASH) on June 1, 2018, at $55 per share. On July 5, 2019, WASH is trading at $40 per share and the investor sells at the market price. On August 1, 2019, the investor purchases a WASH Jan 40 call @4. If there are no other transactions during 2019, the investor's tax consequences are A) no taxable loss for 2019 because of the wash sale rule. B) not able to be determined until we know the disposition of the option. C) $1,500 long-term loss with no wash sale violation because the stock was long term before the purchase of the option. D) $1,500 short-term loss because the option was purchased less than 30 days after the sale erasing the holding period.
A) no taxable loss for 2019 because of the wash sale rule. The investor in WASH has violated the wash sale rule. Anytime a security is sold at a loss and then repurchased within 30 days of the sale (before or after), the loss cannot be taken at that time. The rule includes the purchase of substantially identical securities, such as call options, warrants, and convertibles, when determining if a violation has taken place. Because the question asks for the 2019 tax consequences, the disposition of the option expiring in Jan 2020 is irrelevant. LO 13.h
The Customer Identification Program requires that a tax identification number must be obtained when opening a new account. When the account is an UTMA, the Social Security number used is that of A) the minor who is the beneficiary of the account. B) the appointed custodian. C) a parent or guardian of the minor. D) either the custodian, a parent or guardian, or the minor.
A) the minor who is the beneficiary of the account. The minor's Social Security number is required because the account is fully owned by and taxed to the minor, not to the custodian or the parent. LO 1.b
All of the following are fiduciary accounts except A) transfer on death (TOD) accounts. B) guardian accounts. C) trust accounts. D) estate accounts.
A) transfer on death (TOD) accounts. TOD is an individual account with a designated beneficiary who receives account assets upon the death of the account owner. LO 2.g
A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is A) $0. B) $2,000. C) $4,000. D) $1,000.
B) $2,000 Long 200 shares of MTN @ $30 = $6,000 Long 400 shares of DWQ @ $20 = $8,000 => LMV = $14,000 LMV - Debit = Equity % $14,000 - $8,000 = $6,000 43% < 50% Since equity is less than 50%, account is restricted. Customer sells 200 shares of DWQ for $4,000 Since the account is restricted, 50% of the proceeds are released to SMA Thus, 50% of $4,000 = $2,000 credited to the SMA LO 16.d
A technical analyst has been charting XYZ stock and notes that it fluctuates between $36 and $41. If the analyst expects a breakout through resistance, which of the following orders should be placed? A) Buy XYZ 35 GTC B) Buy XYZ 42 Stop GTC C) Buy XYZ 35 Stop GTC D) Buy XYZ 42 GTC
B) Buy XYZ 42 Stop GTC A buy stop order is placed above a resistance level. It is triggered if and when the stock trades at or above the stop price. This allows an investor to participate in a bullish breakout through resistance. LO 16.a
Your broker-dealer acts as a prime broker for ABC Fund. In this arrangement, your broker-dealer is likely providing which of the following services? I. Execution of all transactions for the fund portfolio II. Clearing services III. Lending for trades done on margin IV. Ensuring that all exchange trading rules are complied with A) I and III B) II and III C) II and IV D) I and IV
B) II and III The prime broker would supply clearing services and lending services for a marginable transaction, as well as back-office support such as cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker-dealers. LO 1.b
An investor who purchased 100 shares of PERD common stock on June 30, 2020, would receive long-term capital gain treatment if the stock is sold at a profit starting A) June 31, 2021. B) July 1, 2021. C) June 30, 2021. D) December 31, 2021.
B) July 1, 2021. Investors must own a security for more than 12 months before it becomes long term for tax purposes. The first day after June 30, 2020, is July 1, 2020. Twelve months later is July 1, 2021. Remember, there is no June 31. LO 3.i
Which of the following statements best describes the effect of reinvesting mutual fund distributions? A) The reinvestment of capital gains and dividends has no effect on cost basis. B) The reinvestment of capital gains and dividends results in a higher cost basis. C) Dividends from investment income that are reinvested have tax-deferred status. D) Capital gains that are reinvested have tax-deferred status.
B) The reinvestment of capital gains and dividends results in a higher cost basis Because reinvested distributions are taxed in the year received, the investor's cost basis is increased by the amount of the distribution. This is to prevent those distributions from being taxed twice. They are taxed once as the dividend or capital gain and then, if not added to the cost basis, would be taxed a second time when the shares are sold. Reinvestment of these distributions does not avoid or defer current taxation. This is not the same as receiving a stock dividend where the taxes are deferred until those shares are sold. LO 8.f
The manager will credit each syndicate member based on sales of that particular maturity allotted to the member, and such credits shall extinguish liability based only on such securities that are sold by the member. This statement describes an agreement among underwriters that is A) a proportionate underwriting. B) a divided account. C) an Eastern account. D) an undivided account.
B) a divided account This is part of an agreement for a Western (divided) syndicate. LO 20.b
The bond resolution includes all covenants between A) the bond counsel and the bondholders. B) the issuer and the trustee acting for the bondholders. C) the issuer and the bond counsel. D) the issuer and the Municipal Securities Rulemaking Board.
B) the issuer and the trustee acting for the bondholders. The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders. LO 6.b
Which of the following statements regarding Treasury bills T-bills are true? I. The government auctions T-bills at a discount. II. The difference between the cost of a T-bill and its value at maturity is treated as a capital gain. III. T-bills have longer maturities than T-notes. IV. The minimum denomination of a T-bill is $100 face amount. A) II and IV B) I and IV C) I and III D) II and III
B. I and IV T-bills are sold at a discount and can be purchased in minimum denominations of $100. The difference between the purchase price and the maturity value is taxed as interest income, not as a capital gain. Treasury bills are short-term investments maturing in 1 year or less. T-notes have maturities of 2 to 10 years. T-bonds have maturities of longer than 10 years. LO 7.b
A shareholder invested in a mutual fund and has signed a letter of intent to invest $25,000. Her original investment was $13,000, and her current account value is $17,000. For her to complete the letter, she must deposit A) $13,000. B) $8,000. C) $12,000. D) $27,000.
C) $12,000 Since her original investment was $13,000 then for her to complete the letter, she must deposit $12,000 Under a letter of intent, the full contribution is required for the letter to be completed. Appreciation is not considered. LO 8.d
In a rising price environment, which of the following inventory valuation methods will result in the highest reported earnings? A) Last in, first out (LIFO) B) Straight line C) First in, first out (FIFO) D) Average cost
C) First in, first out (FIFO) FIFO means lower cost inventory is used first in determining the cost of goods sold. This has the effect of inflating earnings. Using LIFO means higher cost inventory is used to determine the cost of goods sold. In a rising price environment, LIFO better matches cost with revenue. LO 13.c
Investment clubs I. can take advantage of breakpoints on mutual fund purchases. II. cannot take advantage of breakpoints on mutual fund purchases. III. are permitted to purchase new equity issues at the public offering price (POP). IV. are not permitted to purchase new equity issues at the POP. A) I and IV B) II and IV C) II and III D) I and III
C) II and III Investment clubs are not considered restricted persons under the rules regarding sales of a new issue, and therefore, are eligible to purchase new equity issues. Note that if a registered representative (a restricted person) were a member of an investment club, the club would be prohibited from buying a new equity issue. Investment clubs are never permitted to take advantage of breakpoints available on mutual fund purchases. LO 8.d
A sophisticated investor wants to purchase stock of a foreign company or an American depositary receipt (ADR) representing the shares of that company. The purchase would align with the investor's goal of growth and income, but he makes several statements about the potential purchase, and only one of them is accurate. You feel it is important to point out and discuss from a suitability perspective which statements were and were not accurate. Which of the following is the accurate statement? A) I can trade the foreign shares right here on U.S. exchanges. B) With the ADRs, I'll have voting rights just like I would if I purchased the shares directly. C) The purchase of ADRs representing the shares exposes me to currency risk. D) The direct purchase of the foreign stock shares eliminates currency risk.
C) The purchase of ADRs representing the shares exposes me to currency risk. From a suitability perspective, correcting any inaccuracies about an investment that an investor might have is important. Currency risk cannot be avoided when investing in foreign companies, either directly or using ADRs. While ADRs trade on U.S. exchanges, foreign shares do not, and ADR issuers generally do not pass on voting rights to the ADR holders. LO 3.g
Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in A) a tenants in common account with the percentage ownership in the name of the designated person. B) a joint account with a TOD designation. C) a JTWROS account with the Social Security number of the designated person used. D) an account opened as a partnership.
C) a JTWROS account with the Social Security number of the designated person used. In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question. In the real world, it might not satisfy the IRS that the one in the lower tax bracket is being credited with all the income and gains. If the IRS audits the account and sees that the funds came from the working individual, there could be tax issues. However, the exam does not always deal with the real world and we won't either on this one. LO 1.d
Which of the following statements regarding Sallie Mae debentures are true? A) Sallie Mae securities finance building public schools across the country. B) They are backed by the taxing power of the U.S. government. C) Interest is tax exempt at the state and local levels. D) Interest is paid monthly.
C) interest is tax exempt at the state and local levels Interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. As a general rule, debentures pay interest every six months. Sallie Mae is not backed by the taxing power of the U.S. government, Ginnie Mae's are the only agency securities that are backed by the full faith and credit of the federal government and money is used for student loans for higher education. LO 7.c
The ABC Insurance Company is advertising its variable annuity product as "ABC Lifetime Income—income generated from mutual fund returns." This advertisement is A) prohibited because it doesn't reference an annuity. B) permitted as long as there's no guarantee. C) prohibited because it implies returns from mutual funds. D) permitted.
C) prohibited because it implies returns from mutual funds. Variable contracts or their underlying accounts cannot be advertised as mutual funds. Proprietary terms can be used instead of words such as "annuity." LO 19.e
All of the following would be found in a bond resolution for a new municipal issue except A) a description of the issue. B) the issuer's obligations to bondholders. C) the costs to be incurred by the issuer in connection with the offering. D) covenants to which the issuer must adhere.
C) the costs to be incurred by the issuer in connection with the offering. The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer's responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere. Costs to be incurred by the issuer have no impact on bondholders. LO 6.a
Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory? A) Liquidity risk B) Credit risk C) Systematic risk D) Business risk
C. Systematic Risk Market risk - 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. Credit risk can be diversified away by investing in a number of bonds rather than just one or two. The same is true with business risk: a broad portfolio survives the "death" of a single company. A general downturn in the market, however, cannot be eliminated through diversification. LO 14.a
Which of the following are characteristics of commercial paper? I. It represents a loan by the holder to the issuer. II. It is a certificate of ownership in the corporation. III. It is commonly issued to raise working capital for a corporation. IV. It is junior in preference to convertible preferred stock. A) I and IV B) II and IV C) II and III D) I and III
D) I and III Commercial paper instruments are debt securities; they represent loans to the issuing corporation by the holder. They are commonly issued to raise working capital and, as debt obligation, are senior in preference to preferred stock in claims against an issuer. LO 4.c
From first to last, in what order would claimants receive payment in the event of bankruptcy? I. Holders of secured debt II. Holders of subordinated debentures III. General creditors IV. Preferred stockholders A) IV, I, II, III B) I, II, III, IV C) III, I, II, IV D) I, III, II, IV
D) I, III, II, IV The liquidation order is as follows: secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders. LO 5.b
John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability? A) It is the ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59½ years old. B) None because it is the proceeds from a life insurance company C) The entire amount is taxed as ordinary income because it is not life insurance. D) It is the proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate.
D) It is the proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment. LO 9.d
In performing the role required on the NYSE, a designated market maker (DMM) A) may act only as a dealer to facilitate trading on the floor. B) functions in the capacity of a floor broker. C) may act only as a broker to facilitate trading on the floor. D) may act as a broker or a dealer to facilitate trading on the floor.
D) may act as a broker or a dealer to facilitate trading on the floor. DMMs facilitate trading in specific stocks on the floor of the NYSE. Their chief function is to maintain a fair and orderly market in those stocks. In fulfilling this function, they act as both brokers and dealers. They act as dealers when they execute trades for their own accounts and as brokers when they execute orders other members leave with them. Floor brokers work for member firms. They are the people who bring to the DMM the orders their firm's clients have placed. LO 16.e
Which of the following investment company portfolios is supervised rather than managed? A) Real estate investment trust B) Regulated open-end fund C) Closed-end bond fund D) Unit investment trust
D) Unit investment trust A unit investment trust buys securities and holds them until redemption or until a specified future date. The securities in the portfolio are not traded, so no manager is needed. A real estate investment trust is not considered an investment company. LO 8.a
Flag Mountain Floating Rate Capital, a business development company (BDC), has the majority of its assets invested in debt securities. Income distributions are made in the form of A) capital gains. B) interest. C) a return of capital. D) dividends.
D) dividends Business development companies (BDCs) are closed-end investment companies registered under the Investment Company Act of 1940. In addition, they are regulated investment companies (RICs) under the Internal Revenue Code, meaning that BDCs must distribute at least 90% of their net investment income (NII) as dividends to shareholders. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 8.f
Registered representatives must amend their Form U4 when all the following occur except A) if they are arrested for a misdemeanor involving financially related issues. B) if they move residences. C) if they obtain a professional credential. D) if they obtain a college degree.
D) if they obtain a college degree. Registered representatives must amend their Form U4 if they move, are arrested for any felony for financially related misdemeanors, or obtain a professional credential. College degrees are not disclosed on the Form U4. LO 18.a
