Series 7
A customer is short a DMF 50 call for which he received a premium of 4. Seven months later, the call was exercised when the current market for DMF was 56. Under the Internal Revenue Code, what were the proceeds of his sale?
$5,400 He wrote a call and received a premium of 4. He later sold the security at $50, which made his total receipts for the stock $54. Proceeds in this case refer to the total amount he took in (a $400 premium plus $5,000 upon the sale).
Max gain on Debit spread Max loss on debit spread
(diff between so's) - net debit Net debit
open-end fund
- Ex-date set by BOD - Dividends (when declared) voting - Selling price determined by formula - Do NOT trade in second market - Redeem on next days NAV at fund -Issued at NAV & Sales charge - Full or fractional shares (1 class) - Continuously issued Prospectus required
closed-end fund
- Ex-date set by FINRA - Dividends (when declared) voting and preemptive rights - Current CMV + commission; price determined in 2nd MKT - IPO/ Secondary - Full shares only - May issue debt and pref stock - Fixed # shares no prospectus
muni issues
- exempt from 33 - Pre-sales orders - official notice of sale (bond buyer) maturity, bond&bid info, income source -official statement
12 b-1 charges
- expressed as annual amount but charged and reviewed quarterly no more than .25% .75% (75 basis points max)
Corp issues
- regulates and registered under act 33 - ioi - Tombstone/ preliminary prospectus (no pop) - Prospectus
Standard and Poor's
500 Index Tracks the stock market activity for 500 stocks.
book value
liquidating value of the company the book value per share is what the common stockholders would receive
A customer opens a margin account with a broker-dealer and signs a loan consent agreement. The loan consent agreement allows the firm to
loan out the customers margin securities
immediate-or-cancel (IOC)
the broker/dealer can make only one attempt to fill the order, but a partial fill is acceptable.
(Spreads) Buy lower strike--> Sell Lower Strike-->
-->Bull -->Bear
12 b-1 fees notes
-Board of directors. If the fund charges a 12b-1 fee, a simple majority of the board must be made up of noninterested persons, not just 40%. -Misuse of no-load terminology. A fund that has a deferred sales charge or an asset- based 12b-1 fee of more than .25% of average net assets may not be described as a no-load fund. To do so violates the Conduct Rules; the violation is not alleviated by disclosures in the fund's prospectus.
Most important to least in DPP
1. potential economic profitability 2. tax write offs 3. Liquidity & MKTability 4. SEC approval
To meet a Fed call, a customer must deposit
100% in cash 200% in listed securities
straddle
2 contracts everything is the same except 1 call and 1 put
commercial paper defined as mms
270s or less maturity
A registered representative has just been disciplined under the Code of Procedure. Within how many days does the U-4 need to be updated?
30 days
Affiliate of insider holding unregistered shares can sell under rule 144
4 times a year (every 90 days)
You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? - 401(k) balance - Credit card balance - Monthly income - Electric bill
401 k bal credit card bal
ABC Company has issued $20,000,000 of convertible bonds with a coupon of 5% and a current market value of 120. The conversion price is $40. If all the bonds are converted, how many additional shares of common stock will ABC have outstanding?
500,000
Life Annuity with Period Certain
A Life Annuity that guarantees to provide income payments for a minimum period of time or life. Payments will continue to a beneficiary should the annuitant die during the specified period.
Scheduled vs variable life contract
A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.
Receiving a copy of OCC Disclosure Booklet
All customers who are approved by the ROP to trade options must receive a copy of the OCC Disclosure Booklet at or before the time the account is approved to trade options.
FINRA rules governing the use of retail communications?
All retail communications must be approved by a principal.
How are the distributions taxed from her IRA?
All taxable distributions from a (traditional) IRA are taxed as ordinary income.
When a customer, who is at least 59½, withdraws money from a traditional IRA that has been funded totally with deductible contributions
All withdrawals from a traditional IRA that has been funded with pre-tax contributions are subject to taxation at ordinary income tax rates. There is no penalty once the account holder has reached age 59½.
Reg A+
Allows small businesses to raise limited amounts of capital per year with a limited registration Tier 1: 20 mill Tier 2: 50 mill
LIFE ANNUITY/STRAIGHT LIFE
An annuity payout option that pays a monthly check over the annuitant's lifetime. with no benefit to benes
Fitch Ratings
An international credit rating agency dual-headquartered in New York City and London. It is one of the three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the U.S. Securities and Exchange Commission in 1975, together with Moody's and Standard & Poor's.
As interest rates fall, prices of straight preferred stock will:
As rates fall, prices of preferred stocks tend to rise, and vice versa
A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. Her current portfolio consists of $50,000 cash $200,000 in retirement accounts $100,000 in various individual stocks in different industries $100,000 in a balance fund She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which of the following investments would be the most appropriate? A) DEF Asset allocation fund B) ABC Capital Appreciation Small-cap fund C) XYZ Value Equity fund D) MNO High-yield bond fund
B) ABC Capital Appreciation Small-cap fund
A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable?
High-yield bond funds High-yield bonds yield more than investment-grade bonds. Since the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds that yield less.
Debit call
Buy lower
Spread
Buying and selling same stock same type
Which of the following is TRUE of the visible supply in "The Bond Buyer"? A) It is the total of the bonds offered in the Blue List. B) It is a weekly listing of bonds sold in the past 30 days. C) It is a weekly listing of bonds to be offered in the next 30 days. D)It is a daily listing of available bonds
C) It is a weekly listing of bonds to be offered in the next 30 days.
Calls in the money
Call options are in-the-money whenever the market price is greater than the strike price.
current ratio
Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm.
profitability ratio
Gross profit divided by net sales measures the gross profitability of the firm's business operations, not its liquidity
Debit spreads Credit Spreads
DEW CNN
dividend payout ratio
Dividend amount divided by earnings per share how much of a company's earnings are distributed to common stockholders.
Market-Out Clause
Escape clause sometimes written into FIRM COMMITMENT underwriting agreements which essentially allows the underwriters to be released from their purchase commitment if material adverse developments affect the securities markets.
Research Report
Ex.: A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should hold the security **Recommendation**
Under which of the following terms does the underwriter act in a dealer capacity?
Firm commitment
sma in a short account increase by XXX when cmv decreases by $1
For every $1 decrease in market value in a short account, $1.50 of SMA is created
In a strong bull market, which of the following positions utilizing leverage has the potential for the highest percentage gain?
Holding Calls Both a long call and a long stock position are profitable in a rising market. However, because options use leverage, the profit relative to the money invested is larger with option positions. A put writer also profits in a rising market, but only by the amount of the premium. A short seller loses money if the stock rises.
In what order, from first to last, would a syndicate member allocate orders for a new municipal bond issue? 1. Presale orders. 2. Designated orders. 3. Member orders. 4. Group net orders.
I, IV, II and III.
Long margin account
If the initial transaction is less than $2,000, the investor must deposit 100% of the market value.
A.M. Best historically has specialized exclusively on the
Insurance marketplace
Coordination
Issuer registers simultaneously with the state and SEC. both regs effective on same date
qualified
Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.
Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction?
Lowest ask.
A customer may only use a mutual fund as collateral for a margin loan after it has been held in their account for
Mutual funds cannot immediately be used as collateral in a margin account; the fund must be held for 30 days. After 30 days, they are considered fully paid-for securities for margin purposes and can be used as collateral for subsequent purchases.
Who insures GO Bonds
National Public Finance Guarantee Corp. and AMBAC.
MMMF's (money market mutual funds)
Nav $1 per share short term debt instruments offered without a load beta less that 1
efficiency of common shareholders' investment or equity in the firm
Net income divided by average total equity
Red herring contain POP
No
On the order book, all of the following orders are reduced on the ex-date for a cash dividend EXCEPT
Only orders placed below the market price are reduced for cash dividends on the order book. Buy limits and sell stops are entered below the market price. Buy stops are entered above the market price.
Reg D
Private placement. It can be sold up to a maximum of 35 non accredited investors and an unlimited about of accredited investors. Exempt from registration, but full disclosure but be given to investors. Accredited investor: 1mm + net worth or annual income of 100k (individual) or 200k (couple) Doesn't include primary residence. Non accredited investors must be sophisticated. If they cannot evaluate the issue on their own, then they can hire a purchaser representative (lawyer or accountant) they can evaluate and sign letter in offering circle.
Puts in the money
Put options are in-the-money whenever the market price is lower than the strike price.
Reg S
Reg S allows an issuer to sell securities to investors (including Americans) that live or reside abroad. One's citizenship is not relevant to a Reg S offering. Rule 144, 144a, and Rule 145
sale of new equity issues
Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their supported family members. Firms selling only investment company products and/or direct participation programs, and their employees, are exempt from these rules.
Which of the following would be found on a when-, as-, and if-issued confirmation?
S.A.T. is not found in when, if, as issued S-settlement dat A-accrued interest T-total Amt due
Class B Shares
Shares of a mutual fund that generally assesses a contingent deferred sales charge if the shares are sold within a certain period. Class B shares generally have higher 12b-1 fees than Class A shares
Reg T
The Federal Reserve Board regulation that governs customer cash and margin accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities. According to Regulation T, you may borrow up to 50% of the purchase price of securities that can be purchased on margin. This is known as the initial margin. Only applies to nonexempt securities
Persons net worth
The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills such as the electric bill are found on the income statement.
A customer establishes the following positions: Buy 100 ABC at 28 Buy 1 ABC Dec. 25 put at 2 What is the breakeven point?
The breakeven point is where an investor neither makes nor loses money. In this hedged position, the buyer must recover the cost of the stock and the premium paid to break even (28 + 2 = 30).
Which of the following statements describing Section 529 plans is TRUE?
The maximum annual contribution varies from state to state. The features of Section 529 plans, including their contribution limits and fees, vary widely from state to state. Section 529 plans have no age limits as to participation; they are open to both children and adults who plan to attend college or graduate school. For college savings plans, there is no state residency requirement for either owners or beneficiaries of Section 529 plans.
Bid Ask 2.0 1.5
This represents a quote for a T-bill. The quote represents a percentage discount from 100%. It is easy to identify because it looks like the bid price is greater than the ask price. This is the only quote you will see on the Series 7 that looks like this. But if you take 2% from 100%, that is 98%, and if you take 1.5% from 100%, that is $985. Therefore the quote is Bid $980 and the ask is $985. For your exam it is only important to identify the quote as a T-bill quote, not do the calculation.
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? A)10000 B) 1000 C) 17500 D) 7500
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.
Conversion from traditional to Roth
When converting from a (traditional) IRA to a Roth IRA, the distribution is all taxed as ordinary income in the year of the conversion. There is no 10% tax penalty if the conversion is done prior to age 59 1/2.
Under FINRA rules, the carrying member, after receiving account transfer instructions from the receiving member must validate the positions in the account within how many business days of receipt?
Within 1 business day following receipt of the transfer initiation form (TIF), the carrying firm must validate the positions in the account and within 3 business days following validation, the carrying firm must complete the transfer of the account.
12 b-1 fees
annual fees charged by a mutual fund to pay for marketing and distribution costs
The Trust Indenture Act of 1939
applicable to corporate debt issues that are: - nonexempt - over $50 million to be issued within 12 months - offered interstate - have maturities of 9 months or more.
Under FINRA rules, customers who are approved to trade options must receive a copy of the OCC Disclosure Booklet
at the time of or before account approval
Debit Put
buy higher
Combinations and straddles have two breakeven points.
calculate these breakeven points add the combined premiums to the call strike price and subtract the combined premiums from the put strike price.
customers of a selling-group member sell into a penalty stabilizing bid, the selling-group member must pay back to the underwriter the:
concession.
Put spread selling the higher sp =
credit put spread
Class C shares
customer would pay no front-end sales charge and no CDSC after a short time, probably one year.He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the 3 years of his investment.
deferred compensation plan
deferred compensation plans may be somewhat risky because the employee covered by the plan has no right to plan benefits if the business fails
fill-or-kill (FOK)
designates that the customer wants the order to be filled in its entirety in one attempt or be canceled.
Underwriting spread =
difference between offering price and proceeds to issuer
To determine long market value at maintenance
divide DB bal by .75
fundamental analyst is concerned with
economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio
Class a shares
front-end load
When calculating net investment income, an investment company includes:
interest + dividends - op expenses
Qualification
issuer files with state, independent of fed reg and must meet all state requirements
intra state offering (rule 147)
limited to companies that do business in one state and limit stock or bond sales to that states residents. (blue sky reg is same as state reg)
Reg D
max 35 non accredited, unlimited accreditied
Unit Refund Option
minimum number of payments are made upon retirement. If value remains in the account after the death of the annuitant, it is payable in a lump sum to the annuitant's beneficiary added as a rider
Max gain on credit spread Max loss on credit spread
net credit (Dif in sp's)-net credit
customer purchase called bond does yield to maturity matter?
no
Moody's
one of the top three credit rating agencies for corporate and municipal bonds as well as stock. The other two are S&P, and Fitch
The derivative-based strategy known as portfolio insurance involves the:
purchase of a put on the underlying security position.
Breakeven for a covered call writer
purchase price less premiums received. In this case, breakeven is 85 minus 10, or $75 per share; below $75, the customer loses money.
Notice Filing
registered under Investment company act of 1940, fed covered securities. state not required. state may require file notice and fee
Rule 144A
regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs).
Filing with FINRA is required with options
required at least 10 business days prior to first use or publication for retail communications having to do with options.
Trust Indenture Act of 1939
requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture; U.S. governments are exempt.
The Trust Indenture Act of 1939
requires corporate bond issues of $50 mill+ sold interstate to be issued under a trust indenture, a legal contract between the bond issuer and a trustee representing bondholders.
Inflation or purchasing power risk
risk of earning a lower rate of return, which over a longer period of time, might not keep up with the rate of inflation.
A stock selling for $62 is expected to decline temporarily in price, but the long-term trend is favorable. To take advantage of the temporary decline and generate income, the stockholder should
sell a call The sale of a call allows the investor to collect premiums. Because he owns the stock, the option is covered and no margin is required. Alternatively, the investor could buy a put to move more in-the-money as the stock price falls temporarily. He could later liquidate the put at a profit, but buying a put would not generate income.
A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that
selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk This prospect is exposed to a significant amount of business (nonsystematic) risk as indicated by the large investment in ABC common stock. Business risk can be reduced by diversifying the portfolio; and therefore, recommending the sale of a portion of the ABC stock and using the proceeds to purchase mutual funds is suitable. There will be tax considerations but the use of FIFO accounting will likely expose the prospect to higher capital gains taxes than other accounting methods and may not be the best approach to liquidation.
comply with the regulations regarding customer identification programs
the actual date of birth must be obtained. A post office box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired drivers license or passport tax id and name
all-or-none (AON)
the broker/dealer can make numerous attempts to fill the order in its entirety.
alpha
the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved
A generic ad for an investment company placed by a broker-dealer would contain
the name of the broker-dealer placing the ad, but not the name of the investment company
An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose
the scheduled premium policy because the contract is issued with a minimum guaranteed face amount
echnical analyst is concerned with
trading volumes or market trends and prices.
All or none
underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold.
Standby
underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment).
Best efforts
underwriter serves as an agent with no financial obligation for unsold securities
