Series 7 Final 3 Missed Questions
Which of the following best describes a stock that pays out most of its earnings as dividends? A. Income stock B. Special situations stock C. Defensive stock D. Blue Chip stock
A. Blue Chip stocks are large capitalization companies like General Electric that have a long track record (GE has been around for over 100 years) and P/E (Price/Earnings) multiples that are similar to the market as a whole. Their price movements tend to track the overall market. (For trivia freaks, the name "blue chip" comes from the most valuable poker chip.) In contrast, an income stock is one that pays a high dividend rate. These are often slow-growth companies that make up for their lack of growth in stock price by paying a higher dividend rate. Utilities are a "classic" income stock. A defensive stock is one whose price stays fairly stable, regardless of the price movements of the general market. Typical defensive stocks are food companies and health care companies. A special situations stock is a company that is the target of a merger or takeover or a company that is in bankruptcy and which stockholders hope will be able to turn itself around. These are companies in "special situations." If the turnaround or takeover is successful, the stock price could rise steeply.
Call loans made by bank to broker-dealers are secured by which of the following? I Customer margin securities II Fully paid customer securities III Firm securities positions IV Customer securities positions in cash accounts A. I only B. II and IV C. II, III, IV D. I, II, IV
A. Call loans are secured by customer margin securities. Fully paid customer securities cannot be pledged for these loans - they must be segregated and placed in safekeeping. The loans are not secured by cash nor do firm securities positions collateralize these loans. Loans using firm securities as collateral (proprietary positions) must be kept separate from loans using customer securities as collateral.
The purchaser of a CMO tranche experiences extension risk during periods when interest rates: A. rise B. fall C. are stable D. are volatile
A. If interest rates rise, then homeowners will defer moving at the anticipated rate, since they have a "good" deal with their existing mortgage. Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. This is extension risk - the risk that the CMO tranche will have a longer than expected life, during which a lower than market rate of return is earned.
If the United States balance of payments goes from a deficit to a surplus position, the value of the U.S. dollar should: A. appreciate B. depreciate C. fluctuate D. stagnate
A. If the United States exports more to foreign countries than is imported, then there is a balance of payments surplus. To pay for their purchases, foreigners must sell their currency and buy the U.S. dollar (since payment for purchases in the U.S. is made in dollars). Thus, the value of the U.S. dollar will rise.
The components of M-2 include all of the following EXCEPT: A. Jumbo CDs B. Time Deposits C. Demand Deposits D. Currency in Circulation
A. M-2 is a broader money definition than M-1. M-1 consists of currency in circulation and demand deposits. M-2 consists of M-1 plus time deposits. Certificates of Deposit over $100,000 are "negotiable" CDs, also known as Jumbo CDs. These are included in an even broader money definition, M-3, which is M-2 plus Jumbo CDs (certificates of deposit over $100,000). L is M-3 plus savings bonds and money market instruments, and is the broadest money supply measure. (Note that the Federal Reserve no longer computes M-3 or L, but these may still be tested.)
A customer viewing virtual trading floor information on the NYSE Website notices that he can see most, but not all, of the stocks included in the Dow Jones Industrial Average, trading on the floor. The customer asks his registered representative why this is the case. The customer should be told that: A. Of the 30 stocks included in a Dow Jones Industrial Average, a handful do not trade on the NYSE B. The NYSE only includes the most actively traded Dow Jones Industrial Average stocks in the display C. These are the companies that have not paid the NYSE to be included in the display D. The companies that are not displayed have just announced significant news and trading has been halted in those issues until the news is disseminated
A. Of the Dow 30 stocks, most of the issues are NYSE listed, but a handful, such as Microsoft Apple and Intel, are only traded on NASDAQ.
All of the following statements are true about Federal Reserve open market trading activities EXCEPT open market operations affect: A. the National Debt B. M 1 levels C. the Treasury's accounts D. the business cycle
A. Open market operations do not affect the national debt. The issuance and redemption of government securities by the Treasury determines the national debt level. Open market operations affect monetary levels such as M1 (currency in circulation and demand deposits); affect the business cycle; and affect the Treasury's accounts, since FRB funding for its trading activities is provided through the Treasury.
A customer buys 1 ABC Jan 45 Put @ $9 and sells 1 ABC Jan 30 Put @ $1 when the market price of ABC is $42. The customer must deposit: A. $800 B. $900 C. $2,000 D. $4,500
A. The customer has created a debit spread: Buy 1 ABC Jan 45 Put @ $9 Sell 1 ABC Jan 30 Put @ $1 $8 Debit The customer's maximum potential loss is the debit of $800, which is also the deposit.
To find the NAV (Net Asset Value) of a mutual fund, which is deducted from the value of all assets owned by the fund? Correct Answer A. Liabilities Incorrect Answer B. Operating Expenses C. Management Fees D. Redemption Fees
A. The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.
Interest on Eurodollar bonds is paid: A. annually B. semi-annually C. quarterly D. monthly
A. Unlike normal interest bearing obligations in the U.S. which pay interest semi-annually, Eurodollar bonds pay interest once a year.
A decision is reached by the District Hearing Panel under the Code of Procedure. Which statement is TRUE? A. The decision is binding and non-appealable B. An appeal may be filed with the National Adjudicatory Council C. An appeal may be filed with the SEC D. An appeal may be filed in Federal Court
B. The FINRA Code of Procedure is used when the FINRA Department of Enforcement wishes to prosecute a member firm or an associated person for rule violations. It can also be used by a customer that has not signed an arbitration agreement. Under the FINRA Code of Procedure, the first level of hearings in any dispute or complaint proceeding is held at the District Hearing Panel. Their decision may be appealed to the National Adjudicatory Council. The National Adjudicatory Council's decision may be appealed to the Securities and Exchange Commission. Finally, the SEC's decision may be appealed to Federal Court. Also note, in contrast, that any arbitration decision is binding, with no appeal permitted.
A registered representative makes it a regular practice to check in with his actively trading customers at least once a week and with his inactively trading customers at least once a month. Some of his less active customers are senior citizens who are getting on in years. He calls one of these elderly clients as part of his regular monthly contacting and finds that the customer does not recognize who he is and appears to be disoriented. The FIRST thing the representative should do is: A. nothing, since it is not the responsibility of the representative to deal with the personal matters of a customer B. contact the firm's compliance department for guidance on how to handle the situation C. contact the customer's next of kin to discuss the situation D. alert the appropriate government protective service authority
B. The SEC and FINRA are concerned about aging investors, who as their mental capacity diminishes, are prey for investment scams. To protect senior investors, firms must train their employees to identify diminished mental capacity. FINRA requires that firms have an internal process to permit representatives to get advice from others as to what steps to take. These include: the representative should document the suspected diminished capacity and escalate immediately; the firm should have a clearly designated individual to whom the matter is escalated. Once the problem is identified and escalated, the next step for the firm is to stop trading in the account until the concern no longer exists. Then the firm should: communicate with the customer's designated emergency contact person (next of kin) or a person given a power of attorney over the account to discuss the situation; maintain frequent contact with the investor to assess the situation and notify legal or compliance about these conversations; consult appropriate state statutes to determine the next steps, which may include alerting appropriate authorities, including government protective services.
Under the flow of funds in a revenue bond trust indenture, the first use of NET revenues is to pay: A. operation and maintenance B. debt service C. debt service reserve D. reserve maintenance fund
B. This is tricky! Net revenues are defined as gross revenues less operation and maintenance costs. Once operation and maintenance are covered, the net revenues that remain are first used to pay debt service.
A customer is long 100 shares of ABC stock, believes that the market will remain flat for the next 6 months. To maximize income from the position, which strategy is best? A. covered call write B. ratio call write C. short call spread D. short against the box
B. To get income from a long stock position, the customer would sell a call to collect the premium. If the customer is certain that the market will not move, even greater income can be generated by "ratio writing" - that is, selling more call contracts (collecting more premiums) than shares owned. However, for the extra income received also comes extra risk if the market should rise.
Which of the following create a collar on ABC stock, priced at $60? A. Buy 1 ABC 65 Call; Buy 1 ABC 55 Put B. Sell 1 ABC 55 Call; Sell 1 ABC 65 Put C. Sell 1 ABC 65 Call; Buy 1 ABC 55 Put D. Buy 1 ABC 55 Call; Sell 1 ABC 65 Put
C. A "collar" is the purchase of a put at a strike price below that of the underlying instrument (putting a floor on the instrument's price); and the sale of a call at a strike price above that of the underlying instrument (creating a ceiling price, above which the instrument will be called away). By putting a collar on the price, the customer is essentially guaranteeing a minimum and maximum price for the underlying instrument. The net cost of such a collar should be close to "0" since both contracts are "out the money" and the premium received from the sale of the call offsets the premium paid to buy the put.
A self-employed individual makes $200,000 per year. To which type of retirement plan can the maximum contribution be made? A. Traditional IRA B. Roth IRA C. SEP IRA D. SIMPLE IRA
C. A SEP (Simplified Employee Pension) IRA is usually set up by small business because it simplifies all of the recordkeeping associated with retirement plans (though there actually no limit of the size of the company to open up a SEP IRA). Contribution amounts made by the employer cannot exceed 25% (statutory rate; effective rate is 20%) of the employee's income, up to a maximum of $55,000 in 2018. SIMPLE IRAs also are relatively "simple" for a business to set up, but they only allow a maximum contribution of $12,500 (in 2018). So the SEP IRA is better. In contrast, the maximum contribution to either a Traditional or Roth IRA in 2018 is $5,500 (plus an extra $1,000 catch-up contribution for individuals age 50 or older). Also note that because this individual is a high-earner, he cannot open a Roth IRA.
CMO investors are subject to which of the following risks? I Default risk II Extended maturity risk III Prepayment risk IV Interest rate risk A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
C. CMO investors have almost no default risk, since the underlying mortgages are usually implicitly backed by the U.S. Government. CMO tranch holders are subject to extension risk - the risk that the expected life of the tranch becomes much longer due to a rise in interest rates causing homeowners to keep their existing mortgages longer than expected. CMO tranch holders are subject to prepayment risk - the risk that the expected life of the tranch becomes much shorter due to a decline in interest rates causing homeowners to refinance and prepay their existing mortgages earlier than expected. The purchaser of a CMO tranch is subject to interest rate risk - if interest rates go higher, then the value of the tranch will decline.
Exchange traded funds are NOT: A. marginable B. negotiable C. redeemable D. diversifiable
C. ETFs (Exchange Traded Funds) such as SPDRs are negotiable - they trade as would any regular stock. They are marginable; and they are diversifiable, since ETFs are available for many different indexes and sectors. ETFs are not redeemable - it is mutual fund shares that are redeemable.
Exercise limits on stock option contracts cover a time period of: A. one business day B. one calendar day C. one calendar week D. one calendar month
C. Exercise limits are applied to all exercises occurring within a 5 business day period - the same as 1 calendar week.
Fiscal policy encompasses which of the following? I Government spending II Social security payment levels III Tax policy IV Monetary policy A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
C. Fiscal policy is set through Government Actions (approved by Congress) that influence economic activity. Fiscal policy encompasses the tax code, government transfer payment levels, and government spending. Monetary policy is controlled by the Federal Reserve Board.
A customer calls her registered representative and says the following: "I'm looking for a safe investment for $100,000 that I have, that will give me a moderate level of income. I have 2 children, ages 12 and 13, and I will need to use these monies to pay for their college education, starting in 5 years." All of the following recommendations would be suitable EXCEPT: A. Treasury bond mutual fund B. Treasury bonds with 5, 6, 7, 8, and 9 year maturities C. GNMA pass-through certificates with 5, 6, 7, 8, and 9 year maturities D. FNMA debentures with 5, 6, 7, 8, and 9 year maturities
C. GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. If interest rates drop, then the homeowners in the pool will refinance their mortgages and prepay their old higher rate mortgages. These prepayments are passed through to the certificate holders, who are paid off much earlier than expected. If these payments are reinvested, since interest rates have fallen, the overall rate of return falls, and the anticipated monies needed to fund the college education will not be available. Prepayment risk does not exist with conventional debt securities.
Customers A, B, C and D have their portfolio assets allocated as follows: A B C D Money Markets 15% 5% 5% 0% Treasury Bonds 40% 10% 20% 20% Speculative Bonds 10% 30% 10% 30% Blue Chip Equities 15% 15% 20% 10% Small Cap. Equities 10% 10% 30% 5% Emerging Markets 10% 20% 10% 30% REITs 0% 10% 5% 5% Which customer's portfolio is MOST susceptible to a cyclical economic downturn? A. Customer A B. Customer B C. Customer C D. Customer D
C. In a cyclical economic downturn, the hardest hit asset group is stocks. Since earnings fall greatly in a downturn, so do stock prices. Also hard hit are speculative grade bonds, which can default. Portfolio C is the one that is most heavily invested in equities, so it would suffer the most in an economic downturn.
The "OATS" system is an: A. automated order routing and execution for customer market orders B. electronic trade negotiation system between dealers C. electronic order record maintenance system D. automated trade reporting and comparison system
C. OATS stands for "Order Audit Trail System" - it is FINRA's system for electronic capture of order information. This information is later compared to the actual trade execution via the ACT system - Automated Confirmation of Trade system. OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues.
An investor in a "Ginnie Mae" mutual fund assumes all of the risks EXCEPT: A. Fluctuation of Net Asset Value B. Reinvestment Risk C. Credit Risk D. Prepayment Risk
C. Since Ginnie Maes are backed by the full faith and credit of the U.S. Government, there is no credit risk (as is the case with direct Government obligations). Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to prepay their "old" high rate mortgages when rates have declined by refinancing at the new lower rates. When these prepayments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present. As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.
All of the following statements are true regarding defined benefit plans EXCEPT: A. contributions made to the plan can vary from year to year B. employees with the highest salaries and the fewest years to retirement benefit the most C. benefits paid to employees consists of a tax free return of capital and a taxable return of earnings D. actuarial tables are used to determine contribution rates for each employee
C. Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true.
Which statements are TRUE regarding structured products? I Structured products are standardized II Structured products are not standardized III Structured products have a fixed maturity date (similar to a debt security) IV Structured products do not have a maturity date (similar to an equity security) A. I and III B. I and IV C. II and III D. II and IV
C. Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a "bond" portion, which pays interest based on the performance of a well known index such as the S&P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to sell the security back to the issuer (at par) at maturity. These are often marketed as debt instruments, but that is not really the case. Structured products are created by many different brokerage firms and each firm's version is somewhat different.
The FINRA 5% Policy applies to: I offering of Mutual funds II offerings of Direct Participation Programs III trades of Municipal securities IV trades of Over-the-counter securities A. I and II only B. III and IV only C. IV only D. I, II, III, IV
C. The 5% Policy applies to all over-the-counter and exchange transactions, except for transactions in municipal securities, which are covered by a similar MSRB rule. It only applies to secondary market transactions, not to primary market (new issue) transactions. Both mutual funds and limited partnership offerings are new issues and do not fall under the policy. The 5% Policy is a guide, not a rule. Under this policy, depending upon the circumstances, a 1% mark-up can be considered excessive; while a 10% mark-up can be reasonable.
The Visible Supply includes: I General Obligation Bonds II Revenue Bonds III Industrial Revenue Bonds IV Bond Anticipation Notes A. I only B. I and II C. I, II, III D. II, III, IV
C. The Visible Supply includes all competitive bid and negotiated long term bond sales over the next 30 days; it does not include short term notes.
Which of the following actions were taken by the NYSE in response to large increases in trading activity experienced in the 1980s? A. The establishment of more stringent listing requirements B. The expansion of trading hours C. The introduction of automated routing and execution systems D. The admission of more specialist members
C. To handle the greatly increased trading volume that occurred in the 1980s, the NYSE introduced the SuperDOT system - an automated order routing and execution system, which was replaced in late 2009 by the Super Display Book system. The Exchange has kept its listing requirements at about the same levels as in the past; has forced the Specialist/DMM firms to merge to increase their capital so that they could take larger trading positions; and has considered expansion of trading hours but has not taken any action as of yet. Expansion of trading hours will occur because of increased global competition - not because of the Exchange's inability to handle large trading volumes. Currently, the Exchange can comfortably handle over 10 billion share trading days - well in excess of the 4 billion share daily trading average.
How are Treasury Notes quoted? A. Coupon B. Yield to Maturity C. Whole and Fractional D. Decimal
C. Treasury Notes and Bonds are quoted as a percentage of par value, with each "whole" point movement representing 1% of $1,000 par or $10. The minimum price increment is 1/32nd of 1%, so it is a fraction of par. Thus, Treasury Notes and Bonds are quoted in whole and fractional points. For example, a Treasury Note quoted at 100-8 is priced at 100 and 8/32nds % of $1,000 par = 100.25% = $1,002.50.
CLOSED END BOND FUNDS Fund Net Asset Value Stock Close NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Adap Fund will receive: A. $745 B. $745 less a commission C. $750 D. $750 less a commission
D. If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Adap Fund is $7.50. An investor selling 100 shares receives $750 less a commission.
A customer has $20,000 in passive losses from a limited partnership investment. If the customer has $20,000 of passive income for that tax year, the customer may deduct: A. 0 B. $3,000 C. $10,000 D. $20,000
D. Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $20,000 of passive income for this tax year, the $20,000 of passive losses can be deducted in full.
A $100,000 municipal bond is purchased by a financial institution in the secondary market at 95. For tax purposes, the institution opts to not accrete the bond. The bond has 10 years to maturity. The bond is sold after 4 years at 98. The tax consequence is: A. no gain or loss B. a 1 point capital gain C. a 2 point capital gain D. 2 points of interest income and a 1 point capital gain
D. Since these discount bonds are purchased in the secondary market, the market discount that is earned over the life of the bonds is treated as taxable interest income. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder has the option of either accreting the discount annually, and paying tax on the portion of the market discount earned; or of waiting until the bonds are sold or redeemed to pay the tax (the better option). Since the bonds are valued at cost, there was no annual accretion of the discount. Thus, when the 10 year bonds are sold after 4 years, 4/10ths of the 5 point market discount, or 2 points, has been "earned" and will be taxable as interest income at that point. The bonds were bought at 95, and sold for 98, for a 3 point gain. Of the 3 point gain, 2 points are taxable as interest income; with the remaining 1 point being a long term capital gain.
An elderly customer seeking extra income who has $100,000 to invest could be recommended which of the following? I The $100,000 purchase of a variable annuity II The $100,000 purchase of dividend paying blue chip stocks in a cash account against which calls are sold III The $200,000 purchase of dividend paying blue chip stocks at 50% margin in a margin account IV The $100,000 purchase of Treasury bonds A. I and III B. I and IV C. II and III D. II and IV
D. The purchase of a variable annuity is not suitable for an elderly customer. The whole concept behind a variable annuity is that the product has time to build value on a tax deferred basis in the separate account prior to annuitization. An elderly customer needs the income now. Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. This would be suitable. The margining of blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%) is not suitable because this does not come for free! The customer is borrowing the extra money to buy the new shareholding, using his existing stock as collateral, and he must pay interest on the loan. The interest charge will eat up any dividends that the stocks pay - so there goes his income. The purchase of Treasury bonds is suitable, since they provide current income and they are safe as it gets.
A customer with an existing margin account believes that the market is headed for a long period of decline and wishes to speculate on this with PDQ stock and options. Because of the prevailing bearish sentiment, put premiums have reached new heights and call premiums are at new lows. PDQ stock is currently trading at $40 per share. PDQ Jun 40 Calls are trading at $4 and PDQ Jun 40 Puts are trading at $12. If the customer wishes to speculate on a market decline with the smallest capital commitment, the customer should: A. Buy 1 PDQ Jun 40 Put in a margin account B. Buy 1 PDQ Jun 40 Call in a margin account C. Buy 100 shares of PDQ at $40 in a margin account and sell 1 PDQ Jun 40 Call D. Sell short 100 shares of PDQ at $40 in a margin account and sell 1 PDQ Jun 40 Put
D. This customer wants to speculate on a market decline with the smallest capital commitment. If the customer buys a PDQ Jun 40 Put (a bear strategy), the customer must pay a premium of $12 = $1,200. If the customer shorts the stock at $40, a $2,000 margin deposit is required. By selling 1 PDQ Jun 40 Put, the customer collects $1,200 in premiums. This is a "covered" put writer and the premium received can be used to offset the $2,000 margin requirement for a net deposit of $800. This is a smaller capital commitment than buying the put. In a falling market, the short put goes "in the money" and is exercised, forcing the customer to buy the stock at $40. Since the customer already sold the stock at $40, there is no gain or loss on the stock position. However, the $1,200 received in premiums is retained and is the gain. On the other hand, if the market rises, the customer can lose an unlimited amount on the short stock position (the short put expires "out the money"). The customer would not buy a call, since this is a bullish strategy. The customer would not buy the stock and sell a call (a neutral strategy), since in a down market, the customer would lose the value of the stock (net of the collected premium).
Under NYSE rules, a company moving its listing from another market must meet which requirements? I 100,000 publicly held shares II 1,100,000 publicly held shares III $10,000,000 aggregate market value of publicly held shares IV $100,000,000 aggregate market value of publicly held shares A. I and III B. I and IV C. II and III D. II and IV
D. Under NYSE rules, the numerical standards for a company wishing to move its listing from another market include 2,200 or more shareholders, with an average monthly trading volume of 100,000 shares for the past 6 months. There must be 1,100,000 publicly held shares with an aggregate market value of $100,000,000.
