Series 7 Frequently Missed Questions
In a margin account, an investor bought 1,000 shares of RST at $60 and, as a hedge, she also purchased 10 RST July 60 puts which each had a premium of 5. Based on these transactions, what is the customer's required deposit?
$35,000
Under the Capital Asset Pricing Model, risk is defined as:
Deviation in returns or variance in expected return, not the loss of client funds or failure to meet an objective.
An investor expects a sharp decline in interest rates in the near future. To capitalize on this situation, the investor should buy:
Discount bonds with long maturities
A customer owns 2,000 shares of TBDR. She expects a decline in the market and instructs her registered representative to sell 1,500 shares of the stock. The order ticket would be marked:
Sell Long
The bonds included in The Bond Buyer 20-Bond Index have an average rating of:
The 20-Bond Index has an average rating on S&P of AA and on Moody's of Aa2. The 11-Bond Index contains general obligation bonds with an average rating on S&P of AA+ and on Moody's of Aa1.
When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T? (Chapter 19)
Two business days after the settlement date
A customer purchases a security in a foreign market. The settlement date is determined by the: (Chapter 19)
When a customer purchases a security in a foreign market, the settlement date is determined by the regulatory authority in that market. In the U.S. the settlement date would be determined by the SEC or FINRA.
If an equity option is exercised, when is the settlement date for the stock transaction?
When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected within 2 business days (regular-way settlement for stock).
A _____ ____ is characterized by very heavy trading, fast moving prices, high volatility, as well as an imbalance in the number of shares that investors are willing to buy or sell. (Progress Exam 4B)
fast market
One of your investment banking clients has a significant amount of cash on hand. The client has sought your firm's advice regarding income-producing equity investments. Which TWO of the following investments pay a dividend but are NOT eligible for the corporate dividend exclusion?
A money-market fund A real estate investment trust
On February 13, an investor sold 700 shares of ABC stock for a loss. On the next day, the investor purchased 3 ABC February calls. What will happen to the loss from the sale?
A portion of the loss from the sale of the stock will be disallowed // wash sale
An investor owns stock that has increased in value. Which of the following is the most suitable recommendation for an RR to make if the investor wants to protect her profit? A) A sell stop order that's entered above the current market price or a short call position B) A sell limit order that's placed above the market or a long call position C) A sell stop order that's placed below the current market price or a long put position D) A sell limit order that's placed above the market or a short put option
A sell stop order that's placed below the current market price can be used to protect a profit or limit a loss on an existing long position. The stop order will not be activated until the market declines to or below the stop price. By purchasing put options, the investor will have the right to sell his stock at a specific price (the strike price); thereby limiting any greater downside risk. (17056)
An individual who is bearish or wants protection against a decline in the market will likely:
An individual who is bearish will buy a put option. If the market declines and the investor decides to exercise the put, she can purchase the security in the market and then put (sell) it to the writer at the higher agreed-upon strike price. (15668)
An investor buys 200 shares of TDX at $20 per share. TDX declares a 10% stock dividend. The investor's cost basis per share for tax purposes would be:
An investor's cost basis must be adjusted downward upon receiving additional shares when a stock dividend is paid. In this example, the investor receives 20 additional shares (10% x 200). The investor's new cost basis per share would be found by dividing the initial cost of $4,000 by the total number of shares now owned (220). This equals a cost basis per share of $18.18.
In a customer's margin account, the market value that's used to calculate the minimum equity required in the account is determined:
At the close of the market
In January, an investor receives a bonus from her employer and wants to invest the funds. If she needs to have access to the funds in April, her RR should NOT recommend which of the following municipal securities?
Auction Rate Securities (ARSs) // VRDOs and ARSs are both long-term securities with short-term trading features. VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. However, auction rate securities (ARSs) don't have this feature and, if the auction fails, the investor may not have immediate access to his funds.
In a customer's margin account, the interest charged on the debit balance is typically based on the:
Broker Call Rate
What information can be found on the Consolidated Quotation System?
Bid/asked quotations for listed stocks reported by national exchanges and OTC third market makers
The transfer of bonds from one party to another may be accomplished by an endorsement on the back of the bond certificate or through a:
Bond power
An outstanding municipal bond would most likely be called when interest rates: (Chapter 5)
Fall below the bond's nominal yield; Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline.
On September 1, an underwriter offers stock that has been registered with the SEC. This is the first offering of stock made by the issuing company. The issue will be listed on the New York Stock Exchange. A dealer that subsequently sells the stock in the secondary market will be required to furnish a prospectus: (Chapter 13)
For a period of 25 days following the initial offering (follow on offering)
A registered representative is sending out electronic communication that has been prepared by her firm to 75 of her existing retail customers. The communication explains to the customers that their account statements are now available online. Which TWO of the following statements are TRUE? (Chapter 3) I This is considered correspondence II This is considered retail communication III This activity requires principal approval prior to use IV This activity should be reviewed
II This is considered retail communication IV This activity should be reviewed If the retail communication does not make a financial recommendation or does not promote a product or service of the firm (which the electronic communication in this question does not), prior principal approval is not required.
Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?
If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 50% of the dividends it receives on stock that it owns (remaining 50% is excluded). The company would need to add $50,000 (50% of $100,000) to its taxable income. The total taxable income, therefore, is $2,050,000. The tax liability is $697,000 ($2,050,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 35% of the dividends would be taxable (65% is excluded).
A customer who purchases shares of an exchange-traded fund (ETF) may be extended credit by a broker-dealer: (Chapter 18)
Immediately. However, once the mutual fund shares have been held for 30 days, they may be used as collateral for a loan in a margin account
Which of the following statements is TRUE regarding a trade using the seller's option settlement?
It must settle at least three business days after the trade date.
May a brokerage firm place a temporary hold on a securities transaction? (Chapter 14)
No, since this is beyond the scope of SRO rules.
What term is used when a company sells stock to the public above par value? (Chapter 16)
Paid In Capital or Capital Surplus
The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called:
Pre-refunded bonds
A customer calls his representative to place a sell limit order at 24.925 when the stock is trading at 24.25 - 24.92. The representative should:
Reject the order // The Sub-Penny Rule prohibits accepting and displaying orders in pricing increments of less than one penny, unless the stock's value is less than $1.00.
A customer has sold stock, but he has failed to complete the transaction by delivering the securities. The latest date on which the broker-dealer may buy in the securities is:
SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and for maintaining custody of securities. Under the custody of securities section, a brokerage firm must buy in securities within 10 business days from settlement if a customer has failed to deliver the securities that were previously sold.
Ann Smith instructs her broker-dealer to stop sending brokerage account-related mail, since she accesses all information from the Internet. What should the firm do regarding this request? (Progress Exam 4A)
The broker-dealer may honor the request
Two similar companies issue bonds at the same time. One company issues convertible bonds and the other issues nonconvertible bonds. Which two of the following statements are TRUE?
The convertible bonds will probably offer a lower coupon rate. The nonconvertible bonds will probably have a higher yield to maturity.
What is the maximum allowable percentage that may be sold above the original size of the offering that the syndicate can purchase from the issuer through a Green Shoe option? (Progress Exam 4A)
The overallotment provision of an underwriting agreement may contain a Green Shoe clause, which allows the syndicate to increase the number of shares by 15% over the original number of shares in the offering.
Which of the following transactions are NOT exempt from the penny stock disclosure rules?
Transactions with established customers
On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is:
When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.
Municipal bearer bonds that are in default of interest, trade:
With unpaid coupons attached
An employee of a broker-dealer owns shares of XYZ in his personal account. His spouse is a director of XYZ Corporation. If XYZ is engaged in a secondary offering of stock, can shares be purchased in a joint account that's owned by the employee and his spouse? (Chapter 13)
Yes, secondary offerings are permitted for restricted persons. Only the sale of initial public offerings (IPOs) of equity securities are prohibited to restricted persons. Wife is director, so IPO sale would be okay, too.
May a brokerage firm place a temporary hold on the transfer of securities? (Chapter 14)
Yes, transfers - no to securities transactions.
According to the Securities Act of 1933, a prospectus is defined as any notice, circular, prospectus, advertisement, letter, or communication (regardless of whether its written or on television or radio) that: (Progress Exam 4B)
offers a security for sale.
A riskless principal transaction may be reported to FINRA as _____ transaction, but net basis transactions require ____ separate reports.
one; two
Corporations repurchase their own stock in the open market to: (Progress Exam 4B)
to increase earnings per share and to have stock available for stock option plans for key employees. Stock repurchased becomes treasury stock, which does not have voting rights, and its marketability is very difficult to predict.
