Series 7 Sim Exam - Missed Questions
DERF Corporation has a significant amount of cash on hand. The chief financial officer (CFO) has suggested to the chief executive officer (CEO) that it might be wise to use some of that cash to reduce the company's outstanding debt by $10 million. There are four bond issues outstanding, and your broker-dealer is approached for advice on determining which issue to repay. Which of these four issues would the firm most likely recommend? A) $15 million @8% due in 10 years, callable at 101 B) $30 million @12% due in 15 years, non-callable C) $10 million @6% due in 20 years, callable at par D) $25 million @5% due in 5 years, callable at 104
A) $15 million @8% due in 10 years, callable at 101 Explanation: Anytime we have extra cash, it can make sense to pay off debt. Corporations feel the same way. When it comes to deciding which debt to repay, the wisest move is to pay down the debt with the highest interest cost. In this case, that would be the 12% bond. However, that bond is non-callable. Based on the inverse relationship between interest rates and bond prices, the 12% bond is going to be selling at a higher price than any of the others. Any savings in interest payments would be more than offset by the price the company would have to pay to buy the bond in the open market. The next highest interest rate is 8% and that bond will cost us a slight premium of $10 per bond to call. Although the 6% bond is callable at par, the company would be far better off removing an 8% debt than one at 6%. In fact, the 1 point call premium is saved after the first semiannual interest payment. A partial call, calling in $10 million of the 8% bond, should be the recommendation.
Assume that a customer has an established margin account with no special memorandum account, and the account is restricted. With the Regulation T requirement at 50%, the purchase of $10,000 worth of stock would generate a Regulation T call of A) $5,000 B) $20,000 C) $25,000 D) $2,500
A) $5,000 Explanation: The customer must deposit the full margin requirement of the purchase (50% of @10,000), whether the account is restricted or not; therefore, the call would be for $5,000.
Which of the following statements regarding nonqualified deferred compensation plans is NOT TRUE? A) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities B) Employees have a limited claim to plan benefits if the business fails C) Benefits payable to employees at retirement are taxable D) Board members are not eligible for these plans, as they are not considered employees
A) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. Explanation: Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. A typical deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees, and therefore, are not eligible for these plans. Because these plans are rarely funded, business failure places the employee in the role of a general creditor.
All of the following are characteristics of 529 plans EXCEPT A) there is no age limit on the beneficiary B) donor income limits apply C) an official statement (OS) must be provided to any prospective purchaser D) the assets can be transferred to a family member if not used by the original beneficiary
B) donor income limits apply Explanation: Unlike the Coverdell ESA, there are no donor income limits with a 529 plan. All of the other statements are true as to 529 plans.
A new issue of common stock has been filed with the SEC, and a final prospectus can be found on the SEC website. This information has been given to a customer interested in the securities. In this instance, the access-equals-delivery requirements regarding that prospectus A) have been met for mutual funds only. B) have been met. C) have been met for equity issues only. D) have not been met, as a prospectus must always be physically delivered.
B) have been met Explanation: A prospectus must precede or accompany a security for sale and will be deemed so if the final prospectus has been filed with the SEC. Because prospectuses filed with the SEXC can be viewed on the SEC website, the access-equals-delivery requirement is satisfied.
All of the following statements regarding a market not-held order are true EXCEPT A) it gives the floor broker discretion over the price or time of execution B) it is given to a specialist (designated market maker). C) the order ticket must be marked, not held D) a small portion may be filled at a time
B) it is given to a specialist (designated market maker) Explanation: In a market not-held order, the client agrees not to hold the broker responsible if she cannot fill the complete order/ Such an order allows the floor broker to use her judgment on the best execution strategy. Specialists (designated market makers) cannot accept market not-held orders.
Pass-through securities are issued by all of these EXCEPT A) the Federal national Mortgage Association B) the Farm Credit System C) Government National Mortgage Association approved issuers D) the Federal Home Loan Mortgage Corporation
B) the Farm Credit System Explanation: The Farm Credit System (FCS) is a national network of lending institutions that provides agricultural financing and credit. The federal FCS issues discount notes, floating rate bonds, and fixed-rate bonds. The maturities range from one day to 30 years. Unlike the mortgage agencies, these are not pass-through investments.
Having a five-year-old child, a couple wants to begin saving for her college education. They can currently budget $350 per month toward the goal. They know that college costs 13 years in the future need to be factored, but they are not too comfortable with market risk. Which would best align with their profile? A) Coverdell Education Savings Account (ESA) B) Variable annuity plan C) 529 prepaid tuition plan D) Money market mutual fund
C) 529 prepaid tuition plan Explanation: Coverdell ESAs and Section 529 plans are the only choices here specifically associated with saving for education. because the Coverdell ESA can only accept $2,000 per child, per year, and the couple can currently invest more than twice that amount, the 529 plan is a better choice. Additionally, being concerned about inflation and not comfortable with market risk, investing in a 529 prepaid tuition plan enables them to purchase tomorrow's tuition at today's prices.
Buying municipal bonds would normally NOT be considered suitable for A) a mutual fund portfolio B) a corporation's investment account C) a defined benefit plan portfolio D) an individual investor
C) a defined benefit plan portfolio Explanation: A defined benefit plan is a form of qualified tax-deferred corporate pension plan. Tax-free municipal bonds would never be considered suitable for a tax-deferred account on the exam. An individual investor, a mutual fund portfolio, and a corporate investment account could benefit from receiving tax-free municipal bond interest.
All of the following characteristics are advantages of a real estate investment trust (REIT) EXCEPT A) diversification B) professional management C) tax deferral D) liquidity
C) tax deferral Explanation: A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITS are traded on exchanges and over the counter, which provides liquidity. The IRS does not permit tax deferrals on REIT investments.
On February 13, your customer buys an 8% Treasury bond maturing in 2019 for a settlement on February 14. If the bonds pay interest on January 1 and July 1, how many days of accrued interest are added to the buyer's price? A) 45 B) 43 C) 14 D) 44
D) 44 Explanation: Accrued interest for government bonds is figured on an actual-days-elapsed basis. The number of days begins with the previous coupon date and continues up to, but not including, the settlement date. The bonds pay interest on January 1. The bonds settle February 14. There are 13 days of accrued interest for February. Do not count the settlement date (31 + 13 = 44 days).
Which of the following assets would be LEAST LIKELY to be used to back a collateralized debt obligation (CDO)? A) Credit card debt B) Auto loans C) Corporate receivables D) Mortgages
D) Mortgages Explanation: Unlike CMOs, which are backed by mortgages (as the M indicates), CDOs are invariably backed by some other form of asset. Remember that what someone owes is their debt, while it is an asset to the creditor.
The Municipal Securities Rulemaking Board (MSRB) is authorized under the Securities Exchange Act of 1934 to make rules about all of the following EXCEPT A) dealers obtaining fair and reasonable prices for customers B) municipal deal recordkeeping C) the dissemination of price and yield quotes by municipal dealers D) information provided by municipal issuers
D) information provided by municipal issuers. Explanation: The MSRB governs the practices of underwriting and trading municipal bonds. It does not govern municipal issuers.
A registered representative is reading an article in a popular magazine about the advantages of tax deferral in retirement planning. There is a note that reprints of the article are available. In order to send these reprints to existing and prospective customers, A) approval by a principal is required within 10 days after first use. B) filing a copy with FINRA is required. C) the name of the underwriter who commissioned the article must be prominently displayed. D) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors.
D) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors. Explanation: This is an example of an independently prepared reprint. It is a form of retail communications and can be used only if the preparer is independent of the member firm. In most cases, these are used "untouched." However, if there are factual errors or statements contrary to FINRA standards, they must be fixed. Preapproval by a principal is required and there is no filing necessary with FINRA. If the publisher is independent but received money from an issuer or underwriter for authoring the article, it may not be used.
An investor buys a GO bond in the secondary market with a coupon of 3½% that has a basis of 3¾%. If the bond is held until maturity, the investor's actual yield will be A) 3½%. B) 3¾%. C) more than 3¾% . D) more than 3½% but less than 3¾%.
D) more than 3½% but less than 3¾%. Explanation: This is tricky, so follow along. With a coupon of 3½% and a basis (yield to maturity) of 3¾%, we know the bond was purchased at a discount. GO bonds are municipal bonds, and when a municipal bond is purchased in the secondary market at a discount, the accretion of the discount is taxed as ordinary income. Therefore, a portion of the investor's return will be taxable, making the actual return slightly less than the yield to maturity.
Which of the following is NOT TRUE in jurisdictions that recognize the marital property designation known as community property? A) Community property laws do not apply to inheritances. B) Community property laws do not apply to gifts. C) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death. D) Community property applies to property that was owned individually before the marriage and is now joint property once that marriage has occured.
D. Explanation: Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. In addition, it does not apply to inheritances or gifts. There can be federal tax implications for property designated as community property, and laws in states that recognize community property ownership differ from jurisdiction to jurisdiction.
Which of the following statements regarding corporate zero-coupon bonds are TRUE? I. Interest is paid semiannually. II. The discount is in lieu of periodic interest payments. III. The discount must be accreted and is taxed annually. IV. The discount must be accreted annually with taxation deferred until maturity.
II and III Explanation: The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date. However, the discount is accreted annually, and the investor pays taxes yearly on imputed interest.
Which of the following statements regarding the exercise of option contracts are TRUE? I. The exercise of equity options settles the next business day. II. The exercise of equity options settles in two business days. III. The exercise of index options settles the next business day. IV. The exercise of index options settles in two business days.
II and III Explanation: Listed equity options, if exercised, settle in two business days (regular way settlement for equities). Index options, if exercised, settle on the next business day -- and in cash.
When conducting a discussion with a client about the merits of investing in a direct participation program, all of the following could be tax advantages EXCEPT I. accelerated depreciation. II. depletion allowances. III. recapture of depreciation. IV. tangible drilling expenses.
III and IV Explanation: Depreciation is the deduction against income representing the cost recovery of certain fixed assets. when one of those assets is sold for more than the straight-line depreciated value, the excess is recaptured as ordinary income. Only intangible drilling expenses benefit the limited partner.
