Series 7 Test Questions 13

A newly-issued municipal bond pays interest on March 1 and September 1. If the bond has a dated date of August 1, 2011, the bondholder's first interest payment (payable on March 1, 2012) would include interest for a period of:

7 months ****From the dated date of August 1, 2011, to the first payment date of March 1, 2012, is 7 months.****

Which of the following can be rolled over into an IRA?

Another IRA Corporate profit-sharing plan ****Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.****

Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans?

Contribution amounts vary. Benefit payments are fixed ****In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.****

Your client owns a variable annuity contract with an AIR of 4%. In March, the actual net return to the separate account was 8%. If this client is in the payout phase, how would his April payment compare to his March payment?

It will be higher ****If the separate account of a variable annuity with an AIR of 4% had actual net earnings of 8% in March, the April payment will be higher than the March payment.****

If a customer purchases stock in an existing margin account and fails to make payment within the time period specified under Regulation T, the broker/dealer carrying the account can take all of the following actions EXCEPT:

Liquidate the entire account and remit any balance to the customer. ****If a customer does not meet a Fed call, the firm can use existing SMA to meet the call, request an extension of time from its designated examining authority, or liquidate the unpaid portion. The firm would not close out the account.****

Accrued interest for U.S. government bonds is calculated on the basis of actual days elapsed

Sell stop ****Sell stops, placed below the current market, become market orders to sell when the stock trades at or through (below) the stop price. Market sell orders can accelerate declines in the price of the stock.****

Which of the following statements regarding Treasury bills are TRUE?

They are offered with maturities ranging up to 52 weeks. Their interest is exempt from taxation at the state level. ****Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. T-bills are regularly offered with maturities from 4 weeks to as long as 52 weeks from issuance and are issued at a discount. Interest on Treasury bills is taxable at the federal level only.****

Which of the following is an automated system of delivering information relating to the market for municipal securities?

Thomson's Muni News or Muni Market Monitor (Munifacts) ****Thomson's Muni News or Muni Market Monitor (formerly Munifacts) supplies up-to-the-minute information to its subscribers.****

Accrued interest for U.S. government bonds is computed on the basis of:

actual days elapsed ****Accrued interest for U.S. government bonds is calculated on the basis of actual days elapsed****

The placement ratio, as shown in the "Bond Buyer", is:

bonds sold/bonds issued ****BS/BI****

All of the following are advantages of investing in American Depositary Receipts (ADRs) EXCEPT:

currency risk is virtually eliminated ****ADRs carry currency risk because distributions on ADRs must be converted from foreign currency to U.S. dollars on the date of distribution. In addition, the trading price of the ADR is affected by foreign currency fluctuation.****

An ADR is used to:

facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. ****American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors.****

An intrastate offering is exempt from:

federal registration ****An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration.****

A tax-exempt bond fund may invest in:

municipal bonds ****Bond funds will distribute taxable income or dividends unless invested in municipal bonds. Although dividend distributions from a municipal bond fund are tax exempt, capital gains distributions are fully taxable.****

Credit risk involves:

possibility of issuer default ****Credit risk is the danger of losing all or part of the invested principal as the result of the issuer's failure.****

A person wishing to grant a registered representative the right to make investment decisions for his account does so by:

providing a limited power of attorney giving discretionary powers ****A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney (trading authorization).****

All of the following are true of negotiable, jumbo certificates of deposit EXCEPT:

they are fully insured in any denomination by the FDIC ****The FDIC insures only up to $250,000.****

According to the MSRB rules, a registered representative can do all of the following EXCEPT:

train other registered representatives. ****Registered representatives must be trained as well as supervised by a registered principal. They may participate in new municipal bond underwritings and both sell and trade municipal bonds in the secondary markets.****

A margin account with a short credit balance of $39,000 will receive a margin call if the SMV rises above:

$30,000 ****With the margin call, the investor has to return the account to the margin maintenance requirement (30% of CMV here). Dividing the Cr by 1.30 will give the call level: $39,000 / 1.30 = $30,000.****

Which of the following options strategies could be used by an investor who is bearish on a stock?

Debit put spread Long combination straddle ****A debit put spread is a bearish strategy that could realize a profit (the difference between the strike prices minus the premium paid for the spread) if the stock price fell. A long combination, which consists of both a long call and a long put, is both bullish and bearish and could also yield a profit if the stock price fell as the result of the long put. However, both a debit call spread and a long call are bullish strategies and would not be used if one is bearish on the stock.****

Which statements regarding oil and gas limited partnerships are TRUE?

Exploratory programs are more risky than developmental programs. Successful exploratory programs provide higher returns than developmental programs. ****Exploratory oil and gas direct participation programs drill in areas where there are no proven oil reserves. While the chances of success are relatively small, successful exploratory wells provide large returns to investors. Developmental programs drill in areas adjacent to sites where proven oil reserves exist; while the probability of success is favorable, the returns will not be as great as a successful exploratory program.****

A registered representative executes the following trades for an options account: Buy 1 FLB Apr 40 call at 9 Sell 1 FLB Apr 45 call at 4 Are these suitable trades?

No, because the customer cannot make a profit on these trades ****These trades are not suitable because the customer will not make a profit. In any price spread, the net debit represents maximum loss; in this case, the net debit is 5 points, or $500. Maximum loss added to maximum gain will always equal the difference between the strike prices. In this example, the difference between the strike price is 5 points, therefore maximum gain is 0.****

A technical analyst is concerned with all of the following trends EXCEPT:

PE ratios ****Technical analysts are more interested in forecasting market trends and securities prices than in studying individual corporations. Therefore, they are concerned with market prices, trading volumes, changes in the Dow Jones Industrial Average, reversals, support and resistance levels, advance/decline lines, short interest, and many other factors that might help them time buying and selling decisions. Fundamental analysts, on the other hand, concentrate on a stock's intrinsic quality and are concerned with PE ratios and earnings per share.****

An investor has researched XYZ Corporation and is convinced the company's stock will soon decline in value. If the investor wishes to act on that conviction, which investment strategy will allow the investor to take advantage of the anticipated decline in share value with the smallest cash investment?

Purchase a put option ****Buying a put is a basic option strategy utilized when one is bearish on a stock. If the stock declines as anticipated, the investor could exercise the put which allows the stock to be sold at the strike price and then repurchase it at its lower current market price for a profit. The premium paid to buy the put costs less than the margin required if one were to sell the stock short. Purchasing a call or a call spread are bullish options strategies.****

Which of the following statements regarding a discretionary account is NOT true?

Securities in a discretionary account may not be rehypothecated. ****No limits are placed on the rehypothecation of securities in an account based solely on its discretionary status. Both cash and margin accounts may be discretionary.****

An investment adviser representative may describe dollar cost averaging to a customer as:

a funding technique that will cause the average cost per share to be less than the average price per share. ****Dollar cost averaging is beneficial to the client because it achieves an average cost per share which is less than the average price per share over time. Using a fixed dollar amount each investment period it enables the investor to purchase more shares when prices are lower and fewer shares when prices are higher. While dollar cost averaging does not ensure profits in any market, nor does it ensure against losses, it is an economical and convenient method for acquiring shares.****

A municipality is allocating the revenues from an industrial revenue bond under a net revenue pledge. The first priority is:

operation and maintenance. ****Under a net revenue pledge, operations and maintenance are paid first, with debt service following. In a gross revenue pledge, debt service is paid before operations and maintenance.****

A municipal firm acts in an agency capacity to execute a purchase order for a customer. All of the following are required to be on the customer's confirmation of purchase EXCEPT:

the identity of the contra broker. ****The identity of the contra party is not necessary as long as it is stated that the name is available upon request.****

The visible supply has been increasing steadily over the last 30 days. This is an indication that:

yields are likely to rise ****When the visible supply increases it tells us that the number of bond issues coming to market is increasing. Greater supply puts downward pressure on prices. As bond prices fall, yields increase.****

An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year?

$3,000 ****The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year.****

A customer, who has contributed to an IRA and to an employer matching 401(k) plan continuously for many years, wants to purchase an annuity contract to add additional monthly income once retired. Given that all of the current retirement investments are subject to market risk, the customer wants these new funds to have no market risk exposure. One of the following would achieve that objective but a suitability discussion regarding it's risk should also occur. Which is it?

Fixed annuity contract with a discussion regarding purchasing power risk ****A VA with its investments in the separate account subject to market risk would not align with the customer's objective. Therefore only a fixed annuity could be considered as suitable. However, a discussion should occur regarding the risks that are associated with a fixed annuity; purchasing power risk. The fixed payment that the annuitant receives loses purchasing power over time as a result of inflation.****

Which of the following statements regarding the discussion of options with customers is TRUE?

In every discussion about the benefits of options, a statement must be made regarding the corresponding risks ****Any description of options must include a description of the risks. This rule applies to all communications with the public, written, electronic, or in person.****

A municipal bond is offered at a discount. It has a 30-year maturity and is callable in 20 years at par. It is callable in 5 years at a premium and is puttable in 10 years at par. Which of the following yields would be quoted on this basis?

Yield to the 30-year maturity ****Bonds that sell at a discount are always quoted as yield-to-maturity. This is the lowest possible net yield that the investor would make by holding the bonds until the issuer redeems them.****

A new customer has been approved for all levels of options trading and has signed the options disclosure document. Even though approved for all levels of options trades, she notes that she will not be employing nor should the RR recommend any strategies with unlimited maximum loss potential. Given this criteria a RR could suitably recommend

short or long spreads ****Of the pairings offered, only short and long spreads both have defined loss potentials. Short stock, short calls, short straddles, and a short stock/short put hedge positions all have unlimited loss potentials.****

Bond funds will distribute taxable income or dividends unless invested in municipal bonds. Although dividend distributions from a municipal bond fund are tax exempt, capital gains distributions are fully taxable.

short-term financing ****Municipal short-term notes (tax anticipation notes, revenue anticipation notes, grant anticipation notes, and bond anticipation notes) are used as interim financing until a permanent long-term issue is floated or until tax receipts increase or revenue flows in.****

According to technical analysis, when the market is consolidating, a chart showing the market trendline appears to be moving:

sideways within a narrow range ****A consolidating market is one that stays within a narrow price range. When viewed on a graph, the trendline is horizontal and is said to be moving sideways, meaning neither up nor down.****

If XYZ is trading at 39 and a customer sells 1 XYZ June 40 put and buys 1 XYZ June 35 put, he will profit if the:

spread narrows. contracts expire ****When a spread's premiums are not available, the more valuable option is found by examining the strike price. A put with a higher strike price has a higher premium because a put represents the right to sell. Because the investor is selling the more valuable put (the one with the higher strike price), this is a credit spread, and profit occurs if the options expire worthless (in this case, the customer keeps the net credit) or the spread narrows between the premiums.****

If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT:

the issuer must redeem certificates on shareholder request. ****REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.****

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among 5 different mutual funds within 2 fund families, as opposed to purchasing just 1 fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B $495,000 XYZ Research Class B $310,000 XYZ Investors Growth Stock Class B $495,000 ABC Capital Enterprise Class B $495,000 ABC Capital Opportunity Class b $310,000 Total $2,105,000 These recommendations are:

unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0%. ****Class A shares, in most mutual funds, provide breakpoint sales charge discounts so there is no sales charge when purchasing $1 million worth of shares (or less in some cases). Class A shares also have lower operating expenses than Class B shares. This retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years.****