Series 7 Test Questions 22

If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder?

$600 cash ****Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised.****

Advertising relating to municipal securities must be approved by which of the following?

A general securities principal or municipal securities principal ****According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.****

An investor wishes to purchase a new issue municipal bond. Which two of the following terms describe the form of the bond?

Fully registered. Book entry ****All new municipal bonds are issued either in fully registered or book entry form.****

For tax-reporting purposes, qualified dividends are considered to be what type of income?

Portfolio ****Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities.****

A call is in-the-money when the market price of the underlying stock is

more than the strike price ****Call options are in-the-money whenever the market price of the stock is greater than the strike price.****

For a customer who has purchased stock and wants to write a call option, the option ticket would be marked:

opening sale ****An opening transaction is used when establishing a new option position. It is an opening purchase if your client is buying the option. It is an opening sale if your client is writing the option. "Closing" is the term used when the client eliminates an existing option position through a trade of the contract.****

A buy stop order may be used for all of the following EXCEPT:

to protect a profit in a long position ****Buying can only protect short positions, not long positions.****

If a customer purchases $10,000 worth of stock in a cash account on Monday, May 15, under Regulation T how much must the customer deposit, and when must the deposit be made?

$10,000 no later than Friday, May 19 ****Under Regulation T, payment in a cash account must be made in full within 4 business days (regular way settlement plus two additional business days) of the trade date.**** YOU CAN BUY STOCK IN A CASH ACCOUNT AND PAY FOR IT UP TO 4 DAYS LATER

A customer buys 5 municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has a:

$50 capital gain ****The premium on the municipal bonds must be amortized. The bonds were bought at 104 and therefore each bond has $40 in premiums (5 bonds X $40 = $200 premium to be amortized over 20 years). This means the cost basis of the bonds ($5,200) decreases by $10 a year ($200 / 20 years = $10). After 10 years amortization, $100 has been amortized (10 years × $10 per year), and the customer has an adjusted cost basis of $5,100. If the bonds are sold for 103 ($5,150), the customer has a $50 taxable capital gain.****

If LMN, Inc. has filed for bankruptcy, in what order would interested parties be paid? 1. Holders of secured debt. 2. Holders of subordinated debentures. 3. General creditors. 4. Preferred stockholders.

1, 3, 2, 4 ****The liquidation order is as follows: the IRS (and other government agencies), secured debt holders, unsecured debt holders and general creditors, holders of subordinated debt, preferred stockholders, and common stockholders.****

If a municipal bond maturing in 10 years is bought for 110, its cost basis at the end of the sixth year is:

104 ****To establish the new cost basis, determine the amount of the premium to be amortized yearly. For this bond, the $100 premium is amortized over 10 years: $100 ÷ 10 = $10. Then, multiply the annual amortization amount by the number of years the bond is held ($10 × 6 = $60). Finally, subtract the amount of the amortized premium from the original cost of the bond ($1,100 − $60 = $1,040, or 104).****

A customer buys a municipal bond in the secondary market at 96 that has 4 years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are:

2 points of ordinary income and 1 point of capital gain ****When a municipal bond is purchased in the secondary market at a discount, the annual accretion is taxed as ordinary income. The annual accretion is 1 point per year (4 points divided by 4 years to maturity). Therefore, when the bond is sold 2 years later, its cost basis is 98. If the bond is sold at 99, there is a long-term capital gain of 1 point per bond. Also, there is ordinary income taxation on the accretion of 2 points.****

A schoolteacher has a 403(b) tax-qualified deferred retirement plan, into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income?

220,000 ****The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.****

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend?

General obligation bond ****Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.****

Most taxes in the U.S. fit into one of two categories. They are either progressive or regressive. Which of the following taxes are known as progressive taxes?

Income Estate ****With a progressive tax, the percentage amount increases as the taxable amount increases such as income and estate taxes. Sales and cigarette taxes are regressive because all persons pay the same percentage tax regardless of their income.****

If a high-income customer is subject to AMT, which of the following preference items must be added to adjusted gross income to calculate his tax liability?

Interest on a private purpose municipal bond ****If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for alternative minimum tax purposes.****

Which of the following bonds may be secured by a leaseback arrangement?

Lease-rental bonds ****Certain revenue bonds, called lease-rental bonds, are secured by a leaseback arrangement. For example, the state may set up an agency to construct a new office complex to house all state agencies. This authority issued the bonds. Once the facility is built, the state leases the complex from that authority. The bonds are backed by the lease payments.****

A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in:

New Jersey Turnpike revenue bonds rated Aa ****The Michigan revenue bonds, the sub-investment grade municipal bonds, and the Delaware municipal bonds have possible state disadvantages or are less than investment grade.****

Three family members each hold sizable call option positions with the same underlying equity security in their individual accounts. Over the course of 3 days, Monday through Wednesday, each of the customers calls your broker/dealer and gives instructions to exercise all of their call options in that security. You recognize this as a potential violation of

OCC exercise limit rules ****OCC exercise rules limit the maximum number of contracts in the same underlying security that can be exercised within a 5 business day period. Three customers, all related, and all giving instructions to exercise their long calls in the same underlying security within 3 business days should, at a minimum, raise the question of whether or not they are acting in concert in order to circumvent the OCC exercise limit rules.****

Under SEC rules, a customer short sale on an exchange floor can be executed on which of the following?

Plus tick. Zero-plus tick. Minus tick. Zero-minus tick. ****On an exchange floor, a customer short sale can be executed at any time in the trade sequence.****

Which of the following is considered a source of debt service for a city issued GO bond?

Real estate taxes ****General revenues of a city municipality such as real estate taxes or licensing fees may be used to pay the debt service on a general obligation bond. State issued GO bonds will also include sales taxes as a source of money. Usage revenue such as that generated from toll roads or hospitals would be associated with funding revenue bonds.****

Which of the following activities can occur in the municipal bond secondary market?

Retail and institutional transactions Trades done by a broker's broker ****Sales to retail investors, trading between institutions, trading between dealers, and trading on behalf of other brokers all occur in the municipal secondary market. Bidding on new issues and establishing underwriting spreads have to do with the primary market (new issues).****

Which of the following is NOT part of the Federal Farm Credit System?

The Federal Home Loan Banks ****The Federal Farm Credit Bank system is for farms, not homes.****

Under MSRB rules, if a municipal securities dealer has a financial advisory relationship with an issuer, which of the following statements is NOT true?

The relationship need not be disclosed in communications with the public pertaining to that issuer's securities ****When a financial advisory relationship exists, it must be disclosed to all buyers of that issuer's securities, and in any advertising (communications with the public) relating to that issuer.****

Which of the following documents must an existing customer sign to establish a discretionary account?

Trading authorization ****To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements.****

Income from all of the following securities is fully taxable at the federal, state, and local levels EXCEPT:

Treasury bonds ****Interest on Treasury bonds is not taxed at the state level or local level.****

Mutual fund Class B shares assess

a deferred sales load ****Class B shares carry a deferred sales load. This is sometimes referred to as a back-end load. Class A shares carry a front-end load. Class C shares charge a 12b-1 fee quarterly with a small back-end load in the first year.****

Level I Nasdaq service provides subscribers with all of the following information EXCEPT:

bid and ask quotes for each market maker ****Level I Nasdaq service provides subscribers with information on the inside market, last sale, and volume. The bid and ask quotes of each market maker in a particular security are shown over Level II.****

The IRS requires a municipal bondholder to use straight-line amortization for the purpose of determining the annual

decrease to a premium bond's cost basis ****Premiums are amortized; discounts are accreted. For municipal bonds bought at a premium, the bondholder must adjust cost basis annually in such an amount that, if held to maturity, there is no reported capital gain or loss. The amortization is straight line, or the same amount must be amortized each year.****

A formula timing plan that consists of periodic purchases of a fixed dollar amount of stock regardless of price is known as:

dollar cost averaging ****There is no such thing as share averaging. Constant dollar and constant ratio plans do not involve periodic purchase of securities. They involve buying and selling equity and debt securities to keep either a constant dollar or constant ratio between the two. Dollar cost averaging calls for the investor to make regular purchases over a long period.****

A prospectus must be delivered to customers in the sale of all of the following transactions EXCEPT

exchange traded funds (ETFs) trading in the secondary market ****Exchange traded funds trading in the secondary market, like other securities that are already trading in the secondary market, do not require the delivery of a prospectus.****

Expansions in the business cycle are characterized by:

increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values. ****Expansions in the business cycle are characterized by increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values. Each of the remaining characterizations would more likely be associated with periods of contraction in the economic business cycle.****

The net asset value of an international bond fund can be expected to increase if:

interest rates fall abroad the U.S. dollar weakens ****If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. If the U.S. dollar weakens, the value of other currencies will rise. This would also increase the NAV for a portfolio of international bonds.****

One of the benefits of using arbitration to settle disputes between member firms is that it:

is relatively inexpensive ****Arbitration is a method for settling disputes between member firms that is less costly than litigation. In addition, all decisions are final and binding on all parties.****

A breakpoint sale is defined as the sale of mutual fund shares in an amount:

just below the dollar amount at which the sales charge is reduced ****The term "breakpoint sale" refers to the violation that occurs when a sale is made just below the point at which the investor would receive the reduced sales charge. The practice earns a higher commission for the salesperson but is not in the interest of the customer.****

Prior to effecting an initial penny stock transaction for a new customer, the registered representative must:

obtain a signed risk disclosure document from the customer. obtain a signed suitability statement from the customer. determine suitability based on financial condition, investment experience, and investment objectives. ****According to the penny stock rules, registered representatives must provide risk disclosure information to all penny stock buyers which customers must sign. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. If an investor is not considered an established customer they must sign a suitability statement as well. In this case, we are told this is the initial trade by a new customer so we are not going to confirm status as an established customer.****

One of your clients dies. Upon notification of the death, you should immediately do all of the following EXCEPT

obtain the names of the beneficiaries of the estate for the purpose of notification ****The account registered representative should cancel all open orders and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries.****

The function of the Federal National Mortgage Association (FNMA) is to:

purchase FHA-insured, VA-guaranteed, and conventional mortgages ****The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.****

If a customer submits a redemption order to her broker/dealer after the close of the New York Stock Exchange, she will receive a price based on the net asset value computed:

the next time the fund computes it ****Orders to redeem shares are executed at the next computed price.****

A municipal bond transaction is labeled T+2. This means that

the trade is settled regular way in 2 business days ****T+2 means settlement takes place 2 business days after the trade. This is regular way settlement.****