Series-7 Practice Exam Questions with Answers Series 7 General Securities Representative Qualification Examination (GS) Certification

give Bubba its latest available statement. Bubba, like any customer, must be provided with the most recent available information.

if it does not exceed $1,000. If the net amount due is less than $1,000 no action is required under Reg T.

5.00%. The nominal yield is the coupon rate on the bond.

the purchase of one fund would probably be made at a break point allowing more dollars to be invested in fund shares. There is nothing inherently unsuitable about recommending three different funds. However, in most cases, a single fund offers satisfactory diversification and can be purchased with a reduction in sales charge.

the current market for the stock. FINRA rules require the markup to be based upon the current market price.

by competitive biding. The quoted prices for treasury bonds-as with all negotiable securities-is determined in the market by competitive biding.

permission granted to the general partner to act outside the partnership agreement. The limited partners may approve of the general partner pursuing an act that is contrary to the partnership agreement.

preemptive rights. Holders of ADRs do not have preemptive rights, although they have most other rights of shareholders, including the right to vote for board members-even a mother-in-law

a closed-end investment company. An open-end investment company may have a sales charge but not a commission.

American Depository Receipts. American Depository Receipts are used to facilitate transfer of ownership in foreign securities. They are not money market instruments.

$7,500. The short sale transaction is $5,000. The Reg T required deposit is $2,500 ($5,000 x 50%). Adding both results in $7,500.

the holders of common stock and the holders of preferred stock. The holders of all classes of stock are the owners. Each stock class has separate privileges, but all represent ownership. Even if the government is an owner, it holds shares of stock.

yield to maturity. The premium or discount in the security price relative to par value is considered when computing the yield to maturity.

short-term cash needs. Notes are generally used for short-term needs.

it was never executed. The first transaction at 38.75 elected the order, but since it was both a stop order and a limit order, there was never another transaction at 38.75. Consequently, Bubba’s order was never executed.

to reflect prevailing credit ratings and market conditions for the issuer. Premiums or discounts are used in bond offerings to bring the yield in line with current market conditions.

to be executed at a specific price or better. Choice A is only a buy limit order and choice B is only a sell limit order. Choice C is the correct definition of a “limit order”.

premium. That’s the term for the option cost.

breakout. An upward move through a resistance level that is confirmed by heavy volume is called a breakout.

$2,000. Bubba started with $6,000 of equity and a debit balance of $4,000. The market value of his XYZ stock increased by $5,000 ($15,000 - $10,000). Therefore, his equity increased to $11,000. Since Bubba only needs 60% equity, his Reg T requirement is $9,000 ($15,000 x 60%). His equity exceeds the requirement by $2,000.

FINRA. Sales literature regarding investment company shares must be filed with FINRA within three days after the first use.

all of the above. All of the choices are required information for the registered representative to obtain.

both A and B. These describe the activities a registered representative should undertake when a customer dies.

amount of the transaction. The other choices are not FINRA considerations. The dollar amount of the transaction is one of the factors considered in markup fairness. Other factors include the type of security, the amount of service rendered, the unit price of the security, and general availability of the security.

after approval by a majority vote of the shareholders. All vital interests of the shareholders are subject to their majority vote.

pledging securities as collateral. To hypothecate securities is to pledge them.

$5,500. The NYSE maintenance requirements on obligations of the US treasury vary depending upon the term of the instrument. For 20-year bonds, the requirement is 6% of the market value. Multiplying the market value of $92,500 by 6% equals $5,500.

all of these. In the OTC market, all of these orders are possible. A mutual fund is considered OTC.

over-the-counter. The OTC market is much larger than any listed markets.

interest is tax exempt, but the capital gain is taxable. This happens because Bubba purchased the bond in the secondary market with a different price than the original issue face amount.

90 days. To avoid a forced sale, stock many be sold under Rule 144 over a 90-day period.

income, dividend, and capital gain distributions may be automatically used to purchase new shares of the fund. The new purchases are at the ask price, not the bid price.

subject to federal income tax but exempt from state income tax. The interest on US government securities is taxed by the US government but not by state governments. The opposite is true of bonds issued by a state, which are exempt from federal tax but subject to state taxes -except for taxes of the state that issues them.

a pension fund. Since the pension fund does not pay income tax, the tax benefits of the municipal bonds are not realized.

rate of return. Because T-bills pay no interest, Bubba’s rate of return is the discount as a percentage of the face value he receives at maturity.

special tax. The other categories are not revenue bonds. Special tax is the only type that fits the general grouping.

the management group receives a fee based upon the amount of assets in the fund. The management fee is based upon the fund’s assets. The sale charge in choice C is received by the fund sponsor (underwriter), which could include the management group but not necessarily.

sponsor. Also called the “distributor”, these terms are interchangeable for an open -end investment company.

regulated. Investment companies regulated by the Internal Revenue Code Subchapter M are required to pay out a minimum of 90% of their net income annually to their shareholders.

appreciation. That’s the correct term for increase in value.

immediately. The employer’s contributions may be subject to a vesting schedule, but the employee’s contributions are immediately vested.

the custodian may perform an essential clerical service for the fund and its shareholders. The custodian holds the cash and securities of the investment company and performs the bookkeeping functions. It does not have a supervisory role.

tombstone ad. Tombstone ads are used to announce new issues. They do not offer to buy or sell securities. They are informational only.

disintermediation. An easier word would be preferable, but that’s the correct term.

a dealer. When a firm does business directly with a customer, it is acting as a dealer. When it represents a customer, it is acting as a broker.

a balanced fund. A balanced fund varies its investments among these categories of holdings.

cash. Index options are settled by payment of cash.

moral obligation. The lack of a legally binding obligation removes the issue from the general obligation category. Although defaults are possible, it is usually held that no state legislature would allow a moral obligation issue to default.

the price at which the issue is offered. The offering price is usually determined on the offering date and does not normally appear in the preliminary prospectus.

the common stock of a utility company. The term “defensive issue” refers to a security that is least susceptible to swings in the business cycle.

the LEAPS premium will be higher than the traditional option premium. Because LEAPS have a longer time until expiration than traditional options, the premium should be higher.

higher than the strike price of the option. The premium paid is not relevant. All that matters are the strike price of the option relative to the market value of the underlying stock.

cash flow and depletion allowance. The other choices are not applicable because an “income” partnership already has a producing well.

interest is exempt from federal income taxes. This is the choice that is “not” an attribute of treasuries. All of the other choices are attributes of US treasury bills, which are subject to federal income taxes.

the company files regular financial data with the SEC. Rule 144 transactions may use either agency or principal methods.

adjustment bonds. These bonds are also known as income bonds. Interest is paid only if there is income.

all of the above. A transaction that is simultaneous and thus riskless calls for a smaller than usual markup under FINRA guidelines.

It does not imply SEC approval of the issue. The SEC does not approval an issue. It only attempts to see that sufficient information has been provided from which a proper investment determination may be made.

a requirement for shareholders to always accept the call price when called. All of the other statements are true “except” this one. Convertible preferred shareholders have a n opportunity to convert to common stock. There is no forced call price.

$28,000. The equity is the market value plus the credit balance.

amortized over the life of the bond resulting in no loss at maturity. For tax purposes, premiums are amortized over the life of the bond. Some amount is taken each year.

regulated. The term “regulated” refers to tax status under Subchapter M of the Internal Revenue Code. This simply means that if a mutual fund or other investment company qualifies for regulated status, the threat of taxation at multiple levels is eliminated.

all of the above. Dividends can be paid in all of these ways. They can also be paid with treasury stock or authorized but unissued stock.

no capital loss or income deduction is realized. The $20 premium is amortized over the ten-year life of the bond. After five years, half of the premium has been written down. The remaining premium is the same as the premium received upon selling the bond. The sale at 101 results in no loss or gain.

it may be entered. In a joint account any tenant is empowered to enter orders, which is specified in the account agreement.

results in compounding of shares, which can be an important factor for investment growth. Reinvesting dividends and capital gains increases the number of shares owned. Occasionally, these programs permit purchases at net asset value, but never below that price. Shareholders do not avoid current tax liability on the amount of dividends and capital gains reinvested.

98.96. A calculator is not required for this. Even Bubba knows the bond is obviously trading at a slight discount by yielding 5.10% instead of the coupon rate of 5%. If the yield was the same as the coupon rate, the price is 100.00.

White’s. White’s ratings are based on trading market data as opposed to the financial data of the issue, which is used by Moody’s as well as S&P.

the general partner’s personal assets. When a partnership no longer has assets, but does have debts, creditors may look to the personal property of the general partner.

tranche. That’s the term used to describe a separate class within a CMO issue.

500 votes. Under cumulative voting, the number of directors is multiplied by the number of shares owned. The votes may be cast all for a single director or divided in any manner among the directors.

$18,000. Fully paid marginable stock equal to the value of the purchase satisfies the requirement. Since Bubba’s account already has $1,000 of SMA, this comprises buying power of $2,000. Therefore, he only needs to deposit the remaining $18,000.

provide for disclosure of information about new securities offerings. The 1933 act is primarily concerned with registration and disclosures relating to new securities.

$3,900. The requirement for short accounts is 30% of the current market value. The market value is $13,000 ($28,000 - $15,000). Multiplying by 30% equals $3,900.

income reported but not received. Reportable income that is not distributable includes loan forgiveness.

financing charges. In a triple net lease, the tenant is responsible for taxes, insurance, and maintenance.

securities backed by the general credit of the issuers but no specific collateral. And in the case of some issuers, that may be fairly worthless.

only time and price of execution are involved. The only exception to the discretionary rule is when the customer gives discretion regarding time and price of execution.

prices reasonably related to the current market price of the security. All markups must be based upon the current market rather than the dealer’s cost.

the 11-bond index. This index is the highest quality index and thus reflects the lowest average yield.

money spread. Since the strike prices are different, but not the expiration date, this is a money spread (sometimes called a “price spread” or a “vertical spread”).

no later than the fifth business day after the trades. Bubba should pay up no later than the fifth business day.

the amount of municipal bonds distributed weekly as a percentage of each week’s new issue accounts of more than $1 million. This is the definition of the ratio.

best efforts. A best efforts deal least likely for a municipal securities offering. It is most often associated with small corporate stock or limited partnership offerings. Municipal securities are usually competitive bid or negotiated. Both of these types are firm commitment.

US Treasury bill. T-bills are quoted by yield. Therefore, the bid is higher than the asking price. A higher yield means a lower price.

the names of the underwriting syndicate members. At the time the notice of sale is published, the syndicate has generally not been formed. All the other information is required.

the underwriter will be penalized his profit on any securities repurchased from his clients. Since clients sell shares back to the syndicate shortly after the offering, the underwriter has not made a proper distribution. The underwriter therefore may be penalized any profit.

$3,000. The purchase requires $5,000 ($10,000 x 50%). Since the existing SMA is $2,000 Bubba only needs to deposit the remaining $3,000.

a custodian under UGMA. The Uniform Gifts to Minors Act requires securities registration in the name of the custodian for the benefit of the minor. A margin account does not qualify because such an account has all securities registered in street name.

$6,600. The NYSE maintenance requirement on short margin accounts is 30%. Multiplying the short market value of $22,000 by 30% equals $6,600.

Federal Reserve Banks. Debt securities are not issued by Federal Reserve Banks. All of the other entities do issue debt securities.

both A and B. Brokers generally operate as agents attempting to locate buyers or sellers for bond dealers. They do not trade for their own accounts or deal directly with individual investors.

without restriction. A SEP-IRA may be converted to a Roth IRA. The two-year holding period applies to SIMPLE-IRAs.

owned by the members of the syndicate. In a firm commitment the underwriter buys the securities from the issuing company. If they don’t sell to the public, they are owned by the underwriters.

$400,000. In an Eastern account, liability remains open until the entire syndication is closed. Therefore, Big Easy has a liability for 10% of the unsold portion. Since the unsold portion is $6 million, the liability for Big Easy is 10% of that amount, which is $400,000.

a SIMPLE. IRAs are for any individuals, not just small employers. The other choices do not exist.

a letter of intent. This accurately describes the definition of a letter of intent.

both A and C. Choice A is discretionary because the customer did not specify a quantity to purchase. Choice B only provides discretion about timing and thus is not discretionary. Choice C is clearly discretionary.

unit investment trust company. This is an example of a fixed trust, which is a type of unit investment trust.

$30. The current P/E is 10. If earnings are $3 and the P/E is still 10, the share price equals $30 ($3 x 10).

$100. This is the maximum per FINRA rules.

all of the above. These are required I Rule 405 of the NYSE and under suitability requirements in the Rules of Fair Practice of the FINRA.

10 days. The customer has 10 days to deliver before the broker will buy in the account.

certificates of deposit. CDs trade with “accrued interest” as part of the price.

premiums on options of volatile stocks are usually larger than on less volatile stocks. The likelihood of exercise increases with the volatility of a stock. Therefore, a higher premium is demanded.

$48. A 20-point increase results in a bond value of $1,200. Divide that by the conversion ratio of 25 shares to arrive at $48.

ascertains that extensions had been obtained under Reg T. If valid reasons exist, extension of time for payment may be obtained.

breakpoint. This is the dollar value at which the sales charge is reduced.

residential property not used for business. Depreciation is only permitted on income-producing property.

$20,000. The equity in a short margin account is equal to the credit balance minus the short market value. SMA is not considered when computing equity.

the underwriting spread is greater than the selling concession. The underwriting spread (or “gross spread”) is the difference between the price paid to the issuer and the public offering price. The selling concession is the amount that the managing underwriter gives to dealers in the selling group. The reallowance is the amount that underwriters give to other dealers and is less than the selling concession.

$13,350. Munis are not subject to Reg T. The NYSE maintenance requirement on munis is the greater of 15% of the market value or 7% of the principal amount.

deductions from gross income to offset lower value of equipment. Depreciation is the deduction of costs for capital assets as their value declines.

up to but not including the settlement date. Accrued bond interest is always calculated up to but not including the settlement date. The interest accrual begins on the coupon date.

$956.88. The price of 95.22 means 95 and 22 / 32. One thirty-second of a $1,000 bond with a par of 100.00 is $0.3125. Twenty-two thirty-seconds is therefore about $6.88. The 95 is the percentage of one bond with a par value of $1,000. Multiplying 95% by $1,000 equals $950. Adding $6.88 plus $950 equals $956.88.