Series-7 Series 7 General Securities Representative Qualification Examination (GS) Questions and Answers

the issuing municipality. The issuer pays for the attorney.

sell stop-limit order. A sell stop-limit order specifies a price, but will not turn into a market order. This order will only get executed at the price or better. Stop orders, although quicker in execution, will turn into market orders and the customer will not be guaranteed a specific price. Stop -limit orders are risky, in that the order may or may not get executed, but in this situation, it is the best choice.

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.

under no circumstances. No guarantees may be made against loss of market value because no one can guarantee the direction of the market. Insured bonds are protected against loss of principal and interest but not against market value depreciation.

accepting compensation from any other partnership. A general partner may be the partner is more than one partnership.

$200. Since XYZ is trading at 72, a November 65 call has an intrinsic value of $700. A sale at that value compared to the cost of $300 is a profit of $400. Subtract the loss of $200 on the expired put to obtain the profit of $200.

ease credit. A lower reserve requirement permits member banks to have more money available for lending, thus ease credit.

$98,062.50. The financial institution receives the bid price, which is 98 and 2 / 32. Two thirty-seconds is $0.625. The 98 is the percentage of a $1,000 bond. Multiplying 98% by $1,000 results in $980. Add $0.625 to $980 to arrive at $980.625 per bond. But …there are 100 bonds. So, multiplying $980.625 by 100 equals $98,062.50.

in a community property state a married woman must open a brokerage account with her husband. All of the other choices are true. Only choice A is “not” true.

providing short-term capital needs to client companies. The short-term capital needs of companies are normally the function of commercial bankers, not investment bankers.

FRB. The Federal Reserve Board sets the initial margin deposit requirements. The NYSE set the ongoing minimum equity requirements.

6 rights per share. Each share receives a right and there are six million shares receiving rights to one million new shares. So six rights are required for one share.

equally to all CMO holders of any tranche. All bondholders share equally in the interest payments. Only principal payments are directed to the owners in each tranche in sequential order.

warrants. All of the others always have fixed maturity dates. Warrants often have no finite life and, if they do, it is a very long time.

stopping stock. This is the definition of the term “stopping stock”.

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.

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

a copy of the underwriting agreement. The underwriting agreement is “not” in the final prospectus. This is a contract between the issuer and the underwriting syndicate.

Securities Investor Protection Act of 1970. SIPC was established under this act.

$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.

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

they mature one to three years from the date of issuance. Remember the question asks what is “not” a characteristic of treasury bills. The other choices are aspects of treasury bills, which most commonly have maturities of 90 days but never longer than one year.

the $600 premium is capital gain. That’s simply how the tax law works.

long one XYZ October 20 call and one XYZ January 30 call. Options in the same class are either both puts or both calls on the same security.

all are registered. All are registered with the SEC.

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.

the tax collector. Taxes always have preference over any other creditors.

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

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.

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

potential capital appreciation. This is the only correct choice. Any income is not deferred, raw land cannot be depreciation for a large deduction, and there is substantial risk.

the selling group’s determination of value in the prevailing market conditions. The offering price is determined by factors related to the issuer.

The market theory stating that the small investor is usually wrong is called the odd-lot theory. The concept behind this theory is that when small lot sales are high, it is a good time to buy, as a high ratio of small business sales is a contrary indicator of market direction.

all of the above. A broker/dealer must demonstrate that what is said or printed about a product is not fraudulent. Representing a mutual fund as safer than any of the choices above is likely fraudulent.

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.

next computed after receipt of the order by the dealer. This is called “forward pricing”.

Generally, the price is computed as of the close of the market on the day of the order. However, if the order is received after this computation, the order is executed based upon the next day calculation.

270 days. A characteristic of commercial paper is relatively short duration, normally not exceeding 270 days.

8%. The sales charge in this case is $1.44. Dividing that into the offering price of $18.04 results in 8%.

one hundred shares of MST traded on the exchange and appears out of order on the tape.

The ticker symbol followed by “SLD” means that the print is out of sequence.

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

income from extraordinary sources. Single events, such as the sale of property, do not affect basis.

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.

open-end investment companies. Open-end mutual funds are a continuous offering of new securities that are not traded on an exchange. They trade only in the over-the-counter market. The other choices may trade over-the-counter or on exchanges.

4,000,000. Bubba owns 200 shares and receives rights for 100 more. The basis for the rights offering is therefore one new share for each two shares outstanding. The utility company is raising $40 million by selling shares at $20. Therefore, the company is selling 2,000,000 new shares. Since the ratio of existing shares to new shares is 2 to 1, there must be 4,000,000 presently outstanding shares.

specialists. This description defines the function of the specialists.

after the bills are paid and the bank is paid, but before the preferred shareholders. As a creditor, Bubba is paid before any of the shareholders. But his position is subordinated to other creditors, like the bank and accounts payable.

syndicate account letter. This letter is sent by the manager of a competitive bid syndicate to the other members. The priority and other procedures, including allocation amounts, are specified in the letter. Members signify acceptance by signing the letter and returning it to the manger.

physically protects the fund’s assets. The custodian holds the assets of the fund. The transfer agent redeems and issues fund shares.

closed-end funds. Mutual funds are purchased at NAV (when no-load) or NAV plus a sales charge. The pricing of closed-end funds is determined by market activity and has no direct link to NAV.

200. In an issue of rights, there is always one right per share. Bubba owns 200 shares and thus receives the same number of rights.

a contractual plan. The other choices are not suitable. In a voluntary accumulation plan, the load is level. In an automatic withdrawal plan, the load is front -end because the bulk of the sales charge is taken early in the life of the plan.

change the bid. A workable bid indicates a price level where a dealer is willing to negotiate business. It is not a firm bid and may be changed before becoming firm.

margin account. A margin account is required for short sales.

they are adjusted for cash dividends. This is the statement that is “not” true.

$3.75. Three-eighths of a $1,000 bond with a par price of 100.00 equals $3.75.

$9,000. Since the required cash to deposit is $4,500 and Reg T is 50%, Bubba may deposit $9,000 of securities.

semi-annually. Investment companies are required to issue financial report semi-annually. Many do so more frequently.

total debt service as a percentage of net operating revenue. This ratio is applicable to revenue bonds but not general obligation bonds. The other choices are all used in measuring credit risk in a GO bond.

investment advisor. The custodial bank is usually also selected for other functions, but not as investment advisor. That assignment is generally performed by a special advisory firm or the mutual fund management company.

predictions of recession in the economy. All of the other choices are technical market indicators. An economic forecast is “fundamental” market data.

an open-end investment company. By definition, open-end funds may not issue senior securities. They only issue “voting stock”.

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

six million. One right for each outstanding share is distributed.

90 calendar days. An investor has 90 days from the date of original purchase to sign a letter of intent. The maximum duration for the letter is 13 months from the initial purchase.

every month. Collateralized Mortgage Obligations generally pay interest each month. However, some CMOs pay interest quarterly or semiannually.

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.

0. Options do not have loan value, except for long-term LEAPS.

mini-max. These offerings state the minimum and maximum number of shares offered.

may be levied only if the charge if fair, reasonable, and non-discriminatory. This is the standard in the FINRA rules.

that the stated yield is an estimate that may vary passed upon prepayments and market factors. The only guarantee is that nothing is guaranteed, especially the yield.

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

corporate bond. All of the other securities are issues backed by the US government, which are not considered funded debt.

liquidate the securities or otherwise cancel the transaction. Reg T requires the position closed if the customer fails to comply with the rules. An extension may be granted, but not by the member firm. Only an exchange or the FINRA grants extensions for bona fide reasons.

the point at which income exceeds deductions. This is the definition of “crossover”.

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.

10. If a customer fails to deliver securities within ten days after settlement, the broker must repurchase the securities.

restricted stock acquired via open market purchase. The two-year holding period does not apply when the security is acquired in the open market. However, if the security is owned by a control person, the other provisions of Rule 144 do apply.

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

the registered representative. Assuring that limited partners meet net wroth and income requirements is the responsibility of the registered representative.

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.

purchase any IPO security provided the plan is not sponsored solely by a broker/dealer. An ERISA plan that is qualified under Section 401(a) may purchase any IPO security provided that the plan sponsor is not a broker/dealer.

it limits deductions to the amount at risk. Deductions may not exceed contributed capital.

it must be sold only to bona fide residents of one state. Under Rule 147 intrastate offerings are sold only to residents of one state and cannot be sold outside that state for nine months. All the other choices are incorrect about the rule.

agreement among underwriters. This agreement authorizes the manager to handle the offering. The final contract between the manager and the issuer is the “underwriting agreement”.

$10. A point is 1% and bonds are priced in $1,000 increments. Multiplying $1,000 by 1% equals $10.

income. With an income program, the well is already producing. The risk is associated with the commodity price.

$10. Interest rates increased by 20 basis points. One basis point is 10 cents. So 20 basis points is $2. But…since there are five bonds, that $2 x 5 = $10.

a broker/dealer firm. A broker/dealer cannot use Rule 144 when selling stock.

the daily Bond Buyer. News is covered in the daily Bond Buyer as well as Munifacts, which is operated by the daily Bond Buyer. The Blue List shows only current offerings, not prospective ones.

a debenture. Because of the company’s well-established financial condition, it issues a debenture that has no specific collateral and is only backed by the creditworthiness of the issuer.

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.

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.

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

US treasury notes. Savings bank deposits have no risk. The short duration of treasury bills and certificates embodies less market risk than longer-term treasury notes.

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

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

the management group. The management group is actually comprised of the management company (including the underwriter) and the investment advisor.

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

all of the above. All are sources of funds for limited partnerships along with non -recourse loans.

revenue bonds. The security for a revenue bond depends on the revenue produced by the specific facility. Engineering estimates of constructions costs and potential traffic flow are critical.

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.

carrying margin accounts. A call loan is made to brokers who use securities as collateral. They are usually made to finance the debit balances in margin accounts.

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.

21,000. The underwriter is permitted to retain 70% of the 30,000 shares. The remaining 9,000 shares are kept in the pot by the manager.

in-whole calls. Price to call computations are based upon in-whole calls only. These calls will result in all bondholders being called simultaneously, thus guaranteeing a minimum yield to all.

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”.

net income from dividend and interest paid on securities in the fund portfolio. This is the definition of net investment income, which excludes gains on sales of securities.

withholding blocks of a new issue in the member’s account. Underwriters and selling group members are prohibited from keeping blocks of a new issue for their own accounts.

warrants. All of the other choices receive dividends if they are declared. But only warrants are a specific security that never pays dividends.

$100,000. This was a considerable amount of money in 1940.

they are issued in denominations of $1,000 to $1,000,000. Remember, the question asks what is “not” true. The smallest denomination for a US treasury bill is $10,000.

$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.

balance sheet. This report reflects the entire condition of the company by showing all assets, liabilities, and components of net worth.

US treasury bills. T-bills are purchased at a discount and do not have interest coupons. When surrendered, the par value is paid at maturity. All the other choices, if they are paying any interest, pay throughout the term of the issue.

two years. The corporation can offer these securities in whole or in part for the ensuing two years.

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.

Series EE bonds. Because Series EE bonds are not negotiable, they have no collateral value. They cannot be sold back to the US government.