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

a money market comprised of short-term debt and equity issues. This is the statement that is “incorrect”. Equity issues are not traded in the money market, which consists only of high-quality short-term debt securities.

treasury bills. The most prudent investment provides the cash in the six-month short-term period. Common and preferred stock are subject to significant price uncertainty. US treasury issues provide the most safety of principal. Treasury bonds have longer maturities than the six-month terms available for treasury bills.

continuity of life of the business and transferability of assets. Partnerships may seek to avoid continuance of the business life and asset transfer. The other choices are too important for partnerships to sacrifice.

agency sales OTC. Markup policy applies to basically all securities other than government and municipal offerings expect where the security is offered under a current prospectus. Choices C and D are offered under a prospectus. Choice B involves municipal securities. Therefore, choice A is the only correct answer.

0.01%. A basis point is one-hundredth of a point. Since a point is 1%, a basis point is 0.01%. A bond price change of one basis point is ten cents ($1,000 x 0.01%).

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

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.

$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.

$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.

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.

earnings retained after payment of dividends to shareholders. The other choices are clearly incorrect. Earned surplus is also referred to as retained earnings.

net asset value and redemption price. Investors redeeming shares of mutual funds receive the net asset value.

open-end investment companies. The term is generally applied to open-end investment companies.

under no circumstances. The representative may send the red herring but not a research report of his firm.

25. The conversion ratio is how many shares of common stock Bubba obtains by converting. Divide the bond price - $1,000 for a single bond - by the $40 conversion price.

$8.50. Subtract the preferred dividend of $800,000 (100,000 x 8% x 100) from the net income. Divide the result of $3,400,000 ($4,200,000 - $800,000) by the 400,000 common shares to obtain $8.50.

deductions from gross income to offset lower value of equipment. The cost of equipment is deducted from gross income over the life of the equipment, as its value declines.

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

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.

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.

must deposit the full purchase cost before an order is executed. A “frozen” account is restricted to full cash payment in advance for any purchase.

when interest rates fall. Homeowners are most likely to refinance when rates are lower than the past.

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.

according to their percentage participation in the account. For example, if the group net order produces $3,000 in fees and a syndicate member has a 10% overall participation, that member receives $300 in fees.

a Western account. In a Western account each underwriter has a divided liability and is responsible only for his portion of the issue. In Eastern accounts, generally used for municipal issues, the underwriter is responsible for a percentage of any unsold portion. This is called an undivided liability.

$0. The cost of Bubba’s purchase is $3,000 (100 x $30). But Reg T only requires 50% in Bubba’s account and he has that.

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.

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

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.

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.

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

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.

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

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.

it includes a markup. A market-maker acts as principal. Therefore, Bubba pays a markup but not a commission.

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.

it is somewhat below the standard minimum. The standard minimum current ratio for a manufacturing company is 2 to 1. The current ratio for this company is 1.92 (9,400,000 divided by 4,900,000).

a $600 loss. The strike price and Bubba’s purchase price are the same. He has a $600 loss on the option for the premium he paid.

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

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

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.

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.

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.

90 days. Interest accrues from the coupon date to the settlement date. A regular way purchase on April 12 will settle on April 15. corporate bonds are figures on 30-day months, regardless of the actual number of days in the month. The year is considered 360 days. Therefore, interest is calculated for 16 days in January plus 30 each for February and March plus 14 for April.

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

common stock. Leverage refers to the existence of securities that are senior to common stock. There can be debt leverage and equity leverage.

cannot be determined. Since Bubba has not yet sold the stock, a profit cannot be determined on the stock. He has a $400 profit on the option.

$3,800. If the stock declined to $0, Bubba would lose $4,000 from having purchased the stock less the $200 premium he received from selling the call option.

$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.

a best efforts offering. With a best efforts offering the investment banker does not make any guarantee that all the offered securities will sell. The investment banker pays for only those securities that are actually sold and returns unsold shares to the issuer.

not do so under any circumstance. New issues may not be distributed to Bubba or members of his immediate family.

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.

dividends. Net income is determined before dividends.

authorized for inclusion in the NASDAQ system. Stocks listed on an exchange have no more than three characters in their symbols.

a $1,000 gain. There is a $1,000 gain on the stock. The option is a separate capital asset.

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

a penalty of 10% of the withdrawn is assessed. Bubba also owes regular income tax on the withdrawn amount in addition to the 10% penalty for early withdrawal.

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

premium. The price of closed-end investment companies is determined by trading of their shares in the open market. The price may be a discount to net asset value or a “premium” above net asset value.

Regulation T. Because this regulates brokers extending credit to customers, it is important to the securities industry but does not have an extensive effect on the general economy.

$3,000. With Reg T at 50%, Bubba’s equity should be half of the $30,000 account value, which is $15,000. Since his equity is $18,000 Bubba has $3,000 of excess equity.

fill or kill. This type of order is cancelled if the entire amount cannot be executed.

enter orders for the account at the representative’s discretion. A limited trading authorization only allows for entering of orders. A full trading authorization would also permit withdrawals from the account.

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.

the Saturday following the third Friday of the expiration month. It is NOT the third Saturday. The final day to trade options is the third Friday of the expiration month. The options expire the next da y.

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.

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.

Regulation U. Regulation T is the extension of credit by broker/dealers. Reg U relates to the extension of credit by banks on securities.

all of the above. The gross spread (or “underwriting spread”) depends upon all of these factors.

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.

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.

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

$1,000. This is the minimum denomination. Normally, US treasury bonds are in much larger denominations.

securities purchased must be registered in Bubba’s name and then delivered to him. Bubba is requesting delivery of securities in his name instead of being held by the broker.

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

machinery and pipe. These are tangible fixed assets and not associated with intangible drilling costs.

all are registered. All are registered with the SEC.

firm quotations. All Level III quotations are firm.

the longest maturity. These bonds are called first because the municipality will save the interest costs for the longest period of time.

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

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

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.

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

$6.19. The fund has a redemption fee of 1%. This is about 6 cents based upon the bid price. Subtracting that from the $6.25 bid results in $6.19.

a merger. Rule 145 basically applies to mergers, consolidations, and acquisitions.

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

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

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”).

$53. The breakeven price on the call is the premium plus the strike price. Since the premium is $3 per share, the breakeven price is $53.

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

$6,000. Divide Bubba’s excess equity by the Reg T margin requirement of 50%.

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

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

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.

bylaws. The bylaws of a condominium association provide general details about management.

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

both B and C. Treasury notes and treasury bonds have stated interest rates. Treasury bills are always sold at a discount to the face amount payable at maturity.

$500. Bubba sold short at $58. The call with a strike price of 60, gives him the right to buy back the stock at $60. If the stock rises, the call can be used to limit the loss to 2 points. Bubba can lose $200 on the stock. Bubba also paid a $300 premium. Loss potential is $500.

a processing fee. Many custodian banks charge the custodian fee to the mutual fund rather than the individual shareholder.

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.

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

purchase the preferred stock and sell an appropriate amount of the common stock “short exempt”. Arbitrage is the nearly simultaneous purchase and sale of equal securities in different markets for a profit. Selling four shares of common stock for every one share of preferred stock purchased provides a profit. The transactions involve the same number of common shares because the preferred is convertible to common at a four to one ratio.

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

$9,333. If Bubba were depositing cash, he would need $2,800 (70% x $4,000). Since he is depositing stock, he would have to deposit enough with loan value of $2,800. To arrive at this, divide $2,800 by the 30% loan value to obtain $9,333.

refuses the order. Reg T requires that under these circumstances the account must be frozen for 90 days. Any trade prior to that, requires cash in advance.

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

$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.

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

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.

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

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

money laundering. Potential money laundering activities include excessive wiring of money between accounts.

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.

$1,500. The NYSE minimum requirement is the lower of $2,000 or 100% of the account.

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.

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

the syndicate manager. The reallowance as well as the selling concession given to selling group members are determined by the managing underwriters.