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

only after the SEC specifically clears the issue in writing to the principal underwriter. The registration statement becomes effective when notice is received in writing from the SEC.

permits recovery of more than the original cost. Percentage depletion is only available for small producing wells.

face value. The price is 100.00 if the yield is the same as the coupon rate. A price of less than 100.00 means the yield is higher than the coupon rate. A price of more than 100.00 means the yield is lower than the coupon rate. The prices are a percentage of 100.00. However, treasury bonds and municipal bonds are not quoted in this way.

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

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.

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 unchanged. The debentures add to liabilities and to cash (an asset) received from the sale. There is no effect on net worth.

cannot be determined. Bubba can put away the calculator. The warrant is “perpetual” so the value is not determinable from today’s price of the common stock.

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

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

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.

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.

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.

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.

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

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.

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.

19 7/8. The markup is always based on the current market price, not upon cost. Therefore, the markup is based on the offering side of the current quotation.

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

selling the security he already owns. A “covered” call is written on stock already owned.

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.

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

all are registered. All are registered with the SEC.

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

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

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.

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

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.

both B and C. The size of tax deductions is not a “primary” consideration.

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

under no circumstances. An FINRA member firm may not, under any circumstances, allocate shares to itself, any of its employees, or to any employee of a firm that underwrites securities.

granting of power of attorney to the limited partners. The other three choices are in the subscription agreement. Power of attorney is granted to the general partner, not the limited partners.

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.

$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.

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

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

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.

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

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

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

all of the above are required. An intrastate offering under Rule 147 requires qualification under all of these conditions.

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

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.

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.

5.78 - 5.73. Prices for treasury bills are quoted as percentage yields. A quotation in yield means the first price in the spread - the bid price - should be higher than the offer price. A higher yield means a lower price.

$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.

furnish written documents of authority to the brokerage firm executing the orders. The wealthy investor has simply given Bubba discretion over the account. The brokerage firm only requires evidence that this authority has been granted to Bubba.

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

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.

6.49%. Divide the discount from par value of $150 ($1,000 - $850) by the number of years to maturity (15) to determine the annual discount. Add the result of $10 to the annual interest ($50) to determine the total annual return. Divide the result of $60 by the average of the current price (85) and par (100). The result is 60 divided by 92.5, which equals 6.49%.

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.

taxes. Tax credits are not deductible expenses and have no effect on basis.

tax anticipation bill. These obligations pay no interest and their maturity comes after corporate tax payment dates. They are accepted for redemption at face value prior to maturity on corporate tax payment dates to encourage purchase by corporations.

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.

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.

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”).

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

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

expense ratio. Custodial fees are negligible and the sales charge is a one-time expense. The “best” reflection of mutual fund costs is the expense ratio.

a public school. Schools are typically financed by general obligation bonds. The other choices are examples of revenue bonds.

firm commitment. The term underwriting means a guarantee to the issuing corporation. This is a firm commitment, unlike a best efforts offering where there is no guarantee.

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

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

this is permissible. Firms may establish house rules as long as they are at least as strict as the minimum maintenance requirements. Reg T only dictates an initial requirement and does not address minimum equity.

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.

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.

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.

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.

$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.

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

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

long two XYZ July 15 calls. Double the number of contracts and half the strike price. This is similar to XYZ shareholders doubling the number of shares they hold at the lower price.

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

the certificate is validated by the transfer agent. A mutilated bond must be validated before it can be a good delivery. The validation can be made by the issuer or the transfer agent.

Munifacts. This is a wire service provided by the daily Bond Buyer. It displays information on municipal traders, underwriters, and other participants in the fixed income markets.

$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).

an offering scale of serial maturates. The scale is set by the successful bidder.

prospectus contains the significant facts about the issue. The SEC never approves of guarantees an issue. It only attempts to verify that sufficient information is disclosed in the prospectus.

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.

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

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

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.

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

36,000. Under Rule 144 up to one percent of the outstanding shares or the average weekly volume for the preceding four weeks, whichever is greater. The total volume for the last four seeks was 144,000 shares. The average is therefore 36,000 shares. This is greater than one percent of the shares outstanding (35,000).

the custodian can also be the transfer agent. This has become increasingly common. None of the other choices are correct.

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

gift tax. By definition, gift tax is a progressive tax. All of the others are a level percentage.

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.

short straddle. A straddle is a put and call on the same stock with the same strike price and expiration date.

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

$180,000. Subtract current liabilities from current assets. Current liabilities are $170,000 ($460,000 - $290,000).

flow of funds. This is the definition of the term flow of funds.

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.

$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.

$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 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.

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

a guaranteed corporate bond. All of the other securities are obligations of the US government, which is considered to have minimal or no risk.

lending the fund’s securities to banks or broker/dealers. This practice is not permitted under federal law.

European style. These options can only be exercised at the expiration date while American style options can be exercised at any time prior to expiration.

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

public utility companies. Interest rates most affect the companies with the greatest amount of debt. Public utility companies are highly leveraged. Hence, they most likely incur the largest effect of rising interest rates.

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.

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

$600. The maximum profit is the difference between strike prices less the debit amount. The debit amount is $4 ($7 - $3). The difference between strike prices is $10 ($60 - $50). Multiply the $6 difference by 100, which is the number of shares on one option.

trading in outstanding issues. Secondary market transactions involve trading in securities after the original issue is made. When an issuer offers new securities to the public it is a “primary offering”.

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.

$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.

interstate mail fraud in securities offerings. Blue Sky laws are state security laws and do not cover interstate regulations.

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.

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.

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.

27.50. Anytime there is qualifying language attached to a quotation it is not considered firm.

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.

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

net income from dividends and interest paid on securities in the fund’s portfolio. Net investment income is dividends and interest but not capital gains.