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

$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.

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.

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

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

$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.

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.

stay the same. The SMA does not decline as the market value declines.

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.

the FINRA Board of Governors. The first appeal is to the Board of Governors, then to the SEC, and then to the federal courts.

the specific bid and offering terms of the issue. The bid and offering terms are determined after the syndicate letter to underwriters.

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

$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.

this statement constituted a form of fraud prohibited under the Securities Exchange Act of 1934. Such statements are fraudulent when rendered even if future events result in their accuracy.

both A and C. The custodian must be independent of the investment company.

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.

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

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”).

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.

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

60 days. ERISA permits 60 days for rollovers.

a little less than 49.38. Bubba needs a calculator to divide the par value of the preferred stock by the price of the common stock. He then divides the result into the price at which the preferred stock is trading.50 divided by 47.50 = 1.05352 divided by 1.053 = 49.38.

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

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.

one-tenth of one cent. A point equals $10 and a basis point equals ten cents.

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

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

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.

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.

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.

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.

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.

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.

it is stock that has been reacquired by the issuer. Treasury stock has no voting rights and is not entitled to receive dividends. The shares have been issued but are no longer outstanding in the market.

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.

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.

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.

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.

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.

convertible preferred. Because of the conversion feature, convertibles are more closely linked to the price of the common stock. In addition, since the dividend rate on convertible preferred is usually lower than other preferred issues, the convertibles are more sensitive to interest rate fluctuations.

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

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

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

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.

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

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.

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.

4%. The dividend is $1.20 per share ($6 x 20%). Divide this by the stock price to obtain the yield.

$100 profit. The long position in the June call is a $200 profit ($1,200 - $1,000). The short position in the March call is a $300 loss ($900 - $300). Combining the gain and loss results in a $100 loss.

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

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

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.

$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.

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.

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.

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

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