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

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

six months after the date of death. A second evaluation is made six months from the date of death. The estate may then use either value in determining estate tax.

balanced. These funds invest for growth with stock and income with bonds.

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.

$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).

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.

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

$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.

there is a 14-day owner usage provision. This provision is unrelated to qualification as a security.

$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.

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.

cash. Index options are settled by payment of cash.

$5,000,000. This is the maximum under Regulation A.

NAV=$28.14 and Asked Price=$27.75. In this case the ask price is less than NAV, which is never true of an open-end investment company.

reclamation. In a reclamation a dealer requests that another dealer reclaim an improper delivery.

all of the above. A profit sharing plan has tax deductible contributions and is designed to provide a retirement plan for participants. Income in the plan is tax-free until withdrawn.

$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.

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.

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

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

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

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

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

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

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”).

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

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.

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.

$54. Bubba’s position is a bullish spread. The breakeven is determined by adding the debit amount to the lower strike price. The debit amount is $4 ($7 - $3). Adding that to $50 equals $54.

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

$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.

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 value of the annuitant’s contract before annuity payments begin. Accumulation units determine contract value. Payout are determined by annuity units.

commercial paper. The sizes of secondary markets for these securities are listed in order with treasuries first, then banker’s acceptances, followed by certificates of deposit. There is only a very small secondary market for commercial paper.

net tangible asset value per share. Book value is much easier to say.

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.

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.

5.88%. The current yield is the annual interest divided by the price. The bond will pay $50 of interest per year ($1,000 face amount times 5%). Dividing by the price of $850 equals 5.88%.

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.

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

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

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

all of the above. Each of these actions by a limited partner causes the loss of limited liability.

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

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

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.

both B and C. The 200,000 shares are sold on behalf of the affiliated person so the proceeds go to that individual. Only the other 300,000 shares are a primary offering.

inventory. A manufacturer will normally have more inventory than accounts receivable and notes receivable. Sales is not an asset category.

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.

by a US government agency. Since government agencies do not apply for ratings, it is permissible to state that its issues have an “implied AAA rating”. Private issuers must receive a rating in order to state it in advertising.

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

new housing authority bonds issued by a public housing authority. Only housing bonds are backed by the US government if municipalities are unable to meet the obligations for payment.

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

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.

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

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

120%. The toll facility usually sets rates to cover 120% of maintenance and debt service.

$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.

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

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.

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.

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.

$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.

$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.

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.

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.

none of the above. No broker/dealer is exempt. Reg T covers cash accounts as well as margin accounts.

exchange distribution. An exchange distribution is a large block sold internally by one firm that is crossed on the floor of the exchange. The trade would print on the tape identified by the letters “DIST”.

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

$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.

$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.

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.

$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.

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

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

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

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.

the right to vote about important matters of the company. Shareholders have no expectation of stock price increase or dividends. They are entitled to receive dividends only if the board of directors declares them.

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.

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.

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

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.

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.

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

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

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.

$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.

a private placement. Normally, private placements are conducted with an investment letter.

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.

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

borrowing at 6% and investing the funds at 10%. Leverage is all about using money obtained at a lower cost than what can be earned deploying the funds elsewhere. It is unrelated to arbitrage.

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

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

$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.

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

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.

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.

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

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

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

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

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.

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

when the new issue of securities is purchased pursuant to a best effort basis. All the other choices are allowable under the rule “except” this one.

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.

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

transfer of ownership of a limited partnership interest. Transfer of ownership does “not” result in automatic termination.

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.

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

tax anticipation bill. These are specifically designated securities that may be used at face value for payment of corporate taxes.

$0.45. Since treasury stock does not receive dividends, divide $450,000 by the outstanding 100,000 shares to arrive at $0.45 per share.

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.

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

fill or kill. Fill or kill is an order qualifier. It requests immediate execution of the whole order or immediate cancellation. A best efforts underwriting, frequently linked to all or none, is usually seen on small new issues. A standby underwriting is utilized to guarantee the success of a rights offering.