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

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

$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.

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.

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

$100. This is the maximum per FINRA rules.

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.

expected average life. The average life of a CMO is the length of time that each dollar of invested principal is expected to remain outstanding. Pricing of CMOs is based upon this factor.

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

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.

short-term maturity. A money market maintains liquidity and is defined as having maturity of less than one year.

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.

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

8% maturing 1-15-2016. Bonds with the highest coupon rates would be the first to most likely get called. The issuer will look to issue new debt at a lower rate. Since there are two 8% bonds, the one that would most likely get called are those with the longest maturity.

$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.

$4,500. The purchase of DUM will cost $3,000 (100 x $30) and the purchase of OUT will cost $12,000 (100 x $120). Both combined total a cost of $15,000. Reg T requires 50% ($7,500) and Bubba only has $3,000. So he is $4,500 short.

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.

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

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.

$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.

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.

take no action as a result of the tax increase. Excise taxes normally are not important to the typical investor. They generally have little relative effect on securities prices.

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.

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

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.

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

$956.88. The price of 95.22 means 95 and 22 / 32. One thirty-second of a $1,000 bond with a par of 100.00 is $0.3125. Twenty-two thirty-seconds is therefore about $6.88. The 95 is the percentage of one bond with a par value of $1,000. Multiplying 95% by $1,000 equals $950. Adding $6.88 plus $950 equals $956.88.

$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).

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.

underpriced and should rise quickly. The parity price for the common stock is about $49.38 - determined as:50 / 47.50 = 1.053 52 / 1.053 = 49.38 Since the common stock is trading at 51, the preferred is underpriced.

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.

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

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%).

Series EE bonds. All the other securities may be traded. Series EE bonds are purchased and held to maturity. They are not tradable.

when the underlying stock price is rising. That’s why the holder of this option wants to have a right to “call” the stock.

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

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.

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%.

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.

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

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”.

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

both B and C. Choice A is the opposite of a discretionary account. Both B and C are standard procedures for a discretionary account.

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

five years. The five-year holding period begins on the first day of the year for which contributions were made.

$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.

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

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.

a share in the profits from earnings. Both shareholders and limited partners share in the profits from earnings.

by competitive biding. The quoted prices for treasury bonds-as with all negotiable securities-is determined in the market by competitive biding.

riskless transactions. The markup policy applies to everything except securities sold under a prospectus, which is the case with the other choices.

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.

regulation of new issues of securities. The first two choices are covered in the Securities and Exchange Act of 1934.

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.

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.

$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.

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

$48. A 20-point increase results in a bond value of $1,200. Divide that by the conversion ratio of 25 shares to arrive at $48.

$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.

all of the above. Each of these investments qualify for a retirement plan or an IRA.

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

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

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

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.

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.

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

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

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

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

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.

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

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.

the company files regular financial data with the SEC. Rule 144 transactions may use either agency or principal methods.

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.

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

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

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.

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

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.

commodities account in Bubba’s name only. SIPC does not cover commodities accounts.

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.

all of the above. All of the choices are normal ways for the broker to fill the customer’s order.

$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.

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.

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

general obligation. A limited tax bond is generally classified as general obligation.

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.

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

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.

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

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

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.

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

both B and C. Buying in the open market injects funds into the economy. Lowering reserve requirements provides banks with more funds for lending.

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.

2 100-share certificates and 3 90-share certificates. Three 90-share certificates are not good delivery because they cannot be combined into 100-share amounts.

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

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

the issuing municipality. The issuer pays for the attorney.

$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.

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.

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.

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

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.

$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.

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

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”).

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.

a fundamental analyst. These analysts are guided by computations about a company’s performance using data in annual reports.

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

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

the management group receives a fee based upon the amount of assets in the fund. The management fee is based upon the fund’s assets. The sale charge in choice C is received by the fund sponsor (underwriter), which could include the management group but not necessarily.

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.

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

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

acts as an agent for the issuer. In a best efforts offering the investment banker acts as an agent for the issuer and makes no guarantee about selling the securities.