FINRA Series-7 Series 7 General Securities Representative Qualification Examination (GS) Exam Practice Test

$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).

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

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

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.

sell calls. Calls are covered by the underlying stock. If the calls were exercised, the stock would be delivered to meet the obligation. The income also reduces the break-even of the stock.

the LEAPS premium will be higher than the traditional option premium. Because LEAPS have a longer time until expiration than traditional options, the premium should be higher.

higher than the strike price of the option. The premium paid is not relevant. All that matters are the strike price of the option relative to the market value of the underlying stock.

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

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.

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 custodian under UGMA. The Uniform Gifts to Minors Act requires securities registration in the name of the custodian for the benefit of the minor. A margin account does not qualify because such an account has all securities registered in street name.

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.

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

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.

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

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

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

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

the customer becomes a general creditor of the insolvent firm for the amount of deficiency. After the SIPC coverage is exhausted, the customer becomes a general creditor. Due to the insolvency of the broker/dealer, there is no likelihood of the customer receiving restitution.

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.

$9,000. Since the required cash to deposit is $4,500 and Reg T is 50%, Bubba may deposit $9,000 of securities.

restricted stock acquired via open market purchase. The two-year holding period does not apply when the security is acquired in the open market. However, if the security is owned by a control person, the other provisions of Rule 144 do apply.

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.

$1,000,000. In a Western account, each underwriter has divided liability and each is responsibility only for his respective part. In this case, Big Easy is responsible for 10% of $10,000,000 - or $1,000,000.

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

$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 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.

refuse to accept the order unless Bubba has provided a signed trading authorization in favor of Bubbette. Unless Bubbette has been given written trading authorization over Bubba’s account, trading orders cannot be accepted from her or any other person.

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.

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

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

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

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

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.

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.

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.

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.

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.

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.

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

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

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.

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

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.

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.

$10. There are one million shares divided into the $10 million of new capital.

$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.

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.

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

$100. This is the maximum per FINRA rules.

Series EE bonds. Because Series EE bonds are not negotiable, they have no collateral value. They cannot be sold back to the US government.

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

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

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.

70½. This the age at which IRA withdrawals are required.

Series EE bonds. Import-Export bank bonds and Farm Credit System bonds are not direct obligations of the United States.

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

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.

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.

$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.

long one put and short one call. This is a short straddle. A position that is long one put and long one call is a long straddle.

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”.

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

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%).

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.

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

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.

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

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.

$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.

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.

trademarks. Intangible assets are those whose true value cannot be determined, but there is some supposed market value.

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

the holders of common stock and the holders of preferred stock. The holders of all classes of stock are the owners. Each stock class has separate privileges, but all represent ownership. Even if the government is an owner, it holds shares of stock.

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.

FINRA. Sales literature regarding investment company shares must be filed with FINRA within three days after the first use.

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

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

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%.

execute sell orders but do not accept buy orders or distribute assets from the account until a new partnership agreement is provided to the brokerage. Sell orders may be accepted but not buy orders or distributions.

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.

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

$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.

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.

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

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.

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

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.

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.

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.

dividends. Net income is determined before dividends.

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

the issuing municipality. The issuer pays for the attorney.

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.

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

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.

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

$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.

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.

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

up to but not including the settlement date. Accrued bond interest is always calculated up to but not including the settlement date. The interest accrual begins on the coupon date.

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

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.

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

takedown. The takedown is an additional allowance on bonds sold by a member.

$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.

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.

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.

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.

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.

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.

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

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

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.

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

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

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

total debt service as a percentage of net operating revenue. This ratio is applicable to revenue bonds but not general obligation bonds. The other choices are all used in measuring credit risk in a GO bond.

both A and B. Brokers generally operate as agents attempting to locate buyers or sellers for bond dealers. They do not trade for their own accounts or deal directly with individual investors.