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

0. Options do not have loan value, except for long-term LEAPS.

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

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

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.

a normally higher yield than non-convertible bonds of the same issuer. Remember that the question says “except” for this feature. Convertible bonds normally do NOT have a higher yield than non-convertible bonds of the same issuer. Convertibles usually have a lower yield than non -convertible sisters.

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

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

US treasury notes. A maintenance call requires cash or negotiable securities. Only the treasury notes meet this standard.

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.

a shareholder may not redeem any shares for 13 months. Redemptions are permissible at any time. However, since escrowed shares are set aside to cover the difference in sales loads based on terms of the letter, redemptions prior to 13 months may liquidate the escrow account and thus return to the investor 100% of net asset value.

premiums on options of volatile stocks are usually larger than on less volatile stocks. The likelihood of exercise increases with the volatility of a stock. Therefore, a higher premium is demanded.

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.

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.

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

dividends. Net income is determined before dividends.

determined by a method set forth in the prospectus of the issuer. The method is described in the prospectus. It uses the net asset value plus any sales charge

$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.

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

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

the holder of each must pay income taxes on the dividends received each year. Only the holder of mutual fund shares must pay income tax on annual dividends. This is “not” true of annuity owners. The other choices are true statements.

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”.

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.

ascertains that extensions had been obtained under Reg T. If valid reasons exist, extension of time for payment may be obtained.

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.

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.

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

physically protects the fund’s assets. The custodian holds the assets of the fund. The transfer agent redeems and issues fund shares.

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.

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).

in a community property state a married woman must open a brokerage account with her husband. All of the other choices are true. Only choice A is “not” true.

all are registered. All are registered with the SEC.

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

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.

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.

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

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.

25. The conversion ratio is how many shares of common stock Bubba obtains by converting. Divide the bond price - $1,000 for a single bond - by the $40 conversion price.

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

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

$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.

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.

next computed after receipt of the order by the dealer. This is called “forward pricing”.

Generally, the price is computed as of the close of the market on the day of the order. However, if the order is received after this computation, the order is executed based upon the next day calculation.

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

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

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

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.

$3.75. Three-eighths of a $1,000 bond with a par price of 100.00 equals $3.75.

a letter of intent. This accurately describes the definition of a letter of intent.

premium. That’s the term for the option cost.

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

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.

immediately. The employer’s contributions may be subject to a vesting schedule, but the employee’s contributions are immediately vested.

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.

$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 registered representative. Assuring that limited partners meet net wroth and income requirements is the responsibility of the registered representative.

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

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 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.

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

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.

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.

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.

$3,000. The maximum contribution is 25% of compensation. That percentage of $12,000 is $3,000.

certificates of deposit. CDs trade with “accrued interest” as part of the price.

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.

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.

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.

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.

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.

it turns potential capital gains into current taxable income. Recapture is taxed as ordinary income, not capital gain. The other choices are not true.

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

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

net asset value and redemption price. Investors redeeming shares of mutual funds receive the net asset value.

$6,000. Divide Bubba’s excess equity by the Reg T margin requirement of 50%.

income from extraordinary sources. Single events, such as the sale of property, do not affect basis.

secured lenders, general creditors, limited partners, general partners. Creditors first, in order of their security, then partners. General partners are last.

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

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.

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.

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.

adjustment bonds. These bonds are also known as income bonds. Interest is paid only if there is income.

$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.

securities purchased must be registered in Bubba’s name and then delivered to him. Bubba is requesting delivery of securities in his name instead of being held by the broker.

a majority of the shareholders. Any factors that materially affect the interests of shareholders must be approved by a majority vote of the shareholders.

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

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

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

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.

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.

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

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

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

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.

the issuing municipality. The issuer pays for the attorney.

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

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.

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.

cannot be determined. Since Bubba has not yet sold the stock, a profit cannot be determined on the stock. He has a $400 profit on the option.

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

it was never executed. The first transaction at 38.75 elected the order, but since it was both a stop order and a limit order, there was never another transaction at 38.75. Consequently, Bubba’s order was never executed.

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

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

after approval by a majority vote of the shareholders. All vital interests of the shareholders are subject to their majority vote.

a $600 capital loss. The amount of premium paid is the cost and the recovery is zero, resulting in a $600 capital loss.

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

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

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.

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

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.

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.

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.

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

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

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

$8.50. Subtract the preferred dividend of $800,000 (100,000 x 8% x 100) from the net income. Divide the result of $3,400,000 ($4,200,000 - $800,000) by the 400,000 common shares to obtain $8.50.

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.