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

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.

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.

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

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.

$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.

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.

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

common stock. Leverage refers to the existence of securities that are senior to common stock. There can be debt leverage and equity leverage.

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

income, dividend, and capital gain distributions may be automatically used to purchase new shares of the fund. The new purchases are at the ask price, not the bid price.

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.

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

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

trading in outstanding issues. Secondary market transactions involve trading in securities after the original issue is made. When an issuer offers new securities to the public it is a “primary offering”.

revenue bonds. The security for a revenue bond depends on the revenue produced by the specific facility. Engineering estimates of constructions costs and potential traffic flow are critical.

$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.

$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.

a money market comprised of short-term debt and equity issues. This is the statement that is “incorrect”. Equity issues are not traded in the money market, which consists only of high-quality short-term debt securities.

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

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.

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

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

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.

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

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

the current market for the stock. FINRA rules require the markup to be based upon the current market price.

a dealer. When a firm does business directly with a customer, it is acting as a dealer. When it represents a customer, it is acting as a broker.

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.

White’s. White’s ratings are based on trading market data as opposed to the financial data of the issue, which is used by Moody’s as well as S & P.

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

a holding company dealing in mineral leaseholds. The other choices are the three classifications of investment companies under the 1940 act.

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.

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.

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

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.

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).

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

under no circumstances. An FINRA member firm may not, under any circumstances, allocate shares to itself, any of its employees, or to any employee of a firm that underwrites securities.

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.

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

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

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

they are not secured by collateral. Equity is ownership, which has no collateral security…or any other kind of security such as a guaranteed return, maturity, or marketability.

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

prospectus contains the significant facts about the issue. The SEC never approves of guarantees an issue. It only attempts to verify that sufficient information is disclosed in the prospectus.

specialists. This description defines the function of the specialists.

$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.

US Treasury bill. T-bills are quoted by yield. Therefore, the bid is higher than the asking price. A higher yield means a lower price.

fill or kill. This type of order is cancelled if the entire amount cannot be executed.

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.

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.

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.

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.

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

$9,000. Credit balances in short accounts do not change because of fluctuation in market prices. The initial deposit of $3,000 ($6,000 x 50%) plus the $6,000 from the short sale leave a credit balance of $9,000.

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

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.

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.

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

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.

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%).

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

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

authorized for inclusion in the NASDAQ system. Stocks listed on an exchange have no more than three characters in their symbols.

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

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

a merger. Rule 145 basically applies to mergers, consolidations, and acquisitions.

long one XYZ October 20 call and one XYZ January 30 call. Options in the same class are either both puts or both calls on the same security.

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.

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.

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.

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.

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.

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

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”).

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.

$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.

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.

potential capital appreciation. This is the only correct choice. Any income is not deferred, raw land cannot be depreciation for a large deduction, and there is substantial risk.

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.

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

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.

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

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

the general partner’s personal assets. When a partnership no longer has assets, but does have debts, creditors may look to the personal property of the general partner.

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.

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.

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.

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

90 days. Interest accrues from the coupon date to the settlement date. A regular way purchase on April 12 will settle on April 15. corporate bonds are figures on 30-day months, regardless of the actual number of days in the month. The year is considered 360 days. Therefore, interest is calculated for 16 days in January plus 30 each for February and March plus 14 for April.

warrants. All of the other choices receive dividends if they are declared. But only warrants are a specific security that never pays dividends.

may be levied only if the charge if fair, reasonable, and non-discriminatory. This is the standard in the FINRA rules.

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.

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.

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

$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.

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.

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.

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.

270 days. A characteristic of commercial paper is relatively short duration, normally not exceeding 270 days.

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.

60 days. ERISA permits 60 days for rollovers.

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.

ease credit. A lower reserve requirement permits member banks to have more money available for lending, thus ease credit.

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

$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.

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.

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

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

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.

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.

$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.

withholding blocks of a new issue in the member’s account. Underwriters and selling group members are prohibited from keeping blocks of a new issue for their own accounts.

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.

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