Series-7 Questions and Answers

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.

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

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

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.

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.

not do so under any circumstance. New issues may not be distributed to Bubba or members of his immediate family.

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

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

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

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.

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.

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.

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

$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.

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

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.

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.

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.

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.

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

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.

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

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

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

American Depository Receipts. American Depository Receipts are used to facilitate transfer of ownership in foreign securities. They are not money market instruments.

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

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.

$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.

agreement among underwriters. This agreement authorizes the manager to handle the offering. The final contract between the manager and the issuer is the “underwriting agreement”.

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.

predictions of recession in the economy. All of the other choices are technical market indicators. An economic forecast is “fundamental” market data.

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.

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.

deductions from gross income to offset lower value of equipment. Depreciation is the deduction of costs for capital assets as their value declines.

$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.

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.

that the stated yield is an estimate that may vary passed upon prepayments and market factors. The only guarantee is that nothing is guaranteed, especially the yield.

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

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.

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

60 days. ERISA permits 60 days for rollovers.

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.

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.

interest is exempt from federal income taxes. This is the choice that is “not” an attribute of treasuries. All of the other choices are attributes of US treasury bills, which are subject to federal income taxes.

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.

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

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.

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%.

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

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.

two years. The corporation can offer these securities in whole or in part for the ensuing two years.

the selling group’s determination of value in the prevailing market conditions. The offering price is determined by factors related to the issuer.

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.

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.

$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.

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

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.

must deposit the full purchase cost before an order is executed. A “frozen” account is restricted to full cash payment in advance for any purchase.

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.

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.

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

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

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.

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.

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

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%.

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

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

the official notice of sale. All bid requirements are found in the official notice of sale.

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

$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.

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

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”.

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.

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.

$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 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.

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

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.

5.00% net. The other quotes indicate moderate markups over cost. A quote of 5% net indicates a large markup and a price not “reasonably related to the market”. The dollar price would be about $125, a 25% markup over the dealer’s cost.

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

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

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

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

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.

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

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

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

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 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.

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

$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.

the buyer is given one-day notice in writing. A contract made on a “seller’s option” may be terminated by the seller at an earlier date, provided that he gives the buyer one-day notice.

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

the issuing municipality. The issuer pays for the attorney.

best efforts. A best efforts deal least likely for a municipal securities offering. It is most often associated with small corporate stock or limited partnership offerings. Municipal securities are usually competitive bid or negotiated. Both of these types are firm commitment.

they are issued in denominations of $1,000 to $1,000,000. Remember, the question asks what is “not” true. The smallest denomination for a US treasury bill is $10,000.

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”.

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

all of the above. These are required I Rule 405 of the NYSE and under suitability requirements in the Rules of Fair Practice of the FINRA.

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.

a pension fund. Since the pension fund does not pay income tax, the tax benefits of the municipal bonds are not realized.

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

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.

$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).

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.

preemptive rights. Holders of ADRs do not have preemptive rights, although they have most other rights of shareholders, including the right to vote for board members-even a mother-in-law

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

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

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.

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

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

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

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

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