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.

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.

cannot be determined. Bubba can put away the calculator. The warrant is “perpetual” so the value is not determinable from today’s price of the common stock.

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.

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.

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

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

25% of employee compensation. There is also a dollar cap that is has an annual cost-of-living adjustment.

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.

$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.

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

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

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.

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

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.

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

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.

market-out clause. This is used only in the case of some unusual occurrence.

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

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.

premium. The price of closed-end investment companies is determined by trading of their shares in the open market. The price may be a discount to net asset value or a “premium” above net asset value.

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.

the value of the annuitant’s contract before annuity payments begin. Accumulation units determine contract value. Payout are determined by annuity units.

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

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.

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”.

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.

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

$2,000. Bubba started with $6,000 of equity and a debit balance of $4,000. The market value of his XYZ stock increased by $5,000 ($15,000 - $10,000). Therefore, his equity increased to $11,000. Since Bubba only needs 60% equity, his Reg T requirement is $9,000 ($15,000 x 60%). His equity exceeds the requirement by $2,000.

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

it is somewhat below the standard minimum. The standard minimum current ratio for a manufacturing company is 2 to 1. The current ratio for this company is 1.92 (9,400,000 divided by 4,900,000).

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.

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

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

convertible preferred. Because of the conversion feature, convertibles are more closely linked to the price of the common stock. In addition, since the dividend rate on convertible preferred is usually lower than other preferred issues, the convertibles are more sensitive to interest rate fluctuations.

cash. Index options are settled by payment of cash.

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

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.

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

$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.

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

$54. Bubba’s position is a bullish spread. The breakeven is determined by adding the debit amount to the lower strike price. The debit amount is $4 ($7 - $3). Adding that to $50 equals $54.

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.

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

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.

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

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.

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

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

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

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.

every month. Collateralized Mortgage Obligations generally pay interest each month. However, some CMOs pay interest quarterly or semiannually.

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.

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.

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

a Western account. In a Western account each underwriter has a divided liability and is responsible only for his portion of the issue. In Eastern accounts, generally used for municipal issues, the underwriter is responsible for a percentage of any unsold portion. This is called an undivided liability.

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.

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

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

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

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

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.

$10. Interest rates increased by 20 basis points. One basis point is 10 cents. So 20 basis points is $2. But…since there are five bonds, that $2 x 5 = $10.

the names of the underwriting syndicate members. At the time the notice of sale is published, the syndicate has generally not been formed. All the other information is required.

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

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

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

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

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”.

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

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.

$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.

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

their shares are traded at prices determined in the open market. The other choices describe open-end investment companies.

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.

a contractual plan. The other choices are not suitable. In a voluntary accumulation plan, the load is level. In an automatic withdrawal plan, the load is front -end because the bulk of the sales charge is taken early in the life of the plan.

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.

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

enter orders for the account at the representative’s discretion. A limited trading authorization only allows for entering of orders. A full trading authorization would also permit withdrawals from the account.

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

$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.

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

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

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.

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.

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

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

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

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

4%. The dividend is $1.20 per share ($6 x 20%). Divide this by the stock price to obtain the yield.

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.

$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.

all of the above. The gross spread (or “underwriting spread”) depends upon all of these factors.

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

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.

one specific municipal project plus the full financial strength of the issuer. Double -barreled bonds are first payable from a specific project, but are further guaranteed by the issuing municipality.

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

firm commitment. The term underwriting means a guarantee to the issuing corporation. This is a firm commitment, unlike a best efforts offering where there is no guarantee.

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.

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.

$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.

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

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

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

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

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.

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 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.

$6,600. The NYSE maintenance requirement on short margin accounts is 30%. Multiplying the short market value of $22,000 by 30% equals $6,600.

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.

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 guaranteed corporate bond. All of the other securities are obligations of the US government, which is considered to have minimal or no risk.

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

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