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

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

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

a SIMPLE. IRAs are for any individuals, not just small employers. The other choices do not exist.

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.

all are registered. All are registered with the SEC.

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

$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.

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.

open-end investment companies. The term is generally applied to open-end investment companies.

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

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.

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.

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.

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.

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.

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.

$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.

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

$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.

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.

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.

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

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.

$100. This is the maximum per FINRA rules.

commodities account in Bubba’s name only. SIPC does not cover commodities accounts.

underpriced and should rise quickly. The parity price for the common stock is about $49.38 - determined as:50 / 47.50 = 1.053 52 / 1.053 = 49.38 Since the common stock is trading at 51, the preferred is underpriced.

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.

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.

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.

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

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.

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.

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

$1,000. This is the minimum denomination. Normally, US treasury bonds are in much larger denominations.

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

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.

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.

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

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.

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

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.

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

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

there is a 14-day owner usage provision. This provision is unrelated to qualification as a security.

according to their percentage participation in the account. For example, if the group net order produces $3,000 in fees and a syndicate member has a 10% overall participation, that member receives $300 in fees.

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.

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.

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

amount of the transaction. The other choices are not FINRA considerations. The dollar amount of the transaction is one of the factors considered in markup fairness. Other factors include the type of security, the amount of service rendered, the unit price of the security, and general availability of the security.

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

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

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.

8%. The sales charge in this case is $1.44. Dividing that into the offering price of $18.04 results in 8%.

all of the above. Each of these actions by a limited partner causes the loss of limited liability.

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

$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.

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

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

0.7435. The put protects against a decline in the exchange rate for Canadian dollars. However, the cost of the put raises the breakeven point to 0.7435 (0.7400 + 0.0035).

the issuing municipality. The issuer pays for the attorney.

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

both B and C. A trust indenture does both of these but does not define the rights of stockholders.

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

continuity of life of the business and transferability of assets. Partnerships may seek to avoid continuance of the business life and asset transfer. The other choices are too important for partnerships to sacrifice.

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.

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

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.

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.

60 days. ERISA permits 60 days for rollovers.

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.

$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.

semi-annually. Investment companies are required to issue financial report semi-annually. Many do so more frequently.

provide for disclosure of information about new securities offerings. The 1933 act is primarily concerned with registration and disclosures relating to new securities.

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

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

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.

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.

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.

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

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.

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

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.

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

$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.

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.

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.

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

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.

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

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

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.

firm quotations. All Level III quotations are firm.

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.

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%).

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.

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

$3,000. With Reg T at 50%, Bubba’s equity should be half of the $30,000 account value, which is $15,000. Since his equity is $18,000 Bubba has $3,000 of excess equity.

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

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

permission granted to the general partner to act outside the partnership agreement. The limited partners may approve of the general partner pursuing an act that is contrary to the partnership agreement.

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.

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.

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.

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

$100,000. This was a considerable amount of money in 1940.

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.

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.

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

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.

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.

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 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.

$5,500. The NYSE maintenance requirements on obligations of the US treasury vary depending upon the term of the instrument. For 20-year bonds, the requirement is 6% of the market value. Multiplying the market value of $92,500 by 6% equals $5,500.

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

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.

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

$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.

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

a closed-end investment company. An open-end investment company may have a sales charge but not a commission.