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

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

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).

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

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

$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.

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

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

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

$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.

$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.

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

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.

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

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.

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.

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”.

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

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

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.

selling the security he already owns. A “covered” call is written on stock already owned.

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.

$100. This is the maximum per FINRA rules.

10 days. The customer has 10 days to deliver before the broker will buy in the account.

$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.

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

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.

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.

$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.

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

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.

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.

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.

purchase the preferred stock and sell an appropriate amount of the common stock “short exempt”. Arbitrage is the nearly simultaneous purchase and sale of equal securities in different markets for a profit. Selling four shares of common stock for every one share of preferred stock purchased provides a profit. The transactions involve the same number of common shares because the preferred is convertible to common at a four to one ratio.

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

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

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.

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

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

it may be entered. In a joint account any tenant is empowered to enter orders, which is specified in the account agreement.

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

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.

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

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.

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

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

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.

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

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

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

$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.

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.

over-the-counter. The OTC market is much larger than any listed markets.

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.

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.

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.

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”.

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

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

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

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.

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.

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.

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.

all are registered. All are registered with the SEC.

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.

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.

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

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

cash. Index options are settled by payment of cash.

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.

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.

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

special tax. The other categories are not revenue bonds. Special tax is the only type that fits the general grouping.

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

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.

$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.

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.

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

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.

$4,500. The purchase of DUM will cost $3,000 (100 x $30) and the purchase of OUT will cost $12,000 (100 x $120). Both combined total a cost of $15,000. Reg T requires 50% ($7,500) and Bubba only has $3,000. So he is $4,500 short.

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.

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.

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.

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.

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

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

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.

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

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

syndicate account letter. This letter is sent by the manager of a competitive bid syndicate to the other members. The priority and other procedures, including allocation amounts, are specified in the letter. Members signify acceptance by signing the letter and returning it to the manger.

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

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

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

all of the above. A profit sharing plan has tax deductible contributions and is designed to provide a retirement plan for participants. Income in the plan is tax-free until withdrawn.

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.

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.

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.

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”.

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.

without restriction. A SEP-IRA may be converted to a Roth IRA. The two-year holding period applies to SIMPLE-IRAs.

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.

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

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

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”.

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.

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

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.

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 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.

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

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

90 calendar days. An investor has 90 days from the date of original purchase to sign a letter of intent. The maximum duration for the letter is 13 months from the initial purchase.

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.

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.

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.

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

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.

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