Series 7

7 practice exam ?s

Capital gains distributed by a mutual fund to shareholders are reported and taxable for the year

the shares are redeemed by the fund.

Explanation

Capital gains can be distributed to shareholders by a mutual fund no more than once per year and are reported and taxable for the year earned (accrued).

When an agent's permanent residence address changes, an update must be made to the information on file with the regulatory bodies. The proper procedure is to file a

Form U4 within 30 days.

Explanation

Form U4 is used when registering as an agent of a broker-dealer. Changes to material information, such as home address or a bankruptcy filing, are accomplished by filing an amended Form U4 within 30 days. Form U5 is used for partial or full termination.

An individual purchased a variable life insurance policy. Under federal law, the individual is entitled to a complete refund of all premiums paid if the request is made within

45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer.

There are several conditions found in the Securities Act of 1933 permitting the offering of control stock to the public without filing a Form 144. Included in that list are

1. the dollar amount is $1 million or less.

2. 100,000 shares or fewer are sold.

3. 5,000 shares or fewer are sold.

4. the dollar amount is $50,000 or less.

III and IV

Explanation

Under Rule 144, when shares are sold by an affiliate (control), Form 144 need not be filed if 5,000 or fewer shares are sold or the dollar amount is $50,000 or less.  Meeting either of these conditions is considered the de minimis exception. This de minimis rule applies to sales in any 90-day period.

A customer contributed $1,000 a year for 10 years to his tax-deferred nonqualified variable annuity. The value of the separate account is now $30,000. If the customer takes a withdrawal of $10,000, what are the tax consequences?

The entire $10,000 is taxable as ordinary income.

The $30,000 contract value represents $10,000 of contributions and $20,000 of earnings. When a partial withdrawal is made from an annuity, the earnings are considered to be taken out first for tax purposes (or last-in, first-out). Therefore, ordinary income taxes will apply to the entire $10,000. In addition, if the customer is not at least 59½, there will be an additional tax penalty of 10%.

Which of the following oral orders can be accepted from a customer without additional documentation?

A)

Buy 200 shares of computer stock

B)

Increase my position in ABC

C)

Buy 100 shares of ABC when the price is right

D)

Buy $20,000 of quality bank stocks

C)

Buy 100 shares of ABC when the price is right

A prospectus must be delivered to customers who purchase which of the following new issues?

1. U.S. government bonds

2. Corporate bonds

3. Fixed annuities

4. Variable annuities

II and IV

When a broker-dealer specializing in new issue municipal bonds needs current information, the usual choice is to consult

The Bond Buyer.

A legal opinion that has restrictions placed on it by the municipality's bond counsel is called

a qualified opinion.

The initial confirmation of a when-issued municipal bond contains which of the following?

1. Number of bonds involved in the transaction

2. Settlement date

3. Yield to maturity

4. Total dollar amount due

I and III

A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct?

A)

They are generally callable after the first 6 months.

B)

They have a maximum maturity of 365 days.

C)

They are all auctioned on a monthly basis.

D)

They are quoted with a bid higher than the ask.

D)

They are quoted with a bid higher than the ask.

Explanation

T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.

If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true?

1. The corporation will be subject to currency risk.

2. The corporation will not be subject to currency risk.

3. The issue must be filed with the SEC.

4. The issue need not be filed with the SEC.

II and IV

Explanation

Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the United States, the issue is not registered with the SEC.

An investor has losses on the sale of municipal bonds. Which of the following, for tax purposes, is true?

A)

No losses on municipal bonds can be applied against gains on sales of any securities.

B)

The losses can be applied against the gains on the sale of any other security.

C)

The losses can be applied only against gains on the sale of other municipal bonds.

D)

The losses can be applied only against gains on the sale of other debt instruments (bonds).

B)

The losses can be applied against the gains on the sale of any other security.

Explanation

Losses on the sale of one investment can generally be deducted against gains on the sale of any other investment.

To meet a Fed call, a customer must deposit which of the following?

1. 50% of the call in cash

2. 100% of the call in cash

3. 100% of the call in marginable securities

4. 200% of the call in marginable securities

II and IV

On a regular-way basis, a municipal bond is purchased by a client on Monday, March 14. The client must make payment on:

Tuesday, March 15

What form of underwriting commitment allows the underwriter to operate as an agent for the newly issued security?

Best efforts

SEC Rule 144 limits the ability to sell restricted stock and control stock. Which type of stock is not subject to a holding period?

Control stock

An investor is Long 1 DEF Apr 50 Call and Short 1 DEF Jun 40 Call. This position is referred to as a:

Diagonal spread

What type of bond is issued as a municipal bond and qualifies as a private activity bond, but may not provide tax-exempt interest to certain investors?

AMT bond

An investor is Long 1 DEF Mar 40 Call and Short 1 DEF Jul 40 Call. This position is referred to as a:

Horizontal spread

Periodic payment variable annuities provide for which of the following?

A payment which will fluctuate after annuitization

Which of the following statements is FALSE regarding a broker-dealer acting as a market maker in a stock?

   It trades for its own account when buying and selling securities

When making a market, it is acting as a principal

   It makes money by charging commissions for executing transactions

It must be prepared to honor the prices it quotes unless it clearly qualifies them

   It makes money by charging commissions for executing transactions

A market maker is a broker-dealer that stands ready to buy or sell a specific stock for its own inventory (its own account). The price it is willing to pay for the stock is its bid price, while its ask or offer price represents the price at which it is willing to sell stock (to other dealers). The difference between the bid and offer prices is the spread, a source of market-maker profits.

As principals in transactions, market makers do not charge commissions. Commissions are charged when firms act as brokers (agents). However, in transactions with retail customers, market makers might charge a markup when selling (an increase in price above its offer price) and a markdown when buying from customers (a decrease below its bid price).

An individual is receiving payments during the annuity phase. The last payment he received was $235 and the growth in the separate account since the last payment was 7%. If the assumed interest rate is 6%, the next payment will be:

Greater than the previous payment

The assumed interest rate (AIR) is a benchmark for determining future payments after the first payment is made. If the actual growth exceeds the AIR, the next payment will be greater than the previous payment (as in this question). If the actual growth is equal to the AIR, the next payment will equal the previous payment. If the actual growth is less than the AIR, the next payment will be less than the previous payment. (21272)

Taxable income normally includes:

  Reinvested dividends paid on a mutual fund investment

  The taxpayer's annual 401(k) contributions

The interest on municipal bonds issued in the state in which the taxpayer lives

Any unrealized capital appreciation on stocks that the taxpayer owns

 Reinvested dividends paid on a mutual fund investment

Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.

The difference in value between the par value of common stock and its IPO price is considered the:

Paid-in capital or capital surplus

Which of the following are characteristics of growth stocks?

  High dividend payout and low P/E ratio

High dividend payout and high P/E ratio

Low dividend payout and low P/E ratio

  Low dividend payout ratio and high P/E ratio

 Low dividend payout ratio and high P/E ratio

Companies whose stock is categorized as growth stock typically retain most of their earnings to reinvest in the company. This results in a low dividend payout ratio. In addition, the market price of its stock (P) is usually high in relation to its earnings per share (E), which results in a high P/E ratio.

An individual has two children and is about to annuitize her variable annuity. She wants to ensure that her children receive lifetime payments when she dies. Which of the following settlement options is the MOST suitable?

Straight-Life

Life Annuity with Period Certain

Unit Refund Life

  Joint and Last Survivor

  Joint and Last Survivor

A joint and last survivor settlement option is the most suitable since, when the mother dies, both children will continue receiving payments for the remainder of their lives.

A gross revenue pledge means

that the issuer must pay debt service before the project's operating expenses

A net revenue pledge means

that the issuer will pay operating expenses first and then the debt service will be paid out of the project's net revenues

Refunding is when

an issuer repurchases, or calls back, existing bonds by issuing new bonds to pay for them. This process may also be referred to as refinancing.

The Green Shoe Clause is used when

a new issue is oversubscribed due to the high demand for the offering. In some cases, this clause is part of the prospectus and allows the underwriter to purchase a maximum of 15% of the original offering from the issuer to fill additional orders

Duration is

the measure of a bond’s price sensitivity to changes in interest rates. Typically, long-term bonds have a higher duration than short-term bonds. Additionally, bonds with lower yields typically have higher durations than bonds with higher yields.

A stock's breakout of a support level means that the price of the stock is

On the decline

Contributions to a 403(b) plan are made with

pre-tax dollars (i.e., deductible contributions). Also, the contributions to these plans grow on a tax-deferred basis

the full distribution is taxed at the employee's ordinary income rate

An investor writes an S&P 500 Index option. If the option is exercised and assigned, the writer would

 Pay the cash difference between the closing index value and the exercise price

A bank-qualified (BQ) municipal issue allows banks that invest in these bonds to deduct what percent of the interest cost being paid to depositors whose money is used to purchase these bonds

   80%

A double barreled bond is a:

 Revenue bond that's also backed by the taxing authority of the issuer

The amortization of a man-made asset over its expected useful life is described as:

 Depreciation

Under Rule 144, what's the holding period for restricted securities of a non-reporting company

 12 months

How many days must pass before a member of a syndicate may extend credit for a customer on a security that was part of a new issue?

30 days

Each of the following statements are TRUE of an immediate annuity, EXCEPT:

It's funded with one lump-sum deposit.

The purchase can be made in periodic deposits, but payments start immediately.

Payments start after the lump-sum deposit.

 Payments can start at any time chosen by the annuitant.

The purchase can be made in periodic deposits, but payments start immediately.

An immediate income annuity must be purchased in one lump-sum. The payout starts after the lump-sum deposit, which may be one month, quarterly, or some other designated time. However, the first payment is typically made shortly after the lump-sum deposit. (21268)

Unlike most securities, the bid for a T-bill will be

higher than the offer (ask) price

The settlement date for stocks and corporate bonds is

T+1

The ex-dividend date is

on the record date

The rights and responsibilities of the limited and general partners is listed in the

agreement of limited partnership

Which of the following are zero-coupon government securities?
I. Treasury receipts
II. Treasury bonds
III. Treasury notes
IV. Treasury bills

I and IV

Treasury receipts (Treasury STRIPS) and Treasury bills are zero-coupon securities because they don’t receive interest payments; they’re issued at a discount and mature at par value.

A municipal bond backed by the proceeds of tax on certain items instead of ad valorem taxes is a

special tax bond

ABC Corporation would like to open a cash account at DEF Broker-Dealer Corp. In order for ABC Corporation to open the account, it must send a brokerage firm a copy of its

corporate resolution

In most cases, a mutual fund is structured as a corporation. Because of certain tax regulations, it is important for the fund to compute its net investment income. That computation is

interest plus dividends received on portfolio securities, minus the operating expenses of the fund.

Trading in penny stocks may not begin in that account until

at least two business days after sending the statement.