Series 7 Flashcards
Income Statement
The income statement starts with revenues (sales) at the top and then list expenses, which are deductions, going down to the proverbial “bottom line” which is net income (profits)
Cash Flow Statement
The cash flow statement divides the flow of funds into three categories: Operations, Investments and Financing. The cash flow statement reflects a firm’s liquidity over a period of time.
Balance Sheet
A balance sheet uses three categories – assets, liabilities and shareholders’ equity – to give a snapshot of what a business owns and how it has been financed.
The Trust Indenture
The trust indenture defines the legal terms and financing specifications of the bond.
The Bond Resolution
It attests to the issuer’s approval and authorization of the execution of the indenture.
An Option Spread
The simultaneous purchase of one option and sale of another option of the same class.
Riskless Principal Transaction
A riskless principal transaction occurs when a broker receives an order from a customer and then buys stock from a dealer to fill the order, but instead of immediately delivering the stock to the client, puts it into a riskless principal account. The broker then sells the stock from this account to the customer with a markup. It is called a riskless principal transaction because the broker did not have to take a risk on buying the bonds and keeping an inventory on the bonds. It is considered a principal transaction because she is selling the bond out of her own account with a markup.
Payroll Deduction Plan
A payroll deduction plan is a type of non-qualified plan. An employer deducts a certain amount of an employee’s paycheck and puts it into life insurance, an annuity, a mutual fund, or an IRA. Because it is non-qualified, the amount of the funds cannot be deducted from the employer’s or employee’s taxable income.
How are T-bills quoted?
At the bank discount yield. The bank discount yield is the annualized ratio of the bill’s discount to its face value.
Which of the following is true regarding Rule 72(t) withdrawals?
According to IRS Rule 72(t), early withdrawals from a defined contribution account such as a 401(k) are exempt from the normal 10% penalty if they consist of “substantially equal periodic payments” over a minimum of five years.
Indexed annuities resemble fixed annuities in that the annuitant has no say over how the money is invested by the insurance company. However, indexed annuities resemble variable annuities in that their performance is tied to the market. Legally, which are indexed annuities treated as?
Fixed annuities.
Which keeps track of the owner and physical location of every stock held by a broker-dealer?
Securities record
Which rate could be used to determine the price that an investor should be willing to pay today?
Yield to maturity
Bonds purchased at a premium
Highest to Lowest: Nominal yield, current yield, YTM, YTC
Bonds purchased at a discount
Highest to lowest: YTC, YTM, Current yield, Nominal Yield
Broker
Commission and agency transaction.
Dealer
Markup or markdown and principal transaction.
What does a registrar do?
Audits the transfer agent and makes sure issued shares of stock do not exceed authorized shares
Under Regulation T, when is the latest that a customer with a cash account can pay for purchased securities?
T + 4
The maximum potential loss for a short put investor is:
The value of the strike price minus the premium, multiplied by the number of shares
Greg has a client who wants to maximize his returns but wants to defer tax payments for as long as possible. Which of the following options would best suit Greg’s client?
From a tax perspective, Exchange Traded Notes or ETNs, are considered debt securities and are taxed on sale or redemption, not before. Therefore, unlike ETFs, UITs and mutual funds, all of which may pay taxable dividends or capital gains before they are redeemed or sold, ETNs offer investors maximum control over when they may have to pay taxes on investment gains.
For stocks that go public over the counter, the prospectus has to be given for up to _______ after the IPO
90 days
On a company’s income statement, the subtotal that results from subtracting cost of goods sold and operating expenses from sales is:
Operating profit
Sales Charge
Sales Charge = (POP - NAV) / POP
When a variable annuity enters the annuitization phase, which of the following is true of its annuity units?
Their number will remain fixed
Which of the following is excluded from income for regular tax but is added back as a preference item on the AMT:
Qualified private activity bond interest
Which situation would result in a profitable arbitrage involving a convertible bond?
Buying it below its conversion parity, converting it, and selling the shares.
Strategic asset allocation is associated with:
Passive investing strategies
The interbank market for foreign currency options is:
Self-regulated
Which private placement exemption can only be used by offerings under $5 million?
Rule 504. The offering can be sold to anyone. If it is governed by sufficiently strict blue sky laws, it may be publicly advertised, and its securities are not designated as restricted securities.
Rule 506(b)
Rule 506(b) exemptions can be for offerings of any size. The offering cannot be publicly advertised. The offering must be sold mostly to accredited investors. The maximum number of non-accredited investors is 35.
Rule 506(c)
Rule 506(c) exemptions can be for offerings of any size. It is the only private placement exemption that always allows the offering to be publicly advertised. However, the offering must be sold only to accredited investors.
Underwriters of 529 college savings plans and ABLE plans must report which type of information semiannually, and which type of information annually?
Descriptive information semiannually and performance data annually
A free writing prospectus is:
A written offer unaccompanied by a preliminary prospectus.
Under the Securities Act of 1933, which of the following is true about when a registration statement becomes effective?
Registration statements become effective no sooner than 20 days after filing them with the SEC.
Which of the following would not be deducted from sales when calculating net income?
Dividend payments
A unit investment trust:
Has no board of directors
When the Federal Reserve buys and sells securities in the open market, who are the potential buyers and sellers?
Select banks and financial institutions
Which of the following is NOT a direct obligation of the Federal government?
Freddie Mac securities
When the price of a convertible bond exceeds its conversion parity level, which of the following is true?
An investor who holds the bond will make less money by converting the bond to shares of company stock and then selling those shares on the market than he can by selling the bond at market price
Which piece of legislation regulates margin accounts?
Securities Exchange Act of 1934
Customer account records must be updated at least every:
3 years
A company’s quick ratio is calculated by taking:
(current assets - inventory) / current liabilities
Which of the following types of life insurance is typically viewed as having the most flexible options?
Universal life
Which of the following types of risk will a GNMA mutual fund be most susceptible to?
Reinvestment risk
As a Treasury security, TIPS are characterized by which of the following statements?
Interest payments are the product of a fixed interest rate times the adjusted principal
The NAV of a fund:
does not include the sales charge, markup or markdown
Open interest refers to:
The number of options open on a given day
What classes of shares are sold at NAV with no up-front load?
B shares and C shares are sold with no up-front load; only A shares are sold with up-front load.
The MSRB operates EMMA, which:
Requires underwriters to submit municipal security information, including official disclosure documents, for use by the general public
Which of the following is not a self-regulatory organization?
Security industry SROs include the exchanges (for example, the NYSE), FINRA, and the MSRB. The SEC is a governmental agency and not an SRO.
What are the advantages of a limited liability company?
Like S corps and partnerships, LLCs offer owners the benefit of “pass through” taxation which means profits are taxed once (not twice like a C corp) on the owner’s individual tax return. LLCs also offer limited liability.
Control relationships must be disclosed:
Prior to effecting any transaction for customer
A firm can wait until after a customer account is opened to comply with which of the following?
Customer Identification Program
The flow of funds on Municipal Revenue Bonds refers to the order of priority in which expenses are paid. If debt service is paid first in that order, the flow of funds is referred to as a:
Gross Revenue Pledge
A bank qualified municipal bond allows a bank to deduct _____ of interest costs.
80%. A bank qualified municipal bond allows a bank to deduct 80% of interest costs. These types of bonds were created to give banks an incentive to invest in local governments.
How would an order be marked to avoid an adjustment on the ex-dividend date?
Do Not Reduce
Which type of investment has the least reinvestment risk?
zero-coupon bond
What is the price of a $1,000 10-year Treasury bond quoted at 97.16?
$975.00
Treasury bonds are typically priced in $10 units and in fractions of 32nds. The 97 would equate to $970, and the .16 is 16/32nds of $10, which works out to $5.00. $970 + $5.00 = $975.00.
All of the following activities require an office of supervisory jurisdiction (OSJ) except:
receiving customer orders
Which of the following must have bond indentures qualified with the SEC before becoming effective?
Corporate bond issues valued at over $5 million
According to Reg T and FINRA, initial and maintenance margin requirements for a short account are:
Reg T requires an initial deposit of 50% in a short account, and FINRA requires a minimum of 30% of SMV as equity.
Most index options are settled:
European-style
LEAPS may be exercised in:
Either European or American style
A firm is fully covered if it contains the following position in the same account as 10 short put options in ABC
Short 1000 shares of ABC. Short puts are covered by short positions. To cover 10 short puts, you must have a short position of 1000 shares, because each put represents 100 shares.
CAPM
Expected return = Risk-free return + Beta (Market return - Risk-free return)
Alpha
Alpha = Actual return - Expected return
Which of the following CMOs protects senior tranche investors best against both prepayment and extension risk?
Planned Amortization Class CMO
Underwriters of 529 college savings plans and ABLE plans must report which type of information semiannually, and which type of information annually?
Descriptive information semiannually and performance data annually
Which type of municipal bond is also known as an AMT bond, because it is exempt from regular federal income tax but not from the AMT?
Qualified private activity bonds
A company whose securities business is limited to operating a funding portal for crowdfunding offerings:
Must register with the SEC and join FINRA
In international trade, goods are generally priced in:
The currency of their country of origin
If you purchase a mutual fund, how is the price determined?
On a forward basis–it is determined from the next calculated NAV
Typically, a municipality planning to issue a series of revenue bonds will:
Select an underwriter or a group of underwriters and negotiate the terms of the underwriting
The following statements are true regarding calculation of accrued bond interest:
the actual number of days in a year is used for Treasury bonds
the 360-day year is used for corporate bonds and munis
For an insider trading violation, the maximum civil penalty for an individual is:
Treble damages, which means three times the amount of the profit gained or loss avoided as a result of the violation
On a company’s balance sheet, current liabilities include all of the following EXCEPT:
Bond principal
When an annuitant takes a loan on her annuity while it is in the accumulation phase, which of the following is true?
She will be taxed at her ordinary tax rate only for earnings that are part of the loan amount.
The riskiest investment grade bond, according to Moody’s, is rated
Baa3. Using Moody’s combination of letters and numbers to rate bonds, Baa3 is the lowest quality investment grade bond available. S&P would rate the same bond BBB-.
Protective provisions can typically be used by preferred shareholders to:
Protect one class of preferred shareholders from the actions of another class of preferred shareholders. Protect preferred shareholders from dilution of their ownership
Withdrawals from a Coverdell Education Savings Account would be tax-free when used for expenses associated with:
A 10-year-old attending primary school
The Coverdell Education Savings Account (CESA) is similar to a 529 college savings plan in that contributions are made with after-tax dollars and all withdrawals can be made tax-free, as long as they are used for qualified educational expenses before the age of 30. Withdrawals can be used to finance any level of education, from the primary and secondary levels through college.
Which of the following most accurately describes a growth investing portfolio?
Low dividend yields
What are the most common investment goals of an LGIP?
Liquidity and preserving principal
Why might warrants be offered in conjunction with a corporate debt issue?
To lower the interest rate
Which of the following reasons for a withdrawal from a 529 college savings plan will avoid the 10% tax penalty but not avoid regular taxes?
Receipt of a scholarship
