Series 7 REVIEW IT!

Question 1

EXEMPT ISSUES

Answer 1

Question 2

COMMERCIAL PAPER

Answer 2

Question 3

CONTINUING EDUCATION

Answer 3

Question 4

CMO

Answer 4

Question 5

Alpha & Beta

Answer 5

The alpha measures how well a portfolio performed compared to its risk-adjusted benchmark over a specific period.

Beta is not something that is generated by a portfolio. It is a measurement that reflects the expected volatility of a security or portfolio compared to its benchmark.

Question 6

A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as

Answer 6

part earnings and part cost basis.

Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free.

Question 7

When a mutual fund computes its net investment income, all of the following are included except

Answer 7

long-term capital gains.

When calculating NII, capital gains are not included. It is solely income from dividends and interest that make up the gross investment income. NII is the gross investment income minus the expenses. A regulated investment company is required to distribute a minimum of 90% of its NII to shareholders if it wishes the special tax treatment offered by the IRS. This requirement is also true when it comes to distributing long-term capital gains. The treatment of short-term gains is beyond the scope of the exam.

Question 8

REPOS

Answer 8

A blend/core fund combines equities with different market characteristics. There are stocks fitting a growth style and others with a value style. It will include some high quality blue-chip stocks and some on the other end of the risk spectrum. Target date funds have different portfolios for each targeted date and will include both equity and fixed income securities. The portfolio of a growth/income would have much overlap with that of a blend/core fund, but more emphasis is placed on including stocks for their dividend payout. A specialized fund would concentrate in either a specific geographic area or industry and is not going to be recommended as the only fund for the investor’s portfolio.

Question 9

A registered representative (RR) has just explained to a customer that to purchase a particular security, the customer would pay the asking price plus a commission, not a sales charge. Which of the following is the RR speaking of?

Answer 9

Closed-end funds are purchased on an exchange or over the counter where buyers pay the asking price plus a commission.

The RR could not be speaking of all open-end funds because mutual funds—one classification of open-end funds—are purchased at the public offering price, which includes a sales charge.

Management company offerings include both open-end and closed-end funds.

Question 10

Stock prices in the over-the-counter (OTC) market are determined by

Answer 10

negotiation.

The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market. The 5% markup policy regulates commissions and markup, not prices. Competitive bids are a type of underwriting agreement for new issues.

Question 11

Which of the following preferred stock issues includes no added features?

Answer 11

Straight.

Preferred stock that carries no cumulative feature is called straight or noncumulative preferred.

Question 12

Established customers for penny stocks

Answer 12

Once a customer buys three different penny stocks on three separate days involving three separate issues, he is no longer covered by the suitability statement requirement.

Question 13

A company has reverse split its common stock. The effect on the earnings per share will be

Answer 13

When a reverse split takes place, the number of outstanding shares is reduced. Because the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.

Question 14

NET WORTH

Answer 14

ASSETS- Liabilities

Question 15

Many investors diversify by adding foreign securities to their portfolios. Those who do so by purchasing foreign stock mutual funds are least likely to be concerned with

Answer 15

LIQUIDITY RISK!

Because federal law requires mutual funds to offer redemption at net asset value within seven days of the request (in the real world, it is much quicker), liquidity risk is not a concern to this investor. Although the fund trades in dollars and all distributions are in dollars, the income to the fund comes through the foreign currency. That makes investors in the fund subject to the same currency risk as if they bought the stock directly. The foreign securities in the portfolio of the fund are subject to market risk, and that directly affects the value of the fund shares. Political risk is always a concern when making foreign investments. Certainly, it is of less concern in the major developed countries, but we cannot compare that with the absence of liquidity risk.

Question 16

Which of the following have equity positions in a corporation?

Answer 16

Common and preferred stockholders have equity, or ownership, positions. Bondholders (mortgage or otherwise) are creditors, not owners.

Question 17

DJX Corporation’s charter has authorized 10 million shares of common stock. It has issued 5 million shares and has 1 million shares in its treasury. How many shares of DJX common stock are authorized but unissued?

Answer 17

This company has 10 million shares of common stock authorized. It has issued 5 million shares of which 1 million shares have been reacquired as treasury stock. That means there are 4 million shares still outstanding. The remaining 5 million are authorized but unissued. Remember that treasury stock is authorized and issued stock that is no longer outstanding.

Question 18

A bond investor who is looking for capital gains should invest in bonds when interest rates are

Answer 18

high and expected to decline.

This is about the inverse relationship between interest rates and bond prices. As interest rates rise, bond prices fall. Conversely, when interest rates decline, bond prices increase. If an investor buys bonds when the current interest rates are high, a future decline in those interest rates will cause the price of the bonds to increase.

Question 19

When a corporation issues a debt security, the terms of the loan are expressed in a document known as the bond’s indenture. The indenture is sometimes referred to as

Answer 19

the deed of trust.

The indenture, sometimes also referred to as the deed of trust, states the issuer’s obligation to pay back a specific amount of money on a specific date. A debenture is a debt security containing an indenture. The bond resolution is a term used for municipal bonds not corporate debt.

Question 20

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing

Answer 20

If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance of gain.

Question 21

Obtaining higher income returns from specific stock, a basket of stocks, or an equity index upon which the return is based would most likely be described as

Answer 21

equity-linked notes.

In the term equity-linked note (ELN), equity refers to a specific stock, a basket of stocks, or an equity index upon which the return is based. Therefore, the return is not fixed and can be higher or lower than anticipated depending on the selected equity’s performance. There are no such products as exchange or equity-leveraged notes.

Question 22

If a fund has a fixed portfolio of municipal bonds with long maturities, how will substantial changes in general interest rates affect the fund’s portfolio?

Answer 22

The current value will fluctuate significantly, but the investment income will remain relatively unchanged.

For a fund with a fixed portfolio of long-term municipal bonds, the market value of the portfolio will fluctuate with changing interest rates, but the income will remain unchanged.

Question 23

Heightened suitability standards and additional representative training is necessary when recommending

Answer 23

Structured products (such as equity-linked notes and exchange-traded notes) are complex. In many cases, FINRA has discovered that registered representatives had inadequate understanding of the investment, leading to their making unsuitable recommendations.

Question 24

In a discussion with one of your customers, the topic of alternative debt instruments is brought up. It seems that the customer was competing in a duplicate bridge tournament in town and one of the other competitors mentioned that they have been obtaining higher income returns from ELNs. When the customer asks you for the meaning of that abbreviation, you would reply

Answer 24

equity-linked notes.

An ELN is an equity-linked note. That is a strange name for a debt product. The equity refers to the specific stock, a basket of stocks, or an equity index upon which the return is based. Therefore, the return is not fixed and can be higher or lower than anticipated depending on the selected equity’s performance. There are foreign exchange-linked notes where the performance is based on currency rates, but that is unlikely to ever be a topic covered on the exam. There are no such products as exchange or equity-leveraged notes.

Question 25

zero coupon

Answer 25

Zero-coupon bonds accrete in value every year. The accretion does not get paid out as actual income. However, this phantom income is actually taxed every year as ordinary income. Zero coupons held to maturity have no capital gains because the bond was not traded.

Question 26

The manager of ABC Municipal Securities is interested in bidding on some general obligation bond issues that will be available in the coming months. Where would the manager find information about these forthcoming issues?

Answer 26

The Bond Buyer

Municipalities publish their official notices of sale soliciting bids from interested parties in The Bond Buyer. The notice gives the details of the bonds put up for bid and how to bid on the issue. The S&P Bond Guide gives details of outstanding issues and their ratings. The EMMA is an online site primarily for retail nonprofessional investors.

Question 27

Issuers of municipal securities are exempt from registration requirements under the Securities Act of 1933, but there is a full and fair disclosure document that is identified as

Answer 27

The full and fair disclosure document for municipal securities is called the official statement.

Question 28

Investor information about the financial condition of a municipal issuer is most likely found in

Answer 28

the official statement.

The official statement, which is the disclosure document used in new municipal offerings, will describe the issue’s financial condition in detail.

Question 29

Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners not be required?

Answer 29

A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners. Can you imagine a well-known publicly traded corporation with several million shareholders opening an account where the registered representative would have to obtain suitability information on all of them? Even when it is a small business, because the C corporation is its own taxable entity, the suitability requirements are not as critical as with the pass-through businesses (partnerships, LLCs, and S corporations). Of course, the sole proprietorship is the individual, so that is where the suitability is focused.

Question 30

three liquidity calculations using the balance sheet

Answer 30

You are calculating working capital (current assets − current liabilities). There are three liquidity calculations using the balance sheet. They are as follows:

Working capital = current assets − current liabilities

Current ratio = current assets / current liabilities

Quick asset ratio (acid-test ratio) = (current assets − inventory) / current liabilities