Series 7 Practice Questions

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Questions and Answers

What is it called when an investor tells his RR to purchase 50m EGG 11.7% debenture bonds, which are purchased for 113 and valued at 103 a year before maturity?

Amortization

In oil and gas limited partnerships, is the risk greater in developmental or exploratory programs?

Exploratory

What is the best way to measure the Gross National Product (GNP)?

Constant dollars

What is the broker's role in the term 'broker/dealer'?

Executing trades for client accounts Signup and view all the answers

What is the maximum federal tax rate for corporations on their dividends and other income?

35% Signup and view all the answers

What is the maximum federal tax rate for individuals on their dividends and other income?

20% Signup and view all the answers

What type of securities are exempt from registration under the Securities Act of 1933?

Government agency issues Signup and view all the answers

Under federal guidelines, how is the premium received by the writer of a put treated when the put is assigned?

It is subtracted from the cost basis when the writer is assigned Signup and view all the answers

How much income must a REIT generate from real estate properties?

75% Signup and view all the answers

How much must a REIT pass-through of its profits to investors?

90% Signup and view all the answers

What option position would a portfolio manager of a pension fund make if they desire income but want to protect the portfolio?

Write calls against the market index for income and protection Signup and view all the answers

How many days does an investor have to pay when they buy a corporate bond?

3 business days Signup and view all the answers

What are the rating agencies for short-term, long-term, and municipal debt securities?

S&P, Moody's, Fitch's, Best's Signup and view all the answers

What does Best's Rating service rate?

They are the one rating company that rates insurance companies instead of bonds Signup and view all the answers

How are CDs issued?

In bearer form only Signup and view all the answers

Where are CDs shown and for how long?

On Nasdaq with a minimum duration of 14 days Signup and view all the answers

How are CDs quoted?

In terms of yield Signup and view all the answers

Who does not issue Eurodollar deposits?

US government Signup and view all the answers

What kind of taxes is the interest of corporate bonds subject to?

Federal income tax and state income tax Signup and view all the answers

If a zero-coupon bond is held for one year and sold above its original value, what will the investor have?

Ordinary income and capital gain Signup and view all the answers

If a zero-coupon bondholder holds it until maturity, what will they have?

No capital gain Signup and view all the answers

What type of muni note does not get rated by MIG because they are backed by a government bond?

CLNs Signup and view all the answers

What does a bond indenture NOT include?

Re-offering yields Signup and view all the answers

What is required before a revenue bond can be issued?

Feasibility study and engineering report Signup and view all the answers

What must a muni bond being issued obtain from a bond counsel?

Legal opinion Signup and view all the answers

What three things does the bond counsel help do while making its opinion?

Research laws to check into tax-exempt status requirements, assist in getting favorable legislation passed in locality, supplies information to the underwriters for official statement Signup and view all the answers

What are the three major bond rating organizations?

S&P, Moody's, Fitch Investor's Service Signup and view all the answers

What does a broker's broker NEVER do?

Never acts as a market maker and never acts in a principal transaction Signup and view all the answers

Who determines the tax-exempt status of interest on muni bonds through the tax code?

IRS Signup and view all the answers

Who assesses the tax-exempt status of the interest on the bond for the muni by checking local and state laws?

Bond Counsel Signup and view all the answers

Who enforces MSRB rules?

FINRA, Comptroller of the Currency, Federal Reserve Board Signup and view all the answers

What does MSRB Rule G-8 require when opening new accounts?

Name & address of the customer, SSN, occupation, employer info Signup and view all the answers

What does MSRB Rule G-19 suitability require?

Financial status, tax status, investment objectives Signup and view all the answers

What are the six exceptions to the 10% penalty rule?

Death, Disability, Higher education of someone in the family, First time home purchase ($10k limit), Extraordinary medical expenses, If payments are taken over life expectancy Signup and view all the answers

When does a person have to start taking withdrawals from a qualified retirement plan?

By April 1 after the person reaches 70 1/2 Signup and view all the answers

Who does a defined benefit plan benefit?

Older employees Signup and view all the answers

What method of payment is the least suggestive of money laundering?

Personal Check Signup and view all the answers

How many shares can be transmitted over Super DOT?

Up to 100,000, including odd and round lot orders Signup and view all the answers

What is the only thing that can change hands in an index option?

Money Signup and view all the answers

What type of security requires the investor to calculate the alternative minimum tax in addition to regular tax?

Interest from IDBs Signup and view all the answers

What bodies have jurisdiction over the areas covered by the Securities Exchange Act of 1934?

FINRA & SEC Signup and view all the answers

A customer opens an options account with your firm. Under FINRA rules, who has to sign the new account form?

The options principal Signup and view all the answers

What value of the underlying stock determines whether the option has any real value?

Current market value Signup and view all the answers

An option that is in the money is said to have what?

Intrinsic value Signup and view all the answers

Who has intrinsic value: the buyer, the writer, or the option?

Option Signup and view all the answers

A call option is IN THE MONEY when the market price is _________ the strike price.

above Signup and view all the answers

A put option is IN THE MONEY when the market price is ________ the strike price.

below Signup and view all the answers

What is the most important factor when determining the premium for an option?

Market value of the stock Signup and view all the answers

A closing transaction of an option can be accomplished in what three ways?

Closing the option, Exercising the option, Letting the option expire Signup and view all the answers

When do stock, index, and interest rate options expire?

10:59 PM CT on Saturday after the 3rd Friday of the expiration month Signup and view all the answers

When do foreign currency options expire?

Saturday before the 3rd Wednesday Signup and view all the answers

On a spread option position, what must be different?

Expiration month, exercise price or both Signup and view all the answers

What does a vertical/price spread have?

Different strike prices Signup and view all the answers

What does a horizontal/calendar spread have?

Different expiration months Signup and view all the answers

What does a diagonal spread have?

Different strike prices and expiration months Signup and view all the answers

What are two ways investors incorporate option positions to hedge or enhance their stock position?

Buying options to protect their stock, Writing options for income Signup and view all the answers

When investors buy options to protect their positions, they are considered to be what?

Hedging their position Signup and view all the answers

When is an investor considered to have a covered call?

When they own the underlying stock, Bank escrow agreement, Own a call with the same or lower strike price Signup and view all the answers

When is an investor considered to have a covered put?

When they have a short position on the stock, Bank escrow agreement, Own a put with the same or higher strike price Signup and view all the answers

In an even stock split, what goes up?

Number of contracts Signup and view all the answers

In an odd stock split, what goes up?

Shares per contract Signup and view all the answers

In an even and odd stock split, what goes down?

Strike price and premium Signup and view all the answers

In a reverse even stock split, what goes down?

Number of contracts Signup and view all the answers

In a reverse odd stock split, what goes down?

Shares per contract Signup and view all the answers

In a reverse even and odd stock split, what goes up?

Strike price and premium Signup and view all the answers

What can options contracts never be adjusted for?

Cash dividends Signup and view all the answers

When opening a new options account, who is responsible for determining the suitability of a client based on financial objectives?

Registered representative Signup and view all the answers

When does the OCC disclosure document have to be given to a client?

Must be given to the customer prior to opening an account and/or entering any order for the customer Signup and view all the answers

A customer can trade before they sign the OPTIONS AGREEMENT but not before they have seen the what?

OCC disclosure document Signup and view all the answers

Once the options agreement is sent to the customer, how many days do they have to sign in?

15 days Signup and view all the answers

How much of a customer's investment portfolio should be committed to options trading?

No more than 15-20% Signup and view all the answers

When an options contract is first written, who clears all premiums?

OCC Signup and view all the answers

When do all options trades settle?

Next business day Signup and view all the answers

Exercising an option before the ex-dividend date entitles who to the dividend?

The buyer of a call, the seller of a put Signup and view all the answers

What happens to any outstanding option contracts that are in the money by $0.01 or more on the expiration date?

They are automatically exercised Signup and view all the answers

When do equity options that are exercised settle?

Regular way; within 3 business days Signup and view all the answers

When do index and interest rate options that are exercised settle?

One business day Signup and view all the answers

In regards to taxation, what results from the trading of options when the option expires unexercised?

Capital loss or capital gain Signup and view all the answers

When asked for proceeds or cost basis of an option, what should you find?

Breakeven point Signup and view all the answers

Where do most index options trade?

CBOE Signup and view all the answers

In trading index options, who pays the seller the premium?

Buyer Signup and view all the answers

In exercising index options, who pays the buyer of the options?

Seller Signup and view all the answers

What price can investors exercise an index option at?

The closing price of the index that day Signup and view all the answers

Index options cannot be exercised before what?

The end of the trading day Signup and view all the answers

If an investor wants to act on the price of an index option in the middle of the day, what is the only action that the investor can take?

A closing transaction on the index option Signup and view all the answers

Index options have a multiplier of what?

100 Signup and view all the answers

What represents the best hedge against systematic/market risk?

Index options Signup and view all the answers

When do VIX options expire?

The Wednesday 30 days prior to the third Friday of the next calendar month Signup and view all the answers

What do foreign currency options trade in?

US Dollars ONLY Signup and view all the answers

How can foreign currency options be exercised?

Both US dollars and the foreign currency that underlies them Signup and view all the answers

How can a businessperson protect a payment if being paid in a particular currency in 30-60 days?

Buy puts on the foreign currency Signup and view all the answers

How can a businessperson protect a payment if being paid in US dollars in 30-60 days?

Buy calls on the foreign currency Signup and view all the answers

What three things cause the devaluing of the US dollar?

When the US has a large trade deficit with other countries, When the center of economic activity is shifting to fast-growing countries, Because the US dollar is the underlying backing of all foreign currency Signup and view all the answers

When the US dollar loses value, what happens to exports?

Become more competitive Signup and view all the answers

If the US dollar is DEVALUED, what happens to bonds, yields, and US goods?

Bonds drop in price, Yields go up, US goods become more competitive Signup and view all the answers

If the US dollar is REVALUED, what happens to bonds, yields, and US goods?

Bonds go up in price, Yields go down, US goods become less competitive Signup and view all the answers

Mutual fund shares are redeemed at the net asset value less a what?

Redemption fee Signup and view all the answers

Study Notes

Bonds and Securities

Amortization occurs when a bond is purchased above par and later valued lower as it approaches maturity.
Exploratory programs in oil and gas partnerships present greater risk than developmental programs.
Government agency issues are exempt from registration under the Securities Act of 1933.

Financial Measurements and Taxation

Gross National Product (GNP) is best measured in constant dollars to account for inflation.
Maximum federal tax rate for corporations is 35% on dividends and other income, while individuals face a 20% maximum rate.

Real Estate Investment Trusts (REITs)

A REIT must generate at least 75% of its income from real estate properties.
To maintain its status, a REIT must pass through 90% of its profits to investors.

Account Management and Regulation

A registered representative should request an extension for stock payment by the fifth business day.
FINRA, the Comptroller of the Currency, and the Federal Reserve Board enforce MSRB rules.

Options Trading

Covered calls are employed to generate income while protecting stock portfolios.
A registered representative is responsible for assessing the suitability of a client before options trading.

Taxation of Investments

Bondholders face federal and state income taxes on corporate bond interest.
Zero-coupon bonds generate ordinary income and capital gains if sold above original value before maturity.

Bond and Municipal Ratings

The main bond rating agencies include S&P, Moody's, and Fitch's.
Fee studies and engineering reports are required before issuing revenue bonds, stressing the importance of due diligence.

Options Positioning and Hedging

Options used for hedging involve buying for protection or writing for income.
Index options serve as a hedge against systematic market risk, with a multiplier of 100.

Market Dynamics

In an even stock split, the number of contracts increases while the strike price and premium decrease.
Devaluation of the US dollar leads to competitive exports and increased yields, whereas revaluation has the opposite effect.

Miscellaneous

The OCC clears all premiums from options contracts when first written.
VIX options expire on the Wednesday 30 days before the third Friday of the next calendar month, impacting market speculation.

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Test your knowledge on key concepts from Series 7 exam material through these flashcards. Covering topics such as bond valuation and partnership risks, this quiz is designed to enhance your understanding and preparation for licensing tests in finance. Challenge yourself and track your progress with these interactive questions.