Series 7 Practice Exam 1

This is the first of two free Series 7 Practice Exams. This practice test features 50 challenging questions that cover a wide variety of the topics that you will need to know for your exam. Each question includes a detailed explanation of the correct answer. Start your test prep right now with our Series 7 practice questions.

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Question 1
A client of yours with a conservative level of tolerance for systematic risk and a fairly long time horizon has indicated that she would prefer to avoid substantial portfolio turnover. Your suitable recommendation would most likely be:

A
a tactical strategy.
B
a passive strategy.
C
an aggressive strategy.
D
a hedged strategy.
Question 1 Explanation: 
A passive strategy is one in which there is infrequent selling of securities in the portfolio, which fits the client’s desire for low portfolio turnover.
Question 2
When comparing a broker-dealer and an investment advisor, which of these statements is most accurate?

A
Advisors are compensated based upon performance, brokers are not.
B
Advisors are compensated based upon transactions, brokers are compensated based upon assets under management.
C
Advisors are compensated based upon fees for advice, brokers are compensated based upon transactions.
D
Both are compensated based upon transactions.
Question 2 Explanation: 
Advisers are paid for their advice. Brokers are paid commissions when there are transactions, purchases or sales.
Question 3
An agent of a broker-dealer may borrow money from all of the below except:

A
a corporate affiliate of the agent’s member firm.
B
a client which is a bank.
C
a broker-dealer.
D
a mortgage broker.
Question 3 Explanation: 
A mortgage broker is not a lender of money, but rather is a person who is in the business of arranging for loans. Reps cannot borrow money from clients who are loan ‘arrangers,’ but can borrow from lenders such as banks, or broker/dealers as in margin account lending, and from their own employer or affiliates thereof.
Question 4
Mr. Watney has placed a buy order for 1000 shares of ABC at the market. The execution price was $42 in his cash account on Wednesday, February 4th. If he fails to make payment by Monday, February 9th, the most likely consequence will be:

A
an extension of time will be requested on his behalf and if granted, no liquidation will occur.
B
no extension of time is necessary under these circumstances: he has two additional business days in which to make payment.
C
the purchase will be canceled for non-payment: his account will be frozen for 90 calendar days.
D
the firm will do a sell-out, at Mr. Watney’s expense, and freeze his account for 90 calendar days.
Question 4 Explanation: 
Regulation T states that public customers are given 2 business days beyond regular way settlement to make payment. Therefore, non payment in T+3 does not result in any action.
Question 5
The recommended way to handle a conflict of interest between a member firm and one of its customers in a proposed transaction or set of transactions is to:

A
disclose the conflict of interest to the customer.
B
let the compliance and/or legal department handle the situation.
C
avoid the conflict – don’t propose transactions which involve conflicts of interest.
D
the member firm should obtain FINRA approval of the proposed transactions.
Question 5 Explanation: 
The customary practice in the financial services industry is to disclose any potential or actual conflicts of interest at the time of recommending a transaction to a customer. This approach empowers the client to decide if the conflict constitutes a reason to avoid the transaction.
Question 6
Mrs. Ko’s portfolio has an aggressive bias towards growth stocks. As such, its beta is 1.4 and she is concerned about downside exposure due to overall market risk over the near term. The S&P 500 Index is currently at 2000.00 and her portfolio has a current market value of $1,000,000. Which of the following recommendations would provide the best hedge?

A
short 5 S&P 500 Index calls
B
long 5 S&P 500 Index puts
C
long 7 S&P 500 Index puts
D
long 700 S&P 500 Index puts
Question 6 Explanation: 
The S&P 500 has a beta of 1.0. Long Index puts provide an effective hedge against downside portfolio risk. But a portfolio with a beta of 1.4, which is 40% higher than 1.0, requires 40% more put options to acquire the appropriate amount of hedging. Each S&P 500 Index option contract with a 2000 strike price provides protection for $200,000 of portfolio value, which is 2000 times the multiplier of 100. A $1,000,000 portfolio would require 5 put options if the portfolio had a beta of 1.0. This portfolio requires 40% more options: 7 long puts.
Question 7
A wrap account is most appropriate:

A
for a client who actively trades.
B
for a client who is predominantly a buy and hold investor.
C
for a client wishing to follow a dollar cost averaging approach.
D
for a client nearing retirement who will primarily be withdrawing rather than making new investments.
Question 7 Explanation: 
Brokers offering wrap accounts are not charging commissions on each trade. They are charging a fee for managing the customer’s assets. This can be a very effective alternative to commission trading for a customer who buys and sells frequently which would ordinarily generate substantial commission charges. Firms are advised by FINRA to do the math to determine which clients would benefit from the fee-based wrap account approach. Firms are advised to not recommend it to clients who would be better off on a commission basis.
Question 8
All member broker-dealers are required to comply with the USA Patriot Act and related protective regulations. At the time of account opening, individuals filling out a new account form must supply certain information which will enable which of the following agencies to verify they are not on the list of known money launderers, terrorists or others deemed ineligible to open an account at a financial institution?

A
FINRA
B
SEC
C
OFAC
D
Justice Department
Question 8 Explanation: 
The Office of Financial Asset Control keeps the list referred to in this question.
Question 9
Your customer Mr. Furyk has expressed an interest in adding technology stocks to his portfolio. He informs you that he likes ABC Technology, Inc. and has instructed you to buy it when you think the time and price are right and to buy as much of it as you believe is reasonable when considering his portfolio mix and investment objectives.

A
because his instructions are giving you limited discretion as to price and time, you do not require written discretionary power
B
you would be required to obtain branch managerial approval before entering this order
C
you may place the order as you see fit, however Mr. Furyk retains the right to break the trade if he disagrees with the execution
D
you must have written discretionary power in order to do what this client wants
Question 9 Explanation: 
Your customer wants to BUY, and he told you the name of the STOCK, but he did not tell you the AMOUNT to buy. Therefore, discretionary authority in writing is required.
Question 10
Which of the below statements is/are not untrue regarding a Roth IRA?

I.     the maximum contribution below age 50 is $5,500

II.    withdrawals must begin by April 1 of the year after attainment of age 70½

III.   anyone with earned income may open a Roth IRA

IV.   withdrawals after age 59½ are taxable as ordinary income only to the extent they exceed the original principal/cost basis

A
I only
B
I and III
C
III only
D
I, II, III and IV
Question 10 Explanation: 
Warning! Double negatives such as ‘not untrue’ must be dealt with carefully. Not untrue = not false = true. Which of these Roman numeral answers is true: only I. As for why the other answers are false: age 70½ has no significance in the Roth IRA; persons who have earned income above a Congressionally-set threshold are ineligible for a Roth IRA; post-59½ withdrawals from the Roth IRA are normally tax-free.
Question 11
The Van Buren Growth Fund has its first breakpoint at $10,000, and its second breakpoint at $25,000. You have a customer for whom this fund is suitable and has told you he would like to invest $8,000 at this time. Without further discussion, you process the client’s purchase order.

A
When the client invests additional money into the fund, he will be granted the reduced sales charge on that portion of his investment which exceeds the breakpoint.
B
When the client invests additional money into the fund, he will be given a retroactive sales charge reduction once his total investment equals or exceeds the breakpoint.
C
You have engaged in a breakpoint sale.
D
None of the above.
Question 11 Explanation: 
FINRA defines a ‘breakpoint sale’ as the violation which occurs when a registered rep fails to inform, or remind a mutual fund investor of the availability of reduced sales charges at breakpoints, in particular when that investor is purchasing an amount not far from a breakpoint. In this example, a client prepared to write a check for $8,000 should have been told that for an additional $2,000, they would qualify for a reduced commission on the entire $10,000 investment. By failing to discuss this, the rep has engaged in an unfair and unethical practice known as a ‘breakpoint sale.’
Question 12
For the customer who is seeking to hedge a short stock position, which of these strategies can provide some degree of protection?

I.     buy limit order

II.    long call

III.   short put

IV.   buy stop order

A
I, II, III and IV
B
II, III and IV
C
II only
D
I and IV
Question 12 Explanation: 
When shorting stock, loss results from a rise in CMV. A long call locks in the price at which the borrowed stock may be repurchased. A short put provides premium income which provides a partial or limited amount of upside hedge. A buy stop order will close out the short position once the stop order has been triggered by a rise in market price. A buy limit order is placed below CMV and as such, would not be executed in a rising market, and therefore does not provide a hedge against loss in a short sale.
Question 13
Trades appear on Tape A as follows:

XYZ  49……..XYZ   48.95……..XYZ  48.90…….XYZ  49.05

Your customer’s 100 share order to sell XYZ at 49 stop, GTC placed prior to the above trade reports would be executed at:

A
49.05
B
49.00
C
48.95
D
48.90
Question 13 Explanation: 
Sell stop orders are placed below the market. Sell stop orders must first be triggered, also called activated or elected, by a trade at or below the stop price. Once triggered, they become market orders and will be executed at the next available price. The trade at 49 triggers this order. The execution takes place at 48.95.
Question 14
Your firm has hired a new candidate to be a municipal securities registered representative. If her date of hire was March 1st, and she passed the appropriate qualification examination required by the MSRB on March 31st, when is the earliest date on which she may begin to engage in the sale of municipal securities with public customers?

A
March 31st
B
April 1st
C
June 1st
D
July 1st
Question 14 Explanation: 
There is a 90 day apprenticeship period for new hires under MSRB rules. It does not matter if recruits have passed the qualification exam during their first 90 days of employment. June 1st is 3 months after the March 1st date of hire.
Question 15
One of the best ways to hedge against loss when long a listed stock is to acquire a long put position. As such, your client who had purchased 100 shares of Alpha Beta common six months ago at 12.40 takes your advice and buys 1 Alpha Beta May 20 put at 3 with the stock trading at 22.40 to protect against erosion of the 10 point unrealized capital gain. Which of the below statements is correct?

A
your client will break-even with the stock at 25.40
B
your client will break-even with the stock at 19.40
C
your client’s holding period on the stock is erased
D
your client’s potential profit has been capped by purchasing the option
Question 15 Explanation: 
The Internal Revenue Code states that buying a put option to protect a long stock position showing an unrealized short term capital gain wipes out the holding period that has accumulated to that point in time. In this case, there is a $10 unrealized gain on a stock position held only six months (short term). Buying the put will erase the six month holding period. The holding period on the stock will begin again from scratch once the put has been disposed of or has expired.
Question 16
On December 30th, with no other gains or losses for the year, Mr. Mickelson liquidated 300 shares of Ford common at $10 in which he had a cost basis of $20. Because of his long-term bullish belief in Ford, he acquired 300 shares of Ford at $11 on January 10th. His year-end loss of $3,000 is:

A
partially tax deductible in the year of sale
B
fully tax deductible in the year of sale
C
not deductible in the year of sale
D
not enough information to determine
Question 16 Explanation: 
The 30-day wash sale rule states that a sale at a loss, though normally permitted to be included on a taxpayer’s year-end computation of net gains or losses for that year, will be disallowed from current deductibility if the investor buys that same security or one substantially identical to it within 30 days after, or 30 days before the date of the sale that generated the loss. Buying 300 shares of Ford on January 10th took place within 30 days after the December 30th sale at a loss. As a result of purchasing the Ford stock in early January, the December 30th loss cannot be deducted in the year of sale.
Question 17
Gamma Medical, a domestic NASDAQ listed company, has each of the below investments in its corporate investment portfolio. Identify the one with the best after-tax yield, assuming a 35% corporate tax bracket.

A
4% State of Ohio GO
B
5% US Treasury Bond
C
6% IBM debenture
D
5.4% Ford preferred stock
Question 17 Explanation: 
The corporate “70% dividends received exclusion” states that a US corporation investing in the common or preferred stock of another US company only pays corporate taxes on 30% of the annual dividends received from those stock investments. 70% of the dividends received are given tax-free treatment. It is for this reason that the 5.4% preferred stock has the greatest after-tax yield when compared to the other three choices.

The 4% Ohio bond is tax free because it is a municipal bond, giving it a 4% after tax yield. The 5% Treasury is taxable at 35%, giving it a 3.25% after tax yield [65% times 5%]. The 6% IBM bond is taxable at 35%, giving it a 3.9% after tax yield [65% times 6%]. Only 30% of the preferred dividend is subject to taxation [30% times 5.4% = 1.62%]. This means that only 1.62% of the dividend will be TAXED... therefore the tax will be 35% times 1.62% = 0.57%. A 5.4% preferred paying tax of 0.57% leaves an after tax return of 4.83%, which is far greater than the other three investments.
Question 18
With the Fed engaging in a policy of tightening the money supply, interest rates are on the rise. The market price of which of the following issues would likely decline the greatest dollar amount?

A
T-bill
B
T-note
C
T-bond
D
all of the above would tend to decline at about the same rate
Question 18 Explanation: 
The greatest decline in market price is found in the longer term debt instruments, in this case the T-bonds. Short term instruments will react the quickest, but by very small dollar amounts.
Question 19
During normal trading hours, trades in listed stocks must be reported to the appropriate ‘tape’

A
within 2 seconds
B
within 10 seconds
C
within 30 seconds
D
within 15 minutes
Question 19 Explanation: 
Transactions are reported within 10 seconds of execution to the appropriate reporting medium, a/k/a the ‘tape.’
Question 20
Prior to the execution of a short sale of stock, it is the responsibility of the member firm handling the order to obtain an appropriate level of certainty that the shares are available for borrowing and within a time frame which will allow regular way delivery. the regulation which requires this is:

A
Regulation T
B
Regulation U
C
Regulation X
D
Regulation SHO
Question 20 Explanation: 
Regulation SHO contains the ‘locate rule’ requiring the order dept. to know the shares being sold short can be borrowed, or at a minimum to have no reason to believe the shares are not readily available for borrowing.
Question 21
An option trader who simultaneously goes long an XYZ Oct 40 put and short an XYZ Nov 40 put will profit if:

A
both options expire unexercised
B
the difference in premiums widens
C
the market price of XYZ falls below 40 and remains there
D
none of these – this is an uneconomic trade
Question 21 Explanation: 
This strategy is a calendar spread, a/k/a a time or a horizontal spread. The months are different; the strike prices are the same. The option with the longer duration (more distant expiration month) will have a larger premium, due to its additional time value. This investor sold the November and bought the October. Because the November contract will have a larger premium, this spread is a Credit Spread. Credit spreads profit when both options expire (the investor keeps the credit).
Question 22
Mr. Poulter is a high risk tolerant high net worth client who enjoys trading options and shorting the market. As such, he places an order to short 1000 shares of  Citigroup common at $2.25 per share. His deposit requirement with Reg. T at 50% would be:

A
$1,125
B
$2,000
C
$2,250
D
$2,500
Question 22 Explanation: 
The NYSE and FINRA require that short sales of ‘cheap’ stocks have substantially higher deposit and maintenance requirements than traditional margin transactions. In this case, the ‘cheap stock rule’ dictates that a minimum of $2.50 per share is required when shorting stock priced at $2.50 or below. For a 1000 share short sale, the deposit requirement is $2,500.
Question 23
The S&P 500 Index is currently at 1862.42. The S&P 500 Index March 1850 put just traded at 14.40. Pick from the below the answer which correctly states the intrinsic value and the time value of this option.

A
insufficient data to compute
B
0.00; 14.40
C
14.40; 0.00
D
12.42; 1.98
Question 23 Explanation: 
Put options have intrinsic value when the market value of the underlying instrument is below the option’s strike price. In this case, the S&P 500 Index at 1862.42 is NOT below the strike price of the put, which is 1850. This put option has NO intrinsic value. Therefore, the option premium of 14.40 is entirely comprised of time value:

0.00 intrinsic value; 14.40 time value.
Question 24
Registered reps often recommend US T-bonds to their clients looking for stability of income and the safety of government paper. However, T-bonds are not immune from investment risk. To which of the following risks is a T-bond most exposed in the early years of ownership?

A
interest rate risk
B
liquidity risk
C
credit risk
D
inflation risk
Question 24 Explanation: 
If interest rates rise, long term debt will decline in market value, which is referred to as interest rate risk. Liquidity is normally not a concern, since there are always buyers for US T-bonds. Credit risk is essentially non-existent with United States bonds. Inflation risk can be a factor, but in the early years of owning the bond, inflation normally is a small factor.
Question 25
The bid price of a stock is the

A
price a market maker can expect to receive from a customer
B
price a customer can expect to pay for the stock
C
price a market maker will pay a customer for the stock
D
equivalent to the net asset value of the stock
Question 25 Explanation: 
When a customer sells stock, the customer is paid the highest price that dealers, also called market makers, are bidding for that stock at that moment in time.
Question 26
Place the following in their proper order in the handling of an order.

I.     P & S dept.

II.    Cashier

III.   Margin dept.

IV.   Wire room

A
IV, I, III, II
B
I, IV, III, II
C
I, III, II, IV
D
IV, III, I, II
Question 26 Explanation: 
The ‘flow of an order’ has the Order department, a/k/a the wire room, handling the order first. They pass the executed order ticket to the P&S dept. (purchase & sale), who then passes it along to the Margin dept. The last stop in the flow of the order is the Cashier dept. which handles the money and securities to complete the settlement of the transaction.
Question 27
A new stock issue may begin trading on NASDAQ

A
as early as the completion of the IPO
B
following the opening trade on the morning of the effective date
C
30 days after the effective date
D
after a 5 business day quiet period
Question 27 Explanation: 
There is no waiting period for new shares to begin trading in the secondary market.
Question 28
Contributions are permitted to be made to an H.R.10 plan, better known as the Keogh Plan, based upon

A
full time corporate salary
B
part time wages as an employee of a partnership
C
compensation earned as a freelance writer
D
alimony received as part of a court settlement
Question 28 Explanation: 
Self-employed individuals and their Full Time (not part time) employees are eligible for a Keogh Plan. Freelance writing is self-employment.
Question 29
A restricted margin account is one in which

A
the equity has fallen below the minimum maintenance requirement
B
the equity has fallen below the $2,000 minimum equity requirement
C
the customer is temporarily prohibited from accessing SMA
D
the equity is less than Reg. T
Question 29 Explanation: 
The definition of a restricted margin account is one in which the equity is less than the Reg. T percentage, which has been unchanged at 50% for decades.
Question 30
Which of the below instruments trades plus accrued?

A
T-bills
B
Zero coupon bonds
C
STRIPS
D
Industrial Development Revenue bonds
Question 30 Explanation: 
Transactions in bonds that have a periodic payment of interest, usually semi-annually, require the buyer to pay accrued to the seller up to, but not including, the settlement date. This is referred to as trading ‘plus accrued.’ Answers A, B and C are zero coupon securities: they pay no periodic interest. Only answer D pays periodic interest.
Question 31
The Uniform Practice Code of FINRA sets forth requirements regarding deliveries, eligibility for issuer distributions, and a wide variety of rules pertaining to dealer to dealer day to day activities. When it comes to the determination of ex-dividend dates:

A
the ex dividend date for open-end investment company shares is set by the Board or the principal underwriter of the fund.
B
the ex dividend date in respect of listed common shares is normally 2 business days prior to the designated record date set by the Board.
C
the ex-date for stock dividends 25% or greater is normally 1 business day past the payable date.
D
all of the above
Question 31 Explanation: 
All of these statements are correct with respect to ex-dividend dates under FINRA’s rules.
Question 32
Mr. Daly has contacted you regarding some confusion related to the sudden dramatic drop in the price of his shares of Wells Fargo common. As of his latest monthly statement received a few days ago, he held a 400 share long position and the market price was $30. While checking the market this morning, he noticed the stock was trading at $20, down 33%, thus the reason for his call. You inform him this is the result of the 3 for 2 split, previously announced by the Board, which just went ex. How many additional shares will be showing on his next statement?

A
600
B
400
C
200
D
133.33
Question 32 Explanation: 
A 3 for 2 split will give existing shareholders 1 new share for every 2 shares they currently own, i.e. “you’ll own 3 for every 2 you now own.” The fraction 3 over 2, 3/2, three-halves, put into percentage terms is 150%. Mr. Daly previously owned 400 shares. After the split, he’ll be the owner of 150% of 400, which is 600 shares. But, be careful. The question is not asking how many he’ll own after the split: it is asking how many ADDITIONAL shares he’ll own, which is 200 additional shares.
Question 33
As the result of a client complaint involving accusations of churning, and allegations of unauthorized trades, a duly qualified panel of arbitrators has heard the case and rendered its ruling against the registered rep on all counts, as well as the branch manager and the member firm for failure to supervise. FINRA rules set forth the normal procedure for the filing of an appeal to the adverse ruling with which of the following?

A
National Adjudicatory Council
B
Board of Governors of FINRA
C
District Business Conduct Committee
D
none of the above
Question 33 Explanation: 
There is one word in this question that is critical: arbitrators. Arbitrator rulings may NOT be appealed. Arbitration decisions are FINAL and BINDING upon all parties, no appeal is permitted.
Question 34
The most volatile of the money market rates shown below is the:

A
prime rate
B
fed funds rate
C
discount rate
D
call loan rate
Question 34 Explanation: 
Fed funds loans are overnight loans between commercial banks, normally used to assist them in meeting their FRB reserve requirements. The interest rate on these funds is considered the most sensitive, or volatile, of all the short term money market rates.
Question 35
SEC Rule 144 restricts sales of control stock by corporate insiders to which of the following limits?

A
control stock may be sold without limit so long as the insider has filed Form 144 with the SEC at the time of the sale and the sale is not based upon material non-public information.
B
control stock may be sold over a 90 day period in an amount not to exceed the greater of 1% of the issuer’s outstanding shares or the average weekly volume over the 4 week period preceding the sale.
C
control stock may be sold over a 90 day period in an amount equal to the lesser of 1% of the issuer’s outstanding shares or the average weekly volume over the 4 week period preceding the sale.
D
the sale of stock by control persons requires that all sale transactions be effected through a broker/dealer which is a member of the principal exchange on which the stock is traded and the firm may act only in an agency capacity.
Question 35 Explanation: 
The quantity limitations set forth in SEC Rule 144 for sales of control stock are properly described in answer B.
Question 36
One of your customers who is an active trader and is a student of technical analysis has called you to discuss his findings regarding the price action on MMM common. He believes that it is fast approaching its resistance level of 60. If he does not think the stock will break out, which of the below would be most appropriate?

A
sell most if not all of his current long position
B
place a GTC buy limit order at 61
C
place a GTC sell stop order at 60
D
sell MMM 60 put options with a 3 month expiration
Question 36 Explanation: 
Active traders take profit off the table when they believe the market is about to turn around. Resistance at 60 tells us that if the stock is currently in the upper 50’s, it will not go above 60: it will encounter ‘resistance’ at that point. Unless the client believes the stock is about the ‘break out’ to the upside and pierce through the resistance level, the client will sell, taking the profit.
Question 37
The stock of which of the following listed corporations is generally considered the most sensitive to interest rate changes?

A
consumer goods
B
health care
C
public utility
D
broker-dealer
Question 37 Explanation: 
Public Utility companies tend to be highly leveraged, having a capital structure comprised of a substantial amount of long term debt/bonds. The stocks of these companies are referred to as ‘interest rate sensitive’ due to the magnified impact interest rate increases have upon these highly leveraged heavily indebted corporations.
Question 38
In anticipation of a weaker dollar, one would expect

A
US exports to be more competitive
B
foreign exports to increase
C
the US trade deficit to grow
D
none of the above
Question 38 Explanation: 
In simplistic terms, when the US dollar is weak compared to foreign currencies, American goods become cheaper/more competitive/more affordable for foreign businesses, individuals and foreign governments. They buy more US goods, causing US exports to increase, which in turn tends to cause the US trade deficit to decrease.
Question 39
Which of the following mutual funds would be most suitable for the client seeking stability of capital?

A
income fund
B
growth and income fund
C
balanced fund
D
government bond fund
Question 39 Explanation: 
Stability of capital is the stated investment objective of a Balanced Mutual Fund.
Question 40
An investment in United States Treasury bonds may be subject to which of the following taxes?

I.     capital gains

II.    federal income

III.   state income

IV.   ad valorem

A
all of the above
B
I and III
C
I and II
D
II only
Question 40 Explanation: 
US Treasury securities are subject to Federal Income Tax, but are exempt from State Income Tax. Ad valorem taxes are taxes on property, such as a home or commercial building, not on securities investments. If an investor sells a T-bond in the secondary market at a capital gain, that gain is taxable.
Question 41
Direct institution to institution securities transactions are considered

A
a violation of the Securities & Exchange Act of 1934
B
the secondary market
C
the third market
D
the fourth market
Question 41 Explanation: 
The fourth market is direct trading between two institutional investors, with no broker/dealer involved. This is often referred to as trading on Instinet, which is a word combining the two words Institutional Network.
Question 42
According to the rules and regulations of the Options Clearing Corporation and the options exchanges, an equity call option may be covered by each of these except:

A
100 shares of the underlying common stock
B
cash equal to the aggregate exercise price of the option
C
a depository receipt for 100 shares of the underlying common stock
D
none of these are exceptions
Question 42 Explanation: 
Covered call writing requires the writer to own 100 shares of the underlying stock in their brokerage account, or provide their brokerage firm with a receipt from a bank or other depository institution showing that the bank is holding 100 shares of the underlying stock in their vault, stock which belongs to the option writer. Having enough cash on hand to buy 100 shares of the stock is not considered ‘covered’ under the OCC rules.
Question 43
The Daily Bond Buyer publishes information about the municipal securities business including the volume of new municipal issues coming to market over the next 30 days. This is referred to as:

A
the Bond Buyer Index
B
the new issue calendar
C
the placement ratio
D
the visible supply
Question 43 Explanation: 
The Daily Bond Buyer provides data for the municipal bond market, including the new municipal issues expected to come to market in the next 30 days, referred to as the Visible Supply.
Question 44
Uncovered short put exercise results in

A
acquisition of shares with a resulting cost basis of strike price less premium
B
liquidation of shares with a resulting sales proceeds of strike price less premium
C
the potential for unlimited loss
D
the potential for a maximum loss of strike price plus premium
Question 44 Explanation: 
The writer of a put option is obligated to purchase 100 shares at the strike price if the option is exercised. According to the Internal Revenue Code, if exercised, this investor would now be long 100 shares of stock with a ‘net’ cost of the strike price minus the premium. This net cost is the cost basis of the newly acquired shares.
Question 45
LMN corporation has 2 million shares authorized, of which 1 million have been issued and there are 100,000 shares of treasury stock on the balance sheet. If the Board declares a dividend of $200,000, the per-share dividend payout would be:

A
$ 0.20
B
$ 0.22
C
$ 5.00
D
$ 5.55
Question 45 Explanation: 
Dividends are paid on shares which are outstanding in the hands of investors, not on treasury stock. This company has issued 1 million shares, but has bought back 100,000 of those shares, referred to as treasury stock. There are only 900,000 outstanding shares. The dividend of $200,000 divided by the 900,000 shares outstanding:
= 22 cents dividend per share.
Question 46
Rose McGraw has given 1,000 shares of ABC common to her granddaughter under the UGMA regulations. ABC is currently trading at $14 and Rose’s initial cost for the shares nearly a decade ago was $7/share. For taxation purposes, the cost basis and date of acquisition for the granddaughter would be:

A
$7 cost basis and the date of acquisition is the date of the gift
B
$14 cost basis and the date of acquisition is the date of the gift
C
$7 cost basis and the date of acquisition is the donor’s date of purchase
D
$14 cost basis and the date of acquisition is the date of purchase by the donor
Question 46 Explanation: 
IRS regulations state that the donor’s cost and the donor’s date of purchase transfer over to the minor when a gift of securities is given under UGMA.
Question 47
A Eurodollar bond has each of the following characteristics except:

A
interest payments may be made in either US dollars or the currency of the nation in which the bond was issued.
B
its interest payments will be made in US dollars only.
C
these bonds are issued by either US or foreign corporations but are not issued in the United States.
D
principal is repaid at maturity in US dollars.
Question 47 Explanation: 
Owners of Eurodollar bonds cannot elect to have their interest payments in foreign currency -- it must be in U.S. dollars.
Question 48
Compute the taxable or corporate equivalent yield for a 4.5% GO in the portfolio of an investor in the 36% tax bracket.

A
4.5%
B
6.12%
C
7.03%
D
2.88%
Question 48 Explanation: 
The formula is:

Municipal yield divided by (100% minus investor’s tax bracket)

= 4.5% divided by (100% minus 36%)
= 4.5% divided by 64%
= 7.03%
Question 49
The breadth of the market is measured by the

A
put / call ratio
B
price / earnings ratio of the S&P 500
C
daily volume compared to the average daily volume
D
advance / decline ratio
Question 49 Explanation: 
In securities analysis, the breadth of the market is measured by the ratio of advancing stocks to declining stocks.
Question 50
A margin account customer buys 100 shares of JKS common at 80 and deposits the required Reg. T margin. A week later with JKS at 90, the account has SMA of:

A
$ 250
B
$ 500
C
$ 1,000
D
$ 2,000
Question 50 Explanation: 
The initial purchase of $8,000 at 50% Reg. T requires a down payment of $4,000 and creates a loan from the broker to the client of $4,000, referred to as the customer’s debit balance. With the stock rising to 90, the CMV is now $9,000 while the debit balance does not change.

The client’s new equity is $5,000, found by taking CMV minus debit balance = $9,000 minus $4,000.

However, Reg. T only requires equity of 50% of CMV, which on a $9,000 position is a Reg. T required equity of $4,500.

Your client’s equity of $5,000 exceeds Reg. T by $500.

The new equity of $5,000 minus the Reg. T equity of $4,500 = $500.

This $500 is commonly referred to as SMA, and is also called excess equity, also called Reg. T excess, and is also referred to as the client’s ‘line of credit.’
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