Series 7 exam 26 || with Error-free Solutions.
Once registration is effective for a non-exempt new issue, customers that previously received a
preliminary prospectus during the 20-day cooling off period are:
A. automatically confirmed with a purchase of the issue
B. contacted by the underwriter to see if they wish to purchase the issue
C. obligated to buy an amount of the issue determined by the underwriter
D. permitted to make a competitive bid for the issue correct answers The best answer is B. Once
registration is effective, customers, who previously received a preliminary prospectus during the
20-day cooling off period, may be contacted by the underwriter to see if they wish to purchase
the issue
The term "flow of funds" found in a trust indenture applies to municipal:
A. revenue bonds
B. general obligation bonds
C. special assessment bonds
D. bond anticipation notes correct answers The best answer is A. The term "flow of funds"
means the order in which revenues will be applied under the terms of a revenue bond trust
indenture. The typical order is to apply revenues first to operation and maintenance; then to debt
service; followed by debt service reserve; and last to operation and maintenance reserve.
In 2019, a self-employed individual earns $350,000 for the year. The maximum contribution that
can be made to an HR10 plan for this year is:
A. $6,000
B. $56,000
C. $70,000
D. $75,000 correct answers The best answer is B. The maximum contribution to a Keogh is
effectively 20% of income (prior to taking the Keogh "deduction") or $56,000 in 2019,
whichever is less. 20% of $350,000 = $70,000. However, only the $56,000 maximum can be
contributed in 2019. (Note that this amount is adjusted each year for inflation.)
A representative gives a seminar to investors, making a presentation about successful hedge fund
strategies. It is attended by 30 retail clients and 20 institutional clients. FINRA defines this as:
A. an advertisement
B. a solicitation
C. a retail communication
D. correspondence correct answers The best answer is C.
FINRA has 2 main categories of communications to retail clients:
Correspondence: A communication to 25 or fewer existing or prospective retail clients
Retail Communication: A communication to more than 25 existing or prospective retail clients
Excluded from these definitions are Institutional communications and Public appearances.
,Correspondence, Institutional Communications, and Public Appearances are not subject to prior
principal approval - rather, FINRA states that as long as the firm has appropriate supervisory
procedures in place, they are subject to "post use review and approval." They are also not subject
to FINRA filing rules.
In contrast, retail communications must be approved by a principal prior to use and are subject to
FINRA filing rules.
Because this is a communication to 30 retail clients (the number of institutional clients is
irrelevant), this is defined as a "retail communication."
Which of the ratings agencies listed below would most likely rate a municipal hospital revenue
bond issue for credit risk?
A. Moody's
B. Morningstar
C. Fitch's
D. Best's correct answers The best answer is A. Moody's and Standard and Poor's are, by far, the
largest of the ratings firms. Both rate municipal revenue bonds. Standard and Poor's rates issues
if the issuer pays; Moody's rates issues whether the issuer pays or not - their stance is that they
are Moody's Investors Services, and their ratings are a service to the investor (though paid for by
the issuer). Fitch's is a much smaller ratings agency and concerns itself mainly with rating
corporate issues. Morningstar rates mutual funds, not municipal bonds. Best's rates insurance
companies, not securities.
When a customer buys a new stock issue from a syndicate member, the customer pays:
A. the public offering price as stated in the prospectus plus a commission
B. the public offering price as stated in the prospectus plus a mark-up
C. the public offering price as stated in the prospectus without any commission
D. any price since this is a negotiated market offering correct answers The best answer is C.
New stock issues are sold under a prospectus that states the Public Offering Price which is
inclusive of any compensation to the underwriter (the spread). Additional commissions or
charges above the P.O.P. are not allowed.
An equity REIT would most likely invest in all of the following EXCEPT:
A. apartments
B. office buildings
C. shopping malls
D. industrial parks correct answers The best answer is D. An equity REIT invests in income
producing real estate. These include apartment buildings, shopping centers, and office buildings.
The key here is that these have a large, diverse tenant pool. If any one tenant moves out, that will
not have a great impact on the income stream. Industrial parks usually have only a few large
tenants, not a lot of smaller tenants.
, If interest rates are rising rapidly, which U.S. Government debt prices would be LEAST volatile?
A. Treasury Bills
B. Treasury Notes
C. Treasury Bonds
D. Treasury STRIPS correct answers The best answer is A. The shorter the maturity, the lower
the price volatility of a negotiable debt instrument. Of the choices listed, Treasury Bills have the
shortest maturity. Treasury STRIPS are a zero-coupon T-Bond issue with a long maturity, and
would be the most volatile of all the choices offered.
Selling group members earn which of the following discounts for selling a new municipal
offering directly to the public?
A. Selling Concession
B. Additional Takedown
C. Total Takedown
D. Reallowance correct answers The best answer is A. The takedown (also called the "total
takedown") is the discount given by the manager to the syndicate members. This amount is
earned by the syndicate member when he or she sells a bond directly to the public. The takedown
consists of 2 pieces: the selling concession and the additional takedown. When a syndicate
member sells a bond to the public, both pieces are earned. If a selling group member found the
customer for the bond, the syndicate member gives up the selling concession to the selling group
member. Thus, the selling group member earns the selling concession, leaving the syndicate
member with the additional takedown only on that sale.
Time extensions for payment that have not been received within the Reg. T time frame are
granted by the:
A. Federal Reserve Board
B. Securities and Exchange Commission
C. Financial Industry Regulatory Authority
D. Bank lender to the broker-dealer correct answers The best answer is C.
Regulation T of the Federal Reserve Board requires that customers pay for securities purchases
"promptly" but no later than "S + 2" = industry regular way settlement + 2 business days. Under
extraordinary circumstances, a Reg. T extension may be requested from FINRA. This extension
gives another 2 business days for collection. Also note that if FINRA grants a 2 day extension,
the member firm may shorten this period of time to the customer.
If no payment is made, the unpaid position must be liquidated and the account "frozen" for 90
days. When the account is frozen, the customer must pay in advance for purchases.
All of the following securities are redeemable EXCEPT:
A. Common stock mutual funds
B. Bond mutual funds
C. Corporate debentures
