Series 7 practice exam multiple choice
When discussing a corporation's capitalization, each of the below would be included except:
A: non-voting class B preferred stock
B: subordinated debentures rated BB+ by Standard & Poor's
C: earned surplus
D: plant & equipment - correct answer ✔✔Plant and equipment
Capitalization includes Stockholders' Equity and Long-term Debt. Plant & Equipment are Fixed Assets,
which are assets purchased with the Capital raised by the business but are not themselves considered
Capital
Miami-Dade County currently has the following four GOs outstanding. All issues possess a call feature
and have coupons and maturities as shown below. Assume all issues have similar principal amounts
outstanding. In the event interest rates decline, and the County plans to do a refunding of only one of
the four outstanding GOs, which issue would most likely be called?
A :6.25s31 callable at 100
B 5.50s33 callable at 100½
C 4.65s34 callable at 101
DZr29 callable at 100 - correct answer ✔✔A :6.25s31 callable at 100
f you were in charge of finances for the county and you were considering paying off only one of your
debts, wouldn't it be the debt that's costing the county the most (the highest interest rate)? In this
scenario, the county will retire/call the 6.25% callable bonds because those are costing the county the
most every year. Also notice that those bonds have an added advantage - they are callable at 100, which
means at Par, meaning there is no call 'premium' required to retire them.
When viewing the latest quotes on T-bills, you note that the current quote on the new 3 month Bills,
0.50 − 0.55, is somewhat higher than the quote on new 3 month Bills at the previous auction.
,A T-bill prices have risen
B The yield curve is inverting
C The Fed is easing the money supply
D T-bill discounts have increased - correct answer ✔✔D T-bill discounts have increased
T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes represent the
percentage of Discount from Par Value at which banks and dealers purchase T-bills at the Fed Auction. If
you're told that this week's quotes, which are discounts from par, are HIGHER than the discounts from
last week, that means T-Bill purchase prices have gotten LOWER -----we all know that when department
stores increase the DISCOUNT, the price in dollars gets cheaper. It's the same with T-bills. For any of you
who put answer A, it is wrong because it says prices have gone up. When a discount gets higher/bigger,
the sale price goes down.
CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures outstanding
with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are above parity, CPU
common must be trading:
A at 27.50
B at 27.49 or below
C at 27.51 or above
D at 44.00 - correct answer ✔✔B at 27.49 or below
Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is $1,100. The bond
is convertible into 40 shares: that's the 40 to 1 conversion ratio given in the question.
that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the stock can't
be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49 (or below) is less than
$1,100.
All of the below represent bond sweeteners with the exception of:
A a put option
B cum-warrants
C a call feature
D convertibility - correct answer ✔✔C a call feature
,A sweetener is a feature that is good for investors. Owning a callable bond exposes one to call risk, which
is not considered desirable by bond investors. Call risk is the risk of having one's portfolio altered when
the issuer chooses to call the bonds. Having a put feature, a conversion feature, or warrants attached to
a bond can be desirable and even highly profitable
Stabilizing a new stock issue
I. may occur once the S-1 has been filed with the SEC
II. may only occur if disclosed in the final prospectus
IIII. may not occur at or above the POP
IV. if necessary, is normally a function performed by a syndicate manager
A I and III
B II and IV
C III and IV
D I, II, III and IV - correct answer ✔✔B II and IV
Stabilizing a new issue can only be done once the effective date of the new issue has arrived. It isn't
done during the cooling off period, which is prior to the effective date. Stabilizing is normally done by the
managing underwriting either at, or just below, the POP (public offering price). It cannot be done above
the POP
Lyon Technology is being quoted by 3 market makers as follows:
Market Maker A 42.22 - 42.72 10 by 15
Market Maker B 42.28 - 42.75 15 by 10
Market Maker C 42.20 - 42.68 5 by 5
If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech common, the
mark-up or mark-down would be based upon:
A 42.68
B 42.75
, C 42.20
D 42.28 - correct answer ✔✔D 42.28
Question 7 Explanation: The key words in this question are 'customer sell order.' Your client is selling TO
your firm. Your firm will give the client the BEST BID price available at this time, then charge a fair
reasonable mark-down in accordance with the FINRA 5% policy. The best bid is the HIGHEST of all the
bids on the NASDAQ screen, which in this case is $42.28, the bid of Market Maker B.
Your firm is the lead underwriter of a $100,000,000 municipal general obligation offering of New York
City. One of the key elements in the list of disclosures to prospective investors is the legal opinion. Pick
from the below who prepares and issues the legal opinion for this bond issue?
A the City Attorney for NYC
B the Attorney General for NY State
C the lead underwriter's chief counsel
D independent bond counsel - correct answer ✔✔D independent bond counsel
Question 8 Explanation: No lawyer connected in any way to the issuer or the underwriter can issue the
legal opinion on a municipal bond. The law firm rendering the opinion must be 'independent.'
As an RR, you've determined that investment companies would be a suitable product for several of your
customers. In your research, you've located two companies and their NAV and Offer Prices respectively
are shown below:
Company A: 18.45 − 20.25
Company B: 8.79 − 8.15
Which of these companies could be an open-end management investment company?
A Company A only
B Company B only
C Both A & B
D Neither A nor B - correct answer ✔✔D Neither A nor B
When discussing a corporation's capitalization, each of the below would be included except:
A: non-voting class B preferred stock
B: subordinated debentures rated BB+ by Standard & Poor's
C: earned surplus
D: plant & equipment - correct answer ✔✔Plant and equipment
Capitalization includes Stockholders' Equity and Long-term Debt. Plant & Equipment are Fixed Assets,
which are assets purchased with the Capital raised by the business but are not themselves considered
Capital
Miami-Dade County currently has the following four GOs outstanding. All issues possess a call feature
and have coupons and maturities as shown below. Assume all issues have similar principal amounts
outstanding. In the event interest rates decline, and the County plans to do a refunding of only one of
the four outstanding GOs, which issue would most likely be called?
A :6.25s31 callable at 100
B 5.50s33 callable at 100½
C 4.65s34 callable at 101
DZr29 callable at 100 - correct answer ✔✔A :6.25s31 callable at 100
f you were in charge of finances for the county and you were considering paying off only one of your
debts, wouldn't it be the debt that's costing the county the most (the highest interest rate)? In this
scenario, the county will retire/call the 6.25% callable bonds because those are costing the county the
most every year. Also notice that those bonds have an added advantage - they are callable at 100, which
means at Par, meaning there is no call 'premium' required to retire them.
When viewing the latest quotes on T-bills, you note that the current quote on the new 3 month Bills,
0.50 − 0.55, is somewhat higher than the quote on new 3 month Bills at the previous auction.
,A T-bill prices have risen
B The yield curve is inverting
C The Fed is easing the money supply
D T-bill discounts have increased - correct answer ✔✔D T-bill discounts have increased
T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes represent the
percentage of Discount from Par Value at which banks and dealers purchase T-bills at the Fed Auction. If
you're told that this week's quotes, which are discounts from par, are HIGHER than the discounts from
last week, that means T-Bill purchase prices have gotten LOWER -----we all know that when department
stores increase the DISCOUNT, the price in dollars gets cheaper. It's the same with T-bills. For any of you
who put answer A, it is wrong because it says prices have gone up. When a discount gets higher/bigger,
the sale price goes down.
CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures outstanding
with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are above parity, CPU
common must be trading:
A at 27.50
B at 27.49 or below
C at 27.51 or above
D at 44.00 - correct answer ✔✔B at 27.49 or below
Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is $1,100. The bond
is convertible into 40 shares: that's the 40 to 1 conversion ratio given in the question.
that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the stock can't
be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49 (or below) is less than
$1,100.
All of the below represent bond sweeteners with the exception of:
A a put option
B cum-warrants
C a call feature
D convertibility - correct answer ✔✔C a call feature
,A sweetener is a feature that is good for investors. Owning a callable bond exposes one to call risk, which
is not considered desirable by bond investors. Call risk is the risk of having one's portfolio altered when
the issuer chooses to call the bonds. Having a put feature, a conversion feature, or warrants attached to
a bond can be desirable and even highly profitable
Stabilizing a new stock issue
I. may occur once the S-1 has been filed with the SEC
II. may only occur if disclosed in the final prospectus
IIII. may not occur at or above the POP
IV. if necessary, is normally a function performed by a syndicate manager
A I and III
B II and IV
C III and IV
D I, II, III and IV - correct answer ✔✔B II and IV
Stabilizing a new issue can only be done once the effective date of the new issue has arrived. It isn't
done during the cooling off period, which is prior to the effective date. Stabilizing is normally done by the
managing underwriting either at, or just below, the POP (public offering price). It cannot be done above
the POP
Lyon Technology is being quoted by 3 market makers as follows:
Market Maker A 42.22 - 42.72 10 by 15
Market Maker B 42.28 - 42.75 15 by 10
Market Maker C 42.20 - 42.68 5 by 5
If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech common, the
mark-up or mark-down would be based upon:
A 42.68
B 42.75
, C 42.20
D 42.28 - correct answer ✔✔D 42.28
Question 7 Explanation: The key words in this question are 'customer sell order.' Your client is selling TO
your firm. Your firm will give the client the BEST BID price available at this time, then charge a fair
reasonable mark-down in accordance with the FINRA 5% policy. The best bid is the HIGHEST of all the
bids on the NASDAQ screen, which in this case is $42.28, the bid of Market Maker B.
Your firm is the lead underwriter of a $100,000,000 municipal general obligation offering of New York
City. One of the key elements in the list of disclosures to prospective investors is the legal opinion. Pick
from the below who prepares and issues the legal opinion for this bond issue?
A the City Attorney for NYC
B the Attorney General for NY State
C the lead underwriter's chief counsel
D independent bond counsel - correct answer ✔✔D independent bond counsel
Question 8 Explanation: No lawyer connected in any way to the issuer or the underwriter can issue the
legal opinion on a municipal bond. The law firm rendering the opinion must be 'independent.'
As an RR, you've determined that investment companies would be a suitable product for several of your
customers. In your research, you've located two companies and their NAV and Offer Prices respectively
are shown below:
Company A: 18.45 − 20.25
Company B: 8.79 − 8.15
Which of these companies could be an open-end management investment company?
A Company A only
B Company B only
C Both A & B
D Neither A nor B - correct answer ✔✔D Neither A nor B
