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Series 7 Midterm questions with complete solutions
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Series 7 Midterm questions with complete solutions
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Series 7 MidtermWhat term would apply to Authorized Stock?
A. Issued
B. Outstanding
C. Voting
D. Par Value - correct answer ✔✔The best answer is D.
Authorized stock is the total number of shares that the company is "authorized" to sell. Issued stock is
the number of shares that have actually been sold to the public out of the authorized total. Outstanding
stock is the number of shares that are outstanding in the hands of the public and is: Issued stock -
Repurchased Shares (such as shares repurchased for Treasury). The only stock that votes and that
receives dividends is Outstanding shares.Par value is the term that applies to all stock, whether it is
Authorized, Issued, or Outstanding.
A customer holds 100 shares of ABC Corp $100 par convertible preferred stock convertible at a 10 to 1
ratio. If ABC declares and pays a 10% stock dividend, then as of the payable date, the customer will now
have:
A. 90 shares of ABC preferred stock
B. 100 shares of ABC preferred stock
C. 100 shares of ABC preferred stock and 10 shares of ABC common stock
D. 110 shares of ABC preferred stock - correct answer ✔✔The best answer is B.
If ABC declares and pays a 10% "common" stock dividend, the customer who holds convertible preferred
stock still would have 100 shares. However, the conversion ratio which was initially 10 to 1 would reflect
the stock dividend and would get adjusted to an 11 to 1 ratio (10% additional common shares into which
the preferred is convertible). With a new conversion ratio of 11 to 1, the conversion price per share
becomes: $100 par / 11 shares = $9.09 per share.
To be entitled to the dividend declared September 25th, a purchaser must show on the record books of
the company on:
A. September 25th
,B. October 16th
C. October 18th
D. October 30th - correct answer ✔✔The best answer is C.
The record date is set at October 18th for the dividend that was declared on September 25th.
When is the earliest date that the stock can be sold regular way and still allow the customer to receive
the dividend payable Oct 30th?
A. October 15th
B. October 16th
C. October 17th
D. October 18th - correct answer ✔✔The best answer is B.
The ex date for the dividend payable October 30th is set at October 16th. If the stock is sold prior to this
date, the new buyer would be on record to receive the dividend. If the stock is sold on the ex date or
later, the seller is on the record books for the dividend payment.
Corporate bonds are quoted on what basis?
A. Yield to maturity
B. Dollar price
C. Discount yield
D. Nominal yield - correct answer ✔✔The best answer is B.
Corporate bonds are usually term bonds - all bonds of an issue having the same interest rate and
maturity. Term bonds are quoted on a percentage of par basis in 1/8ths, which is the same as a "dollar"
quote.
During a period when the yield curve is inverted:
A. short term bond prices are more volatile than long term bond prices
B. long term bond prices are more volatile than short term bond prices
C. short term and long term bond prices are equally volatile
, D. no relationship exists between short term and long term bond price changes - correct answer ✔✔The
best answer is B.
Whether the yield curve is ascending (normal), flat or inverted, long term bond prices always move
faster than short term bond prices, as interest rates change. This is due to the compounding effect on
the bond's price that occurs, which increases with longer maturities.
At what price did the Crane bonds close at on the preceding trading day?
A. 79 3/4
B. 80 1/4
C. 80 3/4
D. 81 1/4 - correct answer ✔✔The best answer is B.
The Crane bonds closed this day at 80 3/4, up 1/2 from the preceding trading day. Therefore, yesterday
the bonds closed 1/2 point lower at 80 1/4.
Which statement is FALSE regarding Treasury Inflation Protection securities?
A. In periods of deflation, the amount of each interest payment will decline
B. In periods of deflation, the interest rate is unchanged
C. In periods of deflation, the principal amount received at maturity will decline below par
D. In periods of deflation, the principal amount received at maturity is unchanged at par - correct
answer ✔✔The best answer is C.
Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is
adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a
higher interest payment, due to the increased principal amount. When the bond matures, the holder
receives the higher principal amount. In periods of deflation, the principal amount is adjusted
downwards. Even though the interest rate is fixed, the holder receives a lower interest payment, due to
the decreased principal amount. In this case, when the bond matures, the holder receives par - not the
decreased principal amount.
Which statements are TRUE about PO tranches?
I Payments are larger in the early years
II Payments are smaller in the early years
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