Series 7 Example Questions
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In order to render an opinion on a new municipal bond issue, the bond counsel will examine all of the following EXCEPT:
A ) Municipal statutes
B ) State constitution and amendments
C ) Tax code and interpretive regulations
D ) Securities Act of 1933
Rationale: The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he examines municipal statutes, state laws, judicial edicts, and tax regulations. Municipal securities, as well as Government and Agency securities, are exempt from the provisions of the Securities Acts (with the exception of these Acts’ broadly written anti-fraud provisions). Thus, these would not be examined by the bond counsel in connection with rendering a legal opinion.
A customer owning 100 shares of stock could receive protection by:
A ) Buying another 100 shares of the stock
B ) Buying a car
C ) Buying a put
D ) Selling a put
Rationale: In order to hedge a long stock position against a downside market move, the best choice is to buy a put. The long put option allows the holder to put (sell) the stock at the exercise price if the market falls - protecting the stock position from downside market risk.
What is the formula for equity in a Short Margin Account?
A ) + Credit - Short Market Value = Equity
B ) + Credit + Short Market Value = Equity
C ) - Credit + Short Market Value = Equity
D ) - Credit - Short Market Value = Equity
Rationale: The formula for Equity in a Short Margin Account is:
Credit Balance - Short Market Value = Equity
All of the following statements are true regarding the municipal financial advisor in competitive bid underwritings EXCEPT the:
A ) Issuer pays the financial advisor
B ) Financial advisor will be the underwriter of the offering
C ) Financial advisor is usually a municipal broker-dealer
D ) Financial advisor helps the issuer structure a new bond offering
Rationale: Financial advisors to municipalities are municipal broker-dealers familiar with the municipal marketplace. The financial advisor helps a municipality structure a competitive bid offering, receiving a fee from the municipality for this service. The firm that acts as the advisor attempts to get the lowest interest cost for the issuer. If the same firm were to be the underwriter, there is an inherent conflict of interest. As the underwriter, the firm wants to get the highest interest rate from the issuer, which makes the issuer easier to sell. The firm that acts as the financial adviser cannot be the underwriter in the deal - and this is true for both competitive bid and negotiated offerings.
The Securities Act of 1933 is primarily concerned with registration of:Which of the following is defined as options “advertising”?
A ) Options disclosure document
B ) Standard option worksheet
C ) Options website
D ) Letters of an “individual” nature sent to customers
Rationale: Options advertising is defined as any sales material that reaches a public audience through a mass medium, including: websites, newspapers, periodicals, magazines, radio, television, telephone recordings, motion pictures, billboards, signs, or through sales communications to the public.
A letter sent to a customer is defined as correspondence; an options worksheet is defined as sales literature. The Options Disclosure Document (ODD) is the required offering information that must be given to customers when they open an options account; and that must accompany or precede any options communication that makes a recommendation; that shows past performance; or that makes a projection.