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Wiley Series 7 Securities Licensing Exam Review 2019 + Test Bank: The General Securities Representative Examination

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Wiley Series 7 Securities Licensing Exam Review 2019 + Test Bank: The General Securities Representative Examination

Wiley

ISBN: 978-1-119-55383-0 December 2018 640 Pages

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Description

The most comprehensive guide to the Series 7 exam in the marketplace includes a self-directed study guide with all the most essential information to becoming a stockbroker. Areas covered include: Stocks, Debt Securities, Investment Banking, Securities Markets, Taxes, Securities Analysis, Self-Regulatory Organizations (SRO's), Mutual Funds and Investment Companies, Annuities, Margin, Options, Money Market Instruments, Direct Participation Programs and Municipal Securities. There is no prerequisite exam for the FINRA Series 7, however, test takers will be required to take the Series 63 or Series 66 as co-requisite exams. The Series 7 exam is made up of 260 multiple-choice questions of which 10 are experimental. Each student will be given a total of 6 hours for the exam (3 hours for each half). A grade of 72 is considered passing. This book includes multiple practice exams to help test takers improve their scores. The General Securities Representative Examination (Series 7) is an entry-level examination that qualifies the individual for registration with all self-regulatory organizations to trade, promote, and sell:

  • Public offerings and/or private placements of corporate securities (stocks and bonds)
  • rights
  • warrants
  • mutual funds
  • money market funds
  • unit investment trusts
  • REITS
  • asset-backed securities
  • mortgage-backed securities
  • options
  • options on mortgage-backed securities
  • municipal securities
  • government securities
  • repos and certificates of accrual on government securities
  • direct participation programs
  • securities traders
  • venture capital
  • ETFs
  • hedge funds

ABOUT THE SERIES 7 EXAM xxiii

ABOUT THIS BOOK xxvii

ABOUT THE TEST BANK xxviii

ABOUT THE SECURITIES INSTITUTE OF AMERICA xxix

CHAPTER 1 EQUITY SECURITIES 1

What Is a Security? 1

Equity = Stock 2

Common Stock 2

Preferred Stock 14

Currency Risks 22

Functions of the Custodian Bank Issuing ADRs 23

Real Estate Investment Trusts (REITs) 23

Non-Traded REITs 24

Pretest 25

CHAPTER 2 DEBT SECURITIES 29

Corporate Bonds 29

Types of Bond Issuance 30

Bond Certificate 31

Bond Pricing 31

Corporate Bond Pricing 32

Bond Yields 32

Yield Spreads 36

The Real Interest Rate 37

Bond Maturities 37

Types of Corporate Bonds 38

Converting Bonds into Common Stock 41

Advantages of Issuing Convertible Bonds 42

Disadvantages of Issuing Convertible Bonds 42

Convertible Bonds and Stock Splits 42

Reverse Convertible Securities 42

Forced Conversion 43

The Trust Indenture Act of 1939 43

Bond Indenture 43

Ratings Considerations 44

Retiring Corporate Bonds 44

Collateralized Mortgage Obligation (CMO) 46

CMOs and Interest Rates 47

Types of CMOs 47

Private-Label CMOs 49

Exchange-Traded Notes (ETNs) 49

Euro and Yankee Bonds 50

Variable Rate Securities 50

Pretest 51

CHAPTER 3 GOVERNMENT SECURITIES 55

Series EE Bonds 55

Series HH Bonds 56

Treasury Bills, Notes, and Bonds 56

Treasury Bond and Note Pricing 57

Treasury STRIPS 58

Treasury Receipts 58

Treasury Inflation-Protected Securities (TIPS) 59

Agency Issues 59

Government National Mortgage Association (GNMA) 59

Federal National Mortgage Association (FNMA) 60

Federal Home Loan Mortgage Corporation (FHLMC) 60

Federal Farm Credit System (FFCS) 60

Sallie Mae 61

Pretest 63

CHAPTER 4 MUNICIPAL SECURITIES 65

Municipal Bonds 65

Types of Municipal Bonds 66

Issuing Municipal Securities 70

Selecting an Underwriter 70

Creating a Syndicate 71

Syndicate Accounts 72

Submitting the Syndicate Bid 73

Determining the Reoffering Yield 73

Awarding the Issue 74

Underwriter’s Compensation 74

Order Period 76

Allocation Municipal Bond Orders 76

Sale Date 77

When Issued Confirmations 78

Final Confirmations 78

Other Types of Municipal Underwritings 79

Syndicate Operation and Settlement 79

The Official Statement 80

Bond Counsel 81

The Legal Opinion 81

Potential Conflicts of Interest for Municipal Bond Underwriters 82

Acting as a Financial Adviser to the Issuer 82

Information Obtained While Acting as a Fiduciary 82

Acting as a Financial Adviser and an Underwriter 83

Political Contributions 83

Municipal Bond Trading 85

Bona Fide Quotes 85

Informational Quotes 86

Out Firm Quotes 86

Executing a Customer’s Municipal Bond Orders 87

Customer Confirmations 88

Yield Disclosure 89

Sources of Municipal Bond Market Information 89

Recommending Municipal Bonds 90

Taxation of Municipal Bonds 90

Tax Equivalent Yield 91

Purchasing a Municipal Bond Issued in the State in which the Investor Resides 91

Triple Tax Free 92

Original Issue Discount (OID) and Secondary Market Discounts 92

Amortization of a Municipal Bond’s Premium 92

Bond Swaps 93

Analyzing Municipal Bonds 93

Analyzing General Obligation Bonds 93

The Debt Statement 94

Community Factors 95

Sources of Tax Revenue 95

Determining Property Taxes 96

Important Financial Ratios for General Obligation Bonds 96

Analyzing Revenue Bonds 97

Types of Revenue Pledge 97

Municipal Fund Securities 98

Municipal Securities Rulemaking Board (MSRB) 99

Pretest 103

CHAPTER 5 THE MONEY MARKET 109

Money Market Instruments 109

Corporate Money Market Instruments 109

Government Money Market Instruments 111

Municipal Money Market Instruments 112

International Money Market Instruments 112

Interest Rates 112

Pretest 115

CHAPTER 6 ECONOMIC FUNDAMENTALS 117

Gross Domestic Product (GDP) 117

Recession 119

Depression 119

Economic Indicators 119

Schools of Economic Thought 121

Economic Policy 122

Tools of the Federal Reserve Board 122

Fiscal Policy 125

Consumer Price Index (CPI) 126

Inflation/Deflation 126

Real GDP 126

International Monetary Considerations 127

Yield Curve Analysis 127

Pretest 129

CHAPTER 7 OPTIONS 133

Option Classification 133

Option Classes 134

Option Series 134

Bullish vs. Bearish 134

Possible Outcomes for an Option 135

Characteristics of All Options 136

Managing an Option Position 136

Buying Calls 137

Selling Calls 138

Buying Puts 140

Selling Puts 141

Option Premiums 143

At the Money Options 143

Out of the Money Options 144

Intrinsic Value and Time Value 144

Using Options as a Hedge 145

Long Stock Long Puts/Married Puts 145

Long Stock Short Calls/Covered Calls 147

Maximum Gain Long Stock Short Calls 148

Maximum Loss Long Stock Short Calls 149

Short Stock Long Calls 149

Maximum Gain Short Stock Long Calls 150

Maximum Loss Short Stock Long Call 151

Short Stock Short Puts 151

Maximum Gain Short Stock Short Puts 152

Maximum Loss Short Stock Short Puts 153

Multiple Option Positions and Strategies 154

Long Straddles 154

Short Straddles 156

Spreads 158

Combinations 169

Using a T Chart to Evaluate Option Positions 170

Index Options 174

Interest Rate Options 176

Price-Based Options 176

Rate-Based Options 178

Foreign Currency Options 178

The Option Clearing Corporation 180

The Options Markets 181

The Chicago Board Option Exchange 181

Opening and Closing Option Prices 183

Order Execution 183

Expiration and Exercise 184

American vs. European Exercise 184

Market Volatility Options/VIX 185

Flex Options 185

Weekly Options 186

Mini Options 186

Position and Exercise Limits 187

Stock Splits and Stock Dividends 187

Taxation of Options 188

Closing an Option Position 188

Exercising a Call 188

Exercising a Put 189

Protective Puts 189

Covered Calls 189

Retail Communication 189

Option Agreement 189

Pretest 191

CHAPTER 8 MUTUAL FUNDS 199

Investment Company Philosophy 199

Types of Investment Companies 200

Open-End vs. Closed-End Funds 201

Diversified vs. Nondiversified 202

Investment Company Registration 203

Investment Company Components 205

Mutual Fund Distribution 207

Selling Group Member 207

Distribution of No-Load Mutual Fund Shares 208

Distribution of Mutual Fund Shares 208

Mutual Fund Prospectus 208

Characteristics of Open-End Mutual Fund Shares 210

Mutual Fund Investment Objectives 211

Other Types of Funds 212

Alternative Funds 212

Floating Rate Bank Loan Funds 213

Bond Funds 213

Valuing Mutual Fund Shares 215

Changes in the NAV 216

Sales Charges 216

12B-1 Fees 219

Calculating a Mutual Fund’s Sales Charge Percentage 219

Finding the Public Offering Price 220

Sales Charge Reductions 220

Breakpoint Schedule 221

Letter of Intent 221

Backdating a Letter of Intent 222

Breakpoint Sales 222

Rights of Accumulation 222

Automatic Reinvestment of Distributions 223

Other Mutual Fund Features 223

Cost Base of Multiple Purchases 228

Purchasing Mutual Fund Shares 228

Sales Charges 231

45-Day Free Look 232

Withdrawal Plans 232

Recommending Mutual Funds 233

Structured Retail Products/SRPs 234

Pretest 235

CHAPTER 9 VARIABLE ANNUITIES 241

Annuities 241

Equity Indexed Annuity 244

Recommending Variable Annuities 245

Annuity Purchase Options 246

Accumulation Units 247

Annuity Units 247

Annuity Payout Options 247

Factors Affecting the Size of the Annuity Payment 249

The Assumed Interest Rate (AIR) 249

Taxation 250

Types of Withdrawals 250

Annuitizing the Contract 250

Expenses and Guarantees 251

Other Charges 251

Pretest 253

CHAPTER 10 ISSUING CORPORATE SECURITIES 257

The Securities Act of 1933 257

The Prospectus 258

The Final Prospectus 258

Free Writing Prospectus 259

Prospectus to Be Provided to Aftermarket Purchasers 260

SEC Disclaimer 260

Misrepresentations 260

Tombstone Ads 261

Free Riding and Withholding/FINRA Rule 5130 261

Underwriting Corporate Securities 262

Types of Underwriting Commitments 263

Types of Offerings 264

Awarding the Issue 265

The Underwiting Syndicate 265

Selling Group 265

Underwriter’s Compensation 265

Private Placements/Regulation D Offerings 267

Rule 144 268

Private Investment in a Public Equity (PIPE) 269

Regulation S Offerings 270

Regulation A Offerings 270

Rule 145 271

Rule 147 Intrastate Offering 271

Crowdfunding 272

Rule 415 Shelf Registration 273

Pretest 275

CHAPTER 11 TRADING SECURITIES 279

Types of Orders 279

The Exchanges 283

Priority of Exchange Orders 283

The Role of the Designated Market Maker (DMM) 284

The DMM Acting as a Principal 284

The DMM Acting as an Agent 285

Crossing Stock 286

Do Not Reduce (DNR) 287

Adjustments for Stock Splits 287

Stopping Stock 288

Commission House Broker 289

Two-Dollar Broker 289

Registered Traders 289

Super Display Book (SDBK) 289

Short Sales 290

Rule 200 Definitions and Order Marking 290

Rule 203 Security Borrowing and Delivery Requirements 292

Threshold Securities 292

Listing Requirements for the NYSE 294

Over the Counter/Nasdaq 294

Market Makers 294

Nasdaq Subscription Levels 295

Nasdaq Quotes 295

Nominal Nasdaq Quotes 296

Automated Confirmation System (ACT)/Trade Reporting Facility (TRF) 297

Nasdaq Execution Systems 297

The Nasdaq Market Center Execution System (NMCES) 297

The Nasdaq Opening Cross 297

Non-Nasdaq OTCBB 298

Regulation M, Rule 101 299

Penalty Bids 299

Regulation M, Rule 102 300

Regulation M, Rule 103 300

Passive Market Makers’ Daily Purchase Limit 301

Regulation M, Rule 104 301

Syndicate Short Positions 303

Regulation M, Rule 105 303

Pink OTC Market 303

Third Market 304

Fourth Market 304

Reading the Consolidated Tape 304

Exchange Qualifiers 306

Broker vs. Dealer 306

FINRA 5% Markup Policy 307

Markups/Markdowns When Acting as a Principal 307

Riskless Principal Transactions 308

Proceeds Transactions 309

The Order Audit Trail System (OATS) 309

Trade Reporting and Compliance Engine (TRACE) 309

Circuit Breakers 310

Limit Up Limit Down (LULD) 311

Arbitrage 311

Pretest 313

CHAPTER 12 CUSTOMER ACCOUNTS 317

Holding Securities 319

Mailing Instructions 320

Types of Accounts 321

Commingling Customers’ Pledged Securities 331

Wrap Accounts 332

Regulation S-P 332

Identity Theft 333

Day Trading Accounts 333

ABLE Accounts 334

FINRA Rules on Financial Exploitation of Seniors 335

Pretest 337

CHAPTER 13 MARGIN ACCOUNTS 341

Regulation of Credit 341

Regulation T 341

House Rules 344

Establishing a Long Position in a Margin Account 344

An Increase in the Long Market Value 345

Special Memorandum Account (SMA) Long Margin Account 347

A Decrease in the Long Market Value 349

Minimum Equity Requirement Long Margin Accounts 349

Establishing a Short Position in a Margin Account 350

A Decrease in the Short Market Value 351

Special Memorandum Account (SMA) Short Margin Account 352

An Increase in the Short Market Value 353

Minimum Equity Requirement Short Margin Accounts 354

Combined Margin Accounts 355

Portfolio Margin Accounts 355

Securities Backed Lines of Credit 356

Minimum Margin for Leveraged ETFs 356

Pretest 357

CHAPTER 14 RETIREMENT PLANS 361

Individual Plans 361

Individual Retirement Accounts (IRAs) 362

Traditional IRAs 362

Roth IRAs 363

Simplified Employee Pension IRA (SEP IRA) 364

Educational IRA/Coverdell IRA 366

Tax-Sheltered Annuities (TSAs)/Tax-Deferred Accounts (TDAs) 370

Corporate Plans 372

Rolling Over a Pension Plan 374

Health Savings Accounts 374

Employee Retirement Income Security Act of 1974 (ERISA) 375

ERISA 404C SAFE HARBOR 377

Department of Labor Fiduciary Rules 377

Pretest 379

CHAPTER 15 BROKERAGE OFFICE PROCEDURE 383

Executing an Order 383

Customer Confirmations 385

Clearly Erroneous Reports 386

Execution Errors 386

Corporate and Municipal Securities Settlement Options 386

RVP/DVP/COD 387

When-Issued Securities 387

Government Securities Settlement Options 388

Accrued Interest 388

Calculating Accrued interest 389

Accrued Interest for Government Notes and Bonds 390

Rules for Good Delivery 391

Delivery of Round Lots 392

Delivery of Bond Certificates 392

Rejection of Delivery 393

Don’t Know (DK) Procedures 393

Fail to Deliver/Fail to Receive 393

Due Bills 393

Customer Account Statements 394

Carrying of Customer Accounts 394

Proxies 395

Pretest 397

CHAPTER 16 FUNDAMENTAL AND TECHNICAL ANALYSIS 403

Fundamental Analysis 403

The Balance Sheet 404

Industry Fundamentals 411

Top Down and Bottom up Analysis 412

Technical Analysis 412

Market Theories and Indicators 416

Efficient Market Theory 417

Pretest 419

CHAPTER 17 DIRECT PARTICIPATION PROGRAMS 421

Limited Partnerships 421

Structuring and Offering Limited Partnerships 423

Types of Limited Partnerships 424

Oil and Gas Sharing Arrangements 426

Equipment Leasing Programs 426

Tax Reporting for Direct Participation Programs 427

Limited Partnership Analysis 427

Tax Deductions vs. Tax Credits 428

Other Tax Considerations 428

Dissolving a Partnership 428

Pretest 431

CHAPTER 18 CUSTOMER RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION 435

Professional Conduct in the Securities Industry 436

Fair Dealings with Customers 436

Periodic Payment Plans 441

Mutual Fund Current Yield 441

Information Obtained from an Issuer 441

Disclosure of Client Information 442

Borrowing and Lending Money 442

Gift Rule 442

Outside Employment 443

Private Securities Transactions 443

Customer Complaints 443

Investor Information 444

NYSE/FINRA Know Your Customer 444

Investment Objectives 445

Risk vs. Reward 447

Alpha 449

Beta 449

Capital Asset Pricing Model (CAPM) 449

Products Made Available through Member Firms 450

Recommendations through Social Media 451

Tax Structure 452

Investment Taxation 452

Calculating Gains and Losses 453

Cost Base of Multiple Purchases 453

Deducting Capital Losses 454

Wash Sales 454

Taxation of Interest income 455

Inherited Securities 456

Donating Securities to Charity 456

Gift Taxes 456

Estate Taxes 457

Withholding Tax 457

Corporate Dividend Exclusion 457

Alternative Minimum Tax (AMT) 457

Taxes on Foreign Securities 458

Pretest 459

CHAPTER 19 SECURITIES INDUSTRY RULES AND REGULATIONS 465

The Securities Exchange Act of 1934 465

The Securities and Exchange Commission (SEC) 466

Extension of Credit 467

The National Association of Securities Dealers (NASD) 467

Becoming a Member of FINRA 469

Hiring New Employees 470

Disciplinary Actions against a Registered Representative 471

Resignation of a Registered Representative 472

Continuing Education 472

Termination for Cause 474

Retiring Representatives/Continuing Commissions 474

State Registration 474

Registration Exemptions 475

Persons Ineligible to Register 475

Communications with the Public 475

FINRA Rule 2210 Communications with the Public 476

Broker Dealer Websites 479

Blind Recruiting Ads 480

Generic Advertising 480

Tombstone Ads 480

Testimonials 481

Free Services 481

Misleading Communication with the Public 482

Securities Investor Protection Corporation Act of 1970 482

Net Capital Requirement 482

Customer Coverage 483

Fidelity Bond 483

The Securities Acts Amendments of 1975 483

The Insider Trading & Securities Fraud Enforcement Act of 1988 484

Firewall 484

Telemarketing Rules 485

Do Not Call List Exemptions 486

The Penny Stock Cold Call Rule 486

The Role of the Principal 487

Violations and Complaints 487

Resolution of Allegations 487

Minor Rule Violation 488

Code of Arbitration 488

The Arbitration Process 489

Mediation 490

Currency Transactions 491

The Patriot Act 491

U.S. Accounts 493

Foreign Accounts 493

Annual Compliance Review 493

Business Continuity Plan 493

Sarbanes-Oxley Act 494

The Uniform Securities Act 495

Tender Offers 496

Stockholders Owning 5% of an Issuer’s Equity Securities 497

Pretest 499

ANSWER KEYS 505

GLOSSARY OF EXAM TERMS 523

INDEX 589