Wiley Series 7 Exam Review 2016 + Test Bank: The General Securities Representative Examination

The go–to guide to acing the Series 7 Exam!

The General Securities Representative Examination (Series 7) is an entry–level exam that qualifies individuals for registration with all self–regulatory organizations to trade, promote, and sell all forms of general securities.

This intense six–hour test is the must–pass exam for aspiring financial professionals. The exam consists of 250 questions about everything from stocks and stock markets, government securities, municipal and corporate bonds, and options to rules for acquiring customers and handling their accounts, general economic theory, and the rules and regulations of the Securities and Exchange Commission.

Created by the experts at The Securities Institute of America, Inc., Wiley Series 7 Exam Review 2016 arms you with what you need to score high on the test and pass the Series 7 Exam. Designed to let you build and fine–tune your knowledge of all areas covered and guarantee that you′re prepared mentally and strategically to take the test, it provides:

Hundreds of examples Assorted practice questions for each subject area covered in the exam Priceless test–taking tips and strategies Helpful hints on how to study for the test, manage stress, and stay focused

Wiley Series 7 Exam Review 2016 is your ticket to passing the test with flying colors on the first try and becoming a registered General Securities Representative.

Visit www.wileysecuritieslicensing.com for more information.

The Securities Institute of America, Inc. helps thousands of securities and insurance professionals build successful careers in the financial services industry every year. Our securities training options include:

Onsite classes Private tutoring Classroom training Interactive online video training classes State–of–the–art exam preparation software Printed textbooks Real–time tracking and reporting for managers and training directors

As a result, you can choose a securities training solution that matches your skill level, learning style, and schedule. Regardless of the format you choose, you can be sure that our securities training courses are relevant, tested, and designed to help you succeed. It is the experience of our instructors and the quality of our materials that make our courses requested by name at some of the largest financial services firms in the world.

To contact The Securities Institute of America, visit us on the web at www.SecuritiesCE.com or call 877–218–1776.

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

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 Infl ation–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

Position and Exercise Limits 186

Stock Splits and Stock Dividends 187

Taxation of Options 188

Closing an Option Position 188

Exercising a Call 188

Exercising a Put 188

Protective Puts 188

Covered Calls 189

Option Compliance 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 210

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

Calculating a Mutual Fund s Sales Charge Percentage 219

Finding the Public Off ering Price 219

Sales Charge Reductions 220

Breakpoint Schedule 220

Letter of Intent 221

Backdating a Letter of Intent 221

Breakpoint Sales 221

Rights of Accumulation 222

Automatic Reinvestment of Distributions 222

Other Mutual Fund Features 223

Cost Base of Multiple Purchases 227

Purchasing Mutual Fund Shares 228

Sales Charges 230

45–Day Free Look 231

Withdrawal Plans 231

Recommending Mutual Funds 232

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 Aff ecting 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

Prospectus to Be Provided to Aftermarket Purchasers 259

SEC Disclaimer 259

Misrepresentations 260

Tombstone Ads 260

Free Riding and Withholding/FINRA Rule 5130 260

Underwriting Corporate Securities 262

Types of Underwriting Commitments 262

Types of Offerings 264

Awarding the Issue 264

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 A Offerings 270

Rule 145 270

Rule 147 Intrastate Offering 271

Pretest 273

CHAPTER 11 TRADING SECURITIES 277

Types of Orders 277

The Exchanges 281

Priority of Exchange Orders 281

The Role of The Designated Market Maker/DMM 282

The DMM Acting as a Principal 282

The Designated Market Maker/DMM Acting as an Agent 283

Crossing Stock 284

Do Not Reduce (DNR) 285

Adjustments for Stock Splits 285

Stopping Stock 286

Commission House Broker 287

Two–Dollar Broker 287

Registered Traders 287

Super Display Book (SDBK) 287

Short Sales 288

Rule 200 Definitions and Order Marking 288

Rule 203 Security Borrowing and Delivery Requirements 290

Threshold Securities 290

Listing Requirements for the NYSE 292

Over the Counter/Nasdaq 292

Market Makers 292

Nasdaq Subscription Levels 293

Nasdaq Quotes 293

Nominal Nasdaq Quotes 294

Automated Confirmation System (ACT)/Trade Reporting Facility (TRF) 295

Nasdaq Execution Systems 295

The Nasdaq Market Center Execution System (NMCES) 295

The Nasdaq Opening Cross 295

Non–Nasdaq OTCBB 296

Pink OTC Market 297

Third Market 297

Fourth Market 297

Reading the Consolidated Tape 298

Exchange Qualifiers 299

Broker vs. Dealer 299

FINRA 5% Markup Policy 300

Markups/Markdowns When Acting as a Principal 301

Riskless Principal Transactions 302

Proceeds Transactions 302

The Order Audit Trail System (OATS) 302

Trade Reporting and Compliance Engine (TRACE) 303

Circuit Breakers 303

Limit Up Limit down (LULD) 304

Arbitrage 304

Pretest 307

CHAPTER 12 CUSTOMER ACCOUNTS 311

Holding Securities 313

Mailing Instructions 314

Types of Accounts 315

Commingling Customer s Pledged Securities 325

Wrap Accounts 326

Regulation S–P 326

Day Trading Accounts 327

Pretest 329

CHAPTER 13 MARGIN ACCOUNTS 333

Regulation of Credit 333

Regulation T 333

House Rules 336

Establishing a Long Position in a Margin Account 336

An Increase in the Long Market Value 337

Special Memorandum Account (SMA) Long Margin Account 339

A Decrease in the Long Market Value 341

Minimum Equity Requirement Long Margin Accounts 341

Establishing a Short Position in a Margin Account 342

A Decrease in the Short Market Value 343

Special Memorandum Account (SMA) Short Margin Account 344

An Increase in the Short Market Value 345

Minimum Equity Requirement Short Margin Accounts 346

Combined Margin Accounts 347

Portfolio Margin Accounts 347

Securities Backed Lines of Credit 348

Pretest 349

CHAPTER 14 RETIREMENT PLANS 353

Individual Plans 353

Individual Retirement Accounts (IRAs) 354

Traditional IRAs 354

Roth IRAs 355

Simplified Employee Pension IRA (SEP IRA) 356

Educational IRA/Coverdell IRA 358

Tax–Sheltered Annuities (TSAs)/Tax–Deferred Accounts (TDAs) 362

Corporate Plans 364

Rolling Over a Pension Plan 366

Employee Retirement Income Security Act of 1974 (ERISA) 366

Erisa 404C Safe Harbor 368

Pretest 369

CHAPTER 15 BROKERAGE OFFICE PROCEDURE 373

Executing an Order 373

Customer Confirmations 375

Clearly Erroneous Reports 376

Execution Errors 376

Corporate and Municipal Securities Settlement Options 376

RVP/DVP/COD 377

When–Issued Securities 377

Government Securities Settlement Options 378

Accrued Interest 378

Calculating Accrued interest 379

Accrued Interest for Government Notes and Bonds 380

Rules for Good Delivery 381

Delivery of Round Lots 382

Delivery of Bond Certificates 382

Rejection of Delivery 383

Don t Know (DK) Procedures 383

Fail to Deliver/Fail to Receive 383

Due Bills 383

Customer Account Statements 384

Carrying of Customer Accounts 384

Proxies 385

Pretest 387

CHAPTER 16 FUNDAMENTAL AND TECHNICAL ANALYSIS 393

Fundamental Analysis 393

The Balance Sheet 394

Industry Fundamentals 401

Top Down and Bottom Up Analysis 402

Technical Analysis 402

Market Theories and Indicators 406

Efficient Market Theory 407

Pretest 409

CHAPTER 17 DIRECT PARTICIPATION PROGRAMS 411

Limited Partnerships 411

Structuring and Off ering Limited Partnerships 413

Types of Limited Partnerships 414

Oil and Gas Sharing Arrangements 416

Equipment Leasing Programs 416

Tax Reporting for Direct Participation Programs 417

Limited Partnership Analysis 417

Tax Deductions vs. Tax Credits 418

Other Tax Considerations 418

Dissolving a Partnership 418

Pretest 421

CHAPTER 18 CUSTOMER RECOMMENDATIONS, PROFESSIONAL CONDUCT, AND TAXATION 425

Professional Conduct in the Securities Industry 426

Fair Dealings with Customers 426

Periodic Payment Plans 431

Mutual Fund Current Yield 431

Information Obtained from an Issuer 431

Disclosure of Client Information 432

Borrowing and Lending Money 432

Gift Rule 432

Outside Employment 433

Private Securities Transactions 433

Customer Complaints 433

Investor Information 434

NYSE/FINRA Know Your Customer 434

Investment Objectives 435

Risk vs. Reward 437

Alpha 439

Beta 439

Products Made Available through Member Firms 439

Recommendations through Social Media 440

Tax Structure 442

Investment Taxation 442

Calculating Gains and Losses 442

Cost Base of Multiple Purchases 443

Deducting Capital Losses 444

Wash Sales 444

Taxation of Interest income 445

Inherited Securities 445

Donating Securities to Charity 446

Gift Taxes 446

Estate Taxes 446

Withholding Tax 446

Corporate Dividend Exclusion 447

Alternative Minimum Tax (AMT) 447

Taxes on Foreign Securities 447

Pretest 449

CHAPTER 19 SECURITIES INDUSTRY RULES AND REGULATIONS 455

The Securities Exchange Act of 1934 455

The Securities and Exchange Commission (SEC) 456

Extension of Credit 457

The National Association of Securities Dealers (NASD) 457

Becoming a Member of FINRA 459

Hiring New Employees 460

Disciplinary Actions Against a Registered Representative 461

Resignation of a Registered Representative 462

Continuing Education 462

Termination for Cause 464

Retiring Representatives/Continuing Commissions 464

State Registration 464

Registration Exemptions 465

Persons Ineligible to Register 465

Communications with the Public 465

FINRA Rule 2210 Communications with the Public 466

Broker Dealer Websites 469

Blind Recruiting Ads 470

Generic Advertising 470

Tombstone Ads 470

Testimonials 471

Free Services 471

Misleading Communication with the Public 472

Securities Investor Protection Corporation Act of 1970 472

Net Capital Requirement 472

Customer Coverage 473

Fidelity Bond 473

The Securities Acts Amendments of 1975 473

The Insider Trading & Securities Fraud Enforcement Act of 1988 474

Firewall 474

Telemarketing Rules 475

Do Not Call List Exemptions 476

The Penny Stock Cold Call Rule 476

The Role of the Principal 477

Violations and Complaints 477

Resolution of Allegations 477

Minor Rule Violation 478

Code of Arbitration 478

The Arbitration Process 479

Mediation 480

Currency Transactions 481

The Patriot Act 481

U.S. Accounts 483

Foreign Accounts 483

Annual Compliance Review 483

Business Continuity Plan 483

Sarbanes–Oxley Act 484

The Uniform Securities Act 485

Tender Offers 486

Stockholders Owning 5% of an Issuer s Equity Securities 487

Pretest 489

ANSWER KEYS 495

GLOSSARY OF EXAM TERMS 513

INDEX 579