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Series 7 General Securities Representative Qualification Examination (GS) Questions and Answers

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Questions # 31:

Regulation T is set at 50%. Bubba’s account contains long positions in the following securities with the prices listed:

100 ABC $30

200 XYZ $70

200 QBB $40

200 KKK $25

Total market value = $30,000

Debit balance in the account = $12,000

Net equity balance of the account = $18,000

Bubba wants to buy 100 shares of DUM at $30 per share and 100 shares of OUT at $120. How much additional money must be deposited?

Options:

$6,000

$7,000

$4,500

$1,500

Answer

Explanation

$4,500. The purchase of DUM will cost $3,000 (100 x $30) and the purchase of OUT will cost $12,000 (100 x $120). Both combined total a cost of $15,000. Reg T requires 50% ($7,500) and Bubba only has $3,000. So he is $4,500 short.

Questions # 32:

A corporation makes a rights offering to raise $10 million of new capital by issuing one million shares of common stock. If it already has six million shares outstanding at the time of the offering.

What subscription ratio is the corporation establishing for each new share?

Options:

6 rights per share

10 rights per share

6 million rights per share

10 million rights per share

Answer

Explanation

6 rights per share. Each share receives a right and there are six million shares receiving rights to one million new shares. So six rights are required for one share.

Questions # 33:

Initial margin deposit minimum requirements are set by the:

Options:

NYSE

FINRA

FRB

FDIC

Answer

Explanation

FRB. The Federal Reserve Board sets the initial margin deposit requirements. The NYSE set the ongoing minimum equity requirements.

Questions # 34:

Call loans made by banks to broker/dealers are generally for the purpose of which of the following?

Options:

expansion of office facilities

meeting operating expenses

carrying margin accounts

financing securities held in inventory

Answer

Explanation

carrying margin accounts. A call loan is made to brokers who use securities as collateral. They are usually made to finance the debit balances in margin accounts.

Questions # 35:

Which of the following is associated with an income oil and gas partnership?

Options:

capital appreciation

the risk of dry holes

high intangible drilling costs

cash flow and depletion allowance

Answer

Explanation

cash flow and depletion allowance. The other choices are not applicable because an “income” partnership already has a producing well.

Questions # 36:

If recaptured deductions are added to income, recaptured investment tax credits are added to:

Options:

income

basis

gains

taxes

Answer

Explanation

taxes. Tax credits are not deductible expenses and have no effect on basis.

Questions # 37:

What is represented by the net investment income of an open-end investment company?

Options:

net profits from the investment company operation

net gains on sales of portfolio securities

dividends, interest, and net gains on sales of securities

net income from dividend and interest paid on securities in the fund portfolio

Answer

Explanation

net income from dividend and interest paid on securities in the fund portfolio. This is the definition of net investment income, which excludes gains on sales of securities.

Questions # 38:

An option that permits the holder to exercise the contract only at expiration is referred to as:

Options:

European style

American style

Nordic style

Asian style

Answer

Explanation

European style. These options can only be exercised at the expiration date while American style options can be exercised at any time prior to expiration.

Questions # 39:

Bubba held one XYZ July 30 listed call option when XYZ split 2 for 1.

What is the resulting position, Bubba has on the Option Clearing Corporation’s record?

Options:

long one XYZ July 30 call

long one XYZ July 30 call and short one XYZ July 30 call

long two XYZ July 30 calls

long two XYZ July 15 calls

Answer

Explanation

long two XYZ July 15 calls. Double the number of contracts and half the strike price. This is similar to XYZ shareholders doubling the number of shares they hold at the lower price.

Questions # 40:

Which of the following is true about option prices?

Options:

premiums on options for listed stocks are usually greater than on unlisted stocks

premiums on options of higher-priced stocks are usually greater than on lower-priced stocks

premiums on options of well-known companies are usually larger than on lesser-known companies

premiums on options of volatile stocks are usually larger than on less volatile stocks

Answer

Explanation

premiums on options of volatile stocks are usually larger than on less volatile stocks. The likelihood of exercise increases with the volatility of a stock. Therefore, a higher premium is demanded.

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