Free Series 7 Exam Flashcards

A negotiable certificate representing shares of a foreign company trading on U.S. exchanges. Issued by U.S. banks holding the actual foreign shares. Benefits: trades in USD, dividends paid in USD, easier than buying foreign shares directly. Subject to currency risk and political risk.

A company that owns, operates, or finances income-producing real estate. Must distribute at least 90% of taxable income as dividends to shareholders. Provides liquidity to real estate investments. Types: equity REITs (own properties), mortgage REITs (hold mortgages), hybrid REITs (both).

Preferred stock where unpaid dividends accumulate as 'dividends in arrears.' All missed dividends must be paid before any dividends can be paid to common stockholders. Provides stronger dividend protection than non-cumulative preferred.

Preferred stock that can be converted into a specified number of common shares at the holder's option. Conversion ratio is fixed at issuance. Trades at parity when stock price makes conversion attractive. Offers downside protection with upside potential.

The first day a stock trades without the dividend. Set 1 business day before record date. Buyers on or after ex-date do NOT receive the declared dividend. Stock price typically drops by approximately the dividend amount on this date.

Short-term government debt maturing in 4, 8, 13, 26, or 52 weeks. Sold at a discount to par with no coupon payments. Safest debt securities (full faith and credit of U.S. government). Interest exempt from state and local tax. Minimum purchase: $100.

Intermediate-term government debt with maturities of 2, 3, 5, 7, or 10 years. Pays semiannual interest (coupon). Interest exempt from state and local tax. Sold in $100 increments. Highly liquid secondary market.

Long-term government debt with maturities of 20 or 30 years. Pays semiannual interest. Interest exempt from state and local tax. Highest interest rate risk among Treasury securities due to long duration. Backed by full faith and credit of U.S. government.

Treasury securities with principal adjusted for inflation based on CPI. Coupon rate is fixed but paid on the inflation-adjusted principal. Protects against inflation risk. At maturity, receive the greater of original or adjusted principal. Interest taxable federally including inflation adjustment.

A bond sold at a deep discount that pays no periodic interest. Investor receives full face value at maturity. The difference between purchase price and par is the return. Taxed annually on 'phantom income' (accreted interest) even though no cash is received. Highest interest rate risk.

A bond that the issuer can redeem before maturity at a specified call price. Usually called when interest rates fall so issuer can refinance at lower rates. Call protection period prevents early calls. Investors face reinvestment risk when bonds are called.

The yield calculated assuming a bond is called at the earliest call date at the call price. Must be calculated for callable bonds trading at a premium. When comparing YTM and YTC for premium bonds, the lower yield is the more conservative estimate.

Annual interest payment divided by current market price. Formula: Annual Coupon / Market Price. Only measures income return, ignores capital gains/losses. Higher than coupon rate for discount bonds; lower for premium bonds.

A municipal revenue bond issued to finance facilities for private corporations (factories, warehouses). Backed only by the lessee corporation's ability to pay rent, NOT by the municipality. Interest is usually federally tax-exempt.

A municipal bond backed by BOTH a specific revenue source AND the full faith and credit (taxing power) of the issuer. Combines features of revenue and GO bonds. Considered safer than pure revenue bonds.

The yield a taxable bond must offer to equal an after-tax return of a tax-exempt municipal bond. Formula: Tax-Exempt Yield / (1 - Tax Bracket). Example: 3% muni for 32% bracket investor = 3% / (1 - 0.32) = 4.41% taxable equivalent.

The disclosure document for municipal securities, similar to a prospectus for corporate securities. Describes the issuer, terms, risks, and use of proceeds. NOT required by SEC (munis are exempt) but required by MSRB rules.

If a municipal bond is purchased at a market discount exceeding 0.25% per year to maturity, the discount is taxed as ordinary income (not capital gain) at maturity. Example: 10-year bond with discount over 2.5% triggers this rule.

Selling a call option while owning the underlying stock. Generates income (premium) but caps upside if stock rises above strike. Moderately bullish strategy. Maximum gain = premium + (strike - purchase price). Maximum loss = stock purchase price - premium.

Buying a put option while owning the underlying stock. Acts as insurance against stock price decline. Bullish on stock but wants downside protection. Maximum loss = stock cost + put premium - strike price. Unlimited upside potential minus premium paid.

Buying both a call and put with the same strike price and expiration on the same underlying. Profits from large price movement in either direction. Maximum loss = total premium paid (occurs if stock closes at strike). Breakeven: strike +/- total premium.

The amount an option is in-the-money. Call intrinsic value = Stock Price - Strike (if positive). Put intrinsic value = Strike - Stock Price (if positive). Cannot be negative; minimum is zero. Options with intrinsic value are in-the-money.

The portion of an option premium exceeding intrinsic value. Formula: Premium - Intrinsic Value. Reflects probability of option becoming more profitable before expiration. Decreases as expiration approaches (time decay). At expiration, time value = 0.

When an option writer is required to fulfill the contract obligation. Call writer must sell shares at strike price; put writer must buy shares at strike price. Occurs when option holder exercises. Assignment is random among short positions.

Buy a call at a lower strike, sell a call at a higher strike (same expiration). Moderately bullish; lower cost than buying calls alone. Maximum gain = difference in strikes - net premium paid. Maximum loss = net premium paid.

Open-end (mutual fund): continuously issues/redeems shares at NAV, unlimited shares. Closed-end: fixed number of shares, trades on exchange at premium or discount to NAV. Open-end priced once daily; closed-end has real-time pricing.

A sales charge paid when purchasing mutual fund shares, deducted from the initial investment. Maximum 8.5% under FINRA rules. Reduces the amount actually invested. Class A shares typically have front-end loads with lower ongoing expenses.

Contingent Deferred Sales Charge paid when redeeming mutual fund shares, typically declining over time (e.g., 5% year 1, 4% year 2, etc.). Class B shares use this structure. Eventually converts to Class A after surrender period.

Annual fee charged by mutual funds for distribution and marketing expenses, deducted from fund assets. Maximum 1% annually (0.75% distribution + 0.25% service fee). Reduces returns regardless of fund performance. Must be disclosed in prospectus.

A dollar amount at which mutual fund sales charges are reduced. Larger investments qualify for lower sales loads. Letter of Intent allows reaching breakpoint over 13 months. Rights of Accumulation count existing holdings toward breakpoints.

A business structure with general partners (unlimited liability, manage operations) and limited partners (liability limited to investment, passive investors). Losses and income flow through to partners (pass-through taxation). Limited partners cannot participate in management.

The managing partner in a limited partnership with unlimited personal liability. Makes all business decisions, can bind the partnership to contracts. Owes fiduciary duty to limited partners. Cannot be removed except by partnership agreement provisions.

IRS rules limiting deductibility of passive activity losses. Passive losses can only offset passive income, not active income (wages) or portfolio income (dividends, interest). Unused losses carry forward to future years. Real estate professionals may have exceptions.

IRS limitation preventing investors from deducting losses exceeding their amount at risk (cash invested + recourse debt). Non-recourse loans generally don't increase at-risk amount except for qualified real estate financing.

Joint account where each owner has undivided interest in the entire account. Upon death of one owner, assets automatically pass to surviving owner(s), bypassing probate. Each owner can act independently. Common for spouses.

Joint account where each owner has divided ownership (can be unequal percentages). Upon death, deceased owner's share goes to their estate/heirs, NOT to other account holders. Does not bypass probate. All owners must authorize transactions.

Custodial account for minors (Uniform Gifts/Transfers to Minors Act). One custodian, one minor. Assets are irrevocable gift to minor. Taxed at minor's rate (kiddie tax may apply). Minor gains control at age of majority (18 or 21 depending on state).

An account managed by a person (fiduciary) for the benefit of another. Types: trust accounts, estate accounts, guardianships. Fiduciary has legal obligation to act in beneficiary's best interest. Must follow prudent investor rule.

The largest stock exchange by market capitalization. An auction market with designated market makers (DMMs). Listed companies must meet strict requirements. Uses a hybrid system combining electronic trading with floor-based trading.

An electronic, dealer-based stock exchange (negotiated market). Multiple market makers compete to provide best prices. Known for technology stocks. No physical trading floor. Operates through a network of computers.

FINRA requirement that broker-dealers obtain the most favorable terms reasonably available for customer orders. Considers price, speed, likelihood of execution, and total transaction cost. Must be documented and monitored.

Selling borrowed securities with the expectation of buying them back at a lower price. Bearish strategy. Unlimited risk potential (stock could rise indefinitely). Requires margin account. Dividends must be paid to the lender. Locate requirement before shorting.

Profit from selling an asset held more than 12 months. Taxed at preferential rates: 0%, 15%, or 20% depending on income level. Lower than ordinary income rates. Holding period starts day after purchase, ends on sale date.

IRS rule disallowing loss deduction if substantially identical securities are purchased within 30 days before or after the sale. The disallowed loss is added to the cost basis of the replacement shares. Does not apply to gains.

The original value of an investment used to calculate capital gains/losses. Includes purchase price plus commissions. Methods: specific identification, FIFO, average cost (mutual funds only). Inherited securities receive stepped-up basis.

SEC rule governing short sales. Requires locate requirement (locate shares to borrow before shorting). Includes close-out requirements for failures to deliver. Restricts short selling during severe price declines (circuit breaker).

SEC rule governing sale of control and restricted securities. Requires 6-month holding period (if issuer is reporting company) or 12 months (if not). Volume limits for affiliates. Form 144 must be filed for sales over 5,000 shares or $50,000.

SEC rule requiring registration when securities are offered in connection with business combinations (mergers, reclassifications, asset transfers). Shareholders voting on the transaction are considered offerees.

Information gathered to assess suitability: financial status (income, net worth, liquid assets), tax status, investment objectives (capital preservation, income, growth, speculation), risk tolerance, time horizon, liquidity needs, other investments.

The requirement that the number and frequency of recommended transactions are suitable based on the customer's profile. Even if each individual trade is suitable, excessive trading (churning) violates quantitative suitability.