Master Series 7 Exam Practice
Questions and Answers Grade
A+ 2023
A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes
the market has reached its peak, he switches into AC Income Fund within the AC family of
funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax
effect?
A) Any gain or loss is deferred until he liquidates the AC Income Fund.
B) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a
purchase.
C) It is a tax-free exchange.
D) The tax basis of AC Income Fund is adjusted to reflect the gain in AC Growth Fund. - -Your
answer, Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a
purchase., was correct!.
The exchange is treated as a sale of the growth fund shares followed by a purchase of the income
fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares
with the net asset value at the time of exchange. Any difference is a capital gain or loss, even
though the proceeds were immediately used to purchase the income fund.
Reference: 10.7.5.4.1 in the License Exam Manual.
-Which of the following statements regarding qualified retirement plans are TRUE?
Contributions are made with pretax dollars.
Contributions are made with after-tax dollars.
Distributions are 100% taxable.
Distributions are taxable only to the extent of earnings.
A) I and IV.
B) II and IV.
C) II and III.
D) I and III. - -Your answer, I and III., was correct!.
With qualified plans, participants receive a tax deduction for contributions to their plan. As
earnings accumulate tax-deferred, distributions, which consist of tax-deferred earnings and
contributions for which the participant received a tax deduction, are 100% taxable.
,Reference: 11.1.1 in the License Exam Manual.
-A client of your broker/dealer is interested in collateralized mortgage obligations (CMOs).
While determining suitability for the client all of the following should be discussed EXCEPT
A) how currency exchange rates may affect the value of the securities
B) the tax consequences of CMOs
C) the relationship between mortgage loans and mortgage securities
D) how changing interest rates may affect the prepayment rates - -Your answer, how currency
exchange rates may affect the value of the securities, was correct!.
Currency exchange rates are not applicable to the risks associated with CMOs. However, when
determining suitability, a discussion of all of the characteristics and risks of CMOs, should
occur. This would include how changing interest rates may affect prepayment rates and therefore
the average life of the security, tax considerations (CMOs are taxable at all levels), and the
relationship between actual mortgage loans and mortgage-backed securities.
Reference: 2.8.2 in the License Exam Manual.
-Which of the following are required to be given to retail customers at settlement in municipal
new issue transactions?
Confirmation showing the purchase price.
Official statement.
Names of syndicate members with their participation amounts.
Copy of the agreement among underwriters.
A) I and III.
B) II and IV.
C) III and IV.
D) I and II. - -Your answer, I and II., was correct!.
MSRB rules state that a confirmation and an official statement must be sent to the investor no
later than at settlement.
Reference: 3.2.8.1 in the License Exam Manual.
-Which of the following statements regarding UGMA accounts are NOT true?
Only one custodian may be appointed for an UGMA account in the name of a minor.
A gift under UGMA can be revoked.
A custodian is liable for imprudence.
Short sales are permitted in an UGMA account.
A) II and IV.
,B) I and II.
C) I and IV.
D) II and III. - -Your answer, II and IV., was correct!.
An UGMA account is allowed only one custodian and one minor. Short selling is prohibited in
UGMA accounts. Once a gift is given, it is irrevocable. The custodian has fiduciary
responsibility toward the minor to invest conservatively, and the custodian is liable for
imprudence in handling the entrusted funds.
Reference: 5.3.1.5 in the License Exam Manual.
-The latest issue of a newsletter your firm subscribes to is especially relevant to one of your
firm's investment products. If you decide to send it to clients and prospects, you must disclose
that:
A) the newsletter's purpose is to provide your clients with a choice of products that are suitable
for all of their portfolios.
B) the newsletter discusses only those products which you have available through your firm .
C) the newsletter is written and produced by a third party.
D) future articles sent will provide similar discussions and information. - -Your answer, the
newsletter is written and produced by a third party., was correct!.
If a third party is the creator of the newsletter, that fact must be disclosed together with the name
of the third party and the date of publication.
Reference: 17.5.3.1 in the License Exam Manual.
-Which of the following entities was created to protect investors who have money and/or
securities on deposit at member firms?
A) ERISA.
B) CU.S.IP.
C) AGA.
D) SIPC. - -Your answer, SIPC., was correct!.
The Securities Investor Protection Act of 1970 created the Securities Investor Protection
Corporation (SIPC) to protect securities investors against losses resulting from the financial
failure of broker/dealers. SIPC does not provide protection against securities losses arising from
decreases in market value.
Reference: 16.1.6 in the License Exam Manual.
-Revenue bond rate covenants require the user fees to be high enough to cover all of the
following obligations of the issuing authority EXCEPT:
A) the optional call provisions.
, B) the operations and maintenance.
C) the debt service.
D) the debt service reserve fund. - -Your answer, the optional call provisions., was correct!.
Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require
enough to be collected to cover a call on the bonds.
Reference: 3.1.2.2.4 in the License Exam Manual.
-The letter of intent in a corporate underwriting is typically signed by which of the following
parties?
Issuer.
Managing underwriter.
Syndicate members.
Selling group members.
A) I and II.
B) I and III.
C) III and IV.
D) II and IV. - -Your answer, I and II., was correct!.
The letter of intent initiates the underwriting process and is signed by the issuer and managing
underwriter.
Reference: 7.5.1 in the License Exam Manual.
-A margin account customer buys 100 shares of HEX at $70 and writes a HEX Oct 70 call for a
premium of 8. What must he deposit? (Regulation T is 50%.)
A) 3700.
B) 4500.
C) 2700.
D) 2000. - -Your answer, 2700., was correct!.
The normal call would be 50% of $7,000 or $3,500. In this example, subtract the premium of
$800 that the customer received. (Remember, in a covered call situation, no margin is required
for the call.)
Reference: 6.1.3.1 in the License Exam Manual.
-All of the following statements regarding the over-the-counter market are true EXCEPT:
A) it is an auction market.
B) it trades listed securities.
C) more issues trade OTC than on the exchanges.
Questions and Answers Grade
A+ 2023
A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes
the market has reached its peak, he switches into AC Income Fund within the AC family of
funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax
effect?
A) Any gain or loss is deferred until he liquidates the AC Income Fund.
B) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a
purchase.
C) It is a tax-free exchange.
D) The tax basis of AC Income Fund is adjusted to reflect the gain in AC Growth Fund. - -Your
answer, Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a
purchase., was correct!.
The exchange is treated as a sale of the growth fund shares followed by a purchase of the income
fund shares. The gain or loss is determined by comparing the cost basis of the growth fund shares
with the net asset value at the time of exchange. Any difference is a capital gain or loss, even
though the proceeds were immediately used to purchase the income fund.
Reference: 10.7.5.4.1 in the License Exam Manual.
-Which of the following statements regarding qualified retirement plans are TRUE?
Contributions are made with pretax dollars.
Contributions are made with after-tax dollars.
Distributions are 100% taxable.
Distributions are taxable only to the extent of earnings.
A) I and IV.
B) II and IV.
C) II and III.
D) I and III. - -Your answer, I and III., was correct!.
With qualified plans, participants receive a tax deduction for contributions to their plan. As
earnings accumulate tax-deferred, distributions, which consist of tax-deferred earnings and
contributions for which the participant received a tax deduction, are 100% taxable.
,Reference: 11.1.1 in the License Exam Manual.
-A client of your broker/dealer is interested in collateralized mortgage obligations (CMOs).
While determining suitability for the client all of the following should be discussed EXCEPT
A) how currency exchange rates may affect the value of the securities
B) the tax consequences of CMOs
C) the relationship between mortgage loans and mortgage securities
D) how changing interest rates may affect the prepayment rates - -Your answer, how currency
exchange rates may affect the value of the securities, was correct!.
Currency exchange rates are not applicable to the risks associated with CMOs. However, when
determining suitability, a discussion of all of the characteristics and risks of CMOs, should
occur. This would include how changing interest rates may affect prepayment rates and therefore
the average life of the security, tax considerations (CMOs are taxable at all levels), and the
relationship between actual mortgage loans and mortgage-backed securities.
Reference: 2.8.2 in the License Exam Manual.
-Which of the following are required to be given to retail customers at settlement in municipal
new issue transactions?
Confirmation showing the purchase price.
Official statement.
Names of syndicate members with their participation amounts.
Copy of the agreement among underwriters.
A) I and III.
B) II and IV.
C) III and IV.
D) I and II. - -Your answer, I and II., was correct!.
MSRB rules state that a confirmation and an official statement must be sent to the investor no
later than at settlement.
Reference: 3.2.8.1 in the License Exam Manual.
-Which of the following statements regarding UGMA accounts are NOT true?
Only one custodian may be appointed for an UGMA account in the name of a minor.
A gift under UGMA can be revoked.
A custodian is liable for imprudence.
Short sales are permitted in an UGMA account.
A) II and IV.
,B) I and II.
C) I and IV.
D) II and III. - -Your answer, II and IV., was correct!.
An UGMA account is allowed only one custodian and one minor. Short selling is prohibited in
UGMA accounts. Once a gift is given, it is irrevocable. The custodian has fiduciary
responsibility toward the minor to invest conservatively, and the custodian is liable for
imprudence in handling the entrusted funds.
Reference: 5.3.1.5 in the License Exam Manual.
-The latest issue of a newsletter your firm subscribes to is especially relevant to one of your
firm's investment products. If you decide to send it to clients and prospects, you must disclose
that:
A) the newsletter's purpose is to provide your clients with a choice of products that are suitable
for all of their portfolios.
B) the newsletter discusses only those products which you have available through your firm .
C) the newsletter is written and produced by a third party.
D) future articles sent will provide similar discussions and information. - -Your answer, the
newsletter is written and produced by a third party., was correct!.
If a third party is the creator of the newsletter, that fact must be disclosed together with the name
of the third party and the date of publication.
Reference: 17.5.3.1 in the License Exam Manual.
-Which of the following entities was created to protect investors who have money and/or
securities on deposit at member firms?
A) ERISA.
B) CU.S.IP.
C) AGA.
D) SIPC. - -Your answer, SIPC., was correct!.
The Securities Investor Protection Act of 1970 created the Securities Investor Protection
Corporation (SIPC) to protect securities investors against losses resulting from the financial
failure of broker/dealers. SIPC does not provide protection against securities losses arising from
decreases in market value.
Reference: 16.1.6 in the License Exam Manual.
-Revenue bond rate covenants require the user fees to be high enough to cover all of the
following obligations of the issuing authority EXCEPT:
A) the optional call provisions.
, B) the operations and maintenance.
C) the debt service.
D) the debt service reserve fund. - -Your answer, the optional call provisions., was correct!.
Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require
enough to be collected to cover a call on the bonds.
Reference: 3.1.2.2.4 in the License Exam Manual.
-The letter of intent in a corporate underwriting is typically signed by which of the following
parties?
Issuer.
Managing underwriter.
Syndicate members.
Selling group members.
A) I and II.
B) I and III.
C) III and IV.
D) II and IV. - -Your answer, I and II., was correct!.
The letter of intent initiates the underwriting process and is signed by the issuer and managing
underwriter.
Reference: 7.5.1 in the License Exam Manual.
-A margin account customer buys 100 shares of HEX at $70 and writes a HEX Oct 70 call for a
premium of 8. What must he deposit? (Regulation T is 50%.)
A) 3700.
B) 4500.
C) 2700.
D) 2000. - -Your answer, 2700., was correct!.
The normal call would be 50% of $7,000 or $3,500. In this example, subtract the premium of
$800 that the customer received. (Remember, in a covered call situation, no margin is required
for the call.)
Reference: 6.1.3.1 in the License Exam Manual.
-All of the following statements regarding the over-the-counter market are true EXCEPT:
A) it is an auction market.
B) it trades listed securities.
C) more issues trade OTC than on the exchanges.
