Your FREE Series 7 Flashcards 2026 – 300+ Cards

Series 7 Flashcards

What is common stock?

The most junior equity security, representing residual ownership in a corporation. Common holders are paid last in liquidation but have voting rights and the greatest growth potential.

Where do common shareholders rank in liquidation?

Dead last — after secured creditors, general creditors (including bondholders), subordinated debt, and preferred stockholders. In exchange for this residual position they get the greatest upside.

What two main rights does common stock grant?

The right to vote (electing the board and approving major matters like mergers or issuing senior securities) and a residual claim on assets/earnings, plus the greatest growth potential.

Statutory voting

A voting method that caps votes per candidate at the number of shares owned. Votes cannot be concentrated, so it favors large/majority shareholders.

Cumulative voting

A method letting a holder pool all votes (shares x board seats) onto one or more candidates. It favors small/minority shareholders by letting them concentrate votes.

1,000 shares, 9 board seats — max cumulative votes for one candidate?

Votes = shares x seats = 1,000 x 9 = 9,000 votes, all of which can be cast for a single candidate under cumulative voting.

Under statutory voting, max votes for one candidate (1,000 shares)?

1,000 — statutory voting caps votes per candidate at the number of shares owned, no matter how many seats are open.

What is a preemptive right?

A common shareholder's right to buy enough newly issued shares to maintain their proportional ownership percentage, protecting against dilution. It is honored through a rights offering.

What is limited liability for a shareholder?

A shareholder's maximum loss is capped at the amount invested. Personal assets are not at risk for the corporation's debts.

Authorized vs. issued vs. outstanding shares

Authorized = max in the charter. Issued = authorized shares actually sold. Outstanding = issued minus treasury. Only outstanding shares vote and receive dividends.

What is treasury stock?

Previously issued shares that the company has repurchased. Treasury stock carries no voting rights and receives no dividends, and is excluded from shares outstanding.

Formula: outstanding shares

Outstanding = Issued shares − Treasury shares. Outstanding shares are the ones held by investors that vote and receive dividends.

What is preferred stock?

An equity security paying a fixed dividend (a % of $100 par or a dollar amount). It is senior to common for dividends and liquidation, junior to all debt, and usually non-voting.

Is preferred stock more sensitive to growth or interest rates?

Interest rates. Because it pays a fixed dividend, preferred behaves like a fixed-income instrument and its price moves inversely with rates, not with company growth.

Where does preferred stock rank vs. common and debt?

Senior to common (for dividends and liquidation) but junior to all debt (bonds and other creditors). Preferred sits between debt and common.

Straight (non-cumulative) preferred stock

Pays a fixed dividend with no extra features. If a dividend is skipped, it is gone forever — missed dividends do not accrue.

Cumulative preferred stock

Skipped (omitted) dividends accrue as 'dividends in arrears' and must be paid in full before common shareholders receive any dividend.

6% cumulative preferred ($100 par) skipped 2 yrs — owed before common?

Annual dividend = 6% x $100 = $6. Two years in arrears ($12) plus the current year ($6) = $18 per share must be paid before any common dividend.

Participating preferred stock

Preferred that can receive dividends ABOVE its stated rate when the company performs well, participating in extra profits alongside common.

Callable preferred stock

Preferred the issuer can redeem (call), usually at a premium. It typically carries a higher dividend rate to compensate holders for call risk.

Convertible preferred stock

Preferred exchangeable into a fixed number of common shares. Its market price is linked to the common stock, giving upside potential.

Adjustable (variable)-rate preferred stock

Preferred whose dividend resets to a benchmark rate. This reduces price volatility, but the lower volatility usually means a lower yield than fixed-rate preferred.

Do preferred shareholders usually vote?

No. Preferred stock generally carries no voting rights, trading the vote for its senior, fixed-income-like dividend priority.

Which equity is best for a growth-oriented client?

Common stock — it has the greatest growth potential. Preferred, being fixed-income-like, suits income-oriented clients seeking stable dividends instead.

What is a (subscription) right?

A short-term instrument (typically 30-45 days) issued to existing shareholders, honoring the preemptive right, allowing purchase of new shares at a subscription price BELOW current market.

What is a warrant?

A long-term instrument (years or perpetual) to buy stock at a fixed price set ABOVE market at issuance. Often attached to a bond/preferred as a sweetener; has no initial intrinsic value.

Right vs. warrant: exercise price vs. market

A right's subscription price is BELOW market (in-the-money at issue). A warrant's exercise price is ABOVE market at issuance (out-of-the-money), so no immediate intrinsic value.

Right vs. warrant: who receives it and life span

Rights go to existing shareholders and are short-term (30-45 days). Warrants are issued to bond/preferred buyers as sweeteners and are long-term (years or perpetual).

Do rights or warrants pay dividends or carry votes?

No. Neither pays dividends nor carries voting rights — they are not stock until exercised. Both trade separately in the secondary market.

Why are warrants attached to a bond offering?

As a 'sweetener' to make the offering more attractive, letting the issuer offer a lower coupon. The warrant gives bondholders potential equity upside.

Memory hook for rights vs. warrants

Rights are a Reward to current owners (short-term, in-the-money). Warrants are a long-term Wager (issued out-of-the-money as a sweetener).

What is an ADR?

American Depositary Receipt — a negotiable receipt issued by a U.S. bank representing a set number of shares of a foreign company held on deposit abroad, trading/settling in U.S. dollars.

What problem do ADRs solve for U.S. investors?

They let U.S. investors buy foreign equity in U.S. dollars and trade/settle it like a domestic stock, without dealing directly on foreign exchanges.

What is currency risk for ADR holders?

Because the underlying shares are priced in a foreign currency, exchange-rate swings affect the ADR's value and its dollar-converted dividend, independent of the company's performance.

Do ADR holders have voting or preemptive rights?

Generally no. The depositary bank holds and votes the underlying shares. ADR holders typically lack voting and preemptive rights but still receive dividends in dollars.

How are ADR dividends taxed for foreign withholding?

Dividends may be subject to foreign tax withholding, which is often recoverable by the U.S. investor as a foreign tax credit.

ADR is the suitability answer for which client?

A client wanting international diversification and foreign equity exposure without trading directly on foreign exchanges — accepting currency and political risk in exchange.

What is the DERP dividend date sequence?

Declaration, Ex-dividend, Record, Payable. The board declares; the ex-date sets who qualifies; record date identifies holders on the books; payable date is when cash is paid.

By when must you own stock to receive the dividend?

You must own (have purchased before) the stock before the ex-dividend date. Buyers on or after the ex-date do NOT receive that dividend.

What happens to a stock's price on the ex-dividend date?

The stock typically opens lower by the dividend amount, reflecting that new buyers are no longer entitled to the upcoming dividend.

Declaration date

The date the board of directors announces the dividend, including the amount, the record date, and the payable date.

Record date

The date on which a shareholder must be on the company's books to be entitled to the declared dividend.

Payable date

The date the declared dividend is actually paid out to the shareholders entitled to it (those who owned before the ex-date / on the record date).

What are qualified dividends (QDI)?

Dividends from common and most preferred stock that meet IRS holding-period and source rules. They are taxed at the favorable long-term capital-gains rate.

How are non-qualified (ordinary) dividends taxed?

At the investor's regular ordinary income tax rate, which is higher than the long-term capital-gains rate applied to qualified dividends.

Is a stock dividend or stock split currently taxable?

No. A stock dividend/split is not currently taxable. Instead, the investor's total cost basis is spread over more shares, lowering the per-share basis.

How is the holding period split between long- and short-term gains?

Stock held more than 12 months produces a long-term capital gain (favorable rate). Held one year or less produces a short-term gain, taxed as ordinary income.

What is a stepped-up cost basis on inherited shares?

Inherited shares receive a basis stepped up to fair market value at the date of the decedent's death, often eliminating prior appreciation from taxation when sold.

What is the wash-sale rule?

An IRS rule disallowing a capital loss if a substantially identical security is bought within 30 days before or after the sale — a 61-day window total.

Par value of preferred stock and its purpose

An arbitrary accounting value, typically $100 for preferred. It is the base on which the fixed dividend percentage is calculated (e.g., 6% of $100 = $6).

6% preferred ($100 par) — annual dividend in dollars?

6% x $100 par = $6.00 per share per year. Preferred dividends are calculated on par value, not market price.

What is a senior security?

A security (bonds and preferred stock) that ranks ahead of common stock for income and in liquidation. Common shareholders vote to approve issuing additional senior securities.

Liquidation priority order (top to bottom)

1) Secured creditors/IRS/unpaid wages, 2) general creditors (incl. unsecured bondholders), 3) subordinated debt, 4) preferred stock, 5) common stock (last).

Convertible preferred: why might its price exceed straight preferred?

Because it can be exchanged into common shares, its price tracks the common's upside. Strong common performance pulls the convertible's value above a comparable straight preferred.

Which preferred type usually pays the highest stated rate?

Callable preferred. The issuer's right to redeem (usually at a premium) is a disadvantage to holders, so it carries a higher dividend rate to compensate for call risk.

Do treasury shares count toward dividend payments?

No. Treasury stock receives no dividends and has no vote. Dividends are paid only on outstanding shares (issued minus treasury).

Cumulative voting favors which shareholder?

The minority (smaller) shareholder, who can pool all votes onto one candidate. A question mentioning a minority holder, shares, and board seats is testing cumulative voting.

Statutory voting favors which shareholder?

The majority (large) shareholder, because votes per candidate are capped at shares owned and cannot be concentrated, preventing small holders from gaining board representation.

Are rights issued in-the-money or out-of-the-money?

In-the-money. A right's subscription price is set BELOW the current market price, giving it immediate intrinsic value — unlike a warrant, which is issued above market.

Inverse price-yield relationship for bonds

When market interest rates rise, existing bond prices fall, and when rates fall, prices rise. Outstanding fixed coupons become relatively less or more attractive.

What dollar price does a bond quote of 95 mean?

95% of par. With $1,000 par, that is $950, a discount. A quote of 105 means $1,050, a premium.

Nominal yield (coupon)

The fixed stated interest rate of a bond as a percent of par. A 6% bond pays $60 per year per $1,000 bond regardless of market price.

Current yield formula

Current yield = annual coupon / current market price. A $60 coupon bond priced at $900 yields $60/$900 = 6.67%.

Yield to maturity (YTM)

The total annualized return if held to maturity, factoring in the coupon plus any gain (discount) or loss (premium) versus par at maturity.

Yield to call (YTC)

The annualized return if a callable bond is redeemed at its call date instead of maturity, factoring in the coupon and price difference to the call price.

Yield ladder for a DISCOUNT bond

Nominal < Current Yield < YTM < YTC. As price drops below par, each successively forward-looking yield is higher.

Yield ladder for a PREMIUM bond

YTC < YTM < Current Yield < Nominal. Above par, the call (earliest redemption) gives the lowest yield because of the larger loss to par.

Yield relationships at par

Nominal = Current Yield = YTM = YTC. When a bond trades exactly at par, all four yields are equal.

How much is one basis point (bps)?

0.01% (one one-hundredth of a percent). 100 basis points equals 1%.

Which bonds have the highest duration / price volatility?

Zero-coupon bonds and Treasury STRIPS. With no interim coupons, their prices swing the most when interest rates move.

Tax treatment of corporate bond interest

Fully taxable at the federal, state, and local levels. This contrasts with Treasury (state/local exempt) and muni (federal exempt) interest.

Secured bond vs. debenture

Secured bonds (mortgage bonds, equipment trust certificates) are backed by specific pledged assets. A debenture is unsecured, backed only by the issuer's general credit and earning power.

Equipment trust certificate

A secured corporate bond backed by specific equipment (e.g., railcars, aircraft). The collateral makes it safer than an unsecured debenture.

Callable bond — who benefits and when?

The issuer can redeem early, benefiting the issuer when rates fall (it refinances cheaper). It is a reinvestment risk to the investor.

Put bond

A bond that lets the holder (investor) redeem early at a set price, benefiting the investor when rates rise. The opposite of a callable bond.

Sinking fund

Money an issuer sets aside over time to retire bonds before or at maturity. It improves creditworthiness and bondholder safety.

Convertible bond

A corporate bond exchangeable for a fixed number of the issuer's common shares. It typically pays a lower coupon in exchange for the equity upside.

Convertible bond conversion ratio formula

Conversion ratio = $1,000 par / conversion price. A $25 conversion price gives $1,000/$25 = 40 shares per bond.

Parity price of a convertible bond (from stock)

Bond parity = stock price x conversion ratio. If stock is $27 and ratio is 40, parity = $1,080. Above that, the bond trades at a conversion premium.

Bond convertible at $25, bond at $1,100, stock at $27 — arbitrage?

Ratio = 40 shares; share value = 40 x $27 = $1,080. Bond costs $1,100 but shares worth only $1,080, so converting loses $20. No profitable arbitrage.

What is TRACE?

FINRA's Trade Reporting and Compliance Engine, used to report secondary-market corporate and agency debt trades for price transparency.

Day-count convention for corporate bond accrued interest

30/360: every month counts as 30 days and the year as 360 days. Municipal bonds use the same convention.

What backs U.S. Treasury securities?

The full faith and credit of the U.S. government, making them the credit-risk-free benchmark for all other debt.

T-bill maturity and structure

Matures in one year or less (up to 52 weeks). Issued at a discount with no coupon; the investor's return is par minus purchase price.

T-note vs. T-bond maturities

T-notes mature in 2 to 10 years; T-bonds mature in 10 to 30 years. Both pay semiannual coupon interest.

What are Treasury STRIPS?

Zero-coupon Treasury securities created by separating a bond's interest and principal payments. They are sold at a discount and have high duration.

What are TIPS?

Treasury Inflation-Protected Securities. The principal adjusts with the Consumer Price Index (CPI), so both principal and interest rise with inflation.

Phantom income on STRIPS and TIPS

Annually taxed income that the investor never receives in cash — the accreted discount on STRIPS or the inflation principal adjustment on TIPS is taxed each year.

Tax treatment of Treasury interest

Taxable at the federal level but exempt from state and local income tax. Useful for investors in high-tax states.

Day-count convention for Treasury accrued interest

Actual/actual — uses the real number of days in each month and year. Corporate and muni bonds instead use 30/360.

What makes GNMA (Ginnie Mae) unique among agencies?

GNMA carries the full faith and credit of the U.S. government. FNMA and FHLMC are government-sponsored enterprises (GSEs), not directly guaranteed.

What is a CMO?

A collateralized mortgage obligation slices pooled mortgage cash flows into tranches with different maturities and risk/prepayment profiles.

Mortgage-backed pass-through security risk

Subject to prepayment risk: when rates fall, homeowners refinance, returning principal early so investors reinvest at lower rates.

Tax treatment of municipal bond interest

Exempt from federal income tax. For in-state residents it may be triple-tax-exempt (also state and local). Capital gains on munis remain fully taxable.

Common municipal bond exam trap

Muni interest is federally tax-exempt, but capital gains from selling a muni at a profit are still fully taxable. Tax-free applies to interest, not gains.

General obligation (GO) bond

Backed by the issuer's full faith, credit, and taxing power. Usually requires voter approval since it is repaid from tax revenue.

Revenue bond

Backed only by the income of a specific project or facility (e.g., toll road, stadium). Analyze the feasibility study and debt-service coverage, not taxing power.

Private-activity bond (PAB) tax issue

A muni that benefits a private entity; its otherwise tax-exempt interest may be subject to the alternative minimum tax (AMT).

Are all municipal bonds tax-free?

No. Build America Bonds (BABs) are fully taxable, and private-activity bond interest can trigger AMT. Never assume every muni is tax-exempt.

Tax-equivalent yield (TEY) formula

TEY = muni yield / (1 - tax bracket). It converts a tax-free muni yield into the taxable yield needed to match it.

4% muni for a client in the 32% bracket — TEY?

TEY = 4% / (1 - 0.32) = 4% / 0.68 = 5.88%. The client should prefer the muni over any comparable taxable bond yielding less than 5.88%.

Who benefits most from municipal bonds?

High-tax-bracket investors, because the federal (and possibly state/local) exemption is worth more the higher the investor's marginal tax rate.

What is the MSRB?

The Municipal Securities Rulemaking Board writes rules for the municipal securities market. It does not enforce them directly (FINRA/SEC enforce).

What is EMMA?

Electronic Municipal Market Access — the MSRB's official system for municipal securities disclosure and trade-price reporting.

Municipal notes: TANs, RANs, BANs

Short-term munis issued in anticipation of future revenue: Tax (TAN), Revenue (RAN), and Bond (BAN) Anticipation Notes. Rated on the MIG scale (MIG 1-3).

What does a MIG rating measure?

Moody's Investment Grade rating for short-term municipal notes, MIG 1 (best) to MIG 3, reflecting near-term credit quality and liquidity.

What defines a money market instrument?

High-quality debt maturing in one year or less, used for liquidity and capital preservation — suited to conservative, cash-management needs, not growth.

Commercial paper

Short-term unsecured corporate debt maturing in up to 270 days, issued at a discount. The 270-day limit keeps it exempt from SEC registration.

Negotiable (jumbo) CD

A certificate of deposit of $100,000 or more that can be traded in the secondary market before maturity, unlike a standard bank CD.

Banker's acceptance (BA)

A short-term time draft guaranteed by a bank, used to finance foreign trade (imports/exports). Trades at a discount in the money market.

Repurchase agreement (repo)

A short-term, often overnight, collateralized loan in which a dealer sells securities and agrees to repurchase them at a slightly higher price.

Money market mutual fund stable NAV goal

Money market funds aim to maintain a stable $1.00 net asset value per share, providing liquidity and capital preservation for cash holdings.

When is accrued interest paid, and to whom?

When a bond trades between coupon dates, the buyer pays the seller the interest earned but not yet paid. It is added to the price on the confirmation.

Accrued interest day-count split (memory hook)

Corporate and municipal bonds use 30/360; U.S. government securities use actual/actual. Corp/Muni cheat with 30; Governments use the Actual calendar.

Accrued interest counts through what date?

From the last coupon date up to but NOT including the settlement date. The settlement day itself is excluded from the seller's accrued interest.

Regular-way settlement for stocks and most bonds

T+1 (trade date plus one business day) for stocks, corporate, municipal, and Treasury securities, effective May 28, 2024.

Corporate bond accrued interest calculation

Accrued = par x annual coupon rate x (days / 360), counting from the last coupon up to (not including) settlement, then added to the purchase price.

How many shares does one listed equity option control?

100 shares. Dollar value always equals quoted points x 100, so a premium of 3 = $300 and a 5-point move = $500.

Premium = ? + ?

Premium = intrinsic value + time value. The premium is the price the buyer pays and the writer receives, and it is always built into the breakeven.

Intrinsic value of a CALL

max(market price - strike, 0). A call has intrinsic value only when the stock is above the strike (in the money); it can never be negative.

Intrinsic value of a PUT

max(strike - market price, 0). A put has intrinsic value only when the stock is below the strike (in the money); never below zero.

What is an option's time value?

The portion of premium above intrinsic value, reflecting time to expiration and volatility. Time value = premium - intrinsic value, and it decays toward zero at expiration.

Long call: outlook, max gain, max loss

Bullish. Max gain is unlimited (stock can rise indefinitely); max loss is limited to the premium paid.

Short (naked) call: outlook, max gain, max loss

Bearish/neutral. Max gain is limited to the premium received; max loss is UNLIMITED because the stock can rise without limit.

Long put: outlook, max gain, max loss

Bearish. Max gain = strike - premium (stock can only fall to $0); max loss is limited to the premium paid.

Short put: outlook, max gain, max loss

Bullish/neutral. Max gain is the premium received; max loss = strike - premium. If assigned, the writer must buy stock at the strike.

Breakeven for any CALL position

Strike + premium ('call up'). Same formula whether you are long or short the call.

Breakeven for any PUT position

Strike - premium ('put down'). Same formula whether you are long or short the put.

Short put exercised: what must the writer do?

BUY the stock at the strike price. The put writer is obligated to purchase shares put to them - the single most-flipped fact on the exam.

Short call assigned: what must the writer do?

SELL (deliver) the stock at the strike price. The call writer is obligated to sell shares at the strike when assigned.

Which two single positions are bullish?

Long call and short put are bullish. Long put and short call are bearish. (Owning/wanting upside = long call, short put.)

Define a vertical spread

One long and one short option of the SAME type (both calls or both puts) with different strike prices. It caps both gain and loss.

Debit spread vs. credit spread

A debit spread costs net premium to establish (you pay more than you receive). A credit spread produces net premium (you receive more than you pay).

Debit spread: max loss and max gain

Max loss = net debit paid. Max gain = difference in strikes - net debit. You want it to widen and exercise (DEW).

Credit spread: max gain and max loss

Max gain = net credit received. Max loss = difference in strikes - net credit. You want it to narrow and expire (CEN).

Mnemonic DEW for spreads

DEW = Debit spreads want the spread to EXERCISE and WIDEN. Max loss is the net debit; you profit as the spread widens.

Mnemonic CEN for spreads

CEN = Credit spreads want the spread to EXPIRE and NARROW. Max gain is the net credit; you profit as the spread narrows toward zero.

Breakeven of a call spread

Add the net premium to the LOWER strike. (CAL: Call spreads Add to Lower.)

Breakeven of a put spread

Subtract the net premium from the HIGHER strike. (PUSH: Put spreads Use the Subtraction from the Higher strike.)

Long 50 call @5, short 60 call @2: net debit?

Net debit = 5 - 2 = 3 ($300). It's a debit (bull) call spread since you paid more for the long lower-strike call.

Long 50 call @5, short 60 call @2: max gain?

Max gain = strike difference - net debit = (60-50) - 3 = 7 ($700). Achieved if the stock is at or above 60 at expiration.

Long 50 call @5, short 60 call @2: breakeven?

Lower strike + net premium = 50 + 3 = $53. The bull call spread breaks even at $53.

Define a long straddle

Buying a call AND a put at the same strike and expiration. It bets on a big move (high volatility) in EITHER direction.

Long straddle: max loss and where it occurs

Max loss = total premiums paid, occurring if the stock closes exactly at the strike at expiration (both options expire worthless).

Long straddle: the two breakevens

Upper breakeven = strike + total premium; lower breakeven = strike - total premium. The straddle profits only OUTSIDE these points.

Buy 40 call @3 and 40 put @2: breakevens?

Total premium = 5. Upper breakeven = 40+5 = $45; lower breakeven = 40-5 = $35. Profits only above $45 or below $35.

Short straddle: profile and risk

Sells a call and a put at the same strike; collects both premiums and profits if the stock stays near the strike (INSIDE breakevens). Carries unlimited loss (short call leg).

Mnemonic SILO for straddles

SILO = Short Inside, Long Outside. A short straddle profits INSIDE the breakevens; a long straddle profits OUTSIDE them.

What is a covered call?

Long stock plus a short call written against it - a neutral-to-bullish income strategy. The premium received provides limited downside cushion and caps upside.

Covered call: breakeven and max gain

Breakeven = stock cost - premium received. Max gain = (strike - stock cost) + premium received.

What is a protective put?

Long stock plus a long put used as insurance (a 'married put'). Bullish with downside protection: the put sets a floor at the strike.

Protective put: breakeven and max loss

Breakeven = stock cost + premium. Max loss = (stock cost - strike) + premium. Upside is unlimited because you still own the stock.

How does a SHORT SELLER hedge upside risk?

Buy a call. A long call caps the loss on a short stock position by locking a maximum repurchase price at the strike.

How does a LONG stockholder hedge?

Buy a protective put (insurance) or sell a covered call (income). The put protects against decline; the covered call generates income with limited downside cushion.

Are there listed options on the U.S. dollar?

No. To hedge dollar exposure you trade options on the FOREIGN currency instead (e.g., euro options).

How does a U.S. importer paying in euros hedge?

Buy euro CALLS. If the euro rises (dollar weakens), the calls gain and offset the higher cost of paying in euros.

How does a U.S. exporter receiving euros hedge?

Buy euro PUTS. If the euro falls (dollar strengthens), the puts gain and offset the lower dollar value of euros received.

What is the OCC and what does it do?

The Options Clearing Corporation - the central counterparty that issues, guarantees, and settles all listed options, standing on the other side of every trade.

American-style vs. European-style exercise

American-style options (standard equity options) can be exercised any business day up to expiration. European-style can be exercised only at expiration.

How is option assignment allocated?

The OCC assigns to a member firm randomly; the firm then allocates to a customer either randomly or by FIFO (first-in, first-out), per disclosed procedure.

What is the Options Disclosure Document (ODD)?

The OCC booklet 'Characteristics and Risks of Standardized Options.' It must be delivered at or before approval of an options account.

When is an option premium taxed?

Never when paid/received - tax is triggered only at sale, expiration, or exercise of the option.

Tax: option expires worthless - holder vs. writer

The holder takes a capital LOSS equal to the premium. The writer takes a short-term capital GAIN equal to the premium received.

Tax: when a CALL is exercised, how is basis set?

The call buyer ADDS the premium to the strike to set the stock's cost basis (raising basis). This defers the premium into the stock gain/loss.

Tax: when a PUT writer is assigned, what is basis?

The put writer SUBTRACTS the premium from the strike to set the purchase cost basis (lowering basis), since the premium reduced the effective price paid.

When does the holding period start on exercised options?

The stock's holding period starts the day AFTER exercise - not when the option was originally bought.

How can a protective put affect holding period?

Buying a protective put can SUSPEND the holding period on the underlying stock, potentially affecting long-term vs. short-term capital gain treatment.

What does 'at the money' mean?

The option's strike price equals the current market price of the underlying. Intrinsic value is zero; the entire premium is time value.

Dominant-leg shortcut for spreads

When premiums aren't given: for call spreads the LOWER strike dominates; for put spreads the HIGHER strike dominates. This tells you debit vs. credit and bullish vs. bearish.

Max loss on a NAKED put

Strike - premium. The put writer is obligated to buy at the strike, and the stock can fall only to $0, so loss is large but limited.

Why is a naked call the riskiest single position?

Its max loss is UNLIMITED - the writer must deliver stock at the strike, but the market price can rise without any ceiling.

What does it mean for an option to be 'in the money'?

A call is in the money when the stock is ABOVE the strike; a put is in the money when the stock is BELOW the strike. It then has intrinsic value.

Recommended method for every options math question

Draw a T-chart: money OUT on the left, money IN on the right. It prevents sign errors and reveals max gain, max loss, and breakeven directly.

Approximately what % of scored Series 7 questions is Job Function 3?

About 73% of the 125 scored questions fall under Major Job Function 3, which contains the heavily tested options material.

Long straddle profit zone vs. short straddle profit zone

Long straddle profits OUTSIDE the two breakevens (big move needed); short straddle profits INSIDE them (stock stays near strike). SILO: Short Inside, Long Outside.

What law defines the three investment company types?

The Investment Company Act of 1940. It defines open-end funds (mutual funds), closed-end funds, and unit investment trusts (UITs).

Open-end fund: how are shares issued and priced?

A mutual fund continuously issues and redeems an unlimited number of shares at NAV. Shares trade only with the fund, never in the secondary market.

How does a closed-end fund trade?

It issues a fixed number of shares in an IPO, then trades on an exchange at a market price set by supply and demand — which can be a premium or discount to NAV.

Can a closed-end fund trade above or below NAV?

Yes. Its exchange market price can be above NAV (premium) or below NAV (discount), unlike an open-end fund which always transacts at NAV.

What is a UIT?

A unit investment trust holds a fixed, unmanaged portfolio of securities, issues redeemable units, and has a stated termination date.

Is a UIT actively managed?

No. A UIT holds a fixed, unmanaged portfolio. Open-end and closed-end funds are actively managed; UITs are not.

What is forward pricing?

A mutual fund order fills at the next NAV computed after the order is received, not the last published price. It blocks late trading (SEC Rule 22c-1).

Which fund type uses forward pricing?

Open-end mutual funds. An order is executed at the next calculated NAV, not at a prior published price.

How is NAV per share calculated?

NAV = (total fund assets minus liabilities) divided by shares outstanding. It is the per-share value at which mutual fund shares are redeemed.

What is the POP of a mutual fund?

Public offering price — what the investor pays: NAV plus the front-end sales charge. POP = NAV / (1 − sales-charge %).

Formula: POP from NAV and sales charge?

POP = NAV / (1 − sales-charge %). Divide NAV by one minus the charge — do not multiply; multiplying is the planted wrong answer.

NAV $9.20, max sales charge 8%. What is POP?

POP = $9.20 / (1 − 0.08) = $9.20 / 0.92 = $10.00. The $0.80 difference is the sales charge.

Formula: sales charge % from POP and NAV?

Sales charge % = (POP − NAV) / POP. The sales charge is always measured as a percentage of the POP, not of the NAV.

What is the maximum mutual fund sales charge?

8.5% of the POP under FINRA Rule 2341. It applies only to funds offering breakpoints, rights of accumulation, and reinvestment of dividends at NAV.

What three features are required for the 8.5% max load?

Breakpoints, rights of accumulation, and reinvestment of dividends at NAV. Without all three, the maximum sales charge is reduced below 8.5%.

What is a breakpoint?

A reduced sales charge a mutual fund grants at specified higher levels of investment. Larger purchases earn lower percentage loads.

What is a breakpoint sale (the violation)?

A prohibited practice of selling shares just below a breakpoint to earn a higher commission, denying the client the reduced sales charge.

What is a letter of intent (LOI)?

A statement letting an investor get the breakpoint sales charge by promising to invest a set amount within 13 months; it may be backdated up to 90 days.

What are rights of accumulation?

They let an investor qualify for breakpoints based on the total accumulated value of holdings, not just the current purchase — and have no time limit.

Class A shares: load and best fit?

Class A charges a front-end load but lower ongoing fees. Best for large, long-term investments that reach breakpoints.

Class B shares: how is the load collected?

Class B charges a back-end CDSC (contingent deferred sales charge) that declines yearly to zero, after which B shares often convert to A shares.

What is a CDSC?

A contingent deferred sales charge — a back-end load on Class B shares that declines over the holding period and eventually reaches zero.

Class C (level-load) shares: best fit?

Class C has no front-end load but a higher ongoing 12b-1 fee. Best for short investment horizons; costly to hold long term.

What is a 12b-1 fee?

An annual asset-based fee deducted from fund assets to pay for distribution and marketing. Reviewed at least quarterly by the board.

12b-1 limit to still call a fund 'no-load'?

A fund cannot call itself no-load if its 12b-1 fee exceeds 0.25% of average annual net assets.

What is Subchapter M (conduit/pipeline rule)?

A fund distributing at least 90% of net investment income qualifies as a regulated investment company, passing income to shareholders without fund-level tax.

How much income must a RIC distribute under Subchapter M?

At least 90% of its net investment income. This lets it act as a conduit/pipeline and avoid taxation at the fund level on distributed income.

How does an ETF differ from a mutual fund in trading?

An ETF trades intraday on an exchange at market prices like a stock, while mutual funds price once daily at NAV via forward pricing.

Can ETFs be margined or sold short?

Yes. Unlike mutual funds, ETFs can be bought on margin and sold short, and they carry brokerage commissions rather than sales loads.

Why are ETFs generally tax-efficient?

In-kind creation/redemption limits capital-gains distributions, so ETFs typically generate fewer taxable distributions than mutual funds.

What keeps an ETF's price near its NAV?

The creation/redemption (arbitrage) mechanism. Authorized participants exchange baskets of shares for ETF units, keeping price close to NAV.

Suitability cue: ETF vs mutual fund?

ETFs suit cost-conscious, trading-oriented investors wanting intraday liquidity. Mutual funds suit dollar-cost averaging and automatic reinvestment.

What licenses are needed to sell a variable annuity?

A dual license — both a securities (FINRA) registration and a state insurance license — because a VA is an SEC-registered security requiring a prospectus.

What are the two phases of a variable annuity?

Accumulation (pay-in), where premiums buy accumulation units, and the payout (annuitization) phase, where units convert to a fixed number of annuity units.

What is an accumulation unit?

A unit measuring the investor's interest in a variable annuity's separate account during the pay-in (accumulation) phase; its value varies with the account.

What is an annuity unit?

A fixed number of units set at annuitization; each unit's dollar value fluctuates with separate-account performance relative to the AIR.

What is the separate account of a VA?

The investment account, distinct from the insurer's general account, that holds VA assets; the contract owner bears the investment risk.

What is the AIR?

Assumed interest rate — a benchmark, not a guarantee, used to set variable-annuity payments. It determines whether the next payment rises, holds, or falls.

Separate-account return ABOVE the AIR: next payment?

The next annuity payment increases. The payment rises only when actual performance exceeds the assumed interest rate.

Separate-account return EQUALS the AIR: next payment?

The next annuity payment stays the same. Equal-to-AIR performance means no change.

Separate-account return BELOW the AIR: next payment?

The next annuity payment decreases. Underperforming the AIR lowers the payout.

How are variable annuity withdrawals taxed?

Earnings grow tax-deferred and are taxed as ordinary income on withdrawal, using LIFO — earnings come out first. No step-up at death, no capital-gains rate.

What is a 1035 exchange?

A tax-free exchange under IRC Section 1035 of one annuity or life policy for another comparable contract, deferring tax on the gain.

Why is a variable annuity in an IRA usually unsuitable?

It is redundant — the IRA already provides tax deferral, so wrapping a tax-deferred VA inside it adds cost without added tax benefit.

Is a REIT a DPP or an investment company?

Neither. A REIT is its own structure; it passes through income but NOT losses, unlike a DPP, and is not an Investment Company Act entity.

REIT income test to avoid corporate tax?

It must distribute at least 90% of taxable income, invest at least 75% of assets in real estate, and derive at least 75% of income from real estate.

Do REITs pass through losses?

No. REITs pass through income to shareholders but never losses. Only DPPs (flow-through entities) pass through losses.

Traded vs non-traded REIT liquidity?

Exchange-traded REITs are liquid; non-traded REITs are illiquid and unsuitable for clients who need access to cash.

What is a DPP?

A direct participation program (limited partnership) — a flow-through entity whose income, gains, losses, and credits pass directly to investors, avoiding entity tax.

What does flow-through (pass-through) mean?

The entity pays no tax; items of income and loss pass directly to investors' personal returns. DPPs are flow-through; corporations are not.

What can passive losses offset?

Passive losses (e.g., from a DPP) can offset only passive income — never wages (earned income) or portfolio income like dividends and interest.

General partner vs limited partner liability?

A general partner has unlimited liability and manages the program; limited partners have liability capped at their investment plus any recourse debt.

What limits an investor's deductible DPP loss?

At-risk basis — cash contributed plus recourse debt. Deductible losses cannot exceed the amount the investor can actually lose.

What is at-risk basis?

The amount an investor can actually lose: capital contributed plus recourse debt. Nonrecourse debt generally does not add to at-risk basis.

Why is a 'pure tax shelter' DPP unsuitable?

A program with no economic substance (profit motive) is unsuitable. Economic viability must come first; tax benefits are secondary.

First step in evaluating a DPP for a client?

Confirm economic viability — there must be a profit motive, not just tax write-offs — before assessing liquidity, horizon, and suitability.

Typical suitable DPP investor profile?

High net worth, able to bear loss and illiquidity, long horizon, and ideally has passive income to offset passive losses.

Match liquidity to the client — key trap?

Non-traded REITs and DPPs are illiquid and unsuitable for investors with near-term cash needs, regardless of attractive yields or tax benefits.

Reg BI — what is it and its SEC rule number?

Regulation Best Interest, SEC Rule 15l-1, requires firms to act in a retail customer's best interest at the time of a recommendation. It layers on top of FINRA suitability.

What are Reg BI's four obligations (CDCC)?

Care, Disclosure, Conflict-of-Interest, and Compliance. A firm must satisfy all four when recommending securities to a retail customer.

What is Form CRS and who gets it?

The Client Relationship Summary delivered to retail customers. It discloses the relationship, services, fees, conflicts, and standard of conduct.

FINRA Rule 2111 — the three prongs of suitability?

Reasonable-basis (suitable for someone), customer-specific (suitable for this client), and quantitative (trading volume not excessive — anti-churning).

What is reasonable-basis suitability?

The requirement that a product is suitable for at least some investors, based on the rep's understanding of its risks and rewards. It is product-level, not client-specific.

What is quantitative suitability?

The prong of Rule 2111 ensuring the volume of trading is not excessive given the account — the anti-churning rule. Even individually suitable trades can violate it in aggregate.

FINRA Rule 2090 — what does KYC require?

The Know Your Customer rule requires using reasonable diligence to know the essential facts about every customer and account at opening and throughout the relationship.

Name the elements of a customer's suitability profile.

Age, income, net worth, objectives, risk tolerance, time horizon, liquidity needs, tax status, and investment experience. When narrowing answers, weigh risk tolerance and time horizon first.

Match stated objective or full profile?

Match the entire profile, not just the stated objective. A 70-year-old saying 'growth' usually needs capital preservation; short horizon or high liquidity need implies lower risk tolerance.

Best income product for a high-tax-bracket client?

Municipal bonds. Their tax-exempt interest benefits high-bracket investors most. A low-bracket client should hold taxable bonds instead.

Why are municipal bonds unsuitable inside an IRA?

The IRA already shelters income from tax, so the muni's tax exemption is wasted. Munis are also unsuitable in UGMA/UTMA accounts for the same reason.

Suitable products for a conservative investor?

Government securities, money-market instruments, and fixed annuities. These emphasize safety of principal and stable income over growth.

Suitable products for an aggressive investor?

Small-cap stocks, emerging markets, and options. These offer higher potential return with higher risk, fitting high risk tolerance and long horizons.

Client needs cash soon — which products to avoid?

Avoid illiquid investments like DPPs (direct participation programs) and non-traded REITs. A near-term liquidity need rules out products that cannot be readily sold.

Required info to open every new account?

Customer's name, address, date of birth, SSN/TIN, employment, and financial profile. A reasonable effort to obtain a trusted contact person is also required under Rule 4512.

FINRA Rule 4512 — trusted contact person?

Rule 4512 requires reasonable effort to obtain a trusted contact: an adult the firm may contact about suspected exploitation, health issues, or to confirm information. Senior-protection focused.

JTWROS — what happens at an owner's death?

In Joint Tenants With Right of Survivorship, the deceased owner's interest passes automatically to the surviving owner(s), bypassing the estate.

Tenants in Common — what happens at death?

The decedent's fractional share passes to that owner's estate and heirs, not to the co-owners. TIC allows unequal ownership shares.

In a joint account, who can act and how are checks paid?

Each owner can act for (trade) the whole account, but checks/distributions must be made payable to all parties (all names on the account).

UGMA/UTMA — key features?

Irrevocable gift with one custodian for one minor; the minor owns the assets and is taxed on income under kiddie-tax rules. The minor gains control at the age of transfer.

UGMA vs. UTMA — the difference?

UTMA permits a broader range of assets (e.g., real estate) and a later age of transfer to the minor than UGMA. Both are irrevocable custodial gifts.

FINRA Rule 3260 — discretionary accounts?

Requires prior written customer authorization and account designation before exercising discretion in a non-institutional account. Each discretionary order is marked and reviewed by a principal.

Does choosing only time or price = discretion?

No. Selecting only the time or price of an otherwise-specified order is NOT discretion, so no written authorization is needed for that limited choice.

Who approves an options account?

A Registered Options Principal (ROP) must approve the account. Approval levels are keyed to the risk of the strategies the customer intends to use.

Options approval levels from lowest to highest risk?

Lowest: covered/protective writing. Then long options and spreads. Then short uncovered puts and straddles. Highest: naked (uncovered) calls.

When must the ODD be delivered?

The Options Disclosure Document must be delivered at or before options account approval. It is the standardized risk-disclosure booklet for listed options.

Options Account Agreement (OAA) — timing rule?

The OAA must be signed and returned within 15 days of account approval. Trading may begin before it is returned, but the signed form is still required.

Two required margin account agreements?

The hypothecation agreement (customer pledges securities as collateral) and the credit agreement (terms of the loan). Both are required to open a margin account.

What does the loan consent agreement do?

It is the optional margin document that permits the firm to lend the customer's securities to other parties (e.g., for short selling). It is not required to open the account.

Minimum equity to open a long margin account?

$2,000, or 100% of the purchase price if the purchase is less than $2,000. A firm never requires more equity than the cost of the securities.

Reg T initial margin requirement?

50% of the purchase price for marginable securities. Reg T is set by the Federal Reserve Board and governs the initial credit a broker may extend.

What is the Bank Secrecy Act (BSA)?

The core anti-money-laundering law requiring recordkeeping and reporting. It is administered by FinCEN and obligates firms to maintain a written AML program.

What is FinCEN?

The Financial Crimes Enforcement Network, a U.S. Treasury bureau that administers the BSA and receives CTR and SAR filings.

Three required components of an AML program?

A designated AML compliance officer, ongoing employee training, and independent testing. The program must be in writing under the BSA.

What did the USA PATRIOT Act add to AML?

It added the Customer Identification Program (CIP) and OFAC sanctions screening to the BSA framework, strengthening identity verification at account opening.

What is a CTR and its threshold?

A Currency Transaction Report (FinCEN Form 112) filed for cash transactions exceeding $10,000 in a single day, aggregated per customer.

What is a SAR and its threshold?

A Suspicious Activity Report filed for suspicious activity at or above $5,000. It is filed confidentially with FinCEN.

Can you tell a customer a SAR was filed?

No. SAR filings are strictly confidential; notifying (tipping off) the customer that a SAR was filed is itself a violation.

Why is structuring deposits under $10,000 a red flag?

Breaking up cash transactions to stay below the $10,000 CTR threshold is itself reportable suspicious activity — a SAR trigger, not a way to avoid reporting.

What does CIP require be collected?

Name, address, date of birth, and a taxpayer ID, collected before or shortly after the account opens. Identity is then verified against government and OFAC lists.

What is OFAC?

The Office of Foreign Assets Control. Firms screen customers against its sanctions and Specially Designated Nationals (SDN) lists before opening accounts.

What is a TIN?

A Taxpayer Identification Number (often the Social Security number) required to open and identify a customer account.

Are most suitability questions definitional or scenario-based?

Scenario-driven. They ask what you should DO given a client's full profile, not what a term means. Tax status and liquidity often break ties between two plausible answers.

68-yr-old, low bracket, needs funds in 2 yrs, wants income — best choice?

Short-term investment-grade taxable bonds. Low bracket rules out munis, the 2-year liquidity need rules out non-traded REITs, and 'income' rules out a growth fund.

TOD beneficiary on an individual account — effect?

Transfer-on-death designation passes the account directly to the named beneficiary at death, bypassing probate. Without TOD, an individual account passes to the estate.

To whom is UGMA/UTMA income taxed?

To the minor, under kiddie-tax rules — not to the custodian or donor. The account is registered under the minor's Social Security number.

How many custodians and minors per UGMA/UTMA account?

One custodian for one minor per account. A custodial account cannot have joint custodians or multiple minor beneficiaries.

Reg BI vs. FINRA 2111 — which is broader?

Reg BI sets a best-interest standard for retail recommendations and sits on top of Rule 2111 suitability and Rule 2090 KYC; together they govern recommendations to retail customers.

What is churning and which rule covers it?

Excessive trading in a customer's account primarily to generate commissions. It violates the quantitative suitability prong of FINRA Rule 2111.

High tax bracket + income goal — answer cue?

Recommend municipal bonds. The tax-equivalent yield advantage is greatest for high-bracket investors seeking income.

Low tax bracket + income goal — answer cue?

Recommend taxable bonds (e.g., corporates or governments). A low-bracket client gains little from a muni's tax exemption.

What financial info must a new account capture?

The customer's financial profile: income, net worth, and investment objectives — supporting suitability and Reg BI analysis under Rules 2111 and 2090.

Can options trading begin before the OAA is returned?

Yes. Trading may begin once the account is approved and the ODD delivered, but the signed OAA must still be returned within 15 days.

What does the hypothecation agreement do?

It lets the customer pledge securities as collateral for the margin loan. It is mandatory to open a margin account.

AML pipeline — first step at account opening?

Collect CIP data, verify the customer's identity, and screen against OFAC sanctions lists before or shortly after opening the account.

Cash deposit of exactly $10,000 — CTR required?

No. A CTR is triggered when cash EXCEEDS $10,000 in a single day; exactly $10,000 is below the threshold. Watch for aggregation across the day per customer.

Suspicious $4,000 transaction — SAR required?

Not on threshold alone — the SAR threshold is $5,000 or more in suspicious activity. However, patterns or structuring may still warrant a discretionary SAR filing.

What standard does Reg BI apply and to whom?

A best-interest standard at the time of recommendation, applied to retail customers. It cannot be satisfied by disclosure alone — Care and Conflict obligations also apply.

What is a market order?

An order to buy or sell immediately at the best available price. It is guaranteed to fill but the exact execution price is not guaranteed.

What is a limit order?

An order setting a price ceiling to buy or a floor to sell. It protects the price but may never fill if the market doesn't reach the limit.

Where is a buy stop placed and what does it protect?

ABOVE the current market. It activates as the price rises and is commonly used to protect a short position (limit losses on a short).

Where is a sell stop placed and what does it protect?

BELOW the current market. It activates as the price falls and is commonly used to protect a long position (limit a loss).

Mnemonic for which orders go above the market?

BLiSS/SBL: Buy Stops and Sell Limits go ABOVE the market. Buy limits and sell stops go BELOW.

What does a plain stop order become when triggered?

A market order, so it is guaranteed to fill at the next available price (though not at a guaranteed price).

What does a stop-limit order become when triggered?

A limit order. It may not fill if the price runs past the limit, so execution is not guaranteed.

Where does a buy limit order rest relative to the market?

Below the current price. The goal is to buy cheaper than the current market.

Where does a sell limit order rest relative to the market?

Above the current price. The goal is to sell richer than the current market.

What does AON mean as an order qualifier?

All Or None: the entire order must be executed, but not necessarily immediately. It can remain open until fully filled or canceled.

What does FOK mean as an order qualifier?

Fill Or Kill: execute the entire order immediately and completely, or cancel it entirely. No partial fills.

What does IOC mean as an order qualifier?

Immediate Or Cancel: fill as much as possible right away; cancel any unfilled portion. Partial fills are allowed.

What is a GTC order vs a day order?

GTC (good til canceled) stays open until filled or canceled, though firms periodically purge them. A day order dies at the market close if not filled.

On Series 7, why circle EXCEPT, NOT, LEAST, UNLESS?

These qualifiers flip the correct answer and are the number-one source of careless errors on long, wordy stems. Always identify them before answering.

What is the current regular-way settlement cycle?

T+1 (trade date plus one business day), effective May 28, 2024, for equities, corporate and muni bonds, Treasuries, ETFs, and UITs. Any T+2/T+3 material is stale.

What is cash (same-day) settlement?

T+0 settlement, occurring the same day as the trade. It is used when a transaction must settle immediately.

What does the DERP acronym stand for?

The chronological order of dividend dates: Declaration, Ex-dividend, Record, Payable.

What happens on the declaration date?

The board of directors announces the dividend, including the amount, the record date, and the payable date.

What is the ex-dividend date?

The first day the stock trades WITHOUT the right to the upcoming dividend. You must own the stock before this date to receive the dividend.

To receive a dividend, when must you buy the stock?

Before the ex-dividend date. If you buy on or after the ex-date, you are too late and the seller keeps the dividend.

What is the record date?

The date on which holders on the company's books are entitled to receive the dividend.

What typically happens to a stock's price on the ex-date?

It opens lower by roughly the dividend amount, since new buyers are no longer entitled to that dividend.

What is accrued interest on a bond?

Interest earned but not yet paid that the buyer pays the seller. It covers interest from the last coupon date up to but NOT including settlement.

Which bonds use the 30/360 day-count convention?

Corporate AND municipal bonds. It assumes 30-day months and a 360-day year (mnemonic: Corp and Muni cheat with 30).

Which bonds use the actual/actual day-count?

U.S. government bonds (Treasury notes and bonds), counting the real number of calendar days in months and the year.

Which securities trade flat (no accrued interest)?

T-bills (issued at a discount, no coupon), zero-coupon bonds, and bonds in default. The buyer pays no accrued interest on these.

Accrued interest on a 6% corporate bond for 40 days?

At 30/360, $60/yr $\div$ 360 = ~$0.1667/day. 40 $\times$ $0.1667 $\approx$ $6.67 of accrued interest added to price, paid by buyer to seller.

How are economic indicators classified?

By whether they turn before (leading), with (coincident), or after (lagging) the broad economy.

Name key leading economic indicators.

The stock market (S&P 500), new building permits, new orders for consumer goods, and the money supply. They help forecast the economy's direction.

Name key coincident economic indicators.

Industrial production, capacity utilization, and non-farm payroll employment. They move together with the broad economy.

Name key lagging economic indicators.

Corporate profits, the average duration of unemployment, and the prime rate. They confirm a trend after it has already turned.

Common definition of a recession?

Two consecutive quarters of declining GDP.

What is the long-term capital gains holding period?

More than 12 months. Such gains are taxed at preferential rates; 12 months or less is short-term, taxed as ordinary income.

What happens to a disallowed wash sale loss?

It is not lost forever. The disallowed loss is added to the cost basis of the replacement shares.

Sell at $500 loss 3/10, rebuy same stock $4,000 on 3/25?

Wash sale: the $500 loss is disallowed (within 30 days). The loss is added to the new basis: $4,000 + $500 = $4,500 cost basis.

What is the default cost basis method?

FIFO (first in, first out), unless the client elects specific identification. Mutual funds may also use average cost.

How are inherited securities' cost basis treated?

They receive a step-up in basis to the fair market value on the decedent's date of death.

How is a gifted security's cost basis treated?

The recipient keeps the donor's carryover basis (the donor's original cost basis), not a stepped-up value.

How is U.S. Treasury interest taxed?

Taxable at the federal level but exempt from state and local taxes.

How is municipal bond interest taxed?

Federally tax-exempt (and often state-exempt for in-state residents). However, capital gains on a muni are still fully taxable, a classic trap.

What is phantom income on zeros and TIPS?

Accreted interest (or inflation adjustment) is taxed annually even though no cash is received until maturity.

Traditional IRA vs Roth IRA tax treatment?

Traditional: potential pretax (deductible) contributions, taxable withdrawals. Roth: after-tax contributions, tax-free qualified withdrawals.

What is the 2026 IRA contribution limit?

$7,500, plus a $1,100 catch-up contribution for those age 50 and older.

What is the 2026 401(k)/403(b)/457 elective deferral limit?

$24,500, with an $8,000 catch-up at age 50+, and a higher $11,250 catch-up for those ages 60 to 63.

At what age must RMDs begin?

Age 73 under SECURE 2.0, rising to age 75 for those born in 1960 or later.

Does a Roth IRA require RMDs?

No. A Roth IRA has NO required minimum distributions during the owner's lifetime.

Why not hold munis in a tax-deferred account?

Municipal interest is already tax-exempt, so placing it in a tax-deferred IRA wastes the tax advantage and may convert it to taxable withdrawals.

What is a SEP IRA?

A Simplified Employee Pension IRA used by small employers and self-employed individuals, funded by employer contributions, with higher limits than a traditional IRA.

What is a SIMPLE IRA?

A Savings Incentive Match Plan for Employees, a retirement plan for small employers allowing employee deferrals plus required employer matching or contributions.

How do 529 plans grow for taxes?

Earnings grow tax-free, and qualified withdrawals for education expenses are tax-free. They are state-sponsored education savings plans.

What is the Coverdell ESA contribution cap?

$2,000 per year per beneficiary. It is an education savings account with tax-free growth for qualified education expenses.

Series 7 Function 4 covers what, and roughly what %?

Obtaining and verifying instructions and processing, completing, and confirming transactions (order handling and settlement) — about 11% of scored questions.

Triggered stop vs triggered stop-limit fill certainty?

A triggered stop becomes a market order and WILL fill. A triggered stop-limit becomes a limit order and MAY NOT fill if price moves past the limit.

Up to which day does accrued interest count?

From the last coupon date up to but NOT including the settlement date. Forgetting the exclusion causes a common off-by-one error.

Stock market as an economic indicator: which type?

A leading indicator. The S&P 500 is the classic example of an indicator that turns before the broad economy.

Short-term capital gains tax rate?

Short-term gains (held 12 months or less) are taxed as ordinary income, not at the preferential long-term capital gains rate.