Series 7 Cheatsheet — Comprehensive Formulas, Rules & Diagrams

Use this as a comprehensive reference alongside the Syllabus and Practice. Series 7 rewards rule-aware judgment: pick the best next step that is suitable, documented, and compliant.

Exam map (Series 7 is a job-function exam)

At a glance (FINRA)

• Items: 125 scored + 5 unscored (130 total)
• Time: 3h 45m (225 minutes)
• Passing score: 72 (scaled)

What you should do with the blueprint

Study strategy: master the math and product mechanics for F3 + F4 first; then tidy up communication/account-opening points.

Suitability & Reg BI (the answer is usually a process)

The “best answer” checklist (use on every scenario)

1. Who is the customer? (objective, horizon, risk tolerance, liquidity needs, tax status, experience)
2. What is being recommended? (security, strategy, account type, “hold,” switch/exchange, rollover/transfer)
3. What is the primary risk/tradeoff? (liquidity, credit, duration, leverage, concentration, complexity, tax)
4. What must be disclosed + documented? (fees, surrender charges, conflicts, material risks, account authorization)
5. What is the compliant next step? (get missing facts, deliver required disclosure, escalate, refuse activity)

Suitability “three layers” (Series 7 loves this)

• Reasonable-basis: is the product/strategy suitable for any customer?
• Customer-specific: is it suitable for this customer given their profile?
• Quantitative: is the pattern of trading excessive (churning) given the account objectives?

Quantitative red flags to recognize (conceptual):

• high turnover / in-and-out trading
• high costs relative to equity
• trading that contradicts stated objective (e.g., “income” but frequent speculative trades)

Reg BI mindset (high level)

Reg BI is typically tested as: recommendations must be in the retail customer’s best interest and conflicts should not drive the recommendation.

• Disclosure: fees, scope, conflicts, limitations
• Care: reasonable diligence + understanding + risk/return tradeoffs
• Conflict: identify/mitigate conflicts (e.g., compensation incentives)
• Compliance: policies/procedures support all the above

Decision flow (what the “best answer” often looks like)

    flowchart TD
	  A["Customer asks to trade / invest"] --> B{Do we have a complete profile?}
	  B -->|"No"| C["Gather facts: KYC + objectives + risk + liquidity + tax + experience"]
	  B -->|"Yes"| D{Is this a recommendation?}
	  D -->|"No (unsolicited)"| E["Process order if permitted; still follow rules/controls"]
	  D -->|"Yes"| F["Evaluate product/strategy fit + alternatives + costs + risks"]
	  F --> G{Any red flags / conflicts / missing disclosures?}
	  G -->|"Yes"| H["Disclose, document, escalate, or refuse if required"]
	  G -->|"No"| I["Execute + confirm + recordkeeping"]

Accounts & onboarding (what you need to open and trade)

Account types (what to remember)

• Cash vs Margin
  • cash: fully paid; no borrowing
  • margin: borrowing + leverage; subject to Reg T and maintenance rules
• Options: requires options agreement + delivery of ODD; approval level depends on strategy
• Discretionary: requires written authorization + heightened supervision
• DVP/RVP: delivery vs payment; often used for institutions
• Advisory/fee-based vs commission: costs + conflicts differ; suitability/best interest framing changes
• Day-trading: special disclosures/approvals; pattern day trader rules can apply

Registration types (high-yield differences)

• Individual: single owner
• Joint
  • JTWROS: survivorship (passes to surviving owner)
  • TIC: no survivorship; each owner’s share passes via estate
• Trust: authority defined by trust doc; can be revocable/irrevocable
• Custodial (UTMA): minor is beneficiary; custodian controls until age of termination
• Corporate / Partnership / Sole proprietorship: requires entity docs + authorized signers
• Community property (where applicable): ownership rights can differ from common-law states

Documents & authorizations (common test traps)

• POA: trading authority; does not automatically mean discretionary authority
• Discretionary account: written discretionary authorization + supervisory approvals
• Corporate account: corporate resolution + authorized officers
• Trust account: trust agreement + trustee powers and restrictions
• Third-party checks/mailings: require documentation and firm controls

CIP/AML (customer identification) — high-yield checklist

Series 7 usually tests this as: collect, verify, screen, record.

• CIP items (typical): name, date of birth (individual), address, ID number.
• Verify identity using documentary and/or non-documentary methods.
• OFAC screening: ensure the customer isn’t on sanctions lists (firm process).
• Recordkeeping: retain required CIP/AML records and note any exceptions.
• Escalate red flags: suspicious activity is not “handled by the rep alone.”

Options account paperwork (Series 7 test traps)

• ODD delivery: deliver the options disclosure document (ODD) as required by firm process.
• Options agreement: customer signs and returns after account approval (timing is often tested).
• Approval levels: uncovered writing/spreads require higher approval and suitability review.
• Discretionary + options: requires discretionary authorization and options approval (both).

Retirement accounts & rollovers (very high level)

• Traditional vs Roth IRA: tax timing differs (pre-tax vs after-tax); suitability often hinges on tax bracket, horizon, and withdrawal expectations.
• Retirement accounts and margin: generally no margin loans and no uncovered options (fact pattern will signal).
• Rollover vs transfer:
  • Direct rollover/transfer (custodian-to-custodian) reduces “missed deadline/withholding” risk.
  • Indirect rollover is deadline-sensitive and can trigger withholding and penalties if mishandled.

Fundamental analysis and ratios (test-friendly formulas)

Series 7 expects you to interpret basic statements and compute common ratios. Use these “test-friendly” versions.

Balance sheet / liquidity

Working capital

$$ \text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} $$

• Meaning: short-term “cushion” to pay near-term obligations.
• Example: CA $120m, CL $90m → WC = $30m.

Current ratio

$$ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} $$

• Meaning: short-term liquidity (higher is generally safer).
• Example: 120/90 = 1.33×.

Acid test (quick) ratio

$$ \text{Quick Ratio} = \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} $$

• Meaning: liquidity excluding inventory (more conservative).

Leverage / solvency

Debt-to-equity (high level)

$$ \text{Debt-to-Equity} = \frac{\text{Total Liabilities}}{\text{Shareholders’ Equity}} $$

• Meaning: leverage; more leverage generally increases risk.

Interest coverage (bond safety)

$$ \text{Interest Coverage} = \frac{\text{EBIT}}{\text{Interest Expense}} $$

• Meaning: ability to service debt from operations.

Equity valuation

EPS (common)

$$ \text{EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Avg. Common Shares}} $$

P/E ratio

$$ \text{P/E} = \frac{\text{Market Price per Share}}{\text{EPS}} $$

Dividend payout ratio

$$ \text{Payout Ratio} = \frac{\text{Dividends per Share}}{\text{EPS}} $$

Book value per share (common)

$$ \text{BVPS} = \frac{\text{Total Assets} - \text{Total Liabilities} - \text{Preferred Equity}}{\text{Common Shares}} $$

Example: assets 500, liabilities 320, preferred 20, common shares 10 → BVPS = (500−320−20)/10 = 16.

Profitability & efficiency (quick formulas)

Net profit margin

$$ \text{Profit Margin} = \frac{\text{Net Income}}{\text{Sales}} $$

• Meaning: how much profit is generated per dollar of sales.

Inventory turnover

$$ \text{Inventory Turnover} = \frac{\text{COGS}}{\text{Avg Inventory}} $$

• Meaning: how quickly inventory is sold/replaced (higher turnover often implies faster sales and lower inventory build).

Return on common equity (high level)

$$ \text{ROE} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Avg Common Equity}} $$

• Meaning: profitability relative to shareholders’ equity.

Equities & corporate actions (rights, warrants, dividends, splits)

Common vs preferred (must-know)

• Common stock: residual ownership, voting, dividend not guaranteed, last in liquidation.
• Preferred stock: dividend priority over common, typically fixed dividend, usually no voting, more interest-rate sensitive.

Preferred feature checklist:

• Cumulative vs non-cumulative (missed dividends accrue or not)
• Callable (issuer can redeem; call risk increases when rates fall)
• Convertible (can convert to common; equity upside)
• Participating (may receive extra dividends under certain conditions)

Convertibles (quick math)

Let:

• Par = bond par value (typically 1,000)
• $CR$ = conversion ratio (shares per bond)
• $CP$ = conversion price (implied stock price at which conversion equals par)
• $S$ = current stock price

Conversion price

$$ CP = \frac{\text{Par}}{CR} $$

Conversion value (parity value of the bond as stock)

$$ \text{Conversion Value} = S \times CR $$

Parity price (stock parity)

$$ \text{Parity Price} = \frac{\text{Bond Price}}{CR} $$

Example: Par 1,000; CR 20 → CP = 1,000/20 = 50.
If stock S = 60 → conversion value = 60×20 = 1,200 (conversion is attractive if bond price is below that).

ADRs (American Depositary Receipts)

• ADRs represent foreign shares held by a U.S. depository; they trade in USD but still carry currency and country risk.
• Dividends can vary with FX movements and foreign withholding tax.

Rights (high-yield math)

Rights math is a favorite because it’s mechanical.

Let:

• $M$ = market price of stock
• $S$ = subscription price
• $N$ = number of rights needed to buy 1 new share

Rights value (rights-on)

$$ \text{Right Value (on)} = \frac{M - S}{N + 1} $$

Rights value (ex-rights)

$$ \text{Right Value (ex)} = \frac{M - S}{N} $$

Example: stock $M=50$, subscription $S=40$, $N=4$.

• rights-on value = (50−40)/(4+1) = 2
• ex-rights value = (50−40)/4 = 2.50

Warrants (concept)

Warrants are longer-dated than rights and typically issued by the company. Value is driven by:

• underlying price vs exercise price
• time to expiration
• volatility (more volatility → more time value)

Stock splits (pure arithmetic)

• 2-for-1 split: shares ×2, price ÷2 (cost basis per share ÷2)
• Reverse split: shares ÷X, price ×X

Dividend timeline (don’t overthink)

• Declaration → Ex-dividend (first day shares trade without the dividend) → Record → Payable
• To receive the dividend, you must buy before the ex-dividend date.

Funds & packaged products (mutual funds, ETFs, UIT, REITs, DPPs, variable)

Mutual funds (core formulas)

NAV

$$ \text{NAV} = \frac{\text{Assets} - \text{Liabilities}}{\text{Shares Outstanding}} $$

Meaning: per-share value of the fund’s portfolio (priced once per day for open-end funds).

Public offering price (POP) — front-end load

$$ \text{POP} = \frac{\text{NAV}}{1 - c},\qquad c=\frac{\text{Sales Charge}}{100} $$

Example: NAV = 20, sales charge = 5% ⇒ POP = 20 / 0.95 = 21.05.

Sales charge in dollars

$$ \text{Sales Charge} = \text{POP} - \text{NAV} $$

Sales charge percentage (common trap: the % is of POP)

$$ c = \frac{\text{POP} - \text{NAV}}{\text{POP}} $$

Breakpoints / LOI / ROA (what they do)

• Breakpoint: lower sales charge for larger purchases
• ROA: count existing holdings toward breakpoint
• LOI: intent to invest a target amount within a period to earn breakpoint now

Example (ROA concept): if the breakpoint starts at $50,000 and the client already has $40,000 in the fund family, a new $10,000 purchase can qualify for the reduced breakpoint sales charge.

12b-1 fee (high level)

• An ongoing fund fee used for distribution/marketing and/or shareholder services; it can make “cheap now” share classes more expensive over time.

Closed-end funds premium/discount (quick formula)

$$ %\text{Premium/Discount} = \frac{\text{Market Price} - \text{NAV}}{\text{NAV}} $$

Interpretation:

• positive = premium (market > NAV)
• negative = discount (market < NAV)

ETFs vs mutual funds (Series 7 framing)

• ETFs trade intraday; can be shorted/margined like stock.
• Mutual funds price once daily at NAV; purchases/sales execute at next calculated NAV.

UITs (Unit Investment Trusts)

• Fixed portfolio for a defined period; generally no active management.
• Redeemable units; often used for “set-and-hold” strategies but still carry market risk and fees.

REITs (Real Estate Investment Trusts)

• Types: equity REIT (owns property), mortgage REIT (owns loans/MBS), hybrid.
• Key exam risks: interest-rate sensitivity (esp. mortgage REITs), liquidity (non-listed REITs), valuation opacity.
• Tax: distributions can include ordinary income, capital gains, and return of capital (fact pattern matters).

DPPs (Direct Participation Programs)

• Structures: limited partnerships, LLCs (flow-through tax features).
• Key risks: illiquidity, leverage, limited secondary market, sponsor risk, complex tax reporting (often K-1).
• Suitability: generally for experienced, higher risk-tolerance investors who can tolerate illiquidity and complexity.

Variable annuities (two-unit model)

Accumulation value (conceptual)

$$ \text{Accumulation Value} = \text{Accumulation Units} \times \text{Unit Value} $$

Payout after annuitization (conceptual)

$$ \text{Payment} = \text{Annuity Units} \times \text{Annuity Unit Value} $$

Key exam logic:

• AIR (assumed interest rate) is a baseline. Actual performance above AIR tends to raise payouts; below AIR tends to lower payouts (conceptually).

Common variable annuity fees (know the vocabulary):

• M&E (mortality and expense) fee
• administrative fees
• underlying subaccount (fund) expenses
• surrender charges (declining schedule) and potential tax penalties for early withdrawals

Tax framing (high level):

• Growth is tax-deferred; distributions are generally taxed as ordinary income on gains.
• Early distributions can trigger an additional tax penalty (age-based) depending on the fact pattern.
• A 1035 exchange can allow tax-deferred exchange of certain insurance/annuity contracts, but suitability and costs must still be evaluated.

Fixed income & munis (yields, pricing, accrued interest, CMOs)

Core relationship (always true)

• Rates ↑ → bond prices ↓
• Rates ↓ → bond prices ↑

Duration intuition: longer maturity + lower coupon → bigger price swings.

Quote conventions (convert fast)

Corporate/municipal quotes are commonly in points and fractions of a point.

• 1 point = 1% of par.
• On $1,000 par, 1 point = $10.

Example (8ths): 98 3/8 = 98.375% of par.

• dollar price per $1,000 = 0.98375 × 1,000 = $983.75

Treasury quotes are commonly in 32nds (sometimes plus 1/64).

Example: 101-16 = 101 + 16/32 = 101.5% of par.

• dollar price per $1,000 = 1.015 × 1,000 = $1,015

Discount vs premium (yield ladder)

• Discount bond: $\text{YTM} > \text{CY} > \text{Coupon}$
• Premium bond: $\text{Coupon} > \text{CY} > \text{YTM}$

Why it matters: when you pay a premium, part of each coupon is “return of premium” over time; at a discount, part of the return comes from price accretion.

Money market yields (T-bills / discount instruments)

Let:

• Par = face value
• Price = purchase price
• Days = days to maturity
• Discount = Par − Price

Bank discount yield

$$ \text{Discount Yield} = \frac{\text{Discount}}{\text{Par}} \times \frac{360}{\text{Days}} $$

Money market yield (test-friendly)

$$ \text{MMY} = \frac{\text{Discount}}{\text{Price}} \times \frac{360}{\text{Days}} $$

Example: Par 10,000; Price 9,900; Days 90 ⇒ Discount 100.

• Discount yield = (100/10,000)×(360/90) = 4.00%
• MMY = (100/9,900)×(360/90) ≈ 4.04%

After-tax yield (for taxable bonds)

$$ \text{After-Tax Yield} = \text{Taxable Yield} \times (1 - \text{Tax Rate}) $$

Example: taxable yield 6%, tax rate 32% ⇒ after-tax yield = 6%×0.68 = 4.08%.

Premium amortization / discount accretion (straight-line, exam-friendly)

Let:

• Premium = Price − Par
• Discount = Par − Price

Annual amortization (premium)

$$ \text{Amortization per year} \approx \frac{\text{Premium}}{\text{Years}} $$

Annual accretion (discount)

$$ \text{Accretion per year} \approx \frac{\text{Discount}}{\text{Years}} $$

Interpretation: amortization reduces basis over time; accretion increases basis over time (tax rules vary by product/type; focus on the fact pattern the question gives you).

Yield calculations

Current yield

$$ \text{CY} = \frac{\text{Annual Coupon}}{\text{Market Price}} $$

Example: 5% coupon on $1,000 = $50/year. Bond price = $950 → CY = 50/950 = 5.26%.

Approximate YTM (test-friendly)

$$ \text{YTM} \approx \frac{\text{Annual Coupon} + \frac{\text{Par} - \text{Price}}{\text{Years}}}{\frac{\text{Par} + \text{Price}}{2}} $$

Interpretation:

• numerator ≈ annual income + annualized discount/premium amortization
• denominator ≈ average invested amount

Approximate YTC (swap maturity for call)

$$ \text{YTC} \approx \frac{\text{Annual Coupon} + \frac{\text{Call Price} - \text{Price}}{\text{Years to Call}}}{\frac{\text{Call Price} + \text{Price}}{2}} $$

Yield-to-worst (YTW) and call risk (test logic)

Series 7 often wants you to select the relevant yield.

• Yield-to-worst (YTW): use the lowest yield among relevant scenarios (YTM, YTC, etc.).
• Premium callable bonds: if rates fall, the issuer may call; you can “lose the premium,” so YTC is often the worst (lowest).
• Discount callable bonds: calling can accelerate your gain, so YTM is often the worst (lowest).

Duration (quick price sensitivity approximation)

If a question gives duration (or implies “more duration”), this approximation is useful:

$$ %\Delta \text{Price} \approx -(\text{Duration}) \times \Delta y $$

where $\Delta y$ is the yield change in decimals (e.g., 1% = 0.01).

Total return (fixed income or equity)

$$ \text{Total Return} = \frac{\text{Income} + \Delta \text{Price}}{\text{Beginning Price}} $$

Use this when the question mixes coupon + price movement.

Accrued interest (AI)

Corp/muni day count (30/360)

$$ \text{AI} = \frac{\text{Days}}{360} \times (\text{Coupon Rate} \times \text{Par}) $$

Example: 6% coupon, par 1,000, 90 days accrued:

• annual interest = 60
• AI = (90/360)×60 = 15

Treasury day count (actual/actual — conceptual)

$$ \text{AI} = \frac{\text{Days Accrued}}{\text{Days in Coupon Period}} \times \text{Semiannual Coupon} $$

Taxable equivalent yield (munis)

$$ \text{TEY} = \frac{\text{Tax-Free Yield}}{1 - \text{Tax Rate}} $$

Example: muni yield 4.0%, tax rate 32% ⇒ TEY = 4.0% / 0.68 = 5.88%.

Munis: what to remember

• GO bonds: backed by taxing power.
• Revenue bonds: backed by project revenues.
• Interest is generally federally tax-exempt; capital gains are taxable.
• Watch call features, refundings, and AMT exposure where applicable.

Munis: refunding, pre-refunded, and escrowed-to-maturity

• Refunding: issuer refinances old debt with new debt (often when rates fall).
• Current refunding: old bonds called/refunded soon (timing-driven; fact pattern will signal).
• Advance refunding: old bonds are refunded well before the call date; proceeds are placed in an escrow (often Treasuries/Agencies) until the call/redemption.
• Pre-refunded / ETM (escrowed-to-maturity): credit risk is reduced by the escrow, but call/contraction risk can increase; yield is often lower.

Muni new issues: documents, syndicates, and order priority

Key documents to recognize:

• Official statement (OS): primary disclosure document for the issue.
• Bond counsel opinion: addresses legality and (often) tax status of interest.
• EMMA: common place investors access muni disclosures and continuing information.

Syndicate economics (high level):

Order allocation priority (common test framing):

1. Presale orders (customer orders placed before pricing)
2. Group net orders
3. Designated orders
4. Member orders

Revenue bond “coverage” (credit intuition)

For revenue bonds, questions may test whether revenues can cover debt service.

$$ \text{Debt Service Coverage Ratio (DSCR)} = \frac{\text{Net Revenues}}{\text{Annual Debt Service}} $$

Interpretation: higher coverage generally implies stronger ability to pay interest/principal (fact pattern matters).

CMOs / ABS (diagram-level understanding)

    flowchart LR
	  A["Mortgage pool cash flows (principal + interest)"] --> B["Tranches"]
	  B --> C["Sequential tranches (pay A then B then C)"]
	  B --> D["PAC tranche (more stable)"]
	  B --> E["Support tranche (absorbs prepayment variability)"]

Prepayment risk logic:

• falling rates → more prepayments → contraction risk (cash comes back sooner; reinvestment risk)
• rising rates → fewer prepayments → extension risk (money stuck longer; price sensitivity increases)

Common CMO tranche types (what they mean)

Exam habit: if you see “stable cash flows,” think PAC; if you see “absorbs variability,” think support.

Options (contracts, strategies, breakevens and payoffs)

Intrinsic value and time value

Let $S$ = stock price, $K$ = strike, $P$ = premium.

Call intrinsic

$$ \text{Intrinsic}_{\text{call}} = \max(0, S - K) $$

Put intrinsic

$$ \text{Intrinsic}_{\text{put}} = \max(0, K - S) $$

Time value

$$ \text{Time Value} = P - \text{Intrinsic} $$

Breakevens (single options)

• Long call: BE = K + P
• Long put: BE = K − P

Max gain / max loss (single options)

Vertical spreads (high yield)

Debit spread max gain/loss

• max loss = net debit
• max gain = spread width − net debit

Credit spread max gain/loss

• max gain = net credit
• max loss = spread width − net credit

Strategy formulas (with descriptions + examples)

Below are “Series 7 style” formulas (per-share; multiply by 100 for 1 equity option contract).

Covered call (long stock + short call)

Let:

• stock cost = $S_0$
• short call strike = $K$
• call premium received = $P$

Breakeven:

$$ \text{BE} = S_0 - P $$

Max gain:

$$ \text{Max Gain} = (K - S_0) + P $$

Max loss (if stock → 0):

$$ \text{Max Loss} = (S_0 - P) $$

Interpretation: you “sell upside” for premium income; premium cushions downside.

Protective put (long stock + long put)

Let:

• stock cost = $S_0$
• put strike = $K$
• put premium paid = $P$

Breakeven:

$$ \text{BE} = S_0 + P $$

Max loss (floor at strike):

$$ \text{Max Loss} = (S_0 - K) + P $$

Interpretation: you “buy insurance”; you pay premium to cap downside risk.

Bull call spread (debit) = long lower call, short higher call

Let:

• lower strike = $K_1$
• higher strike = $K_2$
• net debit = $D$

Breakeven:

$$ \text{BE} = K_1 + D $$

Max gain:

$$ \text{Max Gain} = (K_2 - K_1) - D $$

Max loss:

$$ \text{Max Loss} = D $$

Bear put spread (debit) = long higher put, short lower put

Let:

• higher strike = $K_2$
• lower strike = $K_1$
• net debit = $D$

Breakeven:

$$ \text{BE} = K_2 - D $$

Max gain:

$$ \text{Max Gain} = (K_2 - K_1) - D $$

Max loss:

$$ \text{Max Loss} = D $$

Bear call spread (credit) = short lower call, long higher call

Let:

• short strike = $K_1$
• long strike = $K_2$
• net credit = $C$

Breakeven:

$$ \text{BE} = K_1 + C $$

Max gain:

$$ \text{Max Gain} = C $$

Max loss:

$$ \text{Max Loss} = (K_2 - K_1) - C $$

Bull put spread (credit) = short higher put, long lower put

Let:

• short strike = $K_2$
• long strike = $K_1$
• net credit = $C$

Breakeven:

$$ \text{BE} = K_2 - C $$

Max gain:

$$ \text{Max Gain} = C $$

Max loss:

$$ \text{Max Loss} = (K_2 - K_1) - C $$

Long straddle (buy call + buy put at same strike)

Let:

• strike = $K$
• total premium = $P_c + P_p$

Breakevens:

$$ \text{BE}{\uparrow} = K + (P_c + P_p), \qquad \text{BE}{\downarrow} = K - (P_c + P_p) $$

Interpretation: direction-agnostic; you need big movement (volatility).

Exercise & settlement (high-yield reminders)

• American-style equity options can be exercised any time → assignment risk for writers.
• Index options are commonly cash-settled (fact pattern will signal this).
• Corporate actions (splits, special dividends, spin-offs) can trigger contract adjustments.

Options tax (high level)

• Some index options and other contracts can be treated under Section 1256 (60% long-term / 40% short-term, mark-to-market).
• Equity options are generally not Section 1256 (fact pattern matters).

Payoff sketches (shape memory)

Long call:

Profit
  |
  |        /
  |      /
  |____/________ Price
      K

Long put:

Profit
  |\
  | \
  |  \
  |___\______ Price
      K

Margin (Reg T, maintenance, SMA, and options margin)

Quick vocabulary (use consistently)

• LMV: long market value
• SMV: short market value
• Debit: amount borrowed (long margin)
• Credit: short proceeds + deposit (short margin)
• Equity: customer’s ownership value (long: LMV − debit; short: credit − SMV)
• SMA: Special Memorandum Account (Reg T line of credit)
• MME: maintenance margin excess (equity − maintenance requirement), used in day-trading calculations

Minimum initial deposit (Series 7 “rules of thumb”)

For long stock purchases on margin, Reg T is typically 50%, but there is a common minimum deposit logic:

• If purchase < $2,000 → deposit 100%
• If purchase $2,000–$4,000 → deposit $2,000
• If purchase > $4,000 → deposit 50%

These thresholds are commonly tested as “minimum margin” concepts; house rules can be stricter.

Buying power (quick)

• Reg T buying power (long) is typically tied to SMA:
  • max purchase ≈ 2 × SMA (because you need 50% equity).
• Day-trading buying power (pattern day trader concept):
  • DTBP ≈ 4 × MME (maintenance margin excess).

Long stock on margin (core equations)

Let:

• LMV = long market value
• Debit = amount borrowed
• Equity = LMV − Debit

Equity (long margin)

$$ \text{Equity} = \text{LMV} - \text{Debit} $$

Reg T initial (typical)

$$ \text{Required Equity} = 50% \times \text{LMV} $$

Maintenance (FINRA baseline, common)

$$ \text{Required Equity} = 25% \times \text{LMV} $$

Maintenance call (long)

$$ \text{Call} = (0.25 \times \text{LMV}) - \text{Equity} $$

Example: LMV 30,000; Debit 25,000 ⇒ Equity 5,000.
Required = 7,500 ⇒ Call = 2,500.

Short stock (core equations)

Let:

• SMV = short market value (current)
• Credit = short proceeds + deposit
• Equity = Credit − SMV

Short initial (Reg T concept)

• proceeds credited (100% of SMV)
• customer deposits ~50% of SMV (typical)

Maintenance (short, common baseline)

$$ \text{Required Equity} = 30% \times \text{SMV} $$

Maintenance call (short)

$$ \text{Call} = (0.30 \times \text{SMV}) - \text{Equity} $$

Example: short 10,000; deposit 5,000 ⇒ Credit 15,000.
If stock rises to 12,000 ⇒ Equity = 15,000 − 12,000 = 3,000.
Required = 3,600 ⇒ Call = 600.

SMA (Special Memorandum Account) — what to know

• SMA is a line of credit created when equity exceeds Reg T requirement.
• SMA generally increases from sales and market appreciation (rules-based), and decreases with purchases/withdrawals.
• SMA does not fall just because market value drops (common test point).

SMA “mechanics” (common exam framing):

• Stock sale in a margin account often increases SMA by 50% of the sale proceeds (not the profit).
• Market appreciation can increase SMA by roughly 50% of the increase in market value.
• SMA decreases dollar-for-dollar with cash withdrawals and by 50% of purchases (because purchases consume equity).

Uncovered options margin (FINRA-style test formulas)

These are common exam formulas; firms can impose higher requirements.

Let:

• $S$ = underlying stock price
• $K$ = strike
• $P$ = option premium (in dollars)
• OTM amount for call = max(0, K − S)
• OTM amount for put = max(0, S − K)

Uncovered call (short) — typical

$$ \text{Margin} = P + \max\big(0.20S - \text{OTM},; 0.10S\big) $$

Uncovered put (short) — typical

$$ \text{Margin} = P + \max\big(0.20S - \text{OTM},; 0.10S\big) $$

Vertical spreads:

• requirement typically ties to spread width × 100 adjusted for net credit/debit.

Common Series 7 spread margin logic:

• Debit spread: max loss is the debit paid (often no additional margin beyond the debit).
• Credit spread: requirement is often: $$ \text{Requirement} = (\text{Width} \times 100) - (\text{Credit} \times 100) $$

Worked mini-example (credit spread): width 5, net credit 1.20 ⇒ requirement ≈ 500 − 120 = 380.

Orders, execution, settlement and trade reporting

Order types (beyond the basics)

• Market: executes immediately at the best available price (price not guaranteed).
• Limit: executes at a specified price or better (execution not guaranteed).
• Stop (stop-market): becomes a market order when triggered.
• Stop-limit: becomes a limit order when triggered (may not fill if price gaps).
• AON: fill entire size or none
• IOC: fill what you can immediately; cancel remainder
• FOK: fill all immediately or cancel entire order
• MOC: execute at the close
• Not-held: time/price discretion (day order)

Stop “trigger logic” (fast recall):

• Buy stop is entered above market (often to enter long on strength or protect a short).
• Sell stop is entered below market (often to protect a long).

Stop vs stop-limit (why you miss fills)

    flowchart TD
	  A["Stop/Stop-limit order placed"] --> B{Stop price touched?}
	  B -->|"No"| C["Order stays dormant"]
	  B -->|"Yes"| D{Order type?}
	  D -->|"Stop (market)"| E["Becomes MARKET → likely fills, price uncertain"]
	  D -->|"Stop-limit"| F["Becomes LIMIT → price protected, fill not guaranteed"]

Best execution (what you’re optimizing)

Best execution questions usually want: reasonable diligence + the best overall result, not just “lowest commission.”

• price and total cost (incl. fees/spread)
• speed and likelihood of execution
• order size/type and market liquidity/volatility
• customer instructions (limit, time-in-force)
• venue quality and potential conflicts (firm routing policies)

Short sales (high-level rules tested on Series 7)

• Short sale: selling borrowed shares with the intent to buy back later.
• Locate/borrow: firms generally must locate shares before shorting (process-based; fact pattern will signal).
• Marking: orders are marked long / short / short exempt based on the customer’s position and rules.
• Buy-ins / close-outs: fails-to-deliver can trigger mandatory close-out processes.
• Customer suitability angle: unlimited loss potential; margin and recall risk.

Confirmations & statements (what must be disclosed)

Series 7 typically tests “does the customer get told X?”

• Confirmations: security, quantity, price, trade date/time, capacity (agent/principal), and commissions/markups/markdowns.
• Bonds: confirmations commonly include yield and call-feature disclosures (when relevant).
• Variable products: costs/fees and surrender-charge timelines are often the key disclosure.

ACATS transfers (what happens)

• The receiving firm initiates the request; the delivering firm validates or takes exception.
• Transfers typically complete in a few business days once validated; “residual sweeps” can occur after.
• Assets that can’t transfer (proprietary products, fractional shares, restrictions) can drive exceptions (fact pattern matters).

Trade lifecycle (who does what)

    flowchart LR
	  A["Customer order"] --> B["Broker-dealer"]
	  B --> C["Execution venue (exchange/ATS/OTC)"]
	  C --> D["Trade reporting (TRACE/EMMA/TRF etc.)"]
	  D --> E["Clearing"]
	  E --> F["Settlement (mostly T+1)"]
	  F --> G["Confirmations + statements + records"]

Settlement / delivery concepts to recognize

• Good delivery: correct registration, endorsements, denominations, required docs.
• Due bills: used to allocate distributions when trades occur around record/ex dates.
• When-issued / as-if-issued / if-issued: conditional trading; higher cancellation/settlement risk.
• DK (don’t know): trade comparison discrepancy that must be resolved promptly.

Tax & cost basis (core rules and calculations)

Capital gains and holding period (high level)

• Long-term vs short-term depends on holding period.
• Short sales and options can modify holding period and create special rules (watch the fact pattern).

Capital gain “netting” (test logic)

Series 7 often wants the direction and the bucket (short-term vs long-term).

1. Net short-term gains and losses.
2. Net long-term gains and losses.
3. Combine the nets (if one is a gain and one is a loss).

Rule of thumb: short-term gains are typically taxed less favorably than long-term gains (rates depend on the taxpayer; exam questions usually focus on classification).

Wash sale (61-day window: 30 days before + 30 after)

If you sell at a loss and repurchase substantially identical securities within the wash sale window, the loss may be disallowed/added to basis.

Exam-friendly mechanics:

• Disallowed loss is generally added to the basis of the replacement shares.
• Holding period can be adjusted (“tacked on”) depending on the scenario.

Let:

• $P$ = replacement purchase price
• $L$ = disallowed loss amount

$$ \text{New Basis} = P + L $$

Mini-example: sell for a $500 loss, then repurchase → new basis increases by $500.

Gifts vs inheritance (basis intuition)

Gift (carryover, with a common “dual basis” trap)

• For gains, basis generally carries over from the donor.
• If the security’s FMV at gift is below donor basis, losses can use a different basis (fact pattern driven).

High-level “dual basis” intuition:

Inheritance

• Basis often “steps up” (or down) to date-of-death value (high-level rule of thumb).

Municipal bond interest vs capital gains

• Interest generally federally tax-exempt (but check AMT/taxable muni facts).
• Capital gains are taxable.

Bond and fund tax quick hits (what Series 7 tends to test)

• Treasuries: taxable at the federal level; typically exempt from state/local (high-level).
• Corporate bonds: interest is taxable.
• Mutual funds: distributions can include ordinary income and capital gains; reinvesting distributions does not make them “untaxed.”
• Premium/discount: questions may describe amortization/accretion and ask how basis moves (basis down for premium amortization; up for discount accretion—use the fact pattern provided).

Options tax (equity options) — basis adjustments you can calculate

Per-share formulas (multiply by 100 per contract).

Section 1256 reminder (high level): some index options/futures can be marked-to-market with 60/40 tax treatment (fact pattern will specify).

Quick reference tables

Yield / pricing “which formula?”

Options breakevens

Quote conversions (fast math)

Day-count conventions (accrued interest)

Rights math (quick reference)

Let $M$ = market price, $S$ = subscription price, $N$ = rights needed for 1 new share.

Margin snapshot (baseline formulas)

Common options strategy “one-liners”

All per-share (multiply by 100 per contract).

Glossary (fast definitions)

• ACATS: automated system to transfer customer accounts between broker-dealers.
• AI (accrued interest): interest earned since last coupon date paid by buyer to seller at settlement.
• BE (breakeven): underlying price where P/L = 0 at expiration (options).
• CMO: mortgage-backed security with tranches; cash flows depend on prepayments.
• DK: “don’t know” trade comparison break.
• ODD: options disclosure document.
• SMA: Special Memorandum Account (margin line of credit).
• TEY: taxable equivalent yield.