Series 7 Practice Exam 2

This is our second free practice test with Series 7 exam questions. As part of your exam prep you should work through as many practice questions as possible. Our questions are designed to be challenging, and they include detailed explanations to help you learn as you go. Continue your exam prep now with our Series 7 sample questions.

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Question 1

Place the following in their proper order in the handling of an order.

I.     P & S dept.

II.    Cashier

III.   Margin dept.

IV.   Wire room

A
IV, I, III, II
B
I, IV, III, II
C
I, III, II, IV
D
IV, III, I, II
Question 1 Explanation: 
The ‘flow of an order’ has the Order department, a/k/a the wire room, handling the order first. They pass the executed order ticket to the P&S dept. (purchase & sale), who then passes it along to the Margin dept. The last stop in the flow of the order is the Cashier dept. which handles the money and securities to complete the settlement of the transaction.
Question 2

A new stock issue may begin trading on NASDAQ

A
as early as the completion of the IPO
B
following the opening trade on the morning of the effective date
C
30 days after the effective date
D
after a 5 business day quiet period
Question 2 Explanation: 
There is no waiting period for new shares to begin trading in the secondary market.
Question 3

Contributions are permitted to be made to an H.R.10 plan, better known as the Keogh Plan, based upon

A
full time corporate salary
B
part time wages as an employee of a partnership
C
compensation earned as a freelance writer
D
alimony received as part of a court settlement
Question 3 Explanation: 
Self-employed individuals and their Full Time (not part time) employees are eligible for a Keogh Plan. Freelance writing is self-employment.
Question 4

A restricted margin account is one in which

A
the equity has fallen below the minimum maintenance requirement
B
the equity has fallen below the $2,000 minimum equity requirement
C
the customer is temporarily prohibited from accessing SMA
D
the equity is less than Reg. T
Question 4 Explanation: 
The definition of a restricted margin account is one in which the equity is less than the Reg. T percentage, which has been unchanged at 50% for decades.
Question 5

Which of the below instruments trades plus accrued?

A
T-bills
B
Zero coupon bonds
C
STRIPS
D
Industrial Development Revenue bonds
Question 5 Explanation: 
Transactions in bonds that have a periodic payment of interest, usually semi-annually, require the buyer to pay accrued to the seller up to, but not including, the settlement date. This is referred to as trading ‘plus accrued.’ Answers A, B and C are zero coupon securities: they pay no periodic interest. Only answer D pays periodic interest.
Question 6

The Uniform Practice Code of FINRA sets forth requirements regarding deliveries, eligibility for issuer distributions, and a wide variety of rules pertaining to dealer to dealer day to day activities. When it comes to the determination of ex-dividend dates:

A
the ex dividend date for open-end investment company shares is set by the Board or the principal underwriter of the fund.
B
the ex dividend date in respect of listed common shares is normally 2 business days prior to the designated record date set by the Board.
C
the ex-date for stock dividends 25% or greater is normally 1 business day past the payable date.
D
all of the above
Question 6 Explanation: 
All of these statements are correct with respect to ex-dividend dates under FINRA’s rules.
Question 7

Underwriting compensation in IPOs is subject to a thorough review by FINRA. Finra will make a definitive ruling on the fairness and reasonability of each of the following issue attributes with the exception of:

A
stock options provided to the underwriting syndicate
B
the POP (public offering price) of the new shares
C
cash compensation provided to the underwriting syndicate
D
none of these are exceptions from FINRA oversight
Question 7 Explanation: 
Finra and the SEC say nothing about the price of a new issue of stock. If the public is willing to pay what the Issuer is asking, it’s buyer beware (caveat emptor) — the public is told to read the prospectus and make an informed investment decision.
Question 8

As the result of a client complaint involving accusations of churning, and allegations of unauthorized trades, a duly qualified panel of arbitrators has heard the case and rendered its ruling against the registered rep on all counts, as well as the branch manager and the member firm for failure to supervise. FINRA rules set forth the normal procedure for the filing of an appeal to the adverse ruling with which of the following?

A
National Adjudicatory Council
B
Board of Governors of FINRA
C
District Business Conduct Committee
D
none of the above
Question 8 Explanation: 
There is one word in this question that is critical: arbitrators. Arbitrator rulings may NOT be appealed. Arbitration decisions are FINAL and BINDING upon all parties, no appeal is permitted.
Question 9

The most volatile of the money market rates shown below is the:

A
prime rate
B
fed funds rate
C
discount rate
D
call loan rate
Question 9 Explanation: 
Fed funds loans are overnight loans between commercial banks, normally used to assist them in meeting their FRB reserve requirements. The interest rate on these funds is considered the most sensitive, or volatile, of all the short term money market rates.
Question 10

SEC Rule 144 restricts sales of control stock by corporate insiders to which of the following limits?

A
Control stock may be sold without limit so long as the insider has filed Form 144 with the SEC at the time of the sale and the sale is not based upon material non-public information.
B
Control stock may be sold over a 90 day period in an amount not to exceed the greater of 1% of the issuer’s outstanding shares or the average weekly volume over the 4 week period preceding the sale.
C
Control stock may be sold over a 90 day period in an amount equal to the lesser of 1% of the issuer’s outstanding shares or the average weekly volume over the 4 week period preceding the sale.
D
The sale of stock by control persons requires that all sale transactions be effected through a broker/dealer which is a member of the principal exchange on which the stock is traded and the firm may act only in an agency capacity.
Question 10 Explanation: 
The quantity limitations set forth in SEC Rule 144 for sales of control stock are properly described in answer B.
Question 11

One of your customers who is an active trader and is a student of technical analysis has called you to discuss his findings regarding the price action on MMM common. He believes that it is fast approaching its resistance level of 60. If he does not think the stock will break out, which of the below would be most appropriate?

A
Sell most if not all of his current long position
B
Place a GTC buy limit order at 61
C
Place a GTC sell stop order at 60
D
Sell MMM 60 put options with a 3 month expiration
Question 11 Explanation: 
Active traders take profit off the table when they believe the market is about to turn around. Resistance at 60 tells us that if the stock is currently in the upper 50’s, it will not go above 60: it will encounter ‘resistance’ at that point. Unless the client believes the stock is about the ‘break out’ to the upside and pierce through the resistance level, the client will sell, taking the profit.
Question 12

The stock of which of the following listed corporations is generally considered the most sensitive to interest rate changes?

A
consumer goods
B
health care
C
public utility
D
broker-dealer
Question 12 Explanation: 
Public Utility companies tend to be highly leveraged, having a capital structure comprised of a substantial amount of long term debt/bonds. The stocks of these companies are referred to as ‘interest rate sensitive’ due to the magnified impact interest rate increases have upon these highly leveraged heavily indebted corporations.
Question 13

In anticipation of a weaker dollar, one would expect

A
US exports to be more competitive
B
foreign exports to increase
C
the US trade deficit to grow
D
none of the above
Question 13 Explanation: 
In simplistic terms, when the US dollar is weak compared to foreign currencies, American goods become cheaper/more competitive/more affordable for foreign businesses, individuals and foreign governments. They buy more US goods, causing US exports to increase, which in turn tends to cause the US trade deficit to decrease.
Question 14

Which of the following mutual funds would be most suitable for the client seeking stability of capital?

A
income fund
B
growth and income fund
C
balanced fund
D
government bond fund
Question 14 Explanation: 
Stability of capital is the stated investment objective of a Balanced Mutual Fund.
Question 15

An investment in United States Treasury bonds may be subject to which of the following taxes?

I.     capital gains

II.    federal income

III.   state income

IV.   ad valorem

A
all of the above
B
I and III
C
I and II
D
II only
Question 15 Explanation: 
US Treasury securities are subject to Federal Income Tax, but are exempt from State Income Tax. Ad valorem taxes are taxes on property, such as a home or commercial building, not on securities investments. If an investor sells a T-bond in the secondary market at a capital gain, that gain is taxable.
Question 16

Direct institution to institution securities transactions are considered

A
a violation of the Securities & Exchange Act of 1934
B
the secondary market
C
the third market
D
the fourth market
Question 16 Explanation: 
The fourth market is direct trading between two institutional investors, with no broker/dealer involved. This is often referred to as trading on Instinet, which is a word combining the two words Institutional Network.
Question 17

According to the rules and regulations of the Options Clearing Corporation and the options exchanges, an equity call option may be covered by each of these except:

A
100 shares of the underlying common stock
B
cash equal to the aggregate exercise price of the option
C
a depository receipt for 100 shares of the underlying common stock
D
none of these are exceptions
Question 17 Explanation: 
Covered call writing requires the writer to own 100 shares of the underlying stock in their brokerage account, or provide their brokerage firm with a receipt from a bank or other depository institution showing that the bank is holding 100 shares of the underlying stock in their vault, stock which belongs to the option writer. Having enough cash on hand to buy 100 shares of the stock is not considered ‘covered’ under the OCC rules.
Question 18

The Daily Bond Buyer publishes information about the municipal securities business including the volume of new municipal issues coming to market over the next 30 days. This is referred to as:

A
the Bond Buyer Index
B
the new issue calendar
C
the placement ratio
D
the visible supply
Question 18 Explanation: 
The Daily Bond Buyer provides data for the municipal bond market, including the new municipal issues expected to come to market in the next 30 days, referred to as the Visible Supply.
Question 19

Uncovered short put exercise results in

A
acquisition of shares with a resulting cost basis of strike price less premium
B
liquidation of shares with a resulting sales proceeds of strike price less premium
C
the potential for unlimited loss
D
the potential for a maximum loss of strike price plus premium
Question 19 Explanation: 
The writer of a put option is obligated to purchase 100 shares at the strike price if the option is exercised. According to the Internal Revenue Code, if exercised, this investor would now be long 100 shares of stock with a ‘net’ cost of the strike price minus the premium. This net cost is the cost basis of the newly acquired shares.
Question 20

LMN corporation has 2 million shares authorized, of which 1 million have been issued and there are 100,000 shares of treasury stock on the balance sheet. If the Board declares a dividend of $200,000, the per-share dividend payout would be:

A
$ 0.20
B
$ 0.22
C
$ 5.00
D
$ 5.55
Question 20 Explanation: 
Dividends are paid on shares which are outstanding in the hands of investors, not on treasury stock. This company has issued 1 million shares, but has bought back 100,000 of those shares, referred to as treasury stock. There are only 900,000 outstanding shares. The dividend of $200,000 divided by the 900,000 shares outstanding:
= 22 cents dividend per share.
Question 21

Rose McGraw has given 1,000 shares of ABC common to her granddaughter under the UGMA regulations. ABC is currently trading at $14 and Rose’s initial cost for the shares nearly a decade ago was $7/share. For taxation purposes, the cost basis and date of acquisition for the granddaughter would be:

A
$7 cost basis and the date of acquisition is the date of the gift
B
$14 cost basis and the date of acquisition is the date of the gift
C
$7 cost basis and the date of acquisition is the donor’s date of purchase
D
$14 cost basis and the date of acquisition is the date of purchase by the donor
Question 21 Explanation: 
IRS regulations state that the donor’s cost and the donor’s date of purchase transfer over to the minor when a gift of securities is given under UGMA.
Question 22

A Eurodollar bond has each of the following characteristics except:

A
interest payments may be made in either US dollars or the currency of the nation in which the bond was issued.
B
its interest payments will be made in US dollars only.
C
these bonds are issued by either US or foreign corporations but are not issued in the United States.
D
principal is repaid at maturity in US dollars.
Question 22 Explanation: 
Owners of Eurodollar bonds cannot elect to have their interest payments in foreign currency -- it must be in U.S. dollars.
Question 23

Compute the taxable or corporate equivalent yield for a 4.5% GO in the portfolio of an investor in the 36% tax bracket.

A
4.5%
B
6.12%
C
7.03%
D
2.88%
Question 23 Explanation: 
The formula is:

Municipal yield divided by (100% minus investor’s tax bracket)

= 4.5% divided by (100% minus 36%)
= 4.5% divided by 64%
= 7.03%
Question 24

The breadth of the market is measured by the

A
put / call ratio
B
price / earnings ratio of the S&P 500
C
daily volume compared to the average daily volume
D
advance / decline ratio
Question 24 Explanation: 
In securities analysis, the breadth of the market is measured by the ratio of advancing stocks to declining stocks.
Question 25

A margin account customer buys 100 shares of JKS common at 80 and deposits the required Reg. T margin. A week later with JKS at 90, the account has SMA of:

A
$250
B
$500
C
$1,000
D
$2,000
Question 25 Explanation: 
The initial purchase of $8,000 at 50% Reg. T requires a down payment of $4,000 and creates a loan from the broker to the client of $4,000, referred to as the customer’s debit balance. With the stock rising to 90, the CMV is now $9,000 while the debit balance does not change.

The client’s new equity is $5,000, found by taking CMV minus debit balance = $9,000 minus $4,000.

However, Reg. T only requires equity of 50% of CMV, which on a $9,000 position is a Reg. T required equity of $4,500.

Your client’s equity of $5,000 exceeds Reg. T by $500.

The new equity of $5,000 minus the Reg. T equity of $4,500 = $500.

This $500 is commonly referred to as SMA, and is also called excess equity, also called Reg. T excess, and is also referred to as the client’s ‘line of credit.’
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