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FINRA · Series 7

Series 7 practice questions with answers

15 free practice questions for the General Securities Representative Exam (Series 7), spread across the exam's topics. Try each one, then open the answer to see why every option is right or wrong.

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  1. Question 1 · Seeks Business for the Broker-Dealer from Customers and Potential Customers

    A member's ad may state that it is a FINRA member, but it may NOT:

    • ALink to FINRA's site
    • BName the member firm
    • CImply endorsement
    • DShow its address
    Show answer and explanation

    Answer: C) Imply endorsement

    • AIncorrect. Links may be allowed.
    • BIncorrect. The firm must be named.
    • CCorrect. Membership isn't approval.
    • DIncorrect. That's allowed.

  2. Question 2 · Opens Accounts after Obtaining and Evaluating Customers' Financial Profile and Investment Objectives

    Why generally can't an IRA be set up as a margin account?

    • AIRAs are limited to holding cash and certificates of deposit
    • BPledging IRA assets as collateral for a loan is a prohibited transaction
    • CFunds borrowed on margin would count against the annual contribution limit
    • DShort-term gains from margin trades would be taxed in the year they occur
    Show answer and explanation

    Answer: B) Pledging IRA assets as collateral for a loan is a prohibited transaction

    Margin means borrowing from the broker and using the account's securities as collateral. The IRS bars borrowing from an IRA or using it as security for a loan, so IRAs generally can't be margin accounts.

    • AIncorrect. IRAs can hold stocks, bonds, mutual funds and many other securities.
    • BCorrect. A margin loan uses the account's securities as collateral. The IRS treats using an IRA as security for a loan, or borrowing from it, as a prohibited transaction, which can cause the account to stop being an IRA.
    • CIncorrect. The problem is not contribution limits. Borrowing against IRA assets is itself a prohibited transaction.
    • DIncorrect. Gains inside an IRA are generally tax-deferred, whatever the holding period. Taxes are not the reason margin is unavailable.

  3. Question 3 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A revenue bond's insurance covenant generally requires the issuer to:

    • AInsure the facility against damage
    • BInsure bondholders against market losses
    • CBuy life insurance for its officials
    • DPay bondholders double if the facility closes
    Show answer and explanation

    Answer: A) Insure the facility against damage

    • ACorrect. It protects the revenue source.
    • BIncorrect. That isn't the covenant.
    • CIncorrect. That isn't the covenant.
    • DIncorrect. That isn't the covenant.

  4. Question 4 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    Under FINRA Rule 2241, managers and co-managers of an IPO may not publish research on the issuer for:

    • A1 full year
    • B1 day only
    • C90 days
    • D10 days
    Show answer and explanation

    Answer: D) 10 days

    • AIncorrect. The period is 10 days.
    • BIncorrect. The period is 10 days.
    • CIncorrect. The period is 10 days.
    • DCorrect. This is the IPO quiet period.

  5. Question 5 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A retired customer who depends on steady interest payments asks about an income (adjustment) bond issued by a company that recently emerged from reorganization. Which characteristic makes this bond a questionable fit for the customer?

    • AInterest is payable only if the issuer's earnings are sufficient to cover it
    • BInterest is paid in additional shares of the issuer's common stock instead of cash
    • CThe holder must give seven days' notice before collecting each scheduled interest payment
    • DInterest payments are guaranteed by a bank letter of credit that may expire before maturity
    Show answer and explanation

    Answer: A) Interest is payable only if the issuer's earnings are sufficient to cover it

    Income (adjustment) bonds, typically issued in reorganizations, pay interest only if the issuer earns enough. The contingent income makes them unsuitable for customers who need dependable payments.

    • ACorrect. Income (adjustment) bonds, often issued in reorganizations, pay interest only when earnings allow. That makes income unreliable, and the bonds generally trade flat.
    • BIncorrect. When earned, income bond interest is paid in cash. Paying interest in additional securities describes payment-in-kind (PIK) structures.
    • CIncorrect. Notice periods apply to tendering demand obligations such as VRDOs, not to collecting interest on income bonds.
    • DIncorrect. Income bonds are known for contingent interest from the issuer's earnings, not for bank credit enhancement.

  6. Question 6 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A stock trades at $50 ex-rights. The subscription price is $40 and 4 rights are needed to buy one new share. Each right's theoretical value is:

    • A$12.50
    • B$2.00, using the cum-rights formula
    • C$10.00, the market price minus subscription price
    • D$2.50
    Show answer and explanation

    Answer: D) $2.50

    • AIncorrect. That isn't the calculation.
    • BIncorrect. Ex-rights uses N, not N + 1.
    • CIncorrect. That's for one new share.
    • DCorrect. ($50 − $40) ÷ 4.

  7. Question 7 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A registered representative is making a recommendation to a non-retail customer, so FINRA Rule 2111 (rather than Regulation Best Interest) applies. Which item does the rule expressly list as part of the customer's investment profile?

    • AThe customer's liquidity needs
    • BThe account's turnover rate and cost-equity ratio
    • CThe security's risks and rewards found through reasonable diligence
    • DThe name of the customer's trusted contact person
    Show answer and explanation

    Answer: A) The customer's liquidity needs

    FINRA Rule 2111 defines a customer's investment profile to include liquidity needs, along with age, other investments, financial situation, tax status, objectives, experience, time horizon and risk tolerance. Turnover measures and product diligence belong to the other suitability obligations.

    • ACorrect. Rule 2111(a) lists age, other investments, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, risk tolerance, and any other information the customer discloses.
    • BIncorrect. These are measures used to judge quantitative suitability (excessive trading). They are not factors in the customer's investment profile.
    • CIncorrect. Understanding the product's risks and rewards is the reasonable-basis suitability obligation. It concerns the security, not the customer's investment profile.
    • DIncorrect. Trusted contact information is collected under FINRA's account-record rule (Rule 4512). Rule 2111 does not list it as an investment profile factor.

  8. Question 8 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A customer writes a 60 call and a 60 put (short straddle). The maximum loss is:

    • AUnlimited
    • BThe premiums
    • C$6,000
    • DZero
    Show answer and explanation

    Answer: A) Unlimited

    • ACorrect. The short call has unlimited risk.
    • BIncorrect. That is the maximum gain.
    • CIncorrect. The call side is unlimited.
    • DIncorrect. Losses are possible.

  9. Question 9 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A customer writes an uncovered 30 put for 2. The breakeven is:

    • A32
    • B28
    • C30
    • D2
    Show answer and explanation

    Answer: B) 28

    • AIncorrect. That would be a call breakeven.
    • BCorrect. Strike minus premium.
    • CIncorrect. The premium matters.
    • DIncorrect. That is the premium.

  10. Question 10 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    Under FINRA Rule 2330, a registered principal must review a recommended deferred variable annuity purchase and approve or reject it no later than:

    • ASeven business days after the OSJ receives a complete and correct application package
    • BSeven calendar days after the customer signs the deferred variable annuity application
    • CThirty calendar days after the insurance company issues the deferred variable annuity contract
    • DOne business day after the registered representative submits the application to the branch
    Show answer and explanation

    Answer: A) Seven business days after the OSJ receives a complete and correct application package

    FINRA Rule 2330(c) requires a registered principal to review a recommended deferred variable annuity transaction before the application goes to the insurer. The deadline is seven business days after the OSJ receives a complete and correct application package.

    • ACorrect. Rule 2330(c) requires principal review before the application is sent to the insurer, and no later than seven business days after an office of supervisory jurisdiction receives a complete and correct application package.
    • BIncorrect. The deadline is counted in business days, not calendar days. It starts when the OSJ receives a complete and correct application package, not when the customer signs.
    • CIncorrect. The principal review must happen before the application goes to the insurer. Waiting until after the contract is issued would be too late.
    • DIncorrect. The rule allows seven business days, and the period starts when the OSJ receives a complete and correct package, not when the representative submits it.

  11. Question 11 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A customer sells stock short at 50 and buys a 55 call for 2. The maximum loss is:

    • AUnlimited
    • B$500
    • C$200
    • D$700
    Show answer and explanation

    Answer: D) $700

    • AIncorrect. The call caps it.
    • BIncorrect. Add the premium.
    • CIncorrect. That's the premium.
    • DCorrect. (55 − 50 + 2) × 100.

  12. Question 12 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A convertible bond trades at $1,100 with a conversion ratio of 20. The stock trades at $50. The conversion premium is:

    • A0%, since the bond trades at parity
    • B10%
    • C20%, the conversion ratio as a percent
    • D5%
    Show answer and explanation

    Answer: B) 10%

    • AIncorrect. It's above parity.
    • BCorrect. Parity is $1,000, so the bond trades $100 above it.
    • CIncorrect. That isn't the calculation.
    • DIncorrect. That isn't the calculation.

  13. Question 13 · Provides Customers with Information about Investments, Makes Suitable Recommendations, Transfers Assets and Maintains Appropriate Records

    A rep tells a customer, "I'll cover any losses on this trade out of my own pocket." Under FINRA Rule 2150, this is:

    • AAllowed for small trades under $1,000 in value
    • BAllowed if put in writing
    • CA prohibited guarantee against loss
    • DRequired for speculative stocks
    Show answer and explanation

    Answer: C) A prohibited guarantee against loss

    • AIncorrect. It's still prohibited.
    • BIncorrect. It's still prohibited.
    • CCorrect. Reps can't guarantee customers against loss.
    • DIncorrect. It's prohibited.

  14. Question 14 · Obtains and Verifies Customers' Purchase and Sales Instructions and Agreements; Processes, Completes and Confirms Transactions

    When a seller fails to deliver securities, the buyer's firm may eventually:

    • ADo nothing
    • BCancel all trades
    • CExecute a buy-in
    • DCall the SEC
    Show answer and explanation

    Answer: C) Execute a buy-in

    • AIncorrect. Remedies exist.
    • BIncorrect. A buy-in is the remedy.
    • CCorrect. The defaulting seller bears any extra cost.
    • DIncorrect. A buy-in is the remedy.

  15. Question 15 · Obtains and Verifies Customers' Purchase and Sales Instructions and Agreements; Processes, Completes and Confirms Transactions

    Regulation NMS's order protection rule is designed to prevent:

    • ATrade-throughs
    • BAll short sales
    • CMargin trading
    • DOdd lots
    Show answer and explanation

    Answer: A) Trade-throughs

    • ACorrect. Orders shouldn't execute at worse prices than protected quotes.
    • BIncorrect. That's Reg SHO.
    • CIncorrect. That's Reg T.
    • DIncorrect. Odd lots are allowed.

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