FINRA FINRA Certifications FINRA-SERIES-7 Questions & Answers

• Question 131:

  Municipal bonds would be least attractive as an investment for which of the following?

  A. an insurance company

  B. a pension fund

  C. a commercial bank

  D. the executive officer of an industrial corporation in the highest income tax bracket

  Correct Answer: B

  a pension fund. Since the pension fund does not pay income tax, the tax benefits of the municipal bonds are not realized.

• Question 132:

  Crossover is best defined as:

  A. the point at which the program becomes profitable

  B. the point at which income exceeds deductions

  C. the fact that there are more general partners than limited partners

  D. the profit of limited partners exceeding profit of general partners

  Correct Answer: B

  the point at which income exceeds deductions. This is the definition of "crossover".

• Question 133:

  Bubba Brokerage Corporation announces through its wire system that it has a large block of stock for sale. Customers purchasing the stock will not pay a commission. The block is crossed on the NYSE floor and is printed on the NYSE tape. This is called a:

  A. special order

  B. exchange distribution

  C. secondary distribution

  D. specialist block purchase

  Correct Answer: B

  exchange distribution. An exchange distribution is a large block sold internally by one firm that is crossed on the floor of the exchange. The trade would print on the tape identified by the letters "DIST".

• Question 134:

  Bubba opens a margin account and sells short 100 shares of XYZ at $50. Assuming a Reg T requirement of 50%, what is the opening balance in Bubba's account?

  A. $10,000

  B. $7,500

  C. $5,000

  D. $2,500

  Correct Answer: B

  $7,500. The short sale transaction is $5,000. The Reg T required deposit is $2,500 ($5,000 x 50%). Adding both results in $7,500.

• Question 135:

  Maintaining a fair and orderly market and acting as a broker's broker are dual functions of the:

  A. competitive trader

  B. odd-lot dealer

  C. specialist

  D. two-dollar broker

  Correct Answer: C

  specialists. This description defines the function of the specialists.

• Question 136:

  The expiration date of a listed option is:

  A. the last day of the expiration month

  B. the third Saturday of the expiration month

  C. the Saturday following the third Friday of the expiration month

  D. the third Friday of the expiration month

  Correct Answer: C

  the Saturday following the third Friday of the expiration month. It is NOT the third Saturday. The final day to trade options is the third Friday of the expiration month. The options expire the next da y.

• Question 137:

  With the Regulation T requirement at 50%, a firm wishes to impose house rules that require a minimum equity of 40%. Which of the following is true?

  A. this cannot be implemented because the level is below Reg T

  B. this cannot be implemented since maintenance requirements are only 25% of equity for long positions

  C. this is permissible

  D. this action must be approved by the FRB and FINRA

  Correct Answer: C

  this is permissible. Firms may establish house rules as long as they are at least as strict as the minimum maintenance requirements. Reg T only dictates an initial requirement and does not address minimum equity.

• Question 138:

  Regulation T is set at 50%. Bubba's account contains long positions in the following securities with the prices listed: 100 ABC $30 200 XYZ $70 200 QBB $40 200 KKK $25 Total market value = $30,000 Debit balance in the account = $12,000 Net equity balance of the account = $18,000

  What is the buying power in Bubba's account?

  A. $3,000

  B. $6,000

  C. $11,000

  D. $0

  Correct Answer: B

  $6,000. Divide Bubba's excess equity by the Reg T margin requirement of 50%.

• Question 139:

  Bubba buys a ten-year municipal and at 102 and sells it five years later at 101. What is tax treatment?

  A. a $10 long-term capital loss is realized

  B. the $10 loss is applied as a reduction against ordinary income

  C. no capital loss or income deduction is realized

  D. the $10 loss is applied against future profits in municipal securities

  Correct Answer: C

  no capital loss or income deduction is realized. The $20 premium is amortized over the ten-year life of the bond. After five years, half of the premium has been written down. The remaining premium is the same as the premium received upon selling the bond. The sale at 101 results in no loss or gain.

• Question 140:

  An investment company acting as a conduit in the distribution of net investment income, pursuant to IRS rules, is called:

  A. balanced

  B. diversified

  C. regulated

  D. dual-purpose

  Correct Answer: C

  regulated. The term "regulated" refers to tax status under Subchapter M of the Internal Revenue Code. This simply means that if a mutual fund or other investment company qualifies for regulated status, the threat of taxation at multiple levels is eliminated.