FINRA FINRA Certifications FINRA-SERIES-7 Questions & Answers

• Question 171:

  Bubba buys a 5% municipal bond maturing in 15 years that is trading at a market price of 85. What is the current yield?

  A. 5.00%

  B. 5.88%

  C. 6.49%

  D. 5.10%

  Correct Answer: B

  5.88%. The current yield is the annual interest divided by the price. The bond will pay $50 of interest per year ($1,000 face amount times 5%). Dividing by the price of $850 equals 5.88%.

• Question 172:

  An option that permits the holder to exercise the contract only at expiration is referred to as:

  A. European style

  B. American style

  C. Nordic style

  D. Asian style

  Correct Answer: A

  European style. These options can only be exercised at the expiration date while American style options can be exercised at any time prior to expiration.

• Question 173:

  Bubba buys a municipal bond at 102 and holds it ten years to maturity. For tax purposes, how is that premium treated?

  A. recorded as a long-term capital loss

  B. an ordinary loss taken as a deduction from taxable income

  C. amortized over the life of the bond resulting in no loss at maturity

  D. carried forward as a premium loss applied against profits realized on future municipal securities

  Correct Answer: C

  amortized over the life of the bond resulting in no loss at maturity. For tax purposes, premiums are amortized over the life of the bond. Some amount is taken each year.

• Question 174:

  Which of the following is an analyst most likely to classify as a defensive issue?

  A. the securities of a company that airplanes to the military

  B. a stock of a large company

  C. the common stock of a utility company

  D. a corporate bond

  Correct Answer: C

  the common stock of a utility company. The term "defensive issue" refers to a security that is least susceptible to swings in the business cycle.

• Question 175:

  In June, Bubba bought 100 shares of XYZ at $35. In November, he bought a listed put in XYZ with a $35 strike price and a July expiration for a premium of $600. In April, Bubba exercises the put option and uses his stock for delivery. What is his resulting tax consequence?

  A. a $600 capital loss

  B. neither profit nor loss

  C. cannot be determined without knowing the market price of XYZ upon exercise

  D. this is a wash sale and cannot be included in the investor's tax calculations

  Correct Answer: A

  a $600 loss. The strike price and Bubba's purchase price are the same. He has a $600 loss on the option for the premium he paid.

• Question 176:

  Municipal syndicate allocation procedures are described in which of the following?

  A. underwriting agreement

  B. syndicate account letter

  C. agreement among the underwriters

  D. official statement

  Correct Answer: B

  syndicate account letter. This letter is sent by the manager of a competitive bid syndicate to the other members. The priority and other procedures, including allocation amounts, are specified in the letter. Members signify acceptance by signing the letter and returning it to the manger.

• Question 177:

  When does a call option provide the most value to its holder?

  A. when the underlying stock is extremely volatile

  B. in the month prior to its expiration

  C. when there is a large open interest in that class of option

  D. when the underlying stock price is rising

  Correct Answer: D

  when the underlying stock price is rising. That's why the holder of this option wants to have a right to "call" the stock.

• Question 178:

  What Federal Reserve Board regulation governs the extension of securities-related credit by banks?

  A. Regulation G

  B. Regulation T

  C. Regulation U

  D. Regulation X

  Correct Answer: C

  Regulation U. Regulation T is the extension of credit by broker/dealers. Reg U relates to the extension of credit by banks on securities.

• Question 179:

  Which of the following does not appear in a municipal syndicate letter to underwriters?

  A. the specific bid and offering terms of the issue

  B. the amount of each member's participation

  C. the extent of the manager's authority in directing the offering

  D. the duration of the syndicate account

  Correct Answer: A

  the specific bid and offering terms of the issue. The bid and offering terms are determined after the syndicate letter to underwriters.

• Question 180:

  Prospective bidders for a municipal bond being issued should consult what document for relevant procedures?

  A. the Eastern account agreement

  B. the official notice of sale

  C. the offering circular

  D. the SEC Registration Statement

  Correct Answer: B

  the official notice of sale. All bid requirements are found in the official notice of sale.