FINRA FINRA Certifications FINRA-SERIES-7 Questions & Answers

• Question 21:

  Which of the following option positions is indicative of the same class of option?

  A. long one XYZ July 70 put and one XYZ July 70 call

  B. long one XYZ October 20 call and one XYZ January 30 call

  C. short one XYZ February 60 put and one ABC February 60 put

  D. short one XYZ June 40 call and one ABC June 20 call

  Correct Answer: B

  long one XYZ October 20 call and one XYZ January 30 call. Options in the same class are either both puts or both calls on the same security.

• Question 22:

  Bubba has a cash account and fails to make full and prompt payment for a purchase. The broker liquidated the transaction. Two weeks later, Bubba places another buy order for 100 shares of XYZ. What does the broker do?

  A. refuses the order

  B. handles the order after obtaining a promise from Bubba to effect prompt settlement

  C. requires a 25% down payment before executing the order

  D. executes the order at its own risk

  Correct Answer: A

  refuses the order. Reg T requires that under these circumstances the account must be frozen for 90 days. Any trade prior to that, requires cash in advance.

• Question 23:

  Bubba Corporation has a registered public offering of 500,000 shares at $36. Of these, 300,000 shares were authorized by unissued and 200,000 shares were sold on behalf of an affiliated person. What is evident from this information?

  A. the entire proceeds of the offering are a primary offering accruing to the corporation

  B. 300,000 shares are identified as a primary distribution

  C. 60% of the proceeds are paid to the corporation and the balance accrues to the affiliated person

  D. both B and C

  Correct Answer: D

  both B and C. The 200,000 shares are sold on behalf of the affiliated person so the proceeds go to that individual. Only the other 300,000 shares are a primary offering.

• Question 24:

  Bubba's margin account has securities valued at $20,000 and an $8,000 credit balance. What is the equity in Bubba's account?

  A. $8,080

  B. $12,800

  C. $20,000

  D. $28,000

  Correct Answer: D

  $28,000. The equity is the market value plus the credit balance.

• Question 25:

  The gross spread in a new issue depends upon which of the following?

  A. the amount of the issue

  B. the type of industry in which the issuer is engaged

  C. the past record of the issuing corporation

  D. all of the above

  Correct Answer: D

  all of the above. The gross spread (or "underwriting spread") depends upon all of these factors.

• Question 26:

  The FINRA markup policy applies to:

  A. agency sales OTC

  B. principal transactions in municipal bonds

  C. mutual fund sales

  D. new issues of corporate securities

  Correct Answer: A

  agency sales OTC. Markup policy applies to basically all securities other than government and municipal offerings expect where the security is offered under a current prospectus. Choices C and D are offered under a prospectus. Choice B involves municipal securities. Therefore, choice A is the only correct answer.

• Question 27:

  If a mutual fund has invested its assets by allocating about one-third each for bonds, preferred stocks, and common stocks, it is identified as:

  A. an income fund

  B. a specialized fund

  C. a balanced fund

  D. a unit investment trust fund

  Correct Answer: C

  a balanced fund. A balanced fund varies its investments among these categories of holdings.

• Question 28:

  Bubba's margin account has $1,000 of SMA. If he buys $20,000 of listed secu rities, how much fully paid margin stock must he deposit to respond to a Reg T requirement of 50%?

  A. $20,000

  B. $9,000

  C. 10,000

  D. $18,000

  Correct Answer: D

  $18,000. Fully paid marginable stock equal to the value of the purchase satisfies the requirement. Since Bubba's account already has $1,000 of SMA, this comprises buying power of $2,000. Therefore, he only needs to deposit the remaining $18,000.

• Question 29:

  A case of leverage is:

  A. selling common stock short and buying warrants for the equivalent number of shares followed by subscribing to the shares and covering the short

  B. borrowing at 6% and investing the funds at 10%

  C. buying stock on the NYSE and later selling it the same day on the CBOE

  D. redeeming a convertible bond before maturity

  Correct Answer: B

  borrowing at 6% and investing the funds at 10%. Leverage is all about using money obtained at a lower cost than what can be earned deploying the funds elsewhere. It is unrelated to arbitrage.

• Question 30:

  Under what circumstances may a registered investment company change its investment objective?

  A. after SEC approval

  B. after it obtains a new charter from the state secretary

  C. after approval by a majority vote of the shareholders

  D. after providing notice that is recorded in the Federal Register

  Correct Answer: C

  after approval by a majority vote of the shareholders. All vital interests of the shareholders are subject to their majority vote.