FINRA FINRA Certifications FINRA-SERIES-7 Questions & Answers

• Question 51:

  The preferred stock of Greatest Technology Corporation has a $100 par and is convertible into four shares of common stock. The preferred is trading at 104.50. The preferred is callable at 101. If the common stock price is presently 27.89, which of the following actions would be a successful arbitrage:

  A. purchase 400 shares of common stock and sell 100 shares of preferred stock as "short exempt" (that is, the sale is exempt from the uptick rule)

  B. purchase the preferred stock and sell an appropriate amount of the common stock "short exempt"

  C. purchase both the common and the preferred stocks as a hedge against further market risk

  D. purchase the preferred stock and let it be called, which is inevitable at these market prices

  Correct Answer: B

  purchase the preferred stock and sell an appropriate amount of the common stock "short exempt". Arbitrage is the nearly simultaneous purchase and sale of equal securities in different markets for a profit. Selling four shares of common stock for every one share of preferred stock purchased provides a profit. The transactions involve the same number of common shares because the preferred is convertible to common at a four to one ratio.

• Question 52:

  Which of the following price quotes is representative of a treasury bill?

  A. 98.9 - 100

  B. 96 - 96½

  C. 5.78 - 5.73

  D. 5.55 - 5.75

  Correct Answer: C

  5.78 - 5.73. Prices for treasury bills are quoted as percentage yields. A quotation in yield means the first price in the spread - the bid price - should be higher than the offer price. A higher yield means a lower price.

• Question 53:

  Bubba holds 200 shares of common stock in a utility company and receives rights to subscribe to an additional 100 shares at $20. The utility company is raising $40 million of new capital. How many rights does Bubba receive?

  A. 20

  B. 50

  C. 100

  D. 200

  Correct Answer: D

  200. In an issue of rights, there is always one right per share. Bubba owns 200 shares and thus receives the same number of rights.

• Question 54:

  Which of the following municipal securities carries the full faith and credit of the US government for payment of interest and principal if the issuer's funds are insufficient?

  A. general obligation bonds issued municipalities

  B. special tax bonds issued by municipalities

  C. revenue bonds issued by municipal port authorities

  D. new housing authority bonds issued by a public housing authority

  Correct Answer: D

  new housing authority bonds issued by a public housing authority. Only housing bonds are backed by the US government if municipalities are unable to meet the obligations for payment.

• Question 55:

  Municipal bond brokers generally conduct the following:

  A. trade for dealer banks

  B. trade for non-bank dealers

  C. trade for their own account

  D. both A and B

  Correct Answer: D

  both A and B. Brokers generally operate as agents attempting to locate buyers or sellers for bond dealers. They do not trade for their own accounts or deal directly with individual investors.

• Question 56:

  A CMO is issued that has three tranches. One has an average life of 2 years. A second has an average life of 10 years. The third has an average life of 30 years. Initially, interest payments are distributed in this order:

  A. first to the holders of the 2-year tranche

  B. first to the holders of the 10-year tranche

  C. first to the holders of the 30-year tranche

  D. equally to all CMO holders of any tranche

  Correct Answer: D

  equally to all CMO holders of any tranche. All bondholders share equally in the interest payments. Only principal payments are directed to the owners in each tranche in sequential order.

• Question 57:

  A bank or trust company that is acting as custodian for a mutual fund does which of the following?

  A. guarantees investor losses on investments

  B. provides investment advice to the fund's managers

  C. redeem and issues fund shares

  D. physically protects the fund's assets

  Correct Answer: D

  physically protects the fund's assets. The custodian holds the assets of the fund. The transfer agent redeems and issues fund shares.

• Question 58:

  Which of the following statements incorrectly describes US securities markets?

  A. a capital market comprised of long-term debt and equity issues

  B. a money market comprised of short-term debt and equity issues

  C. a municipal market comprised of tax-exempt issues of state and local governments

  D. a government and agency market comprised of both short-term and long-term debt issues

  Correct Answer: B

  a money market comprised of short-term debt and equity issues. This is the statement that is "incorrect". Equity issues are not traded in the money market, which consists only of high-quality short-term debt securities.

• Question 59:

  The FINRA markup policy requires that over-the-counter transactions with a customer be at:

  A. prices reasonably related to the current market price of the security

  B. a markup not to exceed 5% of the current offering price

  C. prices reasonably related to the dealer's cost

  D. a markup based on previous activity in the customer's account

  Correct Answer: A

  prices reasonably related to the current market price of the security. All markups must be based upon the current market rather than the dealer's cost.

• Question 60:

  When a corporation dissolves, who gets paid first?

  A. bank lenders

  B. senior bond holders

  C. the tax collector

  D. the lawyer

  Correct Answer: C

  the tax collector. Taxes always have preference over any other creditors.