Series 7 Practice Final UPDATED ACTUAL
Exam Questions and CORRECT Answers
All of the following are types of preferred stock EXCEPT:
A. Performance
B. Participating
C. Cumulative
D. Refundable - CORRECT ANSWER - The best answer is D. There is no such thing as
refundable preferred stock. Participating preferred (also known as performance preferred) allows
the holder to receive additional dividend distributions from the issuer if the issuer is having a
good year. Cumulative preferred "accumulates" any unpaid dividends. Before a common
dividend may be paid, all accumulated dividends must be paid to cumulative preferred
shareholders.
If a customer does not give a broker his or her instructions, cost basis reporting on Form 1099-B
for a stock holding where there have been multiple purchases at different times is done on a:
A. FIFO basis
B. LIFO basis
C. Specific identification basis
D. Random selection basis - CORRECT ANSWER - The best answer is A. Cost basis
reporting to the IRS is required on Form 1099-B. The Form includes the cost basis of the
security, the sale proceeds, and whether the holding period is short term or long term. If there are
multiple purchases of the stock position, absent customer instructions, FIFO is used to report cost
basis. If the customer gives instructions to the broker, then specific identification can be used -
which is beneficial if higher cost shares are selected to either reduce capital gains or increase
reported capital losses.
Municipal bond traders execute transactions in all of the following ways EXCEPT:
A. on the floor of recognized exchanges
B. with bank dealers in the over-the-counter market
,C. with brokerage wire houses in the over-the-counter market
D. with municipal broker's brokers - CORRECT ANSWER - The best answer is A.
Municipal bonds are traded in the over-the-counter market - with bank dealers, other brokers, as
well as with municipal broker's brokers. They are not traded on national stock exchanges.
Of the choices offered, the most actively traded option contract is the:
A. Standard and Poor's 100 Index option (OEX)
B. Major Market Index option (XMI)
C. Value Line Index option (VLE)
D. NASDAQ Index option (NDX) - CORRECT ANSWER - The best answer is A. The
Standard and Poor's 100 option contract (OEX) trades on the Chicago Board Options Exchange
(CBOE) and is the most actively traded contract of the choices given. This was the first broad
based index option, introduced around 1983, and it quickly achieved "market dominance." It is
used extensively by institutional portfolio managers for "portfolio insurance" (buy OEX puts)
and to generate extra income in flat markets (sell OEX calls). Also note that the CBOE, later on,
introduced the SPX (Standard and Poor's 500 index option), which has surpassed the trading
volume of the OEX - but it is not given as a choice!
Which statements are TRUE about over-the-counter transactions?
I In a principal transaction, the customer is charged a mark-up or mark-down
II In an agency transaction, the customer is charged a commission
III In a principal transaction, the firm trades from its inventory account
IV In an agency transaction, the firm trades with other market makers
A. I and II only
B. III and IV only
C. I and IV only
D. I, II, III, IV - CORRECT ANSWER - The best answer is D. In a principal transaction, a
firm trades into, or out of, its inventory account, charging the customer a mark-up or mark-down
that is fair and reasonable. In an agency transaction, the firm trades with another market marker,
charging the customer a fair and reasonable commission for finding the best market.
,Which of the following does not trade "flat" ?
A. Treasury Bills
B. Treasury STRIPS
C. Treasury Bonds
D. Treasury Receipts - CORRECT ANSWER - The best answer is C. Treasury Bills are
short term original issue discount obligations, with the discount earned being the "interest".
Treasury Receipts and Treasury STRIPS are essentially zero-coupon obligations. Because all of
these obligations do not make periodic interest payments, they trade "flat" - that is, without
accrued interest. Treasury Bonds pay interest semi-annually, so they trade with accrued interest.
Under NYSE rules, every "responsible broker or dealer" who communicates bids and offers on
the exchange floor (also known as "addressing the crowd") must comply with all of the
following rules EXCEPT:
A. any bid or offer must be for at least the normal trading unit in that security
B. the highest bid and the lowest offer have precedence in all cases
C. bids and offers must be publicly announced
D. if two bids (or offers) are made at the same time and price, the smaller order has precedence -
CORRECT ANSWER - The best answer is D. Under NYSE trading rules, bids and offers
must be for the minimum 100 share size trading unit; the highest bid and lowest offer have
priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid
and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side
deals allowed). If 2 equivalent price bids (or offers) are made at the same time, the larger order
has precedence and will be filled first.
Monetarist Theory states that:
A. increased government spending will stimulate the economy
B. tax rate reductions and lower government spending will stimulate the economy
C. the actions of the Federal Reserve control the level of economic output
, D. tax rate increases and increased transfer payments will stimulate the economy - CORRECT
ANSWER - The best answer is C. Monetarist Theory states that economic growth is
controlled by the Federal Reserve's actions. If the Federal Reserve allows the money supply to
grow at a pace consistent with real economic growth, there is balance. The theory holds that if
the Federal Reserve allows the money supply to grow more rapidly than real economic growth,
interest rates will fall, stimulating borrowing and investment. Conversely, if the Federal Reserve
allows the money supply to grow more slowly than real economic growth, interest rates will rise,
reducing borrowing and investment.
What is the penalty imposed for excess contributions to an IRA?
A. 6% of the excess contribution
B. 8 1/2% of the excess contribution
C. 10% of the excess contribution
D. no penalties are imposed - CORRECT ANSWER - The best answer is A. Excess
contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not
confuse this penalty with that imposed on a premature distributions from an IRA. Premature
distributions (prior to age 59 1/2) are subject to a 10% penalty tax.
Series EE bonds:
I are negotiable
II are non-negotiable
III pay interest semi-annually
IV pay interest at redemption
A. I and III
B. I and IV
C. II and III
D. II and IV - CORRECT ANSWER - The best answer is D.
Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase
amount of $25 (or more). The interest rate is set at the date of issuance. Interest is "earned"
Exam Questions and CORRECT Answers
All of the following are types of preferred stock EXCEPT:
A. Performance
B. Participating
C. Cumulative
D. Refundable - CORRECT ANSWER - The best answer is D. There is no such thing as
refundable preferred stock. Participating preferred (also known as performance preferred) allows
the holder to receive additional dividend distributions from the issuer if the issuer is having a
good year. Cumulative preferred "accumulates" any unpaid dividends. Before a common
dividend may be paid, all accumulated dividends must be paid to cumulative preferred
shareholders.
If a customer does not give a broker his or her instructions, cost basis reporting on Form 1099-B
for a stock holding where there have been multiple purchases at different times is done on a:
A. FIFO basis
B. LIFO basis
C. Specific identification basis
D. Random selection basis - CORRECT ANSWER - The best answer is A. Cost basis
reporting to the IRS is required on Form 1099-B. The Form includes the cost basis of the
security, the sale proceeds, and whether the holding period is short term or long term. If there are
multiple purchases of the stock position, absent customer instructions, FIFO is used to report cost
basis. If the customer gives instructions to the broker, then specific identification can be used -
which is beneficial if higher cost shares are selected to either reduce capital gains or increase
reported capital losses.
Municipal bond traders execute transactions in all of the following ways EXCEPT:
A. on the floor of recognized exchanges
B. with bank dealers in the over-the-counter market
,C. with brokerage wire houses in the over-the-counter market
D. with municipal broker's brokers - CORRECT ANSWER - The best answer is A.
Municipal bonds are traded in the over-the-counter market - with bank dealers, other brokers, as
well as with municipal broker's brokers. They are not traded on national stock exchanges.
Of the choices offered, the most actively traded option contract is the:
A. Standard and Poor's 100 Index option (OEX)
B. Major Market Index option (XMI)
C. Value Line Index option (VLE)
D. NASDAQ Index option (NDX) - CORRECT ANSWER - The best answer is A. The
Standard and Poor's 100 option contract (OEX) trades on the Chicago Board Options Exchange
(CBOE) and is the most actively traded contract of the choices given. This was the first broad
based index option, introduced around 1983, and it quickly achieved "market dominance." It is
used extensively by institutional portfolio managers for "portfolio insurance" (buy OEX puts)
and to generate extra income in flat markets (sell OEX calls). Also note that the CBOE, later on,
introduced the SPX (Standard and Poor's 500 index option), which has surpassed the trading
volume of the OEX - but it is not given as a choice!
Which statements are TRUE about over-the-counter transactions?
I In a principal transaction, the customer is charged a mark-up or mark-down
II In an agency transaction, the customer is charged a commission
III In a principal transaction, the firm trades from its inventory account
IV In an agency transaction, the firm trades with other market makers
A. I and II only
B. III and IV only
C. I and IV only
D. I, II, III, IV - CORRECT ANSWER - The best answer is D. In a principal transaction, a
firm trades into, or out of, its inventory account, charging the customer a mark-up or mark-down
that is fair and reasonable. In an agency transaction, the firm trades with another market marker,
charging the customer a fair and reasonable commission for finding the best market.
,Which of the following does not trade "flat" ?
A. Treasury Bills
B. Treasury STRIPS
C. Treasury Bonds
D. Treasury Receipts - CORRECT ANSWER - The best answer is C. Treasury Bills are
short term original issue discount obligations, with the discount earned being the "interest".
Treasury Receipts and Treasury STRIPS are essentially zero-coupon obligations. Because all of
these obligations do not make periodic interest payments, they trade "flat" - that is, without
accrued interest. Treasury Bonds pay interest semi-annually, so they trade with accrued interest.
Under NYSE rules, every "responsible broker or dealer" who communicates bids and offers on
the exchange floor (also known as "addressing the crowd") must comply with all of the
following rules EXCEPT:
A. any bid or offer must be for at least the normal trading unit in that security
B. the highest bid and the lowest offer have precedence in all cases
C. bids and offers must be publicly announced
D. if two bids (or offers) are made at the same time and price, the smaller order has precedence -
CORRECT ANSWER - The best answer is D. Under NYSE trading rules, bids and offers
must be for the minimum 100 share size trading unit; the highest bid and lowest offer have
priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid
and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side
deals allowed). If 2 equivalent price bids (or offers) are made at the same time, the larger order
has precedence and will be filled first.
Monetarist Theory states that:
A. increased government spending will stimulate the economy
B. tax rate reductions and lower government spending will stimulate the economy
C. the actions of the Federal Reserve control the level of economic output
, D. tax rate increases and increased transfer payments will stimulate the economy - CORRECT
ANSWER - The best answer is C. Monetarist Theory states that economic growth is
controlled by the Federal Reserve's actions. If the Federal Reserve allows the money supply to
grow at a pace consistent with real economic growth, there is balance. The theory holds that if
the Federal Reserve allows the money supply to grow more rapidly than real economic growth,
interest rates will fall, stimulating borrowing and investment. Conversely, if the Federal Reserve
allows the money supply to grow more slowly than real economic growth, interest rates will rise,
reducing borrowing and investment.
What is the penalty imposed for excess contributions to an IRA?
A. 6% of the excess contribution
B. 8 1/2% of the excess contribution
C. 10% of the excess contribution
D. no penalties are imposed - CORRECT ANSWER - The best answer is A. Excess
contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not
confuse this penalty with that imposed on a premature distributions from an IRA. Premature
distributions (prior to age 59 1/2) are subject to a 10% penalty tax.
Series EE bonds:
I are negotiable
II are non-negotiable
III pay interest semi-annually
IV pay interest at redemption
A. I and III
B. I and IV
C. II and III
D. II and IV - CORRECT ANSWER - The best answer is D.
Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase
amount of $25 (or more). The interest rate is set at the date of issuance. Interest is "earned"
