Series 7 Mock Exam #2 2025
Questions and Answers
If a customer buys 100 shares of stock and writes one out-of-the-money call against her
long position, the breakeven point is
A) the cost of stock purchased less premium.
B) the cost of stock purchased plus premium.
C) the strike price less premium.
D) the strike price plus premium. - ANSWER✔✔-A) the cost of stock purchased less
premium.
Explanation: When the investor owns stock and sells a call, the call is covered.
Breakeven is computed by subtracting the premium from the stock's purchase price.
Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its
shareholders with a statement indicating acceptance or rejection of the offer within how
many business days of the announcement?
A) 5
B) 10
C) 15
D) 20 - ANSWER✔✔-B) 10
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 1
,Explanation: Once a tender offer is announced, the target company, within 10 business
days of the announcement, must provide its shareholders with a statement indicating
acceptance or rejection of the offer and the reasons for the position taken.
A firm must provide a risk disclosure document to a customer before opening which of
the following accounts?
A) Partnership
B) Custodial
C) Margin
D) Transfer on death - ANSWER✔✔-C) Margin
Explanation: All customers opening margin accounts must receive a risk disclosure
document describing the risks associated with trading on margin (e.g., that a customer
could lose more than the initial investment, or that the firm could sell out securities in
the account to meet a maintenance call without providing prior notice to the customer).
This document must also be provided to customers on an annual basis.
Variable-rate municipal bonds are subject to all of the following risks except:
A) liquidity.
B) interest rate.
C) market.
D) default. - ANSWER✔✔-B) interest rate
Explanation: A variable-rate bond is one whose coupon is adjusted periodically
(semiannually or annually) to reflect current interest rates. Therefore, if rates rise and
force prices down, the coupon on a variable-rate bond will be adjusted upward, thereby
tending to keep the bond's price at or near par. Therefore, no interest rate risk is
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 2
,associated with these bonds. However, if rates fall, the coupon will be adjusted
downward, keeping the bond's price at or around par. Normally, a fall in rates will
force prices up, but not with variable-rate bonds.
The City of Columbus issued a 20-year general obligation bond at a price of 50. An
original purchaser sold the bond at 75 after holding it for 7 years. For tax purposes, that
sale generated:
A) a $250 capital gain.
B) a $75 capital gain.
C) no gain or loss.
D) a $25 capital gain. - ANSWER✔✔-B) a $75 capital gain
Explanation: The customer has realized a capital gain of $75. Original issue discount
bonds must accrete the discount over the life of the bond. In this example, the amount
of the discount (par value minus purchase price) is $500 ($1,000 − $500 = $500). The
discount divided by the number of years to maturity determines the annual accretion
added to the cost basis. In this question, the annual accretion is $25 ($500 divided by 20
= $25). The adjusted cost basis would be the original purchase price ($500) plus seven
years of accretion (7 times $25 = $175) for a total of $675. Because the proceeds of the
sale were $750, the customer has realized a capital gain of $75 ($750 − $675 = $75).
An issuer decides to not offer all the registered common stock shares to the public in the
IPO (Initial Public Offering). Instead, some of the shares are held back for later sale. This
is an example of:
A) a shelf registration.
B) a staged public offering.
C) a contingent registration.
D) a partial registration. - ANSWER✔✔-A) a shelf registration
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 3
, Explanation: Think about it this way all the shares are registered and put on the shelf
for sale. However, the issuer decides to sell only some of the shares, keeping some on
the shelf for sale later in an APO (additional public offering).
An investment banking firm has been hired to roll up various partnerships into one
master limited partnership. What is the compensation limit for this activity?
A) 10%
B) 2%
C) 5%
D) 8.5% - ANSWER✔✔-B) 2%
Explanation: Maximum compensation in a limited partnership roll-up is limited to 2%.
That amount must be paid to the brokerage firm, whether the partners vote for or
against the proposed roll-up.
A mutual fund that charges 12b-1 fees may use the money to cover all of the following
except:
A) management fees.
B) sales fees.
C) promotion costs.
D) printing costs. - ANSWER✔✔-A) management fees
Explanation: 12b-1 fees may not be used to pay for the portfolio manager's fees, only for
sales promotions and fees and other activities relating to the distribution of the fund's
shares.
Regulation SHO prohibits:
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 4
Questions and Answers
If a customer buys 100 shares of stock and writes one out-of-the-money call against her
long position, the breakeven point is
A) the cost of stock purchased less premium.
B) the cost of stock purchased plus premium.
C) the strike price less premium.
D) the strike price plus premium. - ANSWER✔✔-A) the cost of stock purchased less
premium.
Explanation: When the investor owns stock and sells a call, the call is covered.
Breakeven is computed by subtracting the premium from the stock's purchase price.
Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its
shareholders with a statement indicating acceptance or rejection of the offer within how
many business days of the announcement?
A) 5
B) 10
C) 15
D) 20 - ANSWER✔✔-B) 10
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 1
,Explanation: Once a tender offer is announced, the target company, within 10 business
days of the announcement, must provide its shareholders with a statement indicating
acceptance or rejection of the offer and the reasons for the position taken.
A firm must provide a risk disclosure document to a customer before opening which of
the following accounts?
A) Partnership
B) Custodial
C) Margin
D) Transfer on death - ANSWER✔✔-C) Margin
Explanation: All customers opening margin accounts must receive a risk disclosure
document describing the risks associated with trading on margin (e.g., that a customer
could lose more than the initial investment, or that the firm could sell out securities in
the account to meet a maintenance call without providing prior notice to the customer).
This document must also be provided to customers on an annual basis.
Variable-rate municipal bonds are subject to all of the following risks except:
A) liquidity.
B) interest rate.
C) market.
D) default. - ANSWER✔✔-B) interest rate
Explanation: A variable-rate bond is one whose coupon is adjusted periodically
(semiannually or annually) to reflect current interest rates. Therefore, if rates rise and
force prices down, the coupon on a variable-rate bond will be adjusted upward, thereby
tending to keep the bond's price at or near par. Therefore, no interest rate risk is
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 2
,associated with these bonds. However, if rates fall, the coupon will be adjusted
downward, keeping the bond's price at or around par. Normally, a fall in rates will
force prices up, but not with variable-rate bonds.
The City of Columbus issued a 20-year general obligation bond at a price of 50. An
original purchaser sold the bond at 75 after holding it for 7 years. For tax purposes, that
sale generated:
A) a $250 capital gain.
B) a $75 capital gain.
C) no gain or loss.
D) a $25 capital gain. - ANSWER✔✔-B) a $75 capital gain
Explanation: The customer has realized a capital gain of $75. Original issue discount
bonds must accrete the discount over the life of the bond. In this example, the amount
of the discount (par value minus purchase price) is $500 ($1,000 − $500 = $500). The
discount divided by the number of years to maturity determines the annual accretion
added to the cost basis. In this question, the annual accretion is $25 ($500 divided by 20
= $25). The adjusted cost basis would be the original purchase price ($500) plus seven
years of accretion (7 times $25 = $175) for a total of $675. Because the proceeds of the
sale were $750, the customer has realized a capital gain of $75 ($750 − $675 = $75).
An issuer decides to not offer all the registered common stock shares to the public in the
IPO (Initial Public Offering). Instead, some of the shares are held back for later sale. This
is an example of:
A) a shelf registration.
B) a staged public offering.
C) a contingent registration.
D) a partial registration. - ANSWER✔✔-A) a shelf registration
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 3
, Explanation: Think about it this way all the shares are registered and put on the shelf
for sale. However, the issuer decides to sell only some of the shares, keeping some on
the shelf for sale later in an APO (additional public offering).
An investment banking firm has been hired to roll up various partnerships into one
master limited partnership. What is the compensation limit for this activity?
A) 10%
B) 2%
C) 5%
D) 8.5% - ANSWER✔✔-B) 2%
Explanation: Maximum compensation in a limited partnership roll-up is limited to 2%.
That amount must be paid to the brokerage firm, whether the partners vote for or
against the proposed roll-up.
A mutual fund that charges 12b-1 fees may use the money to cover all of the following
except:
A) management fees.
B) sales fees.
C) promotion costs.
D) printing costs. - ANSWER✔✔-A) management fees
Explanation: 12b-1 fees may not be used to pay for the portfolio manager's fees, only for
sales promotions and fees and other activities relating to the distribution of the fund's
shares.
Regulation SHO prohibits:
COPYRIGHT © 2025 BY OLIVIA WEST, ALL RIGHTS RESERVED 4
