Series 7 Mock Exam #2 UPDATED ACTUAL
Exam Questions and CORRECT 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. - CORRECT 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 - CORRECT ANSWER - B) 10
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 - CORRECT 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. - CORRECT 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 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. - CORRECT 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. - CORRECT ANSWER - A) a shelf registration
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% - CORRECT 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. - CORRECT 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:
A) short selling in cash accounts.
B) unsuitable short selling.
C) short sales on an uptick.
D) naked short selling. - CORRECT ANSWER - D) naked short selling
Explanation: Regulation SHO mandates a locate requirement with regard to short sales. Before
entering a short sale order, members are required to locate the security to be ensured that delivery
can be made on settlement date. The locate requirement applies to short sales in all equity
securities. Failure to positively locate the stock before making the short sale is the prohibited
practice of naked short selling. Although one can sell short only in a margin account, the
prohibition against doing so in a cash account is part of Regulation T, not SHO. Short selling,
just as with any activity in customer's accounts, must be suitable. That is part of the suitability
requirements, not Regulation SHO. Short sales can be made on any tick: up, down, or the same.
Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per
share. The date of the purchase was April 22, 2021. Simultaneously, the customer purchased one
Exam Questions and CORRECT 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. - CORRECT 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 - CORRECT ANSWER - B) 10
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 - CORRECT 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. - CORRECT 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 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. - CORRECT 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. - CORRECT ANSWER - A) a shelf registration
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% - CORRECT 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. - CORRECT 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:
A) short selling in cash accounts.
B) unsuitable short selling.
C) short sales on an uptick.
D) naked short selling. - CORRECT ANSWER - D) naked short selling
Explanation: Regulation SHO mandates a locate requirement with regard to short sales. Before
entering a short sale order, members are required to locate the security to be ensured that delivery
can be made on settlement date. The locate requirement applies to short sales in all equity
securities. Failure to positively locate the stock before making the short sale is the prohibited
practice of naked short selling. Although one can sell short only in a margin account, the
prohibition against doing so in a cash account is part of Regulation T, not SHO. Short selling,
just as with any activity in customer's accounts, must be suitable. That is part of the suitability
requirements, not Regulation SHO. Short sales can be made on any tick: up, down, or the same.
Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per
share. The date of the purchase was April 22, 2021. Simultaneously, the customer purchased one
