Series 7 Practice Exam


The Series 7 Exam is required for individuals who are entering the securities industry. You must pass this exam to qualify for the solicitation, purchase, and/or sale of all securities products. The test is administered by the Financial Industry Regulatory Authority (FINRA). Our free Series 7 practice exam is great for exam prep. Try these Series 7 exam questions to make sure you’re prepared.

Series 7 Questions

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Question 1
Which of the following is NOT a type of economic indicator?

A
Leading.
B
Lagging.
C
Equitable.
D
Coincident.
Question 1 Explanation: 
Leading economic indicators are those which change before the economy changes (such as the stock market). A lagging economic indicator doesn't change direction until a few quarters after the economy does (such as unemployment). A coincident economic indicator is one that moves at the same time the economy does (such as GDP).
Question 2
Which Act created the SEC?

A
Securities Act of 1933
B
Securities Exchange Act of 1934
C
Investment Company Act of 1940
D
Securities Exchange Commission Act of 1931
Question 2 Explanation: 
The Securities Exchange Act of 1934 governs the secondary trading of securities and created the SEC. The Act of 1933 was about ‘paper,’ i.e. registration of securities, and the 1934 Act is about registration and regulation of ‘people,’ i.e. broker/dealers, RRs, stock exchanges.
Question 3
NASDAQ Market Makers are required to report each trade within how many seconds of execution?

A
10
B
3
C
30
D
No requirement to report.
Question 3 Explanation: 
NASDAQ Real-Time Trade Reporting rules require that Market Makers (and non Market-Makers in certain cases) report each trade within 10 seconds of execution.
Question 4
What is the maximum potential loss when holding a long straddle position?

A
Unlimited.
B
Strike Price of Long Call + Net Premium Paid.
C
Straddle Premium.
D
Strike Price of Long Put − Net Premium Paid.
Question 4 Explanation: 
The maximum loss for a long straddle will occur when the underlying stock price is trading at the strike price of the options on the expiration date of the option contracts. Both options will expire worthless and the investor will lose the entire amount paid for the straddle, the straddle premium.
Question 5
Which of these calls would have the largest premium?

A
JKL October 25 call.
B
JKL October 30 call.
C
JKL October 35 call.
D
JKL October 40 call.
Question 5 Explanation: 
The call with the lowest strike price will be the closest to being in-the-money (or the furthest in-the-money if the underlying stock is above the strike price). So the call with the lowest strike price will have the highest premium.
Question 6
AAA is trading at $55. Mr. Jones buys a May 60 call at $1 and sells a May 50 call at $7. What options strategy has he implemented?

A
Bull Call Spread.
B
Bear Call Spread.
C
Straddle.
D
Bull Put Spread.
Question 6 Explanation: 
This is the bear call spread, where the investor is moderately bearish and buys call options of a specific strike price while selling the same number of call options of a lower strike price (options are on the same underlying security and have the same expiration month).
Question 7
This type of underwriting contract is safest for the issuer, but also the most expensive.

A
Firm Commitment.
B
Best Efforts.
C
All-Or-None.
D
Pari Passu.
Question 7 Explanation: 
With a firm commitment contract the underwriter will guarantee the sale of the issue at the price that has been agreed upon.
Question 8
Ms. Johnson sees that CBA is trading at $53. She buys a December 50 put for $150 and she writes a December 55 put for $400. The stock closes at $59 on the expiration date of the options. What is her profit or loss?

A
$400 gain.
B
$150 loss.
C
$550 loss.
D
$250 gain.
Question 8 Explanation: 
This was a bull put spread. She received a net credit of $250 when she entered the position. Both put options are worthless at expiration, because both put option contracts are out of the money with the stock at $59.
Question 9
Which of the below statements is/are true regarding a ‘red herring?’

I.      It does not contain the Effective Date of the offering.

II.     It may be used to solicit indications of interest from customers.

III.    It is also known as a preliminary prospectus.

A
III only
B
I and III
C
I, II and III
D
None of the above.
Question 9 Explanation: 
The preliminary prospectus, also called a red herring, is used during the 20-day cooling off period by investment bankers underwriting a new issue to provide information about the issue to prospective investors for whom they feel the offering may be a suitable investment. Since the effective date is not yet known, it will not be found in the red herring. Prospective investors may ‘indicate their interest’ in buying the new issue but no sales may occur until the effective date.
Question 10
What percentage of its income is a REIT required to distribute to its equity investors?

A
90%
B
10%
C
100%
D
No requirement.
Question 10 Explanation: 
To qualify as a ‘Regulated Investment Company’ and get the special flow-through tax treatment under the Internal Revenue Code, 90% flow through is a requirement. IF the REIT doesn’t distribute enough income, it will pay taxes on 100% of its net investment income.
Question 11
Renee sells 500 shares of SJM short at a price of $55. What is the credit balance in her margin account as the result of this transaction?

A
$6,875
B
$27,500
C
$34,375
D
$41,250
Question 11 Explanation: 
Renee’s short sale will generate sale proceeds of $27,500 (500 shares times $55), which will be credited to her margin account. In addition, Renee will be required to deposit a Reg. T 50% deposit in accordance with the margin rules, which would be an additional $13,750 credited to her account. Her total Credit Balance is therefore $41,250.
Question 12
Your client is selling restricted shares of a stock that is quoted on NASDAQ. One of the conditions of their Rule 144 sale is that the amount of stock they sell in a 3-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold or:

A
the highest weekly trading volume during the six weeks preceding the filing.
B
the average daily trading volume during the week after the filing.
C
the average daily trading volume during the week preceding the filing.
D
the average weekly trading volume during the four weeks preceding the filing.
Question 12 Explanation: 
Rule 144 applies to the sale of restricted and control securities. The volume restrictions of Rule 144 are ‘the greater of 1% of the outstanding shares or the average weekly trading volume for the previous 4 weeks.’
Question 13
Which of the following is NOT true of the Dow Jones Industrial Average?

A
There are 30 stocks in the index.
B
It's an index that tracks 30 industrial stocks.
C
It's a price-weighted index.
D
It's a closely watched benchmark of stock market activity.
Question 13 Explanation: 
The term "industrial" is historical in nature. The index now contains many companies that are not industrials. It is price-weighted, meaning that each stock makes up a fraction of the index that is proportional to its price.
Question 14
Holders of this type of preferred stock have the opportunity to receive additional dividends if the company attains certain predetermined financial goals.

A
Cumulative preferred.
B
Participating preferred.
C
Callable preferred.
D
Convertible preferred.
Question 14 Explanation: 
With participating preferred stock, investors receive an additional dividend if predetermined goals are achieved. These goals could relate to earnings, sales, or profitability.
Question 15
A municipality issues 30,000 bonds at an offering price of $1,000. The syndicate manager's fee is $1.00 per bond. The selling concession is $4.50 per bond and the total takedown is $7.75 per bond. How much will the issuer receive per bond?

A
$986.75
B
$991.25
C
$992.25
D
$1,000.00
Question 15 Explanation: 
Total takedown consists of the selling concession plus additional takedown that the underwriting group gets for assuming risk. The total spread is the total takedown of $7.75 plus the $1.00 manager's fee, which come to $8.75 per bond. With a $1,000 offering price minus the $8.75 underwriting spread, the issuer will receive $991.25 per bond.
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Series 7 Exam

This exam consists of 250 multiple choice questions, and is given in two parts with 125 questions. You are given 3 hours to complete each part. It is a very challenging test, so make sure you do plenty of Series 7 exam prep, and be sure to work through our Series 7 practice exam along with plenty of additional practice questions.