Practice questions · Finance & Accounting
FINRA Series 7: Practice Questions
Original, outline-based practice questions for the FINRA Series 7 exam. Each answer is explained, including why the other options are wrong. Filter by function or difficulty. These are concept checks built to test understanding - not reproductions of FINRA test content.
Answered 0 · Correct 0
-
A firm plans to email a piece promoting a new fund to 400 retail investors within a 30-day period. Under FINRA's communication rules, this piece is classified as:
Correct answer: B. A written or electronic communication distributed to more than 25 retail investors within 30 calendar days is retail communication, which generally needs prior principal approval. Correspondence is limited to 25 or fewer retail investors, institutional communication may go only to institutional investors, and research reports are still communications subject to their own rules, not outside them. -
Under the telemarketing rules tested on the Series 7, unsolicited cold calls to a prospect's home are generally permitted only:
Correct answer: A. Cold-calling hours run from 8 a.m. to 9 p.m. local time of the person being called, not the firm's time zone. Stating the caller's and firm's name is required but does not remove the hour limits, and no prior written consent is needed for a first solicitation, although do-not-call lists must be honoured. -
A representative wants to run a public seminar that will discuss listed options strategies. Compared with general securities communications, communications about options are:
Correct answer: C. Options communications face stricter approval requirements than ordinary communications, and the options disclosure document must reach customers in connection with opening the door to options business. Standardization does not waive approval, passing the exam does not confer approval authority, and options communications are not restricted to institutions. -
Two unrelated business partners open a joint account and want each owner's interest to pass to that owner's own estate at death. Which registration fits their instruction?
Correct answer: D. In a tenancy in common, a deceased owner's share goes to that owner's estate, which is exactly what the partners asked for. JTWROS does the opposite, passing the interest to the surviving owner. A custodial account is for an adult managing assets for a minor, and discretionary authority concerns who may enter orders, not what happens at death. -
A customer tells her representative to buy 200 shares of a named stock whenever the price looks right during the day. Acting on this instruction:
Correct answer: B. When the customer chooses the security, the action and the amount, and leaves the representative only the time or price of execution, no discretionary authorization is required. Written authorization applies when the representative selects any of those three elements. Know-your-customer is about collecting profile information, and FINRA does not approve individual orders. -
Which statement about an UTMA custodial account is accurate?
Correct answer: A. Once assets go into a custodial account the gift is irrevocable, and the minor is the beneficial owner throughout. Custodial accounts may not use margin regardless of any agreement, only one custodian and one minor are allowed per account, and the securities are registered to the custodian for the benefit of the minor rather than in the minor's own name. -
Under the Customer Identification Program, which set of information must a firm obtain to verify a new individual customer's identity?
Correct answer: D. CIP, a USA PATRIOT Act requirement, calls for name, date of birth, residential address and an identification number. Income, net worth, objectives and risk tolerance belong to the investment profile used for suitability, not identity verification, and educational or marital details are not CIP elements at all. -
In opening a customer's options account, which sequence satisfies the account-approval rules?
Correct answer: C. The options disclosure document must be delivered no later than the account approval, trading may begin once the account is approved, and the customer returns the signed options agreement promptly after approval. The agreement does not have to precede disclosure, trading before approval is prohibited, and prior options experience is considered in suitability but is not a precondition of approval. -
Which feature most clearly distinguishes preferred stock from common stock of the same issuer?
Correct answer: A. Preferred stock pays a fixed dividend and stands ahead of common stock both for dividends and in liquidation. Preferred shareholders usually lack voting rights, so a guaranteed vote describes common stock instead. Preferred stock is equity with no maturity date, and its fixed dividend actually makes it sensitive to interest-rate changes rather than protected from them. -
Compared with a preemptive right distributed to shareholders, a warrant is typically:
Correct answer: B. Warrants are long-term instruments whose exercise price is set above the market price at issuance, often attached to bond offerings as a sweetener. Rights, not warrants, are short-term and priced below market. Warrants convert into the issuer's stock, not bonds, and they are frequently distributed to bond purchasers rather than reserved for existing shareholders. -
An investor holds an American depositary receipt on a foreign issuer. Which risk remains even though the security trades and pays dividends in US dollars?
Correct answer: D. The depositary bank converts dividends into dollars, but the underlying shares remain denominated in the foreign currency, so exchange-rate movements still affect the ADR's value and its dollar dividends. No foreign account is needed, dividends are received in dollars, and trades settle in the US market, which is precisely the convenience ADRs provide. -
A customer wants to receive a cash dividend that has been declared on a stock she is about to buy in a regular-way trade. She must buy the stock:
Correct answer: C. The ex-dividend date is the first day the stock trades without the dividend, so a regular-way buyer must purchase before that date for the trade to settle in time to be a holder of record. Buying on the ex-date or later leaves the dividend with the seller, buying on the record date settles too late, and the payable date is simply when the dividend is paid out. -
A bond is trading at a discount to its par value. Which relationship among its yield measures is correct?
Correct answer: B. At a discount, the ranking runs coupon rate below current yield below yield to maturity, because the buyer earns the coupon on a cheaper price plus the accretion of the discount at maturity. The nominal (coupon) yield is therefore the lowest, not the highest; the measures are equal only at par; and current yield sits in the middle, not at the bottom. -
An issuer's convertible bonds usually carry a lower coupon than its comparable non-convertible bonds because:
Correct answer: A. The right to exchange the bond for common stock has value, so investors accept a lower coupon to obtain it. Convertibles remain corporate debt exposed to default risk until converted, indentures set the terms of a specific issue rather than capping coupons across issues, and convertibles trade above or below par with the stock and interest rates like other bonds. -
When accrued interest is calculated for a regular-way trade in a corporate bond, the convention used is:
Correct answer: C. Corporate and municipal bonds accrue interest on a 30/360 basis from the last coupon up to, but not including, the settlement date. Actual-day counting applies to US government notes and bonds, interest never accrues through the settlement date itself, and the count runs from the last coupon date, not forward from the trade date. -
How does a Treasury Inflation-Protected Security respond when the consumer price index rises?
Correct answer: D. TIPS keep a fixed coupon rate but adjust the principal with CPI inflation, so each interest payment is the fixed rate applied to the adjusted principal. The coupon rate itself never changes after issue, the maturity date is fixed, and there is no conversion feature into nominal Treasuries. -
A customer who buys a tranche of a collateralized mortgage obligation is most exposed to which risk that ordinary Treasury notes do not present?
Correct answer: A. CMO cash flows come from mortgage pools, so falling rates trigger refinancing and return principal early, while rising rates extend the tranche - risks a bullet-maturity Treasury note does not carry. The pools are domestic mortgages, so currency risk is not the issue, and CMOs neither convert into equity nor allow coupons to be skipped at will. -
Repayment of a municipal general obligation bond is primarily secured by:
Correct answer: B. General obligation bonds are backed by the issuer's full faith, credit and taxing power, which is why they typically need voter approval and fall under statutory debt limits. Facility revenues secure revenue bonds instead, and neither a bank letter of credit nor pledged securities is the defining security behind a GO pledge. -
Which measure is most relevant when analysing the credit quality of a municipal revenue bond?
Correct answer: C. Revenue bonds are repaid only from the earnings of the financed facility, so analysts look to debt service coverage, feasibility studies and rate covenants. Property-tax collections and assessed valuations matter for general obligation credits, statutory debt limits constrain GO issuance, and revenue bonds generally do not require voter approval at all. -
The legal opinion delivered with a new municipal bond issue addresses which two matters?
Correct answer: A. Bond counsel's legal opinion states that the bonds are legally valid obligations of the issuer and that their interest qualifies as exempt from federal income tax. Pricing and spread are underwriting matters, ratings come from rating agencies rather than counsel, and feasibility studies and rate covenants belong to revenue-bond analysis, not the legal opinion. -
The interest on most municipal bonds appeals to investors in high tax brackets primarily because that interest is:
Correct answer: D. The core appeal of municipal interest is its general exemption from federal income tax, which is worth more as the investor's bracket rises. Municipal bonds carry no federal guarantee, they normally pay interest semiannually like other bonds, and their payments are fixed rather than indexed to inflation. -
A customer enters an order in the early afternoon to buy shares of an open-end investment company. The price she pays is based on:
Correct answer: B. Open-end funds use forward pricing: every order is filled at the next NAV calculated after it arrives, with any sales charge added for purchases. Yesterday's close and intraday averages are never the basis, and open-end shares are bought from the fund itself rather than at a market bid, which applies to closed-end funds trading on exchanges. -
A representative recommends a fund purchase in an amount just below the level at which the sales charge would drop, without mentioning the reduced charge. This conduct is:
Correct answer: C. Recommending a purchase just below a breakpoint to earn the higher sales charge is the classic breakpoint sale, which FINRA treats as a violation. No waiver cures the failure to disclose the discount, forward pricing concerns when orders are priced rather than how much is invested, and the account type does not change the sales-practice analysis. -
Which statement about a mutual fund letter of intent is accurate?
Correct answer: D. A letter of intent can be backdated up to 90 days so recent purchases count toward the breakpoint, and it gives the customer 13 months to reach the pledged amount. It is not a binding obligation - the fund holds shares in escrow and recaptures the charge difference if the pledge is missed - the window is limited rather than unlimited, and it reduces the sales charge instead of eliminating it. -
How does a 12b-1 fee differ from a front-end sales load?
Correct answer: A. A 12b-1 fee is an annual distribution and marketing charge taken out of fund assets, so it reduces returns every year the position is held, unlike a one-time load deducted at purchase. It is not a single point-of-sale payment, it is a feature of open-end funds rather than exchange-listed closed-end funds, and it is never refunded for long holding periods. -
A variable annuity is in the payout phase. In a month when the separate account's return exceeds the assumed interest rate, the next payment will:
Correct answer: B. The assumed interest rate is the benchmark built into the payout calculation: performance above the AIR raises the next payment, performance below it lowers the payment. Variable payouts are not fixed at annuitization - that describes a fixed annuity - payments do not fall after good months, and annuity units are never converted back into accumulation units. -
A customer wants to move the accumulated value of one insurer's variable annuity into another insurer's contract without recognising the gain. The provision that permits this is:
Correct answer: D. Section 1035 of the tax code allows a direct exchange between qualifying insurance or annuity contracts without current recognition of the accumulated gain. The wash sale rule disallows losses on repurchased securities and is unrelated, Regulation T extensions concern payment deadlines in securities accounts, and ACATS moves brokerage account positions rather than exchanging insurance contracts. -
In a limited partnership organised as a direct participation program, the general partner:
Correct answer: C. The general partner manages the program, bears unlimited personal liability and acts as a fiduciary for the limited partners. Limited liability belongs to the limited partners, not the GP; competing with the partnership breaches the GP's fiduciary duty; and there is no requirement that the GP hold a majority of the units. -
When a direct participation program is evaluated for a customer, the factor generally given the greatest weight is:
Correct answer: B. A DPP must make sense as a business first: its economic viability outweighs projected tax benefits, which cannot rescue a program that fails commercially. Tax write-offs are a secondary consideration, and neither the distributor's reputation nor the count of existing partners tells you whether the underlying venture can generate returns. -
A customer with no other positions buys one listed put option. This customer has acquired:
Correct answer: A. A long put conveys the right, not the obligation, to sell the underlying at the strike before expiration, so it profits when the stock falls. Obligations rest on the option writer, not the buyer, and only an assigned put writer must buy. Option holders receive no dividends, and the put buyer's maximum loss is limited to the premium paid. -
An investor who owns 100 shares of a stock writes one call against the position. The primary trade-off of this covered call is:
Correct answer: C. The covered call writer collects the premium now but will be called away if the stock rises, so gains are capped at the strike plus the premium. The upside is limited rather than unlimited, the shareholder keeps receiving dividends while short the call, and the premium only cushions a decline - it does not remove downside risk on the shares. -
Why would an investor holding an appreciated stock position buy a put on that same stock?
Correct answer: D. A protective put works like insurance: whatever the stock does, the holder can sell at the strike, so the maximum loss is the distance to the strike plus the premium paid. It costs money rather than generating income - that is the covered call's job - it does not magnify gains, and dividends are unaffected by holding a put. -
A customer expects a sharp move in a stock's price but has no view on the direction. Which options position matches that outlook?
Correct answer: B. A long straddle profits from a large move in either direction because one leg gains more than the other loses. A short straddle is the opposite bet, collecting premium in the hope the stock stays flat. A covered call and a short put are both income strategies that suffer when the stock moves sharply against them, so neither fits a big-move outlook. -
A call option has a strike price below the current market price of the underlying stock, and its premium exceeds the difference between those two prices. That excess amount represents:
Correct answer: A. Premium equals intrinsic value plus time value, so whatever the buyer pays beyond the in-the-money amount is time value. The difference between market and strike is the intrinsic value itself, not the excess over it. Settlement on assignment involves delivering stock at the strike, and options do not accrue interest. -
Regulation T, which governs the initial deposit a customer must make on a margin purchase, is set by:
Correct answer: C. Regulation T is a Federal Reserve Board rule governing the credit broker-dealers may extend, including the initial margin deposit and cash-account payment deadlines. FINRA sets the ongoing maintenance requirements, the OCC issues and guarantees listed options rather than regulating credit, and exchanges do not set initial margin for their listings. -
Excess equity develops in a customer's margin account after the stock price rises. The special memorandum account that records it:
Correct answer: B. SMA is a bookkeeping line of credit: once excess equity is recorded there, the buying power remains available even if the market subsequently falls. It does not expire with the settlement cycle, it is drawn on at the customer's option rather than paid out automatically, and it has no effect on the maintenance requirement itself. -
Under FINRA's suitability framework, the quantitative obligation addresses which problem?
Correct answer: D. Quantitative suitability targets churning: a pattern of recommended trades that is excessive in light of the customer's profile even though each individual trade might pass muster. Understanding the product is the reasonable-basis obligation, matching one recommendation to the profile is customer-specific suitability, and identity verification belongs to CIP rather than suitability. -
A customer sells shares at a loss and buys the same stock back three weeks later. For tax purposes:
Correct answer: A. Repurchasing the same or a substantially identical security within 30 days before or after a loss sale triggers the wash sale rule: the loss is disallowed and added to the new position's cost basis. The loss is therefore not currently deductible, its character is not converted to long-term, and firms do not unwind trades because of a customer's tax outcome. -
A sell stop-limit order differs from a plain sell stop order in that, once the stop price is reached, the stop-limit order:
Correct answer: C. After activation, a stop-limit order becomes a limit order that may fill only at the limit price or better, which means a fast decline can leave it unexecuted. Executing at the market regardless of level describes the plain stop order, and stop-limit orders neither cancel automatically at the close nor convert into market orders at the next opening. -
For a regular-way trade in a corporate stock, settlement takes place:
Correct answer: B. Regular-way settlement for equities and for corporate and municipal bonds is one business day after the trade date. Same-day settlement is the separate cash settlement, longer cycles belong to earlier eras of the market, and settlement dates are fixed by the cycle rather than by when the buyer's payment shows up. -
A customer instructs that her account be moved from Firm A to Firm B through ACATS. The transfer process begins when:
Correct answer: D. Under ACATS the receiving firm enters the customer's transfer instructions, and the carrying firm must validate the account or take exception within the system's timeframes. Positions transfer in kind rather than being liquidated, FINRA does not approve individual transfers, and physical certificate delivery is not how an automated transfer starts. -
A customer has an open buy limit order below the current market. On the morning the stock begins trading ex-dividend for a cash dividend, that order is ordinarily:
Correct answer: A. Open buy limit orders (and sell stops) below the market are reduced by the dividend amount on the ex-date, because the stock opens lower by roughly the dividend; a do-not-reduce instruction overrides this. The order is adjusted rather than cancelled, it is never increased, and going ex-dividend does not by itself trigger an execution. -
Which document must a firm send to the customer at or before the completion of each securities transaction?
Correct answer: C. Each transaction requires a confirmation, delivered at or before completion, showing details such as the security, price, capacity and any disclosed compensation. Account statements are periodic rather than per-trade, a prospectus is required only for certain new offerings, and proxy statements relate to shareholder votes rather than trade processing. -
A representative discovers that an order was executed in the wrong customer's account. The proper course of action is to:
Correct answer: B. Errors must be escalated to a principal and corrected through the firm's documented error procedures, which create a record of what happened and why. A representative moving trades between accounts on his own authority conceals the error, offering the position around ignores whose order it was, and executions cannot simply be cancelled without documentation. -
A customer's priority is certainty of execution rather than a particular price. Which order type carries out that instruction?
Correct answer: D. A market order sacrifices price control for immediate execution at the best available price, which is exactly what a customer prioritising execution wants. A sell stop only activates if the market falls to the stop price, a buy limit fills only at the limit or better and may never execute, and an all-or-none order can sit unfilled until its size condition can be met.
Practice questions FAQ
- Are these real Series 7 exam questions?
- No. These are original study questions written to test understanding. They are not real exam questions, exam dumps, or copied from any provider.
- How should I use these practice questions?
- Answer each one, read the explanation (including why the wrong options are wrong), and use the per-domain score below to focus your revision on weak areas. Revisit before exam day.
- How many questions should I do before the exam?
- Enough to score consistently across every domain, alongside full-length practice from official or reputable providers. Understanding why each answer is right matters more than raw volume.
- What score means I am ready?
- A good signal is consistently scoring around 80% or higher across all domains on questions you have not seen before, and being able to explain why the wrong options are wrong.
- Should I use exam dumps?
- No. Dumps (real or leaked questions) breach provider policy, can void your certification, and do not build the understanding the exam actually tests.