Why Practice Questions Are the Key to Passing the Series 7
The Series 7 (General Securities Representative Qualification Examination) is one of the most challenging FINRA licensing exams. With a pass rate of roughly 65-72% and a required score of 72% (90 out of 125 scored questions), many candidates underestimate what it takes to succeed.
Research consistently shows that active recall -- retrieving information from memory through practice questions -- is far more effective than passive reading or re-reading textbooks. Candidates who complete 800-1,000+ practice questions before sitting for the exam pass at significantly higher rates.
This guide gives you 50+ free, exam-realistic practice questions organized by topic, each with a thorough explanation. Use them to identify weak areas, reinforce concepts, and build confidence for exam day.
free Series 7 question bankPractice questions with detailed explanations
Series 7 Exam Format at a Glance
| Detail | Information |
|---|---|
| Total Questions | 125 scored + 5 unscored (pretest) = 130 total |
| Passing Score | 72% (90 out of 125 scored questions) |
| Time Limit | 3 hours 45 minutes (225 minutes) |
| Exam Fee | $245 |
| Prerequisites | SIE exam + FINRA member firm sponsorship |
| Format | Multiple choice, computer-based at Prometric center |
| Retake Wait | 30 days (1st and 2nd failure), 180 days after 3rd failure |
Content Breakdown
| Section | Weight |
|---|---|
| Seeks Business for the Broker-Dealer | 9% |
| Opens Accounts After Obtaining and Evaluating Customers' Financial Profile and Investment Objectives | 11% |
| Provides Information on Investments, Makes Suitable Recommendations, Transfers Assets, and Maintains Appropriate Records | 73% |
| Obtains and Verifies Customers' Purchase and Sales Instructions and Agreements; Processes, Completes, and Confirms Transactions | 7% |
The massive 73% "Investment Recommendations" section covers options, bonds, municipal securities, packaged products, suitability, and more. That is where most of the questions below are focused.
Options Questions
Options are widely considered the most difficult topic on the Series 7. You must know max gain, max loss, breakeven, and suitability for every basic strategy. Master these questions and you will be well ahead of most candidates.
Long Calls and Short Calls
Question 1: An investor buys 1 ABC Dec 50 call at 4. What is the investor's maximum loss?
A) $400 B) $4,600 C) $5,000 D) Unlimited
Answer: A -- The maximum loss for a long call is always the premium paid. The investor paid $4 per share x 100 shares = $400. If ABC stays at or below $50 through expiration, the call expires worthless and the investor loses only the premium.
Question 2: An investor writes (sells) 1 XYZ Jun 60 call naked (uncovered) at 5. What is the investor's maximum potential loss?
A) $500 B) $5,500 C) $6,000 D) Unlimited
Answer: D -- A naked (uncovered) call writer faces theoretically unlimited loss because there is no cap on how high a stock can rise. If XYZ rises to $200, $500, or higher, the writer must buy shares at the market price and deliver them at $60. The premium received ($500) offsets the loss slightly, but the potential loss is unlimited.
Question 3: An investor buys 1 DEF Oct 70 call at 6. What is the breakeven point?
A) $64 B) $70 C) $76 D) $80
Answer: C -- Breakeven for a long call = Strike Price + Premium = $70 + $6 = $76. At $76, the intrinsic value of the call ($76 - $70 = $6) exactly equals the premium paid, resulting in zero profit or loss.
Long Puts and Short Puts
Question 4: An investor buys 1 GHI Mar 45 put at 3. The stock drops to $38. What is the investor's profit?
A) $200 B) $400 C) $700 D) $1,200
Answer: B -- Profit on a long put = (Strike Price - Market Price - Premium) x 100. ($45 - $38 - $3) x 100 = $4 x 100 = $400. The put has $7 of intrinsic value ($45 - $38), minus the $3 premium paid, for a net profit of $4 per share.
Question 5: An investor writes 1 JKL Sep 55 put at 4. What is the investor's maximum loss?
A) $400 B) $5,100 C) $5,500 D) Unlimited
Answer: B -- Maximum loss for a short put = Strike Price - Premium (x 100). The worst case is the stock falling to $0. The writer must buy at $55, offset by the $4 premium received: ($55 - $4) x 100 = $5,100. Unlike a naked call, a short put has a defined maximum loss because a stock cannot fall below zero.
Question 6: An investor buys 1 MNO Nov 80 put at 5. What is the breakeven?
A) $75 B) $80 C) $85 D) $90
Answer: A -- Breakeven for a long put = Strike Price - Premium = $80 - $5 = $75. At $75, the put's intrinsic value ($80 - $75 = $5) exactly equals the premium paid.
Spreads
Question 7: An investor establishes the following position: Buy 1 ABC Apr 40 call at 6, Sell 1 ABC Apr 50 call at 2. What is the maximum gain?
A) $400 B) $600 C) $1,000 D) Unlimited
Answer: B -- This is a bull call spread (debit call spread). Net debit = $6 - $2 = $4. Maximum gain = (Spread width - Net debit) x 100 = ($50 - $40 - $4) x 100 = $6 x 100 = $600. This occurs when both options are in the money at expiration (ABC at or above $50).
Question 8: Using the same position from Question 7 (Buy 1 ABC Apr 40 call at 6, Sell 1 ABC Apr 50 call at 2), what is the maximum loss?
A) $200 B) $400 C) $600 D) $1,000
Answer: B -- The maximum loss on a bull call spread is the net debit paid: $6 - $2 = $4 per share x 100 = $400. This occurs if both options expire worthless (ABC at or below $40 at expiration).
Question 9: An investor establishes a bear put spread: Buy 1 XYZ Jun 60 put at 7, Sell 1 XYZ Jun 50 put at 2. What is the breakeven?
A) $50 B) $55 C) $57 D) $60
Answer: B -- Breakeven for a bear put spread = Higher Strike - Net Debit. Net debit = $7 - $2 = $5. Breakeven = $60 - $5 = $55. At $55, the long 60 put has $5 of intrinsic value, which exactly equals the net premium paid.
Straddles
Question 10: An investor buys 1 QRS Aug 50 call at 4 and buys 1 QRS Aug 50 put at 3. What are the breakeven points?
A) $43 and $57 B) $46 and $54 C) $47 and $53 D) $50 only
Answer: A -- This is a long straddle. Total premium paid = $4 + $3 = $7. Breakeven on the upside = Strike + Total Premium = $50 + $7 = $57. Breakeven on the downside = Strike - Total Premium = $50 - $7 = $43. The investor profits if QRS moves more than $7 in either direction from $50.
Suitability & Customer Accounts
These scenario-based questions test whether you can match investments to client profiles. On the real exam, suitability appears in nearly every section.
Question 11: A 68-year-old retired widow depends on her $400,000 portfolio for living expenses. She has low risk tolerance and needs current income. Which investment is MOST suitable?
A) Growth stock mutual fund B) High-yield corporate bond fund C) Investment-grade municipal bond fund D) Short-term U.S. Treasury bond fund
Answer: D -- A short-term U.S. Treasury bond fund is the most suitable because it offers safety of principal (backed by the U.S. government), current income, and low interest rate risk. High-yield bonds carry significant credit risk. Growth stocks do not generate income. Municipal bonds would provide tax-exempt income, but a retiree in a low tax bracket may not benefit from the tax advantage, and munis carry more credit risk than Treasuries.
Question 12: A 30-year-old single professional earning $150,000 per year has $50,000 to invest for retirement (30+ year time horizon). She has high risk tolerance and already has an emergency fund. Which is MOST suitable?
A) Money market fund B) Intermediate-term bond fund C) Diversified growth stock fund D) Fixed annuity
Answer: C -- With a 30+ year time horizon, high risk tolerance, and no immediate income needs, a diversified growth stock fund offers the best potential for long-term capital appreciation. Money market funds and bonds would not keep pace with inflation over 30 years. A fixed annuity offers guaranteed but low returns with surrender charges.
Question 13: A married couple in the 37% federal tax bracket is looking for tax-advantaged income. They live in New York and want to minimize both federal and state taxes. Which investment is MOST suitable?
A) Corporate bond fund B) U.S. Treasury bond fund C) New York municipal bond fund D) GNMA (Ginnie Mae) fund
Answer: C -- New York municipal bonds provide income that is exempt from federal, New York state, and New York City income taxes ("triple tax-free"). Corporate bonds are fully taxable. Treasury bonds are exempt from state tax but not federal. GNMA income is fully taxable at all levels. For a high-bracket taxpayer seeking to minimize both federal and state tax, in-state munis are the best choice.
Question 14: A customer opens a new margin account and purchases $40,000 worth of stock. Under Regulation T (50% initial margin), how much must the customer deposit?
A) $10,000 B) $20,000 C) $30,000 D) $40,000
Answer: B -- Under Regulation T, the initial margin requirement is 50% of the purchase price. 50% x $40,000 = $20,000. The remaining $20,000 is the debit balance (loan from the broker-dealer).
Question 15: A customer's margin account has a long market value of $60,000, a debit balance of $30,000, and equity of $30,000. What is the equity percentage and maintenance status?
A) 50% -- above maintenance B) 40% -- above maintenance C) 25% -- at minimum maintenance D) 20% -- below minimum maintenance
Answer: A -- Equity percentage = Equity / Long Market Value = $30,000 / $60,000 = 50%. The minimum maintenance requirement under FINRA rules is 25%. At 50%, the account is well above maintenance. A maintenance call would occur only if equity fell below 25% of the long market value.
Question 16: A customer wants to open a custodial account for her 10-year-old nephew under UGMA. Which statement is TRUE?
A) The child may be listed as both custodian and beneficiary B) The account can have multiple custodians at the same time C) Only one minor and one custodian per account D) Margin trading is permitted in custodial accounts
Answer: C -- Under the Uniform Gifts to Minors Act (UGMA), there can be only one minor beneficiary and one custodian per account. Margin trading and short selling are prohibited in custodial accounts. The custodian manages the account in a fiduciary capacity until the minor reaches the age of majority.
Municipal Bonds
Municipal bonds are a significant Series 7 topic. You need to understand GO vs. revenue bonds, tax-equivalent yield, accrued interest conventions, and the regulatory framework.
Question 17: A general obligation (GO) bond is backed by which of the following?
A) Revenue from a specific project B) The full faith, credit, and taxing power of the issuing municipality C) Mortgage payments from homeowners D) Tolls collected from a bridge or highway
Answer: B -- General obligation bonds are backed by the full faith, credit, and taxing power of the issuing municipality. This includes property taxes (for local GO bonds) and income/sales taxes (for state GO bonds). Revenue bonds (not GO bonds) are backed by income from specific projects like toll roads or hospitals.
Question 18: An investor in the 32% federal tax bracket is comparing a 4.5% tax-free municipal bond to taxable alternatives. What is the tax-equivalent yield?
A) 5.25% B) 6.62% C) 7.50% D) 8.10%
Answer: B -- The tax-equivalent yield formula is: Municipal Yield / (1 - Tax Rate). 4.5% / (1 - 0.32) = 4.5% / 0.68 = 6.62%. This means the investor would need a taxable bond yielding 6.62% to match the after-tax return of the 4.5% tax-free municipal bond.
Question 19: An investor in the 24% tax bracket is offered a 3.8% municipal bond and a 5.2% corporate bond. Which provides a better after-tax return?
A) The municipal bond -- its tax-equivalent yield is 5.0% B) The corporate bond -- its after-tax yield is 3.95% C) The municipal bond -- its after-tax yield is higher than the corporate bond's D) They are equivalent
Answer: B -- Compare on an equal basis: the muni's tax-equivalent yield = 3.8% / (1 - 0.24) = 3.8% / 0.76 = 5.0%. The corporate bond yields 5.2%, which is higher than the muni's 5.0% tax-equivalent yield. Alternatively, the corporate bond's after-tax yield = 5.2% x (1 - 0.24) = 5.2% x 0.76 = 3.95%, which exceeds the muni's 3.8% tax-free yield. Either way, the corporate bond provides the better after-tax return in a 24% bracket.
Question 20: Municipal bond accrued interest is calculated on a:
A) 30/360 basis B) Actual/365 basis C) Actual/360 basis D) Actual/actual basis
Answer: A -- Municipal bonds use the 30/360 day-count convention for accrued interest calculations. This assumes each month has 30 days and the year has 360 days. Corporate bonds also use 30/360. Government bonds (Treasuries and agencies) use the actual/actual day count.
Question 21: A customer buys a municipal bond on March 15. The bond pays interest on January 1 and July 1. How many days of accrued interest does the buyer owe the seller (using 30/360)?
A) 74 days B) 75 days C) 76 days D) 77 days
Answer: B -- Using the 30/360 convention, accrued interest runs from the last coupon date (January 1) to the settlement date. Municipal bonds settle T+1, so a trade on March 15 settles March 16. Count: January = 30 days, February = 30 days (30/360 convention), March 1-15 = 15 days. Total = 30 + 30 + 15 = 75 days. Remember, the buyer pays accrued interest to the seller for the period the seller held the bond.
Question 22: Which of the following municipal bonds would NOT be subject to the Alternative Minimum Tax (AMT)?
A) A private activity bond used to finance an airport runway B) A bond used to finance a public school C) An industrial development revenue bond for a private factory D) A bond used for a sports stadium with private naming rights
Answer: B -- Bonds used to finance essential public-purpose projects like public schools are exempt from the AMT. Private activity bonds (those that primarily benefit private entities) are generally subject to AMT. Airport runway bonds can be exempt if they are governmentally owned, but private activity bonds for factories and stadiums with private involvement are typically AMT-subject. A public school bond is the clearest exemption.
Debt Securities
Bond pricing, yield relationships, and interest rate risk are core Series 7 concepts.
Question 23: A bond with a 5% coupon is trading at 103. What is the current yield?
A) 4.85% B) 5.00% C) 5.15% D) 5.26%
Answer: A -- Current yield = Annual Coupon / Market Price. Annual coupon = 5% of $1,000 par = $50. Market price = 103% of $1,000 = $1,030. Current yield = $50 / $1,030 = 4.854%, approximately 4.85%. When a bond trades at a premium, the current yield is below the coupon rate.
Question 24: Rank the following yields from lowest to highest for a bond trading at a premium: Yield to Call (YTC), Current Yield (CY), Coupon Rate (Nominal Yield), Yield to Maturity (YTM).
A) YTC, YTM, CY, Coupon B) Coupon, CY, YTM, YTC C) CY, Coupon, YTM, YTC D) YTM, YTC, CY, Coupon
Answer: A -- For a premium bond, the yield relationship from lowest to highest is: YTC < YTM < CY < Nominal (Coupon) Yield. YTC is the lowest because the call accelerates the premium loss. YTM is next because the premium is amortized over a longer period. Current yield is lower than the coupon because you divide the coupon by a price above par. The coupon rate is the highest because it is based on par value.
Question 25: If interest rates rise by 1%, which bond will experience the greatest price decline?
A) 3% coupon, 5-year maturity B) 3% coupon, 20-year maturity C) 7% coupon, 5-year maturity D) 7% coupon, 20-year maturity
Answer: B -- Bond price sensitivity to interest rate changes (duration) is affected by two primary factors: coupon rate and maturity. Lower coupons = more price sensitivity. Longer maturities = more price sensitivity. The bond with a 3% coupon and 20-year maturity combines both factors for the greatest price decline. It has the lowest coupon (more duration) and the longest maturity (more duration).
Question 26: An investor buys a 6% corporate bond at 95 with 10 years to maturity. What is the approximate yield to maturity (YTM)?
A) 5.50% B) 6.00% C) 6.72% D) 6.84%
Answer: C -- Using the approximate YTM formula: YTM = [Annual Coupon + (Par - Price) / Years to Maturity] / [(Par + Price) / 2]. Annual coupon = $60. Discount amortization = ($1,000 - $950) / 10 = $5 per year. Numerator = $60 + $5 = $65. Average price = ($1,000 + $950) / 2 = $975. YTM = $65 / $975 = 6.67%, approximately 6.72% (the closest option accounting for rounding). When a bond trades at a discount, YTM is higher than the coupon rate.
Question 27: A zero-coupon bond with a face value of $1,000 and 15 years to maturity is trading at $481. An investor buys it and holds to maturity. What is the tax treatment of the $519 gain?
A) Taxed entirely as capital gains at maturity B) Taxed as ordinary income annually (phantom income) through accretion C) Tax-free if held to maturity D) Taxed as capital gains only if sold before maturity
Answer: B -- Zero-coupon bonds are subject to annual accretion (also called phantom income or imputed interest). Even though the investor receives no annual payments, the IRS requires the bondholder to report the annual increase in the bond's value as ordinary income each year. The $519 discount ($1,000 - $481) is accreted over 15 years, and each year's accretion is taxed as ordinary income.
Question 28: Which of the following securities is backed by the full faith and credit of the U.S. government?
A) Federal Home Loan Bank bonds B) Fannie Mae (FNMA) mortgage-backed securities C) Ginnie Mae (GNMA) pass-through certificates D) Federal Farm Credit System bonds
Answer: C -- GNMA (Ginnie Mae) securities are the only mortgage-backed securities that carry the full faith and credit guarantee of the U.S. government. Fannie Mae, Freddie Mac, Federal Home Loan Banks, and Federal Farm Credit System securities are issued by government-sponsored enterprises (GSEs) and carry an implied but not explicit government guarantee.
Equity & Investment Company Products
This section covers mutual funds, ETFs, REITs, DPPs, and related products.
Question 29: An investor purchases mutual fund shares at the public offering price (POP) of $12.50. The NAV is $11.80. What is the sales charge percentage?
A) 5.3% B) 5.6% C) 5.9% D) 6.2%
Answer: B -- The sales charge percentage is calculated on the POP (not the NAV): Sales Charge % = (POP - NAV) / POP. ($12.50 - $11.80) / $12.50 = $0.70 / $12.50 = 5.6%. This is a key distinction -- FINRA requires the sales charge be expressed as a percentage of the POP, not the NAV.
Question 30: Which of the following is TRUE about exchange-traded funds (ETFs)?
A) ETFs can only be purchased at the end of the trading day at NAV B) ETFs are typically actively managed and have higher expense ratios than mutual funds C) ETFs trade throughout the day on exchanges and can be bought on margin or sold short D) ETFs always trade at exactly their NAV
Answer: C -- ETFs trade on exchanges throughout the day, just like stocks. They can be purchased on margin, sold short, and traded with limit or stop orders. Unlike mutual funds, which are priced at NAV at the end of the day, ETFs can trade at slight premiums or discounts to NAV. Most ETFs are passively managed (index-tracking) with low expense ratios.
Question 31: Which of the following investments would provide the BEST hedge against inflation?
A) Long-term fixed-rate bonds B) Preferred stock with a fixed dividend C) Real Estate Investment Trust (REIT) D) Long-term certificates of deposit
Answer: C -- REITs invest in real estate, which historically appreciates with inflation. Real estate rents and property values tend to rise with the general price level, providing a natural inflation hedge. Long-term fixed-rate bonds, preferred stock with fixed dividends, and CDs all lose purchasing power during inflation because their payments are fixed.
Question 32: An investor contributes $10,000 to a limited partnership and signs a recourse note for $15,000. What is the investor's total cost basis and maximum loss exposure?
A) Cost basis: $10,000; Maximum loss: $10,000 B) Cost basis: $25,000; Maximum loss: $10,000 C) Cost basis: $25,000; Maximum loss: $25,000 D) Cost basis: $10,000; Maximum loss: $25,000
Answer: C -- In a direct participation program (DPP), the cost basis includes both the cash contribution and any recourse debt the limited partner assumes. Cost basis = $10,000 + $15,000 = $25,000. With a recourse note, the investor is personally liable for repayment, so maximum loss = the full $25,000. (With a nonrecourse note, the cost basis would still be $25,000, but the maximum cash loss would be limited to the $10,000 cash contributed, with the lender bearing the rest.)
Question 33: An open-end mutual fund (investment company) must have a minimum of what percentage of its assets invested in the type of securities described in its name, per the SEC Names Rule?
A) 50% B) 65% C) 80% D) 95%
Answer: C -- Under the SEC Names Rule (Rule 35d-1), a fund whose name suggests a particular type of investment must invest at least 80% of its net assets in that type. For example, a "Growth Stock Fund" must invest at least 80% of assets in growth stocks. This prevents misleading fund names.
Question 34: A customer redeems mutual fund shares that were purchased 8 months ago at $15 per share. The shares are redeemed at $18 per share. How is the $3 per share gain taxed?
A) As a short-term capital gain at the investor's ordinary income rate B) As a long-term capital gain at the reduced capital gains rate C) As ordinary income regardless of holding period D) Tax-free if reinvested in another mutual fund within 60 days
Answer: A -- Because the shares were held for 8 months (less than 12 months), the $3 per share gain is a short-term capital gain, taxed at the investor's ordinary income tax rate. Long-term capital gains treatment requires a holding period of more than 12 months. There is no tax-free rollover provision for mutual fund redemptions (unlike certain retirement account rollovers).
Regulations & Compliance
The Series 7 tests your knowledge of SEC rules, FINRA rules, and prohibited practices.
Question 35: Under SEC Rule 144, a control person (affiliate) of an issuer who wants to sell restricted stock must:
A) Hold the stock for at least 12 months before selling B) File Form 144 with the SEC and adhere to volume limitations C) Sell only through a private placement D) Register the shares with the SEC before any sale
Answer: B -- Under Rule 144, control persons must file Form 144 with the SEC at the time of the sale order and comply with volume limitations (the greater of 1% of outstanding shares or the average weekly trading volume over the preceding four weeks, measured over a 90-day period). Restricted stock held by non-affiliates has a 6-month holding period (not 12 months) if the issuer is SEC-reporting. Control persons can sell without a holding period if the shares are not restricted.
Question 36: A registered representative learns that a publicly traded company will announce better-than-expected earnings tomorrow. The rep buys shares in his personal account before the announcement. This is a violation of:
A) Regulation SHO (short selling rules) B) The Securities Act of 1933 (registration requirements) C) The Insider Trading and Securities Fraud Enforcement Act of 1988 D) Regulation A (small offerings)
Answer: C -- Trading on material, nonpublic information (MNPI) violates insider trading laws. The Insider Trading and Securities Fraud Enforcement Act of 1988 (ITSFEA) imposes severe penalties: up to 3x the profit gained or loss avoided (treble damages) and criminal fines up to $5 million for individuals. The Act also holds supervisors liable if they fail to prevent insider trading by those they supervise.
Question 37: Under FINRA rules, a registered representative must disclose which of the following when recommending a security to a customer?
A) The rep's personal opinion on the company's management B) Any compensation or conflict of interest related to the recommendation C) The rep's total annual compensation from the firm D) Other customers' positions in the same security
Answer: B -- FINRA requires registered reps to disclose material conflicts of interest and any compensation arrangements that could influence their recommendations. This is part of the suitability obligation (FINRA Rule 2111) and the Regulation Best Interest (Reg BI) requirement. Reps do not need to disclose personal opinions, total compensation, or other customers' positions.
Question 38: A customer writes a check for $12,000 to purchase securities. Under the Bank Secrecy Act / Anti-Money Laundering (AML) rules, what reporting is required?
A) File a Currency Transaction Report (CTR) because the amount exceeds $10,000 B) No reporting is required because checks are not cash C) File a Suspicious Activity Report (SAR) immediately D) Report to OFAC within 24 hours
Answer: B -- Currency Transaction Reports (CTRs) are required for cash transactions exceeding $10,000. A check is not considered cash for CTR purposes. However, if the transaction has unusual characteristics suggesting possible money laundering (structuring, no apparent business purpose, etc.), a SAR should be filed. A routine check payment for $12,000 does not trigger automatic reporting.
Question 39: A registered representative wants to open a securities account at another broker-dealer. Under FINRA rules, the rep must:
A) Nothing -- reps can open accounts anywhere without disclosure B) Notify their employing firm in writing before opening the account C) Get written approval from FINRA before opening the account D) Close all outside accounts before registration
Answer: B -- Under FINRA Rule 3210, a registered representative must provide written notification to their employing member firm prior to opening a securities account at another broker-dealer. The employing firm may also require duplicate statements and confirmations. This allows the firm to monitor for conflicts of interest, insider trading, and excessive outside activity.
Additional Practice: Mixed Topics
Question 40: Which of the following would cause the greatest loss in a bond portfolio?
A) Credit upgrade of holdings B) Rising interest rates C) Falling interest rates D) Increasing bond maturities with stable rates
Answer: B -- Rising interest rates cause bond prices to fall. This is the most significant risk factor for a bond portfolio. A credit upgrade (A) would increase values. Falling rates (C) would increase values. Increasing maturities with stable rates (D) would increase price sensitivity but not directly cause losses. The inverse relationship between interest rates and bond prices is a fundamental concept.
Question 41: A 12b-1 fee charged by a mutual fund covers:
A) Portfolio management expenses B) Distribution and marketing expenses C) Custodian and accounting fees D) SEC registration fees
Answer: B -- 12b-1 fees are charged to cover distribution and marketing expenses, including advertising, compensating brokers for selling shares, and shareholder servicing. Under FINRA rules, 12b-1 fees cannot exceed 0.75% for distribution and an additional 0.25% for service (total max 1.00%). These fees come from fund assets and reduce shareholder returns.
Question 42: An investor owns shares of a company that announces a 3-for-1 stock split. The investor held 200 shares at $90 per share before the split. After the split, the investor has:
A) 200 shares at $30 B) 600 shares at $30 C) 600 shares at $90 D) 200 shares at $270
Answer: B -- In a 3-for-1 stock split, the number of shares triples and the price is divided by 3. 200 shares x 3 = 600 shares. $90 / 3 = $30 per share. Total value remains the same: 200 x $90 = $18,000 = 600 x $30 = $18,000. The investor's cost basis per share is also adjusted: new cost basis = old cost basis / 3.
Question 43: A callable bond is MOST likely to be called when:
A) Interest rates are rising B) Interest rates are falling C) The bond is trading at a discount D) The issuer's credit rating is downgraded
Answer: B -- Issuers call bonds when interest rates fall so they can refinance at a lower rate, just like homeowners refinance mortgages. When rates fall, existing bonds with higher coupons trade at premiums and become attractive to call. This is call risk -- the risk to bondholders that their high-coupon bond will be redeemed early, forcing them to reinvest at lower prevailing rates.
Question 44: Which of the following describes the risk of reinvesting coupon payments at lower interest rates?
A) Credit risk B) Liquidity risk C) Reinvestment risk D) Purchasing power risk
Answer: C -- Reinvestment risk is the risk that coupon payments or principal received must be reinvested at a lower interest rate than the original investment. This is especially problematic for callable bonds (which get called when rates fall) and high-coupon bonds. Zero-coupon bonds have no reinvestment risk because they make no periodic payments.
Question 45: Under the Securities Act of 1933, which of the following securities is EXEMPT from registration?
A) Shares of a new technology company in an IPO B) U.S. Treasury bonds C) Common stock of a foreign company listed on the NYSE D) Convertible bonds of a domestic corporation
Answer: B -- U.S. government securities (Treasuries, agencies, and municipals) are exempt from registration under the Securities Act of 1933. The Act requires registration of new securities offerings, but exempts government securities, bank securities, insurance policies (regulated by states), and certain nonprofit/religious organization securities. Foreign companies listed on U.S. exchanges must register.
Question 46: A customer places a "buy 100 shares XYZ at $45 stop" order. The stock is currently trading at $42. When will this order be triggered?
A) Immediately, because the stock is below $45 B) When the stock trades at or above $45 C) When the stock trades at exactly $45 D) Only if the stock gaps above $45 on the opening
Answer: B -- A buy stop order is placed above the current market price and is triggered when the stock trades at or above the stop price ($45). Once triggered, it becomes a market order and executes at the next available price. Buy stops are used to protect short positions or to enter a position on upward momentum. The stock is at $42 now, so the order waits until $45 is reached.
Question 47: An investor buys 100 shares of ABC at $50 and simultaneously writes 1 ABC Jun 55 call at 3. What is the investor's maximum gain?
A) $300 B) $500 C) $800 D) Unlimited
Answer: C -- This is a covered call strategy. Maximum gain = (Strike - Purchase Price + Premium) x 100 = ($55 - $50 + $3) x 100 = $8 x 100 = $800. The stock can be called away at $55 (gain of $5 per share) plus the $3 premium received. If the stock rises above $55, the writer must deliver shares at $55, capping the upside. The breakeven = $50 - $3 = $47.
Question 48: An investor who is long stock and wants to protect against a decline should:
A) Write a call B) Buy a call C) Write a put D) Buy a put
Answer: D -- Buying a protective put gives the stockholder the right to sell shares at the strike price, creating a floor on potential losses. This is the most direct hedge against a stock decline. Writing a call provides some limited downside protection (the premium) but does not protect against a significant decline. Writing a put would add downside risk. Buying a call provides no downside protection.
Question 49: Which of the following best describes a "wash sale"?
A) Selling a security at a loss and buying a substantially identical security within 30 days before or after the sale B) Buying and selling the same security on the same day for a profit C) Selling securities to manipulate the market price downward D) Trading between related accounts to create the appearance of volume
Answer: A -- A wash sale occurs when an investor sells a security at a loss and purchases a substantially identical security within 30 days before or after the sale (61-day window). Under IRS rules, the loss is disallowed for tax purposes. The disallowed loss is added to the cost basis of the replacement security. This prevents investors from selling solely to realize a tax loss while maintaining the same investment position.
Question 50: Under Regulation SHO, a "locate" requirement means:
A) A broker-dealer must physically hold the securities before executing a short sale B) A broker-dealer must have reasonable grounds to believe shares can be borrowed before executing a short sale C) A short seller must deposit 100% of the sale proceeds D) Short sales can only be executed on an uptick
Answer: B -- Under Regulation SHO, before executing a short sale, a broker-dealer must locate shares -- that is, have reasonable grounds to believe the security can be borrowed and delivered by the settlement date. This prevents "naked" short selling. The broker does not need to physically hold the shares, but must document the locate. The old "uptick rule" was eliminated and replaced with the alternative uptick rule (circuit breaker).
Question 51: T-bills are quoted on a:
A) Percentage of par basis B) Yield basis C) Discount yield basis D) Dollar price basis
Answer: C -- Treasury bills are quoted on a discount yield basis. Unlike T-notes and T-bonds (which are quoted as a percentage of par in 32nds), T-bills are quoted at a discount from par. For example, a T-bill quoted at 4.50% discount means the investor pays par minus the discount and receives par at maturity. The actual yield (bank discount yield) differs from the bond-equivalent yield.
Question 52: A customer's account is covered by SIPC protection. What is the maximum coverage per separate customer?
A) $250,000 for securities and $250,000 for cash B) $500,000 total, including up to $250,000 for cash claims C) $500,000 for securities only D) $1,000,000 total with no sublimit
Answer: B -- SIPC protects customers up to $500,000 per separate customer, with a sublimit of $250,000 for cash claims. SIPC coverage protects against broker-dealer failure (missing securities and cash), NOT against market losses. For example, if a broker-dealer fails and a customer is missing $400,000 in securities and $300,000 in cash, SIPC covers the $400,000 in securities but only $250,000 of the cash ($650,000 total claim, $500,000 covered with cash limited to $250,000).
Tips for Using Practice Questions Effectively
1. Simulate Exam Conditions
Set a timer for 225 minutes and work through a full 125-question practice exam without breaks. Building stamina is crucial -- many candidates report feeling fatigued in the final hour, which leads to careless mistakes.
2. Review Every Question -- Even the Ones You Got Right
Do not just check your score and move on. For each question:
- If you got it right: Confirm your reasoning was correct, not just a lucky guess
- If you got it wrong: Write down why you missed it and the correct rule or formula
- If you guessed: Treat it as a wrong answer and study the concept
3. Track Your Scores by Topic
Create a spreadsheet tracking your accuracy in each subject area:
- Options (target: 75%+)
- Suitability (target: 80%+)
- Municipal bonds (target: 75%+)
- Debt securities (target: 75%+)
- Equity products (target: 80%+)
- Regulations (target: 80%+)
Any topic below 70% needs additional study before you schedule the exam.
4. Use the AI Tutor for Explanations
When you encounter a concept you do not understand, do not just memorize the answer. Use our AI tutor to get a personalized explanation. Ask it to explain the concept in different ways until it clicks.
5. Complete 800-1,000 Questions Minimum
6. Take at Least 3-5 Full Practice Exams
Full-length timed practice exams are the closest simulation to the real experience. Score consistently above 78-80% on practice exams before scheduling your actual exam (to account for exam-day nerves and the difference between practice and real questions).
Ready to Pass the Series 7?
You now have 50+ practice questions covering the most heavily tested topics. But this is just the beginning.
Next Steps:
- Take more practice questions -- Access our full Series 7 question bank with 800+ free questions
- Build a study plan -- Use our AI-powered study planner to create a personalized schedule
- Review weak areas -- Focus your study time on topics where you scored below 70%
- Join our community -- Connect with other Series 7 candidates preparing for the exam
Pro Tip: Use our AI tutor whenever you get stuck. Highlight any concept on this page, click "Ask AI," and get an instant, personalized explanation. It is like having a private tutor available 24/7.
Start your Series 7 prep today -- it is 100% free, and your future career in securities is waiting.