The following are sample practice questions and answers for the Series 7 exam. The test focuses on several big areas including Bonds, Options, FINRA Rules and regulations. The Series 7 license test requires consistant study. These questions are just some examples.

Sample Test examples:

1. Betsy has just opened an options account and enters an order to buy 1 XYZ Oct 70 Call for $300. What is Betsy’s maximum potential gain?

A) $300
B) $6700
C) $7000
D) Unlimited

Correct answer is D: The maximum gain for the Betsy for the purchase of a call option is unlimited. The appreciation of the underlying stock can go up forever. The maximum loss that Betsy can incur is only the premium paid of $300.

2. A customer has a short margin account with a short market value of $22,000, a credit balance of $42,000 and SMA of $500. What is the equity in the account?

A) $500
B) $20,000
C) $20,500
D) $37,000

Correct answer is B: The equity in a short margin account is equal to the credit balance minus the short market value. SMA is not used when computing equity.

3. A customer has a short margin account with a short market value of $22,000, a credit balance of $42,000 and SMA of $500. What is the NYSE minimum equity maintenance on this account?

A) $5500
B) $6000
C) $6600
D) $12,600

Correct answer is C: Minimum equity maintenance on short margin accounts is 30%. NYSE rules state that you must maintain at least 30% equity based on the current short market value. The short market value of $22,000 must be multiplied by 30%. This equals $6600.

4. An investor owns 100 shares of LKI at $58. He needs to limit his loss to 5 points or less and will accept a longer time for the order to be executed, to make sure the loss does not exceed 5 points. Which of the following orders would be the best recommendation?

A) Sell limit order
B) Sell stop-limit order
C) Sell stop order
B) Buy stop order

Correct answer is B: A sell stop-limit order would be the best choice. A sell stop-limit order specifies a price, but will not turn into a market order. This order will only get executed at the price or better. Stop orders, although quicker in execution, will turn into market orders and the customer will not be guaranteed a specific price. Stop-limit orders are risky, in that the order may or may not get executed, but in this situation, it is the best choice.

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5. Assuming all of the following bonds from the same issuer are callable now, which one would most likely get called first?

A) 8% maturing 1-15-2016
B) 8% maturing 1-15-2007
C) 4% maturing 1-15-2012
D) 4% maturing 1-15-2007

Correct answer is A: Bonds with the highest coupon rates would be the first to most likely get called. The issuer will look to issue new debt at a lower rate. Since there are two 8% bonds, the one that would most likely get called, would be the issue with the longest maturity. This is because the bond is potentially more expensive with the amount of years it has compared to the shorter one.

6. A customer sells a 6% corporate bond on Tuesday October 4th for regular way settlement. The bond pays interest on July 1st and January 1st. How many days of accrued interest is this customer owed?

A) 98
B) 97
C) 96
D) 57

Correct answer is C: Accrued interest is the interest that is due a seller of a bond since the last day they were paid. Corporate bonds pay on a 30 day month/360 day year. They also settle on the 3rd business day following the trade date (T+3). The trade settles on Friday October 7th. The last pay date was July 1st. The customer is owed 30 days for July, 30 days for August , 30 days for September and 6 days for October. You do not include the settlement date of the 7th.

7. Customers who engage in increased activity of wiring money from their account could indicate which of the following activities?

A) Interpositioning
B) Churning
C) Crossing
D) Money laundering

Correct answer is D: Potential money laundering activities include excessive wiring of money between accounts.

8. Registered Representatives are not allowed to give gifts to customers or other individuals related to the securities business of the representative above:

A) $500
B) $200
C) $100
D) $50

Correct answer is C: The NASD gift limit is $100.

9. A customer sells 100 shares of GHT short at $58 and buys 1 GHT Mar 60 Call @3. What is the customer’s maximum loss?

A) $500
B) $100
C) Unlimited
D) $5500

Correct answer is A: The customer sold short at $58. The call with a strike price of 60, gives this person the right to buy back the stock at $60. If the stock rises, the call can be used to limit the loss to 2 points. The customer can lose $200 on the stock. The customer also paid a $300 premium. Loss potential is $500.

10. A customer owns 200 shares of GHY at $90, and wishes to hedge the position while generating income. What is the best recommendation?

A) Sell calls
B) Sell puts
C) Buy calls
D) Buy puts

Correct answer is A: Selling options will create income. The customer should sell calls. Calls are covered by the underlying stock. If the calls were exercised, the stock would be delivered to meet the obligation. The income also reduces the break-even of the stock.

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