Series 7 Test 4 with Answers

1. Mr. Hanson buys 3 XYZ May 50 CALLS paying $300 each for them. The breakeven for both contracts is:
A) 56
B) 53
C) 50
D) 47

Correct answer is B: The breakeven for all call options in the strike price (50) plus the premium ($300). The customer needs the stock to rise 3 points on each contract owned. The breakeven is 53 for each contract. The number of contracts Mr. Hanson has does not matter.

2. A listed security on the NYSE has been traded over the counter by a NYSE member firm. In which “market” did the trade take place?
A) First market
B) Second market
C) Third market
D) Fourth market

Correct answer is C: This would be a third market transaction. The third market is listed securities on an exchange that have been traded elsewhere. After hours or better pricing through another broker dealer could be reasons for these trades.

3. Prepayment risk or extension risk would most likely be part of which securities?
A) Municipal Bonds
B) Treasury notes
C) Treasury stock
D) CMO’s

Correct answer is D: CMO’s are paid based on the paying schedule of mortgage holders. Should the mortgage payment slow down, the payments to the bondholders would slow down and the bond may “extend” beyond its original time frame. Mortgage payments speeding up could lead to “Prepayment risk”, which would make the bond pay off faster than anticipated. Only mortgage backed securities (CMO’s, Pass Throughs) have these features.

4. What is the minimum maintenance requirement for a client who maintains 200 shares of XYZ Corp. presently valued at $65 per share?
A) $3,250
B) $4,000
C) $4,750
D) $5,000

Correct answer is D: When calculating the minimum maintenance requirement for a long margin account, multiply the total value of the securities ($13,000) by 25%. The total will come out to $3,250

5. Which of the following is true regarding American Depository Receipts (ADR’s)?

I Foreign companies that list their shares for trading on U.S. stock exchange
II Dividends are paid to shareholders in dollars
III Shareholders do not have voting or preemptive rights
IV Dividends are paid to shareholders in overseas currency


A) I and II
B) I, II and III
C) III and IV
D) I, II, III, and IV

Correct answer is D: An ADR is foreign stock traded in the US. The overseas company will declare it’s dividend in it’s natural currency, but it will be paid in U.S. dollars. An affiliated institution in the US will convert the dividend to US dollars and distribute it to the shareholders in the US. Shareholders do not have voting or preemptive rights, the bank votes the shares that it owns and it sell off preemptive rights and remit the money to the receipt holder.

6. The maximum allowable gift to customers and associated persons under NASD
Rules is:

A) $75
B) $100
C) $125
D) $150

Correct answer is B: NASD rules state that the maximum gift allowance is $100 in cash or equivalents.

7. How many people can be registered as a custodian on a minor’s account?

A) One
B) Two
C) Three
D) Four

Correct answer is A: Only one adult (custodian) can be listed per minor account. Discretionary authority cannot be given to other individuals or custodians.

8. Which of the following will a common shareholder will vote on:

A) Board of director elections
B) Rights offering
C) Stock dividend
D) Cash dividend


Correct answer is A: Common shareholders vote for the Board of Directors and on matters that affect the shareholder’s “ownership interest.” Existing shareholders are given an opportunity to buy any new issue of common stock through a rights offering. There is no voter approval needed. Dividend elections are made by the discretion of the Board of Directors.

9. Billybob has a long margin account with a current market value of $31,000. The current equity is $15,000. The customer then sells $2000 in securities. After meeting the minimum requirement, what would the current debit balance be?

A) $14,000
B) $15,000
C) $15,500
D) $16,000


Correct answer is A: To answer this correctly, you needed to recognize that this is a “restricted account.” A restricted account occurs when the debit balance exceeds the equity. The long market value before the sale was $31,000 and the equity was $15,000. This means the debit balance was $16,000 ($31,000 - $15,000). Selling securities is a restricted account requires half of the sale proceeds to be applied to the debit balance. Since $2000 of securities was sold, $1000 of those proceeds would be applied. The new debit balance would be $15,000.

10. A market maker associated with NASDAQ has not honored or filled firm quotes on a consistent basis. This firm would be guilty of:

A) Backing away
B) Interpositioning
C) Crossing
D) Churning

Correct answer is A: This would be “backing away”. The NASD prohibits backing away. A firm must honor its firm quotes.

Series 7 Study Course