Series Seven Practice Final Exam Questions 20-50

21. Mr.Gold buys 1 ASF NOV 80 PUT for $400. What is Mr. Gold’s maximum potential gain?

A) $400
B) $7600
C) $8400
D) Unlimited


Correct answer is B: The maximum gain for the holder of a put option is the difference between the strike price (80) and the premium paid ($400). The holder of this put option has the right to sell the stock at 80. If this stock declines to 0, the holder can make $8000 minus the $400 premium.





22. A customer buys 1 DFG OCT 40 CALL for $500 and sells 1 DFG OCT 50 CALL for $100. This strategy is a:

A) Long straddle
B) Short straddle
C) Combination
D) Spread


Correct answer is D: A spread is the buying and selling of calls or puts. A long straddle is when you only buy calls and puts. A short straddle is when you only sell calls and puts.


23. Which of the following is true regarding the Specialist on the NYSE?

I The specialist can purchase a security for his own inventory
II The specialist can “stop stock” (hold a price) for a floor broker
III The specialist can accept discretionary orders
IV Specialists are also known as floor brokers


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


Correct answer is D: The specialist works on the floor of the exchange. They accept orders and execute orders for floor brokers. They can purchase for their own inventory and sell out of their own inventory. The specialist can “stop stock” for a floor broker. This guarantees a price while the floor broker decides what he wants to do. They cannot accept discretionary orders. Floor brokers work for the firm and are separate from the specialist.


24. A customer owns 4% of THD non-cumulative preferred stock. In 2003, THD pays a 3% dividend to the preferred stockholders. In 2004, what would THD owe to the preferred shareholders?


A) 2 %
B) 3 %
C) 4 %
D) 5 %

Correct answer is C: The key to the question is “non-cumulative”. Non-cumulative preferred stock does not carry over missed dividends to the next year. Most preferred stock is cumulative and any missed dividends would carry over to the next year.






25. A customer tells an account representative that she wishes to not have her name on her account statements, preferring to have them designated as a number instead. Which of the following is true?


I This is only allowed if the customer has had an account with the firm for 3 years
II This is not permitted for individual accounts
III This is allowed if the customer submits her request in writing to the firm
IV This is only permitted for corporate accounts


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


Correct answer is C: Accounts designated by number on an account statement is permitted, if the customer submits this request in writing. It can be done for individual or corporate accounts. The firm must have the customers name on file at the firm as well.


26. Which of the following are NOT voted on by common shareholders?

A) New issue of common stock
B) New issue of convertible bonds
C) Board of directors elections
D) Forward stock split


Correct answer is A: Corporations allow existing shareholders to subscribe to new issues of common stock before the general public, thus there is no voting that is required. The other choices are all voted on by the shareholders.


27. An OTC trader wants to find information and pricing on several “penny stocks”. Where could this trader find this information?


I NASDAQ
II Pink sheets
III OTC bulletin board
IV Blue list





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


Correct answer is D: Penny stocks are defined as stocks that are $5 or less and not traded on an exchange. This includes NYSE and NASDAQ. Information on these securities are found in the pink sheets and the OTC bulletin board.





28. A bond is trading at $1160, and has a conversion price of $50. At which price would the stock need to trade to be equal to the current bond price?

A) 23
B) 58
C) 50
D) 54


Correct answer is B: The first step is to convert the bond. You must always use par value. Divide the par value (1000) by the conversion price ($50). This equals the amount of shares that will be created (20). To come up with the “parity price” that the stock must trade at, do one of 2 things: Divide $1160 by 20, which equals 58 or multiply 20 by each answer choice until the bond price is equaled. Answer is 58.



29. Which of the following amounts would NOT be covered under SIPC insurance?

A) $350,000 securities + $150,000 cash
B) $400,000 securities + $100,000 cash
C) $200,000 securities + $80,000 cash
D) $500,000 securities + 0 cash


Correct answer is A: SIPC covers up to $500,000 maximum. However, this amount does not cover more than $100,000 in cash.

30. A customer purchases a 6% $10,000 municipal bond that pays July 1st and January 1st. The bond is sold on Thursday September 22nd for regular way settlement. How many days of accrued interest are owed to the seller of this bond?

A) 82
B) 84
C) 85
D) 86

Correct answer is D: Municipal bonds pay interest on a 30 day month/360 day year. Each full month is treated as 30 days. The last pay date was July 1st . The seller is owed 30 days for July and 30 days for August. Municipal bonds settle “trade date + 3 business days”. This bond was sold on Thursday September 22nd. It settles on Tuesday September 27th . The settlement date is not included, because the owner relieves the bond on that day, thus the total for September is 26 days, for a total of 86 days. (July = 30 days August = 30 days September = 26 days)


31. Selling stock short is done for which of the following reasons?

A) To limit losses on a long position
B) To make small gains with limited risk
C) To gain by the decrease in the price of a stock
D) To gain by the increase in the price of a stock


Correct answer is C: Selling stock short is profitable when the market declines, allowing an investor to purchase the stock at a lower price. It is not done with existing long positions and it carries a high degree of risk.


32. A bond is purchased at $96 ¼ and has a nominal yield of 7%. If this bond was held to maturity, the investor would have a yield of:

A) Greater than 7%
B) Less than 7%
C) Equal to 7%
D) Cannot determine


Correct answer is A: A bond that is purchased at discount and held to maturity, would have a yield greater than the coupon rate. The coupon rate is paid to par and the bond will mature at par. The customer will receive 7% in interest plus the discount difference of $96 ¼ and par ($100).


33. Which debt security pays principal and interest monthly?

A) Municipal bonds
B) Treasury Bonds
C) Corporate bonds
D) GNMA bonds


Correct answer is D: Government National Mortgage Association (GNMA) bonds are backed by GNMA mortgages. The mortgage holders make monthly principal and interest payments back to GNMA, which in turn pay the bondholders. The other choices all pay semi annual interest and only pay back the principal at maturity (par)




34. Which of the following does NOT pay dividends?

A) Warrants
B) Preferred stock
C) Cumulative preferred stock
D) Common stock


Correct answer is A: Warrants are long term options to buy a security at a specific price. Until the warrant is exercised (purchasing the underlying stock), the holder does not receive the benefits that a stockholder would have. No dividends would be payable. The other choices can all receive dividends.


35. A customer buys 2 ADF SEP 50 Calls for $300 each. What is the customer’s maximum loss?

A) $300
B) $600
C) $4700
D) Unlimited


Correct answer is B: The maximum loss for any option holder is the total initial cost (Premium). The worst case scenario is that the options expire worthless. The customer bought 2 options for a total of $600. The $600 is the maximum loss.





36. Which of the following must be done before an account can begin options trading?

I Determine suitability
II New account is approved by a registered options principal
III Customer must sign and return the “options agreement”
IV Customer must receive the “risk disclosure” document


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

Correct answer is A: The options agreement is not required for an options account begins trading. It is required within 15 days of the account being approved. All of the other choices must be done prior to the account being able to trade in options.


37. FSG brokerage firm wants to set their long margin account minimum equity maintenance levels at 35% per account. Which of the following is true?

A) This is not permitted, because the NYSE minimum equity requirement is 25%
B) This is only permitted if the firm receives permission from the NASD
C) This is permitted. A firm can increase their minimum maintenance levels.
D) None of the above.


Correct answer is C: A firm can set their minimum equity levels higher than the NYSE minimum. Most firms do set their levels higher than 25%. A firm could not go below 25%.


38. Securities trading on NASDAQ would be part of the:

A) First market
B) Second market
C) Third market
D) Fourth market

Correct answer is B: Over the counter trading of OTC securities, including NASDAQ, is the Second market.






39. Treasury bills are auctioned:

A) Quarterly
B) Monthly
C) Weekly
D) Daily


Correct answer is C: Treasury Bills are auctioned on a weekly basis, using a competitive bidding process.


40. A technical analyst sees that a stock has “broken through” it’s support level. The analyst would consider this action to be:

A) Neutral
B) Overbought
C) Bullish
D) Bearish

Correct answer is D: The support level is the low end of a stocks trading range. Breaking though a support level is a sign of weakness and is considered bearish.



41. A NASDAQ market maker has not honored or filled firm quotes on a consistant 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”. Backing away is prohibited by the NASD. A firm must honor its firm quotes.


42. A Call option is “in the money” when:

A) The strike price is higher than the market price
B) The strike price is lower than the market price
C) The strike price is equal to the market price
D) None of the above


Correct answer is B: Call options are “in the money” when the strike price is lower than the market price. The holder has the right to buy the security at the strike price, thus it is more valuable when the market is above the strike price. Answer choice C would describe an “at the money” option.


43. A common shareholder will vote on all of the following EXCEPT:

A) Board of director elections
B) Stock Split
C) Rights offering
D) A new issue of convertible bonds


Correct answer is C: Existing shareholders are given an opportunity to buy any new issue of common stock through a rights offering. There is no voter approval needed. All of the other choices would require a shareholder vote.


44. 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 custodian can be listed and registered on a minor account. Discretionary authority cannot be given to other individuals or custodians.


45. The maximum allowable gift to customers and associated persons under NASD
rules is:

A) $50
B) $75
C) $100
D) $150

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






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

I Dividends are declared in overseas currency
II Dividends are declared in US currency
III Dividends are paid to shareholders in dollars
IV Dividends are paid to shareholders in overseas currency


A) I and IV
B) II and III
C) II and IV
D) I and III
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. An affiliated institution in the US will convert the dividend to US dollars and distribute it to the shareholders in the US.

47. A customer has a long margin account with a total market value of $27,000. The account has a current debit balance of $13,000 and $1000 in SMA. The equity in this account is:
A) $13,000
B) $14,000
C) $14,500
D) $15,000

Correct answer is B: The equity in a long margin account is the long market value ($27,000) minus the debit balance ($13,000). SMA is not used when calculating equity.






48. Prepayment risk or extension risk would most likely be part of which securities?
A) Corporate 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.

49. A listed security on the NYSE has been traded OTC by a NYSE member firm. This trade took place in what “market”?
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. Off hours or better pricing through another broker dealer could be reasons for these trades.






50. A customer buys 2 ADF JUN 40 CALLS paying $200 each for them. The breakeven for both contracts is:
A) 44
B) 42
C) 38
D) 36

Correct answer is B: The breakeven for all call options in the strike price (40) plus the premium ($200). The number of contracts does not matter. The customer needs the stock to rise 2 points on each contract owned. The breakeven is 42 for each contract.

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