Free Series 7 Practice Questions with Answers

Correct answer: A. $6,000.

Current equity is $60,000 - $45,000 = $15,000. The house requirement is 35% x $60,000 = $21,000, so the customer must deposit $6,000 in cash, which reduces the debit and raises equity to $21,000.

• A. Required equity of $21,000 less current equity of $15,000 leaves a $6,000 shortfall.
• B. This is the account's current equity, not the amount needed to cure the call.
• C. This is the total required equity, not the additional deposit.
• D. A $3,000 deposit would leave equity at $18,000, below the $21,000 required.

Correct answer: D. Individual bondholder voting rights on the corporation's merger and acquisition proposals

The trust indenture, required under the Trust Indenture Act of 1939 for most public bond offerings, spells out the terms of the debt — maturity, interest schedule, sinking fund provisions, and protective covenants — and appoints a trustee to enforce those terms on bondholders' behalf. It does not grant individual bondholders a personal vote on corporate M&A matters; that is a shareholder (equity) right, and even bondholder consents under the indenture are exercised collectively through the trustee, not as an individual voting right on business combinations.

• A. Maturity date and interest schedule are core terms every trust indenture spells out, so this is something the indenture does cover.
• B. Sinking fund provisions are standard indenture content describing how and when the issuer retires debt, so this is covered.
• C. Restrictive covenants limiting additional senior debt or large dividend payments are routine indenture protections for bondholders, so this is covered.
• D. Bondholders are creditors, not equity owners, and the indenture does not grant them voting rights on corporate M&A matters — that's a shareholder right, making this the exception.

Correct answer: D. The general partner(s).

The general partner manages the business and bears unlimited personal liability for partnership obligations, while limited partners' liability is capped at their investment (absent participation in management that would jeopardize that limited status).

• A. Limited partners' liability is capped at their investment (plus any recourse debt assumed); it isn't unlimited even in proportion to ownership.
• B. DPPs organized as limited partnerships do carry personal liability exposure — it just falls on the general partner rather than the limited partners.
• C. Liability is not shared equally; that would defeat the purpose of the limited partner designation.
• D. The general partner(s) manage the partnership and bear unlimited personal liability for its debts and obligations, which is the defining tradeoff of the LP structure.

Correct answer: C. Lowering the discount rate

Lowering the discount rate makes it cheaper for banks to borrow, which is an expansionary (easing) action, not a tightening one. Raising the reserve requirement reduces lendable funds, selling securities drains reserves from the banking system, and raising the fed funds rate target increases the cost of overnight borrowing — all three withdraw liquidity and are tightening measures.

• A. Raising the reserve requirement forces banks to hold more reserves and lend less, which is a tightening action.
• B. Selling Treasury securities drains reserves from the banking system, pushing rates up — this is a tightening open market operation.
• C. Correct. Lowering the discount rate makes borrowing from the Fed cheaper and encourages lending, which is an easing action, not a tightening one.
• D. Raising the fed funds rate target is the Fed's primary signal of tightening monetary policy.

Correct answer: C. $24, representing both years in arrears plus the current year's dividend

With cumulative preferred stock, any unpaid dividends accumulate as arrears and must all be paid, along with the current year's dividend, before any dividend can be paid to common stockholders. Here that totals two years in arrears ($16) plus the current year ($8) = $24.

• A. This ignores the two years of dividends in arrears that must also be paid due to the cumulative feature.
• B. This captures the arrears but omits the current year's $8 dividend, which must also be paid before common stockholders receive anything.
• C. Correct — $16 in arrears plus the current year's $8 dividend equals $24 owed to preferred before common can be paid.
• D. This describes noncumulative preferred stock; cumulative preferred dividends accumulate rather than being forfeited.

Correct answer: D. The support (companion) tranches, which take on the extension and contraction risk

A planned amortization class tranche is protected by support, or companion, tranches that absorb prepayment variability within a defined speed range. The support tranches therefore bear most of the contraction and extension risk.

• A. The PAC schedule is designed to stay stable within the protected range; shifting maturity is the support tranche's role.
• B. An agency guarantee covers timely payment, not a buyback of excess prepayments to protect a tranche.
• C. A Z-tranche accrues interest and is paid last, so it does not take priority over PAC principal.
• D. Correct. Companion tranches soak up the prepayment variability that the PAC tranche is shielded from.

Correct answer: D. Yes, the member remains liable for its proportionate percentage of any unsold balance, regardless of having sold its own allotment

Under an Eastern (undivided) account structure, each syndicate member is liable for its proportionate share of any unsold bonds based on its original participation percentage, even if that member has already sold its own specific allotment. This contrasts with a Western (divided) account, where each member's liability is limited strictly to its own allotment, with no responsibility for other members' unsold bonds.

• A. This describes a Western (divided) account, where liability is limited to one's own allotment; in an Eastern (undivided) account, liability continues even after a member sells its own bonds.
• B. There is no cap tying a member's liability to its underwriting fee; liability is based on its proportionate share of the syndicate's unsold balance.
• C. Liability for unsold bonds in an Eastern account is shared proportionally among all syndicate members, not shifted to the syndicate manager.
• D. In an Eastern (undivided) account, each syndicate member shares liability for unsold bonds in proportion to its original participation, regardless of whether it has already sold its own allotment.

Correct answer: B. $44 and $56

A long straddle's breakeven points are the strike price plus and minus the total combined premium paid for both options: $3 (call) + $3 (put) = $6 total premium. Breakevens are $50 + $6 = $56 (upside) and $50 − $6 = $44 (downside). Choice A uses only one leg's premium instead of the combined total, choice C ignores that a straddle requires the stock to move enough to cover both premiums, and choice D shifts the breakevens incorrectly.

• A. This uses only one leg's premium ($3) instead of the combined premium paid for both the call and put ($6 total), understating the breakeven spread.
• B. A long straddle's breakeven points are the strike price plus and minus the total combined premium paid: $50 + $6 = $56 and $50 - $6 = $44.
• C. $50 is the strike price itself, not a breakeven point; the position needs the stock to move beyond the combined premium in either direction to break even.
• D. These figures don't derive from the straddle breakeven formula (strike ± total premium) and don't correctly bracket the $50 strike.

Correct answer: A. $12.42

NAV per share = (Total assets − Total liabilities) / Shares outstanding = ($120,500,000 − $2,500,000) / 10,000,000 = $118,000,000 / 10,000,000 = $11.80. Because the sales charge is expressed as a percentage of the public offering price (not of NAV), POP = NAV / (1 − sales charge rate) = $11.80 / 0.95 = $12.4210…, which rounds to $12.42. Choice C is simply the NAV with no sales charge applied. Choice B results from incorrectly multiplying NAV by 1.05 instead of dividing by 0.95. Choice D does not correspond to a correct calculation method.

• A. NAV = ($120,500,000 - $2,500,000) / 10,000,000 = $11.80; POP = $11.80 / (1 - 0.05) = $12.42, matching this answer.
• B. $12.39 doesn't match the correct division of NAV by (1 - the sales charge percentage).
• C. $11.80 is the fund's NAV per share, not the public offering price after adding the sales charge.
• D. $12.60 overstates the POP beyond what a 5% charge on the offering price actually produces.

Correct answer: D. Annual income

Under the USA PATRIOT Act's CIP requirements (implemented via SEC/FinCEN rules and referenced in FINRA rules), a broker-dealer must obtain, at minimum, the customer's name, date of birth, address, and identification number (e.g., Social Security number or taxpayer ID) before opening an account, and must verify this information within a reasonable time. Annual income is suitability/financial-profile information collected for Reg BI/know-your-customer purposes, not a CIP identity-verification requirement.

• A. Legal name is one of the four required CIP data points, so it is not the exception.
• B. Date of birth is a required CIP element for individual customers, so it is not the exception.
• C. A residential or business street address is a required CIP element, so it is not the exception.
• D. Correct. Annual income is not one of the four required CIP identifiers (name, date of birth, address, and identification number); it may be collected for suitability purposes but isn't a CIP requirement.

Correct answer: B. 25% of the amount not distributed, reduced to 10% if the shortfall is corrected within the applicable correction window

The SECURE 2.0 Act reduced the excise tax for a missed or insufficient RMD from 50% to 25% of the shortfall, and further reduces it to 10% if the account owner corrects the shortfall within the applicable correction window (generally by the end of the second year following the year the tax is imposed). Choice A reflects pre-SECURE 2.0 law and is now outdated. Choices C and D misstate the applicable tax entirely.

• A. 50% was the excise tax rate under prior law, but current law has reduced the standard penalty and added a further reduction for timely correction.
• B. Correct. Under SECURE 2.0, the excise tax on a missed RMD is 25% of the shortfall, reduced to 10% if the error is corrected within the applicable correction window.
• C. 6% is the excise tax rate for excess IRA contributions, not for a missed RMD, which is penalized differently.
• D. There is in fact an excise tax on a missed RMD, in addition to the ordinary income tax owed once the distribution is taken, even if it is taken in the following tax year.

Correct answer: A. Execute a buy-in

When a selling firm fails to deliver securities by settlement date, the receiving firm (or the clearing corporation on its behalf) may issue a buy-in notice, giving the failing firm a specified notice period to deliver. If delivery still does not occur, the buy-in is executed in the open market at the failing firm's expense, and that firm is liable for any price difference plus associated costs. A DK notice addresses disagreement over whether a trade occurred, not a failure to deliver an agreed trade; reclamation involves returning previously accepted, defective securities; a good faith violation is an unrelated margin-account funding issue.

• A. When a selling firm fails to deliver by settlement date, the receiving firm (or the clearing corporation) may execute a buy-in, purchasing the securities in the market at the defaulting party's expense to obtain delivery.
• B. A DK ("don't know") notice is used to flag a discrepancy or unrecognized trade confirmation, not to remedy a failure to deliver securities.
• C. Reclamation refers to returning securities or documents found to be defective after delivery, not to obtaining securities that were never delivered in the first place.
• D. A good faith violation relates to cash account trading rules (selling securities before payment settles), not to remedying a counterparty's failure to deliver securities.

Correct answer: C. No, disclosure alone does not satisfy suitability; the rep must still have a reasonable basis that the product is suitable in general, and specifically suitable given this customer's investment profile (customer-specific suitability).

Suitability under FINRA Rule 2111 has three prongs: reasonable-basis, customer-specific, and quantitative. A signed risk disclosure only shows the customer was informed of risk — it does not substitute for the rep's affirmative obligation to match the recommendation to the customer's investment profile. D is also wrong because no product category is automatically unsuitable for everyone; suitability is customer-specific.

• A. Disclosure plus a signed acknowledgment does not, by itself, satisfy suitability; the rep must still have a reasonable basis for recommending the product both generally and to this specific customer.
• B. This conflates reasonable-basis suitability with disclosure; reasonable-basis suitability requires actual diligence into the product, and customer-specific suitability is a separate requirement not met by a written acknowledgment.
• C. Suitability has two distinct components beyond disclosure: a reasonable basis that the product is suitable for some investors, and customer-specific suitability tied to this investor's actual profile — a signed risk acknowledgment addresses neither on its own.
• D. Non-traded REITs are not unsuitable as a class for retail investors; suitability is determined case by case based on the product and the customer's profile, not a blanket prohibition.

• Source: FINRA Rule 2111 (Suitability)

Correct answer: B. $15

Annual interest is $60, so accrued interest for 90 of 360 days is $60 x 90/360 = $15, added to the price paid at settlement.

• A. This is the full semiannual coupon, which accrues over 180 days, not 90.
• B. $60 x 90/360 = $15.
• C. This is three-quarters of the semiannual coupon, a miscalculation.
• D. This is the full annual interest, not the accrual to date.

Correct answer: D. The at-risk rules, which limit deductible losses to the amount the investor actually has economically at risk in the investment.

Loss deductibility for a DPP investor is tested in sequence: first basis limitations, then the at-risk rules (capping deductible losses to amounts economically at risk), and only losses that survive those hurdles are then subjected to the passive activity loss limitation rules.

• A. The wash-sale rule concerns disallowing losses on repurchased securities sold at a loss; it has no role in the DPP loss-limitation ordering.
• B. OID accrual rules govern how bond discount income is recognized over time and are not a threshold loss limitation; they are not applied before DPP losses are tested.
• C. The AMT exemption phase-out is a separate tax calculation unrelated to the sequential loss-limitation framework (basis, at-risk, then passive activity) that applies to DPP losses.
• D. Losses must first clear the at-risk rules, which cap deductible losses at the amount the investor is actually economically exposed to lose, before the passive activity loss rules are even applied.

Correct answer: C. Discount rate

The discount rate is the rate the Fed charges banks that borrow directly from it via the discount window. The federal funds rate is the rate banks charge each other for overnight loans of reserves. The prime rate is set by commercial banks for their best customers, and LIBOR (now largely replaced by SOFR) was an interbank offered rate set outside the Fed.

• A. The federal funds rate is what banks charge each other for overnight loans of reserves, not what the Fed charges banks directly.
• B. The prime rate is the rate commercial banks charge their most creditworthy customers, unrelated to Fed discount-window lending.
• C. The discount rate is specifically the rate the Federal Reserve charges member banks that borrow directly from it at the discount window.
• D. LIBOR (and its successors like SOFR) is an interbank benchmark rate, not a rate set by the Fed for discount-window borrowing.

Correct answer: C. 10 rights

The number of rights needed per new share equals outstanding shares divided by new shares being issued: 4,000,000 / 400,000 = 10. Each existing shareholder gets one right per share owned, and it takes 10 of those rights (plus the subscription price) to buy one new share.

• A. 4 rights understates the ratio; dividing 4,000,000 outstanding shares by 400,000 new shares gives 10, not 4.
• B. 8 rights doesn't match the actual ratio of outstanding shares to new shares being offered.
• C. Dividing the 4,000,000 outstanding shares (one right per share) by the 400,000 new shares being offered gives a ratio of 10 rights needed per new share.
• D. 40 rights overstates the ratio by a factor of four relative to the actual 10:1 relationship.

Correct answer: C. Monthly payments consisting of both principal and interest passed through from the underlying mortgage pool

GNMA certificates represent an undivided interest in a pool of residential mortgages. As homeowners make their monthly mortgage payments, GNMA passes those payments through to certificate holders monthly, and each payment contains both a principal and an interest component — unlike a bond, which typically separates interest (periodic) from principal (at maturity).

• A. GNMA pass-throughs don't pay in a single lump sum at maturity; they distribute principal and interest monthly as mortgage payments come in.
• B. Payments aren't semiannual interest-only with principal deferred; both principal and interest pass through monthly.
• C. GNMA certificates pass through monthly payments of both principal and interest collected from the underlying pool of mortgages.
• D. GNMA payments are mortgage pass-throughs, not dividends declared at the discretion of a board of directors.

Correct answer: A. The dealer is generally barred from engaging in municipal securities business with that issuer for two years, because the contribution exceeds the $250 per-election de minimis exception

MSRB Rule G-37 restricts municipal finance professionals' political contributions. A narrow de minimis exception permits contributions of up to $250 per election to officials for whom the contributor is entitled to vote without triggering consequences. A $500 contribution exceeds that $250 threshold, generally triggering the two-year ban on the dealer engaging in municipal securities business with that issuer.

• A. Correct — the $500 contribution exceeds the $250 de minimis exception, generally triggering the two-year business ban.
• B. Being entitled to vote makes the de minimis exception potentially available, but contributions above the $250 cap still trigger the ban and are not merely disclosed.
• C. Refunding a contribution of this size within 30 days does not cure a G-37 violation; the ban applies once the threshold is crossed.
• D. $1,000 is not the relevant threshold; the de minimis cap under G-37 is $250 per election.

Correct answer: A. $600

Net debit is $6 - $2 = $4 and the strike width is $10, so maximum profit is ($10 - $4) x 100 = $600.

• A. Width of $10 less the $4 net debit, times 100, equals $600.
• B. This is the strike width alone and ignores the net debit.
• C. This is only the premium received on the written call.
• D. This is the net debit, which is the maximum loss, not the profit.

Correct answer: D. Authorized Participants exchange in-kind baskets of the underlying securities for large blocks of ETF shares (creation units), and reverse the process to redeem

ETF creation and redemption happen in the primary market through Authorized Participants (typically large institutions), who deliver or receive baskets of the underlying securities in exchange for creation units of ETF shares. This in-kind mechanism, not cash purchases from the sponsor, is what keeps ETF market price tethered to NAV and is a key structural difference from open-end mutual funds.

• A. Retail investors don't transact directly with the ETF sponsor for shares; they buy and sell existing shares in the secondary market like a stock.
• B. Creation isn't restricted to premium conditions — Authorized Participants create or redeem based on arbitrage opportunities in either direction, whether the ETF trades at a premium or discount.
• C. Unlike an open-end mutual fund, the ETF sponsor does not issue shares daily at NAV directly to any requesting investor; that access is limited to Authorized Participants via creation units.
• D. Creation and redemption in the primary market work through Authorized Participants exchanging in-kind baskets of underlying securities for creation units of ETF shares, and reversing the process to redeem — this is the defining mechanism of ETF structure.

• Source: SEC Rule 6c-11 (exchange-traded funds)

Correct answer: D. Correspondence (communications to 25 or fewer retail investors within 30 days) is governed by the firm's supervisory procedures, which may rely on post-use (rather than mandatory prior) review depending on a risk-based system

Unlike retail communications, correspondence does not require prior principal approval before use. Instead, firms must supervise correspondence through written procedures, which can include risk-based, post-use spot-checking rather than pre-approval of every item — though recordkeeping obligations still apply.

• A. Correspondence does not require mandatory prior written principal approval the way retail communications do, and it is not subject to a FINRA filing requirement; that's precisely what distinguishes it.
• B. Rule 2210 imposes no requirement that correspondence be sent from a particular email account or that recipients be pre-approved by a principal.
• C. Correspondence remains subject to recordkeeping requirements; the small number of recipients does not exempt it from retention.
• D. Correspondence, reaching 25 or fewer retail investors within 30 days, is governed by the firm's own supervisory procedures, which can permit risk-based post-use review rather than mandatory prior approval.

Correct answer: B. The original owner of a Roth IRA is not required to take lifetime required minimum distributions, while a traditional IRA owner is

A defining feature of the Roth IRA is that the original owner is never required to take lifetime RMDs, since contributions were made with after-tax dollars. Traditional IRA owners, by contrast, must begin RMDs at the applicable age (currently 73). Roth contributions are never deductible (A is false), Roth IRAs are subject to the same annual contribution limits as traditional IRAs (C is false), and qualified Roth distributions are tax-free rather than always taxable (D is false).

• A. Roth IRA contributions are made with after-tax dollars and are never tax deductible, unlike (potentially) traditional IRA contributions.
• B. A key distinction is that the original Roth IRA owner is not required to take lifetime RMDs, while a traditional IRA owner must begin taking RMDs at their applicable required age.
• C. Roth IRAs are subject to the same annual contribution limits as traditional IRAs (subject to income-based phase-outs for eligibility), not an unlimited amount.
• D. Qualified Roth IRA withdrawals (meeting the holding period and age requirements) are tax-free, not always taxable, which is a central advantage of the Roth structure.

Correct answer: B. The broker can use judgment on timing and price to seek a favorable execution, without being held to the price or moment the order was originally entered — though the security and side are still specified by the client

A 'not held' order gives the broker discretion over the timing and price of execution, allowing them to work the order for a better fill rather than being bound to execute instantly at the price/moment received. It does not grant discretion over which security to trade or whether to buy or sell — that authorization would require a separate discretionary account agreement — and best-execution obligations still apply.

• A. 'Not held' only grants discretion over timing and price of execution; it does not authorize the broker to choose a different security or side without the client's instruction.
• B. A "not held" order lets the broker use judgment on timing and price to seek a better execution, without being bound to the price or moment the order was entered, while the client still specifies the security and the buy/sell side.
• C. 'Not held' does not convert the order into a market order requiring immediate execution; it specifically frees the broker from being bound to immediate execution so that a better price can be sought.
• D. Best execution obligations still apply to "not held" orders; the designation affects timing/price discretion, not the broker's duty to consider prevailing prices and quoted bids and offers.

Correct answer: C. A guarantee of investment performance

Reg BI is built on four component obligations: disclosure, care, conflict of interest, and compliance. There is no obligation — and no permissible representation — that guarantees investment performance; guaranteeing returns on securities is itself a prohibited and misleading practice.

• A. This is one of the four genuine Reg BI component obligations.
• B. This is one of the four genuine Reg BI component obligations.
• C. Correct exception — no regulation obligates or permits a guarantee of investment performance; this is not a real Reg BI component.
• D. This is one of the four genuine Reg BI component obligations.

• Source: SEC Regulation Best Interest (17 CFR 240.15l-1)