Free Series 7 practice questions, every option explained

A registered representative drafts a market commentary email that the firm plans to send to 140 retail customers this week. Under FINRA Rule 2210, how is this piece classified?

• AInstitutional communication
  Institutional communications go only to institutional investors, not to retail customers.
• BCorrespondence
  Correspondence is limited to 25 or fewer retail investors within a 30-calendar-day period.
• CRetail communication
  Correct. 140 retail recipients within 30 days is well above the 25-investor threshold, so the email is a retail communication.
• DPublic appearance
  A public appearance is an unscripted live event such as a seminar or interview, not a written email.

When must a customer receive the Options Disclosure Document (ODD) in connection with a new options account?

• AAt or before the time the account is approved for options trading
  Correct. The ODD must be delivered no later than the time the account is approved for options.
• BWithin 30 days after the account is approved
  No 30-day window exists; delivery must be at or before account approval.
• COnly when the customer first writes an uncovered call
  Every options customer receives the ODD, whatever strategies are used.
• DWithin 15 days after the first options trade settles
  The 15-day period applies to the return of the signed options agreement, not to ODD delivery.

A new customer opens a margin account and buys 100 shares of a stock at $30 per share. How much must the customer deposit?

• A$2,000
  Correct. The $2,000 FINRA minimum exceeds the $1,500 Reg T amount.
• B$750
  $750 applies 25% maintenance to the purchase, which is not an initial requirement.
• C$1,500
  $1,500 is the Reg T requirement alone, but the $2,000 minimum equity requirement is higher.
• D$3,000
  $3,000 is the full cost; a margin customer need only meet the $2,000 minimum here.

Two sisters open a joint account as tenants in common, with one owning 70% and the other 30%. The 70% owner dies. What happens to her interest?

• AIt is split equally between her sister and her estate
  The decedent's full 70% goes to her estate; it is not split with the survivor.
• BIt passes automatically to her sister
  Automatic transfer to the survivor describes joint tenants with right of survivorship.
• CIt passes to her estate
  Correct. A tenant in common's interest passes to her estate.
• DIt is forfeited to the broker-dealer
  Account assets are never forfeited to the firm on a customer's death.

A customer holds 40 common stocks spread across many unrelated industries. Which of the following risks has this diversification most directly reduced?

• AOverall stock market risk (a broad decline)
  Market risk is systematic; a broad decline hits nearly all stocks, so adding more stocks does not remove it.
• BPurchasing power risk from rising inflation
  Inflation erodes real returns across all holdings; it is systematic and not diversified away.
• CBusiness risk of any single company
  Correct. Business (unsystematic) risk is specific to one issuer and is reduced by spreading money across many unrelated issuers.
• DInterest-rate risk from changing market rates
  Interest-rate risk is systematic and affects the whole market; diversifying among stocks does not eliminate it.

A callable bond is trading at a premium. Which yield should be quoted to the customer because it is the lowest (yield to worst)?

• AYield to maturity
  YTM is below current yield for a premium bond but above YTC.
• BYield to call
  Correct. For a premium bond, the premium is lost fastest if the bond is called, so YTC is the lowest yield and the one customers must be shown.
• CCurrent yield
  Current yield is below the coupon but above YTM and YTC on a premium bond.
• DNominal yield
  The nominal yield is the highest yield on a premium bond.

A customer buys 1 ABC Mar 72.50 call at 2.75. What is the breakeven point for the customer?

• A$69.75
  This subtracts the premium, which is the breakeven for a put, not a call.
• B$72.50
  At the strike the call is worthless and the customer has lost the premium.
• C$78.00
  This adds the premium twice.
• D$75.25
  Correct. Long call breakeven = strike + premium = 72.50 + 2.75 = 75.25.

A customer buys 100 shares of STU at $58 and buys 1 STU Jan 55 put at 2 as protection. What is the breakeven point?

• A$56
  This subtracts the premium; a premium paid raises the breakeven.
• B$60
  Correct. Protective put breakeven = stock cost + premium = 58 + 2 = 60.
• C$53
  This is the put's own breakeven (55 - 2), not the hedged position's.
• D$57
  This adds the premium to the put strike, which has no meaning here.

Three market makers quote the same stock: Dealer A 30.05 - 30.30, Dealer B 30.10 - 30.35, and Dealer C 30.00 - 30.25. What is the inside market?

• A30.00 - 30.35
  This takes the lowest bid and the highest offer, the worst prices for the customer. The inside market is the best bid and best offer.
• B30.05 - 30.30
  This is only Dealer A's quote. The inside market combines the best bid and best offer across all dealers.
• C30.10 - 30.25
  Correct. The inside market is the highest bid (Dealer B, 30.10) and the lowest offer (Dealer C, 30.25) among all dealers.
• D30.10 - 30.35
  This is Dealer B's full quote. Dealer C offers lower, at 30.25, so 30.25 is the best (inside) offer.

A customer enters a sell stop order at $35. The next trades are $36.00, $35.50, $34.90, and $35.10, in that order. At which trade is the stop order elected (triggered)?

• AThe trade at $34.90
  Correct. A sell stop is triggered by a trade at or below the stop price. The first such trade is $34.90; the order then becomes a market order and fills at the next available price.
• BThe trade at $35.10
  $35.10 is above the stop price. The order was already elected at $34.90 and would likely execute near this price as a market order.
• CThe trade at $36.00
  $36.00 is above the stop price. A sell stop is elected only at or below $35.
• DThe trade at $35.50
  $35.50 is above the $35 stop price, so it does not trigger a sell stop.