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Series 7 Final exam #2 questions well answered to pass
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Series 7 Final exam #2 questions well answered to pass
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Series 7 Final exam #2A bond is rated AAA by Standard and Poor's. This bond is:
A. Highest Quality Investment Grade
B. High Quality Investment Grade
C. Low Quality Investment Grade
D. Highest Level Speculative Grade - correct answer ✔✔Highest Quality Investment Grade
An AAA rating is the highest quality investment grade.
Which of the following statements are TRUE regarding indications of interest received during the
"cooling off" period for a registered initial public offering?
I The indication is binding on the customer
II The indication is binding on the underwriter
III The indication may be changed or canceled by the customer
IV The indication may be changed or canceled by the underwriter
A. I and II
B. III and IV
C. I and IV
D. II and III - correct answer ✔✔III and IV
An indication of interest is taken during the 20 day cooling off period before a new issue's registration is
effective. The issue may never "go effective" and the indication can be canceled by the underwriter.
Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or
change his indication. These are not binding because the issue cannot be legally "offered or sold" until
the effective date.
,A customer sells 1 ABC Jan 70 Put @ $5 and buys 1 ABC Jan 90 Put @ $19 when the market price of ABC
is $75. The maximum potential gain is:
A. $500
B. $600
C. $1,900
D. $2,000 - correct answer ✔✔$600
The customer has created a long put spread resulting in a $1,400 debit. This position is profitable if the
market should fall (bearish). The positions set up as:
Buy 1 ABC Jan 90 Put @ $19
Sell 1 ABC Jan 70 Put @ $ 5
$14 Debit
If the market should fall below $70, both contracts are "in the money" and are exercised. The customer
sells the stock at $90 and must purchase the stock at $70. Here there is a 20 point, or $2,000 gain. But,
he also paid out $1,400 in premiums (or the debit), so his maximum potential gain is $600.
Which statements are TRUE about FINRA rules regarding the designation of accounts?
I A record must be maintained of the actual customer's name
II No record need be maintained of the actual customer's name
III Numbered accounts are prohibited
IV Numbered accounts are permitted if the customer attests in writing to account ownership
A. I and III
B. I and IV
C. II and III
D. II and IV - correct answer ✔✔I and IV
, FINRA requires that accounts be maintained in customer name; however it will allow a numbered
account to be maintained if the firm keeps on file a written statement by the customer attesting to
ownership. For example, professional traders might worry that if their trades are seen in their name in
the firm, that unscrupulous employees might try to "ghost" their trades. If the account is maintained as a
numbered account, then whoever sees the order does not know the identity of the customer.
On the same day in a margin account, a customer sells short 100 shares of ABC at $49 and buys 1 ABC
Jan 50 Call @ $3. The customer's transactions on this day will generate a margin call of:
A. $2,000
B. $2,750
C. $4,900
D. $5,200 - correct answer ✔✔$2,750
To short the stock requires 50% margin. 50% of $4,900 equals a $2,450 to meet the Regulation T
requirement. To buy the call requires the deposit of 100% of the premium or $300. Thus, the total
Regulation T requirement is $2,750.
A retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement
income. An appropriate recommendation would be to:
A. sell covered calls
B. sell naked calls
C. sell covered puts
D. sell naked puts - correct answer ✔✔sell covered calls
Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for
conservative investors that are looking for extra income. The customer sells calls against stock that is
already owned, getting premium income. If the stock stays flat, the calls expire and the customer keeps
the premium. If the stock rises, the calls are exercised and the stock is called away at no loss to the
customer. If the market falls, the calls expire and the customer loses on the stock (which he would have
lost on anyway!).
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