Free Series 7 Practice Questions

A municipal bond that is backed by the full faith and credit of the issuing municipality is known as a:

A) Revenue bond
B) General obligation bond
C) Industrial development bond
D) Special assessment bond

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Correct Answer: B) General obligation bond

Explanation:
A general obligation (GO) bond is backed by the full faith and credit of the issuing municipality, which means it’s secured by the municipality’s taxing power. This makes GO bonds generally considered safer than revenue bonds, which are only backed by the revenues from specific projects.

Key Study Point:
Remember that GO bonds are backed by taxes, while revenue bonds are backed by project revenues. This is a fundamental distinction that appears frequently on the Series 7 exam.

An investor who believes ABC stock will remain stable in price over the next three months might consider which options strategy?

A) Long straddle
B) Short straddle
C) Long strangle
D) Protective put

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Correct Answer: B) Short straddle

Explanation:
A short straddle involves selling both a call and put option with the same strike price and expiration date. This strategy profits when the stock price remains stable (near the strike price) because both options will expire worthless, allowing the investor to keep the premium received.

Key Study Point:
Short straddles profit from low volatility, while long straddles profit from high volatility. Understanding when to use each strategy based on volatility expectations is crucial for the exam.

Before opening an account for a new customer, a registered representative must obtain all of the following information EXCEPT:

A) Customer’s employment status
B) Customer’s investment objectives
C) Customer’s net worth
D) Customer’s educational background

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Correct Answer: D) Customer’s educational background

Explanation:
While educational background might be helpful, it’s not required information for opening a customer account. FINRA requires information about employment, investment objectives, and financial situation (including net worth) to ensure suitable investment recommendations.

Key Study Point:
Focus on the required vs. recommended information for account opening. Required information includes financial status, investment objectives, and employment, but not personal details like education.

The maximum sales charge for a mutual fund under FINRA rules is:

A) 7.25% of the offering price
B) 8.5% of the offering price
C) 8.5% of the net asset value
D) There is no maximum limit

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Correct Answer: B) 8.5% of the offering price

Explanation:
FINRA Rule 2341 limits the maximum sales charge for mutual funds to 8.5% of the offering price (also called the public offering price or POP). This rule helps protect investors from excessive fees.

Key Study Point:
Remember the 8.5% limit applies to the offering price, not the NAV. Also note that this is the maximum – many funds charge less than this limit.

Which of the following securities would be MOST affected by changes in interest rates?

A) Common stock
B) Preferred stock
C) Convertible bonds
D) Long-term bonds

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Correct Answer: D) Long-term bonds

Explanation:
Long-term bonds have the highest interest rate sensitivity (duration risk) among the choices. When interest rates change, long-term bond prices move more dramatically than shorter-term securities because investors are locked into the current rate for a longer period.

Key Study Point:
Understand the inverse relationship between bond prices and interest rates, and remember that longer maturities have greater price sensitivity to rate changes.