FINRA Series 7 EXAM
Prep 2022
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that
Questions, Verified Answers, and Explanations
took place before the order was entered was 18.88. Round-lot sales that took place after the
order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is:
ANS - 18.50
Explanation: After the order was activated by the round-lot sale of 18.25 (which is at or
lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is
the first price that meets this requirement and is the execution price.
The Taft Food Company intends to distribute shares of its grocery business to existing
stockholders. The shares of this company will be traded separately from Taft. This is an
example of a(n): ANS - Spinoff
Explanation: Spinoff transactions occur when a company is seeking to divest a division. In a
spinoff, each shareholder of the parent retains her original shares, but is also given shares in
the newly created entity. There are no immediate tax consequences to the recipient of the new
shares. Spinoffs are used by sellers in the hopes that the combined valuation assigned by the
market to the two (now) separate companies will be greater than that of the single combined
entity. A stock dividend is a situation where each shareholder is given additional shares of the
existing company. When a company with no shares currently trading publicly begins trading
in the public market, it is an initial public offering (IPO). In a reverse merger, a private
company buys a public company with the acquirer's shareholders swapping their shares for a
majority stake in the publicly traded shell corporation. This technique allows a private
company to obtain publicly listed status quickly, and to avoid much of the regulatory expense
incurred with an IPO.
Which of the following expenditures is a violation under industry rules concerning gifts and
gratuities?
a. Taking a client to a dinner valued at $80 per person
b. Attending a concert with your client valued at $105 per ticket
c. Giving a $300 wedding gift to your brother who is employed at a member firm
d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket
,ANS - d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket
Explanation: Member firm personnel may not give, or permit to be given, a gift of material
value exceeding $100 per recipient per year to personnel employed by another member firm.
Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events,
reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate
business travel. In order for the activity to be considered an expense, the RR must attend the
event, not give the tickets to another person or persons. The value of two tickets ($130)
exceeds the $100 limit.
An exemption is provided if the gift is given to another family member for an event related to
a family relationship (e.g., a wedding).
Upon written request, duplicate account statements would be required in all of the following
circumstances, EXCEPT:
a. The customer works in the operations area of a broker-dealer
b. The customer works on the trading desk of a broker-dealer
c. The customer is a senior executive of an investment advisory firm
d. The customer is a principal of a broker-dealer
ANS - c. The customer is a senior executive of an investment advisory firm
Explanation: Upon the written request by the employing member firm, duplicate account
statements must be sent if an employee of a member firm opens an account at another
member, investment adviser, bank, or other financial institution. The rule applies to any
person employed by a member firm (broker-dealer). There is no requirement to send
duplicate statements if the customer is an employee at a bank, investment adviser, or other
financial institution.
A registered representative enters an order for a client. In error, the RR purchases shares of
the wrong security. Which of the following statements is TRUE?
a. The shares must be placed in the RR's error account
b. The shares must be placed in the broker-dealer's error account
c. The RR must contact the client and cancel the original transaction
d. The firm is required to report the error to the market in which the order was executed
,ANS - The shares must be placed in the broker-dealer's error account
Explanation: All broker-dealers are required to maintain an error account. It is used by a
broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the
wrong side of the market). RRs do not have an error account. It is maintained by the firm.
The firm should execute the original transaction immediately and maintain a record of the
error. The firm is not required to notify the market where the order entered in error was
executed.
Relative to a municipal bond purchased at a discount that is callable at par, place the
following yields in the proper order from lowest to highest yield.
I. Current yield
II. Nominal yield
III. Yield to maturity
IV. Yield to call
ANS - II, I, III, IV
Explanation: A bond trading at a discount, which is callable at par, has a nominal yield that
is less than its yield to maturity. Current yield falls between the nominal yield and yield to
maturity, and the yield to call is greater than the yield to maturity. A bond trading at a
premium has a nominal yield, which is higher than the yield to maturity, with the current
yield in between the other two yields. The yield to call is lower than the yield to maturity for
a bond selling at a premium, which is callable at par.
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders
of record on Friday, December 1. The dividend will be paid to all stockholders whose names
appear on the record books of Foremost Corporation on:
ANS - December 1
Explanation: The dividend will be paid to all stockholders whose names appear on the
record books of Foremost Corporation on the record date, which is given in this example as
December 1.
, A charity has received restricted stock from the director of a corporation. The director owned
the stock for two years before giving it to the charity. According to SEC Rule 144, the charity
may sell the stock:
ANS - Freely under Rule 144
Explanation: The charity may sell the stock freely (immediately) since the required holding
period for restricted stock has already been met by the director. Since the charity is a not
affiliated with the issuer (a nonaffiliated person), it is not subject to the volume restrictions.
However, the stock is still restricted (unregistered) and must be sold under Rule 144. Rule
144A, not Rule 144, requires the purchaser to be a qualified institutional buyer.
A customer contacts her registered representative concerning the bid and offer prices of
mutual funds listed in various financial publications and Web sites. Which TWO of the
following statements are TRUE?
I. The bid price is equal to the net asset value
II The bid price is equal to the net asset value minus the redemption fee
III. The offer price is equal to the net asset value plus a commission
IV. The offer price is equal to the net asset value plus the sales charge
ANS - I and IV
Explanation: The bid price of a mutual fund is also equal to the net asset value (NAV) and is
the price a customer will receive if shares are sold. It does not include the redemption fee,
which may be charged when the customer sells her shares. The offer price is equal to the
NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a
mutual fund. The term commission is not used in the mutual fund industry as the term sales
charge or sales load is used, and is built into the price the customer pays for the fund.
An individual who owns STC stock could provide protection against a decrease in market
value by:
I. Buying calls
II. Buying puts
III. Selling calls
IV. Selling puts
ANS - II and III only
Prep 2022
A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that
Questions, Verified Answers, and Explanations
took place before the order was entered was 18.88. Round-lot sales that took place after the
order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is:
ANS - 18.50
Explanation: After the order was activated by the round-lot sale of 18.25 (which is at or
lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is
the first price that meets this requirement and is the execution price.
The Taft Food Company intends to distribute shares of its grocery business to existing
stockholders. The shares of this company will be traded separately from Taft. This is an
example of a(n): ANS - Spinoff
Explanation: Spinoff transactions occur when a company is seeking to divest a division. In a
spinoff, each shareholder of the parent retains her original shares, but is also given shares in
the newly created entity. There are no immediate tax consequences to the recipient of the new
shares. Spinoffs are used by sellers in the hopes that the combined valuation assigned by the
market to the two (now) separate companies will be greater than that of the single combined
entity. A stock dividend is a situation where each shareholder is given additional shares of the
existing company. When a company with no shares currently trading publicly begins trading
in the public market, it is an initial public offering (IPO). In a reverse merger, a private
company buys a public company with the acquirer's shareholders swapping their shares for a
majority stake in the publicly traded shell corporation. This technique allows a private
company to obtain publicly listed status quickly, and to avoid much of the regulatory expense
incurred with an IPO.
Which of the following expenditures is a violation under industry rules concerning gifts and
gratuities?
a. Taking a client to a dinner valued at $80 per person
b. Attending a concert with your client valued at $105 per ticket
c. Giving a $300 wedding gift to your brother who is employed at a member firm
d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket
,ANS - d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket
Explanation: Member firm personnel may not give, or permit to be given, a gift of material
value exceeding $100 per recipient per year to personnel employed by another member firm.
Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events,
reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate
business travel. In order for the activity to be considered an expense, the RR must attend the
event, not give the tickets to another person or persons. The value of two tickets ($130)
exceeds the $100 limit.
An exemption is provided if the gift is given to another family member for an event related to
a family relationship (e.g., a wedding).
Upon written request, duplicate account statements would be required in all of the following
circumstances, EXCEPT:
a. The customer works in the operations area of a broker-dealer
b. The customer works on the trading desk of a broker-dealer
c. The customer is a senior executive of an investment advisory firm
d. The customer is a principal of a broker-dealer
ANS - c. The customer is a senior executive of an investment advisory firm
Explanation: Upon the written request by the employing member firm, duplicate account
statements must be sent if an employee of a member firm opens an account at another
member, investment adviser, bank, or other financial institution. The rule applies to any
person employed by a member firm (broker-dealer). There is no requirement to send
duplicate statements if the customer is an employee at a bank, investment adviser, or other
financial institution.
A registered representative enters an order for a client. In error, the RR purchases shares of
the wrong security. Which of the following statements is TRUE?
a. The shares must be placed in the RR's error account
b. The shares must be placed in the broker-dealer's error account
c. The RR must contact the client and cancel the original transaction
d. The firm is required to report the error to the market in which the order was executed
,ANS - The shares must be placed in the broker-dealer's error account
Explanation: All broker-dealers are required to maintain an error account. It is used by a
broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the
wrong side of the market). RRs do not have an error account. It is maintained by the firm.
The firm should execute the original transaction immediately and maintain a record of the
error. The firm is not required to notify the market where the order entered in error was
executed.
Relative to a municipal bond purchased at a discount that is callable at par, place the
following yields in the proper order from lowest to highest yield.
I. Current yield
II. Nominal yield
III. Yield to maturity
IV. Yield to call
ANS - II, I, III, IV
Explanation: A bond trading at a discount, which is callable at par, has a nominal yield that
is less than its yield to maturity. Current yield falls between the nominal yield and yield to
maturity, and the yield to call is greater than the yield to maturity. A bond trading at a
premium has a nominal yield, which is higher than the yield to maturity, with the current
yield in between the other two yields. The yield to call is lower than the yield to maturity for
a bond selling at a premium, which is callable at par.
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders
of record on Friday, December 1. The dividend will be paid to all stockholders whose names
appear on the record books of Foremost Corporation on:
ANS - December 1
Explanation: The dividend will be paid to all stockholders whose names appear on the
record books of Foremost Corporation on the record date, which is given in this example as
December 1.
, A charity has received restricted stock from the director of a corporation. The director owned
the stock for two years before giving it to the charity. According to SEC Rule 144, the charity
may sell the stock:
ANS - Freely under Rule 144
Explanation: The charity may sell the stock freely (immediately) since the required holding
period for restricted stock has already been met by the director. Since the charity is a not
affiliated with the issuer (a nonaffiliated person), it is not subject to the volume restrictions.
However, the stock is still restricted (unregistered) and must be sold under Rule 144. Rule
144A, not Rule 144, requires the purchaser to be a qualified institutional buyer.
A customer contacts her registered representative concerning the bid and offer prices of
mutual funds listed in various financial publications and Web sites. Which TWO of the
following statements are TRUE?
I. The bid price is equal to the net asset value
II The bid price is equal to the net asset value minus the redemption fee
III. The offer price is equal to the net asset value plus a commission
IV. The offer price is equal to the net asset value plus the sales charge
ANS - I and IV
Explanation: The bid price of a mutual fund is also equal to the net asset value (NAV) and is
the price a customer will receive if shares are sold. It does not include the redemption fee,
which may be charged when the customer sells her shares. The offer price is equal to the
NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a
mutual fund. The term commission is not used in the mutual fund industry as the term sales
charge or sales load is used, and is built into the price the customer pays for the fund.
An individual who owns STC stock could provide protection against a decrease in market
value by:
I. Buying calls
II. Buying puts
III. Selling calls
IV. Selling puts
ANS - II and III only
