Series 7 Exam
The General Securities Registered Representative Examination (Test Series 7) is taken to qualify to become a general securities registered representative. Since this is the primary qualification, the test has been created in order to protect the public interest, as well as ensure candidates are proficient enough to do the job well. The Series 7 exam assesses entry-level capability.
Candidates must need to know pertinent rules, laws and regulations. The following is a breakdown of the categories and number of questions for each:
- 9 questions – Seeks business for the broker-dealer through customers and potential customers.
- 4 questions – Evaluates customers in terms of financial needs, current holdings and available investment capital, and helps them identify their investment objectives.
- 123 questions – Provides customers and prospective customers with information on investments and makes suitable recommendations.
- 27 questions – Opens, transfers and closes customer accounts and maintains appropriate account records.
- 53 questions – Explains the organization, participants and functions of various securities markets and the principal factors that affect them.
- 13 questions – Obtains and verifies the customer’s purchase and sale instructions, enters orders and follows up on completion of transactions.
- 21 questions – Monitors the customer’s portfolio and makes recommendations consistent with changes in economic and financial conditions, as well as the customer’s needs and objectives.
The Series 7 test takes six hours and includes 260 multiple-choice questions. Ten questions on the test are for pre-trial purposes to be used on future exams, and these do not count towards the final score. Candidates will not know which questions are scored and which are not. To pass the test, candidates must answer approximately 70% of the questions correctly.
Free Series 7 Exam Practice Questions
1. Sally Shortseller has a short margin account with short market value (SMV) of $5000 and a credit balance (CR) of $8000. How much excess equity (SMA) does Sally have in her account?
B. None, the account is restricted.
2. Which of the following statements are true regarding individual retirement accounts (IRAs):
I. Contributions to an IRA are made from pre-tax dollars
II. Contributions to an IRA are made from post-tax dollars
III. Contributions to a Roth IRA are made from pre-tax dollars
IV. Contributions to a Roth IRA are made from post-tax dollars
A. I and III only
B. II and IV only
C. II and III only
D. I and IV only
3. If each of the following bonds were all issued by the same corporation, each bond is callable, and the Federal Reserve has recently raised interest rates by 0.25%, which bond is most likely to be called?
A. 7% bond maturing 12/31/18
B. 4.5% bond maturing 12/31/18
C. 7% bond maturing 12/31/12
D. 4.5% bond maturing 12/31/12
4. Victor Vance maintains an unrestricted long margin account at BD Securities. After a significant move in the S&P 500, his SMA has risen by $12,000. Given this move, how much did the value of the stocks held in his account move (his equity)?
D. There is not sufficient information provided
5. A double-barreled municipal bond is
A. backed by income streams from two different municipal projects
B. pays twice as often as a regular municipal bond
C. is backed by the full faith and credit of the issuer if the revenues obtained from the backing project are insufficient
D. is automatically exempt from all federal, state, and local taxes
Series 7 Exam Review Tips Fixed and Adjustable Numbers
1. D: In a short margin account, equity (EQ) is determined using the relationship SMV + EQ = CR. For Sally, that means that she has $3000 of EQ (the equation $5000 + EQ = $8000 solves to $3000). Remember that the question asks for the level of excess equity (SMA); when Reg T is applied to the SMV, it is determined that the required equity in the account is $2500 (Reg T * SMV = required equity, 50% * $5000 = $2500). Therefore, Sally has $500 of SMA in her account ($3000 – $2500 = $500). It is important not to confuse this with buying power, which is twice the SMA, or $1000 in this example.
2. D: The central difference between an IRA and a Roth IRA is when, in the tax stream, the contributions may be made. An IRA allows for contributions to be made from pre-tax dollars, allowing the investment of a greater number of dollars individually. When the money is withdrawn from an IRA, the withdrawals will be subject to applicable income taxes. This allows the money to grow “tax-deferred.” In a Roth IRA, post-tax dollars are contributed, but any subsequent growth is not subject to additional tax; these assets are allowed to grow tax-free because taxes were paid on the initial dollars before they were invested. Each type of account has advantages and the specifics will differ according to the tax liability needs of the individual investor.
3. A: While prevailing interest rates do affect the likelihood of a company to call a bond, the recent action by the Federal Reserve is irrelevant to determining which of the listed bonds is MOST likely to be called. All other things being equal, an issuer is most likely to call a bond with the highest coupon interest rate in order to issue new debt at a lower rate. Of the two 7% bonds, the issuer is more likely to call the bond with the longer maturity; the longer maturity is more expensive to the issuer over the remaining life of the bond as the higher rate must be paid for a longer period of time. Therefore, the issuer will select the highest coupon, longest maturity bond to call – answer A.
4. C: Since one must assume that this is a normal, on-shore account that is subject to Reg T, an increase in SMA is one half as big as the increase in equity (since Reg T requires that stocks be 50% paid for by equity). You know that the account had some positive SMA before the move in the market, because the question tells you that the account is unrestricted. Therefore, a $12,000 increase in SMA implies that the long market value of the account must have increased by twice as much, or $24,000 (2 * $12,000 = $24,000).
5. C: A double-barreled municipal bond is essentially the combination of a revenue bond, backed by the municipal revenues received through a specific investment in a project, and a general obligation (GO) bond, which is backed by the full taxing authority of the issuing municipality. With a double-barreled bond, if the revenue from the revenue-producing project or facility is insufficient to service the payments due on the bond, the municipality uses its taxing power to make up any shortfall. This is considered an advantage to the bondholder, so double-barreled bonds tend to trade at a discount to straight revenue bonds.