Series 7 Test

The Series 7 test, also known as the General Securities Representative Examination, is a challenging and comprehensive assessment for men and women looking to enter this rewarding and fast-paced field of finance. This exam consists of 250 multiple-choice questions and is administered in two sections of 125 questions each; each section takes three hours to complete.

The content of the Series 7 test is divided along the seven most important critical functions of a general securities representative:

  1. According to the Financial Industry Regulatory Authority, the first task of a general securities representative is to seek business for the broker-dealer through customers and potential customers. (This task relates to 9 questions on the test.)
  2. A general securities representative should also evaluate customers in terms of financial need, current holdings, and available investment capital and help these clients identify their investment objectives (4 questions).
  3. (S)he should provide customers and prospective customers with information on investments and make suitable recommendations (123 questions).
  4. The Series 7 test also includes 27 questions regarding opening, transferring, and closing customer accounts and maintaining appropriate account records.
  5. A general securities representative should be able to explain the organization, participants, and functions of various securities markets and the principal factors that affect them (53 questions).
  6. (S)he should be able to obtain and verify the customer’s purchase and sale instructions, enter orders, and follow up on the completion of transactions (13 questions).

And finally, the Series 7 test includes 21 questions assessing the ability to monitor a customer’s portfolio and make recommendations consistent with changes in economic and financial conditions as well as the customer’s needs and objectives.

Series 7 Test Practice Questions

1. A customer purchased 100 shares of SHC stock at $30 and simultaneously writes 1 SHC Oct 40 call at $2. If the customer closes both positions three months later when SHC is trading at $35 and Oct 40 calls are at $3, what is the realized gain or loss?

A. $600
B. $900
C. $400
D. $1100

2. Frank is the CEO of Mega Corporation, a large multi-national conglomerate that has recently negotiated the acquisition of Accretive Corp. The deal will be announced in a week, but Frank is so excited that he tells his friend Bill over lunch in a popular restaurant. Their conversation is overheard by the waiter, John, who later phones his uncle Mike to share the news. Bill, John, and Mike all buy shares of Accretive the day after the lunch. The following persons have violated the insider trading rules:

I. Frank
II. Bill
III. John
IV. Mike

A. I only
B. II and III only
C. I, II, III, and IV
D. I and II only

3. Each of the following statements is TRUE with regard to the U.S. balance of payments EXCEPT:

A. When U.S. investors purchase Japanese securities, the U.S. balance of payments decreases.
B. When U.S. investors purchase UK securities, the U.S. balance of payments increases.
C. The greater the amount of foreign oil that the U.S. imports, the greater the amount of money flowing out of the country.
D. The greater the amount of U.S. goods that are sold overseas, the greater the amount of money flowing into the country.

4. A customer has a margin account which contains securities having a market value of $40,000 and a debit balance of $15,000. Assuming that current SEC regulations apply, how much buying power does the customer have to purchase additional securities?

A. $15,000
B. $5,000
C. $10,000
D. $20,000

5. When performing strategic asset allocation for a 60 year-old customer, each of the following is TRUE EXCEPT:

A. The customer’s retirement plans should be considered.
B. Invest in stocks according to the formula “100 minus the customer’s age,” and invest the remaining amount in bonds and cash.
C. A large percentage of the customer’s portfolio should be in cash if the equity markets have been particularly weak during the previous 12 months.
D. Portfolio rebalancing should be performed regularly when needed.

Answers

1. The correct answer is C. The question requires you to determine the gain or loss on both the stock position and the option position. On the stock position alone, the customer realizes a profit of $500 from the $5 / share increase in the price of the stock (100 * ($35 - $30)). On the option position alone, the customer has lost $100 (this is the cost of his or her hedge on the SHC stock position). The loss on the option is calculated by multiplying the $1 increase by 100; remember that a call writer is short a call, so an increase in price represents a loss when the option is later repurchased to close the position. The net gain on the combined position is $400 ($500 - $100).

2. The correct answer is D. The insider trading rules apply to those individuals who disclose or receive and act upon non-public material information; a pending takeover that has not yet been made public qualifies as both non-public and material, as it is likely to have a significant impact on the price of the stock. The exception to the insider trading rules applies to those individuals who inadvertently receive this type of information and have no reason to know that the information is privileged. Frank and Bill both know that the information is non-public and material. John may realize that the information is valuable, but has no duty to keep it private- neither he nor Mike violates the rules by acting on the information.

3. The correct answer is B. The U.S. balance of payments is a measurement of all capital flowing into the U.S. as compared to the capital flowing out; this measurement includes both capital flows resulting from the export / import of goods as well as those resulting from investment. In “EXCEPT” questions, when two answers seem to give opposite options, one of these choices is usually correct (the detail of Japanese versus UK securities is irrelevant), so choices A and B should be the focus. When U.S. investors purchase foreign securities, this kind of financial activity sends capital out of the country, thereby decreasing, rather than increasing, the U.S. balance of payments. Choice B is the FALSE answer and therefore the correct choice.

4. The correct answer is C. The buying power in an account is measured as the dollar value of securities that the customer can buy on margin with the excess equity (SMA) in the account. The customer has LMV of $40,000 and a debit balance (DR) of $15,000, and thus, she has $25,000 of equity ($40,000 - $15,000 = $25,000). Under Reg T, a customer is required to have no less than 50% of her LMV in a margin account; any amount above this minimum requirement is considered excess equity and thus SMA. In this case, the customer needs a minimum equity amount of $20,000 (50% * $40,000 or Ret T * LMV). The excess equity is, therefore, $5000 ($25,000 - $20,000). The buying power is the dollar value of the securities that can be purchased on margin with the account’s SMA (2 * $5000 = $10,000).

5. The correct answer is C. The general rule of thumb is that customers should have 100 minus their age invested in stocks. However, years to retirement, retirement plans, and specific investment objectives should also be taken into account. Furthermore, as the customer ages, appropriate portfolio rebalancing should be conducted as a matter of routine procedure. Answer C is correct for two reasons: first, the question refers to strategic asset allocation, while answer C refers to a decision that would fall into the category of tactical asset allocation. Second, the performance of stocks in the most-recent 12 months is insufficient to guide an advisor with regard to the investment objectives of his or her customers.

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Last Updated: 07/28/2014

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