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Home FINRA Series 7

FINRA Series 7 Exam Practice Questions (P. 1)

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Question #1
Which of the following preferred issues is likely to fluctuate most in value?
  1. A
    cumulative preferred
  2. B
    callable preferred
  3. C
    convertible preferred
  4. D
    broker preferred

Correct Answer:
C
convertible preferred. Because of the conversion feature, convertibles are more closely linked to the price of the common stock. In addition, since the dividend rate on convertible preferred is usually lower than other preferred issues, the convertibles are more sensitive to interest rate fluctuations.

Question #2
Which of the following rights does an ADR holder not have?
  1. A
    preemptive rights
  2. B
    the right to vote for your mother-in-law as a board member
  3. C
    the right to transfer ownership
  4. D
    the right to see financial statements

Correct Answer:
A
preemptive rights. Holders of ADRs do not have preemptive rights, although they have most other rights of shareholders, including the right to vote for board members-even a mother-in-law

Question #3
A corporation makes a rights offering to raise $10 million of new capital by issuing one million shares of common stock. If it already has six million shares outstanding at the time of the offering.
How many rights will the corporation distribute to its shareholders?
  1. A
    one million
  2. B
    six million
  3. C
    ten million
  4. D
    sixteen million

Correct Answer:
B
six million. One right for each outstanding share is distributed.

Question #4
A corporation makes a rights offering to raise $10 million of new capital by issuing one million shares of common stock. If it already has six million shares outstanding at the time of the offering.
What is the subscription price per share?
  1. A
    $4
  2. B
    $6
  3. C
    $7
  4. D
    $10

Correct Answer:
D
$10. There are one million shares divided into the $10 million of new capital.

Question #5
A corporation makes a rights offering to raise $10 million of new capital by issuing one million shares of common stock. If it already has six million shares outstanding at the time of the offering.
What subscription ratio is the corporation establishing for each new share?
  1. A
    6 rights per share
  2. B
    10 rights per share
  3. C
    6 million rights per share
  4. D
    10 million rights per share

Correct Answer:
A
6 rights per share. Each share receives a right and there are six million shares receiving rights to one million new shares. So six rights are required for one share.

Question #6
Bubba owns stock with cumulative voting rights. There are five vacancies on a board and he owns 100 shares of stock. Bubba is entitled to cast the following votes:
  1. A
    a total of 100 votes
  2. B
    a total of 100 votes per
  3. C
    a total of 500 votes
  4. D
    you are not allowed to vote

Correct Answer:
C
500 votes. Under cumulative voting, the number of directors is multiplied by the number of shares owned. The votes may be cast all for a single director or divided in any manner among the directors.

Question #7
The definition of debentures is:
  1. A
    a loan secured by real estate
  2. B
    collateralized securities
  3. C
    a worthless security
  4. D
    securities backed by the general credit of the issuers but no specific collateral

Correct Answer:
D
securities backed by the general credit of the issuers but no specific collateral. And in the case of some issuers, that may be fairly worthless.

Question #8
Convertible bonds have all of the following features except:
  1. A
    an ability to protect a short position on the stock into which they are convertible
  2. B
    permissibility for use as collateral
  3. C
    a normally higher yield than non-convertible bonds of the same issuer
  4. D
    fluctuations influenced by changes in the price of the underlying common stock

Correct Answer:
C
a normally higher yield than non-convertible bonds of the same issuer. Remember that the question says "except" for this feature. Convertible bonds normally do NOT have a higher yield than non-convertible bonds of the same issuer. Convertibles usually have a lower yield than non -convertible sisters.

Question #9
Although a corporation has no earnings in a particular year, it is obligated to pay interest on all its outstanding debt except the following:
  1. A
    convertible subordinated debentures
  2. B
    collateral trust bonds
  3. C
    adjustment bonds
  4. D
    equipment trust certificates

Correct Answer:
C
adjustment bonds. These bonds are also known as income bonds. Interest is paid only if there is income.

Question #10
Interest rates rise from 5.10% to 5.30%. For a prospective buyer of five $1,000 bonds, what is the increase in interest payments as a result of the rise?
  1. A
    $20
  2. B
    $100
  3. C
    $2
  4. D
    $10

Correct Answer:
D
$10. Interest rates increased by 20 basis points. One basis point is 10 cents. So 20 basis points is $2. Butsince there are five bonds, that $2 x 5 =
$10.

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