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Home FINRA Series 7

FINRA Series 7 Exam Practice Questions (P. 3)

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Question #21
Bubba owns a subordinated debenture in a company that is liquidating.
When will he get paid?
  1. A
    after the company pays its outstanding bills, but before paying bank loans
  2. B
    after the bills are paid and the bank is paid, but before the preferred shareholders
  3. C
    before the holders of secured debt
  4. D
    after the shareholders of preferred stock

Correct Answer:
B
after the bills are paid and the bank is paid, but before the preferred shareholders. As a creditor, Bubba is paid before any of the shareholders. But his position is subordinated to other creditors, like the bank and accounts payable.

Question #22
When a corporation dissolves, who gets paid first?
  1. A
    bank lenders
  2. B
    senior bond holders
  3. C
    the tax collector
  4. D
    the lawyer

Correct Answer:
C
the tax collector. Taxes always have preference over any other creditors.

Question #23
Bubba wants to buy a $4 convertible preferred with that has a $50 par value and is exchangeable for common stock at $47.50. If the preferred stock is trading at
52, what does Bubba calculate as the common stock price in order to be at parity with the preferred?
  1. A
    47.50
  2. B
    52.00
  3. C
    a little less than 49.38
  4. D
    a little more than 54.50

Correct Answer:
C
a little less than 49.38. Bubba needs a calculator to divide the par value of the preferred stock by the price of the common stock. He then divides the result into the price at which the preferred stock is trading.50 divided by 47.50 = 1.05352 divided by 1.053 = 49.38.

Question #24
Which of the following is an analyst most likely to classify as a defensive issue?
  1. A
    the securities of a company that airplanes to the military
  2. B
    a stock of a large company
  3. C
    the common stock of a utility company
  4. D
    a corporate bond

Correct Answer:
C
the common stock of a utility company. The term "defensive issue" refers to a security that is least susceptible to swings in the business cycle.

Question #25
Which securities do not receive dividends?
  1. A
    ADRs
  2. B
    warrants
  3. C
    common stock
  4. D
    preferred stock

Correct Answer:
B
warrants. All of the other choices receive dividends if they are declared. But only warrants are a specific security that never pays dividends.

Question #26
Bubba buys a bond issued at par with a 5% coupon that is convertible into common stock at $40.
What conversion ratio does Bubba determine?
  1. A
    40
  2. B
    30
  3. C
    25
  4. D
    15

Correct Answer:
C
25. The conversion ratio is how many shares of common stock Bubba obtains by converting. Divide the bond price - $1,000 for a single bond - by the
$40 conversion price.

Question #27
Bubba buys a bond issued at par with a 5% coupon that is convertible into common stock at $40. The bond increases in value by 20 points.
What is the conversion parity of the stock?
  1. A
    $25
  2. B
    $40
  3. C
    $48
  4. D
    $50

Correct Answer:
C
$48. A 20-point increase results in a bond value of $1,200. Divide that by the conversion ratio of 25 shares to arrive at $48.

Question #28
The most common type of bond issued by a well-established company is:
  1. A
    a debenture
  2. B
    a senior secured note
  3. C
    a convertible
  4. D
    an open-end mortgage

Correct Answer:
A
a debenture. Because of the companys well-established financial condition, it issues a debenture that has no specific collateral and is only backed by the creditworthiness of the issuer.

Question #29
A corporate bond is quoted as having a net change in value of plus one point.
By how much did the bond price increase?
  1. A
    $1,000
  2. B
    $100
  3. C
    $10
  4. D
    $1

Correct Answer:
C
$10. A point is 1% and bonds are priced in $1,000 increments. Multiplying $1,000 by 1% equals $10.

Question #30
A basis point is:
  1. A
    0.10%
  2. B
    0.01%
  3. C
    1.00%
  4. D
    0.001%

Correct Answer:
B
0.01%. A basis point is one-hundredth of a point. Since a point is 1%, a basis point is 0.01%. A bond price change of one basis point is ten cents
($1,000 x 0.01%).

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