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Home FINRA Series 7

FINRA Series 7 Exam Practice Questions (P. 5)

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Question #41
Which of the following is not a characteristic of treasury bills?
  1. A
    they are quoted on yield-to-maturity percentages
  2. B
    their payments are exempt from state income tax
  3. C
    the bid price is higher than the offer price
  4. D
    they mature one to three years from the date of issuance

Correct Answer:
D
they mature one to three years from the date of issuance. Remember the question asks what is "not" a characteristic of treasury bills. The other choices are aspects of treasury bills, which most commonly have maturities of 90 days but never longer than one year.

Question #42
Which of the following price quotes is representative of a treasury bill?
  1. A
    98.9 - 100
  2. B
    96 - 96½
  3. C
    5.78 - 5.73
  4. D
    5.55 - 5.75

Correct Answer:
C
5.78 - 5.73. Prices for treasury bills are quoted as percentage yields. A quotation in yield means the first price in the spread - the bid price - should be higher than the offer price. A higher yield means a lower price.

Question #43
Bubba want to buy a CMO. In general, how often should he expect to receive interest payments?
  1. A
    every week
  2. B
    every month
  3. C
    every year
  4. D
    at maturity

Correct Answer:
B
every month. Collateralized Mortgage Obligations generally pay interest each month. However, some CMOs pay interest quarterly or semiannually.

Question #44
A CMO is issued that has three tranches. One has an average life of 2 years. A second has an average life of 10 years. The third has an average life of 30 years.
Initially, interest payments are distributed in this order:
  1. A
    first to the holders of the 2-year tranche
  2. B
    first to the holders of the 10-year tranche
  3. C
    first to the holders of the 30-year tranche
  4. D
    equally to all CMO holders of any tranche

Correct Answer:
D
equally to all CMO holders of any tranche. All bondholders share equally in the interest payments. Only principal payments are directed to the owners in each tranche in sequential order.

Question #45
Which of the following have a stated interest rate on the face of the certificates?
  1. A
    treasury bills
  2. B
    treasury notes
  3. C
    treasury bonds
  4. D
    both B and C

Correct Answer:
D
both B and C. Treasury notes and treasury bonds have stated interest rates. Treasury bills are always sold at a discount to the face amount payable at maturity.

Question #46
Bubba buys a US treasury bond. The interest he earns is:
  1. A
    subject to federal and state income tax
  2. B
    exempt from federal and state income tax
  3. C
    subject to state income tax but exempt from federal income tax
  4. D
    subject to federal income tax but exempt from state income tax

Correct Answer:
D
subject to federal income tax but exempt from state income tax. The interest on US government securities is taxed by the US government but not by state governments. The opposite is true of bonds issued by a state, which are exempt from federal tax but subject to state taxes -except for taxes of the state that issues them.

Question #47
Which of the following does not issue debt securities that trade in the open market?
  1. A
    Fannie Mae
  2. B
    Freddie Mac
  3. C
    Federal Reserve Banks
  4. D
    Federal Land Banks

Correct Answer:
C
Federal Reserve Banks. Debt securities are not issued by Federal Reserve Banks. All of the other entities do issue debt securities.

Question #48
When depositors withdraw money from savings institutions to invest in US treasury securities, this is called:
  1. A
    the multiplier effect
  2. B
    disintermediation
  3. C
    reverse repo
  4. D
    open market operations

Correct Answer:
B
disintermediation. An easier word would be preferable, but thats the correct term.

Question #49
Smart Company, Inc., has cash it intends to use in six months for purchase of equipment. The most prudent investment during the six-month period is:
  1. A
    common stock
  2. B
    preferred stock
  3. C
    treasury bills
  4. D
    treasury bonds

Correct Answer:
C
treasury bills. The most prudent investment provides the cash in the six-month short-term period. Common and preferred stock are subject to significant price uncertainty. US treasury issues provide the most safety of principal. Treasury bonds have longer maturities than the six-month terms available for treasury bills.

Question #50
Which of the following is identified as a funded debt instrument?
  1. A
    US treasury bond
  2. B
    Series EE savings bond
  3. C
    corporate bond
  4. D
    Fannie Mae bond

Correct Answer:
C
corporate bond. All of the other securities are issues backed by the US government, which are not considered funded debt.

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