FINRA Series 7 — All Questions

An investor writes an XYZ 40 put for $3 and is assigned, buying 100 shares at the strike. Ignoring commissions, what is the investor's net cost per share?

• a.$37✓
• b.$3
• c.$40
• d.$43

The writer buys at the 40 strike but has already received 3 per share in premium, so the net cost is 40 - 3 = 37. Adding the premium is the call buyer's cost, and the strike alone ignores the premium received.FINRA Rule 2360(a)(2), (a)(28)

An investor owns 100 XYZ bought at $45 and writes an XYZ 50 call for $2. The call is exercised. Ignoring commissions, what is the total proceeds per share, counting the premium?

• a.$47
• b.$52✓
• c.$50
• d.$48

The shares are sold at the strike of 50, and the writer also keeps the 2 premium, so the total received is 50 + 2 = 52 per share. Subtracting the premium reverses the direction of the premium, and the strike alone leaves it out.FINRA Rule 2360(a)(2), (a)(28)

A municipal bond yields 3.60 percent tax-free. For an investor in the 32 percent federal bracket, what taxable yield is equivalent, ignoring state taxes?

• a.11.25 percent
• b.4.75 percent
• c.5.29 percent✓
• d.2.45 percent

The taxable equivalent yield is the tax-free yield divided by one minus the tax rate: 3.60 / 0.68 = 5.29 percent. Multiplying by one minus the rate runs the calculation backward, giving the after-tax yield of a taxable bond. Multiplying by one plus the rate and dividing by the rate itself are not the formula.Federal income tax exemption, 26 U.S.C. 103; IRS Pub. 550

An investor in the 24 percent federal bracket holds a taxable corporate bond yielding 4.80 percent. What tax-free municipal yield would give the same after-tax return, ignoring state taxes?

• a.1.15 percent
• b.6.32 percent
• c.3.65 percent✓
• d.5.95 percent

The after-tax yield of the corporate bond is 4.80 x (1 - 0.24) = 3.65 percent, so a municipal bond must yield at least that to match it. Dividing by one minus the rate would convert a municipal yield into a taxable one, and the other results do not follow from the tax rate.Federal income tax exemption, 26 U.S.C. 103; IRS Pub. 550

An investor who is not an affiliate acquired restricted stock in a private placement from an issuer that has been an Exchange Act reporting company for several years. How long is the minimum holding period before resale under Rule 144?

• a.Three months
• b.Two years
• c.One year
• d.Six months✓

For restricted securities of a reporting issuer, a minimum of six months must elapse after acquisition from the issuer or an affiliate before resale in reliance on Rule 144. A one-year period applies if the issuer is not a reporting company. The three-month figure is the look-back for the volume limit and the affiliate test, not the holding period.17 CFR 230.144(d)(1)

An investor who is not an affiliate buys restricted stock of a company that has never been subject to Exchange Act reporting. What is the minimum holding period for resale under Rule 144?

• a.One year✓
• b.Six months
• c.Ninety days
• d.Two years

When the issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the minimum holding period is one year. The six-month period applies only to reporting issuers, and ninety days is the period used in the reporting-history test, not the holding period.17 CFR 230.144(d)(1)

An affiliate wants to sell restricted stock under Rule 144. The issuer has 5,000,000 shares outstanding and the average weekly trading volume for the past four weeks was 62,000 shares. The affiliate sold 10,000 shares in reliance on the rule within the past three months. Ignoring the reported-volume alternatives not described here, what is the most the affiliate may sell now?

• a.62,000 shares
• b.50,000 shares
• c.72,000 shares
• d.52,000 shares✓

The three-month limit is the greater of 1 percent of shares outstanding (50,000) or the four-week average weekly volume (62,000), so the limit is 62,000. Subtracting the 10,000 shares already sold in the period leaves 52,000. Using the 1 percent figure alone ignores the greater-of test, and adding the prior sales instead of subtracting them gives another wrong amount.17 CFR 230.144(e)(1)

An affiliate of a reporting issuer plans a Rule 144 sale. Shares outstanding are 12,000,000, four-week average weekly volume is 95,000 shares, and the affiliate has sold 30,000 shares under the rule in the last three months. What is the maximum additional amount that may be sold?

• a.65,000 shares
• b.95,000 shares
• c.90,000 shares✓
• d.120,000 shares

The limit is the greater of 1 percent of outstanding shares (120,000) or average weekly volume (95,000), which is 120,000. After 30,000 shares already sold in the three-month period, 90,000 remain. Using only the volume test, or ignoring the prior sales, misses part of the calculation.17 CFR 230.144(e)(1)

When must an affiliate file a Form 144 notice for a Rule 144 sale?

• a.For every sale, however small
• b.Only when the sale is made to another affiliate
• c.When the amount sold in any three-month period exceeds 5,000 shares or has an aggregate sale price above $50,000✓
• d.Only when the sale is made through a market maker

Form 144 is required for sales in a three-month period that exceed 5,000 shares or units or an aggregate sale price of more than $50,000. Smaller sales need no filing, and the form does not depend on who the buyer is or on whether a market maker is used.17 CFR 230.144(h)

Which institution is a qualified institutional buyer under Rule 144A, assuming it is not a dealer or bank with different rules?

• a.An entity that owns and invests at least $10 million in securities of unaffiliated issuers, regardless of whether it is a dealer, an insurance company or an investment company
• b.An entity that owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers✓
• c.Any registered representative with a Series 7 license
• d.Any individual with a net worth of $1 million

Rule 144A generally defines a qualified institutional buyer as an entity that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers, with a lower $10 million threshold for registered dealers acting for their own accounts. Individuals and licensed representatives do not qualify on net worth or license alone.17 CFR 230.144A

Under Regulation D, a natural person's net worth is measured to decide accredited investor status. What is the net worth test, and how is the primary residence handled?

• a.Individual or joint net worth over $1,000,000, excluding the value of the primary residence✓
• b.Net worth over $1,000,000, including the full value of the investor's primary residence as an asset
• c.Net worth over $250,000, excluding the primary residence
• d.Net worth over $5,000,000, excluding the primary residence

A natural person qualifies on net worth, alone or jointly with a spouse or spousal equivalent, exceeding $1,000,000, and the primary residence is not counted as an asset. The $5,000,000 figure is the total-assets test for certain trusts and entities, and including the residence would overstate the measure.17 CFR 230.501(a)(5)

Which income test makes an individual an accredited investor under Rule 501 of Regulation D?

• a.Income above $500,000 in any one of the last five years
• b.Income above $200,000 in each of the two most recent years, or joint income above $300,000, with a reasonable expectation of the same in the current year✓
• c.Income above $100,000 in the most recent year
• d.Joint income above $200,000 in the most recent year only

The income test requires individual income over $200,000, or joint income with a spouse or spousal equivalent over $300,000, in each of the two most recent years, plus a reasonable expectation of reaching the same level in the current year. A single high year, or a lower threshold, does not meet the test.17 CFR 230.501(a)(6)

In a Rule 506(b) private offering, what limit applies to purchasers who are not accredited investors?

• a.Up to 100 non-accredited purchasers, with no sophistication requirement
• b.No more than 35 non-accredited purchasers in any 90-calendar-day period, each of whom must be sophisticated alone or with a purchaser representative✓
• c.No non-accredited purchasers at all
• d.No more than 35 non-accredited purchasers per year, if each invests under $10,000

Rule 506(b) allows up to 35 non-accredited purchasers in any 90-calendar-day period, and each must have, alone or with a purchaser representative, enough knowledge and experience to evaluate the investment. General solicitation is not allowed under this option. The all-accredited condition describes Rule 506(c), which instead permits general solicitation but requires the issuer to verify status.17 CFR 230.506(b)(2)(i)

An issuer conducts a Rule 506(c) offering and uses general solicitation. What must it do about the purchasers?

• a.Limit sales to no more than 35 purchasers
• b.Register the offering with the SEC within 15 days after the first sale
• c.Accept each purchaser's self-certification box checked on the subscription form as sufficient proof
• d.Take reasonable steps to verify that every purchaser is an accredited investor✓

Rule 506(c) permits general solicitation only if all purchasers are accredited and the issuer takes reasonable steps to verify that status, which can include reviewing tax returns or relying on a written confirmation from a registered broker-dealer, registered investment adviser or licensed attorney. A simple self-certification, by itself, is not a verification step, and the 35-purchaser cap belongs to Rule 506(b).17 CFR 230.506(c)(2)(ii)

Within a 12-month period, what is the maximum aggregate offering price under the Rule 504 exemption from registration?

• a.$5,000,000 for each offering
• b.$10,000,000, reduced by securities sold in the preceding 12 months under the rule's conditions✓
• c.$50,000,000 in total
• d.$1,000,000, with no reduction for earlier sales

Rule 504 limits the aggregate offering price to $10,000,000, less the aggregate offering price of all securities sold within the 12 months before the start of and during the offering. The cap is not $1,000,000 and 504 does not set a per-offering allowance independent of prior sales.17 CFR 230.504(b)(2)

An issuer sells securities under the intrastate offering exemption of Rule 147. For how long after the sale are resales limited to residents of the issuer's state?

• a.Thirty days from the date of the sale by the issuer to the first buyer
• b.Nine months from the date of the sale by the issuer
• c.Six months from the date of the sale by the issuer✓
• d.Five years from the sale

Under Rule 147(e), for six months from the date of the issuer's sale, any resale may be made only to persons resident in the state or territory where the issuer was resident. Shorter and longer periods are not in the rule.17 CFR 230.147(d)

An investor sells stock at a loss on March 10 and buys substantially identical stock in the same account on March 28. What is the tax result of the loss?

• a.The loss is converted into a long-term gain on the new shares when they are later sold
• b.The loss is deductible, but only up to $3,000
• c.The loss is disallowed for now and added to the cost basis of the new shares✓
• d.The loss is fully deductible in the year of the sale

A wash sale occurs when a loss sale is followed, within 30 days before or after, by an acquisition of substantially identical stock. The disallowed loss is added to the cost of the new shares, which postpones the deduction until those shares are sold, and the holding period of the old shares carries over. The $3,000 cap is a separate limit on net capital losses.IRS Pub. 550, Wash Sales

An investor sells 100 shares at a $600 loss. Thirty-five days later she buys 100 shares of the same company. Does the wash sale rule disallow the loss?

• a.Yes, because the same issuer's stock was bought within 60 days
• b.Yes, because any repurchase within one year triggers the rule
• c.No, because the purchase was outside the period running 30 days before and 30 days after the sale✓
• d.No, but only if the new shares are held more than one year

The wash sale window runs 30 days before through 30 days after the sale date, which is a 61-day window. A purchase 35 days after is outside it, so the loss is allowed. The new shares' holding period does not matter to whether the rule applies.IRS Pub. 550, Wash Sales

An investor sells stock at a loss of $250 and, within the wash sale window, buys substantially identical stock for $800. What is the basis of the new shares?

• a.$250
• b.$800
• c.$1,050✓
• d.$550

The disallowed $250 loss is added to the $800 cost of the new stock, giving a basis of $1,050. This postpones the deduction until the new shares are sold. Using the cost alone ignores the adjustment, and subtracting the loss moves it in the wrong direction.IRS Pub. 550, Wash Sales

In a year, an unmarried investor has $9,000 of capital losses and $2,500 of capital gains and no other capital items. What is the maximum capital loss deduction against ordinary income for that year?

• a.$6,500
• b.$3,000✓
• c.$9,000
• d.$1,500

Losses first offset gains, leaving a net loss of $6,500. The deduction against ordinary income is the lesser of $3,000 ($1,500 if married filing separately) or the net loss, so $3,000 is allowed and the rest carries forward. The $1,500 limit applies only to married persons filing separately.IRS Pub. 550, Capital Losses

A married couple filing jointly has a net capital loss of $2,000 for the year. What capital loss deduction may they claim?

• a.$2,000✓
• b.$1,500
• c.$3,000, the annual limit, even though the couple's actual net loss is smaller
• d.$0, because losses cannot be deducted against wages

The deduction is the lesser of $3,000 ($1,500 if married and filing separately) or the total net loss. Here the net loss of $2,000 is less than $3,000, so the full $2,000 is deductible. They can claim the loss against ordinary income, up to the limit.IRS Pub. 550, Capital Losses

An investor sells stock at a gain after owning it for exactly one year, with the sale on the first anniversary of the purchase date. How is the gain classified?

• a.Long-term, because a full year has passed
• b.Long-term, because the sale was after six months
• c.Neither, because the classification is decided only at the end of the calendar year of sale
• d.Short-term, because the stock was not held more than one year✓

A gain or loss on investment property held more than one year is long-term. Holding it for exactly one year does not satisfy the test, so the gain is short-term, and the holding period begins the day after acquisition. The six-month figure is not a general holding period rule.IRS Pub. 550, Holding Period

An investor holds a municipal bond whose interest is tax-exempt and sells it for more than the purchase price. How is the profit on the sale taxed?

• a.It is exempt from federal tax like the interest
• b.It is exempt if the bond is held more than five years
• c.As a capital gain, since the exemption applies to the interest and not to appreciation✓
• d.It is taxed as ordinary interest income

The federal exclusion covers interest on qualifying state and local government bonds. A gain from selling the bond above its adjusted basis is a capital gain, short- or long-term depending on the holding period. Holding for five years does not exempt it.IRS Pub. 550, Capital Gains and Losses

Which type of municipal bond generally pays interest that is taxable for federal income tax purposes?

• a.A private activity bond that does not meet qualified bond requirements✓
• b.A general obligation bond of a state
• c.A revenue bond financing a public toll road owned and operated by a state or local government
• d.A school district bond

Interest on private activity bonds is taxable unless the bonds are qualified bonds, and interest on qualifying state and local government bonds used for public purposes is generally exempt. General obligation bonds of states, school districts and government-run toll road projects serve government functions.IRS Pub. 550, State and Local Government Obligations

An investor borrows money to buy tax-exempt municipal bonds. How is the interest on the loan treated?

• a.It is fully deductible against the tax-exempt bond interest in the same tax year
• b.It is deductible up to the amount of the tax-exempt interest earned in the year
• c.It is deductible only if the bonds are general obligation bonds
• d.It cannot be deducted, because it is incurred to produce tax-exempt income✓

Interest expense on money borrowed to buy or carry tax-exempt securities cannot be deducted. The same applies to shares in funds that distribute only exempt-interest dividends. The type of municipal bond does not change the result.IRS Pub. 550, Interest Expenses

An investor places an order to buy shares of an open-end mutual fund at 11:00 a.m. on a business day. At what price will the order be executed?

• a.The average of the day's high and low
• b.The price at 11:00 a.m. on the exchange
• c.The net asset value computed at the close of the previous business day, not the next one
• d.The fund's net asset value next computed after the order is received✓

Forward pricing under Rule 22c-1 requires redemptions and purchases to be at a price based on the current net asset value next computed after receipt of the order. An order cannot be priced at yesterday's NAV or at an intraday market price.17 CFR 270.22c-1(a)

A money market fund under Rule 2a-7 may not acquire an instrument with a remaining maturity greater than how many calendar days?

• a.60 calendar days, the limit on the fund's dollar-weighted average maturity
• b.One year to the exact day
• c.397 calendar days✓
• d.180 calendar days

Rule 2a-7 limits a money market fund to instruments with a remaining maturity of 397 calendar days or less, subject to the rule's stated exceptions. The 60-day figure is the cap on the portfolio's dollar-weighted average maturity.17 CFR 270.2a-7(d)

A money market fund's dollar-weighted average portfolio maturity may not exceed what limit under Rule 2a-7?

• a.60 calendar days✓
• b.30 calendar days
• c.397 calendar days
• d.120 calendar days

The rule bars a money market fund from maintaining a dollar-weighted average portfolio maturity that exceeds 60 calendar days. The 397-day figure is the limit on the remaining maturity of each individual instrument. A 120-day or 30-day cap is not the WAM limit in the rule.17 CFR 270.2a-7(d)

An investor sells one XYZ 50 put for $4 and buys one XYZ 45 put for $1 on the same expiration date. At expiration, at what stock price does the position break even?

• a.$47, the higher strike less the $3 net premium received✓
• b.$48, the higher strike less the $2 gap between the two premiums
• c.$46, the lower strike plus the $1 premium paid for the long put
• d.$53, the higher strike plus the $3 net premium received

A credit put spread starts with a net premium of 4 - 1 = $3. The short 50 put begins to lose money below 50, and the credit cushions the first $3 of that loss, so the break-even is 50 - 3 = 47. Adding the credit is the formula for a call spread, and the lower strike plays no part in the break-even.FINRA Rule 2360(a)(2), (a)(28)

An investor sells one XYZ 40 put for $3 and buys one XYZ 35 put for $1 on the same expiration date. What is the most the investor can lose, ignoring commissions?

• a.$3,800, the cost of buying the stock at 40 less the net premium, if the stock goes to zero
• b.$300, the $5 spread width less the $2 net premium received✓
• c.$500, the width of the spread, since the premium is not counted against the loss
• d.$200, the net premium received, since that is the amount the investor stands to lose

The long 35 put caps the loss on the short 40 put at the width of the spread, which is $5. The $2 net credit offsets part of it, so the worst case is (5 - 2) x 100 = $300. The long put is what keeps the loss from approaching the strike price, as it would on an uncovered put.FINRA Rule 2360(a)(2), (a)(28)