FINRA Series 7 — All Questions

A market order to buy is an instruction to:

• a.Buy at the closing price only
• b.Buy only at a specified price or lower
• c.Buy immediately at the best available current price✓
• d.Buy only when the stock trades through a stop price

A market order is executed promptly at the best available price when it reaches the market, prioritizing speed of execution over price. It provides no price protection, so in fast-moving or thin markets the execution price may differ from the last quote.

A customer places a limit order to buy 100 shares at $25. This order:

• a.Will be executed only at $25 or higher
• b.Guarantees immediate execution at the market
• c.Will be executed only at $25 or lower✓
• d.Becomes a market order once the stock reaches $25

A buy limit order sets the maximum price the buyer is willing to pay, so it executes only at the limit price or lower. It provides price protection but no guarantee of execution; if the stock never trades at or below the limit, the order goes unfilled.

A sell stop order becomes a market order to sell when the stock:

• a.Pays a regular quarterly cash dividend to each of its common shareholders
• b.Rises to or through the designated stop price on the upside during trading
• c.Reaches a brand-new fifty-two-week intraday high price on heavy volume
• d.Trades at or through the stop price on the downside✓

A sell stop is placed below the current market and is triggered when the stock trades at or through the stop price, at which point it becomes a market order to sell. Investors often use sell stops to limit losses or protect gains on a long position.

A sell stop limit order differs from a sell stop order because, once triggered, the stop limit order:

• a.Executes immediately at whatever prevailing market price then happens to be available
• b.Converts to a buy order
• c.Is automatically canceled the very instant that the designated stop price is touched
• d.Becomes a limit order that executes only at the limit price or better✓

When a stop limit order is triggered at the stop price, it becomes a limit order rather than a market order, so it will execute only at the specified limit price or better. This adds price protection but risks non-execution if the market moves past the limit before filling.

In a securities quote, the bid and ask represent:

• a.The dividend and the coupon
• b.Two different settlement dates
• c.The highest price a buyer will pay (bid) and the lowest price a seller will accept (ask)✓
• d.The opening and closing prices

The bid is the highest price buyers are currently willing to pay, and the ask (offer) is the lowest price sellers will accept. The difference between them is the spread, which reflects liquidity and is a cost of trading; investors generally buy at the ask and sell at the bid.

Regular-way settlement for most corporate stocks and bonds currently occurs on:

• a.Five business days after the trade date
• b.The same day as the trade (T+0)
• c.One business day after the trade date (T+1)✓
• d.The last day of the month

Regular-way settlement for equities and corporate bonds is currently one business day after the trade date (T+1), meaning the exchange of securities and payment is completed the next business day. U.S. Treasury securities and options typically settle on the next business day as well.

The ex-dividend date is significant because an investor who buys the stock on or after that date:

• a.Is not entitled to the upcoming declared dividend✓
• b.Must pay the upcoming declared dividend amount directly to the selling party
• c.Automatically reinvests the upcoming declared dividend into additional shares
• d.Receives a double dividend payment covering that particular quarter's payout

The ex-dividend date is the cutoff for dividend eligibility; buyers on or after this date are not entitled to the declared dividend, which goes to the seller. To account for the payout, the stock's opening price is typically reduced by the dividend amount on the ex-date.

A specialist or designated market maker (DMM) on an exchange is responsible for:

• a.Assigning credit ratings to newly issued corporate and municipal bond offerings
• b.Auditing the annual financial statements filed by exchange-listed companies
• c.Maintaining a fair and orderly market in assigned securities✓
• d.Setting the dividend policy for each of the assigned listed corporations

A designated market maker (formerly specialist) is charged with maintaining a fair and orderly market in assigned securities, providing liquidity by buying and selling for its own account when needed, and facilitating price discovery at the open and close. It must balance public buy and sell interest.

The primary market is where:

• a.Options are exercised
• b.Investors trade previously issued securities among themselves
• c.Issuers sell new securities to investors and raise capital✓
• d.Only government bonds are traded

The primary market is where new securities are issued and sold by the issuer, with proceeds going to the company through an underwriting. Once issued, those securities trade among investors in the secondary market, where the issuer is no longer a party to the transactions.

A stock trading 'ex-rights' means the stock:

• a.Trades without the value of the subscription rights, which now trade separately✓
• b.Still includes the full value of the subscription rights within its current quoted price
• c.Cannot be sold
• d.Has been delisted

When a stock trades ex-rights, buyers no longer receive the subscription rights associated with a rights offering, and those rights trade separately in the market. The stock price typically adjusts downward to reflect the removed value of the rights.

A 'fill-or-kill' (FOK) order instructs the broker to:

• a.Execute the entire order immediately and completely, or cancel it entirely✓
• b.Fill part of the order and cancel the rest
• c.Fill the order over the course of the day
• d.Hold the order open until a materially better price happens to appear later in the session

A fill-or-kill order must be executed in its entirety immediately, or it is canceled outright; partial fills are not permitted. It differs from an immediate-or-cancel order, which allows partial execution, and from an all-or-none order, which does not require immediate execution.

A reverse stock split (for example, 1-for-5) results in a shareholder holding:

• a.A larger total number of shares outstanding for the holder at a proportionally lower price
• b.The same number of shares at a higher price
• c.Fewer shares at a proportionally higher price, with total value roughly unchanged✓
• d.More shares at the same price

In a 1-for-5 reverse split, every five shares become one, so the shareholder holds one-fifth as many shares at roughly five times the price, leaving total market value approximately unchanged. Companies often use reverse splits to raise the per-share price, sometimes to meet exchange listing requirements.

A tender offer is:

• a.A public offer to buy shares from existing shareholders, usually at a premium✓
• b.A type of bond call
• c.An offer to lend an investor's securities out to short sellers in exchange for a periodic fee
• d.A dividend paid in additional shares

A tender offer is a public bid to purchase some or all shareholders' shares, typically at a premium to the market price and within a set period, often as part of a takeover attempt. Shareholders decide whether to tender their shares under the stated terms.

When a company pays a cash dividend, on the ex-dividend date the opening stock price is typically:

• a.Unchanged
• b.Reduced by the amount of the dividend✓
• c.Increased by the amount of the dividend
• d.Doubled

On the ex-dividend date the stock's opening price is generally reduced by the dividend amount because new buyers will not receive that dividend. This adjustment keeps the market value consistent for buyers before and after the dividend right is removed.

The third market refers to:

• a.Exchange-listed securities traded over-the-counter, often between institutions✓
• b.The trading of major foreign currencies between large international banking institutions
• c.Trading of new issues
• d.Options traded on an exchange

The third market is the trading of exchange-listed securities in the over-the-counter market, frequently involving institutional investors and market makers away from the primary exchange. The fourth market, by contrast, refers to direct institution-to-institution trading, often through electronic networks.

A good-till-canceled (GTC) order:

• a.Remains active until it is executed or the customer cancels it, subject to firm and exchange time limits✓
• b.Can never be canceled
• c.Must be executed within one hour
• d.Expires at the end of the trading day if unfilled

A GTC (open) order stays in effect until it is executed or canceled, rather than expiring at the day's close like a day order. Firms and exchanges may impose periodic expiration or confirmation requirements, so GTC orders are typically reviewed or refreshed periodically.

A dealer (principal) transaction differs from an agency (broker) transaction because in a principal trade the firm:

• a.Only matches buyers with sellers and earns a fixed commission for arranging the trade
• b.Acts solely as a fiduciary adviser
• c.Cannot profit from the trade
• d.Buys or sells from its own inventory and may charge a markup or markdown✓

Acting as a dealer or principal, a firm trades from its own account and earns compensation through a markup (on sales to customers) or markdown (on purchases from customers). Acting as a broker or agent, the firm arranges the trade between parties and charges a commission instead.

The National Best Bid and Offer (NBBO) represents:

• a.The highest bid and lowest offer available across all market centers✓
• b.Only quotes from one exchange
• c.The simple arithmetic average of every bid and offer quote reported during the day
• d.The single opening auction price that is established at the start of the session

The NBBO consolidates quotes across all market centers to show the highest available bid and the lowest available offer at a given moment. Firms handling customer orders must seek to execute at prices consistent with the NBBO as part of their best execution obligations.

When an investor sells stock short, the shares delivered to the buyer are:

• a.Borrowed, typically through the broker-dealer✓
• b.Newly issued directly by the underlying company specifically for delivery
• c.Created and issued brand-new by the listing exchange for the transaction
• d.Already owned outright by the short seller before the sale was entered

A short sale involves selling securities the investor does not own by borrowing them, usually through the broker-dealer's securities lending arrangements. The short seller must later buy shares to return the borrowed stock (cover), and is responsible for any dividends paid while the position is open.

A stock dividend (as opposed to a cash dividend) results in:

• a.A reduction in the number of shares outstanding
• b.An increase in the company's total equity
• c.Additional shares to shareholders, lowering the per-share cost basis while total basis stays the same✓
• d.A cash payment to shareholders

A stock dividend distributes additional shares rather than cash, increasing the share count while proportionally lowering the per-share cost basis; the shareholder's total cost basis and total value are unchanged. It does not by itself increase the company's total equity, merely reclassifying amounts within equity.

An 'all-or-none' (AON) order instructs that:

• a.The entire order must be filled, though not necessarily immediately or in one transaction✓
• b.Partial fills are always acceptable
• c.The order executes only at the close
• d.The order must be filled immediately or canceled

An all-or-none order requires that the full quantity be executed, but unlike fill-or-kill it does not demand immediate execution and can be worked over time. If the full size cannot ultimately be filled, none of it is executed.

The role of a transfer agent for a corporation includes:

• a.Setting the market price of the stock
• b.Providing margin loans
• c.Underwriting new securities
• d.Issuing and canceling certificates and maintaining records of registered shareholders✓

A transfer agent handles the issuance and cancellation of share certificates, records changes in ownership, and maintains the register of shareholders, often coordinating with a registrar to prevent over-issuance. It also processes name and address changes and helps distribute dividends and proxies.

When a bond is quoted at '98', the price the investor pays (excluding accrued interest) on a $1,000 par bond is:

• a.$9,800
• b.$98
• c.$980✓
• d.$1,098

Corporate bonds are quoted as a percentage of par, so a quote of 98 means 98% of $1,000 par, or $980. The investor would also pay any accrued interest since the last coupon date in a regular-way purchase.

A buy stop order is typically used by:

• a.An investor protecting a short position or seeking to buy on upside momentum✓
• b.A dividend-focused investor
• c.A bond issuer
• d.An income investor seeking to buy the stock at a specified price below the current market

A buy stop is placed above the current market and triggers when the stock rises to or through the stop price. Short sellers use buy stops to limit losses if the stock rises, and momentum buyers use them to enter once a resistance level is broken.

A trade executed at a price between the current bid and ask is said to occur:

• a.Inside the spread (price improvement for the customer)✓
• b.Only within a private dark pool away from the publicly displayed markets
• c.Entirely outside the prevailing market on the far away side of the quote
• d.Exactly at the prior trading session's official closing print price

An execution between the prevailing bid and ask occurs inside the spread and represents price improvement compared with paying the full ask or receiving only the bid. Achieving price improvement is one way firms meet their best execution responsibilities to customers.

In a regular-way purchase of a bond between coupon dates, accrued interest is:

• a.Deducted from the price and paid by the seller to the buyer
• b.Ignored entirely between coupon dates
• c.Paid by the issuer directly to the buyer
• d.Added to the price and paid by the buyer to the seller✓

The buyer reimburses the seller for interest earned since the last coupon date, so accrued interest is added to the purchase price and flows from buyer to seller; the buyer is then made whole by receiving the full coupon at the next payment. Corporate and municipal bonds accrue on a 30/360 basis, Treasuries on actual/actual.

A U.S. Treasury note quoted at 99.16 is priced at:

• a.$99.16 per $1,000 of par
• b.$991.60 per $1,000 of par
• c.$1,016.00 per $1,000 of par
• d.$995.00 per $1,000 of par✓

Treasury notes and bonds are quoted in 32nds, so '99.16' means 99 and 16/32 = 99.50% of par = $995.00 per $1,000. Trap: reading the .16 as hundredths (choice b) gives $991.60, but Treasuries use 32nds, not the decimal percentage-of-par convention used for corporate bond dollar quotes.

On the order book relative to the current market, which orders rest below the market and which rest above?

• a.Stop orders and limit orders are placed at identical prices
• b.All four of these order types are entered above the current market price and are triggered only on upside price moves
• c.Buy limits and sell stops are placed below the market; sell limits and buy stops are placed above the market✓
• d.All four order types rest below the market

A useful memory aid is that buy limits and sell stops go below the current market, while sell limits and buy stops go above it. This reflects that a buyer wants to pay less (buy limit) and a seller protects a long with a sell stop under the market.

On the ex-dividend date for a cash dividend, which resting orders are automatically reduced (absent a special instruction)?

• a.Buy limits and sell stops, unless the order is marked 'do not reduce'✓
• b.Sell limit orders and buy stop orders that rest above the current market price on the order book
• c.No orders are ever adjusted
• d.Only market orders

Because the stock's price is reduced on the ex-date, orders placed below the market (buy limits and sell stops) are automatically reduced by the dividend amount unless marked DNR (do not reduce). Orders above the market (sell limits and buy stops) are not reduced.

A 'do not reduce' (DNR) instruction on an order means:

• a.The order is not adjusted downward for ordinary cash dividends on the ex-date✓
• b.The order is discretionary and lets the representative choose the security and the amount to trade
• c.The order is a short sale
• d.The order must be filled immediately or canceled

A DNR order tells the firm not to reduce the order price for ordinary cash dividends when the stock goes ex-dividend. It applies to the order types that would otherwise be reduced, namely buy limits and sell stops placed below the market.

An immediate-or-cancel (IOC) order:

• a.Is a day order worked over the session
• b.Must be filled completely and immediately or canceled entirely
• c.Remains open until canceled by the customer
• d.Fills as much as possible immediately and cancels the remainder, permitting a partial fill✓

An IOC order executes whatever quantity is available at once and cancels any unfilled balance, so partial fills are allowed. This differs from fill-or-kill, which requires the entire order to be filled immediately or none at all.

An odd-lot order is one for:

• a.Exactly 1,000 shares
• b.More than 100 shares
• c.Exactly 100 shares
• d.Fewer than 100 shares✓

A round lot is the standard trading unit of 100 shares, so an odd lot is any order for fewer than 100 shares. An order such as 150 shares is a mixed lot (one round lot plus a 50-share odd lot).

A market-on-close (MOC) order instructs the broker to:

• a.Execute the order only at a specified limit
• b.Execute the order at or as near as possible to the day's closing price✓
• c.Cancel the order automatically at the close
• d.Execute the entire order at the official opening auction price at the very start of the session

A market-on-close order is submitted to execute at the closing price, participating in the closing auction. It provides no price protection but ensures the customer receives the day's closing print rather than an intraday price.

A 'not-held' order:

• a.Must be executed instantly at the opening
• b.Gives the floor broker discretion over the time and price of execution, and the broker is not held to a missed market✓
• c.Removes every element of time and price discretion from the floor broker and forces an immediate execution at the prevailing market price
• d.Is a type of stop order

A not-held order lets the executing broker use judgment about when and at what price to fill it in an effort to get a better result; the broker is not held responsible if the market moves away. It grants time and price discretion only, not discretion over what or how much to trade.

A buy stop order:

• a.Can never be triggered
• b.Is placed above the market; when the stock trades at or through the stop price, it becomes a market order to buy✓
• c.Applies only to bonds
• d.Is placed below the market and becomes a limit order when touched

A buy stop is entered above the current market and is triggered when the stock trades at or through the stop, at which point it becomes a market order to buy. Short sellers use buy stops to limit losses, and momentum buyers use them to enter on an upside breakout.

A trade done for 'cash' settlement settles:

• a.Three business days after the trade (T+3)
• b.Five business days after the trade (T+5)
• c.The same day as the trade (T+0), with delivery and payment on the trade date✓
• d.Two full business days after the trade date (T+2), matching the older standard equity settlement cycle

A cash settlement transaction settles the same day the trade is executed (T+0), with delivery of securities and payment occurring on the trade date. This is faster than regular-way settlement, which for most securities is now T+1.

Under T+1 regular-way settlement, the ex-dividend date is set as:

• a.Two business days before the record date, matching the settlement lag that existed under the former T+2 cycle
• b.The payable date
• c.The record date; a buyer must purchase before the ex-date to be an owner of record and receive the dividend✓
• d.The day after the record date

With T+1 settlement, the ex-dividend date generally coincides with the record date. A buyer must purchase before the ex-date to settle by the record date and be entitled to the dividend; buying on or after the ex-date means the seller keeps the dividend.

The correct chronological order of the four dividend dates is:

• a.Record date, ex-date, payable date, declaration date
• b.Ex-date, declaration date, record date, payable date
• c.Payable date, record date, ex-date, declaration date
• d.Declaration date, ex-dividend date, record date, payable date✓

The board first declares the dividend (declaration date), then the stock trades ex-dividend, ownership is fixed on the record date, and the cash is paid on the payable date. Under T+1 the ex-date and record date typically fall on the same day.

A security trading on a 'when-issued' basis is:

• a.A security that is authorized but not yet issued, trading before final settlement terms are set✓
• b.A private placement
• c.A delisted stock
• d.A security whose issuer has defaulted on its obligations and is trading in anticipation of a bankruptcy reorganization

When-issued trading occurs after a security (such as a new municipal bond or a stock from a split) is announced but before it is actually issued and settlement details are final. Trades are conditional and settle once the securities are formally issued.

The premium on a listed option trade settles:

• a.Two business days after the trade (T+2)
• b.Five business days after the trade (T+5)
• c.On the same day as the trade
• d.The next business day (T+1)✓

Listed option transactions settle regular way on the next business day (T+1); the buyer pays the premium and the writer receives it by the following business day. This matches the current T+1 regular-way cycle for most securities.

A market maker is best described as a firm that:

• a.Only matches customer buy and sell orders strictly as an agent, never taking a position in the security for its own account
• b.Quotes both a bid and an offer and stands ready to buy and sell a security for its own account✓
• c.Assigns credit ratings to securities
• d.Regulates the securities markets

A market maker (dealer) continuously quotes a two-sided market, a bid at which it will buy and an offer at which it will sell, trading for its own account and providing liquidity. It profits from the spread and from markups/markdowns, unlike a pure agency broker.

An electronic communication network (ECN) is:

• a.An electronic system that automatically matches buy and sell orders, often outside traditional exchange hours✓
• b.A type of mutual fund
• c.A central securities clearing corporation that guarantees, nets, and settles every trade executed on the national listed exchanges
• d.A bond rating service

An ECN is an alternative trading system that electronically matches buy and sell orders for securities, providing anonymity and access to trading, sometimes before and after regular market hours. ECNs display quotes and can improve execution speed and price.

The 'fourth market' refers to:

• a.Options trading on an exchange
• b.The trading of newly issued securities sold directly from the issuing corporation to the investing public during the primary distribution period
• c.Floor trading of listed stocks
• d.Direct institution-to-institution trading of securities, often through electronic systems, without a broker-dealer intermediary✓

The fourth market is trading of securities directly between institutions (for example, via ECNs) without using a broker-dealer as intermediary. It contrasts with the third market, which is over-the-counter trading of exchange-listed securities.

An underwriting syndicate is:

• a.A group of federal and state securities regulators appointed to oversee the pricing and distribution of an offering
• b.The transfer agent's processing department
• c.A group of underwriters formed to share the risk of distributing a new securities issue✓
• d.The issuer's board of directors

A syndicate is a group of investment banks that join together to underwrite and distribute a new issue, spreading the capital commitment and risk. A lead (managing) underwriter organizes the syndicate, and a selling group may assist in distribution without assuming underwriting risk.

The registrar for a corporation's stock is responsible for:

• a.Lending shares to short sellers
• b.Sets the stock's official opening market price each trading day and maintains a fair and orderly two-sided quotation in the shares
• c.Underwriting new issues
• d.Auditing the transfer agent and ensuring the number of shares issued does not exceed the number authorized✓

The registrar acts as a check on the transfer agent, verifying that the total number of shares outstanding never exceeds the amount authorized, preventing over-issuance. The transfer agent handles issuance, cancellation, and recordkeeping of certificates.

A Nasdaq Level II quote display:

• a.Reports municipal bond trades
• b.Shows only the single most recent last-sale print and the total cumulative share volume for the trading day
• c.Is available only to the issuing company
• d.Displays the quotes of individual market makers, revealing the depth of the market✓

Level II shows the bids and offers of each market maker in a Nasdaq security, letting a viewer see market depth and which dealers are quoting at each price. Level I shows only the inside (best) bid and offer.

A 'dark pool' is:

• a.A federal securities regulator
• b.A bond rating agency
• c.An alternative trading system that lets institutions trade large blocks anonymously without displaying orders publicly before execution✓
• d.A registered national securities exchange dedicated exclusively to the public listing and continuous trading of low-priced penny stocks under one dollar

A dark pool is a private alternative trading system where large institutional orders can be matched without pre-trade transparency, reducing the market impact of big trades. Executions are reported after the fact, but the resting orders are not publicly displayed.

A corporate bond is quoted at '101 1/2'. Excluding accrued interest, the dollar price on a $1,000 par bond is:

• a.$1,001.50
• b.$101.50
• c.$1,015.00✓
• d.$1,150.00

Corporate bonds are quoted as a percentage of par, and 101 1/2 = 101.5% of $1,000 = $1,015.00. The buyer would additionally pay any accrued interest since the last coupon date on a regular-way purchase.

U.S. Treasury bills are quoted:

• a.On a discount yield basis, reflecting the annualized discount from par✓
• b.In 32nds of a point
• c.By their stated coupon rate
• d.As a percentage of par value in thirty-seconds of a point, exactly like a Treasury note or bond

Treasury bills pay no coupon and are quoted on a discount yield (bank discount) basis, expressing the annualized percentage discount from par. Treasury notes and bonds, by contrast, are quoted as a percentage of par in 32nds.

The 'spread' in a securities quote is:

• a.The dealer's stated commission
• b.The coupon rate minus the yield to maturity
• c.The difference between the bid and the ask, tending to be wider when a security is less liquid✓
• d.The difference between a bond's par value and its current secondary-market trading price, expressed in points

The bid-ask spread is the difference between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask). Wider spreads generally indicate lower liquidity and a higher cost to trade, since investors buy at the ask and sell at the bid.

An investor who is short a stock over a dividend record date:

• a.Must pay any dividend declared on the borrowed shares to the lender of the stock✓
• b.Owes nothing related to the declared dividend and may instead claim the dividend as taxable income
• c.Receives a special tax credit
• d.Receives the dividend from the company

Because a short seller has borrowed and sold shares that still belong to a lender, the short seller is responsible for paying the lender any dividend declared while the position is open. This is an additional cost of maintaining a short position.

In a rights (subscription) offering, existing shareholders receive:

• a.An automatic dilution of their proportional holdings with no compensation, subscription privilege, or preemptive right of any kind
• b.Shares reserved only for new outside investors
• c.A type of long-term corporate bond
• d.The right to buy new shares, usually below the current market price, in proportion to their current holdings to avoid dilution✓

A rights offering gives current shareholders short-term rights to purchase additional shares at a subscription price typically below market, in proportion to their existing ownership, preserving their percentage stake (their preemptive right). Rights are usually transferable and trade separately.