NCE PRACTICE EXAM

2023 Edition

Take this free FINRA Series 7 practice exam to get an idea of what is on the exam to become a financial investment representative.

The Series 7 exam (the General Securities Representative Qualification Examination (GS)) tests your competency as a general securities representative, including sales of corporate securities, municipal securities, investment company securities, variable annuities, direct participation programs, options and government securities. Topics tested include: Seeks Business for the Broker-Dealer from Customers and Potential Customers; Opens Accounts after Obtaining and Evaluating Customers' Financial Profile and Investment Objectives; Provides Customers with Information about Investments, Makes Recommendations, Transfers Assets and Maintains Appropriate Records; Obtains and Verifies Customers' Purchase and Sales Instructions and Agreements; Processes, Completes, and Confirms Transactions.

Candidates must pass the Securities Industry Essentials (SIE) exam and the Series 7 exam to obtain the General Securities Representative registration.



1.	Which of the following is true regarding a Regulation D offering?
		a. It can be offered to no more than 55 unaccredited investors per year.
		b. It can be offered to no more than 50 unaccredited investors per year.
		c. It is a private placement.
		d. It is a public placement.
Regulation D offerings can be offered to a maximum of 35 unaccredited investors per year. These are private placements and are not offered to the general public. Incorrect answer. Please choose another answer.



2.	Maria is a new client. She is 81 years old, and her monthly living expenses are exceeding her social security income. She has only $8,000 in total assets. Her holdings consist of Class B Mutual Funds. Her dividends and capital gains received from the fund are being reinvested. Which of the following recommendations may be suitable and help Maria?
		a. Sell out of her Class B bond mutual funds and buy ETFs.
		b. Increase Large-cap holdings, such as S&P 500 companies.
		c. Change dividend and capital gains reinvestment to cash.
		d. Liquidate the Class B Mutual Funds and buy safe Municipal Bonds.
Changing the dividends and capital gains treatment to cash payouts can help Maria with some income and is the best option of all the ones presented. Selling Class B Mutual Funds may trigger a back end load sales charge which is not good for Maria. Large Caps equities may help her, but we are looking for income. Maria is not a prospect for Municipal bonds as her assets are not adequate for them. Incorrect answer. Please choose another answer.



3.	Two sisters are in your office to open a new non-qualified account together. They want to ensure that the assets pass to the other sister if one of them passes away. Which account type is appropriate for this situation?
		a. A Partnership
		b. An LLC
		c. A Joint Tenancy in Common
		d. A Joint Tenancy With Rights Of Survivorship
A Joint Tenancy With Rights Of Survivorship (JTWROS) account best fits the needs of this situation because the assets of the deceased will pass to the surviving joint tenant at the time of death. In a Joint Tenancy In Common account the assets of each individual pass to their heirs or estate upon death. There is no mention of this being a business account, so LLC and Partnership accounts do not apply to this situation. Incorrect answer. Please choose another answer.



4.	A statutory prospectus is also known as a:
		a. Red herring
		b. Blue-sky prospectus
		c. Preliminary prospectus
		d. Final prospectus
A statutory prospectus is referred to as a final prospectus. A preliminary prospectus is sometimes called a red herring. Blue-sky refers to blue sky laws, and not a prospectus. Incorrect answer. Please choose another answer.



5.	Your customer is 60 years old, and he opened his Roth IRA 9 years ago. He is liquidating his assets in his Roth IRA and sending the funds to his checking account. Which of the following is true regarding the tax implication of this action?
		a. The earnings portion is taxed as long-term capital gains.
		b. The entire distribution is tax-free.
		c. The earnings are taxed as long-term gains, the contributions are tax-free.
		d. The entire distribution is taxed as ordinary income.
Withdrawals from Roth IRAs are non-taxable when the account has been open for at least 5 years and the customer is age 59 ½ or more. This includes contributions and earnings. In Roth IRAs, the contributions are made with after-tax dollars. Incorrect answer. Please choose another answer.



6.	A company wishes to raise money from non-accredited investors, with the ultimate goal being an IPO. Which type of offering allows for this type of capital raise?
		a. Regulation D
		b. Regulation A+
		c. Regulation C
		d. Competitive Bid Arrangement
Regulation A+ (formerly known as Regulation A) was updated in the JOBS Act. Reg A+ offerings allow capital to be raised from non-accredited investors. Reg D offerings can only raise funds from accredited investors. Reg C does not apply to capital raises. Incorrect answer. Please choose another answer.



7.	The date is June 23rd. ACME stock is trading at $50 per share. Your client Jon Ice thinks that ACME will move sideways for the next month or so, trading in a range between 47 and 53. Which strategy BEST fits Jon's market outlook?
		a. Buy the June 50 Straddle
		b. Sell the July 45 Put
		c. Buy the July 50/55 Call Spread
		d. Sell the July 45/55 Strangle
Selling a strangle allows traders to profit from a market that is in a sideways trend. Since Jon's outlook for ACME is for the price to remain between $47 and $53 for the next month, selling the strangle (selling a call above market price and a put below market price) will allow him to keep the premium received if the stock is between 45 and 55 at the July options expiration. Incorrect answer. Please choose another answer.



8.	Marcus is bullish on JKL stock. He is long one May 75 call for 7.50. What is his break even point on expiration day?
		a. 67.50
		b. 82.50
		c. 100.00
		d. Not enough information to determine the price
Long means bought. The break-even price at expiration of buying a call (long call) is the strike price plus the premium paid: 75 + 7.50 = 82.50. Marcus would need the JKL stock price to be at or above $82.50 on expiration day to break-even on this trade. Incorrect answer. Please choose another answer.



9.	James owns XYZ 6 percent cumulative preferred stock ($100 Par Value). The first year, XYZ missed paying out $4 in dividends. In year two, XYZ missed paying out $5 in dividends. In year three, the company declared a common dividend. How much will James receive in dividend payments in year three?
		a. $15
		b. $9
		c. $6
		d. $6.54
When companies miss dividend payments to cumulative preferred stock owners, they must pay all dividends in arrears before paying any common stock dividends. XYZ missed $4 in year one and $5 in year two. When a common dividend is announced, they must make up for missed dividends to cumulative preferred shareholders. The dividends paid in year three will be the two years' worth of missed dividends plus the year three dividend of $6.00. (6% of $100 Par Value): $4+$5+$6 = $15. Incorrect answer. Please choose another answer.



10.	CORP corporate bonds are currently quoted at 102.50. Josephine wants to buy 10 of these bonds. What is the price of each bond?
		a. $10,250
		b. $1,025.00
		c. $10,200.50
		d. $102.50
Corporate bonds are quoted as a percentage of their face value ($1,000). 102.5% of $1000 = $1,025.00. Incorrect answer. Please choose another answer.



11.	Which of the following calculates the CY (current yield) of a bond?
		a. Par value divided by face value
		b. Annual interest divided by par value
		c. Annual interest divided by market value
		d. Yield to maturity divided by par value
Annual interest divided by market value = CY (current yield). Incorrect answer. Please choose another answer.



12.	When analyzing the capital structure of a company, an analyst will most closely examine the:
		a. p/e ratio
		b. Debt to equity ratio
		c. Quick ratio
		d. Cash ratio
The debt to equity ratio compares liabilities of a company to the equity of the shareholders. This ratio is indicative of the company's capital structure. Incorrect answer. Please choose another answer.



13.	MNO stock is trading at $31. A client wrote 29 MNO Corp $30 puts for $7.55 each. What is the client's maximum gain?
		a. $21,895
		b. $2,900
		c. $87,000
		d. Unlimited
Option writers (sellers) have a maximum gain potential of the amount of premium received. The client received $755 for each put: 29 x $755 = $21,895. Incorrect answer. Please choose another answer.



14.	All of the following strategies entail theoretically unlimited risk EXCEPT:
		a. Selling a naked call
		b. Buying a put debit spread
		c. Shorting 100 shares of common stock
		d. Selling a straddle
Buying an options spread (call "spread" or "put spread") caps the investor's risk at the amount paid for the spread. The other three strategies feature theoretically unlimited risk. Incorrect answer. Please choose another answer.



15.	A customer has an account with no activity or holdings; a zero balance account. How frequently must a statement be sent to this customer, at minimum?
		a. Yearly
		b. Quarterly
		c. Monthly
		d. Weekly
If customers have account activity, statements must be sent monthly. If there are no trades, statements must be sent at least quarterly. Incorrect answer. Please choose another answer.



16.	ABC Corp. stock has a Beta of 1.27 and its Alpha is 0.29. It is also a component of the Russell 2000 Index. ABC is most likely a:
		a. Blue-chip stock
		b. CMO
		c. A regional bank and lending company
		d. Small-cap technology company
ABC is most likely a small-cap tech company, since the Russell 2000 is an equity index comprised of small cap companies, including many technology companies. Blue-chip stocks are found in the Dow Jones Industrial Average and the S&P 500, sometimes the NASDAQ - not the Russell 2000. A CMO is a Collateralized Mortgage Obligation and does not apply to this question. A Regional Bank would most likely not have a high Beta of 1.27 and even if it did, the most likely answer is small-cap technology company since the market capitalization of the regional bank and lending company are not mentioned. Russell 2000 = small caps. Incorrect answer. Please choose another answer.



17.	Revenue bonds are most likely to fund which of the following facilities?
		a. Toll bridge, power plant
		b. Middle school, library
		c. Highways
		d. A and C only
Revenue bonds fund facilities that produce revenue, like highways, toll roads, and power plants. Schools and libraries would more likely be funded by General Obligation Bonds (GO bonds). GO bonds fund projects that may not produce direct revenue streams, like libraries and middle schools. Incorrect answer. Please choose another answer.



18.	Which of the following measurements describe a stock's volatility in comparison to the market as a whole?
		a. Alpha
		b. Beta
		c. Delta
		d. Gamma
Beta measures a stock's volatility versus the overall market. Delta and gamma are options greeks. Delta measures the rate of change from an option's price to the change of the underlying asset. Gamma measures the rate of change from the options price relative to the move in Delta. Alpha measures the ROI of a stock versus an index. Incorrect answer. Please choose another answer.



19.	An investor wants to buy ACME Corp. stock. The last time you checked, the stock was trading at $363.51. She wants to buy 100 shares of this stock, but only if the stock pulls back to $355.00. What type of order should she use?
		a. Stop
		b. Stop-limit
		c. AON
		d. Limit
A limit order should be used. For a buy order, a limit order specifies the maximum price the buyer is willing to pay. This would be a buy limit order @ $355.00. Stop and stop-limit orders are usually used to limit losses if a stock decreases. AON is an all-or-none order which means 'to fill the whole order' (all 100 shares), or none at all (in this case 100 shares). Incorrect answer. Please choose another answer.



20.	All of the following are agency transactions EXCEPT:
		a. A broker-dealer finds shares for a customer on an exchange and sells them to a client.
		b. A broker-dealer uses a broker's broker and finds shares to sell to a client.
		c. A broker-dealer locates shares in a dark pool and sells them to a client.
		d. A broker-dealer has shares in its inventory and sells them to a client.
When a broker-dealer sells shares out of its own inventory, a principal transaction has occurred. When a broker-dealer finds shares elsewhere, it is an agency transaction. Incorrect answer. Please choose another answer.