Finra Series-7 Exam Questions - Real Practice Questions for Guaranteed Success

Question 1

When does a call option provide the most value to its holder?

Awhen the underlying stock is extremely volatile

Bin the month prior to its expiration

Cwhen there is a large open interest in that class of option

Dwhen the underlying stock price is rising

Correct : D

when the underlying stock price is rising. That's why the holder of this option wants to have a right to ''call'' the stock.

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Awhen the underlying stock is extremely volatile

Bin the month prior to its expiration

Cwhen there is a large open interest in that class of option

Dwhen the underlying stock price is rising

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Question 2

When an index option is exercised, settlement is made by:

Adelivery of the underlying securities

Bdelivery of a futures contract

Ccash

Dany of the above

Correct : C

cash. Index options are settled by payment of cash.

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Adelivery of the underlying securities

Bdelivery of a futures contract

Ccash

Dany of the above

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Question 3

Which of the following is true about option prices?

Apremiums on options for listed stocks are usually greater than on unlisted stocks

Bpremiums on options of higher-priced stocks are usually greater than on lower-priced stocks

Cpremiums on options of well-known companies are usually larger than on lesser-known companies

Dpremiums on options of volatile stocks are usually larger than on less volatile stocks

Correct : D

premiums on options of volatile stocks are usually larger than on less volatile stocks. The likelihood of exercise increases with the volatility of a stock. Therefore, a higher premium is demanded.

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Apremiums on options for listed stocks are usually greater than on unlisted stocks

Bpremiums on options of higher-priced stocks are usually greater than on lower-priced stocks

Cpremiums on options of well-known companies are usually larger than on lesser-known companies

Dpremiums on options of volatile stocks are usually larger than on less volatile stocks

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Question 4

In mid-September, Bubba sells one XYZ February 50 call at $6. It subsequently expires without being exercised.

How is the premium taxed?

ABubba's cost of the underlying stock is reduced

Bthe $600 premium is a capital gain

Cthe $600 premium constitutes ordinary income

Dthe $600 premium is rolled over into another XYZ call with the next longest expiration date

Correct : B

the $600 premium is capital gain. That's simply how the tax law works.

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ABubba's cost of the underlying stock is reduced

Bthe $600 premium is a capital gain

Cthe $600 premium constitutes ordinary income

Dthe $600 premium is rolled over into another XYZ call with the next longest expiration date

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Question 5

When a corporation issues a nonconvertible debenture, what is the effect upon its net worth?

Ait increases

Bif decreases

Cif is unchanged

Dnone of the above

Correct : C

it is unchanged. The debentures add to liabilities and to cash (an asset) received from the sale. There is no effect on net worth.

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Ait increases

Bif decreases

Cif is unchanged

Dnone of the above

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Master Finra Series-7 Exam with Reliable Practice Questions

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