Series 7 Debt & Municipal Securities Practice Questions
Debt & Municipal Securities makes up 9 of every 50 questions on a Tigertest Series 7 practice test. Here are 10 of the 36 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on FINRA's Series 7 content outline. Original questions; 50 per test, weighted like the real 125-question exam, 72% to pass.
1. A 6% bond with 10 years left is bought at 95. Its approximate yield to maturity is:
- A.6.84%
- B.6.67%
- C.6.32%
- D.6.00%
Answer: B. Approximate YTM = (annual interest + annual discount accretion) / average price = ($60 + $5) / $975 = about 6.67%. The current yield, $60 / $950, is 6.32%.
2. A bond bought at 92 is called a few years later at 103. Compared with its yield to maturity, the yield to call is:
- A.The same
- B.Equal to the coupon
- C.Lower
- D.Higher
Answer: D. A discount bond called early returns its discount, plus any call premium, over fewer years, so the yield to call exceeds the yield to maturity. For premium bonds the reverse holds.
3. A corporate bond is quoted at 102 1/4. Its dollar price per $1,000 bond is:
- A.$1,022.50
- B.$1,021.40
- C.$1,002.25
- D.$1,025.00
Answer: A. Corporate bonds are quoted in percent of par, so 102.25% x $1,000 = $1,022.50. One point is $10 and a quarter point is $2.50.
4. A Treasury note is quoted at 99.16. Its dollar price per $1,000 is:
- A.$999.16
- B.$991.00
- C.$995.00
- D.$991.60
Answer: C. Treasury notes and bonds are quoted in 32nds: 99 16/32 = 99.5% of par = $995. Reading .16 as a decimal gives $991.60.
5. Accrued interest on corporate and municipal bonds is figured using:
- A.Actual days and a 360-day year
- B.30-day months and a 365-day year
- C.30-day months and a 360-day year
- D.Actual days and a 365-day year
Answer: C. Corporate and municipal bonds use 30/360. Treasury notes and bonds use actual days over the actual days in the period.
6. An investor buys a zero-coupon corporate bond in a taxable account. Each year the investor must:
- A.Pay tax on accreted interest
- B.Deduct the discount yearly
- C.Pay tax only if sold early
- D.Pay no tax until maturity
Answer: A. The discount on a zero-coupon corporate bond accretes each year and is taxed as interest even though no cash is received, sometimes called phantom income.
7. Which Treasury security protects the holder's principal against inflation?
- A.Treasury bonds
- B.STRIPS
- C.T-bills
- D.TIPS
Answer: D. Treasury Inflation-Protected Securities adjust principal with the CPI, and the fixed coupon is paid on the adjusted principal. STRIPS are zero-coupon pieces with no inflation adjustment.
8. Which collateralized mortgage obligation tranche has the most certain repayment schedule?
- A.Targeted amortization class
- B.Planned amortization class
- C.Companion (support) tranche
- D.Z tranche (accrual bond)
Answer: B. PAC tranches are protected against both prepayment and extension risk because the companion tranches absorb changes in prepayment speed. TACs are protected only against prepayment risk.
9. Why do GNMA pass-throughs usually yield more than Treasuries of similar average life?
- A.Their larger minimum size
- B.Prepayment uncertainty
- C.Greater default risk
- D.Their state tax exemption
Answer: B. GNMA carries the same full faith and credit as Treasuries, so the extra yield pays for uncertain cash flows from prepayments. GNMA interest is taxable by states, which would raise, not lower, its yield.
10. When interest rates fall sharply, mortgage-backed securities face:
- A.Default risk
- B.Reinvestment of coupons at higher rates
- C.Extension risk
- D.Prepayment risk
Answer: D. Falling rates lead homeowners to refinance, returning principal early when it can only be reinvested at lower rates. Rising rates cause extension risk instead.
Practice all 36 debt & municipal securities questions, and the rest of the 200-question bank, in the free Series 7 training sets. Questions you miss come back until you have mastered them.
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