Series 7 Bonds & Debt Securities Practice Exam

25 questions covering bond pricing, yield relationships, duration, Treasury securities, municipal bonds, CMOs, and more. Each question mirrors the style and difficulty of the actual FINRA Series 7 Top-Off Exam.

How to use this exam: Read each question carefully — answer choices are intentionally close. After submitting, you’ll see the correct answer and a plain-English explanation.

1 / 25

Which CMO tranche offers the MOST predictable cash flows?

Z-tranche

Companion tranche

PAC tranche

IO tranche

2 / 25

Which of the following is TRUE about Treasury bills?

They pay semiannual interest

They are issued at par and mature at a premium

They have maturities up to 10 years

They are issued at a discount and mature at par

3 / 25

On a callable bond trading at a discount, yield to call is:

Lower than yield to maturity

Equal to yield to maturity

Higher than yield to maturity

Same as nominal yield

4 / 25

A normal (positive) yield curve indicates:

Short-term rates exceed long-term rates

All maturities yield the same

Long-term rates exceed short-term rates

The economy is in recession

5 / 25

An inverted yield curve most commonly signals:

Potential economic slowdown or recession

Strong economic expansion ahead

Stable inflation expectations

Rising long-term credit demand

6 / 25

A debenture bondholder's claim is based on:

A first mortgage on real property

Specific equipment pledged as collateral

A sinking fund held in escrow

The general credit of the issuer only

7 / 25

Which best describes how TIPS protect investors against inflation?

The coupon rate adjusts upward with CPI

The maturity date shortens as inflation rises

They are exempt from federal income tax

The principal adjusts with CPI; the coupon rate stays fixed

8 / 25

Which risk is UNIQUE to mortgage-backed securities and NOT present in straight corporate bonds?

Credit risk

Interest rate risk

Reinvestment risk

Prepayment risk

9 / 25

A bond trades at 105 and is callable at 102. Yield to call is:

Lower than yield to maturity

Higher than yield to maturity

Same as yield to maturity

Same as nominal yield

10 / 25

A portfolio manager wants less interest rate risk. She should buy bonds with:

Shorter maturity and higher coupons

Longer maturity and higher coupons

Shorter maturity and lower coupons

Longer maturity and lower coupons

11 / 25

As the coupon rate decreases on a bond with fixed maturity, duration:

Decreases

Stays the same

Varies with credit only

Increases

12 / 25

A normal yield curve shows:

Long-term yields higher than short-term

Short-term yields higher than long-term

All maturities at the same yield

Declining yields over time

13 / 25

TIPS adjust based on:

Fed funds rate changes

LIBOR movements

10-year Treasury yield

Changes in CPI

14 / 25

A bond convertible at $25 means:

Each bond converts into 25 shares

The bond is worth 25% of par

Each $1,000 bond converts into 40 shares

Conversion happens at a stock price of $25

15 / 25

In a plain vanilla sequential-pay CMO, which tranche receives principal first?

Tranche A

PAC tranche

Z tranche

Companion tranche

16 / 25

General obligation bonds are backed by:

The full taxing authority of the issuer

Revenue from a specific municipal project

A pledge of U.S. government securities

A letter of credit from a bank

17 / 25

A moral obligation bond relies on:

Full faith and credit pledge

State legislature's non-binding commitment

Revenue from a specific project

Federal guarantees

18 / 25

Which bond has the highest duration?

10-year 5% coupon

10-year 8% coupon

10-year zero coupon

5-year zero coupon

19 / 25

Which muni document contains material financial information prior to issuance?

Trust indenture

Legal opinion

Official statement

Offering circular

20 / 25

A bond is called at 103. The investor receives:

$1,000 plus accrued interest

$1,030 plus accrued interest

$1,030 with no accrued interest

$1,000 with no accrued interest

21 / 25

Which is backed by the full faith and credit of the U.S. government?

GNMA pass-throughs

FNMA pass-throughs

FHLMC pass-throughs

SLMA bonds

22 / 25

A prerefunded municipal bond is now backed by:

The municipality's full faith and credit

Revenue from the original project

U.S. government securities held in escrow

A bank letter of credit

23 / 25

Interest rates rise sharply. A customer who owns a putable bond will most likely:

Call the bond back from the issuer

Hold it — it now trades at a premium

Put the bond back to the issuer and reinvest at higher rates

Convert the bond into common stock

24 / 25

Treasury notes have maturities of:

Up to 1 year

1 to 3 years only

10 to 30 years

2 to 10 years

25 / 25

A put feature on a bond benefits:

The bondholder

The issuer

The underwriter

Both equally

Your score is

The average score is 70%

Series 7 Bonds & Debt Securities Practice Exam

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