Free FINRA Series 7 (General Securities Representative) Practice Questions

Choice A is correct because interest on U.S. Treasury securities is subject to federal income tax but exempt from state and local income taxes. This tax advantage is established by federal law and applies to all Treasury securities including T-bills, T-notes, T-bonds, STRIPS, and TIPS.
Choice B is incorrect because Treasury interest is not fully tax-exempt. While state and local taxes do not apply, the interest is fully taxable at the federal level.
Choice D is incorrect because this describes the opposite of the actual tax treatment. Treasury interest is exempt from state and local taxes, not from federal taxes.
Choice C is incorrect because Treasury interest is not subject to state and local income taxes. Only federal income tax applies to Treasury interest income.

Choice C is correct because zero-coupon bonds pay no periodic interest — they are purchased at a deep discount and mature at par. Since there are no coupon payments to reinvest, there is no reinvestment risk when held to maturity.

Choice D is incorrect because a 30-year Treasury bond pays semiannual coupons that must be reinvested, and the longer the maturity, the greater the cumulative reinvestment risk over the bond's life.
Choice A is incorrect because a 10-year corporate bond paying periodic coupons carries reinvestment risk on each coupon payment received during the holding period.
Choice B is incorrect because a callable municipal bond not only has reinvestment risk on its coupon payments but also has call risk — if called, the entire principal must be reinvested, likely at lower prevailing rates.

Choice B is correct because a crossed market occurs when the national best bid on one exchange exceeds the national best offer (ask) on another exchange. This creates an anomaly where a buyer is willing to pay more than a seller is asking, indicating a breakdown in normal price discovery. Regulation NMS prohibits trade-throughs and requires market centers to prevent crossed and locked markets through their quotation practices.

Choice A is incorrect because two exchanges displaying the same best bid price describes a situation where bid prices are equal, which is normal competitive quoting. A crossed market specifically requires the bid to exceed the offer across venues, not merely equal bids on different exchanges.
Choice D is incorrect because Regulation NMS does not establish maximum bid-ask spread widths for market makers. While wide spreads may indicate poor liquidity, they do not constitute a crossed market. A crossed market is defined by the relationship between the best bid and best offer across exchanges.
Choice C is incorrect because executing a customer order at a price worse than the NBBO describes a trade-through violation under Rule 611 of Regulation NMS, not a crossed market. While both are prohibited under Reg NMS, they are distinct concepts. A crossed market is a quoting anomaly, while a trade-through is an execution violation.