Free FINRA Series 7 (General Securities Representative) Investment Products and Recommendations 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 D is correct because the OCC is the issuer and guarantor of all listed options contracts in the United States. After a trade is executed on an options exchange, the OCC interposes itself between buyer and seller, becoming the counterparty to both sides. The OCC guarantees that the writer will fulfill the obligation if the option is exercised. This eliminates counterparty (credit) risk for option holders — the holder does not need to worry about the financial ability of the specific writer to perform.

Key OCC functions:
- Issues and guarantees all listed option contracts
- Acts as counterparty to every buyer and every seller
- Processes exercises and assignments
- Adjusts contract terms for corporate actions
- Maintains margin requirements for clearing members

Choice C is incorrect because the OCC does not regulate or approve option listings. The SEC regulates options markets, and individual exchanges (CBOE, NYSE Arca, etc.) decide which option series to list. The OCC's role is clearing and guaranteeing, not regulation.
Choice B is incorrect because the OCC is a clearinghouse, not an exchange. Options exchanges (such as Cboe, NASDAQ PHLX, NYSE Arca Options) match buy and sell orders. After a trade is matched on an exchange, the OCC steps in to clear and guarantee the transaction.
Choice A is incorrect because the OCC does not execute orders or act as a broker-dealer. Broker-dealers and their associated persons execute customer orders on exchanges. The OCC operates behind the scenes as the clearing and settlement entity after trades are already executed.