Series 7 Government and Agency Securities Practice Questions

Correct answer: A. $985.00

Treasury notes and bonds are quoted in 32nds of a point, not decimal cents. 98:16 means 98 and 16/32, and 16/32 = 0.50, so the quote equals 98.50% of par. On a $1,000 bond, that's $985.00.

• AA. Treasury prices are quoted in 32nds of a point; 16/32 = 0.50, so 98:16 equals 98.5% of par, or $985.00.
• BB. This treats the quote as decimal cents rather than 32nds, which misreads how Treasury prices are quoted.
• CC. This miscalculates 16/32 as if it were 1.6%, producing an incorrect dollar price.
• DD. This misplaces the fractional portion of the quote, giving a price far too close to par.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Correct answer: D. Semiannually, in fixed coupon payments

Treasury notes and bonds are coupon-bearing instruments that pay fixed interest semiannually over the life of the security, distinct from T-bills (no coupon, discount only) and TIPS (principal adjusts for inflation, interest still paid semiannually but on the adjusted principal).

• AA. A lump-sum payment at maturity describes a zero-coupon instrument or T-bill, not a coupon-bearing Treasury note.
• BB. Annual, inflation-adjusted payments describe how TIPS principal is adjusted (with coupon paid on the adjusted principal), not a standard fixed-coupon Treasury note.
• CC. Monthly payments tied to short-term rates describe a floating-rate note, not a fixed 3% coupon Treasury note.
• DD. Treasury notes pay a fixed coupon rate in equal semiannual installments over the life of the security, which is standard for this instrument.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Correct answer: C. Government National Mortgage Association (GNMA/Ginnie Mae) certificates

GNMA is a wholly owned government corporation within HUD, and its pass-through certificates are the only mortgage-backed securities directly backed by the full faith and credit of the US government. FNMA and FHLMC are government-sponsored enterprises (GSEs). Privately owned (historically) and, while systemically important, their obligations carry only an implicit, not direct, government guarantee. FFCB and similar federal agency issuers are also GSE-type entities without the direct guarantee.

• AA. FNMA (Fannie Mae) is a government-sponsored enterprise, not backed by the full faith and credit of the U.S. government.
• BB. FHLMC (Freddie Mac) is also a GSE without the direct full faith and credit guarantee.
• CC. Correct. GNMA (Ginnie Mae) is a government agency, not merely a GSE, and its securities carry the direct full faith and credit backing of the U.S. government.
• DD. FFCB is a GSE whose securities are not backed by the direct full faith and credit of the U.S. government.

• Source: 12 U.S.C. § 1721, accessed October 2026

Correct answer: A. $9,898.89

Discount amount = Face x Rate x (Days/360) = $10,000 x 0.04 x (91/360) = $10,000 x 0.04 x 0.25278 = $101.11. Purchase price = Face - Discount = $10,000 - $101.11 = $9,898.89.

• AA. Discount = $10,000 × 0.04 × (91/360) ≈ $101.11, so the purchase price is $10,000 − $101.11 ≈ $9,898.89.
• BB. $9,600.00 overstates the discount as if it applied the 4% rate without properly adjusting for the 91-day holding period over a 360-day year.
• CC. $9,900.27 is close but reflects a slightly miscalculated day-count adjustment rather than the correct 91/360 fraction.
• DD. $10,101.11 incorrectly adds the discount amount to face value instead of subtracting it from face value.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Correct answer: A. The principal amount is adjusted semiannually based on changes in the CPI, and the fixed coupon rate is applied to the adjusted principal, so the dollar amount of each interest payment varies

TIPS have a fixed coupon rate set at issuance, but the underlying principal is adjusted semiannually to track changes in the Consumer Price Index (CPI). Each semiannual interest payment equals the fixed rate applied to the currently adjusted principal, so the dollar amount of interest received rises with inflation (and falls with deflation). At maturity, the investor receives the greater of the inflation-adjusted principal or the original par amount, which protects against cumulative deflation.

• AA. Correct. TIPS adjust the principal amount semiannually for CPI changes and apply the fixed coupon rate to that adjusted principal, so each semiannual interest payment varies with inflation even though the rate itself never changes.
• BB. This reverses the mechanism. With TIPS it's the principal that's adjusted for CPI, not the coupon rate, which stays fixed.
• CC. TIPS do pay periodic (semiannual) interest based on the inflation-adjusted principal. The inflation adjustment is not withheld until maturity.
• DD. The principal is adjusted semiannually, not annually, and the greater-of-par-or-adjusted-principal floor (not 'lesser of') applies specifically at maturity to protect against deflation.

• Source: TreasuryDirect: Treasury Inflation-Protected Securities (TIPS), accessed October 2026

Correct answer: A. The greater of the deflation-adjusted principal or the original par value

TIPS principal is adjusted semiannually for changes in the CPI, which can decrease principal during deflationary periods, but the U.S. Treasury guarantees that redemption at maturity will never be less than the original par value. A built-in floor that protects against deflation risk over the life of the bond.

• AA. Correct. TIPS guarantee repayment of at least the original par value at maturity, so the investor receives the greater of the deflation-adjusted principal or the original par value.
• BB. TIPS have a built-in deflation floor at maturity, so the investor does not receive a deflation-adjusted amount that falls below original par.
• CC. TIPS carry no deflation penalty; they still pay at maturity, protected by the par-value floor.
• DD. There is no doubling feature in TIPS; the deflation protection guarantees a floor equal to original par, not a bonus multiple of it.

• Source: TreasuryDirect: Treasury Inflation-Protected Securities (TIPS), accessed October 2026

Correct answer: A. The investor is guaranteed to receive the full $50,000 in notes at the yield determined by the competitive auction process

Noncompetitive bidders agree in advance to accept whatever yield/price results from the auction of competitive bids, and in exchange are guaranteed to receive the full amount they bid for, up to auction limits. They do not set a yield and do not compete for allocation risk.

• AA. Correct. A noncompetitive bidder agrees to accept whatever yield results from the competitive auction and, in exchange, is guaranteed to receive the full amount of securities bid for (up to auction limits).
• BB. Naming a desired yield with rejection risk describes a competitive bid, not a noncompetitive bid.
• CC. Noncompetitive bidders receive the yield determined by the competitive auction, not a better one, and there is no holding-period commitment tied to the award.
• DD. Noncompetitive bids within the per-auction limit are accepted in full before the remaining securities are allocated to competitive bidders, so a $50,000 bid is not cut back or left unfilled. The investor does not receive only what is left over after competitive bids.

• Source: 31 CFR § 356.20, accessed October 2026

Correct answer: D. Interest income is exempt from state and local income taxation, similar to direct Treasury obligations

Choices A, B, and C are all accurate descriptions of GNMA pass-through certificates: they carry the direct full faith and credit guarantee of the US government, distribute monthly principal-and-interest payments from the underlying mortgage pool, and expose holders to prepayment risk since falling rates or mortgagor refinancing return principal earlier than scheduled, shortening the certificate's average life and creating reinvestment risk. Choice D is false. GNMA interest is fully taxable at the federal, state, and local level, unlike direct Treasury interest, which is exempt from state and local tax.

• AA. This is true: GNMA is the only agency whose pass-throughs carry the direct backing of the full faith and credit of the U.S. government.
• BB. This is true: GNMA pass-through holders receive monthly payments combining both principal and interest.
• CC. This is true: early mortgage payoffs and refinancing expose holders to prepayment (and reinvestment) risk.
• DD. This is the false statement: unlike direct Treasury obligations, GNMA pass-through interest is fully taxable at the federal, state, and local levels.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026