Series 7 products and recommendations: free Function 3 practice

Function 3 of the Series 7, "provides customers with information about investments, makes suitable recommendations, transfers assets and maintains appropriate records", carries 91 of the 125 scored questions, 73% of the exam. It covers every product a general securities representative sells, the suitability and best-interest rules for recommending them, and the taxes and economics behind them. The free drill here has 12 questions at the real pace, with every answer explained.

91
of 125 scored questions: 73%
of the exam: 12
questions in the free drill: Free
no sign-up

Last checked 13 November 2026 · Question counts from FINRA's Series 7 content outline (October 2025)

Free Function 3 drill: 12 original Series 7-style questions at the real pace (about 1 minute 44 seconds each), then every answer explained. No sign-up.

12
questions
20:44
time limit
Free
every answer explained

By the LifeScore Editorial Team · Updated 13 November 2026 · How we check facts · How this is scored

What is on Series 7 Function 3?

Products, recommendations and the knowledge behind them: equities and options, corporate, government and municipal debt, packaged products, suitability and Regulation Best Interest, taxes, economics and analysis, and the records and transfers that follow a sale.

The main topic groups in Function 3 (our summary of FINRA's outline)
Topic	What to know	Typical question
Equities	Common and preferred stock, rights and warrants, ADRs, REITs	Which preferred feature lets missed dividends accumulate?
Options	Calls and puts, strategies, breakevens, maximum gains and losses, rules	What is the breakeven on a long put? (see the options page)
Municipal securities	General obligation and revenue bonds, notes, documents, the MSRB rules, taxation	Which document describes a new municipal issue?
Corporate and government debt	Bond prices and yields, Treasuries, agencies, mortgage-backed securities and CMOs, money market instruments	Which yield is highest on a discount bond?
Packaged products	Mutual funds and ETFs, share classes and breakpoints, variable annuities, 529 plans, DPPs	Which share class suits a long holding period?
Recommendations	Suitability, Regulation Best Interest, customer profile, risks	Which product best fits this customer?
Taxes and economics	Capital gains, cost basis, tax-equivalent yield, the business cycle, monetary and fiscal policy	What taxable yield equals this municipal yield?

Because the function is so large, the exam goes deep on the topics a representative uses daily. Expect several questions each on options, on municipal bonds, on suitability and on investment companies, and a steady stream of calculations: yields, tax-equivalent yields, convertible parity, sales charges and options outcomes.

Which bond calculations are on the Series 7?

Current yield, the order of a bond's yields, prices in points and fractions, tax-equivalent yield, convertible parity and accrued interest. Each takes under two minutes once the method is automatic.

Series 7-style question 1 · Current yield
A 6% corporate bond with a $1,000 par value trades at 96. What is its current yield?
1. A5.76%
2. B6.00%
3. C6.25%
4. D6.40%
Worked answer
C: 6.25%. Current yield is the annual interest divided by the market price. The bond pays $60 a year and costs $960: 60 ÷ 960 = 6.25%.
1. Annual interest: 6% of $1,000 = $60.
2. Price: 96% of par = $960.
3. 60 ÷ 960 = 6.25%.
The trap: Multiplying the coupon by the price (5.76%). A discount bond's current yield is above its coupon, not below it.
Series 7-style question 2 · Yield order
A callable corporate bond is trading at a discount. Which of its yields is the highest?
1. AThe nominal yield
2. BThe current yield
3. CThe yield to maturity
4. DThe yield to call
Show the worked answer
D: The yield to call. For a discount bond the order is nominal, then current yield, then yield to maturity, then yield to call. The discount is earned back sooner if the bond is called, so the yield to call is highest.
1. Discount bond: the investor gets back more than was paid.
2. The sooner that gain arrives, the higher the yield.
3. A call comes before maturity, so the yield to call is highest.
The trap: Reversing the order. For a premium bond the yield to call is lowest; for a discount bond it is highest.
Series 7-style question 3 · Tax-equivalent yield
A customer in the 35% federal bracket is offered a municipal bond yielding 3.9%. What taxable yield would match it after federal tax?
1. A2.54%
2. B3.90%
3. C5.27%
4. D6.00%
Worked answer
D: 6.00%. Tax-equivalent yield is the municipal yield divided by one minus the tax rate: 3.9% ÷ 0.65 = 6.00%.
1. One minus the tax rate: 1 − 0.35 = 0.65.
2. Divide the tax-free yield by it: 3.9 ÷ 0.65.
3. = 6.00%.
The trap: Multiplying by 1.35 (5.27%). Gross up by dividing by 0.65, not by adding 35%.
Series 7-style question 4 · Convertible parity
A $1,000 par convertible bond can be converted at $40 a share. The common stock trades at $44. What is the bond's parity price?
1. A$1,000
2. B$1,040
3. C$1,100
4. D$1,760
Show the worked answer
C: $1,100. The bond converts into 1,000 ÷ 40 = 25 shares, worth 25 × $44 = $1,100. That is the price at which the bond and the shares are worth the same.
1. Conversion ratio: 1,000 ÷ 40 = 25 shares.
2. Value of the shares: 25 × 44 = $1,100.
3. Parity price of the bond: $1,100.
The trap: Multiplying the stock price by 40 ($1,760). Divide par by the conversion price first to get the number of shares.

Learn the price conventions as well as the formulas. Corporate and municipal bonds are quoted in points, where one point is $10 per $1,000 bond, and in fractions such as 1/8 ($1.25). Treasury notes and bonds are quoted in 32nds: 98-16 means 98 and 16/32, or $985 per $1,000. Accrued interest on corporate and municipal bonds uses 30-day months and a 360-day year; Treasuries use actual days.

Four Function 3 drills, then the mocks

The Pass Pack has four 12-question drills for each job function and four more full mocks with new questions.

The Series 7 Pass Pack gives you 5 full mocks on the real clock, 16 drills of 12 questions for the sections that cost you points, and a predictor that turns your mocks into the odds of reaching your target. One payment, no subscription, and your free score stays free.

Prep courses for these tests usually cost $19 to $129. The Series 7 Pass Pack is US$39 (£29), once.

See the Series 7 Pass Pack How our questions are built and checked

5
timed mocks: 16
topic drills: 1
score predictor

What do I need to know about municipal bonds for the Series 7?

How general obligation and revenue bonds are backed and analysed, the short-term notes, the documents (official statement, legal opinion, indenture), the MSRB rules, and how municipal interest is taxed.

General obligation bonds are backed by the issuer's taxing power and analysed through its tax base and debt burden; revenue bonds are repaid from the income of the project they finance, so their analysis is about the facility: coverage, feasibility and covenants such as the rate covenant. Know the order in which a net revenue pledge pays (operations and maintenance before debt service) and what a gross revenue pledge changes.

Interest on most municipal bonds is free of federal income tax and is often free of state tax for residents of the issuing state, which is why the tax-equivalent yield matters so much for customers in high brackets. Interest on private activity bonds can be a preference item for the alternative minimum tax. The MSRB writes the rules for municipal dealers, including the rule limiting political contributions to issuers' officials.

Which fund and annuity rules are on the Series 7?

Open-end and closed-end funds and ETFs, share classes, breakpoints, letters of intent and rights of accumulation, net asset value and sales charges, and how variable annuities work and are taxed.

Class A shares carry a front-end sales charge that falls at breakpoints; a letter of intent lets a customer get a breakpoint by promising to invest enough within 13 months, and rights of accumulation count what the customer already holds. Class C shares usually have a level annual 12b-1 fee and suit shorter holding periods. Selling just below a breakpoint without telling the customer is a classic violation (breakpoint selling).

For a variable annuity, know the accumulation and annuity phases, accumulation and annuity units, the assumed interest rate, the payout options, and the tax rule that earnings are taxed as ordinary income when withdrawn, with a 10% additional tax on most withdrawals before age 59½.

How does the Series 7 test recommendations?

Through scenarios: a customer's age, income, tax bracket, objectives, time horizon and risk tolerance, and four products, only one of which fits. Regulation Best Interest and FINRA's suitability rule decide the answer.

Series 7-style question 5 · Regulation Best Interest
Under Regulation Best Interest, what must a broker-dealer do when it recommends a security to a retail customer?
1. ARecommend the lowest-cost product available
2. BAct in the customer's best interest at the time of the recommendation, without putting its own interest first
3. CGet the customer's written approval before every recommendation
4. DRegister the representative as an investment adviser
Worked answer
B: Act in the customer's best interest at the time of the recommendation, without putting its own interest first. Regulation Best Interest requires a broker-dealer to act in the retail customer's best interest when it makes the recommendation, through its disclosure, care, conflict of interest and compliance obligations. Cost matters, but the rule does not require the cheapest product.
1. Reg BI applies to recommendations to retail customers.
2. The standard is the customer's best interest at the time of the recommendation.
3. Cost is one factor in the care obligation, not the rule.
The trap: Choosing "lowest cost". Cost is a factor the firm must weigh, but a more expensive product can still be in the customer's best interest.

Read the customer first and the products second. A retiree living on income needs safety of principal and income, not growth; a customer in a high bracket in a high-tax state is often pointed to in-state municipal bonds; a young investor with a long horizon can take equity risk. When two answers both seem reasonable, the right one usually matches the customer's stated objective most directly and carries no risk the customer has not accepted.

How should I study Function 3?

In order of points per hour: options first, then municipal and corporate debt with their calculations, then funds and annuities, then suitability, taxes and economics. Drill each, then check it holds in a full mock.

Options: learn the four basic positions, then covered calls, protective puts, spreads and straddles. The [options page](/series-7-options-practice-questions) has the method.
Debt: prices, yields and their order, tax-equivalent yield, then the municipal documents and revenue analysis.
Packaged products: share classes, breakpoints, NAV and sales charges, annuity phases and taxes.
Recommendations: practise reading a customer profile before looking at the options.
Run the free drill above, then a [full timed mock](/series-7-practice-test), and compare the Function 3 percentage.

Frequently asked questions

How many Series 7 questions are on products and recommendations?

91 of the 125 scored questions, 73% of the exam, according to FINRA's content outline dated October 2025.

Are options part of Function 3?

Yes. Options knowledge and strategies sit in Function 3, alongside the other products.

Is margin in Function 3?

Mostly not. In our reading of the outline, margin accounts are opened under Function 2 and margin calculations belong to Function 4, so we practise them there.

Do I need to know tax rates?

You need to apply them: tax-equivalent yields, capital gains holding periods and how each product is taxed. Questions give you the bracket.

Win the biggest part of the exam

Four Function 3 drills, four more full mocks and a study plan in the Series 7 Pass Pack, US$39, one payment.