FINRA Securities Industry Essentials 3 — Questions and Answers
Question 1: An investor who sells a call option they do not own the underlying shares for is engaging in:
- Covered call writing
- Naked call writing (Correct answer)
- Protective put strategy
- Cash-secured put writing
Correct answer: Naked call writing
Writing a call without owning the underlying shares is a naked (uncovered) call, which carries theoretically unlimited risk.
Question 2: Under the Investment Company Act of 1940, a mutual fund is required to redeem shares:
- Within 7 days of a redemption request (Correct answer)
- On the next business day after the request
- At the end of the quarter in which the request is made
- Only on dates specified in the fund prospectus
Correct answer: Within 7 days of a redemption request
Open-end investment companies (mutual funds) must stand ready to redeem shares within seven calendar days of receiving a redemption request.
Question 3: Which of the following is a characteristic of a negotiable certificate of deposit (CD)?
- It cannot be sold prior to maturity without penalty
- It is issued in large denominations and can be traded in the secondary market (Correct answer)
- It is backed by SIPC up to $500,000
- It pays a variable interest rate adjusted monthly
Correct answer: It is issued in large denominations and can be traded in the secondary market
Negotiable CDs are issued typically in denominations of $100,000 or more and can be sold in the secondary market before maturity.
Question 4: What does the term 'ex-dividend date' mean for a stock?
- The date the dividend is paid to shareholders
- The first date on which a buyer of the stock will not receive the upcoming dividend (Correct answer)
- The date the board of directors declares the dividend
- The date the company records all shareholders eligible for the dividend
Correct answer: The first date on which a buyer of the stock will not receive the upcoming dividend
On or after the ex-dividend date, a purchaser of the stock is not entitled to the declared dividend; it belongs to the seller.
Question 5: Under Regulation T, the Federal Reserve sets the initial margin requirement for purchasing securities. What is the current standard initial margin requirement?
- 25%
- 50% (Correct answer)
- 75%
- 100%
Correct answer: 50%
Regulation T currently requires investors to deposit at least 50% of the purchase price of marginable securities when buying on margin.
Question 6: A Treasury Inflation-Protected Security (TIPS) adjusts which component in response to changes in the Consumer Price Index?
- The coupon rate
- The principal value (Correct answer)
- The maturity date
- The tax treatment of interest
Correct answer: The principal value
TIPS adjust the principal value up or down with CPI changes, while the coupon rate remains fixed, resulting in varying dollar interest payments.
Question 7: Which of the following describes the 'net asset value' (NAV) of a mutual fund?
- Total assets divided by the number of outstanding shares
- Total assets minus total liabilities divided by the number of outstanding shares (Correct answer)
- The fund's market price minus any sales charges
- The fund's annual dividend per share
Correct answer: Total assets minus total liabilities divided by the number of outstanding shares
NAV equals total fund assets minus total liabilities, divided by the number of outstanding shares, calculated at the close of each trading day.
FINRA Securities Industry Essentials 3
An investor who sells a call option they do not own the underlying shares for is engaging in: