Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: A tenants in common (TIC) account differs from JTWROS in that:

TIC owners must hold equal shares
Each TIC owner's share passes to their estate upon death, not to co-owners (Correct answer)
TIC accounts are only for retirement assets
TIC accounts cannot be held by more than two people

Correct answer: Each TIC owner's share passes to their estate upon death, not to co-owners

In a TIC account, each owner's interest passes to their heirs through their estate, unlike JTWROS where it passes automatically to survivors.

Question 2: An investor buys a stock for $40 and sells it after 8 months for $55. This gain is taxed as a:

Long-term capital gain
Tax-exempt gain
Ordinary income dividend
Short-term capital gain (Correct answer)

Correct answer: Short-term capital gain

Short-term capital gains apply to assets held for one year or less (here 8 months) and are taxed at ordinary income rates.

Question 3: Which self-regulatory organization (SRO) has primary responsibility for overseeing broker-dealers in the United States?

FINRA (Correct answer)
MSRB
CFTC
SIPC

Correct answer: FINRA

FINRA (Financial Industry Regulatory Authority) is the primary SRO responsible for regulating broker-dealers under SEC oversight.

Question 4: A put option gives the holder the right to:

Buy shares at the strike price
Sell shares at the strike price (Correct answer)
Receive interest on the underlying bond
Force a stock split

Correct answer: Sell shares at the strike price

A put option grants the holder the right to sell the underlying security at the strike price before expiration.

Question 5: Cumulative preferred stock means that if a dividend is missed, it must be:

Paid before any common dividends in the future (Correct answer)
Paid immediately by law
Waived permanently
Converted to common stock

Correct answer: Paid before any common dividends in the future

Cumulative preferred dividends that are skipped accumulate as arrears and must be paid before any common dividends.

Question 6: The National Best Bid and Offer (NBBO) rule requires broker-dealers to:

Route orders to the largest market maker
Execute all trades through the NYSE
Execute customer orders at the best available prices across all exchanges (Correct answer)
Charge a minimum commission on all trades

Correct answer: Execute customer orders at the best available prices across all exchanges

The NBBO rule requires broker-dealers to execute customer orders at the best available bid or offer price across all trading venues.

Question 7: When interest rates rise, what happens to the price of existing bonds?

Bond prices rise
Bond prices become volatile but trend upward
Bond prices remain unchanged
Bond prices fall (Correct answer)

Correct answer: Bond prices fall

Bond prices and interest rates have an inverse relationship; when rates rise, existing bonds with lower rates become less attractive, so their prices fall.

Question 8: What is the primary market?

Where investors trade securities among themselves
Where newly issued securities are sold for the first time (Correct answer)
The largest stock exchange by volume
Where foreign securities are listed

Correct answer: Where newly issued securities are sold for the first time

The primary market is where new securities are first issued and sold, with proceeds going to the issuing company.

Question 9: Expansionary fiscal policy is best described as:

Raising the federal funds rate to slow borrowing
Increasing taxes and reducing government spending to reduce deficits
Decreasing taxes and/or increasing government spending to stimulate the economy (Correct answer)
The Federal Reserve selling Treasury securities to reduce the money supply

Correct answer: Decreasing taxes and/or increasing government spending to stimulate the economy

Expansionary fiscal policy uses lower taxes and/or higher government spending to inject money into the economy and stimulate growth, especially during recessions.

Question 10: A letter of intent (LOI) in mutual fund investing allows a shareholder to:

Qualify for a breakpoint discount over a 13-month investment period (Correct answer)
Redeem shares before the surrender period
Defer capital gains taxes on fund distributions
Switch between fund families without sales loads

Correct answer: Qualify for a breakpoint discount over a 13-month investment period

An LOI allows investors to commit to reaching a breakpoint investment level over 13 months to receive the reduced sales load upfront.

Question 11: The bid price in a security quote represents:

The price at which a dealer will buy the security (Correct answer)
The price at which a dealer will sell the security
The average of buy and sell prices
The last traded price of the security

Correct answer: The price at which a dealer will buy the security

The bid price is the highest price a buyer (dealer) is willing to pay to purchase the security from an investor.

Question 12: A discretionary account allows a broker to:

Trade customer funds without prior approval for each transaction (Correct answer)
Open accounts for minors without custodian approval
Bypass suitability requirements
Charge higher commissions than standard accounts

Correct answer: Trade customer funds without prior approval for each transaction

Discretionary accounts grant the broker written authority to make trades without contacting the customer for each decision.

Question 13: Which of the following is a characteristic of a Real Estate Investment Trust (REIT)?

REITs must distribute at least 90% of taxable income to shareholders (Correct answer)
REITs must invest at least 75% of assets in real estate
REITs are exempt from all federal taxes
REITs cannot be traded on stock exchanges

Correct answer: REITs must distribute at least 90% of taxable income to shareholders

To qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders each year.

Question 14: What is the primary purpose of the USA PATRIOT Act requirement for customer identification programs (CIP)?

To verify customer identity and prevent money laundering (Correct answer)
To ensure customers meet accredited investor standards
To prevent tax evasion on investment gains
To prevent market manipulation

Correct answer: To verify customer identity and prevent money laundering

CIP requirements under the PATRIOT Act require firms to verify customer identity to combat money laundering and terrorist financing.

Question 15: Under the Securities Act of 1933, the registration statement filed with the SEC for a new securities offering includes:

A prospectus disclosing material information about the offering (Correct answer)
The issuer's trading history for the past 10 years
Insider trading records of all executives
A guarantee of the offering price by underwriters

Correct answer: A prospectus disclosing material information about the offering

The registration statement includes a prospectus that provides material disclosures to help investors make informed decisions.

Question 16: Under FINRA's Best Execution rule, broker-dealers must:

Match any competitor's price
Execute large orders before small ones
Execute all trades on the NYSE
Seek the most favorable terms reasonably available for customer orders (Correct answer)

Correct answer: Seek the most favorable terms reasonably available for customer orders

Best execution requires broker-dealers to use reasonable diligence to find the most favorable terms for customer order execution.

Question 17: Which market is known as the secondary market for trading existing shares among investors?

Primary market
Over-the-counter market (Correct answer)
IPO market
New issue market

Correct answer: Over-the-counter market

The over-the-counter (OTC) market is a secondary market where existing securities are traded between investors.

Question 18: A limit order is an instruction to buy or sell a security:

Immediately at the best available market price
Only if trading volume exceeds a threshold
At a specific price or better (Correct answer)
Only at the closing price

Correct answer: At a specific price or better

A limit order specifies the maximum price a buyer will pay (or minimum price a seller will accept) and will only execute at that price or better.

Question 19: A call option gives the holder the right to:

Buy shares at the strike price (Correct answer)
Short-sell the underlying stock
Sell shares at the strike price
Receive dividends from the underlying stock

Correct answer: Buy shares at the strike price

A call option grants the holder the right, but not the obligation, to buy the underlying security at the strike price before expiration.

Question 20: What is the key difference between open-end and closed-end mutual funds?

Open-end funds trade on stock exchanges; closed-end do not
Open-end funds invest only in stocks; closed-end invest in bonds
Open-end funds continuously issue new shares; closed-end have a fixed number of shares (Correct answer)
Closed-end funds are only sold to institutions

Correct answer: Open-end funds continuously issue new shares; closed-end have a fixed number of shares

Open-end funds (traditional mutual funds) create and redeem shares continuously, while closed-end funds issue a fixed number of shares traded on exchanges.

Question 21: The USA PATRIOT Act requires broker-dealers to implement a Customer Identification Program (CIP) primarily to:

Increase market liquidity
Reduce trading commissions
Combat money laundering and terrorism financing (Correct answer)
Standardize account fees

Correct answer: Combat money laundering and terrorism financing

The CIP requirement of the USA PATRIOT Act mandates identity verification of customers to prevent money laundering and terrorism financing.

Question 22: Municipal bonds are issued by:

Foreign governments
State and local governments (Correct answer)
The US federal government
Federal agencies like Fannie Mae

Correct answer: State and local governments

Municipal bonds are issued by state, city, county, and other local government entities to fund public projects.

Question 23: The process by which a company first sells shares to the public is known as a(n):

Initial public offering (IPO) (Correct answer)
Private placement
Secondary offering
Rights offering

Correct answer: Initial public offering (IPO)

An IPO is when a company sells its shares to the public for the first time, transitioning from a private to a public company.

Question 24: Which of these describes an Exchange-traded fund's (ETF) drawback?

better tax efficiency compared to alternative investments, such as mutual funds
Expenses of trading versus stocks (Correct answer)
exchanged via the public market
Has to release holdings every day

Correct answer: Expenses of trading versus stocks

While Exchange-Traded Funds (ETFs) offer many advantages like diversification and often lower expense ratios than mutual funds, they do have a drawback related to trading costs. Unlike mutual funds, which are typically bought and sold once a day at their net asset value, ETFs are traded on exchanges throughout the day like individual stocks. This means that each purchase or sale of an ETF incurs trading expenses, such as commissions or bid-ask spreads, which can add up for frequent traders.

Question 25: An investor who believes a stock's price will decline would most likely take which position?

Short position (Correct answer)
Covered call
Long position
Long put

Correct answer: Short position

A short position involves selling borrowed shares with the expectation of buying them back at a lower price.

Question 26: What is a 12b-1 fee?

A penalty for early withdrawal from an annuity
An annual fee charged by mutual funds to cover marketing and distribution costs (Correct answer)
A transaction fee for buying ETF shares
A redemption fee charged when selling fund shares

Correct answer: An annual fee charged by mutual funds to cover marketing and distribution costs

A 12b-1 fee is an annual fund expense used for marketing and distribution, included in the fund's expense ratio.

Question 27: JCB Company owns 5000 shares of issued stock in addition to 1000 shares of treasury stock. The right amount of common stock is represented by which of the following?

1000
6000
4000 (Correct answer)
5000

Correct answer: 4000

The amount of common stock outstanding refers to the shares currently held by investors, which are the shares that have been issued minus any shares the company has repurchased and holds as treasury stock. In this scenario, JCB Company has 5,000 shares of issued stock and 1,000 shares of treasury stock. Therefore, the number of outstanding common shares is 5,000 - 1,000 = 4,000 shares.

Question 28: What information is required on a new account form under FINRA rules?

Only financial information verified by an accountant
Customer's name, address, tax ID, investment objectives, financial situation, and risk tolerance (Correct answer)
Only the customer's name and tax ID
References from two existing brokerage clients

Correct answer: Customer's name, address, tax ID, investment objectives, financial situation, and risk tolerance

FINRA requires firms to collect comprehensive customer information including personal details, financial profile, and investment objectives for suitability purposes.

Question 29: Which economic development would most likely cause broad stock market prices to rise across multiple sectors?

A significant increase in the national unemployment rate
A sustained increase in consumer price inflation
A reduction in interest rates by the Federal Reserve (Correct answer)
A sharp decline in corporate earnings across industries

Correct answer: A reduction in interest rates by the Federal Reserve

Declining interest rates reduce borrowing costs for businesses, increase the present value of future earnings, and make stocks more attractive relative to bonds, driving prices higher.

Question 30: What is a power of attorney (POA) in a brokerage account context?

A document allowing a minor to trade independently
A court order to freeze an account
A written authorization for a third party to act on the account owner's behalf (Correct answer)
A permission form for options trading

Correct answer: A written authorization for a third party to act on the account owner's behalf

A power of attorney authorizes a designated person to make investment decisions and transactions for another person's account.

Question 31: What is the role of a market maker?

To regulate trading activity on exchanges
To set the official closing price of securities
To provide liquidity by continuously quoting bid and ask prices (Correct answer)
To execute trades only for institutional investors

Correct answer: To provide liquidity by continuously quoting bid and ask prices

Market makers provide liquidity by posting continuous bid (buy) and ask (sell) prices, profiting from the bid-ask spread.

Question 32: What is a Uniform Gifts to Minors Act (UGMA) account?

A retirement account for minors
A college savings account with tax benefits
A trust account requiring court oversight
A custodial account holding assets for a minor, managed by an adult custodian (Correct answer)

Correct answer: A custodial account holding assets for a minor, managed by an adult custodian

A UGMA account is a custodial account where an adult manages assets on behalf of a minor until the minor reaches adulthood.

Question 33: To combat rising inflation, the Federal Reserve would most likely:

Lower the discount rate charged to member banks
Purchase government securities on the open market
Lower the reserve requirement for member banks
Sell government securities on the open market (Correct answer)

Correct answer: Sell government securities on the open market

Selling government securities withdraws money from the banking system, reducing the money supply and raising interest rates, which slows inflation.

Question 34: What must occur before a broker-dealer executes an options trade in a customer's account?

The customer must be an accredited investor
The customer must have a minimum of $100,000 in the account
Options agreement must be signed and account must be approved for options trading (Correct answer)
The trade must be approved by FINRA in advance

Correct answer: Options agreement must be signed and account must be approved for options trading

Options accounts require separate approval based on the customer's financial profile, and a signed options agreement before trading.

Question 35: Variable life insurance differs from whole life insurance primarily because:

Variable life cash value depends on investment subaccount performance (Correct answer)
Variable life requires no premiums
Variable life only covers accidental death
Variable life has no death benefit

Correct answer: Variable life cash value depends on investment subaccount performance

Variable life insurance ties the policy's cash value to investment subaccounts, so its value fluctuates with market performance.

Question 36: What is the maximum gain for a seller (writer) of a put option?

The strike price minus the premium
The full value of the underlying stock
The put premium received (Correct answer)
Unlimited

Correct answer: The put premium received

The maximum profit for a put writer is the premium collected upfront, achieved when the put expires worthless.

Question 37: FINRA would compel an investment manager to report on every activity listed below, with the exception of:

A misdemeanor DUI offense results in the arrest of a firm employee. (Correct answer)
For a misdemeanor shoplifting charge, a firm employee is taken into custody.
An employee of the company donates $2,000 to a local political campaign.
An employee of the company works for another financial institution, but they choose not to reveal this.

Correct answer: A misdemeanor DUI offense results in the arrest of a firm employee.

FINRA requires firms to report certain events to maintain regulatory oversight and protect investors. Misdemeanor charges involving theft (like shoplifting) and undisclosed outside business activities (working for another financial institution without disclosure) are typically reportable as they relate to an individual's integrity or potential conflicts of interest. While a misdemeanor DUI offense is a serious matter, a mere *arrest* for a misdemeanor DUI may not always trigger an immediate, direct reporting requirement by the firm to FINRA, unlike a formal charge or conviction for certain offenses, or violations of firm policy like undisclosed outside business activities. Personal political donations, unless tied to 'pay-to-play' rules or firm funds, are generally not reportable.

Question 38: A futures contract obligates the buyer to:

Have the option to buy at a fixed price
Sell the underlying asset immediately at market price
Pay a premium for the right to sell
Purchase the underlying asset at a specified price on a future date (Correct answer)

Correct answer: Purchase the underlying asset at a specified price on a future date

Unlike options, futures contracts create a binding obligation to buy the underlying asset at the agreed price on the delivery date.

Question 39: A churning violation occurs when a broker:

Recommends the same security to multiple customers
Excessively trades a customer's account primarily to generate commissions (Correct answer)
Trades securities at a loss to generate tax benefits
Delays execution of customer orders

Correct answer: Excessively trades a customer's account primarily to generate commissions

Churning is the unethical practice of excessive trading in a customer's account primarily to generate commissions for the broker.

Question 40: What is the difference between a broker and a dealer?

Brokers act as agents for customers; dealers trade for their own account as principals (Correct answer)
Brokers only handle government securities
Dealers are regulated by FINRA; brokers are not
Brokers trade for their own account; dealers trade for customers

Correct answer: Brokers act as agents for customers; dealers trade for their own account as principals

A broker acts as an agent executing trades on behalf of customers, while a dealer trades as a principal from its own inventory.

Question 41: Under the Bank Secrecy Act, broker-dealers must file a Currency Transaction Report (CTR) when a customer conducts a cash transaction exceeding:

$50,000
$25,000
$10,000 (Correct answer)
$5,000

Correct answer: $10,000

The Bank Secrecy Act requires a CTR for any cash transaction exceeding $10,000, and structuring transactions to avoid this threshold is illegal.

Question 42: A margin call is issued when:

The equity in a margin account falls below the maintenance margin requirement (Correct answer)
A customer exceeds the maximum position size
A stock in the account pays a dividend
A broker wants to promote additional trading

Correct answer: The equity in a margin account falls below the maintenance margin requirement

A maintenance margin call requires the customer to deposit additional funds when account equity drops below the maintenance requirement.

Question 43: SIPC (Securities Investor Protection Corporation) protects investors against:

Losses on options strategies
Broker-dealer insolvency and missing customer assets (Correct answer)
Fraud committed by the issuer of securities
Market losses from bad investments

Correct answer: Broker-dealer insolvency and missing customer assets

SIPC covers up to $500,000 (including $250,000 in cash) per customer if a member broker-dealer becomes insolvent.

Question 44: Which entity sets the pattern day trader rule requiring a minimum equity of $25,000?

FINRA (Correct answer)
The Federal Reserve Board
The Treasury Department
The SEC

Correct answer: FINRA

FINRA Rule 4210 establishes the pattern day trader requirement of maintaining at least $25,000 in equity for accounts that day-trade frequently.

Question 45: During which phase of the business cycle does unemployment typically reach its highest level?

Recovery
Peak
Trough (Correct answer)
Expansion

Correct answer: Trough

Unemployment peaks at the trough of the business cycle, the lowest point of economic activity, before the economy begins to recover.

Question 46: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

$10,000 (Correct answer)
$5,000
$25,000
$1,000

Correct answer: $10,000

Financial institutions must file a CTR for any single cash transaction or series of related transactions exceeding $10,000.

Question 47: Which bond rating is considered 'investment grade' by Moody's?

Baa3 (Correct answer)
B1
Caa1
Ba1

Correct answer: Baa3

Moody's ratings of Baa3 and above are considered investment grade, indicating adequate creditworthiness.

Question 48: Which document must be completed before a new brokerage account is opened?

New Account Form (customer profile) (Correct answer)
SIPC membership form
Options Disclosure Document
Regulation T margin agreement

Correct answer: New Account Form (customer profile)

A new account form collecting the customer's financial information, investment objectives, and risk tolerance must be completed before trading.

Question 49: Which of the following is a lagging economic indicator?

Average duration of unemployment (Correct answer)
Stock market prices
Manufacturer's new orders for consumer goods
Building permits

Correct answer: Average duration of unemployment

Average duration of unemployment is a lagging indicator because it reflects the aftermath of economic changes rather than predicting them.

Question 50: Reg BI (Regulation Best Interest) requires broker-dealers to:

Act in the best interest of retail customers when making recommendations (Correct answer)
Act only in a fiduciary capacity at all times
Eliminate all sales commissions
Recommend only no-load mutual funds

Correct answer: Act in the best interest of retail customers when making recommendations

Reg BI requires broker-dealers to place retail customers' best interests first when making investment recommendations.

Question 51: Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Liquidity risk
Systematic risk (Correct answer)
Business risk
Credit risk

Correct answer: Systematic risk

Systematic (market) risk affects all securities in the market and cannot be diversified away because it stems from broad economic factors that impact all investments.

Question 52: In the event that a consumer complaint proceeds to an arbitration hearing, the panel's decision:

may be challenged whenever one wants; there is no deadline
either party may file an appeal within 30 days of the decision.
either party may file an appeal within 25 days of the decision.
is final and enforceable against all parties; an appeal is not available. (Correct answer)

Correct answer: is final and enforceable against all parties; an appeal is not available.

FINRA arbitration decisions are generally final and binding on all parties involved. Unlike court decisions, there are extremely limited grounds for appeal, typically only in cases of fraud, arbitrator misconduct, or if the arbitrators exceeded their authority. This finality is a key characteristic of the arbitration process, designed to provide a swift and conclusive resolution to disputes.

Question 53: A tombstone advertisement for a new securities offering is permitted during the waiting period because it:

Is limited to basic factual information and directs investors to the prospectus (Correct answer)
Is filed separately with FINRA
Solicits orders from investors
Contains a full prospectus

Correct answer: Is limited to basic factual information and directs investors to the prospectus

Tombstone ads are permitted during the cooling-off period because they only provide limited factual information and direct readers to obtain a prospectus.

Question 54: An organization makes $100,000 a year, but it also spends $75,000. The corporation has 10,000 issued shares and owes $7,000 to preferred shareholders. Regarding the value of each share, which of the following assertions is true?

The par value of non-preferred stockholders' shares will be $1.80. (Correct answer)
To enhance the value of the stock held by shareholders, the corporation ought to issue an additional 10,000 shares.
Each share will be worth $2.20.
10% of the company's stock is owned by investors, whose shares are worth at least $5,000.

Correct answer: The par value of non-preferred stockholders' shares will be $1.80.

To determine the value available to non-preferred (common) shareholders, first calculate the company's net income by subtracting expenses from revenue: $100,000 - $75,000 = $25,000. Next, subtract the preferred dividends from the net income, as preferred shareholders are paid first: $25,000 - $7,000 = $18,000. Finally, divide this amount by the number of issued common shares (10,000) to find the earnings per common share, which is $18,000 / 10,000 = $1.80.

Question 55: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

Changes in the federal funds rate
Changes in the Consumer Price Index (CPI) (Correct answer)
Changes in GDP growth
Changes in corporate bond spreads

Correct answer: Changes in the Consumer Price Index (CPI)

TIPS adjust their principal value in line with CPI changes, protecting investors from inflation eroding their purchasing power.

Question 56: What is the par value of a standard corporate bond?

$100
$10,000
$500
$1,000 (Correct answer)

Correct answer: $1,000

The standard par value (face value) for a corporate bond is $1,000, which is repaid at maturity.

Question 57: Which of the following is NOT a function of the Securities Investor Protection Corporation (SIPC)?

Providing up to $500,000 in coverage per customer
Liquidating failed broker-dealers
Insuring against investment losses from market declines (Correct answer)
Returning missing customer cash and securities

Correct answer: Insuring against investment losses from market declines

SIPC protects customers when a broker-dealer fails, but it does not protect against investment losses due to market fluctuations.

Question 58: What is the 'suitability' obligation under FINRA rules?

All customers must be offered the same investment options
Brokers must guarantee a minimum return on recommendations
Firms must offer the lowest-cost products available
Recommendations must be appropriate based on the customer's financial profile and objectives (Correct answer)

Correct answer: Recommendations must be appropriate based on the customer's financial profile and objectives

FINRA's suitability rule requires that investment recommendations be appropriate for the specific customer based on their financial situation and goals.

Question 59: What is the intrinsic value of a call option with a $50 strike price when the stock is trading at $55?

$5 (Correct answer)
$55
$50
$0

Correct answer: $5

Intrinsic value for a call equals stock price minus strike price when in the money: $55 - $50 = $5.

Question 60: FINRA's Rule 3220 was created primarily to:

forbid non-monetary remuneration.
forbid presents and gratuities from one business to another. (Correct answer)
control rival corporations' securities exchanges.
control company expenditures.

Correct answer: forbid presents and gratuities from one business to another.

FINRA Rule 3220, also known as the Gifts and Gratuities Rule, was established to prevent undue influence and maintain fair business practices within the securities industry. It primarily forbids member firms or their associated persons from giving gifts or gratuities exceeding $100 per year to employees of other firms if the gift is related to the business of the recipient's employer. This rule aims to ensure that business decisions are made objectively, free from the sway of excessive gifts.

Question 61: Short selling requires investors to borrow securities because:

Short selling is only permitted on margin
SEC rules require collateral for all trades
They are selling securities they do not currently own (Correct answer)
They must hold the securities for 30 days before selling

Correct answer: They are selling securities they do not currently own

Short sellers borrow securities to sell them first, expecting to buy them back cheaper later and return the borrowed shares.

Question 62: What does it mean to write (sell) a covered call?

Selling a call option while owning the underlying shares (Correct answer)
Selling a call with no existing stock position
Writing an option on an index rather than individual stock
Buying a call as protection against a short stock position

Correct answer: Selling a call option while owning the underlying shares

A covered call involves selling a call option while owning the underlying shares, providing income in exchange for capping upside.

Question 63: A pattern day trader is defined as someone who executes how many or more day trades within five business days?

5
3
2
4 (Correct answer)

Correct answer: 4

FINRA Rule 4210 defines a pattern day trader as any customer who executes four or more day trades in five business days in a margin account.

Question 64: What is a unit investment trust (UIT)?

A hedge fund open to retail investors
A fund actively managed by a portfolio manager
A government-sponsored bond fund
An investment company with a fixed, unmanaged portfolio that terminates on a set date (Correct answer)

Correct answer: An investment company with a fixed, unmanaged portfolio that terminates on a set date

A UIT holds a fixed portfolio of securities and has a set termination date, unlike mutual funds that are actively managed.

Question 65: In addition to the official in-house continuing education programs that all FINRA member companies must set up for their registered people, FINRA has standards for registered representatives regarding CE that are known as:

Lawful-element CE
Required-component CE
Regulatory-element CE (Correct answer)
CE for Firm-Element

Correct answer: Regulatory-element CE

FINRA's continuing education (CE) requirements include two components: the Firm Element and the Regulatory Element. The Regulatory Element is mandated by FINRA and requires registered representatives to complete computer-based training within 120 days of their second registration anniversary and every three years thereafter. This ensures that representatives stay updated on regulatory changes, ethical requirements, and product knowledge relevant to their roles.

Question 66: Credit risk in the context of fixed income investing is best described as:

The risk that a bond cannot be sold quickly in the secondary market
The risk that an issuer will fail to make scheduled principal or interest payments (Correct answer)
The risk that rising interest rates will lower the market price of a bond
The risk that inflation will reduce the purchasing power of bond payments

Correct answer: The risk that an issuer will fail to make scheduled principal or interest payments

Credit risk (also called default risk) is the possibility that a bond issuer will be unable or unwilling to make the promised interest and principal payments.

Question 67: Which risk refers to the chance that a bond issuer will be unable to make interest or principal payments?

Credit (default) risk (Correct answer)
Market risk
Liquidity risk
Reinvestment risk

Correct answer: Credit (default) risk

Credit risk (also called default risk) is the risk that an issuer will fail to make timely interest or principal payments on its debt.

Question 68: In a company liquidation, which security holders are paid LAST?

Secured bondholders
Common stockholders (Correct answer)
General creditors
Preferred stockholders

Correct answer: Common stockholders

In liquidation, common stockholders have the lowest priority and are paid only after all creditors and preferred shareholders.

Question 69: The Options Disclosure Document (ODD) titled 'Characteristics and Risks of Standardized Options' must be provided to customers:

Only after the first options trade is executed
Annually thereafter
Before or at the time of opening an options account (Correct answer)
Only when the customer requests it

Correct answer: Before or at the time of opening an options account

FINRA rules require the ODD be provided to customers before or at the time they open an options trading account.

Question 70: A firm commitment underwriting arrangement means the underwriter:

Purchases all unsold shares from the issuer (Correct answer)
Guarantees the sale price to retail investors
Shares profits equally with the issuer
Sells shares only on a best-efforts basis

Correct answer: Purchases all unsold shares from the issuer

In a firm commitment underwriting, the underwriter buys all securities from the issuer and assumes the risk of selling them to the public.

Question 71: Blue chip stocks are generally characterized by:

Large, well-established companies with stable earnings (Correct answer)
Penny stock pricing under $5
High volatility and high growth potential
Small market capitalization and new companies

Correct answer: Large, well-established companies with stable earnings

Blue chip stocks represent financially stable, large-cap companies with long track records of reliable performance.

Question 72: A rights offering allows existing shareholders to:

Convert preferred shares to common shares
Purchase additional shares at a discount before new investors (Correct answer)
Receive extra dividends
Sell their shares at a premium

Correct answer: Purchase additional shares at a discount before new investors

A rights offering gives existing shareholders the privilege to buy new shares at a discount to maintain their ownership percentage.

Question 73: Rule 144 governs the sale of:

Restricted and control securities (Correct answer)
Exchange-listed options
Foreign securities in US markets
Municipal bonds in the secondary market

Correct answer: Restricted and control securities

SEC Rule 144 establishes the conditions under which restricted and control securities can be publicly resold without registration.

Question 74: A bond trading at a premium means its price is:

Equal to its yield to maturity
Above par value (Correct answer)
Equal to par value
Below par value

Correct answer: Above par value

A bond trades at a premium when its price exceeds par value, typically because its coupon rate is above current market rates.

Question 75: What is the maximum loss for a buyer of a call option?

Loss of the underlying stock's full value
Unlimited loss
The premium paid for the option (Correct answer)
The difference between market price and strike price

Correct answer: The premium paid for the option

The maximum loss for an option buyer is limited to the premium paid, since the option can expire worthless.

Question 76: Net Asset Value (NAV) per share is calculated as:

Market price minus book value per share
Total liabilities divided by shares outstanding
(Total assets minus total liabilities) divided by shares outstanding (Correct answer)
Total assets divided by total shares outstanding

Correct answer: (Total assets minus total liabilities) divided by shares outstanding

NAV per share equals the fund's total assets minus its liabilities, divided by the number of outstanding shares.

Question 77: A stop order (stop-loss order) becomes a market order when:

The security's price reaches the limit price
The security's price reaches or passes the stop price (Correct answer)
Volume exceeds the order size
The order is not filled within one trading day

Correct answer: The security's price reaches or passes the stop price

A stop order is triggered and becomes a market order when the security's price reaches the designated stop price.

Question 78: Under Regulation T, the initial margin requirement for purchasing equity securities is:

50% (Correct answer)
75%
25%
100%

Correct answer: 50%

Regulation T, set by the Federal Reserve, requires customers to deposit at least 50% of the purchase price of marginable securities.

Question 79: Which of the following correctly defines 'liquidity' in the context of securities?

The ease with which a security can be converted to cash without significant price impact (Correct answer)
The creditworthiness of a security's issuer
The volatility of a security's price
The yield earned on a security over its lifetime

Correct answer: The ease with which a security can be converted to cash without significant price impact

Liquidity refers to how quickly and easily a security can be bought or sold in the market without causing a significant change in its price.

Question 80: A customer's account statement shows a 'long' position in 100 shares of XYZ. This means the customer:

Has an option to buy 100 shares at a set price
Has borrowed and sold 100 shares expecting a price decline
Holds a futures contract on 100 shares
Owns 100 shares of XYZ (Correct answer)

Correct answer: Owns 100 shares of XYZ

A long position means the investor owns the security outright and benefits if the price increases.

Question 81: A mutual fund that trades on an exchange throughout the day like a stock is called a(n):

Closed-end fund
Open-end fund
Unit investment trust
Exchange-traded fund (ETF) (Correct answer)

Correct answer: Exchange-traded fund (ETF)

ETFs are investment funds that trade on stock exchanges throughout the trading day, unlike mutual funds which are priced once daily at NAV.

Question 82: A bond that pays no periodic interest but is issued at a discount to face value is called a:

Floating-rate bond
Zero-coupon bond (Correct answer)
Convertible bond
Callable bond

Correct answer: Zero-coupon bond

Zero-coupon bonds make no periodic interest payments and are sold at a discount, with the investor earning the difference at maturity.

Question 83: A joint tenancy with right of survivorship (JTWROS) account means:

Each owner can only access their proportional share
The account is subject to probate upon any owner's death
Owners can designate different beneficiaries for their share
Upon one owner's death, their share passes to the surviving owner(s) (Correct answer)

Correct answer: Upon one owner's death, their share passes to the surviving owner(s)

In a JTWROS account, when one owner dies, ownership automatically passes to the surviving account holder(s) outside of probate.

Question 84: Which type of stock gives shareholders priority over common stockholders when dividends are distributed?

Warrants
Preferred stock (Correct answer)
Common stock
Convertible bonds

Correct answer: Preferred stock

Preferred stockholders receive dividends before common stockholders and have priority in liquidation.

Question 85: An Exchange-Traded Fund (ETF) differs from a mutual fund primarily because:

ETFs trade on exchanges throughout the day like stocks (Correct answer)
ETFs cannot hold stocks
ETFs are only available to institutional investors
ETFs actively manage their portfolios

Correct answer: ETFs trade on exchanges throughout the day like stocks

ETFs trade on exchanges continuously throughout the trading day at market prices, unlike mutual funds priced once at end of day.

Securities Industry Essentials (SIE) Exam

The FINRA Securities Industry Essentials (SIE) exam assesses basic knowledge of the securities industry, including types of products and their risks, the structure of the securities industry markets, and regulatory agencies and their functions. It is a corequisite for most FINRA representative-level qualification exams.

Questions

105 min

Time Limit

70%

To Pass

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