SIE Knowledge 3 — Questions and Answers
Question 1: Under Regulation T, the Federal Reserve sets the initial margin requirement for equity purchases at:
- 25%
- 50% (Correct answer)
- 75%
- 100%
Correct answer: 50%
Regulation T requires investors to deposit at least 50% of the purchase price when buying securities on margin.
Question 2: Which of the following best describes a 'bear market'?
- A market rising 10% or more
- A market declining 20% or more from recent highs (Correct answer)
- A market with high trading volume
- A market dominated by institutional investors
Correct answer: A market declining 20% or more from recent highs
A bear market is generally defined as a broad market decline of 20% or more from recent highs over a sustained period.
Question 3: An investor who sells borrowed shares hoping to buy them back at a lower price is engaged in:
- Hedging
- Short selling (Correct answer)
- Arbitrage
- Margin buying
Correct answer: Short selling
Short selling involves borrowing and selling shares with the intent to repurchase them at a lower price and return them to the lender for a profit.
Question 4: Which document must be provided to customers before or during the opening of an options account?
- Prospectus
- Options Disclosure Document (ODD) (Correct answer)
- Annual report
- Proxy statement
Correct answer: Options Disclosure Document (ODD)
The Options Disclosure Document (ODD), titled 'Characteristics and Risks of Standardized Options,' must be delivered to options account customers.
Question 5: Treasury Inflation-Protected Securities (TIPS) protect investors against inflation because their:
- Interest rate increases when inflation rises
- Principal adjusts with changes in the Consumer Price Index (Correct answer)
- Maturity shortens during inflationary periods
- Coupon payments are tax-free
Correct answer: Principal adjusts with changes in the Consumer Price Index
TIPS have their principal value adjusted based on changes in the CPI, so the interest paid and maturity value rise with inflation.
Question 6: Which of the following is NOT a characteristic of common stock?
- Voting rights
- Residual claim on assets
- Guaranteed dividend payments (Correct answer)
- Limited liability
Correct answer: Guaranteed dividend payments
Common stockholders are not guaranteed dividends; dividends are paid at the discretion of the board of directors.
Question 7: The 'ask' price in a securities quotation represents:
- The price the dealer will pay to buy the security
- The price the dealer will sell the security to investors (Correct answer)
- The last price at which the security traded
- The average of the highest and lowest daily price
Correct answer: The price the dealer will sell the security to investors
The ask (or offer) price is the price at which a dealer is willing to sell a security to a buyer.
SIE Knowledge 3
Under Regulation T, the Federal Reserve sets the initial margin requirement for equity purchases at: