SIE Knowledge 4 — Questions and Answers
Question 1: A corporation issues new shares directly to existing shareholders in proportion to their current holdings through a:
- Secondary offering
- Private placement
- Rights offering (Correct answer)
- Stock split
Correct answer: Rights offering
A rights offering gives existing shareholders the right to purchase additional shares at a set price, usually below market, proportional to their current holdings.
Question 2: Which of the following describes the primary market?
- Where investors trade securities among themselves
- Where new securities are first issued to the public (Correct answer)
- Where derivatives contracts are created
- Where securities are listed on exchanges
Correct answer: Where new securities are first issued to the public
The primary market is where issuers sell new securities directly to investors, with proceeds going to the issuer.
Question 3: An investment company that raises a fixed amount of capital through a one-time IPO and whose shares then trade on an exchange is a:
- Open-end mutual fund
- Closed-end fund (Correct answer)
- Exchange-traded fund
- Variable annuity
Correct answer: Closed-end fund
Closed-end funds issue a fixed number of shares through an IPO, after which the shares trade on secondary markets like stocks.
Question 4: Which risk refers to the chance that a bond issuer will be unable to make interest or principal payments?
- Market risk
- Liquidity risk
- Credit (default) risk (Correct answer)
- 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 5: Which of the following is a characteristic of preferred stock compared to common stock?
- Greater voting rights
- Priority dividend payments (Correct answer)
- Higher potential capital appreciation
- Greater liquidation risk
Correct answer: Priority dividend payments
Preferred stockholders receive dividends before common stockholders and have priority over common stockholders in liquidation.
Question 6: The Dow Jones Industrial Average (DJIA) is best described as a:
- Broad market index of 500 stocks weighted by market cap
- Price-weighted index of 30 large U.S. companies (Correct answer)
- Equal-weighted index of NYSE-listed stocks
- GDP-weighted index of global equities
Correct answer: Price-weighted index of 30 large U.S. companies
The DJIA is a price-weighted index that tracks 30 large, publicly traded U.S. companies and is one of the oldest and most-cited market benchmarks.
Question 7: Under the Securities Act of 1933, the registration statement filed with the SEC for a new securities offering includes:
- The issuer's trading history for the past 10 years
- A prospectus disclosing material information about the offering (Correct answer)
- 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.
SIE Knowledge 4
A corporation issues new shares directly to existing shareholders in proportion to their current holdings through a: