SIE Knowledge 5 — Questions and Answers
Question 1: Which of the following correctly defines 'liquidity' in the context of securities?
- The yield earned on a security over its lifetime
- The ease with which a security can be converted to cash without significant price impact (Correct answer)
- The volatility of a security's price
- The creditworthiness of a security's issuer
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 2: A callable bond gives the issuer the right to:
- Convert the bond into equity shares
- Redeem the bond before its maturity date (Correct answer)
- Adjust the coupon rate based on market rates
- Extend the bond's maturity date
Correct answer: Redeem the bond before its maturity date
A callable bond allows the issuer to repurchase and retire the bond before its stated maturity, typically when interest rates decline.
Question 3: Which of the following entities protects customers of FINRA member broker-dealers if the firm fails?
- FDIC
- SEC
- SIPC (Correct answer)
- MSRB
Correct answer: SIPC
SIPC (Securities Investor Protection Corporation) protects customers of failed broker-dealers by covering up to $500,000 in securities and cash.
Question 4: 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
- Short-term capital gain (Correct answer)
- Ordinary income dividend
- Tax-exempt gain
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 5: Which term describes the difference between the bid and ask prices of a security?
- Premium
- Spread (Correct answer)
- Margin
- Discount
Correct answer: Spread
The bid-ask spread is the difference between the price a buyer will pay (bid) and the price a seller will accept (ask).
Question 6: Which of the following is considered an equity security?
- Corporate bond
- Treasury note
- Common stock (Correct answer)
- Mortgage-backed security
Correct answer: Common stock
Common stock represents ownership (equity) in a corporation, making it an equity security as opposed to a debt security.
Question 7: A customer's account statement shows a 'long' position in 100 shares of XYZ. This means the customer:
- Has borrowed and sold 100 shares expecting a price decline
- Owns 100 shares of XYZ (Correct answer)
- Has an option to buy 100 shares at a set price
- Holds a futures contract on 100 shares
Correct answer: Owns 100 shares of XYZ
A long position means the investor owns the security outright and benefits if the price increases.
SIE Knowledge 5
Which of the following correctly defines 'liquidity' in the context of securities?