Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: 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)
GDP-weighted index of global equities
Equal-weighted index of NYSE-listed stocks

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 2: Under SEC Rule 144, how long must an affiliate hold restricted securities before selling them in the public market?

30 days
2 years
6 months (Correct answer)
1 year

Correct answer: 6 months

SEC Rule 144 requires affiliates to hold restricted securities for at least six months before selling them publicly.

Question 3: Which of the following describes the risk of losing money on an investment as a result of changes in the economy?

Risk of interest rates
Risk to equity
Risk of currency fluctuations
Risk of the market (Correct answer)

Correct answer: Risk of the market

The risk of losing money on an investment as a result of changes in the overall economy is known as market risk, also referred to as systematic risk. This type of risk affects all investments in the market to some degree and cannot be eliminated through diversification. Factors like recessions, political instability, or changes in interest rates are examples of economic shifts that contribute to market risk.

Question 4: What is a 'naked' (uncovered) call option?

Selling a call without owning the underlying stock (Correct answer)
A call option with no time value
Buying a call with no hedge
A call on a stock that pays no dividend

Correct answer: Selling a call without owning the underlying stock

A naked call is written (sold) without owning the underlying shares, creating theoretically unlimited risk if the stock rises sharply.

Question 5: Which of the following best describes the ex-dividend date?

The date the board declares the dividend
The date the shareholder record list is finalized
The date the dividend is paid to shareholders
The first date a buyer of stock is NOT entitled to the declared dividend (Correct answer)

Correct answer: The first date a buyer of stock is NOT entitled to the declared dividend

Purchasing stock on or after the ex-dividend date means the buyer will not receive the upcoming dividend.

Question 6: Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Business risk
Systematic risk (Correct answer)
Credit risk
Liquidity 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 7: Which of the following is considered an equity security?

Corporate bond
Common stock (Correct answer)
Mortgage-backed security
Treasury note

Correct answer: Common stock

Common stock represents ownership (equity) in a corporation, making it an equity security as opposed to a debt security.

Question 8: Regular-way settlement for most equity securities occurs:

1 business day after the trade (T+1) (Correct answer)
2 business days after the trade (T+2)
3 business days after the trade (T+3)
Same day as the trade

Correct answer: 1 business day after the trade (T+1)

Following the SEC's 2024 transition to T+1 settlement, most equity securities must settle one business day after the trade date.

Question 9: A pattern day trader is defined as someone who executes how many or more day trades within five business days?

2
4 (Correct answer)
5
3

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

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

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 11: What is the accumulation phase of an annuity?

The period during which surrender charges apply only
The period during which premiums are paid and the account value grows (Correct answer)
The period during which the annuity makes payments to the annuitant
The period after the annuitant's death when beneficiaries receive payments

Correct answer: The period during which premiums are paid and the account value grows

The accumulation phase is when the investor contributes money and the annuity value grows before distributions begin.

Question 12: Municipal bonds are issued by:

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

Correct answer: State and local governments

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

Question 13: During which phase of the business cycle does unemployment typically reach its highest level?

Peak
Expansion
Trough (Correct answer)
Recovery

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

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

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

Execute all trades on the NYSE
Match any competitor's price
Execute large orders before small ones
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 16: Under Regulation T, the initial margin requirement for purchasing equity securities is:

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

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 17: Diversification of a portfolio is most effective at reducing which type of risk?

Interest rate risk
Inflation risk
Systematic (market) risk
Non-systematic (unsystematic) risk (Correct answer)

Correct answer: Non-systematic (unsystematic) risk

Diversification reduces non-systematic risk — company or industry-specific risks — because losses in one holding tend to be offset by gains in others when risks are uncorrelated.

Question 18: Which phase of the business cycle is characterized by rising GDP, increasing employment, and growing consumer spending?

Recession
Expansion (Correct answer)
Contraction
Trough

Correct answer: Expansion

The expansion phase features increasing economic output, falling unemployment, and growing consumer and business spending as the economy grows.

Question 19: SIPC (Securities Investor Protection Corporation) protects investors against:

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

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

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

Correct answer: $5

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

Question 21: Which of the above scenarios demonstrates an unsystematic risk?

Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock. (Correct answer)
The COVID-19 outbreak drives down stock prices by forcing many businesses to close.
Stock values fall after a hurricane significantly affects the majority of the east coast.
Oil businesses are impacted by the war in Ukraine, which lowers the value of their shares.

Correct answer: Due to poor demand, American Airlines announced route cancellations, which dropped the value of its stock.

Unsystematic risk, also known as specific risk or diversifiable risk, is unique to a particular company or industry. It can be mitigated through diversification of investments. The scenario where American Airlines' stock value drops due to poor demand and route cancellations is an example of unsystematic risk because it specifically affects that company, rather than the entire market or a broad sector.

Question 22: The bid price in a security quote represents:

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

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

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

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 24: What is payment for order flow (PFOF)?

Fees paid by exchanges to attract listing companies
Charges for late settlement of securities
Compensation paid to broker-dealers by market makers for routing customer orders to them (Correct answer)
Commissions paid by customers for trade execution

Correct answer: Compensation paid to broker-dealers by market makers for routing customer orders to them

PFOF is a practice where market makers compensate broker-dealers for routing customer orders to them for execution.

Question 25: Which of the following is required to be disclosed in a prospectus under SEC rules?

The underwriter's internal profit margins
Names of all institutional investors
Specific investor suitability requirements
Risk factors associated with the investment (Correct answer)

Correct answer: Risk factors associated with the investment

A prospectus must disclose material risk factors so investors can make informed decisions about the securities offering.

Question 26: 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 27: A broker-dealer that only transmits customer orders to a carrying firm for execution and clearing is called a(n):

Prime broker
Market maker
Introducing broker (Correct answer)
Specialist firm

Correct answer: Introducing broker

An introducing broker handles customer accounts and order entry but relies on a carrying (clearing) firm for custody of assets and trade settlement.

Question 28: Breakpoints in mutual fund investing refer to:

Investment thresholds that qualify investors for reduced sales loads on Class A shares (Correct answer)
The point at which a fund closes to new investors
NAV levels that trigger automatic rebalancing
Fees charged when switching between funds in a family

Correct answer: Investment thresholds that qualify investors for reduced sales loads on Class A shares

Breakpoints are investment levels at which Class A mutual fund sales loads are reduced as a reward for larger investments.

Question 29: What is the 'spread' in a securities quote?

The difference between par value and market price
The difference between the bid and ask prices (Correct answer)
The commission charged by the broker
The difference between the stock's 52-week high and low

Correct answer: The difference between the bid and ask prices

The spread is the difference between the ask price (what dealers sell at) and the bid price (what dealers buy at), representing the dealer's compensation.

Question 30: A general obligation (GO) municipal bond is backed by:

The issuing government's taxing power (Correct answer)
Federal government guarantees
Collateralized mortgage pools
Revenue from a specific project

Correct answer: The issuing government's taxing power

GO bonds are backed by the full taxing authority of the issuing municipality, making them generally less risky than revenue bonds.

Question 31: What must occur before a broker-dealer executes an options trade in a customer's account?

The trade must be approved by FINRA in advance
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 customer must be an accredited investor

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 32: According to FINRA regulations, a private securities transaction is one in which:

An agent transacts on their own behalf.
A private placement investment is made by any employee of the company, as specified by Regulation D of the Securities Act of 1933.
For the account of a customer, an agent trades.
Outside of their regular work hours, an agent transacts in securities on behalf of their member firm. (Correct answer)

Correct answer: Outside of their regular work hours, an agent transacts in securities on behalf of their member firm.

A private securities transaction, often referred to as 'selling away,' occurs when an associated person engages in a securities transaction outside the regular course or scope of their employment with their member firm. This activity requires the firm's written permission and supervision, especially if the associated person receives compensation. While the phrasing 'on behalf of their member firm' in option B is slightly contradictory to the 'private' nature, the core element of transacting 'outside of their regular work hours' points to activity not under the firm's direct oversight, which is the defining characteristic of such a transaction.

Question 33: What are American Depositary Receipts (ADRs)?

Municipal bond certificates
Foreign company shares traded on US exchanges in US dollars (Correct answer)
US government bonds traded abroad
Receipts for domestic warehouse inventory

Correct answer: Foreign company shares traded on US exchanges in US dollars

ADRs represent shares of foreign companies and are traded on US exchanges denominated in US dollars.

Question 34: A discretionary account allows a broker to:

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

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 35: 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 36: A tenants in common (TIC) account differs from JTWROS in that:

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

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 37: An investor who sells borrowed shares hoping to buy them back at a lower price is engaged in:

Arbitrage
Margin buying
Hedging
Short selling (Correct answer)

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 38: What is the 'suitability' obligation under FINRA rules?

Brokers must guarantee a minimum return on recommendations
Firms must offer the lowest-cost products available
All customers must be offered the same investment options
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 39: What is the key difference between open-end and closed-end mutual funds?

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

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

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

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 41: Candidates must include information regarding their OBAs (also known as: ) on the Form U4.

official commercial operations
Outside of the realm of business (Correct answer)
Other commercial endeavors
accounts outside of brokerages

Correct answer: Outside of the realm of business

OBAs stand for 'Outside Business Activities.' FINRA requires registered representatives to disclose all outside business activities on their Form U4, which is the Uniform Application for Securities Industry Registration or Transfer. This disclosure allows the member firm to assess potential conflicts of interest, ensure compliance with regulations, and supervise the representative's activities adequately.

Question 42: Rule 144 governs the sale of:

Exchange-listed options
Foreign securities in US markets
Restricted and control securities (Correct answer)
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 43: What is the primary purpose of the USA PATRIOT Act requirement for customer identification programs (CIP)?

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

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 44: A churning violation occurs when a broker:

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

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 45: What is the term for a corporate action that increases the number of outstanding shares while reducing the price per share proportionally?

Reverse stock split
Forward stock split (Correct answer)
Rights offering
Stock dividend

Correct answer: Forward stock split

A forward stock split increases share count and lowers the price per share, keeping total market value the same.

Question 46: Which answer accurately sums up a margin account?

Traders need to understand the minimum balance requirements.
Brokers lend money to investors, who use it for trading. (Correct answer)
Brokerage costs are not payable by investors.
Investors make their stock portfolios more resilient.

Correct answer: Brokers lend money to investors, who use it for trading.

A margin account is a brokerage account that allows an investor to borrow money from their broker-dealer to purchase securities. The securities bought with the borrowed funds serve as collateral for the loan. This leverage can amplify returns but also increases potential losses, as investors are still responsible for repaying the loan plus interest, regardless of the investment's performance.

Question 47: Purchasing power risk (inflation risk) in investing refers to:

The risk of being unable to sell an investment quickly at a fair price
The risk that interest rates will change and affect bond prices
The risk that rising prices will erode the real value of investment returns over time (Correct answer)
The risk that a bond issuer will default on payments

Correct answer: The risk that rising prices will erode the real value of investment returns over time

Purchasing power risk is the danger that inflation will outpace investment returns, reducing the real (inflation-adjusted) value of the money earned or received.

Question 48: The 'cooling off' period after filing a registration statement with the SEC typically lasts at least:

20 days (Correct answer)
30 days
10 days
60 days

Correct answer: 20 days

The SEC has a 20-day review period after an S-1 registration statement is filed before securities can be sold to the public.

Question 49: A firm commitment underwriting arrangement means the underwriter:

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

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

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

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 mutual fund share class typically has a front-end sales load?

Class I shares
Class C shares
Class B shares
Class A shares (Correct answer)

Correct answer: Class A shares

Class A shares typically charge a front-end sales load, deducted from the initial investment at the time of purchase.

Question 52: What is a Uniform Gifts to Minors Act (UGMA) account?

A college savings account with tax benefits
A retirement account for minors
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 53: Which of the following is a lagging economic indicator?

Manufacturer's new orders for consumer goods
Average duration of unemployment (Correct answer)
Stock market prices
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 54: A variable annuity differs from a fixed annuity in that:

Variable annuities are not regulated by the SEC
Variable annuities have no surrender charges
Variable annuity returns depend on the performance of underlying investment subaccounts (Correct answer)
Variable annuities guarantee a fixed monthly payment

Correct answer: Variable annuity returns depend on the performance of underlying investment subaccounts

Variable annuity payouts fluctuate based on the performance of selected subaccounts, while fixed annuities pay a guaranteed amount.

Question 55: 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
4000 (Correct answer)
5000
6000

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 56: A put option gives the holder the right to:

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

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 57: A margin call is issued when:

The equity in a margin account falls below the maintenance margin requirement (Correct answer)
A stock in the account pays a dividend
A customer exceeds the maximum position size
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 58: The Securities Act of 1933 primarily regulates:

Investment adviser conduct
The issuance of new securities in the primary market (Correct answer)
Secondary market trading and exchanges
Commodity futures trading

Correct answer: The issuance of new securities in the primary market

The Securities Act of 1933 focuses on new securities offerings, requiring registration and disclosure of material information.

Question 59: When interest rates rise, what happens to the price of existing bonds?

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

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 60: Open market operations conducted by the Federal Reserve refer to:

Setting margin requirements for securities purchases
Issuing new U.S. Treasury bonds to fund the federal deficit
The Fed's purchase or sale of U.S. government securities to influence the money supply (Correct answer)
Regulating the hours that stock exchanges are open

Correct answer: The Fed's purchase or sale of U.S. government securities to influence the money supply

Open market operations involve the Federal Reserve buying or selling U.S. government securities to expand or contract the money supply and influence interest rates.

Question 61: Options traded on US exchanges are standardized and guaranteed by which entity?

FINRA
Options Clearing Corporation (OCC) (Correct answer)
The SEC
SIPC

Correct answer: Options Clearing Corporation (OCC)

The Options Clearing Corporation (OCC) acts as the issuer and guarantor for all US listed options contracts.

Question 62: A futures contract obligates the buyer to:

Pay a premium for the right to sell
Sell the underlying asset immediately at market price
Have the option to buy at a fixed price
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 63: When interest rates rise, what happens to existing bond prices?

Bond yields fall
Bond prices rise
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 bond prices fall.

Question 64: Which type of order guarantees execution but not price?

Market order (Correct answer)
Stop-limit order
Stop order
Limit order

Correct answer: Market order

A market order guarantees execution at the best available current price but does not guarantee a specific price.

Question 65: Which of the following is considered a leading economic indicator?

Building permits issued (Correct answer)
Average duration of unemployment
Prime interest rate
Outstanding commercial loans

Correct answer: Building permits issued

Building permits are a leading indicator because they signal future construction activity and economic expansion before it occurs.

Question 66: The following are some of the main reasons why investors engage in passive ETF investing:

have longer-term gains and save more money than you would from alternative trading methods' higher fees. (Correct answer)
have greater returns over an extended period of time, notwithstanding additional costs associated with alternative trading methods.
make quick profits by trading aggressively and then holding onto stocks for a while till their value rises and then trading them.
make quick profits on large purchases of shares made at a discount to the S&P Index.

Correct answer: have longer-term gains and save more money than you would from alternative trading methods' higher fees.

Investors engage in passive ETF investing primarily to achieve longer-term gains by tracking a market index rather than actively trying to outperform it. This strategy typically involves lower trading activity and, consequently, lower management fees compared to actively managed funds or frequent trading methods. The goal is to benefit from market growth over time while minimizing costs, which often leads to better net returns in the long run.

Question 67: Convertible preferred stock can be exchanged for:

Cash at redemption value
Government securities
Corporate bonds at par
A fixed number of common shares (Correct answer)

Correct answer: A fixed number of common shares

Convertible preferred stock can be exchanged for a predetermined number of common shares at the holder's option.

Question 68: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

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

Correct answer: $10,000

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

Question 69: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

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

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 70: What is the primary market?

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

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 71: Which of the following factors largely affects an option contract's price?

The price at which strikes
The date of the strike
If it's a put or a call
The linked stock's share price (Correct answer)

Correct answer: The linked stock's share price

The price of an option contract is primarily determined by the price of its underlying asset, which is typically a stock. As the underlying stock's price moves, the intrinsic value of the option changes, directly impacting its premium. Other factors like time to expiration, volatility, and interest rates also play a role, but the linked stock's share price is the most fundamental determinant.

Question 72: Which of the following is a characteristic of exchange-traded options?

Custom expiration dates negotiated between parties
Traded only in the over-the-counter market
No margin requirements
Standardized contracts with set strike prices and expirations (Correct answer)

Correct answer: Standardized contracts with set strike prices and expirations

Exchange-listed options are standardized contracts with fixed strike prices, expiration dates, and contract sizes.

Question 73: In a company liquidation, which security holders are paid LAST?

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

Correct answer: Common stockholders

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

Question 74: When a broker-dealer acts as a dealer (principal) in a transaction, it:

Must disclose the trade to a stock exchange
Buys or sells securities from its own inventory and charges a markup or markdown (Correct answer)
Acts as an agent and charges a commission
Is prohibited from profiting on the transaction

Correct answer: Buys or sells securities from its own inventory and charges a markup or markdown

When acting as a principal, a dealer buys or sells from its own inventory and profits through a markup (on sales) or markdown (on purchases) rather than a commission.

Question 75: An Initial Public Offering (IPO) occurs when a company:

Buys back shares from the public
Lists its shares on a stock exchange for the first time (Correct answer)
Issues bonds to the public for the first time
Declares its first dividend

Correct answer: Lists its shares on a stock exchange for the first time

An IPO is when a private company first offers its shares to the public on a stock exchange.

Question 76: Which document must be provided to customers before or during the opening of an options account?

Proxy statement
Options Disclosure Document (ODD) (Correct answer)
Annual report
Prospectus

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

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

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 78: The Securities Act of 1933 primarily regulates:

Exchange operations
The issuance of new securities (Correct answer)
Secondary market trading
Broker-dealer conduct

Correct answer: The issuance of new securities

The Securities Act of 1933 governs the primary market by requiring full disclosure in connection with the offer and sale of new securities.

Question 79: Delta in options pricing measures:

The implied volatility of the underlying stock
The sensitivity of the option to interest rate changes
The rate of change in option price relative to time decay
The rate of change in option price per $1 change in the underlying asset (Correct answer)

Correct answer: The rate of change in option price per $1 change in the underlying asset

Delta measures how much an option's price changes for every $1 move in the underlying security's price.

Question 80: An investor buys a stock for $40 and sells it after 8 months for $55. This gain is taxed as a:

Tax-exempt gain
Short-term capital gain (Correct answer)
Ordinary income dividend
Long-term capital 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 81: Which of the following is NOT a characteristic of common stock?

Residual claim on assets
Guaranteed dividend payments (Correct answer)
Limited liability
Voting rights

Correct answer: Guaranteed dividend payments

Common stockholders are not guaranteed dividends; dividends are paid at the discretion of the board of directors.

Question 82: A joint tenancy with right of survivorship (JTWROS) account means:

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

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 83: Callable preferred stock allows the issuer to:

Convert shares into bonds
Suspend dividends indefinitely
Redeem the shares at a specified price (Correct answer)
Force conversion into common stock at any time

Correct answer: Redeem the shares at a specified price

Callable preferred stock can be redeemed (bought back) by the issuer at a predetermined call price.

Question 84: Which self-regulatory organization (SRO) has primary responsibility for overseeing broker-dealers in the United States?

FINRA (Correct answer)
CFTC
SIPC
MSRB

Correct answer: FINRA

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

Question 85: 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.

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

Checking for saved progress...

Exam Rules

You can skip questions and return to them later
Flag questions for review before submitting
No feedback shown until you submit the entire exam
Unanswered questions count as wrong — answer everything
10 pretest questions are mixed in and don't affect your score
Timer auto-submits when time runs out
Your progress is auto-saved every 30 seconds