Practice Test 2 · 75 Questions

SIE Practice Test 2

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SIE Practice Test 2 Questions and Answers

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Capital MarketsQuestion 1
An issuer in the securities industry is defined as:
1. Option A: A firm that buys securities from investors in the secondary market
2. Option B: An entity that creates and sells its own securities to raise capital
  Correct answer
3. Option C: A regulatory body that approves new securities for trading
4. Option D: A broker that facilitates trades between buyers and sellers
Explanation
An issuer is any entity (such as a corporation, municipality, or government) that develops, registers, and sells securities to raise capital. When a company conducts an IPO, it is acting as the issuer of those shares. The SEC does not approve securities; it requires disclosure. Brokers facilitate trades as agents.
Capital MarketsQuestion 2
A broker-dealer that acts in a principal capacity on a trade is:
1. Option A: Executing the trade on behalf of a customer and charging a commission
2. Option B: Buying or selling securities from its own inventory and charging a markup or markdown
  Correct answer
3. Option C: Providing investment advice for a percentage-based fee
4. Option D: Acting as an intermediary between two institutional investors
Explanation
When a broker-dealer acts as a principal (dealer), it trades from its own inventory, buying securities from or selling securities to customers. Compensation is in the form of a markup (on sales to customers) or markdown (on purchases from customers). In contrast, when acting as an agent (broker), the firm matches buyers and sellers and charges a commission.
Capital MarketsQuestion 3
Which of the following statements about SIPC coverage is TRUE?
1. Option A: SIPC protects investors against losses in the market value of their securities
2. Option B: SIPC coverage includes commodities futures contracts
3. Option C: SIPC returns customers' securities and cash when a broker-dealer is liquidated
  Correct answer
4. Option D: SIPC coverage limits are $500,000 for cash and $250,000 for securities
Explanation
SIPC's role is to return customers' securities and cash held at a failed broker-dealer, not to protect against market losses. Coverage is up to $500,000 total per customer, with a $250,000 sublimit on cash (not the reverse as option D states). SIPC does not cover commodities futures, fixed annuities, or investment contracts not registered with the SEC.
Capital MarketsQuestion 4
The U.S. Treasury Department is directly responsible for:
1. Option A: Regulating broker-dealers and investment advisers
2. Option B: Issuing government securities and collecting federal taxes through the IRS
  Correct answer
3. Option C: Setting initial margin requirements under Regulation T
4. Option D: Clearing and settling equity transactions
Explanation
The U.S. Treasury Department is responsible for managing federal finances, including issuing Treasury securities (bills, notes, bonds) to fund government operations and overseeing the IRS for federal tax collection. The SEC regulates broker-dealers and advisers. The Federal Reserve sets margin requirements. The DTCC clears and settles transactions.
Capital MarketsQuestion 5
An investment adviser is distinguished from a broker-dealer primarily because an investment adviser:
1. Option A: Provides advice about securities for compensation
  Correct answer
2. Option B: Executes trades on an exchange floor
3. Option C: Makes markets in OTC securities
4. Option D: Underwrites new issues of securities
Explanation
Under the Investment Advisers Act of 1940, an investment adviser is any person or firm that, for compensation, engages in the business of advising others about the value of securities or the advisability of investing in securities. Broker-dealers execute trades and may underwrite new issues. Market makers provide liquidity in OTC securities.
Capital MarketsQuestion 6
Which of the following entities has the authority to enforce MSRB rules against broker-dealers that trade municipal securities?
1. Option A: The MSRB itself
2. Option B: FINRA
  Correct answer
3. Option C: The Federal Reserve
4. Option D: NASAA
Explanation
The MSRB writes rules but has no enforcement authority. FINRA enforces MSRB rules for broker-dealers, while banking regulators (such as the OCC, Federal Reserve, and FDIC) enforce MSRB rules for banks that deal in municipal securities. NASAA represents state regulators but does not enforce MSRB rules directly.
Capital MarketsQuestion 7
The FDIC provides insurance coverage for which of the following?
1. Option A: Brokerage accounts at FINRA member firms
2. Option B: Municipal bond portfolios held by banks
3. Option C: Deposit accounts at member banks up to $250,000 per depositor
  Correct answer
4. Option D: Money market mutual fund shares held at a bank
Explanation
The FDIC insures deposit accounts (checking, savings, CDs, money market deposit accounts) at member banks up to $250,000 per depositor, per insured bank, per ownership category. FDIC does not cover investment products such as stocks, bonds, mutual funds, or money market mutual funds, even if purchased at an FDIC-insured bank.
Regulatory FrameworkQuestion 8
A registered representative at a FINRA member firm discovers a colleague engaging in insider trading. Under FINRA rules, the representative should:
1. Option A: Ignore it since it is not their responsibility
2. Option B: Report the activity to compliance or a supervisor
  Correct answer
3. Option C: Confront the colleague directly and demand they stop
4. Option D: Wait until the next compliance audit to mention it
Explanation
A registered representative who discovers suspected insider trading should promptly escalate it to compliance or a supervisor under the firm's written supervisory procedures (WSPs). The WSPs govern how the firm handles the report.
Capital MarketsQuestion 9
Which of the following is TRUE regarding the SEC's role in approving securities?
1. Option A: The SEC must approve all securities before they can be sold to the public
2. Option B: The SEC reviews registration statements for full and fair disclosure but does not approve or disapprove securities
  Correct answer
3. Option C: The SEC only reviews municipal securities offerings
4. Option D: The SEC delegates all approval authority to FINRA
Explanation
The SEC does not approve or disapprove securities, nor does it judge the merit of an investment. The SEC's role under the Securities Act of 1933 is to ensure that issuers provide full and fair disclosure of material information so investors can make informed decisions. A common misconception is that SEC registration means the SEC has endorsed the security.
Capital MarketsQuestion 10
An underwriter in the securities industry primarily:
1. Option A: Regulates the secondary market for securities
2. Option B: Helps issuers bring new securities to market and distribute them to investors
  Correct answer
3. Option C: Provides custody services for institutional investors
4. Option D: Clears and settles trades on behalf of broker-dealers
Explanation
An underwriter (typically an investment bank) assists issuers in bringing new securities to market through the primary offering process. The underwriter may purchase the securities from the issuer (firm commitment) or act as agent (best efforts) in distributing the securities to investors. Underwriters also help with due diligence, pricing, and marketing.
Capital MarketsQuestion 11
A customer has $300,000 in securities and $400,000 in cash at a broker-dealer that is being liquidated. How much will SIPC cover?
1. Option A: $500,000 total ($300,000 in securities and $200,000 in cash)
  Correct answer
2. Option B: $700,000 total (full amount)
3. Option C: $550,000 total ($300,000 in securities and $250,000 in cash)
4. Option D: $250,000 total (cash limit only)
Explanation
SIPC provides maximum coverage of $500,000 per customer, with a $250,000 sublimit on cash. The securities ($300,000) are covered in full. Although the cash sublimit is $250,000, the total coverage cannot exceed $500,000, so only $200,000 of the $400,000 in cash is covered ($500,000 total cap minus $300,000 in securities = $200,000 remaining for cash). The customer receives $300,000 in securities plus $200,000 in cash, totaling $500,000. The remaining $200,000 in cash is not covered by SIPC.
Capital MarketsQuestion 12
Which of the following best describes the Cboe (Chicago Board Options Exchange)?
1. Option A: A self-regulatory organization and exchange for trading listed options
  Correct answer
2. Option B: A federal regulatory agency that oversees derivatives markets
3. Option C: A clearinghouse that guarantees settlement of equity trades
4. Option D: A trade association for options market makers
Explanation
The Cboe is a registered securities exchange and self-regulatory organization that operates a marketplace for trading listed options and other securities. As an SRO, it writes and enforces rules for its members. The OCC (not Cboe) clears and settles options trades. The SEC and CFTC are federal regulatory agencies for securities and commodities respectively.
Trading and AccountsQuestion 13
An investor owns 500 shares of a company whose board declares a reverse stock split of 1-for-5. After the split, the investor will own:
1. Option A: 2,500 shares at a lower price
2. Option B: 100 shares at a higher price
  Correct answer
3. Option C: 500 shares at the same price
4. Option D: 50 shares at a higher price
Explanation
In a 1-for-5 reverse stock split, every 5 shares are consolidated into 1 share. So 500 shares / 5 = 100 shares. The price per share increases proportionally (by 5x) to maintain the same total market value. Reverse splits are often used by companies to raise their stock price above exchange minimum listing requirements.
Products and RisksQuestion 14
A Level III ADR program differs from Level I in that Level III ADRs:
1. Option A: Trade only over-the-counter
2. Option B: Do not require SEC registration
3. Option C: Can raise new capital through a public offering on a U.S. exchange
  Correct answer
4. Option D: Are exempt from U.S. reporting requirements
Explanation
Level III ADRs are listed on a U.S. exchange and allow the foreign company to raise new capital through a public offering in the U.S. They require full SEC registration and compliance with U.S. GAAP reporting. Level I ADRs trade OTC with minimal SEC requirements and cannot raise new capital.
Products and RisksQuestion 15
Which of the following is NOT a characteristic of common stock?
1. Option A: Residual claim on assets
2. Option B: Potentially unlimited capital appreciation
3. Option C: Fixed maturity date
  Correct answer
4. Option D: Voting rights
Explanation
Common stock does not have a maturity date; it exists as long as the corporation exists. Bonds and other debt instruments have maturity dates. Common stock does have a residual claim on assets (last in liquidation), potentially unlimited appreciation, and typically carries voting rights.
Products and RisksQuestion 16
An investor owns convertible preferred stock with a par value of $100 and a conversion ratio of 4. If the common stock is trading at $30, should the investor convert?
1. Option A: Yes, because the conversion value ($120) exceeds the par value ($100)
  Correct answer
2. Option B: No, because the preferred stock pays guaranteed dividends
3. Option C: Yes, because the common stock price will always continue to rise
4. Option D: No, because conversion would result in a loss
Explanation
The conversion value equals the conversion ratio multiplied by the current market price of the common stock: 4 x $30 = $120. Since the conversion value ($120) exceeds the par value ($100), the investor would benefit from converting. However, the investor should also consider the loss of preferred dividend income and the greater volatility of common stock.
Products and RisksQuestion 17
Which of the following best describes Treasury stock?
1. Option A: Stock issued by the U.S. Treasury Department
2. Option B: Previously issued stock that has been repurchased by the issuing corporation
  Correct answer
3. Option C: Stock that has been authorized but never issued
4. Option D: Stock held in a government trust fund
Explanation
Treasury stock is previously issued stock that has been repurchased by the issuing corporation. Treasury stock does not carry voting rights, does not receive dividends, and is not included in the calculation of earnings per share. Companies may repurchase stock to reduce shares outstanding, support stock price, or use for employee stock plans.
Products and RisksQuestion 18
A company has 10 million authorized shares, 8 million issued shares, and 1 million treasury shares. How many shares are outstanding?
1. Option A: 10 million
2. Option B: 9 million
3. Option C: 8 million
4. Option D: 7 million
  Correct answer
Explanation
Outstanding shares = Issued shares - Treasury shares = 8 million - 1 million = 7 million. Outstanding shares are those held by all shareholders (including insiders), and they carry voting rights and are entitled to dividends. Treasury shares, while technically issued, are held by the company itself and do not count as outstanding.
Products and RisksQuestion 19
An investor is concerned about dilution of her ownership percentage. Which event would cause dilution?
1. Option A: A stock split
2. Option B: A stock buyback program
3. Option C: A secondary offering of new shares without preemptive rights
  Correct answer
4. Option D: Payment of a cash dividend
Explanation
Dilution occurs when new shares are issued, reducing existing shareholders' percentage ownership. A secondary offering of new shares without preemptive rights dilutes existing ownership. Stock splits do not cause dilution (everyone gets more shares proportionally), buybacks reduce shares outstanding, and cash dividends have no effect on share count.
Products and RisksQuestion 20
Which of the following preferred stock features would be MOST attractive to an investor who believes the company's common stock price will rise significantly?
1. Option A: Cumulative feature
2. Option B: Callable feature
3. Option C: Convertible feature
  Correct answer
4. Option D: Non-participating feature
Explanation
The convertible feature allows preferred stockholders to convert their preferred shares into common stock at a predetermined ratio. If the common stock price rises significantly, the conversion feature allows the investor to participate in the upside by converting to common shares worth more than the preferred stock's par value.
Products and RisksQuestion 21
When interest rates rise, which type of stock is MOST negatively affected?
1. Option A: Growth stocks
2. Option B: Preferred stocks
  Correct answer
3. Option C: Small-cap stocks
4. Option D: Cyclical stocks
Explanation
Preferred stocks behave similarly to bonds because they pay a fixed dividend. When interest rates rise, the fixed dividend becomes less attractive relative to newly available higher yields, causing preferred stock prices to fall. This interest rate sensitivity makes preferred stock particularly vulnerable to rising rate environments.
Products and RisksQuestion 22
Sponsored ADRs differ from unsponsored ADRs in that sponsored ADRs:
1. Option A: Are cheaper to purchase
2. Option B: Have the involvement and cooperation of the foreign company
  Correct answer
3. Option C: Cannot be listed on major U.S. exchanges
4. Option D: Do not require a depositary bank
Explanation
Sponsored ADRs are created with the cooperation of the foreign company, which typically pays the depositary bank's fees and provides financial information. Unsponsored ADRs are created by a depositary bank without the involvement of the foreign company and generally have fewer reporting requirements and trade only OTC.
Trading and AccountsQuestion 23
An investor owns 100 shares of XYZ at $50. XYZ declares a 5:4 stock split. After the split, the investor has:
1. Option A: 80 shares at $62.50
2. Option B: 125 shares at $40
  Correct answer
3. Option C: 125 shares at $50
4. Option D: 100 shares at $40
Explanation
In a 5:4 stock split, for every 4 shares an investor owns, they receive 5 shares. So 100 shares x (5/4) = 125 shares. The price adjusts proportionally: $50 x (4/5) = $40. The total value remains $5,000 (125 x $40 = 100 x $50). This is a forward split that increases shares and reduces the per-share price.
Products and RisksQuestion 24
Which of the following is the MOST significant risk of owning common stock compared to bonds issued by the same company?
1. Option A: Interest rate risk
2. Option B: Subordinated claim in bankruptcy
  Correct answer
3. Option C: Currency risk
4. Option D: Reinvestment risk
Explanation
The most significant risk of common stock versus bonds from the same issuer is the subordinated position in bankruptcy. Bondholders are creditors and are paid before any equity holders. Common stockholders are last in line and may receive nothing in a liquidation. While stocks can appreciate more, the downside risk in bankruptcy is greater.
Products and RisksQuestion 25
Treasury bills (T-bills) differ from Treasury notes in that T-bills:
1. Option A: Pay semiannual interest coupons
2. Option B: Are sold at a discount and do not pay periodic interest
  Correct answer
3. Option C: Have maturities of 10 to 30 years
4. Option D: Are issued only to institutional investors
Explanation
T-bills are short-term securities (maturities of 4, 8, 13, 17, 26, or 52 weeks) sold at a discount from par value and do not pay periodic interest (zero-coupon). The investor's return is the difference between the purchase price and the par value received at maturity. T-notes and T-bonds pay semiannual interest.
Products and RisksQuestion 26
Which of the following U.S. Treasury securities has a maturity of 2 to 10 years?
1. Option A: Treasury bill
2. Option B: Treasury note
  Correct answer
3. Option C: Treasury bond
4. Option D: Treasury STRIP
Explanation
Treasury notes have maturities ranging from 2 to 10 years and pay semiannual interest. Treasury bills have maturities of one year or less, and Treasury bonds have maturities of 20 to 30 years. Treasury STRIPs are zero-coupon securities created by separating the interest and principal components of Treasury notes or bonds.
Products and RisksQuestion 27
When interest rates rise, what happens to the market price of existing bonds?
1. Option A: Bond prices rise
2. Option B: Bond prices fall
  Correct answer
3. Option C: Bond prices remain unchanged
4. Option D: Bond prices become more volatile but direction is uncertain
Explanation
Bond prices and interest rates have an inverse relationship. When interest rates rise, newly issued bonds offer higher yields, making existing bonds with lower coupon rates less attractive. To compete, existing bond prices must fall until their yield to maturity matches the prevailing market rate. This is a fundamental principle of fixed-income investing.
Products and RisksQuestion 28
A bond with a par value of $1,000, a coupon rate of 5%, and a market price of $950 has a current yield of approximately:
1. Option A: 4.75%
2. Option B: 5.00%
3. Option C: 5.26%
  Correct answer
4. Option D: 5.50%
Explanation
Current yield is calculated as Annual Coupon Payment / Current Market Price. The annual coupon is $1,000 x 5% = $50. Current yield = $50 / $950 = 5.26%. When a bond trades at a discount (below par), its current yield is higher than its coupon rate because the same dollar coupon represents a higher return relative to the lower purchase price.
Products and RisksQuestion 29
A general obligation (GO) municipal bond is backed by:
1. Option A: Revenue from a specific project
2. Option B: The full faith, credit, and taxing power of the issuing municipality
  Correct answer
3. Option C: A specific lien on property owned by the issuer
4. Option D: Insurance from a private company
Explanation
General obligation bonds are backed by the full faith, credit, and taxing power of the issuing municipality. This means the issuer pledges to use its taxing authority (property taxes, income taxes, etc.) to pay principal and interest. This contrasts with revenue bonds, which are backed only by the income generated from a specific project or facility.
Products and RisksQuestion 30
Revenue bonds are secured by:
1. Option A: The taxing power of the issuing municipality
2. Option B: Income generated from a specific facility or project
  Correct answer
3. Option C: The U.S. government's guarantee
4. Option D: Corporate revenues pledged as collateral
Explanation
Revenue bonds are backed by the income (revenue) from a specific project, facility, or source such as a toll road, airport, hospital, or water system. Unlike GO bonds, revenue bonds are NOT backed by the taxing power of the issuer. If the project fails to generate sufficient revenue, bondholders may not be paid.
Products and RisksQuestion 31
The interest income from most municipal bonds is:
1. Option A: Subject to federal income tax and state tax
2. Option B: Exempt from federal income tax but may be subject to state tax
  Correct answer
3. Option C: Exempt from all taxes at all levels
4. Option D: Subject to federal income tax but exempt from state tax
Explanation
Interest income from municipal bonds is generally exempt from federal income tax. If the bond is issued within the investor's state of residence, it may also be exempt from state and local taxes (triple tax-exempt). However, capital gains from selling municipal bonds at a profit are still subject to taxation.
Products and RisksQuestion 32
A corporate bond rated BB by S&P would be classified as:
1. Option A: Investment grade
2. Option B: Non-investment grade (high yield/junk)
  Correct answer
3. Option C: Default
4. Option D: Prime quality
Explanation
Bonds rated BB+ or below by S&P (Ba1 or below by Moody's) are classified as non-investment grade, also known as high-yield or junk bonds. Investment grade is BBB- and above (S&P) or Baa3 and above (Moody's). Non-investment grade bonds carry higher credit risk and therefore offer higher yields to compensate investors.
Products and RisksQuestion 33
Which of the following bonds is MOST sensitive to interest rate changes?
1. Option A: A 2-year bond with a 6% coupon
2. Option B: A 30-year bond with a 3% coupon
  Correct answer
3. Option C: A 5-year bond with a 5% coupon
4. Option D: A 10-year bond with a 7% coupon
Explanation
Bond price sensitivity to interest rate changes (duration) increases with longer maturity and lower coupon rates. A 30-year bond with a 3% coupon has the longest maturity and lowest coupon, making it the most sensitive to interest rate changes. The longer the maturity, the more time there is for rate changes to affect the bond's value.
Products and RisksQuestion 34
A secured bond differs from a debenture in that a secured bond:
1. Option A: Pays a higher interest rate
2. Option B: Is backed by specific collateral or assets
  Correct answer
3. Option C: Has a longer maturity
4. Option D: Is issued only by the federal government
Explanation
A secured bond is backed by specific collateral (such as real estate, equipment, or other assets), giving bondholders a claim on those assets if the issuer defaults. A debenture is unsecured and backed only by the issuer's creditworthiness and general ability to pay. Because debentures carry more risk, they typically offer higher interest rates.
Products and RisksQuestion 35
Mortgage-backed securities (MBS) are subject to which specific risk that traditional bonds are not?
1. Option A: Credit risk
2. Option B: Interest rate risk
3. Option C: Prepayment risk
  Correct answer
4. Option D: Currency risk
Explanation
MBS are uniquely subject to prepayment risk because homeowners may refinance their mortgages when interest rates fall, returning principal to investors earlier than expected. This forces investors to reinvest at lower rates. Traditional bonds have fixed maturities and generally do not face prepayment risk unless they are callable.
Products and RisksQuestion 36
GNMA (Ginnie Mae) securities differ from FNMA (Fannie Mae) securities in that GNMA securities are:
1. Option A: Backed by the full faith and credit of the U.S. government
  Correct answer
2. Option B: Exempt from state and local taxes
3. Option C: Higher yielding
4. Option D: Available only to institutional investors
Explanation
GNMA (Government National Mortgage Association) is a government agency whose mortgage-backed securities carry the full faith and credit guarantee of the U.S. government. FNMA (Federal National Mortgage Association) is a government-sponsored enterprise (GSE) and does NOT carry this explicit government guarantee, though it has an implied guarantee.
Products and RisksQuestion 37
A bond trading at 103 is trading:
1. Option A: At a discount
2. Option B: At par
3. Option C: At a premium
  Correct answer
4. Option D: At parity
Explanation
Bond prices are quoted as a percentage of par value ($1,000). A quote of 103 means the bond is trading at 103% of par, or $1,030. This is above par ($1,000), so the bond is trading at a premium. Bonds trade at a premium when their coupon rate is higher than the prevailing market interest rate.
Products and RisksQuestion 38
Commercial paper is BEST described as:
1. Option A: A long-term unsecured corporate obligation
2. Option B: A short-term unsecured promissory note issued by corporations
  Correct answer
3. Option C: A money market instrument guaranteed by the FDIC
4. Option D: A certificate of deposit issued by commercial banks
Explanation
Commercial paper is a short-term unsecured promissory note issued by creditworthy corporations to meet short-term financing needs. It typically has maturities ranging from 1 to 270 days and is sold at a discount from face value. It is exempt from SEC registration if the maturity is 270 days or less.
Products and RisksQuestion 39
A banker's acceptance is typically used to finance:
1. Option A: Long-term real estate development
2. Option B: International trade transactions
  Correct answer
3. Option C: Domestic consumer loans
4. Option D: Government deficit spending
Explanation
Banker's acceptances are short-term credit instruments used primarily to finance international trade transactions. They are time drafts drawn on and accepted by a bank, which guarantees payment at maturity. The bank's guarantee makes them highly liquid and tradeable in the money market.
Products and RisksQuestion 40
Which of the following relationships between bond yields is correct when a bond is trading at a discount?
1. Option A: Coupon rate > current yield > yield to maturity
2. Option B: Yield to maturity > current yield > coupon rate
  Correct answer
3. Option C: Current yield > yield to maturity > coupon rate
4. Option D: Coupon rate = current yield = yield to maturity
Explanation
When a bond trades at a discount (below par), the yield to maturity (YTM) is the highest because it includes both the coupon income and the capital gain from discount to par at maturity. The current yield is next because it reflects the coupon relative to the lower market price. The coupon rate is the lowest as it is based on par value.
Products and RisksQuestion 41
A callable bond is MOST likely to be called when:
1. Option A: Interest rates have risen significantly
2. Option B: Interest rates have fallen significantly
  Correct answer
3. Option C: The bond is trading at a deep discount
4. Option D: The company's credit rating has been downgraded
Explanation
Issuers call bonds when interest rates fall because they can refinance their debt at a lower rate, reducing their interest expense. When rates decline, the callable bond's market price rises toward or above the call price, making it economical for the issuer to call the bonds and reissue at the lower prevailing rate.
Products and RisksQuestion 42
A bond with a 6% coupon is convertible into common stock at a conversion price of $25. What is the conversion ratio?
1. Option A: 20 shares
2. Option B: 25 shares
3. Option C: 40 shares
  Correct answer
4. Option D: 60 shares
Explanation
The conversion ratio is calculated by dividing the bond's par value by the conversion price: $1,000 / $25 = 40 shares. This means each bond can be converted into 40 shares of common stock. The coupon rate is irrelevant to the conversion ratio calculation.
Products and RisksQuestion 43
Treasury STRIPS are created by:
1. Option A: Issuing new zero-coupon Treasury securities
2. Option B: Separating the interest and principal payments of existing Treasury securities
  Correct answer
3. Option C: Combining multiple Treasury bills into a single security
4. Option D: Stripping the insurance backing from Treasury bonds
Explanation
STRIPS (Separate Trading of Registered Interest and Principal of Securities) are created by separating (stripping) the individual interest payments and the principal payment of a Treasury note or bond into separate zero-coupon securities. Each coupon payment and the final principal payment trade independently at a discount from face value.
Products and RisksQuestion 44
Which of the following is considered the safest type of bond?
1. Option A: Corporate AAA-rated bond
2. Option B: U.S. Treasury bond
  Correct answer
3. Option C: Municipal GO bond
4. Option D: Agency bond issued by FNMA
Explanation
U.S. Treasury securities are considered the safest bonds because they are backed by the full faith and credit of the U.S. government, which has the power to tax and print money. While AAA-rated corporate bonds have very high credit quality, they still carry more credit risk than Treasuries. Treasury securities are considered to have virtually zero default risk.
Products and RisksQuestion 45
An investor purchases a 20-year bond with a 5% coupon at par. If interest rates rise to 7%, the investor faces:
1. Option A: No risk since the coupon payments remain the same
2. Option B: Interest rate risk because the bond's market value will decrease
  Correct answer
3. Option C: Credit risk because the issuer may default
4. Option D: Prepayment risk because the issuer will call the bond
Explanation
When interest rates rise, existing bonds with lower coupon rates become less valuable because new bonds offer higher yields. The 5% bond will decline in market value as investors demand yields comparable to the new 7% rate. This inverse relationship between interest rates and bond prices is the primary manifestation of interest rate risk.
Trading and AccountsQuestion 46
An investor has a short position in XYZ stock. The investor's maximum potential loss is:
1. Option A: Limited to the original sale price
2. Option B: Limited to the margin requirement
3. Option C: Theoretically unlimited
  Correct answer
4. Option D: Limited to 50% of the stock's value
Explanation
A short seller's maximum potential loss is theoretically unlimited because there is no limit to how high a stock price can rise. The short seller must eventually buy back the stock to close the position, and if the price continues to rise, the losses continue to grow without a ceiling.
Trading and AccountsQuestion 47
A customer places an "all-or-none" (AON) order. This means:
1. Option A: The order must be executed in full or not at all
  Correct answer
2. Option B: The order is valid for the entire trading day only
3. Option C: The order can be partially filled
4. Option D: The order must be executed immediately
Explanation
An all-or-none (AON) order specifies that the entire order must be filled completely or not executed at all. Unlike a fill-or-kill (FOK) order, an AON order does not need to be filled immediately; it can remain open. Partial execution is not permitted.
Trading and AccountsQuestion 48
A broker-dealer purchases a municipal bond from a customer at $98 and sells it to another customer at $100. The $2 difference represents:
1. Option A: A commission
2. Option B: A markup
3. Option C: A spread on two principal transactions
  Correct answer
4. Option D: An agency fee
Explanation
The firm bought from one customer at $98 (a principal transaction where it earned a markdown) and sold to another customer at $100 (a principal transaction where it earned a markup). The $2 difference represents the spread on two separate principal transactions. In each transaction, the firm acted as a dealer.
Trading and AccountsQuestion 49
Which of the following statements about a day order is correct?
1. Option A: It remains open until the customer cancels it
2. Option B: It expires at the end of the trading day if not executed
  Correct answer
3. Option C: It must be executed within the first hour of trading
4. Option D: It automatically converts to a GTC order the next day
Explanation
A day order is valid only for the trading day on which it is entered. If it is not executed by the close of business that day, it expires automatically. Unless otherwise specified, all orders are considered day orders by default.
Trading and AccountsQuestion 50
A customer wants to buy a stock only if it breaks above a resistance level at $75. The stock is currently at $70. Which order should the customer place?
1. Option A: Buy limit at $75
2. Option B: Buy stop at $75
  Correct answer
3. Option C: Sell stop at $75
4. Option D: Sell limit at $75
Explanation
A buy stop order is placed above the current market price and is triggered when the stock reaches the stop price. This allows the investor to enter a position when the stock breaks through a resistance level, confirming an upward momentum. Buy limit orders are placed at or below the current market price.
Trading and AccountsQuestion 51
An investor buys 100 shares of stock at $40 and simultaneously writes a covered call with a strike price of $45 for a premium of $3. What is the investor's maximum gain?
1. Option A: $300
2. Option B: $500
3. Option C: $800
  Correct answer
4. Option D: $4,500
Explanation
The maximum gain on a covered call is the premium received plus the gain if the stock is called away. The stock gain would be $45 - $40 = $5 per share ($500), plus the $3 premium per share ($300), for a total maximum gain of $800. The stock would be called away at $45 if the option is exercised.
Trading and AccountsQuestion 52
A trade confirmation must disclose whether the broker-dealer acted in what capacity?
1. Option A: Market maker or specialist
2. Option B: Agent or principal
  Correct answer
3. Option C: Underwriter or syndicator
4. Option D: Institutional or retail
Explanation
Trade confirmations must disclose whether the broker-dealer acted as an agent (earning a commission) or as a principal (earning a markup or markdown). This disclosure is required under SEC Rule 10b-10 and helps customers understand the nature of the transaction and how the firm was compensated.
Trading and AccountsQuestion 53
Which of the following is considered an unrealized gain?
1. Option A: Dividends received from a stock holding
2. Option B: Interest payments from a bond
3. Option C: An increase in the value of a stock that has not been sold
  Correct answer
4. Option D: Profit from a completed sale of stock
Explanation
An unrealized gain (also called a paper gain) is an increase in the value of a security that the investor still holds. It becomes a realized gain only when the security is sold. Dividends and interest are forms of investment income, and profit from a completed sale is a realized gain.
Trading and AccountsQuestion 54
A bond with a face value of $1,000 pays a 5% coupon rate and is currently priced at $950. What is the current yield?
1. Option A: 5.00%
2. Option B: 5.26%
  Correct answer
3. Option C: 4.75%
4. Option D: 5.50%
Explanation
Current yield is calculated by dividing the annual coupon payment by the current market price. The annual coupon is $1,000 x 5% = $50. Current yield = $50 / $950 = 5.26%. Current yield reflects the return based on the price actually paid for the bond.
Trading and AccountsQuestion 55
Which type of yield takes into account the bond's current market price, coupon payments, and the time remaining until maturity?
1. Option A: Nominal yield
2. Option B: Current yield
3. Option C: Yield to maturity (YTM)
  Correct answer
4. Option D: Dividend yield
Explanation
Yield to maturity (YTM) is the total return anticipated on a bond if it is held until it matures. YTM considers the coupon payments, the current market price, the face value at maturity, and the time remaining until maturity. It is the most complete yield measure for bonds.
Trading and AccountsQuestion 56
A basis point equals:
1. Option A: 1%
2. Option B: 0.1%
3. Option C: 0.01%
  Correct answer
4. Option D: 0.001%
Explanation
A basis point (bps) is equal to 1/100th of 1%, or 0.01%. For example, a change from 4.50% to 4.75% represents a change of 25 basis points. Basis points are commonly used to describe changes in interest rates and bond yields to avoid ambiguity.
Trading and AccountsQuestion 57
A stock dividend differs from a cash dividend in that:
1. Option A: A stock dividend reduces the company's cash reserves
2. Option B: A stock dividend gives shareholders additional shares rather than cash
  Correct answer
3. Option C: Only preferred stockholders receive stock dividends
4. Option D: Stock dividends are always taxable as ordinary income
Explanation
A stock dividend is a distribution of additional shares to existing shareholders instead of cash. It increases the number of shares outstanding but does not reduce the company's cash reserves. The share price typically adjusts downward proportionally after a stock dividend.
Trading and AccountsQuestion 58
The four important dates in the dividend payment process, in chronological order, are:
1. Option A: Record date, declaration date, ex-dividend date, payable date
2. Option B: Declaration date, ex-dividend and record date on the same business day, payable date
  Correct answer
3. Option C: Ex-dividend date, declaration date, record date, payable date
4. Option D: Declaration date, record date, ex-dividend date, payable date
Explanation
The sequence is: (1) declaration date, when the board announces the dividend; (2) ex-dividend date and record date, which generally fall on the same business day under T+1; and (3) payable date, when the dividend is paid. If the record date is a non-delivery date, the ex-dividend date is the preceding business day.
Trading and AccountsQuestion 59
Under T+1 settlement, the ex-dividend date is typically:
1. Option A: 2 business days before the record date
2. Option B: 1 business day before the record date
3. Option C: The same day as the record date
  Correct answer
4. Option D: 1 business day after the record date
Explanation
Under T+1 settlement, FINRA Rule 11140 generally sets the ex-dividend date as the same day as the record date when the record date is a business day. When the record date is a non-delivery date, the ex-dividend date is the preceding business day.
Trading and AccountsQuestion 60
An investor buys a stock on the ex-dividend date. Which of the following is true?
1. Option A: The investor will receive the upcoming dividend
2. Option B: The investor will not receive the upcoming dividend
  Correct answer
3. Option C: The investor receives half the dividend
4. Option D: The dividend is held in escrow for the investor
Explanation
An investor who purchases a stock on or after the ex-dividend date will NOT receive the upcoming dividend. To receive the dividend, the investor must purchase the stock before the ex-dividend date, so that settlement occurs by the record date.
Trading and AccountsQuestion 61
Return of capital (ROC) differs from a dividend in that ROC:
1. Option A: Is taxed at a higher rate than dividends
2. Option B: Is a return of the investor's original investment and reduces the cost basis
  Correct answer
3. Option C: Is only paid by government bonds
4. Option D: Increases the investor's cost basis
Explanation
Return of capital (ROC) is not a distribution of profits but rather a return of the investor's original investment. It is not taxable when received but reduces the investor's cost basis in the security. This means when the security is eventually sold, the taxable gain will be larger.
Trading and AccountsQuestion 62
An investor purchases a bond at a premium. The yield to maturity (YTM) will be:
1. Option A: Higher than the coupon rate
2. Option B: Equal to the coupon rate
3. Option C: Lower than the coupon rate
  Correct answer
4. Option D: Zero
Explanation
When a bond is purchased at a premium (above par value), the YTM will be lower than the coupon rate because the investor will receive back less at maturity than what was paid. The premium paid reduces the overall return. The relationship is: discount bond YTM > coupon > premium bond YTM.
Trading and AccountsQuestion 63
A callable bond trading at a premium should be quoted on what yield basis to show the lowest potential return to the investor?
1. Option A: Yield to maturity
2. Option B: Yield to call
  Correct answer
3. Option C: Current yield
4. Option D: Nominal yield
Explanation
For a callable bond trading at a premium, yield to call (YTC) is lower than yield to maturity (YTM) because the bond may be called before maturity, giving the investor less time to recoup the premium paid. The lower of YTM or YTC must be quoted to show the investor the worst-case scenario.
Trading and AccountsQuestion 64
Total return on an investment includes:
1. Option A: Only capital gains
2. Option B: Only income (dividends and interest)
3. Option C: Capital gains (or losses) plus income received
  Correct answer
4. Option D: Only unrealized gains
Explanation
Total return measures the complete return on an investment, including all capital gains (both realized and unrealized), dividends, and interest income. It provides the most complete picture of an investment's performance over a given period.
Trading and AccountsQuestion 65
An investor bought 100 shares of a stock at $30 per share. After receiving $200 in dividends, the investor sells the shares at $35. What is the total return?
1. Option A: $500
2. Option B: $700
  Correct answer
3. Option C: $200
4. Option D: $300
Explanation
Total return = capital gain + income. Capital gain = ($35 - $30) x 100 = $500. Dividend income = $200. Total return = $500 + $200 = $700. Total return captures all sources of investment return, both price appreciation and income.
Trading and AccountsQuestion 66
Which of the following is a benchmark index that tracks 500 large-cap U.S. stocks?
1. Option A: Dow Jones Industrial Average
2. Option B: S&P 500
  Correct answer
3. Option C: Russell 2000
4. Option D: Wilshire 5000
Explanation
The S&P 500 tracks 500 large-cap U.S. companies and is widely considered the best gauge of the U.S. large-cap equity market. The DJIA tracks only 30 large-cap stocks, the Russell 2000 tracks small-cap stocks, and the Wilshire 5000 represents the entire U.S. stock market.
Trading and AccountsQuestion 67
The nominal yield of a bond is the same as its:
1. Option A: Current yield
2. Option B: Yield to maturity
3. Option C: Coupon rate
  Correct answer
4. Option D: Yield to call
Explanation
The nominal yield is the coupon rate stated on the face of the bond. It is fixed at issuance and does not change regardless of market price fluctuations. For a bond with a 6% coupon, the nominal yield is always 6%, even if the bond trades at a premium or discount.
Trading and AccountsQuestion 68
An investor purchases 200 shares of ABC stock at $50. The company then distributes a 10% stock dividend. What is the investor's adjusted cost basis per share?
1. Option A: $50.00
2. Option B: $45.45
  Correct answer
3. Option C: $55.00
4. Option D: $40.00
Explanation
After a 10% stock dividend, the investor has 220 shares (200 + 20). The total cost basis remains $10,000 (200 x $50). The adjusted cost basis per share is $10,000 / 220 = $45.45. Stock dividends do not change the total investment; they spread the cost over more shares.
Regulatory FrameworkQuestion 69
What happens if a registered representative fails to complete the Regulatory Element of Continuing Education on time?
1. Option A: The representative receives a fine but may continue working
2. Option B: The representative's registration becomes inactive
  Correct answer
3. Option C: The representative is permanently barred from the industry
4. Option D: The firm is fined but the representative's registration is unaffected
Explanation
If a registered person fails to complete the Regulatory Element within the prescribed timeframe, their registration becomes inactive. While inactive, the person may not perform any activities requiring registration, including soliciting business or executing trades. Registration can be reactivated upon completion of the requirement.
Regulatory FrameworkQuestion 70
The Firm Element of Continuing Education requires broker-dealers to:
1. Option A: Administer a standardized FINRA-written exam to all registered persons annually
2. Option B: Develop and implement a written training plan for covered registered persons based on their activities and responsibilities
  Correct answer
3. Option C: Send all registered persons to an external training facility once per year
4. Option D: Require all registered persons to retake the SIE exam every three years
Explanation
The Firm Element requires each broker-dealer to develop and administer a written training plan annually for covered registered persons. The content must be based on the firm's size, structure, scope of business, and the specific activities and regulatory responsibilities of the individuals. Unlike the Regulatory Element, the Firm Element is designed by the firm itself, not FINRA.
Regulatory FrameworkQuestion 71
A registered representative has been convicted of a misdemeanor involving the theft of $3,000. Which of the following is most likely true?
1. Option A: This has no impact on the representative's registration status
2. Option B: The representative is subject to statutory disqualification
  Correct answer
3. Option C: The representative must retake the SIE exam but may continue working
4. Option D: The representative must pay a fine to FINRA but faces no other consequences
Explanation
Misdemeanors involving money, securities, insurance, theft, or dishonesty within the prior 10 years are grounds for statutory disqualification under Section 3(a)(39) of the Securities Exchange Act. A theft conviction, even if classified as a misdemeanor, falls squarely within this category and would subject the individual to statutory disqualification.
Regulatory FrameworkQuestion 72
A background check for a prospective registered representative would typically include all of the following EXCEPT:
1. Option A: Verification of employment history for the prior 3 years
2. Option B: A search of the CRD system for prior disciplinary history
3. Option C: A review of the individual's personal investment portfolio
  Correct answer
4. Option D: Fingerprint submission to identify criminal records
Explanation
Background checks for prospective registered representatives typically include verification of employment history, a search of the CRD system for prior registrations and disciplinary history, and fingerprint submission for criminal background checks. A review of the individual's personal investment portfolio is not a standard part of the background investigation process.
Regulatory FrameworkQuestion 73
Under FINRA rules, which of the following is NOT considered a ground for statutory disqualification?
1. Option A: Being expelled or suspended from a self-regulatory organization (SRO)
2. Option B: Having a pending customer arbitration claim
  Correct answer
3. Option C: Being subject to an SEC order denying registration
4. Option D: A felony conviction involving securities fraud
Explanation
Statutory disqualification applies to individuals who have been convicted of certain felonies or misdemeanors, expelled or barred from an SRO, or subject to certain regulatory orders. A pending customer arbitration claim alone does not constitute statutory disqualification, though it may need to be disclosed on Form U4.
Regulatory FrameworkQuestion 74
A registered representative allows their registration to lapse by not being associated with a broker-dealer for more than two years. What must they do to re-enter the industry?
1. Option A: Simply file a new Form U4 with a sponsoring firm
2. Option B: Requalify by passing the appropriate qualification exams
  Correct answer
3. Option C: Write a letter to FINRA requesting reinstatement
4. Option D: Complete an additional 40 hours of Continuing Education
Explanation
If a registered person is not associated with a broker-dealer for more than two years, their qualification exams expire and they must requalify by passing the appropriate exams again. This includes both the SIE and any applicable top-off examination. The two-year window incentivizes registered persons to maintain their industry association.
Regulatory FrameworkQuestion 75
Which examination structure applies to individuals seeking to become registered representatives after the restructuring of FINRA qualification exams?
1. Option A: A single comprehensive exam covering all topics
2. Option B: The SIE exam (general knowledge) plus a representative-level top-off exam (such as the Series 7)
  Correct answer
3. Option C: Only the Series 7 exam with no prerequisite
4. Option D: The SIE exam only, with no additional examination required
Explanation
Under the restructured exam framework effective October 2018, candidates must pass the SIE exam, which tests general securities industry knowledge, plus a representative-level top-off exam specific to their registration category (e.g., Series 7 for General Securities Representatives). The SIE can be taken before associating with a firm, but the top-off exam requires firm sponsorship.

SIE Practice Test 2

SIE Practice Test 2 Questions and Answers

An issuer in the securities industry is defined as:

A broker-dealer that acts in a principal capacity on a trade is:

Which of the following statements about SIPC coverage is TRUE?

The U.S. Treasury Department is directly responsible for:

An investment adviser is distinguished from a broker-dealer primarily because an investment adviser:

Which of the following entities has the authority to enforce MSRB rules against broker-dealers that trade municipal securities?

The FDIC provides insurance coverage for which of the following?

A registered representative at a FINRA member firm discovers a colleague engaging in insider trading. Under FINRA rules, the representative should:

Which of the following is TRUE regarding the SEC's role in approving securities?

An underwriter in the securities industry primarily:

A customer has $300,000 in securities and $400,000 in cash at a broker-dealer that is being liquidated. How much will SIPC cover?

Which of the following best describes the Cboe (Chicago Board Options Exchange)?

An investor owns 500 shares of a company whose board declares a reverse stock split of 1-for-5. After the split, the investor will own:

A Level III ADR program differs from Level I in that Level III ADRs:

Which of the following is NOT a characteristic of common stock?

An investor owns convertible preferred stock with a par value of $100 and a conversion ratio of 4. If the common stock is trading at $30, should the investor convert?

Which of the following best describes Treasury stock?

A company has 10 million authorized shares, 8 million issued shares, and 1 million treasury shares. How many shares are outstanding?

An investor is concerned about dilution of her ownership percentage. Which event would cause dilution?

Which of the following preferred stock features would be MOST attractive to an investor who believes the company's common stock price will rise significantly?

When interest rates rise, which type of stock is MOST negatively affected?

Sponsored ADRs differ from unsponsored ADRs in that sponsored ADRs:

An investor owns 100 shares of XYZ at $50. XYZ declares a 5:4 stock split. After the split, the investor has:

Which of the following is the MOST significant risk of owning common stock compared to bonds issued by the same company?

Treasury bills (T-bills) differ from Treasury notes in that T-bills:

Which of the following U.S. Treasury securities has a maturity of 2 to 10 years?

When interest rates rise, what happens to the market price of existing bonds?

A bond with a par value of $1,000, a coupon rate of 5%, and a market price of $950 has a current yield of approximately:

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

Revenue bonds are secured by:

The interest income from most municipal bonds is:

A corporate bond rated BB by S&P would be classified as:

Which of the following bonds is MOST sensitive to interest rate changes?

A secured bond differs from a debenture in that a secured bond:

Mortgage-backed securities (MBS) are subject to which specific risk that traditional bonds are not?

GNMA (Ginnie Mae) securities differ from FNMA (Fannie Mae) securities in that GNMA securities are:

A bond trading at 103 is trading:

Commercial paper is BEST described as:

A banker's acceptance is typically used to finance:

Which of the following relationships between bond yields is correct when a bond is trading at a discount?

A callable bond is MOST likely to be called when:

A bond with a 6% coupon is convertible into common stock at a conversion price of $25. What is the conversion ratio?

Treasury STRIPS are created by:

Which of the following is considered the safest type of bond?

An investor purchases a 20-year bond with a 5% coupon at par. If interest rates rise to 7%, the investor faces:

An investor has a short position in XYZ stock. The investor's maximum potential loss is:

A customer places an "all-or-none" (AON) order. This means:

A broker-dealer purchases a municipal bond from a customer at $98 and sells it to another customer at $100. The $2 difference represents:

Which of the following statements about a day order is correct?

A customer wants to buy a stock only if it breaks above a resistance level at $75. The stock is currently at $70. Which order should the customer place?

An investor buys 100 shares of stock at $40 and simultaneously writes a covered call with a strike price of $45 for a premium of $3. What is the investor's maximum gain?

A trade confirmation must disclose whether the broker-dealer acted in what capacity?

Which of the following is considered an unrealized gain?

A bond with a face value of $1,000 pays a 5% coupon rate and is currently priced at $950. What is the current yield?

Which type of yield takes into account the bond's current market price, coupon payments, and the time remaining until maturity?

A basis point equals:

A stock dividend differs from a cash dividend in that:

The four important dates in the dividend payment process, in chronological order, are:

Under T+1 settlement, the ex-dividend date is typically:

An investor buys a stock on the ex-dividend date. Which of the following is true?

Return of capital (ROC) differs from a dividend in that ROC:

An investor purchases a bond at a premium. The yield to maturity (YTM) will be:

A callable bond trading at a premium should be quoted on what yield basis to show the lowest potential return to the investor?

Total return on an investment includes:

An investor bought 100 shares of a stock at $30 per share. After receiving $200 in dividends, the investor sells the shares at $35. What is the total return?

Which of the following is a benchmark index that tracks 500 large-cap U.S. stocks?

The nominal yield of a bond is the same as its:

An investor purchases 200 shares of ABC stock at $50. The company then distributes a 10% stock dividend. What is the investor's adjusted cost basis per share?

What happens if a registered representative fails to complete the Regulatory Element of Continuing Education on time?

The Firm Element of Continuing Education requires broker-dealers to:

A registered representative has been convicted of a misdemeanor involving the theft of $3,000. Which of the following is most likely true?

A background check for a prospective registered representative would typically include all of the following EXCEPT:

Under FINRA rules, which of the following is NOT considered a ground for statutory disqualification?

A registered representative allows their registration to lapse by not being associated with a broker-dealer for more than two years. What must they do to re-enter the industry?

Which examination structure applies to individuals seeking to become registered representatives after the restructuring of FINRA qualification exams?