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SIE exam questions with complete solution
1. What type of risk is unique to a specific industry, business enterprise, or investment type?: Nonsystematic
risk
2. Under which of the following circumstances is an investor in a position to acquire stock?: Buy a call, sell a call (The holder of
a call has the right to buy stock at the strike price if exercised. The seller of a put is obligated to buy stock at the strike price if exercised)
3. Options- a premium: the cost of an option contract, expressed in dollars per share of the underlying stock
4. Options- strike price: The price at which the stock will be bought or sold if the contract is exercised, expressed in dollars per share
5. A customer believes that ABC's price will go up but does not have the money to buy 100 shares right now.
How could the customer use options to profit from an increase in the stock's price?: buy calls, write puts (both are bullish)
6. A corporation's offer to current stockholders of the ability to purchase a proportionate number of new
shares at a specific price for a limited time is called a: right (they usually expire in 30-45 days)
7. American depositary receipts (ADRs): issued by banks, represent a specific number of shares of a foreign company, and trade and pay dividends in
dollars
8. Which of the following records must be maintained for 6 years?: Customer ledgers (statements)
9. While underwriters can assist with preparation and filing, the accuracy and adequacy of these documents is the
responsibility of the: Issuing corporation
10. What institutions serve as depository and clearing facilities?: Depository Trust Company and National Securities Clearing
Corporation (most specifically) then carrying and clearing firms can act as these as well.
11. What is a transfer agent?: (often a bank) for a corporation is responsible for ensuring that its securities
are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed
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12. What is the function of the clearing corporation?: Acting as an intermediary in a trade,
examples of these can be a commercial bank, can be a broker-dealer but doesn't have to be
13. Who is considered a control person (security): those owned by directors, oflcers, or persons (which include corporations, trusts, etc.)
who own or control 10% or more of the issuer's equity securities (an unaflliated person would have to own 10% or more of the outstanding shares)
14. What are the two components of Return on Investment?: Capital gains and income
15. To expand the overall economy, we want to: buy securities via open-market operations, pushing interest rates down
16. To meet a Regulation T margin call, a customer would have how long?: settle- ment plus 2 additional business days (or
S + 2)
17. What is A fully disclosed broker-dealer: one that introduces its business to a carrying firm to clear transactions
18. The regulation enacted by the SEC to protect the privacy of customer infor- mation is known as:
Regulation S-P
19. A market maker that does not honor its firm quote is said to be: "backing away"
20. A deficit in the U.S. balance of payments can occur if: interest rates in foreign countries are higher than U.S. domestic rates and
U.S. consumers are purchasing (importing) foreign goods
21. The general partner of a limited partnership has responsibility of: Organizing and managing the partnership, assumes
unlimited liability, and is responsible for paying all partnership debts
22. To grow or expand the economy, U.S. fiscal policy should be to: cut taxes (so consumers have more money to spend) and
increase government spending for programs and development (to create more jobs)
23. What is the federal funds rate: the rate commercial money center banks charge each other for an
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35. Securities Act of 1933: (The Paper Act, Prospectus Act, New Issues Act) requires that issuers who want to raise capital by making a public ottering of
securities to the public, provide full and fair disclosure of all material facts about the company and the securities being ottered.
36. To contract or slow economic growth U.S. fiscal policy should be to: raise taxes
and cut government spending for programs and development
37. Out of the federal funds rate, discount rate, prime rate and broker call loan rate, which is the most volatile?:
Federal funds rate because of the overnight otterings (short-term)
38. The shelf offering (registration) provision under the Securities Act of 1933 allows: issuers to quickly raise capital
when needed or when market conditions are favorable.
39. Types of direct participation programs (DPPs): real estate, gas and oil, and leasing programs
40. Long vs short investor: Long (buy), short (sell)
41. Debenture: a debt obligation of a corporation backed only by its word and general creditworthiness, written promises of the corporation to pay the
principal at its due date and interest on a regular basis.
42. Municipal revenue bonds: bonds issued to finance a project or facility with the bonds' debt service backed by the facility's revenue stream.
The revenue might come from rents, tolls, or admission fees, among other sources.
43. Build America Bonds (BABs): Taxable municipal securities. Two types: Direct Payment ( provide the
municipal issuer with payments from the U.S. Treasury) and Tax Credit, or Issuer (provide the bondholder with a federal income tax credit)
44. Long 1 XYZ January 50, put at 2. What is the max. potential gain?: "Investor BOUGHT
100 shares of XYZ in January at $50 per share, the premium is $2." Maximum gain for a long put is calculated by subtracting the premium from the strike price (50 − 2 = 48 per share). One contract represents 100 shares, so the buyer's maximum gain is $4,800 (this occurs if the stock becomes worthless).
45. Adjusted cost basis problem: see example on page 129 under dividends
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46. When must a suspicious activity report (SAR) be filed with FinCEN after noticing suspicious activity in an
account?: within 30 calendar days, the client may not know he is subject to an SAR.
47. When can corporate accounts trade on margin?: Only when it is not listed as being restricted for doing so.
48. When securities are held in street name, who is the beneficial owner?: The security is put in the broker-dealers name,
but the customer is still the beneficial owner.
49. What are the requirements of a business continuity plan (BCP) if there is a major business disruption in the
firm?: Data backup and recovery (hard and electronic copies), alternate business location for employees, and prompt customer access to funds and securities
50. What securities can be purchased on margin?: Equities, bonds and warrants. Mutual funds cannot be purchased on margin, but can
be used as collateral after being held for 30 days.
51. Spin-off: When one company sells all of the shares of another it own
52. Stagflation: When inflation and stagnation occur simultaneously: a period of high unemployment and lack of growth and business activity (stagnation)
and high unemployment and lack of growth and business activity (inflation)
53. Keynesian theory: Government intervention in the economy is a significant force in creating prosperity by engaging in activities that attect
aggregate demand.
54. Deflation: a general decline in prices occurring during severe recessions and the unemployment rate is rising.
55. Fourth market: market for institutional investors in which blocks of stock trade through electronic commu- nications networks (ECNs) that are open 24
hours a day acting as agents
56. bullish position are...: long (owning/buying a security in hopes that they can resell it at a higher price later & owning securities that can be
converted into rights, warrants and long calls)
57. bearish positions are...: short
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68. Prime rate: the rate charged to their most credit worthy corporate customers for unsecured loans, set by individual commercial banks
69. balance of payments: the flow of money between the US and other countries
70. trustee: An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best
interests of another who has been legally appointed to provide these services (i.e.-fiduciary appointed to manage assets in a trust)
71. custodian: An institution or a person responsible for making all investment, management, and distribution
decisions in an account maintained in the best interests of another (i.e.-Custodian of an account of a minor)
72. Cooling-off period lasts...: 20 CALENDAR days, not business, since the SEC has received it
73. When the FOMC buys treasury securities, interest rates will...: be lowered since the money supply is loosening and there is
more money being pumped into the economy
74. What investment products are NOT covered by the FDIC?: Mutual funds, annuities, life insurance policies, and stocks/bonds.
(An annuity with a self-directed IRA or mutual fund with a certificate of deposit are covered)
75. Types of interest rates charged: Discount rate- FRB
Federal Funds Rate- Large commercial banks to one another for overnight loans of $1M or more (short-term, most volatile) Prime Rate- Large commercial banks charge to credit worthy investors Broker Loan Rate- banks charge broker dealers on money they borrowed to lend to margin account customers
76. Shelf offering registration: when issuers can raise money quickly when needed or when market conditions are just right by selling
shares, the transaction does not have to happen immediately, can occur in the primary and secondary otterings
77. Supply-side theory: Government should allow market forces to determine prices of all goods and that the
federal government should reduce government spending as well as taxes.
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78. Access equals delivery rule: Applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary
prospectuses. No prospectus can be delivered before the registration date
79. A strong US dollar leads to..: more attordablility for U.S. consumers to buy more foreign goods, so
U.S. imports increase. As more imported goods flow in, more money flows out—deficit.
80. prime brokerage account: a customer (an institution) selects one member to provide custody and financing of securities and executes
trades with other firms known as executing brokers.
81. Depository trust company (DTC): serves the custody needs of securities industry participants in the US and a number of foreign countries as
well.
82. carrying firm: or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all
back-oflce tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers.
83. introducing/fully disclosed: A broker-dealer has a line of business restricted solely to the purchase
and sale of securities with trade executions being handled by another member firm, it introduces its customers to a clearing firm
84. Main purpose of issuer/primary market transactions: hopes of raising capital by selling
securities to the investing public
85. Secondary market transactions are where...: investors buy and sell securities to and from one another
86. Primary market transactions are where...: Issuers, or someone acting as an issuer, sells securities to the investing public
87. U.S. consumers are increasing their imports of foreign-made goods, what will likely happen to the GDP?: The
GDP will decrease (it is a measure of goods and services produced), so if there are more foreign goods being shipped in, there are less US goods being produced domestically
88. What is the only form of advertising permitted before the effective date?: -
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101. What does it mean when a fund is highly leveraged?: It means they are borrowing to purchase, or buying on margin. (i.e.- a hedge
fund is highly leveraged)
102. Penny stock: a non-Nasdaq listed (therefore, Bulletin Board or "OTC Pink") stock trading under $5 per share. If a stock is listed on an exchange or listed
on Nasdaq, it is not a penny stock, regardless of price.
103. T-bonds and T-notes pay interest....: semiannually
104. Why is a fixed security not considered a security?: because the annuity buyer assumes no investment risk, the insurance
company does. They do, however, assume inflation risk.
105. A convertible feature for a corporate bond allows: a bondholder to convert a debt instrument into securities that give the
investor ownership rights
106. What causes a mutual fund's NAV per share to fall?: when the fund pays a dividend to shareholders and when the market
value of the portfolio declines
107. American-style vs. European-style option: American: call or put buyers can exercise a contract any time BEFORE expiration
European: call or put buyers can exercise a contract on the expiration day only (last day of trading)
108. Where do tax deductions for real estate programs derive from?: mortgage interest paid and depreciation
109. When the U.S. government deposits securities with a trustee, against which it issues certificates
representing principal payments only, and no regular interest payments, these are known as: Treasury STRIPS
110. What are the three yields used for debt instruments that all mean the same thing?: Nominal, stated and coupon yield, they
are all fixed at the time the bond is issued
111. Sovereign risk is...: a type of political risk, the risk of default by a country on its debt instruments (i.e.-The ratings on the debt instruments of a foreign
country with outstanding loans from a number of other countries worldwide have been downgraded. The impact felt due to the risk of possible default is known as)
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112. Legislative vs Regulatory risk: Legislative: the changing of laws
Regulatory: the changing of regulations
113. Liquid vs illiquid investments: Investments in stocks and bonds are considered liquid (i.e.-common stock), while investments in assets (works
of art, real estate, automobiles) are considered illiquid
114. A registered representative speaks to a customer about a particular 6% municipal bond quoted on a
6.5% basis. What does this mean?: 6% is the bond's coupon, while 6.5% is the bond's yield to maturity
115. Money market instruments guaranteed by a bank that are used to provide capital for international trade/
provide short-term financing for importers and exporters are called: bankers' acceptances (BAs)
116. If an investor is long an option contract and wishes to exercise the contract, the investor notifies the
broker-dealer, who then notifies...: the OCC (Options Clearing Corporation) who's duty is to standardize, guarantee the performance and issue options contracts
117. If the buyer exercises the contract, then the seller...: is obligated to fulfill the terms of the contract
118. What does a bond certificate represent?: The borrower's obligation to repay the amount it borrowed plus interest
119. What happens in repo (reverse repurchase) agreement: a dealer agrees to buy securities from an investor and sell them
back later at a higher price.
120. A preemptive right for existing shareholders is best described as: the right to purchase shares in an amount that would keep a
shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares
121. When is settlement for options trading?: The next business day, the day after the trade date,
T + 1 (i.e.-If someone purchased a call on Tuesday, December 5, the settlement for that trade would be on Wednesday, December 6.)
122. capital market vs money market instruments: capital market: intermediate to long-term,
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133. What is the most common form of direct participation programs (DPPs)?: - Limited partnerships (LPs): business entities
allowing for the economic consequences of the business to flow through to the individual investors (partners).
134. What is the one option contract with unlimited loss potential?: A short call, it is
bearish and wants to see the price of the stock rise
135. What do federal funds represent?: the amount by which a bank exceeds its required deposits to be held on reserve at the FRB
136. What are the steps for opening a new options account?: Obtain essential facts from the customer, get approval from the branch
manager, enter the initial order, then obtain a signed options agreement
137. What are anticipation notes?: Short-term municipal obligations that generate funds for a munici- pality that expects alternate longer-term
financing (i.e.-TANs, RANs, TRANs, BANs, CLNs, GANs)
138. What are the 3 types of investment companies under the Investment Act of 1940?: Face-amount certificates, unit
investment trusts, and management companies (both open- and closed-end)
139. The declaration, record and payment dates are all set by ,
while the ex-dividend date is set by .: DRP are set by the BOD, while E is set by FINRA or the exchange
140. Exception reports are filed when...: There is suspicious activity in a customer account or when there is improper use of a customers'
securities or funds
141. What is capping?: A form of market manipulation, often used by those who have written (Short) call option contracts, in which they enter sell
orders in a stock for the purpose of keeping the stock from rising above the strike price, so that the calls wont be in-the-money and therefore exercised
142. What is backing away?: The failure to honor a firm quote on a security
143. What is a contemporaneous trader?: Someone who enters into a transaction at the same time as someone else who has and may be acting
on inside information; they can sue the other person for up to 5 years after the violation has occurred
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144. What are the three stages of money laundering?: Placement, layering, then integration
145. Regulation T: set by the FRB, the initial margin requirement is 50% of sale proceeds to be deposited in the customer's margin account
146. Standard corporate actions: cash and stock dividends, even and uneven stock splits (both forward and reverse) and the issuance of warrants
and rights
147. Nonstandard/unique corporate actions: mergers and acquisitions, takeovers, spinotts, tender otters and buy-back or repurchases of stock
148. What must happen in order to sell short?: The shares must be borrowed, or located in order to borrow.
149. What does Regulation S-P consider nonpublic information?: a customer's Social Security number, account balances,
transaction history, and any information collected through an internet cookie (a home address is not included as nonpublic information)
150. What is the threshold for triggered suspicious activity and is grounds for
filing an SAR (as compared to a CTR)?: At least $5,000 in funds or assets. A CTR is triggered by amounts greater than $10,000 in funds or assets
151. What is a tender offer?: When a company otters to buy outstanding securities for cash or for cash plus other securities from its stockholders or
bondholders
152. What is a buy-back?: Sometimes referred to as a repurchase, is when a company buys its own outstanding securities in the open market
rather than appealing directly to its investors.
153. What information is contained on the trade confirmation sent to the in- vestor at or on the settlement date?:
The commission charged on the agency transaction and the CUSIP number
154. What would require a loan consent form?: A customer has given permission for securities in an investment account to be used for the
purpose of other customers who want to borrow them in order to sell those securities short
155. What is a municipal financial professional (MFP)?: an employee of a FINRA member engaged in municipal security
representative activities such as underwriting and trading
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167. Under Rule 144, what sales are subject to volume limitation shares?: Control persons selling stock after the minimum 6
month holding period, regardless of how many years they sell them for. As long as they are registered stock (control) sold by an aflliate, volume restrictions always apply
168. What are Jumbo CDs: Issued in denominations of $100,000 to $1 million and trade in the secondary
market, issued with maturities of one year or less, negotiable with no prepayment penalty, they are promissory notes that are backed ONLY by the credit standing of the issuing institution, therefore UNSECURED
169. Who is the only entity allowed to issue options?: The OCC (Options Clearing Corporation).
Corporations would not issue calls and puts, but they would issue debt and equity securities like preferred stock, common stock and debentures.
170. Why do corporations issue promissory notes?: (aka commercial paper) they are short-term,
unsecured commercial paper, issued by corporations to raise cash in order to finance accounts receivable seasonal inventory gluts
171. What are the three debt maturity schedules that can be used?: Serial:
Term: Balloon:
172. What are Treasury bills?: Only Treasury security issued without a stated interest so the investor receives the value of par at maturity, always issued at
a discount, lowest interest rate risk because they are short-term, and their maturities are 4, 13, 26 and 52 weeks.
173. What are the rules for penny stocks?: They are only used in solicited transactions, prospective
investors are always given a stock disclosure document before any transactions take place due to their greater perceived risk, a signed suitability statement is NOT required for established customers and statements of account activity are required monthly when an account holds a penny stock
174. What constitutes an established customer?: They have held an account with the bro-
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175. What is the maximum potential loss for a short put?: The risk is if the stock falls. so
if an investor shorts 2 DEF January 55 puts at a premium of 2 each when the market price of DEF is 56.25, the max potential loss is 55-2 = 53 x 100 shares = 5,300 x 2 contracts = $10,600 max potential loss initial market price doesn't matter here
176. What is the maximum gain for any short position (call or put): The premium (i.e.-An
investor short a January 30 call at 4 has a maximum gain potential of 4 points at $400 - This would occur if, at expiration, the contract was at or out of the money and, therefore, left unexercised)
177. What do tax credits do for real estate program partners?: They reduce tax liability dollar for dollar, which makes them more
beneficial than tax deductions, which only reduce taxable income
178. What debt instrument pays no periodic interest?: Treasury STRIPS because they are sold at a deep discount and mature at par
179. What is inflation risk?: When prices are continually rising, reducing purchasing power that one's investment returns will have
180. How is the coupon rate for a bond calculated?: As a percentage of par, usually $1,000 for a bond
181. Automatic exercise will occur at expiration for any equity option contract that is in the money by at
least: 0.
182. What are the 3 types of real estate direct participation programs?: raw land, new construction and existing properties
183. What is financial risk?: relates to those companies that use debt financing (leverage), Debt financing or utilizing debt leverage too much can lead to
the inability to meet principal and interest payments on a company's debt obligations.
184. U.S. consumers are increasing their imports of foreign-made goods. On this
data alone, one might expect gross domestic product (GDP) to: decrease because you have to assume that when foreign imports are coming in, it is likely that production of U.S. goods will fall ott, leading to a decrease in the GDP.
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195. What is naked short selling?: Selling shares that are not yet borrowed or located in order to be borrowed, which is prohibited
196. What does it mean when a security is held in "street name"?: the BD is the named or nominal owner, but the customer is
still the beneficial owner retaining all rights of ownership.
197. An investor in a direct participation program wishes to divest of a partner- ship interest purchased some
time ago. You would correctly advise that: There is no secondary market making them highly illiquid
198. Short-term purchases and sales of a mutual fund to take advantage of price fluctuation is known as:
Market timing
199. When would producers report periods of rising inventories?: During contraction
200. When would producers report periods of falling inventories?: Expansion (recovery)
201. What is and who performs proprietary trading?: Proprietary trading is buying and selling securities for one's own account. Market
makers tend to do this as the major portion of their business.
202. What is a prime account?: A type of broker-dealer account where the institutional customer utilizes the services of a broker-dealer who provides
custody of securities as well as other back-oflce functions, while also allowing the customer to establish relationships with other broker-dealers for the purpose of executing orders.
203. What are the rules for prospectus delivery for IPOs and APOs: An IPO of a stock to
be listed on the NYSE requires delivery for a period of 25 days, and an APO of a stock that will not be listed nor quoted over Nasdaq requires delivery for a period of 40 days
204. To be an individual accredited investor, one must have a net worth of....: $1 million or more, or has had an annual
income of $200,000 or more in each of the 2 most recent years. For joint accounts, income level must be $300,
205. What is fiscal policy?: Fiscal policy refers to governmental budget decisions enacted by our president
and Congress and it is NOT the most eflcient way to solve short-term economic problems because politics drives Fiscal policy, making the process longer.
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206. While private placement securities can be sold to accredited investors, the
vast majority of these sales are for....: institutional investors
207. What typically do we see during periods of inflation?: Rising prices and rising employ- ment.
208. What tools do the FRB use to impact the money supply?: Change the discount rate, open market operation from the FOMC,
and changing the reserve requirements. Changing the prime rate is set by money center banks.
209. What are mutual funds typically prohibited from that hedge funds are able
to utilize?: Purchasing on margin and selling short (i.e.-taking short positions on NYSE listed stocks)
210. Persons who enter trades at or near the same time in the same security as a person who has inside
information are known as: contemporaneous traders; the simple definition of contemporaneous is: existing, occurring, or originating during the same time. Contemporaneous traders may sue persons that have violated insider trading regulations, and suits may be initiated up to five years after the violation has occurred.
211. What does "investment strategy" include under the Know your customer
(KYC) rule: Applies to recommendations to invest in, hold, or sell specific securities as well as suggestions pertaining to market sectors, day trading, or divesting of an asset or other investments to make funds available to purchase securities. The definition does NOT include non-security investments such as commodities or fixed annuities.
212. All GTC orders are automatically cancelled if gone unexecuted on...: The last day
business day of April and the last business day of October. They are valid until they are cancelled and must be reentered on these days if they don't want them to be cancelled
213. What are the primary benefits of having a Roth IRA, as opposed to a tradi-
tional IRA?: Reaching age 70½ does not trigger the required minimum distributions found in other retirement plans, all earnings grow and may be withdrawn free of any tax, as long as there has been an open Roth IRA for at least 5 years AND the participant is at least 59½, and having the ability to contribute to BOTH types of IRA plans (Roth & Traditional)
214. A client of a member broker-dealer has just found a new job requiring relo- cation with a salary paying 50%
