Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

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

Correct answer: $10,000

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

Question 2: Blue chip stocks are generally characterized by:

Penny stock pricing under $5
Small market capitalization and new companies
Large, well-established companies with stable earnings (Correct answer)
High volatility and high growth potential

Correct answer: Large, well-established companies with stable earnings

Blue chip stocks represent financially stable, large-cap companies with long track records of reliable performance.

Question 3: What does it mean to write (sell) a covered call?

Selling a call with no existing stock position
Selling a call option while owning the underlying shares (Correct answer)
Buying a call as protection against a short stock position
Writing an option on an index rather than individual stock

Correct answer: Selling a call option while owning the underlying shares

A covered call involves selling a call option while owning the underlying shares, providing income in exchange for capping upside.

Question 4: Zero-coupon bonds are sold:

With floating interest rates
At par with no interest payments
At a premium above par
At a discount and pay no periodic interest (Correct answer)

Correct answer: At a discount and pay no periodic interest

Zero-coupon bonds are issued at a deep discount and pay no periodic interest, with the investor receiving par at maturity.

Question 5: Candidates must include information regarding their OBAs (also known as: ) on the Form U4.

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

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

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

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 7: Which of the following describes the primary market?

Where securities are listed on exchanges
Where investors trade securities among themselves
Where derivatives contracts are created
Where new securities are first issued to the public (Correct answer)

Correct answer: Where new securities are first issued to the public

The primary market is where issuers sell new securities directly to investors, with proceeds going to the issuer.

Question 8: Which of the following is NOT a function of the Securities Investor Protection Corporation (SIPC)?

Insuring against investment losses from market declines (Correct answer)
Returning missing customer cash and securities
Providing up to $500,000 in coverage per customer
Liquidating failed broker-dealers

Correct answer: Insuring against investment losses from market declines

SIPC protects customers when a broker-dealer fails, but it does not protect against investment losses due to market fluctuations.

Question 9: Dark pools are best described as:

Derivatives trading platforms
After-hours trading systems
Exchanges that specialize in penny stocks
Private trading venues that do not display quotes publicly (Correct answer)

Correct answer: Private trading venues that do not display quotes publicly

Dark pools are private trading venues where large orders can be executed without showing quotes to the public market.

Question 10: Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Business risk
Liquidity risk
Credit risk
Systematic risk (Correct answer)

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 11: A customer's account statement shows a 'long' position in 100 shares of XYZ. This means the customer:

Holds a futures contract on 100 shares
Has an option to buy 100 shares at a set price
Has borrowed and sold 100 shares expecting a price decline
Owns 100 shares of XYZ (Correct answer)

Correct answer: Owns 100 shares of XYZ

A long position means the investor owns the security outright and benefits if the price increases.

Question 12: Which agency has jurisdiction over futures contracts on agricultural commodities?

FINRA
OCC
SEC
CFTC (Correct answer)

Correct answer: CFTC

The Commodity Futures Trading Commission (CFTC) regulates futures and options on commodities, including agricultural products.

Question 13: What is the primary market?

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

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 14: Under Regulation T, the initial margin requirement for purchasing equity securities is:

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

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

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

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 16: Which of the following is considered an equity security?

Mortgage-backed security
Corporate bond
Common stock (Correct answer)
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 17: Rule 144 governs the sale of:

Exchange-listed options
Foreign securities in US markets
Municipal bonds in the secondary market
Restricted and control securities (Correct answer)

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 18: A tombstone advertisement for a new securities offering is permitted during the waiting period because it:

Is filed separately with FINRA
Solicits orders from investors
Contains a full prospectus
Is limited to basic factual information and directs investors to the prospectus (Correct answer)

Correct answer: Is limited to basic factual information and directs investors to the prospectus

Tombstone ads are permitted during the cooling-off period because they only provide limited factual information and direct readers to obtain a prospectus.

Question 19: Reg BI (Regulation Best Interest) requires broker-dealers to:

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
Eliminate all sales commissions

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

A trust account requiring court oversight
A retirement account for minors
A college savings account with tax benefits
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 21: A bond trading at a premium means its price is:

Equal to its yield to maturity
Equal to par value
Below par value
Above par value (Correct answer)

Correct answer: Above par value

A bond trades at a premium when its price exceeds par value, typically because its coupon rate is above current market rates.

Question 22: What is a unit investment trust (UIT)?

A hedge fund open to retail investors
An investment company with a fixed, unmanaged portfolio that terminates on a set date (Correct answer)
A government-sponsored bond fund
A fund actively managed by a portfolio manager

Correct answer: An investment company with a fixed, unmanaged portfolio that terminates on a set date

A UIT holds a fixed portfolio of securities and has a set termination date, unlike mutual funds that are actively managed.

Question 23: What is a warrant in the context of securities?

A type of bond coupon
A guarantee of dividend payment
A court order to freeze assets
A long-term option to buy shares at a fixed price (Correct answer)

Correct answer: A long-term option to buy shares at a fixed price

A warrant is a long-term security giving the holder the right to purchase shares at a set price before expiration.

Question 24: What must occur before a broker-dealer executes an options trade in a customer's account?

The customer must be an accredited investor
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)

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 25: Which type of stock gives shareholders priority over common stockholders when dividends are distributed?

Warrants
Preferred stock (Correct answer)
Common stock
Convertible bonds

Correct answer: Preferred stock

Preferred stockholders receive dividends before common stockholders and have priority in liquidation.

Question 26: Which of the following is a characteristic of preferred stock compared to common stock?

Greater voting rights
Higher potential capital appreciation
Priority dividend payments (Correct answer)
Greater liquidation risk

Correct answer: Priority dividend payments

Preferred stockholders receive dividends before common stockholders and have priority over common stockholders in liquidation.

Question 27: What is the primary purpose of the USA PATRIOT Act requirement for customer identification programs (CIP)?

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

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

4 (Correct answer)
3
5
2

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 29: A letter of intent (LOI) in mutual fund investing allows a shareholder to:

Qualify for a breakpoint discount over a 13-month investment period (Correct answer)
Redeem shares before the surrender period
Defer capital gains taxes on fund distributions
Switch between fund families without sales loads

Correct answer: Qualify for a breakpoint discount over a 13-month investment period

An LOI allows investors to commit to reaching a breakpoint investment level over 13 months to receive the reduced sales load upfront.

Question 30: Credit risk in the context of fixed income investing is best described as:

The risk that rising interest rates will lower the market price of a bond
The risk that an issuer will fail to make scheduled principal or interest payments (Correct answer)
The risk that inflation will reduce the purchasing power of bond payments
The risk that a bond cannot be sold quickly in the secondary market

Correct answer: The risk that an issuer will fail to make scheduled principal or interest payments

Credit risk (also called default risk) is the possibility that a bond issuer will be unable or unwilling to make the promised interest and principal payments.

Question 31: What is the 'suitability' obligation under FINRA rules?

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)
Brokers must guarantee a minimum return on recommendations

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 32: Under the Securities Act of 1933, the registration statement filed with the SEC for a new securities offering includes:

A guarantee of the offering price by underwriters
A prospectus disclosing material information about the offering (Correct answer)
Insider trading records of all executives
The issuer's trading history for the past 10 years

Correct answer: A prospectus disclosing material information about the offering

The registration statement includes a prospectus that provides material disclosures to help investors make informed decisions.

Question 33: Which document must be completed before a new brokerage account is opened?

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

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

Long-term capital gain
Short-term capital gain (Correct answer)
Ordinary income dividend
Tax-exempt gain

Correct answer: Short-term capital gain

Short-term capital gains apply to assets held for one year or less (here 8 months) and are taxed at ordinary income rates.

Question 35: What is the coupon rate of a bond?

The bond's yield to maturity
The discount rate used to price the bond
The bond's current yield in the market
The annual interest rate stated on the bond at issuance (Correct answer)

Correct answer: The annual interest rate stated on the bond at issuance

The coupon rate is the annual interest rate fixed at issuance, determining the periodic interest payments.

Question 36: Under FINRA's Best Execution rule, broker-dealers must:

Seek the most favorable terms reasonably available for customer orders (Correct answer)
Match any competitor's price
Execute all trades on the NYSE
Execute large orders before small ones

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 37: What is a 12b-1 fee?

An annual fee charged by mutual funds to cover marketing and distribution costs (Correct answer)
A transaction fee for buying ETF shares
A redemption fee charged when selling fund shares
A penalty for early withdrawal from an annuity

Correct answer: An annual fee charged by mutual funds to cover marketing and distribution costs

A 12b-1 fee is an annual fund expense used for marketing and distribution, included in the fund's expense ratio.

Question 38: A margin call is issued when:

A customer exceeds the maximum position size
A broker wants to promote additional trading
A stock in the account pays a dividend
The equity in a margin account falls below the maintenance margin requirement (Correct answer)

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 39: Under Regulation T, the Federal Reserve sets the initial margin requirement for equity purchases at:

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

Correct answer: 50%

Regulation T requires investors to deposit at least 50% of the purchase price when buying securities on margin.

Question 40: The Consumer Price Index (CPI) is primarily used to measure:

The total value of goods and services exported by a country
The total output of the manufacturing sector
Changes in the price level of a basket of consumer goods and services over time (Correct answer)
The interest rate that the Federal Reserve charges member banks

Correct answer: Changes in the price level of a basket of consumer goods and services over time

The CPI tracks changes in the prices paid by urban consumers for a representative basket of goods and services, making it the primary measure of consumer inflation.

Question 41: What is the maximum loss for a buyer of a call option?

The difference between market price and strike price
The premium paid for the option (Correct answer)
Unlimited loss
Loss of the underlying stock's full value

Correct answer: The premium paid for the option

The maximum loss for an option buyer is limited to the premium paid, since the option can expire worthless.

Question 42: What distinguishes a hedge fund from a registered mutual fund?

Hedge funds must publish daily NAV
Hedge funds are not registered with the SEC and are limited to accredited investors (Correct answer)
Hedge funds are prohibited from using leverage
Hedge funds are only allowed to invest in fixed income

Correct answer: Hedge funds are not registered with the SEC and are limited to accredited investors

Hedge funds operate as private funds exempt from SEC registration and restrict participation to accredited investors.

Question 43: When the Federal Reserve raises interest rates, what is the typical effect on existing fixed-rate bond prices?

Bond prices decrease (Correct answer)
Bond prices increase
Bond prices remain unchanged
Bond prices become uncorrelated with rates

Correct answer: Bond prices decrease

When interest rates rise, existing bonds paying lower fixed rates become less attractive compared to new bonds, causing their market prices to fall.

Question 44: Which of the following is required to be disclosed in a prospectus under SEC rules?

Names of all institutional investors
The underwriter's internal profit margins
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 45: What information is required on a new account form under FINRA rules?

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

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 46: An investment adviser with assets under management below $110 million must generally register with:

The state securities regulator where they operate (Correct answer)
FINRA
The SEC
The Federal Reserve

Correct answer: The state securities regulator where they operate

Investment advisers with less than $110 million in AUM are generally required to register with their state securities administrator rather than the SEC.

Question 47: A tenants in common (TIC) account differs from JTWROS in that:

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)
TIC owners must hold equal shares
TIC accounts are only for retirement assets

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

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

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 49: Which US Treasury security has a maturity of more than 10 years?

Treasury note
Treasury STRIP
Treasury bill
Treasury bond (Correct answer)

Correct answer: Treasury bond

Treasury bonds have maturities of 20 to 30 years, making them the longest-duration US government securities.

Question 50: Which of the following is a characteristic of a Real Estate Investment Trust (REIT)?

REITs cannot be traded on stock exchanges
REITs must invest at least 75% of assets in real estate
REITs must distribute at least 90% of taxable income to shareholders (Correct answer)
REITs are exempt from all federal taxes

Correct answer: REITs must distribute at least 90% of taxable income to shareholders

To qualify as a REIT, the trust must distribute at least 90% of its taxable income to shareholders each year.

Question 51: The securities laws of any state in the union may be slightly different from the laws of other states. These state securities laws are most frequently referred to collectively as:

NASAA regulations
Regulations in Series 63
The Sarbanes-Oxley Act
Blue-sky regulations (Correct answer)

Correct answer: Blue-sky regulations

The state securities laws in the United States, which regulate the offering and sale of securities within individual states to protect investors from fraud, are collectively referred to as 'blue-sky regulations.' These laws require the registration of securities, brokers, and dealers, and they mandate disclosures to ensure that investors have adequate information before making investment decisions. The term originated from a judge's comment about speculative schemes having 'no greater value than so many feet of blue sky.'

Question 52: A churning violation occurs when a broker:

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

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 53: What risk do bond investors face when interest rates fall and they must reinvest coupon payments at lower rates?

Liquidity risk
Inflation risk
Credit risk
Reinvestment risk (Correct answer)

Correct answer: Reinvestment risk

Reinvestment risk is the risk that future coupon payments will be reinvested at lower interest rates than originally expected.

Question 54: The Dow Jones Industrial Average (DJIA) is best described as a:

Broad market index of 500 stocks weighted by market cap
Equal-weighted index of NYSE-listed stocks
GDP-weighted index of global equities
Price-weighted index of 30 large U.S. companies (Correct answer)

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 55: Delta in options pricing measures:

The rate of change in option price relative to time decay
The implied volatility of the underlying stock
The sensitivity of the option to interest rate changes
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 56: An Exchange-Traded Fund (ETF) differs from a mutual fund primarily because:

ETFs actively manage their portfolios
ETFs trade on exchanges throughout the day like stocks (Correct answer)
ETFs are only available to institutional investors
ETFs cannot hold stocks

Correct answer: ETFs trade on exchanges throughout the day like stocks

ETFs trade on exchanges continuously throughout the trading day at market prices, unlike mutual funds priced once at end of day.

Question 57: 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
6000
4000 (Correct answer)
5000

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

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

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 59: A call option gives the holder the right to:

Receive dividends from the underlying stock
Sell shares at the strike price
Buy shares at the strike price (Correct answer)
Short-sell the underlying stock

Correct answer: Buy shares at the strike price

A call option grants the holder the right, but not the obligation, to buy the underlying security at the strike price before expiration.

Question 60: SIPC (Securities Investor Protection Corporation) protects investors against:

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

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 61: A bond that pays no periodic interest but is issued at a discount to face value is called a:

Floating-rate bond
Callable bond
Zero-coupon bond (Correct answer)
Convertible bond

Correct answer: Zero-coupon bond

Zero-coupon bonds make no periodic interest payments and are sold at a discount, with the investor earning the difference at maturity.

Question 62: What is the 'time value' component of an option premium?

The portion of premium beyond intrinsic value reflecting time until expiration (Correct answer)
The strike price minus current stock price
The option's intrinsic value
The dividend expected before expiration

Correct answer: The portion of premium beyond intrinsic value reflecting time until expiration

Time value is the premium above intrinsic value, reflecting the probability the option will gain more value before expiration.

Question 63: What is the 'spread' in a securities quote?

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

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 64: Which of the following is considered a money market instrument?

Municipal revenue bond
30-year Treasury bond
Convertible preferred stock
Commercial paper (Correct answer)

Correct answer: Commercial paper

Commercial paper is a short-term unsecured debt instrument issued by corporations, making it a money market instrument.

Question 65: Which of the following is a characteristic of exchange-traded options?

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

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 66: An investment company that raises a fixed amount of capital through a one-time IPO and whose shares then trade on an exchange is a:

Exchange-traded fund
Variable annuity
Closed-end fund (Correct answer)
Open-end mutual fund

Correct answer: Closed-end fund

Closed-end funds issue a fixed number of shares through an IPO, after which the shares trade on secondary markets like stocks.

Question 67: The 'ask' price in a securities quotation represents:

The price the dealer will sell the security to investors (Correct answer)
The price the dealer will pay to buy the security
The average of the highest and lowest daily price
The last price at which the security traded

Correct answer: The price the dealer will sell the security to investors

The ask (or offer) price is the price at which a dealer is willing to sell a security to a buyer.

Question 68: Which of the following describes the risk of losing money on an investment as a result of changes in the economy?

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

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

Hedging
Arbitrage
Margin buying
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 70: What is accrued interest in bond trading?

The discount below par value
The premium paid above par value
Interest earned since the last coupon payment, owed to the seller (Correct answer)
The penalty for calling a bond early

Correct answer: Interest earned since the last coupon payment, owed to the seller

Accrued interest is the interest earned by the bond seller from the last coupon date to the settlement date, paid by the buyer.

Question 71: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

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

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 72: When interest rates rise, what happens to existing bond prices?

Bond prices remain unchanged
Bond prices fall (Correct answer)
Bond prices rise
Bond yields fall

Correct answer: Bond prices fall

Bond prices and interest rates have an inverse relationship — when rates rise, existing bond prices fall.

Question 73: A joint tenancy with right of survivorship (JTWROS) account means:

The account is subject to probate upon any owner's death
Each owner can only access their proportional share
Upon one owner's death, their share passes to the surviving owner(s) (Correct answer)
Owners can designate different beneficiaries for their 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 74: Which term describes the difference between the bid and ask prices of a security?

Premium
Spread (Correct answer)
Margin
Discount

Correct answer: Spread

The bid-ask spread is the difference between the price a buyer will pay (bid) and the price a seller will accept (ask).

Question 75: Open market operations conducted by the Federal Reserve refer to:

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
Setting margin requirements for securities purchases

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 76: A discretionary account allows a broker to:

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

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

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

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 78: Which answer accurately sums up a margin account?

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

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 79: Which of the following entities protects customers of FINRA member broker-dealers if the firm fails?

SIPC (Correct answer)
FDIC
SEC
MSRB

Correct answer: SIPC

SIPC (Securities Investor Protection Corporation) protects customers of failed broker-dealers by covering up to $500,000 in securities and cash.

Question 80: The bid price in a security quote represents:

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

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 81: Municipal bonds are issued by:

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

Correct answer: State and local governments

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

Question 82: Interest rate risk most directly and significantly affects which type of investment?

Short-term commercial real estate leases
Common equity shares of growth companies
Commodity futures contracts
Long-term fixed-rate bonds (Correct answer)

Correct answer: Long-term fixed-rate bonds

Long-term fixed-rate bonds are most sensitive to interest rate changes because their fixed payments are locked in for many years, making price swings larger when rates move.

Question 83: Which options strategy profits when the underlying stock remains relatively flat?

Long put
Long straddle
Long call
Short straddle (Correct answer)

Correct answer: Short straddle

A short straddle (selling both a call and a put at the same strike) profits from low volatility when the stock stays near the strike price.

Question 84: An organization makes $100,000 a year, but it also spends $75,000. The corporation has 10,000 issued shares and owes $7,000 to preferred shareholders. Regarding the value of each share, which of the following assertions is true?

To enhance the value of the stock held by shareholders, the corporation ought to issue an additional 10,000 shares.
10% of the company's stock is owned by investors, whose shares are worth at least $5,000.
The par value of non-preferred stockholders' shares will be $1.80. (Correct answer)
Each share will be worth $2.20.

Correct answer: The par value of non-preferred stockholders' shares will be $1.80.

To determine the value available to non-preferred (common) shareholders, first calculate the company's net income by subtracting expenses from revenue: $100,000 - $75,000 = $25,000. Next, subtract the preferred dividends from the net income, as preferred shareholders are paid first: $25,000 - $7,000 = $18,000. Finally, divide this amount by the number of issued common shares (10,000) to find the earnings per common share, which is $18,000 / 10,000 = $1.80.

Question 85: A stop order (stop-loss order) becomes a market order when:

The security's price reaches the limit price
Volume exceeds the order size
The order is not filled within one trading day
The security's price reaches or passes the stop price (Correct answer)

Correct answer: The security's price reaches or passes the stop price

A stop order is triggered and becomes a market order when the security's price reaches the designated stop price.

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%

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