Securities Industry Essentials (SIE) Exam — Questions and Answers

Question 1: Credit risk in the context of fixed income investing is best described as:

The risk that inflation will reduce the purchasing power of bond payments
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 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 2: What is the key difference between open-end and closed-end mutual funds?

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

Correct answer: Open-end funds continuously issue new shares; closed-end have a fixed number of shares

Open-end funds (traditional mutual funds) create and redeem shares continuously, while closed-end funds issue a fixed number of shares traded on exchanges.

Question 3: An investor buys a stock for $40 and sells it after 8 months for $55. This gain is taxed as a:

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

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

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

Correct answer: Owns 100 shares of XYZ

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

Question 5: Which of the following correctly defines 'liquidity' in the context of securities?

The yield earned on a security over its lifetime
The ease with which a security can be converted to cash without significant price impact (Correct answer)
The creditworthiness of a security's issuer
The volatility of a security's price

Correct answer: The ease with which a security can be converted to cash without significant price impact

Liquidity refers to how quickly and easily a security can be bought or sold in the market without causing a significant change in its price.

Question 6: 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?

The par value of non-preferred stockholders' shares will be $1.80. (Correct answer)
Each share will be worth $2.20.
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.

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 7: 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?

6000
4000 (Correct answer)
1000
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 8: A joint tenancy with right of survivorship (JTWROS) account means:

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

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

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

Correct answer: Seek the most favorable terms reasonably available for customer orders

Best execution requires broker-dealers to use reasonable diligence to find the most favorable terms for customer order execution.

Question 10: What is the term for a corporate action that increases the number of outstanding shares while reducing the price per share proportionally?

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

Correct answer: Forward stock split

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

Question 11: Which type of investment risk cannot be eliminated through diversification because it affects the entire market?

Business risk
Credit risk
Liquidity 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 12: When the Federal Reserve purchases government securities through open market operations, the effect on the money supply is:

The money supply becomes more volatile but does not change in size
The money supply remains unchanged
The money supply increases (Correct answer)
The money supply decreases

Correct answer: The money supply increases

When the Fed buys government securities, it pays for them by crediting bank accounts, injecting money into the banking system and increasing the money supply.

Question 13: A margin call is issued when:

A customer exceeds the maximum position size
A stock in the account pays a dividend
A broker wants to promote additional trading
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 14: What is accrued interest in bond trading?

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

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

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
The total value of goods and services exported by a country
The total output of the manufacturing sector

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 16: Which of the following is a lagging economic indicator?

Manufacturer's new orders for consumer goods
Stock market prices
Average duration of unemployment (Correct answer)
Building permits

Correct answer: Average duration of unemployment

Average duration of unemployment is a lagging indicator because it reflects the aftermath of economic changes rather than predicting them.

Question 17: A bond that pays no periodic interest but is issued at a discount to face value is called a:

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

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 18: What is a 'pink sheet' stock?

A stock trading on the NYSE Amex exchange
A preferred stock with a pink certificate
A government bond issued by a foreign country
An OTC security not listed on a formal exchange, typically with less regulatory oversight (Correct answer)

Correct answer: An OTC security not listed on a formal exchange, typically with less regulatory oversight

Pink sheet stocks trade over-the-counter outside major exchanges with minimal reporting requirements and less regulatory scrutiny.

Question 19: An option is 'in the money' (ITM) when:

The time value exceeds the premium paid
The underlying stock pays a dividend
The holder has made a profit including the premium paid
Exercising the option would produce a positive intrinsic value (Correct answer)

Correct answer: Exercising the option would produce a positive intrinsic value

An option is in the money when exercising it would produce positive intrinsic value, regardless of the premium paid.

Question 20: The USA PATRIOT Act requires broker-dealers to implement a Customer Identification Program (CIP) primarily to:

Increase market liquidity
Reduce trading commissions
Standardize account fees
Combat money laundering and terrorism financing (Correct answer)

Correct answer: Combat money laundering and terrorism financing

The CIP requirement of the USA PATRIOT Act mandates identity verification of customers to prevent money laundering and terrorism financing.

Question 21: A Treasury Inflation-Protected Security (TIPS) adjusts its principal based on:

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

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

accounts outside of brokerages
Outside of the realm of business (Correct answer)
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 23: In a company liquidation, which security holders are paid LAST?

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

Correct answer: Common stockholders

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

Question 24: What is the 'suitability' obligation under FINRA rules?

Recommendations must be appropriate based on the customer's financial profile and objectives (Correct answer)
All customers must be offered the same investment options
Brokers must guarantee a minimum return on recommendations
Firms must offer the lowest-cost products available

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

Only financial information verified by an accountant
Only the customer's name and tax ID
References from two existing brokerage clients
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 26: What must occur before a broker-dealer executes an options trade in a customer's account?

The customer must have a minimum of $100,000 in the account
The trade must be approved by FINRA in advance
Options agreement must be signed and account must be approved for options trading (Correct answer)
The customer must be an accredited investor

Correct answer: Options agreement must be signed and account must be approved for options trading

Options accounts require separate approval based on the customer's financial profile, and a signed options agreement before trading.

Question 27: Under Regulation T, the initial margin requirement for purchasing equity securities is:

100%
50% (Correct answer)
75%
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 28: What is a 12b-1 fee?

A redemption fee charged when selling fund shares
An annual fee charged by mutual funds to cover marketing and distribution costs (Correct answer)
A transaction fee for buying ETF 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 29: What does it mean to write (sell) a covered call?

Writing an option on an index rather than individual stock
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

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

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

Correct answer: Bond prices fall

Bond prices and interest rates have an inverse relationship; when rates rise, existing bonds with lower rates become less attractive, so their prices fall.

Question 31: An Exchange-Traded Fund (ETF) differs from a mutual fund primarily because:

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

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 32: Under the Bank Secrecy Act, broker-dealers must file a Currency Transaction Report (CTR) when a customer conducts a cash transaction exceeding:

$25,000
$5,000
$50,000
$10,000 (Correct answer)

Correct answer: $10,000

The Bank Secrecy Act requires a CTR for any cash transaction exceeding $10,000, and structuring transactions to avoid this threshold is illegal.

Question 33: Regular-way settlement for most equity securities occurs:

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

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

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

Question 34: What is the maximum loss for a buyer of a call option?

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

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

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

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

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

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 37: SIPC (Securities Investor Protection Corporation) protects investors against:

Losses on options strategies
Fraud committed by the issuer of securities
Broker-dealer insolvency and missing customer assets (Correct answer)
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 38: Which market is known as the secondary market for trading existing shares among investors?

IPO market
Primary market
Over-the-counter market (Correct answer)
New issue market

Correct answer: Over-the-counter market

The over-the-counter (OTC) market is a secondary market where existing securities are traded between investors.

Question 39: Which agency's bonds carry an implicit (not explicit) government guarantee?

Federal Reserve
FDIC
Fannie Mae (FNMA) (Correct answer)
US Treasury

Correct answer: Fannie Mae (FNMA)

Government-sponsored enterprises (GSEs) like Fannie Mae carry an implied but not legally guaranteed government backing.

Question 40: What is the primary purpose of the USA PATRIOT Act requirement for customer identification programs (CIP)?

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

Correct answer: To verify customer identity and prevent money laundering

CIP requirements under the PATRIOT Act require firms to verify customer identity to combat money laundering and terrorist financing.

Question 41: An investor buys a Treasury bond in the secondary market from another investor. This transaction occurs on the:

Primary market
Secondary market (Correct answer)
New issue market
Third market

Correct answer: Secondary market

When securities trade between investors after the initial offering, those transactions occur on the secondary market.

Question 42: Filling out Form U4 is necessary for those who want to register with FINRA; FINRA reviews and approves the forms. Candidates who have specific issues on their record—referred to as follows in FINRA rules—will not be authorized.

Retraction
Statutory disqualification (Correct answer)
Misdemeanor
Refusal to register

Correct answer: Statutory disqualification

Candidates who have specific issues on their record, such as certain felony convictions, financial misconduct, or regulatory violations, are subject to what FINRA rules refer to as 'statutory disqualification.' This means they are automatically barred from becoming or remaining registered with FINRA, as these issues indicate a potential risk to investors or the integrity of the securities industry. FINRA reviews Form U4 submissions to identify such disqualifying events.

Question 43: A discretionary account allows a broker to:

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

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 44: What is the 'spread' in a securities quote?

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

Correct answer: The difference between the bid and ask prices

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

Question 45: An investment adviser with assets under management below $110 million must generally register with:

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

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 46: A protective put strategy involves:

Writing a covered put against a short stock position
Buying puts on an index to hedge a bond portfolio
Buying a put option to hedge against a decline in owned shares (Correct answer)
Selling a put to generate income on a long stock position

Correct answer: Buying a put option to hedge against a decline in owned shares

A protective put combines long stock with a long put option, limiting downside risk while maintaining upside potential.

Question 47: What is the role of a market maker?

To execute trades only for institutional investors
To provide liquidity by continuously quoting bid and ask prices (Correct answer)
To regulate trading activity on exchanges
To set the official closing price of securities

Correct answer: To provide liquidity by continuously quoting bid and ask prices

Market makers provide liquidity by posting continuous bid (buy) and ask (sell) prices, profiting from the bid-ask spread.

Question 48: Delta in options pricing measures:

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)
The implied volatility of the underlying stock
The rate of change in option price relative to time decay

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

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

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 50: A corporation issues new shares directly to existing shareholders in proportion to their current holdings through a:

Secondary offering
Rights offering (Correct answer)
Private placement
Stock split

Correct answer: Rights offering

A rights offering gives existing shareholders the right to purchase additional shares at a set price, usually below market, proportional to their current holdings.

Question 51: Which of the above scenarios demonstrates an unsystematic risk?

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

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

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

Question 52: Which of the following best describes the ex-dividend date?

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

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

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

Question 53: In the event that a consumer complaint proceeds to an arbitration hearing, the panel's decision:

either party may file an appeal within 30 days of the decision.
either party may file an appeal within 25 days of the decision.
may be challenged whenever one wants; there is no deadline
is final and enforceable against all parties; an appeal is not available. (Correct answer)

Correct answer: is final and enforceable against all parties; an appeal is not available.

FINRA arbitration decisions are generally final and binding on all parties involved. Unlike court decisions, there are extremely limited grounds for appeal, typically only in cases of fraud, arbitrator misconduct, or if the arbitrators exceeded their authority. This finality is a key characteristic of the arbitration process, designed to provide a swift and conclusive resolution to disputes.

Question 54: Short selling requires investors to borrow securities because:

SEC rules require collateral for all trades
They are selling securities they do not currently own (Correct answer)
They must hold the securities for 30 days before selling
Short selling is only permitted on margin

Correct answer: They are selling securities they do not currently own

Short sellers borrow securities to sell them first, expecting to buy them back cheaper later and return the borrowed shares.

Question 55: 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 become uncorrelated with rates
Bond prices remain unchanged

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 56: In addition to the official in-house continuing education programs that all FINRA member companies must set up for their registered people, FINRA has standards for registered representatives regarding CE that are known as:

Regulatory-element CE (Correct answer)
Required-component CE
Lawful-element CE
CE for Firm-Element

Correct answer: Regulatory-element CE

FINRA's continuing education (CE) requirements include two components: the Firm Element and the Regulatory Element. The Regulatory Element is mandated by FINRA and requires registered representatives to complete computer-based training within 120 days of their second registration anniversary and every three years thereafter. This ensures that representatives stay updated on regulatory changes, ethical requirements, and product knowledge relevant to their roles.

Question 57: What is a power of attorney (POA) in a brokerage account context?

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

Correct answer: A written authorization for a third party to act on the account owner's behalf

A power of attorney authorizes a designated person to make investment decisions and transactions for another person's account.

Question 58: What risk do bond investors face when interest rates fall and they must reinvest coupon payments at lower rates?

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

Correct answer: Reinvestment risk

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

Question 59: A long straddle position is profitable when the underlying stock:

Moves significantly in either direction (Correct answer)
Trades sideways near the strike price
Increases slightly in value
Pays a large dividend

Correct answer: Moves significantly in either direction

A long straddle (buying both a call and put at the same strike) profits from large price moves in either direction.

Question 60: Under the Investment Company Act of 1940, a mutual fund must redeem shares at:

The prior day's closing price
A premium to NAV
A discount set by the fund
Net Asset Value (NAV) (Correct answer)

Correct answer: Net Asset Value (NAV)

Open-end investment companies (mutual funds) must redeem shares at the current NAV, calculated after receipt of a redemption request.

Question 61: What is the difference between a broker and a dealer?

Dealers are regulated by FINRA; brokers are not
Brokers only handle government securities
Brokers trade for their own account; dealers trade for customers
Brokers act as agents for customers; dealers trade for their own account as principals (Correct answer)

Correct answer: Brokers act as agents for customers; dealers trade for their own account as principals

A broker acts as an agent executing trades on behalf of customers, while a dealer trades as a principal from its own inventory.

Question 62: A bond trading at a premium means its price is:

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

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

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

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 64: What is a warrant in the context of securities?

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

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 65: What is a callable bond?

A bond that pays variable interest
A bond backed by collateral
A bond that can be converted to stock
A bond the issuer can redeem before maturity (Correct answer)

Correct answer: A bond the issuer can redeem before maturity

A callable bond allows the issuer to redeem the bond before its stated maturity date, usually when interest rates decline.

Question 66: What is the name of a stock order that won't be filled unless a stock hits or drops below a specific market price?

Put an end to the order
Order of market
Limitation of order (Correct answer)
Order cancellation

Correct answer: Limitation of order

A limit order is a type of stock order that specifies a maximum price an investor is willing to pay to buy a security or a minimum price they are willing to accept to sell a security. This means the order will only be filled if the stock reaches or drops below the specified buy limit price, or reaches or rises above the specified sell limit price. It provides price control but does not guarantee execution.

Question 67: Under the Bank Secrecy Act, currency transaction reports (CTRs) must be filed for cash transactions exceeding:

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

Correct answer: $10,000

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

Question 68: Which type of stock gives shareholders priority over common stockholders when dividends are distributed?

Preferred stock (Correct answer)
Convertible bonds
Warrants
Common stock

Correct answer: Preferred stock

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

Question 69: Which of the following is considered an equity security?

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

Correct answer: Common stock

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

Question 70: Which of the following best describes a 'bear market'?

A market with high trading volume
A market declining 20% or more from recent highs (Correct answer)
A market rising 10% or more
A market dominated by institutional investors

Correct answer: A market declining 20% or more from recent highs

A bear market is generally defined as a broad market decline of 20% or more from recent highs over a sustained period.

Question 71: Which regulatory body has jurisdiction over variable annuities and variable life insurance products?

FINRA only
The Federal Reserve
State insurance regulators only
Both the SEC and FINRA, as well as state insurance regulators (Correct answer)

Correct answer: Both the SEC and FINRA, as well as state insurance regulators

Variable products are considered both securities and insurance, so they fall under SEC/FINRA jurisdiction as well as state insurance regulation.

Question 72: The Securities Act of 1933 primarily regulates:

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

Correct answer: The issuance of new securities

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

Question 73: A tenants in common (TIC) account differs from JTWROS in that:

Each TIC owner's share passes to their estate upon death, not to co-owners (Correct answer)
TIC accounts cannot be held by more than two people
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 74: 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)
The issuer's trading history for the past 10 years
Insider trading records of all executives

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 75: Which term describes the difference between the bid and ask prices of a security?

Discount
Margin
Spread (Correct answer)
Premium

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

5
3
2
4 (Correct answer)

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 77: A churning violation occurs when a broker:

Trades securities at a loss to generate tax benefits
Delays execution of customer orders
Recommends the same security to multiple customers
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 78: To combat rising inflation, the Federal Reserve would most likely:

Lower the discount rate charged to member banks
Sell government securities on the open market (Correct answer)
Purchase government securities on the open market
Lower the reserve requirement for member banks

Correct answer: Sell government securities on the open market

Selling government securities withdraws money from the banking system, reducing the money supply and raising interest rates, which slows inflation.

Question 79: What is the maximum gain for a seller (writer) of a put option?

The strike price minus the premium
The put premium received (Correct answer)
The full value of the underlying stock
Unlimited

Correct answer: The put premium received

The maximum profit for a put writer is the premium collected upfront, achieved when the put expires worthless.

Question 80: What is a Uniform Gifts to Minors Act (UGMA) account?

A retirement account for minors
A custodial account holding assets for a minor, managed by an adult custodian (Correct answer)
A college savings account with tax benefits
A trust account requiring court oversight

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

SIPC membership form
Options Disclosure Document
Regulation T margin agreement
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 82: The 'ask' price in a securities quotation represents:

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

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 83: Insider trading refers to buying or selling securities based on:

Information from publicly available analyst reports
Tips from financial news channels
Technical analysis of price patterns
Material nonpublic information in breach of a duty (Correct answer)

Correct answer: Material nonpublic information in breach of a duty

Insider trading is illegal trading based on material, nonpublic information that gives an unfair advantage over other investors.

Question 84: Which document must be provided to customers before or during the opening of an options account?

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

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 85: Treasury Inflation-Protected Securities (TIPS) protect investors against inflation because their:

Coupon payments are tax-free
Interest rate increases when inflation rises
Principal adjusts with changes in the Consumer Price Index (Correct answer)
Maturity shortens during inflationary periods

Correct answer: Principal adjusts with changes in the Consumer Price Index

TIPS have their principal value adjusted based on changes in the CPI, so the interest paid and maturity value rise with inflation.

Securities Industry Essentials (SIE) Exam

The FINRA Securities Industry Essentials (SIE) exam assesses basic knowledge of the securities industry, including types of products and their risks, the structure of the securities industry markets, and regulatory agencies and their functions. It is a corequisite for most FINRA representative-level qualification exams.

Questions

105 min

Time Limit

70%

To Pass

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