SIE Exam Part 1 - Practice 1

Which class of shares have a 12b-1 fee as the primary sales charge?

Class C shares

Which of these investment companies trade in the secondary market?

Closed end funds Another name for closed end funds is publicly traded funds because they trade in the market like stock of other companies. The other three investment companies listed here are purchased and redeemed through the issuer (a primary market transaction).

Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary?

Collateral trust bond Collateral trust bonds are backed by a portfolio of other securities; mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment. Debentures are backed only by the company's promise to pay (good faith and credit).

Under the Investment Company Act of 1940, which of the following is not considered and investment company?

Hedge Fund

Of the debt and equity holders listed here, in what order would claimants receive payment in the event that a corporate bankruptcy liquidation needed to occur?

In the event of a corporate bankruptcy liquidation, the order of payment is as follows: secured debtholders, unsecured debtholders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.

Which of the following positions will mitigate the risk of a short call position?

Long calls A short call has unlimited risk unless the investor owns the stock (long position) or has another way to purchase the shares at a set price (warrants, stock rights, or long calls, for example).

Which of the following types of investments is least likely to be a major investment strategy for hedge funds?

Money market instruments Hedge funds typically invest in very aggressive strategies like options, short sales, and currency and commodity trading.

Which of the following require voter approval?

Municipal general obligation (GO) bonds require voter approval because the debt service for these bonds (principal and interest payments) is funded by the taxes collected by the municipal issuer. Voters pay these taxes.

Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?

Municipal revenue bonds Municipal revenue bonds are issued to finance any municipal facility that charges user fees. These municipal bonds are self-supporting because principal and interest payments are made exclusively from revenues generated by the project for which the debt was issued, such as a water and sewer facility billing the municipalities' customers for usage each month.

When interest rates in the marketplace move up, what happens to the coupon rate on existing bond?

Nothing; it does not change.

Which of the following is the most junior security?

Preferred stock All of these are debt securities except preferred stock. All debt securities are senior to equity securities.

An investor is convinced that CDT stock will soon decline in value for a number of reasons. Which investment strategy will allow the investor to take advantage of the anticipated decline in share value with the smallest cash investment?

Purchase a put option Purchasing a put is a basic option strategy utilized when one is bearish on a stock. If the stock declines as anticipated, the investor could exercise the right to sell the stock at the strike price and then repurchase it at its lower current market price for a profit. The premium paid to buy the put costs less than the margin required if one were to sell the stock short. Purchasing a call or a call spread are bullish options strategies. LO 3.b

What method is used to assign exercise notices to broker-dealers with short positions by Options Clearing Corporation (OCC)?

Random-selection basis

Which of the following positions would give an investor an unlimited loss potential?

Short 100 shares of IBS stock and Short 1 IBS Jul 50 uncovered call A short stock position gives an investor unlimited risk potential if the stock should rise because the investor must eventually buy back the stock at the higher price. Because stock can rise an unlimited amount, there is unlimited risk. The sale of a naked call requires that, if exercised, the writer must buy the stock in the market and deliver it at the strike price. Again, because the stock can rise to some unlimited price, the position carries unlimited risk.

Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it?

Short Call

On a long call, when the premium is equal to the intrinsic value, which of the following is true

The contract is at parity

XYZ Corporation is guaranteeing a debt issue for the IHG Company. Regarding these bonds, which of the following is true?

These bonds are unsecured, with the value of the guarantee being as good as the strength of XYZ.

A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are

Treasury receipts. Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

Your customer has purchased 1 February 35 call at 2 on Tuesday, December 4. This transaction will settle on

Wednesday, December 5. Options transactions settle on the next business day after the trade date, T + 1. In this case, an option transaction occurring on Tuesday, December 4, would settle on Wednesday, December 5.

T-bills are issued (auctioned) by the U.S. Treasury Department how often?

Weekly

A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true?

Yield to call (YTC) is the same as yield to maturity (YTM). This bond was purchased at par. If a bond is trading at par, the nominal yield (coupon rate) = current yield (CY) = YTC = YTM. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

If a bond is trading at a discount, which of the following rates is correctly ranked from high to low?

Yield to call, yield to maturity, current yield, nominal yield

A bond that is structured so that the issuer pays off a portion of the principal before the final maturity but pays off a major portion of the bond at the final maturity date is

a balloon bond.

An investor holds a debt security backed by ad valorem taxes. This security is issued by

a city or local municipality. Ad valorem taxes are real estate taxes. Real estate taxes can only back debt securities issued by towns, cities, or counties (never states). These are collectively known as local municipalities.

When the Options Clearing Corporation (OCC) receives a notice to exercise, it will assign that notice to

a short broker-dealer.

An investor who is long MES equity put options is

bearish on MES stock. Those who buy equity put options have the right to sell the underlying stock, in this case MES stock. Being in a position to sell the stock makes the investor bearish on the stock. If the underlying goes down in value, the premium on the put will go up.

If a prospectus is being used to close a mutual fund sale, it must be given to the investor

before or during the sales presentation. The mutual fund purchaser must receive a prospectus before or during any sales solicitation or presentation. Additionally, sales literature sent out to prospective customers is considered a sales solicitation and must therefore be accompanied by a prospectus.

The mutual fund purchaser must receive a prospectus before or during any sales solicitation or presentation. Additionally, sales literature sent out to prospective customers is considered a sales solicitation and must therefore be accompanied by a prospectus.

both offer an unlimited number of shares in a continuous public offering. The key difference between open-end investment companies and closed-ends is the fact that new shares are continuously being offered and are unlimited in number for open-end companies. In the case of the closed-end, the number of shares is fixed and once the initial public offering (IPO) is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.

An investor sells (writes) put options on MAS stock. This investor is

bullish on MAS the stock. Those who sell put options may be obligated to buy the stock at the strike price if the contract is exercised by the owner. Being in a position to own the stock makes the investor bullish on the stock

An investor owns MMS call options. This investor is

bullish, hoping the stock will rise. Call owners have the right to purchase the stock. Being in a position to buy (own) the stock makes them bullish. Bulls want stocks to go up. Put owners have the right to sell the stock. Being in a position to sell the stock makes them bearish. Bears want the stock to go down.

An example of a fixed-income security would include all of the following except

common stock that has historically paid dividends

An LP is a type of

direct participation program. A limited partnership (LP) is the most common form of direct participation program (DPP). LPs are business entities allowing for the economic consequences of the business to flow through to the individual investors (partners).

For a corporate bond, once issued, nominal yield

does not change in response to interest rate movements. Nominal yield (coupon) does not change from the time of issue through maturity. Current yield, yield to maturity, and yield to call, however, are impacted as bond prices react (inversely) to the movement of interest rates in the open market.

Negotiable jumbo CDs are characterized by all of the following except

each issue generally matures in 5-10 years. Negotiable jumbo CDs are issued in denominations of $100,000-$1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. These CDs are unsecured promissory notes backed only by the credit standing of the issuing institution.

A Federal Reserve member bank's deposits in excess of the amount required to be on reserve are known as

federal funds.

A customer buys a 4% Treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity (YTM) is

greater than nominal yield. A bond whose price is below par (priced at a discount) has a higher YTM than current yield, which in turn is higher than the nominal yield.

Money market instruments can be associated with all of the following except

high-yielding debt instruments. Money market instruments are highly liquid, short-term debt securities. The short time to maturity makes them less volatile and relatively safe, suitable to meet short-term investment horizons. In return for the safety, investors sacrifice high potential yields for low yields.

All of the following is true about local government investment pools (LGIPs) except

investors must be provided a prospectus at or before they purchase shares in the investment portfolio

An investor holds a 4% bond, callable in 8 years, and maturing in 12 years. The bond's current yield (CY) measures its annual coupon payment relative to

its market price.

A put will have intrinsic value if, just before expiration, the price of the underlying stock is

less than the exercise price. Put buyers are bearish. Puts have intrinsic value if the price of the underlying stock falls below the exercise price of the option, The client will be profitable if the price decline (below the strike) exceeds the amount of the premium paid. If the price of the stock rises above the exercise price or is the same as the exercise price, the put will expire worthless.

All of the following terms and phrases are associated with the sell side of the contract except

lose the premium if the contract expires. The buyer of the contract pays the premium and loses it if the contract expires. The seller receives the premium and keeps it if the contract expires. The buyer has a right to exercise the contract. The seller has an obligation if the buyer decides to exercise. Buyer, holder, owner, and long all mean the same thing. Seller, short, and writer all mean the same thing.

Repurchase agreements and reverse repurchase agreements are

money market instruments.

Secured corporate debt includes

mortgage debt.

Benefits of mutual funds include all of the following except

reinvested dividends are not taxed until withdrawal. When dividends (or capital gains) are reinvested they are still taxed.

All of the following describe mutual funds except

shares may be sold either on an exchange or over the counter (OTC). Mutual fund shares are redeemable securities. Hence, they do not trade in the secondary market either on exchanges or OTC. Instead, they may be purchased and redeemed only through the mutual fund company itself.

When a corporation issues a mortgage bond, the issue's total value

should be less than that of the real estate it is backed by. Mortgage bond issues represent the amount the issuer is borrowing that is backed by its real estate assets. Just as with a home mortgage, the amount borrowed shouldn't exceed the value of the property. Hence, the issue's total value should be less than that of the real estate by which it is backed. Backed by real property, these are secured debt instruments.

The maximum loss on a short put is

strike price - premium.

An investor purchases a T-bill for $9,925 that will mature at $10,000. The difference between the $9,925 paid and the $10,000 that will be received is

the discount to par and will be considered interest received at maturity.

All of the following are true regarding breakpoints for mutual funds except

the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold. There is no standardized industry mandated breakpoint schedule. Offering breakpoints and where they occur is at the discretion of the investment company. In accordance with a breakpoint schedule, the greater the investment, the lower the sales charge will be. A breakpoint sale occurs when a sale is made just below a breakpoint with the intent of the registered representative to be the recipient of a higher sales commission. In this light, disclosure of breakpoints when they are offered is required.

A variable annuity's investment return each month is based on

the performance of the separate account A key feature of the variable annuity is that the premium is invested into the insurance company's separate account rather than the general account. It is the performance of the separate account that provides the annuity's investment return each month. There are no guarantees as to the separate account performance or return each month.

The maximum gain on a short put is

the premium The maximum gain on any short option position is the premium received. The seller of the option is hoping the contract goes out of the money and expires unexercised

An investor owns a bond carrying a 4% coupon. Interest rates in the marketplace have been moving downward and are currently at 2.5%. Given the current interest rates in the marketplace, this investor should see

the price of the bond move higher. Prices of bonds trading in the secondary market have an inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall, and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise. Once the coupon rate is established by the issuer, it remains unchanged throughout the life of the bond.

An investor establishes the following position: Long 1 XYZ September 40 call at 2. Utilizing this position, the maximum potential gain for the investor is

unlimited. Long calls are bullish positions. The investor wants to see the stock go up in price. The maximum gain on a long call is unlimited because, in theory, the underlying stock's price can go to infinity and is, therefore, also unlimited.

All of the following terms and phrases apply to the buy side of the options contract except

wants the contract to expire. The buyer of the contract pays the premium and loses it if the contract expires. The seller receives the premium and keeps it if the contract expires. The buyer has a right to exercise the contract. The seller has an obligation if the buyer decides to exercise.

An investor is long 6 MAS February 60 calls at 2.25 each. If at the time of the February expiration, the calls expire unexercised, how much money will the investor lose?

$1,350 Buyers of options (calls or puts) lose the premium paid if the options expire unexercised. The most this investor can lose is the number of contracts (six) multiplied by the amount of the premium received, $225. Therefore, this investor's maximum loss is $1,350.

Your customer establishes the following position: Long 1 XYZ January 50 put at 2. You can correctly inform the customer that the maximum potential gain on the position is

$4,800. 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).

Money market debt instruments typically have maturities of

1 year or less.

Which of the following investments would be most susceptible to inflation risk?

30-year Treasury bond

An investor is long a January 30 call at 2. Breakeven is

32 Breakeven for a long call is premium (2) plus strike price (30)—in this case, 32 points. The investor needs the stock to be above the breakeven point to make a profit.

Your customer is long 1 October 55 put at 4. The customer's maximum loss potential is

4 points ($400). For long option contracts (puts or calls), the maximum loss is always the premium initially paid—in this case, 4 points ($400). This happens if the price of the underlying is at or above the put strike price at the option's expiration—in other words, at, or out of the money.

Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of

4%. If a bond pays two interest payments of $20 each annually, this means that the total annual interest is $40. Annual interest ($40) divided by par ($1,000) equals the nominal, stated, or coupon yield (0.04 or 4%).

A June 40 call is trading at 3.5. For this call to be trading at parity the underlying stock would have to be trading at

43.5 For any option to be trading at parity, its premium (3.5) must be equal to the amount the contract is in the money (its intrinsic value). For this contract to be in the money by 3.5 points (have an intrinsic value of 3.5), the stock must be trading at 43.5.

The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105½ is approximatelyss is $1,350.

7.1%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 ÷ $1,055 = 7.109%, or approximately 7.1%.

Your customer has one position in her account and it poses an unlimited loss potential. Which of the following is it?

8.5% of the total investment

A guaranteed bond is usually guaranteed by which of the following entities?

A parent company

Which of the following issues only common stock?

An open-end management investment company An open-end (mutual fund) management investment company may only issue redeemable common stock. A unit investment trust offers units of beneficial ownership. A closed-end management investment company may also issue bonds and preferred stock, while a face-amount certificate company offers a contract, as opposed to units or shares.

Which of the following statements regarding bond interest is true?

Bond prices have an inverse relationship to interest rates. Bond prices have an inverse relationship to interest rates. If interest rates go up, bond prices for those bonds trading in the secondary markets will go down. Conversely, if interest rates decline, bond prices rise. Par value is a fixed number for the life of the bond.

An investor believes the price of an exchange-listed stock will likely fall in the near term. Which of the following option strategies would best support this belief?

Buying Puts