SIE practice quiz part 1 (sec 1-3)

An investor owns MMS call options. This investor is A) bullish, hoping the stock will fall. B) bullish, hoping the stock will rise. C) bearish, hoping the stock will fall. D) bearish, hoping the stock will rise.

B. 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 investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of A) 4.5%. B) 5.6%. C) 7.4%. D) 7.8%.

B. Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 ÷ $900 = 5.6%). Years to maturity is not a factor in calculating current yield.

With CDT stock at 42, a September 40 call trading at 3 is A) at the money. B) in the money by 2 points. C) in the money by 3 points. D) out of the money by 2 points.

B. When a calls strike price is lower than the underlying stocks value, the call contract is in the money. The amount it is in the money is the difference between the 2—2 points (42 - 40).

Money market debt instruments typically have maturities of A) 1-2 years. B) 1 year or less. C) 10-30 years. D) longer than 2 years.

B. 1 yr or less Money market debt instruments typically have maturities of one year or less. Generally, securities with maturities of 1-10 years are considered intermediate term and those with 10 years or more to maturity are long term.

When XYZ is trading at 40, an XYZ 30 put purchased at 3 would be A) at parity. B) out of the money. C) in the money. D) at the money.

B. Out of the money All puts are in the money when the market price is below the strike price. They are out of the money when the market price is above the strike price. They are at the money when the market price equals the strike price. They are at parity when the premium equals the intrinsic value.

The maximum loss on a short put is A) strike price + premium. B) strike price - premium. C) the premium. D) the strike price.

B. Strike price - premium The maximum loss on a short put is limited by the fact the stock price cannot drop below zero. The maximum loss on a short put occurs if the stock drops to zero and the seller of the put is exercised. The seller is forced to buy the worthless stock for the strike price, but at least gets the premium to offset the loss.

Common shareholders wanting to vote on issues at a shareholder meeting can do so in all of the following ways except A) in person. B) by telephone or text message. C) by proxy delivered by mail. D) by proxy delivered online.

B. Tele or text

A bond that is structured so that a portion of the principal is scheduled to mature at intervals over several years is A) a serial bond. B) a series bond. C) a term bond. D) a balloon bond.

A With a serial bond, portions of the issue mature over a period of years until the entire issue is paid.

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 A) 43.5. B) 40. C) 3.5. D) 36.5.

A) 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.

A client has established a long put position. The contract will have intrinsic value when the price of the underlying stock is A) anywhere near the exercise price, above or below. B) equal to the exercise price. C) less than the exercise price. D) greater than the exercise price.

C. Less Put buyers are bearish and want the underlying stock to fall in value. Puts give the owner the right to sell at the contract's exercise (strike) price. Therefore, the put contract will pick up intrinsic value if the price of the underlying stock falls below the contract's strike price. The long put position will become profitable if the stock falls below the strike by more than the amount of the premium paid.

What is the intrinsic value of an XYZ 30 call purchased at a premium of 3 when the current market value of XYZ is at 40? A) -$10 B) $7 C) -$7 D) $10

D Intrinsic value is the amount that a contract is in the money. The premium of the contract is not a factor. All calls are in the money when the market value of the stock is above the strike price.

Put buyers are A) neither bullish nor bearish. B) both bullish and bearish. C) bullish. D) bearish.

D Put buyers have the right to sell the stock. Being in a position to sell the stock makes them bearish

An affiliate holding unregistered shares can sell under Rule 144 A) two times a year. B) one time a year. C) as often as wished. D) four times a year.

D Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) 6% B) 4% C) 3% D) 1%

D Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last four weeks' trading volume (whichever is greater), every 90 days.

Regarding sales loads, management fees, and operating expenses for mutual funds, which of the following is true? A) All reduce investor returns because they reduce the amount of money available for the fund to invest. B) All increase investor returns because each is received by the fund increasing the amount they have to invest. C) Sales loads increase investor returns because they are received by the fund increasing the amount they have to invest. D) Only management fees and operating expenses reduce investor returns by reducing the amount of money available for the fund to invest.

D Sales loads go to the underwriters or broker-dealers selling the shares for the fund. Therefore, they are subtracted from the dollars invested and in that light reduce possible returns for investors. Management fees and operating expenses are ongoing costs to the fund and, therefore, reduce the dollars that can be invested, again reducing potential returns.

List the dates associated with dividend payment in their proper order. A) Declaration date, pay date, ex-dividend date, record date B) Record date, declaration date, ex-dividend date, pay date C) Declaration date, record date, ex-dividend date, pay date D) Declaration date, ex-dividend date, record date, pay date Explanation

D The declaration date is the day the board of directors meets to declare the dividend. The ex-dividend date is the first day that a purchaser of the stock is too late to get the dividend. The record date is the day the shareholder must be on the records of the company to receive the dividend, and the checks are mailed on the pay date.

An investor sells one equity call option on DGF stock. This investor is A) bullish on the DGF stock. B) both bullish and bearish on the DGF stock. C) neither bullish nor bearish on the DGF stock. D) bearish on DGF the stock.

D Those who sell equity call options may be obligated to sell the stock at the strike price if the contract is exercised by the owner. Being in a position to sell makes the investor bearish.

An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy A) neither callable nor noncallable bonds. B) callable bonds. C) noncallable bonds. D) either callable or noncallable bonds.

C) Noncallable bonds (callable when interest rate falls benefits issuer not investor) If rates fall, bonds are likely to be called. Therefore, an investor who anticipates that rights might fall soon would look to purchase bonds that are not callable (noncallable). In this way, the investor is assured of receiving the coupon interest payments until maturity.

Which of the following investment companies terminates business on a predetermined date? A) Fixed unit investment trust (UIT) B) Nonfixed unit investment trust (UIT) C) Hedge fund D) Mutual fund

A A fixed UIT typically has bonds in its portfolio that mature on a specific date. Before that date, the trust buys and redeems units of beneficial ownership in the portfolio. When the bonds mature and pay off, the trust distributes the remaining interest and principal to the current unit holders and dissolves.

Which of the following strategies is a covered call? A) Short call, long call B) Short stock, short call C) Short put, short call D) Short stock, long put

A A short call is considered covered when the seller of the call either owns the underlying security, or has a way to get the security at a preset price (like owning a call).

Typically, a corporation would not issue A) option contracts. B) preferred stock. C) common stock. D) debentures.

A Corporations issue equity securities (stock) and debt securities (bonds and debentures), but they do not issue options. Options are issued by the Options Clearing Corporation (OCC).

The holder of an in-the-money option contract gives a do not exercise instruction (notice) to your broker-dealer. This notice A) is used to avoid automatic exercise at expiration. B) is used to notify the writer that the contract will not be assigned to them. C) can only be given at the time the contract is purchased. D) is standard, and given for all in-the-money contracts at expiration.

A Options that are at least $0.01 in-the-money at expiration will be automatically exercised unless a do not exercise instruction or notice is given. If the holder of such a contract does not want the automatic exercise to occur, this notice must be given before expiration.

An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor A) can sell the shares unrestricted at any time. B) must wait six months before any sales can be made. C) can only sell subject to volume limits. D) must wait six months before selling shares subject to volume limits.

A Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.

MMS Corporation has 7% callable preferred shares outstanding. Over the past few years, benchmark interest rates have declined and hovered close to 3%. Which of the following is true? A) The 7% shares are likely to be called. B) The issuer will covert these shares to common stock. C) More 7% callable shares should be issued. D) The issuer is likely to reduce the fixed dividend to 3%.

A When interest rates fall, callable preferred shares are likely to be called. This allows the issuer to cease the higher dividend payments and reissue shares with lower dividend payments that align more with the current interest-rate environment. With interest rates now at 3%, the issuer would have no desire to issue more 7% shares, nor could they reduce the fixed dividend on these 7% shares. If the shares were convertible, conversion would be at the discretion of the shareholders, not the issue

A call feature attached to a bond allows A) an issuer to call in a bond before maturity at times that will benefit the issuer. B) an issuer to call in a bond before maturity at times that will benefit the bondholder. C) a bondholder to call the issuer for a redemption before the maturity date. D) a bondholder to hold a bond beyond the maturity date benefitting the bondholder.

A. A call feature attached to a bond allows an issuer to call in a bond before maturity. Issuers will do this when interest rates have fallen. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. Obviously, the ability to call in the bond benefits the issuer.

n officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell A) immediately, subject to Rule 144 volume limitations. B) under Rule 144 only after a six-month holding period. C) only after leaving (becoming unaffiliated with) the company. D) immediately, with no volume restrictions.

A. Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

On a short put, when the premium equals the intrinsic value, the put is A) at its breakeven point B) at parity C) out of the money D) past expiration.

B All puts are in the money when the market price is below the strike price. They are out of the money when the market price is above the strike price. They at the money when the market price equals the strike price. They are at parity when the premium equals the intrinsic value.

An investor is long a January 30 call at 2. Breakeven is A) 28. B) 32. C) 200. D) 30.

B 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. Premium + Strike Price

All of the following actions must be completed before a customer enters the first option order except A) completion of the new account form. B) completion of (signing of) the options agreement. C) approval by a branch office manager (BOM) or registered options principal (ROP). D) delivery of an Options Clearing Corporation (OCC) disclosure booklet.

B Customers do not have to complete (sign) the options agreement before entering an order, although under the rules, the agreement must be signed and returned by the customer within 15 calendar days of account approval.

The United States Congress has authorized all of the following enterprises to issue securities except A) Federal Deposit Insurance Corporation (FDIC). B) Government National Mortgage Association (GNMA). C) Federal Home Loan Mortgage Corporation (FHLMC). D) Federal National Mortgage Association (FNMA).

B In addition to U.S. Treasury securities, the U.S. Congress authorizes certain agencies of the federal government to issue debt securities. These would include GNMA, FNMA, and FHLM. The Federal Deposit Insurance Corporation (FDIC) does not issues securities but is set up to insure bank deposits in the event of bank failure.

Listed options expire on A) the first day of the expiration month. B) the third Friday of the expiration month. C) the business day after settlement. D) the first Friday of the expiration month.

B Listed options contracts expire on the third Friday of the expiration month at 11:59 pm.

All of the following terms and phrases are associated with the buy side of the contract except A) has a right. B) writes the contract. C) owns the contract. D) pays the premium.

B 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.

Which of the following prospectus must be provided no later than confirmation of the sale? A) Rule 498 prospectus B) Statutory prospectus C) Statement of additional information D) Summary prospectus Explanation

B The summary prospectus and the rule 498 prospectus are the same thing. They can be used to discuss key information, but the statutory prospectus is still required at or prior to confirmation. The statement of additional information is only provided if requested by the customer.

All of the following are true regarding breakpoints for mutual funds except A) a breakpoint sale is considered to be a sale just below a breakpoint. B) the first breakpoint investors can achieve is mandated by industry rule to be at the $10,000 investment threshold. C) the greater the investment, the lower the sales charge. D) breakpoints must be disclosed to potential investors.

B 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.

Which of the following shows Treasury bills, Treasury bonds, and Treasury notes listed in ascending order of maturity? A) Bills, bonds, notes B) Bills, notes, bonds C) Notes, bills, bonds D) Bonds, notes, bills

B (Bills, Notes, Bonds) Treasury bills have a maturity of less than one year, Treasury notes mature in 1-10 years, and Treasury bonds mature in 10 years or more. Therefore, in ascending order, short-term to long-term, they are T-bills, T-notes, T-bonds.

Your customer is long 1 October 75 put at 2. The customer's maximum gain potential is A) $7,500. B) $7,300. C) $7,700. D) $2,000.

B 7,300 The maximum potential gain for put owners is the option's strike price (75) less the amount of the premium paid (2)—in this case, 73. Note that this is the same as the contract's breakeven point. Remember that put owners are bearish and want to see the stock fall in price. A stock's price can potentially fall to zero; therefore, from the breakeven to zero (73 points) is the most that can be gained.

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend? A) Callable B) Participating C) Adjustable rate D) Convertible

C Adjustable-rate preferred dividends are tied to benchmark interest rates such as Treasury securities. As these rates fluctuate up and down, so do the dividends on the adjustable shares

Two investors have engaged in the same put transaction: one, the buyer who is now long the put and the other, the seller who is now short the put. All of the following are true except A) maximum gain and loss potential for one investor are different than the others maximum gain and loss potential. B) breakeven is the same number for both investors. C) both investors have a maximum loss potential that is limited to the premium paid. D) one investor's maximum loss potential is the other's maximum gain potential.

C All options are a two-party contract. One investor's maximum loss potential is the other's maximum gain potential. Therefore, for each of the parties, the maximum gain is different and the maximum loss is different. Only buyers have a maximum loss potential limited to the premium paid. And, finally, remember that the breakeven is always the same for both parties. The put buyer, who is bearish, wants the underlying stock price below the breakeven, while the put seller, who is bullish, wants the underlying stock price above the breakeven.

An investor looking to speculate in penny stocks would be exempt from the suitability statement requirement under which of the following circumstances? A) The investor has already received the risk disclosure statement. B) The investor is already exempt from the risk disclosure requirements. C) The investor is an established customer. D) The investor's account is approved for margin purchases.

C Established customers are exempt from the penny stock suitability statement requirement. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements.

On a short call, when the premium is equal to the intrinsic value, which of the following is true? A) The contract has time value B) None of these C) The contract is at parity D) The contract is out of the money

C Parity is when the premium equals intrinsic value.

An investor sells short 1 MJS June 55 put at 2. The current market value of LMN is 56. The investor's maximum loss potential is A) unlimited. B) $5,425. C) $5,300. D) $10,600.

C Put sellers are bullish. the maximum risk is if the stock falls to 0. The maximum potential loss, therefore, is the strike price less the premium received for the put (55 − 2 = 53). The maximum loss per contract is $5,300. The current market value of the stock at the time the put was sold short is of no consequence.

A penny stock is best described as A) an unlisted stock valued at less than $2 per share. B) an exchange-listed stock valued at less than $5 per share. C) an unlisted stock valued at less than $5 per share. D) an unlisted stock valued at less than $1 per share.

C -5$ unlisted

Most municipals pay interest that is tax free at the federal level. Which one of the following is a taxable municipal bond? A) RANs B) TANs C) GANs D) BABs

D. BABs are Build America Bonds that were issued without the tax free status. The others are tax-free municipal notes. Though BABs are not covered in the SIE material, the other three items are, and are all tax free. Note that industrial development revenue bonds (IDRs or IDBs) are also taxable for investors subject to the alternative minimum tax (AMT).

What is the intrinsic value of an XYZ 40 call bought at a premium of 3 when the current market value of XYZ is at 30? A) -$7 B) -$10 C) $7 D) $0

D. Intrinsic value is the amount that a contract is in the money. The premium of the contract is not a factor. All calls are in the money when the market value of the stock is above the strike price.

An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? A) Rights will be distributed to existing stockholders; they have only two options: exercise the rights or let them expire. B) Warrants will be distributed to existing stockholders with an exercise price equal to the current market value. C) Warrants will be distributed to existing stockholders and they will have two to five years to decide whether or not to buy the stock at the strike price. D) Rights will be distributed to existing stockholders with an exercise price lower than the current market value.

D. Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.

At the time of maturity, an investor realizes that the overall return on the investment was actually greater than the coupon rate stated on the bond when purchased. This most likely would have occurred because the bond had initially been purchased A) as a callable bond. B) at a premium. C) at par. D) at a discount.

D. Discount Bonds are redeemed at par. When a bond is purchased at a discount (less than will be received at the time the bond matures), that discounted amount will increase the overall return of the bond, making it greater than the coupon rate. If the discount bond is called before it matures, the increased return due to the discount purchase would still occur but would now be accelerated.

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 A) $38 per share. B) $40 per share. C) $42 per share. D) unlimited.

D. 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.