SIE Final Review
As compared to short term bonds, bonds with a longer time until maturity usually
1) have higher interest rates 2) are less marketable
Your client Robert wants to avoid inflation risk as much as possible. Which of the following products is the least suitable investment for Robert?
10 year Treasury Note A bond paying a fixed coupon would not be an appropriate investment for someone seeking to avoid inflation, or purchasing power risk.
An investor sells 10 XYZ June 30 puts at 3.5. The breakeven point is
26.5
A recently retired high school math teacher, Richard is scheduled to begin receiving distributions from his 403 (B) annuity contract next month. These distributions will
A 403(b) is the investment plan for a tax-qualifed variable annuity. These plans are provided for employees of non-profit organizations, such as schools or religious groups. These plans are funded with pre-tax dollars, and all distributions are considered ordinary income to the recipient and taxed accordingly.
Which of the bonds below would subject an investor to the greatest amount of call risk?
A 6% bond with no call premium An issuer is most likely to call bonds with a higher coupon when interest rates are falling. An issuer also prefers to call bonds that do not require payment of a call premium.
The overall objective of asset allocation is to ensure that investors have
A blended portfolio of assets that will react differently under different market conditions.
An American Depository Receipt is best described as a security representing
A foreign company trading in the US
A bond would "trade flat" for all of the following reasons except
A trade occurs 30 days prior to the next coupon date. A bond "trading flat" does not make a regular interest payment. This happens for a variety of reasons, including any trade involving a zero-coupon bond. When the settlement date and an interest payment date are different, there will be accrued interest involved in the trade.
A mutual fund share that charges 12b-1 fees is which of the following?
A, B, or C-share 12b-1 shares are charged by mutual funds for marketing and distribution. These charges are in addition to front-end or back-end sales charges.
A stable share price along with a fluctuating dividend based on market conditions is associated with
Adjustable-rate preferred stock
A cash dividend has been declared on ABC stock which is payable on Friday, June 20th to shareholders of record on Friday June 13th. Which of the following statements are true?
An investor must purchase the stock before Thursday June 12, to receive the dividend An investor who purchases ABC stock on Thursday, June 12, regular way settlement, will not receive the dividend
XYZ is trading at 60. Which of these options contracts is trading for time value only?
August 55 Put An option will trade for its time value only when it is out of the money. In this example, only the August 55 put option is out of the money. The other options positions are in the money.
A hedge fund in which the fund manager is given complete authority to decide on the assets in which to invest is a
Blind pool fund
Which of the following statements is true regarding purchases and redemptions of mutual fund shares?
Both full and fractional shares can be purchased and redeemed Mutual fund shares do not trade in the secondary market. Purchases take place at the POP next calculated; redemptions at the NAV next calculated. Redeemed shares are not reissued; they are canceled and destroyed.
Dividend and capital gains distributions are made to investors in
Both open-end funds and unit investment trusts
Which of the statements are correct regarding taxation of dividends?
Cash dividends are taxable upon receipt. Stock dividends are taxable only when the shares are sold.
According to monetarist economic theory, an economy's health can be controlled if the government
Changes the money supply Monetarists believe that the economy is best controlled through the money supply. The money supply is controlled by the Federal Reserve Board.
When growth is the primary investment objective, an investor's portfolio would likely be focused on
Common stock (equity securities)
Sinking funds
Commonly used to retire corporate debt. Issuers set aside money each year by making payments to a trustee who retires part of the issue by purchasing the bonds in the open market.
In a period of stable interest rates, which of the following securities is MOST likely to fluctuate in value?
Convertible preferred stock The price of the convertible preferred stock is most likely to fluctuate in value because the price of the underlying common stock to which the preferred can be converted will influence the value of the preferred stock itself.
Lagging indicators
Corporate profits and average duration of unemployment are lagging economic indicators
Which of the following is not an ERISA Qualified plan?
Deferred compensation plan - only after-tax funds may be contributed
All of the following securities pay interest that is taxable at the federal level and exempt from state taxation EXCEPT
Federal Home Loan Mortgage corporation notes Issues of the federal government like Treasury notes, bonds, bills and TIPS pay interest that is taxable at the federal level but exempt at the state level. Federal Farm Credit and Federal Home Loan Bank securities follow this same taxation rule.
Miss Jones purchased a 7% J&J 15 municipal bond on Tuesday, March 18th in a regular way trade. How much accrued interest will she pay?
Figure out the number of days of accrued interest between the most recent interest payment date and the settlement date. Municipal Bonds trade regular way, T+2, so the settlement date is Thursday, March 20th. They also trade on a 30/360 basis, so there are 16 days of accrued interest in January (15-30th, including the 15th), 30 days in February, and 19 days in March (do not include settlement date), for 65 days of accrued interest. To calculate the accrued interest payable: 65 days/360 days per year x $70 (annual interest) = $12.64 in accrued interest.
Bearer bonds
Have interest coupons attached; the interest is payable to the individual who presents the appropriate coupon.
All of the following sectors are considered cyclical EXCEPT
Healthcare The healthcare industry is considered a recession-proof (i.e. defensive) sector because it remains constant regardless of the ups and downs of the economy
All of the following statements regarding the trading strategies of hedge funds are true EXCEPT
Hedge funds are limited in the amount of leverage they can employ in accomplishing their investment objectives
An investor can manage systematic risk through a process of
Hedging with derivatives
Which of the following investment products would not be appropriate for an individual who says her current investment objective is growth?
High-grade municipal bond Growth oriented investors would be interested in equities and equity mutual funds. Fixed-income products would not be a suitable investment for this investment objective.
Which of the following are types of underwritings?
I. Firm commitment II. All or none III. Standby IV. Best efforts
An investor buys $1 million of 10% corporate bonds at par. At the end of the day, the bonds close up 1/2 point. The investor has a gain of
In increase of ½ point represents an increase of .5% à .005 x 1,000,000 = $5,000.
A customer owns five 6% U.S. government bonds. The customer is in the 28% federal tax bracket and the 14% state tax bracket. What is her income tax liability on the interest?
Income tax is only on interest income earned on U.S. government bonds at the federal level. Therefore, the customer's income tax liability = .28 x $60 annual interest x 5 bonds = $84.
Which of the following mutual funds is most likely a "no-load" fund?
Index fund
Investors that purchase high quality fixed income investments for retirement income are most concerned with
Inflation risk Inflation risk is a major concern for investors who hold portfolios of fixed income investments for funding retirement income. As inflation increases, the purchasing power of their fixed coupon will fall.
Characteristics of commercial paper include all of the following EXCEPT
Issued only by banks and other financial institutions Commercial paper is issued by corporations for short term financial needs. It is unsecured and usually matures in 270 days or less. It is usually sold in minimum denominations of $100,000 and is highly liquid.
Which of the following are NOT directly regulated by the MSRB?
Issuers of municipal bonds The MSRB regulates underwriters, traders, and salespeople of municipal bonds. The MSRB does not regulate the municipalities that issue municipal bonds.
Which of the following is a significant risk of a raw land limited partnership program that must be disclosed by a registered representative?
Lack of liquidity
An investor would like to invest in a growth mutual fund that holds the stock of well-known companies with a stable performance history. An appropriate recommendation for this customer is a
Large cap stock fund A large cap stock fund includes the stock of blue chip companies that have large market capitalization. They are usually well recognized names with a strong performance history.
A business structure that offers limited liability and pass through benefits but is publicly traded is a
Master Limited Partnership; a pass-through taxation entity, but has ownership divided into shares that can be publicly traded.
Craig would like to participate in a tender offer for MNO Inc. and currently holds a net short position in MNO shares. Craig
May not participate in the tender offer In order to participate in a tender offer, an individual must have a net long position in the security. Form 144 is used when an investor is selling shares of restricted stock.
All of the following statements are true of the municipal securities market EXCEPT
Most municipal securities are readily available in the secondary market
All of the following investments offer either full or partially tax-deductible contributions to individuals who meet eligibility requirements EXCEPT
Mutual funds IRAs, Keogh plans and variable annuities may all be qualified plans if the individual meets the requirements, but mutual funds will never offer tax-deductible contributions.
Outside business activity (e.g, 2nd jpb)
Notification to firm is required
Private securities transaction for NO compensation
Notification to firm is required
Jeff is an RR with his broker-dealer and is considering a part-time offer as an independent contractor with a real estate company, to supplement his commissions as an RR. Jeff should
Notify his supervisory to accepting this offer Under FINRA rules, any business activity outside the scope of the relationship with the employing firm requires prior written notification - the rules do not require permission. Firms, however, may impose stricter rules on their own employees.
A bond that is issued with a call feature
Offers the issuer flexibility for refinancing its outstanding debt (call features are advantageous to the issuers)
Under MSRB rules, all the following would be considered advertisements EXCEPT
Official statements
To limit downside exposure and generate income, structured products often rely on which of the following?
Options strategies Downside protection and income is generated for structured products through the use of derivative investments and options strategies.
All of the following would be considered discretionary EXCEPT
Order that specifies the size of the security but leaves the choice of price and time up to the account executive Discretionary trades are trades where the customer does not specify the type of security, type of transaction or quantity. For a discretionary trade, a registered rep must have discretionary authority. An order that leaves the time and price open is not considered discretionary.
A type of stock that offers the possibility of a higher dividend than the stated rate is
Participating preferred stock
Direct participation programs (DPPs) are characterized by
Passive income offsetting passive losses with the resulting income taxable at all levels
Private securities transactions for compensation
Permission from firm is required
RR opening outside account
Permission from firm is required
A client is interested in an investment that will generate income but does not want to add more bonds to his portfolio. The best recommendation for this client would be
Preferred stock
Maud and Louis are an elderly retired couple seeking to preserve their life savings. They attend a free-lunch seminar where many types of securities are discussed. Which of the following is the least suitable investment for Maud and Louis?
Real estate limited partnerships These will offer the least amount of safety and liquidity. Given the shorter investment horizon, lack of current income, and goal to preserve principal these investors would likely seek safe, liquid investments and may seek current income to assist in their meeting current expenses.
Broker dealers and their representatives are held to suitability standards that apply to virtually all securities
Recommendations: it is the recommendation to buy, sell, exchange or hold securities that triggers suitability rules. When clients direct reps to complete a transaction (without a recommendation), suitability rules may not apply.
Investors in REITs can expect all of the following EXCEPT
Redemption at NAV REITs trade in the secondary market at a premium or discount to their NAV. Investors sell their shares to other investors to through exchange transactions; REITs do not redeem their shares.
The benefit investors receive for reinvestment of mutual fund dividend and capital gains distributions is
Reduced sales charge on reinvestment
In which of the following events will an open order price not be adjusted?
Reverse split
In which of the following positions does the investor face unlimited risk?
Short call
Albert owns 2,000 shares of DDD Inc., a thinly traded stock. The market for this security is likely characterized by
Significant price changes when small trades occur A thinly-traded asset is one where low trading volumes and volatile price changes are commonplace. There are relatively few trading participants in the security, often attributable to the fact that these are typically unknown publicly traded companies.
An investor with a relatively high-risk tolerance would like to add a growth fund to his portfolio. Of the following, which type of fund may be most appropriate?
Small cap stock fund Because the investor is not risk averse, a small cap fund will offer the most growth potential of the choices offered.
Preferred stock trades most like which of the following instruments?
Straight debt security
According to industry rules, the delivery date for stock in a regular way transaction is
T+2
The interest income on federal agency securities is
Taxed on all levels
Who sets the margin requirement for OTC stocks?
The FRB
An investor writes an ABC January 50 put at 3. At expiration ABC stock is trading for 47. Which of the following statements is TRUE?
The contract has intrinsic value of $300
All of the following statements about municipal revenue bonds are TRUE EXCEPT:
The maturity of the revenue bond usually coincides with the useful life of the facility being built. Bonds that are issued to build them usually mature before the facility is no longer of use. Municipal revenue bonds do not have debt limitations like general obligation bonds. Revenue bonds can be issued by states, political subdivisions (such as counties or townships), interstate authorities and intrastate authorities. The interest and principal owed to bondholders is paid from the revenue received from the facility.
All of the following statements about mutual fund 12b-1 fees are true EXCEPT
The maximum 12b-1 fee allowed by the Investment Company Act of 1940 is 2% of the fund's NAV The Investment Company Act of 1940 permits a maximum 12b-1 fee of 1% of the fund's NAV. 12b-1 fees are charged to recover marketing and distribution costs, and are included in a fund's expense ratio. They must be approved initially and are subject to annual approval by the fund's board of directors.
Your client Sally owns 2,000 shares of the Omega Venture Fund, an open-end investment company. If Sally places an order to sell 1,000 of her shares, she will receive
The next computed net asset value
An investor purchases 5 6-month XZY 45 calls for 3.25. Excluding commissions, how much does the investor pay for these calls?
The premium of an option contract is based on a single share. A standard contract covers 100 shares. Because this investor purchases 5 contracts, the price is 5 x 3.25 x 100, or $1,625.
A shareholder has capital gains from common stock ownership when
The stock is bought at a low price and sold at a higher price
A call option is out of the money when
The strike price is above the market price of the underlying security
A customer writes a put option. The customer's maximum loss is
The strike price minus the premium down to zero
If units of a UIT are redeemed prior to the termination of the trust, the investor will receive
The value of the units as calculated at the end of the business day AND more or less than the original purchase price
Which of the following statements regarding mutual funds is not correct?
They are redeemed at the public offer price (POP). Mutual fund shares are redeemed at the net asset value (NAV), not the public offer price (POP).
Common stock holders have limited liability. This means that
They cannot lose more than their original investment
All of the following statements describing REITs are true EXCEPT
They generally invest in residential real estate only
An investor wants to make an initial purchase of $3,000 in a margin account. How much equity are they required to deposit?
Under FINRA rules, if a customer wants to purchase between $2,000 and $4,000 of stock in a margin account, they must deposit minimum initial equity of $2,000.
A RR may pay a customer a finder fee
Under no circumstance
With knowledge of an order for the purchase of a block of ABC for an institutional client of the firm, a registered rep places an order to purchase 100 shares of ABC for his own account. This order
Violates FINRA regulations governing front-running.
Becky has been approached by her client Tom, who is also a personal friend, for a loan to cover some expenses that Tom needs help with. Becky may lend funds to Tom
With advance written consent from her firm This activity would be permitted, with advance notification to, and pre-approval from, the broker-dealer. FINRA does not need to be notified.
May a RR engage in the sale of a security for a party other than her firm?
Yes, but this required prior written approval from her firm.
STRIPS
are zero coupon bonds (typically with maturities of at least 10 years) that are backed by the US Treasury. Because they are zero coupon bonds, they have no reinvestment rate risk since there is no cash flows to reinvest each year into the market. Instead of receiving coupon payments, investors buy the bond for a discount and receive the full face value at maturity, which is treated as interest income for the investor and only taxed at the federal level.
A mutual fund's expense ratio is the ratio of expenses to
average net assets
When a broker-dealer maintains a firm market in a stock, that broker-dealer is committed to
buying or selling the normal trading unit of that stock at the quoted price
Keynesian economic theory
espouses that the government needs to be the leading force in promoting economic growth and stability. Supply-side economics advocates that tax cuts provide incentives for consumers to save and invest, thereby producing benefits that will encompass the broad economy.
Edgar is about to receive his first distribution from a non-qualified variable annuity that he began funding several years ago. He asks you if he will have to pay any taxes on this distribution. You should tell Edgar that
he will have to pay taxes on all funds received in excess of his original contribution Distributions from non-qualified variable annuities are subject to tax liability on the amount in excess of the original contribution (which was funded with after-tax dollars).
Losses from direct participation programs can be used to offset
income from limited partnerships
Call options can be beneficial if an investor
is trying to protect a short position in an equity position Call options are commonly used to hedge (or protect) a short position in an underlying security. If the value of the security that has been sold short increases (thereby producing a potential loss), the value of the call option would increase, providing an offset to the total position.
Issuing stock is advantageous for a company because
it does not require the company to pay back the money or make interest payments along the way.
When a firm "position trades", it
makes a market in securities and trades for the firm's account
"Switching"
occurs when a registered rep moves a customer from one mutual fund to another fund with a similar, or identical, investment objective. There is no benefit to the customer when this occurs, and is usually harmful.
The process by which an issuer calls bonds with a high coupon and reissues new bonds with a lower coupon is referred to as
refunding
Under the Securities Exchange Act of 1934, the Securities and Exchange Commission does all of the following EXCEPT
regulate the extension of credit by BDs - this is given to the Federal Reserve Board
Bonds with long maturity offer
stability of income due to the constant, semi-annual interest payments made to the bondholder. They also fluctuate more in market value with a change in underlying interest rates than comparable short-term debt.
A "not-held" order means
that the commission house broker will not be held responsible if he does not get an immediate execution of the market order A "market, not-held" order means that the customer is letting the RR use her own best judgment as to the price and time at which the transaction will be executed, and will not hold the RR responsible if she misses the market for a security.
When an individual receives a stock dividend,
the cost basis for the entire position is adjusted downward, with no tax liability for the additional shares upon receipt.
Industrial development revenue bonds
type of taxable municipal security that is issued by a municipality on behalf of a corporation. Specifically, the municipality will issue to debt to build a facility on behalf of a corporation and then lease that facility to the corporation. Because the bonds are backed by lease payments made by the corporation, the debt is the responsibility and credit quality of the corporation.
An investor concerned about rising prices would most likely invest in a
variable annuity, as its equity exposure provides a hedge against inflation. Investments in equities generally serve as a hedge against inflation. Fixed income investments, such as fixed annuities will lose purchasing power as prices increase. The tax consequence of an investment is not relevant when considering how to hedge against rising prices.