SIE Exam
All of the following terms and phrases are associated with the sell side of the contract except A) has an obligation. B) has a right. C) receives the premium. D) writes the contract.
B) has a right. Explanation: The buyer of the contract pays the premium and loses it if the contract expires worthless. The seller receives the premium and keeps it if the contract expires unexercised. 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 transactions would take place in the secondary market? A) A broker-dealer selling securities out of its inventory to the public B) A corporation selling its securities to the public C) A municipality selling its securities to the public D) The U.S. government selling its securities to the public
A) A broker-dealer selling securities out of its inventory to the public Explanation: Secondary market transaction are investor-to-investor transactions. Primary market transactions are issuers selling to the public. A broker-dealer selling securities from its own inventory is operating in the secondary market (likely as a market marker in the OTC market).
Your client, Alice Tate, with no other positions in her margin account, is bearish on ABC stock. Which of the following transactions would you recommend? A) Sell ABC to open B) Sell ABC to close C) Buy ABC to close D) Buy ABC to open
A) Sell ABC to open Explanation: Because there are no other positions, this would be an opening transaction and selling the stock would be bearish.
Mr. Smith bought an American depository receipt (ADR) in a French company at $13.03 and recently sold the shares for $24.88. How would this trading profit be taxed? A) The profit is taxed as a capital gain in the United States only. B) The profit is taxed as income in France only. C) The profit is not taxed because ADRs are tax-exempt securities. D) The profit is taxed as income in the United States only.
A) The profit is taxed as a capital gain in the United States only.
An issuer has issued bonds with a call feature. It is likely that these bonds have A) a higher coupon than similar bonds without the feature. B) a coupon that need not reflect the impact of the call feature. C) a lower coupon than similar bonds without the feature. D) a coupon that will be called away by the issuer before maturity.
A) a higher coupon than similar bonds without the feature. Explanation: When bonds are issued with features that benefit the issuer, such as a call feature, the issuer generally will need to pay a slightly higher coupon rate of interest to make the bond attractive to new investors.
Blaine Smith has owned XYZ stock for several years and believes it is time to take his profit and invest that money in another stock. He should A) sell XYZ to close. B) buy XYZ to open. C) sell XYZ to open. D) buy XYZ to close.
A) sell XYZ to close. Explanation: When a client owns a stock and wants to get out of that position, he should sell the stock in a closing transaction.
Interest on a 7% corporate bond would be paid to the investor as A) two semiannual checks for $35 each. B) several checks totaling $70 each year. C) one annual $70 check. D) two semiannual checks for $70 each
A) two semiannual checks for $35 each. Explanation: Interest on corporate bonds is paid twice per year, or semiannually. The interest rate reported, however, is an annual rate. Thus a 7% bond would pay 7% of par ($1,000), or $70, per year as two semiannual checks for $35 each.
Nate McCann is closing on a house tomorrow and wants to sell some securities to meet closing costs. He wants to know how soon he could get the money and what he needs to do. You should tell A) if he does the trade today for cash settlement he would settle tomorrow. B) if he does the trade today for cash settlement he could settle today. C) if he does the trade today he won't be able to get the money for 2 business days because regular way settlement is T + 2. D) if he does the trade today he won't be able to get the money for 3 business days because regular way settlement is T + 3.
B) if he does the trade today for cash settlement he could settle today. Explanation: Cash settlement is same day settlement
When XYZ is trading at 40, an XYZ 30 put sold at 3 would be A) at parity. B) out of the money. C) at the money. D) in the money.
B) out of the money. Explanation: 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 prices equals the strike price. They are at parity when the premium equals the intrinsic value.
What is the penalty, if any, for overcontribution to an IRA? A) 50% B) 10% C) 6% D) No penalty
C) 6% Explanation: There is a 10% penalty is for early withdrawal. There is a 50% penalty is for failure to make the minimum required distribution for the year. Contribution of more than the maximum amount in a year carries a 6% penalty.
Which of the following preferred stocks' price would remain most stable in an environment of changing interest rates? A) Straight preferred B) Participating preferred C) Adjustable rate preferred D) Nocumulative preferred
C) Adjustable rate preferred Explanation: Adjustable rate preferred dividend resets when interest rates change so the price remains stable.
Deposits received in currency for amounts over $10,000 in a day would require the firm to report the transaction in how many days on what form? A) SAR within 30 days B) SAR within 15 days C) CTR within 15 days D) CTR within 30 days
C) CTR within 15 days Explanation: The Bank Secrecy Act requires firms to report on a CTR any currency received in the amount of more than $10,000 on a single day, within 15 days.
Which type of underwriting is characterized by the broker-dealer buying the entire issue from the issuer and then reoffering it to the public? A) Mini max B) Best efforts C) Firm commitment D) All-or-none
C) Firm Commitment Explanation: In a firm commitment, the underwriter buys the entire offer into inventory and then redistributes it to the public.
When a bond is purchased at a discount the current yield will be A) lower than the fixed rate. B) lower that the stated rate. C) higher than the coupon rate. D) the same as the nominal rate.
C) Higher than the Coupon Rate Explanation: The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a discount bond, the current yield is always higher than the coupon rate.
All the following are leading indicators except A) stock prices. B) new orders. C) personal income. D) the money supply.
C) Personal Income Explanation: The money supply, new orders, and stock prices are all leading indicators. These increase in advance to an increase in economic activity. Personal Income, however, is a coincident indicator moving along with economic activity.
Which of the following is the rate of interest charged by the Federal Reserve Bank (FRB) for short-term loans to its member banks? A) The broker call loan rate B) The federal funds rate C) The discount rate D) The prime rate
C) The discount rate Explanation: The discount rate is the rate the Federal Reserve charges for short-term loans to member banks
Which of the following sets of FINRA rules focuses on broker-dealers doing business with other broker-dealers? A) Code of Procedures B) Conduct Rules C) Uniform Practice Code D) Code of Arbitration
C) Uniform Practice Code Explanation: The Conduct Rules deal with a broker-dealer's (and representative's) relationship with the customer and the public. The Uniform Practice Code deals with interactions with other broker-dealers.
Of the following, reinvestment risk is most closely associated with A) market risk. B) capital risk. C) call risk. D) inflation risk.
C) call risk. Explanation: When interest rates fall, callable securities are likely to be called. While the investor may receive the redemption proceeds sooner than anticipated, it is often difficult to reinvest while maintaining the same level of return due to the lower interest-rate environment. This is why reinvestment risk and call risk can be viewed as being closely associated with each other.
As an investment vehicle, and regarding the tax consequences, Real Estate Investment Trusts (REITs) are organized as A) corporations. B) debt instruments. C) mutual funds. D) trusts.
D) trusts Explanation: REITs, as their name tells us, are organized as trusts. Assets held in the trust and the distributions made can impact the tax consequences for the trust. As an investment vehicle, shares are sold to investors and these shares sometimes trade on exchanges. Whether traded or non-traded, the shares are considered to be equity (not debt) securities.
Which of the following best describe a wrap account? 1 The firm offering the account would need to be registered as both a broker-dealer and an investment advisor 2 The account fee covers both transactions and advice 3 The wrap fee for the account covers only where the firm acts as a broker or acts as a dealer 4 The firm may only be registered as a broker or dealer
1 & 2 Explanation: The fee covers both the advice and any transaction; the firm must be registered as both a broker-dealer and an investment advisor.
Which of the following are true of traditional IRAs but not of Roth IRAs? 1 Contributions may be deductible 2Contributions are always deductible 3 There is a 50% penalty for failing to take the required minimum distribution (RMD) 4 There are income limits for making contributions
1 & 3 Explanation: If the contributor has an employer-sponsored plan and makes over the limit, the contributor can still have an IRA but it won't be deductible. After reaching age 72, if not still working, the RMD's must be taken each year. Failure to do so results in a 50% penalty. Income limits on traditional IRA's impact deductibility, not contributions.
Advantages to the investor offered by investment companies include 1 ability to invest small amounts in many different securities. 2 special securities prices available only to investment companies. 3 elimination of market risk through pooling of investments. 4 increased purchasing power in the marketplace.
1 & 4 Explanation: Investors who can only invest relatively small amounts of money can nevertheless purchase interest in many different securities through investment companies. By the same token, they also gain access to increased purchasing power by pooling their investments with others
The benefits of designating a brokerage account as transfer on death (TOD) are that 1 the designation eliminates estate taxes. 2 the designation avoids probate. 3 the account holder no longer has to make investment decisions regarding the account. 4 the account holder may still make beneficiary changes for the account. A) I and IV B) II and III C) II and IV D) I and III
2 & 4 Explanation: The transfer on Death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account's assets upon death. Those named persons may be changed whenever the account holder wishes. Although this designation allows the account to bypass probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.
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? A) Buying puts B) Buying both calls and puts C) Selling puts D) Buying calls
A) Buying Puts Explanation: A put buyer is a bearish investor because they anticipate the market falling. The put is exercised only if the market price of the stock falls below the strike price.
The coupon on a bond can be described as its A) yield to call. B) nominal yield. C) basis yield. D) current yield.
B) Nominal Yield Explanation: The coupon on a bond is also known as the nominal or stated yield and indicates the annual interest paid. For example, a 4% bond pays $40 of interest per year
Which of the following best describes the calculation for gains or losses for tax purposes? A) Proceeds minus dividend plus cost basis B) Proceeds minus cost basis C) Proceeds plus cost basis D) Proceeds plus dividends minus cost basis
B) Proceeds minus cost basis Explanation: Proceeds minus cost basis equals capital gains. The dividends are not part of the calculation for capital gains.
Which of these investment companies trade in the secondary market? A) Face amount certificates B) Unit investment trusts C) Open end funds D) Closed end funds
D) Closed end funds Explanation: 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).
Under the Investment Company Act of 1940, which of the following is not considered and investment company? A) Management company B) Face-amount certificate company C) Unit investment trust D) Hedge fund
D) Hedge Funds Explanation: Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). Hedge funds are organized as private investment companies, which are excluded under the definition of investment company under the Act of 1940.
A bank issues and guarantees certificates of deposit, and those that are negotiable are considered money market instruments. What makes a CD negotiable? A) Backing by the banks good faith and credit B) A fixed interest rate C) Short-term maturity D) Secondary market trading
D) Secondary Market Trading Explanation: While all of these are characteristics of negotiable certificates of deposit issued by banks, it is the ability to trade CDs in the secondary market that makes them negotiable.
Which position has the greatest potential risk if the price of the underlying stock goes up? A) Long call B) Short put C) Long put D) Short call
D) Short Call Explanation: The greatest potential risk has to do with the maximum loss potential. IF the market is rising, the greatest potential risk posed by an option position is a short naked call because the potential maximum loss is unlimited.
A customer has multiple accounts at a bank that also owns accounts at a broker-dealer. All of the following accounts would be covered by FDIC insurance up to the specified limits except A) an IRA in a five-year CD. B) a joint savings account with a spouse. C) both spouses' individual savings account. D) a checking account in a money market mutual fund.
D) a checking account in a money market mutual fund. Explanation: A money market mutual fund is not considered a deposit of the bank; it is a security, so it is not covered by the FDIC.
MJS Corporation has called in its 6% preferred shares. Owners of these shares should expect that A) the shares will be resold to new investors. B) dividend payments will continue until the owner chooses to turn in the shares. C) the shares will continue to trade in the open market. D) dividend payments will cease on the call date.
D) dividend payments will cease on the call date Explanation: When a corporation calls in preferred shares, the shares stop trading and dividend payments cease on the call date.
A mutual fund can offer all of the following to investors except A) acting as custodian for retirement accounts. B) the ability to do transfers by telephone or online. C) check-writing privileges for redemptions. D) physical custody of the fund's portfolio cash and securities.
D) physical custody of the fund's portfolio cash and securities. Explanation: The services mutual funds offer may include retirement account custodianship, investment plans, check-writing privileges, transfers by telephone or online, withdrawal plans, and a number of other services and privileges. However, the Act of 1940 requires that each investment company place portfolio cash and securities with a custodian for safekeeping.