SIE Exam Caril 2023 with Complete Solutions

What type of risk is unique to a specific industry, business enterprise, or investment type? - ANSWER-Nonsystematic risk Under which of the following circumstances is an investor in a position to acquire stock? - ANSWER-Buy a call, sell a call (The holder of a call has the right to buy stock at the strike price if exercised. The seller of a put is obligated to buy stock at the strike price if exercised) Options- a premium - ANSWER-the cost of an option contract, expressed in dollars per share of the underlying stock Options- strike price - ANSWER-The price at which the stock will be bought or sold if the contract is exercised, expressed in dollars per share A customer believes that ABC's price will go up but does not have the money to buy 100 shares right now. How could the customer use options to profit from an increase in the stock's price? - ANSWER-buy calls, write puts (both are bullish) A corporation's offer to current stockholders of the ability to purchase a proportionate number of new shares at a specific price for a limited time is called a - ANSWER-right (they usually expire in 30-45 days) American depositary receipts (ADRs) - ANSWER-issued by banks, represent a specific number of shares of a foreign company, and trade and pay dividends in dollars Which of the following records must be maintained for 6 years? - ANSWER-Customer ledgers (statements) While underwriters can assist with preparation and filing, the accuracy and adequacy of these documents is the responsibility of the - ANSWER-Issuing corporation What institutions serve as depository and clearing facilities? - ANSWER-Depository Trust Company and National Securities Clearing Corporation (most specifically) then carrying and clearing firms can act as these as well. What is a transfer agent? - ANSWER-(often a bank) for a corporation is responsible for ensuring that its securities are issued in the correct owner's name, canceling old and issuing new certificates, maintaining records of ownership, and handling problems relating to lost, stolen, or destroyed certificates What is the function of the clearing corporation? - ANSWER-Acting as an intermediary in a trade, examples of these can be a commercial bank, can be a broker-dealer but doesn't have to be Who is considered a control person (security) - ANSWER-those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities (an unaffiliated person would have to own 10% or more of the outstanding shares) What are the two components of Return on Investment? - ANSWER-Capital gains and income To expand the overall economy, we want to - ANSWER-buy securities via open-market operations, pushing interest rates down To meet a Regulation T margin call, a customer would have how long? - ANSWER-settlement plus 2 additional business days (or S + 2) What is A fully disclosed broker-dealer - ANSWER-one that introduces its business to a carrying firm to clear transactions The regulation enacted by the SEC to protect the privacy of customer information is known as - ANSWER-Regulation S-P A market maker that does not honor its firm quote is said to be - ANSWER-"backing away" A deficit in the U.S. balance of payments can occur if - ANSWER-interest rates in foreign countries are higher than U.S. domestic rates and U.S. consumers are purchasing (importing) foreign goods The general partner of a limited partnership has responsibility of - ANSWER-Organizing and managing the partnership, assumes unlimited liability, and is responsible for paying all partnership debts To grow or expand the economy, U.S. fiscal policy should be to - ANSWER-cut taxes (so consumers have more money to spend) and increase government spending for programs and development (to create more jobs) What is the federal funds rate - ANSWER-the rate commercial money center banks charge each other for an overnight, unsecured loan The Federal Open Market Committee (FOMC) - ANSWER-buy or sell Treasury securities in the open market. Purchases add money to the economy, making the money available to lend more plentiful, and sales take money out of the economy, making money available to lend less plentiful. Reports of rising inventories generally occur during which period of the business cycle? - ANSWER-Contraction, due to a lack of consumer demand Who is exempt from registering with SIPC? - ANSWER-Those who deal exclusively with US Government securities (i.e.-Treasury bonds), exclusively municipality securities, and in redeemable investment company securities Retail investor - ANSWER-An individual who makes investments such as the purchase of securities for his or her account rather than for an organization Market maker - ANSWER-Any entity, individual or organization, willing to accept the risk of holding a particular security in its own account to facilitate trading and provide liquidity in that security When the Federal Reserve Board wants to expand (loosen) the money supply, it will - ANSWER-buy Treasury securities from banks in the open market SROs functioning under the SEC include... - ANSWER-FINRA, MSRB and CBOE Mild inflation can - ANSWER-encourage growth and stimulate the economy Discount rate - ANSWER-The rate the FRB charges member banks Prime rate - ANSWER-The rate commercial banks (Wells Fargo) charges their most creditworthy investors (Lincoln Financial). Prime rate decreases when banks sell securities because there's money money in the market and don't need to charge as much. Raise the rate when they buy securities. 4 stages of the business cycle - ANSWER-expansion (recovery), peak (prosperity), contraction (decline), trough, and then expansion (recovery) again Securities Act of 1933 - ANSWER-(The Paper Act, Prospectus Act, New Issues Act) requires that issuers who want to raise capital by making a public offering of securities to the public, provide full and fair disclosure of all material facts about the company and the securities being offered. To contract or slow economic growth U.S. fiscal policy should be to - ANSWER-raise taxes and cut government spending for programs and development Out of the federal funds rate, discount rate, prime rate and broker call loan rate, which is the most volatile? - ANSWER-Federal funds rate because of the overnight offerings (short-term) The shelf offering (registration) provision under the Securities Act of 1933 allows - ANSWER-issuers to quickly raise capital when needed or when market conditions are favorable. Types of direct participation programs (DPPs) - ANSWER-real estate, gas and oil, and leasing programs Long vs short investor - ANSWER-Long (buy), short (sell) Debenture - ANSWER-a debt obligation of a corporation backed only by its word and general creditworthiness, written promises of the corporation to pay the principal at its due date and interest on a regular basis. Municipal revenue bonds - ANSWER-bonds issued to finance a project or facility with the bonds' debt service backed by the facility's revenue stream. The revenue might come from rents, tolls, or admission fees, among other sources. Build America Bonds (BABs) - ANSWER-Taxable municipal securities. Two types: Direct Payment ( provide the municipal issuer with payments from the U.S. Treasury) and Tax Credit, or Issuer (provide the bondholder with a federal income tax credit) Long 1 XYZ January 50, put at 2. What is the max. potential gain? - ANSWER-"Investor BOUGHT 100 shares of XYZ in January at $50 per share, the premium is $2." 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). Adjusted cost basis problem - ANSWER-see example on page 129 under dividends When must a suspicious activity report (SAR) be filed with FinCEN after noticing suspicious activity in an account? - ANSWER-within 30 calendar days, the client may not know he is subject to an SAR. When can corporate accounts trade on margin? - ANSWER-Only when it is not listed as being restricted for doing so. When securities are held in street name, who is the beneficial owner? - ANSWER-The security is put in the broker-dealers name, but the customer is still the beneficial owner. What are the requirements of a business continuity plan (BCP) if there is a major business disruption in the firm? - ANSWER-Data backup and recovery (hard and electronic copies), alternate business location for employees, and prompt customer access to funds and securities What securities can be purchased on margin? - ANSWER-Equities, bonds and warrants. Mutual funds cannot be purchased on margin, but can be used as collateral after being held for 30 days. Spin-off - ANSWER-When one company sells all of the shares of another it own Stagflation - ANSWER-When inflation and stagnation occur simultaneously: a period of high unemployment and lack of growth and business activity (stagnation) and high unemployment and lack of growth and business activity (inflation) Keynesian theory - ANSWER-Government intervention in the economy is a significant force in creating prosperity by engaging in activities that affect aggregate demand. Deflation - ANSWER-a general decline in prices occurring during severe recessions and the unemployment rate is rising. Fourth market - ANSWER-market for institutional investors in which blocks of stock trade through electronic communications networks (ECNs) that are open 24 hours a day acting as agents bullish position are... - ANSWER-long (owning/buying a security in hopes that they can resell it at a higher price later & owning securities that can be converted into rights, warrants and long calls) bearish positions are... - ANSWER-short An investor purchased 100 shares of Acme Shoelace stock for $20 per share. Four years later, the investor sold the stock for $28 per share. This investor would report these transactions, on a per share basis, as - ANSWER-$20 cost base, $8 capital gains (cost base: the price paid for the security, capital gain/loss: difference between the cost base and price security sold for later) A member firm holding stock in street name may vote the shares as it sees fit if - ANSWER-the customer does not return the signed proxy statement by the 10th day before the shareholders' meeting, and if the matters to be voted on are of minor importance. What records have to be maintained for 6 years? - ANSWER-Blotters, general ledger, stock ledger, customer ledger, and customer account records Churning - ANSWER-Excess trading in a customer's account, can happen in discretionary and nondiscretionary accounts What will be found in a trade confirmation? - ANSWER-trade date, account number, description of the security, CUSIP number, commissions (not markups or markdowns), RR's ID number, BOT (bought) or SLD (sold) position, number of shares, yield, price per share, amount paid, and net amount DERP - ANSWER-Declarate date: When the BOD approves the dividend payment Ex-Dividend date: one business day before the record date, or two business days after the trade date (regular way settlement), stock must be purchased before Ex date Record date: when stockholders receive the dividend distribution Payable date: when the shareholders receive dividend checks (the actual payment) Interest payments for securities - ANSWER-corporate bond: pay semiannually inflation - ANSWER-Rising employment due to an increase in demand for goods and services best efforts underwriting types: - ANSWER-All or none: underwriter sells all of the shares or cancels the underwriting Mini-max: fixing a minimum/maxiumum (floor or ceiling) dollar amount to be sold in order to move forward with the entire offering market maker - ANSWER-A broker-dealer that accepts the risk of holding a particular security in its account to facilitate trading and provide liquidity in that security Prime rate - ANSWER-the rate charged to their most credit worthy corporate customers for unsecured loans, set by individual commercial banks balance of payments - ANSWER-the flow of money between the US and other countries trustee - ANSWER-An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another who has been legally appointed to provide these services (i.e.-fiduciary appointed to manage assets in a trust) custodian - ANSWER-An institution or a person responsible for making all investment, management, and distribution decisions in an account maintained in the best interests of another (i.e.-Custodian of an account of a minor) Cooling-off period lasts... - ANSWER-20 CALENDAR days, not business, since the SEC has received it When the FOMC buys treasury securities, interest rates will... - ANSWER-be lowered since the money supply is loosening and there is more money being pumped into the economy What investment products are NOT covered by the FDIC? - ANSWER-Mutual funds, annuities, life insurance policies, and stocks/bonds.(An annuity with a self-directed IRA or mutual fund with a certificate of deposit are covered) Types of interest rates charged - ANSWER-Discount rate- FRB Federal Funds Rate- Large commercial banks to one another for overnight loans of $1M or more (short-term, most volatile) Prime Rate- Large commercial banks charge to credit worthy investors Broker Loan Rate- banks charge broker dealers on money they borrowed to lend to margin account customers Shelf offering registration - ANSWER-when issuers can raise money quickly when needed or when market conditions are just right by selling shares, the transaction does not have to happen immediately, can occur in the primary and secondary offerings Supply-side theory - ANSWER-Government should allow market forces to determine prices of all goods and that the federal government should reduce government spending as well as taxes. Access equals delivery rule - ANSWER-Applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary prospectuses. No prospectus can be delivered before the registration date A strong US dollar leads to.. - ANSWER-more affordablility for U.S. consumers to buy more foreign goods, so U.S. imports increase. As more imported goods flow in, more money flows out—deficit. prime brokerage account - ANSWER-a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers. Depository trust company (DTC) - ANSWER-serves the custody needs of securities industry participants in the US and a number of foreign countries as well. carrying firm - ANSWER-or clearing broker-dealers, can execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks, such as sending trade confirmations and statements for themselves as well as for other broker-dealers. introducing/fully disclosed - ANSWER-A broker-dealer has a line of business restricted solely to the purchase and sale of securities with trade executions being handled by another member firm, it introduces its customers to a clearing firm Main purpose of issuer/primary market transactions - ANSWER-hopes of raising capital by selling securities to the investing public Secondary market transactions are where... - ANSWER-investors buy and sell securities to and from one another Primary market transactions are where... - ANSWER-Issuers, or someone acting as an issuer, sells securities to the investing public U.S. consumers are increasing their imports of foreign-made goods, what will likely happen to the GDP? - ANSWER-The GDP will decrease (it is a measure of goods and services produced), so if there are more foreign goods being shipped in, there are less US goods being produced domestically What is the only form of advertising permitted before the effective date? - ANSWER-Tombstone ads What is the primary regulatory body for the securities industry? - ANSWER-the SEC, not FINRA The cost of doing business is closely linked to the cost of money, which is known as - ANSWER-interest Firm commitment underwriting is when... - ANSWER-Underwriters acting as principals and committing to purchase any unsold shares for the syndicate account FINRA regulates - ANSWER-all matters related to investment banking (securities underwriting), trading in the OTC market, trading in NYSE-listed securities, and the conduct of FINRA member firms and associated persons Syndicate - ANSWER-two or more broker-dealers (investment bankers) which work with an issuer through, for example, the registration process in the case of corporate securities and bring the issuer's securities to the market by selling them to investors. There are syndicates that specialize in underwriting municipal bonds. The members of a syndicate are also known as the underwriters or collectively the underwriting group. A depository - ANSWER-A business entity that performs the function of receiving and delivering payments and securities on behalf of both parties to a securities transaction What type of risk can be reduced through diversification? - ANSWER-Nonsystematic risk (i.e.-business, capital, financial, call, prepayment, currency, liquidity, regulatory, legislative, and political risk) What type of risk cannot be reduced through diversification? - ANSWER-Systematic risk (i.e.-market, interest rate, reinvestment, and inflation/purchasing power) Limited partnerships - ANSWER-An investment that allows for a share in the income, gains, losses, deductions, and tax credits of the business entity to pass through to investors The effect of continually rising retail prices on the investment returns of one's portfolio is best described as - ANSWER-Inflation risk Long call and long put - ANSWER-call buyer owns the right to buy shares (bullish), while the put buyer has the right to sell the shares (bearish) Short call and short put - ANSWER-call writer has the obligation to sell the shares (bearish), while the put writer has the obligation to buy the shares (bullish) What does it mean when a fund is highly leveraged? - ANSWER-It means they are borrowing to purchase, or buying on margin. (i.e.- a hedge fund is highly leveraged) Penny stock - ANSWER-a non-Nasdaq listed (therefore, Bulletin Board or "OTC Pink") stock trading under $5 per share. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price. T-bonds and T-notes pay interest.... - ANSWER-semiannually Why is a fixed security not considered a security? - ANSWER-because the annuity buyer assumes no investment risk, the insurance company does. They do, however, assume inflation risk. A convertible feature for a corporate bond allows - ANSWER-a bondholder to convert a debt instrument into securities that give the investor ownership rights What causes a mutual fund's NAV per share to fall? - ANSWER-when the fund pays a dividend to shareholders and when the market value of the portfolio declines American-style vs. European-style option - ANSWER-American: call or put buyers can exercise a contract any time BEFORE expiration European: call or put buyers can exercise a contract on the expiration day only (last day of trading) Where do tax deductions for real estate programs derive from? - ANSWER-mortgage interest paid and depreciation When the U.S. government deposits securities with a trustee, against which it issues certificates representing principal payments only, and no regular interest payments, these are known as - ANSWER-Treasury STRIPS What are the three yields used for debt instruments that all mean the same thing? - ANSWER-Nominal, stated and coupon yield, they are all fixed at the time the bond is issued Sovereign risk is... - ANSWER-a type of political risk, the risk of default by a country on its debt instruments (i.e.-The ratings on the debt instruments of a foreign country with outstanding loans from a number of other countries worldwide have been downgraded. The impact felt due to the risk of possible default is known as) Legislative vs Regulatory risk - ANSWER-Legislative: the changing of laws Regulatory: the changing of regulations Liquid vs illiquid investments - ANSWER-Investments in stocks and bonds are considered liquid (i.e.-common stock), while investments in assets (works of art, real estate, automobiles) are considered illiquid A registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. What does this mean? - ANSWER-6% is the bond's coupon, while 6.5% is the bond's yield to maturity Money market instruments guaranteed by a bank that are used to provide capital for international trade/ provide short-term financing for importers and exporters are called - ANSWER-bankers' acceptances (BAs) If an investor is long an option contract and wishes to exercise the contract, the investor notifies the broker-dealer, who then notifies... - ANSWER-the OCC (Options Clearing Corporation) who's duty is to standardize, guarantee the performance and issue options contracts If the buyer exercises the contract, then the seller... - ANSWER-is obligated to fulfill the terms of the contract What does a bond certificate represent? - ANSWER-The borrower's obligation to repay the amount it borrowed plus interest What happens in repo (reverse repurchase) agreement - ANSWER-a dealer agrees to buy securities from an investor and sell them back later at a higher price. A preemptive right for existing shareholders is best described as - ANSWER-the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares When is settlement for options trading? - ANSWER-The next business day, the day after the trade date, T + 1 (i.e.-If someone purchased a call on Tuesday, December 5, the settlement for that trade would be on Wednesday, December 6.) capital market vs money market instruments - ANSWER-capital market: intermediate to long-term, equity or debt securities with maturities of one year or more money market: short-term, highly liquid, high-yielding debt securities, to corporations, banks, broker-dealers, government municipalities, US government, maturities of 1 year or less, higher degree of safety, no interest payments (purchase at discount and mature at face value) Types of money market instruments - ANSWER-Certificates of deposit (CDs), Bankers' Acceptances (BAs), Commercial paper, US Treasury bills, Repurchase Agreements (REPOs), and Federal Funds What are ad valorem taxes? - ANSWER-real estate taxes issued by local municipalities (towns, cities, or counties -- never states) What is capital risk? - ANSWER-the potential for an investor to lose some or all of their money (the invested capital) under circumstances unrelated to an issuer's financial stability (i.e.-least likely when they invest in securities backed by the government, but likely when they invest in derivative products like options or businesses like DPPs) What are depletion allowances? - ANSWER-Tax deductions that compensate an oil and gas program for the decreasing supply of the resource after it is taken out of the ground and sold Limited partnerships consist of... - ANSWER-a large group of investors contributing a small sum While options accounts are initially approved by the branch office manager (BOM), they must ultimately be approved by the... - ANSWER-Reigistered options principal (ROP) in a promptly manner When the current yield is higher than the coupon, what does this mean? - ANSWER-The bond was purchased at a discount When a bond is being sold with current interest rates lower than coupon, what does this mean? - ANSWER-The bond was sold at a premium How are ETFs priced? - ANSWER-by supply and demand where transactions prices may be higher or lower than the fund's NAV What is market timing? - ANSWER-Short-term purchases and sales of a mutual fund to take advantage of price fluctuation What is the most common form of direct participation programs (DPPs)? - ANSWER-Limited partnerships (LPs): business entities allowing for the economic consequences of the business to flow through to the individual investors (partners). What is the one option contract with unlimited loss potential? - ANSWER-A short call, it is bearish and wants to see the price of the stock rise What do federal funds represent? - ANSWER-the amount by which a bank exceeds its required deposits to be held on reserve at the FRB What are the steps for opening a new options account? - ANSWER-Obtain essential facts from the customer, get approval from the branch manager, enter the initial order, then obtain a signed options agreement What are anticipation notes? - ANSWER-Short-term municipal obligations that generate funds for a municipality that expects alternate longer-term financing (i.e.-TANs, RANs, TRANs, BANs, CLNs, GANs) What are the 3 types of investment companies under the Investment Act of 1940? - ANSWER-Face-amount certificates, unit investment trusts, and management companies (both open- and closed-end) The declaration, record and payment dates are all set by ___________, while the ex-dividend date is set by _________. - ANSWER-DRP are set by the BOD, while E is set by FINRA or the exchange Exception reports are filed when... - ANSWER-There is suspicious activity in a customer account or when there is improper use of a customers' securities or funds What is capping? - ANSWER-A form of market manipulation, often used by those who have written (Short) call option contracts, in which they enter sell orders in a stock for the purpose of keeping the stock from rising above the strike price, so that the calls wont be in-the-money and therefore exercised What is backing away? - ANSWER-The failure to honor a firm quote on a security What is a contemporaneous trader? - ANSWER-Someone who enters into a transaction at the same time as someone else who has and may be acting on inside information; they can sue the other person for up to 5 years after the violation has occurred What are the three stages of money laundering? - ANSWER-Placement, layering, then integration Regulation T - ANSWER-set by the FRB, the initial margin requirement is 50% of sale proceeds to be deposited in the customer's margin account Standard corporate actions - ANSWER-cash and stock dividends, even and uneven stock splits (both forward and reverse) and the issuance of warrants and rights Nonstandard/unique corporate actions - ANSWER-mergers and acquisitions, takeovers, spinoffs, tender offers and buy-back or repurchases of stock What must happen in order to sell short? - ANSWER-The shares must be borrowed, or located in order to borrow.