85 SIE Practice Exam Questions with Correct Answers

85 SIE Practice Exam Questions with Correct Answers The Sierra Verde Coffee Company recently developed a new flavor, jasmine chili salted mocha. Unfortunately, the coffee has a horrible taste, and the company discontinues the flavor. The costs involved in bringing the new product to market combined with the drop in sales and a reputational hit have translated into a significant drop in the price of the stock. This is an example of what type of risk? A) Market risk B) Interest rate risk C) Business risk D) Default risk >>> C) Business risk Risk that arises out of a poor business decision is business risk. Interest rate risk and default risk impact bond values. Market risk impacts the entire market. Which of the following is an example of systematic risk? A) Interest rate risk B) Default risk C) Call risk D) Business risk >>> A) Interest rate risk Interest rate risk affects all fixed-income investments in a similar way due to the inverse relationship. Business and default risk are issuer specific. Call risk is issue specific, and is generally seen as unsystematic. In the event of a corporate bankruptcy, which of the following is true? A) A shareholder's liability is limited to the amount invested when shares were purchased. B) A shareholder has unlimited liability as an owner of the corporation. C) A shareholder can be obligated to liquidate personal assets to meet the liabilities of the corporation. D) A shareholder can be required to rebate all dividends received during ownership to meet the liabilities of the corporation. >>> A) A shareholder's liability is limited to the amount invested when shares were purchased. Shareholders have limited liability and are personally at risk only for the amount that was invested. Which of the following is not reported on Form U4? A) Aliases B) Marital status C) Employment history D) Residency history >>> B) Marital status Marital status is not on Form U4. The form requires a 5-year residency history, 10-year employment history, and any aliases you use. Risk that is difficult to reduce by diversification within an asset class is called which of these? A) Financial risk B) Unsystematic risk C) Nonsystematic risk D) Systematic risk >>> D) Systematic risk Systematic risk affects an entire asset class in the same way, so diversification does little to reduce systematic risks. Market and interest rate risk are examples. Unsystematic and nonsystematic risk are different terms for the same class of risk. Financial risk is a specific nonsystematic risk. An investor with no other positions in LMN stock purchases 600 shares at the market. This investor is: A) short LMN stock and bullish. B) short LMN stock and bearish. C) long LMN stock and bullish. D) long LMN stock and bearish. >>> C) long LMN stock and bullish. With no other positions in LMN stock, the purchase was an opening transaction. Having purchased the stock in an opening transaction, the investor now has a long position in LMN stock and is bullish—wanting to see the stock rise in value. An IRA can be funded using all of the following except: A) stocks and bonds. B) an investment company. C) securities. D) works of art. >>> D) works of art. IRAs can be funded with stocks, bonds, investment company securities (open- and closed-end funds), U.S.-minted gold and silver coins, and many other securities. There are, however, certain investments that are ineligible in an IRA such as collectibles, antiques works of art, and others. As participants in a firm commitment underwriting agreement, the underwriters know that: A) they, the underwriters, will not be at risk for any securities left unsold. B) they, the underwriters, will be acting as principals buying the securities from the issuer. C) if shares cannot be sold to the public, the issuer will not be able to raise all of the capital needed as an agent. D) for the issuer, they are only committing to making their best effort to sell securities for them. >>> B) they, the underwriters, will be acting as principals buying the securities from the issuer. In a firm commitment, the underwriters contract with the issuer to buy the securities from them and thus are acting as principals rather than agents. In this type of underwriting, it is the underwriters who are at risk for any shares they cannot sell to the public, not the issuer. The issuer knows that ultimately all of the securities will be sold and all of the capital needed will be raised. Achieving a Better Life Experience (ABLE) accounts may be opened for beneficiaries at what age? A) Before the beneficiary's 26th birthday B) On or after the beneficiary's 26th birthday C) Any age D) Before the beneficiary reaches the age of majority in their home state >>> C) Any age The age limit for ABLE accounts is based on the onset of disability, not their current age. The onset must be before they turn 26 years old. For common shareholders, which of the following true? A) Dividends declared by the board of directors represent neither income nor growth. B) An increase in the value of shares owned represents growth or capital appreciation. C) An increase in the value of shares owned represents income. D) Dividends declared by the board of directors represent growth or capital appreciation. >>> B) An increase in the value of shares owned represents growth or capital appreciation. For shareholders, an increase in the value of shares owned represents growth or capital appreciation, while any dividends paid represent income. If Edna moves $50,000 from a maturing certificate of deposit to her checking account, which of the following measures of money supply would change? A) All of these B) M2 C) M3 D) M1 >>> D) M1 This move would only impact M1. M1 is a component of M2 and M3, so the funds never leave those measurements. The only change would be an increase in M1. The Windmill Alternative Energy Fund offers its shares to the public at the fund's net asset value (NAV) based on the next calculation of that figure. Based on this, you can say that the fund is A) a no-load fund. B) a closed-end fund. C) a front-end load fund. D) a hedge fund. >>> A) a no-load fund. Offering shares at the next NAV calculation is a characteristic of mutual funds and other open-end management companies (called forward pricing). If a mutual fund has a public offering price equal to its NAV, it has no sales charge and is therefore a no-load fund. Details surrounding a termination must be included with a Form U-5 filing for all of the reasons below except: A) other. B) discharged. C) death. D) permitted to resign. >>> C) death. Death is self-explanatory. All of the others require a full explanation as to the circumstances of the termination. An investor owns a municipal bond fund. What is the tax status of distributions from the fund? A) Income is tax free, but capital gains distributions are taxable. B) Income is taxable, but capital gains distributions are tax free. C) Both income and capital gains distributions are taxable. D) Both income and capital gains distributions are tax free. >>> A) Income is tax free, but capital gains distributions are taxable. Interest income distributed from municipal bond funds is normally tax free to an investor. Trading profits from portfolio adjustments, however, are taxable at capital gains rates. An investor is selling shares of Rule 144 restricted stock after holding it the required length of time. The buyers of these shares are purchasing shares of stock that: A) are now considered registered but will still be subject to a holding period. B) will still be unregistered and will still be subject to a holding period. C) will still be unregistered but no longer subject to a holding period. D) are now considered registered and no longer held to a holding period. >>> D) are now considered registered and no longer held to a holding period. Shares being sold subject to Rule 144 after having met the required holding period are now effectively considered registered. These registered shares are being purchased unencumbered and no longer require that any holding period be met. A registered representative (RR) wants to give employees of another broker-dealer located in the same office building $20 boxes of chocolates for the holiday season. Which of the following is true? A) The gifts are permitted if no condition of sales or reciprocal business is expected, and the RR's employing firm gives prior approval. B) The gifts do not violate the annual dollar gift limit threshold and are therefore permitted in all circumstances with no approval required. C) The gifts would not be permitted, as all gifts to other member firm employees are strictly prohibited. D)Because the gifts are not conditional on sales or reciprocal business from the other member firm, no permission is needed from the RR's employing firm to give the gifts. >>> A) The gifts are permitted if no condition of sales or reciprocal business is expected, and the RR's employing firm gives prior approval. Broker-dealers or their associated persons may not distribute business-related gifts or gratuities to the employees of other member firms. However, a broker-dealer may give other firms' employees gratuities without violating the rules, provided the compensation is not conditional on sales or promises of sales, the employing member has given prior approval, and the compensation's value given to any one person does not exceed the annual limit set by the regulatory bodies (currently $100 per year). Your customer, Rodrigo, is 40 years old. He is married and has four sons. Five years ago, he purchased a nonqualified variable annuity for $20,000. It has grown to $25,000 by the time he withdraws $10,000 to pay for his oldest son's college tuition. How will the withdrawal be taxed? A) $5,000 tax free and ordinary income, plus a 10% penalty on the other $5,000 B) No taxes on the withdrawal if customer specifies it is from principal only C) Ordinary income on $10,000 D) Ordinary income and a 10% penalty on the entire amount of the withdrawal >>> A) $5,000 tax free and ordinary income, plus a 10% penalty on the other $5,000 Any withdrawal from a variable annuity must first come from any growth in the portfolio. All growth is taxed as ordinary income in the year it is withdrawn. If the owner is under 59½ at the time of withdrawal, there is a 10% penalty on the taxable portion of the withdrawal. Once any growth has been exhausted, what remains is principal. There are no taxes on the return of principal. A registered representative is introducing options terminology to a client. Of the following, which explanation regarding owners and writers of listed equity option call contracts would be true? A) The owner of a call has the right to exercise the contract, and the writer would then be assigned the obligation to buy shares from the owner at the strike price. B) The owner of a call has the right to exercise the contract, and the writer would then have the right to buy shares from the owner at the strike price. C) The owner of a call has the right to exercise the contract, and the writer would then be assigned and obligated to sell shares to the owner at the strike price. D) The owner of a call is obligated to exercise the contract to sell shares to the writer, who may choose to purchase them or not. >>> C) The owner of a call has the right to exercise the contract, and the writer would then be assigned and obligated to sell shares to the owner at the strike price. Owners of option contracts have the right to exercise, and writers are obligated to perform when they are assigned. In the case of an equity call contract, the owner has the right to exercise the contract to purchase shares at the strike price, and the writer would then be assigned and obligated to sell the shares at the strike price. Your customer, Cecelia, is 40 years old. She is married and has four sons. Her third child, age 13, has committed to going to college at the prestigious Bookworm Institute of Los Angeles in Southern California. Cecelia and her spouse have noted the rapid increase in the school's tuition over the past few years and are worried about their savings keeping pace with tuition costs. They also express discomfort with the uncertainties in market returns. Which of the following is the most suitable recommendation for the customer? A) A Coverdell ESA account B) A 529 college savings plan C) A 529 prepaid tuition plan D) A custodial account in the name of the minor >>> C) A 529 prepaid tuition plan 529 prepaid tuition plans are designed to protect against inflation in tuition costs. Both the college savings and ESA are likely exposed to market risk, as is the custodial account. Additionally, the custodial account is not earmarked for education, and the minor may take control of the account when she reaches the age of majority. Joshua, a registered representative, calls a prospect at 7:00 pm only to be told that the caller is in a different time zone, where it is 10:00 pm. Joshua has done which of these? A) Not a violation because the rule is no longer valid due to emerging mobile technology B) Violated the TCPA because it is after 9:00 pm the prospect's time C) Not a violation because the area code was local to Joshua's location D) Not violated the TCPA because it is still within the allowed time at his location >>> B) Violated the TCPA because it is after 9:00 pm the prospect's time This is still a violation. The rule clearly states that the time requirements are based on the prospective customer's time. The existence of cell phones does not invalidate the law. A broker-dealer must make a reasonable effort to obtain the name and contact information for a trusted contact person for a senior customer when doing which of these? A) Opening an account and annually thereafter B) Opening an account or when updating account information C) Opening an account and every two years thereafter D) Opening an account and on the customer's birthday every third year >>> B) Opening an account or when updating account information The requirement is to attempt to obtain this information when opening the account and whenever updating existing account information. Supply-side economists believe that the government should: A) use taxation to increase or decrease the money supply. B) use fiscal policy to control the demand for goods and services. C) allow market forces to determine prices of all goods. D) manipulate the money supply to bring about stability in prices. >>> C) allow market forces to determine prices of all goods. Supply-side economics holds that the government should allow market forces to determine prices of all goods. Monetarists believe the quantity of money—the money supply—is the major determinant of price levels and according to Keynes, a government's fiscal policies determine the country's economic health. Fiscal policy involves adjusting the level of taxation and government spending. You are recommending the purchase of the XYZ Growth Fund to one of your clients, and you explain that the fund operates pursuant to a 12b-1 plan. Under the terms described in the prospectus, the fee is: A) reduced on purchases that reach or exceed specified breakpoints. B) included in the sales charge when shares are purchased. C) a part of the fee paid to the fund's investment manager. D) part of the expense ratio of the fund. >>> D) part of the expense ratio of the fund. A 12b-1 fee is deducted each quarter from a mutual fund's assets to cover the costs of marketing and distributing the fund to investors. A company's net worth belongs to its owners (shareholders). The net worth for a company is computed as: A) assets divided by liabilities. B) liabilities plus assets. C) fixed assets less liabilities. D) assets less liabilities. >>> D) assets less liabilities. The basic net worth computation is business assets minus the company's liabilities. A common shareholder's preemptive right is the right to: A) share in earnings of the corporation via dividends when declared. B) any increase in share value between the time purchased and sold. C) vote for board members when vacancies arise. D) maintain a proportionate share of ownership in the corporation. >>> D) maintain a proportionate share of ownership in the corporation. A shareholder's preemptive right is the right to maintain a proportionate share of ownership in the corporation. If a corporation wants to issue additional shares, existing shareholders have the right to purchase those shares in an amount that would keep their proportionate ownership in the corporation unchanged. For tax purposes, which of the following is not associated with being reportable as ordinary income? A) Rent or lease payments received B) Interest received from debt securities C) Gains from securities transactions D) Wages earned >>> C) Gains from securities transactions Ordinary income can be defined as the income earned from interest, wages, rents, royalties, and similar income streams. Capital gains are usually associated with the sale or exchange of property, including securities. If a representative possesses material inside information about a publicly traded company, under which of the following circumstances may he communicate this information to a customer? A) If the customer knows it is inside information B) Under no circumstances C) If the customer enters an unsolicited order D) If the information will be made public the next day >>> B) Under no circumstances Inside information may never be divulged to a client. Violations are punishable with both civil and criminal penalties. The Securities Exchange Act of 1934 covers all of the following except: A) issuance of corporate securities. B) broker-dealers and associated persons. C) trading of corporate securities. D) manipulative, deceptive devices. >>> A) issuance of corporate securities The Securities Exchange Act of 1934 (the People and Places Act) regulates the secondary market, including strict prohibitions from using manipulative, deceptive, or other fraudulent tactics. The Securities Act of 1933 (the Paper Act) regulates the primary market. Rob takes a job with Seacoast Securities, a FINRA member broker-dealer firm, as a receptionist in a branch. Which of the following activities may violate the rules concerning activities of registered persons? A) Providing a prospectus in response to the customer request B) Directing a customer to a flyer for a specific mutual fund that Rob really likes C) Directing a customer to the restroom D) Directing a customer to a deli Rob really likes >>> B) Directing a customer to a flyer for a specific mutual fund that Rob really likes Nonregistered persons may not engage in investment banking activities. Giving a customer information on an investment without their prior request is likely to be seen as a recommendation. Member Bank A wants to borrow from the Federal Reserve Bank's window. What would be the interest rate on this loan? A) The federal funds rate B) The prime rate C) The discount rate D) Zero percent, since members are prohibited from charging other members interest >>> C) The discount rate Member banks borrow from the Federal Reserve Bank's "discount window" at the discount rate. Member-to-member borrowing and lending is made at the federal funds rate. The prime rate is set by individual banks and is the rate of interest charged to a bank's best customers. A client and her spouse own shares in the ACE Fund as tenants in common. If each has a 50% ownership interest in the account, and the client dies, what happens to the shares in the account? A) Her spouse would automatically own all the shares. B) Half of the shares would belong to her spouse, and the remaining half would be distributed to her estate. C) Ownership of the shares would be determined by probate court. D) The account would be liquidated. >>> B) Half of the shares would belong to her spouse, and the remaining half would be distributed to her estate. In a TIC account, securities pass to the deceased owner's estate. If consumer prices are steadily dropping from month to month, this is known as what? A) Disinflation B) Stagflation C) Deflation D) Inflation >>> C) Deflation Deflation is a steady drop in consumer prices. Inflation is a steady increase in those process. An increase in prices combined with higher unemployment is stagflation. Disinflation is what happens when you let the air out of a balloon. A penny stock is defined as: A) an exchange-listed stock trading at $5 or less per share. B) an unlisted (not listed on a U.S. stock exchange) security trading at less than $5 per share. C) a stock in a company that has suffered a 50% devaluation within the most recent 30 calendar days. D) an unlisted common or preferred stock trading for $5 or less per share. >>> B) an unlisted (not listed on a U.S. stock exchange) security trading at less than $5 per share. A penny stock is an unlisted (not listed on a U.S. stock exchange) security trading at less than $5 per share. Risk that is specific to an issuer, or even an individual issue, is called which of these? A) Reasonable risk B) Nonsystematic risk C) Market risk D) Systematic risk >>> B) Nonsystematic risk Risk that is specific to an issuer is called nonsystematic risk (also unsystematic). Market risk is a type of systematic risk. Reasonable risk is not a type of risk, just a level of risk that is acceptable given the investment objective. Which of the following is not true regarding convertible bonds? A) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. B) Coupon rates are usually lower than nonconvertible bond rates of the same issuer. C) If the common stock is above parity, the convertible feature will affect the price. D) Convertible bondholders are creditors of the corporation. >>> A) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. Coupon rates are not higher than nonconvertible bond rates. They are lower because of the conversion feature's value to the bondholder. The bondholders are creditors, and if the stock price rises above the conversion price, the conversion feature will greatly influence the bond's price. Money laundering is defined as: A) the process of using legitimate money for illegal activity. B) the process of making counterfeit currency appear to be legal tender. C) a Federal Reserve Bank process of renewing worn currency. D) a process used to make funds obtained from illegal activity appear to have come from an original source. >>> D) a process used to make funds obtained from illegal activity appear to have come from an original source. Money laundering is the process of creating the appearance that money obtained for illegal activity came from a legitimate source. Although a counterfeiter may use a washing machine to age counterfeit currency, that is not money laundering. The largest employer in Los Nachos, California, has closed. The subsequent drop in revenue is threatening the city's ability to make its next interest payment on a bond. This is an example of what type of risk? A) Business risk B) Seismic risk C) Default risk D) Systematic risk >>> C) Default risk The inability to make timely debt payments is default risk, and is specific to this issuer (a nonsystematic risk). Business risk is likely responsible for the business closing, but that is not directly related to the potential default. Seismic risk is an issue in California, but is not part of these exams. Your Client, Sven, has an extensive portfolio of stocks and bonds. Last year, he had an income of $36,000, of which $200 a month was from a part-time job and the rest from his portfolio. How much can he contribute to a ROTH IRA for the previous year? A) $2,400, which is deductible from his ordinary income B) The indexed maximum, which is not deductible from his ordinary income C) $2,400, which is not deductible from his ordinary income D) The legal maximum, which is deductible from his ordinary income >>> C) $2,400, which is not deductible from his ordinary income You may only contribute earned income to an IRA, not investment income. The most he may contribute is $2,400, based on his earned income from the part-time job. ROTH IRA contributions are not deductible. A client buys stock on Monday, May 2, in a cash account. Under Regulation T, when is the client's payment due? A) The same day B) In two business days C) In four business days D) At or prior to the time of order placement >>> C) In four business days Regular-way firm-to-firm settlement is two business days after the trade date (T+2). Under Regulation T, payment must be made two business days after the settlement date (S+2 or T+4). All registered persons must complete a computer-based training session within 120 days of the person's second registration anniversary and every three years thereafter to comply with: A) FINRA's regulatory element regulation. B) both continuing education (CE) regulatory requirements. C) FINRA's firm element regulation. D) the Uniform Securities Act state regulation requirements. >>> A) FINRA's regulatory element regulation. The CE requirement consists of two elements: regulatory and firm. It is the regulatory element requirement that must be completed within 120 days of the person's second registration anniversary and every three years thereafter. BuyMore, Inc., (ticker: BMOR) is a NYSE-listed retailer. The company has a long history of steady growth and has paid dividends every quarter for five decades. They recently announced that they expect steady growth in same-store sales and will continue paying dividends into the foreseeable future. They have also announced plans to expand into Central and South America. BMOR stock is an example of: A) a mid-cap stock. B) a blue-chip stock. C) a preferred stock. D) an emerging market stock. >>> B) a blue-chip stock Blue-chip stocks are the equity issues of financially stable, well-established companies that have demonstrated their ability to pay dividends in both good and bad times. Your customer owns 500 common shares of Seabird Airlines (ticker: SBRD). He purchased the shares three years ago at $45 a share. Seabird is currently trading at $92 a share. The customer is concerned that a recent drop in airline travel will negatively impact the price of the stock. However, he does not want to sell the shares as he believes the company's long-term prospects are good. What would you recommend to the customer? A) Buy 5 SBRD 90 puts B) Sell 5 SBRD 95 calls C) Buy 5 SBRD 90 calls D) Sell 5 SBRD 95 puts >>> A) Buy 5 SBRD 90 puts By buying SBRD 90 puts, the customer has the right to sell the 500 shares by exercising the put at any time before expiration. This would be the customer's best hedge. Writing an option provides very little protection. Buying calls does not protect downside exposure at all. For an owner to be paid a dividend, his name should be recorded on the stock record book of the issuer's transfer agent by: A) the payable date. B) the next business day. C) the ex-date. D) the record date. >>> D) the record date. To receive a dividend, the buyer must be on the issuer's books as the owner on the record date. A major difference between an open-end management investment company and a closed-end company is that the open-end investment company: A) offers shares that are not redeemable by the issuer. B) has a fixed number of shares outstanding. C) has a share price determined by su