SIE FINAL EXAM 01 QUESTIONS &
DETAILED CORRECT ANSWERS
A corporation will be paying a cash dividend to its shareholders. On what date will the market
price of the stock be reduced? CORRECT ANSWER - Ex-date (The ex-date is the first day that a
stock trades without its dividend included in its price. On the ex-date, the stock's price is
reduced by the amount of (or enough to cover) the dividend)
What's the maximum profit for the buyer of a call option? CORRECT ANSWER - Unlimited (The
maximum gain for the buyer of a call option is unlimited. A buyer of a call option will realize a
profit if the underlying stock rises above the breakeven point. Since a stock's increase is
unlimited, so too is the potential profit for the buyer of a call. On the other hand, if the stock
doesn't rise and instead falls below the strike price (i.e., the option is out-of-the-money), the
buyer's maximum loss is the premium paid.)
A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%.
The bonds are currently selling at 96. What is the current yield? CORRECT ANSWER - 8.3% (To
find the current yield of the bonds, divide the yearly interest paid on the bonds by the current
market value of the bonds. The yearly interest is $80. The market value of a bond is $960.
Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). The fact that these
are convertible bonds is not relevant.)
When is an underwriting broker-dealer able to accept payment from an investor for the
purchase of a new issue? CORRECT ANSWER - When the registration is declared effective.
(Broker-dealers can only accept payment for a new issue after a security's registration is
declared effective. The red herring is also referred to as the preliminary prospectus and is given
to investors before the effective date. The cooling-off period lasts between the date on which an
issuer files its registration statement with the SEC and the effective date of the offering. During
the cooling-off period, no sales can be confirmed and no payment can be accepted.)
,A broker-dealer must establish information barriers between which two departments?
CORRECT ANSWER - Investment banking and trading (Information barriers must be maintained
at firms to prevent the flow of certain information between different departments at the firm.
Much of the focus is on preventing the free flow of information between investment banking
and other departments. In fact, most of the communication between investment banking and
other departments is made through compliance)
The SEC rules regarding the record retention generally require that records be kept in an easily
accessible location for the: CORRECT ANSWER - First two years
In judging the fairness of a firm's markup, industry rules would NOT consider: CORRECT
ANSWER - Whether the client was a retail or institutional customer Among the relevant factors
that a member may consider in determining a fair markup or commission are the following.
-The type of security involved (Common stock would normally demand a higher markup than
debt.)
-The availability of the security in the market (actively or inactively traded)
-The price of the security
The amount of money involved in the transaction
-Disclosure (made prior to the execution of the transaction may be relevant)
-The pattern of markups
-The nature of the member firm's business (What type of services does the member provide to
the customer?)
-The type of client is not specifically mentioned in the rules as determining whether the markup
or commission is fair and reasonable.
A registered representative persuades a customer to purchase a security by assuring her that,
should it fall in value, the representative will make up the difference in the account. This
practice is: CORRECT ANSWER - Not permitted (Guaranteeing a customer against a loss is
prohibited regardless of the relationship.)
, The type of market in which an issuer raises capital by selling its securities to investors is
referred to as the: CORRECT ANSWER - Primary market (The type of market in which an issuer
raises capital by selling its securities to investors is referred to as the primary market. The
secondary market is where investors that purchased securities in the primary market then sell
them to other investors. The third market involves securities that are listed on an exchange
(e.g., the NYSE or Nasdaq) are traded in the OTC market. The fourth market refers to direct
institution-to-institution trading and does not involve the public markets or exchanges.)
A registered employee is required to disclose which of the following activities to her employing
broker-dealer? CORRECT ANSWER - Serving as a director for a profit-based firm (Registered
employees must disclose all outside business activities to their employers. Volunteering or
playing sports don't require disclosure since the registered representative is not receiving
compensation.)
FINRA prohibits selling away and it can be best described as: CORRECT ANSWER - Selling
securities in private transactions without prior written consent of the employing broker-dealer-
(Selling away occurs when a registered representative (RR) engages in a securities transaction
that's outside of the regular scope of their employment with a member firm. Recommending
the services of another broker-dealer is not prohibited. Splitting commissions with another RR
of the same BD is not prohibited. Advising customers to buy mutual fund shares at dollar levels
just below a breakpoint is prohibited and is referred to as "breakpoint selling," not "selling
away.")
A covered call writer can be described as being: CORRECT ANSWER - Short the call, and long the
stock (When writing (or selling) the call, the investor is said to be short the call. A covered call
writer will currently own the underlying securities, and hence be long the stock.)
Which of the following are short-term trading vehicles? CORRECT ANSWER - Leveraged ETFs
(Due to the inherent volatility of leveraged ETFs, they are appropriate as short-term trading
vehicles. Each of the other choices are considered longer term investments.)
Which of the following risks does not apply to both foreign and domestic debt instruments?
CORRECT ANSWER - Exchange - (Exchange (rate) risk could result in investors suffering losses
DETAILED CORRECT ANSWERS
A corporation will be paying a cash dividend to its shareholders. On what date will the market
price of the stock be reduced? CORRECT ANSWER - Ex-date (The ex-date is the first day that a
stock trades without its dividend included in its price. On the ex-date, the stock's price is
reduced by the amount of (or enough to cover) the dividend)
What's the maximum profit for the buyer of a call option? CORRECT ANSWER - Unlimited (The
maximum gain for the buyer of a call option is unlimited. A buyer of a call option will realize a
profit if the underlying stock rises above the breakeven point. Since a stock's increase is
unlimited, so too is the potential profit for the buyer of a call. On the other hand, if the stock
doesn't rise and instead falls below the strike price (i.e., the option is out-of-the-money), the
buyer's maximum loss is the premium paid.)
A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%.
The bonds are currently selling at 96. What is the current yield? CORRECT ANSWER - 8.3% (To
find the current yield of the bonds, divide the yearly interest paid on the bonds by the current
market value of the bonds. The yearly interest is $80. The market value of a bond is $960.
Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). The fact that these
are convertible bonds is not relevant.)
When is an underwriting broker-dealer able to accept payment from an investor for the
purchase of a new issue? CORRECT ANSWER - When the registration is declared effective.
(Broker-dealers can only accept payment for a new issue after a security's registration is
declared effective. The red herring is also referred to as the preliminary prospectus and is given
to investors before the effective date. The cooling-off period lasts between the date on which an
issuer files its registration statement with the SEC and the effective date of the offering. During
the cooling-off period, no sales can be confirmed and no payment can be accepted.)
,A broker-dealer must establish information barriers between which two departments?
CORRECT ANSWER - Investment banking and trading (Information barriers must be maintained
at firms to prevent the flow of certain information between different departments at the firm.
Much of the focus is on preventing the free flow of information between investment banking
and other departments. In fact, most of the communication between investment banking and
other departments is made through compliance)
The SEC rules regarding the record retention generally require that records be kept in an easily
accessible location for the: CORRECT ANSWER - First two years
In judging the fairness of a firm's markup, industry rules would NOT consider: CORRECT
ANSWER - Whether the client was a retail or institutional customer Among the relevant factors
that a member may consider in determining a fair markup or commission are the following.
-The type of security involved (Common stock would normally demand a higher markup than
debt.)
-The availability of the security in the market (actively or inactively traded)
-The price of the security
The amount of money involved in the transaction
-Disclosure (made prior to the execution of the transaction may be relevant)
-The pattern of markups
-The nature of the member firm's business (What type of services does the member provide to
the customer?)
-The type of client is not specifically mentioned in the rules as determining whether the markup
or commission is fair and reasonable.
A registered representative persuades a customer to purchase a security by assuring her that,
should it fall in value, the representative will make up the difference in the account. This
practice is: CORRECT ANSWER - Not permitted (Guaranteeing a customer against a loss is
prohibited regardless of the relationship.)
, The type of market in which an issuer raises capital by selling its securities to investors is
referred to as the: CORRECT ANSWER - Primary market (The type of market in which an issuer
raises capital by selling its securities to investors is referred to as the primary market. The
secondary market is where investors that purchased securities in the primary market then sell
them to other investors. The third market involves securities that are listed on an exchange
(e.g., the NYSE or Nasdaq) are traded in the OTC market. The fourth market refers to direct
institution-to-institution trading and does not involve the public markets or exchanges.)
A registered employee is required to disclose which of the following activities to her employing
broker-dealer? CORRECT ANSWER - Serving as a director for a profit-based firm (Registered
employees must disclose all outside business activities to their employers. Volunteering or
playing sports don't require disclosure since the registered representative is not receiving
compensation.)
FINRA prohibits selling away and it can be best described as: CORRECT ANSWER - Selling
securities in private transactions without prior written consent of the employing broker-dealer-
(Selling away occurs when a registered representative (RR) engages in a securities transaction
that's outside of the regular scope of their employment with a member firm. Recommending
the services of another broker-dealer is not prohibited. Splitting commissions with another RR
of the same BD is not prohibited. Advising customers to buy mutual fund shares at dollar levels
just below a breakpoint is prohibited and is referred to as "breakpoint selling," not "selling
away.")
A covered call writer can be described as being: CORRECT ANSWER - Short the call, and long the
stock (When writing (or selling) the call, the investor is said to be short the call. A covered call
writer will currently own the underlying securities, and hence be long the stock.)
Which of the following are short-term trading vehicles? CORRECT ANSWER - Leveraged ETFs
(Due to the inherent volatility of leveraged ETFs, they are appropriate as short-term trading
vehicles. Each of the other choices are considered longer term investments.)
Which of the following risks does not apply to both foreign and domestic debt instruments?
CORRECT ANSWER - Exchange - (Exchange (rate) risk could result in investors suffering losses
