FINRA-Like SIE Practice Exam and Questions

The SEC reviews the information in a registration statement, it does not approve or disapprove of the information, nor does it guarantee the accuracy of the information disclosures. Therefore no sales agent can say to a prospect that these are ‘government approved’ securities.

What do many homeowners do when interest rates decline? They refinance their mortgage at the lower interest rate. This means the high-interest mortgages in the portfolio of the mortgage-backed product will vanish…..one term used to describe the risk of this occurring is prepayment risk.

A firm may hold customer mail upon written request. Mail can be held for up to three months.

Knowing your customer is the single most important step in the suitability of recommendations.

There are no federal dollar limits on contributions as long as they do not exceed “the amount necessary to provide for the qualified education expenses of the beneficiary.” Many states do impose dollar limits on total contributions made on behalf of one beneficiary.

A bond’s current yield is calculated by dividing the annual interest income by the current market price. $50/$950 = 5.26%.

When an investor shorts/writes/sells a put option, they agree to be OBLIGATED to BUY the underlying instrument at the strike price.

Pre-emptive Rights entitle a corporate shareholder to purchase shares in an additional share offering at a favorable below market price. Warrants enable the holder of the warrant to buy more shares at an exercise price which when first set, tends to be higher than CMV at that time. Warrants are normally quite long term whereas rights typically expire in 30 days or less. Both are tradable on organized stock exchanges, such as the NYSE.

Any investor who writes a call or a put option, also known as selling an option, also known as ‘shorting’ an option, is obligated to perform in accordance with the terms of the contract, but only if the option is exercised by the person who had purchased the option, referred to as the holder of the option, or the long option position.

Penny stocks are stocks priced below $5 per share that do not trade on an exchange. They are frequently thinly traded, which means that there may be no market for the stock if customers want to liquidate their positions. Because of this market risk additional disclosure must be made to all buyers of penny stock.

Whether one considers answers A, B, or C partially accurate, the last answer, D is the most complete therefore best answer.

Stabilizing implies keeping the price steady, which SEC allows in a new issue if done in accordance with strict guidelines of SEC—anti-manipulation guidelines.

A communication made available to retail investors cannot be classified as institutional. If the number of retail recipients is up to and including 25 persons, it is classified as correspondence. For larger audiences (more than 25 retail persons), it is considered retail communication.

Front-running is defined as trading on material non-public information ahead of an imminent block sale in the same or related securities.

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.

The term ‘STOCK’ dividend tells you this is a distribution, NOT of cash, but of more shares of STOCK.

NYSE hours and CBOE hours are the same. 9:30 to 4 ET for the NYSE is the same as 8:30 to 3:00 CT. Make sure you KNOW your time zones!

Industrial development bonds are issued by governments for the benefit of private corporations. Revenue streams raised by the facilities pay principal and interest. They are a form of conduit bond. Projects funded by IDRs include parking garages, factories, industrial parks, and sports stadiums.

When a bond is trading at a discount (market price lower than par value), the YTC will be the highest yield, then YTM, then CY, and the nominal yield the lowest yield.

A notice of sale is an advertisement published by a municipality in order to get bids from interested broker-dealers who wish to underwrite the sale of that issuer’s upcoming bond offering. The other answers are different names for documents which make full disclosure to purchases of securities.

Nasdaq is a negotiated market where market-makers negotiate a price with other customers and broker-dealers.

An upward sloping, or normal yield curve, indicates that long-term interest rates are higher than short-term interest rates. This is considered normal as investors holding bonds with long-term maturities demand more interest for taking on the increased risk.

Government budget, spending and taxation policies are fiscal policies. Federal Reserve policies are monetary.

Non-systematic risk is business risk — the risk of putting all your eggs in one basket, in one company, in one business sector…..and if that business does badly, you lose. Diversification is a good way of mitigating this risk.

Investors sell their shares at the net asset value price next calculated after the order is received, which is the concept of forward pricing.

Trades are to be reported to the appropriate ‘tape’ within 10 seconds of execution of the transaction.

A letter of intent is not an obligation but rather a show on one’s intent to invest an amount equal or more than a mutual fund’s breakpoint level so as to qualify for the reduced sales charge. LOI gives 13 months to do so.

A “breakpoint sale” is a violation that occurs when a registered rep does not disclose to the customer the opportunity to take advantage of a sales charge discount, or “breakpoint”.

The Securities Exchange Act of 1934 created the U.S. Securities and Exchange Commission (SEC) and authorized it to govern the secondary market trading of company securities in the U.S.

An investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process.

Each of these when associated with a bond issue makes the bond more attractive from a client’s point of view.

Think of a funnel. Big institutional investors are doing many trades every day through numerous broker-dealers with which they have accounts. But all the transactions and the cash and securities clearing and settlement are ‘funneled’ through one firm for accounting simplicity. The prime broker is the bottom part of the funnel.

Confirmations must be delivered to customers at or before completion of each transaction (aka by settlement).

Pink sheets: the Pinks: the Pink quotes: All these terms in your textbook speak of thinly traded, closely-held, low daily volume stocks, where liquidity is not especially present when compared to NYSE and NASDAQ stocks.

Market making firms post firm quotes during the trading day at which they are obligating themselves to do business with other firms as well as retail customers.

Once a person passes their RR exam, within 2 years from that anniversary date, a FINRA required continuing education test must be taken and passed. Then the CE tests are every three years thereafter.

Investment grade ratings end with the BBB rating. Below that are speculative grade ratings. BB+ would be the higher speculative rating from among these multiple choice answers. Ba1 is a Moody’s rating, not S&P.

Accrued interest is measured from the last interest payment date (coupon date) up to but not including the settlement date of the trade. Settlement date is not included in these accrued interest computations because legal ownership of the bond changes on settlement date and this is the date from which the new owner of the bond begins earning his own interest.

Though a very simplistic way of describing Keynesian theory, it focuses on government taxation and spending policies, which are fiscal in nature. Answer A would be more appropriate if we were asking about monetary policies, which would be the work of the Federal Reserve.

This is the framework behind Keynesian economic theory, founded by John Maynard Keynes in the 1930’s.

Variable annuities sell ‘accumulation units’ to purchasers, whose price each day is based upon the 4 pm net asset value of the separate account.

TIC, tenants in common, holds that each co-tenant in the account will have their % share of the account go to their estate upon death. In joint tenancy with rights of survivorship (JTWROS), the survivor receives the share of the other co-tenant upon death.

Going public means sharing equity ownership (common stock) with public investors, for the first time (Initial public offering, IPO).

A stock split doesn’t affect the total value of stock owned. In this example, the shares are worth $9,000 before and after the split. But three times as many shares are owned. To calculate the new number of shares, multiply the shares by the first number of the split and divide by the second number of the split: 100 shares x 3 / 1 = 300 shares. Because the $9,000 is now divided among 300 shares, the new stock price will be $30 per share.

Exchange traded funds; Exchange traded Notes; Equity Linked Notes are all traded on the NYSE.

The ‘trick’ with this question is that anytime a company is selling NEW previously unissued shares from their Authorized shares maximum, those shares are NEW —- Primary distribution means the shares being sold are NEW, never before issued, not previously owned by anyone.

REITs can avoid double taxation on profits passed through as dividends to shareholders by concentrating their investments in real estate. At least 75% of total assets must be in real estate, and at least 75% of gross income must be derived from real estate. Also, they must pass through at least 90% of their gains to shareholders.

This is one of the functions of a Transfer Agent. Registrars make sure that a company does not issue more shares than authorized in the Charter.

Freeriding is the prohibited practice of entering a trade to buy securities, then selling them the following day without having had sufficient funds in the account to pay for the trade.

Because zero coupon bonds pay no interest until maturity, their prices fluctuate more than other types of bonds in the secondary market. Variable bonds have little price fluctuation because their rates adjust to current interest rates. Also, long-term bonds are generally more volatile than short-term bonds.

Investors would now be facing reinvestment rate risk, as bonds have been called and it will be difficult to find another investment offering the same return that was available prior to the bond being called.

Common stock is purchased by investors for its capital appreciation potential. Historically it has kept pace with the rate of inflation and is used to meet growth objectives. It is most junior in terms of claims to assets in a corporate liquidation, and does not protect investors from investment risk.

For regular way trades in equities, the ex-dividend date is one business days before the record date.

Monthly or quarterly, depending on whether there has been any securities activity in the account.

Firms must verify customer information at least once every 36 months. The point of this requirement is to ensure that the account is still appropriate and the information on file is still accurate.

Under a Tenancy in Common (or Joints Tenants in Common account), each owner has a specified percentage of the entire account. At each owner’s death, his/her portion of the account is liquidated and distributed to his/her beneficiary.

One of the most attractive benefits of a variable annuity is tax-deferred growth during the accumulation period. All dividends, interest, and capital gains earned during the accumulation period may be reinvested tax-free.

A market order gives the broker instructions to buy or sell a specified quantity of securities immediately, as soon as the order reaches the market. A full execution of the order is assured but the execution price is unknown.

The term Secondary Offering is used to describe a situation in which already-issued shares are being resold into the marketplace, usually by insiders, officers, and directors of a company. The shares being sold are NOT new shares coming from the company. A follow-on offering, also called an APO (additional public offering) is where a company is issuing and selling more new shares to the public.

Closed-end company shares trade in the secondary market on exchanges. Their prices are determined by market supply and demand and therefore may be priced at a premium or discount to their NAV.

The credit quality of an exchange-traded note is based on the creditworthiness of the issuer, usually an investment bank that structures the note and sets its terms. Importantly, the credit quality is not based on the underlying portfolio for which the performance of the investment is based upon.

The terms ‘clearing’ and ‘carrying’ have to do with a brokerage firm’s performance of certain functions most other firms are not permitted to do, such as have physical possession and custody of customers’ cash and securities.

The purchase needs to be paid for in a timely way or the law does not consider the purchaser to be the ‘owner’ of the shares and entitled to any profit on them. Regulation T refers to the use of sale proceeds to pay for the purchase as ‘free-riding.’ It is not acceptable.

Corporate securities are not exempt from registration under the Securities Act of 1933. They must be SEC-registered.

The FINRA markup markdown and commission policy does not apply to new issues as well as municipal bonds — MSRB has its own such policy.

Cyclical companies tend to follow the business cycle: defensive companies tend to perform in a consistent stable way regardless of the cycle; growth companies are expected to grow faster than the economy in general.

Defensive: stable, utilities, basic food, the basic needs of life, these are NOT growth industries.

This is the industry’s definition of a ‘shelf’ offering – register more shares now than you intend to sell now, and save the balance for a later time, putting them ‘on the shelf.’

Investors seeking ‘tax shelter’ or ‘tax advantage’ are often suitable for the flow through benefits of DPPs (direct participation program— limited partnerships).

SIPC coverage protects customers from financial loss in the event of the financial failure of a broker-dealer. It protects each separate customer for up to $500,000 total, but no more than $250,000 in cash. Importantly, SIPC does not protect against market losses.

Stock splits and reverse splits do not change the total value of investors’ holdings. For example, if the investor owned 800 shares at $1 per share before the 1-for-10 reverse split, he/she will own 80 shares at about $10 per share after the event.

Shorting an option contract is doing an opening sale transaction, which is writing an option contract, generating premium income.

As described in the explanation to question #67 above, diversification is an effective way to reduce exposure to business risk.

Passive losses may be used to offset earnings from other passive sources only. They cannot be used to offset investment income or ordinary income.

Exchange traded funds trade on exchanges at market prices determined by supply and demand – the same as regular corporate stocks.