SIE Practice Exam 1

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.

With more active trading in a stock (high volume), the spread between the bid and ask prices usually narrows.

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.

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.

The maximum maturity is 9 months or 270 days.

According to the Investment Company Act of 1940, financial statements are required to be sent to shareholders on a semiannual basis at the minimum.

Total return on a bond is determined by adding the interest earned during the time period to any capital gain, then dividing this result by the initial purchase price of the bond.

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.

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.’

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!

Stock dividends are not Cash dividends – they are dividends in the form of additional shares.

Under monetary policy, an increase to either the reserve requirement or the discount rate will deter lending, which will result in a tightening of the money supply. A decrease in spending by the U.S. government will also reduce the amount of money, but government spending is a tool of fiscal policy. When the Fed purchases securities in the open market more money goes into circulation, so this would ease the money supply.

Debt maturing in one year or less trades in the money market. Money market investments are attractive to investors because they offer high liquidity. Many investors access this market through money market mutual funds.

Call option contracts go ‘in the money’ (intrinsic value) when the current market value of the underlying security exceeds the exercise price (strike price) of the option. If a call option’s exercise price is $20, and the underlying stock is trading at $25, the intrinsic value of the call option is $5.

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

American Depository Receipts are receipts for foreign stock and are a best way for American investors to take beneficial ownership in shares of foreign corporations.

The social security number of the minor is used, as the minor is the legal owner of the assets.

SHO are the first 3 letters of the word ‘short.’ Answer C. best describes the basics of this regulation.

Unsecured bonds are also known as debentures.

The regular corporation, known as the C corp., has its profits taxed under the Internal Revenue Code. The other three business types in this question are not subject to IRS taxation of their profits.

Annuity units in variable annuity contracts fluctuate in value based on the performance of separate account assets. The number of units is fixed but their value continues to fluctuate.

Customers that open margin accounts must sign a hypothecation agreement to pledge their securities as collateral for loans from the broker-dealer for margin account purchases. The broker-dealer may then rehypothecate the securities to the bank, meaning that they are pledged to the bank as collateral for loans to the broker-dealer for lending to customers.

ETFs are not redeemed by the issuer. Instead, investors liquidate shares by selling them on an exchange.

This practice is known as ‘payment for order flow’ and is perfectly legal as long as the firm makes full disclosure to public customers that such an agreement exists.

When the term blue chip stocks is used, think of the long-establish most well-known companies that consistently perform well and have done so for a very long time. Most if not all of these are listed on the NYSE.

SEC was formed in 1934.

Trades in the 3rd market are trades in stocks which are executed off the floor of the stock exchange on which those stocks are listed.

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.

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.

Syndicate implies a firm commitment; group implies best efforts.

FINRA rules prohibits broker-dealers from interpositioning a third party between the customer and broker for purposes of avoiding or evading the best execution requirement, or to generate additional fees and commissions

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

Buying broad-based Index Put options will provide a hedge against the decline in the broad market.

A unit investment trust typically has a fixed portfolio of securities, whereas an open end (mutual fund) makes purchases of additional securities for the portfolio on a regular and frequent basis.

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.

An illustration is the best way to show why limited profit/limited loss is correct:
Example:
You purchase 100 shares of ABC stock at $50. You write/sell an ABC May 50 call for a premium of $3. If the stock falls to zero dollars per share (bankrupt), you lose $50 on the stock but get to keep the $3 premium. Net loss = $47/share. If the stock rises to infinity, your call gets exercised and you are OBLIGATED to deliver your 100 shares of ABC to the person exercising the call, and you will receive the $50 per share exercise price. You sold your stock at $50 and you had paid $50 for it initially — you make nothing on the stock, but you get to keep the $3 premium — your maximum gain is $3 per share. You have limited loss ($47 worst case) and you have limited gain ($3 best case).

Inflation risk is a major concern for investors who hold portfolios of fixed income investments for funding retirement income. As inflation increases, the purchasing power of their fixed coupon will fall.

Federal securities laws typically supersede State laws.

The Options Clearing Corporation (OCC) is the world’s largest equity derivatives clearing house. As a clearinghouse, the OCC also acts as guarantor, ensuring that the obligations of the contracts it clears are fulfilled.

A Currency Transaction Report (CTR) must be filed with FINCEN within 15 days for any cash deposits in excess of $10,000 in a single day.