1
Q
Mark Schwimmerr owns 2,500 shares of TP Corporation. Which Of the following actions would dilute Mark’s equity?
I. Primary share offerings (registered)
II. A stock split
III. Payment of a stock dividend
IV. Secondary share offerings (registered)
A) I only
B) II only
C) I, II, and IV
D) I, II, III, and IV
A
A.
Another primary issue of shares would dilute Mark’s ownership because new shares would be coming to the market. Don’t forget that when a corporation issues stock
dividends, splits its stock, or makes a secondary offering, the percent of equity does not change.
2
Q
Mike Smith is one of your clients. Mike is 55 years old, has a wife, two young adults going to college, and two children living at home. You have helped Mike determine his
investment profile and how much risk he should be willing to take. However, Mike is hot on a particularly speculative security that doesn’t fit his investment profile. Mike calls
you saying he wants to purchase $20,000 worth of this security. What should you do?
A) Accept the order and mark it as unsolicited.
B) Refuse the order because it doesn’t fit his investment profile.
C) Do nothing until talking to a principal.
D) Limit Mike’s exposure by making sure that he doesn’t purchase more than $5,000 worth of this speculative security.
A
A.
You can accept the trade and mark it as unsolicited. Even if a customer wants to purchase a security that doesn’t fit his investment profile, you can still accept it in most cases by marking it as unsolicited. I call this the CYD (cover your derriere) rule. As long as you mark the ticket as unsolicited, you save yourself some aggravation (and maybe arbitration) if Mike loses money on the deal.
3
Q
- An investor would like to save money for
a child who will be going to college in
15 years. Which of the following is a suitable
investment?
(A) T-bills
(B) T-notes
(C) Treasury receipts
(D) AAAA aggressive growth fund
A
- C. (Chapter 7) T-strips or Treasury receipts are long-term zero-coupon bonds backed by
the full faith and credit Of the U.S. government. Zero-coupon bonds are ideal investments
to plan for future events because investors don it face reinvestment risk. Reinvestment risk
is the additional risk taken with interest or dividends received. Since holders of Treasury
receipts don’t receive interest payments, there is nothing to reinvest. In addition, the
purchase price for long-term coupon bonds is comparatively IOW.
4
Q
- Which of the following statements is TRUE
about revenue bonds?
(A) Their value is measured by the munici-
pal project ‘s capacity for generating
revenue.
(B) They are secured by a mortgage-backed
bond.
(C) They are a type of general obligation
(D) They are subject to the Statutory debt
limitations Of the issuing jurisdiction.
A
- A. (Chapter 8) The SIE examiners want to see that you can distinguish revenue bonds from
general obligation bonds. In this question, Choice (A) is the correct answer. Revenue bonds
are backed by a project’s earning capacity. Choices (B), (C), and (D) are incorrect because
revenue bonds are not secured by a specific pledge of property, are not a type of general
obligation bond, and are not subject to debt limitations the way that many general obliga-
tion bonds are.
5
Q
- Which Of the following is the balance sheet
equation?
(A) assets = liabilities + shareholder’s equity
(B) assets liabilities = shareholder’s equity
(C) shareholder’s equity + assets = liabilities
(D) none of the above
A
- A. (Chapter 13) When you look at a corporation’s balance sheet, the left-hand side lists all
the assets and the right-hand side lists all the liabilities plus the shareholders’ equity. The
left side and the right side balance out (equal the same amount Of money).
6
Q
- Regarding the taxation of dividends from cor-
porate securities, which TWO Of the following
are TRUE?
l. (Ulified dividends are taxed at the
investor’s income-tax rate.
Il. (Ulified dividends are taxed at a maxi-
mum rate of 20 percent.
. Nonqualified dividends are taxed at the
Ill
investor’s tax rate.
Nonqualified dividends are taxed at a
IV.
maximum rate of 20 percent.
(A) 1 and 111
(B) 1 and IV
11 and 111
(C)
(D) Il and IV
A
- C. (Chapter 15) Dividends are profits shared by corporations. Dividends can be taxed as
either qualified (up to a maximum rate of 20 percent) or nonqualified (according to the
investor’s tax bracket). In order for the dividends to be qualified, the investor must have
held onto the stock for at least 61 days. The 61-day holding period starts 60 days prior to
the ex-dividend date.
7
Q
- Where can an investor find the most informa-
tion about a new municipal issue?
(A) In a prospectus
(B) In an official statement
(C) In a tombstone ad
(D) In a registration statement
A
- B. (Chapter 8) An official statement includes all relevant information about a new munici-
pal bond. Municipal bonds don’t have a prospectus, but an official statement is along the
same lines. An Official statement gives information about the municipal issue, such as the
reason the bonds are being issued, what revenue is going to be used to pay the bonds, the
issuer’s payment history, and so forth. A tombstone ad is a brief advertisement that does
not go into detail about the security being issued, and a registration statement is used by
corporations when they are filing With the SEC.
8
Q
- Which of the following statements made by a
registered rep is not prohibited?
(A) “The stock will double in price.”
(B) “The earnings of the company will be
better than expected.
(C) “I can guarantee that you will not lose
money on this stock
(D) “A research report shows that the com-
pany’s financial performance may be
better than expected.
A
- D. (Chapter 16) This question is a double negative (“not prohibited”), so it’s asking which
statement a registered representative can make. The answer is pretty much a matter of
logic. Choices (A), (B), and (C) are all guarantees. A registered rep who makes guarantees
may get into trouble. However, Choice (D) is not a guarantee and may be said to an investor
as long as it’s true.
9
Q
- Which tv.’0 of the following are true of Roth
IRAs?
l. Contributions are made from after-tax
dollars.
ll. Contributions are made from pretax
dollars.
Distributions are tax-free.
Ill.
Distributions are taxed on the amount
IV.
above the amount of the contribution.
(A) 1 and 111
(B) 1 and IV
(C) 11 and
11 and r,’
(D)
A
- A. (Chapter 15) The main difference between traditional IRAs and Roth IRAs is the tax
implications. Contributions to traditional IRAs are made from pretax dollars (you can write
them off on your taxes), whereas contributions to Roth IRAs are made from after-tax
dollars (you can’t write them Off on your taxes). However, distributions (withdrawals) from
traditional IRAs are taxed on the amount withdrawn, Whereas withdrawals from Roth IRAs
are tax-free. When withdrawing from a Roth IRA, neither the amount invested, which was
already taxed, nor the amount the account has gone up in value (appreciation) is taxed,
which is a great benefit to Roth IRA holders.
10
Q
- Which of the following are true of broker-
dealer business continuity and disaster recov-
ery plans?
l. They must be in written form.
ll. Firms must have back-up of data (both
hard copies and electronic).
Ill. Firms must have some sort of alternative
communication between the firm and its
employees.
IV. They must be approved by a principal.
(A) 1, 11, and 111
(B) 11, m, and w
(C) 1, 11, and IV
(D) 1, 11, 111, and IV
A
- D. (Chapter 16) All firms must now have business continuity and disaster recovery plans to
be prepared in the event of a significant disruption in their business. These plans must be
in written form, be approved by a principal, and address the following information;
The existence Of back-up data
* A means of alternative cornmunication between a firm and its employees, customers. and
regulators
* The creation of an alternative bcation for all employees
* A means of giving customers fast access to their securities and funds
11
Q
- One of your clients wants to start adding
some diversity to her portfolio by investing in
mutual funds. Which of the following is the
most important consideration when choosing
a mutual fund?
(A) Whether the fund is load or no-load
(B) Management fees
(C) Investment objectives
(D) 12b1 fees
A
I l. C. (Chapter 9) Certainly all the choices listed are important, but the most important one is
the investment objectives of the mutual fund. In other words, you need to know whether
the investor is looking for a growth fund, an income fund, a municipal bond fund, an
intemational fund, and so on. When comparing funds with the same investment objectives,
all the other things, such as comparing management fees, whether the fund is load or
no-load, and so on, come into play.
12
Q
- Common stockholders in a corporation can do
which of the following?
(A) Elect the corporation’s board of directors
(B) Make decisions about the day-to-day
dealings, such as the office supply dealer
used by the corporation
(C) Receive interest payments
(D) Expect to be paid par value for their
stock if the corporation goes out of
business
A
- A. (Chapter 6) Common stockholders may cast votes for candidates to be members of the
board of directors; therefore, Choice (A) is the correct answer. Choice (B) is incorrect
because while common stockholders may vote on important issues that affect the welfare of
the corporation, they do not have voting rights on the day-to-day operations of the
corporation, like buying office supplies. Choice (C) is incorrect because a stockholder
doesn ‘t receive interest payments, bondholders do. Finally, Choice (D) is incorrect because
a common stockholder’s initial investment can lost if a corporation fails; therefore, par
value is not guaranteed.
13
Q
- Which Of the following investments are suita—
ble for a 21 -year- Old investor who has limited
resources but would like to start investing on a
regular basis?
l. Growth funds
Il. Raw land DPP
Ill. call options
Hedge funds
IV.
(A) I only
(B) 11 and IV
(C) 1, 11, and
1, 111, and IV
A
- A. (Chapter 9) The clues in this question are that the investor is 21 years old, has limited
resources, and would like to start investing on a regular basis. *mis investor is screaming
out to be put in a mutual fund. upically, investors of mutual funds are in it for the long
haul; they’re not in and out like they may be With other investments. Ideally, this investor
should probably be set up on a dollar cost averaging plan whereby he invests x amount of
dollars every so often (for instance, Sloo once a month). Because this investor is young, he
can take a little more risk, so a growth fund would be ideal. DPPs, buying call options, and
hedge funds are too risky, require too much money, and/or require a certain degree of
soph istication.
14
Q
- Melissa purchased 1,000 shares of DDD com-
mon stock at SQ per share on January On
January Of the following year, Melissa sold
the shares at S46 per share. W’hich TWO Of the
following are TRUE?
I. It Will be taxed as a short-term capital
gain.
It will be taxed as a long-term capital
The gain will be taxed at Melissa’s tax
Ill.
bracket.
IV.
The gain will be taxed at a maximum of
20 percent.
(A) land
(B) 1 and IV
(C) 11 and 111
(D) 11 and IV
A
- A (Chapter 15) Since Melissa sold the stock at a profit, she would be subject to capital gains
tax. In order to be a long-term capital gain, she would’ve had to have held the stock for
over one year. In this case, she only held the stock for exactly one year so it would be a
short-term capital gain, which would be subject to taxes at Melissa’ s tax bracket.
15
Q
- Which of the following statements is TRUE
regarding municipal revenue bond issues?
(A) The bonds are backed by the issuer’s
unlimited taxing power.
(B) User fees provide revenue for the
municipality to make sure they can pay
bondhold ers.
(C) The bonds’ feasibility is not dependent
on the earnings potential of the facility
or project.
(D) Revenue bonds are most suitable for
investors with high risk tolerance.
A
- B. (Chapter 8) The answer is Choice (B). Choices (A), (C), and (D) are incorrect. Revenue
bonds are generally considered low-risk because they’re issued by municipalities. The
riskiest municipal bonds are IDRS (industrial development revenue bonds), which are
backed by a corporation, not the municipality.
16
Q
- Jameson and Johnson Securities sent Art a
confirmation of his latest trade Of Johnstone
Corporation common stock. WIIich of the fol-
lowing items should be on the confirmation?
I. The trade date and the settlement date
ll. Whether Jameson and Johnson acted as
an agent or a principal
Ill. The name of the security and how many
shares were traded
IV. The amount of commission paid if
Jameson and Johnson acted as an agent
(A) I and Ill
(B) 1, 11, and 111
(C) 1, 111, and IV
(D) 1, 11, 111, and IV
A
- D. (Chapter 16) When a client receives a trade confirmation (receipt of trade), the confirma-
tion must show the trade date, settlement date, the name Of the security, how many shares
were traded, whether the broker- dealer acted as an agent or principal, and the amount of
commission if traded on an agency basis.
17
Q
If a customer, Jessica James, decides to give
limited power of attorney to her registered
representative, Which of the following is
TRUE?
(A) The registered representative still needs
verbal authorization from Jessica for
each trade.
(B) Jessica must sign a power-of-attorney
document.
(C) The registered representative must sign
a power- Of- attorney document.
(D) Jessica must initial each order before it
is entered.
A
- B. (Chapter 12) The correct answer is Choice (B) because when Jessica grants her registered
representative a limited power of attorney, she is the one Who must sign the document.
Although a principal must approve before the registered representative exercises his
discretionary authority, the registered representative does not have to sign the document,
and Jessica’s approval Of each order is not required.
18
Q
- Which of the following is NOT a characteristic
Of a real-estate investment trust (REIT)?
(A) Pass-through treatment Of income only
(B) Pass-through treatment of income and
losses
(C) At least 75 percent of the assets must be
invested in real-estate -related projects
(D) Ownership Of real property without
management responsibility
A
- B. (Chapter 10) Real-estate investment trusts pass through income earned by the real-
estate investments, but not losses. Real -estate limited partnerships pass through income
and losses to investors DPPs aren’t responsible for paying business taxes.
19
Q
- A principal is responsible for approving new
accounts opened for
l. individuals
ll. corporations
. banks
IV. trusts
(A) I only
(B) land 11
(C) 1, 11, and 111
(D) 1, 11, m, and IV
A
- D. (Chapter 16) I hope this was an easy one for you. Principals must approve all new
accounts and must sign all new account forms.
20
Q
- George Lincoln opens a margin account and
signs a loan consent, hypothecation, and credit
agreement. Which of the following statements
are TRUE?
l. George’s stock may not be kept in street
ll. A portion of George’s stock may be
pledged for a loan.
Ill. George will be required to pay interest on
the money borrowed.
IV. George’s stock must be cosigned by the
broker/dealer.
(A) land IV
(B) 11 and 111
(C) and 11
(D) None of the above
A
- B. (Chapter 12) Because George is borrowing money through a margin account to purchase
securities, he must leave the stock in the broker-dealer’s safekeeping, pay interest on the
loan, register the stock in street name, and agree to allow the broker-dealer to pledge the
securities because he signed a loan consent agreement.
21
Q
- To protect investors of variable life insurance
policies who become disabled, there is a rider
called a(n)
(A) disability rider
(B) waiver Of premium
(C) early withdrawal rider
(D) none of the above
A
- B. (Chapter 9) Variable life insurance IX)Iicies often have a rider Or Statement Of condition
that allows individuals to keep their policy in force if they become disabled. This waiver of
premium forgives policyholders of paying additional premiums if they become totally
disabled.
22
Q
- As a client’s investment objectives change,
a registered rep should keep track of those
changes so that he can rebalance the client’s
portfolio and make proper recommendations.
Which of the following changes may affect a
customer’s investment objectives?
l. Growing older
ll. Getting divorced
Ill. Having triplets
IV. Getting a higher paying job
(A) land 111
(B) 1, 11, and 111
(C) 11, 111, and IV
(D) 1, 11, 111, and1V
A
- D. (Chapter 12) Certainly just about anything you can think of could change a client’s
investment objectives. As people get older, they usually can’t take as much risk. Conversely,
investors Who get higher-paying jobs are likely to want to take additional risk. Someone
who is getting (or has gotten) divorced is likely to have less money (due to alimony pay-
ments, one person paying for the house instead of two, child support payments, and so on).
Obviously, having triplets puts a financial burden on an investor (unless she gets a reality
show).
23
Q
- JKLM Corporation has declared a so.’o divi-
dend payable to shareholders Of record on
Thursday, September 14. What would happen
to the opening price of JKLM on Wednesday,
September 13?
(A) It would be reduced by the amount of the
dividend.
(B) It would remain the same.
(C) It would be increased by the amount of
the dividend.
(D) Cannot be determined
A
- A. (Chapter 6) Remember, the ex-dividend date (the first day the stock trades without
dividend) is one business day before the record date. In this case, the record date is Thurs-
day, Septemtkr 14, which makes the dividend date Wednesday, September 13. The
opening price on the ex-dividend date is reduced by the amount Of the dividend ($0.40 in
this case).
24
Q
- Larry Eagle is a resident of Michigan. Mr.
Eagle purchased a Michigan municipal bond.
What is the tax treatment Of the interest that
Larry earns on his Michigan bond?
I. It is exempt from local taxes.
Il. It is exempt from State taxes.
Ill. It is exempt from federal taxes.
(A) 111 only
(B) land 111
(C) 11 and 111
(D) 1, 11, and 111
A
- D. (Chapter 8) When you purchase a municipal bond issued within your home State, the
interest you receive is triple-tax-free (exempt from federal, state, and local taxes). In
addition, if you purchase a bond issued by a U.S. territory (such as Puerto Rico, U.S.
Islands, Guam, Samoa, and Washington, D.C.), the interest is triple-tax-free. However,
you purchase a bond issued by another state, the interest is exempt from federal taxes
25
25. Who is responsible for paying the taxes when
securities in a Uniform Gifts to Minors Act
(UGMA) account are sold at a profit?
(A) The minor
(B) The donor
(C) The custodian
(D) The parent or guardian
25. A (Chapter 12) The correct answer is Choice (A). All taxes on the account are the
bility Of the minor because the UGMA account was opened for the benefit Of the minor
the account is registered with the minor's Social Security number.
26
26. An investor wants to invest in a DPP that's
relatively safe. Which of the following are you
LEAST likely to recommend?
(A) A real-estate partnership that invests in
raw land
(B) An oil and gas developmental program
(C) An Oil and gas income program
(D) An equipment leasing program
26. A (Chapter 10) Of the choices listed, a real-estate partnership that invests in raw land B
the riskiest. partnerships that invest in raw land are considered speculative, as are oil
gas wildcatting (exploratory) programs. The risk of investing in raw land is that even
though the property is purchased at a low price, developers may not be interested in thz
area and the partnership may be stuck with relatively worthless property.
27
27. Which of the following is a function of a
transfer agent?
(A) Underwriting shares in new corporate
stock offerings
(B) Preparing corporate balance sheets
(C) Advising municipalities regarding the
debt structure of new issues
(D) Sending out proxies
27. D. (Chapter 6) Hopefully the word "transfer" in "transfer agent" led you to the correct
answer. Yes, the transfer agent is responsible for transferring or sending thinB.
28
28. All the following information is required on a
preliminary prospectus EXCEPT
(A) the final Offering price
(B) the purpose for which the issuer is rais-
ing the funds
(C) a statement in red lettering stating that
items on the preliminary prospectus are
subject to change before the final pro-
spectus is issued
(D) the issuer's history and financial Status
28. A (Chapter 5) The final offering price would not be found on the preliminary prospectus
(red herring) because the price hasn't tæen finalized at this point. After the issuer and the
syndicate manager come up with a final offering price, they place it on the final prospectus.
29
29. Which Of the following situations requires a
broker-dealer to file a currency transaction
report?
(A) A customer purchases s20,000 worth of
stock with a check from a joint account.
(B) A customer opens an account With
Sl/„ooo cash.
(C) A customer opens an account with a Wire
transfer from his personal account for
S25,ooo.
(D) A customer deposits corporate bonds
with a par value of $30,000.
29. B. (Chapter 16) When determining whether a broker-dealer has to file a currency transac-
tion report (CrR), you need to look at the size of the trade first. Any cash or cash-
equivalent (for example, a money order) transaction of SIO,OOO or more requires that you
file a CPR to FinCEN (the U.S. Treasury Financial Crimes Network) to determine whether it
may be money laundering. In Choice (B), the investor is depositing S14,000 in cash, which
is over the SIO,OOO threshold. In addition, an SAR (Suspicious Activity Report) must be filed
for any transaction of $5,000 or more for any trade Or transfer that just looks suspicious.
30
30. A mutual fund has a NAV of $9.30 and a POP of
SIO. What is the sales charge of this fund?
(B) 6 percent
(C) 7 percent
30. C. (Chapter 9) To determine the sales charge percentage of a fund, use the follovving
pop -NAV Slooo-S9.30_ SO.70
Sales charge
POP
The POP is the public offering price, Which is the price that investors pay, including the
sales charge. The NAV is the net asset value and is where the fund should trading,
excluding the sales charge.
31
31. Investments that move in the opposite direc-
tion of the economic cycles are known to be
counter-cyclical. Historically, investments
that are known to be counter-cyclical include
(A) discount retailer stock
(B) utility stock
(C) pharmaceutical stock
(D) food company stock
31. A. (Chapter 13) The correct answer is Choice Historically, fast food companies, discount
retailers, and precious metals, like gold, are counter-cyclical and move opposite of the
economic cycles. Choices (B), (C), and (D) are incorrect because utility, pharmaceutical,
and food companies are defensive or noncyclical, and their movement isn't tied to the
economic cycle.
32
32. On a competitive bid for a new municipal
underwriting, the difference between the Syn-
dicate bid and the reoffering price is the
(A) discount price
(B) offering price
(C) spread
(D) bid price
32. C. (Chapter 8) On a competitive bid for a new municipal underwriting, the difference
between the bid to the issuer and the dollar price at which the underwriter reoffers the
bonds to the public is the spread, which, importantly, is also the underwriter' s
conwlsa tion.
33
34. A sell Stop Order is entered
l. below the support level of the stock
ll. above the resistance level of the stock
. to limit the loss on a long stock position
IV. to limit the loss on a short stock position
(A) 1 and 111
(B) landlV
(C) 11 and 111
(D)
11 and IV
3'4. A. (Chapter 14) Sell Stop orders are used for protection. A sell stop order is placed below
the support level of the stock and limits the loss on a long position. For argument's sake,
say that a stock has a trading range of 30 to 32. An investor may enter a sell stop order at
29.50 to protect herself if the stock drops to 29-50 or below. If the price of the stock hits
29-50, the sell stop order becomes a market Order for immediate execution at the next
available price.
34
35. The indenture of a corporate bond includes all
Of the following EXCEVI'
(A) the coupon rate
(B) the credit rating
(C) the name of the trustee
(D) the maturity date
35. B. (Chapter 7) The indenture (trust indenture or deed of trust) of a bond is a legal contract
between the issuer and the trustee representing the investors. The bond indenture includes
the coupon rate (nominal yield), the maturity date, the name of the trustee, collateral that
may be backing the bond, and so on. However, the credit rating isn't found on the inden-
ture because that's something that would change if the financial condition of the issuer
35
36. Which of the following items can be found in
the certificate Of limited partnership?
1. The goals of the partnership and how
long it's to last
ll. The authority of the general partner to
charge a fee for making management
decisions for the partnership
. How the profits are to be distributed
Ill
IV. The amount contributed by each partner,
plus future expected investments
(A) 1, 11, and Ill
(B) 11, 111, and IV
1, 111, and IV
1, 11, 111, and IV
(D)
36. C. (Chapter 10) The certificate of limited partnership is the legal agreement between the
limited and general partners and has to be filed With the secretary of state. The certificate
of limited partnership includes the name of the partnership, the partnership's primary
place Of business, the names and addresses of the limited and general partners, the goals of
the partnership and how long it's expected to last, the amount contributed by each partner,
how the profits are to be distributed, the roles of the participants, how the partnership can
be dissolved, and whether a limited partner can sell or assign his interest in the partner-
ship. The authority that allows the general partner to charge a fee for making management
decisions is found in the partnership agreement.
36
37. All the following securities may pay a dividend
(A) warrants
(B) common stock
(C) American depositary receipts (ADRs)
(D) participating preferred stock
37. A (Chapter 6) The correct answer is Choice (A). Because warrants are basically long-term
options to buy stock at a fixed price from the issuer, they can't pay dividends.
37
38. Which of the following is/are true of a REIT?
I. It must invest at least 75 percent of its
assets in real-estate-related activities.
Il. It must be organized as a trust.
Ill. It must distribute at least 90 percent of
its net investment income.
IV. It must pass along losses to
sha reh01d ers.
(A) 1, 11, 111, and IV
(B) 1, 11, and
(C) I only
(D) 11 and
38. B. (Chapter 10) Choice (B) is the correct answer because three components are true about a
REIT. As indicated by its acronym, a REIT is a real-estate investment trust. REITs engage in
real-estate activities and are organized as trusts. In order to qualify for favorable tax
treatment, a REIT must pass through at least 90 percent Of its net investment income to its
shareholders. Statement IV is false because, although a REIT can pass through income to
investors, it can't pass through losses.
38
39. An investor purchases 100 shares of DUD Corp.
at St+5 per share and purchases 1 DUD Oct 40
put at 6. What is the customer's break-even
point?
(A) 39
(B) 45
(C) 46
(D) 51
39. D. (Chapter 11) The easiest way to calculate the break-even point for stock/option problems
is to take a look at what's happening. This investor purchased the stock for per share
and then purchased the option for SO per share. The investor paid S51 (S45 S6) per share
Out of pocket, so the investor needs the stock to be at $51 per share in order to break even.
39
Under the Securities Act Of 1933, which Of the
following securities are exempt from registra-
tion and disclosure provisions?
(A) Railroad equipment trust certificate
(B) Municipal bonds
(C) commercial paper maturing in 270 days
or less
(D) All of the above
40. D. (Chapter 5) All the securities listed are exempt from the registration and disclosure
provisions under the Securities Act of 1933.
40
41. One of your customers is interested in invest-
ing in an Oil and gas limited partnership. As
his registered rep, which Of the following steps
are you required to take?
. Prescreen the customer.
Determine the economic soundness of
ll.
the program.
Explain the risks Of investing in limited
Ill.
partnerships.
Have your customer fill out a partnership
IV.
agreement.
(A) land 111
(B) 1, 11, and 111
(C) n, 111, and IV
1, 11, 111, andrv
(D)
41. B. (Chapter 10) Investors of limited partnerships bear additional risks, such as the possibil-
ity of money t*ing tied up for a long period of time, little or no liquidity, the making of
additional loans to the partnership, and so on. AS a registered rep, you need to prescreen
your customers to see whether thev re a good match for the partnership. You should also
look at the partnership and management itself to see whether they have a good track record
and whether the partnership makes sense. You need to explain the risks to your customer
and have your customer fill out a subscription agreement, not a partnership agreement.
The subscription agreement needs to include a check, a signature giving the general partner
power of attorney, financial statements, and so on.
41
42. Which Of the following funds changes its bal -
ance to hold more fixed-income securities and
less equity securities as the years pass?
(A) A balanced fund
(B) A hedge fund
(C) A life-cycle fund
(D) A growth fund
42. C. (Chapter 9) Life-cycle (target-date) funds are ideal for investors of any age. The idea
behind them is that investors buy into life—cycle funds that are targeted for their age. The
percentage of equities held by the fund decreases Over time, whereas the percentage of
fixed- income securities increases, because investors should hold a higher percentage Of
fixed-income securities as they age. For example, Say a 45-year-old investor buys into a
life-cycle fund that s targeted for investors who are currently between the ages Of 44-47.
At this particular point, the fund may have a nearly 50-50 split between equity securities
and fixed-income securities. The fund rebalances every so Often so that ten years into the
future, the fund may have 40 percent invested in equity securities and 60 percent invested
in fixed-income securities. Ten years after that, the fund may have a 30-70 split between
equity and fixed- income securities. This fund is designed to take the guesswork out of the
equation for investors.
42
43. The first time a company ever issues securities
is called a(n)
(A) IPO
(B) first-market trade
(C) rights Offering
(D) None Of the above
43. A. (Chapter 14) An IPO (initial public offering) is the first time a corporation ever sells
securities to the public. A first-market trade is a trade of exchange-listed securities trading
on an exchange. A rights offering is when a company offers new shares to existing share-
holders at a discount.
43
44. Bearish strategies include
I. selling short
ll. buying put options
111.
selling uncovered call options
selling covered call options
(A) 1 and IV
(B) 11 and
(C) 1, 11, and 111
(D) 1, 11, and IV
44. C. (Chapter 13) When someone is bearish on the market or an individual security, she
believes that the price is going down. Investors who believe that they can capitalize on their
bearish feelings can sell securities short, buy bearish funds (ones that generally increase in
value in a declining market), purchase inverse ETES (exchange-traded funds), sell uncov-
ered (naked) options, buy put options, and so on.
44
45. One of your customers wants to add some
diversity to his portfolio by investing in some
defensive stocks. Which Of the following stocks
would you recommend?
I. CCCold Refrigerator Corporation com-
mon stock
Il. Smoky Tobacco Inc. common Stock
111.
Forgetful Vodka Corp. common stock
IV.
ImpeeAuto Corporation common stock
(A) and IV
11 and
(C) 1, 111, and IV
(D) 11, 111, and IV
45. B. (Chapter g) Defensive stcxks perform consistently no matter how poorly the economy's
doing. Stock Of corporations that sell goods such as alcohol, tobacco, pharmaceutical
supplies, food, and So on issue defensive stocks. However, companies that sell appliances,
automobiles, and so on aren't defensive because they sell items that don't sell well in a
weak economy.
45
46. Mr. Smith has an inactive account with stocks
and bonds at a broker-dealer. How often is the
firm required to send Mr. Smith an account
statement?
(A) Once a month
(B) Once a week
(C) Once every three months
(D) Once every six months
46 C. (Chapter 16) The broker-dealer must send out account statements at least once every
three months (quarterly) whether the account has been active or not. Mutual funds must
send out account statements once every six months (semiannually).
46
47. All the following Orders are reduced on the
order book for a cash dividend on the ex-date
(A) buy limit
(B) sell stop
(C) sell Stop limit
(D) buy stop
47. D. (Chapter 14) Here's another question where you must find the false answer. Choices (A),
(B), and (C) are wrong only orders placed below the market price are reduced for
cash dividends on the order book. Buy limits and sell stops (BLiSS orders) are entered
below the market price. Buy Stops are entered above the market price, so Choice (D) is the
false — and therefore, correct — answer.
47
48. An investor sells 10 TUV Jan 40 calls for 3. If
the options expire unexercised, What would be
the tax consequences Of this transaction?
(A) Short-term capital loss
(B) Short-term capital gain
(C) Long-term capital loss
(D) Long-term capital gain
48. B. (Chapter 11) As a reminder, all options are capital gains or capital losses. Since options
expire in nine months or less (except for LEAPS), it would be a short-term gain or loss- In
Order to be long-term, it would have to be over one year. In this case, the investor sold
options that expired, so it would be a short-term capital gain.
48
49. An investor who purchases a variable life
insurance policy faces which Of the following
risks?
(A) The insurance company may have to
increase the premium if the securities
held in the separate account underper-
form the market.
(B) The insurance company may decrease
the premium if the securities held in the
separate account outperform the market.
(C) The policy may have no cash value if the
securities held in the separate account
perform poorly.
(D) The death benefit may fall below the
minimum in the event that the secu-
rities held in the separate account
underperform.
49. C. (Chapter 9) Similar to variable annuities, variable life insurance policies have a separate
account of securities. All variable life insurahce (WI) IX)Iicies have a set premium and a
minimum death benefit. However, if the securities held in the separate account perform
well, the policy will build up cash value, which will increase the death benefit.
49
50. All of the following are nonfinancial influences
that may help determine an investor's invest-
ment profile EXCEPT
(A) the investor's age
(B) the amount of marketable securities the
investor owns
(C) the number Of dependents
(D) investment experience
50. B. (Chapter 12) Certainly, all the choices listed are important when determining a client's
investment profile. However, this is an "except" question, which means that you're looking
for an investment influence that is financial. The amount Of marketable securities an
investor owns is part of her financial profile as well as other things like net worth, money
available for investing, current income, expenses, home ownership, and so on.
50
51. Ginny Goldtrain is a wealthy investor who is
in the highest income bracket. Ginny is 100k-
ing for an investment that would limit her
tax liability and put her on equal footing With
investors in lower income-tax brackets. Which
of the following securities would you MOST
likely recommend?
(A) High -yield bonds
(B) CMOS
(C) Municipal bonds
(D) Hedge funds
51. C. (Chapter 8) The interest received on municipal bonds is federally tax-free. Ginny
is in the highest income-tax bracket, she can save more tax money by investing in munici-
pal bonds. This strategy will put her on equal footing with other investors because neither
high-income nor low-income investors have to pay taxes on the interest received from
municipal bonds. Therefore, municipal bonds are more advantageous to investors in high
income - tax brackets.
51
52. Which Of the following bonds most likely has
the highest coupon rate?
(A) DEF Corp. mortgage bonds
(B) DEF Corp. collateral trusts
(C) DEF Corp. debentures
(D) DEF Corp. equipment trusts
52. C. (Chapter 7) Mortgage bonds, collateral trusts, and equipment trusts are all forms of
Secured bonds. Because these bonds are secured with collateral, the collateral securing the
bonds is sold to satisfy the bondholders if the issuer defaults. However, debentures are not
backed with collateral and are therefore riskier. Because more risk equals more reward,
debenture holders can a coupon rate that's higher than that of the secured bonds.
52
53. Your client, Dana Griffin, is about to retire and
she wants predictable income. Which of the
following would NOT be a good investment for
Dana?
1. AA rated IDB
Il. US. Treasury note
. AA rated debenture
Ill
IV. Income bonds
Il only
(A)
I and Ill
(B)
Il and IV
(C)
(D) IV only
53. D. (Chapter 7) Of the answer choices given, Choice (D) is the least preferable and, therefore,
the correct answqr. AA rated bonds, U.S. Treasury notes, and AA rated debentures can yield
predictable income. By contrast, income bonds are issued when a is cMn_ing
of bankruptcy and trying to reorganize. Therefore, income bonds only pay interest if the
corporation can meet the interest payment and normally trade Without accrued interest.
Income bonds are not suitable for Dana because she' s seeking predictable income.
53
54. Which TWO of the following are TRUE regard-
ing 401(k) plans?
I. They are qualified plans.
ll. They are nonqualified plans.
They are defined benefit plans.
Ill.
They are defined contribution plans.
(A) land 111
11 and Ill
(C)
Il and IV
(D)
54. B. (Chapter 15) are corporate retirement plans. Employees may contribute a defined
percentage of their salary each year. So, they are defined contribution plans and because
they meet IRS standards, they are qualified plans and the contributions are deducted from
the employee's gross income.
54
55. Which of the following is the issuer and guar-
antor Of all listed options?
(A) The OCC
(B) The OAA
(C) The ODD
(D) The CBOE
55. A (Chapter 11) The OCC (Options Clearing Corporation) is the issuer and guarantor of all
listed options, The OCC determines which options will be traded and guarantees that option
holders can always exercise their options.
55
56. If your customer, William Goate, purchases
shares in a municipal bond fund, which of the
following statements is TRUE?
(A) Dividends are subject to alternative
minimum tax.
(B) Dividends are taxable to all investors.
(C) Capital gains distributions are taxable.
(D) Capital gains distributions are not
taxable.
56. C. (Chapter 9) Dividends that are distributed by municipal bond funds are federally tax-
free, but any capital gain distribution is taxable. Choice (C) is the right answer.
56
57. These municipal notes provide interim financ—
ing for a municipality that's waiting for a
grant from the U.S. government.
(A) BANS
(B) TRANS
(C) GANS
(D) CLNs
57. C. (Chapter 8) Hopefully, the "G" in "GANs" was enough to help you get the correct
answer. GANS are grant anticipation notes, which a municipality issues to provide temporary
financing while waiting for a grant from the US. government.
57
59. What is the margin call for an investor who
has an existing margin account and is pur-
chasing $1,200 worth Of securities?
(A) $300
(B) $600
(C) $1,200
(D) $2,000
59. B. (Chapter 12) Since the purchase was made in an existing margin account, the purchase
is not to the initial transaction requirements needed when opening a margin
account. In this case, the investor is purchasing worth of securities, so the investor
only has to deposit $600, which is the 50 percent Regulation T
58
60. Which of the following statements regarding
municipal bonds With call provisions is TRUE?
(A) Bonds are likely to be called when inter-
est rates fall.
(B) Call provisions favor investors.
(C) Bonds are likely to be called when inter-
est rates rise.
(D) Call provisions are not advantageous to
issuers.
A. (Chapter 7) The correct answer is Choice (A) because issuers call bonds when interest
rates are falling so they can issue bonds with lower coupon rates. Choice (B) is incorrect
because investors would have their bonds with high coupon rates called and if wanting to
keep a similar position, have to invest in bonds with lower coupon rates. Choice (D) is
incorrect because municipal bond call provisions are advantageous to issuers; the call
provisions reduce fixed costs by providing issuers With the ability to redeem bonds before
maturity.
59
61. Sam Smith sends an email to his registered
rep, John Johnson, complaining about the
amount Of commission he was charged on
his last trade. According to FINRA rules, what
should John Johnson do With the complaint?
(A) Ignore it because the complaint needs to
be in writing.
(B) Print it Out and give it to his principal.
(C) Print it out and send it to FINRA.
(D) Forward it to FINRNs complaint
department.
61. B. (Chapter 16) All written complaints ne«l to be handled by a principal and kept on file.
Even though the complaint was sent via email, it's still considered a written complaint. The
complaint does not need to be forwarded or sent to FINRA.
60
62. All of the following are types of blue-sky reg-
istration EXCEPT
(A) registration by cooperation
(B) registration by coordination
(C) registration by qualification
(D) registration by filing
62. A. (Chapter 5) All securities sold in a state must registered in that State (also known as
blue-sky registration). Coordination, qualification, and notification (filing) are all types of
state registration; registration by cooperation is not. If an agent wants to sell in a state, the
security, the registered rep, and the broker-dealer must be registered in that State.
61
63. A TUV Oct 60 call is trading for 9 When TUV is
at $65. What is the time value of this option?
63. B. (Chapter 11) The easiest way to figure out the answer to this question is to use the
equation P I + T, where
* P = the Premium of the option
* I —the Intrinsic valueofthe option (how much it is in-the-money)
* T the Time value of the investor is paying for the time to use
the option)
9-5.T
First, put the premium of 9 into the equation. Next, because the option is 5 points in-the-
money (call options go in-the- money When the price of the stock goes above the strike
price), insert the intrinsic value Of 5 in the equation. Because the premium is 9 and the
option is 5 points in-the-money, the time value is
62
64. Which of the following need approval from a
brokerage firm 's principal?
(B) 1.5
(035
l. New accounts
11. Recommendations
Handling Of complaints
Ill.
IV. Trades in all accounts
I and Il
(A)
1, 111, and IV
11, 111, and IV
(D) 1, 11, 111, and IV
64. (Chapter 16) Principals of a firm must approve all new accounts, advertising used by the
firm, handling Of complaints, trades in all accounts, and so on. However, as far as the SIE
exam goes, principals don't need to approve recommendations made by registered reps. In
real life, I would get approval before making recommendations if I were you. You have to
remember that principals must sign all order tickets, and if you don't clear a recommenda-
tion with them first, they may be reluctant to do so.
63
65. Mrs. Smith previously shorted 10 DEF Nov 40
calls at 5 when the market price Of DEF was
39.50. Two weeks prior to expiration, DEF is
trading at 1+2 and Mrs. Smith decides to buy 10
DEF Nov 40 calls at 3. The second option Order
ticket would be marked
(A) opening sale
(B) opening purchase
(C) closing sale
(D) closing purchase
65. D. (Chapter n) When the investor originally sold (shorted) the option, it was an opening
sale, Since the investor is purchasing her way out of that position, the second transaction is
a closing purchase.
64
66. All of the following are included on a confir-
mation for non-callable municipal bonds that
were purchased on a yield basis EXCEVr
(A) the purchase price
(B) the par value
(C) the yield-to-maturity
(D) the taxable equivalent yield
66. D. (Chapter 8) Remember that an "except" question is looking for a false answer. The
correct answer is Choice Taxable equivalent yields cannot be shown because every
investor has a unique tax issue and bracket.
65
67. A customer purchases 500 shares of HIJ com-
mon stock at S22 per share from Xtra Broker-
Dealer. If the customer purchased the stock
from Xtra' s inventory, which of the following
is true?
(A) The purchase was on a principal basis
and the customer's purchase price
includes a markup.
(B) The purchase was on a principal basis
and the customer Will be charged a
commis Sion.
(C) The purchase was on an agency basis
and the customer's purchase price
includes a markup.
(D) The purchase was on an agency basis
and the customer Will be charged a
commission.
67. A. (Chapter 14) Since the customer was purchasing from Xtra's inventory, Xtra was acting
as a dealer (principal or market maker) for HIJ common stock. When stock is purchased
from a dealer, the purchase price includes a markup.
66
68. Which of the following are money market
securities?
(A) Commercial paper
(B) Treasury bonds
(C) American depositary receipts (ADRs)
(D) Warrants
68. A. (Chapter 7) Money market securities are short- term debt securities. Remember that
Commercial paper, as well as negotiable certificates Of deposit, are money market
securities.
67
Income derived from an investment in a real-
estate limited partnership is termed
(A) earned income
(B) passive income
(C) portfolio income
(D) capital gains
69. B. (Chapter 10) Any income derived from an investment in a limited partnership is termed
passive. passive gains can only be Written off against passive losses. Earned income
includes money made from salary, bonuses, tips, and so on. Portfolio income includes
money made from interest, dividends, and capital gains made from investing in securities.
68
70. W'hat is the intrinsic value of a DEF 30 put
option which was purchased at 5 when DEF is
currently trading at $28.50?
70. B. (Chapter n) All intrinsic value means is how much the option is in-the-money. Put
options go in-the- money when the price of the underlying security drops below the strike
(exercise) price. Since the strike price is 30 and the stock price is $28.50 (28.5), the intrinsic
value is 1.5 (30 - 28.5).
69
71. An investor purchased 1,000 shares of WXY at
s"o. If WXY announces a 5-for-4 split, what is
the investor's position after the split?
(A) 1,250
(B) 1,250
(C) goo at $32
(D) 800 at $50
71. A. (Chapter 6) After the split, stockholders are going to have 5 shares for every 4 that they
had before. If the number of shares is going to increase, the price of the stock is going to
decrease to make up for the additional shares, After the split, the investor should have the
same Overall market value of securities. Use the following equation to determine the
number of shares and the stock price after a split:
1,000 shares x — = 1,250 shares
$40 x4=S32
70
72. The economic theory that Supports control-
ling the money supply in order to stimulate
economic growth is called
(A) the Federal Reserve Board
(B) the Keynesian theory
(C) supply-side economics
(D) the monetarist theory
72. D. (Chapter 13) correct answer is Choice (D) because controlling the money supply
implies a hands-on approach that's referred to as the monetarist theory. Choice (A) is
incorrect because, although the Federal Reserve Board (FRB) controls the money supply, it
isn't an economic theory, Choice (B) is incorrect because the Keynesian theory is about big
(some say stifling) government intervention; it's more about raising taxes and government
control over businesses. Choice (C) is incorrect because the supply-side economic themy calls
for low taxes and low government spending to stabilize the economy.
71
73. Which of the following is characteristic of
commercial paper?
(A) It is quoted as a Of par.
(B) It is proof Of ownership Of the
corporation.
(C) It is issued to raise capital for a
corporation.
(D) It is junior to convertible preferred stock
73. C. (Chapter 7) Commercial paper is generally issued for the purpose of raising capital for a
corporation for the short-term. Choice (A) is incorrect because commercial instruments are
not quoted as a percent Of par. Choice (B) is incorrect because a commercial instrument is
proof of a debt, not ownership. Choice (D) is incorrect because commercial instruments are
a debt security, therefore, if a claim is filed against the issuing corporation, the commercial
instrument holds a senior position to preferred stock.
72
74. A mutual fund that invests Only in securities
Within a specific industry is called a
(A) Balanced fund
(B) Growth fund
(C) Hedge fund
(D) Sector fund
74. D. (Chapter 9) A specialized or sector fund invests within a single industry or
geographical area.
73
75. At What time must an individual begin with-
drawals from a Roth IRA?
(A) At age
(B) At age 72
(C) On April I Of the year after turning 72
(D) None of the above
75. D. (Chapter 15) Withdrawals from a Roth IRA may begin any time after the investor reaches
age 591/2. However, there's no required beginning date (RBD) or required minimum
distribution (RMD) for Roth IRAs like there is for Other retirement plans. You need to
remember that the money withdrawn from a Roth IRA is tax-free, so the IRS doesn't care
when these investors take their money because it isn 't getting any of it.
74
If a Customer wants to open a cash account at
a brokerage firm, the signature(s) of which of
the following is/are required?
l. The registered representative
Il. The customer
Ill. The principal
IV. The guarantor
(A) IV only
(B) 1 and
(C) 1, 11, and 111
(D) 1, 11, 111, andrv
33. B. (Chapter 16) Remember, when a customer opens a cash account, the only signatures that
are required are those of the registered rep and a principal of the firm. However, if a
customer were to open up a margin account, she'd have to sign a margin agreement.
SIE Practice Exam - Stage 1
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