FREE SIE Practice Questions Part 2

The conversion ratio tells the investor how many shares of stock they can receive if they convert the bond. Here, a conversion ratio of 40 means the investor can convert the bond into 40 shares of stock, regardless of the bond’s par value.

In a mini-max underwriting, the underwriter agrees to sell a minimum number of shares to ensure that the offering proceeds. If the minimum is not reached, the offering may be canceled.

This underwriting arrangement sets a minimum threshold (mini) of shares that must be sold for the offering to proceed. If the minimum isn’t reached, the offering is canceled.

Why others are incorrect?

Selling all shares or canceling applies to all-or-none underwritings.

Committing to purchase unsold shares applies to firm commitment underwritings.

Guaranteeing all shares are sold isn’t a feature of mini-max.

The ODD has to be provided for every investor before an investor’s first options transaction. This paper will explain option trading risks, rewards, and strategies, as well as some other basic information.

SIPC insurance covers the customer’s stocks and bonds held at brokerage firms in the event of their failure. Commodities, futures contracts, and mutual funds are not covered by SIPC insurance.

The SIPC protects investors if their brokerage fails, covering securities like stocks and bonds, along with up to $250,000 in cash held in accounts. It does not cover futures contracts, commodities, or direct losses from market fluctuations.

Mutual funds are covered only if they are held in a brokerage account. This ensures investor confidence in the securities market, with regulations updated and effective for 2025 standards.

Common stock is the face value security of a company that represents the ownership of the shareholder in a corporation.

Ownership in a Corporation:
Common stockholders are part-owners of a corporation. They have voting rights in key corporate decisions, such as electing the board of directors.

Why Other Options Are Incorrect?

Fixed dividends and guaranteed return of capital are features of preferred stock, not common stock.

Priority over preferred stock in dividend payments is incorrect. Preferred shareholders always have priority for dividends and capital return.

A broker-dealer acts as an agent when it executes a trade on behalf of a customer and does not take title to the securities. The firm receives a commission in exchange for performing this function.

The mission of the SEC is to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation, by enforcing federal securities laws.

T-bills are short-term debt securities backed by the U.S. government, making them one of the safest investments. They are issued at a discount and redeemed at face value, with no risk of default.

Corporate bonds are issued by companies, not the government, and involve credit risk.

Municipal bonds are issued by state or local governments and may involve risk depending on the issuer’s financial health.

Preferred stock represents equity, not a debt obligation, and carries higher risk compared to T-bills.

When an investment amount reaches a breakpoint, the sales charge percentage is reduced. This therefore creates a cost-saving incentive when investors invest larger sums of money.

The countercyclical sectors like gold mining do well during bad economic times. In general, these industries benefit when the overall economy is not doing well.

Gold as a Safe Asset:
During economic downturns, investors flock to gold as a stable and reliable store of value. This increased demand benefits the gold mining industries.

Why Other Options Are Incorrect?

Luxury Goods: Consumers reduce discretionary spending during recessions.

Construction: Investment in new projects often slows due to reduced capital availability.

Automobiles: Purchases of big-ticket items like cars typically decline during economic uncertainty.

If an investor buys a bond below par and it is callable, the Yield to Call (YTC) will likely be the highest. YTC includes both the coupon payments and the price discount realized over a shorter time if the bond is called early.

When a bond is bought at a discount and is callable, the yield to call is usually the highest. This is because it calculates the total return, including the discount gain, over a shorter period if the bond is called early.

Incorrect Options:

Yield to maturity is still high, but it spreads the return over the bond’s full life, which is longer.

Nominal yield and current yield don’t account for the full impact of the discount, so they are lower.

AML programs are not static documents that need to be reviewed and updated from time to time in order for them to stay current, updated, and efficient. Bank Secrecy Act regulations require this.

Treasury bonds pay interest semi-annually (every six months). With a 3% annual coupon rate, the bond pays 3% of its face value per year. Assuming the bond’s face value is $1,000, the annual interest is $30 (3% of $1,000). Therefore, the investor will receive half of that every six months, which is $15. The bond price of $1,020 does not affect the interest payment.

If the assets increase while the liabilities and the number of outstanding shares of a fund don’t change, the NAV will rise. This is because the value of the assets bettered against the liabilities, therefore giving a higher per-share value.

The primary purpose of Asset-Backed Securities (ABS) is to help financial institutions convert loans and receivables, which are usually illiquid, into marketable securities. This process allows them to gain liquidity and access capital more easily.

Under FINRA Rule 3270, registered representatives must disclose all outside business activities (OBAs) that involve compensation or the expectation of compensation.

Providing consulting services: This is a compensated activity and must be disclosed.

Playing in a local band on weekends: If the band activities generate income, they qualify as OBAs requiring disclosure.

Working as a part-time sales associate at a retail store: This is a compensated role and must be disclosed.

Since all listed activities can involve compensation, the representative is obligated to disclose each under Rule 3270 to avoid potential conflicts of interest and ensure compliance with regulatory standards.

If the funds in a Coverdell Education Savings Account (ESA) are not used by the time the beneficiary turns 30, any remaining balance must be distributed. The earnings portion of the distribution will be taxable as income and subject to a 10% penalty unless rolled over to another eligible family member under 30 years old​.

When a 529 college savings plan is established, the owner retains control of the assets in the account after the beneficiary reaches legal adulthood, thereby assuring flexibility in the handling of the finances.

Such activities as trading and investment advising may be performed by registered persons, while non-registered persons, by virtue of law, cannot do so.

Operating income is calculated by subtracting both COGS and operating expenses from net sales. Here the calculation is $1,000,000 (sales) – $400,000 (COGS) – $200,000 (operating expenses) = $400,000 operating income.

When the credit rating of a bond gets downgraded, that usually means it is getting riskier, therefore the price goes down. With higher risk, investors want a higher yield, and that forces the market price of the bond lower.