SIE Mock Exam 3 – Securities Industry Essentials

The quick ratio measures a company’s liquidity by comparing its most liquid assets to its current liabilities, indicating its ability to meet short-term obligations.

Under FINRA Rule 1017 and SEC “Statutory Disqualification” guidelines, an individual is subject to disqualification from associating with a FINRA member firm if they have been convicted of a felony or a securities-related misdemeanor within the past 10 years. A conviction for a securities-related misdemeanor 9 years ago falls within the 10-year disqualification period and would bar the individual from association.

A stop order is designed to limit an investor’s loss on a position by triggering a sale if the price falls to a predetermined level.

The Federal Reserve conducts open market operations by buying and selling government securities to influence the money supply and interest rates.

In regular-way settlement, equity trades settle in two business days (T+2). For dividend eligibility, what matters is who is the holder of record on the record date. In this case, the trade settles Wednesday, making the buyer the holder of record for Thursday’s record date. Therefore, the buyer is entitled to the dividend. The payable date (when the dividend is actually pai doesn’t affect who receives it.

The efficient market hypothesis posits that all available information is already reflected in stock prices, making it difficult for investors to consistently achieve higher returns than the overall market through stock selection or market timing. It does not claim that markets are always efficient or that securities are always correctly priced, nor does it dismiss the potential for anomalies or inefficiencies.

A ‘BB’ rating by Standard & Poor’s classifies the bond as speculative or junk grade, indicating higher risk compared to investment-grade bonds.

A market order directs the broker to execute the buy or sell transaction immediately at the best available current price.

A prospectus provides essential details about an investment, ensuring transparency for potential investors.

When mutual funds are inherited, the cost basis is adjusted to the NAV of the shares at the date of death, known as a step-up in basis.

Lagging indicators reflect historical data and are used to confirm economic trends.

A market order is an instruction to buy or sell a security immediately at the best available current price.

A Fixed Unit Investment Trust (UIT) is structured to hold a fixed portfolio of securities for a set period. Unlike mutual funds or variable UITs, it does not actively trade its holdings, reducing management risk. Once the portfolio is created, it remains unchanged, and investors receive a proportional share of the earnings from the assets. Therefore, Fixed UITs carry less investment risk compared to the others.

To determine how far the call option is out of the money, you compare the strike price of the option to the current market price of the underlying asset. The strike price is $85, and the current market price is $78. The option is out of the money by $7 ($85 – $78).

Under MSRB Rule G-37, municipal finance professionals can contribute up to $250 per election cycle to officials for whom they can vote. In this case, $200 has already been contributed, leaving room for an additional $50.

The Federal Reserve’s open market operations involve buying and selling government securities to expand or contract the money supply, thereby influencing interest rates and overall economic activity. Setting the discount rate is another tool of the Federal Reserve, regulating the stock market is the role of the SEC, and insuring bank deposits is the function of the FDIC.

Warrants typically have longer expiration periods compared to rights, options, or repurchase agreements, sometimes lasting years.

Breakpoint sales occur when the representative fails to make a customer aware of the upcoming breakpoint schedule (usually to earn a higher commission, which is a conflict of interest and a violation of fiduciary duty). This is prohibited. Selling away is a different prohibited practice that occurs when a representative sells something that is not on the broker-dealer’s approved list in order to turn a profit for the representative.

With a Traditional IRA, contributions are often tax-deductible up front, and then you pay taxes when you withdraw the funds in retirement.

With a Roth IRA, you contribute after-tax dollars, but you get to withdraw both your contributions and any earnings completely tax-free in retirement (assuming you meet certain requirements)

Municipal bonds are exempt securities and therefore are not required to deliver a prospectus to customers. Instead, most municipalities will deliver an official statement that functions in a similar manner to a prospectus.

The ex-dividend date determines who is eligible to receive the declared dividend; investors who purchase the stock on or after this date are not entitled to the dividend.

A no-load mutual fund does not charge sales commissions or fees when investors buy or sell shares.

Blue sky laws’ are state securities regulations aimed at protecting investors from fraudulent sales practices and securities offerings.

Exchange-Traded Funds (ETFs) are similar to mutual funds but are passively managed, resulting in lower costs. Mutual funds are actively managed and are not tax-advantaged. ETNs are a form of debt product. LGIPs are local government investment pools. REITs are real estate investment trusts.

TIPS have a principal value that adjusts based on changes in the Consumer Price Index, providing protection against inflation.

The average duration of unemployment is considered a lagging economic indicator because it reflects past economic conditions. In contrast, average weekly initial claims for unemployment insurance and building permits for new private housing units are leading indicators

A stock option is a derivative security, as its value is derived from the value of an underlying stock.

UTMA accounts are custodial accounts that use the minor’s tax ID, even though the custodian manages the account.

FINRA is an SRO responsible for regulating brokerage firms and exchange markets.

Money market instruments are short-term securities, such as Treasury bills, with high liquidity.

Qualified distributions from a Roth IRA are tax-free, provided certain conditions are met.

A mutual fund’s prospectus provides investors with comprehensive information about the fund’s objectives, investment strategies, risks, fees, and other pertinent details to make informed investment decisions. While it may include past performance data, its primary purpose is informational rather than promotional.

Long-term bonds are most affected by interest rate risk because their prices are more sensitive to changes in interest rates over time.

A bond quoted at 102 is trading at 102% of its face value. Therefore, 102% of $1,000 equals $1,020.

A market maker is a firm or individual that provides liquidity to the market by actively quoting buy and sell prices for securities.

The Federal Reserve manages the nation’s monetary policy to achieve stable prices and maximum employment.

Long-term bonds are more sensitive to interest rate changes and will experience greater price declines when interest rates rise compared to short-term or intermediate-term bonds. Floating-rate bonds have interest rates that adjust periodically, making them less susceptible to interest rate risk.

Variable life insurance policies invest in market-linked subaccounts. The greatest risk in these policies is market risk, as their cash value and death benefits depend on the market’s performance.

A ‘no-load’ mutual fund does not charge sales commissions, allowing investors to purchase shares without a sales charge.

Margin trading involves purchasing securities using funds borrowed from a broker, allowing investors to leverage their positions.

Preferred stockholders have priority over common stockholders in receiving dividends, but typically do not have voting rights.

STRIPS stands for separate trading of registered interest and principal of securities. Essentially, someone like a corporation buys Treasury bonds, strips the payments from the bonds, and then sells those individually as STRIPS.

The Wilshire 5000 is one of the largest indices and is considered a total stock market index. The Value Line Index also covers a large number of companies, but it is not as comprehensive as the Wilshire 5000.

The Securities Act of 1933 aims to ensure full disclosure of material information in securities offerings, protecting investors from fraud.

Partnerships are notorious for being very illiquid, which is one of the reasons they are generally only bought by sophisticated investors

The Securities Exchange Act of 1934 regulates the secondary trading of securities, overseeing activities of securities exchanges and broker-dealers.

A 10% stock dividend means the investor will receive an additional 10 shares (10% of 100), resulting in a total of 110 shares.

Treasury bonds are debt securities issued by the U.S. Department of the Treasury and are backed by the full faith and credit of the U.S. government.

All of the answer options are forms of economic theory except for the Efficient Market Hypothesis, which is a theory for the stock market exclusively.

In a Roth IRA, qualified distributions are tax-free, and contributions are made with after-tax dollars.

In a period of rising interest rates, bond prices typically decrease because existing bonds with lower interest rates become less attractive compared to new issues offering higher rates.

Closed-end funds issue a fixed number of shares that are traded on the secondary market. Unlike open-end funds, they do not continuously offer new shares or redeem shares at net asset value.

When inflation expectations rise, investors typically demand higher yields to maintain real returns (returns after inflation). This causes existing bond prices to fall as their fixed coupon payments become less valuable in real terms. The relationship between bond prices and yields is inverse – when one rises, the other falls. This fundamental relationship is influenced by various economic factors, with inflation being one of the most direct and significant factors.

Municipal bonds are exempt from registration under the Securities Act of 1933. Corporate bonds, common stock, and preferred stock are typically subject to registration requirements.

Mutual funds issue redeemable shares, allowing investors to sell them back to the fund at the current Net Asset Value (NAV).

Bond yield reflects the annualized return based on current market price and coupon payments

The Securities Act of 1933 governs the issuance of new securities in the primary market.

A debenture is an unsecured debt instrument backed solely by the issuer’s creditworthiness, not by any collateral.

A clearinghouse acts as an intermediary between buyers and sellers in financial markets, ensuring the proper transfer of securities and funds.

A callable bond allows the issuer to redeem the bond before its maturity date, typically at a specified call price. This feature is advantageous to issuers, especially if interest rates decline, enabling them to refinance debt at lower rates.

The NAV of a mutual fund is determined by subtracting the fund’s liabilities from its total assets and dividing the result by the number of outstanding shares.

When interest rates go up, bond prices go down. When bond prices go down, yields go up. Therefore, interest rates have an inverse correlation to bond prices and a positive correlation with yields. However, the nominal yield on a bond does not change as it is the stated rate of return. Yield to maturity, yield to call, and current yield do change.

As of 2025, the maximum contribution limit for individuals under 50 to a traditional IRA is $6,500.

The Federal Reserve conducts open market operations to control the money supply and influence short-term interest rates.

Engaging in insider trading, which involves trading based on non-public, material information, is prohibited under FINRA rules.

Front-running occurs when a trader uses non-public information about pending customer orders to trade ahead for personal benefit. In this case, trading in a personal account before executing a large institutional order that could move the market price is a clear violation. It breaches the duty to put client interests first and misuses confidential information for personal gain. This differs from legitimate trading based on public information or proper order execution. Front-running is a serious violation that can result in disciplinary action, fines, and potential criminal charges.

A market order is an instruction to buy or sell a security immediately at the best available current price.

A ‘BB’ rating by Standard & Poor’s classifies the bond as speculative grade, indicating higher risk compared to investment-grade bonds.

During economic expansion, interest rates often rise as demand for credit increases and the Federal Reserve may tighten monetary policy to prevent overheating.

A callable bond allows the issuer to redeem the bond before its scheduled maturity date, typically at a specified call price.