SIE Practice Exam Review Questions and Answers 2022

Preferred stock trades most like which of the following instruments? Straight debt security Because of the fixed dividend payment, preferred shares are influenced in the market by the same factors that impact straight debt securities. Like bonds, there is an inverse relationship between price and interest rates. (NOT convertible bonds) Business cycle predictability: Business cycles are generally considered to be random and unpredictable. While it is true that the sequence of the cycles is generally the same, the factors and impacts differ substantially. 00:16 01:36 Counter-cyclical stocks and correlation to overall performance of the economy: Counter-cyclical stocks are negatively correlated to the overall performance of the economy. In other words, they perform well when the economy is declining, and less well when the economy is strengthening. No correlation means that there is no relationship. Counter-cyclical stocks can be very effective in hedging other cyclical stocks against an economic decline as their price has a tendency to strengthen in a contracting economy. What does the Fed use reverse purchase agreements for? Tighten credit and Remove money from the system In reverse repurchase agreements, the Fed sells securities to primary dealer, thus taking money out of the system. This activity tightens credit. (A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day.) Why are U.S. Treasury Securities used for conducting Open Market Operations? Because the market for these securities is the broadest and most active in the U.S. financial markets (In order to manage open market operations, the Open Market Committee needs the ability to buy and sell quickly in whatever volume of securities needed. The market for U.S. Treasury securities offers these capabilities, as it is the broadest and most active of U.S. financial markets.) In margin accounts, broker-dealers charge customers a competitive rate of interest on the amount borrowed, which is called debit balance. (Margin accounts allow customers to borrow against the market value of securities held in the account. The broker-dealer acts as lender, charging a competitive rate of interest on the amount borrowed in the "debit balance.") A pattern day trader goes on vacation for two weeks, starting on Monday August 15. There are no securities positions in the account when the vacation starts, and no trades are placed while the trader is on vacation. Under FINRA rules, what is the minimum equity the trader will need to resume trading, after the vacation ends? $25,000 (A pattern day trader must maintain minimum equity of at least $25,000, for any day that the margin account trades. The $25,000 test is made at the close of business each day, and trading is restricted starting the next day and continuing until equity is increased to at least $25,000. There is no minimum equity requirement while an account is inactive, but the $25,000 requirement must be met before trading can resume.) What is the name of a participant-directed ERISA plan sponsored by a non-profit organization or educational institution? 403(b) (403(b)s are participant-directed ERISA plans sponsored by non-profit organizations and educational institutions. Like 401(k)s, they allow participants to make elective deferrals and manage their own investments.) Ted inherits a Traditional IRA from his father, after the father's death. It is worth $75,000 and he takes a full immediate withdrawal. No part of it is non-deductible contributions. Ted is 45 years old. What tax will he pay on the withdrawal? Ordinary income tax but no penalty (Beneficiaries pay ordinary income tax on withdrawals from Traditional IRAs. But withdrawals by a beneficiary after the account owner's death is one exception to the 10% penalty. The exception is not available to a spouse beneficiary who elects to treat the IRA as his/her own) The separate account of an insurance company is managed to Help provide inflation protection for purchasers of both life insurance and annuity products (The separate account of an insurance company separates purchase payment for variable life and annuity products from purchase payments for fixed products (general account products). The separate account is designed to offer growth to keep pace with inflation for purchasers of variable products. In exchange for growth potential, purchasers take on investment risk.) Mary Jane is a registered representative who helps her clients buy securities, and she also gives them investment advice about retirement plans. What type of compensation could require her to register as an investment adviser? Hourly fee (Any compensation received by a broker-dealer or registered representative other than commissions, markups or markdowns is considered special compensation. Receiving special compensation can trigger a need for adviser registration.) Must emergency contacts for a broker-dealer's business continuity plan be registered principals? No. (A firm is required to name two emergency contacts for its business continuity plan and report this information to FINRA. One of the persons must be a registered principal and a member of senior management of the film.) What are typical maturities in banker's acceptances (BAs)? 30 to 180 days (Maturities of BAs typically fall between 30 and 180 days. Issues usually can be sold in the secondary market at any time prior to maturity.) A mutual fund's investment manager is paid A percentage of the assets held by the fund (The investment advisor of a mutual fund is paid an annual fee based on the value of the fund's assets.) To avoid double taxation on dividends paid to shareholders, REITs must invest what portion of their total assets in real estate? At least 75% (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.) Which of the following offers a leveraged alternative to a long position in stock? A long call gives the investor the right to buy the underlying stock and allows an investor to benefit on its gains without having paid in full for the shares. The investor benefits from leverage, receiving a higher return for a dollar invested. Which two of the following options contracts are subject to automatic exercise at expiration if the market price of ABC is 45.25? I. Long ABC 42 call II. Long ABC 46 put III. Long ABC 48 call IV. Long ABC 44 put I and II (The Options Clearing Corporation has provisions for the automatic exercise of certain in-the-money options at expiration. Generally, OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and an index option that is $.01 or more in-the-money. Calls are in the money when the market price is higher than the exercise price; puts are in the money when the market price is lower than the exercise price.) Exempt securities and transactions under '33: Exempt securities include treasuries, municipal bonds, commercial paper and commercial bank. Exempt transactions include Private Placements (Reg D) and intrastate offerings (Rule 144). Open-end funds (i.e. mutual funds) are required to be registered. According to the specifications of Rule 506 of Regulation D, a sophisticated investor is: I. Accredited II. Accredited or non-accredited III.Credentialed as a professional in the financial or legal industry IV. Capable of evaluating the merits and risks of the prospective investment II and IV (Rule 506 says that if investors are non-accredited, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.) Who can purchase shares of an IPO? IPOs may not be purchased by anyone who is considered to be "restricted" under FINRA Rule 5130. Grandparents are not considered immediate family members, so they would be permitted to purchase shares of the offering. Who is allowed to buy stock rights during the ex-rights period? Any interested investor What is the most sensitive short term interest rate? Fed Funds Rate (The Federal Funds Rate is the rate that banks charge one another for overnight loans. It is the most volatile rate in the market and changes on a daily basis.) If the U.S. trade deficit is decreasing, which two of the following are also likely to occur? I. U.S. bond prices will rise II. U.S. bond prices will fall III. the value of the dollar has weakened against foreign currency IV. The value of the dollar has strengthened against foreign currency 1 and 3 (If the trade deficit is growing smaller, foreign buyers are buying more U.S. goods. This is because foreign currency has strengthened against the dollar. The value of the dollar against foreign currency and interest rates move in the same direction. So if the dollar is weakening, interest rates are falling, and bond prices are rising.) Jim wants to know if he can take a penalty-free withdrawal from his Traditional IRA at age 50 to pay for his child's college tuition. Yes, if the expenses are qualified (The exception to the 10% penalty for higher education expenses is fairly liberal. Expenses must only be qualified i.e., used to pay for tuition, fees, books, supplies or equipment required to attend an eligible institution.) Louis turns age 70 on November 1, 2018. By which date must he begin taking Required Minimum Distributions? His 70 ½ birthday occurs on May 1, 2019. His Required Beginning Date is April 1 of the following year, 2020. (RMD begins on April 1 on the year following in which the investor became 70.5) Which of the following may be suitable for an investor who wants guaranteed income for life that begins 10 years from now and continues for life? A deferred life only annuity (In a deferred annuity, payments begin in the future. They will last for the life of the annuitant if a life only option is selected.) For which students is the cost of room and board a qualified education expense from a 529 plan? Room and board is a qualified education expense only if the student is enrolled at least half-time. Expenses may not exceed the college's allowance for room and board. Nonqualified withdrawals from Section 529 College Savings Plans are subject to which of the following? Nonqualified withdrawals from Section 529 College Savings Plans are subject to full federal and state income taxation on the entire amount of the distribution that is attributable to earnings, plus a 10% penalty tax on this amount. Because the contributions to these accounts are made with after tax dollars, only the earning are subject to taxation and the penalty. Firms must report to FINRA any written customer complaint involving allegations of theft or misappropriation of funds or securities A firm must report to FINRA not later than 10 business days after the firm or a representative becomes the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery. This incident would be reported to FINRA on an amended U-4. Voter referendums Voter referendums are required in many new issues of general obligation bonds. They are not required for revenue bond. Revenue bonds are backed by user fees, or potentially by fees paid by a private corporation for the use of the facility. Revenue bonds are not subject to limits on the taxing authority of the issuer. What does revenue bonds fund? Public housing projects, airports and other major transportation facilities that are funded by user fees and housing for colleges and universities are typically funded by revenue bond issues. The function of the sponsor of the fund The sponsor of the fund distributes, or is in charge of the sale of the fund's shares. Distributors must have a selling agreement with the fund. The custodian is responsible for safekeeping; the transfer agent for customer redemptions and other services; and the investment advisor for the trading of the fund's portfolio. Of the REITs available for customer purchase, which is generally the most leveraged, and relies on options strategies and hedging in the management of its portfolio? A mortgage REIT is generally more leveraged than equity REITs. Derivative and options strategies are frequently used to protect the portfolio assets and lessen portfolio volatility. Hedge fund lockup period reasons A lock up period is not used to prohibit new investment into a hedge fund. Instead, it limits liquidity by imposing a time frame during which investors cannot withdraw assets. This allows the fund to pursue higher returns by limiting the amount of cash on hand, facilitating investment in illiquid assets, and permitting greater overall investment flexibility. Before any recommendations can be made in communications, FINRA members must conduct a due diligence investigation on the product recommended. This process is called Reasonable basis suitability is required on a security or product before any specific recommendation can be made. The broker-dealer determines that there is reasonable basis to believe the security/product is suitable for any customer. The process must be documented. Which of the following allows an issuer to sell securities multiple times using the same registration statement? Shelf registration (Registration exemptions include private placements, Section 4(6), Section 4(2), Regulation A, Intrastate Offerings, and Rule 701. Shelf registrations allow qualified companies to make multiple offerings of securities under a single pre-filed registration.) An official statement is not yet available for a new issue of municipal securities. In this situation A preliminary official statement can be used if available, but a final official statement must be furnished as soon as possible (If the official statement is not yet available, customers must receive written notice of its status, and a copy of the preliminary official statement must be provided if it exists. The final official statement must be delivered when it is available.) The fraud provisions of the act of 1934 apply to The fraud provisions of the act of 1934 apply to all persons and for all types of securities. No person or transaction is ever exempt from the antifraud provisions of the Securities Act of 1934.