SIE EXAM SECTION 2-
UNDERSTANDING PRODUCTS AND
THEIR RISKS QUESTIONS &
ACCURATE ANSWERS
Common Stock - Correct Answer ✔✔ Is a security that represents ownership in a
corporation.
Exercise control by electing a board of directors and voting on corporate policy.
Are on the bottom of the priority ladder for ownership structure
Have rights to a company's assets only after bondholders, preferred shareholders and
other debt holders are paid in full.
Preferred Stock - Correct Answer ✔✔ Is a class of ownership in a corporation that has a
higher claim on its assets and earnings than common stock.
Generally have a dividend that must be paid out before dividends to common
shareholders, and the shares usually do not carry voting rights.
Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in
that it has the potential to appreciate in price. The details of each preferred stock
depend on the issue
Rights - Correct Answer ✔✔ _________ offering is a group of rights offered to existing
shareholders to purchase additional stock shares, known as subscription warrants, in
proportion to their existing holdings. In a rights offering, the subscription price at which
each share may be purchased is generally discounted relative to the current market
price. Rights are often transferable, allowing the holder to sell them in the open market.
Warrants - Correct Answer ✔✔ are a derivative that give the right, but not the obligation,
to buy or sell a security—most commonly an equity—at a certain price before expiration.
An American depositary receipt (ADR) - Correct Answer ✔✔ is a negotiable certificate
issued by a U.S. bank representing a specified number of shares (or one share) in a
foreign stock traded on a U.S. exchange.
Control & Restrictions SEC Rule 144 - Correct Answer ✔✔ When you acquire restricted
securities or hold control securities, you must find an exemption from the SEC's
, registration requirements to sell them in a public marketplace. Rule 144 allows public
resale of restricted and control securities if a number of conditions are met.
A Treasury Bill (T-Bill) - Correct Answer ✔✔ is a short-term debt obligation backed by
the Treasury Department of the U.S. government with a maturity of less than one year,
sold in denominations of $1,000 up to a maximum purchase of $5 million on
noncompetitive bids. ________ have various maturities and are issued at a discount
from par.
A Treasury Note - Correct Answer ✔✔ is a marketable U.S. government debt security
with a fixed interest rate and a maturity between one and 10 years.
Treasury Receipts - Correct Answer ✔✔ is a zero-coupon bond that does not pay
interest at regular intervals between the date of issue and maturity, but instead accrues
the interest and pays it with the principal at maturity.
A Treasury bond (T-bond) - Correct Answer ✔✔ is a marketable, fixed-interest U.S.
government debt security with a maturity of more than 10 years. Treasury bonds make
interest payments semiannually, and the income received is only taxed at the federal
level. Treasury bonds are known in the market as primarily risk-free; they are issued by
the U.S. government with very little risk of default.
An asset-backed security (ABS) - Correct Answer ✔✔ is a financial security
collateralized by a pool of assets such as loans, leases, credit card debt, royalties or
receivables.
A mortgage-backed security (MBS) - Correct Answer ✔✔ is a type of asset-backed
security that is secured by a mortgage or collection of mortgages.
Corporate Bonds - Correct Answer ✔✔ is a debt security issued by a corporation and
sold to investors. The backing for the bond is usually the payment ability of the
company, which is typically money to be earned from future operations. In some cases,
the company's physical assets may be used as collateral for bonds.
Municipal Securities - Correct Answer ✔✔ A municipal bond is a debt security issued by
a state, municipality or county to finance its capital expenditures, including the
construction of highways, bridges or schools. Municipal bonds are exempt from federal
taxes and most state and local taxes, making them especially attractive to people in
high income tax brackets.
General obligation (GO) bonds - Correct Answer ✔✔ A general obligation bond (GO) is
a municipal bond backed by the credit and taxing power of the issuing jurisdiction rather
than the revenue from a given project. General obligation bonds are issued with the
belief that a municipality will be able to repay its debt obligation through taxation or
revenue from projects. No assets are used as collateral.
UNDERSTANDING PRODUCTS AND
THEIR RISKS QUESTIONS &
ACCURATE ANSWERS
Common Stock - Correct Answer ✔✔ Is a security that represents ownership in a
corporation.
Exercise control by electing a board of directors and voting on corporate policy.
Are on the bottom of the priority ladder for ownership structure
Have rights to a company's assets only after bondholders, preferred shareholders and
other debt holders are paid in full.
Preferred Stock - Correct Answer ✔✔ Is a class of ownership in a corporation that has a
higher claim on its assets and earnings than common stock.
Generally have a dividend that must be paid out before dividends to common
shareholders, and the shares usually do not carry voting rights.
Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in
that it has the potential to appreciate in price. The details of each preferred stock
depend on the issue
Rights - Correct Answer ✔✔ _________ offering is a group of rights offered to existing
shareholders to purchase additional stock shares, known as subscription warrants, in
proportion to their existing holdings. In a rights offering, the subscription price at which
each share may be purchased is generally discounted relative to the current market
price. Rights are often transferable, allowing the holder to sell them in the open market.
Warrants - Correct Answer ✔✔ are a derivative that give the right, but not the obligation,
to buy or sell a security—most commonly an equity—at a certain price before expiration.
An American depositary receipt (ADR) - Correct Answer ✔✔ is a negotiable certificate
issued by a U.S. bank representing a specified number of shares (or one share) in a
foreign stock traded on a U.S. exchange.
Control & Restrictions SEC Rule 144 - Correct Answer ✔✔ When you acquire restricted
securities or hold control securities, you must find an exemption from the SEC's
, registration requirements to sell them in a public marketplace. Rule 144 allows public
resale of restricted and control securities if a number of conditions are met.
A Treasury Bill (T-Bill) - Correct Answer ✔✔ is a short-term debt obligation backed by
the Treasury Department of the U.S. government with a maturity of less than one year,
sold in denominations of $1,000 up to a maximum purchase of $5 million on
noncompetitive bids. ________ have various maturities and are issued at a discount
from par.
A Treasury Note - Correct Answer ✔✔ is a marketable U.S. government debt security
with a fixed interest rate and a maturity between one and 10 years.
Treasury Receipts - Correct Answer ✔✔ is a zero-coupon bond that does not pay
interest at regular intervals between the date of issue and maturity, but instead accrues
the interest and pays it with the principal at maturity.
A Treasury bond (T-bond) - Correct Answer ✔✔ is a marketable, fixed-interest U.S.
government debt security with a maturity of more than 10 years. Treasury bonds make
interest payments semiannually, and the income received is only taxed at the federal
level. Treasury bonds are known in the market as primarily risk-free; they are issued by
the U.S. government with very little risk of default.
An asset-backed security (ABS) - Correct Answer ✔✔ is a financial security
collateralized by a pool of assets such as loans, leases, credit card debt, royalties or
receivables.
A mortgage-backed security (MBS) - Correct Answer ✔✔ is a type of asset-backed
security that is secured by a mortgage or collection of mortgages.
Corporate Bonds - Correct Answer ✔✔ is a debt security issued by a corporation and
sold to investors. The backing for the bond is usually the payment ability of the
company, which is typically money to be earned from future operations. In some cases,
the company's physical assets may be used as collateral for bonds.
Municipal Securities - Correct Answer ✔✔ A municipal bond is a debt security issued by
a state, municipality or county to finance its capital expenditures, including the
construction of highways, bridges or schools. Municipal bonds are exempt from federal
taxes and most state and local taxes, making them especially attractive to people in
high income tax brackets.
General obligation (GO) bonds - Correct Answer ✔✔ A general obligation bond (GO) is
a municipal bond backed by the credit and taxing power of the issuing jurisdiction rather
than the revenue from a given project. General obligation bonds are issued with the
belief that a municipality will be able to repay its debt obligation through taxation or
revenue from projects. No assets are used as collateral.
